OD_C12 (Global Organizations) (OD_C12 (Global ...€¦ · Web viewDesigning Global Organizations...

1

Designing Global Organizations


Alan S. Gutterman

This chapter discusses the design and management of global organizational structures. The chapter begins with an overview of the changing strategies that companies are using for global expansion, the opportunities that globalization provides for acquiring and exploiting core competencies to achieve a competitive advantage and the specific organizational capabilities that companies must develop in order to successfully expand their operations into foreign markets. The chapter then discusses several key factors that shape the organizational structure of a global business including the level of international development, the amount of cross-border coordination, the role of host governments in the local economy, the diversity of the company’s international business portfolio and the particular products and markets being considered for globalization. The chapter includes a detailed discussion of the process of internationalization and several of the organizational strategies that companies might use along the way including geographical divisions and the transnational form. While most of the discussion in the chapter focuses on companies with just one line of business, the chapter also includes a section that describes organizational structuring options for companies with multiple lines of business. The chapter concludes with an analysis of methods that can be used to design and manage effective cross-border teams.

Changing Strategies for Global Expansion

As companies expand their activities outside of the US and look to take advantage of available customers and resources in foreign markets, they must carefully consider the best way to realign their overall organizational structures and modify their management processes to efficiently coordinate activities that are taking place in different time zones by persons speaking different languages and acting under diverse cultural norms. Each of the organizational structures suggested below for a global company illustrates a different strategy for combining and coordinating the activities of three essential parts—functional units, product divisions, and geographic or territorial entities. Functional units are well-known are require little additional description. There focus is on specific functional activities such as research and development, manufacturing and sourcing, sales, marketing, finance, human resources, and government relations. The later three activities—finance, human resources, and government relations—are sometimes separated from the other product-related activities and referred to management resource and support services. Product divisions, which are sometimes organized and designated as business units, groups, sectors or subsidiaries, have responsibility for development, commercialization and overall management of groups of products that are related by technology and/or by the customers or markets to which the products are promoted. Geographic or territorial entities, often organized as subsidiaries, are responsible for local operations in a particular national, regional or continental area. In some cases, the scope

Copyright © 2020 by Alan S. Gutterman. Information about the author, the Sustainable Entrepreneurship Project (seproject.org) and permitted uses of this Work appears at the end of this Work.

2


of the activities of these entities is referred to as a “market” or “business”. Among the organizational structuring options that are available are the following1:

A function-focused approach, which includes a division and general manager for manufacturing, sales and marketing and research and development. The manufacturing division would have a business unit for the US and each major foreign market that would be responsible for manufacturing activities in that territory and the sales and marketing division would have a similar structure for geographic-specific sales and marketing activities.

The international division approach, which includes a division and general manager for each of the company’s products and a separate international division with its own general manager that would be selling all of the company’s products outside of the US. The product divisions would have their own functional resources for marketing and manufacturing and would presumably be focusing exclusively on the US market and the activities of the international division would be divided up into geographical territories with their own managers reporting to the general manager of the division.

The mixed international division approach, which includes a division and general manager for products A and B and a separate international division with its own general manager that would only be selling product A. In this case, international sales of product B would be handled in the product B division under the oversight of one or more country managers that report to the general manager of that division.

A geography-focused approach, which includes a division and general manager for the US and a division and general manager for each major foreign market. Each division would have its own full complement of functional resources.

A product-focused approach, which includes a division and general manager for each product line. Each product division would then be organized along the lines of the geography-focused approach (i.e., a business unit for the US and for each foreign market, each of which has its own full set of marketing and manufacturing resources).

A matrix approach, which includes a division and general manager for products A and B and a division and general manager for areas A and B, and which is designed to coordinate the sales of product A in area A. Product division A would have a manager for the US and a manager for international activities, each of which would report to the general manager of the product division. Area division A would have general managers for each country in the area that would have managers for product A reporting to them. Management of country-specific sales efforts for product A would be a joint effort between the product manager in that country and the international manager in the product A division.

The options described above are confusing enough; however, the challenges for senior management of an international business are becoming even more daunting as competitive pressures begin to dictate that responsibility for key functional activities, such as research and development and/or manufacturing, be moved completely outside of the US to geographic locations in other parts of the world that have become recognized as

1 Adapted from S. Humes, Managing the Multinational: Confronting the Global-Local Dilemma (Hertfordshire UK: Prentice Hall International (UK) Ltd., 1993), 11-14.


3


the centers of excellence and innovation with respect to those activities and sources of competitive advantage.

Globalization and Core Competencies

When companies expand into global markets and launch business activities in foreign countries, they are embarking on new paths to potentially developing and strengthening their core competencies. Specifically, a company can create value for its stakeholders through globalization in the following ways:

A company can transfer a functional core competence to a foreign market in order to reduce costs or improve quality and thus produce products that will have a competitive advantage in that market and generate additional revenues that can be used to increase value and acquire more scarce resources. For example, a developer and distributor of software may be able to deploy its core competencies in software design to quickly and efficiently create customized programs for customers in different countries and the revenues from foreign sales may ultimately exceed those generated from domestic activities.

A company can establish a global network that links the centers for “value creation” activities that have been established around the world in order to take advantage of opportunities for cost reduction or other forms of differentiation. For example, a company may transfer the bulk of its resources for certain functional activities, such as procurement and manufacturing, to foreign countries where business conditions are most favorable; however, in order to achieve the benefits of this strategy the company must create reporting relationships and communications paths that link these resources and ensure that worldwide activities are being properly coordinated.

Global expansion provides a company with access to resources and skills from all around the world and allows the company to tap into resources and skills located in countries where a significant competitive advantage is available. For example, a US company seeking to decrease the costs associated with its manufacturing activities can partner with firms in foreign countries that specialize in “lean” production techniques. This allows the company to immediately lower its production costs and gain access to know-how and technology that can be deployed in the US and in other foreign countries. In addition, companies may rely on their foreign manufacturers to design and produce new products that might appeal to customers in the US.

A company can establish offices and research centers in foreign countries to expand its knowledge network and improve the quality and breadth of its core competencies. For example, a company can literally globalize its innovation processes by establishing multiple R&D laboratories around the world and connecting scientists and engineers from different countries through networks that allow them to collaborate on continuous development of new technologies and product concepts.

A company can forge international strategic alliances to gain first-hand access to, and knowledge of, innovative ideas in a diverse range of functional areas such as research and development, manufacturing and marketing. For example, by participating in a joint venture with a foreign partner a company can expose its personnel to


4


manufacturing techniques that can be transferred to other countries and activities provided the legal rights of the foreign partner are not infringed.

Globalization, including exporting global competencies into foreign markets, is not a strategy for the faint at heart and there are obviously significant risks involved and difficult challenges associated with managing and controlling resources located in remote locations. For example, when a company transfers technology to a foreign partner as part of an effort to reduce manufacturing costs there is always the possibility that the partner may appropriate and improve the technology and then use it for its own account as a competitor. In addition, if a company outsources management and maintenance of a functional core competency it may begin to lose focus on the continuous investment and attention that is required to sustain the corresponding competitive advantage. As such, successful globalization requires that a balance be struck between protecting and sharing those scarce resources that are most essential to the company’s competitive advantage.2

In reality, very few companies grow to be solely global or solely local and the optimal mix will be determined by industrial and competitive requirements. In the technology area pharmaceutical businesses offer a good example of the need for a company to be global, regional and local at the same time. The significant investment necessary to develop a new drug product dictates the need to pursue a global market and thus it is commonplace to find that research and development activities are global functions managed by the parent unit. Since, however, each country will have its own specific requirements regarding testing and governmental approvals for new drugs the organization must plan on placing manufacturing activities at the country or regional level. Finally, sales and marketing will be coordinated and executed locally since the sales process is labor intensive and requires face-to-face communications with physicians, hospitals and others in a position to make procurement decisions about the new drug; however, the parent unit can assist in these local sales and marketing efforts through proper global brand management.

Emergence of Transnational Companies

The way that companies are expanding globally in the 21st Century represents a radical departure from traditional strategies. In the early 20th Century companies followed what was essentially a “colonial” method for establishing operational locations in foreign countries. Headquarters activities, including ultimate responsibility for the management of capital and the functional departments, remained in one place and international outreach generally was limited to dispatching managers from headquarters to set branch offices in foreign countries that typically concentrated solely on local sales and marketing. The second half of the 20th Century was marked by a transition to a multi-national model with country or regional business units that included all of the functions necessary to operate in the applicable geographic territory but often with limited coordination and communication with units in other markets. Today globalization means 2 For further discussion of the role of globalization in transferring and exploiting competitive advantages, see A. Gutterman, Going Global: A Guide to Building an International Business (Eagan, MN: Thomson Reuters, 2019).


5


becoming a “transnational” company that can quickly and efficiently transfer functional activities to any place in the world where the company can find the talent and other resources necessary to reduce costs and differentiate itself from competitors. For example, Lenovo adopted a global structure based on maintaining executive offices in several cities around the world and organizing its functional activities around “hubs of expertise” (e.g., hardware designers in Japan and marketing gurus in India) that are tightly linked through global communications networks that allow the company to operate virtually and perpetually as if everyone were in the same time zone. Globalization no longer means distributing managers and employees from the US to foreign postings; instead, companies must be ready and able to create and manage a mobile global workforce that effortlessly transfers people and know-how across borders.3

Models for Global Organization

The groundbreaking work of Albert Chandler in studying US corporations found a strong relationship between the diversification strategy of a firm and its structure.4 Specifically, companies that remained in a single business, regardless of how large they became, tended to use a function-based organizational structure, while firms that diversified into multiple businesses eventually restructured themselves into product-focused units that became independent profit centers. Chandler’s “structure follows strategy” principles, particularly the diversification strategy followed by the firm, also proved to be valid in the initial research on the preferred structure for the multinational business. Researchers found that multinational firms with a diversified business portfolio tended to be organized around worldwide product divisions while those involved in a single business generally opted for country- or regional-focused business units.5

The sections that follow describe various organizational strategies that companies might use as they expand their international activities. In most cases the initial step is the creation of an international division that focuses primarily on exporting products from the US to a handful of potentially attractive foreign markets. Theses international divisions are quite dependent upon other functional divisions for resources and thus there is a need to coordinate that may soon overburden the capacity of the organizational structure. Once the company’s international activities outgrow the international division structure it must choose between several other possible multi-divisional structures that can support global operations. One possibility is the world-wide product division that is given world-wide profit responsibility for the development, manufacture and sale of a particular product line. Another possibility is establishment of one or more area divisions that have profit responsibility for a particular product line in a specified geographic region. Companies may also combine these division forms by establishing world-wide divisions for certain products and area divisions for others. Companies may also choose to limit the scope and size of their product line in foreign markets which means that certain products will only be commercialized in the US and not included in any worldwide or 3 J. McGregor and S. Hamm, “Managing the Global Workforce”, Business Week, January 28, 2008, 034.4 A. Chandler, Strategy and Structure (Cambridge, MA: MIT Press 1962). 5 J. Stopford and L. Wells, Managing the Multinational Enterprise: Organization of the Firm and Ownership of the Subsidiaries (New York: Basic Books 1972).


6


area product divisions. However, as companies begin to introduce a higher proportion of their products into the foreign markets the balance begins to tip toward the use of world-wide product divisions.

When the organizational structure consists largely of world-wide product divisions, each product division will be largely self-contained and include its own specific set of functional and/or geographic subdivisions. Of particular interest is the need to decentralize research and development activities into the product divisions in order to meet the need for rapid development of new technologies and products that can support the world-wide scope of activities. In most cases, firms will first launch new products in the US even when the products are championed by a world-wide product division; however, the division must also move quickly to transfer the technology to other foreign markets and plan for rapid new product launches outside of the US. Given the risks and uncertainties associated with these activities, it is not surprising that there is a significant amount of decentralization associated with world-wide product divisions.

In contrast, when the organizational structure is largely area divisions the level of decentralization is much less than in the case of world-wide product divisions. This follows from the fact that the area divisions typically concentrate on manufacture and sale of standardized products that are mature and already time-tested in major geographic markets such as the US. As such, competition in a particular area is based on traditional marketing factors such as price and promotion and not on the ability of the area division to immediately develop and build new products that are suited for its market. Since each of the area divisions will be selling essentially the same products, it is possible to continue to maintain relatively high staffing levels at the headquarters location in order to take advantage of economies of scale in areas such as research and development, finance and procurement.

The development and use of the front-end/back-end organizational form discussed later in this chapter is an example of the impact that the diverse forces described above are having on the design of the modern global organization. This form divides the activities of the company into two separate, yet related, areas in an effort to better meet the requirements of global customers. The “front end” of the structure is organized by customer or geography and houses most of the activities that are immediately relevant to customer service and support including sales, marketing, technical support and training and education. This type of organizational structure is intended to address and satisfy the changing demands of customers for better service and responsiveness, customer-specific knowledge and programs and systems integration. At the “back end” of the structure one finds those product-oriented activities that have traditionally benefited from economies of scale such as manufacturing, purchasing, engineering and product development. The anticipated benefits and advantages of the front-end/back-end organizational form is that the company can develop and offer a full-line of products through the “back end” while relying on the “front end” resources to cross-sell products and bundle them in a way that addresses the specific needs of each of the company’s major global customers.6

6 J. Galbraith, “The Value-Adding Corporation: Matching Structure with Strategy”, in J. Galbraith, E. Lawler III, and Associates, Organizing for the Future: The New Logic for Managing Complex


7


Building and Maintaining the Global Network

Regardless of the diversification strategy of the multinational business it is clear that reliance will be placed on a number of subsidiaries and other business units located around the world. As such, the next question for researchers was how do multinational firms hold all of these subsidiaries together and coordinate their activities.7 A number of solutions were identified including information systems, planning processes, performance measures and teams (e.g., product development and project teams).8 Other noted the ability of multinational firms to develop and maintain “common cultures” based on shared norms and values. In order for this to be achieved multinational firms were urged to adopt global human resource practices that emphasized selection and development of managers and employees interested in international careers and job assignments that included rotations through several foreign subsidiaries.9

Recently the multinational firm has been conceived of a network of national subsidiaries, strategic business partners and organizational units within the subsidiaries.10 The ability to create links between subsidiaries has increased substantially due to advances in, and decreased costs of, communications and transportation. In addition, the home country headquarters office of the multinational firm often does not have the power and control that is normally attributed to it and it is also becoming increasingly common to see advanced foreign subsidiaries taking the lead in various functional activities such as research and development. Viewing a multinational firm as a network is consistent with the challenges confronting the firm when responding to their global environment since competition and accompany strategy changes requires that business units must be capable of continuously reconfiguring themselves along different dimensions. For example, appropriate organizational units may be asked to align themselves into a product-focused business unit to develop new global products. In addition, units may be placed into a geographic-focused unit to negotiate with local governments or into customer-focused units to efficiently serve customers operating in numerous countries.

International Organizational Capabilities

As part of the process of setting and achieving the goals and objectives associated with expansion of global activities companies must recognize the need to develop and nurture

Organizations. (San Francisco: Jossey-Bass, 1993), 23-25.7 For a good general survey of the research in this area, see J. Pla-Barber, “From Stopford and Well’s Model to Bartlett and Ghoshal’s Typology: New Empirical Evidence”, Management International Review (April 2002). See also J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000).8 C. Bartlett and S. Ghoshal, Managing Across Borders: The Transnational Solution (Boston: Harvard Business School Press 1989) and C. Prahalad and Y. Doz, The Multinational Mission (New York: The Free Press 1987).9 J. Galbraith and A. Edstrom, “International transfer of managers: some important policy considerations”, Columbia Journal of World Business, 11(2), 100-112.10 N. Nohria and S. Ghoshal, “Differentiated Fit and Shared Values: Alternatives for Managing Headquarters-Subdsidiary Relations”, Strategic Management Review, 15 (1994), 491-502.


8


certain core international organizational capabilities.11 As described below, these capabilities require the involvement and support of various functional business units and managers in geography-based business units around the globe and companies must establish formal processes to ensure that there will be a coordinate effort to sustain global product development processes and transfer competitive advantages to new geographies where they can be used to create value for the company and improve the knowledge base and core competencies of the entire company.

International Product Development Process

One of the most important capabilities for successful global expansion is an international product development process that takes into account in advance the possibility that changes and modifications will be necessary in order for a particular product to meet the specific requirements of a number of different countries and geographic regions. The first time that a company launches a product into a new geographic region and is faced with a request for design changes to an existing product the reaction might be that it is simply too costly and difficult to make the changes because of the original design was completed without consideration of the possibility of later adjustments. The key is for the company to learn from this experience and establish processes that guarantee that input from all major geographic regions will be solicited before the design and development of future products commences. This process is generally coordinated through a cross-functional, cross-border task force that studies best practices, designs a cross-border product development process and disseminates information about it throughout the company through training and other education communications and then actually uses the process in the course of developing new products. When successful, the company will have learned how to determine which elements of a new product can be standardized, thus providing the scale efficiencies associated with a global platform, and which can be designed for easy modification to suit the demands of different markets. A similar process can be used for another important capability—creation and management of global brands across national borders. Global product development is discussed in greater detail later in this chapter.

Competitive Advantage Transfer Process

A second important international organizational capability is learning how to effectively and efficiently transfer and modify the organization’s competitive advantages, which can be product-service and/or resource based, to new geographies.12 In order to build and strengthen this capability is it useful to create a dedicated team within the parent unit of the company to collect information about each new start-up process in a new geographic

11 The specific international organizational capabilities discussed in this section are based on the presentation in J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000). For further discussion of organizational capabilities, see G. Dosi, R. Nelson and S. Winter, The Nature and Dynamics of Organizational Capabilities (Oxford: Oxford University Press, 2001).12 For discussion of transferring competitive advantages, including resource advantages, to foreign markets, see A. Gutterman, Going Global: A Guide to Building an International Business (Eagan, MN: Thomson Reuters, 2019).


9


region that can be used to support and knowledge when and if the company decides to move forward with additional foreign subsidiaries. The team can organize the information, disseminate it through training and educational programs and create databases that can be readily accessed by the mangers of new foreign subsidiaries. The goal is to ensure that part of the return on investment from each start-up effort is a significant contribution to organizational knowledge on key issues such as how to develop local networks of suppliers and distributors, launch customer relationships and recruit and retain talented and motivated local personnel.

Cross-Border Integration of Business Units

A third international organizational capability is the cross-border integration of subsidiaries so that the organizational structure of the company as a whole can nurture and support a strong network of experienced global managers and develop and implement processes for coordinating activities throughout its expanding geographic base. Several steps can be taken in this regard starting with adopting human resources policies that are designed to create and develop interpersonal relationships among key personnel involved in the international growth initiative. For example, international assignments are the best way for managers to learn about the challenges of entering new geographic regions and also provide a good way for managers in the US and in the foreign subsidiaries to get to know one another on a personal basis. Movement should go in both directions—US-based managers should spend time at the foreign subsidiaries and local managers from the foreign subsidiaries should be given assignments in the home country to observe and learn how the parent operates and meet the persons responsible for activities that might ultimately impact the foreign subsidiary. Coordination and integration can also be encouraged and facilitated through the development of cross-border financial reporting systems, human resources policies and information and decision processes. The size and scope of these systems, policies and processes depends on the level of cross-border integration required by the particular company and will also evolve as the geographic reach of the company’s activities expands. In addition, more coordination may be required as suppliers and customers expand geographically and demand a single global interface with its business partners as opposed to doing transactions on a country-by-country basis. As discussed below, geographical divisions should be expected to provide input on modifications that may be necessary and appropriate in light of their specific local cultural, legal and business conditions.

Factors Shaping the Global Organization

Companies operating on a global basis will see their organizational structure influenced by a variety of key factors—the level of international development, the amount of cross-border coordination, the role of host governments in the local economy, the diversity of the company’s international business portfolio and the particular products and markets being considered for globalization.13 Other minor factors may be relevant in certain cases 13 The discussion of the various factors shaping global organizational structures in this section is based on the presentation in J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 12-23.


10


such as the size of the company’s home country market and the history and experience of the company in international business for those firms that have been in existence for a long period of time.14

Each of the factors should be carefully weighed to determine the appropriate balance of power in the network of subsidiaries and other business units within the organizational structure. If the analysis supports a strong geographical dimension it is generally appropriate to configure the subsidiaries as country or regional profit centers. This will usually occur when the company is just launching business activities in foreign countries and the level of international development is low; when there is little need or opportunity for cross-border coordination; when local governments are active and demanding in relation to the company’s proposed business activities; and when the international business portfolio includes products and services that are closely related. This type of organizational structure has been referred to as multi-domestic and is described in greater detail below.15 On the other hand, if the business or product dimension is stronger, the subsidiaries should be configured into global product-based business units, each of which is responsible for developing and implementing their own cross-border strategy. This will usually occur when there is a high level of international development, including a substantial proportion of assets and personnel in foreign countries; when there is a great need or opportunity for cross-border coordination; when local institutions are passive or weak; and when the international business portfolio is large and diverse.

Level of International Development

Organizational structure will be affected by the level of international development that the firm has attained. The level of international development is a function of several different factors including the methods used by the company to participate in the economy of a foreign country (e.g., exporting, joint venture with a local partner, or wholly-owned subsidiary); the role assigned to foreign subsidiaries; the percentage of assets, employees and, in particular, management personnel located outside of the US; and the level of reliance by the company as a whole on foreign resources for high-valued activities such as research and development. International activities will play the greatest role in the design of the organizational structure when the company has reached the point where it is creating fully-functional foreign subsidiaries and begins building itself into a multi-dimensional network. The various levels of international development are discussed in great detail below in the section on the process of internationalization.

Cross-Border Coordination

Another important factor influencing the organizational structure of a global business is the level of cross-border coordination, sometimes referred to as “global integration”.16

When there is little cross-border coordination the main profit centers are the countries

14 C. Bartlett and S. Ghoshal, Managing Across Borders: The Transnational Solution (Boston: Harvard Business School Press 1989).15 Id.16 Id. and C. K. Prahalad and Y., Doz, The Multinational Mission (New York: The Free Press 1987).


11


and regions and they become the main axes in the overall organizational structure. In contrast, when there is a high level of cross-border coordination, including trading between subsidiaries in different countries and regions and activities designed to ensure that a uniform approach is taken to servicing customers with multiple locations around the world, the main axes in the overall organizational structure tend to be either business units (in the case of a multi-business organization) or functions (in the case of a single-business organization). There are several different factors that influence the level of cross-border coordination that may be necessary in order for an organization to achieve its goals and objectives including the level of fixed costs; the homogeneity of products and markets; the nature of customers, competitors and suppliers; and the transportability of the products or services of the organization.17

Fixed Costs

Companies that are required to invest heavily in certain assets or activities, such as research and development, manufacturing facilities, telecommunications infrastructures and/or marketing campaigns, are often unable to generate sufficient sales volume in any single country to obtain an adequate return on their investment. In those situations, the company is essentially forced to seek revenues in other countries to justify the initial investment in the applicable resources and thus becomes reliant on various cross-border strategies and activities including global product development process and the creation and management of local distribution partnerships. The key issue for the company is being able to leverage the investment made in one country or in a small number of countries and not duplicate the same amount of time, effort and capital in every new foreign country that the company enters. The task for senior management is to successfully complete the investment project in one or a few countries and then smoothly and efficiently transfer the results (i.e., technology, products, services and/or branding) to other countries through the use of product- or function-based business units.

Products and Markets

Products are best suited to cross-border activities when they are relatively standardized and the markets in question are relatively homogeneous. Unfortunately, and not surprisingly, most markets fall somewhere within the extremes of completely homogeneous and completely divergent and companies that wish to market and sell their products on a global basis will need to acquire the skills necessary to design products that are partially standardized and also capable of easy and efficient modification to suit local requirements in key foreign markets. Companies with these types of design skills and resources will be successful because they can be both global and local at the same time and can take advantage of economies of scale while addressing the specific tastes of customers around the world.

Customers, Competitors and Suppliers

17 J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000).


12


The need for cross-border coordination will be greater in situations where the company’s customers, competitors and suppliers are also global firms that demand that their business partners provide solutions that are coordinated across national borders. This is generally not the case, however, and companies may have a mix of global and local customers which means that the company must be able to act both globally and locally as the circumstances dictate. Some companies specialize in one strategy or the other—for example, a company may choose an organizational structure that focuses solely on global customers or opt for a country- or region- focused structure that concentrates on the needs of customers in those areas that are not serviced by their global-focused competitors. This type of breakout is commonly seen among banks and other financial institutions, a marketplace that includes large global players and smaller local entrants.

Transportability

Cross-border coordination is more likely to occur when the product has a relatively high level of transportability, which occurs when the product has a high value relative to it costs of transportation and there are significant scale efficiencies in concentrating production in a single location and then transporting the finished goods to the customers. For example, semiconductors are a good example of a highly transportable commodity since there are obvious efficiencies to building a small number of large capacity facilities for production and the ratio of value to transport costs is very high. On the other hand, building products, such as cement and glass, are heavy and bulky and difficult and costly to transport over long distances. Accordingly, it is no surprise that companies specializing in building products tend to be local businesses.

Role of Host Governments

The role of host governments in the local economy may be another important factor in the form of organizational structure that operates independently of the level of international development and the amount of cross-border coordination.18 In many cases, the local government may be an important customer, a joint venture partner, a regulator, or some combination of all three of these roles. In any situation where the local government is an active stakeholder in the projected business activities of the company it is recommended that the firm appoint a strong country manager to assume responsibility for maintaining the relationship with the local government and entering into whatever negotiations and communications may be necessary in order to further the goals and objectives of the firm in the country. A similar need may arise when other local institutions, such as trade unions, wield significant influence. If the strong country manager operates within an organizational structure where there are already strong business unit managers to coordinate cross-border activities than the company will be operating through a matrix organizational structure. While in the past it has often been necessary to pay close attention to the role of host governments, their strength and influence has recently been reduced in many cases due to free-trade agreements, global 18 Y. Doz, “Technology partnerships between larger and smaller firms: some critical issues”, in F. Contractor and P. Lorange (Eds.), Cooperative strategies in international business (Lexington, Mass: Lexington Books, 1988).


13


capital markets, deregulation and privatization. As a result, the strong country manager is disappearing; however, the rising power and prestige of regional governmental entities has forced global organizations to grant more authority to regional managers.

Diversity of the International Business Portfolio

The degree of diversity in a business portfolio is analyzed by reference to the number of businesses with different business logic in the portfolio of the company—the greater the number of businesses the greater the level of diversity. Emphasis is placed on the business logic since a company may have two businesses that fall within the same broad industry category yet each business requires a very different strategy and organizational emphasis due to the specific factors necessary for competitive advantage and success in that business. For example, both ethical and over-the-counter drugs would normally be placed within the broader pharmaceutical industry; however, they are actually very different in that the ethical pharmaceuticals business is driven by research and development to discover and develop new compounds while the over-the-counter business is marketing-driven and success depend on huge and accurate investments in advertising and promotion of drugs. In general, if a company has a highly diverse international portfolio of businesses, it is difficult for country managers to attempt to coordinate across product-based business units and therefore the optimal organizational form is a strong product-based business unit manager and weaker country or regional managers. It should be noted that it is the number of businesses in the international portfolio that is important and some companies may be have highly diverse domestic business portfolios and just one or two businesses that have pushed outward into the international market.

Product and Market Factors

Many of the factors mentioned above relate to the particular products and markets under consideration for globalization—the level of fixed costs in the product development and manufacturing process, the nature of the markets served by the company, the type of products, the type of customers, the type of competitors, the transportability of the products and raw materials, and the degree of diversity of the product portfolio. At one extreme the company is likely to use geographic profit centers when fixed costs are low, markets are heterogeneous, customers and competitors are local, transportability of products and raw materials is very low and product diversity is very low. On the other hand, the company will usually select business profit centers as the dominant dimension when fixed costs are high, markets are mixed, products are standardized, customers are global and local, competitors are global, transportability of products and raw materials is high and product diversity is high.

Process of Internationalization

It is apparent that the process of internationalization occurs incrementally for companies as they develop their core business, modify their strategy and learn, usually through trial-and-error, how to transfer their competitive advantages to other countries and form and


14


effectively manage localized business units. A number of studies of the process of internationalization have concluded that it proceeds in stages and the discussion above noted that one of the factors that impacts the organizational structure of a company engaged in global business activities is the stage that the company has reached with respect to international development. For example, Galbraith, a well-known commentator on designing the organizational structure for global corporations has suggested that there are five levels of international development, each of which is described in detail below.19 While this makes sense on its face, there are several practical problems with the conclusions reached in these studies that case doubt on the efficacy of the stages model as a predictor for organizations looking to expand globally. First, although all of the studies claim to have found stages there is no real consensus about how to define a stage nor is their agreement on what the stages will be. Second, in addition to the problems with identifying a universally accepted set of stages there is no good evidence to validate that the stages must be followed and, in fact, studies show that some organizations do follow a given sequence of stages and often skip one or more of the stages completely.

The issues noted above should not necessarily be a cause for abandoning the concept of stages completely—it simply means that one must be realistic about relying on such models and recognize that there must be differences among companies, countries and industries that cannot easily be reconciled into a single model. It is certainly accurate to say that companies generally must approach new foreign markets in increasingly complex and engaged stages and unforeseen events, problems and opportunities will trigger changes along the way. Moreover, while a stages model might turn out to be accurate for entry into one foreign market or business sector it may be totally worthless in the next one that the company selects.

Galbraith has argued that an alternative to the stages model is to track international development of a company and its organizational structure through a series of levels while not concluding or requiring that companies must follow a specific sequence when moving forward or backward within the identified levels. While most companies begin their foray into global business at Level 1 (e.g., exporting activities emanating exclusively or primarily from the US) and then move forward to levels with higher numbers there is no reason why a company cannot begin operating at Level 5 by taking the extraordinary step of acquiring a firm that is already at Level 5 and then adopting the organizational structure and absorbing the organizational capabilities of the target company.20 Among emerging companies in the US it is becoming increasing common for them to move quickly, within a short period from launch, to an international or global strategy, as described in the next part of this Guide, and then quickly to the transnational level described below. For example, a new company may be launched in Silicon Valley where the primary founders live and have worked; however, specific functional activities essential to the strategy of the company may be quickly outsourced to foreign countries

19 The discussion of the various levels of international development in this section is based on the presentation in J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 35-51.20 The use of Levels 1, 2, 3, 4 and 5 in this paragraph refers to the five levels of international development described in the following sections of this part of the Guide.


15


with appropriate resource advantages—hardware research and development, as well as product design, may be located in Europe within a cluster of scientists and engineers with the necessary specialized technical skills; software development may be located in Silicon Valley or overseas in India; manufacturing may be carried out in one or more low-cost countries in Asia; marketing strategy would be set at the headquarters in Silicon Valley; and sales teams would be established worldwide in every region or country where there is a projected market of sufficient size for the products developed by the company. On the other hand, very large companies can move in an opposite direction by selling unprofitable international businesses that could not be managed and settling in as a Level 1 national company focusing on the US and limiting foreign sales to simple and straight forward exporting initiatives. It is also important to note that there is no particular reason that a company must reach Level 5, or even venture beyond Level 1, in order to be successful; however, competitive factors may push a company operating at Level 1 to move beyond simply exporting to serve global customers or contend with rising home country labor costs that are threatening to erode historical margins. Finally, companies may operate at different levels in different parts of the world and are more likely to operate at Levels 4 and 5 in regions where they have experience while using geographic-focused organization structures typical of Levels 2 and 3 in new and relatively unfamiliar geographic regions.

Initial Exporting Activities

The first level of international development, which is the simplest, is “exporting” and may be done entirely from the headquarters company in the US and/or through foreign subsidiaries that act primarily or solely as sales companies. The basic strategy for exports is to transfer products or services from the US to a foreign country and market and sell those products or services locally based on US-based resource advantages, product superiority and/or a global brand. For product-focused companies, the foreign subsidiaries would be staffed by sales and administrative employees and sales would either be made directly in the foreign country or local staffers would seek and consummate relationships with local sales representatives and distributors. For service-focused organizations, the foreign subsidiaries would serve as sales offices and when projects are brought in they would be staffed and completed by the appropriate service providers from the US who would travel to the foreign country to work on the project. In addition to sales, the foreign subsidiary would also provide input to the product or service development process in the US in the form of suggestions regarding improvements and modifications that might make the products or services of the organization more suitable for the local market.

Investment in Foreign Markets

The second level of international development involves actual investment in a particular foreign market in collaboration with one or more other partners, usually a local company with access to resources thought necessary for success in the market. The structure used at this level is referred to as a joint venture and joint venturing has traditionally been a popular method of entering a new foreign market for a number of reasons. First and


16


foremost, a joint venture with a local partner is generally considered the best way to quickly learn how to do business in a foreign country that is new and unfamiliar to the investor. Specifically, the investor can use the joint venture process as a testing ground to determine how well its home country competitive advantages will transfer to the foreign country and identify what advantages can be obtained more efficiently through the joint ventures and what changes might be needed to the basic business model in order for the products and services of the investor to be successful in the foreign market. Once the initial learning period has been completed the investor can determine the best strategy for the foreign country including the possibility of expanding the joint venture, buying out the local partner, launching a new wholly-owned subsidiary to conduct unrelated business activities in the foreign country while continuing with the joint venture, or even simply shutting down the joint venture and abandoning the market. In most cases all of these options are available; however, they should be anticipated in advance with negotiating the initial joint venture agreement. Host governments may limit the flexibility of foreign investors by requiring a joint venture with a local partner as a condition of entering the local market.

Formation of Wholly-Owned Foreign Subsidiaries

The third level of international development involves the formation of wholly-owned foreign subsidiaries that actually undertake one or more essential functional activities—product development, sales, marketing and/or manufacturing—on their own in the local market. At this point the subsidiaries become more than just sales companies working with local sales representatives and distributors and expand to the point where a free-standing direct sales force is put into place and supported by investment in local warehouses for inventories and in customer service units. In addition, if there is sufficient local volume to justify the investment, the subsidiary may engage in manufacturing activities and assume responsibility for the management of its own supply chain. Companies that have reached this level of international development typically implement the multi-domestic organizational strategy described in greater detail below.

Since the subsidiary is essentially becoming a multi-functional business, consideration must be given to the whole array of issues that arise when launching a new enterprise. Most important is the degree of autonomy to be given to the subsidiary. As a general rule, if it is anticipated that a substantial amount of work will be needed to modify the transferred advantages of the parent company in the US to suit local requirements than it is probably best to afford the local management a good deal of autonomy. On the other hand, if the advantages of the parent company can be transferred fairly easily the parent can retain a fair amount of control over subsidiary operations at the beginning. Regardless of how autonomy and control issues are resolved, however, this level of development involves new, and very real, challenges with respect to managing and coordinating the activities of employees located in different time zones that often come from different cultural backgrounds and speak a different language. In addition, as the company is struggling with launching a full-form business unit in a foreign country and transferring and modifying its resource advantages to a new geography it must also


17


continue to address the ongoing challenges of managing a global product development process and support an international brand.

While direct investment through the creation of wholly-owned foreign subsidiaries is not easy, and often can be very costly at the set up stage, there are generally very good and important reasons for taking that step as opposed to continuing to rely on the first two levels of international development, particularly exporting. First, when the company has been able to increase sales volume in a particular country or geographic area it becomes more economical and efficient to launch local manufacturing activities to support sales as opposed to continuing to transport goods into the country from the US or elsewhere. Second, when the costs of labor and other inputs become too high in the US the company is forced to look for more cost-effective alternatives in other countries or geographical areas. Of course, the importance of this factor depends on the labor intensity of the manufacturing process and companies generally have to balance lower labor costs in foreign countries against actual or perceived reductions in quality. The move to a wholly-owned subsidiary may also be driven by the requirements of host governments and/or the business needs of major customers who demand that suppliers be local in order to speed delivery and strengthen support.

Formation of Global Product-Focused Business Units

Companies that have reached the third level of international development generally maintain the US parent as the primary business unit at the top of the organizational structure and launch and expand activities in foreign countries through a multi-domestic organizational strategy described in detail below (e.g., an international business unit or perhaps two or more business units focusing specifically on a given country or geographical region). As the company continues to grow, however, and expands into more and more geographic areas and places greater reliance on functional resources deployed outside the US it begins to take on the characteristics of a multi-dimensional network consistent with a fourth level of international development. While the primary role of the foreign subsidiaries at this level is the same as at the third level—implementing the advantages and strategies that have been developed in the US—the job of senior management in designing the organizational structure is to identify, create and nurture coordination capabilities that extend across business units throughout the geographic areas in which the company is active. Specifically, the organizational structure must include coordination links among the foreign subsidiaries as well as links between the foreign subsidiaries and the relevant business units that remain headquartered in the US. In this situation, companies begin to use an international or global organizational strategy, each of which is described in greater detail below.

One can observe a wide array of alternatives in the ways that global companies have approached coordination links at this level of international development and the determining factor appears to be the degree of cross-border coordination required in order for the overall business of the company to operate smoothly and efficiently. For example, if there is little cross-border coordination then the links between the subsidiaries will be weak and the organizational structure will typically be a portfolio of geography-


18


based subsidiaries that each has its own profit-and-loss accountability. What common bond there is will generally be limited to sharing financial resources and centralized product development. At the other extreme is the global organizational structure where cross-border coordination has been fully implemented and senior management has created strong links among the business units in the US and the foreign subsidiaries. In this situation, one begins to see the erosion of the independence of the geographic-focused units in favor of stronger worldwide product-focused business units and it is common to see the international and geographic-focused business units associated with the third level of international development broken up and their activities transferred to the relevant product-focused business units.

Different structures may be used depending on the situation and there is a continuum based on the relative distribution of power between product-focused business units and geographic-focused units. When the product dimension is the dominant element the company may abandon the use of geographic units in its organizational structure altogether and adopt a structure that consists of only worldwide product-focused and functional units. The product-focused business units may have country managers and if there is a need for the company to be represented to a local government or other important interest group in a country that role will be taken on by the product-focused business unit that has the highest volume of activity in that particular country. Another solution is to allow the geographic-focus units to retain profit-and-loss responsibility and authority over key local decisions related thereto while giving global product-focused business units power and discretion over management of product development and branding. Between these two examples is the structure where the global product-focused business units become the profit-and-loss centers with responsibility for product development and the geographic-focused subsidiaries report to both the product-focused business units and the CEO and limit their activities to coordinating the relationships with local customers and governmental entities.

Use of Foreign Subsidiaries for Management of Strategic Advantages

The fifth, and highest, level of international development is the transnational form in which one or more of the foreign subsidiaries actually assume the leadership role in developing and disseminating certain strategic advantages back to the parent company in the US and throughout the global network of subsidiaries established within the organizational structure. In order to assume this type of role a foreign subsidiary generally has a location-specific advantage such as access to specialized manufacturing skills and/or basic research and development institutions that are leaders with respect to a given technology or scientific area. For example, one foreign subsidiary may be the best at development and design of new products while another subsidiary in a different geography is more advanced at manufacturing on a large and efficient scale. In that situation, the designs for the new product may be sent from the first subsidiary to the second for production and often key parts and components will be used from still another foreign subsidiary that specializes in those items. The bottom line is that each foreign subsidiary contributes its specialized skills and resources in order to provide the organization with overall advantages of scale and excellence.


19


While use of the transnational form has tremendous potential advantages it places significant demands on the senior management of the company given the obvious challenges in coordinating a number of strategy centers around the world and making sure that their advantages are successfully and smoothly transferred to other subsidiaries spread all over the globe. One of the major challenges is communication since the subsidiaries will be managed and staffed by persons from different nationalities and cultural and business backgrounds. Communication and coordination is also made more difficult by the fact that foreign subsidiaries are operating in different time zones that makes it harder for colleagues from different subsidiaries to collaborate on a real-time basis. In order to overcome these obstacles the company must be prepared to invest in a modern telecommunications infrastructure that allows information to flow quickly and freely throughout the global network. In addition, a concerted effort must be made with respect to normative integration to define and disseminate a set of common core values that brings all of the employees within the network together in their understanding and acceptance of the common overall goals and objectives of the global organization. This task generally falls to those with responsibility for developing the global human resource systems of the company.

Given the complexity of creating and maintaining the transnational form one may wonder whether it is really worth it. In fact, many companies decide that it is not and there is no particular advantage with operating at the fifth level of international development as opposed to any other absent specific competitive reasons for doing so. However, pursuit and use of the transnational form may become a strategic imperative when there are significant location-specific advantages outside of the US that simply cannot be ignored in order for the organization to remain competitive. Low cost manufacturing opportunities in certain foreign markets is an easy and well understood example of this situation. Another, somewhat related, reason for focusing on development of a strategic advantage in a foreign subsidiary is when competitors have already taken a similar step by establishing a significant presence in a particular location. For example, if it appears that a specific geographic area is emerging as the center of excellence for a promising new technology it is incumbent upon the company to establish and actively support a subsidiary in that location to ensure it gains access to the ideas and personnel necessary to appropriate any new competitive advantages. Failure to do so on a timely basis may cause the company to lose out to competitors that moved more quickly to set up their own presence in that location. Implementation of an organizational strategy based on the transnational principle is described in greater detail below.

Organizational Strategies for Global Activities

As a company grows it generally identifies opportunities to create additional value through expanding its business activities outside of the US. While marketing and selling products in foreign markets is an obvious example of how a company can derive additional revenues it is also possible to realize low-cost or differentiation advantages by conducting other key functional activities in a foreign location. A common example is when a company moves all or a significant portion of its manufacturing activities to a


20


foreign country in order to take advantage of cheaper inputs such as raw materials and/or personnel. As with any other significant change in the scope of a company’s activities it is essential for senior management to select an appropriate strategy for achieving the desired goals and objectives. With regard to “going global,” companies generally begin by either forming an international department or division with responsibility for certain activities associated with exporting specified products and services to selected geographic markets or simply retaining a basic functional-focused organizational structure and allowing managers of each functional unit to make their own decisions as to how much of their activities should be conducted outside of the US. As time goes by, however, the company may opt for more complex organizational strategies that fall into one of the following general categories21:

Multi-domestic strategy, which involves creating self-contained subsidiaries and divisions (i.e., each subsidiary or division has its own full array of functional resources) in each country where the company intends to operate and customizing the company’s products to suit local tastes and requirements.

International strategy, which involves centralizing research and development and marketing activities in the US and decentralizing the remaining functional activities into national or regional subsidiaries or divisions.

Global strategy, which involves centralizing each of the key value-creation functions at the domestic or foreign location (i.e., either in the US or in a foreign country) where the applicable functional activities can be carried out with the highest level of efficiency and quality.

Transnational strategy, which involves centralization of some functional activities and decentralization of other functional activities as necessary in order to achieve cost savings or increase responsiveness to local requirements.

Each of these strategies carries its own set of requirements with respect to coordination and integration that must be taken into accounts when senior management designs the organizational structure and establishes the dominant cultural values and norms. At one extreme is the transnational strategy which requires the creation and careful management of a complex global network that facilitate the transfer of the skills and resources associated core competencies housed at different locations around the world across all of the company’s operating divisions in the US and in foreign markets. In order for these transfers to be successful the company must be prepared to incur the bureaucratic costs associated with all of the coordination activities including the need to invest in the proper tools necessary for communication and measurement of the performance of the global network. On the other end of the spectrum is the multi-domestic strategy which requires little or no additional coordination expenses because the each country-focused subsidiary or division has its own complete set of functional resources and thus is not highly dependent on a resource transfer from another business unit outside of its country. The coordination requirements and the amount of bureaucratic costs associated with the remaining two strategies—international and global—fall somewhere in the middle of the 21 The discussion of the various organizational strategies for global activities in this section is based on the presentation in G. Jones, Organizational Theory, Design and Change (5 th Ed) (Old Tappan N.J.: Prentice Hall, 2007), 228-235.


21


spectrum because the volume and complexity of the necessary resource transfers within the company’s global network is less than in the case of a transnational strategy.

It is common and expected for companies to change their globalization strategies as circumstances warrant and senior management must always carefully consider the following issues when determining the appropriate organizational structure and control mechanisms for administering an international network:

What are the most effective means for distributing responsibility and authority for operational activities between company managers in the US and managers located in foreign countries?

What divisional structure should be used in order to achieve the most efficient development and use of functional resources while simultaneously satisfying the requirements of foreign customers?

What are the most effective processes and procedures for integrating and controlling the activities of business units that are widely dispersed around the world?

What is the most suitable and effective organizational culture to support the chosen globalization strategy?

International Department or Division

The initial efforts of the company in foreign markets will be typically be housed within an international department or division that is primarily responsible for exporting products and services to selected geographical regions. The other, and larger, part of the company’s organizational structure will focus on US operations and will be broken down and managed according to functional activities. As the international activities expand, often through acquisitions and/or joint ventures in large foreign markets, the organizational structure will gradually change to the point where it features geographic-focused profit centers for each major geographic region/country as well as a profit center for the US—the multi-domestic strategy described below. Profit centers established for major geographic regions, such as Europe and Asia, will typically have sub-geographic units for the larger countries in the region (e.g., China, India and Japan in Asia). Each geographic profit center will have the assets and employees necessary to carry out all of the functional activities that should be executed locally such as sales, marketing, operations, finance and human resources; however, the parent will retain control over those functions as to which it may be more efficient to have centrally controlled and managed—product development, finance, procurement, brand development, marketing services and even manufacturing in some cases. Selection of which functions to centralize and which to delegate to the geographic units depends on the particular circumstances and what will ultimately be most efficient and cost-effective for all of the units within the organizational structure. For example, it may be too costly to have manufacturing facilities in each of the geographic regions and therefore it makes sense for manufacturing to be controlled by the parent unit that can determine where products will be manufactured and then delivered to the geographic units.

Functional Authority over International Activities


22


A functional-focused organizational structure is recommended and preferred for businesses that make substantial investments in research and development, distribute and market relatively standardized products, require high volume manufacturing capabilities and sell primarily to global customers. In that situation the primary axis of the organizational structure will be functional and will include senior managers for each of the key functions-product development, manufacturing, engineering, finance, sales and marketing and human resources-that each report directly to the chief executive officer in the home country. Each of these functions will then make their own decisions about the extent to which their activities will be dispersed globally. For example, in order for the manufacturing function to achieve the necessary economies of scale and costs savings it may outsource manufacturing to foreign countries that have an adequate supply of skilled personnel available to work at low wages.

Multi-Domestic Strategy

A company that elects to pursue a multi-domestic strategy typically uses a global geographic organizational structure with the corporate headquarters group at the top of the hierarchy and foreign subsidiaries or divisions for each of the countries and/or geographic regions in which the company is conducting operating activities. Each of the foreign subsidiaries and divisions are self-contained and include sufficient resources for them to independently pursue all of the necessary value-creation activities for their geographic area (i.e., product development, procurement, manufacturing and marketing). The organizational structure for the entire company is relatively flat and authority is substantially decentralized to each of the foreign business units who are given the power and responsibility to set and execute the strategies that are best suited to meeting the needs of local customers. The corporate headquarters group, which is overseen by the chief executive officer (“CEO”), focuses on various performance measures—return on investment, market share and operating costs/efficiency—to determine which of the foreign business units are most successful and make decisions regarding allocation of capital and possible transfer of resources between the business units.

Companies often attempt to reduce the potential communication and resource transfer issues within a global geographic organizational structure by grouping several countries within a specific geographic region into one regional division. For example, a company may have separate divisions for each of the major countries in which it is operating (e.g., the US, Canada, Japan and the United Kingdom) and then create regional divisions to cover other countries that can be addressed using similar operational strategies (e.g., Asia-Pacific Region (other than Japan), Latin and South America and Europe (other than the United Kingdom). Regional divisions can be successful and efficient in those cases where customers in each of the countries have the same tastes and preferences with respect to product design and marketing messages and the cultural values in each of the countries are similar.

Since each of the country/regional subsidiaries or divisions created and operated within a global geographic organizational structure are intended to be autonomous and are


23


provided with their own functional resources there is generally little need for senior management to attempt to establish and administer integrating mechanisms such as task forces or managers within the corporate headquarters group that spend a substantial amount of time coordinating communications among the business units. Similarly, since it is not necessary for the business units to engage in extensive communications the creation of common worldwide cultural values and norms is also less important. On the other hand, since each country/regional subsidiary and division has its own set of specialist resources in each functional area this type of organizational structure can be quite expensive to establish and maintain and there is a real chance of waste due to redundancy and slack usage of resources. In addition, since the multi-domestic strategy does not encourage transfer of skills and resources between divisions the company may miss opportunities to leverage core competencies on a global basis. For example, if the Japanese division develops a low-cost manufacturing process the global geographic organizational structure does not include a mechanism for easily and quickly transferring the information about the process to other business units where it can be used to gain a competitive advantage beyond what has been created in Japan. At a minimum the company should invest in its information technology (“IT”) structure to allow personnel around the world to communicate electronically and improve the collection of information from the business units so that the corporate headquarters group can evaluate how the entire global network is performing.

International Strategy

An international strategy is often selected by a company that already has a diverse range of products or businesses and is looking to find the best way to coordinate the flow of products and resources across international boundaries. In that situation the company will opt for a global organizational structure that organizes operational activities into different product groups. The structure includes a relatively tall hierarchy with a corporate headquarters group, overseen by the CEO, at the top; two or more global product group headquarters groups at the next level; and country/regional divisions within each global product group at the third level. Each product has its own senior product manager working within the applicable product group headquarters who is responsible for all aspects of setting and executing the global strategy for value creation with respect to the specific product that he or she is managing.

When using an international strategy companies typically centralize certain activities that involve core competencies, such as research and development and marketing, within the global product group headquarters and decentralize the remaining functional activities into the country/regional product group divisions. Given the likelihood of conflicts among the country/regional divisions, each of which need to deal with their own unique local requirements, the organizational designers must anticipate the need for integrating mechanisms that will improve communication and cooperation across the country/regional divisions. Moreover, care must be taken to strike the proper balance of decentralization between the global product manager in the product group headquarters and the country/regional product managers in each division who may have their own ideas the direction that should be taken with respect to core competency activities such as


24


new product design and/or marketing. Finally, in order for a global product manager to effectively control worldwide activities relating to specific products the company must make the necessary investments in IT to ensure that relevant data relating to the performance of each of the country/regional divisions is available on a “real time” basis.

Global Strategy

A global strategy involves locating each of the key value-creation activities of the company (e.g., research and development and manufacturing) at whatever location around the world is thought to be the best in order to achieve the highest level of quality and efficiency. In order for this strategy to be successful, however, the company must design an organizational structure that control and reduces the bureaucratic costs associated with transferring resources from the global functional hubs to the operating divisions. In addition, the corporate headquarters group must ensure that it is able to control and manage the activities of the global functional hubs since they are disbursed in several locations around the world. This type of control is necessary in order for the CEO and the senior executive team to monitor whether the company’s global network is producing the results that are expected in the context of the company’s overall business strategy. In order for its global strategy to be effective a company must focus on facilitating communication and collaboration within its widely dispersed web of functional specialists and this means developing a global IT network and creating an overall corporate culture that is understood and accepted on a global basis.

The preferred organizational structure for a company implementing a global strategy is the global product group structure that is also usually selected by companies pursuing the international strategy. Once again, the company creates two or more global product groups that control all of the resources necessary to develop and commercialize their products on a worldwide scale. Each global product group centralizes management and control over key value-creation activities under the global product group headquarters and decentralizes the remaining activities into country/regional product group divisions. It is up to the managers in the global product group headquarters to decide where the key value-creation activities should be conducted. In some cases, for example, they will be housed in the headquarters office. The more likely situation, however, is for some of the activities to be placed in other locations where the company can tap into special local advantages such as lower labor costs and/or access to cutting-edge technology. An increasingly typical scenario for a US-based company is transferring manufacturing activities to low-cost countries in Asia and product design activities to Europe while retaining control of worldwide branding and marketing in the US.

Transnational Strategy

The global product group structure that is typically used by companies that select either the international or global strategies is helpful in increasing efficiency and quality on product-by-product basis since it centralizes most the key decisions that global product managers need to make in order to successfully produce and promote their products in diverse markets around the world. One of the problems, however, that the emphasis on


25


centralization creates is that it often becomes more difficult for a country/regional division to respond quickly to the unique tastes and requirements of the customers in their geographic area. In addition, the global product group structure does not anticipate or promote the transfer of resources and core competencies across the boundaries that have been established for each product group. This is understandable given the high costs of establishing the communication and integration tools necessary for sharing among product groups; however, it is inevitable that companies will miss valuable opportunities to leverage core competencies developed within one product group that can also be exploited by other groups.

In order to simultaneously pursue the dual objectives of lowering costs across all global activities and achieving differentiation advantages based on innovation and responsiveness to the local requirements of all customers around the world companies have opted for a transnational strategy that relies on the effective use of a different organizational structure—the global matrix structure. The vertical axis on the organizational chart for the global matrix structure identifies each of the company’s country/region divisions (e.g., US, Europe and/or Asia). The managers of each of these divisions would be primarily responsible for all of the local operational activities including, most importantly, establishing strong relationships with their customers that can serve as a source of information on local tastes and requirements. The horizontal axis on the organizational chart for the global matrix structure identifies each of the global product groups which are created to provide each of the geographic divisions with necessary specialist services in key functional areas such as research and development, product design and marketing. Functional specialists in the global product groups are actually organized in a way that corresponds to the geographic divisions and they are simultaneously accountable to managers in both the product group and in the geographic division. In order to be successful the global matrix structure must include mechanisms for global product managers to receive product-specific information from each of the geographic divisions so that they can determine the best global strategy for their products and provide the CEO and other members of the senior executive team with sufficient data to evaluate product group performance and make resource allocation decisions. In addition, the senior regional and country managers must collaborate with product group managers to ensure that the dual reporting requirements of functional specialists are managed smoothly and that any function-based core competencies can be transferred and leveraged throughout the worldwide organization.

A transnational strategy allows a company to use foreign operations as a means for lowering costs and improving efficiency with respect to products that are sold in the US while at the same time executing a strategy of localization in foreign markets that will makes it products attractive to customers outside of the US. One of the most common features of a transnational strategy is the decision to locate worldwide operational activities for manufacturing and assembly at locations outside the US where labor costs are low and raw materials are readily accessible while retaining control over research and development and product design in the US. This allows the company to develop low-cost core competencies that can be exploited in the US and in foreign countries. At the same time the company can establish country/regional divisions that are responsible for


26


marketing the company’s products in their geographic areas including identifying product modifications and enhancements thought necessary to customize those products to local tastes and requirements. Information about the modifications and enhancements is transmitted to the global manufacturing division which designs and manufactures products that are tailored to the needs of the foreign divisions. Another important element of the transnational strategy is the sharing of marketing information among country/regional divisions. For example, if a new product is successfully introduced in the US the global matrix structure facilitates the transfer of marketing information about that product to foreign divisions so that they can also commercialize the product with any necessary localization.

A global matrix structure requires a keen focus on integration and carries the highest level of potential bureaucratic costs of all of the “going global” strategies. As noted above, managers and employees around the world must continuously recall and balance their concurrent responsibilities to product and geographic divisions. At a minimum, the company must build a global communications network that supports the needs of employees to continuously communicate to their colleagues with their specific product, geographic and functional areas. In addition, in order for the company to cultivate functional core competencies integrating mechanisms must be created to allow specialists in a particular functional area to communicate and share information. The global matrix structure also requires the highest level of communication and interaction among employees who are separated by long distances and thus it is essential to establish and disseminate “international” cultural norms and values that can be shared and understood by all employees around the world. If done well, however, the global matrix structure can provide regional and country managers with the requisite authority and autonomy to design and execute truly local strategies for relating to customers while providing global product managers at the corporate headquarters with the information and resources that are required in order for them to manage their own worldwide strategies for the products under their control.

It should be noted that many companies manage the complexity of their transnational strategy by adopting elements of a network organizational structure. These companies invest in, and retain full ownership and control over, the resources necessary to conduct certain activities that are part of the company’s core competencies (e.g., research and development). However, rather than incurring the large additional costs of establishing wholly-owned manufacturing, marketing and sales operations all around the world the company may rely on a network of strategic alliances with foreign manufacturers and distributors to produce the company’s products and act as the company’s marketing and sales agent in foreign markets. Each of these foreign partners is required to adhere to strict standards with respect to quality control and business ethics and the company retains the right to terminate the relationship in the event a partner breaches its obligations or the company realizes that the alliance is no longer necessary or appropriate in light of the company’s overall strategy and objectives. The network structure reduces the costs and risks of forging a transnational strategy and provides the company with a substantial degree of flexibility to address rapidly changing competitive conditions and customer requirements.


27


Geographical Divisions

The first organizational unit for international activities that is created when a company decides to begin expanding its activities outside of the US is usually a geographical division. Companies that have no international experience will add this division to existing business units that have already been established for their US-based operations.22

As the company acquires international experience it will often add a new division for each new geographical region that it enters. For example, expansion into Asia may call for the formation of a division that will cover Southeast Asia and the company may also form divisions specifically devoted to large country markets such as China and India.23

There are several reasons why a geographic division is the preferred organizational structure at the beginning of a company’s international expansion:

Geography is generally the best and easiest way to organize and manage the key activities required to launch operations in a new foreign market—sales, distribution, marketing and service. By creating a geographic structure the company can reduce travel and transportation costs while still providing the necessary level of local customer support.

A separate division specifically dedicated to the activities in a particular region provides a higher level of emphasis and focus to the efforts of the company to be successful in the particular foreign market.

Launching a geographic-focused division is a good way to signal a change in the overall strategy of the company and demonstrate commitment to creating a critical mass of resources dedicated to international expansion. An international division can provide a focus for the efforts of the company to recruit and train international managers and designating a senior executive of the division who can also be part of the company’s top management group guarantees that the issues and needs of foreign geographies will be taken into account in setting overall company strategy.

An international division is a good way to conserve a scarce resource—managers with meaningful experience in the selected geographic region. Initially this core group of managers can be pulled together into a single group to pool their information and experience in a way that would not be possible if they remained dispersed throughout the regular organizational structure of the company. As time goes by they can put programs in place to recruit and develop additional experienced managers to handle the expansion and maturation of the activities in the geographic region.

As discussed below, while reliance on an international or geographic division is based on the choice to make geography the primary dimension of the company’s organizational structure the company will nonetheless establish functional structures that will be part of

22 Geographic divisions are typically used by firms that have a low proportion of assets and few subsidiaries in foreign countries. See W. Egelhoff, Organizing the Multinational Enterprise: An Information Processing Perspective (Cambridge, MA: Ballinger Publishing Co. 1988). 23 The discussion of geographical divisions in this section is based on the presentation in J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 71-83.


28


a secondary dimension in the structure to provide support for the activities of the geography-focused units. The decision as to which is the primary axis will depend on analysis of the key factors impacting cross-border coordination and the company will generally select geography as its primary access when fixed costs are low; products, markets and brands are heterogeneous; and key business partners, such as customers and suppliers, as well as competitors are local. For example, a company engaged in the tobacco industry will likely opt for geographic profit centers on a global basis since there is little research and development, efficiencies of scale are not that important, countries all have their own preferences and favorites as to brands and blends of tobacco and competitors and customers are generally local. In any event, the challenge for the company is to ensure that its organizational structure includes the necessary networking processes between geography and function.

The role of the geographical division in providing a special focus is worth discussing in greater detail. Even companies with substantial experience in international operations should view expansion into a new geographic region or foreign country as akin to launching a start-up business that will necessarily require special attention and some degree of separation from the day-to-day activities of the rest of the organizational structure and its prevailing policies and practices. Inevitably the management of any new geographic division will want the latitude to deviate from the way things are done in the US and in other geographic divisions to fit the specific requirements of the foreign country. As such, these managers can be expected to request approval for a series of exceptions to standard business processes and will also likely push for modifications to product designs and marketing campaigns in order to fit the local market. The new geographic division will also need patience and assistance as it goes through what is often a trial-and-error learning experience in attempting to transfer resource advantages to the new geography and, as necessary, modify them in order for them to be effective in the specific business environment.24 Given the need for all of these changes and exceptions, using a separate geographic division, at least at the start-up stage, is a sound and sensible strategy for reducing conflicts that might otherwise arise with existing divisions in the US and in other geographic regions. One reason for keeping a new international division separate from the existing network is to protect the division from domination by the existing organizational units that are more entrenched and have significantly more resources in terms of management influence and assets. However, caution should be used when deciding how long a new international division should be separated from the activities that continue to occur in the other parts of the organizational structure. If the international division remains isolated for too long there is a risk that the organization structure will be bifurcated into separate and divided units and thus create ongoing communication and coordination problems. In general, once the international division is up and running and has identified and executed the most important changes required in order for it to be successful the focus of senior management should shift to ensuring that the division is effectively integrated into the 24 For discussion of transferring competitive advantages, including resource advantages, to foreign markets, see A. Gutterman, Going Global: A Guide to Building an International Business (Eagan, MN: Thomson Reuters, 2019).


29


overall network as a strong contributor that can hold its own in the face of the competing demands for resources and attention from the other organizational units.

Roles and Responsibilities of Geographical Divisions

Galbraith has identified six main roles or responsibilities for geographical divisions.25

The first three are essentially inbound, or US to new geography, activities and include the transfer of competitive advantages from the US or another existing geography to the new geography, localization of the success formula of the organization and building a local business. The other three are outbound, or new geography to US or other existing geographies, activities and include communicating with and educating the US and other existing geographies about how business is done in the new geography and how the transfer process can be made more efficient, championing the activities and opportunities of the new geographical division and contributing to the development and growth of the international expansion capabilities of the entire organizational structure.

Inbound Transfer of Competitive Advantages

The first responsibility and activity of the new geographical division is identifying and transferring the relevant competitive advantages of the company to the new geography and for devising strategies that will allow the division to overcome any natural competitive advantages of local competitors (e.g., local know-how, reputation, and relationships with local customers, suppliers, regulators and other partners). Companies may have product- or service-type advantages and/or resource advantages (i.e., advantages that can be used to create and sustain product- or service-type advantages).26

In order to increase the chances of a successful transfer of advantages the company should assign managers and employees with actual experience in the new geography (i.e., expatriates) who are also familiar with the company’s business model and its unique competitive advantages and have them work with carefully selected local personnel to launch the business activities of the new division.

Modification of Competitive Advantages to Meet Local Requirements

Ideally a company would be able to easily and seamlessly transfer each of its necessary competitive advantages to a new geography without modification. However, it is often the case that there are certain advantages that cannot be transferred “as is” and the second responsibility of the new division in those instances is to identify and execute the necessary modifications to those advantages in order to conform to local requirements or, if that is not feasible or adequate, find workable local substitutes or develop a way to compete without those particular advantages. For example, assume that a company has been able to rely on low wages as a way to develop a competitive service advantage in the US and other geographies by building a business model based on a high ratio of staff

25 See J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 73.26 For discussion of transferring competitive advantages to foreign markets, including various strategies that companies might use to transfer or replicate resource advantages, see A. Gutterman, Going Global: A Guide to Building an International Business (Eagan, MN: Thomson Reuters, 2019).


30


to customers. If the company decides to open for business in a new geography where local labor costs are higher it may be impossible profitably sustain the large staff-to-customer ratio in that geography and the new division will need to look for substitutes in order to provide the level of service deemed necessary in order for it to stand out among competitors. One possibility would be to design human resources policies in that geography in ways that motivate personnel to provide customers with the desired service experience (e.g., recruitment and hiring policies that focus on creating a younger and more enthusiastic staff, extensive training and incentive programs that reward service-oriented performance).

Building Local Organizational and Business Infrastructure

The third responsibility of the new geographical division, once the initial transfer and, if necessary, modification of competitive advantages has largely been completed, is to put in place all the building blocks necessary for the operation of a sustainable business in the new geography. This includes hiring and training local personnel, establishing supplier and distribution networks, building and nurturing a customer base and forging relationships with the government and other key local stakeholders such as trade unions. This process can be particularly challenging in situations where it takes longer than expected to transfer or modify the competitive advantages since the division will be growing and adding personnel at the same time it struggles to identify the best and most efficient business model to use in the new geography. A formal planning process should be undertaken prior to launching the new division so that those responsible for the managing the division have a plan to follow and goals and objectives to pursue;27

however, the proper path for building the local business is often a matter of trial-and-error and sudden changes must often be made in the design of the local business model and the manner in which initially scarce resources are allocated.

Establishing Communications with US-Based Managers

The fourth responsibility for the managers of the new geographical division is to make sure they maintain constant communication with US-based managers and transfer sufficient information back to the US to educate managers in the headquarters office about the process of transferring competitive advantages and other resources and the progress that is being made to develop the local business in the new geography. This is not as easy as it sounds for a variety of reasons that extend beyond the normal and anticipated problems associated with differences in culture, language and time zones. For example, US managers often have trouble understanding why a business model that has been so successful in their country cannot easily and quickly be transferred to another geographic region, particularly a country that is considered to be “less advanced”. A combination of arrogance and ignorance within headquarters personnel sometimes makes it difficult for managers in the new geographic region to explain their problems to US managers and elicit meaningful feedback and suggestions for solving transfer issues. A related issue is the need for the new geographical division managers to request a large 27 For further discussion of planning for entry into new foreign markets, see A. Gutterman, Going Global: A Guide to Building an International Business (Eagan, MN: Thomson Reuters, 2019).


31


volume of changes to the elements of the successful US business model in order to satisfy specific local requirements of customers in the new geography.

Championing the Needs of Foreign Subsidiaries

The fifth responsibility of a geographical division is to serve as a champion for the needs of its own new foreign subsidiaries within the entire organizational structure of the company, particularly in relation to senior management of the parent unit back in the US. For example, if personnel in a new country strongly believe that changes to a product are necessary in order to achieve success locally the geographical division can take the lead in convincing US-based product engineers to focus on the need for redesigning the product and can also work to obtain the necessary financial resources to fund the redesign work. US-based managers affiliated with the geographical division must continuously collect information and ensure that local managers are provided with the necessary support and encouragement as they present new ideas back to the parent unit and request changes in the traditional business model.

Supporting Development of International Organizational Capabilities

The final major responsibility of a geographic division is to assist the parent unit of the company in developing and improving the international organizational capabilities mentioned above including creation of an international product development process; improving the processes for transferring, modifying or replacing competitive advantages to be used in new geographies; and promotion cross-border integration of business units. As previously discussed, a number of initiatives are required in order for a company to develop the capabilities necessary for efficient global expansion. For example, a cross-functional, cross-border task force should be created to oversee global product development and create and manage global brands that can be promoted across national borders. As for cross-border integration, companies must be prepared to make substantial investments to keep their growing global networks together including improved technology and implementation of human resources practices that facilitate close interaction among personnel in different countries.

Balance of Authority Between Geographical and Functional Dimensions

As noted above, geographical divisions generally exist and operate in an organizational structure that includes both geographical and functional units and it is incumbent upon the designers of the organizational structure to adopt a structural solution that combines the best elements of geographic and functional focus based on the overall strategy of the company and practices and trends in its specific industry. In general, the company must be able to identify which of the most important strategic factors for a combined organizational structure should be managed geographically and which should be managed functionally and these decisions can be used to create the proper balance in the organizational structure.


32


In many industries, such as pharmaceuticals, research and development relating to new products is an expensive proposition that requires a substantial investment in relation to the total sales of the organization. Given the need to closely manage this activity and seek and achieve economies of scale it is typical to find that R&D is a global function even though significant portions of the activity may be performed in different countries subject to the overall control and coordination of a central management team. Globalization of R&D in the pharmaceutical industry is also dictated by the need to develop common processes and systems for conducting and completing clinical trials in major geographic markets and then collecting the information from the trials in a database that can be used to support clinical trials and applications for approval of new drugs in other countries if potential sales volume warrants that type of effort. A global R&D function is also the cornerstone of a coordinated new product development process that include other essential functions such as manufacturing and marketing and the best way to ensure that this process is established is by making it a global effort that is centrally managed.

Manufacturing is also likely to be a global function given that there are generally cost savings that can be achieved through volume manufacturing and it is simply too costly to build and maintain smaller manufacturing facilities dispersed throughout all of the geographic regions in which the organization is actually selling its products. On the other hand, country and regional managers, who have profit-and-loss responsibility for the local businesses that they oversee, will generally have greater input into functional activities that can and should be customized to their specific requirements—sales, marketing and packaging. In addition, ideas and suggestions will flow back and forth between the global functions and geographic units on various issues. For example, country and regional managers will push the global R&D function to consider designs that can ultimately be easily adapted for their local markets. Also, while each geographic region will need to adopt and implement its own decisions regard promotion and positioning of products, there should be a global marketing strategy and accompanying support that serves as foundation for all marketing efforts in the various geographic regions. Finally, the global manufacturing function should reach out to the geographic units to understand their specific packaging requirements and identify strategies for greater efficiencies such as pooling purchases of packaging materials.

Once again the pharmaceuticals business, while clearly one in which it is essential to implement a global R&D function, is a good example of some of the local issues that usually dictate the need for strong multi-functional geographic units with profit-and-loss responsibility. Country conditions and requirements can vary in a number of areas including preferences of “customers” (e.g., patients and their physicians); governmental testing and approval requirements; strength of dosage (even though the active ingredient is the same in all countries); and form of use (e.g., capsule, tablet, liquid or injection). These differences will impact the strategy used to enter a particular country and the investment of time and money necessary to establish a business for the new product. In some cases, particularly when the form of use in the new country differs from the form in the home country, additional clinical trials will be needed and additional trials may also be recommended in cases where it is believed that the information gather by that process


33


will be necessary in order to educate local hospitals and physicians about the new product. Different doses and forms of use will also obviously impact the packaging requirements for the country and this information must be shared with the global manufacturing function. Finally, if the local government is heavily involved with procurement decisions, as is the case when the health care system is government controlled, it may be necessary to invest in local activities such as clinical trials and manufacturing in order to induce the government to view the new product favorably.

An organization chart for a combined geographic and functional structure would have several geographic units and several functional units at the top of the chart reporting directly to the CEO. For example, geographic-focused business units might be created for North America, Asia and Europe while functional-focused business units with global authority and responsibility might be created for R&D, manufacturing and marketing. The geographic-focused business units might be further broken down into countries and each country business unit, which would have profit-and-loss responsibility for that country, would have functional managers that would be responsible for communicating with the global functional units. For example, the country unit for Spain would have an R&D manager responsible for communicating any specific product development needs for that country and a marketing manager responsible for receiving and adapting the global marketing strategy to the local requirements in that country. While Spain might not have a manufacturing manager, unless the global manufacturing unit has decided to locate a manufacturing facility in Spain, it will nonetheless have someone responsible for communicating the global manufacturing unit on packaging and logistics issues relating to products to be delivered to and sold in Spain. Each country unit would also have its own separate local sales function.

Subsidiary Autonomy

An important decision to be made when establishing a geographical division or foreign subsidiary is how much autonomy should be extended to the new unit by the parent company in the US. Arguments for granting a high level of autonomy focus on the need for the new geographical division to have the freedom to learn about business conditions in its region and adapt its operations and strategies to suit local requirements. On the other hand, however, headquarters has a legitimate interest in exercising some level of control over its geographical divisions in order to ensure that the core advantages of the organization are efficiently transferred and that each of the divisions is ultimately integrated into the global network of the organization. The search for the proper balance has been studied in great detail28 and it is not surprising to find ongoing tension between headquarters and its geographical divisions as they struggle to find the best solution.

The first factor that should be considered with respect to the autonomy issue is how much cross-border coordination is actually necessary in order for the company to execute its international strategy. If it is clear from the outset that there will be a need to tightly 28 See, e.g., W. Egelhoff, Organizing the Multinational Enterprise: An Information Processing Perspective (Cambridge, MA: Ballinger Publishing Co. 1988); N. Nohria and S. Ghoshal, The Differentiated Network: Organizations Knowledge Flows in Multinational Corporations. (San Francisco: Jossey-Bass, 1997).


34


integrate the geographical division into the global organizational network, the division will typically not be given much autonomy. On the other hand, if cross-border coordination is not that important or there are special considerations such as a strong local governmental influence then it is more reasonable to delegate more autonomy to the geographical division.

The second factor to take into account is the cultural differences between the US and the geographic region in which the new division is being launched. If there is a substantial cultural gap due to customs, language and the like there is a higher likelihood that there will be problems in efficiently transferring competitive advantages and management systems from the US to the new geography. In that situation the geographic division will need more freedom to make the changes it believes are necessary in order to re-create the most important elements of the US business model in the new area.

The third factor to consider is the types and amount of competitive advantages that need to be transferred from the US to the new geography and the amount of adaptation that may be required in order for those advantages to be successfully transferred. It is clear that the new division will need more autonomy when success depends on determining how best to transfer resource advantages such as creating a new supply chain, building a local workforce and nurturing customer relationships. The more adaptation that is necessary the greater the need for changes and modifications to the US-based competitive advantages and the new geographical division will flounder if it lacks the autonomy to act on its own and must wait through a time-consuming approval process at headquarters.

Naturally the headquarters office in the US will have concerns and some anxiety about granting substantial authority to a geographical division to make changes and modifications that the division believes to be necessary to the competitive advantages being transferred from headquarters. However, time wasted on obtaining approvals from headquarters can make it more difficult for the geographical division to assemble the employees, suppliers and distributors necessary for success and may prevent it from satisfying the legitimate requirements of local customers on a timely basis. Moreover, since most of the information and knowledge that is relevant to proposed changes and modifications resides in the specific geography there is often a real issue about whether managers at the US-based headquarters are really in a position to make intelligent and thoughtful decisions. One solution that should be considered in order to create an acceptable balance between control by headquarters and autonomy for geographical divisions is to establish a team of managers with responsibility over the geographical division that includes both expatriates and local nationals. The expatriates can provide the requisite knowledge about the competitive advantages of the company that are to be transferred as well as the way management systems work at the headquarters office and the local nationals can provide the necessary knowledge and information about business conditions in the new geography.

Examples of the Geographical Division


35


An international or geographical division can take a variety of forms and may either become a permanent part of the company’s organizational structure or serve as a transitional unit that will change as the company continues to expand its global operations and move a greater percentage of its assets and employees outside of the US. Generally, the initial international or geographical division is formed at the same level of the company’s organizational structure as the existing US business units. The US business units each coordinate the functional activities necessary for their operation and success while the international division is initially broken down along geographic lines into regions and countries. If most of the assets and employees of the company stay in the US the international division will remain in place and the organizational structure will need to include coordination processes to make sure that the international division is appropriately linked to activities in the US. Historically many Japanese companies have followed this approach by maintaining most of their research and development and manufacturing activities in Japan and then limiting the activities of the international division to sales and distribution.29

On the other hand, if a company moves a significant percentage of its assets and employees outside of the US, and foreign sales continue to increase, the international division may soon give way to a regional structure which calls for an organization structure that includes separate units or divisions for each major geographic area. For example, there may be a regional division for each of Europe, Asia and the Western Hemisphere and each of those divisions would be given the resources and authority to manage a wide range of functions within the region including manufacturing, sales, distribution and marketing. Research and development might be retained in one country, presumably but not necessarily the US, to harvest the benefits of economies of scale; however, research and development processes would be adapted to facilitate localization of new products for each of the regional divisions. Each regional division will be established as a separate profit center and managers in each division will be given sufficient autonomy to make the decisions that are most relevant to achieving their regional goals and objectives.

Once regional divisions have been formed, they will sit beside the existing US business units on the overall company organizational chart and their activities will be broken out into functions (e.g., manufacturing) and into countries and sub-regions. Regional structures make sense when the level of product and market diversity has increased to the point where it becomes appropriate and efficient to decentralize decision making and the key to success of regional structures is development of a strong pool of managers with experience in the region and in overcoming the challenges of working within a global organization. In addition, serious consideration should be given to launching a regional division when the volume of sales and other activities within the region has reached the point where it can support the investment that will need to be made in building or acquiring factories and other facilities and in the administrative overhead associated with the creation and maintenance of the division.

29 See S. Humes, Managing the Multinational: Confronting the Global-Local Dilemna (Hertfordshire UK: Prentice Hall International (UK) Ltd., 1993).


36


Once the company has implemented a regional organizational structure it may later transition once again to creating global product-based business units, which are discussed elsewhere in this Guide. For example, as the market differences between regions becomes smaller and business units in the home region, such as North America, become more experienced with the requirements of international business, the next natural step is to organize the activities in each region into product-based business units, each of which will become a regional profit center. More and more assets and employees of the company will be moving outside of the US and key global activities, such as research and development, will also begin to migrate to the region that offers the best resources and opportunities. Eventually the regional product-based business units will be combined into global product-based business units; however, the regional units will generally remain in some form to provide infrastructure and shared services for the global units.

Multi-Business Companies

The geographical division organizational structure described above, which is generally based on geography as the primary dimension and functions as the secondary dimension, is appropriate in instances where the company is engaged in a single line of business. In contrast, multi-business companies (i.e., companies that have more than one active line of business) tend to adopt organizational structures that use geography and business as the two primary dimensions. As a general rule, multi-business companies execute necessary cross-border coordination through their business units, the necessary operating functions are placed within these business units and profit-and-loss responsibility will be balanced between geographic regions and businesses. The balance of power within the organizational structure will depend on specific strategic considerations and multi-business organizations may allow geography to be the dominant dimension (i.e., geographic profit centers) or may go the other direction and base their structure on the premise that the global businesses will be the dominant dimension (i.e., business profit centers). A matrix organizational structure will be used when there is an attempt to balance geography and business.30

Geographical Profit Centers

While it is now relatively rare for a multi-business company not to have at least one, if not more, global business units it is nonetheless still possible for such a company to design and use an organizational structure that is based primarily, if not entirely, on geographical profit centers. Geographical profit centers make sense when the main strategic factors for each business dictate localized control and there is little need for cross-border coordination between similar businesses. In effect, each geographical profit center is a portfolio of domestic businesses and one could expect to find some of the following characteristics associated with each of the businesses: low fixed costs, research and development investment as a percentage of sales is low, no global branding or advertising requirements, a strong need to satisfy specific local consumer tastes and 30 The discussion of strategies for organizational structuring available to multi-business companies in this section is based on the presentation in J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000).


37


needs, minimum-efficient-scale plants that can supply areas that are smaller than the countries or other geographic regions selected by the organization, supplies and other inputs can all be obtained from within the geographic region, and a largely local customer base that requires that the managers and employees of the business unit forge strong relationships within the local community. Not surprisingly, geographical profit centers should also be considered when the local governments play a significant role in the business sector as a regulator, source of capital and/or consumer. In some cases the businesses within the geographical profit center, although separated for structural purposes, are actually closely related and thus the situation is similar to a single-business structure in which geography has been selected as the dominant dimension.

Balanced Organizational Structures

Several factors may drive multi-business companies away from the extreme structural solution of strong geographical profit centers described above toward some sort of balance between geographic and business dimensions:

As product lines become more diverse it becomes too challenging for a single country manager to simultaneously oversee all of the products that the company intends to offer locally including the need to manage different supply chains and distribution channels.

As competitive factors accelerate the push for new products companies must adopt the cross-functional processes considered to be important for successful new product development. The effect of this change is to reduce the authority vested in the functions and push the company toward creation of and reliance upon strong global business units.

Companies expanding internationally have become increasingly interested in developing and nurturing global brands, as opposed to a mixed bag of smaller local brands. In order to accomplish this objective more control must be given to specialized business units recognized at the parent level that are vested with brand management responsibilities that cut across geographic borders.

Companies have become increasingly dependent on cross-border joint venture arrangements with business partners interested in collaborating within a broad geographic region, such as Europe or Asia, rather than just a specific country. This trend has tended to reduce the authority of country managers in those countries where the joint venture is active.

Customers that formerly operated locally have begun to expand their operations across borders and have begun to demand that there vendors deal with them under a single contract rather than having each country-based subsidiary set prices and negotiate terms of delivery and service.

Many companies have needed to change their structures in respond to the moves toward globalization that have been made by their competitors.

In response to these factors companies have adopted an organizational structure that features geographical profit centers combined with central business unit coordination. The main business units in such a structure would fall into one of three categories—key


38


functional units that are considered important enough to the entire company that they should continue to be managed by the parent, such as research and development, purchasing and finance and administration; business groups that oversee multiple units organized around discrete businesses; and geographic units for large regional areas such as North America, Europe and Asia. This structure is the byproduct of several important shifts in the way that certain activities are managed. First, certain important functions, such as manufacturing and marketing, have been taken out of the control of the parent and moved to the appropriate business units; however, the parent still controls and coordinates important strategic initiatives such as cross-border branding and monitoring activities of global competitors. Second, the geographic units have been reorganized so that individual countries are no longer preeminent and that emphasis is now placed on coordination across borders within a larger geographic region. This type of structure makes particular sense in regions such as Europe and South America where regional economic and political units have been emerging. In addition, it allows the company to take advantage of new opportunities for cross-border purchasing of packaging materials and cross-border distribution. Each of the business units is defined in light of products, brands and global competitors and includes each of the functional activities necessary to pursue and achieve profit-and-loss goals for the specific products. While the geographic units are organized on a regional basis, their activities are further broken down into countries and larger countries may adopt a business unit structure similar to the business groups to simplify communications between business managers and country managers responsible for the same products and activities. For example, if there is a global business unit for paper products it will likely have a dedicated group assigned to marketing strategies for those products. In the business unit for the larger countries there may also be a product manager for paper products and that manager may assign one of his staff members to handle in-country marketing and coordinate with the marketing group in the global business unit for those products.

Matrix Structure

In cases where it is necessary for the company to simultaneously have strong global business units and strong country-focused units it may opt for a matrix organizational structure that creates a roughly equal balance of power between the business and geographic dimensions. For example, a company may have a portfolio of businesses that each require significant investment in research and development, large scale factories and extensive cross-border coordination—all factors that point to strong business units—while also needing strong country managers because the main customers for the various products manufactured by the business units are local governments or customers heavily influenced by local governments (e.g., utilities and contractors working on government projects). In that situation, the organizational structure might include three main categories of business units that report directly to the CEO—business-focused units organized into the major business segments of the company; regional-focused units organized into the major geographic regions in which the company conducts its business activities; and functional units for those functional activities that have been retained by the parent such as human resources, finance and/or research and development. Within each business segment there will be a large number of discrete business areas or sub-


39


businesses and within each regional-focused unit there will be separate business units for each country within the geographic region.

With a matrix structure such as the one described above the front line organizational unit will be the companies that have responsibility for a business area in a particular country. These companies will have profit-and-loss responsibility for the entire country as well as for specific products within the business area that are distributed within the country and the manager of the company will need to report to both a senior manager for the business area and a senior manager for the country. For example, if one of the business areas is widgets and one of the countries is Italy then there will be country manager overseeing the Italian widget business who will report to the global widget manager and the general manager for all business activities in Italy. The Italian widget business could be operated based on functional activities or could itself be broken down further into two or more discrete product lines that are themselves profit-and-loss centers directed by an Italian product manager who might have to deal with three reporting relationships—the global product manager, the manager of the Italian widget business and, to some limited extent, the Italian country manager.

In a matrix organizational structure, the critical element is how actual and potential conflicts between the needs and goals of business and geographic managers are handled.31

One way to maximize the possibility of success is to be sure that there are adequate accounting and management systems in place to fairly and objectively record and report the performance of each profit center created within the organizational structure. Specifically, it is important for the systems to be able to be determine profit-and-loss for each business area across all countries and within each of the countries and determine profit-and-loss for each country across all of the business areas that are active in that country. With this information it is much easier for the global business manager and the country manager to reach agreement on the appropriate profit-and-loss objectives for business areas in that country and they are therefore much more likely to cooperate with one another in support the efforts of the country business area manager. Another important strategy to reduce conflicts in the “balanced” arrangement is to actually allocate in advance primary authority over certain types of business decisions to either the business manager or the country manager. For example, business managers may take the lead with product development, capital expenditures, location of manufacturing facilities, procurement and pricing while country managers will be given the nod with respect to primarily local issues such as recruitment and human resources strategies, customer strategies and relations with local governments and other key local players such as trade unions. Finally, even under the best of circumstances conflicts will arise and the designer must establish institutional methods for communication and conflict resolution among business and country managers so that country business area managers can remain focused on attaining their profit-and-loss goals.

31 For further discussion of the challenges associated with using a matrix organizational structure, see A. Gutterman, Organizational Structure (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at www.alangutterman.com.


40


Recruitment and supervision of the employees with dual reporting responsibilities is one of the key issues in a matrix structure. It is important for both managers to actively participate in the hiring process and to work together to establish goals for the employee and evaluate the performance of the employee. In this way the employee is able to focus on completion of the responsibilities associated with the position rather than getting bogged down in conflicts between the two managers. It is not necessary that each of the managers be involved in every activity of the employees; however, the activities of employees should be broken down so that it is clear which ones fall within the purview of the business manager or the geographic manager.

Business Profit Centers

Many multi-business companies have moved toward establishing global business units as the dominant dimension in their organizational structure coupled with a corresponding subordination of the roles of geographic dimension. This trend is based on several factors that have increased the need for effective cross-border coordination—shorter product life cycles that demand global volume in order to recover increasingly larger investments in new product development, a shift from local to global customers that demand global standards and universal supply agreements that cover multiple countries and regions, and a rise in global competitors. The organizational structure for these companies is based product line-focused global business units that are the profit centers for the organization; however, full-time managers for geographic regions and some major countries may still be used to handle important relationships with local governments and customers and centralized functions such as human resources will continue to coordinate and administer activities that require attention to country-specific requirements (e.g., compliance with local laws and regulations pertaining to salaries and pensions). Another way to be sure that the geographic dimension is not totally ignored in an organizational structure dominated by global business units is to have the general managers of those units be responsible for issues that might arise in the area of the world where they are located. For example, if the general manager of a group of businesses is located in Europe that manager may be designated as the voice and face of the organization to the local business community and assigned to monitor political and economic developments within the European Union. A similar approach for a company that has manufacturing facilities in numerous countries is to have the managers of those sites serve as the country manager in situations where such a position is considered necessary.

Front-Back Hybrid Organization

The front-back hybrid structure relies on two multifunctional halves, each of which is focused on different activities. The front half of the structure is organized around a particular customer group and the composition of the customer group can be defined by reference to geographic regions (e.g., a large country or a group of countries in proximity to one another), markets (e.g., industries) or even just a single large global customer. The back half of the structure is organized around a specific product or a group of products that have been combined into a distinct product line. The front end units are created and managed to achieve a high level of responsiveness and service to the requirements of the


41


selected customers while the back end units, which supply the products to all of the front end customer units, are organized and operated to achieve the economies of scale and efficiencies generally associated with global product units. In order for the front-back hybrid structure to be successful senior management must be able to effectively link the activities of both ends of the structure.32

Both of the units or companies in the front-back hybrid structure are multifunctional profit centers although they obviously have different functions consistent with the primary focus of their activities. The front half units include the functional activities that are closest to the customer, such as sales and service, while the back half units focus on the activities necessary to create, launch and maintain global products that can be produced and distributed efficiently—research and development, operations (i.e., procurement, manufacturing and logistics) and marketing. The back half units, or product companies, limit their activities to supporting all of the customer companies and do not have their own sales and service functions. The front half units, or customer companies, are not limited to one product or product line and are in fact responsible for fulfilling, through sales and services, all of the product needs of their customers.

The division of responsibilities in the front-back hybrid structure can clearly be distinguished from the situation where the organization has opted to use a global business unit structure in which all of the functions are placed into, and managed by, a single company, unit or division that services customers all over the world. Global business units have their own sales and service teams for their particular products and customers may find that they are dealing with several global business units when doing business with the organization. The front-back hybrid structure is designed to smooth the interface between the organization and its global customers through the creation of the customer companies; however, the challenge for the customer companies is understanding all of the products offered by the product companies and coordinating with two or more of the product companies to ensure that customers receive the desired level of service and the products that are best suited for their requirements.

As noted above, many organizations created customer companies to focus on specific countries or geographic regions. However, in industries, such as financial services, where geography is less important and large customers are engaged in global activities the customer companies may be structured around industries and/or specific global accounts. For example, a global financial services company might establish market companies focusing on the automotive, banking and oil and gas industries. Within each of the industry-focused customer companies there will be a dedicated global relationship or account managers for the largest potential customers (e.g., General Motors, Ford and other large US and foreign companies in the automotive industry) who will oversee sales and service to that customer. Since global customers are, by definition, engaged in business throughout the world there would be numerous local account managers

32 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 238-254. For further discussion of the “hybrid structure”, see A. Gutterman, Organizational Structure (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at www.alangutterman.com.


42


reporting to the global account manager who would be responsible for maintaining contact with the customer in each country where the customer has significant activities. The relationship managers will work with a product manager from each of the back end product companies to sell all of the products that the customer may require on a global basis.

Each of the customer/market and product companies created within a front-back hybrid structure would report to the chief executive officer. In addition, the organizational structure will usually provide for several functional units operating at the headquarters level with responsibility for certain activities that impact the entire organization—finance, human resources, legal, operations, risk management and possibly research and development. The product companies may be organized in a manner that mirrors the headquarters organization and thus each product company may have operations and research and development units that interact with their counterparts at the headquarters level. Market companies may have several layers—the first level might be large geographic regions such as North America, Europe and Asia and the second level would be country units within each of the regions. Customer/market companies generally focus primarily on sales, service and local marketing issues and activities; however, market companies in some countries may also engage in assembly and manufacturing in situations where local governments require that foreign companies conduct those activities within the country.

The product companies not only establish the global marketing strategy for their products they also engage in in-house marketing and promotion of their products to the customer/market companies. At the most basic level this means conducting training programs for sales personnel of the customer/market companies to familiarize them with the features and advantages of new products so that the sales team has the tools and incentive to push the products out into the marketplace. In addition, the product companies must be prepared to work with customer relationship managers in the customer/market companies to close sales and provide post-sale service and support.

In order for the front-back hybrid structure to be successful there must be an effective and efficient method for linking the activities of the both ends. One way in which this can be accomplished is through the formation of global business units that integrate and link clearly related activities of the customer/market and product companies through the use of a matrix organizational structure. For example, senior management may determine that the products and services offered by the organization can be specialized and divided into three distinct businesses and then proceed with creation of three global business units, each of which would be overseen by a global business unit manager responsible for coordinating the activities of the customer/market and product companies that relating to the business. Once this decision has been made the sales activities of the customer/market companies will be broken down into the three markets corresponding to the business units and sales personnel will have dual reporting responsibilities to the manager of the country/market company and the relevant global business unit manager. Similarly, the activities in the product companies—product development, manufacturing and marketing--will be organized to correspond to the business units assuming that there


43


is sufficient volume for the business to warrant specialization. The manager for these activities would also have dual reporting responsibilities to the manager of the product company and the global business unit manager. Other activities of the product companies, such as research and development and procurement, would still be managed as shared resources for the benefit of all of the businesses with the company. The byproduct of all this is that the global business unit manager is in a position to coordinate all of the relevant functional activities from both ends of the front-back hybrid structure starting with global product development and ending with post-sale service and support for specific customers and markets; however, the efficiency of the organizational structure depends on how well the matrix relationships can be coordinated. The main reason that companies are considering front-back hybrid structure is the growing leverage of global customers and the ability of those customers to dictate the terms of service that they require in their procurement relationships. Companies now realize that they must be structured in a way that allows them to provide more attentive service to their best customers and meet the requirements of those customers in all of most the geographic regions around the world where the customers set up for business. The customer/market companies in the front-back hybrid structure serve this purpose. Ideally companies could place all of the functional activities relating to the products offered to particular customers and markets, including product development and manufacturing, into a single business unit; however, this if often not practical from a financial and technological perspective. For example, semiconductor manufacturers have found large and diverse industrial markets for customized semiconductor products including the computer, defense and telecommunications industries. The problem is that it generally would be prohibitively expensive to build a dedicated manufacturing facility for each customer or market. The answer to this dilemma is provided by the front-back hybrid structure—a product company can oversee construction and operation of the manufacturing facilities around the world that are necessary to satisfy global demand from all of the customer market segments and customer/market companies can focus on sales, service, product design and application engineering for specific customer market segments. The product companies make it possible to achieve the benefits of economies of scale which lead to lower costs that can be passed along to customers in the form of more attractive pricing. In addition, product companies are able to focus on continuous improvements in design and engineering that ultimately lead to higher levels of innovation and product excellence. In turn, the customer/market companies can concentrate on forming closer relationships with their customers, collecting information about those customers and making sure that the specific needs and requirements of customers are taken into account by the product companies.

Sales personnel working in the customer/market companies can collaborate to create cross-selling opportunities to introduce customers to products that they might not currently be purchasing. For example, it often makes sense to bundle a suite of products together and offer them to customers at a single price that is substantially lower than the amount the customer would have had to pay had all of the products been purchased separately. This strategy provides move value for the customer and also allows the company to establish a foothold in new business areas with the customer that can be


44


expanded in the future. Customer/market companies can also improve and expand their relationships with customers by creating and offering expanding services to support the products and educate customers about new and more effective ways to deploy the products in their businesses. Computer companies have been doing this for a long time by offering consulting, systems integration, education and applications software and customer/market companies are better situated to provide these services than the product companies because of the need to customize the services to specific requirements and expectations in each market.

One of the greatest challenges of implementing the front-back hybrid structure is making sure that the activities of both ends are effectively integrated. Problems can be anticipated due to the fact that the product companies and customer/market companies are engaged in very different activities and managers from both companies will often different priorities and perspectives with regard to specific issues. Further complexity is added when managers are separated by distance, time, language and cultural backgrounds. Companies may use several different approaches to ensure that the front and back ends work effectively together. The most common strategy is to rely on formal management processes to facilitate communication and coordination. Other companies prefer to have the relationship between their product companies and customer/market companies based on “market forces” which means that the product companies are free to sell to others in a particular market and that customer/market companies are allowed to do business with third parties offering products comparable to those manufactured by the product companies. It is believed that the influence of competition in the relationship between the front and back ends will be a powerful force in resolving conflicts and pushing managers toward coordination and cooperation. A third option is to simply focus on being either a product company or a customer/market company and then seek strategic alliances with third parties to build the other end of the structure. For example, companies with a strong research and development function may opt to invest their resources in creating and managing back end product companies and then enter into joint ventures around the world with sales-focused companies that have strong existing customer relationship to provide the necessary front end support.

Integration through Coordination Mechanisms

The most common method for integrating the front and back ends of the hybrid structure is purposeful implementation of formal processes for coordination and communication between the managers of the product companies and the customer/market companies. There are several threshold issues that must be considered and resolved in order for this approach to be successful. First, a decision obviously must be made regarding placement of the functions (i.e., which functions will be placed in the product companies and which functions will be placed in the customer/market companies). Second, once the functions have been organized there must be guidelines for distributing power and authority between the companies. Finally, management structures and processes must be designed


45


and implemented to ensure that the activities of the companies at both ends of the structure are integrated and coordinated.33

Function Placement

Placement of the functions is generally pretty straightforward in most cases—research and development, product design, procurement and operations are usually placed in the product companies and sales, after-sales service and customer services and support are logically placed in the customer/market companies. Tougher questions arise with respect to placement of the various activities associated with marketing and in some cases it makes sense to locate some of the activities relating to product design and operations, particularly manufacturing, in the customer/market companies. It makes sense for certain strategic issues relating to global marketing to be assigned to the product companies. For example, marketing managers in the product companies should be held responsible for new product development, changes and upgrade to features of existing products and product positioning. However, those aspects of marketing strategy that are more closely related to customers and markets should be delegated to the customer/market companies—channel selection, bundling of products, ancillary services for the specific customers and markets and creation of marketing and promotional tools customized to the requirements of the sales force. Manufacturing, a function normally associated with the product companies, may be placed in the customer/market companies when volume requirements in the front end exceed the minimum level necessary to realize economies of scale or local governments insist that manufacturing and assembly be done locally. Customer companies may have their product development group for larger customers that have unique requirements with respect to the design and/or features of the products that they are interested in purchasing.34

The future trend appears to be toward placing more functions in the customer/market companies as customers increase their demands for personal attention and continue to generate greater global volume requirements that justify the investment of resources in customer-specific activities. One factor contributing to expanding customer appetites for products is the increased reliance by those customers on strategic alliances with third parties that are forged, at least in part, to access new foreign markets and customers.

When authority over the activities relating to a specific function is given to both ends of the front-back structure there must be coordination and consistency in the decisions made by the managers. For example, managers in a market-focused company may be given discretion to set product prices in a country at a level that allows those products to be competitive they should always act within the boundaries of the product positioning strategy established by the product company. This means that products positioned as high-end luxury items should not be priced at deep discounts by country managers.

Balance of Power Between Front and Back Ends of the Structure33 J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 254-265.34 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 255.


46


In addition to deciding where each of the functions in the value chain for a particular product should be placed senior management must also establish guidelines for allocation of power and authority between the product companies and the customer/market companies.35 One method that might be used is to designate one of the companies as a profit center and the other as a cost center. For example, if most of the functional activities have been placed in the customer/market company, including a substantial amount of customized manufacturing and new product development, it is appropriate to make that company a profit center while the product company is designated as a cost center focusing on research and development, procurement and manufacture of components that are transferred to the customer/market company for assembly in the manner required by the design standards set by the customer.

Another possibility is to designate both the product company and the customer/market company as profit centers but to issue a directive from senior management that makes it clear to the leaders of both companies that one of the companies, generally the customer-focused unit, will be given priority in the event of any conflicts. This type of structure may be used when the product company is given rights and responsibilities to sell to third parties in addition to the customer/market companies in order to achieve the necessary economies of scale. In that situation, the first priority of the product companies is still supporting the customer/market companies and making sure that the requirements of their customers are satisfied before anything else. Since this may mean that the product companies will be required to sacrifice profitability that might be realized by concentrating on their own customers, senior management must be sure that the most important measure of performance for the product companies is the level of service they provide to the customer/market companies. Some of the performance measurement tools that might be used include customer-satisfaction surveys and asking managers within the customer/market companies to rate the quality of the relationships with various functions within the product companies.

When both the product company and the customer/market company are profit centers it is important to make sure that the managers of both companies are clearly aligned on the overall goals with respect to revenue and profits for each product line and customer/market segment. The first step in this process is to implement an information system that collects and organizes date on sales, expenses, profits and market share for all product lines and all relevant customer/market segments. All this information should be made available to every product manager and customer/market manager so that they can see and understand the contributions to their bottom line that are being made by related activities in the other company. For example, a product manager should not only have information on revenues, profits and market shares stated on a global basis but should also see exactly how the product is doing on those performance measures in the major geographic and/or industrial markets around the world. In turn, country managers should see how well each of the products is doing in relation to competitors in their geographic markets.

35 Id. at 256-258.


47


Once managers from both ends of the structure have all the necessary information the next step is for them to meet and confer in order to set mutually agreed targets for sales and profits for each product in each customer/market segment for the planning period that has been established by senior management. For example, a country manager may realize that there is a good opportunity to grow market sales and market share for a particular product line in the manager’s country and will therefore approach the product manager to negotiate elements of a business plan that will allow both managers to benefit. The important thing is for both managers to agree on a target for which they can be mutually accountable. Another useful byproduct of this process is the sharing of information between the product groups and personnel active on the front line in dealing with the customers and the activities of competitors. Managers from the customer/market companies can provide product managers with the intelligence behind the numbers and educate the product managers about changing customer demands and new trends in the marketplace. In turn, product managers can dissemination information about new product development ideas and anticipated long-term technological changes. Managers from both sides also benefit from the opportunity to make and reinforce personal relationships with colleagues from around the world. In fact, it is recommended that companies consider gatherings on a regular basis, such as annually or semi-annually, during which customer/market managers from all over the world can come to headquarters to meet with the product managers for several days to develop a plan for the business cycle extending through the next meeting and to work on strengthening the network required for effective global communication and coordination.

Another idea for making sure that the front and back ends work together effectively when they both are profit centers is making sure that senior management clarifies for all parties the roles and responsibilities of the product companies and customer/market companies. A formal set of policies and procedures should be prepared and acknowledged by managers from both companies that list which of the companies will be responsible for various decisions in areas such as pricing, forecast preparation and inventory management. With respect to areas where it is clear that there will need to be consultation and coordination between the companies there should be a procedure to make sure that everyone understands there assignments and how inputs can be provided to the persons who will make the final decisions. For example, if customer/market companies intend to bundle several products to attract new customers or expanded the scope of business with existing customers there should be a dialog with the product companies about pricing of the products included in the bundle since it is likely that the customer/market companies will want to offer discounts that could adversely impact the profit-and-loss results of the product companies in the short-term.

Links Between Front and Back Ends of the Structure

Integration and coordination of the activities of the front and back ends of the structure must be encouraged through the creation and maintenance of formal links between the


48


product companies and the customer/market companies.36 One of the best ways to do this is to form specific units within each of the companies that are primarily responsible for working with the other company. For example, within the customer/market companies there should be a product management unit that corresponds to each of the major product companies that offer products that are sold by the customer/market company. For their part, the product companies should establish coordination units for each of the major customer/market companies that are involved in the sale and service of their products. The product management unit in the customer/market company is responsible for working with the product company and takes the lead in communications and activities such as customizing the products for specific customers and/or markets or resolving pricing issues that might arise when the customer/market company wants to bundle products. Product managers in the customer/market companies also work with relationship managers to educate them about the products and develop marketing and training programs that can be implemented for specific customer groups. In fact, when launching major sales initiatives to new and existing customers the effort should be led by teams composed of relationship managers and representatives from the product management unit and larger customers that generate sufficient volume will have a dedicated product manager assigned to them.

While the product managers are located in the customer/market company and spend most of their time working with sales personnel in that company it is common for them to have reporting relationships to both the product company and the customer/market company. In the customer/market company the focus should be on representing the product line and supporting the customer relationship groups by providing expert advice on the selection and use of the products. In many cases the product manager participates directly in meetings with key customers in order to better understand their specific requirements and assist the sales team in offering the best solutions for the customers. Moreover, once the sale is completed the product managers can remain involved in post-sale service and support to make sure the customer is satisfied and to gather additional information about how the products are used and perform. In the product company the manager should share information learned from working the customer/market company and be an advocate for development of new products and applications that would have special appeal to the customers serviced by the front end. In addition, the manager can gather information about new products and technologies from the product company and then transfer that information back to the sales personnel in the customer/market company. It is obvious that the product manager position is crucial and demanding and the best candidates have experience in both the front and back ends—a position in sales or marketing with a customer/market company and a period of service in the product company focusing on marketing and/or product development.

Effective integration and coordination of the activities of the front and back end companies requires the development and use of formal communication processes within both of the companies and within the corporate headquarters. First of all, in order for the product manager to effectively represent the needs of the customer/market company there 36 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 258-265.


49


needs to be a process for sharing and collecting information within that company. For example, the general manager of the customer/market company should establish a formal process for ensuring that managers involved in sales to customers, segments and geographic regions within the company consult regularly with the product managers to discuss product-related issues and satisfying customer requirements. The second process must be established within the product companies to ensure that there is a dialogue between the product managers from the customer/market companies and the managers of the various product lines and functions located in the product companies. While global product and functional groups prefer a high level of standardization in order to meet their goals with respect to scale economies and cost controls it is also necessary to take into account the need for customization to meet the unique requirements of major customers and large country or market segments. Finally, senior management within the headquarters unit must implement a planning and budgeting process that involves the general managers of both the product companies and customer/market companies so that there is a mutual understanding and agreement regarding the goals for products, customers and markets and the responsibilities of all of the companies in achieving those goals.

The organizational structure of the customer/market company described above might have several customer divisions or units reporting directly to the company chief executive. In addition, the product management unit would also report directly the company chief executive. Depending on the size of the company it may have its own supporting units for essential functions such as finance and human resources. Each of the customer units may be further broken down into geographic regions. A large global customer may warrant continental regions such as North America, Europe and Asia and managers for larger countries that are responsible for customer relationships in those countries and for working with other country managers on activities that require cross-border coordination. The product management unit will be broken out into product lines that correspond to the relevant product companies and for each product line there will be a manager or department that is specifically responsible for coordination with the customer/market companies.

There is no single way that customer/market companies should be organized and the structure will depend on the strategy selected by senior management for sales and distribution in a particular market. For example, many companies are organized by country and the key factors that should be considered when deciding how to break out activities within the company include the products offered, market segmentation, distribution channels and the size of customers. A simple and common method of organization is based on customer segments with each segment having its own specialized group of sales and service personnel. Another possibility is to break out sales activities by geographic regions within the country. In addition, if there are one or more customers that purchase a significant volume of products it may make sense to establish a dedicated group that concentrates solely on the needs of the customer(s). Combinations of these methods may be used in a particular country—a dedicated group for a major customer, another group for a significant market segment with several customers


50


operating all over the country, and several geographic groups to work with small regional customers.

A packaging business may establish global product companies that focus on research and development, procurement of materials and manufacturing of packaging equipment. The goal of these companies is to attain the benefits of economies of scale for these functional activities and then transfer the materials and equipment to the customer/market companies where they can be used to create customized packaging solutions for local customers.

Integration through Market Mechanisms

A company may establish a group of strategic business units each of which is focused on a portfolio of related products that are to be manufactured and sold on a global basis. 37

Each unit is largely self-contained and includes the entire array of functional activities including product design, procurement, manufacturing, product marketing, global brand management and sales. The units sell their products to the company’s front-end marketing and sales companies; however, they also are allowed and encouraged to sell their products to unrelated companies. For example, a company involved in the development and manufacture of computer-related products may sell those items to unrelated original equipment manufacturers (“OEMs”) for integration into products that OEMs sell under their own brand name to end users. The front-end companies may be organized on a geographic basis with responsibility for sales and services activities in specific countries and regional markets. The important functional activities in these regional business units include local sales, marketing, distribution and post-sale service and support. In addition, regional business units may be involved in some degree of product assembly if necessary in order to meet the requirements of local governments and larger customers.

One important decision that needs to be made is the scope and focus of the front end companies. While these companies have generally been referred to as “customer/market” companies to take into account that many customers are global and require an organizational structure that facilitates cross-border coordination, there are situations where the preferred approach is to create front end companies that are bounded by reference to geography (i.e., countries or regions such as Asia, Europe or Latin America). This approach can be particularly useful in situations where there are significant variations in the characteristics of markets around the world. For example, in the computer industry countries are still at different levels of development and manufacturers must be prepared to deal with a wide array of local preferences with respect to cost, configuration and performance. These companies are generally locally managed and have develop strong long-term relationships with small- and medium-sized customers that are themselves local and have no particular need for cross-border service and support. In many cases the front end companies begin as joint ventures with firms that are already established in the country or geographic region and it is common to allow 37 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 265-268.


51


local managers to retain an ownership stake in the company. In smaller countries the company may exert significant influence on the local economy as an employer and preferred vendor to governmental agencies, financial institutions and other large businesses. It is even possible for the front end companies to offer a portion of their equity interests to the public in regional securities markets, which also provides a way to incentive local managers and employees; however, control of a majority of the shares will be retained by the parent company.

Product design is important to realizing the advantages associated with the front-back hybrid organization. The dual goals of global scale and local customization can best be achieved through modular product design and product standards so that components can be manufactured efficiently by the product companies and then quickly and easily configured by the customer/market companies to suit local requirements. Product companies can also realize significant savings by negotiating volume discounts with vendors that would not be available to the customer/market companies acting on their own.

When market mechanisms are used to integrate the activities of the front and back ends, it is necessary to establish ground rules governing the relationship, and the terms of transactions, between the product companies and the customer/market companies. In order to ensure that the scale advantages associated with the product companies are realized there should be certain product components that the customer/market companies are required to obtain from the product companies. This requirement should be limited to those components as to which the product companies have a real advantage in terms of the costs and/or technology. Moreover, the product company must be able to satisfy all of the inventory requirements of customer/market companies for these components on a timely basis in order to ensure that the customer/market companies can respond quickly to changes in local demand and avoid the need for those companies to incur the additional expense of stocking inventory that is not currently required. In order to be sure that orders can be fulfilled quickly product companies should carefully place their manufacturing centers in strategic locations around the world in order to take advantage of access to large commercial carriers. No negotiations are permitted for the required components and a standard transfer price will be established by senior management with input from the general managers of both the product companies and the customer/market companies.

For other product components as to which the product companies do not necessarily have significant advantages the customer/market companies would be free to purchase from other sources; however, if those components are available through one of the product companies the customer/market company should give them the first opportunity to make the sale. While the product companies should make every effort to offer attractive pricing, and in fact should be able to do so in most cases due to their leverage in negotiating discounts with their suppliers, there may be situations where it is cheaper and easier for the customer/market companies to purchase certain components from local sources. In addition, new technologies may become available from third parties that the customer/market companies want or need to integrate into their finished products as soon


52


as possible and thus they cannot wait for the product companies to decide whether they will begin to offer their own version of products using these new technologies. In that instance, of course, the customer/market companies are expected to share information that they obtain or develop on new technologies with the product companies so that a decision can be made as to whether changes should be implemented into the global product design and manufacturing processes.

Headquarters must be an active facilitator and integrator between the front and back ends to ensure that reliance on market mechanisms does not cause the product companies and the customer/market companies to drift apart. The chief executive officer and other members of the senior management team should invest time and effort in the initial selection of local partners and in cultivating and maintaining strong relationships with the managers of those companies.

The Transnational Form

Companies that are truly committed to taking advantage of all of the opportunities and resources available around the world have been opting for the transnational strategy described above. The organizational structure for a transnational company is similar to the multi-dimensional structures used when executing other strategies in that it will be considered in situations where a significant percentage of the employees and assets of the company are located outside of the US. However, while the multi-dimensional structure is based on the premise that the foreign subsidiaries will be primarily focused on transferring US-based competitive advantages to new geographies the transnational structure contemplates that advantages may be developed by subsidiaries located anywhere in the global network and that the applicable subsidiary, which is often outside of the US, will be the leader and catalyst in transferring those advantages to its affiliates in the network. A transnational organizational structure not only requires extensive coordination, as is the case with a multi-dimensional structure, but also depends on the ability of the company’s US-based senior management to accept and embrace a transfer of leadership and authority to foreign subsidiaries and ability of senior management worldwide to work within a framework in which power is broadly distributed.38

Factors Driving Use of Transnational Form

Several factors may push companies toward the use of the transnational form. First, the company may realize that the location-specific advantages necessary for it to be competitive on a global basis are located in a country or geographic region other than the US. For example, it is now common for US companies to transfer responsibility for significant activities such as research and development and manufacturing to geographic regions outside of the US in order to take advantage of access to skilled scientific and engineering personnel, raw materials and/or low-cost labor. Second, in many industries there are one or more geographic markets that are considered the hub or lead market from a competitive aspect and it thus becomes imperative for companies to establish a 38 The discussion of implementing the transnational form in this section is based on the presentation in J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 164-174.


53


presence in those markets even though they are far away from the company’s home market. The abundance of financial services firms operating in New York and London is an example of this phenomenon. Operating in a lead market is not only necessary from a profit-and-loss perspective, since that is where most of the significant customers will be, it is also important as a way for the company and its personnel to observe the practices and procedures of its competitors and develop the core competencies and technologies necessary for survival. One challenge is to evaluate where the lead markets of the future are likely to be located since environmental factors, such as deregulation or adoption of new technical standards for the industry, may shift the center of leadership from one geographic market to another. Companies are leaning toward relocating the senior management for each business to the lead market for that business and this contributes to the broad geographic distribution of authority and talent that is characteristic of the transnational form. Finally, a transnational form may evolve when the company believes it must have a strong presence in a number of large country or regional markets, in addition to any lead market, and those countries or regions demand a significant volume of local value-added activities.

One basic model of a transnational form arises out of the strong trend toward locating research and development activities throughout the world at sites that has been established as the leading areas for innovation in the relevant technologies. For example, US company might establish a major software development facility in Japan or India to take advantage of lower costs and skilled personnel in those countries and then transfer the results of the development work back to the US and/or subsidiaries in other countries for use in a variety of product lines. Another transnational model that might be used by a company that already has subsidiaries around the world is to move from having each region develop and manufacture its own products to a structure in which each region would specialize in the development and manufacture of specific products and then those products would be transferred to all of the regions for local activities such as assembly, sales and service. The potential advantages of this model are obvious—lower product development costs by centralizing development activities in one region as opposed to duplicating them in multiple regions and greater efficiencies in procurement and manufacturing due to the availability of scale economies. However, there are significant problems and challenges that must be overcome when moving to this type of model. For example, since specialists essential to the development of certain types of products would no longer be needed in every region it may be necessary to transfer skilled personnel to assignment in other regions where their skills can be used. Even more importantly there is a higher level of interdependence between the regions with this new model since each region must rely on the other regions for many of products required to meet the needs of global customers. As such, communication and coordination are essential in order for this model to be successful.

Challenges in Transitioning to Transnational Form

Companies contemplating a transition to a transnational model must anticipate and address several significant challenges. For example, the new model will often represent a significant departure from the way in which the company has conducted and managed its


54


business operations and this may creation confusion and consternation for many managers and employees. In particular, senior managers in the US who are used to exercising authority over foreign subsidiaries may be forced to give up some of their power and learn to cooperate and share authority with their colleagues in other countries. In fact, a true transnational model means that senior managers in the US will often have to take direction from the foreign subsidiaries and invest time and effort in making their case to foreign managers for special features in new products, inventories and marketing funds. The problems experienced by mature organizations in adapting to the transnational model are often quite significant and take years to overcome and it can be argued that the model might be better suited for new companies or new divisions in older companies where there are little or no institutional barriers to establishing a balance of power and influence among geographic regions.

A related challenge for older companies is the need to recruit and develop managers and employees that have the requisite experience, skills and perspective to thrive in a transnational model. At the highest levels of management, for example, team members must have a cross-border perspective, experience in working with colleagues and business units in foreign countries, teamwork skills and the knowledge to understand and use the technological tools that are at the core of the information and design systems for a transnational. Most companies find that it takes several years to recruit and develop the necessary talent; however, new companies may shorten this timetable substantially if they anticipate adopting the transnational model from the beginning any factor that into their staffing decisions as the company grows. The human resources function can play a significant role in this area through its recruiting policies and by identifying and providing the necessary training in areas such as team building, understanding foreign cultures and using information technologies.

The interdependence among regions that is associated with the transnational model also carries a certain amount of business risk for the entire company. Under the traditional model where each geographic region was essentially independent a problem in one region, such as a delay in the introduction of new product or a slowdown in local manufacturing to supply the region, generally did not have a large negative impact on the other regions. However, when the transnational model is in place and the region that is responsible for manufacturing and supplying a particular product to all of the regions has a problem it will impact product managers and their local customers all over the world.

Finally, once the transnational model is in place the company must be able to manage it effectively and must have the flexibility to shift resources and power quickly to keep up with changes in location-specific advantages and lead markets. For example, the initial structure adopted when the organization first moves to a transnational model might locate primary responsibility for products based on a particularly technology in the US; however, if technical standards change in the future and it becomes apparent that the center of innovation with respect to that technology has shifted to Europe the organization must be prepared to transfer the primary responsibility for those products to the new locations in Europe where the location-specific advantages are emerging.


55


Guidelines for Successful Transition to the Transnational Form

The chances of the transition to the transnational form being successful can be increased by following a variety of practices and procedures. For example, senior management must instill and reinforce norms and values of reciprocity to encourage communication and collaboration across borders. When manufacturing resources are being centralized in one geographic region changes should be made to the global order fulfillment process and procedures for coordinating procurement and transfer of raw materials and other supplies needed for the manufacturing activities. Proper and efficient use of the transnational form generally means that a formal global product development process should be implemented using sufficient resources to elicit input and participation from all geographic regions. Finally, a number of changes must be made in management styles and processes to take into account the dual emphasis on geographic and business strategies and performance.

Norms and Values of Reciprocity

Senior management must instill and reinforce norms and values of reciprocity and cooperation that must apply across all of the geographic regions and the business and other units spread around the globe. This means that manager and employees in Region A must be prepared to serve the needs of customers based in other regions and that managers and employees in Region A must have a reasonable expectation that their colleagues in other regions will be responsive to the needs of customers based in Region A yet conducting business with the company in other parts of the world. Reciprocity and cross-regional cooperation can and must be supported through changes in the way that managers are evaluated and rewarded for their performance.

Global Order Fulfillment Process

Another important step that needs to be taken when being a transnational means that manufacturing will be centered in one region is ensuring that the company makes the necessary changes to create an efficient and fair global order fulfillment process and a complimentary supply coordination function. Since one or more regions will not have their own manufacturing capability it will be essential for those regions to be able to have their supply chain requirements understood and satisfied, taking into account the need to balance the needs of all regions, in order to have products available on a timely basis to fill customer orders in their regions. Creation of a global order-fulfillment process begins with formation of a cross-functional, cross-regional team to design the process. Each region should have a team member representing the region’s interests with respect to sales, assembly and component manufacturing. In addition, headquarters should appoint one or more representatives to oversee the process and one of those representatives should serve in coordinator role during the design process and eventually move on to become the leader of the global supply coordination function once the design is completed and implemented. The activities and deliberations of the team should be supported by other managers from each of the regions who will eventually step in and act


56


as regional coordinators once the design is completed and become the primary regional contacts for the leader of the global supply coordination function.

Order fulfillment and supply coordination are two areas in which companies can and should rely on increasingly sophisticated software tools to collect, categorize and report relevant information on a real-time basis. One possibility is design a process that can be placed on to an intranet maintained by the company that can be accessed by all interested parties in each of the regions around the world. Among other things it should be possible for everyone to view all information relating to pending orders, schedules, inventories and movement of components. This method ensures that everyone has all of the information necessary to coordinate their activities and engage in communications necessary to establish priorities and resolve potential conflicts relating to fulfillment of orders and similar issues. In addition, of course, this information is invaluable in assisting sales personnel in each region in their communications with their customers about scheduling of deliveries.

The supply coordination function addresses issues that might arise in organizing and prioritizing the availability of products and components for each of the geographic regions. Once the design of the order fulfillment process has been completed the headquarters should assemble a supply coordination team composed of members from the supply departments or units within each of the regions and led by the headquarters manager that oversaw the design of the global order-fulfillment process. The responsibilities of the global supply-coordination function should be clearly delineated and generally include coordination of decisions regarding the volume and timing of sending supplies to the various regions and providing training covering supply chain and logistics issues. The unit overseeing the global supply-coordination function becomes, in effect, a smaller model of the transnational form in that integrates the geographic regions into a single body using the tools available through sophisticated information systems. In addition, the organization benefits from the creation of informal networks with members from each of the regions that support the supply function on a global basis. Also, if the organization rotates membership on the supply coordination team, perhaps by limiting service on the team to a finite term, it provides opportunities for the participants to gain international experience and exposure to other talented colleagues in the organization and creates an influential alumni network that can continue to support the activities of the team in the future once they return full-time to their home regions.

Global Product Development Process

Another important area that generally needs to be addressed when transitioning to the transnational form is establishing of a global process for new product development, a subject which is discussed in greater detail below. A model similar to the one described above for designing the order fulfillment process can be used to facilitate coordination among all of the geographic regions on key new product development issues. For example, each region may designate representatives from their existing engineering, manufacturing and marketing units to serve as members of the global design team. Leadership may be assigned to the engineering representative from the largest region or


57


senior management could designate an engineer from headquarters to serve as the team leader. While the global design team was responsible for the product design process for the entire organization the engineering groups in each region were expected to assume primary responsibility for the products that would eventually be manufactured in their region. The global design process can be expedited through the use of technological tools such as CAD that allowed engineers and other interested parties in all of the regions to access the design process at anytime from anywhere in the world. Each region contributed to the process by testing new design on their key customers before final decisions were made by the team.

An effort should be made to build new products with a modular design that could easily be adapted for the specific local requirements of each of the geographic regions. Several basic rules of thumb should be followed in establishing the appropriate balance between globalization and localization in new product development. First and foremost, the time and effort should be expended in identifying exactly what the ultimate consumer wants, as opposed to speculating that because a particular product or design is popular in the US it will undoubtedly find similar acceptance in other countries. Second, while global products are desirable for a number of reasons it is important not to make products more global than they really are and to understand and respect local requirements; however, every effort should be made to establish standardized features and components without creating significant issues for sales and services in an important geographic market.

The geographic region with primary responsibility for a new product should take the lead in creating and maintaining informal networks across all of the regions to support the product and coordinate global activities such as development and implementation of marketing strategies. A variety of tools can and should be used to nurture these networks. For example, face-to-face meetings should be encouraged through seminars, visits, and exchanges of personnel between regions. Meetings of network members should be held on a regular basis, such as quarterly or annually, and communications between meetings should be encouraged through e-mail, electronic message boards, CAD, telephone calls and video conferencing. In addition to the regular meetings, network members should get together after the completion of each new product launch to critique how the process work and identify and implement changes for future products.

Changes in Management Style and Processes

One of the most striking features of transitioning to the transnational form is real need for managers from each region to acknowledge and understand that they are heavily dependent on one another and, as such, must learn to work together as a team to identify and resolve conflicts that might arise the whole spectrum of operational activities—new product development, order fulfillment, logistics, manufacturing and marketing. In order for cooperation and coordination to occur the company must change its business planning process and invest in information systems that produce data broken down by both products and regions. In addition, regional managers must come to grips with the fact that they will be held accountable for the global performance of each product for which they region is responsible as opposed to focusing just on profit and losses in their region.


58


In order to be successful in this new role regional managers must become knowledgeable about the global markets for the specific products and must be prepared to support the efforts of other regional managers in dealing with local issues relating to those products. All this requires training and patience and transnational companies must be prepared to devote substantial time and effort in transforming their management teams. Reward systems will also need to be revised to include objective measures of global performance and subjective assessments of the quality of collaboration with managers in other regions. One way to provide an incentive for senior managers from all of the regions to work together is to set bonuses for the entire group by reference to total worldwide profits of all product lines.

Research on Selection of Organizational Structure for Global Activities

Egelhoff set out to suggest a comprehensive model of strategy and organizational design for multi-national corporations (“MNCs”) based on a thorough review of conceptual theory about macro organizational design and strategic management and data collected from a sample of 50 large, successful MNCs distributed roughly evenly between the US and Europe.39 Among other things, Egelhoff introduced and described four different and commonly referenced types of organizational structure that MNCs might choose for managing their foreign operations: a worldwide functional division structure, an international division structure, a geographical region structure and a worldwide product division structure. Each of these structures typically display the characteristics described for them above; however, Egelhoff specifically described each of them as follows40:

Worldwide functional division structure, which calls for functional activities in foreign countries, such as manufacturing and marketing, to report back to the appropriate functional division in the parent in the home country (which also oversees the functional activities of the MNC in its home country).

International division structure, which separates foreign operations and activities from the activities of functional or product divisions in the parent charged with overseeing activities in the home country. The international division usually has its own CEO or managing director who reports to the CEO of the parent in the same way as the heads of the functional or product divisions for the home country.

39 W. Eglehoff, Organizing the Multinational Enterprise: An Information-Processing Perspective (1988). In addition to the research and analysis on organizational structures for international operations discussed below Eglehoff also examined how MNCs approached and managed other organizational design issues in the course of internationalization: the centralization of decision making, performance control, subsidiary staffing and planning systems. These issues are not discussed in this chapter; however, it is recommended that readers consult the cited publication for further information.40 W. Eglehoff, Organizing the Multinational Enterprise: An Information-Processing Perspective 61 (1988). Egelhoff referred to each of these as “elementary structures” because the reporting or authority relationship took place along a single dimension such as function, product or geographic region. He also examined matrix and “mixed” forms (e.g., international and product divisions or geographical region and product divisions); however, the discussion in this section is limited to findings related to the elementary structures. For discussion of Egelhoff’s findings related to the matrix and mixed forms, including various hypotheses regarding the relationship between elements of organizational strategy and forms of organizational structure, see Id. at 91-128.


59


Geographical region structure, which divides the international markets in which the MNC is active into regions, each of which has its own headquarters and its own CEO or managing director (who reports to the CEO of the parent). Each regional division is primarily responsible for all of the MNCs products and business activities in each of the countries in that region.

Worldwide product division structure, which calls for the expansion of the duties and responsibilities of product divisions originally launched in the home country to include management of their product lines all over the world in each of the foreign countries in which the MNC is operating.

Egelhoff was interested in identifying which elements of a firm’s international strategy were most necessary in order for a particular type of organizational structure to be effective and successful. Egelhoff recognized that one could identify a wide range of elements of international strategy and chose to take an “information-processing perspective” of organizational design and thus selected and analyzed the following eight elements of company-level strategy that appeared to have the most influence on information flow and processing between the parent and its foreign subsidiaries41:

Foreign product diversity: This element was measured by the number of “broad product lines” a firm offered for sale in two foreign countries designated in the course of the analysis of the empirical data (a major European country and Brazil). In order to qualify as a separate “broad product line” the products had to have either a different manufacturing technology (thus requiring its own specialized manufacturing facility) or different customers and/or end uses.

Product modification differences among foreign subsidiaries: This element was measured across a five-point scale (i.e., 1-to-5) as follows: 1: identical products, parts are interchangeable worldwide; 3: substantial cosmetic difference; however, parts share same basic technological engineering; 5: basic technology differences requiring separate basic technology engineering.

Product change: This element was measured by calculating the percentage of revenues from sales that was invested in research and development activities.

Size of foreign operations: This element was measured by calculating the percentage of total worldwide sales that came from outside of the home country of the MNC.

Size of foreign manufacturing: This element was measured by calculating the percentage of foreign sales attributable to products that were manufactured in foreign countries as opposed to products that were manufactured in the home country and then exported from the home country to foreign markets.

Number of foreign subsidiaries: This element was measured by identifying the number of foreign countries in which the MNC had either resident marketing or manufacturing operations.

41 W. Eglehoff, Organizing the Multinational Enterprise: An Information-Processing Perspective (1988) 34, 49-51, 86. For full discussion of the “information-processing perspective of organizational design”, including the models suggested by various researchers such as Burns and Stalker, Lawrence and Lorsch, Galbraith, Duncan and others, see Id. at 15-29.


60


Extent of outside ownership in foreign subsidiaries: This element was measured by calculating the percentage of the foreign sales of the MNC generated by foreign subsidiaries that had greater than 30% outside ownership.

Extent of foreign acquisitions: This element was measured by calculating the percentage of the foreign sales of the MNC that were derived from acquisitions in foreign markets made by the MNC within the 10 years up to the date the data was collected.

Egelhoff proposed and tested several hypotheses regarding the expected “fit” between organizational structures and elements of international strategy (e.g., MNCs with product division structures will tend to have more foreign product diversity than MNCs with other organizational structures) and the summarized the hypothesized fits that were supported by the sample data.42 Egelhoff began by explaining that the selection and use of a worldwide functional division structure was most effective when the firm had a narrow and highly consistent worldwide product line, a limited number of foreign subsidiaries, a low level of outside ownership among its foreign subsidiaries and relatively few foreign acquisitions in the past. Egelhoff noted that this type of structure required more fits between structure and the elements of strategy than the other three structures and thus offered firms less flexibility than the other structures. A worldwide functional division structure offers significant advantages in terms of cost reduction since emphasis is placed on the technological and product-related strengths and resources within the parent and these are centralized at one point within the parent and not duplicated, at great cost, in foreign locations. However, any economies of scale achieved by this type of centralization must be balanced against the costs of creating an information processing system that can effectively link the foreign subsidiaries to the parent and these costs can best be managed when the firm is able, presumably by choice (i.e., choice of industry and/or technology), to operate in a worldwide environment that is relatively homogenous and stable.43

Eglehoff found that the international division structure was appropriate when the size of a firm’s foreign operations was relatively small, a result that was in accord with arguments that others have made regarding the expected path of changes in organizational design and structure as globalization increases. Elgehoff commented that the international division structure is a low product-integration structure that requires relatively little in terms of information processing capacity between the parent and foreign subsidiaries, a tolerant structure that can be used in a wide range of strategic conditions and a low cost structure that can be implemented by centralizing international expertise at a single point within the organizational structure without having to invest in recruiting and retaining a large group of international managers spread around the world. Another advantage of this type of structure in terms of efficiency is that allows management outside of the international division to remain completely focused on the activities of the MNC in its

42 W. Eglehoff, Organizing the Multinational Enterprise: An Information-Processing Perspective (1988), 86-89. For full discussion of Egelhoff’s hypotheses, the methodology used for testing and the statistical analysis of the results, see Id. at 73-85.43 W. Eglehoff, Organizing the Multinational Enterprise: An Information-Processing Perspective (1988), 87.


61


home country. The downside of an international division structure is that it makes it more difficult for personnel in that division to tap into the technological and product-related experience and resources that are available elsewhere in the organization.44

Effectiveness of a geographical region structure turned on having a sufficiently large portfolio of foreign operations and a relatively heavy reliance on foreign subsidiaries for the manufacture of products sold in foreign markets. Eglehoff pointed out that this type of organizational structure comes with a relatively high cost in terms of establishing and maintaining robust information-processing capabilities for each of the regional headquarters that must cover both product matters and matters relating to the company and individual countries within the region. Given the costs involved firms will embrace this form of organizational structure only in situations where they believe that the regions are large (i.e., a large number of country-level subsidiaries or branches within each region) and offer opportunities for “regional optimization”. Eglehoff commented that a geographical regional structure provides relatively low information-processing capacity between home country operations based in the parent and the regional units and thus makes it difficult for the regional units to rely on exports from the home country for inventories, thus highlighting the need for localized manufacturing activities.45

Finally, worldwide product division structures, like geographical region structures, were found to be suitable when foreign operations were relatively large and spanned a large number of foreign markets; however, the worldwide product division structure distinguished itself from the other possibilities by the need for both high foreign product diversity and a high rate of product change in order to justify the high costs associated with creating and maintaining a full portfolio of functional capabilities (i.e., research and development, manufacturing, marketing and service) for each product line that is robust enough to meet the needs of the firm’s home country and each of its foreign markets. Studies have indicated that high rates of product change place a premium on the ability to transfer new technology efficiently and quickly reformulate product strategy on a frequent basis, tasks that require that information-process resources be focused on centers of product-related knowledge and strategy such as worldwide product divisions.46

Design and Management of Cross-Border Teams

As discussed above, one of the key internationalization capabilities for any company seeking to expand globally is the ability to encourage communication and collaboration “laterally” across borders. There several different types and levels of lateral coordination and each has its own characteristics with respect to level of authority and decision-making power, the required amount of coordination, and the costs and difficulties of implementation. The simplest methods of lateral coordination are based on interpersonal networks and informal coordination, such as colleagues communicating on an informal and voluntary basis about shared interests and problems. When and if more formal coordination methods are needed the company may first put together a formal team 44 Id.45 Id. at 87-88.46 Id. at 75 and 88.


62


including members from all business units or departments impacted by an issue or problem. As the scope of the tasks assigned to the team get more complex the organization may assign a full-time coordinator or integrator to the team to ensure that the team deliberates on schedule and fulfills its responsibilities. The highest level of formal coordination is the matrix arrangement.47

While all of the lateral coordination methods used above may be used at some point by companies as they increase their international activities it is particularly important for those companies to understand how to design and manage the formal cross-border teams that are deliberately created and nurtured by senior management to address and resolve coordination issues relating to products, functions or customers. Senior management should give each team a formal mandate or charter by clearly defining the purpose of the team, the issues the team is expected to address, the scope of authority of the team (i.e., the decisions that the team will be allowed to make on behalf of the organization) and the resources that the team should expect to be made available to it. A mandate or charter not only focuses the activities of the team it also reduces the likelihood of conflict or overlap with other units or teams within the organizational structure.

The composition and focus of any team will depend on the dominant dimension in the organizational structure. For example, with a geographic-based organizational structure a functional-based team composed of marketing managers from each major geographic region may be formed to coordinate a major global marketing campaign for the company’s products and services. Similarly, teams within a geographic-based organizational structure may be business-based or customer-based. In order to increase the likelihood that the teams will be successful, senior management must pay special attention to several important design issues including specification of the goals and objectives of the team, staffing, allocation of resources, conflict resolution procedures and rewards. Correct staffing of a team is essential to its success and legitimacy and it is important to ensure that there are representatives from every unit or department that will be materially affected by the decisions made by the team. In addition, representatives should have adequate time to commit to the activities of the team, have a level and position within their regular unit or department that provide them with sufficient information that is relevant to the activities of the team and, most importantly, have sufficient authority to make commitments on behalf of their unit or department in order for the team to achieve its goals and purposes.

It is inevitable that conflicts will arise as the members of the team attempt to carry out their activities and it is strongly recommended that the team develop, on its own, mechanisms for resolution of conflicts before they arise. Failure to have conflict resolution procedures in place may cause significant delays in the progress of the team at critical junctures and may ultimately destroy the trust and spirit of cooperation necessary

47 For further discussion of the various methods for lateral coordination, see A. Gutterman, Organizational Structure (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at www.alangutterman.com. The discussion of lateral coordination within a global organization, and the formation and use of cross-border teams, in this is based on the presentation in J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 125-139.


63


for the team to be successful. Senior management can act as a facilitator on this issue by providing training on team-building techniques on a regular basis throughout the organization so that team members know what is expected before they become engaged in team activities. A willingness to resolve conflicts and continue to focus on achievement of group goals can only be realized if the team members understand that their job-related rewards (e.g., salary and bonuses) will be based in part on team outcomes and performance.

Leadership

One important consideration in forming and managing formal cross-border teams is determining whether the team should have a designated leader and, if so, how the leader should be selected and what authority and responsibilities should be vested in the leadership role. There may be circumstances, such as when the team is relatively small and all of the members have prior experience in working within teams and using self-management techniques, where it is not necessary to anoint a single person to act as the leader. In that situation the group itself will decide upon which of members they will look to for direction depending on the specific issue at hand and the experience and competence necessary to resolve the issue effectively. However, when the team is large and widely dispersed, and its activities are likely to be complex, it can be expected that senior management will opt to select a leader who will be responsible, at a minimum, for setting the agenda for the team, convening meetings of the team, leading discussions among members of the team and making sure that other parts of the organization are kept informed about the activities of the team.

Several methods may be used to select the formal leader of a cross-border team. One idea is to tap someone who regularly works in the organizational unit that has the most at stake with respect to the activities of the team. Another possibility is to select a leader from the dominant or lead unit represented on the team such as the representative from the business unit located in the largest country. A different approach for leadership of teams involved in a series of activities, such as new product development, is rotation of the leadership role as the focus of the activities changes from stage-to-stage. For example, since new product development teams typically follow the product from design through implementation it might make sense for leadership to follow the same sequence—the initial leader would come from research and development in the home country; the next leader would come from the manufacturing facility assigned responsibility for producing the first units that will be released into the marketplace; and the final leader would come from sales and marketing once the design is finalized, manufacturing has begun and the product is ready for sale. The composition of the team does not change during its life and input is still available from all functions and geographic units. All of the methods described above assume the leader also has responsibilities within his or her own unit that must be tended to during the life cycle of the team and there is always a possibility that the leader will show favoritism and/or simply not have the time to do his or her regular job and lead the team effectively. If this appears to be a problem and it is anticipated that management of the team will bring significant challenges it may be best


64


to appoint a full-time, independent leader to serve as a dedicated and neutral coordinator of the team’s activities.

Functional Teams

Functional-based teams are often used by single business companies as an initial structural change designed to increase cross-border coordination and communicate and share best practices throughout the organization. These teams are also able to facilitate the development and transfer of standardized practices and processes so that unnecessary duplication can be reduced and the company can realize cost savings through volume purchases of common equipment and materials that can be deployed around the world. One method used for launching and maintaining a functional-based team is the creation of a functional council that is chaired by a member of the senior management team of the organization with appropriate experience and background in the functional area. Having a senior manager chair the council ensures that the function, and the activities and needs of the council, are afforded proper respect and attention within the organization. For example, a manufacturing council might be formed that includes the manufacturing directors from all of the countries. Council members would be expected to share news and information regarding new manufacturing technologies, debate decisions about opening new manufacturing facilities or expanding or closing existing facilities and device strategies for combining procurement activities in order reduce the expense of acquiring new equipment and raw materials. A distribution council might focus on logistical issues, such as location of warehouses, and a marketing council would focus on establishing, building and protecting global brands that would be promoted in a coordinated fashion in various countries. Multi-business companies may also establish cross-border functional teams to handle issues in areas such as research and development, finance, procurement and human resources.

Business Teams

Cross-border coordination can also be achieved through the use of business teams composed of representatives from all of the geographic regions in which the company conducts its business activities around the world. One area where this process works particularly well is new product development process for products that will be launched globally. For example, the company may create global product business teams for each major line of products and each team would be composed of product managers from each geographic region. Team members would meet face-to-face on a regular basis several times a year to create, implement and monitor a global plan for their mutual product line. The global plan would address key issues such as the appropriate mix of global and regional products, new products, line extensions or next generations of existing products and minor changes to existing products (e.g., small changes in features, styling or color). Formal meetings would be supplemented by regular communications throughout the year as necessary in order to monitor progress.

If the company is large enough so that it has organized itself into two or more groups of related product lines the cross-border coordination structure will have additional levels.


65


In that situation, the top level would include the senior manager for that group from each of the geographic regions. These senior managers, usually led by the individual overseeing the group in the largest geographic region, would meet two or three times a year to establish a global business strategy for the group and each of the product lines falling within the group. The strategy would establish guidelines for the product line teams referred to above with respect to investments that should be made in new products and changes in existing products. The information would then be passed to the product line teams and the global plans developed by the product line teams would be sent back up to the group teams for review, modification and approval. When the global plans of the product line teams are approved by the group teams there will be a simultaneous allocation of financial and other resources to permit the product line managers to pursue their objectives.

Business Coordinators

The business team structures described above rely on the participation of senior and product managers that are also involved with discharging their day-to-day responsibilities and who may therefore have conflicting loyalties between their regular duties and their obligations as a member of the business team. The alternative, which is generally recommended in situations where the company is embarking on strategies that require extensive cross-border coordination, is designation of a full-time, neutral coordinator to oversee the business team. For example, if the company needs to implement standard service levels and warranties in multiple countries in order to meet the requirements of global customers then a strong business unit coordinator or manager structure should be considered. A similar approach can be taken when the company is pursuing a global product development strategy based on standardization of new products for simultaneous introduction in multiple countries. Profit-and-loss responsibility may remain with the geographic units, at least initially; however, the business coordinators will be given varying amounts of decision-making authority and independent resources that will allow them to influence the activities of the regional and country managers.

The organizational structure for a company that has continued to make geography the primary axis while gradually introducing business units might have a combination of geographic and strategic business units at the highest level of the organizational chart reporting directly to the chief executive officer along with headquarters staff performing parenting functions. For example, there may be three main geographic units for North America, Asia and Europe and two other top-tier strategic business units for two groups of related product lines. The geographic units might be broken down into country-specific profit-and-loss centers and each country might be organized into the same strategic business units as at the top of the chart with country managers for each product line in the business unit. The top-tier strategic business unit would designate a coordinator for each major product line within the unit and the coordinator would be tasked with global coordination of the activities of the country managers for that product line. The difference between this structure and the geographic-based organization with business teams described above is that the later does not have any top-tier strategic business units that can begin to act independently of the regional and country units.


66


Two of the most important, and easiest to implement, tools for placing power into the hands of the business coordinator are information systems and implementation of formal planning and budgeting processes. The company should invest in information systems that can track and report revenues and profits across geographies and product lines. This allows the business coordinator to identify and assist countries where the product line is underperforming—even if the country unit taken as a whole is doing very well. The information gathered by the business coordinator can then be used in debates with country managers in the course of the formal planning and budgeting processes during which senior management makes decisions about the performance goals for each country. Business coordinators can make their case that country managers should be tasked with focusing on particular product lines and that evaluation of country performance should be linked to attaining specific goals with respect to revenues, profits and market share for those products.

Great care must be taken in selecting the person to serve in the role of business coordinator. Perhaps the most important characteristic of successful coordinators is the ability to influence others even though the coordinator has little or no formal authority. In order to do so the business coordinator should ideally be someone with the interpersonal skills and ability to persuade others to take actions required in order to fulfill the objectives of the business team. In addition, the business coordinator must be credible and should ideally have demonstrated and acknowledged expertise and experience in the relevant business or product lines. Business coordinators will also benefit from having strong and broad networks of relationships within the organization which can be used to gather information and gather the necessary resources for the benefit of the team. While it is possible to recruit business coordinators from outside the organization the preferred method is to consciously develop programs to nurture and develop managers from within who will eventually assume business coordinator duties and responsibilities. For example, potential candidates might be given opportunities to work on small, local cross-functional teams working on a specific aspect of a larger problem or issue such as designing and recommending customized features of a new product being developed under the oversight of a global product development team. Candidates who are successful at this initial level would then graduate to membership on cross-border teams and also be given the opportunity for international assignments that would broaden their experience, expanding their personal networks and allow them to build a track record that would serve as the foundation for eventually becoming a business coordinator.

While business coordinators are commonly used for cross-border coordination of new product development they may also be assigned responsibility for other global issues such as research and development, brand management, customers and suppliers. Regardless of the issue it is important for senior management to be clear about the responsibilities and authority of the business coordinators and ensure that country managers are involved in and accept the definition of the role given to the coordinators. For example, a business coordinator may be given responsibility for management and development of a global brand including authority over advertising campaigns and


67


packaging for branded products that are distributed worldwide. In that situation the coordinator will certainly be expected to solicit information and opinions from the appropriate product managers in each of the key countries, and those managers would be expected to cooperate with the coordinator; however, the final decisions would be made by the coordinator and the coordinator would be evaluated by senior management based on the success or failure of the branding activities.

In addition to supporting business coordinators by vesting them with the authority to make decisions, senior management may give the coordinators greater leverage by providing them with their own funding and other resources that can be tapped into when carrying out the responsibilities given to the coordinators. For example, the business coordinator responsible for global brand management may be given a budget for spending monies on advertising and/or packaging that can supplement the funding for such matters already set aside for product managers in the various countries. The business coordinator can use those funds to gather the support and cooperation of country product managers for new advertising campaigns that the countries might be reluctant to implement due to the costs and potential adverse impact on their profit-and-loss position. Another method for providing business coordinators with control over resources is to give them authority over all or most of the funds available for an essential step in development and introduction of new products in each country. This strategy is illustrated by the practice of pharmaceutical firms in delegating authority over funding for clinical trials to business coordinators and then requiring that countries compete for those funds by presenting an acceptable plan for successful completion of the trials on a cost-effective basis and subsequent launch of the new drug product.

Global Product Development

Product life cycles are shortening and companies can no longer rely on competitive advantages at the product level to be sustainable for long periods of time. In the future the companies that are most likely to be successful are those that develop the capacity to create a continuous series of short-term advantages at the product level. In order for this to occur, companies must focus on improving their new product development.48

Shortening product life cycles changes the economics associated with recovering the investment made by companies in certain fixed costs associated with development and launching new products including research and development expenses and the costs of ramping up manufacturing processes. It is now much more difficult to look just to revenues from the home country, such as the United States, to recoup the monies invested and companies have been forced to seek revenues from other countries in order to achieve their return-on-investment targets. This shift has transformed the new product development process from a purely domestic activity to one that now requires extensive cross-border coordination from the moment that an idea for a new product is conceived. In addition, strategic and economic need to simultaneously launch new products in

48 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 275.


68


multiple countries has triggered a shift in power and authority away from country-focused subsidiaries to global business units.

The need to execute a global product development process has been one of the factors in accelerating the development and expanded use of new technological tools for product design and changes in new product architectures. For example, it is now possible to transfer new product concepts into digital form that can be viewed and worked on by designers and engineers located all around the world. At the same time there is a decided shift toward the use of modular product architecture which makes it easier to break up the tasks associated with the development process and also permits easy and quick adaptation of a standard design to fit local requirements in various countries.

Evolution of the New Product Development Process

The traditional new product development process was largely sequential and, as such, often took quite a long time to complete.49 The first step was taken by marketing specialists working with engineers in order to generate technical specifications for a possible new product that they believed would be perceived as valuable and useful by prospective customers. Once general agreement was reached on the specifications a series of activities involved several different functional areas would begin—the engineering group would work on creating a tangible product that incorporated the specifications; the manufacturing group would develop the processes necessary for fabrication and assembly of the products on a scale sufficient to meet the anticipated customer demand; and the sales and marketing groups would develop launch plans and strategies and make decisions regarding key issues such as pricing and position of the new product. Under this paradigm the primary measures of performance and success for the new product development process was how well the final product conformed to the original specifications; how long the development process took and whether specific development milestones were attained; and whether the development process was completed within the budgetary guidelines established at the beginning. In order to ensure that the development process was completed on time and within budget a great deal of effort was put in at the front end to define the product and freeze the design. If ideas for additional changes were generated later in the process the tendency was to defer implementing those changes until later versions of the product in order to avoid disruptions that might derail the original development schedule.

While engineers involved in the modern new product development process continue to be focused on creating products embodying technologies in a manner that provides customers with the desired features and highest levels of performance the design process must now account for several other desirable and necessary goals and objectives. First, products must be designed for “manufacturability,” which means that they must easily manufactured on a large scale at low costs. As a result, engineers specializing in

49 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 276-278. For further discussion of the “traditional” new product development process, see A. Gutterman, Technology Management and Transactions (Eagan, MN: Thomson Reuters, 2019).


69


manufacturing have become important members of the design team and begin contributing at the earliest stages before the design has moved too far along and it becomes too late to make changes necessary to attain the manufacturability goals. Second, quality assurance engineers have been added to the process to ensure that products meet increasingly higher standards of reliability—reducing the instances where customers find that the products fail or require more than the normally anticipated level of post-sale maintenance. Third, customer service engineers are involved to make sure that it is easier to provide post-sale maintenance and service for the products. For example, the design should reduce the burden on field technicians that are likely to be called upon to service or replace specified parts or components over the life cycle of the product. Fourth, social activists have convinced companies and regulators that recyclability should be an important factor in product design and designers must now plan in advance for the eventual disassembly, reuse or disposal of the products. Finally, artists, designers and anthropologists are being tapped to provide input on making products easier to use and more attractive to the look and touch of customers.

The need to design for manufacturability, reliability, serviceability, recyclability and usability means that the entire new product development process has become substantially more complex and now involves a wide array of experts including specialized engineers, artists, designers, social scientists as well as the traditional participants from sales and marketing. The new issues are often difficult and costly to resolve. For example, many companies are finding that the need to factor in recyclability in order to comply with new regulations has made product design much more costly since many products were originally designed with no intention that they would ever be disassembled. In addition, each of the experts can be expected to exert pressure to influence the design process as early as possible and therefore planning for the overall design process has become even more crucial.

Another important factor that has revolutionized the new product development process is the growing influence of external stakeholders such as suppliers and customers. It is now taken as standard practice to encourage early supplier involvement in the design of new products and suppliers are generally eager to participate in order to put their stamp on selection and design of components before other vendors have the opportunity. The growing influence of customers is also well known and more and more companies are inviting representatives of their larger customers to join the internal experts from the very beginning of the design discussions.

The need to involve so many parties in the development process and carve out sufficient time for each of them to provide the necessary inputs has transformed the new product development process from sequential to simultaneous or concurrent. Moreover, there is growing pressure to significantly shorten the development process to continuously replace old products with shorter and shorter life cycles and reduce the overall costs of the development project. Design and development teams are no longer measured by their ability to meet a series of milestones in a lengthy development process; instead the definition of success in this area has changed to how long it takes to bring the finished product to market (“time-to-market”) or, even better, whether the product can be


70


completed and production and sales ramped up to a target amount on or before a specified date (“time-to-volume”). In order to meet these tighter deadlines the activities of all of the stakeholders in the development processes must be closely managed and coordinated and each of the activities that played out one after the other in the traditional new product development process must occur simultaneously—customized parts and raw materials must be procured from suppliers and delivered on a timely basis, manufacturing facilities must be tooled and ready to produce large volumes of high quality finished products from the moment the design is completed, distribution channels in multiple countries and market segments must be established when the first unit rolls off the production line, a global marketing campaign must be completed and active even before the product is available, and sales and service personnel all over the world must be trained and ready to work with customers as soon as the product is ready.

The new product development process has also forced companies to revise and update their financial models for estimating and computing costs of developing and supporting new products and establishing the target price for those products. Under the traditional model companies focused on three areas when they established a budget for developing a new product—research and development costs, capital investment and production costs once the development stage was completed (i.e., costs of goods sold). These expenses are still relevant in the new product development model; however, companies now recognize that they must account for additional items that were either neglected in the past or simply not relevant—warranties, post-sale service and support and recycling/disposal. In addition, given the increase in development costs, particular with products based on new technologies that are expensive to commercialize, companies are looking at ways to economize by reusing equipment and/or components from the last version of a product. The savings from these initiatives are difficult to estimate and add greater uncertainty and complexity to the budgeting process.

The marketing representatives on the new product development team also need to consider additional factors when establishing pricing strategies and estimating revenues associated with the sale of the products and related services. Specifically, pricing decisions can no longer be made by simply calculating the fixed and variable costs of designing and manufacturing the product and then adding a target profit margin. It is now necessary to take into account the total costs that a customer may need to bear in the event that it decides to purchase and use the product. For example, while a product may be marketed on the basis of certain new features consideration must be given to the costs that a customer may incur in training its employees to use and receive the benefits associated with those features. In some cases, those ancillary costs may become barriers to sale and the designers need to consider whether certain features can be dropped, or turned into options, in order to reduce the total product lifecycle costs that customers may be faced with when making their purchasing decision.

Pressures for Global Products


71


The need to globalize the new product development process is driven by several important factors.50 First, since technology is the foundation for product advantage in many instances it is not surprising that new product development has become an increasingly expensive proposition and companies are facing much higher fixed research and development expenses. In order to recover these costs and realize the projected return on investment for taking on the risks of commercializing new technologies companies are forced to look beyond their home countries for sales opportunities to generate revenues. Accordingly, it is assumed from the very beginning of the new product development process that the finished product must be suitable for a global market. Second, product lifecycles have been shortened significantly which means that companies have a much smaller window of time within which to attempt to recover their investment in research and development. Gone are the days in which companies could spread their R&D costs over five to ten years and cover them with revenues from one country. Today R&D costs must be cover in 12 to 18 months and the only way to do that is to cultivate multiple revenue streams from a number of different countries.

Companies have begun to appreciate that the standardization associated with development and design of global products can actually lead to cost savings in comparison to the traditional process that often focused too much on perceived local differences in various countries. For example, truly global products generally reduce the number of products, packages and advertisements that will need to be created and this should help lower some of the fixed costs associated with new product development. In the past country-focused managers argued that customers would not be interested in products that have not been obviously localized; however, there is a decided convergence of preferences and tastes around the world that has made global products more acceptable to customers. Moreover, the lack of variety is less of a problem when and if customers are allowed to share in the cost savings through lower prices. This does not mean that differences in local preferences are no longer respected and accommodated; however, companies are now looking first to realize savings through standardization and then to identify minor changes that can be made at the very end of the process if justified by potential demand in specific geographic or industrial market segments.

Several factors have been cited as driving the convergence of customer preferences and tastes across national borders—increased globalization of media and travel; convergence in the levels of education and disposable income, each of which are cited as key drivers of consumer behavior and preferences; and the rising importance of global customers who want and need the same products and services in every location where they are doing business around the world.

Global Product Development Process

Global products are designed in a way that captures the advantages of global scale while retaining the flexibility to make changes and modifications that are considered to be absolutely essential to addressing real differences in significant geographic or industrial 50 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 278-279.


72


markets.51 In order for this to occur the design team must focus from the beginning on creating and building a product platform that allows the company to take advantage of economies of scale for the most expensive components included in the product or service while also accommodating the anticipated need to make changes and modifications quickly and cost-effectively when required for specific markets or customers. Basic examples of a platform-based design include computers—the hardware is essentially standardized while different computing requirements of users are accommodated by variations in the software—and pharmaceuticals—a massive investment is made in development, testing and manufacture of the active ingredient and then local requirements are accommodated by making the modifications to permit different methods of delivering the drug to patients (e.g., powder, tablet or injection). Designing a global product is typically more costly than designing a product for a single national market; however, in the long run the investment in a global product will be more cost effective than attempting to create a single unique design for each national market that the company intends to enter with the product. Among other things, costs savings will be realized by establishing and maintaining a single large manufacturing process for all global markets and the ability of the company to bargain effectively with suppliers for favorable pricing based on the purchase of large volumes of those components that are essential to the platform.

In addition to relying on the creation and use of a platform-based design, companies also may deploy several forms of “postponement” strategies in order to maximize the benefits sought from economies of scale and retain the greatest degree of flexibility during the design process. One of the most commonly used postponement strategies is to defer differentiation of the standard product for specific countries or customers until as late as possible in the design process. In order for this to be feasible the product must be designed so that special components or features can easily be incorporated locally without corrupting the standardized design of the product. If differentiation can be postponed long enough the company can realize substantial scale-related savings by being able to manufacture one standard product for all of the global markets and hold that product in a single inventory until it is needed for a particular country or customer. Since the standard product has not been differentiated for a particular country the company can establish regional warehouses around the world and ship the products easily and quickly to countries in the region or even to other regions if there is sufficient demand. Differentiation of the standard products will only take place when they arrive in the country from which an actual customer order has been placed.

Successful implementation of postponing differentiation depends on making the right decisions regarding product design, assembly and logistics and fully understanding the potential costs and risks associated with pursuing standardization at the expense of a more deliberate approach to anticipating and satisfying the requirements of specific countries and markets. The process begins by creating a product design and architecture that makes it simple and easy to add optional or localized components and features at the very end just before the product is delivered to the customer. The company must then 51 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 281-289.


73


ensure that its distribution facilities have the necessary equipment and technical personnel to efficiently complete the assembly required once the orders have been received. It is also advisable to create a network of warehouse facilities around the world where the standard products can be held until needed and then quickly assembled and shipped to customers.

Striving for a standard global design can be expensive and challenging, particularly when the preferences of customers are dynamic and fast-changing, and companies must also factor in the costs of changing their distribution and logistics system and additional assembly activities. On the other hand, however, postponing differentiation reduces the risks associated with trying to anticipate in advance how many units will be needed for each country or market. In the past companies would design and assemble differentiated versions of new products for each major market based on forecasted sales and then place the finished units into inventories awaiting sale. This not only resulted in higher inventory carrying costs but it also exposed the company to problems in the event that the forecasts turned out to be incorrect. For example, if the forecasts were too high the company would soon have obsolete inventory and since the products were already customized for a specific local market it was impossible to ship them to other markets for sale. In addition, of course, if the forecasts were too low and customers were demanding more units than the company had in its inventory it was difficult for the company to manufacture the needed additional units quickly enough to make up the shortfall. Presumably postponing differentiation, if done correctly, can overcome all of these disadvantages and potential problems.

Postponement of product differentiation can also be done by delaying the point in the product development process where the product concept is “frozen.” In order to illustrate how this would work one has to begin with the traditional development model in which the first phase is the development and finalization of the product concept and the second phase, which does not begin until the first phase is completed, is the period during which the concept is implemented (i.e., the product is actually designed) and further changes are rarely made to the concept. This model generally works fine in situations where the implementation phase is expected to proceed quickly and smoothly and it is not anticipated that there will be any significant changes in the relevant technology or in the marketplace once the concept phase is completed. If there is, however, volatility with respect to technology or markets then use of the traditional model creates a real risk that unforeseen changes after the concept has been frozen will cause the finished product to be obsolete by the time it hits the market. In that situation important parts of the concept phase and the implementation phase will done concurrently so that decisions regarding those elements of the concept and design that are most vulnerable to change can be delayed for as long as possible. In order to derive the most benefits from this strategy it is important to engage in frequent and continuous testing of the evolving concept from the very beginning and customers should be exposed to prototypes in order to gather their feedback and suggestions that can be incorporated into changes in the concept while there is still some flexibility in the design process.


74


The frequent and continuous testing required in order for postponement of the concept freeze to be effective has been facilitated by the growing use and acceptance of sophisticated collaborative tools such as computer-aided design, generally referred to as “CAD”. CAD allows each of the parties involved in development of the concept to provide their input by viewing, and suggesting modifications to, a digital version of the product or service that can be accessed from anywhere in the world at any time. CAD software makes it possible to test the effects of proposed modifications to the product or service and gather immediate feedback from interested stakeholders including vendors and customers. Test results obtained through the use of the CAD software can serve as the basis for resolving conflicts that might arise during the design process and provide valuable objective data that is more reliable than the potential biased opinions offered by representatives of functional constituencies primarily interested in protecting their own interests.

The three points of reference for both the traditional model and the more flexible model necessary to delay the concept freeze are the starting date of the project, the date the concept is frozen and the date of market introduction. The concept is developed throughout the period beginning the start of the project to the date of market launch; however, the entire process is generally broken down into two phases—concept development and design development (or implementation). In the traditional model little or no work was done on design development or implementation until the concept is frozen. In contrast, the flexible model anticipates that concept development will extend for a longer period of time (i.e., the date the concept is frozen will be later and closer to the date of market introduction); however, activities related to development and implementation of the design of the product or service will begin at about the same time as they do in the traditional model. Accordingly, there is a significant period during which both concept development and implementation are occurring simultaneously. It is important to emphasize the there is no difference between the two models with respect to the total time necessary to take the project from the starting to market introduction.

The use of modular product architectures is also an important tool for successful development of global products. Modular product architecture has been recognized as an essential strategy for simultaneously achieving the benefits of scale associated with global products while still being able to efficiently configure variations on the standard design to meet the specific preferences of important customers and markets. In the past, the primary objectives of product design was attempting to identify and create the single configuration of components that provided end users with optimal performance while making it easy to manufacture the product on a large scale. In order to achieve these objectives the various components within the product had to be tightly and carefully integrated which meant that the functional groups responsible for each of the components needed to work very closely with one another and generally needed to be working together in a single location. In contrast, modular architecture takes the focus of product design and development away from creating a single product and places the spotlight on creating platforms that are flexible enough to permit customization for individual customers and easily accommodate upgrades in the future as improvements are made in specific components. Put another way, while the goal of traditional product design was


75


to develop a design that was optimized to particular performance or cost constraints, modular product design seeks to create a modular product architecture that serves as the foundation, or platform, for an array of product variations each offering their own unique combination of performance and cost characteristics.

In order to understand the important of modular product architecture it is necessary to define the two essential concepts of product architecture. The first phase of defining the architecture for a product or service involves decomposing the overall functionality of the product or service into smaller narrowly defined functions and then identifying the components (and parts of those components) that will be needed for each of these sub-functions. Once that step is completed the next phase is clarifying how each of the sub-functions will work together with one another to create a system that is the complete product or service to be offered to customers. This is accomplished by defining the specifications of the interfaces between the various sub-functions. Specification of the interfaces is essential to design flexible product architectures that permit companies to easily differentiate the standard product by substituting component variations with having to make changes to components in other parts of the product. For example, the product architecture of most personal computers now permits easy substitution of a wide array of components including different disk drives, external drives, memory and microprocessor speeds. In addition, a global PC hardware platform can be created for delivery to and use anywhere in the world as part of systems that are assembled just before sale to customers and include preferred local peripherals such as keyboards and monitors and country-specific versions of software. As a result, PC manufacturers can quickly assemble products with the exact functions, features and performance levels to meet the requirements of specific customers.

Since modular product architecture allows companies to achieve scale advantages of global products while reducing and controlling the costs of product differentiation it is not surprising that many industries—personal computers, consumer electronics, automobiles and major appliances—are embracing modularity. The recognition and adaptation of the modular approach to product architecture has had a significant impact on the how companies look at their businesses and develop and implement their strategies. First, the decision to embrace modular product architecture is itself based on the recognition that customers must have a greater say in how products are designed and how companies are driven to satisfy customer requirements. Under the traditional design process manufacturers tried to figure out the optimal combination of components that would be popular with customers; however, manufacturers could not be sure that they had acted correctly until the product was fully completed and launched into the marketplace. At that point if feedback from customers included requests for different functions, features and performance levels it became very expensive for manufacturers to make changes to the products. On the other hand, with modularization companies have much more flexibility to adapt to customer demands.

Another potential advantage from modular product architecture is that manufacturers can contract with a wide range of suppliers to provide various components for use as part of the standard architecture. By establishing clear specifications for the interfaces included


76


in the product architecture companies can provide guidelines for suppliers who are interested in forging alliances to include their specialized components as part of a menu of options that will be made available to customers.

Perhaps the most important byproduct of the shift toward modular product architecture is the impact it has on how senior management views the product development process. Rather than focusing on specific product designs, management must now think more strategically and invest time and resources in developing platforms that can be used right now in a wider range of markets and serve as a foundation for future upgrades when new technologies for the various components emerge and mature. Given the strategic importance of modular product architecture, senior management must be prepared to give guidance to the design process by identifying the markets that the company wants to target and the component-based functions that management sees as being the most important to achieving and maintaining market leadership. Architectural decisions regarding interfaces are now so important they can no longer be left to engineers and mid-level managers since they will determine how well the company is able to remain competitive by continuously offering product variations, upgrades and new generations of products that take advantage of improvements in technology.

Modular product architecture also allows companies to move away from the traditional practice of forming a single product development team to achieve the tight integration of components to a new organizational structure composed of independent design and development units for each of the key components. Independence works as long as each of the units meet the interface standards and are able to communicate effectively with the other units using CAD and other new technological tools. This creates several significant advantages for the company with respect to the speed of innovation and completion of the overall design process. First, independence allows each of the units to be more creative with their experimentation and testing of their particular module and this generally increases the rate of innovation. Second, once the product architecture has been determined each of the units can work concurrently to implement their particular modules thus reducing the overall time-to-time market for the product. Finally, independence allows companies to establish units around the world in the locations that are best suited for the particular activities. For example, a company working on a new development project may set up units in locations that offer favorable government financing terms to support certain activities conducted locally, specific technical skills and expertise, or lower labor costs. In that situation most of the higher-level design work will be done, and the project manager will be based at, one primary location and the project manager will visit the various units over the course of the project and also keep in touch and maintain control over the project through the CAD software.

The interest in modular product architecture is consistent with the growing importance of reusability to both manufacturers and end users. The main reason reusability is essential for manufacturers is that the ratio of development costs to production costs is shifting more and more toward development. As a result, manufacturers are looking to maximize their return on investment in development projects by creating a design of components that can support numerous product variations and several generations of products. In


77


addition, if the initial design process is done correctly and carefully manufacturers are well positioned to quickly bring improved products to market as key components are upgraded. Other benefits from reusability, which is attractive to both manufacturers and end users, are economies of learning and improvements of quality. When manufacturers reuse components to design new products their familiarity with the components should make the design process easier, more efficient and less costly and create products of higher quality and reliability. End users are more likely to embrace new products with familiar components since it should be easier and quicker for them to learn how to use the products. Moreover, once end users have made an investment in products based on a particular product architecture they will be hesitant, even unwilling in most cases, to try new components that cannot easily be plugged into their existing systems.

Designing the Global Product Development Organization

The complexity of the organizational structure used to design a global product depends on a variety of factors including the complexity of the product itself, the number of geographic regions with specific differentiation needs, and the degree to which key customers and vendors are to be involved in the design process.52 For example, for a large design project such as a new airplane the manufacturer may begin by dividing the project up into major parts such as fuselage, wing and tail and then breaking down each of these parts into sub-parts to be designed by their own dedicated cross-functional.

For example, the top level of the organizational structure used by a computer manufacturer for design and implementation of a global product may be a cross-functional and cross-border core team composed of the leaders of key sub-teams created to carry out necessary activities relating to hardware development, software development, manufacturing, sales and marketing and localization. The leadership roles for the core team would be assigned to a project manager and the chief architect of the modular product. The core team would oversee the entire process and would serve as conflict resolution group in the event that issues arise between the sub-teams.

Responsibility for the design of the main product platform would be vested in the hardware team and the work within that team would be broken down into various modules. Completion of the modules would be a cross-functional activity that would require coordination between members of the hardware team and the manufacturing team to ensure that the module design was efficient from the perspective of manufacturability. In addition, the hardware design team members would work with members of the localization team to create differentiated versions of the modules that could be easily attached to the main platform to suit the specific requirements of various geographic areas around the world. Similarly, software design team members would work with colleagues on the localization team to design geographic-specific software programs. While some of the members of the localization team were focused on localization issues on a full-time basis other divided their time between localization and one of the other teams and thus provide support in communications between the teams and making sure 52 The discussion in this section is adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 290-292.


78


that the activities of the teams were linked and coordinated. For example, product managers from the larger countries were appointed to serve as members of both the marketing and sales team and the localization team and having engineers who were members of both the hardware design and localization teams makes it easier to design a platform that is at once global and yet suitable for local differentiation using local modules and software.

As part of the design process consideration should be given to creating an organizational structure that can deal effectively with outside vendors that may be tapped to provide components that can be easily attached to the platform. For example, rather than investing time and money in designing its own version of standardized components such as keyboards and power sources a computer manufacturer is probably better off working with one vendor (or a small group of vendors) to create interfaces that are compatible with proven components that are already manufactured in bulk and available at reasonable prices. In fact, costs can be cut even more if a deal can be struck with one vendor and the projected volume is sufficient to create additional economies of scale that can be passed along in the form of lower prices. In order to take advantage of opportunities in this area the company may form a commodity team for the particular component that will include engineers from the product team, procurement specialists, and engineers from the key vendors. As necessary the commodity team will also receive input from functional and geographic specialists.

Authority of the Global Product Development Leader

The authority of the project leader for a global product development project depends on several factors including the “newness” of the product, the type of product, the timetable for completion of the initial development of the product, the overall complexity of the project, and the anticipated duration of the project and lifecycle of the core team. 53 In general, stronger project leaders are needed as the rate of innovation increases, product life cycles shorten, development times accelerate and pressure builds to create products that are suitable for multiple markets around the world. Under those circumstances strong project leaders can facilitate the cross-functional and cross-border coordination and communication necessary for the design process to be successful and efficient. However, in order for the project leader to be effective the leader must have experience with the relevant technology and tools necessary for effective integration and must be given decision-making authority and a separate budget in order to influence the functions and geographic regions involved in the project.

Newness of the Proposed Product

As a general rule, the authority of the project leader increases in relation to the “newness” of the product since a new product, particularly a product based on technologies that are new to the market and/or the company, is more risky to the company and requires significantly higher levels of coordination among different groups disbursed around the 53 The discussions in this section and in the following sub-sections covering each of the factor are adapted from J. Galbraith, Designing the Global Corporation (San Francisco: Jossey-Bass, 2000), 293-297.


79


globe. With new products it should be expected that conflicts will arise, changes in the design and development plan will be needed, and that surprises will come up that delay the project or cause it to more off into a different direction than originally anticipated. As a result, a strong project leader with clear authority and independent resources, including a separate budget, is needed to ensure that the activities of all of the teams are integrated and the project is completed on a timely basis.

It is useful to identify and explain a basic continuum of products categorized by reference to their “newness”—style changes, product improvements, line extensions, next generation, new products, new technologies and finally new businesses:

At one extreme is the relatively simple style change to an existing product. In fact, this is hardly a “new” product and is generally driven by the marketing function with little or no innovation that requires extensive involvement from other functions such as engineering and manufacturing. Styles changes typically can be completed with very low levels of formal coordination.

The next step on the scale of “newness” is an “improvement” to an existing product such as adding new features or ingredients. Improvements may be combined with style changes as discussed above. While the project is still focused on an existing product, improvements will usually require involvement from several different functions and thus the project leader will need to invest more time and effort in coordinating activities. If the product has been properly designed with modular architecture it should be relatively easy to add a number of new features and, in fact, it is expected that many additional features will have been anticipated at the time the initial product platform was launched and the features were simply deferred so as not to unduly delay introduction of the basic product.

Beyond improvements to an existing product in complexity is the decision to undertake an extension of the current product line. While the product remains the same the company has decided to invest in changes that will presumably make the product attractive to a new segment of the market. For example, a car manufacturer may want to introduce a convertible version of a popular model to garner the interest of a new demographic market. In order to successfully complete a line extension the company must be prepared to make changes in key areas such as design, manufacturing and marketing and it should be anticipated that representatives of all of these functional areas will need to be heavily involved in the project. Moreover, since the goal of the line extension is to introduce the product to a new market segment on a global basis the project leader must be able to coordinate cross-border communications between marketing and sales teams in different countries to make sure that the new version of the product is properly positioned and priced in each of the geographic regions of interest to the company.

The next scenario on the continuum of complexity is launching a new generation of, or major update to, an existing product. This type of project normally involves not only style changes and numerous improvements but also typically will include incorporation of new technologies. Major updates are not frequent occurrences and occur only once every three to five years depending on the product and industry;


80


however, when they do occur the company must be ready to implement significant changes in almost every functional area.

Beyond major updates to existing products are projects that involve the design and introduction of completely new products. In many cases the product is new to the market and may use existing technologies in new ways or may be based on a completely new technology that has yet to be commercialized. Regardless of whether the product is new to the market or simply a different direction for the company the project will be extremely risky for the company and generate substantial uncertainty and disruption for all of the involved functions. The pressure becomes even greater with new technologies since technical risk is added to market risk. In any event, new products require the highest level of communication between functions and geographic regions and thus it is typical to find that these projects are overseen by leaders that have been given substantial authority by senior management.

Type of Proposed Product

New products can be categorized into various types based on breadth of the geographic area in which they are to be launched and maintained. At one extreme is the local product that is being developed for commercialized in one country or segment of a country. At the other extreme is the truly global product that will be marketed and sold all over the world albeit with localized modules deemed necessary to meet specific requirements in various countries. As a general rule, the degree of coordination and communication that will be required in order to complete the new product design process will increase as the number of countries or geographic regions where the product is to be sold expands.

Project Speed and Complexity

It is fairly obvious that more coordination may be required as the timetable for completion of the project is accelerated. In addition, coordination will become more important as more functions and other stakeholders (e.g., vendors and customers) are brought in to the process and/or the project is broken down in great numbers of modules with their own sub-teams. Speed and complexity is highly correlated with the relative “newness” of the project. For example, a style change is generally not a time-sensitive initiate nor does it require a large number of parties outside of marketing to implement.

Project Duration

While a tight timetable for completion of a design project is usually a good reason for vesting the project leader with significant authority to coordinate, it is also common to formalize and institutionalize the project leader position when the specific project is expected to extend for a significant period of time. For example, when automobile manufacturers undertake to create and design new automotive platforms it can be expected that the project will run anywhere from two to four years. In cases like that not only will the project leader be given extensive authority but the core team that the leader oversees may be re-located within the organization so that they are in closer proximity to


81


one another and the project leader and report directly to the project leader rather than to the functions or countries from which they originally came.

Another way of looking at the duration factor is how much of the activities associated with the full life cycle of the product are placed under the oversight of the project leader and the core team. While the usual point of reference is the length of time required to create and design the product to the point of launch it is also possible to ask the project leader and the core team to remain in place and assume responsibility for design, launch, maturation and retirement of the product. This organizational strategy may be used when the product life cycle is expected to be from two to three years with the first six to eight months devoted to design and the remaining period to commercializing the product to the point where a satisfactory return on investment has been attained, inventories have been liquidated and new generations of the core product are ready for launch.


82


____________________

About the Author

This chapter was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace. His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business. Alan has also authored or edited over 90 books on sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH and BNA. Alan is currently a partner of GCA Law Partners LLP in Mountain View CA (www.gcalaw.com) and has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital, corporate governance, Japanese business law and law and economic development. He has also launched and oversees projects relating to sustainable entrepreneurship and ageism. He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge. For more information about Alan and his activities, and the services he provides through GCA Law Partners LLP, please contact him directly at [email protected], follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

About the Project

The Sustainable Entrepreneurship Project (www.seproject.org) was launched by Alan Gutterman to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet. The Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3) of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative sustainable enterprises that will have a material positive environmental or social impact on society as a whole.

Copyright Matters and Permitted Uses of Work

Copyright © 2020 by Alan S. Gutterman. All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.

062720


http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode

https://www.linkedin.com/in/alangutterman/

mailto:[email protected]

http://www.gcalaw.com/

OD_C12 (Global Organizations) (OD_C12 (Global ...€¦ · Web viewDesigning Global Organizations...

Documents

Transcript of OD_C12 (Global Organizations) (OD_C12 (Global ...€¦ · Web viewDesigning Global Organizations...