18 Organizational Design And Control International Business This chapter covers: Design of organizational structures Organizational dimensions Organizational forms The virtual corporation Decision making in an IC Control of a joint venture Reports needed by an IC Organizational Design And Control International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Explain why the design of organizational structure is important to international companies Understand the organizational dimensions that must be considered when selecting organizational structures Discuss the various organizational forms Understand the concept of the virtual corporation Explain why decisions are made where they are among parent and subsidiary units of an international company Understand how an IC can maintain control of a joint venture List the types of information an IC needs to have reported to it by its units around the world 18-2

Organizational Structure The way organization arranges its various domestic and international units and activities The relationships among these components Determines where formal power and authority will be located Presented in an organization chart 18-3

Organization Design Organization design deals with how an international business should be organized in order to ensure its worldwide business activities are able to be integrated in an efficient and effective manner Structures and systems must be consistent with each other and with the environmental context Size and complexity of the organization must be considered in design Structure must be able to evolve over time in order to respond to change 18-4

Design Concerns Organizational Design Concerns Two concerns that management faces in designing the organizational structure Finding the most effective way to departmentalize to take advantage of the efficiencies gained from specialization of labor Coordinating the activities of those departments to enable the firm to meet its overall objectives 18-5

Design Dimensions Product and technical expertise regarding the businesses Geographic expertise regarding the countries and regions Customer expertise regarding the client groups, industries, market segments, or population groups Functional expertise regarding the value chain activities 18-6

Evolution of the International Company International Division A division in the organization that is at the same level as the domestic division and is responsible for all non-home country activities Organization on a regional or geographic basis As overseas operations grow global structures are formed 18-7 Management changes to global product or global geographic form to Be more capable of developing competitive strategies Obtain lower production costs Enhance technology transfer and the allocation of resources

Global Corporate Form Product Product divisions responsible for the worldwide operations such as marketing and production of products Each division generally has regional experts Eliminates duplication of product experts Creates a duplication of area experts 18-8

Global Corporate Form Geographical Regions Responsibilities for all activities under area managers who report directly to the CEO This kind of organization simplifies the task of directing worldwide operations Every country is clearly under the control of someone who is in contact with headquarters 18-9

Global Corporate Form Geographical Regions Used for both multinational and global companies Used by Companies that manufacture products with a low or stable technological content that require strong marketing ability Firms with diverse products Producers of consumer products Creates duplication of product and functional specialists 18-10

Global Corporate Form Function Few firms are organized by function at the top level Senior executives responsible for each functional area report to CEO Users of the functional form are those with a narrow and highly integrated product mix 18-11 Hybrid Forms A mixture of the organizational forms is used at the top level and may or may not be present at the lower Often result of regionally organized company introducing new and different product line or Firm selling to sizable, homogeneous class of customers

Global Corporate Form Matrix Organization Organization based on one or two dimensions superimposed on organization based on another dimension Evolved from attempt to mesh product, regional, and functional expertise Requires multiple managers to agree on decision Matrix overlay attempts to correct this problem 18-12

Strategic Business Units An organizational form in which product divisions have been defined as though they were distinct, independent businesses Most SBUs are based on product lines 18-13

Changes in Organizational Form Pressure to act more quickly, reduce costs and improve quality have created new forms Reengineering to reduce levels of middle management restructure work processes reduce fragmenting across departments empower employees improve communication respond more quickly become more innovative 18-14

Current Organizational Trends Virtual Corporation Coordinates activity to deliver value to customers using resources outside traditional boundaries Relies to a great extent on third parties to conduct its business Also called a network corporation Advanced by technology 18-15 Advantages Permits greater flexibility Forms a network of dynamic relationships taking advantage of the competencies of other organizations Disadvantage Potential to reduce management’s control over the corporation’s activities

Current Organizational Trends Horizontal Corporation Gives flexibility to respond quickly “antiorganzation” removes constraints of conventional structures Employees worldwide create, build, and market the company’s products through a carefully cultivated system of interrelationships 18-16

Control Where Are Decisions Made? All at IC headquarters All at subsidiary level Combination Variables determining the location of decision making Product and Equipment Competence of subsidiary management Size of the international company and how long it has been one Detriment of a subsidiary for the benefit of the enterprise Subsidiary frustration 18-17

Control Product and Equipment Standardized product affiliates have to follow company policy Without global product policy, still attempt to standardize as much as possible If profit potential greater when subsidiary customizes, subsidiary can proceed with parent approval 18-18 Competence of Subsidiary Management depends on How well do executives know one another How well do they know company policies Understanding of host country conditions Distances between home and host countries Size and age of parent company

Control Greater reliance on subsidiary management if Executives are moved around between headquarters and subsidiaries HQ less familiar with host country Greater distance Smaller company lacks internationally experienced managers and cannot afford to hire them 18-19

Control Benefiting the Enterprise to the Detriment of a Subsidiary IC can source raw materials and components, locate factories, allocate orders and govern intrafirm pricing that may benefit the IC but be a detriment to the subsidiary 18-20 Moving Production Factors Cost, labor, taxes, market, currency, political stability Which Subsidiary Gets the Order Transportation, production, tariffs, currency, backlogs Multicountry Production Economies of scale Which Subsidiary Books the Profits Taxes, currency controls, labor relations, political climate, social unrest

Control Subsidiary Frustration Management of subsidiaries must be motivated and loyal If all decisions made at HQ they can lose incentive and prestige or face with their employees and the community They may become hostile and disloyal HQ management should delegate as much as reasonably possible Subsidiary managers should be kept informed 18-21

Joint Ventures and Subsidiaries Less than 100 Percent Owned A joint venture may be A corporate entity between an IC and local owners A corporate entity between two or more companies that are foreign to the area where the joint venture is located One company working on a project of limited duration in cooperation with one or more other companies 18-22

Joint Ventures and Subsidiaries Less than 100 Percent Owned Loss of freedom and flexibility because shareholders can block HQ efforts to Move production factors Fill an order from another affiliate or subsidiary Shareholders may bring legal pressures Political pressures 18-23 Methods HQ can use to maintain control include A management contract Control of the finances Control of the technology Putting people from the IC in important executive positions Joint venture partner will want their own or host government personnel in executive positions

Control For controls to be effective all operating units of an international company must provide headquarters with timely, accurate, and complete reports Types of reporting required Financial Technological Market opportunity Political and economic 18-24

De-Jobbing Mass production and large organizations are disappearing New computer and communication technologies are “de-jobbing” the workplace Fixed jobs are being replaced with tasks performed by evolving teams 18-25

De-Jobbing Traits of Companies with De-Jobbed Workers They encourage employees to make operating decisions that used to be reserved for managers They give employees the information they need to make such decisions They give employees lots of training to create an understanding of business and financial issues that used to concern only an owner or executive They give employees a stake in the fruits of their labor--a share of the profits 18-26