1. Chapter Copyright© 2007 Thomson Learning All rights reserved 8 Organizational Designs for Multinational Companies

2. Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives Understand the components of organizational design Know the basic building blocks of organization structure Understand the structural options for multinational companies Know the choices multinationals have in the use of subsidiaries Understand the components of organizational design Know the basic building blocks of organization structure Understand the structural options for multinational companies Know the choices multinationals have in the use of subsidiaries

3. Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives See the links between multinational strategies and structures Understand the basic mechanisms of organizational coordination and control Know how coordination and control mechanisms are used by multinational companies Understand the need for knowledge management systems within organizations See the links between multinational strategies and structures Understand the basic mechanisms of organizational coordination and control Know how coordination and control mechanisms are used by multinational companies Understand the need for knowledge management systems within organizations

4. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizational Design How organizations structure subunits and coordination and control mechanisms to achieve strategic goals Basic questions: - How to divide work among the organization’s subunits? - How to coordinate and control the efforts of the units created? How organizations structure subunits and coordination and control mechanisms to achieve strategic goals Basic questions: - How to divide work among the organization’s subunits? - How to coordinate and control the efforts of the units created?

5. Copyright© 2007 South-Western/Thomson Learning All rights reserved Nature of Organization Design In small organizations, there is little reason to divide work - Everyone does the same thing and everything As organizations grow, there is a need to divide work and the organization There is no one best organizational design In small organizations, there is little reason to divide work - Everyone does the same thing and everything As organizations grow, there is a need to divide work and the organization There is no one best organizational design

6. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Basic Functional Structure Departments perform separate business functions such as marketing or manufacturing Simplest of organizations Most smaller organizations have functional structures Departments perform separate business functions such as marketing or manufacturing Simplest of organizations Most smaller organizations have functional structures

7. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.1: A Basic Functional Structure

8. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Basic Functional Structure Works best when organization has: - Few products - Few locations - Few types of customers - A stable environment - Routine technology Works best when organization has: - Few products - Few locations - Few types of customers - A stable environment - Routine technology

9. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Basic Product and Geographic Structures Product structure: departments or subunits based on different product groups Geographic structure: departments or subunits based on geographic regions Product structure: departments or subunits based on different product groups Geographic structure: departments or subunits based on geographic regions

10. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Basic Product and Geographic Structures (cont.) Usually less efficient than the functional organization Allows a company to serve customer needs that vary by region or product Usually less efficient than the functional organization Allows a company to serve customer needs that vary by region or product

11. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.2: Product Structure

12. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.3: A Basic Geographic Structure

13. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Basic Product and Geographic Structures Managers choose product structures when: Product or an area sufficiently unique to require focused functional efforts on one type of product or service Hybrid structure: mixes functional, geographic, and product units Managers choose product structures when: Product or an area sufficiently unique to require focused functional efforts on one type of product or service Hybrid structure: mixes functional, geographic, and product units

14. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizational Structures to Implement Multinational Strategies When company first goes international, it seldom changes structure. - Passive exporter Licensing has little impact on domestic structures. However, when international sales become more central, structures need to be changed. When company first goes international, it seldom changes structure. - Passive exporter Licensing has little impact on domestic structures. However, when international sales become more central, structures need to be changed.

15. Copyright© 2007 South-Western/Thomson Learning All rights reserved Export Department Coordinates and controls a company’s export operations Export department - Is created when exports become significant - Deals with international sales of all products Coordinates and controls a company’s export operations Export department - Is created when exports become significant - Deals with international sales of all products

16. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.4: A Functional Structure with an Export Department

17. Copyright© 2007 South-Western/Thomson Learning All rights reserved Foreign Subsidiaries Subunit of the multinational company that is located in another country Types of foreign subsidiaries - Minireplica subsidiary: smaller version of the parent company Uses the same technology and producing the same products as the parent company - Transnational subsidiary: has no companywide form or function Each subsidiary contributes what it does best Subunit of the multinational company that is located in another country Types of foreign subsidiaries - Minireplica subsidiary: smaller version of the parent company Uses the same technology and producing the same products as the parent company - Transnational subsidiary: has no companywide form or function Each subsidiary contributes what it does best

18. Copyright© 2007 South-Western/Thomson Learning All rights reserved Foreign Subsidiaries Many subsidiaries are neither minireplicas nor transnationals May take different forms or functions Many subsidiaries are neither minireplicas nor transnationals May take different forms or functions

19. Copyright© 2007 South-Western/Thomson Learning All rights reserved Foreign Subsidiaries Multinationals choose the mix of functions based on: - The firm’s multinational strategy or strategies - The subsidiaries’ capabilities and resources - The economic and political risk of building and managing a subunit in another country - How the subsidiaries fit into the overall multinational organizational structure Multinationals choose the mix of functions based on: - The firm’s multinational strategy or strategies - The subsidiaries’ capabilities and resources - The economic and political risk of building and managing a subunit in another country - How the subsidiaries fit into the overall multinational organizational structure

20. Copyright© 2007 South-Western/Thomson Learning All rights reserved International Division Larger and has greater responsibilities compared to the export department Responsible for managing exports, international sales, and foreign subsidiaries Usual step after export department Deals with all products Manages overseas sales force and manufacturing sites Larger and has greater responsibilities compared to the export department Responsible for managing exports, international sales, and foreign subsidiaries Usual step after export department Deals with all products Manages overseas sales force and manufacturing sites

21. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.5: An International Division

22. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizational Structures to Implement Multinational Strategies Reasons to abandon the international division - Diverse products overwhelm capacities of multinational - Not close enough to local markets - Cannot take advantage of global economies of scale or global sources of knowledge Reasons to abandon the international division - Diverse products overwhelm capacities of multinational - Not close enough to local markets - Cannot take advantage of global economies of scale or global sources of knowledge

23. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizational Structures to Implement Multinational Strategies Several options available to deal with these shortcomings - Worldwide product structure - Worldwide geographic structure - Matrix structure - Transnational-network structure Several options available to deal with these shortcomings - Worldwide product structure - Worldwide geographic structure - Matrix structure - Transnational-network structure

24. Copyright© 2007 South-Western/Thomson Learning All rights reserved Worldwide Geographic Structure Has geographical units representing regions of the world - Prime reason is to implement a multidomestic or regional strategy - Organizational design with maximum geographic flexibility - Separate divisions for large market countries Has geographical units representing regions of the world - Prime reason is to implement a multidomestic or regional strategy - Organizational design with maximum geographic flexibility - Separate divisions for large market countries

25. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.6: Royal Vopak Geographic Structure

26. Copyright© 2007 South-Western/Thomson Learning All rights reserved Worldwide Product Structure Worldwide product structure - Gives product divisions responsibility to produce and sell their products or services throughout the world - Implements strategies that emphasize global products - Provides an efficient way to organize and centralize the production and sales of similar products Worldwide product structure - Gives product divisions responsibility to produce and sell their products or services throughout the world - Implements strategies that emphasize global products - Provides an efficient way to organize and centralize the production and sales of similar products

27. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.7: Worldwide Product Structure

28. Copyright© 2007 South-Western/Thomson Learning All rights reserved Hybrids Both worldwide product structure and worldwide geographic structure have advantages and disadvantages - Product structure: supports global products - Geographic structure: emphasizes local adaptation Multinationals often want both abilities Use hybrids Both worldwide product structure and worldwide geographic structure have advantages and disadvantages - Product structure: supports global products - Geographic structure: emphasizes local adaptation Multinationals often want both abilities Use hybrids

29. Copyright© 2007 South-Western/Thomson Learning All rights reserved Front-back Hybrid Structure The front side has units based on geography to provide a multidomestic or regional focus The backside has units based on product groups to capture global economies of scale in R&D and production The front side has units based on geography to provide a multidomestic or regional focus The backside has units based on product groups to capture global economies of scale in R&D and production

30. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.8: Tetra Pak’s Front- Back Hybrid Structure

31. Copyright© 2007 South-Western/Thomson Learning All rights reserved Worldwide Matrix Structures Symmetrical organization with equal emphasis on - Worldwide product groups and - Regional geographical divisions Geographic divisions focus on national responsiveness and product divisions focus on finding global efficiencies Symmetrical organization with equal emphasis on - Worldwide product groups and - Regional geographical divisions Geographic divisions focus on national responsiveness and product divisions focus on finding global efficiencies

32. Copyright© 2007 South-Western/Thomson Learning All rights reserved Worldwide Matrix Structures Balances the benefits produced by area and product structures Creates equal lines of authority for products and areas - Works best with near equal demands from both sides Requires extensive resources for communication and coordination Requires middle and upper level managers with good human relations skills Balances the benefits produced by area and product structures Creates equal lines of authority for products and areas - Works best with near equal demands from both sides Requires extensive resources for communication and coordination Requires middle and upper level managers with good human relations skills

33. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.9: Worldwide Matrix Organization

34. Copyright© 2007 South-Western/Thomson Learning All rights reserved Matrix Structures Problems emerging with worldwide matrix structures - Slow decision making process - Too bureaucratic - Too many meetings and too much conflict Problems emerging with worldwide matrix structures - Slow decision making process - Too bureaucratic - Too many meetings and too much conflict

35. Copyright© 2007 South-Western/Thomson Learning All rights reserved Matrix Structures (cont.) Result - Some companies have abandoned their matrixes and returned to product structures -Other companies have redesigned their matrix structures to be more flexible with speedier decision making Result - Some companies have abandoned their matrixes and returned to product structures -Other companies have redesigned their matrix structures to be more flexible with speedier decision making

36. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Transnational-Network Structure Newest solution to the complex demand of being locally responsive and taking advantage of global economies of scale Combines functional, product, and geographic subunits - Dispersed subunits - Specialized operations - Interdependent relationships Newest solution to the complex demand of being locally responsive and taking advantage of global economies of scale Combines functional, product, and geographic subunits - Dispersed subunits - Specialized operations - Interdependent relationships

37. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Transnational-Network Structures Has no symmetry or balance in its structural form Resources, people, and ideas flow in all directions Nodes or centers in the network coordinate product, functional, and geographic information Has no symmetry or balance in its structural form Resources, people, and ideas flow in all directions Nodes or centers in the network coordinate product, functional, and geographic information

38. Copyright© 2007 South-Western/Thomson Learning All rights reserved The Transnational-Network Structures Philips divides the world into three groups Key countries: such as the Netherlands and the United States produce for local and world markets and control local sales Large countries: such as Mexico and Belgium have some local and worldwide production facilities and local sales Local business countries: smaller countries that are primarily sales units and that import products from the product divisions’ worldwide production centers in other countries Philips divides the world into three groups Key countries: such as the Netherlands and the United States produce for local and world markets and control local sales Large countries: such as Mexico and Belgium have some local and worldwide production facilities and local sales Local business countries: smaller countries that are primarily sales units and that import products from the product divisions’ worldwide production centers in other countries

39. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.10: Geographic Links in the Philips Transnational Structure

40. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.11: Product Links in the Same Organization

41. Copyright© 2007 South-Western/Thomson Learning All rights reserved Components of the Transnational-Network Structure 1.Dispersed subunits: subsidiaries located anywhere where they can most benefit the company 2.Specialized operations: subunits specializing in particular product, research areas, or marketing areas 3.Interdependent relationships: continuous sharing of information and resources by dispersed and specialized subunits 1.Dispersed subunits: subsidiaries located anywhere where they can most benefit the company 2.Specialized operations: subunits specializing in particular product, research areas, or marketing areas 3.Interdependent relationships: continuous sharing of information and resources by dispersed and specialized subunits

42. Copyright© 2007 South-Western/Thomson Learning All rights reserved Metanational Structure Large entrepreneurial multinational Can tap into pockets of innovation, technology, and markets located around the world Develops extensive systems to encourage organizational learning and entrepreneurial activities Large entrepreneurial multinational Can tap into pockets of innovation, technology, and markets located around the world Develops extensive systems to encourage organizational learning and entrepreneurial activities

43. Copyright© 2007 South-Western/Thomson Learning All rights reserved Metanational Characteristics Nonstandard business formulas for any local activity Looking to emerging markets as sources of knowledge and ideas Creating a culture supporting global learning Extensive use of strategic alliances to gain knowledge for varied sources Nonstandard business formulas for any local activity Looking to emerging markets as sources of knowledge and ideas Creating a culture supporting global learning Extensive use of strategic alliances to gain knowledge for varied sources

44. Copyright© 2007 South-Western/Thomson Learning All rights reserved Characteristics of Metanationals High levels of trust between partners to encourage knowledge sharing Centerless organization that moves strategic functions away from headquarters to major markets Decentralization of decision making to managers who serve key customers and strategic partners High levels of trust between partners to encourage knowledge sharing Centerless organization that moves strategic functions away from headquarters to major markets Decentralization of decision making to managers who serve key customers and strategic partners

45. Copyright© 2007 South-Western/Thomson Learning All rights reserved Micro-Multinational Company Micro-multinational companies: smaller organizations that take advantage of the Web to operate globally from Day One

46. Copyright© 2007 South-Western/Thomson Learning All rights reserved Micro-Multinational Company Characteristics - They operate as born-global firms from the day they are founded, and they operate everywhere around the world - They are willing to start operations and hire workers from around the world and from where it makes the most sense to do so - They are more likely to use various state-of-the-art technology for communication purposes Characteristics - They operate as born-global firms from the day they are founded, and they operate everywhere around the world - They are willing to start operations and hire workers from around the world and from where it makes the most sense to do so - They are more likely to use various state-of-the-art technology for communication purposes

47. Copyright© 2007 South-Western/Thomson Learning All rights reserved Multinational Strategy and Structure: An Overview Most companies support early internationalization efforts with export department Depending on globalization strategy, they evolve into product or geographic structure Pressure for local adaptation and global efficiencies result into matrix or transnational-network No company reaches any pure form—use hybrids Most companies support early internationalization efforts with export department Depending on globalization strategy, they evolve into product or geographic structure Pressure for local adaptation and global efficiencies result into matrix or transnational-network No company reaches any pure form—use hybrids

48. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.12: Multinational Strategy, Structure, and Evolution

49. Copyright© 2007 South-Western/Thomson Learning All rights reserved Control Systems Control system: helps link the organization vertically, up and down the organizational hierarchy Basic functions of control system - Measure or monitor the performances of subunits - Provide feedback to subunit managers regarding the effectiveness of their units Control system: helps link the organization vertically, up and down the organizational hierarchy Basic functions of control system - Measure or monitor the performances of subunits - Provide feedback to subunit managers regarding the effectiveness of their units

50. Copyright© 2007 South-Western/Thomson Learning All rights reserved Coordination Systems Coordination system: horizontal organizational links - Provide information flows among subsidiaries Coordination system: horizontal organizational links - Provide information flows among subsidiaries

51. Copyright© 2007 South-Western/Thomson Learning All rights reserved Design Options for Control Systems Four types of control systems - Output control system - Bureaucratic control system - Decision-making control - Cultural control system Four types of control systems - Output control system - Bureaucratic control system - Decision-making control - Cultural control system

52. Copyright© 2007 South-Western/Thomson Learning All rights reserved Output Control Systems Assesses the performance of a unit based on results, not on the processes used to achieve these results - Profit center: unit controlled by its profit or loss performance Assesses the performance of a unit based on results, not on the processes used to achieve these results - Profit center: unit controlled by its profit or loss performance

53. Copyright© 2007 South-Western/Thomson Learning All rights reserved Bureaucratic control system Focuses on managing behaviors within the organization - Budgets: financial targets for expenditures - Statistical reports: information to top management about nonfinancial outcomes - Standard operating procedures (SOPs): rules and regulations of appropriate behavior Focuses on managing behaviors within the organization - Budgets: financial targets for expenditures - Statistical reports: information to top management about nonfinancial outcomes - Standard operating procedures (SOPs): rules and regulations of appropriate behavior

54. Copyright© 2007 South-Western/Thomson Learning All rights reserved Control and Coordination Systems Decision-making control: level in the organizational hierarchy where managers have the authority to make decisions Cultural control system: uses organizational culture to control behaviors and attitudes of employees Decision-making control: level in the organizational hierarchy where managers have the authority to make decisions Cultural control system: uses organizational culture to control behaviors and attitudes of employees

55. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.13: Use of Control Mechanisms in Multinational Organizational Structures

56. Copyright© 2007 South-Western/Thomson Learning All rights reserved Design Options for Coordination Systems Textual communication: e-mail, memos, and reports Direct contact: face-to-face interaction of employees Liaison roles: part of a person’s job in one department to communicate with people in another department Task forces: temporary teams created to solve a particular organizational problem Full-time integrators: cross-unit coordination is the main job responsibility Textual communication: e-mail, memos, and reports Direct contact: face-to-face interaction of employees Liaison roles: part of a person’s job in one department to communicate with people in another department Task forces: temporary teams created to solve a particular organizational problem Full-time integrators: cross-unit coordination is the main job responsibility

57. Copyright© 2007 South-Western/Thomson Learning All rights reserved Teams Teams: permanent unit of the organization -Global virtual teams: groups of people from different parts of the world who work together by using information and communication technologies such as intranets, web meetings, WIKI’s, e-mails and instant messaging Teams: permanent unit of the organization -Global virtual teams: groups of people from different parts of the world who work together by using information and communication technologies such as intranets, web meetings, WIKI’s, e-mails and instant messaging

58. Copyright© 2007 South-Western/Thomson Learning All rights reserved Problems with Global teams Team members’ native languages are different Differences in cultural background Global teams dominated by headquarters’ perspectives and experiences Major challenges in building team collaboration Challenges in meeting programmatic objectives Team members’ native languages are different Differences in cultural background Global teams dominated by headquarters’ perspectives and experiences Major challenges in building team collaboration Challenges in meeting programmatic objectives

59. Copyright© 2007 South-Western/Thomson Learning All rights reserved Steps to ensure the global teams collaborate to function effectively Build relationships and trust Devote significant attention to project planning and hold project progress meetings regularly Cultural, language, and active-listening training Be aware of team-development stage Build relationships and trust Devote significant attention to project planning and hold project progress meetings regularly Cultural, language, and active-listening training Be aware of team-development stage

60. Copyright© 2007 South-Western/Thomson Learning All rights reserved Knowledge Management Knowledge management: refers to the systems, mechanisms, and other design elements of any organization to ensure that the right form of knowledge is available to the right individual at the right time

61. Copyright© 2007 South-Western/Thomson Learning All rights reserved Knowledge Management Types of knowledge Explicit form:found in records or other repositories of information Tacit knowledge: represents the knowledge that usually resides within employees and is dependent on the organization’s culture and context Types of knowledge Explicit form:found in records or other repositories of information Tacit knowledge: represents the knowledge that usually resides within employees and is dependent on the organization’s culture and context

62. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 8.14: Knowledge Management Barriers

63. Copyright© 2007 South-Western/Thomson Learning All rights reserved Knowledge Management: Steps to Develop Successful System Identify/support knowledge activists Make knowledge management part of the general strategy Provide financial and human resources support Emphasize importance of communication Celebrate success Identify/support knowledge activists Make knowledge management part of the general strategy Provide financial and human resources support Emphasize importance of communication Celebrate success

64. Copyright© 2007 South-Western/Thomson Learning All rights reserved Conclusion Good strategies do not guarantee success – also need good implementation Need the right organizational designs to carry out strategies Chapter reviews basic organizational structures and discusses international organizational designs and structures Chapter also discusses knowledge management systems Good strategies do not guarantee success – also need good implementation Need the right organizational designs to carry out strategies Chapter reviews basic organizational structures and discusses international organizational designs and structures Chapter also discusses knowledge management systems