1. Chapter 12 Daniels Prentice Hall, 2002 1 Chapter Twelve Governance of Operations

2. Chapter 12 Daniels Prentice Hall, 2002 2 Chapter Objectives  To discern the factors influencing whether international companies’ decisions should be made by headquarters or country-level managers  To appreciate how different organization structures have advantages and disadvantages for handling international operations  To realize how the selection and development of key personnel are important for governing international companies  To comprehend the major instruments to control companies’ international operations  To conceive of the special governance problems created through acquisitions, shared ownership, networks, and changes in strategies  To recognize the factors that make international operations inherently more difficult to govern than domestic operations

3. Chapter 12 Daniels Prentice Hall, 2002 3 Introduction  Companies operating internationally use a number of governance mechanisms to help meet company performance objectives  Four major means of governance include: Location of decision making Organizational structure Selection and development of key personnel Control instruments

4. Chapter 12 Daniels Prentice Hall, 2002 4 Location of Decision Making  The higher within an organization that managers make decisions, the more the decisions are centralized  The lower within an organization that managers make decisions, the more the decisions are decentralized  Companies should base their choice of decision location on a combination of three trade-offs: Balancing pressures for global integration versus pressures for local responsiveness The higher the pressure for global integrating, the greater the need to centralize decision making The higher the pressure for responsiveness to local conditions, the greater the need to decentralize decision making Reasons for pressures for deciding on global integration or responsiveness to local conditions include: o Resource transference o Standardization o Systematic dealings with stakeholders o Relationship to corporate strategy

5. Chapter 12 Daniels Prentice Hall, 2002 5 Location of Decision Making

6. Chapter 12 Daniels Prentice Hall, 2002 6 Location of Decision Making Balancing the capabilities of headquarters versus capabilities of subsidiary personnel Headquarters managers’ perceptions of their own competence versus foreign subsidiary managers’ competence influences the decisions that each will make Subsidiary managers may need to exert initiative to enhance the flow of information about subsidiary capabilities Important factors for managers to consider include: o Motivation and development o Changes in competencies Balancing the expediency versus the quality of decisions Although corporate personnel may be more experienced in advising on or making certain decisions, the time and expense involved in centralization may not justify the so-called better advice Any discussion of location of authority must consider the importance of the particular decision

7. Chapter 12 Daniels Prentice Hall, 2002 7 Organization Structure  The organization structure defines how companies group individuals and operating units to carry out their activities  A company may group its international activities separately from its domestic ones International division By grouping international activities into their own division, companies put specialized personnel together to handle situations

8. Chapter 12 Daniels Prentice Hall, 2002 8 Organization Structure Functional division Companies with a narrow range of products are the most likely to use functional divisions Product division Companies with diverse product lines are most apt to utilize product divisions Geographic division Companies using geographic divisions generally have very large foreign operations that are not dominated by a single country or area

9. Chapter 12 Daniels Prentice Hall, 2002 9 Organization Structure  Because of the problems inherent in either integrating or separating foreign operations, many companies are moving toward matrix organizations  This structure is based on the premise that the groups will become more interdependent, exchange information, and exchange resources with each other because they share responsibility  Companies using a matrix organization do encounter drawbacks: How groups compete for scarce resources Elimination of multiple viewpoints  A company’s structure can evolve as its business evolves  Organizations most often have a mixed structure

10. Chapter 12 Daniels Prentice Hall, 2002 10 Selection and Development of Key Personnel  Companies need good personnel to formulate and implement effective strategies to achieve superior performance  A successful international company’s total employment force must include sufficient people with: Functional expertise Ability to integrate functions Vision to plan for an uncertain future A global rather than a national orientation to operations Understanding of both national responsiveness and cross-national integration Interpersonal skills to bring diverse cultural viewpoints together

11. Chapter 12 Daniels Prentice Hall, 2002 11 Selection and Development of Key Personnel  International staffing is two-tiered: Subsidiaries need people who can manage well locally Headquarters needs people who can effectively coordinate and control worldwide and regional operations  Companies need to get personnel to think globally much less when their strategy is multidomestic than when their strategy is global or transnational  The collaborative nature of integration requires a high level of cooperation  Unless headquarters management has a global mind-set, the company may be excessively ethnocentric or polycentric There is also a need to manage in a style that subordinates will accept

12. Chapter 12 Daniels Prentice Hall, 2002 12 Selection and Development of Key Personnel  Companies use three approaches to build a global mind-set: They mix nationalities within the organization so as to create a greater likelihood that managers will consider diverse national viewpoints when making decisions They assign managers temporarily to foreign countries so that they can learn to work in a variety of social systems and can better mesh domestic and foreign operations when they take on corporate responsibilities They include global and national results in their evaluations of managers for compensation and advancement purposes  Any company has certain common values that its employees share Corporate culture

13. Chapter 12 Daniels Prentice Hall, 2002 13 Control Instruments  Companies use a variety of instruments to govern their international operations Developing teams with members from different countries Strengthening corporate staff Keeping the international and domestic personnel in closer proximity to each other Establishing liaisons among subsidiaries Giving all divisions and subsidiaries credit for business Basing reward systems partially on global results Using specialized staff departments  Headquarters needs timely reports to allocate resources, correct plans, and reward personnel Not all information exchange occurs through formalized written reports Headquarters should evaluate subsidiaries and their managers on a number of indicators rather than relying too heavily on one

14. Chapter 12 Daniels Prentice Hall, 2002 14 Special Governance Problems  The following can create control problems: Acquisitions Shared ownership Network organizations Network alliance Heterarchy Changes in strategies

15. Chapter 12 Daniels Prentice Hall, 2002 15 International Governance Difficulties  Governance is usually more difficult in international than in domestic operations because of the following reasons: Distance Diversity Uncontrollable factors Degree of certainty