Chapter 10

Organizational Design
and Control

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
• LO 10-1 Explain why the design of organizational structure is
important to international companies.
• LO 10-2 Discuss the organizational dimensions that must be
considered when selecting organizational structures.
• LO 10-3 Discuss the various organizational forms available for
structuring international companies.
• LO 10-4 Explain why decisions are made when they are among
parent and subsidiary units of an international company.
• LO 10-5 Discuss how an international company can maintain
control of a joint company in which the IC owns less than 50
percent of the voting stock.
• LO 10-6 List the types of information an international company
needs to have reported to it by its units around the world.

10-2
 What is Organizational Design, and Why is
it Important for International Companies?
• How an IC is • Org. Design must:
organized to ensure – Evolve
efficient and effective – Respond to change
integration of global – Reconfigure so
business activities competencies &
resources are
integrated in and
across business units

10-3
 The Relationship Among International
Environment, Competitive Strategy, and
Organizational Structure

10-4
 Organizational Design Concerns
1. Find the most effective 1. Product and technical
expertise regarding the IC’s
way to departmentalize businesses
to take advantage of 2. Geographic expertise about
efficiencies gained from countries and regions where the
specialization of labor IC operates
3. Customer expertise regarding
2. Coordinate the the client groups, industries,
activities of those market segments, or population
departments to enable groups across national borders
4. Functional expertise
the firm to meet its regarding the IC’s value chain
overall objectives activities

10-5
Evolution of the International Company
Shift from International Division
Stages top Worldwide Organization

1. Exporting • Worldwide organization

2. Overseas sales based on:
companies – Product
– Region
3. Foreign manufacturing
– Function
facilities
– Customer classes
4. International Division
– “same level as domestic
• At lower levels:
division but responsible for – Process
all non-home-country – National subsidiary
activities”
– International or domestic

10-6
International Division

10-7
International Structural Stages Model

10-8
 Reasons for Additional
Structural Changes
1. Need more capability to develop competitive
strategies to confront global competition

2. Lower production costs with global product

standardization and manufacturing
rationalization

3. Enhance technology transfer and resource

allocation
10-9
 Global Corporate Forms
Product Geographic Regions
• Product divisions • Regional managers report
responsible for directly to CEO
– Global line & staff operations • Found in both multinational
– Marketing
(multidomestic) and global firms
– Production • Works well for products with
low/stable technology but
• Issues: needing strong marketing
– Regional experts avoid
• Hard to coordinate production
duplication of product
experts
across regions
– Duplication of area experts • Managers have no line
authority but give input to
decisions

10-10
Global Corporate Form – Product

10-11
Global Corporate Form – Geographic Regions

10-12
 Global Corporate Forms
Function Hybrid
• Very few firms • Hybrid
organized by function at – “Structure organized by more
top levels than one dimension at top level”
– May not be hybrid at lower
• Senior executives levels
reporting to CEO have • Used when:
specific functional – Regional firm introduces line best
responsibility handled by worldwide product
division
• Firm typically has a – An acquired firm has distinct
narrow & highly products & functional marketing
network in place
integrated product mix – Firm sells to large, homogenous
customer group

10-13
Global Corporate Form – Function

10-14
Hybrid Organizational Form

10-15
 Matrix Organizations
Matrix Organization Problems with the Matrix
• “one or more superimposed • 2 or 3 managers must
organizational structures agree on decisions
in an attempt to mesh
• Less-than-optimum
product, regional,
functional, and other
compromises
expertise” • Delayed responses
• Country managers • Attention paid to process,
responsible for both area not problem
and product-line managers • Unresolved problems go to
management

10-16
Regional – Product Matrix

10-17
 Solution: Matrix Overlay
Matrix Overlay Benefits
• “top level organizations • Requires accountability
are required to heed • Avoids stress of pure
input from staff matrix structure
composed of experts of • Regional specialists with
another organizational staff function give input
dimension in an attempt to product decisions
to avoid the double- • Organized into
reporting difficulty of a international divisions
matrix organization but
• Regional product
still mesh two or more
managers
dimensions”
10-18
 Strategic Business Units
SBUs

• business entity with a clearly defined market,

specific competitors, the ability to carry out
specific business mission, and size appropriate for
control by single manager

• Typically based on product lines

• Also called Product Business Units (PBUs) and
Strategic Performance Units (SPUs)

10-19
 Changes in Organizational Forms
Reengineering
Business Environment • redesigning organizational
structure, hierarchy, business
changes create systems, and processes to
pressures to: improve organizational efficiency

• Reengineering :
• act more quickly – reduces levels of middle management
– restructures work processes
• reduce costs – reduces fragmenting across
• improve quality –
departments
improves speed and quality of
• maintain alignment –
strategy execution
empowers employees
– communicates instantly
– transmits information swiftly

10-20
 Current Organizational Trends
Virtual Corporation
– “coordinates economic
activity to deliver value to
customers using resources
outside the traditional
boundaries of the
organization”
– aka Network Corporation
Advantages/Disadvantage
• Advantages
– Changes in workforce & work
methods
– Greater flexibility
– Network of dynamic
relationships
– Takes advantage of other
organizations’ competencies
• Disadvantage
– Potential to reduce
management’s control over
the corporation’s activities
10-21
 Current Organizational Trends
Horizontal Corporation Issues
• Seen as “antiorganization”
• “form of organization • Company teams solve problems,
characterized by lateral bring product to market
decision processes, • Globally cultivated relationships
horizontal networks, and to build & market products
a strong corporate-wide • Greater innovation & new
business philosophy” product development
• Middle managers and skilled
professionals make decisions
• Cooperation & coordination
substituted for strict control and
supervision

10-22
Corporate Survival in the 21st Century

• Dynamic Network Structure

– Breaks down major functions into smaller
companies
– Coordinated by small-size HQ organization
– Business functions by separate organizations
– Core business focus for optimal vertical integration
– Non-essential business functions outsourced

10-23
 Control

• Puts plans into effect

• Evaluates plan effectiveness
• Makes desirable corrections
• Evaluates & rewards executive performance

10-24
 Where to Make Decisions in
Wholly-Owned Subsidiaries?
Decision Locations Decision Variables
• IC Headquarters • Product & equipment
• Subsidiary Level • Subsidiary management
• Cooperatively competence & HQ
reliance on them
• IC size and duration
• Subsidiary detriment for
enterprise benefit
• Subsidiary frustration

10-25
 Competence of Subsidiary
Product and Equipment Management
• Standardized by HQ if • Based on:
no global policy exists – Execs knowing each other
well
• If subsidiary shows
– How well execs know
greater profit from
company policies
tailored product
– How well execs understand
subsidiary moves host country conditions
forward. – Distance between home and
host country
– How big and old the parent
company is

10-26
Moving Executives Understanding Host
Around Country Conditions
• Promising managers often • HQ will rely more on
moved to gain experience subsidiary managers if
– Among subsidiaries
– To HQ
less familiar with host
• Learn HQ policies and country conditions or
problems implementing at they are very different
subsidiary level
• Builds network of intra-IC How Far Away Is Host
personal relationships
Country?
• Communications easier and
with less error • The greater the
distance, the greater the
perceived differences

10-27
 Benefitting Enterprise to
Size & Age of the IC
Subsidiary Detriment
• Large companies hire • Subsidiary Detriment
more specialists,
– “situation in which a small
experts, and experienced loss for a subsidiary results
executives than do in gain for the total IC”
smaller companies.
• Older companies have Moving Production
more experienced top Factors
management than do – HQ may decide to move
younger ones. production to take advantage
of better conditions in another
host country
– Subsidiary not enthusiastic

10-28
Which Subsidiary Gets Multicountry
the Order? Production
• Based on • Consolidating
– Transportation standardized production
– Production costs in several small markets
– Tariffs for attaining overall
– Currency restrictions manufacturing
– Order backlogs economies of scale
– Governmental pressure • Requires high degree of
– Taxes HQ coordination and
• HQ decision avoids price control
competition

10-29
Which Subsidiary
Books the Profit?
• HQ decision based on: Example
– Tax considerations
– Currency controls
– Labor relations
– Political climate
– Social unrest
• Transfer Pricing
– “Pricing that is
established or
transactions between
members of the enterprise”

10-30
Subsidiary Frustration
• HQ must give motivated management and loyalty
to its subsidiaries.
• If subsidiary managers lose incentive, prestige or
face with employees and community, they become
hostile and disloyal.
• Authority and responsibility need to be delegated
to subsidiary managers.
• They need to be kept thoroughly informed and
consulted about serious issues.
• If not, frustration and resignations will result.

10-31
 Joint Ventures and Subsidiaries
Less Than 100% Owned
Loss of Freedom and
Control Can Be Had
Flexibility
• IICs with <50% to “0”
• Outside shareholders
voting stock still can
can control the affiliate
control with:
and block HQ initiatives
– Management contract
by voting their shares or – Control of finances
applying political and – Control of technology
legal pressure – Putting people from the IC in
important positions

10-32
 Reporting
Financial Technological
• Use of Surplus Funds: • New technology needs to
– Retained for investment be reported to HQ
or contingencies • HQ can acquire or
– Remit to parent as license for own corporate
dividends
competitive advantage
– Loan to or investment in
another subsidiary

10-33
 Reporting
Market Opportunities Political and Economic
• Spot new or growing • All economic and
market opportunities political changes should
• Sell in new market be reported because they
• Assemble or license if have direct impact on
large enough to support subsidiary and parent
performance and
• Monitor and report profitability
competitor activities
• Changes in subsidiary’s
market share

10-34
Managing in a World out of Control
The Internet as MIT System of
Working Anarchy Distributed Control
• Nobody owns it 1. Do simple things first
• Nobody runs it 2. Learn to do them
flawlessly
• Dint of online etiquette
3. Add new layers of activity
• No rules after the results of the
• No regulations simple task
• Rampant expansion and 4. Don’t change the simple
things
evolution
5. Make the new layer work
• Highly adaptable as flawlessly as the simple
• Less susceptible to one
network crash 6. Repeat ad infinitum
10-35
Managing in a World out of Control
Control: Yes and No
• IC control is critical for the success of the IC family
• The trend is toward centralized decision making
• Functional control is becoming more technology-
driven, decentralizing and de-jobbing the firm
• Workers do evolving tasks with changing teams
• Hierarchies dissolve
• Leaders give up control
• Workers are trained for change and rewarded for
coping well
• No rules no regulations
10-36
 GLOBAL Debate
• What is your impression
• Life in a Virtual of working in a virtual
Organization organization?
• How will they evolve?
• Will they replace
traditional
organizations?
• What are their greatest
strengths and
weaknesses?
• Would you like to work
in one? Why or why not?
10-37