Chapter Thirteen

Organizational
Design and Control

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives

 Explain why the design of organizational structure

is important to international companies (IC)
 Discuss the organizational dimensions an IC
considers to select an organizational structure
 Discuss organizational forms used by ICs
 Understand the concept of the virtual corporation

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 Learning Objectives

 Explain why decisions are made where they are

among parent and subsidiary units of ICs
 Discuss how an IC can maintain control of a
 joint venture
 company in which it owns <50% of voting
stock
 List the types of information an IC needs to have
reported to it by its units around the world

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 Organizational Structure

 Organizational structure refers the way that an

organization formally
 arranges its domestic and international units and
activities
 sets relationships among the organization’s
various elements

LO1
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 Organization Design for ICs
 Organizational design refers to how an IC should
be organized in order to ensure it can efficiently
and effectively integrate its worldwide business
activities
 structures and systems must be consistent with
each other and with the environmental context
 size and complexity of business activities must
be considered for organization design
 Structure must be able to evolve over time in order
to
 respond to change
 reconfigure to integrate competencies and
resources
LO1
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Relationship Among Environment,
Strategy, and Structure

LO1
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 Design Concerns

 Find the most effective way to departmentalize to

take advantage of efficiencies gained from
specialization of labor
 Coordinate the activities of those departments to
enable the firm to meet its overall objectives

LO1
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 Design Dimensions

 Product and technical expertise regarding the IC’s

businesses
 Geographic expertise about countries and regions
where the IC operates
 Customer expertise regarding the client groups,
industries, market segments, or population groups
across national borders
 Functional expertise regarding the IC’s value chain
activities

LO2
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 Evolution of the
International Company
 International division: typically an IC’s early
organizational choice
 Responsible for all non-home country activities
 At the same level as the domestic division
 Once international business’ relative importance to
the company increases worldwide organizations are
established

LO3
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 Evolution of the International
Company’s Organization

The Structural Stages Model LO3

Based on: Stopford, J. M. and L. T. Wells, Strategy and Structure of the Multinational Enterprise, 1970, New York: Basic Books
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 Global Corporate Form
Product Division Organization

LO3
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Global Corporate Form
Geographic Division

LO3
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Global Corporate Form
Functional Division

LO3
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Global Corporate Form
Hybrid Organization

LO3
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 Global Corporate Form
Matrix Organization

 One or more superimposed organizational

structures that attempt to mesh product,
regional, functional, and other expertise
LO3
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 Global Corporate Form

 Strategic Business Unit: business entity

 Clearly defined market
 Specific competitors
 Ability to carry out business mission
 Size appropriate for control by single manager

LO3
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 Changes in Organizational Form

 Changes in organizational form are a result of

pressures to act more quickly and reduce costs
and improve quality
 Reengineering to
 reduce levels of middle management
 restructure work processes
 reduce fragmenting across departments
 improve speed and quality of strategy
execution
 empower employees
 communicate instantly
 transmit information swiftly LO3
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 Virtual Corporation
 A virtual corporation coordinates economic activity to deliver
value to customers using resources outside the traditional
boundaries of the organization
 Advantages
 Greater flexibility
 A network of dynamic relationships
 Takes advantage of other organizations’ competencies
 Disadvantage
 Potential to reduce management’s control over the
corporation’s activities

LO4
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 Horizontal Corporation

 A horizontal corporation is characterized by

 lateral decision processes
 horizontal networks
 strong corporate-wide business philosophy
 Creates, builds, and markets products through
cultivated interrelationships

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 Where are IC Decisions Made?

 All at the headquarters

 All at subsidiary level
 Subsidiary or affiliate: company controlled
by the IC through voting stock control
 Mostly overseas for ICs
 Some at HQ and some at subsidiary level

LO5
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 Location of Decision Making

 The location of decision making depends on

 product and equipment
 the competence of subsidiary management
which can be independent because it enjoys the
confidence of HQ
 the size of the IC and its history in the
international arena
 the detriment of a subsidiary for the benefit of
the enterprise
 the level of subsidiary frustration

LO6
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 Control

 Product and Equipment

 Existence of global product policy
 Degree standardized or localized

LO6
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 Control

 Reliance of HQ on subsidiary managers depends on

 how well executives know one another
 By moving executives from country to country,
managers meet each other and get to know
local conditions in many countries
 geographic distance
 how well executives know company policies
 whether headquarters management feels it
understands host country conditions and the
differences between the home and host country

LO6
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 Benefiting Enterprise to
the Detriment of Subsidiary
 Subsidiary detriment
 Situation in which a small loss for a subsidiary
results for a greater gain for the total IC
 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 LO6
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 Subsidiary Frustration

 Subsidiaries’ managers must be motivated and loyal

 If all decisions are made at HQ managers
 can lose incentive, prestige, face with their
employees and the community
 may become hostile and disloyal

LO6
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 International Joint Venture

 An international joint venture refers to a corporate

entity between an IC and host country owners
 A corporate entity between two or more companies
that are both foreign to the country where the joint
venture is located

LO6
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 Joint Venture Disadvantages

 The disadvantages of joint ventures include

 a loss of freedom and flexibility
 JV partners can block HQ efforts to
 move production factors
 fill an order from another of the IC’s
subsidiaries
 Shareholders may bring
 legal pressures
 political pressures

LO6
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 Joint Venture Control

 Management contract
 Control of finances
 Control of technology
 People from IC in important executive
positions at the JV
 IC controls majority of shares and has majority
on board of directors

LO6
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 Effective Reporting

 Operating units must provide headquarters with

timely, accurate and complete reports
 Financial
 Technological
 Market Opportunities
 Political and Economic

LO7
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