Chapter 7

Organizational Designs for Multinational Companies

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Learning Objectives
Understand the components of Understand the components of organizational design organizational design Know the basic building blocks of Know the basic building blocks of organization structure organization structure Understand the structural options for Understand the structural options for multinational companies multinational companies Know the choices multinationals have Know the choices multinationals have in the use of subsidiaries in the use of subsidiaries
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Learning Objectives
See the links between multinational See the links between multinational strategies and structures strategies and structures Understand the basic mechanisms of Understand the basic mechanisms of organizational coordination and control organizational coordination and control Know how coordination and control Know how coordination and control mechanisms are used by multinational mechanisms are used by multinational companies companies

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Organizational Design
How organizations structure subunits How organizations structure subunits and coordination and control and coordination and control mechanisms to achieve strategic goals mechanisms to achieve strategic goals Basic questions: Basic questions: How to divide work among the How to divide work among the organizations subunits? organizations subunits? How to coordinate and control the How to coordinate and control the efforts of the units created? efforts of the units created?
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Nature of Organization Design

In small organizations, there is little In small organizations, there is little reason to divide work reason to divide work Everyone does the same thing and Everyone does the same thing and everything everything As organizations grow, there is a need As organizations grow, there is a need to divide work and the organization to divide work and the organization There is no one best organizational There is no one best organizational design design
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The Basic Functional Structure

Departments perform separate Departments perform separate business functions such as marketing business functions such as marketing or manufacturing or manufacturing Simplest of organizations Simplest of organizations Most smaller organizations have Most smaller organizations have functional structures functional structures

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Exhibit 7.1: A Basic Functional Structure

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The Basic Functional Structure

Works best when organization has: Works best when organization has: Few products Few products Few locations Few locations Few types of customers Few types of customers A stable environment A stable environment Routine technology Routine technology

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The Basic Product and Geographic Structures

Product structure: departments or Product structure: departments or subunits based on different product subunits based on different product groups groups Geographic structure: departments or Geographic structure: departments or subunits based on geographic regions subunits based on geographic regions

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The Basic Product and Geographic Structures (cont.)

Usually less efficient than the Usually less efficient than the functional organization functional organization Allows a company to serve customer Allows a company to serve customer needs that vary by region or product needs that vary by region or product

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Exhibit 7.2: Product Structure

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Exhibit 7.3: A Basic Geographic Structure

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The Basic Product and Geographic Structures

Managers choose product structures Managers choose product structures when: when: Product or an area sufficiently unique Product or an area sufficiently unique to require focused functional efforts to require focused functional efforts on one type of product or service on one type of product or service Hybrid structure: mixes functional, Hybrid structure: mixes functional, geographic, and product units geographic, and product units

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Organizational Structures to Implement Multinational Strategies

When company first goes international, When company first goes international, it seldom changes structure. it seldom changes structure. Passive exporter Passive exporter Licensing has little impact on domestic Licensing has little impact on domestic structures. structures. However, when international sales However, when international sales become more central, structures need become more central, structures need to be changed. to be changed.
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Export Department
Coordinates and controls a companys Coordinates and controls a companys export operations export operations Export department Export department Is created when exports become Is created when exports become significant significant Deals with international sales of all Deals with international sales of all products products
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Exhibit 7.4: A Functional Structure with an Export Department

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Foreign Subsidiaries
Subunit of the multinational company Subunit of the multinational company that is located in another country that is located in another country Types of foreign subsidiaries Types of foreign subsidiaries Minireplica subsidiary: smaller Minireplica subsidiary: smaller version of the parent company version of the parent company Uses the same technology and Uses the same technology and producing the same products as producing the same products as the parent company the parent company Transnational subsidiary: has no Transnational subsidiary: has no companywide form or function companywide form or function Each subsidiary contributes what it Each subsidiary contributes what it

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Foreign Subsidiaries
Many subsidiaries are neither Many subsidiaries are neither minireplicas nor transnationals minireplicas nor transnationals May take different forms or functions May take different forms or functions

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Foreign Subsidiaries
Multinationals choose the mix of Multinationals choose the mix of functions based on: functions based on: The firms multinational strategy or The firms multinational strategy or strategies strategies The subsidiaries capabilities and The subsidiaries capabilities and resources resources The economic and political risk of The economic and political risk of building and managing a subunit in building and managing a subunit in another country another country
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International Division
Responsible for managing exports, Responsible for managing exports, international sales, and foreign international sales, and foreign subsidiaries subsidiaries Usual step after export department Usual step after export department Deals with all products Deals with all products Manages overseas sales force and Manages overseas sales force and manufacturing sites manufacturing sites
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Exhibit 7.5: An International Division

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Organizational Structures to Implement Multinational Strategies

Reasons to abandon the international Reasons to abandon the international division division Diverse products overwhelm Diverse products overwhelm capacities of multinational capacities of multinational Not close enough to local markets Not close enough to local markets Cannot take advantage of global Cannot take advantage of global economies of scale or global sources economies of scale or global sources of knowledge of knowledge Several options available to deal with Several options available to deal with

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Worldwide Geographic Structure

Has geographical units representing Has geographical units representing regions of the world regions of the world Prime reason is to implement a Prime reason is to implement a multidomestic or regional strategy multidomestic or regional strategy Organizational design with maximum Organizational design with maximum geographic flexibility geographic flexibility Separate divisions for large market Separate divisions for large market countries countries
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Exhibit 7.6: Royal Vopak Geographic Structure

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Worldwide Product Structure

Worldwide product structure Worldwide product structure Gives product divisions responsibility Gives product divisions responsibility to produce and sell their products or to produce and sell their products or services throughout the world services throughout the world Implements strategies that Implements strategies that emphasize global products emphasize global products Provides an efficient way to organize Provides an efficient way to organize and centralize the production and and centralize the production and sales of similar products sales of similar products
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Exhibit 7.7: Worldwide Product Structure

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Hybrids
Both worldwide product structure and Both worldwide product structure and worldwide geographic structure have worldwide geographic structure have advantages and disadvantages advantages and disadvantages Product structure: supports global Product structure: supports global products products Geographic structure: emphasizes Geographic structure: emphasizes local adaptation local adaptation Multinationals often want both abilities Multinationals often want both abilities Use hybrids Use hybrids

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Front-back Hybrid Structure

The front side has units based on The front side has units based on geography to provide a multidomestic geography to provide a multidomestic or regional focus or regional focus The backside has units based on The backside has units based on product groups to capture global product groups to capture global economies of scale in R&D and economies of scale in R&D and production production

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Exhibit 7.8: Tetra Paks FrontBack Hybrid Structure

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Worldwide Matrix Structures

Symmetrical organization with equal Symmetrical organization with equal emphasis on emphasis on Worldwide product groups and Worldwide product groups and Regional geographical divisions Regional geographical divisions

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Worldwide Matrix Structures

Balances the benefits produced by area Balances the benefits produced by area and product structures and product structures Creates equal lines of authority for Creates equal lines of authority for products and areas products and areas Works best with near equal demands Works best with near equal demands from both sides from both sides Requires extensive resources for Requires extensive resources for communication and coordination communication and coordination Requires middle and upper level Requires middle and upper level managers with good human relations managers with good human relations

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Exhibit 7.9: Worldwide Matrix Organization

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Matrix Structures
Problems emerging with worldwide Problems emerging with worldwide matrix structures matrix structures Slow decision making process Slow decision making process Too bureaucratic Too bureaucratic Too many meetings and too much Too many meetings and too much conflict conflict

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Matrix Structures (cont.)

Result Result Companies have redesigned their Companies have redesigned their matrix structures to be more flexible matrix structures to be more flexible with speedier decision making with speedier decision making Other companies have abandoned Other companies have abandoned their matrices and returned to their matrices and returned to product structures product structures

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The Transnational-Network Structure

Newest solution to the complex Newest solution to the complex demand of being locally responsive and demand of being locally responsive and taking advantage of global economies taking advantage of global economies of scale of scale Combines functional, product, and Combines functional, product, and geographic subunits geographic subunits Dispersed subunits Dispersed subunits Specialized operations Specialized operations Interdependent relationships Interdependent relationships

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The Transnational-Network Structures

Has no symmetry or balance in its Has no symmetry or balance in its structural form structural form Resources, people, and ideas flow in all Resources, people, and ideas flow in all directions directions Nodes or centers in the network Nodes or centers in the network coordinate product, functional, and coordinate product, functional, and geographic information geographic information

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Exhibit 7.10: Geographic Links in the Philips Transnational Structure

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Exhibit 7.11: Product Links in the Same Organization

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Components of the Transnational-Network Structure

Dispersed subunits: subsidiaries Dispersed subunits: subsidiaries located anywhere where they can most located anywhere where they can most benefit the company benefit the company Specialized operations: subunits Specialized operations: subunits specializing in particular product, specializing in particular product, research areas, or marketing areas research areas, or marketing areas Interdependent relationships: Interdependent relationships: continuous sharing of information and continuous sharing of information and resources by dispersed and specialized resources by dispersed and specialized subunits

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Metanational Structure
Large entrepreneurial multinational Large entrepreneurial multinational Can tap into pockets of innovation, Can tap into pockets of innovation, technology, and markets located technology, and markets located around the world around the world Develops extensive systems to Develops extensive systems to encourage organizational learning and encourage organizational learning and entrepreneurial activities entrepreneurial activities

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Metanational Characteristics
Nonstandard business formulas for any Nonstandard business formulas for any local activity local activity Looking to emerging markets as Looking to emerging markets as sources of knowledge and ideas sources of knowledge and ideas Creating a culture supporting global Creating a culture supporting global learning learning Extensive use of strategic alliances to Extensive use of strategic alliances to gain knowledge for varied sources gain knowledge for varied sources
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Characteristics of Metanationals
High levels of trust between partners to High levels of trust between partners to encourage knowledge sharing encourage knowledge sharing Centerless organization that moves Centerless organization that moves strategic functions away from strategic functions away from headquarters to major markets headquarters to major markets Decentralization of decision making to Decentralization of decision making to managers who serve key customers managers who serve key customers and strategic partners and strategic partners
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Multinational Strategy and Structure: An Overview

Most companies support early Most companies support early internationalization efforts with export internationalization efforts with export department department Depending on globalization strategy, Depending on globalization strategy, they evolve into product or geographic they evolve into product or geographic structure structure Pressure for local adaptation and global Pressure for local adaptation and global efficiencies result into matrix or efficiencies result into matrix or transnational-network transnational-network
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Exhibit 7.12: Multinational Strategy, Structure, and Evolution

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Control Systems
Control system: helps link the Control system: helps link the organization vertically, up and down organization vertically, up and down the organizational hierarchy the organizational hierarchy Basic functions of control system Basic functions of control system Measure or monitor the performances Measure or monitor the performances of subunits of subunits Provide feedback to subunit Provide feedback to subunit managers regarding the managers regarding the effectiveness of their units effectiveness of their units
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Coordination Systems
Coordination system: horizontal Coordination system: horizontal organizational links organizational links Provide information flows among Provide information flows among subsidiaries subsidiaries

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Options for Control Systems

Four types of control systems Four types of control systems Output control system Output control system Bureaucratic control system Bureaucratic control system Decision-making control Decision-making control Cultural control system Cultural control system

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Output Control Systems

Assesses the performance of a unit Assesses the performance of a unit based on results, not on the processes based on results, not on the processes used to achieve these results used to achieve these results Profit center: unit controlled by its Profit center: unit controlled by its profit or loss performance profit or loss performance

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Bureaucratic control system

Focuses on managing behaviors within Focuses on managing behaviors within the organization the organization Budgets: financial targets for Budgets: financial targets for expenditures expenditures Statistical reports: information to top Statistical reports: information to top management about nonfinancial management about nonfinancial outcomes outcomes Standard operating procedures: rules Standard operating procedures: rules and regulations of appropriate and regulations of appropriate
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Control and Coordination Systems

Decision-making control: level in the Decision-making control: level in the organizational hierarchy where organizational hierarchy where managers have the authority to make managers have the authority to make decisions decisions Cultural control system: uses Cultural control system: uses organizational culture to control organizational culture to control behaviors and attitudes of employees behaviors and attitudes of employees

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Exhibit 7.13: Use of Control Mechanisms in Multinational Organizational Structures

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Design Options for Coordination Systems

Textual communication: e-mail, Textual communication: e-mail, memos, and reports memos, and reports Direct contact: face-to-face interaction Direct contact: face-to-face interaction of employees of employees Liaison roles: part of a persons job in Liaison roles: part of a persons job in one department to communicate with one department to communicate with people in another department people in another department

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Design Options for Coordination Systems

Task forces: temporary teams created Task forces: temporary teams created to solve a particular organizational to solve a particular organizational problem problem Full-time integrators: cross-unit Full-time integrators: cross-unit coordination is the main job coordination is the main job responsibility responsibility Teams: permanent unit of the Teams: permanent unit of the organization organization
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