Organization of Multinational Operations: Why does it Matter?

 Definition Designing The Skeleton and The Structure That Delineate The Nature and Extent of Formal Relationships Among Internal Components: Tasks, Jobs and Units  It allows for distribution of power and authority and the establishment of communication lines  Physical and Nonphysical Forms Differ in Response to Internal Requirements (technology, nature of tasks, type of strategy) and External Environment (constituents & forces)  Six bases for departmentalization: knowledge & skill, work process & function, time, output, client and place. Organization of MNC’s Operations

Four Questions for Organizing:  What should the units of the organization be?  Which components should be joined, and which should be kept apart?  What size and shape pertain to the different components?  What is the appropriate placement of and relationship between different units? Six bases for departmentalization: knowledge & skill, work process & function, time, output, client and place. Two most common forms of departmentalization: Geographic and Functional

 Factors Influencing MNC Structure External Forces  Economic Conditions  Technological Development  Product-Market Characteristics (Competition)  Host Government Policies Company Factors  History  Top Management Philosophy  Nationality  Corporate Strategy  Corporate Culture  Degree of Internationalization Organization of MNC’s Operations

 Two major factors influence development: From Simple to Complex (size) From Domestic Orientation to Global Perspective (global presence)  Three phases that follow the Product Life Cycle Phase 1: Introduction  Competition is Limited to Domestic Firms  Export  International Operation Is An Extension of Domestic Development of International Corporate Structure….It’s a process!

 Phase 2: Growth  Technology Diffusion and Price Competition- Manufacturing Facilities in Low-Cost Countries  International Division  Phase 3: Maturity  Most of The Corporate Revenues Are From Abroad  Organize Operations on a Global Basis Development of International Corporate Structure

 The Extension of Domestic Structure Export Manager Reports to the Marketing Executive (Narrow Product Line) Export Manager Reports to C.E.O. (Broad Product Line) Increased Competition and Market Maturity- - Local Manufacturing MNC Corporate Structure

The Transition:  Autonomous Foreign Subsidiary Distant Operations Are Given Local Decision-Making Control Through Financial Reporting Foreign Subsidiary May Have Local Board of Directors  Very typical originally with European MNCs, but also practiced by P&G for a long time. MNC Corporate Structure

Advantages and Disadvantages  Can integrate into local economy and operate as a local firm = fewer restrictions, take advantage of local resources.  Respond better to local consumers.  Have the ear of top management because of direct report to President/CEO = local prestige.

…and Disadvantages  Can end up ignoring the common good (overall objectives) of the wider corporation.  Can end up duplicating resources (e.g., manufacturing) and causing inefficiencies.

 International Division Structure – 60% of all US firms go through this stage…. Four Factors Prompt The Establishment of International Division  Increased International Involvement -- Require a Senior Executive  Concentration Allows Exploiting The Worldwide opportunities  Internal Specialists Are Needed  A Desire to Be Proactive (Identify Opportunities) usually adopted by companies already dominant in their home mkts., w/ limited product line & limited geographic diversity, and few managers with international experience. EG Wal-Mart MNC Corporate Structure (see figure 8.2)

 The Geographic Division  The Product Division  The Functional Structure  Mixed and Matrix Forms MNC Corporate Structure

CEO Headquarters Staff European Division North American Division South American Division Geographic Division Structure ( Figure 8.3) is the most common structure

AdvantagesDisadvantages  Regional economies of scale  Treatment of subsidiaries as profit centers.  Good when regional customers are similar.  Tend to be useful in mature businesses w/narrow product lines.  Permits large manufacturing plants in low cost regional countries. Autos, beverages, food, pharmaceuticals….e.g., Nestle  Not good for firms w/diverse product ranges (bad for coordination between product lines).  Coordination at corporate level suffers.  Rivalry among regions.  Duplication of resources/plants.  Difficulty transferring new technology and product ideas across regions/strong regional managers.

CEO Headquarters Staff Product Group AProduct Group BProduct Group C Product Division Structure Figure 8.4

AdvantagesDisadvantages  Good for firms w/diverse product lines (often) w/hi technology content and different end users.  Permits fast diffusion of technology across a product line/simultaneous intro of product across the world.  Good when local manufacturing is favored (e.g., high tariffs) for certain product lines/concentration of key activities in one locale.  Facilitates quick response to global competitive pressures against certain products. High technology firms (HP); Heinz  May result in wasteful duplication of plants and sales personnel.  Customers may be interacting with many representatives from the company.  Limited voice to local managers on needed adaptations.

CEO R&D (Worldwide) Marketing (Worldwide) Manufacturing (Worldwide) Finance (Worldwide) International Function Structure Figure 8.5

Fairly rare (only 10% of US MNCs)….  Mostly used by natural resource extraction firms (mining, oil).  Narrow, standardized product.  Technology is relatively stable, but execution of the functions (e.g., extraction, marketing, finance) are keys to success.

Mixed or Matrix Structure  A way of trying to gain the optimum integration of inputs from regional, functional and product areas.  A normal hierarchy is overlaid by some form of authority, communication, and influence.

CEO Product A (Worldwide, except US and Europe USA Division European Division Product B (Worldwide, except US and Europe International Mixed Structure Figure 8.6

Challenges of a matrix… It is an efficient use of specialists and equipment and can improve vertical and lateral communication and information flow. BUT…..is costly, cumbersome and a lot of work for managers! Wearing two hats, and often leads to tensions. Lots of shared decision making. e.g. Dow Chemical (now adapted).

Network Model Suppliers, bankers, manufacturers, customers, etc. Complex Process of Coordination and Cooperation Large Flows of Components, Products, Resources and Information among the network

Network model is….  Good for unstable environments where innovation and quick response are needed – which are increasing!  Has been made possible by the technological advances in communication, which makes coordination among numerous players less costly.  A network is inherently unstable itself.