Organization of Multinational Operations Ellen Devlin International Management 446 April 19, 2011 Class 4

Organization of MNC’s Operations Definition: Designing a structure that explains the nature and extent of formal relationships among various internal components. Allows for distribution of power among the organization’s members. Establishes formal communication lines. Tool for attainment of a MNC’s goals.

Building an org. structure? Four Basic Questions must be answered: 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? NOTE: Organizational Design may become the responsibility of all managers at some point in their career.

Departmentalization: Clustering of activities. TASKS JOBS DEPARTMENTS BUSINESS UNITS CORP. STRUC.

Departmentalization: Clustering of activities Six bases…. Knowledge and skill (Engineering department) Work Process and Function (Supply Chain, HR, Finance) Time (shifts in factory) Output (Products/Services) Client (Customer or supplier) Place (Geographic) Two Most Common Forms Geographic (where) Functional (what)

Type of Organization Structure? CEO HRM Finance Manu. Mktg R&D Type of Organization Structure? CEO West Region SW Region South Region Midwest Region East Region

Organization of MNC’s Operations Organizing is really re-organizing influenced by many factors... EXERCISE: DISCUSS IN GROUPS OF THREE(p. 408-412) Left side-External Right side-Company. External Forces What are they? Which one is the most important? Why should you care? Company Factors What are the factors? Give a company example What does structure follow?

Development of International Corporate Structure….It’s a process! Two major factors influence development: From Simple to Complex (size) From Domestic Orientation to Global Perspective (global presence)

Development of International Corporate Structure: Where is your company? Phase 1: International: Introduction Competition is limited to domestic firms. Export International Operations is an extension of domestic. Phase 2: Multinational: Growth Technology Diffusion and Price Competition- Manufacturing Facilities in Low-Cost Countries International Division Phase 3: Global: Maturity Most of The Corporate Revenues Are From Abroad Organize Operations on a Global Basis

MNC Corporate Structure Evolution 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 ( Distributor) 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.

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.

MNC Corporate Structure (see figure 8.2, page 419) International Division Structure – 60% of all US firms go through this stage….(Owned) Four Factors Prompt The Establishment of International Division Increased International Involvement -- Require a Senior Executive Internal Specialists Are Needed A Desire to Be Proactive (Identify Opportunities). EG Wal-Mart

MNC Corporate Structure The Geographic Division The Product Division The Functional Structure Mixed and Matrix Forms The geographic division allows for the most local responsiveness. Why?

Geographic Division Structure (Figure 8 Geographic Division Structure (Figure 8.3) is the most common structure CEO Headquarters Staff European Division North American Division South American Division

Advantages Disadvantages 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.

Product Division Structure Figure 8.4 (page 426) CEO Headquarters Staff Product Group A Product Group B Product Group C

Advantages Disadvantages 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.

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

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.

International Mixed Structure Figure 8.6 (page 429) CEO Product A (Worldwide, except US and Europe Product B (Worldwide, except US and Europe USA Division European Division

Matrix Organization

Nike Matrix Organization (before 2009 Financial Crisis) Corporate Functions: HR/Finance/IT/Etc. Regions USA Europe Asia/Pacific The Americas Product Type Footwear Apparel Equipment

Nike Matrix Organization(Post 2009 Financial Crisis) Why did they change? External factor? Internal factor? Corporate Functions: HR/Finance/IT/Etc. Geographic Locations North America Western Europe Eastern Europe China Japan Emerging Markets Categories Running Soccer Basketball Training Wm’s Fitness Sports Culture Other

Challenges of a matrix… “The Matrix is a state of mind.” HBR 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.

Next Week Test 1 Group Project Time BEFORE YOU LEAVE TODAY Piece of Paper-no name What did I learn today? What is still a little foggy? Other comments.