Chapter 11 Organizational Design and Control McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

What is Organizational Design, and Why is it Important for International Companies? How an IC is organized to ensure efficient and effective integration of global business activities Org. Design must: –Evolve –Respond to change –Reconfigure so competencies & resources are integrated in and across business units Org. Design must: –Evolve –Respond to change –Reconfigure so competencies & resources are integrated in and across business units LO1 11-2

Organizational Design Concerns 1.Find the most effective way to departmentalize to take advantage of efficiencies gained from specialization of labor 2.Coordinate the activities of those departments to enable the firm to meet its overall objectives 1.Find the most effective way to departmentalize to take advantage of efficiencies gained from specialization of labor 2.Coordinate the activities of those departments to enable the firm to meet its overall objectives 1. Product and technical expertise regarding the IC’s businesses 2. Geographic expertise about countries and regions where the IC operates 3. Customer expertise regarding the client groups, industries, market segments, or population groups across national borders 4. Functional expertise regarding the IC’s value chain activities 1. Product and technical expertise regarding the IC’s businesses 2. Geographic expertise about countries and regions where the IC operates 3. Customer expertise regarding the client groups, industries, market segments, or population groups across national borders 4. Functional expertise regarding the IC’s value chain activities LO2 11-3

Evolution of the International Company Stages 1.Exporting 2.Overseas sales companies 3.Set up foreign manufacturing facilities 4.Form International Division – “same level as domestic division but responsible for all non-home-country activities” 1.Exporting 2.Overseas sales companies 3.Set up foreign manufacturing facilities 4.Form International Division – “same level as domestic division but responsible for all non-home-country activities” Shift from International Division top Worldwide Organization Worldwide organization based on: –Product –Region –Function –Customer classes At lower levels: –Process –National subsidiary –International or domestic Worldwide organization based on: –Product –Region –Function –Customer classes At lower levels: –Process –National subsidiary –International or domestic LO3 11-4

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 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 LO3 11-5

Global Corporate Forms Product Product divisions responsible for –Global line & staff operations –Marketing –Production Issues: –Regional experts avoid duplication of product experts –Duplication of area experts Product divisions responsible for –Global line & staff operations –Marketing –Production Issues: –Regional experts avoid duplication of product experts –Duplication of area experts Geographic Regions Regional managers report directly to CEO Found in both multinational (multidomestic) and global firms Works well for products with low/stable technology but needing strong marketing Hard to coordinate production across regions Managers have no line authority but give input to decisions Regional managers report directly to CEO Found in both multinational (multidomestic) and global firms Works well for products with low/stable technology but needing strong marketing Hard to coordinate production across regions Managers have no line authority but give input to decisions LO3 11-6

Global Corporate Forms Function Very few firms organized by function at top levels Senior executives reporting to CEO have specific functional responsibility Firm typically has a narrow & highly integrated product mix Very few firms organized by function at top levels Senior executives reporting to CEO have specific functional responsibility Firm typically has a narrow & highly integrated product mix Hybrid – “Structure organized by more than on dimension at top level” –May not be hybrid at lower levels Used when: –Regional firm introduces line best handled by worldwide product division –An acquired firm has distinct products & functional marketing network in place –Firm sells to large, homogenous customer group Hybrid – “Structure organized by more than on dimension at top level” –May not be hybrid at lower levels Used when: –Regional firm introduces line best handled by worldwide product division –An acquired firm has distinct products & functional marketing network in place –Firm sells to large, homogenous customer group LO3 11-7

Matrix Organizations Matrix Organization “ one or more superimposed organizational structures in an attempt to mesh product, regional, functional, and other expertise” Country managers responsible for both area and product-line managers “ one or more superimposed organizational structures in an attempt to mesh product, regional, functional, and other expertise” Country managers responsible for both area and product-line managers Problems with the Matrix 2 or 3 managers must agree on decisions Less-than-optimum compromises Delayed responses Attention paid to process not problem Unresolved problems go to management 2 or 3 managers must agree on decisions Less-than-optimum compromises Delayed responses Attention paid to process not problem Unresolved problems go to management LO3 11-8

Solution: Matrix Overlay Matrix Overlay “ Benefits Requires accountability Avoids stress of pure matrix structure Regional specialists with staff function give input to product decisions Organized into international divisions Regional product managers Requires accountability Avoids stress of pure matrix structure Regional specialists with staff function give input to product decisions Organized into international divisions Regional product managers “ top level organizations are required to heed input from staff composed of experts of another organizational dimension in an attempt to avoid the double- reporting difficulty of a matrix organization but still mesh two or more dimensions” LO3 11-9

Strategic Business Units LO

Current Organizational Trends Virtual Corporation Or Network Corporation – “coordinates economic activity to deliver value to customers using resources outside the traditional boundaries of the organization” Or Network Corporation – “coordinates economic activity to deliver value to customers using resources outside the traditional boundaries of the organization” Advantages/Disadvantage Advantages –Changes in workforce & wok methods –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 Advantages –Changes in workforce & wok methods –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 LO

Current Organizational Trends Horizontal Corporation “form of organization characterized by lateral decision process, horizontal networks, and a strong corporate wide business philosophy” Issues Seen as “antiorganization” Company teams solve problems, bring product to market Globally cultivated relationships to build & market products Greater innovation & new product development Middle managers and skilled professionals make decisions Cooperation & coordination substituted for strict control and supervision Seen as “antiorganization” Company teams solve problems, bring product to market Globally cultivated relationships to build & market products Greater innovation & new product development Middle managers and skilled professionals make decisions Cooperation & coordination substituted for strict control and supervision LO

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

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

Size & Age of the IC Large companies have greater resources to hire more specialists, experts, and experienced executives than smaller ones. Older companies have more experience top management than younger ones. Large companies have greater resources to hire more specialists, experts, and experienced executives than smaller ones. Older companies have more experience top management than younger ones. Benefitting Enterprise to Subsidiary Detriment Subsidiary Detriment – “situation in which a small loss for a subsidiary results in gain for the total IC” Subsidiary Detriment – “situation in which a small loss for a subsidiary results in gain for the total IC” Moving Production Factors –HQ decides to move factors to take advantage of better conditions in another host country –Subsidiary not thrilled –HQ decides to move factors to take advantage of better conditions in another host country –Subsidiary not thrilled LO

Joint Ventures and Subsidiaries Less Than 100% Owned Loss of Freedom and Flexibility Outside shareholders can control the affiliate and bock HQ initiatives by voting their shares, or applying political and legal pressure Control Can Be Had IICs with<50% to “0” voting stock till can control with: –A management contract –Control of the finances –Control of the technology –Putting people from the IC in important executive positions Difficult because partners and local governments often prefer their own nationals in key positions IICs with<50% to “0” voting stock till can control with: –A management contract –Control of the finances –Control of the technology –Putting people from the IC in important executive positions Difficult because partners and local governments often prefer their own nationals in key positions LO

Managing in a World out of Control The Internet as Working Anarchy Nobody owns it Nobody runs it Dint of online etiquette No rules No Regulations Rampant expansion and evolution Highly adaptable Less susceptible to network crash Nobody owns it Nobody runs it Dint of online etiquette No rules No Regulations Rampant expansion and evolution Highly adaptable Less susceptible to network crash MIT System of Distributed Control 1.Do simple things first 2.Learn to do them flawlessly 3.Add new layers of activity after the results of the simple task 4.Don’t change the simple things 5.Make the new layer work as flawlessly as the simple one 6.Repeat ad infinitum 1.Do simple things first 2.Learn to do them flawlessly 3.Add new layers of activity after the results of the simple task 4.Don’t change the simple things 5.Make the new layer work as flawlessly as the simple one 6.Repeat ad infinitum 11-17