1. McGraw-Hill/Irwin International Management © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. International Management Phatak, Bhagat, and Kashlak

2. McGraw-Hill/Irwin International Management © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 9 Organizing International Operations

3. 9-3 Learning Objectives Understand the relationship between an organization’s international strategies and their respective organizational structures. Understand the factors that affect an organization’s choice of structure. Distinguish among various types of global structures including product-structure, geographic structure, the global matrix structure and transnational and hierarchical structures. Discuss the benefits and potential problems of each distinct global-oriented structure.

4. 9-4 Chapter Topics The Strategy-Structure Linkage for the International Firm Pre-International Division Phase International Division Structure Global Hierarchical Structures Multidimensional Global Structures

5. 9-5 The Strategy-Structure Linkage “They say that structure should follow strategy, and indeed it should, in ideal circumstances. Structure is one of the administrative elements of a business, and it exists to make operations and strategy work better”

6. 9-6 Fig 9-1:Firm Expansion and Organization of Activities Vertical Expansion (growth in new activities for an existing product line) Product Expansion (growth into new product markets) Vertically- Integrated Firm Product- Diversified Firm Geographic Expansion (growth into new overseas markets) Geographically- Diversified Firm

7. 9-7 Dimensions of Organizational Form For Multinational Enterprises 1) Functional Expertise of the value chain activities in which the firm is involved 2) Product and Technical Know-How of the various lines of business in which the firm is involved 3) Knowledge of the Countries and Regions, where the firm has business interests 4) Customer Expertise, regarding similar market segments and major accounts that cut across various regions and countries

8. 9-8 Fig 9-2:Linking International Strategy Formulation and Implementation Strategy Structure Organization Culture Systems People and Skills

9. 9-9 Strategic Concerns in the Early Stages of International Business 1) How to encourage a predominantly domestic organization to take full advantage of growth opportunities abroad 2) How to blend product knowledge and geographic area knowledge most efficiently in coordinating worldwide business 3) How to coordinate the activities of foreign units in many countries while permitting each to retain its own identity

10. 9-10 Fig 9-3: International Strategy- International Structure Foreign Product Diversity Foreign Sales as a % Total Sales International Division Pre-International Division Global Product Structure Global Area Structure Matrix Structure Heterarchies And Transnational Structures

11. 9-11 A) The Pre-International Division Structure Many firms make their initial entry into international markets by setting up a subsidiary or by exporting locally produced goods or services. An export arrangement is a common among manufacturing firms. Because there is a little competitive, the firm can change a premium price and handle sales through an export manager.

12. 9-12 Fig 9-4: The Pre-International Division Structure Chief Executive Officer ProductionFinanceMarketingPersonnel R&D etc. Export Manager Or Export Department

13. 9-13 B) International Division Structure International Division Structure: A structural management that handles all international operations out of division created for this purpose. Reasons: 1. If international operations continue to grow and overseas sales continue to increase, local governments often exert pressure in these growing markets for setting up on-site manufacturing operations (Government pressure factor). 2. Additionally, many firms find themselves facing increased competition, which results in establishing foreign manufacturing subsides (Competition factor). 3. Moreover, by this, MNC can reduce transportation costs, thus making the products more competitive (Cost factor). The head of the international division coordinates and monitors overseas activities and reports directly to the chief executive officer.

14. 9-14 Fig 9-5: The International Division Structure Chief Executive Officer ProductionFinanceMarketingPersonnel R&D CORPORATE STAFF LINE MANAGEMENT Product A Domestic Product B Domestic Product C Domestic etc. International Division (All Products)

15. 9-15 C) Global Division Structure Global structures comes in three common types: Products, Area, and Functions.

16. 9-16 C. 1 ) The Global Product Division Structure Is a structural arrangement in which domestic divisions are given worldwide responsibility for product groups. In this sense, mangers who is in charge of product division “A ” (for example), has authority for this product line on global basis. He also has internal functional support related to the product line. For example, all marketing, production, finance activities associated with product “A” are under the control of this manager.

17. 9-17 The Global Product Division Structure (Cont.) There is considerable autonomy for these managers when running the operation. They have the authority to make an important decisions. However, corporate headquarters usually maintain control in terms of budgetary constraints, home-office approval for certain decisions.

18. 9-18 Fig 9-6: The Global Product Division Structure Chief Executive Officer ProductionFinanceMarketingPersonnel R&D CORPORATE STAFF LINE MANAGEMENT Product AProduct B.Product C etc. Product D etc. North Asia Europe Latin America

19. 9-19 Conditions Favoring the Global Product Structure: There is a high level of product diversity where the firm manufactures products that require different technologies and that have a wide variety of customers. There is little use of common marketing tools and channels of distribution among the various product divisions There is a significant need to globally integrate production, marketing, and research related to the product There is little need for local product knowledge and product adaptation as the firm expands into new countries The products involved need continuous technical service and inputs, and a high level of technological capability, requiring, therefore, close coordination between divisional staff groups and production centers abroad

20. 9-20 C. 2 ) Global Area Division A structure under which global operation are organized on geographic rather than product basis. Managers are responsible for all business operations in their designated geographic area. It is often used by companies that are in mature business and have narrow product lines. These product lines often are differentiated based on geographic area. For example, the product has a strong demand in Europe but not on S. Africa, or the type of product that is offered in France differs from that sold in England. The geographic structure, allow the division manager to cater the tastes of local markets and make rapid decisions to accommodate environmental changes. (ex. Food product)

21. 9-21 Fig 9-7: The Global Area Division Structure Chief Executive Officer ProductionFinanceMarketingPersonnel R&D CORPORATE STAFF LINE MANAGEMENT EuropeNorth Amer.Asia etc. Latin Amer. etc. United Kingdom Italy France Etc.

22. 9-22 C. 3 ) Global Functional Division Organize worldwide operations based primarily on function and secondarily product. This approach is not widely used other than extractive companies such as oil and mining firms. It is fevered only by firms that need tight, centralized coordination and control of integrated production processes and firms that are involved in transporting products and row materials from one geographic area to another.

23. 9-23 Fig 9-8: The Global Functional Division Structure Chief Executive Officer ProductionMarketingFinance Foreign Production Product A Product B Product C Product D Domestic Production Product A Product B Product C Product D Domestic Production Product A Product B Product C Product D Foreign Production Product A Product B Product C Product D

24. 9-24 D) The International Matrix Structure Some companies find neither a global product, an area or functional division structure is satisfactory. They opt for a mixed organizational structure. Matrix structure is a combination of product and area structure. MNC coordinates geographic and product lines through the use of Matrix design.

25. 9-25 Fig 9-8: The International Matrix Structure Chief Executive Officer ProductionFinanceMarketingPersonnel R&D CORPORATE STAFF LINE MANAGEMENT EuropeTractorsAsia GM – Tractors Europe GM – Tractors Asia etc. Other Area and Product Divisions

26. 9-26 Conditions Favoring Adoption of a Matrix Structure 1. Substantial product and area diversification 2. Need to be responsive simultaneously to product and area demands 3. Constraints on resources requiring that they be shared by two or more product, area or functional divisions 4. Significant problems created and opportunities lost due to emphasis on only the product or area dimension 5. Formulation of corporate strategy requiring the simultaneous consideration of functional, product, or area concerns

27. 9-27 Heterarchy 1.Decision-making is dispersed throughout the organization and not concentrated at the top levels 2.Lateral managerial relationships exist as complements to the usual vertical relationships 3.Firm-level activities are coordinated across multiple dimensions including product, function, and geography

28. 9-28 Characteristics of Heterarchies 1. Less systematic 2. More flexibly coordinated 3. Nimbler 4. Less hierarchical These structures have: a) Higher levels of interdependency among the subsidiaries b) Greater exchange of knowledge, especially informal knowledge c) Informal coordination processes d) Potentially shifting positions and relationships e) Lateral as well as vertical sharing of knowledge f) Consensual decision-making

29. 9-29 Fig 9-9a: Multiple Hierarchies Structure I II III IV V VI Chinese R&D New Product M&A IJVs/ Major Customer Market Launch SAs Accounts b c d e e a a e a e a b c d ABCDE F c a b f f d

30. 9-30 Fig 9-9b: Multiple Hierarchies Network Effect I II III IV V VI China R&D New Product Launch M&A IJVs & SAs Major Customer Accounts Networks of Partners Networks of Acquired/Merged Firms

31. 9-31 Key Terms and Concepts International division Global product structure Global area structure Matrix structure Transnational structure Heterarchy