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Organizational Designs for Multinational Companies

Learning Objectives (1 of 2)

Understand the components of organizational design.
Know the basic building blocks of organization structure.
Understand the structural options for multinational companies.
Know the choices multinationals have in the use of subsidiaries.

Learning Objectives (2 of 2)

See the links between multinational strategies and structures.
Understand the basic mechanisms of organizational coordination and control.
Know how multinational companies use coordination and control mechanisms.

Organizational Design

The best multinational strategies do not guarantee success. Managers must design their organizations with the best mechanisms to carry out domestic and international strategies.
Organizational Design: How organizations structure subunits and use coordination and control mechanisms to achieve their strategic goals

The Nature of
Organizational Design (1 of 2)

Two basic questions involved in designing an organization:
How shall we divide the work among the organization’s subunits?
How shall we coordinate and control the efforts of the units we create?
In small organizations, there is little reason to divide work. Everyone does the same thing and everything

The Nature of
Organizational Design (2 of 2)

As organizations grow, there is a need to divide work into specialized jobs and the organization into specialized subunits.
Once an organization has specialized subunits, managers must develop measures to coordinate and control their efforts.
Decision-making may be centralized or decentralized.
There is no one best organizational design.

A Primer on Organizational Structures

Organizations usually divide work into departments or divisions based on functions, geography, products, or a combination of these criteria.
Each way of organizing has its advantages and disadvantages.
A company’s choice of subunit forms is based on management’s beliefs concerning the best structure or structures to implement the chosen strategies.

The Basic Functional Structure (1 of 2)

In a Functional Structure, departments perform separate business functions such as marketing or manufacturing.
The functional structure is the simplest organization.
Most smaller organizations have functional structures.
Even large organizations have functional subunits.
Organizations choose a functional structure for its efficiency.

The Basic Functional Structure (2 of 2)

Efficiencies arise from economies of scale in each function because of cost savings when a large number of people do the same job in the same location.
Coordination is difficult, as functional units are separated from each other and serve functional goals.
The functional structure works best when the firm has few products, locations, and types of customers.
Works best in a stable environment, with minimal need for adaptation.

Exhibit 8.1:
A Basic Functional Structure

The Basic Product and Geographic Structures (1 of 4)

Product Structure: Building departments or subunits around a particular product.
Geographic Structure: Building departments or subunits based on a particular geographic region.
Product and Geographic units must still perform all of the functional tasks of a business.
Functional tasks are duplicated for each unit, leading to loss of economies of scale, and loss of efficiency.

The Basic Product and Geographic Structures (2 of 4)

But, such inefficiencies disappear as customer groups and products proliferate.
And even for small organizations, a product or geographic unit may offer competitive advantages:
It allows a company to serve customer needs that vary by region or product.
Managers can quickly identify customer needs and adapt products.

Exhibit 8.2:
Basic Product Structure

Exhibit 8.3:
Basic Geographic Structure

The Basic Product and Geographic Structures (3 of 4)

Recent research also suggests the customer-focused organization structure, which uses groups of customers related by industry or application as the basis for designing the organizational structure.
MNCs are adopting such structures because of:
Pressures to reduce costs
Subsidiary coordination

The Basic Product and Geographic Structures (4 of 4)

Few organizations adopt purely organizational forms.
Each organization has unique trade-offs based on efficiency, product types, and customers’ needs.
Companies design organizations with mixtures of structures that will best implement their strategies.
Mixed-form organizations are called Hybrid Structures.
A Hybrid Structure mixes functional, geographic, and product units.

Organizational Structures
to Implement
Multinational Strategies

When a company first goes international (as a passive exporter), it seldom changes its structure.
Even though exporting, it prefers to rely on EMCs and ETCs rather than change organizational structure.
Similarly, a licensing strategy has little impact on domestic structure.
However, when international sales become more central, the structure needs to be changed.

The Export Department

The Export Department coordinates and controls a company’s export operations.
The Export department:
Is created when exports become significant
Deals with international sales of all products
Sales representatives in other countries may report to the Export Department manager.

Exhibit 8.4:
A Functional Structure with an Export Department

Foreign Subsidiaries

Foreign Subsidiaries are subunits of the multinational company that are located in another country
These are a growing component of international business.
The United Nations estimates that worldwide, there are more than 65,000 multinational corporations with more than 850,000 foreign subsidiaries employing nearly 25 million people.

Subsidiaries (1 of 3)

Types of subsidiaries:
A Minireplica Subsidiary is a scaled down version of the parent firm. It uses the same technology and produces the same products as the parent firm.
A Transnational Subsidiary supports a multinational firm strategy based on location advantages. It has no firm wide form or function. Each subsidiary contributes what it does best or most efficiently anywhere in the world.

Foreign Subsidiaries (2 of 3)

Most subsidiaries are neither pure minireplicas nor pure transnationals.
Foreign subsidiaries take many forms and have many functions.
Foreign subsidiaries are the structural building blocks for running multinationals.

Foreign Subsidiaries (3 of 3)

Multinationals choose the mix of functions for their foreign subsidiaries based on:
The firm’s multinational strategy or strategies;
The subsidiaries’ capabilities and resources;
The economic and political risk of building and managing a subunit in another country;
How the subsidiaries fit into the overall multinational organizational structure.

International Division (1 of 4)

The International Division differs from the export department in several ways:
It is larger and has greater responsibilities.
It has more extensive staff with international expertise.
It is responsible for managing exports, international sales, negotiating contracts, and managing foreign subsidiaries.
It is the usual step after the export department.
It deals with all products.
It manages overseas sales force and manufacturing sites.

International Division (2 of 4)

The International Division has declined in popularity among large multinationals.
It is not considered effective for multiproduct companies operating in many countries.
However, for companies of moderate size with limited numbers of products or country locations, the International Division remains a popular and effective structure.

International Division (3 of 4)

There are several structural options to deal with the shortcomings of the International Division:
Worldwide product structure
Worldwide geographic structure
Matrix structure
Transnational network structure

International Division (4 of 4)

Why do companies often abandon their international divisions?
Too many products overwhelm the capacities of the international division.
When the number of locations in different countries grows, it is difficult for the international division to manage multidomestic or regional adaptations.
The international division makes it more difficult to implement international strategies using worldwide products or location advantages.

Worldwide
Geographic Structure (1 of 3)

In the Worldwide Geographic Structure, regions or large-market countries become the geographic divisions of the multinational company.
The primary reason to adopt this structure is to implement a multidomestic or regional strategy.
Differentiation of products or services requires an organizational design with maximum geographic flexibility.

Worldwide
Geographic Structure (2 of 3)

In the Worldwide Geographic Structure, regions or large-market countries become the geographic divisions of the multinational company.(cont’d)
The semiautonomous subunits provide flexibility to meet local needs.
Country-level divisions usually exist only when a country’s market size is sufficiently large to support its own organization.
Separate divisions make sense for large market countries.

Exhibit 8.5:
International Division in a Domestic Product Structure

Exhibit 8.6:
Royal Vopak’s Worldwide
Geographic Structure

Worldwide
Geographic Structure (3 of 3)

Product divisions form the basic units of the Worldwide Product Structure:
Each product division is responsible for producing and selling its products or services throughout the world.
It may be the ideal structure to implement an international strategy in which the firm gains economies of scale by selling worldwide product activities based at home.
This type of structure sacrifices the regional or local adaptation strengths derived from a geographical structure.

Exhibit 8.7:
Worldwide Product Structure

Hybrids and Worldwide Matrix Structures (1 of 4)

Both Worldwide Product Structure and Worldwide Geographic Structure have advantages and disadvantages:
A Product Structure supports global products.
A Geographic Structure emphasizes local adaptation.
Multinationals often want both abilities.
To achieve this, most multinationals use a Hybrid form of structure, which combines both.

Hybrids and Worldwide Matrix Structures (2 of 4)

To balance the benefits of geographic and product structures, and to coordinate their subunits, some multinationals create a Worldwide Matrix Structure:
Unlike hybrids, it is a symmetrical organization with equal lines of authority for worldwide product groups and geographical divisions.
The Geographic Divisions focus on national responsiveness.
The Product Divisions focus on finding global efficiencies.

Hybrids and Worldwide Matrix Structures (3 of 4)

A Worldwide Matrix Structure:
Balances the benefits produced by area and product structures
Works best with near equal demands from both sides
Requires extensive resources for communication and coordination
Requires middle and upper level managers with good human relations skills
In theory, produces quality decisions

Exhibit 8.8:
Worldwide Matrix Structure

Hybrids and Worldwide Matrix Structures (4 of 4)

Problems with Worldwide Matrix Structures:
Slow decision making process
Too bureaucratic
Too many meetings and too much conflict
Result:
Some companies have abandoned their matrixes and returned to product structures.
Others have redesigned their matrix structures to be more flexible with speedier decision making.

The Transnational Network Structure (1 of 5)

Unlike the symmetrical matrix structure, The Transnational Network has no basic form, symmetry or balance between geographic and product divisions.
Instead, The Transnational Network links different functional, product, and geographic subsidiaries dispersed worldwide.
Nodes, units at the center of the network, coordinate product, functional and geographic information.

The Transnational Network Structure (2 of 5)

No two subunits are alike.
Transnational units evolve to take advantage of resources, talent and market opportunities wherever they exist in the world.
Resources, people and ideas flow in all directions.

The Transnational Network Structure (3 of 5)

The Dutch multinational Philips Electronics N.V. works in 60 different countries, making products as diverse as defense systems and light bulbs.
Philips has 8 product divisions with more than 60 subgroups based on product similarity.
The product divisions have subsidiaries, which may focus on only one product or on an array of products.
Subsidiaries can specialize in R&D, sales, etc.
Some units are highly independent, some tightly controlled.

Transnational Network Structures (4 of 5)

Philips divides the world into three groups:
Key countries such as the Netherlands and the United States produce for local and world markets, and control local sales
Large countries such as Mexico and Belgium have some local and worldwide production facilities and local sales.
Local business countries are smaller countries that are primarily sales units and that import products from the product divisions’ worldwide production centers in other countries.

Exhibit 8.9:
Geographic Links in the Philips Transnational Structure

Exhibit 8.10:
Product Links in the Philips Transnational Structure

The Transnational Network Structure (5 of 5)

The basic structural framework of The Transnational Network has 3 components:
Dispersed subunits are subsidiaries located anywhere in the world they may benefit the firm.
Specialized Operations are subunits that specialize, whether in product lines, research or marketing.
Interdependent Relationships must exist to manage the dispersed and specialized subunits which share resources and information continuously.

Beyond the Transnational: Is There a New Structure for the Multinational? (1 of 5)

Large entrepreneurial multinational
Can tap into pockets of innovation, technology, and markets located around the world
An evolution of the transnational network structure that develops extensive systems to encourage organizational learning and entrepreneurial activities

Beyond the Transnational: Is There a New Structure for the Multinational? (2 of 5)

Structure for multinational firms continues to evolve.
A new structure is emerging called The Metanational, a large, entrepreneurial multinational firm able to tap into hidden pockets of innovation, technology and markets, especially emerging markets worldwide.
The Metanational is similar to the Transnational:
It is a networked, but centerless organization
Decision-making resides with the subunits.

Beyond the Transnational: Is There a New Structure for the Multinational? (3 of 5)

The Metanational is different from the Transnational in that:
It has an overriding objective to learn from anywhere in the world, and to share that knowledge with everyone in the company.
The Metanational organization uses the latest in virtual connectivity to link team members worldwide.

Beyond the Transnational: Is There a New Structure for the Multinational? (4 of 5)

The characteristics of the Metanational structure are:
Nonstandard business formulas for any local activity
Looking to emerging markets as sources of knowledge and ideas, not just for local labor
Creating a culture and advanced communication system that supporting global learning
Extensive use of strategic alliances to gain knowledge for varied sources

Beyond the Transnational: Is There a New Structure for the Multinational? (5 of 5)

The characteristics of the Metanational structure (cont’d):
High levels of trust between partners to encourage knowledge sharing
A centerless structure that moves strategic functions away from headquarters and to major markets
A decentralization of decision making to managers who serve key customers and strategic partners

Multinational Strategy and Structure: An Overview

Most companies support early internationalization efforts with export departments.
Depending on globalization strategy, they evolve into product or geographic structure.
Pressures for local adaptation and global efficiencies move to matrix or transnational network structures.
Most companies never quite reach a pure structure, and instead, adopt a hybrid structure.

Exhibit 8.11:
Multinational Strategy, Structure, and Evolution

Control and
Coordination Systems (1 of 2)

Although different subunits perform specialized tasks, managers must design organizational systems to control and coordinate their activities.
Control Systems help link the organization vertically, up and down the organizational hierarchy in two ways:
They measure or monitor performance of the subunits
They provide feedback on effectiveness to subunit managers

Control and
Coordination Systems (2 of 2)

Coordination Systems link the organization horizontally.
Coordination Systems provide information flows among subsidiaries so that they can coordinate their activities.
Example: Ford plans to use advanced information systems so that designers in Europe, the U.S. and Japan can coordinate their design efforts for the world market.

Design Options for
Control Systems (1 of 5)

There are four broad types of control systems:
1. Output control systems
2. Bureaucratic control systems
3. Decision-making control systems
4. Cultural control systems

Design Options for
Control Systems (2 of 5)

1. Output Control Systems:
Assesses the performance of a unit based on results, not on the process used to achieve those results
Responsibility for profit is the most common output control.
Example: a Profit Center.

Design Options for
Control Systems (3 of 5)

2. Bureaucratic Control Systems:
Focuses on managing behaviors, not outcome
Examples include budgets, statistical reports, and centralization of decision-making.
Budgets set financial targets for expenditures.
Statistical reports provide information to top management on non-financial outcomes.
Standard operating procedures (SOPs) provide rules that identify approved ways of behaving.

Design Options for
Control Systems (4 of 5)

3. Decision-making Control Systems:
The level of the organization where managers have the authority to make decisions.
In decentralized organizations, lower-level managers make many important decisions.
In centralized organizations, higher-level managers make most important decisions.
Transnational structures do not have a tendency for control in either direction.

Design Options for
Control Systems (5 of 5)

4. Cultural Control Systems:
Use organizational culture to control employees’ behaviors and attitudes
Strong organizational cultures develop shared norms, values, believes and traditions
Such cultures encourage high levels of commitment and support for the organization.

Design Options for Coordination Systems (1 of 4)

There are 6 basic horizontal coordination systems:
Textual Communication: e-mail, memos, and reports
Direct Contact: face-to-face interaction of employees
Liaison Roles: part of a person’s job in one department to communicate with people in another department
Task Forces: temporary teams created to solve a particular organizational problem
Full-time Integrators: cross-unit coordination is the main job responsibility

Design Options for Coordination Systems (2 of 4)

Teams: (groups of employees working together)
The strongest coordination mechanism
Permanent units of the organization
Come from several organizational subunits to specialize in particular problems

Summary

Good strategies do not guarantee success. The MNC also needs a good organizational structure to achieve its goals.
The MNC needs the right organizational design to carry out its strategic intent, goals and objectives.
Chapter 8 reviews basic organizational structures and discusses international organizational designs and structures.