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CEO had made most of the major decisions and then worked with business unit heads to exe cute them. Liu, though, re-formed the eight top managers at Lenovo into a close-knit team and then they all worked together to make decisions and formulate plans.After decisions and plans were made by consensus, the team continued to work together to ensure that they were implemented effectively and with buy-in from others throughout the organization. However; he also decided to continue Amel ia's push away from functional divisions toward more cross functional activity; he also increased the prominence of regional activities in different parts of the world.
Today Lenovo is headquartered in Hong Kong but has major operations in Beijing,Singapore, and Morrisville, North Carolina. The firm's products include PCs, workstations, servers, storage de vices,and IT services. In 201O Lenovo generated profits of $129 million on revenues of $16.6 billion and employed over 22,000 workers.Right now it's still too soon to know if '!he changes at Lenovo will improve its fortunes or not. But Liu believes that his new approach,which he calls a "blend of old Chinese thinking and modern global thinking," will soon carry '!he day.1
The Lenovo case illustrates one of the most fundamental issues facing any international business-how much authority to retain at the top and how much to delegate to lower levels of the organization. In its earlier days the firm followed a consensus-oriented approach to authority. But as the firm sought to globalize, U.S. managers brought in to lead the firm installed a more centralized, command-and-control approach. Finally, though, as the firm's top management team again came to be dominated by Chinese executives Lenovo reverted back to its earlier consensus-based approach. As we will see in this chapter, this issue is an important component in managing international organization design and control.
In this chapter we describe the various organization designs that international businesses use to help achieve their strategic goals. Because these designs typically evolve along a well defined path as firms become more international, we first discuss the initial forms of organiza tion design firms use as they begin to internationalize their operations.2 We then analyze the more advanced forms of organization design that firms adopt as they broaden their participation in international business to become true multinational corporations (MNCs). Next we discuss several related issues in global organization design. We conclude by describing another impor tant management function related to organization design: control.
The Nature of International Organization Design
Organization design (sometimes called organization structure) is the overall pattern of struc tural components and configurations used to manage the total organization.3 The appropriate design for any given organization may depend on the firm's size, strategy, technology, and envi ronment, as well as the cultures of the countries in which the firm operates. Organization design is also the basic vehicle through which strategy is ultimately implemented and through which the work of the organization is actually accomplished.
A firm cannot function unless its various structural components are appropriately assem bled.4 Through its design the firm does four things. First, it allocates organizational resources. Second, it assigns tasks to its employees. Third, it informs those employees about the firm's rules, procedures, and expectations about the employees' job performances. Fourth, it collects and transmits information necessary for problem solving, decision making, and effective organi
zational control.5 This last task is particularly important for large MNCs, which must manage
sharing vast amounts of information between corporate headquarters and subsidiaries and staff spread worldwide.
An organization's structure is not created and then left alone; organization design is an on
going process. Indeed, managers change the design of their firms almost continually. One study found that most firms and divisions of large firms make moderate design changes about once a year and one or more major design changes every four to five years.6 These changes often result from changes in a firm's strategy because an important characteristic of a successful firm is its ability to match its strategy with a compatible organization design, as Lenovo has sought to do.7
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major organization design changes as well as hundreds of smaller ones. And clearly, a strategy calling for increased internationalization will have an impact on the firm's organization design.
To see how this begins to happen, we will start by considering a domestic firm that has no international sales. Many entrepreneurs, particularly in larger economies such as those of the United States, Japan, and Germany, start new firms in response to some perceived need in the lo cal market; they give little immediate thought to the international marketplace. Also, many small, domestically oriented firms enter international markets passively through indirect export ing, as discussed in Chapter 12.Because such indirect exporting occurs as a routine part of the firm's domestic business, the firm's organization design need not change at all.
Now assume that the hypothetical firm just described begins to engage in direct exporting on a modest level. Its initial response to international sales and orders is the corollary approach, whereby the fmn delegates responsibility for processing such orders to individuals within an ex isting department, such as finance or marketing. Under this approach the firm continues to use its existing domestic organization design. This approach is typical of a fmn that has only a very small level of international activity.
As a firm's export sales become more significant, however, its next step usually is to create
a separate export department The export department takes responsibility for overseeing inter national operations, marketing products, processing orders, working with foreign distributors, and arranging financing when necessary.Initially, the head of the export department may report to a senior marketing or finance executive. As exports grow in importance, however, the export department of a small- to medium-size fmn may achieve equality on the organization chart with finance, marketing, human resources, and other functional areas.
When selling to foreign customers is not fundamentally different from selling to domestic ones, the export department may get by with knowing only a little about foreign markets. However, as international activities increase, firms often find that an export department no longer serves their needs. Once a fmn begins to station employees abroad or establish foreign subsidiaries to produce, distribute, and/or market its products, managerial responsibilities, coor dination complexities, and information requirements all swell beyond the export department's capabilities and expertise. Familiarity with foreign markets becomes more important and new methods for organizing may be required.
Firms respond to the challenges of controlling their burgeoning international business by changing their organization design through the creation of an international division that special izes in managing foreign operations. The international division allows a firm to concentrate resources and create specialized programs targeted on international business activity while simultaneously keeping that activity segregated from the firm's ongoing domestic activities.
Global Organization Designs
As a firm evolves from being domestically oriented with international operations to becoming a true multinational cmpmation with global aspirations, it typically abandons the international di vision approach. In place of that division it usually creates a global mganization design to achieve synergies among its far-flung operations and to implement its organizational strategy.8 Fm example, for several years Aetna maintained a separate division for its small but growing in ternational operations. When its international revenues more than doubled during a three-year period, however, the firm announced plans to eliminate the international division and integrate Aetna' s global initiatives into its existing structure. Executives at the firm indicated that their
new structure would make it easier to transfer knowledge and technology between international markets.9 Indeed, the global design adopted by any firm must deal with the need to integrate three types of knowledge to compete effectively internationally: 10
· Area knowledge: Managers must understand the cultural, commercial, social, and economic conditions in each host country market in which the firm does business.
· Product knowledge:Managers must comprehend such factors as technological trends, customer needs, and competitive fmces affecting the goods the firm produces and sells.
· Functional knowledge: Managers must have access to coworkers with expertise in basic business functions such as production, marketing, finance, accounting, human resource management, and information technology.
The five most common forms of global organization design are product, area, functional, customer, and matrix. As we will discuss, each form allows the firm to emphasim one type of knowledge, yet perhaps each also makes it more difficult to incorporate the other types of knowledge into the firm's decision-making processes. Accordingly, the global design the MNC chooses will reflect the relative importance of each of the three types of knowledge in the firm's operations, as well as its need for coordination among its units, the source of its firm-specific ad
vantages, and its managerial philosophy about its position in the world economy. 11
MNCs typically adopt one of three managerial philosophies that guide their approach to such functions as organization design and marketing. The ethnocentric approach is used by firms that operate internationally the same way they do domestically.The polycentric approach is used by firms that customize their operations for each foreign market they serve. The geo centric approach is used by firms that analyze the needs of their customers worldwide and then adopt standardized operations for all markets they serve. <:Ne discuss these concepts more fully in Chapter 16.)
Global Produd Design
The most common form of organization design adopted by MNCs is the global product design. The global product design assigns worldwide responsibility for specific products or product groups to separate operating divisions within a firm. This design works best when the firm has diverse product lines or when its product lines are sold in diverse markets, thereby rendering the need for coordination between product lines relatively unimportant. H the products are related, the organization of the firm takes on what is often called an M-form design; if the products are unrelated, the design is called an H-form design. The M in M-form stands for "multidivisional" the various divisions of the firm are usually self-contained operations with interrelated activities. The H in H-form stands for "holding," as in "holding oompany"---the various unrelated busi nesses function with autonomy and little interdependence. After selling its specialty chemicals group (as discussed in this chapter's closing case), Unilever became an M-form business because the businesses it chose to retain were all somewhat related to one another.
Samsung Group is the largest business in Korea, with 2010 revenues of $134 billion and 277,000 employees. Samsung uses the H-form global product design, shown in Figure 14.1.The firm is organized into four major divisions: the electronics group, the chemical products group, the financial services group, and another group of smaller businesses. Each of these groups has little in common with the others and functions separately from them. Similarly, the other affili ated companies group includes businesses that are also unrelated, including a catering business, a small hotel chain, an amusement park, a professional baseball team, and a small group of hos pitals and medical centers.
The global product design provides several potential competitive advantages. First, because a division focuses on a single product or product group, the division managers gain expertise in all aspects of the product or products , better enabling them to compete globally. Second, the global product design facilitates efficiencies in production because managers are free to manu factnre the product wherever manufacturing costs are the lowest. It also allows managers to co ordinate production at their various facilities, shifting output from factory to factory as global
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FIGURE 14.1
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CHAPTER 14 •INTERNATIONAL ORGANIZATION DESIGN AND CONTROL 369
demand or cost conditions fluctuate. Further, because managers have extensive product knowl edge, they are better able to incorporate new technologies into their product(s) and respond quickly and flexibly to technological changes that affect their market. The global product design also facilitates global marketing of the product. The firm gains flexibility in introducing, pro moting, and distributing each product or product group. Rather than being tied to one marketing plan that encompasses the whole firm, individual product line managers may pursue their own plans. Finally, because the global product design forces managers to think globally, it facilitates geocentric corporate philosophies. This is a useful m.ind-set as firms work to develop greater in
ternational skills internally.12
The global product design also has disadvantages, however. For one, it may encourage ex pensive duplication because each product group needs its own functional-area skills such as marketing, finance, and information management, and sometimes even its own physical facili ties for production, distribution, and research and development (R&D). Similarly, each product group must develop its own knowledge about the cultural, legal, and political environments of the various regional and national markets in which it operates. Coordination and corporate learn ing across product groups also becomes more difficult. If such coordination is an important part of the firm's international strategy, a different global design, such as the global area design, may be preferable. Thus, businesses must carefully consider the relative advantages and disadvan tages of using the global product design when deciding the best form of organization design for their particular circumstances.
Global Area Design
The global area design organizes the firm's activities around specific areas or regions of the world. This approach is particularly useful for firms with a polycentric or multidomestic corpo rate philosophy. 13 A global area design is most likely to be used by a firm whose products are not
readily transferable across regions. ''Emerging Opportunities" discusses how many firms doing business in China are using the global area design.
As shown in Figure 14.2, Adecco S.A. uses the global area design.14 Adecco, a Swiss firm, is the world's largest temporary employment agency, serving over 100,000 clients from more than 5,500 offices worldwide. The fr'rm has eight basic divisions, each representing a
FIGURE 14.2
Adecco S.A.·s Global Area Design
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different area of the world where Adecco does business. Managers in each area division han dle recruiting, distribution, promotion, advertising, client services, and other functions for their particular region.
The global area design is particularly useful for a firm whose strategy is marketing-driven rather than predicated on manufacturing efficiencies or technological innovation or for a firm whose competitive strength lies in the reputation of its brand name products. Both conditions ap ply to Adecco. Further, the geographical focus of this design allows a firm to develop expertise about the local market. Area managers can freely adapt the firm's products to meet local needs and can quickly respond to changes in the local marketplace. They also can tailor the product mix they offer within a given area. For example, Adecco managers must adapt their practices to local demand for temporary employment as well as different labor laws and cultural differences regarding employment relationships.
The global area design does have disadvantages, however. By focusing on the needs of the area market, the firm may sacrifice cost efficiencies that might be gained through global produc tion. Diffusion of technology is also slowed because innovations generated in one area division may not be adopted by all the others. Thus, this design may not be suitable for product lines un dergoing rapid technological change. Further, the global area design results in duplication of re sources because each area division must have its own functional specialists, product experts, and, in many cases, production facilities. And finally, it makes coordination across areas expen sive and discourages global product planning.
Global Fundional Design
The global functional design calls for a firm to create departments or divisions that have world wide responsibility for the common organizational functions--:finance, operations, marketing, R&D, and human resources management. This design is used by MNCs that have relatively nar row or similar product lines. Itresults in what is often called a U-form organization, where the U stands for "unity." Lenovo used this design in the early years of its existence. Another example of the global functional design is that used by British Airways, shown in Figure 14.3. This firm is essentially a single-business firm-it provides air transport services-and has company-wide functional operations dedicated to marketing and operations, public affairs, engineering, corpo rate finance, human resources, and other basic functions.
The global functional design offers several advantages. First of all, the firm can easily trans fer expertise within each functional area. For example, Exxon Mobil uses the global functional design, so production skills learned by Exxon Mobil's crews operating in the Gulf of Mexico can be used by its offshore operations in Malaysia's Jerneh field, and new catalytic cracking technology tested at its Baton Rouge, Louisiana, refinery can be adopted by its refineries in Singapore and Trecate, Italy. Second, managers can maintain highly centraliz.ed control over functional operations. For example, the head of Exxon Mobil's refinery division can rapidly ad just the production runs or product mix of refineries to meet changes in worldwide demand, thereby achieving efficient usage of these very expensive corporate resources. Finally, the global functional design focuses attention on the key functions of the firm. For example, managers can easily isolate a problem in marketing and distinguish it from activities in other functional areas.
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FLYING SOLO IN CHINA
W hen most foreign firms doing business in China first set up shop in that country.they used a local partner. Such part- ners were generally required by Chinese law. and they theoret ically served an important role in helping foreign managers better navigate the Chinese bureaucratic maze. For instance, U.S.
companies have signed well over 100,000 contrads to do business in China, and virtually all those contracts included one or more lo cal partners.
But in recent years, however, observers have begun to notice some changes. As part of its efforts to be admitted into the World Trade Organization and wanting to put forward as business-friendly a face as possible, the country has started easing its requirements for local business partners in selected industries. (Telecommunicati ons firms, automakers, and energy companies still require local partners.} Foreign firms have quickly started to take advantage of the new rules.
Many had found, for instance, that their local partners were serv ing little purpose and were instead a drain on assets. Others may have benefited from the local partner but had subsequently learned what they needed to know about doing business in
China and were prepared to work alone.
As a result, two things have been happening. First, many foreign firms partnering with local firms have been buying out their joint ven ture partners. Second. foreign firms have been steering their new in vestments into wholly owned subsidiari es and businesses. Procter & Gamble. Kimberly-Clark. Dow Chemical. and Delphi Automotive are among the businesses moving aggressively in these new diredions. In general firms that are taking this approach are setting up their Chinese operations as separate business units. This allows the firms to
focus on the needs of local consumers and maintain a concentrated focus on the evolving Chinese marketplace.15
Despite these advantages, this design is inappropriate for many businesses, For one thing, the global functional design is practical only when the firm bas relatively few products or cus tomers. For another, coordination between divisions can be a major problem. For example, the manufacturing division and the marketing division may become so differentiated from each other that each may start pursuing its own goals to the detriment of the firm as a whole. Finally, there may also be duplication of resources among managers. For example, the finance, market ing, and operations managers may each hire an expert on Japanese regulation, when a single expert could have served all three functional areas just as effectively.
Because of these problems, the global functional design bas limited applicability. It is used by many firms engaged in extracting and processing natural resources, such as the min ing and energy industries, because in their case the ability to transfer technical expertise is im portant. Firms that need to impose uniform standards on all their operations also may adopt this approach. For example, to ensure safety, British Airways standardizes its maintenance and flight procedures regardless of whether a flight originates in London, Hong Kong, or Sydney.
Global Customer Design
The global customer design is used when a firm serves different customers or customer groups, each with specific needs calling for special expertise or attention. For example, Kodak bas adopted a global customer design, as is shown in Figure 14.4. Its Commercial Business Group focuses on selling high-quality film products to studios in Hollywood, London, Munich, Hong Kong, Toronto, and other centers for filmed entertainment, as well as film and supplies to the medical community and other commercial customers. Its Consumer Business Group sells both
film and digital media to professional and amateur photographers, while its New Business Group targets emerging markets and new technologies of relevance to leading-edge customers around the world.16
This design is useful when the various customer groups targeted by a fll'Dl are so diverse as to require totally distinct marketing approaches. For example, selling four packages of image printing paper to an individual is a completely different task from selling medical imaging sup plies to a cancer hospital. The global customer approach allows the firm to meet the specific needs of each customer segment and track how well the firm's products or services are doing
among those segments. On the other hand, the global customer design may lead to a significant duplication of resources if each customer group needs its own area and functional specialists. Coordination between the different divisions is also difficult because each is concerned with a fundamentally different market.
CHAPTER 14 • INTERNATIONAL ORGANIZATION DESIGN AND CONTROL 373
FIGURE 14.4
Eastman Kodak's Global Customer Design
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Global Matrix Design
The most complex form of international organization design is the global matrix design.17 A global matrix design is the result of superimposing one form of organization design on top of an existing, different form. The resulting design is usually quite fluid, with new matrix dimen sions being created, downscaled, and eliminated as needed. For example, the global matrix de sign shown in Figure 14.5 was created by superimposing a global product design (shown down the side) on an existing global functional design (shown across the top). This was the design that Lenovo's America managers attempted to use. Using a global matrix design, a firm can form specific product groups comprising members from existing functional departments. These product groups can then plan, design, develop, produce, and market new products with appropriate input from each functional area. In this way the firm can draw on both the func tional and the product expertise of its employees. After a given product development task is completed, the product group may be dissolved; its members will then move on to new assign ments. Of course, other matrix arrangements are possible. For example, an area design could be overlaid on a functional design, thereby allowing area specialists to coordinate activities with functional experts.
An advantage of the global matrix design is that it helps bring together the functional, area, and product expertise of the firm into teams to develop new products or respond to new chal lenges in the global marketplace. For example, Texas Instruments (TI) often uses a global matrix design for new product development, although its underlying organization design is based on function. At any one time TI has several product development groups in operation, which draw members from relevant functional groups and work toward creating new products or new uses for existing ones. Ifand when such breakthroughs are achieved, matrix-based product groups are used to transfer the new technology throughout the rest of the firm. After the task assigned to the product group is completed (for example, after the new product has been launched), the group may be dissolved.
The global matrix design thus promotes organizational :flexibility. It allows firms to take ad vantage of functional, area, customer, and product organization designs as needed while sinwlta neously minimizing the disadvantages of each. Members of a product development team can be added or dropped from the team as the firm's needs change. The global matrix design also pro motes coordination and communication among managers from different divisions.
The global matrix design has limitations, however. First of all, it is not appropriate for a firm that has few products and that operates in relatively stable markets. Second, it often puts employees in the position of being accountable to more than one manager. For example, at any given time an employee may be a member of his or her functional, area, or product group as
FIGURE 14.5
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well as of two or three product development groups. As a result, the individual may have split loyalties-caught between competing sets of demands and pressures as the area manager to whom the employee reports wants one thing and the product line manager wants another. Similarly, the global matrix design creates a paradox regarding authority. On the one hand, part of the design's purpose is to put decision-making authority in the hands of those managers most able to use it quickly. On the other hand, because reporting relationships are so complex and vague, getting approval for major decisions may actually take longer. And finally, the global matrix design tends to promote compromises, or decisions based on the relative political clout of the managers involved.18
Hybrid Global Designs
Each global form of international organization design described in this section represents an ideal or pure type. Most firms, however, create a hybrid design that best suits their purposes, as dictated in part by the firms' size, strategy, technology, environment, and culture. Most MNCs are likely to blend elements of all the designs discussed. A firm may use a global product design as its overall approach, but it may have more of a functional orientation or area focus in some of its product groups than in others. In fact, if it were possible to compare the designs used by the world's 500 largest MNCs, no two would look exactly the same. A firm's managen start with the basic prototypes, merge them, throw out bits and pieces, and create new elements unique to their firm as they respond to changes in the organization's strategy and competitive environment In many ways, Lenovo is using a hybrid design today. Specifically, its current design reflects functional, area, and matrix components.
Figure 14.6 illustrates how Nissan Motor Corporation uses a hybrid design to structure its
U.S. operations. At the top level of the firm Nissan has some managen dedicated to products (such as the vice president and general manager for the Infiniti division) and others dedicated to
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functions (such as the vice president and chief financial officer). The marketing function for Nissan automobiles is broken down by product, with specific units responsible for sedans, sports cars, and trucks and utility vehicles. Both the Infiniti and Nissan divisions also have regional general managers organized by area. In similar fashion all large international firms mix and match forms of organization in different areas and at different levels to create hybrid organiza tion designs that their managers believe best serve the firm's needs.
Related Issues in Global Organization Design
Inaddition to the fundamental issues of organization design we have addressed, MNCs also face a number of other related organizational issues that must be carefully managed.
Centralization versus Decentralization
When designing its organization, an MNC must make a particularly critical decision that deter mines the level of autonomy, power, and control it wants to grant its subsidiaries. Suppose it chooses to decentralize decision making by allowing individual subsidiaries great discretion over strategy, finance, production, and marketing decisions, thereby letting those decisions be made by managers closest to the market These managers may then focus only on the sub sidiary's needs rather than on the firm's overall needs. An MNC can remedy this deficiency by tightly centralizing decision-making authority at corporate headquarters. Decisions made by the corporate staff can then take into account the firm's overall needs. However, these decisions of ten hinder the ability of subsidiary managers to quickly and effectively respond to changes in their local market conditions. Because both centralization and decentralization offer attractive
benefits to the MNC, most firms constantly tinker with a blend of the two to achieve the best outcome in tenns of overall strategy.19
Numerous U.S. businesses have stumbled after setting up shop in China because they try to maintain centralized control from abroad. This has been especially problematic in industries where responsiveness to market conditions is critical. Both Google and eBay, for instance, have struggled in China because small local rivals have been more nimble in responding to customer preferences. Amazon, meanwhile, recently acquired a major online Chinese retailer called Joyo.com. Amazon founder and CEO Jeff Bezos has vowed to not replicate the mistakes of other finns, but instead insists that the local Joyo.com managers will have a great deal of discretion
and control over how they responds to peculiarities in the Chinese market 20
Role of Subsidiary Boards of Directors
An MNC typically incorporates each of its subsidiaries in the subsidiary's country of operation. This is done to limit the subsidiary's liability and to allow it to attain legal status as a local citi zen. Most countries require each corporation, including a wholly owned subsidiary of a foreign MNC, to have a board of directors.21 The board is elected by corporate shareholders (which is the MNC), is responsible to those shareholders for the effective management of the subsidiary (which is owned by the MNC), and oversees the activities of top-level managers (who are hired
by the MNC). The issue facing most MNCs is whether to view the creation of a subsidiary board of directors as a pro forma exercise and therefore give the board little real authority or to em power the board with substantial decision-making authority.22
Empowering the subsidiary's board promotes decentralization. Foreign subsidiaries may need the authority to act quickly and decisively without having to always seek the parent's ap proval. Also, if the MNC decentralizes authority to local levels, an active board provides a clear accountability and reporting link back to corporate headquarters. Some MNCs also have found that appointing prominent local citizens to the subsidiary's board is helpful in conducting busi ness in a foreign country. These members can help the subsidiary integrate itself into the local business community and can be an effective source of information for both parent and subsidiary about local business and political conditions.
For example, prominent local business officials on the board of Apple's Japanese sub sidiary were key to the firm's early success in the Japanese market. They enhanced the credibil ity of Apple's products in a country where corporate connections and status are an important marketing tool, while their appointment demonstrated Apple's long-term commitment to the
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Japanese market. A subsidiary board also can help monitor the subsidiary's ethical and social responsibility practices. A potential disadvantage of empowering a subsidiary's board is that the subsidiary may become too independent as its board assumes substantial authority and thereby fails to maintain the desired level of accountability to the parent.23
In general a subsidiary board is most useful when the subsidiary has a great deal of auton omy, its own self-contained management structure, and a business identity separate from the parent's. Active subsidiary boards are particularly useful in H-form organizations because a holding company's subsidiaries are typically run independently of one another. For example, Nestle's U.S. subsidiary, Carnation, meets each of the three criteria noted above. Not surpris ingly, therefore, Carnation also has a very active board of directors. Honda, Matsushita, Hewlett Packard, and Dow also empower their local boards of directors to make decisions and respond to local conditions.
Coordination in the Global Organization
Finally, as part of creating an effective design for itself, an international :finn must address its co ordination needs. Coordination is the process of linking and integrating functions and activities of different groups, units, or divisions. Coordination needs vary as a function of interdependence among the firm's divisions and functions. Inother words, the higher the level of interdependence among divisions and functions, the more coordination is necessary among them.
MNCs can use any of several strategies to achieve and manage their desired level of coordi nation. The organizational hierarchy itself is one way to manage interdependence and promote coordination. An organization design that clearly specifies all reporting relationships and direc tions of influence facilitates coordination because each manager knows how to channel commu nications, decision making, and so on. Rules and procedures also facilitate coordination. For example, a standard operating procedure that requires the reporting of monthly and quarterly revenue, cost, and profit data to headquarters allows corporate staff to coordinate the firm's cash flows and to quickly identify troublesome markets.
MNCs also may adopt somewhat more temporary or ad hoc coordination techniques.24
Using employees in liaison roles is one such technique. Suppose two divisions of an MNC are collaborating on an activity or function. Each may designate a specific manager as its liaison with the other. H any manager in one unit has information or questions that involve the other unit, they are channeled through the liaison to the appropriate person or unit. Toyota, for exam ple, frequently uses this technique for managing relatively small-scale joint efforts.
When the magnitude of the collaboration is significant, task forces may be used for coordi nation. In such cases each participating unit or division assigns one or more representatives to serve on the task force. The assignment may be either full-time or part-time. Ford and Mazda, for example, used a task force when they collaborated on the design of the Ford Focus. Each finn designated members of its design, engineering, operations, and finance departments to serve on the task force. Employees of the two firms rotated on and off the task force depending on its needs and on the automobile's stage of development. When the final design was complete and the automobile was put into production, the task force was dissolved.
Many international firms also rely heavily on informal coordination mechanisms.Informal management networks can be especially effective. An informal management network is sim ply a group of managers from different parts of the world who are connected to one another in some way. These connections often form as a result of personal contact, mutual acquaintances, and interaction achieved via travel, training programs, joint meetings, task force experiences, and so on. Informal management networks can be very powerful for short-circuiting bureau cracy that may delay communication and decision making. They also can be effective for getting things done more quickly and more effectively than if normal and routine procedures
were always followed.25
The Control Function in International Business
Another important role of organization design is to enable the firm to more effectively manage its control function. Control is the process of monitoring ongoing performance and making nec essary changes to keep the organization moving toward its performance goals. Control is con ceptually similar to a thermostat. A thermostat monitors room temperature and then turns on the
cooling or heating system when the actual temperature moves too far from the ideal temperature. When the desired room temperature is reached, the system is turned off until it is needed again.
As illustrated in Figure 14.7, there are three main levels at which control can be imple mented and managed in an international business. These three key levels of control are the strategic, organizational, and operations levels. Although each is important on its own merits, the three levels also are important collectively as an organizing framework for managers to use in approaching international control from a comprehensive and integrated perspective.
Strategic Control
Strategic control is intended to monitor both how well an international business formulates strat egy and how well it goes about implementing that strategy.26 Strategic control thus focuses on how well the firm defines and maintains its desired strategic alignment with the firm's environ ment and how effectively the firm is setting and achieving its strategic goals. For example, a few years ago Germany's largest automobile manufacturer, Daimler-Benz, bought Chrysler, the third largest automaker in the United Stat.es. At the time this decision seemed very logical. For in stance, managers believed that the firms could learn from each other, that their existing product lines and organizational strengths complemented one another, and that the combined firm would be able to compete more effectively in global markets with other behemoths such as General Motors, Ford, and Toyota. As it turned out, though, this ended up being a poor strategic decision. The anticipated synergies and efficiencies could never be achieved and so Chrysler was subse quently sold to a group of private investors. (Those investors recently sold the firm to Fiat.)
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PART 3 • MANAGING INTERNATIONAL BUSINESS
FIGURE 14.7
Levels of International Control
STRATEGIC CONTROL
How the international business formulates and achieves its strategic goals
.
OPERATIONS CONTROL
How the intematiOnal buSinel9 fOcu• aperatin1systems withinthe ClrJlanizlltian, as well 11within individual subsidiaries llllcl operatq units, administration and distribution centers, manufacturins facilities, etc.
CHAPTER 14 • INTERNATIONAL ORGANIZATION DESIGN AND CONTROL 379
Strategic control also plays a major role in the decisions firms make about foreign-market en try and expansion. This is especially true when the market holds both considerable potential and considerable uncertainty and risk. For example, in the wake of India's overtures for foreign direct investment, many firms are expanding their operations in that country. Hindustan Lever, Unilever's Indian subsidiary,has increased its capacity for soap and detergent manufacturing and launched new food-processing operations as well. These steps represent a strategic commitment by the firm to the Indian market. As this strategy is implemented, strategic control systems will be used in making decisions about future operations there. H opportunities in the Indian market con tinue to unfold, Unilever no doubt will continue to expand. However, if uncertainty and risk be come too great, the firm may become cautious, perhaps even reversing its expansion in India.
Often the most critical aspect of strategic control is control of an international firm's financial resources. Money is the driving fmce of any mganization, whether that money is in the form of profits or of cash flow to ensure that ongoing expenses can be covered. Mmeover, if a firm has surplus revenues, managers must ensure that those funds are invested wisely to maximize their payoff for the firm and its shareholden. Thus, it is extremely important that an international firm develop and maintain effective accounting systems. Such systems should allow managers to fully monitor and understand where the firm's revenues are coming from in every market in which the firm operates, to track and evaluate all its costs and expenses, and to see how its parts contribute to its overall profitability.27
Poor financial control can cripple a firm's ability to compete globally. For example, Mantrust, an Indonesian firm, bought Van Camp Seafood, packager of Chicken of the Sea tuna, for $300 million. Most of that money was borrowed from Indonesian banks. Mantrust's owner was unskilled at managing debt, and the firm had difficulties making its loan payments. Both Mantrust and Van Camp struggled for years until Mantrust sold Van Camp to Tri-Union Seafood, a limited partnership owned by investon in the United States and Thailand.
Financial control is generally a separate area of strategic control in an international firm. Most firms create one or more special managerial positions to handle financial control. Such a position is usually called controller.Large international firms often have a corporate controller responsible for the financial resources of the entire organization. Each division within the firm is likely to have a divisional controller who is based in a country where the division operates and who oversees local financial control. Divisional controllen usually are responsible both to the heads of their respective divisions and to the corporate controller.These control relationships are managed primarily through budgets and financial forecasts.
A special concern of an international controller is managing the inventory of various curren cies needed to run the firm's subsidiaries and to pay its vendon.28 For example, Coca-Cola has to manage its holdings of over 150 currencies as part of its daily operations. Each foreign subsidiary
of an international firm needs to maintain a certain amount of local currency for the subsidiary's domestic operations. Each also needs access to the currency of the parent corporation's home country to remit dividend payments, reimburse the parent for the use of intellectual property, and pay for other intracorporate transactions. The subsidiary further must be able to obtain other currencies to pay suppliers of imported raw materials and component parts as their invoices are received.
Given the possibility of exchange rate fluctuations, the controller needs to oversee the firm's
holdings of divene currencies to avoid losses if exchange rates change. Many multinational cor porations (MNCs) centralize the management of exchange rate risk at the corporate level. However, others, such as the Royal Dutch/Shell Group, allow their foreign affiliates to use both domestic and international financial and commodity markets to protect the affiliates against exchange rate :fluctuations. Firms that decentralize this task need to maintain adequate financial controls on their subsidiaries or face financial problems. For example, a few years ago Shell's Japanese affiliate, Showa Shell Seikyu KK, engaged in widespread speculative trading in foreign-currency markets, a practice forbidden by Shell. Knowledge of this speculative trading was brought to light only when the Japanese affiliate reported a loss of over $1billion. Clearly, Shell's internal controls had broken down and failed to detect the speculative activities. As a result, corporate officials implemented new procedures and tighter controls to better manage the firm's financial resources.
Another type of strategic control that is increasingly important to international firms is con trol of joint ventures and other strategic alliances.
alliances, particularly joint ventures, are being used more often by and becoming more impor tant to international firms. Itfollows that strategic control systems also must account for the per formances of such alliances. By definition a joint venture or other strategic alliance is operated as a relatively autonomous enterprise; therefore, most partners agree to develop an independent control system for each alliance in which they participate. The financial control of these al liances then becomes an ingredient in the overall strategic control system for each partner's firm. That is, the alliance maintains its own independent control systems, but the results are communi cated not only to the managers of the alliance but also to each partner.
Organizational Control
Organizational control focuses on the design of the organization itself. As discussed earlier, there are many different forms of organization design that an international firm can use. However, selecting and implementing a particular design does not necessarily end the organiza tion design process. For example, as a firm's environment or strategy changes, managers may need to alter the firm's design to better enable the firm to function in the new circumstances. Adding new product lines, entering a new market, or opening a new factory-all can dictate the need for a change in design.
The most common type of organizational control system is a decentralized one called responsibility center control. Using this system, the firm first identifies fundamental responsi bility centers within the organization. Strategic business units are frequently defined as responsi bility centers, as are geographical regions or product groups. Once the centers are identified, the firm then evaluates each on the basis of how effectively it meets its strategic goals. Thus, a unique control system is developed for each responsibility center. These systems are tailored to meet local accounting and reporting requirements, the local competitive environment, and other circumstances.
Nestle uses responsibility center control for each of its units, such as Poland Springs, Alcon Labs, and Nestle-Rowntree (see Map 14.1).These subsidiaries regularly provide financial per formance data to cmporate headquarters. Managers at Poland Springs, for example, file quar terly reports to Nestle headquarters in Switzerland so that headquarters can keep abreast of how well its U.S. subsidiary is doing. By keeping each subsidiary defined as a separate and distinct unit and allowing each to use the control system that best fits its own competitive environment, cmporate managers in Switzerland can see how each unit is performing within the context of its own market. Each report must contain certain basic information, such as sales and profits, but each also has unique entries that reflect the individual subsidiary and its market.
A firm may prefer to use generic organizational control across its entire organization; that is, the control systems used are the same for each unit or operation, and the locus of authority generally resides at the firm's headquarters. Generic organizational control most commonly is used by international firms that pursue similar strategies in each market in which they compete. Because there is no strategic variation between markets, responsibility center control would be inappropriate. The firm is able to apply the same centralized decision making and control stan dards to the strategic performance of each unit or operation. Moreover, international firms that use the same strategy in every market often have relatively stable and predictable operations; therefore, the organizational control system the firms use also can be relatively stable and straightforward. For example, United Distillers PLC markets its line of bourbon products in the United States, Japan, and throughout Europe. Because the product line is essentially the same in every market and the characteristics of its consumers vary little across markets, the firm uses the same control methods for each market.
A third type of organizational control, which could be used in combination with either re sponsibility center control or generic organizational control, focuses on the strategic planning process itself rather than on outcomes. Planning process control calls for a firm to concen trate its organizational control system on the actual mechanics and processes the firm uses to develop strategic plans. This approach is based on the assumption that if the firm controls its strategies, desired outcomes are more likely to result. Each business unit may then concentrate more on implementing its strategy, rather than worrying as much about the outcomes of that strategy.
Inimplementing planning process control, whenever a unit fails to meet its goals, the head of that unit meets with the firm's executive committee. The meeting focuses on how the original
380
PART 3 • MANAGING INTERNATIONAL BUSINESS
MAP 14.1
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goals were set and why they were not met. Throughout the meeting the emphasis is on the process that was followed that led to the unsuccessful outcome. The goal is to correct shortcom ings in the actual process each unit uses. For example, a unit might have based its unmet sales goals on outdated market research data because there were insufficient funds for new market research. Planning process control would focus not on correcting the sales shortfall but on enabling more accurate forecasting in the future.
There are clear and import.ant linkages between strategic control and organizational control in an international firm. When a finn adopts a centralized form of organization design, strategic control is facilitated as a logical and complementary extension of that design. When a finn uses a decentralized design, strategic control is not as logically connected with that design.30 A de
centralized design gives foreign affiliates more autonomy and freedom while making it more difficult for the parent to maintain adequate control. The challenge facing managers of the parent is to foster the autonomy and freedom that accompany a decentralized design while simultane ously maintaining effective parent control of operating subsidiaries.
For a large international firm organizational control must be addressed at multiple levels. At the highest level the appropriate form of organization design must be maintained for the entire firm.At a lower level the appropriate form of organization design must be maintained for each subsidiary or operating unit. The firm also must ensure that these designs mesh with each other.
Operations Control
The third level of control in an international firm is operations control. Operations control fo cuses specifically on operating processes and systems within both the firm and its subsidiaries and operating units. The firm also may need an operations control system for each of its manu facturing facilities, distribution centers, and administrative centers.
Strategic control often involves time periods of several years, while organizational control may deal with periods of a few years or months. Operations control, however, involves relatively short periods of time, dealing with components of performance that need to be assessed on a reg ular-perhaps daily or even hourly-basis. An operations control system is also likely to be much more specific and focused than strategic and organizational control systems.
For example, a manufacturing firm may monitor daily output, scrappage, and worker produc tivity within a given manufacturing facility, while a retail outlet may measure daily sales. A firm that wants to increase the productivity of its workforce or enhance the quality of its products or services primarily will use operations control to pursue these goals. Operations control usually focuses on the lower levels of a firm, such as first-line managers and operating employees.
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PART 3 • MANAGING INTERNATIONAL BUSINESS
CHAPTER 14 • INTERNATIONAL ORGANIZATION DESIGN AND CONTROL 383
Consider Aldi, a German grocery chain. Although people in the United States are used to sprawling, full-line supermarkets that carry everything from apples to zippers, typical European grocery stores tend to be smaller and less service oriented, to carry fewer product lines, and to charge higher prices.Aldi has prospered in Europe through an elaborate operations control sys tem that relies heavily on cost control and efficiency.Aldi stores do not advertise or even list their numbers in telephone directories. Products are not unpacked and put on shelves but instead are sold directly from crates and boxes. The no-frills stores are also usually located in areas where rents are low. Customers bring their own sacks (or pay Aldi 5¢ each for sacks), bag their own purchases, and rent shopping carts for 25¢ (refunded if the customer returns the cart to the storage rack). Aldi does not accept checks or coupons and provides little customer service, but this austere approach allows the firm to charge rock-bottom prices. Aldi has effectively trans ferred its control methods to its U.S. operation. The result? Aldi's net profit margins and sales per square foot in the United States are about double the industry nonn. With over 800 stores op erating in 27 states (primarily from Kansas to the east coast), Aldi has become one of the coun try's most profitable grocery chains.
Managing the Control Function in International Business
Given the obvious complexities in control, it should come as no surprise that international firms must address a variety of issues in managing the control function. To effectively manage con trol, managers need to understand how to establish control systems, what the essential tech niques for control are, why some people resist control, and what managers can do to overcome this resistance.
Establishing International Control Systems
As illustrated in Figure 14.8, control systems in international business are established through four basic steps: (1) set control standards for performance, (2) measure actual perfonnance,
(3) compare performance against standards, and (4) respond to deviations. There obviously will be differences in specificity, time frame, and sophistication, but these steps are applicable to any area and any level of control. "Bringing the World into Focus" describes how Ford has set goals and implemented a new control system targeting international growth.
SET CONTROL STANDARDS FOR PERFORMANCE The first step in establishing an international control system is to define relevant control standards.A control standard in this context is a tar get, or a desired level of the perfonnance component the firm is attempting to control. Control standards need to be objective and consistent with the firm's goals. Suppose a firm is about to open its first manufacturing facility in Thailand. Itmight set the following four control standards
BRINGING THE WORLD INTO FOCUS FORD AIMS HIGH
During the global recession of 2008-2009 the already-shaky Big Three U.S. automakers were especially hard hit. But while General Motors and Chrysler relied on government support to survive, Ford managed to stay afloat on its own. One reason for Ford's success was that under the leadership of Alan Mulally the
firm was already well along its way to regaining its profitability. Among other things, Mulally has helped Ford reduce its overhead, boost productivity, and overhaul its product line to appeal more to younger auto buyers. For instance, while Ford SUVs still are the firm's largest selling products, new entrants like the Focus, Flex, Fusion, and Escape Hybrid have all been big hits.
But one area where Ford still lags is its international sales. In 2010, for example, Ford derived 54 percent of its revenue from North America but only 15 percent from China, currently the world's largest auto market. But in mid-2011 Mulally made it clear he intended to
change things. Specifically, he announced a new corporate goal of increasing Ford's global sales by 50 percent by the end of 2015. He further specified that the Asia-Pacific region, India, and Africa were expected to account for most of the revenue growth. Much of the growth is expected to come from sales of small cars. For instance, one of Indias' hottest-selling cars is the subcompact Ford
Figo, recently named the 2011 India Car of the Year.
To make sure the firm stays on track, Mulally also put into place a series of annual growth goals for each region. These annual goals, in turn, will play a major control function. Each year area managers will be largely judged based on their contributions to the overall 50 per cent growth goal. Their contributions, in turn, will impact their salary and other rewards for the year. Will this all work? Well, Mulally has so far done a masterful job of rebuilding the iconic Ford brand so few
people want to bet against him.31
384 PART 3 • MANAGING INTERNATIONAL BUSINESS
FIGURE 14.8
Steps in International Control
..·......·
STEP 1
SET CONTROL STANDARD FOR PERFORMANCE
Establish a desired level of performance for
which mana11ers are held accountable
..........."
.:...........
STEP 2
STEP 3
MEASUREAcrUAL PERFORMANCE
Dwelop a valid melllft or the performance
component being controlled
.
.
.....
...........
.:...........
CoMPARE PERFORMANCE AGAINST STANDARD
Compare measured performance (from step 2) asainst the ori11inal control standard (from step 1)
.
............
STEP 4
..
.....
..·..........
RESPOND TO DEVIATIONS
Respond to outcomes that result from comparing the control standard to actual performance
..... ..... .....
. .
CHANGE CoRRECT MAINTAIN STAN.DARD DEVIATION SrATUS Quo
.. . .
..... ..... .....
...........
for the plant: (1) Productivity and quality in the new plant will exceed the levels in the firm's existing plants. (2) After an initial break-in period 90 percent of all management positions in the plant will be filled by local managers. (3) The plant will obtain at least 80 percent of its re sources from local suppliers. (4) The plant will produce and sell 100,000 units per month.
These control standards help provide a road map for managers involved in opening and run ning the new plant Managers can readily see that sales, productivity, and quality are critical and that the firm expects them to hire and buy locally. Where did these standards come from? The
firm set them on the basis of its objectives for the new plant, its experience with similar opera tions, and its overall goals.32 The second and third goals may have resulted from a conscious strategy of reducing political risk or the parent firm's desire to be a good corporate citizen in
each country in which it operates.
MEASURE ACTUAL PERFORMANCE The second step in creating an international control system is to develop a valid measure of the performance component being controlled. Some elements of performance are relatively easy and straightforward to measure; examples are actual output, worker productivity, product quality, unit sales, materials waste, travel expenses, hiring prac tices, and employee turnover. Considerably more difficult are measuring the effectiveness of an advertising campaign to improve a firm's public image, measuring ethical managerial conduct, and measuring employee attitudes and motivation. For the firm introducing a new product in a
CHAPTER 14 • INTERNATIONAL ORGANIZATION DESIGN AND CONTROL 385
foreign market, performance may be based on the actual number of units sold. For the new plant in Thailand used as an example earlier, performance would be assessed in terms of sales, pro ductivity, quality, and hiring and purchasing practices,
COMPARE PERFORMANCE AGAINST STANDARDS The third step in establishing an international control system is to compare measured performance (obtained in step 2) against the original control standards (defined in step 1).Again, when control standards are straightforward and ob jective and performance is relatively easy to assess, this comparison is easy. For example, com paring actual sales of 80,437 units against a target sales level of 100,000 is simple. Likewise, comparing the actual hiring of 20 Thai managers against a target of hiring 19 Thai managers is also straightforward. When control standards and performance measures are less concrete, however, comparing one against the other is considerably more complicated. Suppose a manager established a control standard of "significantly increasing market share" and now finds that mar ket share has increased by 4 percent Is this significant? Obviously, this comparison is ambigu ous and difficult to interpret. Managers are advised to use specific and objective standards and performance measures whenever possible.
RESPOND TO DEVIATIONS The fourth and final step in establishing an international control sys tem is responding to deviations observed in step 3. One of three different outcomes can result when comparing a control standard and actual performance: the control standard has been met, it has not been met, or it has been exceeded. For example, if the standard is sales of 100,000 units, actual sales of 99,980 units probably means the standard has been met, whereas sales of only 62,300 units means it has not been met Actual sales of 140,329 units clearly surpasses the standard
Depending on the circumstances, managers have many alternative responses to these out comes. If a standard has not been met and a manager believes it is because of performance deficiencies by employees accountable for the performance, the manager may mandate higher per formance, increase incentives to perform at a higher level, or discipline or even terminate those employees. Of course, the actual course taken depends on the nature of the standard versus per formance expectations, the context within which the failure has occurred, and myriad other factors, Sometimes standards are not met for unforeseen reasons, such as unexpected competition, an un expected labor strike, unpredictable raw material shortages, or local political upheavals. On the other hand, the original control standard may have been set too high to begin with, in which case it may be possible to adjust the standard downward or to make additional allowances.
386 PART 3 • MANAGING INTERNATIONAL BUSINESS
Finally, actual performance occasionally exceeds the control standard. Again, there may be multiple explanations: Managers and employees may have ex.pended extra effort, the original standard may have been too low, or com.petitors may have bungled their own opportunities. In this case managers may need to provide additional rewards or bonuses, adjust their control stan dards upward, or aggressively seize new opportunities.
Kenya Power & Lighting (KP&L) often finds it must react to deviations between control standards and actual performance in its distribution of electric power throughout Kenya. Businesses and municipalities in Kenya are more heavily dependent on hydroelectric power than are those in most other countries. Whenever Kenya experiences inadequate rain or prolonged dry spells (see Map 14.2), KP&L's water-powered electric plants have to ration electricity. Twice in the last 20 years, the government-run utility has been forced to enact nationwide rationing to ensure adequate power. It also has used smaller-scale rationing on numerous other occasions. During each rationing period continued supplies of electricity were guaranteed to hospitals and security installations, whereas big businesses were required to cut energy consumption by 30 percent, and homeowners were subjected to two-hour blackout periods each day. As soon as energy supplies reached an acceptable limit, rationing was phased out.
Essential Control Techniques
Because of the complexities of both the international environment and international firms them selves, those firms rely on a wide variety of different control techniques, as "Bringing the World into Focus" suggests. We do not describe them allbut introduce a few of the most important ones.
MAP 14.2
Kenyan Rainfall
K E N Y A
Eldorett Mt. Kenya
l7
u • ,058 ft.
al1Ur•u Thika
Nairobi I
AVERAGE ANNUAL RAINFALL IN INCf.IES
· Over 80
• 60 to80
• 40 tt160
• 20 to 40
• 10 to 20
Under 10
Although power supplies in many reg ons of Africa are a bit erratic, they do have enormous potential. For example, some
experts believe Africa possesses 40 percent of the world's hydroelectric potential.
Kenya mirrors the larger continent in that its temperature and rainfall vary greatly--
from a hot, humid coastal strip to the semidesert of the northeastern highlands. Most of Kenya's farming takes place in the fertile grasslands bordering Lake Victoria.
ACCOUNTI NG SYSTEMS Accounting is a comprehensive system for collecting, analyzing, and communicating data about a firm's financial resources. Accounting procedures are heavily regu lated and must follow prescribed methods dictated by national governments. Because of these regulations, investors, government agencies, and other organizational stakeholders within a given country can better compare the financial performance of different organizations, have a common understanding of what various kinds of information mean, and place reasonable trust in the accuracy and meaning of that information. International firms face more difficulties in estab lishing their accounting procedures than do purely domestic firms. International businesses must develop accounting systems to control and monitor the performance of the overall firm and each division, operating unit, or subsidiary. These systems enable managers to keep abreast of the fi nancial performance of every part of the firm.
Problems can arise when the accounting standards or procedures of the countries in which a firm operates are incompatible with each other, as is frequently the case. Each subsidiary must maintain its accounting records in accordance with local procedures and denominate its ac counts in the local currency to satisfy local government regulations and meet the needs of local managers. Yet to meet the needs of investors, regulators, and tax collectors in the parent' s home country, the parent needs the local accounting records of each subsidiary translated into the par ent's currency using accounting procedures dictated by the parent's home country. The parent further must decide whether it will evaluate the performance of its subsidiaries and the sub sidiaries' managers using the local cmrency, the parent's home country currency, or some com
bination of the two.
PROCEDURES Policies, standard operating procedures, rules, and regulations all help managers carry out the control function. For example, a firm may establish a policy that at least 75 per cent of the raw materials it buys must be obtained from local suppliers. This policy guides plant managers in making purchasing decisions and allocations. A firm also could have a rule that each employee transferred to a foreign unit must attain basic proficiency in the local language within six months. This rule would serve as an ongoing and easily referenced measure of what is expected.
Firms often alter their procedures in the face of adversity. For example, during the crisis in volving the Firestone/Ford recall of defective tires both firms had to deviate from their estab lished procedures in order to satisfy both their customers and government regulators.Firestone replaced tires at no cost instead of prorating costs based on tread wear. Ford replaced many Firestone tires with more expensive Michelin tires at no extra cost At times both firms even refused to sell new tires to unaffected customers to maintain a sufficient inventory for the recall program.
PERFORMANCE RATIOS International firms also use various performance ratios to maintain con trol. A performance ratio is a numerical index of performance that the firm wants to maintain. A common performance ratio used by many firms is inventory turnover. Holding excessive inven tory is dysfunctional because the inventory ties up resources that could otherwise be used for different purposes and because the longer materials sit in inventory, the more prone they are to damage and loss. Based on a firm's unique circumstances, it may decide it does not want any thing to sit in inventory for more than 30 days.Turnover rates are likely to differ among different types of retailers and among different countries depending on the amount of floor space, the sophistication of inventory management systems, and the reliability of suppliers. For example, because rents are so high in Tokyo, convenience stores like 7-Eleven have little room for stor age. They must maintain high inventory turnover ratios to remain profitable. Often vendors resupply the 7-Elevens four or five times a day to ensure that goods are available for customers. Sophisticated electronic linkages allow the stores to communicate their inventory needs to sup pliers on a real-time basis.
British Airways also uses performance ratios to maintain control of its airline operations. One key ratio for an airline is the percentage of seats filled on its flights.If this ratio falls below a set minimum, the firm looks into alternative ways to generate passenger demand, such as dis counts or additional promotional activity. Another ratio of interest to British Airways is the
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388 PART 3 • MANAGING INTERNATIONAL BUSINESS
BRINGING THE WORLD INTO FOCUS GETIING BACK TO BASICS
While Japan's economy has been in the doldrums for the past few years,some experts believe that the problems facing many Japanese corporations are not related to economic woes, but rather to poor management. "Ninety percent of the Japanese economy is made up of domestic companies that are low-tech and
low-productivity," claims consultant Masao Hirano. However,a few pio
neering firms are starting to demonstrate that "by becoming better fo cused, [Japanese companies] can survive and even prosper," says analyst Satoru Oyama.
Cosmetics maker Shiseido held too much inventory and had overly high expenses, leading to a $550 million loss over two years. But rather than call for a government bailout, Shiseido executives focused on fun damental improvements. Better technology allowed them to control and forecast inventory more effectively. They cut costs throughout the corporation and curtailed their product line. After Shiseido returned to profitability. chief logistics officer Seiji Nishimori boasted, "We're show ing other Japanese companies that it's possible to reverse a slide."
Canon,the world's leading maker of copiers and laser printers, has also taken a disciplined approach to performance improvement. CEO Fujio Mitarai replaced every manufacturing line at the firm's 29 Japanese factories with small,self-directed teams of half a dozen workers that do the work previously done by 30 laborers. The teams discovered more ef ficient inventory management techniques, and Canon was able to close 20 of its 34 parts warehouses. "Manufacturing is where most of the costs lie." Mitarai claims. Canon earnings improved by 53 percent en abling Mitarai to conclude, "We're much more profitable today because of these changes."
The success of notable high performers such as multina tional Toyota has caused Japanese firms to realize the benefit of global cost competitiveness. High-tech companies are aban doning manufacturing and switching attention to R&D to coun-
teract an influx of inexpensive electronics from China, Taiwan, and Korea. For example, NEC has reduced its commitment to the unprof itable semiconductor chip-making business, and focused on more lucrative cell phones and software. Sharp, too, has given up on low margin PC monitors and refocused its operations on innovative products such as liquid crystal displays for PDAs. Sony is working on revolutionary new computer chips while reducing its investment in consumer electronics.
All three companies say they now listen to their consumers more closely. "We were proud of our great technology. and [we] just pumped out products without thinking of our customers' needs," says NEC director Kaoru Tosaka. "Now,we're emphasizing efficiency, profits, and clients."
These companies are an exception in Japan, where so-called zom bie firms are bailed out over and over again by a government that fears unemployment and chaos if businesses fail. But the zombies need to hear the lessons these stellar firms have learned: Watch in ventory. Cut costs where possible. Use information technology more effectively. Simplify product lines. Experiment with new ways of or ganizing. Shut down money-losing businesses. Choose areas where the firm can add value. Listen to customer feedback. If the zombies could adopt these suggestions, the Japanese-and the rest of the world-would surely benefit.33
percentage of its flights that arrive and depart on time. Ifthis ratio slips too much, managers try
to identify and eliminate the reasons for delays.
Behavioral Aspects of International Control
Regardless of how well formulated and implemented a control system may be, managers must understand that human behavior plays a fundamental role in how well control works. Essential to this understanding is being aware that some people resist control. Also essential is recogniz ing that resistance can be minimi 7.ed. Although resistance to control is likely to exist within most cultures, its magnitude will vary across cultures.
RESISTANCE TO CONTROL People in international firms may resist control for various reasons. One potential reason is overcontrol, whereby the finn tries to exert more control over individuals than they think is appropriate.34 By definition control regulates and constrains behavior; most
people accept this within what they perceive to be reasonable limits (with the limits being par tially determined by the cultural context). However, if attempts to control behavior begin to ex ceed those perceived limits, people may balk and begin to resist. For example, when Disney first opened Disneyland Paris, it attempted to apply the same grooming standards for its employees there that it uses in the United States, banning beards and mandating trimmed hair. French em ployees saw this as overcontrol. They complained about the standards, vented their grievances in the media, and occasionally ignored the standards altogether. The resistance grew to the point where Disney eventually backed off and developed standards that were more acceptable to its European employees.
People also may resist control because it may be inappropriately focused; that is, the finn may inadvertently be trying to control the wrong things. For example, if a firm places so much
emphasis on lowering costs that quality is compromised and employee morale suffers, employ ees may become indignant and attempt to circumvent the control system. Whistler Radar, a U.S. firm, encountered this problem in its assembly of radar det.ectors. Its control system focused on quality control only at the end of the assembly process. When managers discovered that 100 of the firm's 250 employees were doing nothing more than reworking defective units assembled by the other 150, the managers realized that control should have been focused on quality through out the assembly process.
Finally, people may resist control because control increases their accountability. In the absence of an effective control system employees may be able to get by with substandard performance because managers do not understand what the employees are doing relative to what they should be doing. For example, if a foreign-branch manager has to submit finan cial performance data only annually, the manager may not do as good a job on a day-to-day basis as the firm would like. If the firm were to request performance reports more fre quently, it could increase the manager' s accountability. At the same time, if the firm de mands too much reporting, it becomes prone to overcontrol. Thus, it is important to strike a balance between appropriate and acceptable levels of accountability without edging over into overcontrol.
OVERCOMING RESISTANCE TO CONTROL Although there are no guaranteed methods for elim inating resistance to control, there are a few that can help minimize it. The appropriate method, as well as its likely effectiveness, will vary by culture. In many cultures, for in stance, one effective way to overcome resistance to control is to promote participation. Involving employees who are going to be affected by control in its planning and implementa tion will enable them to better understand the goal of the control system, how and why the system works, and how their jobs fit into the system. As a result, the employees may be less prone to resist it.
Another method to reduce resistance that works well in most cultures is to create a control system that has a clear appropriate focus and that creates reasonable accountability without overcontrolling. GlaxoSmithKline, the U.K.'s largest pharmaceutical firm, uses this method. The firm is very receptive to allowing scientists to explore ideas and possibilities for new prescrip tion drugs, thereby motivating those scientists to pursue ideas and creating an atmosphere of cre ativity and innovation. At the same time Glaxo managers carefully monitor the progress of new product development. If costs start becoming excessive or if development begins to lag too far behind the competition, managers may choose to curtail a given project. Employees see this as a
viable strategy because it gives them the opportunity to pursue their scientific interests while simultaneously keeping costs in check.35
A firm also may overcome resistance to control by providing a diagnostic mechanism for addressing unacceptable deviations. Suppose a plant manager reports productivity levels far be low those expected by headquarters. Top managers should avoid jumping to a potentially wrong conclusion, such as simply assuming the manager has done a poor job and reprimanding the manager, or worse. Instead they first should learn why the poor performance occurred. For example, it may have resulted from the corporate purchasing manager's having bought inferior materials for the plant.
Again, it is important to account for cultural factors when planning how to deal with resist ance to control People from hierarchical cultures, for example, may be reluctant to actively par ticipate in planning and implementing control because they view such activities as the domain of management.
Finally, behavioral aspects of control can be approached and managed from a cultural per spective. A firm may attempt to replace behaviors resulting from national culture with those more consistent with the firm's corporate culture. Being careful to hire people with values, expe riences, work habits, and goals that are consistent with the firm's can go a long way toward this goal. Managers of Japanese-owned automobile factories in the United States, for example, spend thousands of dollars per worker selecting U.S. employees who will be receptive to the Japanese way of working as Chapter 19's closing case, "Training for the World,"reports. Further refine ments in behavior can be expedited through training and management development programs designed to impart the firm's cultural values and business methods.
CHAPTER 14 • INTERNATIONAL ORGANIZATION DESIGN AND CONTROL 389
390 PART 3 • MANAGING INTERNATIONAL BUSINESS
Summary
Organization design is the overall pattern of structural compo nents and configurations used to manage the total organization. The most appropriate design of an organization depends on several factors. Managers also realize that organization design is an evolutionary process. When a firm first begins to operate internationally, it usually must change its design in one or more ways. Such change may involve following the corollary ap proach, then establishing an export department, and then creat ing an international division.
After a firm has established a significant international presence, it will usually develop a global organization design. The most common approaches to global organization design are the global product design, the global area design, the global functional design, the global customer design, and the global matrix design. Each of these approaches has unique ad vantages and disadvantages, and one approach may be more suitable for some firms than for others. Indeed, many firms ac tually use a hybrid global design best suited to their needs.
MNCs also must make other decisions related tD organiza tion design. Particularly important are those regarding central ization versus decentralization, the role of subsidiary boards of directors, and which coordination mechanisms to use.Informal management networks are especially powerful mechanisms for coordination.
Control is the process of monitoring and regulating activi ties of a firm so that a targeted component of performance is achieved or maintained. For an MNC control must be man aged both at the corporate level and within each subsidiary. Most MNCs usually address control at three levels. Strategic control monitors how well an international firm formulates strategy and then goes about trying to implement it Financial control is an especially important area of strategic control in international business, because poor financial control can crip ple a firm's ability to compete globally. Organizational control
involves the design of the firm. Three basic forms of organiza tional control are responsibility center control, generic strate gic control, and planning process control. Operations control focuses specifically on operating procedures and systems within the firm.
When international firms establish control systems, they first set control standards, then measure actual performance. Next they compare performance against the standards and respond to deviations. Essential control techniques include accounting systems, procedures, and performance ratios. International managers also need to understand behavioral aspects of control, such as why people resist control and how to overcome that resistance. Cultural factors are an important ingredient in addressing behavioral aspects of control.
Review Questions
1. What are some of the initial impacts of international activ ity on organization design?
2. What is the global product design? What are its strengths
and weaknesses?
3. What is the global area design? What are its strengths and weaknesses?
4. What is the global functional design? What are its
strengths and weaknesses?
5. What is the global customer design? What are its strengths
and weaknesses?
6. What is the global matrix design? What are its strengths
and weaknesses?
7. What are the three levels of control in international business?
8. Why is financial control so important?
9. What are the four basic steps in establishing an interna tional control system?
Questions for Discussion
1. If a new organization starts out with a global perspec tive, will it necessarily experience any of the initial impacts of international activity on organization design? Why or why not?
2. Do managers of international firms need to approach
organization design differently from their counterparts in domestic firms? Why or why not?
3. How do the global product, area, functional, and customer approaches to organization design differ? How are they similar?
4. Why is a global matrix design almost always transitional in nature?
5. Why is control an important management function in inter national business?
