MGX5181 International Business Strategy Week 12 International Strategy Implementation Organisational structure and control

MGX5181 International Business Strategy

Week 12

International Strategy Implementation

Organisational structure and control

Objectives By the end of this session, students should be

able to:Identify a range of controls available to an

international businessesDemonstrate how organisational design (structure)

impacts on the control process of an international business

Understand how strategy impacts on structure Recognise how centralisation and decentralisation

of decision-making impacts on strategy and structure

Control Options

What are some of the methods used by MNCs to control their international operations:Human resourcesStructureReports and BudgetsVisitsSystems Corporate Culture

Direct Control

Face to Face or personal meetings for the purpose of monitoring operations. Problems are discussed, goals set, and actions taken to improve effectiveness.

Visits by top executives. Staffing practices of MNC’s. Organisation Structure - who reports to whom.

Indirect Control

Reports and other written forms of communication.eg: operating reports such as financial statements

including balance sheets, income statements, cash budgets and financial ratios etc..

Indirect controls are particularly important in international management because of the great cost associated with direct methods.

Factors that make control difficult:

Distance The geographic and cultural distances separating countries

will increase the time, expense, and possibility of error in cross-cultural communications.

Diversity Difficult to set standards or evaluate performance when

market size, type of competition, product, labour cost, currency etc vary between countries.

Factors that make control difficult continued...

Uncontrollablesshareholder’s demands may clash with company

objectives.Government regulations both in host & home countries.

Degree of CertaintyPolitical & economic conditions are subject to rapid

change in some locations. This change impedes the setting of long-term plans.

The Control Sequence

Establish Objectives

Select Control Methods

Set Standards

Locate Responsibility

Establish Communications

Continuous Review of Results

Continuous Correction of all Stages

Reassess Objectives & modify if needed

Review Methods & modify if needed

Reconsider Standards & modify if needed

Evaluate Communications & modify as necessary

Source: Cateora & Hess, 1979

4 Main Elements in Control Process

Setting of standards

The development of monitoring devices or techniques to monitor the performance of the individual or the organisational system.

4 Main Elements in Control Process continued..

The comparison of performance measures obtained from the different monitoring devices to the plans in order to determine if the current state of performance is sufficiently close to the planned state.

Employment of effective action devices to correct significant deviations of performance.

The 4 Major Areas of Control

Foreign Exchange Risks Monitoring Risk Limits Exchange rate forecasting Hedging

Environmental Controls Accounting Standards Tax Requirements Legal Differences Inventory Policies Social Overheads

eg: phone, electricity, education.

The 4 Major Areas of Control continued..

Risk AssessmentPoliticalEconomicLegal

Conflict with Host GovernmentActivitiesEmploymentSocial Controls

eg: Pollution

Factors that influence the type of decision making in subsidiary operationsEncourage centralisation Encourage decentralisationLarge size Small size

Large capital investment Small capital investment

Relatively high importance toMNC

Relatively low importance to MNC

Highly competitive environment Stable environment

Strong volume to unit costrelationship

Weak volume to unit costrelationship

High degree of technology Moderate degree of technology

Strong importance attached tobrand name, patent rights

Little importance attached to brandname, patent rights, etc

Low level of productdiversification

High level of productdiversification

Homogeneous product lines Heterogeneous product lines

Small geographic distancebetween home office andsubsidiary

Large geographic distance betweenhome office and subsidiary

High interdependence betweenunits

Low interdependence between units

Fewer highly competentmanagers in host country

More highly competent managers inhost country

Much experience in internationalbusiness

Little experience in internationalbusiness

The Evolution of Structure

Generally, firms give little thought to structure when first going international.

Typically there is no formal structure until such time that the international operations grow to a level where it becomes critical for a formalised structure to be put in place.

As the organisation’s international operations develop, so to will the need, to modify structure.

The “right” organisational form?

There is not one “right” way to organise. Generally, organisations are not “pure” but mixed. The greater the specialisation of the organisation’s

units, the more difficult it is to co-ordinate their activities.

Organisational structures are never permanent.

HQ

Overseas Operations

Home Country

Company size

Age of industry

Technology

Strategy

Personnel

Organisational

culture

Domestic operation

Products

Diversity

Finances

Ownership

Centralisation

Structure

Factors affecting Multinational Structure

Foreign Factors

National policies

Legal constraints

Distance

Size population

Raw materials

Markets

Health

Climate

Personal values

Language

Religion

Labour skills

Level of industrialisation

Communication

Organisational Structure and its impact on decision making

Stage 1: Exporting and LicensingWhen a firm’s first exposure to

international business comes from

export orders:Business focus remains domestic orientedDomestic structure is organised by function

Manufacturing,Finance,Marketing, etc..

Foreign orders a novelty or means of disposing excess productionAn Export Manager may be appointed Export Manager has little authority in organisation as to resource

allocation

Stage 1: Exporting and Licensing Growth usually haphazard May be supervised by executives with little interest

in these operations Status usually too low to take advantage of

opportunities As problems get out of hand a specialist dept usually

formed, often within Marketing Division If licensing used, staff ideally come from R & D and

employed by Marketing or Export. In practice licensing often remains part of R & D

Two options for emerging international organisations

Marketing Export Production Research and development

Export [Licensing]

Marketing Export Production Research and development

[Licensing] [Licensing]

[Licensing]

Or

(a)

(b)

Stage 1: Exporting and Licensing

Problems Negotiating payments on conditions

unenforceable in another country Appointment of agents or licensees on invalid

conditions Poor distribution, promotion and pricing Failure to monitor market for opportunities

Threats New competition as market grows Increasing government regulation

Typical Organisation of International Co. primarily engaged in exporting

Chief Executive Officer

Production Marketing Finance Personnel R & D

Export Manager



Export Manager

Product Division : Dyestuffs

Product Division : Chemicals

Product Division: Pesticides

Product Division: Plastics

(a) Company with narrow product line

(b) Company with broad product line


Stage 2: Foreign Operations Faced with increased competition from

other producers and higher comparative costs resulting from such things as freight and tariff costs, the exporting firm feels pressed to defend its foreign market position by establishing a production facility inside the foreign market.

Initial operations usually decentralised Centralised management as importance and knowledge

grows Centralising control results in move to an International

Division Structure.

Typical organisation of company at Early Foreign Production Stage



UK Germany Brazil Nigeria Japan

Corporate Staff

Foreign Subsidiaries

etc.


Stage 3: International Division StructureAs the volume of international business grows and becomes

relatively more important the firm typically establishes an international division.

All international activities are grouped into one separate division and assigned to a senior executive at corporate headquarters.

Executive at same level as other divisional & functional heads. Segregates operations into domestic and international.

The International Division Tends to be highly centralized.

Places international operations at the same organisational level as domestic oriented Functional or Product divisions.

Still less autonomous than domestic divisions.

Few executives have international expertise.

The International Division

Benefits Special needs of foreign operations are met.

Provides unified position to company's activities in different countries.

Coordinated financial function, investment decisions made on a global basis.

The International DivisionProblems Separation & isolation of domestic managers from

their international counterparts Problem of whether domestic managers think

strategically on a global basis. Conflict between domestic & international divisions

when international division gets what it considers inadequate technical support and second-rate staff for overseas assignments.

Research & development remains domestically oriented.

International Division Structure



Corporate Staff

Line Management

Domestic Division : Dyestuffs

Domestic Division: Chemicals

Domestic Division: Pesticides

Domestic Division: Plastics

International Division

etc.

Divisions within the International Division

(b) By product

Product Frozen Foods

Product Soup Product Canned Foods

Product Dairy Products

International Division Head

(a) By area

Europe Asia South

America

Africa

International Division

Product Fruit Drinks

Organisational Structure

Stage 4: Global StructuresInternational division is not the

appropriate structure when:The international market is as important as the domestic

market.Senior officials have both foreign and domestic experience.International sales represent 25% to 35% of total sales.Technology used in domestic divisions has far outstripped

that of the international division.

ResultGlobal Product Division; Global Area Division, Global

Functional Division, Matrix Structure or Variation.

GLOBAL PRODUCT STRUCTURE

Under a global product structure, the product divisions are responsible for all manufacture and marketing worldwide.

It is the most common structure used by MNCs. It is used by most consumer-product firms with

a diversity of products.

Global Product Division Structure



Corporate Staff

Line Management

Product Division A

Product Division B

Product Division C

Product Division D

Product Division E

etc.

Europe Africa Latin Far East

America

Indonesia

South Korea

Singapore

Production Marketing Finance

etc.


BenefitsImproved cost efficiency through centralisation of

manufacturing facilities.Ability to balance the functional inputs needed for a product. Ability to react quickly to product-specific problems in the

marketplace.Suited to the development of a global strategic focus in

response to global competition.Allows departments to operate as autonomous profit centres

(SBUs)Adds flexibility to a firm’s structureDevelops broadly trained managers


ProblemsUpheaval as change to this structure usually accompanied by

consolidation of operations and plant closings.Fragments international expertise within the firm because a

central pool of international experience no longer existsProduct managers may focus their attention only on the larger

markets, or only on the domestic, and fail to take the long-term view.

Co-ordination of activities among various product groups operating in the same markets is crucial.

Leads to decreased communication between functional specialists

Contributes to a lack of clarity of functional area responsibilities and a duplication of services

STRATEGIC BUSINESS UNITS

Commonly defined as business entity with a clearly defined market, specific competitors, the ability to carry out its business mission, and a size appropriate for control by a single manager.

Most SBUs are based on product structure lines and if a product must be modified to suit different markets, a worldwide product SBU may be divided into a few product/market SBUs serving various countries or groups of countries.

SBUs do not determine how a company as a whole will organise its internal operations.

Companies with numerous SBUs frequently group them together into another unit called sector or operating unit. Other firms use other names.

GLOBAL AREA STRUCTURE

Under a global area structure geographic divisions are responsible for all manufacture and marketing in their respective areas.

Used by:Companies that have relatively narrow product lines with

similar end uses and end users. • However, expertise is needed in adapting the product and its marketing to

local market conditions.

Popular with companies that manufacture products with a low, or at least stable technological content that require strong marketing ability.

Producers of consumer products such as prepared foods, pharmaceuticals and household products employ this type of organisation.



Corporate Staff

Line Management

North

AmericaEurope Latin

America

Middle

EastAsia

etc.

United Kingdom

France

Germany

Italy

Global Geographic (Area) Division Structure

GLOBAL AREA STRUCTURE Benefits

Organisations can cope with markets that vary widely in respect to product acceptance and operating conditions as authority to make decisions pushed down to regional headquarters.

Allows business units to adapt to local circumstancesTakes advantage of local legal, political and cultural differencesProvides territories as a training ground for general managers

GLOBAL AREA STRUCTURE

ProblemsHard to coordinate production across regions.Requires a large number of general managersLeads to a possible duplication of staff servicesPresents problems for top management control over local operationsDifficult to co-ordinate global product planning.Essential information and experience may not be transferred from one

regional area to another.• To help alleviate these problems management often place specialised product

managers on the headquarters staff.

GLOBAL FUNCTIONAL STRUCTURE

Under a global functional structure, functional areas such as production, marketing, finance and HRM are responsible for the worldwide operations of their own functional area.

Used by:Organisations where both the products and customers

are relatively few and similar in nature e.g. aircraft manufacture; oil refining

Global Functional Structure


Production Personnel Finance MarketingR & D

Production Domestic Production Foreign

Product A

Product B

Product C

Product D

Product A

Product B

Product C

Product D

Marketing Domestic Marketing Foreign

Region A

Region B

Region C

Region D

Region A

Region B

Region C

Region D

Global Functional Process Structure


Exploration Production Transportation MarketingRefining

South China Sea

Bay of Bengal

Persian Gulf

Saudi Arabia

Taiwan

India

Kuwait

Saudi Arabia

North America

Europe and Middle East

Far East and Australia

South China Sea

Bay of Bengal

Persian Gulf

Saudi Arabia

GLOBAL FUNCTIONAL STRUCTURE

ProblemsCo-ordination between manufacturing and marketing in an area is

typically a key problem.Multiple product lines are difficult to manage because of the

separation of production and marketing into departments with parallel lines of authority to the top, and only the CEO can be held responsible for the profits.

• To overcome this, staff functions are created to interact between the functional areas, otherwise the company’s marketing and regional expertise may not be exploited to the fullest extent possible.

Functional structures are not common and can breakdown easily if poor co-operation between functions.

MATRIX ORGANISATIONS

Superimposes an organisation based on another dimension.

Both the area and product managers will be at the same level, and their responsibilities will be at the same level and overlap.Ciba-Geigy, the Swiss chemical and

pharmaceutical MNC, has an organisational structure based on a matrix of 3 dimensions:

• product• function• geographic region



Corporate Staff

Line Management

Europe Tractors Asia

Other area and product divisions

General manager of tractors, Europe

General manager of tractors, Asia

Matrix Structure

MATRIX ORGANISATIONS

Problems: 2-3 managers must agree on a decision.

This can lead to less-than-optimum compromises, delayed responses and power politics.

When agreement cannot be reached, the problem goes higher and takes management away from its duties.

Solution: Matrix overlay.

Matrix Overlay Structure

Attempts to address the problems of the matrix structure by requiring accountability of all functions without the stresses.

If organised by product, may have regionalist specialist in a staff function required to have input to product decisions. May be organised in an international division.

A regional organisation may have product managers on its staff who provide input to regional decisions.

Hybrid FormsA mixture of organisational forms is used at the top

level and may or may not be present at the lower levels.Are the result of a regionally organised company

having introduced a new and different product line that management believes can be best handled by a worldwide product division.

An acquired company with distinct products may be incorporated as a product division even though the rest of the company is regionalised, until management becomes familiar with the operation.

Hybrid Organisational Form

Domestic Division A

CEO

Domestic Division B

International Division Corporate Staff

Pacific Division Products A & B

Worldwide Product Division C

Original Equipment Products A & B

Serves Products A & B in locations other than the Pacific

HORIZONTAL ORGANISATIONS

Sometimes called corporate networking.

Teams can be drawn from different departments to solve a problem or deliver a product, i.e. this occurs in industries such as aerospace, or vehicles.

HORIZONTAL ORGANISATIONS

In a networked firm, employees worldwide create, build and market the company’s products through a carefully cultivated system of inter-relationships.E.g. Marketers in UK speak directly to production in Brazil

without going through head office in Germany. Greater decision making is at middle management level. The idea is to instigate cooperation and coordination instead of strict control and supervision.

Firms that have adopted the horizontal organisation have a strong corporate wide business philosophy that binds employees. IBM and Dow Chemicals are two examples.

Transnational Focus not on structure but on management processes & culture. It recognises that a global organisation has 4 types of managerial

roles:Global business managers

focus on global activity and strategy

Country managers Act as sensors of local opportunities and threats build national resources and contribute to global competitive development

Functional managers Specialists

Corporate Managers Overall leaders and talent developers

Transnational Key is develop matrix of the mind “Think global act local”. Seven key features:

Business units are part of a network reciprocal dependent

Non-dominant dimension All important (e.g area, function, global)

Clear defined operating systems Transparent and multidimensional

Good interpersonal relationshipsInter-unit decision forums

Active participation b/w global and functional managers in SBU boards

Strong corporate valuesCulture of sharing and willingness to collaborate

Documents

MGX5181 International Business Strategy Week 12 International Strategy Implementation Organisational structure and control