Chapter 7

Chapter 7
Organizational Designs for
Multinational Companies

Copyright© 2007 Thomson Learning All rights reserved

Learning Objectives

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

Copyright© 2007 South-Western/Thomson Learning All rights reserved

Learning Objectives

•• See the links between multinational strategies and
See the links between multinational strategies and
structures
structures
•• Understand the basic mechanisms of organizational
Understand the basic mechanisms of organizational
coordination and control
coordination and control
•• Know how coordination and control mechanisms are
Know how coordination and control mechanisms are
used by multinational companies
used by multinational companies
•• Understand the need for knowledge management
Understand the need for knowledge management
systems within organizations
systems within organizations

Organizational Design

•• How organizations structure subunits and coordination
How organizations structure subunits and coordination
and control mechanisms to achieve strategic goals
and control mechanisms to achieve strategic goals
•• Basic questions:
Basic questions:
-- How to divide work among the organization’s
How to divide work among the organization’s
subunits?
subunits?
-- How to coordinate and control the efforts of the units
How to coordinate and control the efforts of the units
created?
created?


Nature of Organization Design

•• In small organizations, there is little reason to divide
In small organizations, there is little reason to divide
work
work
-- Everyone does the same thing and everything
Everyone does the same thing and everything
•• As organizations grow, there is a need to divide work
As organizations grow, there is a need to divide work
and the organization
and the organization
•• There is no one best organizational design
There is no one best organizational design


The Basic Functional
Structure

•• Departments perform separate business functions
Departments perform separate business functions
such as marketing or manufacturing
such as marketing or manufacturing
•• Simplest of organizations
Simplest of organizations
•• Most smaller organizations have functional structures
Most smaller organizations have functional structures


Exhibit 8.1: A Basic Functional
Structure


The Basic Functional
Structure

•• Works best when organization has:
Works best when organization has:
-- Few products
Few products
-- Few locations
Few locations
-- Few types of customers
Few types of customers
-- A stable environment
A stable environment
-- Routine technology
Routine technology


The Basic Product and
Geographic Structures

•• Product structure: departments or subunits based on
Product structure: departments or subunits based on
different product groups
different product groups
•• Geographic structure: departments or subunits based
Geographic structure: departments or subunits based
on geographic regions
on geographic regions


Geographic Structures (cont.)

•• Usually less efficient than the functional organization
Usually less efficient than the functional organization
•• Allows a company to serve customer needs that vary
Allows a company to serve customer needs that vary
by region or product
by region or product


Exhibit 8.2: Product Structure


Exhibit 8.3: A Basic
Geographic Structure


Geographic Structures

•• Managers choose product structures when:
Managers choose product structures when:
•• Product or an area sufficiently unique to require
Product or an area sufficiently unique to require
focused functional efforts on one type of product or
focused functional efforts on one type of product or
service
service
•• Hybrid structure: mixes functional, geographic, and
Hybrid structure: mixes functional, geographic, and
product units
product units


Organizational Structures to
Implement Multinational
Strategies
•• When company first goes international, it seldom
When company first goes international, it seldom
changes structure.
changes structure.
-- Passive exporter
Passive exporter
•• Licensing has little impact on domestic structures.
Licensing has little impact on domestic structures.
•• However, when international sales become more
However, when international sales become more
central, structures need to be changed.
central, structures need to be changed.


Export Department

•• Coordinates and controls a company’s export
Coordinates and controls a company’s export
operations
operations
•• Export department
Export department
-- Is created when exports become significant
Is created when exports become significant
-- Deals with international sales of all products
Deals with international sales of all products


Exhibit 8.4: A Functional
Structure with an Export
Department


Foreign Subsidiaries

•• Subunit of the multinational company that is located in
Subunit of the multinational company that is located in
another country
another country
•• Types of foreign subsidiaries
Types of foreign subsidiaries
-- Minireplica subsidiary: smaller version of the parent
Minireplica subsidiary: smaller version of the parent
company
company
•• Uses the same technology and producing the
Uses the same technology and producing the
same products as the parent company
same products as the parent company
-- Transnational subsidiary: has no companywide form
Transnational subsidiary: has no companywide form
or function
or function
•• Each subsidiary contributes what it does best
Each subsidiary contributes what it does best


•• Many subsidiaries are neither minireplicas nor
Many subsidiaries are neither minireplicas nor
transnationals
transnationals
•• May take different forms or functions
May take different forms or functions



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


International Division

•• Larger and has greater responsibilities compared to
Larger and has greater responsibilities compared to
the export department
the export department
•• Responsible for managing exports, international sales,
Responsible for managing exports, international sales,
and foreign subsidiaries
and foreign subsidiaries
•• Usual step after export department
Usual step after export department
•• Deals with all products
Deals with all products
•• Manages overseas sales force and manufacturing
Manages overseas sales force and manufacturing
sites
sites

Exhibit 8.5: An International
Division


Strategies
•• Reasons to abandon the international division
Reasons to abandon the international division
-- Diverse products overwhelm capacities of
Diverse products overwhelm capacities of
multinational
multinational
-- Not close enough to local markets
Not close enough to local markets
-- Cannot take advantage of global economies of scale
Cannot take advantage of global economies of scale
or global sources of knowledge
or global sources of knowledge


Strategies
•• Several options available to deal with these
Several options available to deal with these
shortcomings
shortcomings
-- Worldwide product structure
Worldwide product structure
-- Worldwide geographic structure
Worldwide geographic structure
-- Matrix structure
Matrix structure
-- Transnational-network structure
Transnational-network structure


Worldwide Geographic
Structure

•• Has geographical units representing regions of the
Has geographical units representing regions of the
world
world
-- Prime reason is to implement a multidomestic or
Prime reason is to implement a multidomestic or
regional strategy
regional strategy
-- Organizational design with maximum geographic
Organizational design with maximum geographic
flexibility
flexibility
-- Separate divisions for large market countries
Separate divisions for large market countries


Exhibit 8.6: Royal Vopak
Geographic Structure


Worldwide Product Structure

•• Worldwide product structure
Worldwide product structure
-- Gives product divisions responsibility to produce and
Gives product divisions responsibility to produce and
sell their products or services throughout the world
sell their products or services throughout the world
-- Implements strategies that emphasize global
Implements strategies that emphasize global
products
products
-- Provides an efficient way to organize and centralize
Provides an efficient way to organize and centralize
the production and sales of similar products
the production and sales of similar products


Exhibit 8.7: Worldwide
Product Structure


Hybrids

•• Both worldwide product structure and worldwide
Both worldwide product structure and worldwide
geographic structure have advantages and
geographic structure have advantages and
disadvantages
disadvantages
-- Product structure: supports global products
Product structure: supports global products
-- Geographic structure: emphasizes local adaptation
Geographic structure: emphasizes local adaptation
•• Multinationals often want both abilities
Multinationals often want both abilities
•• Use hybrids
Use hybrids


Front-back Hybrid Structure

•• The front side has units based on geography to
The front side has units based on geography to
provide a multidomestic or regional focus
provide a multidomestic or regional focus
•• The backside has units based on product groups to
The backside has units based on product groups to
capture global economies of scale in R&D and
capture global economies of scale in R&D and
production
production


Exhibit 8.8: Tetra Pak’s Front-
Back Hybrid Structure


Worldwide Matrix Structures

•• Symmetrical organization with equal emphasis on
Symmetrical organization with equal emphasis on
-- Worldwide product groups and
Worldwide product groups and
-- Regional geographical divisions
Regional geographical divisions
•• Geographic divisions focus on national responsiveness
Geographic divisions focus on national responsiveness
and product divisions focus on finding global
and product divisions focus on finding global
efficiencies
efficiencies


Worldwide Matrix Structures

•• Balances the benefits produced by area and product
Balances the benefits produced by area and product
structures
structures
•• Creates equal lines of authority for products and areas
Creates equal lines of authority for products and areas
-- Works best with near equal demands from both
Works best with near equal demands from both
sides
sides
•• Requires extensive resources for communication and
Requires extensive resources for communication and
coordination
coordination
•• Requires middle and upper level managers with good
Requires middle and upper level managers with good
human relations skills
human relations skills

Exhibit 8.9: Worldwide Matrix
Organization


Matrix Structures

•• Problems emerging with worldwide matrix structures
Problems emerging with worldwide matrix structures
-- Slow decision making process
Slow decision making process
-- Too bureaucratic
Too bureaucratic
-- Too many meetings and too much conflict
Too many meetings and too much conflict


Matrix Structures (cont.)

•• Result
Result
-- Some companies have abandoned their matrixes
Some companies have abandoned their matrixes
and returned to product structures
and returned to product structures
-- Other companies have redesigned their matrix
Other companies have redesigned their matrix
structures to be more flexible with speedier decision
structures to be more flexible with speedier decision
making
making


The Transnational-Network
Structure

•• Newest solution to the complex demand of being
Newest solution to the complex demand of being
locally responsive and taking advantage of global
locally responsive and taking advantage of global
economies of scale
economies of scale
•• Combines functional, product, and geographic
Combines functional, product, and geographic
subunits
subunits
-- Dispersed subunits
Dispersed subunits
-- Specialized operations
Specialized operations
-- Interdependent relationships
Interdependent relationships

Structures

•• Has no symmetry or balance in its structural form
Has no symmetry or balance in its structural form
•• Resources, people, and ideas flow in all directions
Resources, people, and ideas flow in all directions
•• Nodes or centers in the network coordinate product,
Nodes or centers in the network coordinate product,
functional, and geographic information
functional, and geographic information


Structures

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

Exhibit 8.10: Geographic Links
in the Philips Transnational
Structure


Exhibit 8.11: Product Links in
the Same Organization


Components of the
Transnational-Network
Structure
1. Dispersed subunits: subsidiaries located anywhere
1. Dispersed subunits: subsidiaries located anywhere
where they can most benefit the company
where they can most benefit the company
2. Specialized operations: subunits specializing in
2. Specialized operations: subunits specializing in
particular product, research areas, or marketing areas
particular product, research areas, or marketing areas
3. Interdependent relationships: continuous sharing of
3. Interdependent relationships: continuous sharing of
information and resources by dispersed and
information and resources by dispersed and
specialized subunits
specialized subunits


Metanational Structure

•• Large entrepreneurial multinational
Large entrepreneurial multinational
•• Can tap into pockets of innovation, technology, and
Can tap into pockets of innovation, technology, and
markets located around the world
markets located around the world
•• Develops extensive systems to encourage
Develops extensive systems to encourage
organizational learning and entrepreneurial activities
organizational learning and entrepreneurial activities


Metanational Characteristics

•• Nonstandard business formulas for any local activity
Nonstandard business formulas for any local activity
•• Looking to emerging markets as sources of knowledge
Looking to emerging markets as sources of knowledge
and ideas
and ideas
•• Creating a culture supporting global learning
Creating a culture supporting global learning
•• Extensive use of strategic alliances to gain knowledge
Extensive use of strategic alliances to gain knowledge
for varied sources
for varied sources


Characteristics of
Metanationals

•• High levels of trust between partners to encourage
High levels of trust between partners to encourage
knowledge sharing
knowledge sharing
•• Centerless organization that moves strategic functions
Centerless organization that moves strategic functions
away from headquarters to major markets
away from headquarters to major markets
•• Decentralization of decision making to managers who
Decentralization of decision making to managers who
serve key customers and strategic partners
serve key customers and strategic partners


Micro-Multinational Company

•• Micro-multinational companies: smaller organizations
Micro-multinational companies: smaller organizations
that take advantage of the Web to operate globally
that take advantage of the Web to operate globally
from Day One
from Day One


Micro-Multinational Company

•• Characteristics
Characteristics
-- They operate as born-global firms from the day they
They operate as born-global firms from the day they
are founded, and they operate everywhere around
are founded, and they operate everywhere around
the world
the world
-- They are willing to start operations and hire workers
They are willing to start operations and hire workers
from around the world and from where it makes the
from around the world and from where it makes the
most sense to do so
most sense to do so
-- They are more likely to use various state-of-the-art
They are more likely to use various state-of-the-art
technology for communication purposes
technology for communication purposes

Multinational Strategy and
Structure: An Overview

•• Most companies support early internationalization
Most companies support early internationalization
efforts with export department
efforts with export department
•• Depending on globalization strategy, they evolve into
Depending on globalization strategy, they evolve into
product or geographic structure
product or geographic structure
•• Pressure for local adaptation and global efficiencies
Pressure for local adaptation and global efficiencies
result into matrix or transnational-network
result into matrix or transnational-network
•• No company reaches any pure form—use hybrids
No company reaches any pure form—use hybrids


Exhibit 8.12: Multinational
Strategy, Structure, and
Evolution


Control Systems

•• Control system: helps link the organization vertically,
Control system: helps link the organization vertically,
up and down the organizational hierarchy
up and down the organizational hierarchy
•• Basic functions of control system
Basic functions of control system
-- Measure or monitor the performances of subunits
Measure or monitor the performances of subunits
-- Provide feedback to subunit managers regarding the
Provide feedback to subunit managers regarding the
effectiveness of their units
effectiveness of their units


Coordination Systems

•• Coordination system: horizontal organizational links
Coordination system: horizontal organizational links
-- Provide information flows among subsidiaries
Provide information flows among subsidiaries


Design Options for Control
Systems

•• Four types of control systems
Four types of control systems
-- Output control system
Output control system
-- Bureaucratic control system
Bureaucratic control system
-- Decision-making control
Decision-making control
-- Cultural control system
Cultural control system


Output Control Systems

•• Assesses the performance of a unit based on results,
Assesses the performance of a unit based on results,
not on the processes used to achieve these results
not on the processes used to achieve these results
-- Profit center: unit controlled by its profit or loss
Profit center: unit controlled by its profit or loss
performance
performance


Bureaucratic control system

•• Focuses on managing behaviors within the
Focuses on managing behaviors within the
organization
organization
-- Budgets: financial targets for expenditures
Budgets: financial targets for expenditures
-- Statistical reports: information to top management
Statistical reports: information to top management
about nonfinancial outcomes
about nonfinancial outcomes
-- Standard operating procedures (SOPs): rules and
Standard operating procedures (SOPs): rules and
regulations of appropriate behavior
regulations of appropriate behavior


Control and Coordination
Systems

•• Decision-making control: level in the organizational
Decision-making control: level in the organizational
hierarchy where managers have the authority to make
hierarchy where managers have the authority to make
decisions
decisions
•• Cultural control system: uses organizational culture to
Cultural control system: uses organizational culture to
control behaviors and attitudes of employees
control behaviors and attitudes of employees


Exhibit 8.13: Use of Control
Mechanisms in Multinational
Organizational Structures


Design Options for
Coordination Systems

•• Textual communication: e-mail, memos, and reports
Textual communication: e-mail, memos, and reports
•• Direct contact: face-to-face interaction of employees
Direct contact: face-to-face interaction of employees
•• Liaison roles: part of a person’s job in one department
Liaison roles: part of a person’s job in one department
to communicate with people in another department
to communicate with people in another department
•• Task forces: temporary teams created to solve a
Task forces: temporary teams created to solve a
particular organizational problem
particular organizational problem
•• Full-time integrators: cross-unit coordination is the
Full-time integrators: cross-unit coordination is the
main job responsibility
main job responsibility

Teams

•• Teams: permanent unit of the organization
Teams: permanent unit of the organization
-- Global virtual teams: groups of people from different
Global virtual teams: groups of people from different
parts of the world who work together by using
parts of the world who work together by using
information and communication technologies such
information and communication technologies such
as intranets, web meetings, WIKI’s, e-mails and
as intranets, web meetings, WIKI’s, e-mails and
instant messaging
instant messaging


Problems with Global teams

•• Team members’ native languages are different
Team members’ native languages are different
•• Differences in cultural background
Differences in cultural background
•• Global teams dominated by headquarters’
Global teams dominated by headquarters’
perspectives and experiences
perspectives and experiences
•• Major challenges in building team collaboration
Major challenges in building team collaboration
•• Challenges in meeting programmatic objectives
Challenges in meeting programmatic objectives


Steps to ensure the global
teams collaborate to function
effectively
•• Build relationships and trust
Build relationships and trust
•• Devote significant attention to project planning and
Devote significant attention to project planning and
hold project progress meetings regularly
hold project progress meetings regularly
•• Cultural, language, and active-listening training
Cultural, language, and active-listening training
•• Be aware of team-development stage
Be aware of team-development stage


Knowledge Management

•• Knowledge management: refers to the systems,
Knowledge management: refers to the systems,
mechanisms, and other design elements of any
mechanisms, and other design elements of any
organization to ensure that the right form of knowledge
organization to ensure that the right form of knowledge
is available to the right individual at the right time
is available to the right individual at the right time


Knowledge Management

•• Types of knowledge
Types of knowledge
•• Explicit form:found in records or other repositories of
Explicit form:found in records or other repositories of
information
information
•• Tacit knowledge: represents the knowledge that
Tacit knowledge: represents the knowledge that
usually resides within employees and is dependent
usually resides within employees and is dependent
on the organization’s culture and context
on the organization’s culture and context


Exhibit 8.14: Knowledge Management
Barriers


Knowledge Management:
Steps to Develop Successful
System
•• Identify/support knowledge activists
Identify/support knowledge activists
•• Make knowledge management part of the general
Make knowledge management part of the general
strategy
strategy
•• Provide financial and human resources support
Provide financial and human resources support
•• Emphasize importance of communication
Emphasize importance of communication
•• Celebrate success
Celebrate success


Conclusion

•• Good strategies do not guarantee success – also need
Good strategies do not guarantee success – also need
good implementation
good implementation
•• Need the right organizational designs to carry out
Need the right organizational designs to carry out
strategies
strategies
•• Chapter reviews basic organizational structures and
Chapter reviews basic organizational structures and
discusses international organizational designs and
discusses international organizational designs and
structures
structures
•• Chapter also discusses knowledge management
Chapter also discusses knowledge management
systems
systems

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