978-0077606121 Chapter 10 Lecture

Type

Quiz

Book Title

International Business: The Challenge of Global Competition 13th Edition

ISBN 13

978-0077606121

April 7, 2019

CHAPTER 10

1 Organizational Design and Control

2 Learning Objectives

3LO10-1 Explain why the design of organizational structure is important to international companies.

4LO10-2 Discuss the organizational dimensions that must be considered when selecting

organizational structures.

5LO10-3 Discuss the various organizational forms available for structuring international companies.

6LO10-4 Explain why decisions are made where they are among parent and subsidiary units of an

international company.

7LO10-5 Discuss how an international company can maintain control of a joint venture or of a

company in which the IC owns less than 50 percent of the voting stock.

8LO10-6 List the types of information an international company needs to have reported to it by its

units around the world.

NOTE:

International business statistics, data, and facts about countries, regions, governments, and companies can

change rapidly and dramatically. We recommend that you update this information regularly.

As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the

International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles,

videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to

the ever-changing topic of international business.

iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video

service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop

to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and

discussion questions. Key concepts for each video are identified to save you time! Visit

www.mhhe.com/ball, or talk to your McGraw-Hill sales representative for more information about iGlobe

or the IB Newsletter.

9 Overview

Organizational design is integrated with strategic planning. For IB, firms may (1) have an international

division, (2) be organized by product, function or region, or (3) have a mixture of them (hybrid form such

as matrix). A matrix form tries to attain a balance between product and regional expertise, but its

disadvantages have led some firms to use a matrix overlay in combination with the traditional product,

regional or functional form. Managements are now examining two developing organizational forms, the

virtual corporation and the horizontal corporation.

Because the operations of an IC are far flung around the world and because events in one country may

affect the entire enterprise, two needs are information and control.

When decisions must be made which affect more than one unit of the IC, balance must be struck between

the interests of the parent company, the subsidiary companies, and the enterprise as a whole.

Control, decisions, and measurements are easier when the subsidiary is 100 percent owned than when it is

less than 100 percent owned or when an independent joint venture company is involved. In a JV, control

capability can be supported by maintaining control over necessary technology, staffing the key positions,

providing the capital and marketing the product.

A focus on reporting issues (financial, technological, political and economic) and managing in a world out

of control conclude the chapter.

10 Suggestions and Comments

1. Organizational design is abstract, so helping learners appreciate its influence often gives them a

new approach to thinking about business.

2. To point out the importance for an IC to control activities of its units and efforts around the world,

review the control issues Nike faced in its outsourcing, with child labor and worker abuse (can

search this on the Web, for example). Similarly, it is possible to discuss a variety of other

companies that have encountered control issues with their own or their suppliers’ operations, such

as Apple’s recent challenges arising from worker complaint, suicides, and other issues in its

Chinese supplier, Foxconn Technology Group.

3. Discuss the relationship between national culture and different means of control.

4. Discuss reasons up-to-date, accurate information is necessary for successful IC operations.

12 Student Involvement Exercises

1. Have students analyze why certain types of decisions should be made by the IC parent company

while others should be made by the subsidiary and other IC units.

2. Have students report on sources of the information that needs to be reported by IC units to the

parent.

3. Have students analyze an IC to identify its organizational structure, strategic control issues and

methods used in the company. Toyota and its recent (2010/2011) automobile recalls is a good

example here.

14 Guest Lecturers

1. Your school’s management and organization people could speak on control and information.

2. Executives from ICs located near you could add to those subjects.

3. Virtual organizations may be described by local IC managers.

Worldview

The focus of this Worldview explores “Life in a Virtual Organization.” The virtual organization,

Accenture Ltd., is an example of new-order 21st Century organizations operating without a “bricks &

mortar” HQ and formal branch facilities. They outsource various functions and professional services

through a virtual existence. Asking questions such as, “Is this the wave of the future for the

corporation?,” “What do you think might be the greatest strengths and weaknesses of working in a virtual

organization like this?,” and “Do you think you would enjoy working in a virtual organization? Why or

why not?,” will serve as a starting point for class discussion on organizational structure and design,

control in organizations, and how these organizational elements are changing as technology provides the

infrastructure for virtual environments.

Global Debate

The focus of this Global Debate explores “GlobalSoft: Profiting from International Transfer

Pricing.” Transfer pricing in international companies has recently received increasing attention in the

business and popular press, and this Global Debate is intended to help shed some light on why transfer

pricing has become the focus of so much attention. The discussion provides a vignette of a hypothetical

company that is using transfer pricing to alter its corporate tax bill by over $500 million per year. This

brief scenario provides an interesting base to explore a range of different financial, political, ethical, and

other issues associated with a management decision such as transfer pricing practices, and can allow the

discussion to consider these issues from a variety of different perspectives. Asking questions such as, “If

you were a shareholder in GlobalSoft, would you be supportive of the company’s approach to transfer

pricing? Why or why not?,” “If you represented the government of Ireland, would you be supportive of

GlobalSoft’s approach to transfer pricing? Why or why not?,” and “If you represented the U.S.

government, or the government of one of the other nations in Europe, would you be supportive of

GlobalSoft’s approach to transfer pricing? Why or why not?” can serve as the foundation for a lively

discussion.

The Global Path Ahead

The focus of this The Global Path Ahead explores a student’s decision to expand his international and

cross-cultural experience base by initially building homes for homeless in Mexico and then pursuing an

affordable international internship in China, where he taught English. The discussion addresses some of

the challenges he faced, actions he took to help facilitate a successful immersion in the Chinese culture,

and recommendations for how to improve the rewards of international experiences. The Resources for

Your Global Career section provides a range of useful suggested resources for understanding the structure

of international companies, including different organizational design options, including both wholly

owned and jointly owned options.

16 Mini-Case, “SemiConnected Inc. – Must It Reorganize?”

Students will have various ideas and organizational structures for SemiConnected, Inc. One option is for

the president to restructure the company into a matrix overlay. The structure of the company could

include product divisions with an international division on staff. All decisions must require the

International Division to be notified about all proposed product changes and given an opportunity to

discuss them with the appropriate product division. The International Division and the product division

must be in agreement in matters affecting sales outside the United States.

17 Lecture Outline

I. Opening Section

The opening section examines Kraft’s restructuring. This narrative is a good way to walk in to the

general organizational design area. Note the close ties between organizational design and strategy.

Remind your students that the strategic planning process assures that managers have a clear

understanding of the company’s mission, a vision for how to achieve that mission, and an

understanding of how they will compete with other companies. Organization design is the next step

and there are different organizational structures based on the firm’s level of international involvement.

Organizational structure sets control mechanisms into place and control is

necessary for effective management response to ever-changing market conditions, globally or locally.

II. What Is Organizational Design, and Why Is It Important for International Companies?

Organizing normally follows planning. In designing the organizational structure, management

faces two concerns: (1) finding the most effective way to take advantage of specialization of labor

and (2) coordinating a firm’s activities to enable it to meet its overall objectives. (Fig. 10.1)

A. Organizational Design Concerns

1. Finding the most effective way to departmentalize for efficiencies from specialization of

labor

2. Coordinate departmental activities to meet overall objectives

3. Four dimensions to consider in designing the IC:

a. Product and technical expertise

b. Geographic expertise

c. Customer expertise

d. Functional expertise

B. Evolution of the International Company

1. Companies often enter foreign markets by exporting, then forming sales companies and

finally setting up production facilities.

2. As its foreign involvement changes, the firm’s organization often changes. Each domestic

product division may be responsible. When firm begins to invest overseas, it might form an

international division that often is organized on a regional basis (Fig. 10.2).

3. As overseas operations increase in importance, some firms eliminate international divisions

and establish worldwide organizations based on product, region or function. In some cases,

customer classes are also a top-level dimension. Paths for IC design and evolution are shown

in Fig. 10.3.

4. Some firms eliminate the international division and organize operations based on product,

region or geography, function, or customer classes and at lower levels organize based on

process, national subsidiary, and international or domestic dimensions. Management that

makes these changes will realize:

a. Greater capability to develop competitive strategies to confront global competition

b. Lower production costs thorough worldwide standardization and manufacturing

realization

c. Enhanced technology transfer and resource allocation

5. Global Corporate Form – Product (Fig. 10.4)

The product division is responsible for global line and staff operations. Each division has

regional experts. This organizational form avoids duplication of product experts common in

a company with an international division; it creates a duplication of area experts. Some firms

have a group of regional experts in an international division that advises the product divisions

but has no line authority over them.

6. Global Corporate Form – Geographical Regions (Fig. 10.5)

These firms put responsibility for all activities under area managers who report directly to

the CEO. This form is used for both multinational and global companies. It is popular with

companies that manufacture products with low or stable technological content that require

strong marketing ability. Product coordination across regions presents problems and

management often places specialized product managers on the headquarters staff to provide

input to corporate decisions regarding products.

7. Global Corporate Form – Function (Fig. 10.6)

Few companies organized by function at top level. Narrow and highly integrated product mix

is common to this form.

8. Hybrid Forms (Fig. 10.7)

Hybrid organizations use a mixture of organizational forms at the top level.

9. Matrix Organizations (Fig. 10.8)

Evolves from management’s attempt to mesh product, regional and functional expertise while

maintaining clear lines of authority.

10. Problems with the Matrix – managers from each dimension of the matrix must agree on a

solution. This leads to sub-optimal compromises, delayed responses and power politics. The

problem goes to higher organizational levels when managers cannot agree.

11. Matrix Overlay – because of these problems, some firms have maintained their organization

based on product, region or function, but have built into the structure accountability for other

organizational dimensions. Firms organized by product might have regional specialists in a

staff function, with the requirement that they have input to product decisions.

12. Strategic Business Units (SBUs) – business entities with 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 lines.

C. Changes in Organizational Forms

The rapidly changing business environment is pressuring managements to look for organizational

forms that will enable their firms to act more quickly, reduce costs, and improve product quality.

D. Current Organizational Trends

Two organizational forms are now receiving the attention of many CEOs: the virtual corporation

and the horizontal corporation.

1. Virtual Corporation (network corporation) enables companies to come together quickly to

take advantage of a specific marketing opportunity. These alliances enable each member to

concentrate on its core competency. Benefits include obtaining specialized expertise globally,

flexible working practices, and global networking (modular corporations). Virtual

corporations take advantage of lower inventories through enhanced supply chain

management. A virtual corporation can have superior capabilities, flexibility, and market

response to those of any organizational form. Disadvantages include reduced management

control and employees can feel less job security due to rapid global market changes.

2. Horizontal Corporation. A form of organization characterized by lateral decision processes,

horizontal networks, and a strong corporate business philosophy. The idea is to substitute

cooperation and coordination for strict control and supervision. Teams are created to solve

specific problems or deliver product to market. Lateral relationships may enhance innovation

and new-product development.

E. Corporate Survival in the 21st Century

Managers will make greater use of the dynamic network structure that breaks down major

functions of the firm into small companies coordinated by a small-sized headquarters

organization. Business functions such as marketing and accounting may be outsourced. Firms

must learn how to be large and entrepreneurial. Small is not better; focused is better.

III. Control – successful firms use controls to put plans into effect, evaluate plan effectiveness, make

corrections, and evaluate and reward or correct executive performance. Subsidiaries and affiliates

are interchangeable terms.

A. Where to Make Decisions in Wholly-Owned Subsidiaries?

Every successful company uses controls to put its plans into effect and to evaluate and reward or

correct executive performance. An element of controls is whether decisions are made by the

parent company, the subsidiaries, or by a combination.

1. Product and Equipment

a. For profit reasons, subsidiaries may favor product and equipment designed specially for

the market and conditions of the host country.

b. The parent company may prefer product and equipment be standardized in order to

multiply source options and simplify procurement and maintenance.

2. Competence of Subsidiary Management and Headquarters’ Reliance on It. With greater

confidence, more decisions will be delegated or left to subsidiaries.

a. Moving Executives Around

i. Moving subsidiary managers into parent operations or into other subsidiaries

widens the executives’ knowledge of the system and knowledge of each other.

ii. Moving parent managers into subsidiaries widens their knowledge of subsidiary

problems to which the parent might not be sensitive otherwise.

iii. Transferring managers gives them opportunity to learn HQ policies and problems

if implementing policies at subsidiary level first-hand.

b. Understanding Host Country Conditions

HQ needs to understand host country’s conditions and relies on subsidiary managers for

information.

c. How Far Away Is the Host Country?

The greater the distance between HQ and subsidiary, HQ relies more on subsidiary

manager information.

3. Size and Age of the IC.

a. As the company grows, it can hire more specialists, experts, and experienced executives.

The longer a company has been an IC, the more likely it will have a number of

experienced executives who will have served abroad and will have knowledge of

company policies and will have developed confidence with international activities. More

decisions will tend to be made at parent headquarters.

b. At the same time, delegation and decentralization allow for local adaptation, so there may

be a tension in this area.

4. Benefiting the Enterprise to the Detriment of a Subsidiary

A small loss for a subsidiary can result in a greater gain for the total IC and HQ makes

this decision.

a. Moving Production Functions

i. HQ may move production factors from one country to another to gain financial or

competitive advantage.

ii. Subsidiary not thrilled with loss of control.

b. Which Subsidiary Gets the Order?

HQ decides on a number of factors including cost, operational issues, financial factors,

and governmental pressure.

c. Multicountry Production

i. If one market is too small for economies of scale, HQ may have specific countries

make a single component(s) that all other markets can use.

ii. This demands greater HQ coordination and control.

d. Which Subsidiary Books the Profit?

i. HQ decides price and profit allocation to the subsidiary that contributes most to

overall IC profitability and will get to book the profit.

ii. Transfer pricing is the price for transactions between members of the same enterprise.

e. Subsidiary Frustration. An objective of all businesses is to obtain and keep able, loyal

executives. If subsidiary managers are not allowed to make important decisions,

regarding their operations, they may resign or become hostile toward HQ.

B. Joint Ventures and Subsidiaries Less Than 100 Percent Owned

Control is not as easy as it is with a 100 percent owned subsidiary. The other shareholders or joint

venture partner may make it difficult or impossible for the parent or other partner to make the sort

of decisions mentioned above. There are ways to exercise some control over subsidiaries owned

less than 100 percent.

1. Loss of Freedom and Flexibility. If shareholders outside the IC control the affiliate, they can

block efforts of IC headquarters to move production factors away, fill an export order from

another affiliate or subsidiary, etc. If outside shareholders are a minority and cannot directly

control the affiliate, they can bring pressures on the IC to prevent it from diminishing the

affiliate’s profitability for the enterprise’s benefit. A local joint venture partner is unlikely to

agree with measures that penalize the venture for the IC’s benefit.

2. Control Can Be Had. With less than 50 percent of the voting stock and even with no voting

stock, an IC can have control through:

a. A management contract

b. Control of the finances

c. Control of the technology

d. Putting people from the IC in important executive positions.

C. Reporting

For controls to be effective, all operating units of an IC must provide headquarters with timely,

accurate, and complete reports.

1. Financial - Parent HQ must know the existence and size of a surplus to determine its best use

across the range of options: the subsidiary generating the surplus, another subsidiary or

affiliate, or at the parent company.

2. Technological - New technology is constantly being developed in different countries, and the

subsidiary or affiliate operating in such a country is likely to learn about it before IC

headquarters. If HQ finds the new technology potentially valuable, it can gain competitive

advantage by being the first to contact the developer for a license to use it.

3. Market Opportunities - Affiliates may spot new or growing markets for some product of the

enterprise.

4. Political and Economic - Economic and political conditions in local markets need to be

continually monitored and reported to HQ for quick response or changes as needed.

D. Managing in a World out of Control.

The Internet is the closest thing to a working anarchy the world has ever seen. No one owns or

runs it, protocol and etiquette is minimal, and there are no rules or regulations.

1. MIT’s system of distributed control:

a. do simple things first

b. learn to do them flawlessly

c. add new layers of activity over the results of the simple task

d. don’t change the simple things

e. make the new layer work as flawlessly as the simple,

f. repeat ad infinitum

2. The most successful companies will advance by involving and adapting in this organic,

bottom-up way. Successful leaders will have to:

a. relinquish or relax control,

b. honor error because a breakthrough may be indistinguishable from a mistake,

c. constantly seek disequilibrium

IV. Control: Yes and No

A. Timely and accurate reporting is necessary for successful control within the IC

B. Trends and IT lead to decentralization and de-jobbing

C. Hierarchies are dissolving and leaders often give up direct control to workers trained and

rewarded for coping with evolving tasks.