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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.
11
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.
13
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.
15
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.
