978-1259317224 Chapter 10 Part 1

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International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

Module 10: Organizational Design and Control

Use this Instructor Guide to incorporate the unique content of this product and facilitate your

Face-to-Face, Online, and Hybrid classes. This guide has been designed to be interactive and links

have been created within each title in the Table of Contents to guide you to each section. You

can also link back to the main page by clicking at the button at the bottom of each page.

Here is the Table of Contents highlighting what you’ll be able to find to support you in teaching

this module:

YOUR CONTENT

Summary

Learning Objectives

Key Terms & Key Terms with Definitions

Content Outline

CONNECT TOOLS FOR CLASS P R EPARATION

SmartBook

What is SmartBook?

How Does SmartBook Help You/Students?

How to assign SmartBook to ensure students come to class prepared?

ENGAG EMENT & APPLICATION (FACE TO FACE & ONLINE & HYBRID)

BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS

IB IN PRACTICE

GLOBAL DEBATE

GET THAT JOB! FROM BACKPACK TO BRIEFCASE

Critical Thinking Questions

Global Edge Research Task

MiniCase

Bonus Activities

Video Suggestions

Team Exercises

Supplemental Lecture

Tools & Tricks

Controversial Issues

Teaching Suggestions

International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

CONNECT TOOLS FOR ASSESSEMENT OF LEARNING

Interactive Applications

Assigning Interactives

Time-Saving Hints:

Connect Content Matrix

International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

YOUR CONTENT

SUMMARY

Organizational design is closely aligned with an organization’s strategy and approach to operation. For

international business, 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) concludes the module.

LEARNING OBJECTIVES

LO 10-1 Explain why the design of organizational structure is important to international

companies.

LO 10-2 Identify the various organizational dimensions managers must consider when selecting

organizational structures.

LO 10-3 Explain how decision making is allocated between parent and wholly owned subsidiaries

in an international company.

LO 10-4 Discuss how an international company can maintain control of a joint venture or of a

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

LO 10-5 List the types of information an international company’s units around the world need to

report to the parent company.

International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

KEY TERMS AND DEFINITIONS

Affiliates (p. 270)

Companies controlled by other companies, but less-than-majority

owners may exercise control by a variety of means, both those

involving stock ownership and those involving nonownership

mechanisms.

Horizontal corporation (p. 268)

A form of organization characterized by lateral decision processes,

horizontal networks, and a strong corporate-wide business

philosophy.

Hybrid corporation (p. 264)

A structure organized by more than one dimension at the top level.

International division (p. 261)

A division in the organization that is at the same level as the

domestic division and is responsible for all non-home-country

activities.

Matrix organization (p. 264)

An organizational structure composed of one or more superimposed

organizational structures in an attempt to mesh product, regional,

functional, and other expertise.

Matrix overlay (p. 266)

An organization in which top-level divisions are required to heed

input from a staff composed of experts of another organizational

dimension in an attempt to avoid the double-reporting difficulty of a

matrix organization but still mesh two or more dimensions.

Organizational design (p. 260)

A process that determines how a company should be organized to

ensure its worldwide business activities are integrated in an efficient

and effective manner.

Organizational structure (p. 259)

The way an organization formally arranges its domestic and

international units and activities, and the relationships among these

components.

Reengineering (p. 267)

Redesigning organizational structure, hierarchy, business systems,

and processes in order to improve organizational efficiency.

Strategic business unit (SBU)

(p. 266)

A self-contained 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.

Subsidiaries (p. 270)

Companies controlled by other companies (known as parent

companies) through ownership of enough voting stock to elect a

majority of the voting members on the company’s board of directors.

Transfer pricing (p. 272)

Pricing established for transactions between members of the

enterprise.

Virtual corporation (p. 267)

An organization that coordinates economic activity to deliver

value to customers using resources outside the traditional

boundaries of the organization.

International Business

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Instructor Guide to Module 10

CONTENT OUTLINE

The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY

TERMS learners will need to take away from the course and a notation of when to use POWERPOINT

SLIDES with LECTURE NOTES to drive home teaching points.

LO 10-1

Explain why the design of organizational structure is important to

international companies

• Introduction

• How does organizational design impact international

companies?

Key Terms:

• Organizational design

Lecture Outline and Notes:

I. Introduction

A. Organizations exist to enable a group of people to effectively coordinate their collective activities

and accomplish objectives

1. Organizational structure is the way an organization formally arranges its

domestic and international units and activities and the relationships among

these components

2. A company’s structure helps determine where formal power and authority will

be located within the organization

3. Creating and developing the structure of an international company (IC) over

time are fundamental tasks of senior management

4. Management also need to structure activities within their area of responsibility

in a manner consistent with the company’s overall structure

II. How does organizational design impact international companies?

1. Organizational design is a process that determines how a company should be organized to ensure

its worldwide business activities in an efficient and effective manner.

As suggested in Figure 10.1, structures and systems must be consistent with each other, with the

environmental context in which the organization is operating, and with the strategy the

company is using

The size of the organization and the complexity of its business operations also influence its

organizational design

The structure of an IC must be able to evolve over time to respond to change and efficiently and

effectively reconfigure the way its competencies and resources are integrated within and

across the IC’s various units

Structure follows strategy, but the reverse is also true

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

Organizational design concerns:

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

labor

Coordinate departmental activities to meet overall objectives

International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

Four dimensions to consider in designing the IC:

i. Product and technical expertise

ii. Geographic expertise

iii. Customer expertise

iv. Functional expertise

LO 10-2

Identify the various organizational dimensions managers must

consider when selecting organizational structures

I. Evolution of the International Company Structure

A. International division structure

B. International product structure

C. Geographic region structure

D. Global functional structure

E. Hybrid organizational structures

F. Matrix organizations

G. Matrix overlay

H. Strategic business units

I. Current organizational trends

1. Reengineering

2. Virtual corporation

3. Horizontal corporation

J. Requirements for the future of international

companies

Key Terms:

• International division

• Hybrid organization

• Matrix organization

• Matrix overlay

• Strategic business unit

(SBU)

• Reengineering

• Virtual corporation

• Horizontal corporation

Lecture Outline and Notes:

I. Evolution of international company structure

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

setting up production facilities.

2. International division structure

1. 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 (Figure 10.2)

Use of an international division structure can result in conflicts within the firm

Challenges of managing the international division effectively as the size of this division and the

range of products, markets, and activities increase can be substantial, causing rising

inefficiency

As the company’s overseas operations increase in importance and scope, ICs often eliminate

international divisions in favor of worldwide organizational structures based on product,

region, function, or customer classes. At second, third and still lower levels, these 4

characteristics provide the basis for subdivisions

Figure 10.3 illustrates the international structure stages of typical evolution of IC structures

Management that makes these changes will realize:

Greater capability to develop competitive strategies to confront global competition

Lower production costs thorough worldwide standardization and manufacturing

realization

International Business

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Instructor Guide to Module 10

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Enhanced technology transfer and resource allocation

3. International product structure

1. The product division (Figure 10.4) 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

4. Geographic Region structure

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

CEO (Figure 10.5).

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, and also by firms with diverse products, each having different product requirements,

competitive environments, and political risks.

The disadvantage of an organization divided into geographic regions is that each region must have

its own product and functional specialists; although duplication of area specialists is

eliminated, duplication of product and functional specialists is necessary.

Production coordination across regions presents challenges, as does global product planning. To

address these, ICs often place specialized product managers on the headquarters staff.

Although these managers have no line authority, they do provide input to corporate decisions

concerning products

5. Global functional structure (Figure 10.6)

1. Few companies organized by function at top level.

Narrow and highly integrated product mix is common to this form.

6. Hybrid organizational structures

1. Hybrid organizations use a mixture of organizational forms at the top level (Figure 10.7).

Such combinations are often the result of a regionally organized company having introduced a new

and different product line that management believes can best be handled by a worldwide

product division

A mixed structure may also be used when an IC is selling to a sizable, homogeneous class of

customers.

7. Matrix organizations

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

maintaining clear lines of authority.

In an organization of two dimensions, such as area and product (Figure 10.8), both the geographic

area managers and the product managers will be at the same level, and their responsibilities

will overlap. Note that the country managers are responsible to both the area managers and

the product-line managers.

Disadvantages of the matrix form and its multiple reporting relationship have kept most

worldwide companies from adopting it.

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International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

8. Matrix overlay

1. The matrix overlay is an organization in which top-level divisions are required to heed input

from a staff composed of experts of another organizational dimension in an attempt to avoid

the double-reporting difficulty of a matrix organization but still mesh two or more dimensions.

The matrix overlay attempts to address the problems of the matrix structure by requiring

accountability of all functions in the organization while avoiding the management

complications of a pure matrix structure.

9. Strategic business units (SBUs)

1. An organizational form in which product divisions are defined as if they were distinct,

independent businesses makes use of strategic business units (SBUs), self-contained business

entities, each 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 lines.

If a product must be modified to suit different markets, a worldwide SBU may be divided into a

few product/market SBUs serving various markets or groups of countries.

10. Current organizational trends

1. Reengineering

a. Reengineering involves redesigning organizational structure, hierarchy, business systems,

and processes in order to improve organizational efficiency.

Reengineering is often accompanied by a significant reduction in middle management

staff, restructuring of work processes across functional departments, and

improvement in the speed and quality of strategy execution.

Virtual corporation

a. A virtual corporation, also called a network corporation or a modular corporation, is an

organization that coordinates economic activity to deliver value to customers using

resources outside the traditional boundaries of the organization; it relies to a great extent

on third parties to conduct its business.

Outsourcing once was used for downsizing and cost reduction, but now companies are

using it to obtain specialized expertise they don’t have but need in order to serve

new markets or adopt new technology.

The virtual corporation permits greater flexibility than other corporate structures.

Virtual corporations form a network of dynamic relationships that allows them to

take advantage of the competencies of other organizations in order to respond

rapidly to changing circumstances.

Disadvantages include the potential to reduce management’s control over the

corporation’s activities; networks are vulnerable to the opportunistic actions of

partners, including cost increases, unintended “borrowing” of technical and other

knowledge, and departure from the relationship at inappropriate times.

For employees, virtual organization may replace the security of long-term employment

and ever-increasing salaries with the insecurity of a global market.

International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

Horizontal corporation

a. A form of organization characterized by lateral decision processes, horizontal networks,

and a strong corporate-wide business philosophy.

In many companies, teams are drawn from different departments to solve a problem

or deliver a product.

The horizontal organization has been characterized as “antiorganization” because its

designers are seeking to remove the constraints imposed by the more

conventional organizational structures. Employees worldwide create, build, and

market the company’s products through a carefully cultivated system of

interrelationships.

Proponents claim lateral relationships spark innovation and new product development

and place more decision-making responsibility in the hands of middle managers

and other skilled professionals, who do not have to clear each detail with higher–

ups.

The objective of the horizontal organization form is to substitute cooperation and

coordination, which are in everyone’s interest, for strict control and supervision.

Pursued effectively, this approach can help develop international communities of

skilled workers that create and exploit valuable intangible assets.

11. Requirements for the future of international companies

1. 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.

LO 10-3

Explain how decision making is allocated between parent and

wholly owned subsidiaries in an international company

• where decisions are made in wholly owned subsidiaries

• standardization of the company’s products and

equipment

• competence of subsidiary management and

headquarters’ reliance on it

• size and age of the IC

• headquarters’ willingness to benefit the enterprise

at the subsidiary’s expense

• the subsidiary’s frustration with its limited power

Key Terms:

• Subsidiaries

• Affiliates

• Transfer pricing

Lecture Outline and Notes:

I. Where Decisions are made in Wholly owned subsidiaries

1. 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. Subsidiaries are companies controlled by other companies (known as parent companies)

International Business

Geringer, McNett, Minor, Ball

Instructor Guide to Module 10

through ownership of enough voting stock to elect a majority of the voting members on the

company’s board of directors.

Affiliates are companies controlled by other companies, but less-than-majority owners may

exercise control by a variety of means, both those involving stock ownership and those

involving nonownership mechanisms.

2. Standardization of the company’s products and equipment

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

market and conditions of the host country.

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

source options and simplify procurement and maintenance.

3. Competence of Subsidiary Management and Headquarters’ Reliance on It

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

Moving subsidiary managers into parent operations or into other subsidiaries widens the

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

Moving parent managers into subsidiaries widens their knowledge of subsidiary problems to which

the parent might not be sensitive otherwise.

Transferring managers gives them opportunity to learn HQ policies and problems if implementing

policies at subsidiary level first-hand.

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

information.

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

information.

4. Size and age of the IC

1. 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.

At the same time, delegation and decentralization allow for local adaptation, so there may be a

tension in this area.

5. Headquarters’ willingness to benefit the enterprise at the subsidiary’s expense

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

decision.

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

advantage; subsidiary management is not thrilled with loss of control.

When deciding which subsidiary gets an order for goods, HQ decides on a number of factors

including cost, operational issues, financial factors, and governmental pressure.

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; this demands greater HQ coordination and

control.

HQ decides price and profit allocation to the subsidiary that contributes most to overall IC

profitability and will get to book the profit.