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CHAPTER 14
International Organization Design and
Control
Chapter Objectives
After studying this chapter, students should be able to:
1. Define and discuss the nature of international organization design and
identify and describe the initial impacts of international business activity
on organization design.
3. Identify and describe related issues in global organization design.
5. Describe how international firms manage the control function.
LECTURE OUTLINE
OPENING CASE: Lenovo Spreads Its Wings
The opening case describes Lenovo’s effort to expand its operations outside China, and
into the global business arena.
Key Points
• Lenovo was started in Beijing in 1984 by Chinese entrepreneur Liu Chuanzhi,
focusing on the production of personal computers.
• The firm was structured in the traditional functional areas of operations, marketing
and finance, with each unit reporting directly to Chuanzhi.
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• As part of the agreement, senior IBM executives (including Stephen Ward) were to
become part of the Lenovo organization, providing Lenovo with the knowledge and
CHAPTER SUMMARY
Chapter 14 explores the various organization designs that may be adopted by
companies as they pursue their international strategies. In addition, issues related to
global organization design are discussed and the topics of corporate culture and
changes are considered.
THE NATURE OF INTERNATIONAL ORGANIZATION DESIGN
• Organization design, also known as organization structure, is the overall pattern of
structural components and configurations used to manage the total organization.
• A firm, through its design, allocates organizational resources, assigns tasks to its
employees, instructs those employees concerning the firm’s rules, procedures, and
• Organization design changes as a firm expands internationally. At their start, many
firms do not consider international markets in their strategies, and may in fact make
their initial entrance to foreign markets through indirect exporting (see Chapter 12).
As indirect export sales grow, however, firms begin to consider pursuing
opportunities in new markets.
• The Corollary Approach. An initial response to international markets may be
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• As international sales continue to grow, the export department may not be in a
position to handle all of a firm’s international activities. In fact, familiarity with foreign
markets typically becomes more important as foreign sales rise, requiring new
methods of organizing.
GLOBAL ORGANIZATION DESIGNS
• A firm’s international division is typically abandoned in favor of a global organization
design as a firm moves from being domestically oriented with international sales to
being a multinational corporation. A global design must enable a firm to integrate
Global Product Design
• The most common organization design is the global product design, which assigns
responsibility for specific products or product groups to separate operating divisions
within a firm. The design is most appropriate for firms that have diverse product lines
or product lines that are sold in diverse markets.
• Firms typically take on an M-form design (multidivisional) if products are related,
and an H-form design (holding company) if products are unrelated. The text notes
that Unilever has an M-form design, while the Samsung Group has an H form.
Discuss Figure 14.1 here.
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Global Area Design
• The second most common form of global design, the global area design, centers
Flying Solo in China
When most businesses started operating in China, they did so by using a local
partner (this was often required by law). However, changes in rules have prompted
many firms to buy out their Chinese partners or venture into China with wholly owned
subsidiaries. The Chinese subsidiaries allow firms to focus on the needs of local
consumers and the evolving Chinese marketplace.
• The global area design is typically used by firms whose products do not transfer well
across regions. The text notes that Bertelsmann AG and Cadbury-Schweppes PLC
both use the global area design for this reason. Discuss Figure 14.2 here.
• The global area design is also appropriate for firms whose strategy is marketing-
driven rather than based on manufacturing efficiencies, technological innovation, or
Global Functional Design
• Under the global functional design, a firm creates departments or divisions that
have worldwide responsibility for the common organizational functions. Firms that
adopt this design typically have relatively narrow or similar product lines. The design
is sometimes called a U-form design (unity). See Figure 14.3 here.
• There are several advantages to the global functional design. First, firms can
develop and transfer expertise within each functional area. Second, it is possible to
maintain highly centralized control over functional operations. Third, the design
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Global Customer Design
• The global customer design is used when a firm serves different customers or
customer groups, each with specific needs calling for special expertise or attention.
The text notes that Eastman Kodak uses this design. See Figure 14.4 here. The
main advantages of the global customer design are that it allows a firm to use
Global Matrix Design
• The most complex international organization design, a global matrix design, is the
result of superimposing one form of organization design on top of an existing,
different form. Discuss Figure 14.5 here.
• The global matrix design allows firms to draw on the functional and product expertise
Hybrid Global Designs
RELATED ISSUES IN GLOBAL ORGANIZATION DESIGN
Not only must firms select an appropriate organization design, but they must also
contend with issues related to centralization versus decentralization, the role of
subsidiary boards of directors, and coordination issues among the firm’s various
operations.
Centralization versus Decentralization
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Role of Subsidiary Boards of Directors
• In most countries, each corporation, including a wholly owned subsidiary of a foreign
MNC, is required to have a board of directors. A key decision facing MNCs is
whether to view the creation of the subsidiary board of directors as a pro forma
exercise or whether to empower the board with substantial decision-making
authority.
• The advantage of empowering the board is that it promotes decentralization, giving
foreign subsidiaries the ability to respond to changes in the environment quickly. A
Coordination in the Global Organization
• A final step in creating an effective organizational design is addressing the issue of
coordination. Coordination is defined to be the process of linking and integrating
functions and activities of different groups, units, or divisions. The amount of
coordination necessary is a function of the degree of interdependence among the
firm’s divisions and functions.
• There are three levels of interdependence. The highest coordination needs are
found in organizations that have reciprocal interdependence (each division or activity
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THE CONTROL FUNCTION IN INTERNATIONAL BUSINESS PP 14-28
Control is the process of monitoring ongoing performance and making necessary
changes to keep the organization moving toward its performance goals. Control can be
implemented at the strategic, organizational, and operational levels. Discuss Figure
14.7 here.
Strategic Control
• Strategic control is intended to monitor both how well an international business
formulates its strategy and how well it goes about implementing it. Strategic control
allows a company to see how effectively it is achieving its goals and whether it is
• A special managerial position may be created to handle financial control. The
position is usually called a controller. A primary responsibility of an international
controller is managing the inventory of various currencies necessary for the smooth
functioning of the company’s operations.
• In some cases, management of exchange rate fluctuations is centralized at the
corporate parent level, while in other cases it is decentralized to the subsidiary level.
Organizational Control
• Organizational control focuses on the design of the organization itself. It is
important to recognize that a firm’s design may change as its situation (internal and
external environment) changes.
• Responsibility center control is the most common type of organizational control
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• Under the planning process control approach, which can be used in combination
with either responsibility center or generic controls, firms concentrate their
Operations Control
• Operations control focuses specifically on operating processes and systems within
an organization, as well as its individual subsidiaries and operating units. Operations
MANAGING THE CONTROL FUNCTION IN INTERNATIONAL BUSINESS
Establishing International Control Systems
Control systems in international business are established through four basic steps.
The steps are applicable to any area and any level of control. Discuss Figure 14.8
here.
E-WORLD
Ford Aims High
This box discusses the intention of Ford Motor to expand global sales by 50% by the
end of 2015. Most of this growth was being projected to come from the Asia Pacific
region, India and Africa.
• Set Control Standards for Performance. The first step in establishing a control
system is defining relevant control standards, defined here to be a target or desired
• Compare Performance Against Standards. Step Three in the process of
establishing a control system is to compare measured performance (obtained in Step
Two) against the original control standards (specified in Step One). Depending on
how well defined control standards and performance measures are, this step may be
fairly simple or fairly complicated.
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Essential Control Techniques
BRINGING THE WORLD INTO FOCUS
Getting Back to Basics
This section describes efforts by several Japanese firms to turn their businesses
around during Japan’s prolonged economic slump. Firms have been able to succeed
under adverse conditions by taking basic steps such as watching inventory, cutting
costs, simplifying product lines, reorganizing, using technology more efficiently, and
listening to customer feedback (among other steps).
• Accounting Systems. Accounting is a comprehensive system for collecting,
analyzing, and communicating information about an organization’s financial
• Procedures. Most firms use a variety of procedures to maintain effective control.
Moreover, procedures may be changed in some cases, as is illustrated with the
example of the Ford/Firestone tire recall.
Behavior Aspects of International Control
Human behavior plays a role in the effectiveness of control systems. For example,
some people resist control.
• Resistance to Control. Control may be resisted for several reasons. For example,
most people will resist overcontrol (when an organization tries to exert more control
over individuals than they think is appropriate). The text points out that Disney has
been accused of overcontrol.
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Teaching Note:
An interesting discussion can usually be generated at this point by
asking students how control systems should be implemented in a
firm’s foreign operations. Students will probably quickly recognize that, depending
on where an individual stands on Hofstede’s four dimensions, certain types of control
systems are likely to be more effective than others. The question then focuses on
whether the company should utilize control systems that fit better with the host
country culture or the home country culture.
• Overcoming Resistance to Control. Resistance to control can be minimized in
several ways depending on the culture in question. First, if the employees who are
CHAPTER REVIEW
1. What are some of the initial impacts of international activity on organization design?
International activity initially impacts organization design in a very minor way, as most firms
The global product design assigns worldwide responsibility for specific products or product
groups to separate operating divisions within a firm. There are several advantages to the
global product design. First, managers gain expertise in all aspects of a product(s) since a
3. What is the global area design? What are its strengths and weaknesses?
The global area design involves centering a firm’s activities around specific areas or regions
of the world. A primary strength of the design is that it allows firms to develop expertise
4. What is the global functional design? What are its strengths and weaknesses?
The global functional design involves the creation of departments or divisions that have
worldwide responsibility for the common organizational functions. This structure allows a
5. What is the global customer design? What are its strengths and weaknesses?
The global customer design is appropriate when a firm serves different customers or
6. What is the global matrix design? What are its strengths and weaknesses?
The global matrix design is a result of superimposing one form of organization design on top
7. What are the three levels of control in international business?
The three levels of control in international business are strategic, organizational, and
8. Why is financial control so important?
Financial control is critical because it is the driving force of an organization. Firms must
9. What are the four basic steps in establishing an international control system?
The four basic steps in establishing an international control system are setting the control
QUESTIONS FOR DISCUSSION
1. If a new organization starts out with a global perspective, will it necessarily experience any
of the initial impacts of international activity on organization design? Why or why not?
2. Do managers of international firms need to approach organization design differently from
their counterparts in domestic firms? Why or why not?
3. How do the global product, area, functional, and customer approaches to organization
design differ? How are they similar?
The global product structure is appropriate for firms that have diverse product lines or
product lines sold in diverse countries because it assigns responsibility for specific products
or product groups to separate divisions within the organization. In contrast, the global area
4. Why is a global matrix design almost always transitional in nature?
5. Why is control an important management function in international business?
Control is the process of monitoring and regulating activities in a firm so that some targeted
measure of performance is achieved or maintained. It is an important management function
6. Do you think the three common types of international organizational control are mutually
exclusive? Why or why not?
7. Which form of control system would you most and least prefer for your own work? Why?
8. Which control techniques are most likely to be tailored to international settings? Which can
be merely extensions of domestic operations?
Firms use many control techniques. Some of the more common ones include accounting
systems, procedures, and performance ratios. Many students will probably suggest that all
BUILDING GLOBAL SKILLS
Essence of the exercise
This exercise is designed to let students see the impact on organization design of changes in a
firm’s (Unipro) business mix. Students, working in groups, are asked to identify an appropriate
structure for Unipro after it has diversified into new areas.
Answers to the follow-up questions:
1. How is your group’s organization design similar to and different from those of other groups?
2. What do you see as the biggest advantages and disadvantages of your group’s organization
design?
Responses to this question will differ depending on the particular organization design each
3. What additional information would have made it easier for you to develop a new
organization design for Unipro?
Responses to this question will vary by group. Some of the more common information
requested probably relates to Unipro’s beliefs about autonomy, centralization and
decentralization, the different products Fundamental Foods and General Chemical are
CLOSING CASE
Unilever Matches Strategy and Structure
The closing case describes Unilever’s effort to streamline its operations and focus on its
core business areas.
Key Points:
• With sales of $64 billion annually, Unilever, a packaged goods company, is second only
to industry giant Procter & Gamble. Its brand names include Lipton, Dove, Q-tips, and
Vaseline, and its product groups range from frozen foods to personal care products.
They have also grown by acquiring other businesses. For example, in 2007, they
acquired Buavilta, a vitality drink company based in Indonesia and Inmarko, the leading
ice cream maker in Russia.
• Over the years, Unilever’s growth strategy often involved acquiring consumer product
businesses, many of which had supporting operations. However, this strategy resulted
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• In 1997, Unilever sold its specialty chemical group in order to eliminate the inefficiencies
Case Questions
1. Identify the basic organization design issues at Unilever.
Combining two different groups (consumer specialties and chemical products)
seemed to be a marriage of complementary companies, but was really a
2. What seems to account for the frequent changes in organizational design at
Unilever?
3. Do frequent changes in organizational design at Unilever seem to be overall
relatively positive or relatively negative?
4. Identify the basic control issues at Unilever from all three levels?
The three levels of control are strategic control, organizational control and
operational control. From a strategic control perspective, the basic issue is what
strategic direction should Unilever take? That is, how should resources be
5. How do you think the control function should be organized and managed at
Unilever?