International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 10
10-1
Module 10: Organizational Design and Control
YOUR CONTENT
Summary
Learning Objectives
Key Terms and Definitions
Content Outline
ENGAGEMENT & APPLICATION
Boxed Text Discussion Questions with Suggested Answers
End of Module Exercises
Bonus Activities
Video Suggestions
CONNECT TOOLS FOR ASSESSEMENT OF LEARNING
Connect Content Matrix
Connect Activities
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
10-2
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
LEARNING OBJECTIVES
LO 10-2 Identify the various organizational dimensions managers must consider when
selecting organizational structures.
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.
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
10-3
KEY TERMS AND DEFINITIONS
affiliates (p. 278)
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. 277)
A form of organization characterized by lateral decision
processes, horizontal networks, and a strong corporate-wide
business philosophy
hybrid corporation (p. 272)
A structure organized by more than one dimension at the top
level
international division (p. 269)
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. 273)
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. 274)
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. 268)
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.
267)
The way an organization formally arranges its domestic and
international units and activities, and the relationships among
these components
reengineering (p. 275)
Redesigning organizational structure, hierarchy, business
systems, and processes in order to improve organizational
efficiency
strategic business unit (SBU)
(p. 275)
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. 278)
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
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
10-4
transfer pricing (p. 281)
Pricing established for transactions between members of the
enterprise
virtual corporation (p. 275)
An organization that coordinates economic activity to deliver
value to customers using resources outside the traditional
boundaries of the organization
International Business
Geringer, McNett, Ball
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 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
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.
manner consistent with the company’s overall structure.
II. How Does Organizational Design Impact International Companies?
1. 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.
2. The size of the organization and the complexity of its business operations also
influence its organizational design.
3. 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
4. Structure follows strategy, but the reverse is also true.
5. Organizing normally follows planning. In designing the organizational structure,
management faces two concerns: (1) finding the most effective way to take
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
advantage of specialization of labor and (2) coordinating a firm’s activities to
enable it to meet its overall objectives.
6. Organizational design concerns:
a. Finding the most effective way to departmentalize for efficiencies from
specialization of labor.
b. Coordinate departmental activities to meet overall objectives.
c. 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.
• Evolution of the International Company Structure
o International Division Structure
o International Product Structure
o Geographic Region Structure
o Global Functional Structure
o Hybrid Organizational Structures
o Matrix Organizations
o Matrix Overlay
o Strategic Business Units
o 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
I. Evolution of International Company Structure
A. Companies often enter foreign markets by exporting, then forming sales companies and
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
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).
2. Use of an international division structure can result in conflicts within the firm.
3. Challenges of managing the international division effectively as the size of this
eliminate international divisions in favor of worldwide organizational structures
based on product, region, function, or customer classes. At second, third and still
5. Figure 10.3 illustrates the international structure stages of typical evolution of IC
structures.
competition.
b. Lower production costs thorough worldwide standardization and
manufacturing realization.
c. Enhanced technology transfer and resource allocation.
C. International Product Structure
company with an international division; it creates a duplication of area experts.
3. Some firms have a group of regional experts in an international division that
D. Geographic Region structure
1. These firms put responsibility for all activities under area managers who report
directly to the CEO (Figure 10.5).
companies that manufacture products with low or stable technological content
that require strong marketing ability, and also by firms with diverse products, each
risks.
3. The disadvantage of an organization divided into geographic regions is that each
region must have its own product and functional specialists; although duplication
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
of area specialists is eliminated, duplication of product and functional specialists is
necessary.
4. 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.
E. Global Functional Structure (Figure 10.6)
1. Few companies organized by function at top level.
2. Narrow and highly integrated product mix is common to this form.
1. Hybrid organizations use a mixture of organizational forms at the top level (Figure
10.7).
introduced a new and different product line that management believes can best be
handled by a worldwide product division.
3. A mixed structure may also be used when an IC is selling to a sizable, homogeneous
G. Matrix organizations
1. Evolves from management’s attempt to mesh product, regional and functional
2. 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.
H. Matrix Overlay
2. 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.
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
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.
2. Most SBUs are based on product lines.
3. 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.
a. Reengineering involves redesigning organizational structure, hierarchy,
business systems, and processes in order to improve organizational
efficiency.
management staff, restructuring of work processes across functional
departments, and improvement in the speed and quality of strategy
execution.
2. Virtual corporation
b. 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.
c. 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
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
e. For employees, virtual organization may replace the security of long-
term employment and ever-increasing salaries with the insecurity of a
global market.
3. Horizontal Corporation
a. A form of organization characterized by lateral decision processes,
horizontal networks, and a strong corporate-wide business philosophy.
b. In many companies, teams are drawn from different departments to
solve a problem or deliver a product.
c. The horizontal organization has been characterized as “anti–
organization” 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.
d. 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.
e. 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
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
and Equipment
Key Terms:
• subsidiaries
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
o Competence of Subsidiary Management and
Headquarters’ Reliance on It
o Size and Age of the IC
o Headquarters’ Willingness to Benefit the
Enterprise at the Subsidiary’s Expense
o The Subsidiary’s Frustration With Its Limited
Power
I. Where Decisions Are Made in Wholly Owned subsidiaries
A. 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) through ownership of enough voting stock to elect a majority of the
voting members on the company’s board of directors.
2. 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.
1. For profit reasons, subsidiaries may favor product and equipment designed
specifically for the market and conditions of the host country.
to multiply source options and simplify procurement and maintenance.
C. Competence of Subsidiary Management and Headquarters’ Reliance on It
1. With greater confidence, more decisions will be delegated or left to subsidiaries.
2. Moving subsidiary managers into parent operations or into other subsidiaries
3. Moving parent managers into subsidiaries widens their knowledge of subsidiary
problems to which the parent might not be sensitive otherwise.
4. Transferring managers gives them opportunity to learn HQ policies and problems if
implementing policies at subsidiary level first-hand.
5. HQ needs to understand host country’s conditions and relies on subsidiary
6. The greater the distance between HQ and subsidiary, HQ relies more on subsidiary
manager information.
D. Size and Age of the IC
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
10–12
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.
2. At the same time, delegation and decentralization allow for local adaptation, so
there may be a tension in this area.
E. 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.
2. 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.
3. 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.
6. Transfer pricing is the price for transactions between members of the same
enterprise.
F. The Subsidiary’s Frustration With Its Limited Power
a. An objective of all businesses is to obtain and keep able, loyal
decisions, regarding their operations, they may resign or become hostile
toward HQ.
of a joint venture or of a company in which it owns less than
50 percent of the voting stock.
Subsidiaries Less Than 100 Percent Owned
o Loss of Freedom and Flexibility
o Control Can Be Had Even With Limited or No
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
I. Where Decisions Are Made in Joint Ventures and Subsidiaries Less Than 100 Percent Owned
A. 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.
B. Loss of Freedom and Flexibility
1. 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.
2. 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.
3. A local joint venture partner is unlikely to agree with measures that penalize the
venture for the IC’s benefit.
C. Control Can Be Had Even With Limited or No Ownership
1. 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.
LO 10-5
List the types of information an international company’s
units around the world need to report to the parent
company.
• Reporting
o Technological Reporting
o Reporting About Market Opportunities
Key Terms:
II. Reporting
A. For controls to be effective, all operating units of an IC must provide headquarters with
timely, accurate, and complete reports.
B. Financial Reporting
International Business
Geringer, McNett, Ball
Instructor Guide to Module 10
1. 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.
C. Technological Reporting
1. 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.
2. 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.
D. Reporting About Market Opportunities
1. Affiliates may spot new or growing markets for some product of the enterprise.
E. Political and Economic Reporting
1. Economic and political conditions in local markets need to be continually
monitored and reported to HQ for quick response or changes as needed.