Organization of Multinational Operations: Why does it Matter?

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Organization of Multinational Operations
Why does it Matter?
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Organization of MNCs Operations

• Definition
• Designing The Skeleton and The Structure That
  Delineate The Nature and Extent of Formal
  Relationships Among Internal Components Tasks,
  Jobs and Units
• It allows for distribution of power and authority
  and the establishment of communication lines
• Physical and Nonphysical Forms Differ in Response
  to Internal Requirements (technology, nature of
  tasks, type of strategy) and External Environment
  (constituents forces)
• Six bases for departmentalization knowledge
  skill, work process function, time, output,
  client and place.

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Four Questions for Organizing

• What should the units of the organization be?
• Which components should be joined, and which
  should be kept apart?
• What size and shape pertain to the different
  components?
• What is the appropriate placement of and
  relationship between different units?
• Six bases for departmentalization knowledge
  skill, work process function, time, output,
  client and place.
• Two most common forms of departmentalization
  Geographic and Functional

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Organization of MNCs Operations

• Factors Influencing MNC Structure
• External Forces
• Economic Conditions
• Technological Development
• Product-Market Characteristics (Competition)
• Host Government Policies
• Company Factors
• History
• Top Management Philosophy
• Nationality
• Corporate Strategy
• Corporate Culture
• Degree of Internationalization

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Development of International Corporate
Structure.Its a process!

• Two major factors influence development
• From Simple to Complex (size)
• From Domestic Orientation to Global Perspective
  (global presence)
• Three phases that follow the Product Life Cycle
• Phase 1 Introduction
• Competition is Limited to Domestic Firms
• Export
• International Operation Is An Extension of
  Domestic

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Development of International Corporate Structure

• Phase 2 Growth
• Technology Diffusion and Price Competition-
  Manufacturing Facilities in Low-Cost Countries
• International Division
• Phase 3 Maturity
• Most of The Corporate Revenues Are From Abroad
• Organize Operations on a Global Basis

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MNC Corporate Structure

• The Extension of Domestic Structure
• Export Manager Reports to the Marketing Executive
  (Narrow Product Line)
• Export Manager Reports to C.E.O. (Broad Product
  Line)
• Increased Competition and Market Maturity-- Local
  Manufacturing

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MNC Corporate Structure

• The Transition
• Autonomous Foreign Subsidiary
• Distant Operations Are Given Local
  Decision-Making
• Control Through Financial Reporting
• Foreign Subsidiary May Have Local Board of
  Directors
• Very typical originally with European MNCs, but
  also practiced by PG for a long time.

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Advantages and Disadvantages

• Can integrate into local economy and operate as a
  local firm fewer restrictions, take advantage
  of local resources.
• Respond better to local consumers.
• Have the ear of top management because of direct
  report to President/CEO local prestige.

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and Disadvantages

• Can end up ignoring the common good (overall
  objectives) of the wider corporation.
• Can end up duplicating resources (e.g.,
  manufacturing) and causing inefficiencies.

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MNC Corporate Structure (see figure 8.2)

• International Division Structure 60 of all US
  firms go through this stage.
• Four Factors Prompt The Establishment of
  International Division
• Increased International Involvement -- Require a
  Senior Executive
• Concentration Allows Exploiting The Worldwide
  opportunities
• Internal Specialists Are Needed
• A Desire to Be Proactive (Identify
  Opportunities).
• usually adopted by companies already
  dominant in their home mkts., w/ limited product
  line limited geographic diversity, and few
  managers with international experience.
• EG Wal-Mart

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MNC Corporate Structure

• The Geographic Division
• The Product Division
• The Functional Structure
• Mixed and Matrix Forms

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Geographic Division Structure(Figure 8.3) is
the most common structure
CEO
Headquarters Staff
European Division
North American Division
South American Division
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Advantages Disadvantages

• Regional economies of scale
• Treatment of subsidiaries as profit centers.
• Good when regional customers are similar.
• Tend to be useful in mature businesses w/narrow
  product lines.
• Permits large manufacturing plants in low cost
  regional countries.
• Autos, beverages, food, pharmaceuticals.e.g.,
  Nestle

• Not good for firms w/diverse product ranges (bad
  for coordination between product lines).
• Coordination at corporate level suffers.
• Rivalry among regions.
• Duplication of resources/plants.
• Difficulty transferring new technology and
  product ideas across regions/strong regional
  managers.

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Product Division Structure Figure 8.4
CEO
Headquarters Staff
Product Group A
Product Group B
Product Group C
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Advantages Disadvantages

• Good for firms w/diverse product lines (often)
  w/hi technology content and different end users.
• Permits fast diffusion of technology across a
  product line/simultaneous intro of product across
  the world.
• Good when local manufacturing is favored (e.g.,
  high tariffs) for certain product
  lines/concentration of key activities in one
  locale.
• Facilitates quick response to global competitive
  pressures against certain products.
• High technology firms (HP) Heinz

• May result in wasteful duplication of plants and
  sales personnel.
• Customers may be interacting with many
  representatives from the company.
• Limited voice to local managers on needed
  adaptations.

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International Function StructureFigure 8.5
CEO
RD (Worldwide)
Marketing (Worldwide)
Manufacturing (Worldwide)
Finance (Worldwide)
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Fairly rare (only 10 of US MNCs).

• Mostly used by natural resource extraction firms
  (mining, oil).
• Narrow, standardized product.
• Technology is relatively stable, but execution of
  the functions (e.g., extraction, marketing,
  finance) are keys to success.

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Mixed or Matrix Structure

• A way of trying to gain the optimum integration
  of inputs from regional, functional and product
  areas.
• A normal hierarchy is overlaid by some form of
  authority, communication, and influence.

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International Mixed Structure Figure 8.6
CEO
Product A (Worldwide, except US and Europe
USA Division
European Division
Product B (Worldwide, except US and Europe
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Challenges of a matrix

• It is an efficient use of specialists and
  equipment and can improve vertical and lateral
  communication and information flow.
• BUT..is costly, cumbersome and a lot of work for
  managers! Wearing two hats, and often leads to
  tensions. Lots of shared decision making.
• e.g. Dow Chemical (now adapted).

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Network Model
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Network model is.

• Good for unstable environments where innovation
  and quick response are needed which are
  increasing!
• Has been made possible by the technological
  advances in communication, which makes
  coordination among numerous players less costly.
• A network is inherently unstable itself.