Organizational Design for International Companies: Key Dimensions and Trends

1. Chapter 13 Organizational Design and Control

2. Learning Objectives • Explain why the design of organizational structure is important to international companies • Discuss the concerns and organizational dimensions that must be considered when selecting organizational structures • Discuss the various organizational forms available for structuring international companies • Familiarize with current organizational trends • Explain why decisions are made where they are among parent and subsidiary units of an international company

3. 1. Introduction • When business firm enters a foreign market or makes FDI or opens a subsidiary, it has to two make fundamental decisions: product decision or competitive strategy (Ch 12) and about organization decision or Organization Design and Control (Ch 13). • Chapter 13 deals with two aspects of organization decision – Organization Design and Organization Control. We deal with Organization Design first, then comes Organization Control. • Organization Design is closely related to Organizational Structure. Organization design is the input, Organization Structure is the Output.

4. 2. Definition and Importance • Organizational structure is the way that an organization formally arranges its domestic and international units and activities, and the relationships among these various organizational components. • A company’s structure helps determine where formal power and authority will be located within the organization. Organizational Structure is the same as Organogram. • Creating and evolving the structure of an international organization over time are fundamental tasks of senior management.

5. 2. Definition and Importance • Organizational design is a process that deals with how an international business should be organized in order to ensure that its worldwide business activities are able to be integrated in an efficient and effective manner. • It is essential that the structures and systems are consistent with each other, as well as consistent with the environmental context. • There is a triangular relations among: Organizational Design, Competitive Strategy and International Environment (Fig 1)

6. 2. Definition and Importance Fig: The relationship among international environment, competitive strategy, and organizational structure – Ref: Page# 403

7. 2. Definition and Importance • The size and complexity of its business operations are also important in designing a company. • The structure of an international company (IC) must be able to evolve over time, so that the organization can respond to change. • This is a major challenge for the management of international companies, as these companies’ activities are increasingly dispersed and subject to rapid & ongoing changes.

8. 2. Definition and Importance • Failure to successfully deal with this challenge threatens the organization’s performance and its long-term survival. • An IC’s strategic planning process often discloses a need to alter the organization. • Strategic planning and organizing are so closely related that usually the structure of the organization is treated by management as an integral part of the strategic planning process.

9. 3. Organizational Design: Concerns and Dimenions • While designing the organization structure of an IC, the management faces the following two concerns: • finding the most effective way to departmentalize to take advantage of the efficiencies gained from the specialization of labor and • coordinating the activities of those departments to enable the firm to meet its overall objectives.

10. 3. Organizational Design Concerns and Dimensions • These two concerns run counter to each other, i.e. the gain from increased specialization of labor may at times be nullified by the increased cost of coordination. • Thus the management looks for an optimum balance between the two concerns.

11. 3. Organizational Design: Concerns and Dimensions • When designing the structure of an IC, the following four primary dimensions need to be considered: • Product and technical expertise • Geographic expertise • Customer expertise • Functional expertise • The way these dimensions are structured and integrated varies among different international companies.

12. 3. Organizational Design : Concerns and Dimensions • Managers have to consider both the current and future nature of their company’s international operating environment and strategy, when deciding the company’s organizational structure. • The most common types of organizational designs for international companies will be discussed in the following slides. • Although in reality the structure of many ICs often deviates from these basic organizational designs, it is important to understand the attributes associated with these basic designs.

13. 3. Organizational Design: Concerns and Dimensions • Organizational design proceeds along four dimensions: • Product or technical expertise concerning the main product or business of the IC; • Geographic or regional expertise regarding geographic regions where the IC operates its business or subsidiaries are located; • Clientele or market expertise concerning clientele or market segmentation; and • Functional expertise concerning functional areas like finance, HR, marketing, corporate administration

14. 4. Evolution of the International Company • Evolution of a domestic company into an International Company and the Global Company mirror images IPLC theory, excepting that the latter takes product route while the former takes organization route. • When a domestic company starts exports, initially this is handled by the marketing division, then possibly an Export Cell within marketing division. • When foreign production starts, an International Division is created to deal with foreign production while the rest of the divisions take care of domestic production and marketing.

15. 4. Evolution of the International Company • An international division is a division in the organization that is at the same level as the domestic division and is responsible for all non-home-country activities (Fig 2). • There are some companies that are organized into a primary domestic division, supplemented by an international division to serve the rest of the world. • Examples:

16. 4. Evolution of the International Company • As their overseas operations increased, most managements felt the need to establish worldwide organizations based on product, region, function or customer classes. • That is when, the IC with International Division go Global abolishing the domestic and International Divisions. • One of the product or regional divisions take charge of domestic operations. Most American MNCs make Americas or North American Division responsible for US operations

17. 4. Evolution of the International Company Fig 2: International Division – Ref: Page# 405

18. Evolution of the International Company • These four dimensions, along with • process • national subsidiary • international or domestic divisions provide the basis for subdivisions at secondary, tertiary, and still lower levels. • As they grow over time, most ICs move away from the use of international divisions and implement one of the global structures (that will be presented later in the slides).

19. 4. Evolution :The international Structural Changes Model Fig 3: Ref: Page# 406

20. 4. The international Structural Changes Model • Managements that changed to the alternative paths shown in the previous diagram felt they would: • be more capable of developing competitive strategies to confront the increasing global competition, • obtain lower production costs by promoting worldwide product standardization & manufacturing rationalization, and • enhance technology transfer and the allocation of company resources • In what follows, we review four Global forms of IC: Global Product, Global Regional, Global Clientele and Global Functional.

21. 5.1 Global Corporate Form – Product • Commonly this structure represents a return to pre-export department times in that the domestic product division has been given responsibility for global line and staff operations. • In the present-day global form, product divisions are responsible for the worldwide operations such as marketing and production of products under their control. • When a company produces limited number of distinct products, this form is followed.

22. 5.1 Global Corporate Form – Product • Each division generally has regional experts and thus this organizational form creates a duplication of area experts. • However, the duplication is avoided by creating a pool of regional experts in the Corporate Division. • This structure is graphically shown in the following slide.

23. 5.1 Global Corporate Form – Product Fig 4: Global corporate form – productRef: Page# 406

24. 5.2 Global Corporate Form – Geographic Regions • Firms in which geographic regions are the primary basis for division put the responsibility for all activities under area managers who report directly to the chief executive officer. • This kind of organization simplifies the task of directing worldwide operations, because every country in the world is clearly under the control of someone who is in contact with headquarters.

25. 5.2 Global Corporate Form – Geographic Regions Fig 5: Global corporate form – Geographic RegionsRef: Page# 407

26. 5.2 Global Corporate Form – Geographic Regions • Some U.S. global companies have created a North American division that includes Canada, Mexico, and Central American countries in addition to the United States, to emphasize that the home country is given no preference. • This structure is popular with companies that manufacture diverse products with low, stable technological content requiring strong marketing ability.

27. 5.2 Global Corporate Form – Geographic Regions • This structure requires having own product & functional specialists, creating duplication of product & functional specialists. • This is the disadvantage of an organization divided into geographic regions. • Like global product planning, there are problems of production coordination across regions. • To tackle these problems managements often place specialized product managers on the headquarters staff.

28. 5.3 Global Corporate Form: Clientele/Market • Client segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs, and then be designed and implemented to target these specific customer segments, addressing needs or desires that are believed to be common in this segment, using media that is used by the market segment.

29. 5.3 Global Corporate Form: Clientele/Market • Every organization engaged in a market will develop different ways of imagining market segments, and create product differentiation strategies to exploit these segments. Successful market segmentation and corresponding product differentiation strategy can give a firm a commercial advantage, due to the more effective match between target customer and product.

30. 5.3 Global Corporate Form: Clientele/Market • Kimberly Clark Ltd is an example that is organized along client segmentation. • With brands like Kleenex, Scott, Huggies, Pull-Ups, Kotes, Poise and Depend, KC holds No. 1 and No. 2 brand share in more than 80 countries. • But all products are not sold in all countries. • Major organizational divisions that KC follows is : Developed and Developing Countries

31. 5.4 Global Corporate Form – Function • Few firms are organized by function at the top level. • These firms believe that worldwide functional expertise is more significant to the firm than product or area knowledge. • In this type of organization, those reporting to the CEO might be the senior executives responsible for each functional area. • This functional form is common among firms like aircraft manufacturers and oil refining companies, who have a narrow & highly integrated product mix.

32. 5.4 Global Corporate Form – Product Fig 6: Global corporate form – FunctionRef: Page# 407

33. 5.5 Other Corporate Forms • Two other Corporate Forms based on the above broad categories are: Hybrid Organization and Matrix Organization. • They are discussed below.

34. 5.5.1 Hybrid Forms • In a hybrid organization, a mixture of the organizational forms is used at the top level and may or may not be present at the lower levels. • Combinations, as shown in the figure on the next slide, are often the result of a regionally organized company having introduced a new & different product line. • A mixed structure may also result from the firm’s selling to a sizable, homogeneous class of customers.

35. Hybrid Forms Fig: Hybrid Organizational FormRef: Page# 408

36. Matrix Organizations • Matrix organization is an organizational structure composed of one or more superimposed organizational structures in an attempt to mesh product, regional, functional, and other expertise. • It is called a matrix because an organization based on one or two dimensions is superimposed on an organization based on another dimension.

37. Matrix Organizations • In an organization of two dimensions, such as area & product, both the geographic area managers & the product managers will be at the same level, and their responsibilities will overlap. • Figure on the next slide illustrates an extremely simply matrix organization based on two organizational dimensions. • Here, the country managers are responsible to both the area managers and the product-line managers.

38. Matrix Organizations Figure: Regional-Product Matrix – Ref: Page# 409

39. Problems with the Matrix • One problem with the matrix is that the two or three managers must agree on a decision. • This can lead to less-than-optimum compromises, delayed responses, and power politics in which more attention is paid to the process than to the problem. • When the managers cannot agree, the problem goes higher in the organization and takes top management away from its duties.

40. Problems with the Matrix • The disadvantages of the matrix form have kept most worldwide companies from adopting it. • Many firms have maintained their original organizations based on product, function, region, or international divisions and have built into the structure accountability for the other organizational dimensions. • This is often known as a “matrix overlay”.

41. Matrix Overlay • The matrix overlay attempts to address the problems of the matrix structure by requiring accountability of all functions, while avoiding the troublesome management stresses of a pure matrix structure.

42. Matrix Overlay • A firm organized by product may have regional specialists in a staff function, requiring that they have input to product decisions. • They may even be organized in an international division. • Conversely, a regional organization would have product managers on its staff who provide input to regional decisions.

43. Strategic Business Units (SBUs) • It is a concept in which product divisions have defined as though they were distinct, independent businesses. • An SBU is defined as 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. • Most SBUs are based on product lines.

44. Changes in Organizational Forms • The rapidly changing business environment is pressuring companies to look for new, more efficient organizational forms. • Many firms are increasingly accepting the need for frequent reorganizations, which is often accompanied by: • a significant reduction in the levels of middle management

45. Changes in Organizational Forms • restructuring of work processes to reduce the fragmenting of the process across functional departments • improvement in the speed & quality of strategy execution • empowerment of employees, and • the use of computers for instant communication and swift transmittal of information

46. Changes in Organizational Forms • CEOs are striving to make their organizations to lean, flat, fast to respond, and innovative. • This redesigning organizational structure, hierarchy, business systems, and processes in order to improve organizational efficiency is called “reengineering”.

47. Current Organizational Trends • The following slides describe the two organizational forms, which are now receiving the attention of many CEOs: • the virtual corporation • the horizontal corporation

48. Virtual Corporation • A virtual corporation, often known as a network 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. • Companies are now using outsourcing to obtain specialized expertise in order to serve new markets or new technology.

49. Virtual Corporation • The evolution of the technology infrastructure has made possible changes in the work force and working methods that have contributed to the increase in virtual corporations. • Global networking on the Internet has made worldwide outsourcing possible for firms of all sizes. • Dell, Accenture Ltd., Reebok, Nike, DKNY are some examples of network organizations.

50. Virtual Corporation • The virtual corporation concept has several potential benefits. • It permits greater flexibility than typical corporate structures. • Virtual corporations form a network of dynamic relationships that allow them to take advantage of the competencies of other organizations and respond rapidly to changing circumstances.