MGX5181 International Business Strategy

MGX5181 International Business Strategy Week 12 International Strategy Implementation Organisational structure and control

Objectives • By the end of this session, students should be able to: • Identify a range of controls available to an international businesses • Demonstrate how organisational design (structure) impacts on the control process of an international business • Understand how strategy impacts on structure • Recognise how centralisation and decentralisation of decision-making impacts on strategy and structure

Control Options • What are some of the methods used by MNCs to control their international operations: • Human resources • Structure • Reports and Budgets • Visits • Systems • Corporate Culture

Direct Control • Face to Face or personal meetings for the purpose of monitoring operations. Problems are discussed, goals set, and actions taken to improve effectiveness. • Visits by top executives. • Staffing practices of MNC’s. • Organisation Structure - who reports to whom.

Indirect Control • Reports and other written forms of communication. • eg: operating reports such as financial statements including balance sheets, income statements, cash budgets and financial ratios etc.. • Indirect controls are particularly important in international management because of the great cost associated with direct methods.

Factors that make control difficult: • Distance • The geographic and cultural distances separating countries will increase the time, expense, and possibility of error in cross-cultural communications. • Diversity • Difficult to set standards or evaluate performance when market size, type of competition, product, labour cost, currency etc vary between countries.

Factors that make control difficult continued... • Uncontrollables • shareholder’s demands may clash with company objectives. • Government regulations both in host & home countries. • Degree of Certainty • Political & economic conditions are subject to rapid change in some locations. This change impedes the setting of long-term plans.

The Control Sequence Evaluate Communications & modify as necessary Establish Objectives Select Control Methods Reconsider Standards & modify if needed Set Standards Review Methods & modify if needed Locate Responsibility Reassess Objectives & modify if needed Establish Communications Continuous Correction of all Stages Continuous Review of Results Source: Cateora & Hess, 1979

4 Main Elements in Control Process • Setting of standards • The development of monitoring devices or techniques to monitor the performance of the individual or the organisational system.

4 Main Elements in Control Process continued.. • The comparison of performance measures obtained from the different monitoring devices to the plans in order to determine if the current state of performance is sufficiently close to the planned state. • Employment of effective action devices to correct significant deviations of performance.

The 4 Major Areas of Control • Foreign Exchange Risks • Monitoring • Risk Limits • Exchange rate forecasting • Hedging • Environmental Controls • Accounting Standards • Tax Requirements • Legal Differences • Inventory Policies • Social Overheads • eg: phone, electricity, education.

The 4 Major Areas of Control continued.. • Risk Assessment • Political • Economic • Legal • Conflict with Host Government • Activities • Employment • Social Controls • eg: Pollution

Factors that influence the type of decision making in subsidiary operations

The Evolution of Structure • Generally, firms give little thought to structure when first going international. • Typically there is no formal structure until such time that the international operations grow to a level where it becomes critical for a formalised structure to be put in place. • As the organisation’s international operations develop, so to will the need, to modify structure.

The “right” organisational form? • There is not one “right” way to organise. • Generally, organisations are not “pure” but mixed. • The greater the specialisation of the organisation’s units, the more difficult it is to co-ordinate their activities. • Organisational structures are never permanent.

Factors affecting Multinational Structure Home Country Company size Age of industry Technology Strategy Personnel Organisational culture Domestic operation Products Diversity Finances Ownership Centralisation Structure Foreign Factors National policies Legal constraints Distance Size population Raw materials Markets Health Climate Personal values Language Religion Labour skills Level of industrialisation Communication HQ Overseas Operations

Organisational Structure and its impact on decision making Stage 1: Exporting and Licensing When a firm’s first exposure to international business comes from export orders: • Business focus remains domestic oriented • Domestic structure is organised by function • Manufacturing,Finance,Marketing, etc.. • Foreign orders a novelty or means of disposing excess production • An Export Manager may be appointed • Export Manager has little authority in organisation as to resource allocation

Stage 1: Exporting and Licensing • Growth usually haphazard • May be supervised by executives with little interest in these operations • Status usually too low to take advantage of opportunities • As problems get out of hand a specialist dept usually formed, often within Marketing Division • If licensing used, staff ideally come from R & D and employed by Marketing or Export. In practice licensing often remains part of R & D

Two options for emerging international organisations (a) Research and development Marketing Production Export [Licensing] Export [Licensing] Or (b) Research and development Production Marketing Export [Licensing] [Licensing]

Stage 1: Exporting and Licensing Problems • Negotiating payments on conditions unenforceable in another country • Appointment of agents or licensees on invalid conditions • Poor distribution, promotion and pricing • Failure to monitor market for opportunities Threats • New competition as market grows • Increasing government regulation

Typical Organisation of International Co. primarily engaged in exporting (a) Company with narrow product line Chief Executive Officer Production Marketing Finance Personnel R & D Export Manager (b) Company with broad product line Chief Executive Officer Marketing Production Finance R & D Personnel Export Manager Product Division : Chemicals Product Division: Pesticides Product Division : Dyestuffs Product Division: Plastics

Organisational Structure and its impact on decision making Stage 2: Foreign Operations • Faced with increased competition from other producers and higher comparative costs resulting from such things as freight and tariff costs, the exporting firm feels pressed to defend its foreign market position by establishing a production facility inside the foreign market. • Initial operations usually decentralised • Centralised management as importance and knowledge grows • Centralising control results in move to an International Division Structure.

Typical organisation of company at Early Foreign Production Stage Corporate Staff Chief Executive Officer etc. Production Marketing Finance Personnel R & D Foreign Subsidiaries UK Germany Brazil Nigeria Japan

Organisational Structure and its impact on decision making Stage 3: International Division Structure As the volume of international business grows and becomes relatively more important the firm typically establishes an international division. • All international activities are grouped into one separate division and assigned to a senior executive at corporate headquarters. • Executive at same level as other divisional & functional heads. • Segregates operations into domestic and international.

The International Division • Tends to be highly centralized. • Places international operations at the same organisational level as domestic oriented Functional or Product divisions. • Still less autonomous than domestic divisions. • Few executives have international expertise.

The International Division Benefits • Special needs of foreign operations are met. • Provides unified position to company's activities in different countries. • Coordinated financial function, investment decisions made on a global basis.

The International Division Problems • Separation & isolation of domestic managers from their international counterparts • Problem of whether domestic managers think strategically on a global basis. • Conflict between domestic & international divisions • when international division gets what it considers inadequate technical support and second-rate staff for overseas assignments. • Research & development remains domestically oriented.

International Division Structure Corporate Staff Chief Executive Officer etc. Production Marketing Finance Personnel R & D Line Management Domestic Division: Chemicals Domestic Division: Pesticides Domestic Division : Dyestuffs Domestic Division: Plastics International Division

Divisions within the International Division International Division (a) By area Asia South America Europe Africa International Division Head (b) By product Product Soup Product Canned Foods Product Frozen Foods Product Fruit Drinks Product Dairy Products

Organisational Structure Stage 4: Global Structures International division is not the appropriate structure when: • The international market is as important as the domestic market. • Senior officials have both foreign and domestic experience. • International sales represent 25% to 35% of total sales. • Technology used in domestic divisions has far outstripped that of the international division. Result • Global Product Division; Global Area Division, Global Functional Division, Matrix Structure or Variation.

GLOBAL PRODUCT STRUCTURE • Under a global product structure, the product divisions are responsible for all manufacture and marketing worldwide. • It is the most common structure used by MNCs. • It is used by most consumer-product firms with a diversity of products.

Global Product Division Structure Chief Executive Officer Corporate Staff etc. Production Marketing Finance Personnel R & D Line Management Product Division B Product Division C Product Division A Product Division D Product Division E Europe Africa Latin Far East America Indonesia South Korea Singapore etc. Production Marketing Finance

GLOBAL PRODUCT STRUCTURE • Benefits • Improved cost efficiency through centralisation of manufacturing facilities. • Ability to balance the functional inputs needed for a product. • Ability to react quickly to product-specific problems in the marketplace. • Suited to the development of a global strategic focus in response to global competition. • Allows departments to operate as autonomous profit centres (SBUs) • Adds flexibility to a firm’s structure • Develops broadly trained managers

GLOBAL PRODUCT STRUCTURE • Problems • Upheaval as change to this structure usually accompanied by consolidation of operations and plant closings. • Fragments international expertise within the firm because a central pool of international experience no longer exists • Product managers may focus their attention only on the larger markets, or only on the domestic, and fail to take the long-term view. • Co-ordination of activities among various product groups operating in the same markets is crucial. • Leads to decreased communication between functional specialists • Contributes to a lack of clarity of functional area responsibilities and a duplication of services

STRATEGIC BUSINESS UNITS • Commonly defined as 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 structure lines and if a product must be modified to suit different markets, a worldwide product SBU may be divided into a few product/market SBUs serving various countries or groups of countries. • SBUs do not determine how a company as a whole will organise its internal operations. • Companies with numerous SBUs frequently group them together into another unit called sector or operating unit. Other firms use other names.

GLOBAL AREA STRUCTURE • Under a global area structure geographic divisions are responsible for all manufacture and marketing in their respective areas. • Used by: • Companies that have relatively narrow product lines with similar end uses and end users. • However, expertise is needed in adapting the product and its marketing to local market conditions. • Popular with companies that manufacture products with a low, or at least stable technological content that require strong marketing ability. • Producers of consumer products such as prepared foods, pharmaceuticals and household products employ this type of organisation.

Global Geographic (Area) Division Structure Chief Executive Officer Corporate Staff etc. Marketing Production Finance R & D Personnel Line Management North America Latin America Middle East Europe Asia United Kingdom France Germany Italy

GLOBAL AREA STRUCTURE • Benefits • Organisations can cope with markets that vary widely in respect to product acceptance and operating conditions as authority to make decisions pushed down to regional headquarters. • Allows business units to adapt to local circumstances • Takes advantage of local legal, political and cultural differences • Provides territories as a training ground for general managers

GLOBAL AREA STRUCTURE • Problems • Hard to coordinate production across regions. • Requires a large number of general managers • Leads to a possible duplication of staff services • Presents problems for top management control over local operations • Difficult to co-ordinate global product planning. • Essential information and experience may not be transferred from one regional area to another. • To help alleviate these problems management often place specialised product managers on the headquarters staff.

GLOBAL FUNCTIONAL STRUCTURE • Under a global functional structure, functional areas such as production, marketing, finance and HRM are responsible for the worldwide operations of their own functional area. • Used by: • Organisations where both the products and customers are relatively few and similar in nature e.g. aircraft manufacture; oil refining

Global Functional Structure Chief Executive Officer Personnel Production Finance R & D Marketing Production Domestic Production Foreign Marketing Domestic Marketing Foreign Region A Region B Region C Region D Product A Product B Product C Product D Product A Product B Product C Product D Region A Region B Region C Region D

Global Functional Process Structure Chief Executive Officer Refining Production Transportation Exploration Marketing South China Sea Bay of Bengal Persian Gulf Saudi Arabia Taiwan India Kuwait Saudi Arabia North America Europe and Middle East Far East and Australia South China Sea Bay of Bengal Persian Gulf Saudi Arabia

GLOBAL FUNCTIONAL STRUCTURE • Problems • Co-ordination between manufacturing and marketing in an area is typically a key problem. • Multiple product lines are difficult to manage because of the separation of production and marketing into departments with parallel lines of authority to the top, and only the CEO can be held responsible for the profits. • To overcome this, staff functions are created to interact between the functional areas, otherwise the company’s marketing and regional expertise may not be exploited to the fullest extent possible. • Functional structures are not common and can breakdown easily if poor co-operation between functions.

MATRIX ORGANISATIONS • Superimposes an organisation based on another dimension. • Both the area and product managers will be at the same level, and their responsibilities will be at the same level and overlap. • Ciba-Geigy, the Swiss chemical and pharmaceutical MNC, has an organisational structure based on a matrix of 3 dimensions: • product • function • geographic region

Matrix Structure Corporate Staff Chief Executive Officer Personnel Marketing Production Finance R & D Line Management Other area and product divisions Tractors Asia Europe General manager of tractors, Europe General manager of tractors, Asia

MATRIX ORGANISATIONS Problems: • 2-3 managers must agree on a decision. • This can lead to less-than-optimum compromises, delayed responses and power politics. • When agreement cannot be reached, the problem goes higher and takes management away from its duties. Solution: • Matrix overlay.

Matrix Overlay Structure • Attempts to address the problems of the matrix structure by requiring accountability of all functions without the stresses. • If organised by product, may have regionalist specialist in a staff function required to have input to product decisions. May be organised in an international division. • A regional organisation may have product managers on its staff who provide input to regional decisions.

Hybrid Forms • A mixture of organisational forms is used at the top level and may or may not be present at the lower levels. • Are the result of a regionally organised company having introduced a new and different product line that management believes can be best handled by a worldwide product division. • An acquired company with distinct products may be incorporated as a product division even though the rest of the company is regionalised, until management becomes familiar with the operation.

Hybrid Organisational Form CEO Domestic Division A Corporate Staff Domestic Division B International Division Serves Products A & B in locations other than the Pacific Original Equipment Products A & B Pacific Division Products A & B Worldwide Product Division C

HORIZONTAL ORGANISATIONS • Sometimes called corporate networking. • Teams can be drawn from different departments to solve a problem or deliver a product, i.e. this occurs in industries such as aerospace, or vehicles.

MGX5181 International Business Strategy