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Chapter 10 - Organizational Design and Control

CHAPTER 10
Organizational Design and Control
Learning Objectives
LO10-1 Explain why the design of organizational structure is important to international companies.
LO10-2 Discuss the organizational dimensions that must be considered when selecting organizational
structures.
LO10-3 Discuss the various organizational forms available for structuring international companies.
LO10-4 Explain why decisions are made where they are among parent and subsidiary units of an
international company.
LO10-5 Discuss how an international company can maintain control of a joint venture or of a
company in which the IC owns less than 50 percent of the voting stock.
LO10-6 List the types of information an international company needs to have reported to it by its
units around the world.

NOTE:

International business statistics, data, and facts about countries, regions, governments, and companies
can change rapidly and dramatically. We recommend that you update this information regularly.

As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the
International Business Newsletter. The IB Newsletter gives you an array of timely and relevant
articles, videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and
richness to the ever-changing topic of international business.

iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video
service for McGraw-Hill adopters that allows you to download breaking news videos onto your
desktop to show in class or online. Updated monthly, these streaming videos are complete with
teaching notes and discussion questions. Key concepts for each video are identified to save you time!
Visit www.mhhe.com/ball, or talk to your McGraw-Hill sales representative for more information
about iGlobe or the IB Newsletter.

Overview
Organizational design is integrated with strategic planning. For IB, 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 product, regional or functional form. Managements are now examining two developing
organizational forms, the virtual corporation and the horizontal corporation.

Because the operations of an IC are far flung around the world and because events in one country may
affect the entire enterprise, two needs are information and control.

When decisions must be made which affect more than one unit of the IC, balance must be struck
between the interests of the parent company, the subsidiary companies, and the enterprise as a whole.

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Control, decisions, and measurements are easier when the subsidiary is 100 percent owned than when
it is less than 100 percent owned or when an independent joint venture company is involved. In a JV,
control capability can be supported by maintaining control over necessary technology, staffing the key
positions, providing the capital and marketing the product.

A focus on reporting issues (financial, technological, political and economic) and managing in a
world out of control conclude the chapter.

Suggestions and Comments

1. Organizational design is abstract, so helping learners appreciate its influence often gives them a
new approach to thinking about business.
2. To point out the importance for an IC to control activities of its units and efforts around the
world, review the control issues Nike faced in its outsourcing, with child labor and worker
abuse (can search this on the Web, for example). Similarly, it is possible to discuss a variety of
other companies that have encountered control issues with their own or their suppliers’
operations, such as Apple’s recent challenges arising from worker complaint, suicides, and
other issues in its Chinese supplier, Foxconn Technology Group.
3. Discuss the relationship between national culture and different means of control.
4. Discuss reasons up-to-date, accurate information is necessary for successful IC operations.

Student Involvement Exercises

1. Have students analyze why certain types of decisions should be made by the IC parent
company while others should be made by the subsidiary and other IC units.
2. Have students report on sources of the information that needs to be reported by IC units to the
parent.
3. Have students analyze an IC to identify its organizational structure, strategic control issues and
methods used in the company. Toyota and its recent (2010/2011) automobile recalls is a good
example here.

Guest Lecturers
1. Your school’s management and organization people could speak on control and information.
2. Executives from ICs located near you could add to those subjects.
3. Virtual organizations may be described by local IC managers.

Worldview
The focus of this Worldview explores “Life in a Virtual Organization.” The virtual organization,
Accenture Ltd., is an example of new-order 21st Century organizations operating without a “bricks &
mortar” HQ and formal branch facilities. They outsource various functions and professional services
through a virtual existence. Asking questions such as, “Is this the wave of the future for the
corporation?,” “What do you think might be the greatest strengths and weaknesses of working in a
virtual organization like this?,” and “Do you think you would enjoy working in a virtual organization?
Why or why not?,” will serve as a starting point for class discussion on organizational structure and
design, control in organizations, and how these organizational elements are changing as technology
provides the infrastructure for virtual environments.

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Global Debate
The focus of this Global Debate explores “GlobalSoft: Profiting from International Transfer
Pricing.” Transfer pricing in international companies has recently received increasing attention in the
business and popular press, and this Global Debate is intended to help shed some light on why
transfer pricing has become the focus of so much attention. The discussion provides a vignette of a
hypothetical company that is using transfer pricing to alter its corporate tax bill by over $500 million
per year. This brief scenario provides an interesting base to explore a range of different financial,
political, ethical, and other issues associated with a management decision such as transfer pricing
practices, and can allow the discussion to consider these issues from a variety of different
perspectives. Asking questions such as, “If you were a shareholder in GlobalSoft, would you be
supportive of the company’s approach to transfer pricing? Why or why not?,” “If you represented the
government of Ireland, would you be supportive of GlobalSoft’s approach to transfer pricing? Why or
why not?,” and “If you represented the U.S. government, or the government of one of the other
nations in Europe, would you be supportive of GlobalSoft’s approach to transfer pricing? Why or why
not?” can serve as the foundation for a lively discussion.

The Global Path Ahead

The focus of this The Global Path Ahead explores a student’s decision to expand his international
and cross-cultural experience base by initially building homes for homeless in Mexico and then
pursuing an affordable international internship in China, where he taught English. The discussion
addresses some of the challenges he faced, actions he took to help facilitate a successful immersion in
the Chinese culture, and recommendations for how to improve the rewards of international
experiences. The Resources for Your Global Career section provides a range of useful suggested
resources for understanding the structure of international companies, including different
organizational design options, including both wholly owned and jointly owned options.

Mini-Case, “SemiConnected Inc. – Must It Reorganize?”

Students will have various ideas and organizational structures for SemiConnected, Inc. One option is
for the president to restructure the company into a matrix overlay. The structure of the company
could include product divisions with an international division on staff. All decisions must require the
International Division to be notified about all proposed product changes and given an opportunity to
discuss them with the appropriate product division. The International Division and the product
division must be in agreement in matters affecting sales outside the United States.

Lecture Outline
I. Opening Section

The opening section examines Kraft’s restructuring. This narrative is a good way to walk in to
the general organizational design area. Note the close ties between organizational design and
strategy. Remind your students that the strategic planning process assures that managers have a
clear understanding of the company’s mission, a vision for how to achieve that mission, and an
understanding of how they will compete with other companies. Organization design is the next
step and there are different organizational structures based on the firm’s level of international
involvement. Organizational structure sets control mechanisms into place and control is

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necessary for effective management response to ever-changing market conditions, globally or

locally.

II. What Is Organizational Design, and Why Is It Important for International Companies?
Organizing normally follows planning. In designing the organizational structure, management
faces two concerns: (1) finding the most effective way to take advantage of specialization of
labor and (2) coordinating a firm’s activities to enable it to meet its overall objectives. (Fig.
10.1)
A. Organizational Design Concerns
1. Finding the most effective way to departmentalize for efficiencies from specialization of
labor
2. Coordinate departmental activities to meet overall objectives
3. Four dimensions to consider in designing the IC:
a. Product and technical expertise
b. Geographic expertise
c. Customer expertise
d. Functional expertise
B. Evolution of the International Company
1. Companies often enter foreign markets by exporting, then forming sales companies and
finally setting up production facilities.
2. 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 (Fig. 10.2).
3. As overseas operations increase in importance, some firms eliminate international
divisions and establish worldwide organizations based on product, region or function. In
some cases, customer classes are also a top-level dimension. Paths for IC design and
evolution are shown in Fig. 10.3.
4. Some firms eliminate the international division and organize operations based on product,
region or geography, function, or customer classes and at lower levels organize based on
process, national subsidiary, and international or domestic dimensions. Management that
makes these changes will realize:
a. Greater capability to develop competitive strategies to confront global competition
b. Lower production costs thorough worldwide standardization and manufacturing
realization
c. Enhanced technology transfer and resource allocation
5. Global Corporate Form – Product (Fig. 10.4)
The product division is responsible for global line and staff operations. Each division has
regional experts. This organizational form avoids duplication of product experts common
in a company with an international division; it creates a duplication of area experts. Some
firms have a group of regional experts in an international division that advises the product
divisions but has no line authority over them.
6. Global Corporate Form – Geographical Regions (Fig. 10.5)
These firms put responsibility for all activities under area managers who report directly to
the CEO. This form is used for both multinational and global companies. It is popular
with companies that manufacture products with low or stable technological content that
require strong marketing ability. Product coordination across regions presents problems
and management often places specialized product managers on the headquarters staff to
provide input to corporate decisions regarding products.

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7. Global Corporate Form – Function (Fig. 10.6)

Few companies organized by function at top level. Narrow and highly integrated product
mix is common to this form.
8. Hybrid Forms (Fig. 10.7)
Hybrid organizations use a mixture of organizational forms at the top level.
9. Matrix Organizations (Fig. 10.8)
Evolves from management’s attempt to mesh product, regional and functional expertise
while maintaining clear lines of authority.
10. Problems with the Matrix – managers from each dimension of the matrix must agree on a
solution. This leads to sub-optimal compromises, delayed responses and power politics.
The problem goes to higher organizational levels when managers cannot agree.
11. Matrix Overlay – because of these problems, some firms have maintained their
organization based on product, region or function, but have built into the structure
accountability for other organizational dimensions. Firms organized by product might
have regional specialists in a staff function, with the requirement that they have input to
product decisions.
12. Strategic Business Units (SBUs) – business entities with 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.
C. Changes in Organizational Forms
The rapidly changing business environment is pressuring managements to look for
organizational forms that will enable their firms to act more quickly, reduce costs, and
improve product quality.
D. Current Organizational Trends
Two organizational forms are now receiving the attention of many CEOs: the virtual
corporation and the horizontal corporation.
1. Virtual Corporation (network corporation) enables companies to come together quickly to
take advantage of a specific marketing opportunity. These alliances enable each member
to concentrate on its core competency. Benefits include obtaining specialized expertise
globally, flexible working practices, and global networking (modular corporations).
Virtual corporations take advantage of lower inventories through enhanced supply chain
management. A virtual corporation can have superior capabilities, flexibility, and market
response to those of any organizational form. Disadvantages include reduced
management control and employees can feel less job security due to rapid global market
changes.
2. Horizontal Corporation. A form of organization characterized by lateral decision
processes, horizontal networks, and a strong corporate business philosophy. The idea is to
substitute cooperation and coordination for strict control and supervision. Teams are
created to solve specific problems or deliver product to market. Lateral relationships may
enhance innovation and new-product development.
E. Corporate Survival in the 21st Century
Managers will make greater use of the dynamic network structure that breaks down major
functions of the firm into small companies coordinated by a small-sized headquarters
organization. Business functions such as marketing and accounting may be outsourced. Firms
must learn how to be large and entrepreneurial. Small is not better; focused is better.

III. Control – successful firms use controls to put plans into effect, evaluate plan effectiveness, make
corrections, and evaluate and reward or correct executive performance. Subsidiaries and
affiliates are interchangeable terms.

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A. Where to Make Decisions in Wholly-Owned Subsidiaries?

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. Product and Equipment
a. For profit reasons, subsidiaries may favor product and equipment designed specially
for the market and conditions of the host country.
b. The parent company may prefer product and equipment be standardized in order to
multiply source options and simplify procurement and maintenance.
2. Competence of Subsidiary Management and Headquarters’ Reliance on It. With greater
confidence, more decisions will be delegated or left to subsidiaries.
a. Moving Executives Around
i. Moving subsidiary managers into parent operations or into other subsidiaries
widens the executives’ knowledge of the system and knowledge of each
other.
ii. Moving parent managers into subsidiaries widens their knowledge of
subsidiary problems to which the parent might not be sensitive otherwise.
iii. Transferring managers gives them opportunity to learn HQ policies and
problems if implementing policies at subsidiary level first-hand.
b. Understanding Host Country Conditions
HQ needs to understand host country’s conditions and relies on subsidiary managers
for information.
c. How Far Away Is the Host Country?
The greater the distance between HQ and subsidiary, HQ relies more on subsidiary
manager information.
3. Size and Age of the IC.
a. 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.
b. At the same time, delegation and decentralization allow for local adaptation, so there
may be a tension in this area.
4. Benefiting the Enterprise to the Detriment of a Subsidiary
A small loss for a subsidiary can result in a greater gain for the total IC and HQ
makes this decision.
a. Moving Production Functions
i. HQ may move production factors from one country to another to gain financial or
competitive advantage.
ii. Subsidiary not thrilled with loss of control.
b. Which Subsidiary Gets the Order?
HQ decides on a number of factors including cost, operational issues, financial
factors, and governmental pressure.
c. Multicountry Production
i. If one market is too small for economies of scale, HQ may have specific countries
make a single component(s) that all other markets can use.
ii. This demands greater HQ coordination and control.

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d. Which Subsidiary Books the Profit?

i. HQ decides price and profit allocation to the subsidiary that contributes most to
overall IC profitability and will get to book the profit.
ii. Transfer pricing is the price for transactions between members of the same
enterprise.
e. Subsidiary Frustration. An objective of all businesses is to obtain and keep able, loyal
executives. If subsidiary managers are not allowed to make important decisions,
regarding their operations, they may resign or become hostile toward HQ.
B. Joint Ventures and Subsidiaries Less Than 100 Percent Owned
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.
1. Loss of Freedom and Flexibility. 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. 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. A local joint venture
partner is unlikely to agree with measures that penalize the venture for the IC’s benefit.
2. Control Can Be Had. 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.
C. Reporting
For controls to be effective, all operating units of an IC must provide headquarters with
timely, accurate, and complete reports.
1. Financial - 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.
2. Technological - 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. 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.
3. Market Opportunities - Affiliates may spot new or growing markets for some product of
the enterprise.
4. Political and Economic - Economic and political conditions in local markets need to be
continually monitored and reported to HQ for quick response or changes as needed.

D. Managing in a World out of Control.

The Internet is the closest thing to a working anarchy the world has ever seen. No one owns
or runs it, protocol and etiquette is minimal, and there are no rules or regulations.
1. MIT’s system of distributed control:
a. do simple things first
b. learn to do them flawlessly
c. add new layers of activity over the results of the simple task
d. don’t change the simple things
e. make the new layer work as flawlessly as the simple,

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f. repeat ad infinitum
2. The most successful companies will advance by involving and adapting in this organic,
bottom-up way. Successful leaders will have to:
a. relinquish or relax control,
b. honor error because a breakthrough may be indistinguishable from a mistake,
c. constantly seek disequilibrium
IV. Control: Yes and No
A. Timely and accurate reporting is necessary for successful control within the IC
B. Trends and IT lead to decentralization and de-jobbing
C. Hierarchies are dissolving and leaders often give up direct control to workers trained and
rewarded for coping with evolving tasks.

Answers to End of Chapter Questions

1. Why is organizational structure an important issue for international companies?

Organizational structure integrates the organization. It is the way jobs are grouped and their
reporting relationships established. It also provides information conduits for the data needed
for decision-making.

2. What are the main strengths and weaknesses of the use of an international division as
part of a company’s organizational structure? Under what circumstances might such a
structure be an appropriate choice for a company?
An international division takes control of the IC’s international involvement. After beginning
with an international division, most companies move on to organize their international
activities based on product, function, classes of customer, or region. The international division
structure is limited in its ability to deal with complexity of doing business internationally. At
the same time, some large companies, such as Wal-Mart, use an international division to
organize their international involvement.

3. Compare and contrast geographic and product structures for international companies.
Geographic structures bring marketing issues such as distribution and localization to the fore,
whereas product structures lend a focus to product development. The points of comparison are
in specialists. Product structures have regional expert duplication, and geographic structures
have product and functional expert duplication.

4. Your company’s matrix organization isn’t working; decisions are taking too long, and it
seems to you that instead of best solutions, you’re getting compromises. What can your
company’s CEO do to address this problem?
Set up an organization based on product or region and install a matrix overlay. Establish a
group of regional experts at headquarters if your new organization is based on product. Make
clear to the product managers that the regional experts will have input to the product decisions.

5. You are the CEO of Mancon Incorporated, and you have just acquired Pozoli, the Italian
small-appliance maker (electric shavers, small household and personal care appliances).
It has been in business for more than 40 years and has manufacturing plants in Italy,
Mexico, Ireland, and Spain. Its output is sold in more than 100 markets worldwide,
including the United States. Your company is now organized into two product groups—
shaving and personal care—along with an international division at the top level. How are
you going to include Pozoli in your organization? Explain your rationale.
You could break up Pozoli and put its product divisions in the Mancon divisions Pozoli is
already a multinational that has been in business for years. Its brand names are well known all
over the world. Probably better to locate the entire company in the international division unless

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this division’s job is only to handle exports for the two product groups. If so, either you need to
change the international division’s thrust or establish Pozoli as a separate division on the same
level as the international division and the two product divisions.

6. It is obvious that in formulating new strategies, management may uncover a need to

change its organization. Can you describe some situations in which the reverse may be
true?
The reverse is instead of strategic planning driving change, another force drives organizational
change. Let’s say the firm makes an acquisition whose business is significantly different from
the present businesses. New expertise is needed. Perhaps the company is entering new markets
and needs regional expertise it doesn’t have now. An important customer changing a JIT or
synchronous production could force the firm to change also as Ford, GM, Campbell and many
others have required their major suppliers to do. This alone could require the firm to make
numerous changes in the organization.

7. In determining whether decisions will be made by the parent company or by its

subsidiaries, what are the considerations when equipment and products are standardized
worldwide rather than tailored to individual national circumstances and markets?
If the subsidiary’s market is large and different enough, it may make economic sense to design
and produce equipment and products for that one market. Management of the subsidiary would
probably make those decisions. Otherwise, it may be more economic to standardize on a
worldwide basis. Such standardization could save on procurement, training, and maintenance
costs. It could give the organization a choice of sources; if one subsidiary had difficulties, the
product could be furnished by another.

8. Regarding issues of control in an international company:

a. What are some decisions that could result in detriment for a subsidiary but greater
benefit for the enterprise as a whole?
Decisions to channel business through a low tax country subsidiary rather than a high tax
country sub, or decisions based on capacity utilization or production costs to let one
subsidiary bid for a contract while forbidding others to complete.

b. In such circumstances, where will the decision be made—at IC headquarters or at the

affected subsidiary?
Such decisions would most likely be made at IC headquarters.

9. What measures can be utilized to control subsidiaries that are less than 100 percent
owned by the firm or joint venture partners in which the firm has no ownership?
The company can exercise control if it is providing necessary ingredients such as money,
technology, management skill, production management or sales distribution.

10. Some companies use standardized organizational controls across their entire
organization, in that the same control systems are used for each unit or operation
worldwide. For example, companies such as Starbucks, Kentucky Fried Chicken, or
McDonald’s apply the same rigid quality controls throughout all aspects of their
organizations, even as they expand internationally. Why would a company such as these
impose rigorous corporate quality standards, regardless of the country in which it
operates? What modifications in these quality standards, if any, should the company
permit because of differences across nations or regions of the world? Why is the company
allowing these modifications to occur?
Companies might implement rigorous quality standards, regardless of country of operation, if
they are developing standardized froducts for global markets. There may also be a preference to
standardize because it is easier for the headquarters’ personnel to be able to oversee and
understand international operations when activities are done in the same manner everywhere

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the company operates. The decision on whether to permit modifications to quality standards
will depend on consideration of a number of different factors, including the specific
circumstances in different countries (such as legal and regulatory differences), the company’s
international strategy, analysis of competitors, and the nature and extent of potential subsidiary
detriment, among other factors. Adjustments might be considered due to factors such as the
impact of differences in language, regulations, profit potential, competence of subsidiary
managers, and the size and age of the IC.

GlobalEDGE Answers

Exercise One
1. You work at a U.S.-based food and beverage company that is currently planning to
expand operations to other parts of the world. To design the structure of the international
organization, management has requested additional information on the food and beverage
sector abroad. Use the Industry Profiles in the globalEDGE website to prepare a risk
assessment of the Food and Beverage industry that can help management gain a better
understanding of the external environment in foreign markets.

Answer:
http://globaledge.msu.edu
Search Phrase: “Food and Beverage Industry”
Resource Name: globalEDGE Industry Profiles
globalEDGE™ Category: “Industries: Food and Beverage”
Website: http://globaledge.msu.edu/industries/food-and-beverage/
In the globalEDGE site, click on the “Industries” tab and select “Food and Beverage.” Go to “risk
description” to obtain the requested information.

Exercise Two
2. Fortune magazine conducts an annual survey and publishes the rankings of the “World’s
Most Admired Companies.” Locate the most recent publicly available ranking, follow the
link to the best and worst companies, and focus on the nine factors highlighted by Fortune
magazine. Based on these data, prepare an executive summary of the strategic and
organizational success factors of a company of your choice.

Answer:
http://globaledge.msu.edu
Go to Resource Desk: http://globaledge.msu.edu/ResourceDesk/
Search Phrase: “Fortune”
Resource Name: Fortune: World’s Most Admired Companies
globalEDGE™ Category: “Research: Rankings”
Website: http://money.cnn.com/magazines/fortune/mostadmired/2011/index.html

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