Module VI

Multinational corporations: Organization, Design and Structure

MSM/SRK/IBM/10

P &G
Started in 1837 William Procter and James Gamble as candle and soap manufacturing company originating from Cincinnati, USA Created in 1930 by the amalgamation of the operations of British soapmaker Lever Brothers and Dutch margarine producer Margarine Unie

MSM/SRK/IBM/10

Personal care, Household Care ,Health and Well-Being products

The Role of Strategy in a Firm 
Strategy: 
Actions

managers take to attain the goals of the firm.  Need to identify and take action that lowers the cost of value creation and/or differentiates the firm s product through superior design, quality, service, or functionality.

MSM/SRK/IBM/10

Profiting from Global Expansion 
International 
Earn

firms can:

a greater return from competencies. distinctive skills or core competencies.  Realize location economies by dispersing value creation activities to locations where they can be performed most efficiently.  Realize greater experience curve economies, economies, which reduces the cost of value creation.

MSM/SRK/IBM/10

Experience Curve Economies 
Learning 
Labor

Effects: Effects:

productivity increases over time as individuals learn the most efficient ways to perform particular tasks. 

Economies

of Scale: 

Reductions

in unit cost achieved by producing a large volume of a product. 

Strategic 
Moving
MSM/SRK/IBM/10

Significance:

down the experience curve allows a firm to reduce its cost of creating value.

The Experience Curve
Unit costs B Moving down the curve reduces the cost of creating value

A Accumulated output

MSM/SRK/IBM/10

The Firm as a Value Chain   

Primary Activities:  Those activities having to do with creating, marketing and delivering the product to customers and providing support and after-sales afterservice. Support Activities:  Provide inputs that allow primary activities to occur. An Efficient Infrastructure:  helps create value and reduce the cost of creating value.
MSM/SRK/IBM/10

The Firm as a Value Chain

Profits

MSM/SRK/IBM/10

Firms Face Two Conflicting Concepts (Pressures) Overseas 
Reduce

costs.  Be responsive to local needs.

MSM/SRK/IBM/10

Pressures for Cost Reduction and Local Responsiveness
High
Company C

Cost pressures
Company B

Generally reflects the position of most companies

Low Low

High Pressures for local responsiveness

MSM/SRK/IBM/10

Cost Reduction  

Desire to reduce costs by:  Mass production  Product standardization.  Optimal location production. Hard to do with commodity-type products. commodity products serving universal needs.

Rs. 

Also 

hard where competition is in low cost producing location.

Finally, int l competition creates price pressures.

MSM/SRK/IBM/10

Local Responsiveness 
Different

consumer tastes and preferences.  Different infrastructure and practice.  Differences in distribution channels.  Government demands.

MSM/SRK/IBM/10

McDonalds 
McDonald s

overseas experience.  Detailed planning  Export of management skills.  Foreign partners.  Adaptation/Adopting ideas.

MSM/SRK/IBM/10

Strategic Choice 
Four

basic strategies: 

International

strategy.  Multidomestic strategy.  Global strategy.  Transnational strategy.

MSM/SRK/IBM/10

Four Basic Strategies
High
Global Strategy Transnational Strategy

Cost pressures
International Strategy Multi domestic Strategy

Low

Low

High Pressures for local responsiveness

MSM/SRK/IBM/10

International Strategy 
Go

where locals don t have your skills.  Little adaptation. Products developed at home (centralization).  Manufacturing and marketing in each location.  Makes sense where low skills, competition, and costs exist.
MSM/SRK/IBM/10

MultiMulti-domestic Strategy 
Maximize

local responsiveness. 

Customize

the product and marketing strategy to national demands. 

Skill

and product transfer.  Transfer all value-creation activities, no valueexperience curve rewards.  Good for high local responsiveness and low cost reduction pressures.
MSM/SRK/IBM/10

Global Strategy 
Best

use of the experience curve and location economies.  This is the low cost strategy.  Utilize product standardization.  Not good where local responsiveness demand is high.

MSM/SRK/IBM/10

Transnational Strategy 
Christopher

MSM/SRK/IBM/10

Bartlett and Sumantra Ghoshal  Core competencies can develop in any of the firm s worldwide operations.  Flow of skills and product offerings occurs throughout the firm - not only from home firm to foreign subsidiary (global learning).  Makes sense where there is pressure for both cost reduction and local responsiveness.

Opening Case 
  

 

One of world s oldest multinational corporations Organized on a decentralized basis Annual conferences on company strategy and executive education sessions establish connections between managers Duplication of facilities and high cost structure a problem in new competitive environment 1996: introduced structure based on regional business groups Lever Europe established to consolidate the company s detergent operation in order to reduce costs and speed up new product information

MSM/SRK/IBM/10

Introduction
Organizational architecture includes the totality of a firm s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people

MSM/SRK/IBM/10

Essentials of an Ideal Organisational Architecture 

Superior enterprise profitability requires three conditions  The different elements of a firm¶s organizational architecture must be internally consistent  The organizational architecture must match or fit the strategy of the firm  The strategy and architecture of the firm must not only be consistent with each other but they also must be consistent with competitive conditions

MSM/SRK/IBM/10

Organizational Architecture 
Three 

elements of organizational structure

The formal division of the organization into sub-units sub The location of decision-making responsibilities within decisionthat structure  The establishment of integrating mechanisms to coordinate the activities of subunits  Control systems are the metrics used to measure the performance of sub-units and make judgments about subhow well managers are running them  Incentives are the devices used to reward appropriate managerial behavior
MSM/SRK/IBM/10

Organizational Architecture 
 

Processes are the manner in which decisions are made and work is performed within the organization Organizational culture refers to the norms and value systems that are shared among the employees of an organization People are not just the employees of the organization; the term refers also to the strategy used to recruit, compensate, and retain those individuals and the type of people they are in terms of their skills, values, and orientation

MSM/SRK/IBM/10

Organizational Architecture

MSM/SRK/IBM/10

Organizational Structure 
This

should be thought of in terms of three dimensions 
Vertical

MSM/SRK/IBM/10

differentiation: differentiation: the location of decisiondecision-making responsibilities within a structure  Horizontal differentiation: the formal differentiation: division of the organization into sub-units sub Establishment of integrating mechanisms: mechanisms for coordinating mechanisms: subsub-units

Centralization Versus Decentralization 
Centralization: 
 

Decentralization: 
     

Facilitates coordination Ensure decisions consistent with organization¶s objectives TopTop-level managers have means to bring about organizational change Avoids duplication of activities

Overburdened top management Motivational research favors decentralization Permits greater flexibility Can result in better decisions Can increase control

MSM/SRK/IBM/10

Horizontal Differentiation: The Design of Structure 
Horizontal

differentiation is concerned with how the firm decides to divide itself into sub-units. sub The decision is normally made on the 
Basis

of function  Type of business  Geographical area
MSM/SRK/IBM/10

A Typical Functional Structure
Top Management

Purchasing

Manufacturing

Marketing

Finance

Buying units

Plants

Branch sales units

Accounting units

MSM/SRK/IBM/10

A Typical Product Division Structure
Headquarters

Division product line A

Division product line B

Division product line C

Department Purchasing Buying units
Figure 13.2
MSM/SRK/IBM/10

Department manufacturing

Department marketing

Department finance

Plants

Branch sales units

Accounting units

The International Division  



Many manufacturing firms expanded internationally by exporting the product manufactured at home to foreign subsidiaries to sell In time it might prove viable to manufacture the product in each country The result could be that
Firms with a functional structure at home would replicate the functional structure in every country in which they do business  Firms with a divisional structure would replicate the divisional structure in every country in which they do business 

MSM/SRK/IBM/10

International Division Structure
Headquarters
Domestic division General manager Product line A Domestic division General manager Product line B Domestic division General manager Product line C International division General manager area line

Figure 13.3

Functional units

Country 1 General manager (product A, B, and / or C)

Country 2 General manager (product A, B, and / or C)

Functional units
MSM/SRK/IBM/10

Problems with the International Structure 
Potential

for conflict and coordination problems between domestic and foreign operations  Heads of foreign subsidiaries are not given as much voice in the organization as the heads of domestic functions 

The international division is presumed to be able to represent the interests of all countries to headquarters

MSM/SRK/IBM/10

Problems with the International Structure 
Lack

of coordination between domestic operations and foreign operations  To combat these problems firms choose one of the following structures
Worldwide product divisional structure which tends to be adopted by diversified firms that have domestic product division  Worldwide area structure which tends to be adopted by undiversified firms whose domestic structures are based on functions 

MSM/SRK/IBM/10

The International Structural Stages Model

MSM/SRK/IBM/10

Worldwide Area Structure 
Favored

by firms with low degree of diversification and domestic structure based on function  World is divided into autonomous geographic areas  Operational authority decentralized  Facilitates local responsiveness  Fragmentation of organization can occur  Consistent with multi-domestic strategy multiMSM/SRK/IBM/10

Worldwide Area Structure

Headquarters

North American area Latin American area

European area Middle East / Africa area Far East area

Figure 13.5

MSM/SRK/IBM/10

Worldwide Product Divisional Structure 
  

MSM/SRK/IBM/10

Adopted by firms that are reasonably diversified Original domestic firm structure based on product division Value creation activities of each product division coordinated by that division worldwide  Help realize location and experience curve economies  Facilitate transfer of core competencies Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness

A Worldwide Product Division Structure
Headquarters

Worldwide product group or division A

Worldwide product group or division B

Worldwide product group or division C

Area 1 (domestic)

Area 2 (international)

MSM/SRK/IBM/10

Functional units

Global Matrix Structure 
Helps

to cope with conflicting demands of earlier strategies  Two dimensions: product division and geographic area  Product division and geographic areas given equal responsibility for operating decisions  Problems 
Bureaucratic

MSM/SRK/IBM/10

structure slows decision making  Conflict between areas and product divisions  Difficult to make one party accountable due to dual responsibility

Global Matrix Structure
Headquarters

Area 1 Product division A Product division B Product division C
MSM/SRK/IBM/10

Area 2

Area 3

Manager here belongs to division B and area 2

Global Matrix Structure

MSM/SRK/IBM/10

Head quarter and Subsidiaries relationships: Integrating Mechanisms 
Need

for coordination follows the following order on an ascending basis 
Localization  International  Global  Transnational

MSM/SRK/IBM/10

Impediments to Coordination 
Differing

goals and lack of respect  Different orientations due to different tasks  Differences in nationality, time zone, and distance  Particularly problematic in multinational enterprises with their many sub-units both subhome and abroad
MSM/SRK/IBM/10

Formal Integrating Systems 
Direct

contact between sub-unit managers sub Liaison roles: an individual assigned responsibility to coordinate with another subsub-unit on a regular basis  Temporary or permanent teams from subsubunits to achieve coordination  Matrix structure: all roles viewed as integrating roles 
Often
MSM/SRK/IBM/10

based on geographical areas and worldwide product divisions

Formal Integrating Systems

MSM/SRK/IBM/10

Informal Integrating Mechanisms  

 

Informal management networks supported by an organization culture that values teamwork and a common culture NonNon-bureaucratic flow of information It must embrace as many managers as possible Two techniques used to establish networks  Information systems  Management development policies 
Rotating

managers through various sub-units on a subregular basis

MSM/SRK/IBM/10

Informal Integrating Mechanisms

MSM/SRK/IBM/10

Control Systems and Incentives 
Types of control systems  Personal controls  Bureaucratic controls  Output controls  Cultural controls  Incentive systems  Refer to devices used to reward appropriate behavior  Closely tied to performance metrics used for output controls
MSM/SRK/IBM/10

Factors that Influence Incentive Systems 
Seniority

and nature of work  Reward linked to output target that the employee can influence  Cooperation between managers in sub-units sub Link incentives to profit of the entire firm  National differences in institutions and culture  Consequences of an incentive system should be understood
MSM/SRK/IBM/10

Organizational Culture 
 

MSM/SRK/IBM/10

Values and norms shared among people Sources  Founders and important leaders  National social culture  History of the enterprise  Decisions that result in high performance Cultural maintenance  Hiring and promotional practices  Reward strategies  Socialization processes  Communication strategy

Culture and Performance 
A

Strong Culture 

Not

always good  Sometimes beneficial, sometimes not  Context is important 

Adaptive cultures  Culture must match an organization¶s architecture  Culture does not necessarily translate across borders
MSM/SRK/IBM/10

Organizational Change  



Firms need to periodically alter their architecture to conform to changes in environment and strategy Hard to achieve due to organizational inertia Sources of inertia  Possible redistribution of power and influence among managers  Strong existing culture  Senior manager¶s preconceptions about the appropriate business model  Institutional constraints such as national regulations including local content rules regarding layoffs

MSM/SRK/IBM/10

Organizational Change 
Change 
Hard

to match competitive and strategy environment
to change 
Existing distribution of power and influence  Current culture  Manager¶s preconceptions about the appropriate

business model or paradigm  Institutional constraints 

Principles for change  Unfreeze the organization  Moving to the new state  Refreezing the organization
MSM/SRK/IBM/10