Organization of Multinational

Operations: Why does it Matter?

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.

Organization of MNC’s Operations

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

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

Organization of MNC’s Operations

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

Development of International Corporate Structure….It’s a process!

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

Development of International 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

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 P&G for a long time.

MNC Corporate Structure

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.

…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.

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

MNC Corporate Structure (see figure 8.2)

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

MNC Corporate Structure

CEO

Headquarters Staff

EuropeanDivision

North AmericanDivision

South AmericanDivision

Geographic Division Structure(Figure 8.3) is the most common structure

AdvantagesDisadvantages 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.

CEO

Headquarters Staff

Product Group A Product Group B Product Group C

Product Division Structure Figure 8.4

AdvantagesDisadvantages 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.

CEO

R&D (Worldwide)

Marketing (Worldwide)

Manufacturing(Worldwide)

Finance (Worldwide)

International Function StructureFigure 8.5

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.

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.

CEO

Product A (Worldwide,except US and Europe

USA DivisionEuropeanDivision

Product B (Worldwide,except US and Europe

International Mixed Structure Figure 8.6

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).

Network Model

Suppliers, bankers, manufacturers, customers, etc.

Complex Process of Coordination and Cooperation

Large Flows of Components, Products, Resources and Information among the network

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.