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Chapter 14

MGCR382 Chapter 14 Notes - International Organizational Design & Control.docx

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Management Core
MGCR 382
Nicholas Matziorinis

MGCR382 Chapter 14 Notes: International Organizational Design and Control The Nature of International Organizational Design Organization design – overall pattern of structural components and configurations used to manage the total organization. The appropriate design for any given organization may depend on the firm’s size, strategy, technology, and environment, as well as the cultures of the countries in which the firm operates. OD is also the basic vehicle through which strategy is ultimately implemented and through which the work of the organization is actually accomplished  1) Allocates organizational resources, 2) assigns tasks to its employees, 3) it informs those employees about the firm’s rules, procedures, and expectations about the employees’ job performances, 4) collects and transmits information necessary for problem solving, decision making, and effective organizational control (particularly important for large MNCs, which must manage sharing vast amounts of information worldwide  Design is changed continually  these changes often result from changes in a firm’s strategy because an important characteristic of a successful firm is its ability to match its strategy with a compatible organizational design  Corollary approach – the firm delegates responsibility for processing such orders to individuals within an existing department, such a finance or marketing. Under this approach, the firm continues to use its existing domestic OD  typical of a firm that has a small level of international activity  Export department – takes responsibility for overseeing international operations, marketing products, processing orders, working with foreign distributors, and arranging financing.  When selling to foreign customers is not fundamentally different from selling to domestic ones, the export department may get by with knowing only a little about foreign markets. However, as international activities increase, firms find that an export department no longer serves their needs.  Firms respond to the challenges of controlling their burgeoning international business by changing their OD through the creation of an international division that specializes in managing foreign operations  allows a firm to concentrate resources and create specialized programs targeted on international business activity while simultaneously keeping that activity segregated from the firm’s ongoing domestic activities Global Organization Designs  As a firm evolves from being domestically oriented with international operations to becoming a true MNC with global aspirations, it typically abandons the international division approach  in place of the division it usually creates a global OD to achieve synergy Area knowledge: managers must understand the cultural, commercial, social, and economic conditions in each host country market in which the firm does business Product knowledge: managers must comprehend such factors as technological trends, customer needs, and competitive forces affecting the good the firm produces and sells Functional knowledge: managers must have access to coworkers with expertise in basic business functions such as production, marketing, finance, accounting, human resource management, and information technology Ethnocentric – used by firms that operate internationally the same way they do domestically Polycentric – used by firms that customize their operations for each foreign market they serve Geocentric – used by firms that analyze the needs of their customers worldwide and then adopt standardized operations for all markets they serve Global Product Design – assigns worldwide responsibility for specific products or product groups to separate operating divisions within a firm. This design works best when the firm has diverse product lines or when its product lines are sold in diverse markets, thereby rendering the needs for coordination between product lines relatively unimportant. If the products are related, the organization of the firm takes on what is often called an M-form design; if the products are unrelated, the design is an H-form. The M in M-form is for multidivisional (the various divisions of the firm are usually self-contained operations with interrelated activities). The H in H-form stands for holding (the various unrelated businesses function with autonomy and little interdependence)  Advantages: because a division focuses on a single product or product group, the division managers gain expertise in all aspects of the product or products, better enabling them to compete globally. Second, the global product design facilities efficiencies in production because managers are free to manufacture the product wherever manufacturing costs are the lowest. It also allows managers to coordinate production at their various facilities, shifting output from factory to factory as global demand or cost conditions fluctuate. Further, because managers have extensive product knowledge, they are better able to incorporate new technologies into their products and respond quickly to technological changes. The GPD also facilitates global marketing  firm gains flexibility in introducing, promoting, and distributing the product. Finally, because the GPD forces managers to think globally, it facilitates geocentric corporate philosophies  Disadvantages: it may encourage extensive duplication because each product group needs its own functional-area skills such as marketing, finance, etc. and sometimes even its own physical facilities for production, distribution, and R&D. Similarly, each product group must develop its own knowledge about the cultural, legal, and political environments of the various regional and national markets in which it operates. Coordination and corporate learnings across product groups becomes more difficult. Global Area Design – organizes the firm’s activities around specific areas or regions of the world. This approach is particularly useful for firms with a polycentric or multidomestic corporate philosophy. A GAD is most likely to be used by a firm whose products are not readily transferable across regions  Advantages: particularly useful for a firm whose strategy is marketing-driven rather than predicated on manufacturing efficiencies or technological innovation or for a firm whose competitive strength lies in the reputation of its brand name products. Further, the geographical focus of this design allows a firm to develop expertise about the local market. Area managers can freely adapt the firm’s products to meet local needs and can quickly respond to changes in the local marketplace. They also can tailor the product mix they offer within a given area  Disadvantages: by focusing on the needs of the area market, the firm may sacrifice cost efficiencies that might be gained through global production. Diffusion of technology is also slowed because innovations generated in one area division may not be adopted by all the other. Thus, this design may not be suitable for product lines undergoing rapid technological change. The GAD results in duplication of resources because each area division must have its own functional specialists, product experts, and production facilities  makes coordination across areas expensive and discourages global product planning Global Functional Design – calls for a firm to create departments or divisions that have worldwide responsibility for the common organizational functions. This design is used by MNCs that have relatively narrow or similar product lines. It results in what is called a U-form organization (unity)  Advantages: the firm can easily transfer expertise within each functional area. Second, managers can maintain highly centralized control over functional operations. Finally, the global functional design focuses attention on the key functions of the firm  Disadvantages: inappropriate for many businesses  the GFD is practical only when the firm has relatively few products or customers. Coordination between divisions can be a major problem. There may also be duplication of resources among managers  Limited applicability. It is used by many firms engaged in extracting and processing natural resources, because the ability to transfer technical expertise is important Global Customer Design – used when a firm serves different customers or customer groups, each with specific needs calling for special expertise or attention. This design is useful when the various groups targeted by a firm are so diverse as to require totally distinct marketing approaches. The GCD allows the firm to meet the specific needs of each customer segment and track how well the firm’s products or services are doing among those segments. On the other hand, the GCD may lead to a significant duplication of resources if each customer group needs its own area and functional specialists. Coordination between the different divisions is also difficult because each is concerned with a fundamentally different market Global Matrix Design – result of superimposing one form of OD on top of an existing, different form. The resulting design is usually quite fluid, with new matrix dimensions being created, downscaled, and eliminated as needed. Using a GMD, a firm can form specific product groups comprising members from existing functional departments. These product groups can then plan, design, develop, product, and market new products with appropriate input from each functional area. In this way the firm can draw on both the functional and the product expertise of its employees. After a given product development task is completed, the product group may be dissolved; its members will then move on to new assignments  Advantages: it helps bring together the functional, area, and product expertise of the firm into teams to develop new products or respond to new challenges in the global marketplace. Promotes organizational flexibility  allows firms to take advantage of functional, area, customer and product ODs as needed while simultaneously minimizing the disadvantages of each. Members of a product development team can be added or dropped from the team as the firm’s needs change. The GMD also promotes coordination and communication among managers from different divisions  Disadvantages: it is not appropriate for a firm that has few products and that operates in relatively stable markets. Second, if often puts employees in the position of being accountable to more than one manager. As a result, the individual may have split loyalties. Similarly, the GMD creates a paradox regarding authority. On the one hand, part of the design’s purpose is to put decision-making authority in the hands of those managers most able to use it quickly. On the other hand, because reporting relationships are so complex and vague, getting approval for major decisions may actually take longer. And finally, the GMD tends to promote compromises, or decisions based on the relative political clout of the managers involved Hybrid Global Designs  Most firms create a hybrid design that best suits their purposes  A firm may use a GPD as its overall approach, but it may have more of a functional orientation or area focus in some of its product groups than in others  In similar fashion all large international firms mix and match forms of organization in different areas and at different levels to create hybrid organization designs that their managers believe best serve the firm’s needs Related Issues in Global Organization Design Centralization vs. Decentralization  When designing its organization, an MNC must make a decision that determines the level of autonomy, power, and control it wants to grant its subsidiaries. Because both centralization and decentralization offer attractive benefits to the MNC, most firms constantly tinker with a blend of the two to achieve the best outcome in terms of overall strategy Role of Subsidiary Boards of Directors  An MNC typically incorporates each of its subsidiaries in the subsidiary’s country of operation. This is done to limit the subsidiary’s liability and to allow it to attain legal status as a local citizen. Most countries require each corporation, including a wholly owned subsidiary of a foreign MNC, to have a board of directors. The board is elected by corporate shareholders, is responsible to those shareholders for the effective management of the subsidiary, and oversees the activities of top-level managers. The issue facing most MNCs is whether to view the creation of a subsidiary board of directors as a pro forma exercise and therefore give the board little real authority or to empower the board with substantial decision-making authority  Empowering the subsidiary’s board promotes decentralization. Foreign subsidiaries may need the authority to act quickly and decisively without having to always seek the parent’s approval. Also, if the MNC decentralizes authority, an active board provides a clear accountability and reporting link back to corporate headquarters. Some MNCs have also found that appointing prominent local citizens to the subsidiary’s board is helpful in conducting business in a foreign country  A subsidiary board also can help monitor the subsidiary’s ethical and social responsibility practices. A potential disadvantage of empower a subsidiary’s board is that the subsidiary may become too independent as its board assumes substantial authority and thereby fails to maintain the desired level of accountability to the parent  In general an SB is most useful when the subsidiary has a great deal of autonomy, its own self-contained management structure, and a business identity separate from the parent’s. Active subsidiary boards are particularly useful in H-form organizations bec
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