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Cite all your sources using APA style. See External Links for guidance in using APA style citations. Section Three; Strategy and Structure: The final task before setting up shop is to determine the optimal international strategy and organizational structure that will best support this international venture. The CEO of your organization has asked you to write a report on your recommendations of the type of international strategy and organizational structure they should adopt. For this portion of the term project, you will be focusing specifically on the concepts and discussions from Chapters 13 (Strategy) and 14 (Structure). Please also remember to research the actual organization you have been using as a reference for this project. Look at their current international presence (if they do not have an international presence, look at their domestic presence), their organizational culture, their current structure, and their supply and distribution channels. You are to use at least three additional sources to complete this assignment. PLEASE remember to cite all your sources; proper citation of your sources is a requirement for this course. This assignment is to be a minimum of 2 pages typed, font 12, double-spaced. Please support all recommendations with sound reasoning and research. International Business, 8th Edition Griffin & Pustay Copyright © 2015 Pearson Education, Inc. Chapter 13- Learning Objectives Compare joint ventures and other forms of strategic alliances Characterize the benefits of strategic alliances Describe the scope of strategic alliances Discuss the forms of management used for strategic alliances Identify the limitations of strategic alliances Copyright © 2015 Pearson Education, Inc. Chapter 13- International Corporate Cooperation Strategic Alliances Cross-licensing of proprietary technology Sharing of production facilities Co-funding of research projects Marketing of each other’s products using existing distribution networks Joint Venture (JV) Firms Share Management One Firm Takes Responsibility Independent Managers Are Hired Copyright © 2015 Pearson Education, Inc. Chapter 13- Cooperation between international firms can take many forms, such as cross-licensing of proprietary technology, sharing of production facilities, co-funding of research projects, and marketing of each other’s products using existing distribution networks. Such forms of cooperation are known collectively as strategic alliances, business arrangements whereby two or more firms choose to cooperate for their mutual benefit. The partners in a strategic alliance may agree to pool R&D activities, marketing expertise, or managerial talent. A joint venture (JV) is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are normally established as corporations and are owned by the founding parents in whatever proportions they negotiate. Although unequal ownership is common, many are owned equally by the founding firms. Each participant in a strategic alliance is motivated to promote its own self-interest, but each one has determined that cooperation is the best way to achieve its goals. A joint venture, as a separate legal entity, must have its own set of managers and board of directors. It may be managed in one of three ways. The founding firms may jointly share management, with each appointing key personnel who report back to officers of the parent. One parent may assume primary responsibility. An independent team of managers may be hired to run it. The third approach is often preferred, because independent managers focus on what is best for the joint venture rather than attempting to placate bosses from the founding firms. International Corporate Cooperation (Cont.) Copyright © 2015 Pearson Education, Inc. Chapter 13- Strategic Alliance Purpose Scope Duration Joint Ventures Broader Broader Longer Non-Joint Ventures Narrower Narrower Shorter A formal management organization allows a joint venture to be broader in purpose, scope, and duration than other types of strategic alliances. In contrast, a non–joint venture strategic alliance may be formed merely to allow the partners to overcome a particular hurdle that each faces in the short run. A joint venture will be more helpful if the two firms plan a more extensive and long-term relationship. A typical non–joint venture strategic alliance has a narrow purpose and scope. Because of their narrow mission and lack of a formal organizational structure, non–joint ventures are relatively less stable than joint ventures. Benefits of Strategic Alliances Copyright © 2015 Pearson Education, Inc. Chapter 13- As summarized in Figure 13.1, international business may realize four benefits from strategic alliances: ease of market entry, shared risk, shared knowledge and expertise, and synergy and competitive advantage. Ease of Market Entry Overcome Entrenched Competition Deal with Government Regulations Get Economies of Scale and Scope Manage Costs of Doing Business Copyright © 2015 Pearson Education, Inc. Chapter 13- A firm wishing to enter a new market often faces major obstacles, such as entrenched competition or hostile government regulations. Partnering with a local firm can often help it navigate around such barriers. In other cases, economies of scale and scope in marketing and distribution confer benefits on firms that aggressively and quickly enter numerous markets. Yet the costs of speed and boldness are often high and beyond the capabilities of a single firm. A strategic alliance may allow the firm to achieve the benefits of rapid entry, while keeping costs down. Shared Risk Copyright © 2015 Pearson Education, Inc. Chapter 13- Today’s major industries are so competitive that no firm has a guarantee of success when it enters a new market or develops a new product. Strategic alliances can be used to either reduce or control individual firms’ risks. Shared risk is an especially important consideration when a firm is entering a market that has just opened up or that is characterized by uncertainty and instability. New Market/New Product Strategic Alliances Reduce/Control Risks Shared Knowledge and Expertise Copyright © 2015 Pearson Education, Inc. Chapter 13- Still another common reason for strategic alliances is the potential for the firm to gain knowledge and expertise that it lacks. A firm may want to learn more about how to produce a product or service, acquire certain resources, deal with local governments’ regulations, or manage in a different environment. A business partner can often provide such information. Strategic Alliances Gain Knowledge and Expertise Synergy and Competitive Advantage Market Entry Risk Sharing Learning Potential Copyright © 2015 Pearson Education, Inc. Chapter 13- Firms may also enter into strategic alliances in order to attain synergy and competitive advantage. These related advantages reflect combinations of the other advantages discussed in this section. The idea is that through some combination of market entry, risk sharing, and learning potential, each collaborating firm will be able to achieve more than if it had attempted to enter a new market or industry alone. Scope of Strategic Alliances Copyright © 2015 Pearson Education, Inc. Chapter 13- The scope of cooperation among firms may vary significantly, as Figure 13.2 illustrates. For example, it may consist of a comprehensive alliance, in which the partners participate in all facets of conducting business, ranging from product design to manufacturing to marketing. Or it may consist of a more narrowly defined alliance that focuses on only one element of the business, such as R&D. The degree of collaboration will depend on the basic goals of each partner. Comprehensive Alliances Copyright © 2015 Pearson Education, Inc. Chapter 13- Comprehensive alliances arise when the participating firms work together to perform multiple stages of the process by which goods or services are brought to the market. Because of the broad scope of comprehensive alliances, the firms must establish procedures for meshing functional areas as finance, production, and marketing for the alliance to succeed. As a result, most comprehensive alliances are organized as joint ventures. As an independent entity, the joint venture can adopt operating procedures that suit its specific needs, rather than attempting to accommodate the procedures of the parents, as might be the case with another type of strategic alliance. Moreover, by fully integrating their efforts, participating firms in a comprehensive alliance are able to achieve greater synergy through sheer size and total resources. R&D Design Production Marketing Distribution Comprehensive Alliances Functional Alliances Production Alliances Marketing Alliances Financial Alliances R&D Alliances Copyright © 2015 Pearson Education, Inc. Chapter 13- Strategic alliances may also be narrow in scope, involving only a single functional area of the business. In such cases, integrating the needs of the parent firms is less complex. For this reason, functionally based alliances often do not take the form of a joint venture. Types of functional alliances include production alliances, marketing alliances, financial alliances, and R&D alliances. In a production alliance, two or more firms manufacture products or provide services in a shared or common facility. A production alliance may utilize a facility one partner already owns. A marketing alliance is a functional alliance in which two or more firms share marketing services or expertise. In most cases, one partner introduces its products or services into a market in which the other partner already has a presence. The established firm helps the newcomer by promoting, advertising, or distributing its products or services. The established firm may negotiate a fixed price for its assistance, or it may share in a percentage of the newcomer’s sales or profits. As an alternative, the firms may agree to market each others’ products on a reciprocal basis. No matter what the arrangements of a marketing alliance may be, all partners must ensure that their expectations and needs are mutually understood. A financial alliance is formed by firms that want to reduce financial risks associated with a project. Partners may share equally in contributing financial resources to the project. On the other hand, one partner may contribute the bulk of the financing, while special expertise or other contributions are provided by its partner (or partners) in lieu of financial investments. In an R&D alliance, the partners agree to undertake joint research to develop new products or services. Such alliances are usually not formed as joint ventures, since scientific knowledge can be transmitted through private research conferences, exchange of scientific papers, and laboratory visits. Instead, each partner may simply agree to cross-license whatever new technology is developed in its labs. That way, each partner will have equal access to all technology developed by the alliance, an arrangement that guarantees none of the partners will fall behind in the technological race. In addition, partners are freed from legal disputes among themselves over ownership and validity of patents. Because of the importance of high-tech industries to the world economy, many countries are supporting the efforts of R&D consortia as part of their industrial policies. An R&D consortium is a confederation of organizations that band together to research and develop new products and processes for world markets. It represents a special case of strategic alliance, in that governmental support plays a major role in its formation and continued operation. Implementation of Strategic Alliances Selection of Partners Form of Ownership Joint Management Considerations Copyright © 2015 Pearson Education, Inc. Chapter 13- The decision to form a strategic alliance should develop from the firm’s strategic planning process. Having made this decision, managers must then address several significant issues, which set the stage for how the arrangement will be managed. Some of the most critical issues are the selection of partners, the form of ownership, and joint management considerations.   Selection of Partners Compatibility Between Partners Nature of Products and Services Relative Safeness of the Alliance Learning Potential of the Alliance Copyright © 2015 Pearson Education, Inc. Chapter 13- Research suggests that strategic alliances are more likely to be successful if the skills and resources of the partners are complementary—each must bring to the alliance some organizational strength the other lacks. In addition, a firm should select a compatible partner that it can trust and with whom it can work effectively. Another factor to consider is the nature of a potential partner’s products or services. A firm should ally itself with a partner whose products or services are complementary to (but not directly competitive with) its own. Managers should gather as much information as possible about a potential partner before entering into a strategic alliance. For example, managers should assess the success or failure of previous strategic alliances formed by the potential partner. Also, it often makes sense to analyze the prospective deal from the other firm’s side. The probability of success will increase if the alliance makes good business sense for both parties. Before establishing a strategic alliance, partners should also assess the potential to learn from each other. At the same time, each partner should protect proprietary information and not offer information that will result in competitive disadvantages for itself, should the alliance dissolve. Forms of Ownership Copyright © 2015 Pearson Education, Inc. Chapter 13- Another issue in establishing a strategic alliance is the exact form of ownership that is to be used. A joint venture almost always takes the form of a corporation, usually incorporated in the country in which it will be doing business. The corporate form enables the partners to arrange a beneficial tax structure, implement novel ownership arrangements, and protect their other assets. This form also allows the joint venture to create its own identity apart from those of the partners. Of course, if either or both of the partners have favorable reputations, the new corporation may choose to rely on them, perhaps by including the partners’ names as part of its name. In isolated cases, incorporating a joint venture may not be possible or desirable. In such cases, the partners usually operate under a limited partnership. In a limited partnership, the managing partner assumes full financial responsibility for the venture, regardless of the amount of its own investment. The liability of other partners is limited to the amount of their investments. Obviously, such arrangements are riskier for the managing partner. Corporate Form Limited Partnership Forms of Ownership: Public-Private Venture Opportunities New Market Government Support Reduced Competition Challenges Investment Lost Assets Seized Operation Closed Copyright © 2015 Pearson Education, Inc. Chapter 13- Another form of joint venture is a public-private venture. This arrangement involves a partnership between a privately owned firm and a government entity. When the government of a country controls a resource, it may enlist the assistance of a firm with expertise related to that resource. Similarly, a firm may pursue a public-private venture if a particular country does not allow wholly-owned foreign operations. Such arrangements are typical in the oil industry. In assessing such a venture, a firm should consider the political and legal environment it will be facing. Foremost is the stability of the government. If the existing government is replaced with another, the firm may face serious challenges. At best, the venture will be considered less important by the new government. At worst, the firm’s investment may be wiped out, its assets seized, and its operation shut down. However, if the local government is relatively stable, public-private ventures can be quite beneficial. The government may act benignly and allow the firm to run the joint venture. It may also use its position to protect its own investment (and its partner) by restricting competing business activity. Joint Management Considerations Copyright © 2015 Pearson Education, Inc. Chapter 13- Further issues and questions are associated with how a strategic alliance will be managed. Three standard approaches are often used to jointly manage a strategic alliance (see Figure 13.3): shared management agreements, assigned arrangements, and delegated arrangements. Under a shared management agreement, each partner fully and actively participates in managing the alliance. The partners run the alliance, and their managers regularly pass on instructions and details to the alliance’s managers. The alliance’s managers have limited authority of their own and must defer most decisions to managers from the parent firms. This type of agreement requires a high level of coordination and near-perfect agreement between the participating partners. As such, it is the most difficult to maintain and the one most prone to conflict among the partners. Under an assigned arrangement, one partner assumes primary responsibility for the operations of the strategic alliance. Management of the alliance is greatly simplified because the dominant partner has the power to set its own agenda for the new unit, break ties among decision makers, and even overrule its partner(s). Of course, these actions may create conflict, but they keep the alliance from becoming paralyzed, which may happen if equal partners cannot agree on a decision. Under a delegated arrangement, which is reserved for joint ventures, the partners agree not to get involved in ongoing operations. Instead, the partners delegate management control to the executives of the joint venture itself. These executives may be hired to run the new operation or may be transferred from the participating firms. They are responsible for making day-to-day decisions, managing the venture, and implementing its strategy. Because they have the power and autonomy needed to make significant decisions, these executives are much less accountable to managers in the partners’ firms. Pitfalls of Strategic Alliances Copyright © 2015 Pearson Education, Inc. Chapter 13- Regardless of the care and deliberation a firm puts into constructing a strategic alliance, it still must consider limitations and pitfalls. Figure 13.4 summarizes five fundamental sources of problems that often threaten the viability of strategic alliances: incompatibility of partners, access to information, conflicts over distributing earnings, loss of autonomy, and changing circumstances. Incompatibility among the partners of a strategic alliance is a primary cause of the failure of such arrangements. At times, incompatibility can lead to outright conflict, although typically it merely leads to poor performance of the alliance. Limited access to information is another issue. For a collaboration to work effectively, one partner (or both) may have to provide the other with information it would prefer to keep secret. Each firm may have to be forthcoming with the information or else compromise the effectiveness of the collaboration. An obvious limitation of strategic alliances relates to the distribution of earnings. Because the partners share risks and costs, they also share profits. The partners must agree on the ratio of earnings that will be distributed as opposed to being reinvested in the business. They must also agree on accounting procedures that will be used to calculate earnings or profits, and the way transfer pricing will be handled. Another pitfall of a strategic alliance is the potential loss of autonomy. Just as firms share risks and profits, they also share control, thereby limiting what each can do. Changing circumstances may also affect the viability of a strategic alliance. The economic conditions that motivated the cooperative arrangement may no longer exist, or technological advances may have rendered the agreement obsolete. Review Questions What are the basic differences between a JV and other types of strategic alliances? Why have strategic alliances grown in popularity in recent years? What are the basic benefits partners are likely to gain from their strategic alliance? Briefly explain each. What are the basic characteristics of a comprehensive alliance? What form is it likely to take? What are the four common types of functional alliances? Briefly explain each. Copyright © 2015 Pearson Education, Inc. Chapter 13- Review Questions (Cont.) What is an R&D consortium? What factors should be considered in selecting a strategic alliance partner? What are the three basic ways of managing a strategic alliance? Under what circumstances might a strategic alliance be undertaken by public and private partners? What are the potential pitfalls of strategic alliances? Copyright © 2015 Pearson Education, Inc. Chapter 13- Copyright © 2015 Pearson Education, Inc. Chapter 13- International Business, 8th Edition Griffin & Pustay Copyright © 2015 Pearson Education, Inc. Chapter 14- Learning Objectives Define and discuss the nature of international organization design, and identify and describe the initial influence of international business activity on organization design Identify and describe five advanced forms of international organization design and discuss hybrid global designs Identify and describe key related issues in global organization design Explain the general purpose of control and the levels of control in international business Describe how international firms manage the control function Copyright © 2015 Pearson Education, Inc. Chapter 14- The Nature of International Organization Design Copyright © 2015 Pearson Education, Inc. Chapter 14- Organization design (sometimes called organization structure) is the 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. Organization design is also the basic vehicle through which strategy is implemented and the work of the organization is actually accomplished. A firm cannot function unless its various structural components are appropriately assembled. Through its design, the firm does four things. First, it allocates organizational resources. Second, it assigns tasks to its employees. Third, it informs those employees about the firm’s rules, procedures, and expectations about the employees’ job performances. Fourth, it collects and transmits information necessary for problem solving, decision making, and effective organizational control. This last task is particularly important for large MNCs, which must manage the sharing of information between corporate headquarters, subsidiaries, and staff. Allocate Organizational Resources Assign Tasks Provide Information Collects and Transmits Information Organization Design The Nature of International Organization Design (Cont.) Copyright © 2015 Pearson Education, Inc. Chapter 14- A strategy calling for increased internationalization will have an impact on the firm’s organization design. To see how this begins to happen, consider a domestic firm that has no international sales. No changes are needed to the firm’s organization design. Now assume that the firm begins to engage in direct exporting on a modest level. Its initial response to international orders is the corollary approach, whereby the firm delegates responsibility for processing such orders to individuals within an existing department. The firm continues to use its existing domestic organization design. As the firm’s exports become more significant, its next step is to create a separate export department. It will oversee international operations, market products, process orders, work with foreign distributors, and arrange financing. If selling to foreign customers is essentially the same as selling to domestic ones, the export department may not need to know much about foreign markets. However, as international activities increase, knowledge of foreign markets will be more important, and new methods for organizing may be required. The firm can respond by creating an international division that specializes in managing foreign operations. Then, the firm can concentrate resources and target international business activity, while keeping that activity segregated from ongoing domestic activities. Corollary Approach Export Department International Division Global Organization Designs Copyright © 2015 Pearson Education, Inc. Chapter 14- As a firm evolves from being domestically oriented with international operations to becoming a true multinational corporation with global aspirations, it will abandon the international division approach. It usually creates a global organization design to achieve synergies among its far-flung operations and implement its organizational strategy. The global design adopted by any firm must deal with the need to integrate three types of knowledge: Area Knowledge: Managers must understand the cultural, commercial, social, and economic conditions in each host country market. Product Knowledge: Managers must comprehend such factors as technological trends, customer needs, and competitive forces affecting the goods the firm produces and sells. Functional Knowledge: Managers must have access to co-workers with expertise in basic business functions such as production, marketing, finance, accounting, human resource management, and information technology. Product Knowledge Functional Knowledge Area Knowledge Global Design Global Organization Designs (Cont.) Common Forms Product Design Area Design Functional Design Customer Design Matrix Design Managerial Philosophy Ethnocentric Polycentric Geocentric Copyright © 2015 Pearson Education, Inc. Chapter 14- The five most common forms of global organization design are product, area, functional, customer, and matrix. As we will discuss, each form allows the firm to emphasize one type of knowledge. However, each form can make it more difficult to incorporate the other types of knowledge into the firm’s decision-making processes. The global design the MNC chooses will reflect the relative importance of each of the three types of knowledge in the firm’s operations. It will also reflect the need for coordination among its units, the source of its firm-specific advantages, and its managerial philosophy about its role in the world economy. MNCs typically adopt one of three managerial philosophies that guide their approach to such functions as organization design and marketing. The ethnocentric approach is used by firms that operate internationally the same way they do domestically. The polycentric approach is used by firms that customize their operations for each foreign market they serve. The geocentric approach is used by firms that analyze the needs of their customers worldwide and then adopt standardized operations for all markets they serve. These concepts are discussed more fully in Chapter 16. Global Product Design Copyright © 2015 Pearson Education, Inc. Chapter 14- The most common form of organization design adopted by MNCs is the global product design, which 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 reducing the need for coordination between product lines. 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 called an H-form design. The “M” in M-form stands for “multidivisional”—the various divisions of the firm are usually self-contained operations with interrelated activities. The “H” in H-form stands for holding, as in a holding company where the various unrelated businesses function with autonomy and little interdependence. Related Products M-Form (Multidivisional) Unrelated Products H-Form (Holding) Global Product Design (Cont.) Advantages Expertise Efficiencies Global Marketing Geocentric Corporate Philosophies Disadvantages Expensive Duplication Knowledge Development Coordination Levels Corporate Learning Copyright © 2015 Pearson Education, Inc. Chapter 14- Global product design offers several competitive advantages. First, since a division focuses on a single product group, division managers gain expertise in all aspects of the product, better enabling them to compete globally. Second, the global product design facilitates efficiencies in production. Managers are free to manufacture the product wherever manufacturing costs are the lowest and coordinate production at their various facilities. Global product design also facilitates global marketing by allowing for flexibility in introducing, promoting, and distributing each product. The global product design also has disadvantages. It may encourage expensive duplication because each product group needs its own functional-area skills and sometimes even its own physical facilities for production, distribution, and research and development (R&D). In addition, each product group must develop its own knowledge about the regional and national markets in which it operates. Coordination and corporate learning across product groups also become more difficult. Global Area Design Advantages Marketing-Driven Strategy Brand-Name Reputation Expertise about the Local Market Disadvantages May sacrifice cost efficiencies May slow diffusion of technology Results in duplication of resources Raises costs of coordination Impedes global product planning Copyright © 2015 Pearson Education, Inc. Chapter 14- The global area design organizes the firm’s activities around specific areas or regions of the world. This system is particularly useful in two situations: In a firm whose strategy is driven by marketing rather than predicated on manufacturing efficiencies or technological innovation. In 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 adapt the firm’s products to meet local needs and respond to changes in the local marketplace. They also can tailor the product mix they offer within a given area. The global area design does have 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 others. Therefore, this design may not be suitable for product lines undergoing rapid technological change. Further, the global area design results in duplication of resources because each area division must have its own functional specialists, product experts, and, in many cases, production facilities. And finally, it makes coordination across areas expensive and discourages global product planning. Global Functional Design Advantages Transfer Expertise Centralize Control Focus on Functions Disadvantages Limited Products or Customers Difficult to Coordinate Duplication of Resources Copyright © 2015 Pearson Education, Inc. Chapter 14- The global functional design calls for a firm to create departments or divisions that have worldwide responsibility for the common organizational functions—finance, operations, marketing, R&D, and human resources management. This design is used by MNCs that have relatively narrow or similar product lines. It results in what is often called a U-form organization, where the “U” stands for unity. The global functional design offers several advantages. First of all, 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. Despite these advantages, this design is inappropriate for many businesses. For one thing, the global functional design is practical only when the firm has relatively few products or customers. For another, coordination between divisions can be a major problem. Finally, there may also be duplication of resources among managers. Because of these problems, the global functional design has limited applicability. It is used by many firms engaged in extracting and processing natural resources, such as the mining and energy industries, because in their case the ability to transfer technical expertise is important. Global Customer Design Opportunities Serve Diverse Customers Focus Marketing Approach Challenges Duplication of Efforts Coordination Issues Copyright © 2015 Pearson Education, Inc. Chapter 14- The global customer design is 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 customer groups targeted by a firm are so diverse as to require totally distinct marketing approaches. The global customer approach 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 global customer design 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 Copyright © 2015 Pearson Education, Inc. Chapter 14- A global matrix design is the result of superimposing one form of organization design 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. For example, the global matrix design shown in Figure 14.5 was created by superimposing a global product design (shown down the side) on an existing global functional design (shown across the top). Global Matrix Design (Cont.) Advantages Organizational Flexibility Coordination and Comunication Disadvantages Limited use in firm with few products Limited use in fairly stable markets Involves more than one manager Creates a paradox in authority Tends to promote compromises Copyright © 2015 Pearson Education, Inc. Chapter 14- An advantage of the global matrix design is that 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. The global matrix design thus promotes organizational flexibility. It allows firms to take advantage of functional, area, customer, and product organization designs 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 global matrix design also promotes coordination and communication among managers from different divisions. The global matrix design has limitations, however. First of all, it is not appropriate for a firm that has few products and that operates in relatively stable markets. Second, it often puts employees in the position of being accountable to more than one manager. As a result, the individual may have split loyalties—caught between competing sets of demands and pressures. Similarly, the global matrix design creates a paradox regarding authority. On the one hand, part of the design’s purpose is to put decision-making authority into 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. Finally, the global matrix design tends to promote compromises, or decisions based on the relative political clout of the managers involved. Hybrid Global Designs Size Strategy Technology Environment Culture Copyright © 2015 Pearson Education, Inc. Chapter 14- Each global form of international organization design described in this section represents an ideal or pure type. Most firms, however, create a hybrid design that best suits their purposes, as dictated in part by their size, strategy, technology, environment, and culture. Managers start with the basic prototypes, merge and adjust them, and create new elements as they respond to changes in the organization’s strategy and competitive environment. In fact, if it were possible to compare the designs used by the world’s 500 largest MNCs, no two would look exactly the same. Related Issues in Global Organization Design Centralization versus Decentralization Role of Subsidiary Boards of Directors Coordination in the Global Organization Copyright © 2015 Pearson Education, Inc. Chapter 14- In addition to the fundamental issues of organization design we have addressed, multinational corporations also face a number of other related organizational issues that must be carefully managed. Centralization versus Decentralization Copyright © 2015 Pearson Education, Inc. Chapter 14- Decision Making Focus Local Market Response Overall Needs of the Firm Corporate Headquarters Lower Higher Local Subsidiary Higher Lower When designing its organization, an MNC must make a particularly critical decision that determines the level of autonomy, power, and control it wants to grant its subsidiaries. Suppose it decentralizes decision making by giving subsidiaries the authority to make finance, production, and marketing decisions. This approach allows those closest to the market to respond quickly to changes in local conditions. However, local managers may focus on the subsidiary’s needs rather than on the firm’s overall needs. An MNC can remedy this deficiency by tightly centralizing decision-making authority at corporate headquarters. Decisions made by the corporate staff can then take into account the firm’s overall needs. However, these decisions often hinder the ability of subsidiary managers to quickly and effectively respond to changes in their local market conditions. Because both centralization and decentralization offer attractive benefits, most firms constantly tinker with a blend of the two, the purpose being to achieve the best outcome in terms of overall strategy. Role of Subsidiary Boards of Directors Copyright © 2015 Pearson Education, Inc. Chapter 14- An MNC typically incorporates each of its subsidiaries in the subsidiary’s country of operation. 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 the subsidiary’s 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 (thus giving the board little authority), or to empower the board with substantial decision-making authority. As a rule, a subsidiary board 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. 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 to local levels, an active board provides clear accountability and a reporting link back to corporate headquarters. Some MNCs also have found that appointing prominent local citizens to the subsidiary’s board is helpful in conducting business in a foreign country. These members can help the subsidiary integrate into the local business community. They can also be an effective source of information for both parent and subsidiary about local business and political conditions. A subsidiary board also can help monitor the subsidiary’s ethical and social responsibility practices. A potential disadvantage of empowering a subsidiary’s board is that the subsidiary may become too independent, as its board assumes substantial authority. As a result, it may fail to maintain the desired level of accountability to the parent. Substantial Decision-Making Authority Board of Directors MNC Little Authority Coordination in the Global Organization Organizational Hierarchy Rules and Procedures Ad Hoc Coordination Techniques Informal Coordination Mechanisms Informal Management Network Copyright © 2015 Pearson Education, Inc. Chapter 14- Coordination is the process of linking and integrating functions and activities of different groups, units, or divisions. MNCs can use any of several strategies to achieve and manage their desired level of coordination. The organizational hierarchy itself is one way to manage interdependence and promote coordination. An organization design that clearly specifies all reporting relationships expedites coordination because each manager knows how to channel communications, decision making, and so on. Rules and procedures also facilitate coordination. Many international firms also rely heavily on informal coordination mechanisms. Informal management networks can be especially effective. An informal management network is simply a group of managers from different parts of the world who are connected to one another in some way. These connections often form as a result of personal contact, mutual acquaintances, and interaction achieved via travel, training programs, joint meetings, task force experiences, and so on. Informal management networks can be very powerful for short-circuiting bureaucracy that may delay communication and decision making. They also can be effective for getting things done more quickly and more effectively than if normal and routine procedures were always followed. The Control Function in International Business Copyright © 2015 Pearson Education, Inc. Chapter 14- Another important role of organization design is to enable the firm to manage its control function more effectively. Control is the process of monitoring ongoing performance and making necessary changes to keep the organization moving toward its performance goals. As illustrated in Figure 14.7, there are three main levels at which control can be implemented and managed in an international business. These three key levels of control are the strategic, organizational, and operations levels. Although each is important on its own merits, the three levels also are important collectively as an organizing framework for managers to use in approaching international control from a comprehensive and integrated perspective. Strategic Control Copyright © 2015 Pearson Education, Inc. Chapter 14- Strategic Control Formulate Strategy Implement Strategy Role of Strategic Control Financial Resources Inventory Management Exchange Rate Fluctuations Joint Ventures and Strategic Alliances Strategic control is intended to monitor how an international business formulates strategy and how well it implements that strategy. Strategic control thus focuses on how well the firm defines and maintains its desired strategic alignment with its environment and how effective the firm is at setting and achieving its strategic goals. Strategic control also plays a major role in the decisions that firms make about foreign-market entry and expansion. This is especially true when the market holds both considerable potential and considerable uncertainty and risk. Often, the most critical aspect is control of an international firm’s financial resources. Therefore, international companies must develop and maintain effective accounting systems. In large international firms, a corporate controller is responsible for the financial resources of the entire organization. A special concern of an international controller is managing the various currencies needed to run the firm’s subsidiaries and pay its vendors. Given the possibility of exchange rate fluctuations, the controller needs to oversee the firm’s holdings of diverse currencies to avoid losses, if exchange rates change. Control of joint ventures and other strategic alliances is increasingly important to international firms. It follows that strategic control systems also must account for the performance of such alliances.   Organizational Control Responsibility Center Control Generic Organizational Control Planning Process Control Copyright © 2015 Pearson Education, Inc. Chapter 14- Organizational control focuses on the design of the organization itself. The most common type of organizational control is responsibility center control. Using this system, the firm first identifies fundamental responsibility centers within the organization. Once the centers are identified, the firm then evaluates each one according to how effectively it is meeting its strategic goals. Thus, a unique control system is developed for each responsibility center. A firm may use generic organizational control across its entire organization; that is, the control systems used are the same for each unit or operation, and the locus of authority generally resides at the firm’s headquarters. Often, generic organizational control is used by international firms that pursue similar strategies in each market in which they compete. Planning process control focuses on the actual mechanics and processes that the firm uses to develop strategic plans. This approach is based on the assumption that if the firm controls its strategies, desired outcomes are more likely to result. Operations Control Processes Performance Copyright © 2015 Pearson Education, Inc. Chapter 14- Operations control focuses specifically on operating processes and systems within the firm, its subsidiaries, and its operating units. The firm also may need an operations control system for each of its manufacturing facilities, distribution centers, and administrative centers. Operations control involves relatively short periods of time, dealing with components of performance that need to be assessed on a regular basis. Normally, this method of control focuses on the lower levels of a firm, such as first-line managers and operating employees. Managing the Control Function in International Business Effectively Manage Control Establishing International Control Systems Essential Control Techniques Behavioral Aspects of International Control Copyright © 2015 Pearson Education, Inc. Chapter 14- Given the obvious complexities in control, it should come as no surprise that international firms must address a variety of issues in managing the control function. To effectively manage control, managers need to understand how to establish control systems, what the essential techniques for control are, why some people resist control, and what managers can do to overcome this resistance. Establishing International Control Systems Copyright © 2015 Pearson Education, Inc. Chapter 14- As illustrated in Figure 14.8, control systems in international business are established through four basic steps: (1) set control standards for performance, (2) measure actual performance, (3) compare performance against standards, and (4) respond to deviations. There obviously will be differences in specificity, time frame, and sophistication, but these steps are applicable to any area and any level of control. The first step is to define relevant control standards. A control standard is a target, or a desired level of the performance component the firm is attempting to control. These standards must be objective and consistent with the firm’s goals. The second step is to develop a valid measure of the performance component being controlled. Some elements of performance (such as unit sales or actual output) are relatively easy to measure. Other elements are more difficult to measure, such as the effectiveness of an advertising campaign to improve a firm’s public image. The third step in establishing an international control system is to compare measured performance against the original control standards. Again, when control standards and elements of performance are straightforward, this comparison is easy. When control standards and performance measures are less concrete, comparing one against the other is considerably more complicated. The fourth and final step in establishing an international control system is responding to deviations observed in step 3. One of three different outcomes can result when comparing a control standard and actual performance: the control standard has been met, it has not been met, or it has been exceeded. Depending on the circumstances, managers could change the standard, correct the deviation, or maintain the status quo. Essential Control Techniques Accounting Systems Policies, Procedures, Rules and Regulations Performance Ratios Copyright © 2015 Pearson Education, Inc. Chapter 14- Because of the complexities of both the international environment and international firms themselves, those firms rely on a wide variety of different control techniques. Accounting is a comprehensive system for collecting, analyzing, and communicating data about a firm’s financial resources. International businesses must develop accounting systems to control and monitor the performance of the overall firm and each division, operating unit, or subsidiary. Policies, standard operating procedures, rules, and regulations all help managers carry out the control function. International firms also use performance ratios to maintain control. A performance ratio is a numerical index of performance that the firm wants to maintain. A common performance ratio is inventory turnover. Behavioral Aspects of International Control Resistance to Control Reaction to Over-Control Inappropriate Focus Increased Accountability Overcoming …