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 firms can:
 Earn a greater return from
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,
which reduces the cost of value creation.

MSM/SRK/IBM/10
 Experience Curve Economies
 Learning Effects:
 Labor 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 Significance:
 Moving down the experience curve allows a firm to
reduce its cost of creating value.
MSM/SRK/IBM/10
 The Experience Curve

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

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 service.
 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 Company
A C

Cost Generally reflects

pressures the position of most
companies
Company
Low B

Low High
Pressures for local responsiveness

MSM/SRK/IBM/10
 Cost Reduction
 Desire to reduce costs by:
 Mass production
 Product standardization.
Rs.
 Optimal location production.
 Hard to do with commodity-type products.
 products serving universal needs.

 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 Transnational
Strategy Strategy

Cost
pressures
International Multi domestic
Strategy 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
 Multi-domestic Strategy

 Maximize local responsiveness.

 Customize the product and marketing
strategy to national demands.
 Skill and product transfer.
 Transfer all value-creation activities, no
experience 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 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.

MSM/SRK/IBM/10
 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
 The location of decision-making responsibilities within
that 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
how 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 differentiation: the location of
decision-making responsibilities within a
structure
 Horizontal differentiation: the formal
division of the organization into sub-units
 Establishment of integrating
mechanisms: mechanisms for coordinating
sub-units
MSM/SRK/IBM/10
 Centralization Versus
Decentralization
 Centralization:  Decentralization:
 Facilitates coordination  Overburdened top
 Ensure decisions management
consistent with
organization’s objectives
 Motivational research
favors decentralization
 Top-level managers have
means to bring about  Permits greater
organizational change flexibility
 Avoids duplication of  Can result in better
activities 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.
 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 Plants Branch Accounting

units sales units units

MSM/SRK/IBM/10
 A Typical Product Division Structure
Headquarters

Division product Division product Division product

line A line B line C

Department Department Department Department

Purchasing manufacturing marketing finance

Buying Plants Branch Accounting

units sales units units
Figure 13.2
MSM/SRK/IBM/10
 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 Domestic Domestic International

division division division division
General General General General
manager manager manager manager
Product line A Product line B Product line C area line

Figure 13.3 Functional units Country 1 Country 2

General General
manager manager
(product A, B, (product A, B,
and / or C) 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
MSM/SRK/IBM/10
 Worldwide Area Structure

Headquarters

North American European

area area

Far East
Latin American Middle East / area
area Africa area
Figure 13.5

MSM/SRK/IBM/10
 Worldwide Product
Divisional Structure
 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
MSM/SRK/IBM/10
 A Worldwide Product Division
Structure
Headquarters

Worldwide Worldwide Worldwide

product group product group product group
or division A or division B or division C

Area 1 Area 2

(domestic) (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 structure slows decision making
 Conflict between areas and product divisions
 Difficult to make one party accountable due to
dual responsibility
MSM/SRK/IBM/10
 Global Matrix Structure

Headquarters

Area 1 Area 2 Area 3

Product
division A
Manager
Product here
division B belongs to
division B
Product
and area 2
division C

MSM/SRK/IBM/10
 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
home and abroad

MSM/SRK/IBM/10
 Formal Integrating Systems
 Direct contact between sub-unit managers
 Liaison roles: an individual assigned responsibility to
coordinate with another sub-unit on a regular basis
 Temporary or permanent teams from sub-units to
achieve coordination
 Matrix structure: all roles viewed as integrating roles
 Often based on geographical areas and worldwide
product divisions

MSM/SRK/IBM/10
 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
 Non-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
regular 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
 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
 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
MSM/SRK/IBM/10
 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 to match competitive and
strategy environment
 Hard 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