CHAPTER 14

ORGANIZATIONAL DESIGN AND CONTROL

Learning Objectives
1.

To understand why the design of organizational structures is important to international

companies.

2.

To study the organizational dimensions that must be considered when selecting organizational
structures

3.

To study various organizational forms and understand the concept of the virtual corporation.

4.

To understand why decisions are made where they are among parent and subsidiary units of an
IC.

5.

To explain how an IC can maintain control of a joint venture or other organization in which it
has less than 50% ownership.

6.

To list the types of information an IC needs from its units around the world.

Overview
Organizational design generally follows strategic planning and both are commonly done during the
planning process. Firms may (1) have an international division, (2) be organized by product, function
or region (3) have a mixture of them (hybrid form). Some firms have tried a matrix form to attain a
balance between product and regional expertise, but its disadvantages have led some firms to use a
matrix overlay over the traditional product, regional or functional form instead of a matrix.
Managements are now examining two organizational forms, the virtual corporation and the horizontal
corporation.
Because the operations of an IC are far flung in countries around the world and because events in one
country may affect the entire enterprise, two needs are information and control.
When decisions must be made which affect more than one unit of the IC, balance must be struck
between the interests of the parent company, the subsidiary companies and the enterprise as a whole.
Control, decisions and measurements are easier when the subsidiary is 100 percent owned than when
it is less than 100 percent owned or when an independent joint venture company is involved. In the
latter situation, measures to try to control include keeping the technology necessary, keeping the key
positions (such as general manager, treasurer or production manager), providing the capital or
marketing the product.
Good information is essential for decision-making. Important areas are financial, technology, markets,
political and economic.

Suggestions and Comments

1.

Because of its abstract conceptual basis, organizational design is a challenging area for some
students. At the same time, they may be interested in the control aspect of the topic, in part
because it is more tangible for them.

2.

Point out the importance for an IC to control activities of its units and efforts around the world.
You can initiate a discussion of different means by which such control can be exercised, as well
as the impacts of factors such as national culture on the appropriateness and effectiveness of
different means of control.

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3.

Give examples of reasons up-to-date, accurate information is necessary for successful IC

operations.

Student Involvement Exercises

1.

Have students analyze why certain types of decisions should be made by the IC parent
company while others should be made by subsidiary and other IC units.

2.

Have students report on sources of different types of information that should be reported by IC
units to the parent.

3.

Have students analyze an IC to identify its organizational structure and strategic control issues
and methods used in the company.

Guest Lecturers
1.

Your schools management organization people could speak on control and information.

2.

Executives from ICs located near you could add to those subjects.

3.

Virtual organizations may be described by local IC managers.

Lecture Outline
I.

Opening Section
The opening section examines Krafts restructuring. This narrative is a good way to walk in
to the general organizational design area. Note the close ties between organizational design
and strategy. The strategic planning process assures that managers have a clear understanding
of the companys mission, a vision for how to achieve that mission, and an understanding of
how they will compete with other companies. Organization design is the next step.

II.

Organizational Design
Organizing normally follows planning. In designing the organizational structure, management
is faced with two concerns: finding the most effective way to take advantage of specialization
of labor and coordinating firms activities to enable it to meet its overall objectives.
A. Evolution of the IC
1. Companies often enter foreign markets by exporting, then forming sales companies
and finally setting up production facilities.
2. As its foreign involvement changes, the firms organization often changes. Each
domestic product division may be responsible. When firm begins to invest overseas,
it might form an international division that often is organized on a regional basis.
3. As overseas operations increase in importance, some firms eliminate international
divisions and establish worldwide organizations based on product, region or function.
In some cases, customer classes are also a top-level dimension.
4. Global corporate formproduct
The product division is responsible for global line and staff operations. Each division
will have regional experts, so, although this organizational form avoids duplication of
product experts common in a company with an international division, it creates a
duplication of area experts. Some firms have a group of regional experts in an
international division that advises the product divisions but has no line authority over
them.

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III.

5. Global corporate formgeographical regions.

These firms put the responsibility for all activities under area managers who report
directly to the CEO. This form used for both multinational and global companies. It
appears to be popular with companies that manufacture products with low, or at least,
stable technological content that require strong marketing ability. Product
coordination across regions presents problems and management often places
specialized product managers on the headquarters staff to provide input to corporate
decisions regarding products.
6. Global corporate formfunction
Few companies organized by function at top level. Commonality among users of this
form is a narrow and highly integrated product mix.
7. Hybrid forms
In a hybrid organization, a mixture of organizational forms is used at the top level.
8. Matrix organizations
Has evolved from managements attempt to mesh product, regional and functional
expertise while maintaining clear lines of authority.
a. Problems with matrixmanagers from each dimension of the matrix must agree
on a solution. This often leads to sub-optimal compromises, delayed responses
and power politics. The problem goes higher in the organization when the
managers cannot agree.
b. Matrix overlaybecause of these problems, some firms have maintained their
organization based on product, region or function, but have built into the structure
accountability for other organizational dimensions. A firm organized by product,
for example, might have regional specialists in a staff function with the
requirement that they have input to product decisions.
c. Strategic Business Unitsbusiness entities with a clearly defined market specific
competitors, the ability to carry out its business mission, and a size appropriate
for control by a single manager. Most SBUs are based on product lines.
B. Changes in Organizational Forms
The rapidly changing business environment is pressuring managements to look for
organizational forms that will enable their firms to act more quickly, reduce costs, and
improve product quality.
C. Current Organizational Trends
Two organizational forms are now receiving the attention of many CEOs: the virtual
corporation and the horizontal corporation.
1. Virtual Corporation enables companies to come together quickly to take advantage of
a specific marketing opportunity. These alliances enable each member to concentrate
on its core competency. A virtual corporation can have capabilities superior to those
of any member.
2. Horizontal corporations. A form of organization characterized by lateral decision
processes, horizontal networks, and a strong corporate business philosophy. The idea
is to substitute cooperation and coordination for strict control and supervision.
D. Corporate Survival into the 21st Century
Managers will make greater use of the dynamic network structure that breaks down major
functions of the firm into small companies coordinated by a small-sized headquarters
organization. Business functions such as marketing and accounting may be outsourced. T
Firms must learn how to be large and entrepreneurial. Small is not better; focused is
better.
Control and Where Decisions are Made
Every successful company uses controls to put its plans into effect and to evaluate and reward
or correct executive performance. An element of controls is whether decisions are made by
the parent company, the subsidiaries or by a combination.
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III.

IV.

A. Product and Equipment

1. Subsidiaries may favor product and equipment designed specially for the market and
conditions of the host country.
2. The parent company may prefer product and equipment be standardized in order to
multiply source options and simplify procurement and maintenance.
B. Competence of Subsidiary Management and Headquarters Reliance on It. With greater
confidence, more decisions will be delegated or left to subsidiaries.
1. Moving subsidiary managers into parent operations or into other subsidiaries widens
the executives knowledge of the system and knowledge of each other.
2. Moving parent managers into subsidiaries widens their knowledge of subsidiary
problems to which the parent might not be sensitive otherwise.
C. Size and age of the IC.
1. As the company grows, it can hire more specialists, experts, and experienced
executives. The longer a company has been an IC, the more likely it will have a
number of experienced executives who will have served abroad and will have
knowledge of company policies and will have developed confidence with
international activities. More decisions will tend to be made at parent headquarters.
2. At the same time, delegation and decentralization allow for local adaptation, so there
may be a tension in this area.
D. Benefiting the Enterprise to the Detriment of a Subsidiary
1. Move production facilities or invest in new ones.
2. Where the parent and/or one or more subsidiaries could fill an order, who gets it?
3. Multi-country production.
4. Which subsidiary books the profit?
E. Subsidiary Frustration. An objective of all businesses is to obtain and keep able, loyal
executives. If subsidiary managers are not allowed to make important decisions,
regarding their operations, they may resign or become hostile. Some companies reporting
such developments in the mid 1990s were IBM, CS First Boston, and European
International.
Joint Ventures and Subsidiaries Less Than 100 Percent Owned. Control is not as easy as it is
with a 100 percent owned subsidiary. The other shareholders or the joint venture partner may
make it difficult or impossible for the parent or other partner to make the sort of decisions
mentioned above. With a subsidiary less than 100 percent owned, there are some ways to
exercise some control.
A. Loss of freedom and flexibility. If shareholders outside the IC own control of the
affiliate, they can block efforts of IC headquarters to move production factors away, fill
an export order from another affiliate or subsidiary, and so forth. Even if outside
shareholders are a minority and cannot directly control the affiliate, they can bring
pressures on the IC to prevent it from diminishing the affiliates profitability for the
enterprises benefit. Likewise, a local joint venture partner is unlikely to agree with
measures that penalize the venture for the ICs benefit.
B. Control Can Be Had. With less than 50 percent of the voting stock and even with no
voting stock, an IC can have control, such as through a management contract, control of
the finances, control of the technology, or putting people from the IC in important
executive positions.
Reporting. For controls to be effective, all operating units of an IC must provide headquarters
with timely, accurate, and complete reports.
A. Financial

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Parent headquarters must know the existence and size of a surplus to determine its best use
across the range of options: the subsidiary generating the surplus, another subsidiary or
affiliate, or at the parent company.

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B. Technological
New technology is constantly being developed in different countries, and the subsidiary or
affiliated company operating in such a country is likely to learn about it before IC
headquarters. If headquarters finds the new technology potentially valuable, it can gain
competitive advantage by being the first to contact the developer for a license to use it.
C. Market Opportunities
Affiliates in various countries may spot new or growing markets for some product of the
enterprise.
D. Political and Economic
VII.

De-jobbing
Big firms where many of the good jobs used to be are unbundling activities and farming them
out to smaller organizations. New computer and communications technologies are de-jobbing
the workplace, changing from traditional fixed job approach to one in which teams perform
tasks.
A. The transformation is from a structure built out of jobs into fields of work, or projects,
needing to be done.
B. As the project develops, the persons responsibilities change as does the composition of
the team.
C. Hierarchy implodes, and people no longer take their cues from a supervisor. Signals come
from the changing demands of the project.
D. Traits of companies with de-jobbed workers:
1. Employees are encouraged to make the kinds of operating decisions that used to be
reserved for managers.
2. Employees are given the information they need to make those decisions.
3. Employees are given training to understand business and financial issues that used to
concern only an owner or executive.
4. Employees are given a stake in the fruits of their labora share of profits.
VIII. Managing in a world out of control.
A. do simple things first
B. learn to do them flawlessly
C. add new layers of activity over the results of the simple task
D. dont change the simple things
E. make the new layer work as flawlessly as the simple,
F. repeat ad infinitum
G. Increasingly, the most successful companies will advance by involving and adapting in
this organic, bottom-up way.
H. Successful leaders will have to: (1) relinquish or at least relax control, (2) honor error
because a breakthrough may at first be indistinguishable from a mistake, (3) constantly
seek disequilibrium
IX. Control: Yes and No
i.
Timely and accurate reporting is necessary for successful control within the IC
ii.
Trends and IT lead to decentralization and de-jobbing, with hierarchies dissolving and
leaders often giving up direct control

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Answer to Questions
1.

Organizational structure integrates the organization. It is the way jobs are grouped and their
reporting relationships established. It also provides information conduits for the data needed
for decision-making.

2.

An international division takes control of the ICs international involvement. After beginning
with an international division, most companies move on to organize their international activities
based on product, function, classes of customer, or region. The international division structure
is limited in its ability to deal with complexity of doing business internationally. At the same
time, some large companies, such as Wal-Mart, use an international division to organize their
international involvement.

3.

Geographic structures bring marketing issues such as distribution and localization to the fore,
whereas product structures lend a focus to product development. The points of comparison are
in specialists. Product structures have regional expert duplication, and geographic structures
have product and functional expert duplication.

4.

Set up an organization based on product or region and install a matrix overlay. Establish a
group of regional experts at headquarters if your new organization is based on product. Make
clear to the product managers that the regional experts will have input to the product decisions.

5.

You could break up Pozoli and put its product divisions in the Mancon divisions Pozoli is
already a multinational that has been in business for years. Its brand names are well known all
over the world. Probably better to locate the entire company in the international division unless
this divisions job is only to handle exports for the two product groups. If so, either you need to
change the international divisions thrust or establish Pozoli as a separate division on the same
level as the international division and the two product divisions.

6.

The reverse is instead of strategic planning driving change, another force drives organizational
change. Lets say the firm makes an acquisition whose business is significantly different from
the present businesses. New expertise is needed. Perhaps the company is entering new markets
and needs regional expertise it doesnt have now. An important customer changing a JIT or
synchronous production could force the firm to change also as Ford, GM, Campbell and many
others have required their major suppliers to do. This alone could require the firm to make
numerous changes in the organization.

7.

If the subsidiarys market is large and different enough, it may make economic sense to design
and produce equipment and products for that one market. Management of the subsidiary would
probably make those decisions. Otherwise, it may be more economic to standardize on a
worldwide basis. Such standardization could save on procurement, training, and maintenance
costs. It could give the organization a choice of sources; if one subsidiary had difficulties, the
product could be furnished by another.

8.

Headquarters would make these decisions.

a.
Decisions to channel business through a low tax country subsidiary rather than a high
tax country sub, or decisions based on capacity utilization or production costs to let one
subsidiary bid for a contract while forbidding others to complete.
b.
Such decisions would most likely be made at IC headquarters.

9.

The company can exercise control if it is providing necessary ingredients such as money,
technology, management skill, production management or sales distribution.

10.

Computer and communications technology will polarize the work force with a relatively small
elite group controlling automated production and de-jobbing everyone else.

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11.

De-jobbing is changing the way we think about work. Instead of established roles in
companies, there are task-groups, moving from one set of goals and one group to another. This
trend results in flatter organizations, more responsibility on the individual, establishment of
skills sets, and workers sharing in the gains of their labor. One wonders what Karl Marx would
have thought about de-jobbing.
CRITICAL THINKING EXERCISE 14-1
In the age of technology and rapidly changing business environments many workers have found
themselves on the outside lacking appropriate skills necessary to compete.
Have the students discuss the following question:

Who is responsible, the organization itself or the individual worker?

CRITICAL THINKING EXERCISE 14-2

Meaningful Paragraph
Choose five vocabulary words from the end of the chapter to write a paragraph. Your use of the
vocabulary should demonstrate your comprehension of each word. The paragraph should not merely
be a listing of the words and their meanings. Rather your paragraph should show a working
knowledge of each vocabulary word within an integrated meaningful paragraph.

globalEDGE Answers
Chapter 14
Exercise One
http://globaledge.msu.edu
Search Phrase: Global Most Admired Companies
Resource Name: Fortune: Global Most Admired Companies
globalEDGE Category: Research: Rankings
Website: http://money.cnn.com/magazines/fortune/globalmostadmired/
Exercise Two
http://globaledge.msu.edu
Search Phrase: A.T. Kearney and/or Globalization
Resource Name: A.T. Kearney / Foreign Policy: Globalization Index
globalEDGE Category: Research: Rankings
Website: http://www.atkearney.com/main.taf?p=5,4,1,116

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