IBM Module 6

8/8/2019 IBM Module 6

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MSM/SRK/IBM/10MSM/SRK/IBM/10

Module VIModule VIMultinational corporations:Multinational corporations:

Organization, Design and StructureOrganization, Design and Structure


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P P & & G G Started in 1837 William P rocter andStarted in 1837 William P rocter and

James G amble as candle and soapJames G amble as candle and soapmanufacturing companymanufacturing companyoriginatingoriginating from Cincinnati,from Cincinnati, USAUSA


Created in 1930 by the amalgamation of the operations of British soapmaker Lever Brothers and Dutch margarine producer

Margarine Unie

Personal care, Household Care ,Health and Well-Being products


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The Role of Strategy in a FirmThe Role of Strategy in a Firm

Strategy:Strategy:Actions managers take to attain the goals of Actions managers take to attain the goals of the firm.the firm.Need to identify and take action that Need to identify and take action that lowerslowersthe cost the cost of value creation and/orof value creation and/or differentiatesdifferentiatesthe firm s product through superior design,the firm s product through superior design,

quality, service, or functionality.quality, service, or functionality.


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Profiting from Global ExpansionProfiting from Global Expansion

International firms can:International firms can:Earn a greater return fromEarn a greater return fromdistinctive skills ordistinctive skills or core competenciescore competencies. .RealizeRealize location economieslocation economies by dispersingby dispersingvalue creation activities to locations wherevalue creation activities to locations wherethey can be performed most efficiently.they can be performed most efficiently.

Realize greaterRealize greater experience curve economiesexperience curve economies ,,which reduces the cost of value creation.which reduces the cost of value creation.


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Experience Curve EconomiesExperience Curve EconomiesLearning EffectsLearning Effects ::

Labor productivity increases over time as individualsLabor productivity increases over time as individualslearn the most efficient ways to perform particularlearn the most efficient ways to perform particular

tasks.tasks.Economies of Scale:Economies of Scale:Reductions in unit cost achieved by producing aReductions in unit cost achieved by producing alarge volume of a product.large volume of a product.

Strategic Significance:Strategic Significance:Moving down the experience curve allows a firm toMoving down the experience curve allows a firm toreduce its cost of creating value.reduce its cost of creating value.


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The Experience CurveThe Experience Curve

B

A

Accumulatedoutput

Unit costs Moving down the curve reducesthe cost of creating value


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The Firm as a Value ChainThe Firm as a Value ChainPrimary Activities:Primary Activities:

Those activities having to do with creating,Those activities having to do with creating,marketing and delivering the product tomarketing and delivering the product tocustomers and providing support and aftercustomers and providing support and after- -salessalesservice.service.

Support Activities:Support Activities:Provide inputs that allow primary activities toProvide inputs that allow primary activities to

occur.occur.An Efficient Infrastructure:An Efficient Infrastructure:

helps create value and reduce the cost of helps create value and reduce the cost of creating value.creating value.


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The Firm as a Value ChainThe Firm as a Value Chain

Profits


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Firms Face Two ConflictingFirms Face Two ConflictingConcepts (Pressures) OverseasConcepts (Pressures) Overseas

Reduce costs.Reduce costs.Be responsive to localBe responsive to localneeds.needs.


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Pressures for Cost Reduction andPressures for Cost Reduction and

Local ResponsivenessLocal ResponsivenessCompany

C

Company

B

High

Costpressures

Low

Low High

Generally reflectsthe position of most

companies

Pressures for local responsiveness


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Cost ReductionCost ReductionDesire to reduce costs by:Desire to reduce costs by:

Mass productionMass productionProduct standardization.Product standardization.

Optimal location production.Optimal location production.Ha rd to do with commodityHa rd to do with commodity- -type products.type products.products serving universal needs.products serving universal needs.

Also hard where competition is in low cost Also hard where competition is in low cost producing location.producing location.F in all y, int l competition cre a tes priceF in all y, int l competition cre a tes pricepressures.pressures.

Rs.


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Local ResponsivenessLocal Responsiveness

Different consumer tastes andDifferent consumer tastes andpreferences.preferences.Different infrastructure and practice.Different infrastructure and practice.Differences in distribution channels.Differences in distribution channels.Government demands.Government demands.


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McDonaldsMcDonalds

McDonald s overseas experience.McDonald s overseas experience.

Detailed planningDetailed planningExport of management skills.Export of management skills.Foreign partners.Foreign partners.

Adaptation/Adopting ideas.Adaptation/Adopting ideas.


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Strategic ChoiceStrategic Choice

Four basic strategies:Four basic strategies:

International strategy.International strategy.Multidomestic strategy.Multidomestic strategy.Global strategy.Global strategy.

Transnational strategy.Transnational strategy.


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Four Basic StrategiesFour Basic Strategies

G lobalG lobalStrategyStrategy

TransnationalTransnationalStrategyStrategy

Multi domesticMulti domestic

StrategyStrategy

High

Costpressures

Low

Low High

I nternationalI nternational

StrategyStrategy

Pressures for local responsiveness


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International StrategyInternational Strategy

Go where locals don t have your skills.Go where locals don t have your skills.Little adaptation. Products developed at Little adaptation. Products developed at home (centralization).home (centralization).Manufacturing and marketing in eachManufacturing and marketing in eachlocation.location.Makes sense where low skills, competition,Makes sense where low skills, competition,and costs exist.and costs exist.


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MultiMulti--domestic Strategydomestic Strategy

Maximize local responsiveness.Maximize local responsiveness.Customize the product and marketingCustomize the product and marketingstrategy to national demands.strategy to national demands.

Skill and product transfer.Skill and product transfer.Transfer all valueTransfer all value- -creation activities, nocreation activities, noexperience curve rewards.experience curve rewards.Good for high local responsiveness andGood for high local responsiveness andlow cost reduction pressures.low cost reduction pressures.


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Global StrategyGlobal StrategyBest use of the experience curve andBest use of the experience curve andlocation economies.location economies.

This is the low cost strategy.This is the low cost strategy.Utilize product standardization.Utilize product standardization.Not good where local responsivenessNot good where local responsiveness

demand is high.demand is high.


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Transnational StrategyTransnational Strategy

Christopher Bartlett and Sumantra GhoshalChristopher Bartlett and Sumantra GhoshalCore competencies can develop in any of Core competencies can develop in any of

the firm s worldwide operations.the firm s worldwide operations.Flow of skills and product offerings occursFlow of skills and product offerings occursthroughout the firmthroughout the firm -- not only from homenot only from homefirm to foreign subsidiary (global learning).firm to foreign subsidiary (global learning).Makes sense where there is pressure forMakes sense where there is pressure forboth cost reduction and localboth cost reduction and localresponsiveness.responsiveness.


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Opening CaseOpening CaseOne of world s oldest multinational corporationsOne of world s oldest multinational corporationsOrganized on a decentralized basisOrganized on a decentralized basisAnnual conferences on company strategy andAnnual conferences on company strategy andexecutive education sessions establish connectionsexecutive education sessions establish connections

between managersbetween managersDuplication of facilities and high cost structure aDuplication of facilities and high cost structure aproblem in new competitive environment problem in new competitive environment 1996: introduced structure based on regional1996: introduced structure based on regional

business groupsbusiness groupsLever Europe established to consolidate theLever Europe established to consolidate the

company s detergent operation in order to reducecompany s detergent operation in order to reducecosts and speed up new product informationcosts and speed up new product information


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IntroductionIntroduction

Organizational architectureOrganizational architecture includes theincludes thetotality of a firm s organization,totality of a firm s organization,including formal organization structure,including formal organization structure,control systems and incentives,control systems and incentives,processes, organizational culture, andprocesses, organizational culture, andpeoplepeople


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Essentials of an Ideal OrganisationalEssentials of an Ideal OrganisationalArchitectureArchitecture

Superior enterprise profitability requires threeSuperior enterprise profitability requires threeconditionsconditions

T he different elements of a firmsT he different elements of a firmsorganizational architecture must beorganizational architecture must be internallyinternallyconsistentconsistentT he organizational architecture must match or T he organizational architecture must match or fit the strategyfit the strategy of the firmof the firmT he strategy and architecture of the firm mustT he strategy and architecture of the firm mustnot only be consistent with each other butnot only be consistent with each other butthey also must bethey also must be consistent with competitiveconsistent with competitiveconditionsconditions


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Organizational ArchitectureOrganizational ArchitectureThree elements of organizational structureThree elements of organizational structure

T heT he formal divisionformal division of the organization intoof the organization into subsub--unitsunitsT heT he location of decisionlocation of decision- -making responsibilitiesmaking responsibilities withinwithin

that structurethat structureT he establishment of T he establishment of integrating mechanismsintegrating mechanisms totocoordinate the activities of subunitscoordinate the activities of subunits

Control systems are the metrics used to measure theControl systems are the metrics used to measure the

performance of subperformance of sub- -units and make judgments about units and make judgments about how well managers are running themhow well managers are running themIncentives are the devices used to reward appropriateIncentives are the devices used to reward appropriatemanagerial behaviormanagerial behavior


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Organizational ArchitectureOrganizational Architecture

P rocessesP rocesses are the manner in which decisions areare the manner in which decisions aremade and work is performed within the organizationmade and work is performed within the organizationO rg a niz a tion al cu ltureO rg a niz a tion al cu lture refers to the norms andrefers to the norms andvalue systems that are shared among the employeesvalue systems that are shared among the employeesof an organizationof an organizationP eop leP eop le are not just the employees of theare not just the employees of theorganization; the term refers also to the strategyorganization; the term refers also to the strategyused to recruit, compensate, and retain thoseused to recruit, compensate, and retain thoseindividuals and the type of people they are in termsindividuals and the type of people they are in termsof their skills, values, and orientationof their skills, values, and orientation


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Organizational ArchitectureOrganizational Architecture


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Centralization VersusCentralization VersusDecentralizationDecentralization

Centralization:Centralization:F acilitates coordinationF acilitates coordinationEnsure decisionsEnsure decisions

consistent withconsistent withorganizationsorganizationsobjectivesobjectivesT opT op--level managerslevel managershave means to bringhave means to bringabout organizationalabout organizationalchangechangeAvoids duplication of Avoids duplication of activitiesactivities

Decentralization:Decentralization:O verburdened topO verburdened topmanagementmanagement

Motivational researchMotivational researchfavors decentralizationfavors decentralizationPermits greater Permits greater flexibilityflexibility

Can result in better Can result in better decisionsdecisionsCan increase controlCan increase control


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Horizontal Differentiation:Horizontal Differentiation:The Design of StructureThe Design of Structure

Horizontal differentiation is concernedHorizontal differentiation is concernedwith how the firm decides to dividewith how the firm decides to divideitself into subitself into sub- -units.units.The decision is normally made on theThe decision is normally made on the

Basis of functionBasis of functionT ype of businessT ype of businessGeographical areaGeographical area


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A Typical Functional StructureA Typical Functional Structure

Purchasing Manufacturing Marketing Finance

TopManagement

Buyingunits

Plants Branchsales units

Accountingunits


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A Typical Product Division StructureA Typical Product Division Structure

Figure 13.2

DepartmentPurchasing

Departmentmanufacturing

Departmentmarketing

Departmentfinance

Buyingunits

Plants Branchsales units

Accountingunits

Division productline A

Headquarters

Division productline B

Division productline C


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The International DivisionThe International Division

Many manufacturing firms expanded internationallyMany manufacturing firms expanded internationallyby exporting the product manufactured at home toby exporting the product manufactured at home toforeign subsidiaries to sellforeign subsidiaries to sellIn time it might prove viable to manufacture theIn time it might prove viable to manufacture theproduct in each countryproduct in each countryThe result could be that The result could be that

F irms with a functional structure at home would replicateF irms with a functional structure at home would replicatethe functional structure in every country in which they dothe functional structure in every country in which they dobusinessbusinessF irms with a divisional structure would replicate theF irms with a divisional structure would replicate thedivisional structure in every country in which they dodivisional structure in every country in which they dobusinessbusiness


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Problems with theProblems with theInternational StructureInternational Structure

Potential for conflict and coordinationPotential for conflict and coordinationproblems between domestic and foreignproblems between domestic and foreign

operationsoperationsHeads of foreign subsidiaries are not givenHeads of foreign subsidiaries are not givenas much voice in the organization as theas much voice in the organization as theheads of domestic functionsheads of domestic functions

T he international division is presumed to be able toT he international division is presumed to be able torepresent the interests of all countries to headquartersrepresent the interests of all countries to headquarters


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Problems with theProblems with theInternational StructureInternational Structure

Lack of coordination between domesticLack of coordination between domesticoperations and foreign operationsoperations and foreign operations

To combat these problems firms chooseTo combat these problems firms chooseone of the following structuresone of the following structuresWorldwide product divisional structure which tends to beWorldwide product divisional structure which tends to beadopted by diversified firms that have domestic productadopted by diversified firms that have domestic productdivisiondivisionWorldwide area structure which tends to be adopted byWorldwide area structure which tends to be adopted byundiversified firms whose domestic structures are basedundiversified firms whose domestic structures are basedon functionson functions


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The InternationalThe InternationalStructural Stages ModelStructural Stages Model


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Worldwide Area StructureWorldwide Area Structure

F avored by firms with low degree of F avored by firms with low degree of diversification and domestic structure baseddiversification and domestic structure basedon functionon function

World is divided into autonomousWorld is divided into autonomousgeographic areasgeographic areasO perational authority decentralizedO perational authority decentralized

F acilitates local responsivenessF acilitates local responsivenessF ragmentation of organization can occur F ragmentation of organization can occur Consistent with multiConsistent with multi- -domestic strategydomestic strategy


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Worldwide Area StructureWorldwide Area Structure

Europeanarea

Middle East /Africa area

FarE

astarea

Headquarters

Figure 13.5

N orth Americanarea

Latin Americanarea


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Worldwide Product Worldwide Product Divisional StructureDivisional Structure

Adopted by firms that are reasonably diversifiedAdopted by firms that are reasonably diversifiedOriginal domestic firm structure based on product Original domestic firm structure based on product divisiondivision

Value creation activities of each product divisionValue creation activities of each product divisioncoordinated by that division worldwidecoordinated by that division worldwide

Help realize location and experience curveHelp realize location and experience curveeconomieseconomies

F acilitate transfer of core competenciesF acilitate transfer of core competenciesProblem:Problem: area managers have limited control,area managers have limited control,subservient to product division managers, leadingsubservient to product division managers, leading to tolack of local responsivenesslack of local responsiveness


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A Worldwide Product DivisionA Worldwide Product DivisionStructureStructure

W orldwideproduct groupor division A

W orldwideproduct groupor division C

Headquarters

W orldwideproduct groupor division B

Area 1

(domestic )

Area 2

(international )

Functional units


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Global Matrix StructureGlobal Matrix Structure

Helps to cope with conflicting demands of Helps to cope with conflicting demands of earlier strategiesearlier strategiesTwo dimensions: product division andTwo dimensions: product division andgeographic areageographic areaProduct division and geographic areas givenProduct division and geographic areas givenequal responsibility for operating decisionsequal responsibility for operating decisionsProblemsProblems

Bureaucratic structure slows decision makingBureaucratic structure slows decision makingConflict between areas and product divisionsConflict between areas and product divisionsDifficult to make one party accountable due toDifficult to make one party accountable due todual responsibilitydual responsibility


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HeadquartersHeadquarters

Area 1Area 1 Area 2Area 2 Area 3Area 3

ProductProductdivision Adivision A

ProductProductdivision Bdivision B

ProductProductdivision Cdivision C

Managerherebelongs todivision Band area 2


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Head quarter and SubsidiariesHead quarter and Subsidiariesrelationships: Integrating Mechanismsrelationships: Integrating Mechanisms

Need for coordination follows theNeed for coordination follows thefollowing order on an ascending basisfollowing order on an ascending basis

LocalizationLocalizationInternationalInternationalGlobalGlobalT ransnationalT ransnational


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Impediments to CoordinationImpediments to CoordinationDiffering goals and lack of respect Differing goals and lack of respect Different orientations due to different Different orientations due to different taskstasksDifferences in nationality, time zone, andDifferences in nationality, time zone, anddistancedistanceParticularly problematic in multinationalParticularly problematic in multinationalenterprises with their many subenterprises with their many sub- -units bothunits bothhome and abroadhome and abroad


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Informal IntegratingInformal IntegratingMechanismsMechanisms

Informal management networks supported by anInformal management networks supported by anorganization culture that values teamwork and aorganization culture that values teamwork and acommon culturecommon culture

NonNon--bureaucratic flow of informationbureaucratic flow of informationIt must embrace as many managers as possibleIt must embrace as many managers as possibleTwo techniques used to establish networksTwo techniques used to establish networks

Information systemsInformation systemsManagement development policiesManagement development policies

Rotating managers through various subRotating managers through various sub- -units on aunits on aregular basisregular basis


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Informal IntegratingInformal IntegratingMechanismsMechanisms


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Control Systems and IncentivesControl Systems and IncentivesTypes of control systemsTypes of control systems

Personal controlsPersonal controlsBureaucratic controlsBureaucratic controls

O utput controlsO utput controlsCultural controlsCultural controls

Incentive systemsIncentive systemsRefer to devices used to reward appropriateRefer to devices used to reward appropriatebehavior behavior Closely tied to performance metrics used for Closely tied to performance metrics used for output controlsoutput controls


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Factors that InfluenceFactors that InfluenceIncentive SystemsIncentive Systems

Seniority and nature of workSeniority and nature of workReward linked to output target that theReward linked to output target that theemployee can influenceemployee can influence

Cooperation between managers in subCooperation between managers in sub- -unitsunitsL ink incentives to profit of the entire firmL ink incentives to profit of the entire firm

National differences in institutions and cultureNational differences in institutions and cultureConsequences of an incentive system shouldConsequences of an incentive system shouldbe understoodbe understood


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Organizational CultureOrganizational CultureValues and norms shared among peopleValues and norms shared among peopleSourcesSources

F ounders and important leadersF ounders and important leadersNational social cultureNational social cultureHistory of the enterpriseHistory of the enterpriseDecisions that result in high performanceDecisions that result in high performance

Cultural maintenanceCultural maintenance

Hiring and promotional practicesHiring and promotional practicesReward strategiesReward strategiesSocialization processesSocialization processesCommunication strategyCommunication strategy


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Culture and PerformanceCulture and Performance

A Strong CultureA Strong CultureNot always goodNot always goodSometimes beneficial, sometimes notSometimes beneficial, sometimes notContext is importantContext is important

Adaptive culturesAdaptive culturesCulture must match an organizationsCulture must match an organizationsarchitecturearchitectureCulture does not necessarily translate acrossCulture does not necessarily translate acrossbordersborders


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Organizational ChangeOrganizational Change

Change to match competitive andChange to match competitive andstrategy environment strategy environment

Hard to changeHard to changeExisting distribution of power and influenceExisting distribution of power and influenceCurrent cultureCurrent cultureManagers preconceptions about the appropriateManagers preconceptions about the appropriatebusiness model or paradigmbusiness model or paradigmInstitutional constraintsInstitutional constraints

Principles for changePrinciples for changeU nfreeze the organizationU nfreeze the organizationMoving to the new stateMoving to the new stateRefreezing the organizationRefreezing the organization

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IBM Module 6

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