ORGANIZATIONAL STRUCTURE
ORGANIZATIONAL STRUCTURE
As a firm develops international business activities, its corporate structure must adapt to the changing environment in order to accommodate foreign operations effectively. The organizational structure that emerges will depend on many factors, including the location and type of foreign facilities, the impact of international operations on total corporate performance, the nature of assets employed in pursuit of business abroad, and the time horizons for achieving international and total corporate goals.
Firms must establish legal and organizational structures at home and abroad to meet company objectives. Within each foreign country these arrangements may differ because of the unique nature of activities and environmental requirements. Layered above the country organizations are additional structures that coordinate activities in more than one country. The form, method, and location of operational units at home and abroad will affect taxes, expenses, and control. Consequently, organizational structure has an important effect on the fulfillment of corporate objectives.
Level of Importance
The more important the The more important the specific foreign operations are to total corporate per--oreign operations, the formance, the higher the corporate level to which these units should report.
Higher thev report in ... .
the structure. Tne organizational structure or reporting system therefore should change
over time to parallel a company's increased involvement in foreign activities.
At one end of the spectrum is the firm that merely exports temporary surpluses through a middleman who takes title and handles all the export details. Clearly, in this situation few people in the firm are concerned with the conduct of the business. Since no personnel are either overseas or engaged in the export arrangement, there is no need for the firm to devise new personnel policies or training programs. Because the title to goods changes hands in the home country, there are no foreign legal or tax matters to consider. Also, since payment is effected in the home currency, there are no problems of transferring funds or evaluating country-by-country performance. Finally, because no attempt is made to increase foreign sales, the firm does not require new marketing programs. The entire operation is apt to be so insignificant to total corporate performance that top-level management is concerned very little with such transactions. The duties may be handled by anyone in the organization who knows enough and has time to discern whether or not orders can be filled. In this situation, foreign activities should be handled at a low level in the corporate hierarchy.
At the other end of the spectrum is the firm that has passed through intermediate stages and now owns and manages foreign manufacturing and sales facilities. Every functional and advisory group within the company undoubtedly will be involved in the establishment and direction of the facilities. Since sales, investments, and profits are now a more significant part of the corporate total, people very high in the corporate hierarchy are affected by the foreign operations.
Integrated Versus Separate International Activities
All of a company's international activities may be grouped together (e.g., international department or division) or gathered by the product, function, or geographic structure the company relies on domestically. Figure 17.1 shows simplified examples of different approaches to the placement of foreign activity within the organizational structure; most companies broadly fit one of these categories.
International Division The separation of international activities allows for specialized personnel to handle such diverse matters as export documentation, foreign-exchange transactions, and relations with foreign governments. By combining all international operations, the international activities constitute a large enough critical mass to wield power within the organization. When separated among product or functional units, these activities may be so small in comparison to domestic business that the firm gives little attention to their development. On the other hand, this separation may necessitate dependence of the international division on the domestic divisions for product, personnel, technology, and other resources. Since managers in the domestic divisions are evaluated against domestic performance standards, they may withhold their best resources from the international group in order to improve their own performance.
Part A of Fig. 17.1 is an example of separating international operations, as used by such firms as Campbell Soup.11 Although this structure is not popular among European multinational firms, it is very common among those based in the United States.12 One of the apparent causes for the difference is that U.S. firms are typically much more dependent on the domestic market than are European firms; therefore, the international division allows U.S. firms to gain the "critical mass" discussed above.
Product Division Parts B, C, and D in Fig. 17.1 are types of international operations that are integrated rather than handled separately. The product organization (B) is particularly popular among companies that operate within
highly diverse product groups, especially those that have become diverse primarily through acquisitions, such as Motorola. Since the product groups may have little in common, even domestically, the groups may be highly independent of each other. Note that different subsidiaries within the same foreign country will report to different groups at headquarters.
Geographic (Area) Division The geographic organization, part C in Fig. 17.1, is used primarily by firms with very large foreign operations, not dom-inated by a single country or area. This structure is found more commonly among European MNEs, such as Nestld, than among U.S. MNEs because of
the dominance of the U.S. domestic market. Recall that Nestle can use this structure because no one region dominates its operations.
Functional The functional organization, part D in Fig. 17.1, is popular
among extractive companies (such as oil or bauxite extraction) because of homogenous products for which production and marketing methods are relatively undifferentiated from one country to another. For example, it is used by Exxon.
A matrix organization Matrix Because of the problems inherent in either integrating or separating
gives product, function, foreign operations, some firms, such as Dow Chemical, are moving toward
and area an even focus. ... . , °
matrix organizations, part E m Fig. 17.1. In these organizations a subsidiary reports to more than one group (product, function, or area). The theory is that, since each group shares responsibility over foreign operations, each group will depend on the others. The groups will become more interdependent, will exchange information, and will ultimately take strategic global perspectives as they seek to exchange resources with other groups. For example, product group managers must compete so that R&D personnel responsible to a functional group are assigned to the development of technologies that fall within their product domain. The same product group managers must compete as well to see that area managers put sufficient emphasis on their lines. Not only are product groups competing, the functional and geographic areas also must strive to draw upon resources held by others in the matrix.
Although a matrix form requires that all major perspectives be represented in strategic decision making, this form of organization is not without drawbacks. One of the problems is that groups and coalitions inevitably compete for scarce resources, and a management decision must be made above the group level on how to allocate the resources when lower-level managers fail to reach an agreement. Such elements as faith in a specific executive or business group may result in more decisions being made in their favor.13 As others in the organization see this occurring, they may perceive that the locus of relative power lies with a certain individual or group, which may lead managers in turn to divert most of their energies toward the activities that are perceived as most likely to be accepted, thus perpetuating the difference in relative power. This may not represent the areas that would be the firm's best strategic choices on a global basis. Consequently, some of the advantages sought in a matrix organization may be diminished because of these interpersonal relationships. A number of alternatives may help to alleviate this problem, including the transfer of individuals among groups and the development of additional reporting and control systems reflecting each of the three groups (product, function, and area) on a global basis. However, these alternatives are not without costs.
Dynamic Nature of Structures
Companies' structures are apt to change as their business evolves. For example, as product lines become more diverse the overall organization is apt to shift from a functional to a product structure. Likewise, international business growth may necessitate structural changes. When the company is merely exporting, an export department attached to a product or functional division may suffice. But if international operations continue to grow and be conducted by overseas production in addition to exports, a department may no longer be sufficient. Perhaps an international division replaces the department. Or perhaps each product division takes on worldwide responsibility for its own products. Since most companies prefer that their divisions be of a similar size, it may be necessary to break up an international division, such as among areas, if it becomes too large relative to domestic divisions. For example, in the Nestle case it would be hard to imagine a single international division handling over 95 percent of the sales.
Because of growth dynamics, companies seldom, if ever, have all their activities corresponding to the simplified structures we have described. Most, therefore, have certain elements of a mixed structure. A recent acquisition, for example, might report differently to headquarters until it can be consolidated efficiently within existing divisions. Or circumstances for a particular country, product, or function might necessitate its unique handling apart from the overall structure.
Coordinating Mechanisms
Because all of the organizational structures just described have advantages an(j disadvantages, companies in recent years have developed organizational mechanisms to pull together some of the diverse functional, geographic (in- eluding international), and product perspectives without abandoning their existing structures. These have included the strengthening of corporate staffs
(groups of advisory personnel) so that people with line responsibilities (decision making authority) are required to listen to different viewpoints (whether they take advice or not); the use of more management rotation, such as between line and staff and domestic and international, in order to break down parochial views; the placement of international and domestic personnel in closer proximity to each other; and the establishment of liaisons among subsidiaries within the same country so that different product groups can get combined action on a given issue. Companies also use staff departments (e.g., legal or personnel) to centralize functions common to more than one subsidiary. At Heinz, for instance, one expatriate-transfer-and-compensation policy is used by all the geographic divisions, thus minimizing the duplication of effort.14
Hetarchies
Companies have traditionally been organized in hierarchies, which are characterized by superior-subordinate relationships. However, many companies now depend heavily on alliances with other firms where it is not clear-cut that one company is the superior and the other the subordinate in the relationship. Therefore, the management of the alliances is among so-called equals, a situation known as a hetarchy.15 Corning epitomizes this situation
in that about half of its earnings come from alliances, especially joint ventures. There are formal linkages among the alliance partners; however, management at Coming's headquarters must serve as brokers, conflict negotiators, and facilitators rather than exerting direct authority over the alliances.16
Many Japanese companies are linked similarly in what is known as a keiretsu, whereby each company owns a small percentage of other companies in the group. For example, the Mitsubishi group consists of 28 core companies in which no single company predominates. The business activities are extremely diverse, ranging from mining to real estate and credit cards to tuna canning.17 Typically within a keiretsu the core companies will buy and sell with each other only if and to the extent that the transactions make business sense. However, interlocking directorships and high levels of personal relationships among managers in core companies build common interests that do not depend on formal controls. The relationships encourage individual companies to undertake long-term and high-risk investments because other members of the keiretsu feel morally obligated to support a core company that has financial problems.
Locating international and Regional Headquarters
Once a company develops substantial foreign operations, there may be advantages to shifting part of the headquarters staff to a new location.18 One reason is to minimize communications and travel expense and time between the staff group and the foreign operations. Another is to be near specialized private and public institutions such as banks, factoring firms, insurance groups, public accountants, freight forwarders, customs brokers, and consular offices, which handle certain international functions. Finally, firms need to hire bilingual or multilingual personnel as well as export documentation people. The international transportation, institutions, and specialized personnel are concentrated in a few locales. For this reason, New York is by far the most popular international headquarters location for U.S. companies that maintain corporate headquarters elsewhere. If foreign operations are sufficient, staff may be segmented on a regional basis. Many U.S. firms maintain Latin American regional offices in the Miami area, and many have a European headquarters somewhere in Europe.
As transportation and communications have become faster and cheaper, some of the advantages of locating an international group apart from headquarters have lessened. This, when coupled with moves to seek greater integration of international and domestic operations, has meant that more of the international operations are being relocated near the corporate headquarters.
As a firm develops international business activities, its corporate structure must adapt to the changing environment in order to accommodate foreign operations effectively. The organizational structure that emerges will depend on many factors, including the location and type of foreign facilities, the impact of international operations on total corporate performance, the nature of assets employed in pursuit of business abroad, and the time horizons for achieving international and total corporate goals.
Firms must establish legal and organizational structures at home and abroad to meet company objectives. Within each foreign country these arrangements may differ because of the unique nature of activities and environmental requirements. Layered above the country organizations are additional structures that coordinate activities in more than one country. The form, method, and location of operational units at home and abroad will affect taxes, expenses, and control. Consequently, organizational structure has an important effect on the fulfillment of corporate objectives.
Level of Importance
The more important the The more important the specific foreign operations are to total corporate per--oreign operations, the formance, the higher the corporate level to which these units should report.
Higher thev report in ... .
the structure. Tne organizational structure or reporting system therefore should change
over time to parallel a company's increased involvement in foreign activities.
At one end of the spectrum is the firm that merely exports temporary surpluses through a middleman who takes title and handles all the export details. Clearly, in this situation few people in the firm are concerned with the conduct of the business. Since no personnel are either overseas or engaged in the export arrangement, there is no need for the firm to devise new personnel policies or training programs. Because the title to goods changes hands in the home country, there are no foreign legal or tax matters to consider. Also, since payment is effected in the home currency, there are no problems of transferring funds or evaluating country-by-country performance. Finally, because no attempt is made to increase foreign sales, the firm does not require new marketing programs. The entire operation is apt to be so insignificant to total corporate performance that top-level management is concerned very little with such transactions. The duties may be handled by anyone in the organization who knows enough and has time to discern whether or not orders can be filled. In this situation, foreign activities should be handled at a low level in the corporate hierarchy.
At the other end of the spectrum is the firm that has passed through intermediate stages and now owns and manages foreign manufacturing and sales facilities. Every functional and advisory group within the company undoubtedly will be involved in the establishment and direction of the facilities. Since sales, investments, and profits are now a more significant part of the corporate total, people very high in the corporate hierarchy are affected by the foreign operations.
Integrated Versus Separate International Activities
All of a company's international activities may be grouped together (e.g., international department or division) or gathered by the product, function, or geographic structure the company relies on domestically. Figure 17.1 shows simplified examples of different approaches to the placement of foreign activity within the organizational structure; most companies broadly fit one of these categories.
International Division The separation of international activities allows for specialized personnel to handle such diverse matters as export documentation, foreign-exchange transactions, and relations with foreign governments. By combining all international operations, the international activities constitute a large enough critical mass to wield power within the organization. When separated among product or functional units, these activities may be so small in comparison to domestic business that the firm gives little attention to their development. On the other hand, this separation may necessitate dependence of the international division on the domestic divisions for product, personnel, technology, and other resources. Since managers in the domestic divisions are evaluated against domestic performance standards, they may withhold their best resources from the international group in order to improve their own performance.
Part A of Fig. 17.1 is an example of separating international operations, as used by such firms as Campbell Soup.11 Although this structure is not popular among European multinational firms, it is very common among those based in the United States.12 One of the apparent causes for the difference is that U.S. firms are typically much more dependent on the domestic market than are European firms; therefore, the international division allows U.S. firms to gain the "critical mass" discussed above.
Product Division Parts B, C, and D in Fig. 17.1 are types of international operations that are integrated rather than handled separately. The product organization (B) is particularly popular among companies that operate within
highly diverse product groups, especially those that have become diverse primarily through acquisitions, such as Motorola. Since the product groups may have little in common, even domestically, the groups may be highly independent of each other. Note that different subsidiaries within the same foreign country will report to different groups at headquarters.
Geographic (Area) Division The geographic organization, part C in Fig. 17.1, is used primarily by firms with very large foreign operations, not dom-inated by a single country or area. This structure is found more commonly among European MNEs, such as Nestld, than among U.S. MNEs because of
the dominance of the U.S. domestic market. Recall that Nestle can use this structure because no one region dominates its operations.
Functional The functional organization, part D in Fig. 17.1, is popular
among extractive companies (such as oil or bauxite extraction) because of homogenous products for which production and marketing methods are relatively undifferentiated from one country to another. For example, it is used by Exxon.
A matrix organization Matrix Because of the problems inherent in either integrating or separating
gives product, function, foreign operations, some firms, such as Dow Chemical, are moving toward
and area an even focus. ... . , °
matrix organizations, part E m Fig. 17.1. In these organizations a subsidiary reports to more than one group (product, function, or area). The theory is that, since each group shares responsibility over foreign operations, each group will depend on the others. The groups will become more interdependent, will exchange information, and will ultimately take strategic global perspectives as they seek to exchange resources with other groups. For example, product group managers must compete so that R&D personnel responsible to a functional group are assigned to the development of technologies that fall within their product domain. The same product group managers must compete as well to see that area managers put sufficient emphasis on their lines. Not only are product groups competing, the functional and geographic areas also must strive to draw upon resources held by others in the matrix.
Although a matrix form requires that all major perspectives be represented in strategic decision making, this form of organization is not without drawbacks. One of the problems is that groups and coalitions inevitably compete for scarce resources, and a management decision must be made above the group level on how to allocate the resources when lower-level managers fail to reach an agreement. Such elements as faith in a specific executive or business group may result in more decisions being made in their favor.13 As others in the organization see this occurring, they may perceive that the locus of relative power lies with a certain individual or group, which may lead managers in turn to divert most of their energies toward the activities that are perceived as most likely to be accepted, thus perpetuating the difference in relative power. This may not represent the areas that would be the firm's best strategic choices on a global basis. Consequently, some of the advantages sought in a matrix organization may be diminished because of these interpersonal relationships. A number of alternatives may help to alleviate this problem, including the transfer of individuals among groups and the development of additional reporting and control systems reflecting each of the three groups (product, function, and area) on a global basis. However, these alternatives are not without costs.
Dynamic Nature of Structures
Companies' structures are apt to change as their business evolves. For example, as product lines become more diverse the overall organization is apt to shift from a functional to a product structure. Likewise, international business growth may necessitate structural changes. When the company is merely exporting, an export department attached to a product or functional division may suffice. But if international operations continue to grow and be conducted by overseas production in addition to exports, a department may no longer be sufficient. Perhaps an international division replaces the department. Or perhaps each product division takes on worldwide responsibility for its own products. Since most companies prefer that their divisions be of a similar size, it may be necessary to break up an international division, such as among areas, if it becomes too large relative to domestic divisions. For example, in the Nestle case it would be hard to imagine a single international division handling over 95 percent of the sales.
Because of growth dynamics, companies seldom, if ever, have all their activities corresponding to the simplified structures we have described. Most, therefore, have certain elements of a mixed structure. A recent acquisition, for example, might report differently to headquarters until it can be consolidated efficiently within existing divisions. Or circumstances for a particular country, product, or function might necessitate its unique handling apart from the overall structure.
Coordinating Mechanisms
Because all of the organizational structures just described have advantages an(j disadvantages, companies in recent years have developed organizational mechanisms to pull together some of the diverse functional, geographic (in- eluding international), and product perspectives without abandoning their existing structures. These have included the strengthening of corporate staffs
(groups of advisory personnel) so that people with line responsibilities (decision making authority) are required to listen to different viewpoints (whether they take advice or not); the use of more management rotation, such as between line and staff and domestic and international, in order to break down parochial views; the placement of international and domestic personnel in closer proximity to each other; and the establishment of liaisons among subsidiaries within the same country so that different product groups can get combined action on a given issue. Companies also use staff departments (e.g., legal or personnel) to centralize functions common to more than one subsidiary. At Heinz, for instance, one expatriate-transfer-and-compensation policy is used by all the geographic divisions, thus minimizing the duplication of effort.14
Hetarchies
Companies have traditionally been organized in hierarchies, which are characterized by superior-subordinate relationships. However, many companies now depend heavily on alliances with other firms where it is not clear-cut that one company is the superior and the other the subordinate in the relationship. Therefore, the management of the alliances is among so-called equals, a situation known as a hetarchy.15 Corning epitomizes this situation
in that about half of its earnings come from alliances, especially joint ventures. There are formal linkages among the alliance partners; however, management at Coming's headquarters must serve as brokers, conflict negotiators, and facilitators rather than exerting direct authority over the alliances.16
Many Japanese companies are linked similarly in what is known as a keiretsu, whereby each company owns a small percentage of other companies in the group. For example, the Mitsubishi group consists of 28 core companies in which no single company predominates. The business activities are extremely diverse, ranging from mining to real estate and credit cards to tuna canning.17 Typically within a keiretsu the core companies will buy and sell with each other only if and to the extent that the transactions make business sense. However, interlocking directorships and high levels of personal relationships among managers in core companies build common interests that do not depend on formal controls. The relationships encourage individual companies to undertake long-term and high-risk investments because other members of the keiretsu feel morally obligated to support a core company that has financial problems.
Locating international and Regional Headquarters
Once a company develops substantial foreign operations, there may be advantages to shifting part of the headquarters staff to a new location.18 One reason is to minimize communications and travel expense and time between the staff group and the foreign operations. Another is to be near specialized private and public institutions such as banks, factoring firms, insurance groups, public accountants, freight forwarders, customs brokers, and consular offices, which handle certain international functions. Finally, firms need to hire bilingual or multilingual personnel as well as export documentation people. The international transportation, institutions, and specialized personnel are concentrated in a few locales. For this reason, New York is by far the most popular international headquarters location for U.S. companies that maintain corporate headquarters elsewhere. If foreign operations are sufficient, staff may be segmented on a regional basis. Many U.S. firms maintain Latin American regional offices in the Miami area, and many have a European headquarters somewhere in Europe.
As transportation and communications have become faster and cheaper, some of the advantages of locating an international group apart from headquarters have lessened. This, when coupled with moves to seek greater integration of international and domestic operations, has meant that more of the international operations are being relocated near the corporate headquarters.
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