Int

Unit 3.
2a International Organisation Structure
PART 4: International Business Management

Chapter 11: The Organisation of International Business
1 Introduction
The successful implementation of global strategies depend on

the establishment of appropriate organisation structures
designed to provide effective decision making, co-ordination,
control and a smooth flow of communication between all levels in
the organisation
Alfred Chandler The crux of firms diversification is its

international strategy, wherein lies the problem of organisation
configuration which successful firms must institute organisation
accommodation (Structure must follow Strategy)
In devising an appropriate organisation structure, the MNE

faces additional problems to those experienced by domestic
companies
In addition to coordinating functional and product

responsibilities the MNE must also co-ordinate geographically
dispersed operations
The challenge facing the MNE is to devise an organisation

structure which balances both the country dimension and is also
relevant to the discussion of decision making within the MNE
Many companies go through 4 stages as they evolve towards

full-fledged global operations
2 Stages of Internationalisation and International Structure

Stages of
International Organisation Structure
Internationalisation
1 Domestic Stage
2 International Stage
3 Global Stage
Export Department
International Division
a Global Product Division add products
4 Transnational Stage
b Regional ( Area) Division add markets

Global Matrix Structure standardise + customise
3 Domestic
Stage
MNC as a Network
Stage 1, the firm is domestically oriented, but may want to
consider some initial foreign involvement to expand production
volume
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Unit 3.2a International Organisation Structure
Structure is domestic, typically functional or divisional, and

foreign sales are handled thru an export department
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ADVANTAGES
Simple and saves costs
Found in early stages of internationalisation to control and coordinate foreign sales where production is minimal
Ensure that foreign sales are included in the planning process
Suitable for cost leadership strategy necessary to cut cost
Where centralised control is essential
Where there is a single business or market
Ethnocentric or International orientation
DISADVANTAGES
Concentration on domestic market rather than international

market
Conflict of interest between domestically oriented product

divisions and the export department
Export departments are ill suited to further foreign market

expansion thru other modes of entry
Note: Expansion of firms internationally has led firms to change

export department structure
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International
Stage
Stage 2, the firm becomes multi-domestic and foreign

subsidiaries may be established
An international division has replaced the export department of

stage one
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Majority of US MNEs have used this type of structure at some

stage in their internalisation
ADVANTAGES
Enables organisation to venture into international markets more

aggressively than the export department of the domestic stage
Clear hierarchy of authority vested with International

Divisional Director
Concentrate international knowledge and expertise in a single

division
Allows greater control and co-ordination of foreign operations
Ensures that the interest of the foreign subsidiaries are taken

into account in the corporate planning process
DISADVANTAGES
Replicating the functional structure in each country
Inherent problem of conflict and co-ordination between

domestic and foreign operations
Head of subsidiaries are not given much authority
Needs of the local market may be ignored, lack of local

responsiveness
Can inhibit world-wide introduction of new products, unable to

transfer core competence between domestic and foreign
operations and the consolidation of global products at key
location so as to realise location economies and benefit from
experience curve economies all these cannot be enjoyed
Only suitable firms which pursues international strategy, or

firms that wish to maintain their home country orientation
Note: Due to the above reasons, most firms abandon the

international division structure and adopt the international
structural stages model (Stopford & Wells)
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International
Structural
Stages Model
6 GLOBAL
Stage 3, the Global Stage, there are 2 alternatives
STAGE
If the firm has a domestic structure based on function and has

a low degree of product diversity, it will probably adopt an Area
Division Structure
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The problem with lack of regional co-ordination can be

overcome by adopting global regional / geographical structures,
and is suited for MNEs with narrow product lines with
geographically disperse operations
ADVANTAGES
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Each area is self-contained and authority is decentralised
Local responsiveness
Product rationalisation
Pooling of resources
Day to day control
Management development for global orientation
Good market research
DISADVANTAGES
Fragmentation into highly autonomous entities
Difficult to transfer core competencies
Unable to rationalise the value creation activities to take

advantage of experience curve
Over emphasis of customisation higher costs and lower profits
Unable to take advantage of location economies
ADDENDA:
1. Area Division ( Decentralisation of Authority )
a Introduction option suggested by Stopford and Wells part of
their International Structural Model when firm strategises to
expand and go global.
b e.g. Firms operate in a global matured market with narrower
product lines, such as pharmaceutical, food, beverages
Nestle
c Merits
i High local responsiveness Nestle conducts advertising in
local languages; Chinese prefer more ginger and papaya
flavour in their milk
ii Cultural diversity / polycentric approach / Multidomestic
strategy Apparels European, Middle-Eastern, Japanese,
South African H&M
iii Satisfy regulatory requirements e.g. EU labels in products
must have the main European languages
iv Product rationalisation Electrolux white goods, save
enormous costs
v Able to curve out a niche in the area or regional market
Parmalat European Food Producers
d Demerits
i Unable to enjoy economies of scale and scope regional
market is not geocentric difficult to fully transfer core
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competencies as firms need to customise

ii Adaptation of marketing mixes increase higher costs
Nestle, Pepsi-cola to overcome, celebrities join Tina Turner
and advertisement shown in countries where the celebrities
come from
iii issue of control and co-ordination vs global matrix
duplication of activities higher costs e.g. Unilever suffered
many years by adopting this type of structure different
brands different countries
iv R&D; Production; HRM suffers from the disadvantages of
decentralisation duplication of functional not so for Global
Product Division
v. World divided into many regional markets Area division
most suitable for such markets, Nissan US SUV, Europe
Sedan
Conclusion Not many products lend themselves to Area
Division benefits must outweigh the costs. Consumable
items usually thrive on such a structure, Apparels and Food.
WORLDWIDE PRODUCT DIVISION STRUCTURE
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If firm has a domestic base on the product and is relatively

highly diversified, it will probably adopt a Worldwide Product
Division Structure
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ADVANTAGES
It is designed to help overcome the problems of co-ordination

that arise with the international division and worldwide area
structure
Easier to pursue the consolidation of value creation activities at

key locations and therefore enjoy experience curve economies
Helps to transfer core competence
Managers have high level of authority and expertise to develop

products
Best for companies that produce unrelated products
Managers look at technical development that can be applied to

products
Manager are going to be alert to co-ordinate products
Managers have firm control over its marketing strategies
DISADVANTAGES
Limited voice given to area / country managers
Lack of local responsiveness
Product line managers may not co-operate
Different divisions have different learning hence managers

may not co-operate optimally
Suffer from hierarchical structure rigid rules and regulations

to satisfy product
Lack of flexibility due to high investment cost in plant
Product lines need to be adjusted to customer preferences and

competitive dynamics
ADDENDA:
The product divisional structure often evolves as a response to the
coordination difficulties experienced with the international division
and worldwide geographic area structures.
Merits
each product or product line develop expertise to manage
them. Managers will create a product in a best possible way.
Looking at ways in which the products can be improved.
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Product mgrs are going to have product knowledge pertaining

to the product as well as marketing plus the rules and
regulations affecting the product but there might be
duplication of activities of functions
product mgrs will be more myopic and concentrate only on
certain products ignoring the wider angel
transfer production to areas wherever it is cheaper to
produce.
able to incorporate new product technology
able to distribute worldwide
able to pursue geocentric corporate strategies
Demerits
See above points
Conclusion
TNCs that have multiple product range and the products are
not closely related to each other. As time goes by organisation
structure may be in need of adaptation due to changes. Also
goods and services have a strong influence on reconfiguration
+ managerial resources + regulatory factors.
Most companies have a combination of different structures
known as hybrid structures. So an optimum structure is
dependent on many factors.
Description - part of
7 Global Product vs. Area Division

Global Product Division
Area Division
high product diversity; low product diversity;
Stopford and Wells - Int

Structural Stages Model
Orientation (EPRG)
Locational Economies
% of foreign sales to
total sales is low
Geocentric
more important -
total sales is high.
Polycentric
not particularly
search for countries

Transfer of Core
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with lower cost e.g.

possible since product
significant
not able to do so -
12
competence
Experience curve factor
Customer satisfaction
E.g.
standardise
customisation of local
take advantage of
markets or regions
Cost goes up due to
accumulated production
production and
to lower cost per unit -
marketing activities to
can price down the
satisfy the markets
LRAC
standardisation does
main purpose of such a
not allow the structure
structure - hence sales
to enjoy this factor
from customisation
Boeing, Disk drive
satisfaction > cost of it

Retailer
manufacturers;
Pharmaceutical
products
Conclusion: path of Stopford & Wells model - progression into matrix structure if
firms wish to expand further - but not necessary. Some firms prefer to stick to
their evolved structure like Boeing and Banks as these structures work well for them.
8 Transnational
Stage/ Global
Matrix
Structure
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ADVANTAGES
Stage 4, the firm is trying to realise location and experience

curve economies, as well as concentrate on local responsiveness
and diverse transfers of core competencies
These often conflicting demands suggest a Global Matrix

Structure
DISADVANTAGES
Doesnt work in real life
Clumsy, bureaucratic, necessitates many meetings, unable to

respond to market shifts and innovate
Conflict and power struggle between managers, finger pointing
Cobweb of co-ordination
Relevant people need to be consulted
Information overload
Different functions at different levels, culture needs to be

considered
Nave approach to assume that such a structure can enjoy all

benefits
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Addenda: Limitations of the traditional models and matrix

structure reasons for the emergence of transnational solution
MNCs can respond to local needs, but the fragmentation of

activities inevitably carries efficiency penalties
Learning also suffers, because knowledge is not consolidated

and does not flow among the various parts of the company
Local innovations often represent little more than the efforts

of subsidiary management to protect its turf and autonomy
Structural stages model is no longer rich enough to describe

international org development adequately (inertia in
transferring info)
Formal systems alone cannot support huge info processing needs
Prevents the global learning of firms, makes the firms less

competitive in integrated new global economy
CONDITIONS FOR MATRIX TO WORK
Need time; Need a mechanism (Microstructural Tools) to solve

conflicts; Strong culture that promotes sharing of units
Matrix in the mind of the manager Establishing contacts and

relations with managers of other depts. in other countries
Need to have organisation psychology change of culture
Nee to have organisation sociology improve relations amongst

managers globally
Need to have organisation physiology sharing of information

via IT
Note: The lesson learn from the Japanese Experience Matsushita

overwhelming success with its VCR - VHS system where Philips
failed - V2000/Sony Betamax (this was the superior
technology). Matsushita VCR/VHS in USA - delayed play - back but
in Japan used for watching videos/ Japanese use the VCR for
Karaoke. Success is also enjoyed by other Japanese firms auto
manufacturers.
Addenda:
Unilever multi-domestic structure - (Polycentric Area
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Structure) - experienced high costs - change matrix structure - to

integrated branches worldwide branches - enjoy experience curve,
location economies, transfer core competence and local
responsiveness - by adopting the global matrix structure - Unilever
was able to improve its transnational competitiveness and
capabilities and became a formidable competitor against P & G and
Kao.
9 Global
Reasons for the adoption of Global Functional Divisions. Some
Functional
firms have Global Product Division, Area (Regional), Matrix -
Structure
others may choose to select G. Functional div.
Advantages
specialisation
development of expertise
better control of functions
able to cut cost due to specialisation
no confusion or conflict in terms of reporting function
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multi-nationality is relatively small

cost - leadership strategy - cost control through such as
structure.
Disadvantages
unable to transfer core competence, enjoy experience curve
factor, and benefit from location economies
unable to commit to local responsiveness.
impossible to co-ordinate worldwide
prevent organisational learning
hinders its global expansion and capability due to the
dependency on functionality.
Note: the disadvantages are the advantages of other global
structures which is unable to enjoy due to its functionality in
nature.
10 Global
Not a common type of structure adopted by MNC
Customer
Telecommunications and Computer firms may adopt such
Structure
structure
Activities are configured based on the customers which the
organisation serves
e.g. configuration could be based on Public sector customers
(Ministries and government owned) and Private sector (sole trader,
partnership, companies - public and private limited); Individuals and
households
Alternatively the customers could be based on standard industry
classifications - retailing, manufacturing, financial, government,
education, entertainment etc.
Advantages
satisfy marketing concept
push up sales
functional activities can be used to satisfy customer e.g. HRM,
Marketing
done globally can enjoy economies of scale
customer becomes lock-in - competitors cannot cut-in e.g.
software programme
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satisfy customers will have more products to purchase cross

selling and up selling
can attain global market positioning - e.g. SAP is an integrated
software worldwide
Disadvantages
cultural and language issues
size of customers may not be large enough to justify servicing of
customers
cost of adapting marketing and production mixes to sales
sales may not justify costs
too many customers - confusion, problem of co-ordination and
control
customers may not be permanent - resources for developing
software may be wasted - competitors may develop a substitute
and pull away customers e.g. Oracle vs. SAP/ India developing a
super cheap computer - $20 for the masses.
Conclusion:
Inspite of its limitations, global customer configuration still apt for
certain industries usually the firm will commence with global
functional structure and when the number of customers reach a
certain critical mass a switch in configuration is imperative to
global customer structure to ensure its smooth modus operandi
11 Structure Of
An International
Size Number of employees may be moderated by Span of

control, Formalisation, Flexible centralisation etc
Business Would
Strategy Strategy may determine structure
Depends on:
Technology (Joan Woodward) Distinct relationships between

Unit, Mass and Process production and Org structure
Environment (Burns & Stalker) Mechanistic structure

characterised by high complexity, formalisation and
centralisation; Organic structure which is relatively flexible and
adaptive
Country Culture A structure which fits our culture may not be

appropriate in another culture
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Nature of Products - cars - hierarchical; software informal
Stages of Internationalisation Stopford and Wells
18
Value Chain specialisation of certain activities worldwide

more control; transfer whole value chain to other countries decentralised
Why do firms need to have an organisational structure?
International
firms
need
to
locate
its
decision
making
responsibility. We need to have a formal structure for this.
Any firms need to embody different functions - e.g. HRM,

production, marketing etc. - so that's why we need structure.
Co-ordinating and integrating different activities - some may

require tight while others require loose arrangement.
The structure will embody the elements of both formal and

informal mechanisms; e.g. neat reporting lines, neat coordinating activities and informal activities which cannot be
represented by the organisational chart.
What are the factors that might influence the structure?
EPRG orientation
Types of products - e.g. decentralised structure - knowledge

industries need to give staff some initiatives and autonomy
National rules & regulations - e.g. financial services need to

embody reporting requirement of the central bank
Evolution of firm will determine the type of organisational

structure - Export Department. As export sales rises - shift to
Int. Division. But later consider the international activities product, area or a hybrid (matrix)
Managerial resources of the firm - no point giving autonomy if

managerial talent is not available. Centralisation therefore may
be necessary.
12 Benefits of
flexibility - decision making is not centralised at HQ level as
Decentralised
markets are uncertain.
Operations
not to over burden top managers
autonomy promotes innovation - if employees are given
autonomy to develop ideas and subsequently innovation
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promotes motivation - employees will now be more content and

as they able to make decisions/able to feed their own desires in
decision outcome.
communication flow and information sharing with
centralisation the whole flow of communication becomes clogged up;
this is not with decentralisation
top mgrs are free to concentrate on more international
strategies
differences in culture - requires differences management style
- cannot use centralised structure in such situations.
13a COMPARISON OF THE VARIOUS TYPES OF ORGANISATION STRUCTURE.
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13 Factors
affecting the
structure of an
International
Business
*
desire for centralisation of control
Asian countries - greater centralisation vs Western countries e.g Microsoft structure vs Daewoo structure (culture Hofstede - power distance)
*
nature of products - cars, hierarchical structure vs
soft - ware firm - more informal management structure.
*
legal, political & regulatory environment - stable
Mechanistic vs unstable organic
*
size, structure & geographical presence - mode of
entry e.g JV Area Div; Export Export Dept; GI
Global Matrix
*
cultural factors - Hofstede Power Distance High PD
Tall; Low PD flat
*
sort of technology it adopts - Joan Woodward - cars mass production(mechanistic); custom -tailored - soft-ware
(organic); Developing countries assembly line Mechanistic;
Developed countries FMS Organic
*
variables of Stopford & Wells - product diversity;
foreign sales as percentage of total sales three configuration
Global Product, Area Div or Global Matrix
*
Also Porter's dichotomy of configuration and coordination of value chain activities - concentration or
dispersion or value chain create a configuration of structure
suitable to organisations strategy.
*
need to improve efficiency
knowledge - Transnational solution
and
to
share
Also depends on firms multinational strategies

- International strategy International division- UOL
- Multidomestic strategy Area /Regional Division
Popular
Book Store
- Global Strategy Global Product Division Boeing
-Transnational Strategy Global Matrix
14 Evolution of
An the initial stages the firm is likely to have an export
structure need
department to service unsolicited overseas orders. But as
for a contingency
overseas orders pick up an international structure is likely to be
approach
established to satisfy the significant increased in overseas orders.

But as has been seen in the aforesaid the international division
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places great limitation for a firm to expand abroad. Hence

Stopford and Wells theory of international structural stages
approach would then apply here. The firm can either adopt a
Global product division if it has high product diversity to
standardize its product operations or an Area Division if it has
numerous geographic markets and needs to customize its
operations. However if the firms needs to standardise as well as
customize its operations then it is likely to turn to a global matrix
structure.
However since the introduction of the structural stages model
there has been significant changes in international business in
terms of dynamism, size, new players and competitiveness. The
structures as explain above rarely found today in their pure forms.
With an ever changing global environment, flatter structure with
decentralized decision making have become more popular with
international businesses.
To illustrate the above let us use Nestle a global player
- centralized functions finance and control, information systems,
logistics, e-commerce, HQ corporate affairs
- global product groups each product group is responsible for its
own strategy, business development, mergers and acquisitions and
market entry
- R & D- this functions and is located in 13 countries
- regional organizations there are five which report directly to
HQ. Each region has a number of countries reporting to it with
each country manager responsible for sales in that country.
An optimum organization structure therefore is never achieved
due to the every changing environment. Organisations therefore
face configuration dilemma . To operate efficiently most
organization now incorporate into their configuration some form of
integrative mechanism to co-ordinate their global operations. For
e.g. IBM adopted the matrix structure only to discover that the
structure was a cobweb which could not facilitate the transfer of
huge information globally and thus was affecting its learning
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capabilities. IBM then decided to supplement the formal matrix

structure with informal integrative mechanism which I now turn to.
15
Integrating Mechanism and the role of Knowledge Management
1. Introduction
There is a need for MNEs to transfer huge flow of information

that exists in their global operations. The lack of mechanism to
assist in the transfer of knowledge that exist inherently within
MNEs will unable the firm to enjoy first-mover-advantage and
hence will add to the firms transnational inefficacy as it will not be
able to build its required market share and positioning.
2. What are the
Formal mechanism are simply direct contact between unit
formal
managers, following rules and regulations, the development of cross
mechanism?
functional border teams, submission of reports, channel of

communications, hierarchical relationships with the MNEs.
The above formal mechanism though adds to administrative
transnational efficacy but prevents the sharing of knowledge
amongst global subunits and hence are a blockage to learning and
the development of transnational core competency.
3. What is
knowledge
management?
The concept of knowledge management has been much

discussed as a current trend since the mid-1990s. Those who
write about it do not agree on a single definition or a precise
meaning for the term, however there are several key
characteristics of the explanations:
the acquisition of knowledge - A

The sharing of knowledge - S
The development of knowledge - D
This knowledge is to be captured, formalised, stored and
shared (CFSS). Much of the knowledge management literature

also stresses the contribution and importance of technology for
the management of organisational knowledge. Alvesson and
Karreman (2001: 995) describe knowledge management
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What is informal
mechanism?
the capturing and distribution of knowledge in

organisations through technological novelties such as the
Internet, intranet, and e-mail and social relations and
interactions.
Alvesson and Karreman (2001
How can MNEs

use knowledge
management to
their advantage?
Thus there is the existence of explicit knowledge which can be

transferred by formal mechanism through cross border
functional teams or through various committee meetings.
The challenge for the firm is how to identify implicit knowledge
and then to harness the benefits of such knowledge. Bartlett
and Ghoshal have suggested the development of organisational
sociological (the development of informal contacts amongst
global managers ) and to use technological novelties
(organisational physiology) such as internet, websites, social
media, videoconferencing etc as well as the development of
community of practices, to transfer such knowledge among
global units. This is easily said then done. Often global units
may not wish to share their knowledge. The challenge to firms
then is to create the right attitude amongst its global
employees so that they are willing to share their knowledge
globally. This will require the creation of a right culture, a
culture of sharing and learning, what is termed as
organisational psychology.
IBM opted for the global matrix structure only to discover that
its multidisciplinary nature of the structure created a cobweb
which prevented the sharing of knowledge.
IBM then
introduced informal mechanism for communication alongside the
already established formal mechanism.
With both these
mechanisms IBM was able to share knowledge and thus
contributed to its transnational capability and global core
competencies.
16
Fitting strategy, structure and organization architecture.
Introduction
You should take note that organization structure is part of what

is known as ORGANISATION ARCHITECTURE
Organisation architecture is then the totality of a firms
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1. Organisation
organization including the following:

the formal division of the organization into units and subnits
structure
how decisions are made, centralization or decentralistion

the setting up of integrative coordinative mechanism to link
2. Control systems
various units and their cross functional teams globally

these control include, personal controls, bureaucratic controls,
and incentives
output controls and cultural controls

these can used to measure the performance of units, managers
and employees.
the incentives to reward the performance of units, managers
3. Processes
and the employees e.g. incentives can be linked to profitability

this relates to the manner in which decisions are made and how
work is performed within organization
processes exist throughout the examinations for example
process are necessary to service customers, for product
development, allocating budget, quality control, measuring staff
performance etc
it is necessary to distinguish between the following:
Core
Mission and competitive advantage depends on
processes
Support
These are necessary and enabling however do
processes
not differentiate the companys

products/services in the market place.
Note: both the above are critical for success
and requires integrating mechanism and cross
organization co-operating
Example: Study guide states that to design a
software may require the use of R&D in
California to design the software, production
in Taiwan and marketing in Europe, Asia, and
4. Organisation
North and South America.

Culture is the behaviour, beliefs, attitudes, activities and values
Culture
that distinguishes one organization from others. So to

integrative activities worldwide it is important to have a strong
culture. Such culture tends to promote co-operation rather than
conflict amongst units and its globally employees. For IBM has
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always emphasized on the need to share knowledge, similarly

Toyota shares its Production Systems worldwide. Strong culture
thus supports the working of processes.
However do take note that sometimes strong culture may not be
supportive especially when organizations are not doing well and
may therefore inhibit global performance.
This refers to HRM strategy of recruitment, selection, training
5. People
and development as well as performance appraisal. The right

HRM strategy will ensure that organizations have the right
competencies ( skills and knowledge ) and values to support the
architecture of the firm.
IMPORTANT NOTE: SUPERIOR COMPANY PROFITABILITY
Conclusion
DEPENDS ON 3 THINGS TO HAPPEN:

1. Organisation architecture - INTERNALLY CONSISTENT
2. Organisation architecture FIT THE STATEGY
3. Organisation architecture FIT WITH COMPETITIVE
CONDITIONS.
Questions
1
Examine the different forms of organisational structure that a

transnational corporation can have.
Is the matrix structure the best form of organisational structure for

a transnational corporation
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Purpose of the matrix structure is to overcome the limitations

of the global structures - mention briefly - global product
division and area division
Then you should explain why it is the best form of structure do not list the advantages - you need to explain what are the
main advantages over other structures . Draw the Matrix
structure.
Is this the best form? - no - do not elaborate on the

transnational solution -which overcomes the limitations of
the matrix structure.
27
some firms may find that the international division structure

fit their requirements e.g UOL - hence for these firms the
Matrix Structure is certainly not the best solution.
structure would depend on a number of factors briefly -
beyond the matrix
- explain
Analyse the factors which should determine the design of

organisational structure for transnational companies.
The answer should be based on the following guidelines:
Such factors would include the importance of global strategy for
national firms, the resolution of the tensions between the
requirement of centralisation and the desire for local autonomy, the
nature of the product or service that the firm is engaged in
providing to its customers ( for example, can it be produced in
multiple locations in close proximity to customers or can it be mass
produced in a single location and exported the world over?), the
legal and political environment within which the firm operates, the
sort of technology that the firm utilises ( can it for example, enjoy
the protection of intellectual property rights or does it require
internalisation for global exploitation?) Additional factors could
include the variety magnitude of management resources that the
firm possesses, the ethos of corporate culture that it embodies and
its size and global ambitions. All these factors have a crucial
bearing on the sort of organisation structure that a firm would
evolve.
Examine the strengths and weaknesses of the matrix design as a

form of global organisational structure for firms engaged in
international business.
Analyse the
advantages and disadvantages of
the global
functional divisions as an organisational design for
a
transnational corporation
Introduction
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Reasons for the adoption of Global Functional Divisions. Some firms

have Global Product Div, Area (Regional), Matrix
- others may
choose to select G. Functional div.
Advantages
specialisation
development of expertise
better control of functions
able to cut cost due to specialisation
no confusion or conflict in terms of reporting function
multinationality is relatively small
cost - leadership strategy - cost control through such as

structure.
Disadvantages
unable to transfer core competence, enjoy experience curve

factor, and benefit from location economies
unable to commit to local responsiveness.
impossible to co-ordinate worldwide
prevent organisational learning
hinders its global expansion and capability due to the

dependency on functionality.
Note: the disadvantages are the advantages of other global

structures which is unable to enjoy due to its functionality in
nature.
Comment on the future of the global functional structure
Organic times - shock waves - functional specialisation brings efficiency penalties - restrict towards organisation
globalisation/transnational strategies. The adoption of this
type of structure is only transitory - better to look at Stopford
& Wells and Barlett & Ghoshal.
"Given the complexity of modern business, the matrix structure is

the best form of organisation structure for an international firm."
Discuss
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Rephrasing the
question would
disadvantages of Matrix Structure
be like - the advantages and
Stopford and Wells - where a firm has high diversity of products and where
the foreign sales are a significant % of foreign sales.
There are a number of factors which affect the organisation structure.
The matrix structure is decentralised unlike a hierarchical structure.
Decision making is done by consultation. The product, market and branch
managers consult to make decisions.
Hence the structure is fluid
structure.
Advantages
1
The decision would be an optimal decision - due to the need to consult

for other points on advantages see notes.
Disadvantages
1
Slow-down decision making process.

bureaucratic.
It would
be cumbersome or
Imposes on burden on individual managers - managers are lock into

meetings and hence no time to manage.
In theory everyone suppose to carry equal weight - in reality some

managers likely to dominate over others - so no optimal decision making
Managers will start striking on deals - also no optimal decision - making managers will enter into politics and make comprises
No one will carry any responsibility - engage in finger pointing
Need a company that has high degree of corporate culture - not a

structure but a frame of mind
Hence difficult to have a matrix structure. Firms should have Informal

Matrix Structure - can have a culture of management where managers can
have their own channel of communication - committees and social
activities improve working relationships. Hence need to have flat structure
- power flows liberally.
Examine the benefits of a decentralised organisational structure

for a transnational corporation (TNC)
Decentralised structure
- simply it is delegation of authority to the lower levels; dispersion
or concentration of value chain activities (Porter)
M.Nageb
30
transfer of core competency - production can takes place other than

the home market - expand international production e.g this is how
the American firms initiated their global web/network; experience
curve factor - higher output and lower cost
more local responsiveness - e.g as in the case of multi-domestic,

area division and matrix structure - VHS system of Matsushita and
Unilever for local responsiveness
TNC - use FDI and decentralise

international expansion -
Decentralised operations enable TNC to take advantage of Dunning

Eclectic model ; Some firms also transfer their FDI operations by
decentralisation as firms did in Vernon Life cycle process
Decentralisation of firms also enable TNC to enjoy large markets of

Trading blocs and if such blocs are outward - looking the
decentralisation of TNC will benefit from greater trade arising from
inter and intra bloc trade -
The decentralisation of structure is a function of Porter's two

variables of international dimension - the co-ordination of value
chain activities and the configuration of value chain activities. The
dispersion of activities enables firms to co-ordinate its global
operations (Honda); also it enables firms pursue a global launch,
attack and defend of its global market;
in
addition the
decentralisation of operations
facilitates global learning and
transfer of knowledge management - contributing to organisational
capabilities in the global market;
By decentralisation of non-critical activities of the value chain a TNC

firm can concentrate on its core competencies and strengthen its
capabilities to compete in the global market. The Japanese are
masters of this benefit of decentralised outsourcing acitivities
The decentralisation of operation enables the TNC to manage its

global production network - increase plant loading capacity in
countries where the exchange has fallen
operation to expand their
Conclusion
As the world progresses towards convergence of one big market
decentralisation would become the norm rather than exception in
today's and tomorrow's international business operations.
7
Analyse the merits and demerits of the global product structure

as a form of organisational design for a TNC.
What do understand by the global product structure?
How is the
company organised? The company's organisation structure is based on
the product or product line that the company is involved in. Product
M.Nageb
31
structure can be M-Form and H-Form. M -Form is where the product is

related. The significance of that is there are some functions that are
carried out. The H-Form is where the company is one where the company
has an interest in a diversified activities. By and large each product line
has to operate autonomously. In essence this contribute to the global
product structure.
Merits
managers will have high level of expertise to develop products.

They have the entire responsibility to develop the product
best for companies that produce relatively unrelated products each product needs different attention. Also relevant for companies
that produce many products without common characteristics.
the manager has the opportunity to concentrate on the product or

product line - cost saving measures
look at technological development that can be applied to products
managers are giong to be alert to co-ordinate the activities very

well. Managers have a general overview and can quickly change to
global market demand
managers will have a firm control over its marketing strategies.

Hence many companies adopt a product division structure. For e.g a
Bank could a product structure - credit card, personal banking,
corporate banking, insurance; Unilever - produces a variety of
products - not major divisions - product structure is relevant. The
managers automatically develop a global output. How best can we
do in the global market. Suitable for a mindset to have a global
strategy.
Demerits
Problem in control and co-ordination - product lines managers may

not co-operate with others
Activities being duplicated within each product lines
Different divisions have different learning - e.g culture, govt.

regulation, market knowledge - therefore firm is not operating
efficiency
Alternative Corporate Structure
Functional, Area, Customer, Matrix as well as Barlett & Ghoshal - so

the company has other opportunities for the organisation structure.
M.Nageb
32
Assess the merits and demerits of the global area design as a form of
organisational structure for a transnational corporation (TNC).
What is the organisation structure devised to do? The purpose is to

allocate resources, duties and responsibilities, make decisions, functional
activities must be co-ordinated well etc.
All these activities are
undertaken by an organisation structure.
Initially when the firm engages in international activities - it will have an
export department, international division and move into the global
structures such as product, area, customer, functional, matrix, hybrid
structures
Global Area Division
What is the fundamental principle underlying this type of organisational

structure. The organisation is based on the area or the region in which the
firm wishes to base. The orientation of the firm is polycentric or multidivisional. This form of organisation structure is appropriate for firms
which thinks that particular regions need to be satisfied.
E.g
International Accounting firm will have a global area division as
accounting requirements various from countries to countries. This type of
chart is not significant for a firm that produces a standard product.
Advantages
Able to customise with regional specialist to suit local demand
Develop area specific knowledge - good marketing research.
changes in patterns will quickly be detected by the area managers.
Any
The structure enables the regional mangers to mobilise resources to

meet the area requirements
Disadvantages
Unable to exploit global perspective - there is only a regional or area
focus
Higher cost due to customisation - duplication of activities this will
diminish capabilities - may also be due to differences in culture
Unable to effectively diffuse technology to other branches.
managers are unable to make linkage with product lines.
Local
In the real business the crucial point for international managers is to be

aware that the reality has change. Hence the area structure may be
M.Nageb
33
momentary as the firm move on to other forms of structure due to internal

and external environmental changes. E.g Vodafone is now restructuring to
a product structure. But it is important to note that for some firms like
international accounting firm the area structure is the optimum but for
others like auto manufacturers and consumer electronic firms a
reconfiguration to other forms of structure is imperative.
Type of Questions that may be asked

compare and contrast questions - Global Product vs Area Division - refer
normal notes
Global
Division
Product
Area Division
Description - part of
Stopford and Wells - Int
Structural Stages Model
high product diversity;

total sales is low
low product diversity;

total sales is high.
Orientation (EPRG)
Geocentric
Polycentric
Locational Economies
more
important
search
for
countries
with lower cost e.g
not
significant
Transfer
of
competence
possible since product

standardise
not able to do so
effectively
customisation of local
markets or regions
Experience curve factor
take
advantage
of
accumulated production
to lower cost per unit can price down the
LRAC
Cost goes up due to

production
and
marketing activities to
satisfy the markets
Customer satisfaction
standardisation does
not allow the structure
to enjoy this factor
main purpose of such

a structure - hence sales
from
customisation
satisfaction > cost of it
E.g
Boeing, Disk
manufacturers;
Pharmaceutical
products
Banks, Retailer
Core
drive
particularly
Conclusion: path of Stopford & Wells model - progression into matrix structure
if firms wish to expand further - but not necessary. Some firms prefer to stick
to their evolved structure like Boeing and Banks as these structures works
well for them.
M.Nageb
34
Analyse the factors which influence the choice of organisational structure

for firms engaged in international business.
Why do firms need to have an organisational structure?
International firms need to locate its decision making responsibility. We
need to have a formal structure for this.
Any firms need to embody different functions - e.g HRM, production,
marketing etc. - so that's why we need structure.
Co-ordinating and integrating different activities - some may require tight
while others require loose arrangement.
The structure will embody the elements of both formal and informal
mechanisms; e.g neat reporting lines, neat co-ordinating activities and
informal activities which cannot be represented by the organisational
chart.
What are the factors that might influence the structure?

EPRG orientation
Types of products - e.g decentralised structure - knowledge industries
need to give staff some initiatives and autonomy
National rules & regulations - e.g financial services need to embody
reporting requirement of the central bank
Evolution of firm will determine the type of organisational structure Export Department. As export sales rises - shift to Int. Division. But later
consider the international activities - product, area or a hybrid (matrix)
Managerial resources of the firm - no point giving autonomy if
managerial talent is not available.
Centralisation therefore may be
necessary.
10
Discuss the benefits of a decentralised organisational structures for firms

engaged in cross border business activities
Purpose of Organisation structure

- facilitate the implementation of the firm's strategy - operationalising the
strategy of firms
- how the company is to organise its functional activities
- assign decision making activities
- so for a various reasons the firm has to have organisation structure
Opposite of decentralised structure is taller structure /

Hierarchical - more important the decisions the higher the level of mgt.
Benefits
M.Nageb
35
flexibility - decision making is not centralised at HQ level as

markets are uncertain.
not to over burden top managers
autonomy promotes innovation - if employees are given
autonomy to develop ideas and subsequently innovation
promotes motivation - employees will now be more content and
as they able to make decisions/able to feed their own desires in
decision outcome.
communication flow and information sharing - with
centralisation the whole flow of communication becomes clogged up;
this is not with decentralisation
top mgrs are free to concentrate on more international
strategies
differences in culture - requires differences management
style - cannot use centralised structure in such situations.
11
Analyse the advantages and disadvantages of the global product design as

a form of organisational structure for a firm engaged in international
business.
Knowledge of area + functions that need to be carried out +

knowledge (goods, services) - all these will affect the type
organisation structure that it needs to embody
2
product
of
What are the functions of organisation design?
Firstly structure enables to make decision + co-ordinating activities

conduct
of function structure must cater for all these.
Menu of choice to cater for other requirements Area Division, Functional

division, Global Customer Design, Global Matrix structure organisation
design flexible, consult all relevant parties, has merits and complex
problems
in implementing it; in the real there are few companies are
able to
operate
successfully; Also there is
Barlett and Ghoshals
transnational structure.
4
to
Does not exist in isolation from the culture and managerial skills. We need
have a wider perspective to assess the feasibility of suchs tructures.
M.Nageb
36
Pointless
designing a complicated business structure as it may not have the
prerequisites
Merits
a Management devolves the activities of the product to specific product

manager.
Managers therefore will have a geocentric strategy this is one that
neither
favours domestic or international. Here is to develop best practices
product is manufacture and sold worldwide in a most optimum manner
b economies of scale most efficient manner in worldwide
c development of management of expertise in specific products and such
managers will be able to infuse higher productivity
d also infuse technological improvement in product development
e Managers of company able to share knowledge in development of new
products
Demerits
a Managers contain their knowledge within product divisions unless

there is
learning due to the design structure lack of horizontal
movement of
knowledge
b Every product manager needs to develop functional activities
duplication of
activities not using economic resources in most
efficient
manner result in higher production costs
c More time in decision making lack of sharing of knowledge
d Technological innovation retain within each product lines or
Opportunity for product improvement is retarded.
product.
7 What type of companies use this structure?

a Product which are distinct
not
b Products do not change in a dynamic sense if susceptible to change

so
relevant
c Not so useful for service sector but useful for manufacturing which
need to
share knowledge.
M.Nageb
37
M.Nageb
38
M.Nageb
39
Sample Questions
1. a.
b.
What is organisation structure?

What types of structure are there, what are their advantages and
disadvantages, when they best used?
c.
What additional integrating mechanism might be needed in the modern MNE?

Illustrate your answer with examples where possible.
Tutorial Questions
a.
What are the four main types of international strategy?
4 marks
b.
Under what conditions would a firm adopt each strategy?
4 marks
c.
Assess the types of structure, and how a firm can devise its organisations
structure to fit its international strategy.
M.Nageb
12 marks
40

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Unit 3.

2a International Organisation Structure

PART 4: International Business Management

The successful implementation of global strategies depend on

Alfred Chandler The crux of firms diversification is its

In devising an appropriate organisation structure, the MNE

In addition to coordinating functional and product

The challenge facing the MNE is to devise an organisation

Many companies go through 4 stages as they evolve towards

2 Stages of Internationalisation and International Structure

b Regional ( Area) Division add markets

Unit 3.2a International Organisation Structure

Structure is domestic, typically functional or divisional, and

Unit 3.2a International Organisation Structure

Simple and saves costs

Ensure that foreign sales are included in the planning process

Suitable for cost leadership strategy necessary to cut cost

Where centralised control is essential

Where there is a single business or market

Ethnocentric or International orientation

Concentration on domestic market rather than international

Conflict of interest between domestically oriented product

Export departments are ill suited to further foreign market

Note: Expansion of firms internationally has led firms to change

Unit 3.2a International Organisation Structure

Stage 2, the firm becomes multi-domestic and foreign

An international division has replaced the export department of

Unit 3.2a International Organisation Structure

Majority of US MNEs have used this type of structure at some

Enables organisation to venture into international markets more

Clear hierarchy of authority vested with International

Concentrate international knowledge and expertise in a single

Allows greater control and co-ordination of foreign operations

Ensures that the interest of the foreign subsidiaries are taken

Replicating the functional structure in each country

Inherent problem of conflict and co-ordination between

Head of subsidiaries are not given much authority

Needs of the local market may be ignored, lack of local

Can inhibit world-wide introduction of new products, unable to

Only suitable firms which pursues international strategy, or

Note: Due to the above reasons, most firms abandon the

Unit 3.2a International Organisation Structure

Stage 3, the Global Stage, there are 2 alternatives

If the firm has a domestic structure based on function and has

Unit 3.2a International Organisation Structure

The problem with lack of regional co-ordination can be

Unit 3.2a International Organisation Structure

Each area is self-contained and authority is decentralised

Day to day control

Management development for global orientation

Good market research

Fragmentation into highly autonomous entities

Difficult to transfer core competencies

Unable to rationalise the value creation activities to take

Over emphasis of customisation higher costs and lower profits

Unable to take advantage of location economies

Unit 3.2a International Organisation Structure

competencies as firms need to customise

WORLDWIDE PRODUCT DIVISION STRUCTURE

Unit 3.2a International Organisation Structure

If firm has a domestic base on the product and is relatively

Unit 3.2a International Organisation Structure

It is designed to help overcome the problems of co-ordination