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Every business seeks efficiency and effective structures to organize tasks. In the global environment, structures take on differing forms in order to effectively answer cultural demands and respond to global environments. The most appropriate organizational structure will be determined by the overall global strategy of the firm, the relative size of international operations as compared to domestic operations, and the characteristics of the marketplace in which the firm competes.
Factors that influence the choice of strategy in a firm are:
Beliefs and ambitions of managers
Societal and political influences
Regulatory and legislative actions.
Organizational structure is ultimately driven by strategy; in the near term however, strategy is shaped by organizational structure, because structure provides a constraint to action. Structure is relatively immobile in the short run; in the longer term, it can (and does) change. Channon and Jalland (1979) argued that "there is no one optimal organization form which should be adopted by the MNC. Rather the structure should be consistent with strategy in so far as this is possible. Moreover, since strategy itself tends to change over time so might organization structure expect to undergo modifications."
As I have already mentioned, there are four traditional organization structures: global, multi-domestic, transnational and international exporter. I will discuss each one separately.
A global firm is an organization which has operations across geographies and where operations in one country affect or have strategic impact on the company or its operations in other areas. The falling of international trade barriers have facilitated the emerging of global firms. It has made it easier and less expensive to integrate activities and coordinate resources across international borders.
The term "global" was first used in Levitt's (1983) article which implied a homogenized global market in terms of consumer needs and preferences. Yet the global refers to more than markets and is used to indicate global industry, global strategy, and global management. A global market refers to one which has broadly similar consumer needs and product preferences. A global industry is one which is a global configuration of value-adding activities within an industry.
In globalized world customers have similar needs and with the same product firms are able to reach all customers in different markets. Nowadays the competition is stronger than ever and only those firms able to lower their cost have a chance to survive. A global strategy enables firms to reduce costs by economies of scale or by having operations in third world countries. This ability will derive in cost reduction and strategic advantage. A very high worldwide coordination of the supply chain is required. This is the reason for IT and networking being core to successful global company operations today.
The global functional organization has the advantage of tight control over specific functions worldwide. It allows a relatively small group of officers to bring out competitive strengths in each function. The functional structure works rather well when companies remain comparatively small and have a few lines of products.
However, global type of structure has some serious weaknesses. Coordination of functions is difficult, as this structure separates, for example, marketing from manufacturing. Subsidiaries normally have to report to several different persons at headquarters, resulting in tremendous duplication of effort. Finally, the global structure is unsuitable for multi-product or geographically dispersed organization as each function may need its own product or regional specialists.
A good example of a global services firm is Ernst & Young. The firm has more than 15,000 consultants in 135 countries, claiming worldwide coverage. It strives to provide a global standard of service and performance in all its worldwide locations. The firm is organized using a strategic business unit approach rather than a geographic approach, suggesting that specialists are tapped from various locations to create the strongest global team possible.
The multidomestic company allows its subsidiaries to develop and exploit local opportunities, expects them to create a local knowledge and competency base. Decision-making and resource-allocation reside with the country subsidiary. Multidomestic company exhibits few extra national scale economies or experience curve effects, or location economies. Minimum economic size of production units will be relatively small, as each will serve only its local market.
Multidomestic strategy is a strategy by which companies try to achieve maximum local responsiveness by customizing both their product offering and marketing strategy to match different national conditions. Production, marketing and R&D activities tend to be established in each major national market where business is done. Levels of both product and process standardization are likely to be low as each country centre will have high autonomy and little co-ordination with the other country subsidiaries in the group. Since their markets are different, there is no need for it. A multidomestic strategy makes most sense when there are high pressures for local responsiveness and low pressures for cost reductions.
McDonald's is an example of a multidomestic firm. In 1955, McDonald's opened its first restaurant in Des Plaines, Illinois. Today it operates over 31,000 restaurants worldwide, in 119 countries, on six continents, employing more than 1.5 million people all over the world. McDonald's a multidomestic company because they adjust to the cultures of their host countries. This is most seen in their branch in India. Cows are held sacred in the Indian religion of Hinduism which is why McDonald's India doesn't serve beef. Indian McDonald's burgers are purely vegetarian and they serve several other products that are 100% beef free like several kinds of wraps and pans.
Multidomestic companies are generally unable to realize value from experience curve effects and location economies, sometimes needlessly duplicates facilities and also posses high cost structure. Multidomestic companies were very popular until 1970s, when each country market had high levels of trade barriers and high transport costs. Nowadays, lower market barriers, regional rather than national market boundaries, the needs of scale economies, technology sharing and emerging greater similarities in market tastes have combined to make it relatively obsolete as a typical MNC organizational form.
The modern multidomestic is a tighter confederation than its traditional predecessor, it is becoming more centralized corporation with differentiated products and it this case it is difficult to call it multidomestic at all.
Transnational firms aim to realize location and experience curve economies and have centralized control over global production centers. They have a shared vision under a corporate umbrella, but alter operations for local demands.
The transnational strategy allows for the attainment of benefits inherent in both global and multidomestic strategies. The overseas components are integrated into the overall corporate structure across several dimensions, and each of the components is empowered to become a source of specialized innovation. It is a management approach in which an organization integrates its global business activities through close cooperation and interdependence among its headquarters, operations, and international subsidiaries, and its use of appropriate global information technologies (Zwass, 1998).
The key philosophy of a transnational organization is adaptation to all environmental situations and achieving flexibility by capitalizing on knowledge flows (which take the form of decisions and value-added information) and two-way communication throughout the organization. The principal characteristic of a transnational strategy is the differentiated contributions by all its units to integrated worldwide operations. As one of its other characteristics, a joint innovation by headquarters and by some of the overseas units leads to the development of relatively standardized and yet flexible products and services that can capture several local markets. Decision making and knowledge generation are distributed among the units of a transnational organization.
Nokia can be an example of transnational company. Though their marketing strategy is worldwide and their products basically uniform, they put conscious effort into understanding the different needs and tastes of their consumers all over the world.
The International Exporter company has a strong domestic base, but developed small, mainly sales outfits, in many countries around the world. These subsidiaries depend heavily on their parent for products and transfer of knowledge, and generally heavily patronized by the parent.
In this form the corporate centre and power base is in the home country. There are no country-based national subsidiaries, only sales and marketing affiliates. The dominant decision flow is from the centre to the affiliates. The characteristic of the international exporter is to enable a domestic company to become an international one without the need to change its culture or organization. The home country saw international exporting as the only sensible way to expand, given its lack of international market knowledge and its modest resource base. The international exporter form is a first step in becoming international.
The International exporter strategy makes sense if a firm has a valuable core competence that indigenous competitors in foreign markets lack, and if the firm faces relatively weak pressures for local responsiveness and cost reductions. In such circumstances, an international strategy can be very profitable. However, when pressures for local responsiveness are high, firms pursuing this strategy lose out to firms that place a greater emphasis on customizing the product offering and market strategy to local conditions. Due to the duplication of manufacturing facilities, firms that pursue an international strategy tend to suffer from high operating costs. This makes the strategy inappropriate in manufacturing industries where cost pressures are high.
During the last quarter of the 20th century the nature and organization of work in advanced industrial society is said to have undergone a radical transformation, resulting from the emergence of forms of organizational innovation that are both quantitatively and qualitatively different than those that existed at the beginning of the century (Delbridge, 1998). These innovations are said to have brought about major changes not only in the way in which goods and services are produced, but also major changes in business practices, management control methods and management-labour relations.
The changes are said to provide businesses with the means to operate more flexibly to improve productivity, product quality and reliability, and therefore customer satisfaction, and to respond more rapidly to shifting economic and market conditions (Child, 2005). Employees benefit because change offers them an opportunity to be much more involved in the day-to-day planning and organization of production in ways that make their work much more interesting and rewarding.
Nowadays companies are increasingly abandoning rigid structures in an attempt to be more flexible and responsive to the dynamic global environment. In general, over the last decade, it has become increasingly clear that through the forces of globalization, competition and more demanding customers, the structure of many companies has become flatter, less hierarchical, more fluid and even virtual. Some of the ways the companies adapting are by transitioning to formats known as inter organizational networks, global e-corporation network structures, and transnational corporation network structures.
One of the newest organizational structures is team. Teams can be both horizontal and vertical. In small businesses the team structure can define the entire organization. Larger bureaucratic organizations can benefit from the flexibility of teams as well. Xerox, Motorola, and DaimlerChrysler are all among the companies that actively use teams to perform tasks.
Another modern structure is network. In essence, managers in network structures spend most of their time coordinating and controlling external relations, usually by electronic means. H&M is outsourcing its clothing to a network of 700 suppliers, more than two-thirds of which are based in low-cost Asian countries. Not owning any factories, H&M can be more flexible than many other retailers in lowering its costs, which aligns with its low-cost strategy. The potential management opportunities offered by recent advances in complex networks theory have been demonstrated including applications to product design and development, and innovation problem in markets and industries..
A special form of boundaryless organization is virtual. It works in a network of external alliances, using the Internet. This means while the core of the organization can be small but still the company can operate globally and be a market leader in its niche. Although none sell in huge numbers, there are so many niche products that collectively they make a significant profit, and that is what made highly innovative Amazon.com so successful.
Chandler (1962) pointed out that structure follows strategy. The appropriate structure is to make strategy and its management work better. As companies transit from being domestic to international, they must cope with geographically dispersed operations, diverse social, cultural, political, legal, economic environments, and divergent trends in different countries. 'There is no permanent organization chart for the world. It is of supreme importance to be ready at all times to take advantage of new opportunities", - said Robert C. Goizueta, former Chairman and CEO of Coca-Cola. Organizational structures must change to accommodate a firm's evolving internationalization in response to worldwide competition.
A company needs to make a change in organizational structure in case of:
change in goals or strategy
change in scope of operations
indications of organizational inefficiency
conflicts among divisions and subsidiaries
complaints regarding customer service.
In summary, the creation of an effective organizational structure is one of the most important tasks for top managers of any company. To succeed, an international business must have appropriate formal and informal organizational structure and control mechanisms. Firms pursuing a global strategy require different structures and control mechanisms than firms pursuing a multidomestic or a transnational strategy. Traditional forms of organizations are still useful for MNSc in organizing their international structures; however the companies should always monitor new opportunities in the dynamic world and be ready to change. Generally to succeed, a firm's structure and control systems must match its strategy in discriminating ways.
Handbook of organizational change and innovation
By Marshall Scott Poole, Andrew H. Van de Ven