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ORGANIZATIONAL STRUCUTRE AND CONTROL SYSTEM
Organization Structure:
An organization is a system of consciously coordinated activities or forces of two or more
people
Organizations are formed for three purposes: forprofit (formed to make money), nonprofit
(formed to offer services, but not make a profit), and mutualbenefit (formed to promote
members’ interests)
Organizations can be represented in an organization chart (a boxandlines illustration
showing the formal lines of authority and the organization’s official positions)
Nature of organization structure
The formal pattern of interactions and coordination designed by management to link the
tasks of individuals and groups in achieving organizational goals.
Design Process
The purpose and goals of the organization must be very clear.
The design process of organization structure consists of four elements:
• Assignment of tasks and responsibilities for the individual job positions,
• Grouping the individual positions into units and departments,
• Determining various mechanisms for the vertical coordination, and
• Determining various mechanisms for the horizontal coordination
Basic types of Organization Structure
When people with diverse occupational specialties are put together in formal groups, a
divisional structure is in place
1. Product divisions group activities around similar products or services
2. Customer divisions group activities around common customers or clients
3. Geographic divisions group activities around regional locations
4. The conglomerate structure groups divisions or business units around similar
businesses or industries
5. A hybrid structure uses functional and divisional structures in different parts of
the same organization
6. When an organization combines functional and divisional chains of command in a
grid so that there a two command structures, vertical and horizontal, a matrix
structure is used
7. In a teambased structure, teams, both temporary and permanent, are used to
improve horizontal relations and solve problems throughout the organization
8. The network structure or virtual organization has a central core that is linked to
outside independent firms by computer connections which are used to operate as if
all were a single organization
The organization chart
Line diagram depicting broad outlines of an organization's structure
The chain of command
Unbroken line of command ultimately linking each individual with the top organizational
position
Departmentalisation
Clustering individuals into units, and units into departments and larger units, to achieve
organisational goals.
Types of departmentalisation
Functional structure
A structure in which positions are grouped according to their main functional (or
specialised) area.
Advantages:
• Indepth expertise development
• Clear career path within function
• Efficient use of resources
• Possible economies of scale
• Ease of coordination within function
• Potential technical advantage over competitors
Disadvantages:
• Slow response to multifunction problems
• Decision backlog at top of hierarchy
• Bottlenecks due to sequential tasks
• Inexact measures of performance
• Narrow training of future managers
Divisional structure
A structure in which positions are grouped according to similarity of products,
services or markets.
Advantages:
• Fast response to environmental change
• Simplified coordination across functions
• Simultaneous emphasis on organizational goals
• Strong customer orientation
• Accurate measurement of performance
• Broad training in management skills
Disadvantages:
• Resource duplication in each division
• Reduction of indepth expertise
• Competition amongst divisions
• Limited sharing of expertise between divisions
• Innovation restricted to each division
• Neglect of overall goals
Matrix structure
A structure superimposing a horizontal set of divisional reporting relationships onto a
hierarchical functional structure.
Appropriate when need a strong focus on both functional and divisional dimensions.
need to quickly process information and coordinate activities.
pressure for shared resources .
Matrix Management/Projects
• All resources and skills are equally shared across the organisation
• Suits a project oriented organisation
• Can be very efficient way of utilising resources
• Provides variety of projects, and hence can be stimulating and satisfying for
employees
• It may result in overloading of some members
Advantages:
• Decentralised decisionmaking
• Strong product coordination
• Improved environmental monitoring
• Flexible use of human resources
• Efficient use of support systems
• Fast response to change
Disadvantages:
• High administrative costs
• Confusion over authority and responsibility (potential)
• Excessive focus on internal relations
• Overemphasis on group decision making
• Slow response to change (possible)
Matrix organisation – some practical experiences
• Enforces uniform policy application across divisions.
• Facilitates sharing of specialised resources.
• Brings together functional expertise and customer responsiveness.
BUT
• Can result in responsibility conflicts and confusion in responsibilities and
reporting. (Who’s my boss?)
• Overall resource planning has to be effectively managed – otherwise overloads
and/or poor utilisation.
Informal Organisations
• As different job types require different skills and activities it is necessary to
determine the areas of work specialisation.
• Job design involves the specification of tasks associated with a particular job.
• Work specification includes a collection of jobs necessary for achieving
organisational goals.
• A well done job design is important for the efficient performance of the
organisation and motivation of its members.
Job Design Trends
• Move from efficiencydriven highly defined, repetitive, (boring) jobs to
• More varied approaches to job design featuring
• Job rotation
• Multiskilling
• Job enrichment
• Greater autonomy – especially for groups of workers
Methods of vertical coordination
Linking of activities at the top of the organisation with those at the middle and lower
levels to achieve organisational goals.
• Formalisation
• Span of management
• Centralisation vs. decentralisation
• Delegation
• Line and staff positions
Formalisation Policies & Procedures
Formalisation is the degree to which written policies, rules, procedures, job descriptions,
and other documents specify what actions are (or are not) to be taken under a given set
of circumstances.
Most organisations need some degree of formalisation so that fundamental decisions do
not have to be made more than once and so inequities will be less likely to occur.
Being too highly formalised can lead to cumbersome operations, slowness in reacting to
change, and low levels of creativity and innovation.
It becomes then a question of balance as to how much formality is necessary, and should
apply.
International quality standards – ISO9001,9002 (and common sense ) demand that
formal procedures etc. do reflect actual practice.
Span of Management
Span of management, or span of control, is the number of subordinates reporting
directly to a specific manager.
Managers should have neither too many nor too few subordinates.
Then, what is a “good balance” of the span of management?
Factors influencing span of management:
• High competence levels
• Low interaction requirements
• Work similarity (between organisational peers)
• Low problem frequency and seriousness
• Physical proximity
• Few nonsupervisory duties of managers
• Considerable available assistance
• High motivational work possibilities
Delegation
The assignment of part of a manager’s work to others, along with both responsibility and
authority necessary to achieve expected results.
Factors restraining delegation:
• Fear of subordinate failure
• Time to train subordinates
• Enjoy doing tasks
• Release of authority
• Concern for task performance
• Fear subordinate competence
Centralisation
The extent to which power and authority are retained at the top organisational
levels.
Decentralisation
The extent to which power and authority are delegated to lower levels.
Factors favouring decentralisation:
• Large organisational size
• Geographic dispersion
• Technological complexity
• Environmental uncertainty
Line and staff positions
Line authority
– The authority following the chain of command established by the formal
hierarchy.
Functional authority
– The authority of staff over others in the organisation in matters related directly
to their respective functions (e.g. HRM dept).
Horizontal coordination
• Linking of activities across departments at similar levels
• Need for information processing across the organisation
• Promotes innovation through dissemination of ideas and information
• Risk of organisation ‘silos’
Hierarchical Levels
• Organisational effectiveness is influenced by the number of its hierarchical levels.
• Problems with very tall organisations:
• high administrative overhead,
• slow communication and decision making,
• more difficult to pinpoint responsibility for various tasks, and
• encouragement of formation of dull, routine jobs.
• each level must add value
Restructuring
• Restructuring an organisation is the process of making a major change in
the structure, often involving:
• reducing management levels, and
• changing major organisational components through divestiture and/or
acquisition.
• Centralising / decentralising activities
Downsizing
Downsizing is the process of:
• significantly reducing the layers of middle management,
• expanding spans of control, and
• shrinking the size of the work force.
• Downsizing must be planned and implemented carefully.
• Done poorly, downsizing may result in loss of valuable employees, demoralised
survivors, and an ultimate decline in productivity.
• Done well, downsizing may result in reduced costs, faster decision making, more
challenging jobs, fewer redundancies, and increased innovation.
• Voluntary redundancy, how does it work? and what is wrong with it?
Changes that takes place in a firm that expands globally
When firms expand internationally, they often group all of their international activities
into an international division
Over time, manufacturing may shift to foreign markets
firms with a functional structure at home would replicate the functional structure in the
foreign market
firms with a divisional structure would replicate the divisional structure in the foreign
market
In either case, there is the potential for conflict and coordination problems between
domestic and foreign operations
Firms that continue to expand will move to either a Worldwide product divisional
structure adopted by firms that are reasonably diversifiedallows for worldwide
coordination of value creation activities of each product division helps realize location and
experience curve economies facilitates the transfer of core competencies does not allow for
local responsiveness
Worldwide area structure favored by firms with low degree of diversification and a
domestic structure based on function divides the world into autonomous geographic areas
decentralizes operational authority facilitates local responsiveness can result in a
fragmentation of the organization
is consistent with a localization strategy
Worldwide Product Division Structure
Worldwide Area Structure
Factors creating the best structure
Contingency design is the process of fitting the organization to its environment
The International Structure Stages Model
The Global Matrix Structure
The global matrix structure is an attempt to minimize the limitations of the worldwide
area structure and the worldwide product divisional structure allows
• for differentiation along two dimensions product division and geographic area has
dual decision–making product division and geographic area have equal
responsibility for operating decisions
• can be bureaucratic and slow
• can result in conflict between areas and product divisions
• can result in fingerpointing between divisions when something goes wrong
Integration of sub units
Regardless of the type of structure, firms need a mechanism to integrate subunits need
for coordination is lowest in firms with a localization strategy and highest in
transnational firms coordination can be complicated by differences in subunit orientation
and goals simplest formal integrating mechanism is direct contact between subunit
managers, followed by liaisons temporary or permanent teams composed of individuals
from each subunit is the next level of formal integration the matrix structure allows for
all roles to be integrating roles
A Simple Management Network
Firms must consider:
1. The environment (mechanistic versus organic)
Mechanistic organizations are characterized by centralized authority, clearly specified
tasks and rules, and close supervision of employees
When authority is decentralized, there are few rules and procedures, and networks of
employees are encouraged to cooperate and respond quickly to unexpected tasks, an
organic organization exists
2. The environment (differentiation versus integration)
Differentiation is the tendency of the parts of an organization to disperse and fragment
Integration is the tendency to come together to achieve a common purpose
3. Size
Organizational size is usually measured by the number of fulltime employees
4. Technology
Technology (the tools and ideas for transforming materials, data, or labor into goods and
services) influences organizational design
5. Organizational life cycle
The organizational life cycle involves birth, youth, midlife, and maturity
4.1 Organization Structure of MNC's : The organizational structures for MNC’s need
to integrate their world wide operations with in a single administrative system that
optimizes the use of company resources and enable the firm to take full advantage of
opportunities where ever they arise.
4.1.1 Problems of building MNC’s
1. Difficulty to coordinate the activities of units in geographically distant regions
2. Difference in cultural orientation
3. Multiplicity of interest groups
4. Difficulty to cope with enormous volume of information generated world wide
5. Possible wide discrepancies in the motivation of staff in various subsidiaries
4.2 Designing international organization structure:
4.2.1 The essential purposes of an organizational structure are:
1. To have the right people taking the right decisions at the right time
2. To establish who is accountable for what and who reports to whom
3. To facilitate the easy flow of information through the organization
4. To provide a working environment that encourages efficiency and the acceptance of
change
5. To integrate and coordinate activities
Organization structure must balance order and innovation. On the one hand, it needs to
avoid the duplication of effort, to standardize procedures, monitor the quality of work, etc.
On the other hand, it should encourage initiative among the staff and generate job
satisfaction in employees.
4.2.2 Manifestations of an inappropriate organization structure include:
1. Poor internal communication
2. Slow decision making and frequent bad decisions
3. Lack of motivation among staff
4. Poor coordination of the work of various divisions and departments
5. Bad relations between line and staff managers
6. Staff not knowing the organization’s true objectives
7. Conflicts between individual and organizational goals
8. Slow and inefficient decisiontaking within the business
9. Excessive numbers of meetings necessitated by people not being sure what they are
expected to do
10. Poor coordination of projects
11. Nonimplementation of strategic plans
4.2.3 Factors influencing the choice of organizational form:
1. The number, size, types and complexity of operating units in various countries
2. Ability levels and experience of the MNC’s staff in each country, especially their
capacities to think strategically and plan for the long term
3. Ease of communication with and control of operating units
4. Availability of local finance and other resources
5. Stability of local markets
4.2.4 Requirements in selecting a structure for MNC:
1. Ensure that the organization has an unambiguous chain of command
2. Capable of coordinating worldwide activities
3. Can take decisions quickly at the most appropriate level
4. Provides for fast and effective communication between units
5. Structure chosen needs to motivate and develop employees
6. Facilitate international communications
7. Planning, decisionmaking and control
8. Create a clearly defined accountability and delegation system
9. Make it as easy as possible for the company to satisfy customer demand
10. It is particularly important that managers of all units have a common perception
of the firm’s overall goals and how they should be pursued.
4.2.5 Tall and flat structures:
Narrow spans of control create numerous levels of authority within the organization and
hence long chains of command.
Advantages of a ‘tall’ organization are as follows:
1. Managers may devote their full attention to the demands of their subordinates in
various countries.
2. There is proper supervision and effective control.
3. There is less need to coordinate the activities of subordinates than in a flat
structure
4. Duplication of effort among subordinates is unlikely
5. Communications are facilitated
6. Employees are presented with a career ladder and thus can expect regular
promotion through the system
Advantages of flat organizations:
1. Managers are forced to delegate work, so that subordinates acquire experience of
higherlevel duties
2. Morale may improve on account of the majority of employees being on the same
level
3. Low supervision costs
4. Subordinates are given more discretion over how they achieve their objectives
5. Fewer personal assistants and staff advisers are necessary because there are fewer
levels
6. Managers and subordinates communicate directly without having to go through
intermediaries. Hopefully, therefore, information will not be lost or misinterpreted
as it passes up and down the organization
7. Managers remain in touch with activities at the base of the enterprise.
ISSUES IN GLOBAL ORGANISATION DESIGN
STRUCTURE OF ORGANIZATION
ISSUES IN ORGANISATION DESIGN
Related issues in global organization design. There are six major issues
1. Centralization vs. Decentralization
2. Role of subsidiary director
3. Non traditional organizational arrangements
4. Changing role of information technology in organizing
5. Control system
6. Managing change in international business
1. CENTRALISATION VERSUS DECENTRALISATION
1. Centralization:Everything which goes to reduce the importance of subordinate role
is centralized.
2. Decentralization:Everything which goes to increase the importance of subordinate
role is decentralization.
2. USE OF SUBSIDIARY BOARD OF DIRECTOR
Subsidiary of any international firm,will have its own board of directors to oversee the
activities of the top level managers in that subsidiary.
3. NONTRADIONAL ORGANISATIONAL ARRANGEMENT
In recent years, MNCs have increasingly expanded their operations. These includes
Organizational design for Acquisitions Organizational Arrangement for Joint Ventures
4.ROLE OF INFORMATION TECHNOLOGY
In international business IT plays an important role. At the same time,problems
associated with IT should not be lost sight of.
5.CONTROL SYSTEMS
A major task of an MNCs leadership is to control the various subsidiaries. The factors
that affect the international business are
1. Distance
2. Diversity
3. Degree of uncertainty.
MANAGING CHANGE IN INTERNATIONAL BUSINESS
1. Change take place because of environmental changes and change in technology and
cultural values and more.
2. Environmental changes
3. Change in technology
4. Change in cultural values
Formal control methods
Planning and budgeting
Planning and budgeting are the main formal control methods. The budget spells out the
objectives and necessary expenditures to achieve these objectives. Control consists of
measuring actual sales against expenditures. If there is tolerable variance then no action
is usually taken.
Evaluating performance
Performance is evaluated by measuring actual against planned performance. The
problem is setting a performance standard. Usually it is based on historical performance
with some kind of industry average. Problems of international comparison inevitably
occur like how does one plan in an environment where exchange rates fluctuate quite
often during the budget period.
Influences on marketing budgets
In preparing a budget or plan, the following factors are important:
a) Market potential how large, can it be tested?
b) Competition what is the competitive level?
c) Impact of substitute products packaging can be substituted in many ways
d) Process headquarters may impose an "indicative planning" method or
guidance.
Other performance measures
Other measures of performance include share of market, image, position or corporate
acceptance. Often these are difficult to obtain where data or data collection is difficult.
Informal control method
When staff are transferred from market to market, they often take their standards of
performance with them and these can be assessed. Other methods include facetoface
contact and evaluation.
Variables influencing control
A number of factors may influence the control methods. These include:
a) Domestic practices and values of standardisation these may not be
appropriate
b) Communication systems have a heavy influence on control mechanisms
electronic control measures may not always be available
c) Distance the greater the distance, the bigger the physical and psychological
differences
d) The product the more technological the product the easier it is to
implement uniform standards
e) Environmental differences the greater the environmental differences the
greater the delegation of responsibility and the more limited the control
process
f) Environmental stability the greater the instability in a country the less
relevance a standardized measure of performance has
g) Subsidiary performance the more a subsidiary does, or reports, a non
variance, the less likely is there to be headquarters interference
h) Size of international operators the bigger and greater the specialisation of
headquarters staff the more likely will extensive control be applied.
Obviously the ability to control any international operation, whether it be very
sophisticated or relatively unsophisticated, the process will break down without adequate
facetoface and/or electronic communications.
INTERNATIONAL CONTROL SYSTEM
1. Personal controls –personal contact with subordinates most widely used in small
firms
2. Bureaucratic controls –a system of rules and procedures that directs the actions of
subunits
budgets and capital spending rules
3. Output controls – setting goals for subunits to achieve and expressing those goals
in terms of objective performance metrics compare actual performance against
targets and intervene selectively to take corrective action
4. Cultural controls – exist when employees “buy into” the norms and value systems
of the firm
strong culture implies less need for other forms of control
Incentives are the devices used to reward behavior
• usually closely tied to performance metrics used for output controls
• should vary depending on the employee and the nature of the work being
performed
• should promote cooperation between managers in subunits
• should reflect national differences in institutions and culture
• can have unintended consequences
Performance ambiguity exists when the causes of a subunit’s poor performance are not
clear
• is common when a subunit’s performance is dependent on the performance of other
subunits
• is lowest in firms with a localization strategy
• is higher in international firms
• is still higher in firms with a global standardization strategy
• is highest in transnational firms
LINK BETWEEN CONTROL INCENTIVES AND STRATEGY
PROCESSES
Processes refer to the manner in which decisions are made and work is performed many
processes cut across national boundaries as well as organizational boundaries processes
can be developed anywhere within a firm’s global operations network formal and informal
integrating mechanisms can help firms leverage processes
ORGANIZATIONAL CULTURE
Organizational culture refers to the values and norms that employees are encouraged to
follow and evolves from
• founders and important leaders
• national social culture
• the history of the enterprise
• decisions that resulted in high performance
Organizational culture can be maintained through
• hiring and promotional practices
• reward strategies
• socialization processes
• communication strategies
Organizational culture tends to change very slowly
Managers in companies with a “strong” culture share a relatively consistent set of values
and norms that have a clear impact on the way work is performed
A “strong” culture
• is not always good
• may not lead to high performance
• could be beneficial at one point, but not at another
• Companies with adaptive cultures have the highest performance
A SYNTHESIS OF STRATEGY CULTURE AND ARCHITECTURE
Firms pursuing a localization strategy focus on local responsiveness
• they do not have a high need for integrating mechanisms
• performance ambiguity and the cost of control tend to be low
• the worldwide area structure is common
Firms pursuing an international strategy create value by transferring core
competencies from home to foreign subsidiaries
• the need for control is moderate
• the need for integrating mechanisms is moderate
• performance ambiguity is relatively low and so is the cost of control
• the worldwide product division structure is common
Firms pursuing a global standardization strategy focus on the realization of
location and experience curve economies
• headquarters maintains control over most decisions
• the need for integrating mechanisms is high
• strong organizational cultures are encouraged
• the worldwide product division is common
Firms pursuing a transnational strategy focus on simultaneously attaining
location and experience curve economies, local responsiveness, and global
learning
• some decisions are centralized and others are decentralized
• the need for coordination and cost of control is high
• an array of formal and informal integrating mechanism are used
• a strong culture is encouraged
• matrix structures are common
For a firm to succeed
• The firm’s strategy must be consistent with the environment in which the firm
operates
• The firm’s organization architecture must be consistent with its strategy
firms need to change their architecture to reflect changes in the environment in which
they are operating and the strategy they are pursuing
To implement organization change
• Unfreeze the organization through shock therapy requires taking bold actions like
plant closures or dramatic structural reorganizations
• Move the organization to a new state through proactive change in architecture
• requires a substantial and quick change in organizational architecture so that it
matches the desired new strategic posture
• Refreeze the organization in its new state requires that employees be socialized
into the new way of doing things
• Organizations can be difficult to change because of the existing distribution of
power and influence, the current culture, managers’ preconceptions about the
appropriate business model or paradigm, and/or institutional constraints
GLOBAL BUSINESS PLANNING
A global business plan serves the same basic function as any other business plan. It forms
a sales pitch towards creating an international market for your product. Notwithstanding
the great business opportunities post globalization, international expansion is not really
a cakewalk for any company. You may be fancying such a venture idea, what with the
huge long term profits to be made by tapping the potential international market. But it
calls for some serious homework before you get down to the actual implementation of your
idea. Some preparation and research would be in place before you carry out any such
international business transactions.
A global business plan is all about how to implement your business idea and for that the
organization needs to do some sort of research to get a hang of the market place. A global
business plan takes care of some factors crucial to the success of your business by letting
you assess market situation and operations, objectives, commitments, and so on. It helps
you delineate the exact process of your product marketing and also helps you survey the
market for any business opportunity.
A global business plan is targeted at a potential international market. It gets across some
important information regarding you business to the potential trade. Stuff like your
business commitment, the potential market or customers, the pricing parameters and
your methods of market entry form a part of this information packet. It also discusses the
potential hurdles and your plan of action to meet them, the business objectives and an
action statement including a detailed timeline for a stepbystep achieving of the goals.
A global business plan can be formal or informal and it is very important if you are
looking to garner some finance for your concern. You need to tack it along with your
request for loans. If you are planning on international expansion of your business, you
need to deal with issue of currency exchange rates in your business plan. The bottom line
is that if you are a United States based business and you pay your taxes in dollars, your
business plan has to be framed on dollar basis. Even so, if your business encompasses a
wide range of currencies, the various tax and accounting practices of the different
national markets also need to be taken into account. And so do the different legal
requirements.
Planning involves where the organisation would like to be and how to get there, which
involves goal setting and strategy determination. Planning involves three main activities:
a) Situation analysis where are we now?
b) Objectives where do we want to be?
c) Strategy and tactics how can we best reach our goals?
Planning gives a number of advantages:
∙ Gives rise to systematic thinking
∙ Helps coordinate activities
∙ Helps prepare for exigencies
∙ Gives activity continuity
∙ Integrates functions and activities
∙ Helps in a continuous review of operations.
The planning task depends on the level of involvement in a country. Exporting and
licensing give minimum country involvement but joint ventures involve more incountry
activity and give a greater degree of integration and control. Wholly owned subsidiaries
give the organisation almost total control. Because of the "external uncontrollables"
international planning is rather more difficult than domestic planning (see table 13.2).
Planning can be standardised, decentralised or interactive.
Standardised plans
These offer a number of advantages:
Cost savings on limited product range and economies of scale both in
production and marketing, for example fertilisers.
Uniformity of consumer choice across the world.
There are disadvantages:
Different market characteristics make uniform products inappropriate, for
example, fresh milk products.
Decentralised plans
Decentralised plans take into account the subtleties of local conditions; however they are
usually very costly and resource consuming.
Interactive plans
In this approach headquarters devises branch policy and a strategic framework, and
subsidiaries interpret these under local conditions, for example Nestlè. Headquarters
coordinates and rationalises advertising, pricing and distribution. Within any of the
above approaches plans can be either long or short term. Increasingly planning is
becoming fairly routine. Most companies operate "annual operating plans" although these
are often "rolled forward" to cover a few years hence.
Domestic vs international planning
Domestic Planning International Planning
1. Single language and nationality 1. Multilingual/multinational/multicultural
factors
2. Relatively homogeneous market 2. Fragmented and diverse markets
3. Data available, usually accurate and 3. Data collection a large task requiring
collection easy significantly higher budgets and
personnel allocation
4. Political factors relatively unimportant 4. Political factors frequently vital
7. Chauvinism helps 7. Chauvinism hinders
In many cases LDCs have found it difficult to make real international inroads often
because they lack the information required. "Country grouping" is an effective way to
plan. Hence countries are grouped according to a number of criteria and treated alike.
Such criteria include market size, market accessibility (market or commercial economies),
stage of market development, prospects for growth, and promise for future growth and
development. Zimbabwe may be a "promising" country for investment, but Somalia may
not be "promising". Other concepts for planning are "competence centres". The mission of
a competence centre is to formulate a global business strategy for a new business.
Competence centres are not those developed through "leadership" ability but involve a
number of factors like strategic location and skills.
In marketing planning, ultimately, the decision on the type of plan rests entirely on the
size of the task, type of task and competence to achieve the task. In exporting flowers,
say, to Europe, Zimbabwe would be well advised, with the small quantities involved, to
leave the task to those experts in Holland and Germany whose knowledge and
competence is far superior. The downside is that some market opportunities may be
overlooked.
Difference between domestic and global business plans
Currency exchange rates?
Currency exchange rates are the first thing that concerns most people as they consider an
internationaloriented business plan. How do I handle currency exchange rates? How
much does this influence my plan? Can I do a standard plan when I deal with currency
exchange rates?
A big deal in international business
Currency fluctuations can be critical in international business. Changes in currency can
mean changes in your costs and expenses, your sales, and even the value of your assets
and liabilities.
For example, suppose you are importing handicrafts from Mexico. Your costs are mainly
in Mexican pesos. When the peso trades at 3 pesos per dollar, then the handpainted bowl
from Oaxaca that costs you 15 pesos per unit costs you $5 per unit. When the peso
exchange rate changes and the peso drops to 5 pesos per dollar, then the same bowl costs
you only $3 per unit. If you think the peso is going to increase in value, you want to buy
up bowls and convert them to inventory quickly. If you think the peso is going to decrease
in value, then you want to postpone your purchases to reduce the ultimate cost.
The problem with currency fluctuations, however, is a classic problem of guessing the
future. Like prices in the stock market, currency exchange rates are a guessing game.
Guess right, and you make money. Guess wrong, and you lose.
In the larger international businesses, predicting and managing currency exchange can
be critical. When I was consulting to Apple Japan in the early 1990s, chief financial
officer Judy David produced substantial profits, occasionally comparable to the profits
from the computer business, with astute currency management. This involved detailed
programs to keep assets in whichever currency seemed likely to increase in value and
liabilities in currencies likely to decrease in value. When I was with McKinsey
Management Consulting in Mexico City in 1981, I saw major companies lose millions of
dollars when the peso devalued, catching them with assets in pesos and liabilities in
dollars.
Simple mechanics in the plan
As critical as currency exchange may be in your business, its specific treatment in your
business plan is not much different than how a wheat farmer would treat fluctuations in
the market price of wheat. To understand that, you should first recognize that regardless
of how international your business might be, you are still going to do your books and
report your numbers to the tax authorities in a single currency. If you are based in the
United States, your business plan should be in dollars. It doesn’t matter how many
countries you deal with, you still do your plan in dollars because you pay your taxes in
dollars.
So where does the currency exchange come in? That depends on your business. Some
businesses buy products in foreign markets and bring them into the United States to sell.
Some export products made in the United States and sell them in foreign markets. You
can sometimes be involved in multiple currencies, three or four in a single transaction.
For example, you can buy computer circuit boards made in three countries and other
hardware made in a fourth and a fifth, and then manufacture computers somewhere else
and sell them in more than one country. In all these cases, however, if you are based in
the United States then you are still going to have to translate all your currencies into
dollars for your plan, your accounting, and your taxes.