Chapter 14 210

CHAPTER 14
International Organization Design and
Control
After studying this chapter, students should be able to:

> Define and discuss the nature of international organizational design and
identify and describe the initial impacts of international business activity on
organizational design.
> Identify and describe five advanced forms of international organizational
design and discuss hybrid global designs.
> Identify and describe related issues in global organization design.
> Explain the general purpose of control and the levels of control in international
business.
> Describe how international firms manage the control function.

LECTURE OUTLINE

OPENING CASE: Unilever Matches Strategy and Structure

The opening case describes Unilever’s effort to streamline its operations and focus on
its core business areas.

Key Points

 With sales of $46 billion annually, Unilever, a packaged goods company, is second
only to industry giant Procter and Gamble. Its brand names include Lipton, Dove,
Q-tips, and Vaseline, and its product groups range from frozen foods to personal
care products.

 Over the years, Unilever’s growth strategy often involved acquiring consumer
products businesses, many of which had supporting operations. However, this
strategy resulted in an unwieldy structure consisting of five basic business groups:
food products, personal products, soap/laundry products, cosmetics/perfume/hair
products, and specialty chemicals.

 The specialty chemicals group had only indirect linkages with the other groups, and
consequently, had higher administrative costs. In addition, the group was not
meeting its performance targets, and perhaps even more disturbing, some of the
chemicals it made could often be bought at a lower price on the open market.
211 Chapter 14

 In 1997, Unilever sold its specialty chemical group in order to eliminate the
inefficiencies in the firm’s structure and finance new acquisitions that were a better
fit with the core business areas. It acquired Ben & Jerry’s and Slimfast.

 The sales and acquisitions failed to deal with Unilever’s other problems – slow
decision making and weak control of worldwide marketing strategies.

 In 2000, Unilever launched another restructuring.

CHAPTER SUMMARY

Chapter Fourteen explores the various organization designs that may be adopted by
companies as they pursue their international strategies. In addition, issues related to
global organization design are discussed and the topics of corporate culture and
changes are considered.

I. THE NATURE OF INTERNATIONAL ORGANIZATION DESIGN

 Organization design, also known as organization structure, is the overall pattern of

structural components and configurations used to manage the total organization.
 A firm, through its design, allocates organizational resources, assigns tasks to its
employees, instructs those employees concerning the firm’s rules, procedures, and
expectations about their job performances, and collects and transmits information
necessary for problem solving and decision-making.
 There is no single best structure for all organizations, rather organizations should
select a design that fits with their situations. Factors affecting the selection of
organization design include size, strategy, technology, environment, and cultures of
the countries in which it operates. The text provides examples of why Procter and
Gamble and Black & Decker have selected their organization designs.
 Organization design is an ongoing process that reflects the changes in a firm’s
strategy.
 Organization design changes as a firm expands internationally. At their start, many
firms do not consider international markets in their strategies, and may in fact make
their initial entrance to foreign markets through indirect exporting (see Chapter 11).
As indirect export sales grow, however, firms begin to consider pursuing
opportunities in new markets. The text provides an example of how O.I.
International went through this process.
 The corollary approach. An initial response to international markets may be
through the corollary approach whereby a firm delegates responsibility for
processing international orders to individuals within an existing department, such as
finance or marketing.
 The export department. As export sales grow, firms may form a separate export
department which takes responsibility for overseeing international operations,
marketing products, processing orders, working with foreign distributors, and
arranging financing when necessary. Eventually, the department may hold a similar
status to other functional areas.
 As international sales continue to grow, the export department may not be in a
position to handle all of a firm’s international activities. In fact, familiarity with
foreign markets typically becomes more important as foreign sales rise, requiring
new methods of organizing.
 International Organization Design and Control 212

 The International Division. Many firms establish an international division to cope

with the firm’s international business activities. The division enables a company to
allocate resources and create specialized programs and activities targeted for
foreign markets, while at the same time, keeping that activity segregated from
ongoing domestic activities.

II. GLOBAL ORGANIZATION DESIGNS

 A firm’s international division is typically abandoned in favor of a global organization

design as a firm moves from being domestically oriented with international sales to
being a multinational corporation. A global design must enable a firm to integrate
three types of knowledge: area, product, and functional.
 A firm will usually select one of five common global organization designs (product,
area, functional, customer, or matrix) depending on its situation in the market, its
firm-specific advantages, and its managerial philosophy. Each of the design types
typically emphasizes one type of knowledge (area, product, and/or functional), and
thus reflects a company’s weighting of the importance of each.

Global Product Design

 The most common organization design is the global product design, which
assigns responsibility for specific products or product groups to separate operating
divisions within a firm. The design is most appropriate for firms that have diverse
product lines or product lines that are sold in diverse markets.
 Firms typically take on an M-form design (multidivisional) if products are related,
and an H-form design (holding company) if products are unrelated. The text notes
that Unilever has an M form design, while Shougang Corporation has an H form.
Discuss Figure 14.1 here.
 There are several advantages to the global product design. First, managers are
able to gain expertise in all aspects of a product or products since a division
focuses on a single product or product group. Second, efficiencies in production
are facilitated since products can be manufactured wherever manufacturing costs
are lowest. Third, production can be coordinated at various facilities reflecting
global demand and cost fluctuations. Fourth, managers, because of their extensive
product knowledge, are in a position to incorporate new technologies into their
product(s) and respond quickly and flexibly to technological changes that affect
their market. Fifth, the design facilitates global marketing. Finally, it facilitates
geocentric corporate philosophies.
 There are several disadvantages associated with the global product design. First, it
may encourage expensive duplication in functional areas and even in physical
facilities. Second, each product group must develop its own knowledge about the
local environment. Third, coordination and corporate learning across product
groups is more difficult.
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Global Area Design

 The second most common form of global design, the global area design, centers
the firm’s activities around specific areas or regions of the world. The design is
particularly appropriate for firms with polycentric or multidomestic corporate
philosophies.

Flying Solo in China

When most businesses started operating in China, they did so by using a local
partner (this was often required by law). However, changes in rules have prompted
many firms to buy out their Chinese partners or venture into China with wholly
owned subsidiaries. The Chinese subsidiaries allow firms to focus on the needs of
local consumers and the evolving Chinese marketplace.

 The global area design is typically used by firms whose products do not transfer
well across regions. The text notes that Bertelsmann AG and Cadbury-Schweppes
PLC both use the global area design for this reason. Discuss Figure 14.2 here.
 The global area design is also appropriate for firms whose strategy is marketing-
driven rather than based on manufacturing efficiencies, technological innovation, or
the reputation of its brand name products. The structure also allows a firm to
develop expertise about the local market and adapt its product mix and products
accordingly.
 There are several disadvantages to the global area design. First, the firm may
sacrifice cost efficiencies that could be achieved through global production since
the structure emphasizes the needs of the area market. Second, technology
diffusion is slowed since innovations may not be adopted across the organization.
Third, resources are duplicated since each area division has its own functional
specialists, and in some cases, production facilities. Finally, coordination across
areas is expensive and global product planning is discouraged under this design.

Global Functional Design

 Under the global functional design, a firm creates departments or divisions that
have worldwide responsibility for the common organizational functions. Firms that
adopt this design typically have relatively narrow or similar product lines. The
design is sometimes called a U-form design (unity). Show Figure 14.3 here.
 There are several advantages to the global functional design. First, firms can
develop and transfer expertise within each functional area. Second, it is possible to
maintain highly centralized control over functional operations. Third, the design
focuses attention on the key functions of the firm.
 The global functional design also has several disadvantages. It is only practical
when the firm has relatively few products or customers. It does not promote
coordination between divisions. It may result in duplication of resources among
managers.
 International Organization Design and Control 214

Global Customer Design

 The global customer design is used when a firm serves different customers or
customer groups, each with specific needs calling for special expertise or attention.
The text notes that both Eastman Kodak and Bridgestone Corporation use this
design. Show Figure 14.4 here.
 The main advantages of the global customer design are that it allows a firm to use
different marketing techniques when it targets diverse customer groups and it allows
the firm to track how well it is doing within individual segments.
 The design does result in a duplication of resources, however, and coordination
between divisions is difficult.

Global Matrix Design

 The most complex international organization design, a global matrix design, is the
result of superimposing one form of organization design on top of an existing,
different form. Discuss Figure 14.5 here.
 The global matrix design allows firms to draw on the functional and product
expertise of its employees because it brings together the functional, area, and
product expertise of the firm into teams that can develop new products or respond
to a changing marketplace. In addition, the design promotes organizational
flexibility and promotes coordination and communication across divisions. The text
notes that Texas Instruments uses this type of design.
 There are several disadvantages to the global matrix design. First, it is
inappropriate for firms that have few products and operate in relatively stable
markets. Second, employees have more than one boss. Third, the design creates
a paradox regarding authority. Finally, it tends to promote compromises or
decisions based on the relative political clout of the managers involved.

Hybrid Global Designs

 Most firms create some sort of hybrid design that fits their particular situations. The
design adopted by a firm may actually combine some of the elements of the other
structures. The text notes that, in fact, Nestle does just that. In addition, Nissan
Motor Corporation uses a hybrid design for its American operations. Show Figure
14.6 here.

III. RELATED ISSUES IN GLOBAL ORGANIZATION DESIGN

Not only must firms select an appropriate organization design, but they must also
contend with issues related to centralization versus decentralization, the role of
subsidiary boards of directors, and coordination issues among the firm’s various
operations.

Centralization versus Decentralization

 One critical decision an MNC must make when designing its organization is the
level of autonomy, power, and control it wants to give its subsidiaries. Because
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centralization and decentralization have both advantages and disadvantages, most

MNCs use a blend of the two forms of organization.

Role of Subsidiary Boards of Directors

 In most countries, each corporation, including a wholly owned subsidiary of a

foreign MNC, is required to have a board of directors. A key decision facing MNCs
is whether to view the creation of the subsidiary board of directors as a pro forma
exercise or whether to empower the board with substantial decision-making
authority.
 The advantage of empowering the board is that it promotes decentralization, giving
foreign subsidiaries the ability to respond to changes in the environment quickly. A
second advantage of decentralization is that the active board can act as an
accountability and reporting link to the parent. In addition, if prominent local citizens
are appointed to the board, they may facilitate business in that country. The text
notes that Apple was able to increase its credibility in the Japanese market through
the appointment of several prominent local executives to the board of directors.
 Empowering a subsidiary’s board of directors is not without disadvantages,
however. For example, the subsidiary may become too independent if its board has
too much autonomy and fails to maintain accountability to the parent.
 A subsidiary board is considered to be most useful when the subsidiary has a great
deal of autonomy, has its own self-contained management structure, and has a
business identity separate from the parent’s.

Coordination in the Global Organization

 A final step in creating an effective organizational design is addressing the issue of

coordination. Coordination is defined to be the process of linking and integrating
functions and activities of different groups, units, or divisions. The amount of
coordination necessary is a function of the degree of interdependence among the
firm’s divisions and functions.
 There are three levels of interdependence. The highest coordination needs are
found in organizations that have reciprocal interdependence (each division or
activity is dependent on all other divisions or activities because work flows back and
forth between divisions in a reciprocal manner).
 Moderate coordination needs are characterized by sequential interdependence
(each division or activity is dependent on only some of the others because work
flows between divisions in a one-way or sequential fashion).
 Finally, organizations that have a lower need for coordination have pooled
interdependence (each division or activity functions with relatively little dependence
on the others because it does its own work and its results are pooled with those at
the corporate level).
 MNCs can use a variety of strategies to achieve their desired level of coordination
including the organizational hierarchy and temporary or ad hoc coordination
techniques such as using employees in liaison roles, task forces, or informal
management networks. The text provides examples of each type of strategy.
 An informal management network is a group of managers from different parts of
the world who are connected to one another in some way. These networks are
effective because they can avoid the delays that might arise from bureaucracy, and
allow firms to get things done more quickly and effectively.
 International Organization Design and Control 216

IV. THE CONTROL FUNCTION IN INTERNATIONAL BUSINESS

Control is the process of monitoring ongoing performance and making necessary

changes to keep the organization moving toward its performance goals. Control can be
implemented at the strategic, organizational, and operational levels. Discuss Figure
14.7 here.

Strategic Control

 Strategic control is intended to monitor both how well an international business

formulates its strategy and how well it goes about implementing it. Strategic
control allows a company to see how effectively it is achieving its goals and whether
it is maintaining its desired strategic alignment with its environment. The text
provides an example of how Tyco used strategic control to assess its purchase of
Matchbox.
 Strategic control may also affect a company’s decisions regarding foreign market
entry and expansion. The text points out that Unilever is using strategic control to
assess its opportunities in India.
 Control is particularly important when it comes to a company’s financial resources.
A lack of control in the area can be detrimental to a firm’s competitiveness. In fact,
the text notes that it was poor financial control that led to Mantrust’s difficulties after
it bought Van Camp Seafood.
 A special managerial position may be created to handle financial control. The
position is usually called a controller. A primary responsibility of an international
controller is managing the inventory of various currencies necessary for the smooth
functioning of the company’s operations.
 In some cases, management of exchange rate fluctuations is centralized at the
corporate parent level, while in other cases it is decentralized to the subsidiary level.
The text provides an example involving Royal Dutch Shell of the latter situation.
 Information networks are a critical means of supplying controllers with relevant,
current, and accurate information.
 Strategic control is also important in joint ventures and strategic alliances. In most
cases, an independent control system is developed for each joint venture or
strategic alliance.

Organizational Control

 Organizational control focuses on the design of the organization itself. It is

important to recognize that a firm’s design may change as its situation (internal and
external environment) changes.
 Responsibility center control is the most common type of organizational control
system. The system, a decentralized one, involves identifying fundamental
responsibility centers within an organization such as SBUs. Individual centers are
then evaluated on how well they meet their goals. The text provides an example of
how Nestle uses responsibility center control. Show Map 14.1 here.
 Some businesses use generic organizational control. This type of control is most
frequently used when a firm pursues similar strategies in each market where it
competes. Since there is no strategic variation between markets, control is
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centralized at headquarters, and the control systems used are the same for each
unit. The text illustrates this concept with an example of United Distillers PLC’s
control system.
 Under the planning process control approach, which can be used in combination
with either responsibility center or generic controls, firms concentrate their
organizational control systems on the actual mechanics and processes they use to
develop strategic plans. The focus is on the process rather than on the outcomes.
The text points out that Northern Telecom uses planning process control.
 Organizational control must be addressed at multiple levels. Not only must the
appropriate form of organization design be adopted for the entire organization, but
each subsidiary or operating unit must also be organized appropriately.

Operations Control

 Operations control focuses specifically on operating processes and systems within

an organization, as well as its individual subsidiaries and operating units.
Operations control generally focuses on relatively short periods of time, and is
typically more specific and focused than strategic or organizational control systems.
The text provides an example of how Aldi has found success by implementing
operations control.

V. MANAGING THE CONTROL FUNCTION IN INTERNATIONAL BUSINESS

Establishing International Control Systems

 Control systems in international business are established through four basic steps.
The steps are applicable to any area and any level of control. Discuss Figure 14.8
here.
 Set Control Standards for Performance. The first step in establishing a control
system is defining relevant control standards, defined here to be a target or desired
level of the performance component that the organization is attempting to control.
Control standards should be objective and consistent with the goals of the
company.
 Measure Actual Performance. The second step in establishing a control system is
to develop a valid measure of the performance component being controlled.
 Compare Performance Against Standards. Step three in the process of
establishing a control system is to compare measured performance (obtained in
step two) against the original control standards (specified in step one). Depending
on how well-defined control standards and performance measures are, this step
may be fairly simple or fairly complicated.
 Responding to Deviations. The last step in the process is responding to deviations
that are observed in step three. The three possible outcomes of this comparison
are: the control standard was met; the control standard was not met; and the control
standard was exceeded. Responses will vary depending on which situation has
occurred. The text discusses Kenya Power & Lighting’s response process. Show
Map 15.2 here.
 International Organization Design and Control 218

Reel Time Information

This e-World box discusses Blockbuster’s control of its European operations. It has
a regional HQ in Uxbridge, U.K., and each country is led by a country manager that
supervises multiple district managers. Each district manager oversees a dozen or
so stores. Daily final reports from the stores took 72 person-hours to create each
day. Today, Blockbuster has automated the reporting system using XcellNet and
reports can be generated in an hour.

Essential Control Techniques

 Accounting Systems. Accounting is a comprehensive system for collecting,

analyzing, and communicating information about an organization’s financial
resources. Because accounting procedures are heavily regulated, comparisons
between the financial performance of firms within a given country are easy.
International companies, however, must frequently deal with situations in which the
accounting standards and procedures in one country are incompatible with those in
another country. Not only must an MNC translate the accounting records of each
subsidiary into the parent company’s currency using the parent company’s
accounting procedures, but an MNC must also decide whether subsidiaries will be
evaluated on the basis of their accounting practices or those of the MNC.

 Procedures. Most firms use a variety of procedures to maintain effective control.

Moreover, procedures may be changed in some cases, as is illustrated with the
example of the Ford/Firestone tire recall.

 Performance Ratios. Performance ratios such as inventory turnover are also

commonly used by international businesses. The text notes that British Airways
uses performance ratios to maintain control of its airline operations.

Getting Back to Basics

This section describes efforts by several Japanese firms to turn their businesses
around during Japan’s prolonged economic slump. Firms have been able to
succeed under adverse conditions by taking basic steps such as watching
inventory, cutting costs, simplifying product lines, reorganizing, using technology
more efficiently, and listening to customer feedback (among other steps).

Behavior Aspects of International Control

Human behavior plays a role in the effectiveness of control systems. For example,
some people resist control.

 Resistance to Control. Control may be resisted for several reasons. For example,
most people will resist overcontrol (when an organization tries to exert more control
over individuals than they think is appropriate). The text points out that Disney has
been accused of overcontrol.
 People may also resist control if they feel that it is not focused appropriately. For
example, they may feel that the organization is inadvertently trying to control the
wrong things. The text notes that Whistler Radar suffered from this problem.
 Finally, people may resist control because it increases their accountability.
219 Chapter 14

Teaching Note:
An interesting discussion can usually be generated at this point by asking students
how control systems should be implemented in a firm’s foreign operations.
Students will probably quickly recognize that depending on where an individual
stands on Hofstede’s four dimensions, certain types of controls systems are likely to
be more effective than others. The question then focuses on whether the company
should utilize control systems that fit better with the host country culture or the
home country culture.

 Overcoming Resistance to Control. Resistance to control can be minimized in

several ways depending on the culture in question. First, if the employees who are
going to be affected by new controls are allowed to participate in the planning and
implementation of the system, they will be less likely to resist it. Second, control
systems should be developed with an appropriate focus and reasonable
accountability. Third, diagnostic mechanisms for addressing unacceptable
deviations should be developed.
 Finally, companies may try to alter behavior variations associated with national
culture by hiring individuals that will fit into the company’s corporate culture and by
providing management development programs that impart the company’s corporate
culture.

CHAPTER REVIEW

1. What are some of the initial impacts of international activity on organization design?

International activity initially impacts organization design in a very minor way, as most firms
use the corollary approach to assign responsibility for international orders. Under the
corollary approach, responsibility is delegated to existing departments such as finance or
marketing. As international activity grows, a firm might establish an export department to
oversee international sales. However, as international sales grow, many firms find that an
export department is no longer sufficient and they establish an international division.

2. What is the global product design? What are its strengths and weaknesses?

The global product design assigns worldwide responsibility for specific products or product
groups to separate operating divisions within a firm. There are several advantages to the
global product design. First, managers gain expertise in all aspects of a product(s) since a
division focuses on a single product or product group. Second, manufacturing can take
place wherever the manufacturing costs are lowest, so production efficiencies are
facilitated. Third, managers are able to coordinate production at their various facilities.
Fourth, managers can make use of their extensive product knowledge to incorporate new
technology into the product and respond quickly and flexibly to technological change that
affects their markets. The structure also facilitates global marketing, which enables the firm
to develop the necessary expertise to compete globally. Finally, the structure forces
managers to think globally. The main disadvantages associated with the structure include
its tendency to encourage expensive duplication, the fact that each product group must
develop its own knowledge about the local environment, and finally, the fact that it makes
coordination and corporate learning across product groups more complex.

3. What is the global area design? What are its strengths and weaknesses?
 International Organization Design and Control 220

The global area design involves centering a firm’s activities around specific areas or
regions of the world. A primary strength of the design is that it allows firms to develop
expertise about the local market necessary in order to adapt products to meet local needs.
However, the design may sacrifice cost efficiencies that could be gained through global
production, technology diffusion is slowed since there may not be cross-division transfer of
technology, resources are duplicated in each area, and finally, coordination is expensive
and product planning is put on the back burner.

4. What is the global functional design? What are its strengths and weaknesses?

The global functional design involves the creation of departments or divisions that have
worldwide responsibility for the common organizational functions. This structure allows a
firm to develop and transfer expertise within each functional area, maintain centralized
control over functional operations, and focus attention on key functions. However, the
structure is only practical when the firm has relatively few products or customers.
Moreover, duplication of resources among managers may occur and the firm may find it
has difficulty coordinating divisions.

5. What is the global customer design? What are its strengths and weaknesses?

The global customer design is appropriate when a firm serves different customers or
customer groups, each of which has specific needs that require special expertise or
attention. The design allows a firm to focus on the needs of each customer segment and
track the success of its products within segments. However, since each segment needs its
own area and functional specialists, duplication of resources may occur, and firms may
have difficulty coordinating divisions.

6. What is the global matrix design? What are its strengths and weaknesses?

The global matrix design is a result of superimposing one form of organization design on
top of an existing, but different form. The structure allows a firm to capitalize on both the
functional and the product expertise of its employees. In addition, the matrix design allows
a firm to respond quickly to changes in the marketplace, promotes organizational flexibility,
and promotes coordination and communication among managers from different divisions.
However, the structure implies that employees have two bosses, creates a paradox
regarding authority, and promotes compromises or decisions based upon political clout
rather than merit.

7. What are the three levels of control in international business?

The three levels of control in international business are strategic, organizational, and
operational. Strategic control allows a firm to monitor both the formulation and
implementation of strategy. Organizational control involves adopting the appropriate
organizational design to fit the internal and external environment. Finally, operational
controls relate to the operating processes and systems within a company.
221 Chapter 14

8. Why is financial control so important?

Financial control is critical because it is the driving force of an organization. Firms must
design appropriate control systems that monitor a firm’s revenues, costs, and expenses. In
most firms, financial control is separated from other parts of strategic control, and is
handled by a controller.

9. What are the four basic steps in establishing an international control system?

The four basic steps in establishing an international control system are setting the control
standards for performance, measuring actual performance, comparing performance
against standards, and responding to deviations. These steps are applicable to any area
and any level of control.

QUESTIONS FOR DISCUSSION

1. If a new organization starts out with a global perspective, will it necessarily experience any
of the initial impacts of international activity on organization design? Why or why not?

A company that starts out with a truly global perspective will probably not experience any of
the initial impacts of international activity on organization design because these impacts
are typically experienced by firms as they begin their international involvement, usually with
indirect exports, later with limited direct exports, and still later with strong export sales. An
organization with a global perspective is the next step in this evolutionary process, one in
which a global organization design is employed to take advantage of synergies among
international operations.

2. Do managers of international firms need to approach organization design differently from

their counterparts in domestic firms? Why or why not?

Most students will probably suggest that managers of international firms must approach
organization design differently from their counterparts in domestic firms mainly because of
the complexity involved in operating an MNC as compared to a domestic firm. In particular,
students will probably point to coordination and communication issues that make the
process more difficult, as well as the differences in the operating environments that occur
as a result of differing legal, economic, political, and cultural factors.

3. How do the global product, area, functional, and customer approaches to organization
design differ? How are they similar?

The global product structure is appropriate for firms that have diverse product lines or
product lines sold in diverse countries because it assigns responsibility for specific products
or product groups to separate divisions within the organization. In contrast, the global area
design is appropriate for firms whose products are not readily transferable across regions
because it centers the firm’s activities around specific areas or regions of the world. The
global functional design is appropriate for firms that have relatively few products or
customers because it requires a firm to create departments or divisions that have
worldwide responsibility for the common organizational functions. Finally, the global
customer design is useful for firms that serve different customers or customer groups, each
 International Organization Design and Control 222

with special needs that call for special expertise because it involves establishing separate
departments that are dedicated exclusively to servicing a particular account. Thus, the
focus of each structure is quite different, and as such each structure has different
implications for communications and control.

4. Why is a global matrix design almost always transitional in nature?

A global matrix design involves superimposing one form of organization structure on top of
an existing, different form. A firm using the design attempts to capitalize on both the
functional and the product expertise of its employees by forming product groups made up
of members from existing functional departments. The design is almost always transitional
in nature because after a product development task is completed, the product group may
be disbanded. Employees are then reassigned to another task.

5. Why is control an important management function in international business?

Control is the process of monitoring and regulating activities in a firm so that some targeted
measure of performance is achieved or maintained. It is an important management
function in international business because it allows a company to limit actions that could be
detrimental to the success of the organization, and encourage actions that are beneficial to
the firm. As this chapter’s Going Global Box points out, it was a lack of such control that
led to the downfall of one of Britain’s oldest banks, Baring Brothers. The three key levels of
control in an international business are strategic, operational, and organizational.

6. Do you think the three common types of international organizational control are mutually
exclusive? Why or why not?

The three types of international organizational control are strategic, organizational, and
operational. Strategic control involves monitoring the development and implementation of
strategy, organizational control involves adopting the most appropriate organizational
design, and operational control involves focusing on the operating processes and systems
within a firm. Most students will probably agree that these types of control are not mutually
exclusive. For example, strategic control and organizational control are interrelated in that
certain organizational designs facilitate the implementation of certain strategies better than
others do. Similarly, students may suggest that operations control could be viewed as a
subset of strategic control in that operations control focuses on specific performance
issues that may be a part of a broader strategic control system.

Which form of control system would you most/least prefer for your own work? Why?

Many students may respond to this question by suggesting that all three control systems
are formally present in their organizations. Other students may suggest that some of the
control systems are present in their organizations in an informal way only. For example,
students that work at small companies may find that strategic and operational controls are
clearly present, but that organizational control is less obvious.
223 Chapter 14

7. Which control techniques are most likely to be tailored to international settings? Which can
be merely extensions of domestic operations?

Firms use many control techniques. Some of the more common ones include accounting
systems, procedures, and performance ratios. Many students will probably suggest that all
of these control techniques should be tailored (at least to some degree) to international
settings. For example, a firm may allow a subsidiary to use the locally accepted accounting
system so that it satisfies local officials and banks, but require that the information also be
compiled using the headquarters’ accounting system so that the firm can control and
monitor the entire firm in a meaningful manner. Similarly, while some procedures may be
organization-wide, others may be adapted to the local culture. Moreover, a firm must
recognize differences between its operations that could affect performance ratios, even if
the same ratios are used on an organization-wide basis.

BUILDING GLOBAL SKILLS

Essence of the exercise

This exercise is designed to let students see the impact on organization design of changes in a
firm’s (Unipro) business mix. Students, working in groups, are asked to identify an appropriate
structure for Unipro after it has diversified into new areas.

Answers to the follow-up questions:

1. How is your group’s organization design similar to and different from those of other
groups?

Most students will probably create a multidivisional design that separates each of Unipro’s
businesses from the others. Within each division, however, there may be differences. For
example, most students will probably keep the functional design in the jet aircraft division;
some may suggest a global area design for the software division, and a global product
design for the foods division.

2. What do you see as the biggest advantages and disadvantages of your group’s
organization design?

Responses to this question will differ, depending on the particular organization design each
group selects. Most of the discussion will probably revolve around
centralization/decentralization issues, factors related to communication and control, and
cost issues.

3. What additional information would have made it easier for you to develop a new
organization design for Unipro?

Responses to this question will vary by group. Some of the more common information
requested probably relates to Unipro’s beliefs about autonomy, centralization and
decentralization, the different products Fundamental Foods and General Chemical are
involved in, and corporate culture.
 International Organization Design and Control 224

Other Applications
Unipro, with its involvement in several unrelated businesses, is an example of a
conglomerate firm. Instructors can ask each group of students to find an example of a real
international conglomerate firm and research how the firm structures its operations.
Students can compare and contrast their suggested structures for Unipro with that of the
real firm and analyze why differences and similarities exist.

CLOSING CASE

Daimler and Chrysler: Dream or Nightmare?

The closing case describes the “merger” between Daimler-Benz and Chrysler. Though
the merger was termed a "marriage of equals," it was more truly an acquisition of
Chrysler by Daimler. With complementary products and markets, the “merger” seemed
destined for success. However, the new company quickly ran into problems. By the
end of 2000, the market value of DaimlerChrysler was lower than it had been for either
Daimler or Chrysler before the merger.

Key Points

 In 1998 Daimler-Benz CEO Jurgen Schrempp orchestrated a merger between

Daimler-Benz and Chrysler. DaimlerChrysler became the third largest automaker in
the world. Daimler would contribute lessons in quality and technology, while
Chrysler contributed efficiency and speed to market.

 Differences in culture and operating procedures between Chrysler and Daimler-

Benz contributed to problems in the merged company. At Chrysler, decisions were
made quickly; at Daimler-Benz decisions were not made without lengthy meetings
and detailed reports.

 Chrysler's financial condition was not really as good as it appeared to be at the time
of the merger. Some of its most popular designs (such as the Jeep Grand
Cherokee) were badly in need of major redesign.

 Chrysler's efforts to improve quality had significantly increased the cost of its cars --
often with little perceived benefit to the consumer.

 Daimler's executives were accustomed to many perks (first class travel, fancy
hotels) that Chrysler's managers saw as wasteful and unnecessary.

 Morale fell sharply among previous Chrysler employees as they witnessed American
executives in the new corporation being replaced by Daimler employees.

 The future of the merged company is uncertain. If merger-related problems could be

worked out, DaimlerChrysler could still benefit from the capabilities of the merged
companies.

Case Questions
225 Chapter 14

1. Identify the basic organization design issues at DaimlerChrysler.

Combining two firms with different organization designs is a difficult task. What
seemed to be a great marriage of complementary product lines was really a
marriage of two parties that had little in common. The firms differed in terms of
decision-making style (including level of centralization), strategy, and culture.

2. What form of organization design might be most appropriate for DaimlerChrysler?

In retrospect, a hybrid design that allowed the firms to continue operating somewhat
autonomously might have been best. However, such a design would have made it
hard for the desired synergy between the two firms to be achieved. Students will
probably argue for either a global product design or a global area design (and a
strong case can be made for either). Given the complementary nature of the
products of the two firms, a product design would likely allow the differentiation and
integration necessary for the success of the new firm.

3. Identify the basic control issues at DaimlerChrysler from all three levels.

The three levels of control are strategic control, organizational control, and
operational control. From a strategic control perspective, the basic issue is what
strategic direction should DaimlerChrysler take? That is, how should resources be
invested and who should control the new organization? Right now, it seems that
Daimler-Benz managers have assumed the strategic control of DaimlerChrysler.
From an organizational control perspective, the question is what kind of structure
should DaimlerChrysler adopt? Related to the question of organization structure is
the question of what type of control mechanisms will be used. It appears that the
more rigid and structured decision making processes will prevail. At the operations
control level, the question is whether day-to-day operations at Chrysler's and
Daimler's plants will continue as they were before the merger, or whether
operational controls will be standardized across the merged firm.

4. How do you think the control function should be organized and managed at
DaimlerChrysler?

Students may differ in their perspectives on this question, though U.S. students
typically tend to side with Chrysler's pre-merger approach. Often, they will also
suggest that in Europe one set of control standards should be used and another set
should be used in America. While such a recommendation may be feasible,
students recommending dual control standards should also address the problems
that might be created by such a system.

5. Describe how behavioral issues may have played a role in DaimlerChrysler's

problems.

Behavioral issues clearly sparked the resistance to change by American workers.

Those managers accustomed to making decisions quickly and without having to get
approval would naturally resist the more restrictive controls commonplace at
Daimler Benz. As noted in the text, power-tolerant, uncertainty accepting Americans
 International Organization Design and Control 226

would feel differently toward control than power-accepting, uncertainty avoiding

Germans.

SINGAPORE: FROM THE SPICE TRAIL TO THE SEAWAYS

Chapter 14:
International Organization Design and Control

Suggestions on incorporating the Multimedia exploration into the lesson plan

The key objectives of Chapter 14 are:

 Understanding the nature of international organization design and the initial impacts on
international business activity
 Identifying and describing global organizational design
 Understanding how international firms manage the control function

The following are some suggestions on how best to utilize the CultureQuest materials to
achieve these objectives.

1. The chapter includes three active media hangers, called CultureQuest

Insight Into, on the three key topic areas: culture, business, geography & history. In this
chapter all three focus on Singapore. For each Active Media lesson, assign your
students to review the online materials that include additional video and discussion of
the respective topic. They will need to review this online material in order to answer the
test questions as well as participate in suggested activities and discussion noted later in
this section.

2. Review the case in the text at the end of the chapter and use it as an
example to initiate additional discussion and activities

Additional Exercises
1. Student Activity and Discussion:
After the students have read the chapter end case and reviewed the online
materials, discuss the following questions and statements.

 Discuss the cultural nuances of doing business in Singapore and how that has
impacted strategic alliances.
 Discuss the role that Singapore has played in becoming a regional hub for global
businesses.

2. Team Activity and Discussion:

227 Chapter 14

Group students into teams of 2-3. Have students select a global company that has
headquartered its regional operations in Singapore.

 What factors do you think the company considered when they selected Singapore as
its regional headquarters?
 Based on the company’s annual report and other research, what global organizational
design do you think the company has implemented? Do you think this design integrates
well with Singaporean culture?

Additional test questions on this information can be found in the Test Item File.

Chapter 14:
Test Questions

1. True or False.

The government in Singapore is very relaxed towards rules and regulations.

False. Overall, the business environment is favorable and healthy, though some might say
overregulated compared with some of its fiercest competitors, such as Hong Kong. The
government seems to be making a concerted effort to loosen controls.
2. List three reasons why foreign companies like to do business in Singapore.
Managers of foreign companies generally find Singapore a great place to do business. Among
the attractions they cite are the island’s political stability, generally unrestrained capitalist
economy, seemingly faultless infrastructure, laws and tax incentives that encourage foreign
investment, and emphasis on automation and training.

3. List two historical reasons why Singapore has made it a favorite of global businesses?

The country is strategically located. Several events during the mid-nineteenth century further
enhanced Singapore’s position as a premier trading route. Most important, the Suez Canal
opened in 1869, which made the Strait of Malacca the preferred shipping route to East Asia.
Concurrently, with the expansion of colonialism, the Malay Peninsula became important to the
British. Also during this period, Singapore became an increasingly attractive destination for
immigrants from South China. Modern-day Singapore has focused its attention on building an
economically secure, stable and strong nation.

4. True or False.

The Singaporean government is not very involved in the local economy, preferring to let market
forces lead the way.

False. The Singapore government manages the island’s economy much like a bank manages
its holdings, reinvesting revenues into national road construction, education, housing, and
other infrastructural improvements. The objective is to create a standard of wealth equal to —
and eventually better than — Europe’s.
 International Organization Design and Control 228

Resources for additional information

www.worldinformation.com – overview per continent/region; current events; trade, etc.

http://www.expatsingapore.com/once/business.htm – information on establishing a business in

Singapore

http://asp.amcham.org.sg/home/index.html – site of the American Chamber of Commerce in

Singapore

www.nationsonline.org – general information on countries/regions/continents; history, business

and finance information

www.executiveplanet.com – information on business etiquettes/protocols per country

www.nationbynation.com – information on geography, history and people of each country

www.businesstravelogue.com – information on business etiquettes for each country

www.economist.com – search for global ethics to see most recent articles

http://www.countrybriefings.com/?showPage&PAGE=atmaGlobal.tml&RID=4196 – current
economic information on major economies around the world
www.culture-quest.com – business and cultural information on countries and regions around
the world