© 2001 Prentice Hall15-1 International Business by Daniels and Radebaugh Chapter 15 Control...

© 2001 Prentice Hall 15-1

International Businessby

Daniels and Radebaugh

Chapter 15Control Strategies


ObjectivesTo explain the special challenges of controlling foreign

operationsTo describe organizational structures for international

operationsTo show the advantages and disadvantages of decision

making at headquarters and at foreign subsidiary locationsTo highlight both the importance of and the methods for

global planning, reporting, and evaluatingTo give an overview of some specific control considerations

affecting MNEs, such as the handling of acquisitions and the shifts in strategies to fulfill international objectives


IntroductionControl issues facing all companies:

• Centralization of decision-making power • Reporting procedures for foreign operations• Ensuring that company meets global objectives

Control is necessary to achieve international goals• Control keeps a company’s direction on track• Prevents individuals from making decisions that endanger

the companyControl of international operations is difficult

• Distance—more time and expense to communicate• Diversity—hard to compare operations due to country

differences• Uncontrollables—may be unable to take corrective action• Degree of certainty—affected by speed and degree of

change


EXTERNAL INFLUENCES

COMPETITIVE ENVIRONMENT

PHYSICAL AND SOCIETAL FACTORS• Political policies and legal practices• Cultural factors• Economic forces• Geographical influences

OPERATIONS

OBJECTIVES

MEANS

STRATEGY

Assurances that objectivesare met

Control in International Business


PlanningCompanies must mesh objectives with internal and external

constraints and set means to implement, monitor, and correct

Step A—develop a strategic intent• An objective that will hold the organization together over

a long period while it builds global competitive viability• May include whether and where a company wants to be

dominating• May establish priorities

Step B—analyze internal resources and environmental resources in the home country

• Company tries to find a fit between what it needs and what it is good at

Step C—set the overall rationale for international activities• Company must consider its ability to compete


Planning (cont.)Step D—conduct a local analysis of the host country

• Examine financial, marketing, and other factorsStep E—Select alternatives and priorities

• Determines the extent to which a company follows a global, transnational, or multidomestic strategy

Step F—implement strategy• Alternatives must be ranked to facilitate adding or

deleting strategies• Speicific objectives must be set for each subsidiary

Uncertainty and planning • The greater the uncertainty, the harder it is to plan• Company’s international operations have more

complexity and uncertainty than its domestic ones


Organization StructureOrganization structure- the formal patterns of lines of

communication and responsibilities• Groups individuals in operational ways• Structure depends on many factors

International division structure—international business activities grouped in one division

• Puts internationally specialized personnel together• Prevents duplication of function in more than one place in

the organization• Creates critical mass of personnel that can wield power in

the organization• Depends on domestic divisions for products, personnel,

technology, and other resources• Best suited for multidomestic strategies, where there is

little integration and standardization between domestic and foreign operations


In tern ation alD iv ision

A u tom otiveD iv ision

A erosp aceE lectron ics

D iv ision

D ieselC om p an y(F ran ce)

E lectron icsC om p an y(F ran ce)

B rakeC om p an y(M exico)

In tern ation alD iv ision

C E O

International Division Structure


Organization Structure (cont.)Geographic (area) division structure—company has large

foreign operations that are not dominated by a single country or area

• Useful when maximum economies in production can be gained on a regional rather than a global basis

• Possible costly duplication of work among areasMatrix division structure—a subsidiary reports to more than one

headquarters group• Groups expected to become more interdependent

because of shared responsibility• Product-group managers compete to ensure that

geographic-group managers emphasize their lines• Functional and geographic groups compete to obtain

resources– may lead to disagreements that have to be resolved

by top management


P rod u ctionN orth A m erica

P rod u ctionE u rop e

P rod u ction

M arketin gN orth A m erica

M arketin gE u rop e

M arketin g

C E O

Functional Division Structure


E lectricC om p an y(B elg iu m )

M eterC om p an y

(A rgen tin a)

P ow er S ystem sG rou p

E levatorC om p an y(B elg iu m )

C on stru ctionP rod u ctsC om p an y

(Ita ly)

In d u stry an dD ef en se G rou p

C E O

Product Division Structure


Organization Structure (cont.)Functional division structure—group personnel by function

• Popular among companies with a narrow range of products —appropriate when production and marketing methods are undifferentiated• Becomes cumbersome as company adds new and different products

Product division structure—foreign and domestic operations for a given product report to the same manager

• Popular among companies that make a variety of diverse products

- divisions have little in common» may be independent of each other

• Likely to result in duplication functions and international activities among divisions


U n itedK in gd om

N eth erlan d s Ita ly

E u rop e an dL atin A m erica

D iv ision

U n itedS tates

Jap an C an ad a

N orth A m ericaan d P acif ic

D iv ision

C E O

Geographic (Area) Division Structure


T extilesG rou p

A gricu ltu ra lP rod u cts

G rou p

E u rop e-A f ricaG rou p

L atin A m ericaG rou p

C E O

United Kingdom

Mexico

Matrix Division Structure


Organization Structure (cont.)Dynamic nature of structures—as its international operations

grow, structure of the firm must evolveMixed nature of structures—because of growth dynamics,

companies assume mixed structures that evolve from simplified structures

Evolving StructuresNetwork organizations—interdependence among customers

and suppliers create network alliances• Company decides what operations it can handle and

outsources the other operations• Heterarchy—ambiguous location of control in a network

alliance– negotiation and persuasion used to establish control

• Keiretsus—Japanese networks of organizations that own small percentages of involved companies


Evolving Structures (cont.)Spin-off organizations—operations in/of noncore competencies

may become separate companies• Parent will retain some, but not necessarily all, ownership• Spin-off company must stand on its own and satisfy its

own stockholders• Can specialize in its competencies without approval of

higher authoritiesLead subsidiary organizations—headquarters of certain

divisions located in foreign countries


Location of Decision MakingCentralization—important decisions made at higher

organizational levels (above the foreign subsidiary)• More likely with pressures for global integration

Decentralization—important decisions made at lower organizational levels (subsidiary)

• More likely with pressures for local responsivenessLocation of decision making may change within a company

over time• Choice of location based on balancing:

– pressures for global integration versus pressures for local responsiveness

– capabilities of headquarters versus subsidiary personnel

– the expediency versus the quality of decision


Location of Decision Making (cont.)Resource transference—decisions on moving goods or other

resources internationally are more likely to be made centrally

Standardization—worldwide uniformity of products• Limits decision making in subsidiaries

Systematic dealings with stakeholders—requires centralization of decision making

• Concessions granted to stakeholders in one country usually demanded by stakeholders in other countries

Transnational strategy—based on needs for global integration and local responsiveness

• MNEs try to weaken decision-making partitions to improve information flow within the organization

• Increasing interdependence among subsidiaries results in more informal contacts and the creation of cross cultural teams


Weak

For

ces

for

Loc

al R

esp

onsi

ven

ess

and

D

ecen

tral

ized

Con

trol

Strong

StrongForces for Global Integration and Centralized Control

Centralized ControlUndifferentiated by Country• Construction and mining machinery• Nonferrous metals• Industrial chemicals• Scientific measuring instruments• Engines

Control to Fit Different Country Needswith Overlaid Control of Integrationby Parent Company• Drugs and pharmaceuticals• Photographic equipment• Computers• Automobiles

Ad Hoc Variationof Control• Metals (other than nonferrous)• Machinery• Paper• Textiles• Printing and publishing

Control to Fit Differing Needs ofEach Subsidiary• Beverages• Food• Rubber• Household appliances• Tobacco

Environmental Influences and Control of MNEs


Location of Decision Making (cont.)Capabilities of headquarters versus subsidiary personnel

• Decentralization more likely when:– local management team is large– local managers have substantial experience– local managers have been successful

• Local managers acquire experience needed to advance within the company if decisions are delegated

Decision expediency and quality• Cost and expediency—companies must consider how

long it takes to get help from headquarters in relation to how rapidly a decision must be made

– time and expense in centralization may not always justify the better advice

• Importance of the decision—important and potentially costly decisions typically centralized


Control in the Internationalization ProcessLevel of importance—more important foreign operations should

report to higher corporate levels• High-level corporate managers involved when a

subsidiary’s sales, investments, and profits are a significant part of the corporate total

• Changes in competencies—decentralization more likely as foreign operations grow

• Foreign managers more capable of acting on their own• Corporate managers less able to deal with expanding

foreign operationsChanges in operating forms—may require changes in areas of

responsibility• Departments not equally involved with all forms• Joint committees and planned sharing of information help

ensure that activities complement each other


Control MechanismsCorporate culture—a company’s common values that are

shared by its employees• Form of implicit control that helps enforce explicit

bureaucratic control mechanisms• MNEs have difficulty in developing corporate culture

because of differences among countries’ norms and limited exposure of subsidiaries’ managers to corporate values

• Coordinating methods—pull together diverse perspectives without abandoning existing structure

• Developing teams with members from different countries• Strengthening corporate staffs• Using more management rotation• Keep domestic and international managers in closer

proximity• Basing reward systems on global results


Control Mechanisms (cont.)Reports—must be frequent, accurate, and up-to-date

• Written reports more important in international settings than in domestic settings

• Types of reports to control international operations– intended to evaluate operating units and

management in those units• Visits to subsidiaries—there are “rules” for visits

– control foreign operations by collecting information and offering advice and directives

• Management performance evaluation—should be based on matters over which managers have control

– controllable matters differ from one subsidiary to another

– managers should be evaluated on results in comparison to budgets


Control Mechanisms (cont.)Reports (cont.)

• Cost and accounting comparability—management must ensure that it is comparing relevant costs

– different costs among subsidiaries may prevent meaningful comparisons

• Evaluative measurements—rely on a number of indicators rather than on a single measure

– financial criteria most prevalent» budget compared with profit» budget compared with sales value

• Information systems—provide additional data required to manage international operations

– problems in acquiring information» cost compared to value» redundant information» information that is irrelevant


Control in Special SituationsAcquisitions

• Create specific control problems– overlapping geographic responsibilities– differences in performance criteria curtailment of

previous autonomyShared ownership—limits flexibility of corporate decision

making• Administrative mechanisms to gain control even with a

minority equity interestChanges in strategies—movement from multidomestic to

transnational global operations• Requires—new reporting relationships

– changes in the type of information collected– new performance appraisal system

• Difficult to shift control from managers accustomed to acting autonomously


Role of Legal Structures in Control StrategiesBranch and subsidiary structures

• Company must consider its objectives for control, liability, secrecy, and taxes when deciding whether to operate a branch or subsidiary branch

• —foreign operation not legally separate from parent company

» parent holds 100% ownership– subsidiary—an FDI that is a legally separate entity

» authorities in each country typically limit liability to the subsidiary’s assets

» raises questions about decisions that are appropriate for the parent company to make


Role of Legal Structures in Control Strategies (cont.)Types of subsidiaries and how they affect control strategy

• Number of alternative legal forms that vary in terms of:– ability of parent to sell its ownership– number of stockholders required to establish the

subsidiary– percentage of foreigners permitted on board– amount of required public disclosure– how equity capital may be acquired– types of businesses (products) that are eligible– minimum capital required to establish the subsidiary

© 2001 Prentice Hall15-1 International Business by Daniels and Radebaugh Chapter 15 Control...

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Transcript of © 2001 Prentice Hall15-1 International Business by Daniels and Radebaugh Chapter 15 Control...