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© 2001 Prentice Hall 15-1
International Businessby
Daniels and Radebaugh
Chapter 15Control Strategies
© 2001 Prentice Hall 15-2
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
© 2001 Prentice Hall 15-3
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
© 2001 Prentice Hall 15-4
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
© 2001 Prentice Hall 15-5
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
© 2001 Prentice Hall 15-6
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
© 2001 Prentice Hall 15-7
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
© 2001 Prentice Hall 15-8
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
© 2001 Prentice Hall 15-9
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
© 2001 Prentice Hall 15-10
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
© 2001 Prentice Hall 15-11
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
© 2001 Prentice Hall 15-12
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
© 2001 Prentice Hall 15-13
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
© 2001 Prentice Hall 15-14
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
© 2001 Prentice Hall 15-15
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
© 2001 Prentice Hall 15-16
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
© 2001 Prentice Hall 15-17
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
© 2001 Prentice Hall 15-18
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
© 2001 Prentice Hall 15-19
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
© 2001 Prentice Hall 15-20
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
© 2001 Prentice Hall 15-21
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
© 2001 Prentice Hall 15-22
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
© 2001 Prentice Hall 15-23
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
© 2001 Prentice Hall 15-24
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
© 2001 Prentice Hall 15-25
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
© 2001 Prentice Hall 15-26
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
© 2001 Prentice Hall 15-27
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