Organization of Multinational

Operations 8

Chapter Outline
Overview
Introduction
Definition and Functions of Organizing
The Organization of Multinationals
Factors Influencing the Structure of MNCs
External Forces
Company Factors
The Development of an International Corporate Structure
The International Division Structure
Advantages
Disadvantages
The Geographic Division Structure
Advantages
Disadvantages
The Product Division Structure
Advantages
Disadvantages
The Functional Structure
Advantages
Disadvantages
Global Matrix Structure
Advantages
Disadvantages
Mixed Structure
Newer Forms of Organizations
Market-Based Design
Strategic Business Unit
Networks
Chapter Summary
Discussion Questions

© Springer Nature Switzerland AG 2019 241

K. Fatehi, J. Choi, International Business Management, Springer Texts in
Business and Economics, https://doi.org/10.1007/978-3-319-96622-9_8
242 8  Organization of Multinational Operations

In this chapter, we present the various organizational structures of MNCs, and we

will learn about the many factors that influence an MNC’s selection of the proper
organizational structure. Some of these factors are external forces and demands,
such as economic conditions at home and abroad, host government policies,
product-­market characteristics, and information technology. Factors related to the
firm itself are the history of the company, top management philosophy, nationality,
corporate strategy, and degree of internationalization. We first discuss the develop-
ment of an organizational structure designed to deal with the export of products to
foreign markets. The subsequent major structural designs for MNCs, including the
autonomous foreign subsidiary, the international division, the geographic and prod-
uct divisions, and the matrix structure, are explained in this chapter. Finally, we
describe the newer forms of organization, such as market-based and strategic busi-
ness unit organizations, virtual corporations, and networks.

Overview

Chapter Vignette
Born Global Internationalization used to be incremental expansion and a learning
process for firms going through the successive stages of domestic, international,
multinational, and global design and restructuring. Now, this norm is being revised.
The unique feature of the global economy, which is dominated by the interlink
between firms in the value chain covering R&D, production, logistics, marketing,
and financial service, enables these firms to start from the beginning on a global
mission. These firms are “Born Globals.” [43] Born Globals can be defined as
“Business organizations that, from or near their founding, seek superior interna-
tional business performance from the application of knowledge-based resources to
the sale of outputs in multiple countries.” [44]
An example of a Born Global company is CMS Energy, which was a relatively
small Midwest utilities firm generating electric power for the state of Michigan. In
the 1990s, under the new management, it began transformation into global opera-
tion at a very fast pace. Within a decade, it became one of the leading companies in
the world for building and operating the systems that bring energy to people. It oper-
ates worldwide businesses in energy and power production, in natural gas pipelines
and storage, and in oil and gas exploration and production. It also builds and oper-
ates power plants, power lines, and distribution companies. It provides energy mar-
keting and management services. CMS Energy has acquired assets totaling around
$16 billion throughout the United States and in 22 countries around the world. It
generates revenues worth more than $10 billion. It has achieved this phenomenal
growth and globalization in less than a decade [1, 2].
Definition and Functions of Organizing 243

Introduction

Collective endeavors, such as businesses, require a certain amount of order and

organization, without which failure ensues. Organizational goal achievement
depends on the effective combination of the contributions and work output of indi-
vidual members. Because organizational activities are interdependent, complemen-
tary, and varied in type and timing, they require a certain degree of coordination and
integration, which are facilitated through their operational proximity. Operational
proximity means making allowances for the synchronization of activities in time
and space. Simply put, physical proximity allows members of the organization to
perform their tasks together and in a timely fashion. Organizational activities need
to be grouped in a way that makes it easy for people to work together and expedites
progress toward goals. Different methods and frameworks are used to arrange the
operational proximity of organizational activities and tasks. The methods of orga-
nizing are based on the work specialization, division of labor, and economies of
scale, principles that were first articulated by Adam Smith. The frameworks used
should provide for appropriate job designs, reporting and communication arrange-
ments, authority and responsibility distribution, and the physical layout of the orga-
nization. In short, an organization needs form and structure.

Definition and Functions of Organizing

The organizing function involves designing a skeleton and structure that delineate
the nature and extent of formal relationships among various internal components,
including tasks, jobs, positions, and units of the organization. It is the physical and
nonphysical form the organization assumes in response to its internal requirements
and external environment. It allows for the distribution of power and authority
among the members and the establishment of communication lines between them.
The internal requirements of a firm are related to the type of technology used, the
nature of tasks performed, and the type of strategy employed. The external environ-
ment is the combination of outside constituencies and forces that are influential in
determining the fate of the organization. Because firms have different internal
requirements and external environments, they employ various structural configura-
tions. In other words, the structure of a firm is a tool for attainment of goals and a
means to an end.
The structure of the organization defines the boundaries of the organizational
components (units); the relationships among the various parts; the extent, limits,
and location of authority and power; and the formal communication patterns. The
architects of the organizational structure need to answer four basic questions about
the firm [3, p. 529]:
244 8  Organization of Multinational Operations

1 . What should the units of organization be?

2. Which components should be joined, and which should be kept apart?
3. What size and shape pertain to the different components?
4. What is the appropriate placement of and relationship between the different
units?

The basic principle for organizing is to group activities that have similar char-
acteristics and functions from the lowest levels of the firm and proceed upward. In
doing so, tasks are clustered into jobs, jobs are combined to form departments,
and departments are put together to create business units. Larger firms that serve
multiple markets and have many product lines, consequently, have a number of
different business units. These business units are organized into a corporate struc-
ture. The clustering of activities just described is commonly referred to as
departmentalization.
There are six common bases for departmentalization or grouping of organiza-
tional activities: knowledge and skill, work process and function, time (shifts in a
factory), output (products), client, and place (geographic) [4]. Figure 8.1 represents
organizational structures resulting from two of the most commonly used types of
departmentalization: functional and geographic.
The relationships provided by the operational necessities that we have just
described are basically internally oriented. These relationships are mediated by the
strategic requirements that are dictated by the nature of the competitive forces that
govern the external relationships. Organizational structure is often determined by both
internal requirements and external forces. However, from time to time, one element,
either internal or external, exerts more influence on the shape of the organization.

Functional Organizational Structure

CEO

HRM Finance Manufacturing Marketing R&D

Geographic Organizational Structure

CEO

Western Southwest Southern Midwest Eastern

Region Region Region Region Region

Fig. 8.1  Two types of departmentalization

Factors Influencing the Structure of MNCs 245

The Organization of Multinationals

The fundamental structural considerations of MNCs are similar to those of domestic

firms. Internal requirements and the external environment of MNCs, however, pose
additional design challenges. The MNC structure should take into account physical
distance, legal and governmental considerations, headquarter-subsidiary relation-
ships, and many other factors. Because of the environmental diversity, the coordina-
tion and integration needs of MNCs are different from those of domestic firms.
Therefore, the requirements of operating across national borders create additional
concerns for organizing. In addition to those issues pertinent to organizing in
domestic firms, there are three major concerns in the design of an MNC organiza-
tional structure [5, p. 5]:

1. How to encourage a predominantly domestic organization to take full advantage

of the growth opportunities abroad
2. How to blend product knowledge and geographic area knowledge most effi-
ciently in coordinating worldwide business
3. How to coordinate the activities of foreign units in many countries while permit-
ting each to retain its own identity

As consumers’ tastes converge globally, the firms that respond to this conver-
gence in product preferences could gain competitive advantage. MNCs respond to
these changes by adopting the various strategies that were discussed in the previous
chapter. Therefore, we could add another item to the above list:

4. How to exhibit local responsiveness while maintaining a global orientation

An MNC’s response to these concerns is influenced by many factors, including

the size and history of the company, top management orientation, product-market
characteristics, and corporate strategy. As MNCs expand abroad, under the influ-
ence of these factors, their structures evolve to facilitate the accomplishment of
corporate objectives. Consequently, there are many variations among MNC
structures.
The organizing variations among firms are usually at a level directly below the
chief executive officer. That is why we focus our presentation at this level. We also
confine our discussion to the managerial organization, as opposed to statutory or
legal organization. To satisfy host countries’ legal and statutory requirements,
MNCs create legal entities that exist on paper only. The statutory entities are
designed to fulfill legal obligations while promoting the MNCs’ objectives of ease
of operation and increased earnings. It is through these entities that the legal and
ownership relationships between the headquarters and its various subsidiaries are
specified. Many different statutory and legal forms link the parent company to its
foreign operations, including branch offices, subsidiaries, and holding companies.
The legal requirements of the host country and tax implications determine the
MNC’s statutory organization [6, p. 253].
246 8  Organization of Multinational Operations

Factors Influencing the Structure of MNCs

Many factors influence an MNC’s choice of organizational structure: external envi-

ronmental forces, factors related to the firm itself, or a combination of both.

External Forces

The major external environmental forces that influence an MNC’s structure are eco-
nomic conditions, host governments, technological developments, product-market
characteristics, and information technology (see Ref. [7, Chaps. 3 and 8, pp. 97–99]).

Economic Conditions  Changes in economic conditions at home and abroad create

opportunities for and threats to the operation of MNCs. Unemployment and reduced
purchasing power resulting from recessions and slower economic growth force
adjustments in MNCs’ business operations. Reduced market share and earnings in
mature markets may prompt firms to diversify. Internationalization may partly be
the consequence of home market saturation and maturity.

Technological Developments  In some industries, the high level of risk and huge
investment required for developing new products are straining the financial capa-
bilities of many MNCs, prompting international joint ventures between competi-
tors. Also, because of globalization, MNCs face the same competitors in many
markets. Consequently, local advantages are quickly eroded by the immediate
responses of international rivals. The reality of competition between partners of
international joint ventures and the need for fast response require a flexible structure
and a closer integration of worldwide operations.

Technological developments are considered to be the most important factor

influencing structural changes in MNCs. New product development and new manu-
facturing methods offer opportunities for expansion into new markets. In turn,
expanded foreign operations resulting from technological advances necessitate the
provision of organizational support systems and structural changes. Technological
advances have increased international competition and caused the global integration
of MNCs. Telecommunications and information processing technology have
improved the ability of the headquarters office to monitor the performance of sub-
sidiaries in a timely fashion. Improved communication between subsidiaries and
headquarters allows the adoption of either a centralized or a decentralized mode of
control. In either case, the management of information provides an opportunity to
devise a proper structure.

Product-Market Characteristics  Newly industrialized countries such as South

Korea and Taiwan have appeared on the international scene as competitors partly
because of recent shifts in regional economic growth. The emergence of this new
Factors Influencing the Structure of MNCs 247

competition has increased market uncertainty and instability. Simultaneously,

advances in manufacturing technologies, new product development, and market-
ing, along with the convergence of consumer tastes and preferences for certain
products, have created a global market. To compete in this market, MNCs need
global economies of scale and quick response. Consequently, firms require a
greater degree of internal integration and coordination among their dispersed
worldwide operations while allowing for local responsiveness to their national sub-
sidiaries. Therefore, in designing a new structure, MNCs are concerned with the
reconciliation of these two conflicting needs. An MNC’s organizational structure
should facilitate global integration and local responsiveness. Other product-market
characteristics, such as diversity of product line and the nature of the competition,
affect the organizing efforts of MNCs. A product division structure and a central-
ized decision-making process, for example, would serve well those firms that have
a diverse product line and are competing with other MNCs in national markets. If
competition in national markets is limited to local firms, granting more autonomy
to the subsidiary would be appropriate. With competition limited to local firms,
intimate knowledge of local conditions and a closer relationship with domestic
businesses would be necessary.

Host Government Policies  Host government policies are influential factors shaping
the strategies and, in turn, the structure of MNCs. Investment incentives offered by
host governments stimulate FDI and the expansion of MNC operations. Many forms
of trade and business requirements and restrictions influence the management of
MNCs. Taxes and tariffs, the need for local content, local ownership, technology
transfer, local employment, and minimum exports exert pressure on foreign subsid-
iaries. Of course, an MNC’s responses to host government policies influence
headquarters-­ subsidiaries relationships and subsequently result in structural
changes.

Company Factors

Major company factors include its history, top management philosophy, nationality,
corporate strategy, and degree of internationalization (see Ref. [7, Chaps. 3 and 8,
pp. 97–99]).

Company History  Firms in the early stages of internationalization have a few man-
agers with experience and expertise in coping with a complex worldwide operation.
As the firms continue to operate abroad and learn how to manage their worldwide
businesses, decisions regarding the organizational structure will be affected by
those years of experience in foreign markets. Therefore, when there is a small pool
of managers with international experience, the most feasible structure is an interna-
tional division. The use of other types of structures has to wait for more advanced
stages of internationalization.
248 8  Organization of Multinational Operations

Top Management Philosophy  Top management philosophy regarding the auton-

omy granted to subsidiaries is reflected in various control mechanisms that the
headquarters employs. The organizational structure is a means for exercising head-
quarters control over subsidiaries. A loose federation of national subsidiaries under
the general direction of headquarters, for example, is a sign of management belief
that local executives are better qualified to run their own operations.

Nationality  There are differences among the organizational designs of American,

Japanese, and European MNCs. European subsidiaries, for example, tend to have
more autonomy than American subsidiaries. The type of control used also varies
among the MNCs of different countries. US MNCs tend to exercise a higher level of
output control over their subsidiaries, while Europeans usually exert a higher level of
behavioral control [9]. Foreign subsidiaries of Japanese MNCs appear to have more
local decision-making power. Executive selection, socialization, and acculturation of
Japanese managers ensure the subsidiaries’ strict compliance with the norms set by
headquarters, reducing the need for other control mechanisms. Consequently, there
is no need for foreign subsidiaries of Japanese MNCs to send extensive and frequent
performance data to their headquarters like American subsidiaries are required to do.
Another unique feature of Japanese MNCs is the structure of the keiretsu system. A
keiretsu is a tight network of companies that share capital, R&D, customers, vendors,
and distributions. Keiretsus are the intricate web of relationships linking banks, man-
ufacturers, suppliers, and distributors with the government. Major keiretsus have the
ability to control nearly every aspect of the value chain in a variety of industrial,
service, and resource sectors. Many Japanese manufacturing firms have been using
the keiretsu system. The Japanese have effectively used keiretsu systems to gain
international competitiveness and successfully penetrate world markets.

Corporate Culture  Another factor that influences the choice of organizational struc-
ture is corporate culture. Trompenaars and Hampden-Turner [10, p. 167] identified
four types of corporate culture: the family, the Eiffel Tower, the guided missile, and
the incubator. These were discussed in the chapter on culture (Chap. 3). Of course,
corporate culture is a product of the national culture in which it operates. Therefore,
these four types reflect the overall characteristics of their respective national cultures.
Trompenaars and Hampden-Turner suggested the appropriateness of certain kinds of
organizational structure for each corporate culture type. For example, matrix organi-
zational structure may run into implementation problems in Asian countries, because,
in these countries, a family corporate culture is a dominant form. In such a corporate
culture, employees cannot give their undivided loyalty to two bosses. Superiors are
regarded as fathers, and no one can have two fathers.

Corporate Strategy  Corporate strategy greatly influences the firm’s structure. From
the pioneering work of Chandler [11], and subsequent research by others [12], we
have learned that the strategy of the firm sets the stage for structuring the
Factors Influencing the Structure of MNCs 249

organization. The popular phrase “structure follows strategy” suggests the link
between the two. An internationalization strategy that moves the firm away from the
familiar domestic market also results in structural variations. Some organizational
structures employed by MNCs appear to work better with certain strategies [13, 14].
For example, international division structure tends to fit a strategy that calls for a
low level of foreign sales with a few products. Strategies that involve product diver-
sity tend to be associated with product division structures.

Organizational Structure: Japanese Style

Like many other aspects of the Japanese economy, politics, and culture, there
is a unique Japanese organizational form called keiretsu. Keiretsus are the
outgrowth of zaibatsus, which dominated the Japanese economy before World
War II.  After the war, the occupational forces attempted to break up the
monopoly of the zaibatsus, which had helped the Japanese government in the
war. But soon, they realized that a strong Japan was needed to fight the Korean
War and the expansion of communism. Substantial aid was poured into the
Japanese economy, and the attempts to break down the Japanese corporate
structure were abandoned. Zaibatsu companies that were broken down were
free to regroup. Some regrouped around banks and trading companies that
held shares in other firms too. The resultant conglomerates are the keiretsus.
A keiretsu is a tight network of companies that share capital, R&D, custom-
ers, vendors, and distributions. Keiretsus also maintain ties with the govern-
ment. Major keiretsus have the ability to control nearly every aspect of the
value chain in a variety of industrial, service, and resource sectors.
There are two types of keiretsus: horizontal and vertical. A horizontal kei-
retsu is a cluster of companies around a bank from related or unrelated indus-
tries. Large horizontal keiretsus are found in many industries, including banking,
insurance, steel, trading, manufacturing, electric, gas, and chemicals. Members
use each other’s products and services and are given preferential treatment. In
effect, they form a production system that is distributed among many firms.
Many assert that such preferential treatment and the purchasing habits of keiret-
sus are barriers to free trade and major impediments to foreign investment,
products, and services. The major banks, Mitsui, Mitsubishi, Sumitomo, Fuyo,
Sanwa, and Dai-Ichi Kangyo, belong to horizontal keiretsus.
A vertical keiretsu is a network of companies around a major manufacturer.
The manufacturer itself may be a member of a horizontal keiretsu. While the
members of a horizontal keiretsu are from diverse industries, members of a
vertical keiretsu are from a single industry. The members consist of suppliers
and distributions that serve a large manufacturer at the core. Vertical keiretsus
include large manufacturers such as Toyota, Nissan, Honda, Matsushita,
Hitachi, Toshiba, and Sony.
It appears that globalization and the changes that are taking place in the
Japanese economy along with the demands by foreign governments are caus-
ing keiretsus to drift away from a “network” model and open up to—even
form alliances with—foreign business.
250 8  Organization of Multinational Operations

Degree of Internationalization  The degree of internationalization affects organiza-

tional structure through headquarters-subsidiary relationships. The foreign subsid-
iary’s autonomy and internationalization of the firm are related. Internationalization
can be defined as the number of foreign countries in which a firm has subsidiaries.
As the number of foreign subsidiaries increases, so does the complexity of manag-
ing them. It is expected that MNCs with a high degree of internationalization may
be forced to allow more autonomy to their subsidiaries for certain decisions such as
marketing. For other decisions such as finance, however, they may exert more con-
trol because the intimate knowledge of local situations is more critical in marketing
than in finance.

The Development of an International Corporate Structure

As a mechanism that facilitates progress toward goals, organizational structure

evolves to accommodate the implementation of strategies. Firms follow different
paths to international expansion, which assumes many different forms. The organi-
zational structure of most international operations evolves to serve the growing
needs of their diverse markets. Consequently, their choice of the structure depends
on the type of strategy employed. An organization’s structure not only signifies
distribution of power and authority and a formal relationship between organiza-
tional members, but it also indicates the importance the company places on certain
aspects of the business. A company organized along customer groups, for example,
signals emphasis on meeting the needs of its customers.
As the firm grows, so does the significance of its structure. A small business
requires a simple formal organization. But as it expands, increased specialization of
tasks and duties creates an additional demand for coordination and integration. A
more sophisticated structure is needed to handle the complexity of the operation and
the coordination and integration requirements of a large firm. Such a structure
would also facilitate the efficient distribution of the firm’s resources and the execu-
tion of its strategies. The structure that served the business of a domestic firm may
be ill-equipped to handle the diversity of the international marketplace. International
expansion brings about structural changes. A three-phase evolutionary process char-
acterizes the changes in the organizational structure of MNCs. The progression
through these phases parallels the three stages of introduction, growth, and maturity
of a product’s life cycle (Sect. 13.4) [15]. The firm thus transforms from a domesti-
cally oriented one and passes through three phases—namely, international, multina-
tional, and global.

International Orientation  In the first phase, competition is limited to a small num-

ber of companies located in developed countries. These firms manufacture products
with functions, features, and characteristics that are designed for the domestic mar-
ket. International operation for these firms consists only of exports. Although
exports may be an important source of revenue, they constitute only a small portion
The Development of an International Corporate Structure 251

of the total corporate earnings, so international operations are merely an appendage

to their domestic business. At this stage, firms continue using the existing domestic
structures, with some minor additions to accommodate business activities across
national borders.

Multinational Orientation  In the growth stage, technology diffusion and price com-
petition, particularly from domestic firms, force firms to establish manufacturing
facilities in low-cost locations abroad. As increased foreign sales make up a larger
share of corporate revenues, firms enter the second phase by changing the organiza-
tional structure to include the international division structure. All international busi-
ness activities are organized into a division comparable with other divisions on the
domestic side of the business. There is no attempt to integrate foreign subsidiaries,
and operations within each foreign country remain separate from one another. Some
firms go through a transition phase before entering Phase 3, in which they attempt to
learn the intricacies of the international environment through their autonomous for-
eign subsidiaries. A major portion of the MNC earnings come from these autono-
mous foreign subsidiaries, which are given substantial decision-­making freedom.

Global Orientation  In Phase 3, most of the corporate revenues are generated from
abroad. At this stage, MNCs organize their operations on a global basis. Domestic
operation becomes one aspect of their business and receives corresponding attention
along with foreign operations. Various forms of organizational structure that involve
the transition from a domestic form to an international structure are discussed next.

A Global Company
Asea Brown Boveri (ABB) is a global electronic equipment company created
by merging Asea, a Swedish engineering group, with Brown Boveri, a Swiss
competitor, and adding on more than 70 other companies in Europe and the
United States, with joint ventures in South Korea and Taiwan. ABB became
very efficient by getting rid of excess capacity and eliminating duplication
and reducing waste. There are no more than a dozen executives at the head-
quarters in Zurich, making up the executive committee that consists of
American, German, Swedish, and Swiss managers. Since there is no common
first language, they speak only English. The executive committee is respon-
sible for ABB’s global strategy and performance, and more than 50 business
area managers report to them.
To leverage its core technologies and global economies of scale without
sacrificing local responsiveness, ABB used a loose, decentralized version of
the matrix organizational structure. ABB organized its operations along a
matrix system of 50 or so business areas (BAs), which were grouped into 8

(continued)
252 8  Organization of Multinational Operations

business segments, each of which was the responsibility of a member of the

executive committee. An example of a business segment is a group of five
BAs that sells components, systems, and software to firms for automating
their industrial processes. This business segment includes metallurgy, drives,
and process engineering. Its office is located in Stamford, Connecticut.
BA managers devise strategies to optimize the BAs globally. They are
responsible for the cost and quality standards, allocation of export markets to
factories located around the world, and sharing of expertise by rotating people
across borders. National managers, who are responsible for local firms within
national borders, report to BA managers. Most of the national managers are
host country citizens. The local companies act as national firms and have their
own boards, which may include eminent outsiders, presidents, financial
reporting, and career ladders for employee advancement. The managers of
local firms have a global boss, the BA manager, who sets the overall frame-
work for the operation of the BA. They also report to the country manager,
who coordinates the activities of national firms [16–18].

The International Division Structure

At the early stage of international expansion, firms’ interest and expertise are cen-
tered on domestic operations, and its international involvement is incidental. Often,
international sales are triggered by foreigners’ inquiries and are insignificant com-
pared with domestic sales. The lack of competition and the firm’s superior technol-
ogy lead it to export the existing products or product line without many modifications.
As international sales increases, the firms may set up an in-house export desk or
export unit. An export manager, who reports to the marketing executive, is given the
responsibility of handling all export activities. The export manager’s position and
reporting arrangement depend on the breadth of the product line. In a firm with a
narrow product line, the export manager reports to the chief marketing officer. In a
firm with a broad product line, the export manager reports directly to the chief
executive officer [19, p. 82]. As the volume of sales and revenues increases con-
stantly, the firm may establish an office abroad to handle product sales and service.
Now, the firm is compelled to impose more coordination and control and needs an
organizational structure that can deal with the diversity of expanded foreign busi-
ness. At this stage, MNCs adopt an international perspective and use international
division structures (Fig. 8.2). This organizational structure is typically associated
with an international strategy introduced in Chap. 6.
Three factors prompt the establishment of an international division structure that
enjoys sufficient organizational status on par with the other divisions [20].
The Development of an International Corporate Structure 253

CEO

Domestic Division
International Division
(Manufacturing, R&D, etc.)

Country A Country B
General Manager General Manager

Fig. 8.2  International division structure

1. Increased international involvement: Operational and strategic attention and

involvement of a senior executive and the structure of a separate organizational
unit are required.
2. The early stage of internationalization: The geographic diversification of busi-
ness operations is not significant. The concentration of all international activities
in a single organizational unit is the best way to deal with the complexity of the
global market and exploit worldwide business opportunities.
3. The requirement of international market specialists: There is a realization
that internal specialists are needed to deal with the special features of global
markets and assess global opportunities and threats rather than passively respond-
ing to conditions that are presented to the firm.

In an international division structure, the management of foreign operations is

coordinated by an international division of the firm in the home country. Each sub-
sidiary (or sales offices) manager reports directly to the head of the international
division. The executive in charge of the division is a member of the corporation’s
executive board. All activities of foreign operations are centralized at the interna-
tional division, and the head of the international division is given line authority over
the foreign subsidiaries. Through the international division, the MNC headquarters
exercises control and coordination over foreign operations without much change in
the corporation’s existing structure. With the creation of an international division,
the loss of autonomy of the foreign subsidiaries is matched by a corresponding
measure of guidance and support from the corporate staff (see Refs. [15, Sect. 13.5;
19, p. 155]). In effect, the international division allows the firm to maintain separate
domestic and foreign businesses and to use its limited international expertise effi-
ciently. Since the firm basically has a domestic orientation, not many executives
have international experience. The concentration of international staff in the inter-
national division allows for integration, coordination, and control of foreign subsid-
iaries without placing undue demands on the other executives.
254 8  Organization of Multinational Operations

The international division corporate structure is likely to be adopted by firms

with a dominant domestic business, a narrow product line, limited geographic diver-
sity, and few managers with international business expertise and experience. With
the dominance of domestic business over international operations, upward mobility
of the executives in the corporate hierarchy is not tied to international expertise and
experience. Therefore, not too many executives see the knowledge, experience, and
expertise associated with international business as necessary for their career prog-
ress. Often, a foreign assignment may be an organizational hindrance that could
limit their managerial advancement. By spending a few years abroad on foreign
assignments, they could become outsiders to the domestic corporate network. They
could be bypassed for promotion in favor of those who are active in domestic opera-
tions and who are a part of the internal power network.
An international division structure is a manifestation of the firm’s international
orientation and geographic interests, which are translated into design arrangements
fitting the multinational nature of its foreign operations. The firm, at this stage, con-
siders each geographic area to be a separate market that requires differentiated busi-
ness practices that are handled by foreign subsidiaries. These subsidiaries, although
separated operationally, could benefit from the overall guidance and integration
efforts of headquarters. There is a need to balance the self-interest of foreign subsid-
iaries with overall corporate performance, by standardization of the information
control mechanisms of foreign subsidiaries. The structure of the international divi-
sion and the associated standardization allow for the application of international
corporate practices that improve corporate performance, such as transfer pricing,
resource acquisition and allocation, and product distribution (Sect. 13.5) [15].
Polaroid is an example of a firm that has used the international division structure.
During the 1980s, nearly 40% of Polaroid’s revenues came from international oper-
ations. Its international division controls all manufacturing and marketing functions
outside the United States. It has three facilities, in Scotland, Ireland, and the
Netherlands, that handle many aspects of manufacturing Polaroid products. It essen-
tially sells abroad the same products as those sold in the domestic market, with
some modifications to accommodate special market conditions, local regulations,
and metric measures. The international division markets the full line of Polaroid
products through wholly owned subsidiaries in 20 countries. It is treated as a profit
center and seems to enjoy a degree of independence within the corporation that is
envied by other divisions [21, p. 513]. The recent reorganization has carved the firm
into three major business units—consumer, industrial, and magnetic. It seems that
Polaroid is experimenting with the goal of creating a matrix organization design
[22, p. 102].
Coleman Corporation, based in Wichita, Kansas, is another firm that has
employed the international division structure for many years. Coleman is the largest
manufacturer of outdoor products in the world. Its product line, especially gasoline-­
powered lanterns and insulated coolers, has gained worldwide recognition. Coleman
started its international operations in 1919 and has had an international division
structure since the 1940s. The division is headed by an executive-level vice presi-
dent and is located a few miles from the corporate headquarters.
The Development of an International Corporate Structure 255

The international division structure works well for Coleman, which has a rather
centralized manufacturing operation and a narrow, homogeneous line of products.
Coleman has its principal manufacturing sites in Wichita and Inheiden, Germany.
There are other, smaller manufacturing sites in Texas, South Carolina, Utah, and
Washington. Outdoor products are manufactured at the Wichita, Inheiden, and
Texas sites. The Utah and South Carolina facilities make textile products, such as
sleeping bags and tents. Portable generators are produced in Nebraska and water
skiing equipment in Washington.
Coleman outdoor products generally need little modification for sales in foreign
markets. The changes that are made are generally cosmetic, such as labeling and
packaging changes. In the United States and developed countries, Coleman prod-
ucts are used for recreational purposes. In these countries, advertising and market-
ing are relatively undifferentiated. Adjustments are made for variations in the
infrastructure of the markets and for differences in cultures and languages. An
example is Japan, where there are many small retailers and long channels of distri-
bution. Products are used recreationally, however, so advertising and marketing tac-
tics are similar to those in Europe and the United States.
In developing countries, Coleman products often serve basic utility functions.
Lanterns are a primary source of light, and insulated coolers are a principal source
of refrigeration. Therefore, in these countries, the marketing mix is differentiated,
and the distribution is through dealers with an emphasis on product promotion.
Coleman does not coordinate advertising but, instead, provides free products for
demonstration based on the distributor’s promotion efforts.
Except for Inheiden, the international division is centralized at the headquarters.
At Inheiden, Germany, Coleman manufactures products for sale to European mar-
kets. Inheiden also coordinates European sales operations and regional sales and
distribution offices in Bristol, England, and Alphen aan den Rijn, the Netherlands.
The international division coordinates all other regional sales and distribution
offices, including Tokyo, Singapore (which covers the rest of Asia), Sydney, New
Zealand, and San Juan, Puerto Rico (which includes Latin America and the
Caribbean).
The international division structure at Coleman reflects the characteristics of
various foreign markets and Coleman’s strategic approach in serving those markets.
Europe has long held business opportunities in outdoor products. The interest in
outdoor recreation and the higher level of income make Europe a large market for
Coleman products. Consequently, European operations are significantly larger than
operations in other countries and are afforded more local decision-making power. In
a sense, market characteristics determine either centralization or autonomy of the
operating units.
While Europe has been Coleman’s largest foreign market, Japan is its fastest-­
growing market. During the 1980s, Coleman became the largest vendor of outdoor
products in Japan. The increasing popularity of outdoor activities among the
Japanese combined with the fast rate of market growth may make the Japanese
market equal to that of the United States for Coleman’s products. It is also expected
that the market for outdoor equipment will increase in the rest of the Asian and the
256 8  Organization of Multinational Operations

Latin American countries. These changes in the external environment will have a
structural impact on Coleman, as foreign sales surpass domestic sales. Until then, an
international division structure seems to be appropriate for Coleman, based on its
narrow product line and a dominant domestic business.
MNCs typically continue to use the international division structure as long as it
remains smaller than most domestic divisions. It is abandoned in favor of other
structures when it rivals the largest domestic divisions. However, the international
division structure may last longer if the rest of the MNC is organized along the
geographic structure, because there is a better fit between a geographic structure and
an international division. The increased volume of business results in increased size,
which in turn strains the capacity of the division to handle the MNC’s product diver-
sity and geographic dispersion. At this point, the worldwide activities need corpo-
rate direction. A very strong international division, however, hampers headquarters’
direction of worldwide operations. The increased size of the international division,
which is accompanied by more independence, “tends to insulate the headquarters
from international operations and the corporate management from overseas prob-
lems and opportunities” [20, p. 257].
The international division needs the product expertise possessed by domestic
divisions. Domestic division staff, however, are reluctant to share their expertise
with foreign operations due to differences in their goals. Consequently, the need to
reorganize leads to one of the two forms—an international product division or an
international geographic division.

Advantages
The choice of any organizational design represents the trade-offs between the ben-
efits gained and the limitations imposed on the management of the firm. The inter-
national division structure provides a few benefits, including the adequate top
management attention to foreign business, the concentration of international man-
agement expertise at the headquarters, and the acquisition of capital and resources
worldwide (see Refs. [6, pp. 259–260; 19, pp. 85–86]). Since the head of the inter-
national division is a member of the senior executive team, the firm is constantly
reminded of the international implications of strategic decisions. The existence of
international expertise at the headquarters expedites coordination between func-
tional units, such as marketing, finance, production, and foreign operations. The
presence of international managers at the top corporate hierarchy and their partici-
pation in strategy-making committees facilitate evaluation of investment decisions
on a worldwide basis.

Disadvantages
The international division structure has some drawbacks (see Refs. [6, pp. 259–260;
19, pp. 85–86; 23, pp. 256–257]). There is an inherent conflict between the goals of
the domestic and international divisions. Almost always, products that are sold
abroad are those produced for the domestic market. The international division does
not have its own R&D and engineering staff. Therefore, it cannot cater to the special
needs of its foreign customers. Domestic functional specialists are reluctant to give
The Development of an International Corporate Structure 257

priority to foreign customers because the evaluation of their performance is based

on domestic criteria. The international division, therefore, relies heavily on the
cooperation of domestic functional departments, and such cooperation may not be
forthcoming. There is also another source of conflict. Some activities, such as
financing and resource acquisition, need to be coordinated internationally at the
divisional level. Attempts at the divisional level to exercise central control over
financing clash with country-level activities, such as local marketing. Domestically,
the firm gives high priority to product coordination as compared with area coordina-
tion (a divisional activity). The international division, however, needs both product
and area (geography) coordination.

The Geographic Division Structure

The geographic or regional structure divides worldwide operations into regional

divisions. The responsibility for managing each geographic area goes to a senior-­
level executive (see Fig. 8.3). These executives have operational and human resource
management responsibilities for their regions, while the headquarters maintains
strategic planning and control for worldwide corporate operations. The headquar-
ters grant autonomy to foreign subsidiaries and allow them to operate freely as
independent business units. Autonomous foreign subsidiaries can integrate into the
economic context of the host country and develop their own competitive posture.
They gain a competitive advantage by setting up local manufacturing, marketing,
and purchasing. By operating as a local firm, they can tap the domestic source of
cheap labor and are faced with fewer restrictions. In addition, their independence
from headquarters enables them to consider local consumers’ needs in making
major decisions and to be sensitive to local markets and governments. The direct
relationship between the foreign subsidiary and headquarters makes it possible to
present the subsidiary’s problems at the highest corporate level without additional
levels of bureaucracy. It also elevates the prestige of the subsidiary’s managers in
the eyes of host government officials and immensely improves their negotiation
status [6, p. 257].
However, when a subsidiary’s contributions to corporate earnings become large
enough to warrant closer scrutiny and when the rate of international experience
accumulated by the headquarters increases, the headquarters begins a search for
ways to exercise more control. Also, as the corporate executives become more
familiar with foreign operations, they begin to feel more confident in establishing
more coordination and control among foreign operations through organizational
design modifications.
Given the nature of subsidiary independency, firms adopting a host country focus
strategy (introduced in Chap. 6) tend to have a geographic division organizational
structure. McDonald’s is an example of a firm adopting the geographic division
structure. McDonald’s has over 36,525 restaurants in 119 countries (as of 2015) and
is managed as distinct 5 geographic segments, comprised of the United States,
Europe, Asia-Pacific, Middle East, and Africa [45]. And under the geographic
258 8  Organization of Multinational Operations

CEO

Headquarters
Staff

European North America Latin America

Division Division Division

Fig. 8.3  Geographic division structure

division structure, subsidiaries of each region focus on their own regional market
and customize a market-mix strategy (e.g., product, price, place, and promotion) to
meet the cultural needs and customer tastes/preferences of that market.

Advantages
The geographic division structure is suitable for certain products and market charac-
teristics. The advantages of the geographic division form are the possibility of
regional economies of scale and the treatment of country subsidiaries as profit cen-
ters. The geographic division works well when regional similarities in customers’
preferences allow for standardization and create the opportunity for economies of
scale. It is also suited to situations where whole regions can be treated as a market,
with modest marketing modifications for individual countries. Firms using regional
structures tend to have mature businesses and narrow product lines and a greater
growth prospect abroad, where their products are still new. Since these firms generate
large earnings from foreign markets, they need an intimate knowledge of the local
environment. They generally emphasize low-cost manufacturing by establishing
large plants and using stable technologies. They try to create competitive advantages
through marketing techniques and price and product differentiation. Automotive,
beverages, containers, cosmetics, food, farm equipment, and pharmaceutical indus-
tries have characteristics favoring the regional structure (Sect. 13.7) [20].

Disadvantages
Although a regional structure simplifies the task of top management by creating
regional specialists, it may cause problems (see Refs. [6, p. 264; 15, Sect. 13.9]). A
firm with a diverse product range may find that the regional structure is inadequate
to handle coordination among product lines and between the country subsidiaries.
The regional structure tends to emphasize coordination and integration within an
area at the expense of overall corporate integration. It may focus too much attention
on regional performance, which may not necessarily optimize overall corporate
interests. Rivalry among the regions may sacrifice the cooperation needed for global
competition and may create too much duplication of functional and product
The Development of an International Corporate Structure 259

specialists among the regions. Strong regional managers may block or delay the
implementation of strategies aimed at taking advantage of global economies of
scale and worldwide opportunities. MNCs using a geographic division structure
may experience difficulties with the transfer of new production techniques and new
product ideas from one country to another and the optimum flow of products and
material from diverse sources to world markets. Firms facing this problem may
respond by establishing a worldwide product manager at the corporate headquar-
ters. This manager is assigned responsibility for particular products or product lines
worldwide. Product managers promote the development, progress, and dissemina-
tion of product ideas and production worldwide. They recommend global product
strategies and act as a clearinghouse for the transfer of successful developments
from one area to the rest of the MNC.  This represents experimentation with the
matrix structure, which is discussed later. It is likely, however, that they will encoun-
ter an ambiguous operating relationship with geographic division managers, who
have line responsibilities [20, p. 261].

The Product Division Structure

Firms using a product division structure arrange their business into product groups
and assign a senior line executive total responsibility for each product division
(Fig. 8.4). As in the regional structure, strategic decisions within each product divi-
sion that affect the total MNC operations are made by headquarters. Products using
similar technologies and having similar customers are grouped within a division.
The total responsibility of serving the world market rests with each product divi-
sion, which plans service strategies within the guidelines established by headquar-
ters. These plans need headquarters’ approval before they are implemented.
Corporate staff provides financial, legal, technical, and other functional services and
guidance to all product divisions. Thus, it is more a centralized organizational struc-
ture in which firms organize international operations based on their major products
and plans made by the headquarters.

CEO

Headquarters
Staff

Product Group Product Group Product Group

A B C

Fig. 8.4  Product division structure

260 8  Organization of Multinational Operations

Firms adopting the global integration strategy and with diverse product lines and
a high degree of coordination within each product line for sharing of technology and
manufacturing the product tend to use the product division structure. Their products
typically have a relatively high level of technological content and different end
users. Because of a varying requirement of marketing for these products, there is a
need for product and market integration among them. The product division structure
makes it easier to market such products and provides product and market
integration.
Hewlett Packard is a firm that has been using the product division structure to
serve the world market. In 1970, Hewlett Packard established its first product
groups, with four divisions. In 1975, the product groups expanded to six: electronic
test and measurement instruments, computer and computer-based systems, calcula-
tors, solid-state components, medical electronic products, and electronic instrumen-
tation for chemical analysis. Each division was responsible for all aspects of
business within its product group, including manufacturing, sales, and services.
Product groups also prepared sales forecasts and recommended prices. The general
managers of product divisions reported to two executive vice presidents who were
jointly responsible for operations. Product divisions were supported by the corpo-
rate staff reporting to the vice president for administration [24].

Advantages
The benefits of product division are realized when high transportation costs, tariffs,
and other considerations favor local manufacturing of the product. By emphasizing
the product market and taking advantage of advanced technology and product
expertise, multinational operations are better served by this type of structure. The
flexibility of division by product allows the MNCs with growth strategies to add
new product divisions without disturbing the rest of the organization [8, pp. 97–99].
It also facilitates fast response to the global competitive pressures against specific
product lines. The global competitive maneuvers of international rivals are spotted
faster by product division executives. Therefore, the MNC can effectively concen-
trate and apply its resources at the location of the competitive attack.

Disadvantages
A product division structure may result in wasteful duplication of management,
sales representation, and plant capacity utilization within regions [25, p.  262]. A
customer, for example, may be visited by representatives from different product
divisions. To eliminate duplication and waste, coordination among divisions would
be necessary. Within a given geographic area, however, the coordination of different
product division activities may be difficult. The addition of country managers, who
do not have profit responsibility, may overcome this shortcoming. Country manag-
ers report to appropriate product divisions for their share of local activity and per-
haps to a regional staff specialist for their role in maintaining a local presence (see
Refs. [6, p. 266; 15, Sect. 13.11]). In this manner, the country managers function as
if they are operating in a matrix organization.
The Development of an International Corporate Structure 261

The Functional Structure

In a functional structure, the responsibilities of managing the MNC’s operations are

organized by functions. Each business function, such as manufacturing, marketing,
finance, R&D, and human resource management, is assigned to a top-level execu-
tive. Each executive has a worldwide responsibility in his or her functional area and
reports to the chief executive officer of the MNC (Fig.  8.5). The manufacturing
executive, for example, has line authority over, and is responsible for, all manufac-
turing activities, domestic and foreign, within the MNC organization. This form of
structure works well in a situation where the firm has a narrow, standardized product
line [8, p. 94], and its global coverage and demand have reached a plateau, with no
serious changes in the competitive challenge [6, pp. 259–260]. A functional organi-
zation allows tight centralized control with a small cadre of functional managers.
Except in raw material extractive industries, the functional form is less popular
among MNCs. In a survey of 92 American MNCs, only 10 had a functional struc-
ture, and all were in the raw material extractive industry [26].

Advantages
A functional structure seems to work well in the raw material extractive industry
because raw materials are very homogeneous and processes do not differ substan-
tially from one country to another. Coordination among the functions, such as
exploration, production, and sales, is of strategic importance, not the introduction of
new products or marketing. All major oil companies, for example, have exploration,
crude oil production, transportation (tankers and pipelines), refining, and marketing
worldwide. Functional design permits line managers to control directly all activi-
ties, at each step, globally through the process of product flow.

Disadvantages
For a firm with a multiple product lines, the use of a functional structure could cre-
ate problems. It puts undue demands on functional managers, which are not easily
met. These managers would need expertise in multiple product lines and regions.
Another problem is the inherent divergence of objectives among functional manag-
ers. The conflicts resulting from differences in objectives between functional man-
agers, such as marketing and production, which cannot be resolved at the country

CEO

R&D Manufacturing Marketing Finance

(Worldwide) (Worldwide) (Worldwide) (Worldwide)

Fig. 8.5  Functional structure

262 8  Organization of Multinational Operations

level, need to be referred to headquarters. A headquarters overburdened with

reconciling and resolving conflicts among the functional divisions has less time for
strategic decisions.

Global Matrix Structure

Ever since its introduction, the matrix structure has been praised and criticized by
both business scholars and managers. Matrix management is an organizational form
in which normal hierarchy is overlaid by some form of lateral authority, communi-
cation, and influence. A matrix organization does not follow the traditional principle
of unity of command, which prescribes that each subordinate will have only one
superior. It usually combines two chains of command—one along functional/prod-
uct lines and the other along geographic areas (Fig. 8.6). There are dual channels of
authority, performance responsibility, evaluation, and control in a matrix
organization.
Dow Chemical pioneered the matrix management structure since the 1960s and
still uses a more flexible version of it. Dow’s operations are arranged in the form of
three overlapping components: functional, business, and geographic. The functional
components include manufacturing, R&D, marketing, and so on. The business seg-
ment consists of product lines. The geographic part encompasses the countries
where Dow has business operations [30]. As can be seen from Fig. 8.6, subsidiaries
in different regions involve in the development of the same product; optimize opera-
tional efficiency by sharing resources, technologies, and manufacturing activities
across subsidiaries through a flexible coordination mechanism; and adjust their
operations to be able to respond to local demands/needs. As such, the global matrix
structure is widely used by MNCs focusing on the transnational strategy (Fig. 8.7).
Given the nature of the global matrix structure, it could be viewed as the end
product in a sequence of lateral coordinating arrangements that encompass liaison

Subsidiaries or Local Companies CEO

Europe North America Latin America Asia Pacific

Product
Group A

Product
Group B

Product
Group C

Fig. 8.6  Global matrix structure

The Development of an International Corporate Structure 263

roles, task forces, teams, integrating managers, integrating departments, and finally
matrix [31]. The matrix structure is a delicate system to manage. Experience indi-
cates that firms that succeeded in building multidimensional organizations, such as
the matrix, are those that begin by building an organization instead of installing a
new structure. In other words, these firms first altered organizational psychology
and built a strong organizational culture. Then, they reinforced organizational psy-
chology with improvements in organizational physiology by building the proper
structure [32].
Citicorp, Digital Equipment, General Electric, Shell Oil, and Texas Instruments
are among the well-known firms that have used matrix design [28, p. 333]. However,
some large companies such as Xerox and Philips have recently abandoned the
matrix structure, claiming it had created a stranglehold on product development and
slowed decision-making [29, 30]. Peters and Waterman [31] even asserted that the
tendency toward hopelessly complicated and ultimately unworkable structures
“reaches its ultimate expression in the formal matrix organization structure” (p. 49).
Now, we describe below the pros and cons of global matrix organizational
structure.

Advantages
A matrix structure offers many advantages. It enables the efficient use of organiza-
tional resources. Specialists, as well as equipment, can be shared across multiple
projects or countries. It also provides a clear and workable mechanism for coordina-
tion work across functional lines, facilitating project integration. Vertical informa-
tion flow should improve in a matrix form since one role of the country manager or
the project manager is to be a central communication link with top management. In
addition, lateral communication is normally very strong due to the necessity of such
communication. The result is improved interaction both vertically and laterally.
Frequent contacts between members from different areas expedite decision-making
and enhance management flexibility.

Disadvantages
The matrix structure has several disadvantages. Proponents praise its efficiency and
flexibility, while critics say the matrix is costly, cumbersome, and overburdening to
manage. It has a built-in tension between country managers and product managers,
who are in competition for control over the same set of resources. Such conflict is
viewed as a necessary mechanism for achieving an appropriate balance between
product issues and unique country requirements. The effect on morale, however, can
be very damaging. Oftentimes, work conflicts resulting from differences in objec-
tives and accountabilities disputes about credits or blames, and infringements on
professional domains spill over to a more personal level. Any situation in which
equipment and personnel are shared across projects lends itself to conflict and com-
petition for scarce resources. The time-consuming nature of shared decision-­
making, while enhancing flexibility, also increases costs. The additional managers
increase administrative overhead. The very nature of matrix structures creates
264 8  Organization of Multinational Operations

situations in which “when everyone is responsible, no one is responsible.” In effect,

“passing the buck” is easy in a matrix organization.
Firms using the matrix structure are aware of the problems, and some have
moved to minimize their impact on the organization. Dow Chemical, for example,
found that instead of promoting communication, a matrix design created a labyrinth
of bureaucracy (e.g., complex communication between headquarters and business
units), many committees, and miles of red tape. Given this disadvantage, the com-
pany revamped its organizational structure. To be more flexible and responsive to
local markets and to reduce communication costs between headquarters and geo-
graphic business units, the firm gave the ultimate authority to geographic
managers.
“Moving forward, we will have less structure at the top of the company with
more deployment and implementation in the markets and out in the field” said
Chairman and Chief Executive Andrew N. Liveris. “We will have less centralization
and more decentralization.” [27]

Mixed Structure

Some firms may find geographic and product division structures inadequate for their
expanding operations. These forms are too restrictive for the ever-changing pattern
of international business activities. Therefore, these organizations have opted for
either a mixed design or a matrix form. The mixed or overlapping design is a combi-
nation of the other structures. One option is to combine functional and product divi-
sions. Another choice is to mix geographic and product lines. A third version
combines functional and geographic divisions. Or firms can simply adopt multiple
organizational structures depending upon their product divisions. For instance,
DuPont company uses a functional structure for oil division, a product division struc-
ture for pharmaceuticals division, and a matrix structure for plastic division.
A major reason for the adoption of a mixed structure is that other designs do not
allow for optimum integration of inputs from regional, functional, and product
areas. An optimum level of interaction and cross-fertilization among the three areas
is necessary to gain a competitive position in the ever-changing global market.
MNCs are constantly in search of a structure that combines area knowledge with
product and functional skills [8, p. 95].

Newer Forms of Organization

MNCs and domestic firms alike are in constant search for the best possible organi-
zation design. Although functions, products, and geographic areas remain the three
basic models of organizational structure, each has shortcomings that limit its appli-
cation. The efforts to combine the benefits of all three models while keeping the
drawbacks at a minimum produced the matrix structure. Although the matrix design
offers the flexibility and quick response needed in a dynamic global business
The Development of an International Corporate Structure 265

environment, it is not the final answer to the organizing needs of the MNCs. Many
firms that were enthusiastically promoting the matrix earlier are now not quite sure
of its benefits. Some have found it too cumbersome and confusing and have aban-
doned it in favor of market-based designs.

Market-Based Design
A market-based design takes into account market differences in structuring the firm.
A market could be a group of countries that have a similar pattern of needs, purchas-
ing behaviors, and product use. Based on these criteria, the world could be divided
into a few markets that could be served with similar products and services. The
advent of the Internet and modern communication technologies has reduced the
problems associated with geographic separation between different units within each
market. Therefore, the physical proximity that is the basis for the geographic divi-
sion structure is abandoned in favor of more meaningful market characteristics.
Instead of dividing the world into geographic regions, such as South America,
Europe, and East Asia, for example, countries could be categorized by their level of
economic development. On that basis, for example, Brazil, Mexico, South Korea,
Taiwan, Turkey, and the OPEC countries could form one market (Sect. 13.14) [15].

 trategic Business Units

S
Based on the logic of market-based design, General Electric established its planning
around “strategic business units” (SBUs)—families of businesses that encompass
product and geographic dimensions. The older structure serves as a supportive skel-
eton on which the newer structure of an SBU is overlaid. Xerox Corporation has
done similarly by discarding its matrix structure in favor of SBUs [29, p. 58]. While
the limitations of travel and communication over long distances coupled with the
advantages of physical proximity for managing were the basis for adopting the geo-
graphic division structure, advances in telecommunications and information pro-
cessing have reduced both the limitations and the benefits. Such developments have,
in turn, enabled firms to use market-based and SBU structures.

Networks
There are two paths to internationalization: the traditional path and the new path.
The new path is provided by the free trade system and the network of its partici-
pants, which act as a springboard from which firms can launch themselves directly
to the global stage. In doing so, they become a part of the network and acquire net-
work structures.
Previously, not having a large home market was a hindrance to growth and inter-
nationalization. While many European firms by necessity were engaged in cross-­
border businesses, their operations were merely an expansion to neighboring
markets that were within a few hours of travel time. Today, globalization has made
it possible for the firms from small home markets to expand globally. Because of
their small home markets, these firms are forced to use innovative strategies that
consider the whole world as a market. Also, they are free to design organizational
structures that are not burdened with intermittent, large-scale modifications, such as
266 8  Organization of Multinational Operations

those that traditional companies had to go through—namely, progression through

domestic, international, multinational, and global structures. From the beginning or
at an early stage of their growth, they become global players.
Characteristically, globalization makes it possible for small- and mid-sized firms,
as well as start-ups, to become global operators. A global market is a vast network
of many firms, in many industries, with a multitude of links to each other in the form
of supplier-buyer-customer, marketer-middle man-service provider, and so on.
According to the United Nations, for example, there are 60,000 firms with more
than 800,000 national affiliates operating in the global market [30]. This vast net-
work is at the disposal of those who have the ingenuity of knowing how to use it.
Unencumbered by the organizational memory of old methods and free from
organizational habits, traditions, culture, and structure that are past-oriented, new-
comers to the global market can move quickly and effectively. Often, it will take
these firms much less time to become global players than their traditional counter-
parts took to reach a global status. Particularly, the development of the organiza-
tional structure of these firms follows a less cumbersome path, which takes them
directly to global design. Traditionally, the organizational structure of the firm goes
through successive states—namely, domestic, international, multinational, and
global. But innovative newcomers, all of which start with a much smaller size than
existing global companies, acquire a global posture and structure in a short time.
Because they move quickly to the global level, these firms do not use any of the
conventional designs. They use an innovative, fluid, and organic structure. This
structure is in congruence with the network character of the global economy.
The global economy is emerging as a worldwide web of interfirm connections [2,
p. 41]. Internationalization, therefore, can be defined as the process by which firms
are becoming integrated into the worldwide web of economic activities. From this
perspective, the major features of the global economy—namely, the size and the
weblike character, the free trade system, and the existence of global customers—
push and pull firms to become global players using innovative organizational designs.
The push comes from the size of the network of the global market, which cannot
be managed by conventional methods if a firm does not have a considerable resource
base. Also, from their inception, most of these firms have a global mission.
The pull comes from the free trade system, which allows cross-border transac-
tions without many restrictions and makes faraway people the next-door customers.
Even niche players, which previously did not have enough customers at home to
grow, can find enough customers in distant places. The pull also results from the fact
that existing global companies need suppliers to service their operations in multiple
markets. These global customers pull competent and imaginative newcomers to the
global stage. If the newcomers are to serve these customers and move quickly, they
cannot be burdened with the rigidity of traditional forms. They devise their own
forms, which do not fit into conventional designs. These firms are characterized by
their connections with suppliers, marketers, and other firms and, where needed,
with the local governments. We call these forms a “network” design. The network,
however, is neither a solid form nor a design that has a permanent skeleton on which
the organizational requirements of job design, authority-responsibility designation,
The Development of an International Corporate Structure 267

Suppliers

Designers Bankers

Firm

Distributors Manufacturers
Marketers/
Promotion

Fig. 8.7  A simple view of network organization

communication, and relationships could be fleshed out. It is more of a multidirec-

tional organization rather than either a vertical or a horizontal organization. It is in
a permanent state of evolution and mostly involves external relationships with other
firms and their own subsidiaries and joint ventures. The framework of a traditional
organizational structure cannot portray a network organization because this form of
organization relies on dynamic relationships. It is not a hierarchical and authority-­
based firm but a “hyperarchy.”
The network structure is very young. It is closely tied to another form of organi-
zation called a virtual corporation. In 1992, Davidow and Malone [36], after a care-
ful observation of the world’s most advanced companies, suggested that the
successful future firms of the twenty-first century will be the “virtual corporations.”
When asked what a virtual corporation would look like, they replied:
There is no single answer. To the outside observer, it will appear almost edgeless, with
permeable and continuously changing interfaces between the company, supplier, and cus-
tomer. From inside the firm, the view will be no less amorphous with traditional offices,
departments, and operating divisions . . . [but] even the very definition of employee will
change, as some customers and suppliers begin to spend more time in the company than
will some of the firm’s own workers. (p. 7)

Instead of asking “How does it look?”, maybe we should ask “How does it work?”
To describe the nature of the products and production processes of the virtual cor-
poration, Davidow and Malone borrowed the words of the manufacturing expert
Earl Hall:
The complex product markets of the twenty-first century will demand the ability to quickly
and globally deliver a high variety of customized products. These products will be differen-
tiated not only by form and function, but also by the services provided with the product,
including the ability for the customer to be involved in the design of the product. . . . A
manufacturing company will not be an isolated facility of production, but rather a node in
the complex network [italics added] of suppliers, customers, engineering, and other “ser-
vice” functions.
268 8  Organization of Multinational Operations

The virtual corporation is very tightly coupled with customers and suppliers.
Customers participate in product design, and suppliers have access to most of the
company’s resources that previously were the exclusive domain of the firm.
Suppliers, the firm, and customers are partners. In short, a virtual corporation
appears “less a discrete enterprise and more an ever-varying cluster of common
activities in the midst of a vast fabric of relationships” (p. 7) [36].
The network structure has been used by the apparel industry for a long time.
Many clothing designers do not make their own clothes. Others do it for them much
cheaper and better. At the heart of a virtual corporation is the readiness to rely on
other companies, technologies, and engineers, all of which may be scattered around
the globe [40]. Flexibility, speed of response, low costs, and local connections are
the obvious benefits of a virtual corporation, but there are some risks involved. First,
there is a loss of control over the functions of the partners, who may not fulfill their
part and may not be vigilant in safeguarding proprietary information. Second, the
structure poses new and demanding challenges to managers [37]. They need to work
in a less hierarchical organization, become accustomed to having less control, and
accept that the top-down strategy approach is inappropriate in the global economy,
where “on-spot information” disperses knowledge throughout the firm, to its suppli-
ers, customers, and other relevant businesses. This is a new reality acknowledged by
the organizational theorist, who envisions even radical forms of “disposable
organizations.”
As rates of change have accelerated, processes of knowledge acquisition that emphasize
direct experience within a particular organization have probably become less important to
competitive advantage than those processes that emphasize more analytical and broader
knowledge. Research and education have become more important; individual and organiza-
tional experience has become less relevant. As a result, the comparative advantage of the
individual organization as a sustained accumulator of idiosyncratic experiential knowledge
has declined. [38, p. 430]

Let us take a look at the mechanisms of two networks in practice: one is the case of
Taiwanese ventures into Mainland China and the other is practiced by an American
corporation.

1. Case 1: To take advantage of China’s low labor costs and export quotas,
Taiwanese companies set up intermediary firms in Hong Kong. They established
links with the local government of Guangdong and Fujian to set up manufactur-
ing subsidiaries that were tied to the intermediary firms in Hong Kong [39].
These subsidiaries farmed out work to small shops in the surrounding villages.
This network provided them with flexibility and enabled them to capture the
advantages of costs and locations, benefit from government support services, use
several countries as export platforms, and diffuse technology throughout the sys-
tem [40, p. 173].
2. Case 2: Cisco Systems does almost no manufacturing of its own products.
Moreover, over 50% of its customer orders via the Internet go directly to its con-
tractors. Also, Cisco handles more than 80% of its orders and customer service
The Development of an International Corporate Structure 269

issues over the Web. Cisco customers receive their orders directly from the con-
tractor, and Cisco receives payment for those products. By not being burdened
with manufacturing, Cisco concentrates on what it does best: R&D, design, engi-
neering, information, technical support, marketing, and building a reliable net-
work of suppliers [40, p. 182].

With these two examples in the background, we can identify two types of organi-
zations that have used networks: first, those that from a traditional base, by necessity
and by the nature of their worldwide operations, have embraced a network structure
and, second, those that from the beginning have used a network form to reach the
worldwide market. Well-known MNCs such as Nike, Ford, IBM, Toyota, and Cisco
Systems are in the first category. Acer, Ispat, Cemex, and Nexia International [40]
belong to the second group. (The stories of Acer, Ispat, and Cemex are well docu-
mented by a number of authors, including John A. Mathews [2]).
The development of a network organization can be attributed to rapid technologi-
cal changes, which increased uncertainty and unpredictability. This, in turn, made
corporate flexibility a desired characteristic. Globalization magnified the need for
flexibility. Firms were forced to abandon vertical bureaucracy in favor of a
horizontal-­flat design that measured performance by customer satisfaction, which
required the maximization of contact with suppliers and the customer and informa-
tion availability at all levels of the organization.
The network structure is well suited to firms operating in an unstable environ-
ment, which requires quick response and innovation. Well-established relations
with suppliers and distributors replace vertical integration with the benefit of added
flexibility. Spreading business functions all over the world, instead of having them
at a central location, exposes the organization to multiple sources of information
and new trends. It enables the firm to cope with rapid technological change and
increasing globalization of competition.
Sophisticated information technology provides easy access to the global network
of suppliers and vendors, even to the smallest firms, at a very low cost. Low-cost
information makes vertical integration more expensive as compared with the net-
work, which is more economical. The Internet has reduced the transaction costs of
doing business externally instead of relying on in-house suppliers. As formal, hier-
archical controls are replaced with informal and personal relationships, internally
and externally, the boundaries of firms become porous and permeable. This will
lead to a blurring of the line that separates the firm from its suppliers, buyers, and
competitors and creates a hospitable condition for the emerging alternative organi-
zational form, the network. Traditionally designed and managed companies cannot
operate successfully in such an environment.
With all its versatility, flexibility, and adaptability, some believe that the network
structure is inherently unstable and transitional. In a case study of Nexia International,
a network of independent public accounting firms, Koza and Lewin [41] came to the
conclusion that the network structure is an unstable form. Nexia has more than 100
affiliated independent firms that pool some of their resources to gain access to a
wide spectrum of competencies and respond to the global changes in accounting,
270 8  Organization of Multinational Operations

auditing, and consulting services. Nexia also enables members to receive referrals
from the affiliates, all of which want to remain local. Some affiliates began offering
their own services in other national markets, either because of their dissatisfaction
with the fees they were receiving due to referral of businesses to other members or
because they had gained exposure and experience in the international market. This
introduced a potentially disruptive and destructive condition in the network.
It is hard to disagree with the claim that such a network is unstable. But Nexia is
a contractual, alliance network, unlike a network built on equity participation and
ownership, such as Acer. Established in 1976, Acer is among the world’s top 10
branded PC vendors. Acer employs marketing and service operations across the
Asia-Pacific region, Europe, the Middle East, and the Americas, supporting dealers
and distributors in over 100 nations. In addition to offering a broad spectrum of IT
products and services, Acer is also a leading innovator of e-business, providing
MegaMicro e-enabling solutions that combine IT products with a range of micro
services delivered via Acer’s mega infrastructure (http://global.acer.com/about/
index.htm).
Acer’s rapid international expansion into emerging markets began with its
becoming a leading IT supplier, partnering with Computec in Mexico and Wipro in
India. The partnership arrangement of Acer is not a network of contractual alliances.
Mathews [2] describes Acer’s self-propagating partnership model, which enables
the firm to use an accelerated mode of internationalization through networking, as
follows (p. 89):

Step 1: Firm A looks for new markets, forming links with many firms in Countries
2, 3, and 4.
Step 2: In Country 2, Firm A experiments with Firms B, C, and D for reliability.
Step 3: Firm A selects Firm C as a partner and forms joint ventures (JVs) in Country
2.
Step 4: JV AC seeks a new partnership in Countries 5, 6, and 7.
Step 5: JV AC experiments with Firms E, F, and G in Country 6.
Step 6: JV AC selects Firm F to form a new JV, ACF, in Country 6 and then looks
for partners in neighboring countries.

Thus, the process of accelerated expansion is propagated from country to coun-

try. The network model of Acer, which at the beginning is based on alliances and
contractual agreements, ultimately transforms most of the alliances into an equity
position.
The astounding performance of East Asian economies during the 1970s and
1980s has prompted much research in comparative organizational theory. This
research indicates that the business systems of these countries are mostly network-­
based, although they are of a different form [2]. These firms do not follow the tradi-
tional Anglo-Saxon pattern, embedded in property rights, individualism, and
separation of business and government [42].
The Development of an International Corporate Structure 271

Networks are either centered on a major MNC or formed on the basis of alliances
and cooperation between them. Most economic activities in leading industries are
organized around five types of networks [43, pp. 5–6]:

1. Supplier networks: These include original equipment manufacturers, the subcon-

tractor, and the links between clients and their suppliers, as well as original
design manufacturers.
2. Producer networks: These include all involved in co-producing, enabling com-
peting producers to broaden their portfolios by pooling their resources.
3. Customer networks: These include the linkage between manufacturing compa-
nies and distributors, marketing channels, value-added resellers, and end users.
4. Standard coalitions initiated by potential global standard setters: They try to
enlist as many firms as possible into agreeing with their propriety product or
interface standards.
5. Technology cooperation networks: These facilitate the acquisition of product
design and production technology. They enable the participants to share generic
scientific knowledge and R&D, and production and process development.

Small- and mid-sized firms with their characteristic flexibility seem to be suited
for the emerging informational economy. The large companies, however, are still at
the center of the new global economy. But the success of small- and mid-sized firms
with innovative strategies and organizational structure creates doubts about the
value of the traditional model of organization based on vertical integration and hier-
archical functional management.

Chapter Summary
Organizational structure is a means and a tool with which the firm can accom-
plish its goals and implement its plans. The same basic organization design
concepts used by domestic firms can be useful for MNCs. To operate on a
worldwide basis, however, MNCs need to examine the organizational struc-
tures more carefully. Since their organization is spread across the globe, it is
only through an effective structure that they can maintain a productive rela-
tionship between the various foreign operations and the headquarters.
External environmental conditions and circumstances, along with the
firm’s characteristics, determine an MNC’s proper organizational structure.
The MNC’s history, top management philosophy, nationality, corporate strat-
egy, and degree of internationalization are attributes that affect the proper
choice of an organizational structure. Also, economic conditions, host govern-
ment policies, product-market characteristics, and information technology are
major external forces that influence an MNC’s attempts to choose an organi-
zational structure.

(continued)
272 8  Organization of Multinational Operations

Five types of organizational structure are commonly used by MNCs. At

the early stage of expansion into foreign markets, firms use the international
division. When the revenues from foreign sales become a substantial part of
corporate earnings and when the firm has gained sufficient international
experience, other forms are employed. When an international division is no
longer adequate for dispersed MNC operations, product division or geo-
graphic division structures are employed. Some firms go through a transi-
tion stage before establishing a product or geographic division. In the
transition stage, independent foreign subsidiaries handle almost all the
MNC’s business transactions. A functional organizational structure is used
by firms with limited product diversity, such as the raw material extractive
industry. Finally, the need for flexibility, coordination, and integration
among their worldwide businesses prompts some MNCs to establish matrix
structures. Newer forms of organization design, such as market-based
designs, SBUs, virtual corporations, and networks, attempt to reduce the
drawbacks of the conventional forms but benefit from the flexibility and
adaptability that these forms can provide.

Discussion Questions
1. What are the similarities and differences of the organizing needs of
MNCs compared with those of domestic firms?
2. Use the product life cycle theory to explain the development of the orga-
nizational structure of MNCs.
3. When do MNCs abandon the use of an existing domestic organizational
structure and reorganize to support their international expansion?
4. In modifying a domestic organization to handle international operations,
what is the most common structure employed by MNCs?
5. Describe the structure of an autonomous foreign subsidiary. What are its
strengths?
6. Explain the differences between the structure of an autonomous foreign
subsidiary and that of an international division.
7. Elaborate on the conditions that prompt a firm to use the international
division structure.
8. Why might a firm with diverse products find a geographic organizational
structure inadequate for its needs? What type of organization do you rec-
ommend for such a firm?
9. While the functional organizational structure has not been very popular
among MNCs, some have used it effectively. Do you think more firms
may use it in the future? Elaborate on your answer.
References 273

10. What are the advantages of using a matrix structure? Which MNCs ben-
efit from it? How can we minimize the problems associated with using a
matrix structure?
11. Discuss in detail two internal and external factors that influence an
MNC’s choice of organizational structure.
12. What are the differences between a keiretsu and a sogo shosha?
13. Virtual corporation and network designs differ from the conventional
forms. What are their differences?
14. Is it easier or more difficult for a small firm to internationalize?
15. Do you think that small organizations threaten the domination of the
global market by large MNCs? Elaborate.

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