MULTINATIONAL CORPORATIONS

Module - 6

Objectives of the module

Multinational Corporations

Organization , design and structures

Head quarters and subsidiary relations in multinational corporations

Foreign capital : Need

Sustaining a high level of investment The technological gap Exploitation of natural resources Undertaking the initial risk Development of basic economic

infrastructure The Foreign exchange gap

This foreign capital is generated by private participation of foreign players or by allowing MNCs in the country or FDIs.

MNC

A corporation that has its facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries.

Sometimes referred to as a "transnational corporation".  

Nearly all major multinationals are either American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW.

Advocates of multinationals say they create jobs and wealth and improve technology in countries that are in need of such development.

On the other hand, critics say multinationals can have undue political influence over governments, can exploit developing nations as well as create job losses in their own home countries.

Multinational Corporations

Dynamics of economic liberalization

Led to expansion and growth of MNCs

Acc. To World Investment Report 1997 there were 45,000 MNCs with some 280,000 affiliates

Acc. To World Investment Report 2002 there were about 65,000 MNCs with some 8.5 lacs foreign affiliates

Developed countries account for only 12 % of these

China host to more than 3.5 lacs of affiliates

Three-fourth of them in developing countries

Indian Scenario

More than 1400 in India………………….

Organization Structure

Defining Organizational Structure

Vertical Differentiation Arguments for Centralization

Arguments for Decentralization Horizontal Differentiation International Division Worldwide Area Structure

Strategic Business UnitProduct Division StructureMatrix Structure

Network Structure.

Organizational Architecture

Totality of a firm’s organization, including firm’s formal organization structure, control systems & incentives, organizational culture, processes & people

Three conditions need to be fulfilled for successful architecture: The different elements of firm’s architecture

should be internally consistent Must fit the strategy of the firm Strategy & architecture must be fit with

competitive conditions in the market

Organization Structure

I. The formal division of the organization into subunits such as product divisions, national operations, and functions (Horizontal differentiation)

II. The location of decision making responsibilities within that structure (centralized or decentralized) – Vertical Differentiation

III. The establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams and or pan-regional committees – integrating mechanisms

Vertical Differentiation

VD determines where in its hierarchy the decision making power is concentrated

E.g., Are production, marketing & finance decisions are centralized to the top-level managers or decentralized to low level managers

Let’s discuss on arguments for centralization and decentralization

Arguments for Centralization1. Centralization can facilitate coordination

2. Centralization can help ensure that decisions are consistent with organizational objectives

3. Centralization can give top-managers the means to bring about needed organizational changes

4. Centralization can avoid the duplication of activities that occurs when similar activities are conducted by various subunits within the organization

Arguments for decentralization1. Top mgmt. can become overburdened

when decision making authority is centralized & can result in poor decision making

2. Motivational research favors decentralization

3. Decentralization permits greater flexibility4. Decentralization can result in better

decisions5. Decentralization can increase control

Strategy & Centralization in International Business The choice between centralization &

decentralization

Centralize some decisions & decentralize others, depending upon the type of decisions & the firm’s strategy

Firms pursuing Global Strategy They must decide how to disperse the various

value creating activities around the globe so location and experience economies can be realized

The head office must make decision about where to locate R&D office, production & marketing & so on

The globally dispersed web of value creation activities that facilitates a global strategy must be coordinated. This creates pressure for centralizing some operation decisions

In contrast, the emphasis on local responsiveness in multi-domestic firms creates strong pressures for decentralizing operating decisions to foreign subsidiaries

International firms tend to centralize their core competencies and to decentralize other decisions to foreign subsidiaries

Horizontal Differentiation

How the firm decides to divide itself into subunits

May be based upon function, type of business, or geographical area

The structure of Domestic firm

Owner / ManagerOwner / Manager

Owner/Manager makes all major Owner/Manager makes all major decisions directly and monitors all decisions directly and monitors all activitiesactivities

Difficult to maintain this structure as Difficult to maintain this structure as the firm grows in size and the firm grows in size and complexitycomplexity

As firm grows, the demand of management become too great for one individual or a small team to handle

At this point the organization is split into functions reflecting the firm’s value creation activities – production, marketing, R & D, sales

Branch Branch unit 2unit 2

Branch Branch unit 1unit 1

Branch Branch unit 3unit 3

Branch Branch Unit 4Unit 4

Branch Branch Unit 5Unit 5

Branch Branch Unit 5Unit 5

Functional StructureFunctional Structure

Top Management Top Management LevelLevel

ManufacturingManufacturingPurchasingPurchasing FinanceFinance AdvertisingAdvertisingMarketingMarketing

Further, horizontal differentiation may be required if the firm significantly diversifies its product offerings

Problems of coordination & control arise when different business areas are to be managed within the framework of a functional structure

At this stage most firms switch to a product divisional structure

With a product division structure is division is responsible for a distinct product line

Dept. Dept. ManufacManufacturingturing

Dept. Dept. PurchaPurchasingsing

Dept. Dept. MarketinMarketingg

Dept. Dept. FinanceFinance

Dept. Dept. ProductProduct

ionion

Dept. Dept. advertiadverti

singsing

Product Divisional Structure Product Divisional Structure StructureStructureHeadquartersHeadquarters

Division Division Product Line BProduct Line B

Division-Product Division-Product Line ALine A

Division Product Division Product Line CLine C

International Divisional International Divisional Structure Structure

HeadquartersHeadquarters

Domestic Domestic Division –GM Division –GM Product Line Product Line

BB

Domestic Domestic Division- GMDivision- GM

Product Line AProduct Line A

Domestic Domestic Division GM Division GM

Product Line CcProduct Line Cc

International International DivisionDivision

GMGM

Country 1Country 1GMGM

Product A,B,CProduct A,B,C

Country 2Country 2GMGM

Product A,B , CProduct A,B , C

Worldwide Area Structure Worldwide Area Structure

MultinationalMultinationalHeadquartersHeadquartersMultinationalMultinationalHeadquartersHeadquarters

North AmericanNorth American AreaArea

North AmericanNorth American AreaArea

Latin American Latin American AreaArea

Latin American Latin American AreaArea

Middle EastMiddle East areaarea

Middle EastMiddle East areaarea Far East AreaFar East AreaFar East AreaFar East Area

European AreaEuropean AreaEuropean AreaEuropean Area Middle EasternMiddle EasternAfrican AreaAfrican Area

Middle EasternMiddle EasternAfrican AreaAfrican Area

Worldwide Product Division Worldwide Product Division Structure Structure

MultinationalMultinationalHeadquartersHeadquartersMultinationalMultinationalHeadquartersHeadquarters

WorldwideWorldwideProductsProductsDivision ADivision A

WorldwideWorldwideProductsProductsDivision ADivision A

WorldwideWorldwideProductsProductsDivision BDivision B

WorldwideWorldwideProductsProductsDivision BDivision B

WorldwideWorldwideProductsProductsDivision EDivision E

WorldwideWorldwideProductsProductsDivision EDivision E

WorldwideWorldwideProductsProducts

Division DDivision D

WorldwideWorldwideProductsProducts

Division DDivision D

WorldwideWorldwideProductsProductsDivision FDivision F

WorldwideWorldwideProductsProductsDivision FDivision F

WorldwideWorldwideProductsProductsDivision CDivision C

WorldwideWorldwideProductsProductsDivision CDivision C

Area 1Area 1 DomesticDomestic

Area 1Area 1 DomesticDomestic

Area 2Area 2InternationalInternational

Area 2Area 2InternationalInternational

8 - 28

Global Matrix Structure

CanadianDivision

Individual business division

Automobile product group

Chemicals product group

Consumer goodsproduct group

North American Area

United StatesDivision

Mexican Division

European Area

British Division

French Division

Pacific Area

JapaneseDivision

TaiwanDivision

Area Specialists

Martha Stewart

6 - 6 - 2929

Magazines

Books

Internet

Radio/ Newspaper

Network/ Cable TV

K-mart Line

Sears Paint

Catalog Line

Specialty/ Retailing

Cooking

Entertainment

Weddings

Crafts

Gardening

Home

Holidays

Children

Media Group Merchandising Group

Matrix Organization at

Relationships between headquarters & subsidiaries

Few subsidiaries can be directly managed by an MNC If the number is more, it has to make a permanent

structural relationship between itself & its subsidiaries

Since, MNC supplies various resources & inputs to its subsidiaries and receives inputs from the subsidiaries

This activity needs to be controlled & coordinated IT provide on line facility to co-ordinate & control the

activities

Different aspects of relationship

Information Sharing Resource Sharing Decisions flow Co-ordination of activities Control of operations Strategy Formulations