Determinants of Control Strategies and Organisational Structures

Table of Contents

1 Introduction

2 Organisational Environment
2.1 Internal Environment
2.2 External Environment
2.2.1 PEST Analysis
2.2.2 Porter’s Five Forces

3 Control Strategies
3.1.1 International Strategy
3.1.2 Global Strategy
3.1.3 Multidomestic Strategy
3.1.4 Transnational Strategy

4 Organisational Structures and Control Mechanisms
4.1 Organisational Structures
4.1.1 International Division Structure
4.1.2 Global Functional Division Structure
4.1.3 Global Product Division Structure
4.1.4 Global Area Structure
4.1.5 Global Matrix Structure
4.2 Control Mechanisms

5 Synthesis

6 Cases
6.1 Procter & Gamble
6.1.1 Strategy
6.1.2 Structure
6.2 Johnson & Johnson
6.2.1 Strategy
6.2.2 Structure

7 Conclusion

Bibliography

Appendices
Appendix I: Porter’s five forces
Appendix II: Arguments for centralisation and decentralisation
Appendix III: Advantages and disadvantages of control strategies
Appendix IV: Advantages and disadvantages of organisational structures
Appendix V: Integrating Mechanisms
Appendix VI: Example of Dow Chemicals Global Matrix Structure

Figures and Tables

Figure 1: Porter’s Five Forces

Figure 2: Four Basic Strategies

Figure 3: International Division Structure

Figure 4: Functional Division Structure

Figure 5: Global Product Division Structure

Figure 6: Global Area Structure

Figure 7: Global Matrix Structure

Table 1: Synthesis

Table 2: Advantages and disadvantages of control strategies

List of Abbreviations

illustration not visible in this excerpt

1 Introduction

From 1980 to 2002 Foreign Direct Investments (FDI) have grown by 12% per year (Unctad, 2004, p. 33). This indicates that Multinational Enterprises (MNEs) increasingly operate abroad through fully owned subsidiaries which have to be managed, controlled and coordinated by domestic headquarters. Therefore, it becomes more and more important for MNEs to choose an adequate control strategy combined with the most suitable organisational structure.

Due to a changing global environment, some of our competitors seem to change their organisational strategies and structures in order to achieve a competitive advantage. This report presents an overview of the determinants of strategies and structures adopted by MNE’s, the location of decision making and the types of mechanisms used to control foreign subsidiaries. The second chapter of this paper deals with the organisational environment and describes tools which can be used to assess the internal and external environment. The third chapter examines four control strategies. Organisational structures and control mechanisms are described in Chapter four. The fifth chapter examines the strategies and structures of our main competitors Procter & Gamble and Johnson & Johnson.

2 Organisational Environment

The strategy of a company has to fit to its environment. Therefore the internal and external environment should be analysed carefully in order to choose the most appropriate strategy.

2.1 Internal Environment

The SWOT analysis assesses the internal strengths and weaknesses and the external opportunities and threats. Therefore it focuses on the internal and external environment. As this chapter deals with the internal environment, only strengths and weaknesses will be regarded.

The relative strengths which a company might possess compared to its competitors could be a well-known brand name, high market shares, managerial talent or the use of technology. The main strengths of BMW are the expertise and skills of its workforce and its engineers and the “reputation for producing high-quality automobiles” (Griffin & Pustay, 1995, p. 356).

Weaknesses, for example, could be the skills of the managers and the workforce, the distribution network, a bad R&D function or other factors which inhibit the competitiveness of a company. The high labour costs in the domestic market constitute the main weakness of BMW (Griffin & Pustay, 1995, p. 356).

2.2 External Environment

The external environment can be analysed with two different tools. The PEST analysis is used to identify the influences of the remote environment. Porter’s five forces, however, deals with the competitive environment.

2.2.1 PEST Analysis

The PEST analysis is used to assess and monitor the factors which influence the environment in the long run. PEST is an acronym for the political, economic, sociocultural and technological factors of an environment

Political factors include taxation policy, foreign trade regulations, political stability and legal issues such as employment and competition laws.

Economic factors affect the economic development, the level of wages and unemployment rate. Furthermore, prospects for GDP, inflation rate and foreign currency should be analysed.

Sociocultural factors are, for instance, demographics, dominant religion, education system and income distribution

A company should consider technological factors such as government spending on research, infrastructure and costs of transportation, the number of new discoveries / innovations, availability of energy and costs, and legislation for intellectual property (Morrison, 2002, p.23 - 24).

2.2.2 Porter’s Five Forces

According to Porter, the competitive environment consists of five forces which determine the competition within an industry (Brooks & Weatherston, 2000, p. 63). Porter´s five forces are illustrated in Figure 1:

illustration not visible in this excerpt

Figure 1: Porter’s Five Forces

(Source: http://www.libraries.psu.edu)

By analysing these forces the attractiveness of an industry and the sources of competition within an industry can be assessed. (Johnson & Scholes, 2005, p. 78)

In Appendix I, each of these competitive forces will be explained in more detail.

3 Control Strategies

MNE’s face a tension between local responsiveness and cost pressure. On the one hand, it is desirable to produce a standard product which is sold worldwide with only as little adaptation as possible in order to reap scale economies. On the other hand, the marketing need to customise the product to local tastes and demands consequently raises cost and contradicts with the need of cost efficiency (Segal-Horn & Faulkner, 1999, p. 121). Therefore, the strategy which suits best depends on the extent of pressures for cost reductions and local responsiveness (Hill, 2002, p. 390). MNE’s can choose between 4 different strategies which are illustrated in Figure 2. The advantages and disadvantages are shown in Appendix II.

illustration not visible in this excerpt

Figure 2: Four Basic Strategies

(Source: Hill, 2002, p. 392)

3.1.1 International Strategy

Companies pursuing an international strategy transfer their knowledge and their core competencies to foreign subsidiaries which are regarded as appendages to the parent company (Dicken, 2003, p. 216). Major decisions and functions like R&D, product design and marketing are centralised in the domestic country (Hill, 2002, p. 404). However, manufacturing and distribution might be decentralised to the foreign subsidiaries (George & Jones, 1999, p. 622).

Customisation of products and marketing strategies tends to be limited and head office retains tight control over foreign operations (Hill, 2002, p. 391). In some cases, foreign subsidiaries are only responsible for selling the product which has been manufactured in the domestic country. For example, Microsoft produces and customises (only the language) all its software in the US. Finally the products are exported and sold to software distributors all over the world (George & Jones, 1999, p. 623).

The international strategy is suitable for companies facing weak pressure for local responsiveness and cost reductions. Moreover, the strategy is appropriate if the company has valuable skills which are unique in the foreign environment (Hill, 2002, p. 392).

3.1.2 Global Strategy

A characteristic for companies operating with a global strategy is that they try to achieve location and experience curve economies in order to increase their profitability. Aggressive pricing policies can be carried out. Value creating activities (e.g. production, marketing and R&D) are globally dispersed and concentrated in favourable locations which are either the cheapest, the most efficient or the best locations worldwide (Hill, 2002, p. 393). Subsidiaries are responsible for assembling and selling the product. The products are not customised or modified because this would raise costs. Therefore local market conditions tend to be ignored and standardised products are sold worldwide (Dicken, 2003, p. 216).

Global companies centralise most of their decisions because the subsidiaries are interdependent and the flow of products has to be coordinated. Furthermore the head office has to decide where to locate the value creating activities (Hill, 2002, p. 404).

This strategy is suitable for companies with high cost pressure and low pressure for local responsiveness. A good example is the semiconductor industry. Because of global standards within the industry, companies like Intel or Texas Instruments produce very standardised products. In contrast, the global strategy is inappropriate in consumer goods industries (e.g. food industry). Because of national differences in tastes, demands for local responsiveness are very high. (Hill, 2002, p. 393)

3.1.3 Multidomestic Strategy

Multidomestic companies adapt their products and marketing strategies to local needs and conditions. Therefore they tend to establish a full set of value creating activities in each country where they do business. This leads to duplication of resources and consequently to a high cost structure (Hill, 2002, pp. 392 - 393).

The main pressure for Multidomestic companies is local responsiveness. Hence, the authority for main decisions is decentralised to foreign subsidiaries, which have autonomy in the most important issues (Hill, 2002, p. 404).

The adoption of a Multidomestic strategy makes most sense where the demand for local responsiveness is very high and where pressure for cost reduction is low. (Hill, 2002, pp. 392-393). Companies like Nestlé and Unilever pursue a Multidomestic strategy because their products must be tailored to local tastes which differ from country to country. (McDonald & Burton, pp. 256-257). The strategy is not suitable for industries with intense cost pressure.

3.1.4 Transnational Strategy

Bartlett and Goshal have argued, that today’s highly competitive environment forces MNEs to achieve all the benefits from the three above mentioned strategies (Bartlett & Ghoshal, 2002, pp. 23-29). For this reason, companies have to be “globally efficient” (as global companies), “multinational flexible” (as Multidomestic companies) and capable to “transfer core competencies within the company” (as international companies) simultaneously (Dicken, 2003, p. 217) (Hill, 2002, p. 393). Companies pursuing these objectives follow a transnational strategy.

Transnational companies tend to produce and assemble products in low-cost locations in order to achieve location economies. Other foreign subsidiaries are located in a few countries of particular world regions, in which the product should be marketed. They are responsible for customising the product to local demands. All subsidiaries are linked together, forming a global network. This enables global learning and facilitates the transfer of resources worldwide (George & Jones, 1999, p. 622). However, implementing a transnational strategy is very difficult (Hill, 2002, p. 393).

Whereas the need to be locally responsive requires decentralised decision making, the need to reap location and experience curve economies forces a MNE to have centralised control over the subsidiaries. Therefore some operating decisions are decentralised and others are centralised at the headquarters (Hill, 2002, p. 405).

[...]