Module 6 - Multinational Corporations

MULTINATIONAL CORPORATIONS

Module - 6

Objectives of the module 

Multinational Corporations

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Organization , design and structures

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Head quarters and subsidiary relations in multinational corporations

Foreign capital : Need     

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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

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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 coordinate global management. Very large multinationals have budgets that exceed those of many small countries.

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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

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Led to expansion and growth of MNCs

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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

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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 

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Defining Organizational Structure Vertical Differentiation Arguments for Centralization Arguments for Decentralization Horizontal Differentiation International Division Worldwide Area Structure Strategic Business Unit Product Division Structure Matrix Structure Network Structure.

Organizational Architecture 

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

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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

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

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Let’s discuss on arguments for centralization and decentralization

Arguments for Centralization 1.

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Centralization can facilitate coordination Centralization can help ensure that decisions are consistent with organizational objectives Centralization can give top-managers the means to bring about needed organizational changes Centralization can avoid the duplication of activities that occurs when similar activities are conducted by various subunits within the organization

Arguments for decentralization 1. 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 flexibility 4. Decentralization can result in better decisions 5. Decentralization can increase control

Strategy & Centralization in International Business 

The choice between centralization & decentralization

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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

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

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

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

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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

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

The structure of Domestic firm Owner / Manager Owner/Manager makes all major decisions directly and monitors all activities Difficult to maintain this structure as the firm grows in size and complexity

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

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

Functional Structure Top Management Level

Purchasing

Branch unit 1

Manufacturing Marketing

Branch unit 2

Branch unit 3

Finance

Branch Unit 4

Advertising

Branch Unit 5

Branch Unit 5

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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 Divisional Structure Structure Headquarters Division-Product Line A

Dept. Purcha sing

Division Product Line B

Dept. Dept. Manufac Marketin turing g

Dept. Finance

Division Product Line C

Dept. Product ion

Dept. adverti sing

International Divisional Structure Headquarters Domestic Division- GM Product Line A

Domestic Division –GM Product Line B

Domestic Division GM Product Line Cc

Country 1 GM Product A,B,C

Internatio Division Divisio GM

Coun GM Product

Worldwide Area Structure North American Area

European Area

Latin American Area

Multinational Headquarters

Middle East area

Middle Eastern African Area

Far East Area

Worldwide Product Division Structure Worldwide Products Division A

Worldwide Products Division B

Area 1 Domestic

Area 2 ernational

Worldwide Products Division F

Worldwide Products Division E

Multinational Headquarters

Worldwide Products Division C

Worldwide Products Division D

Global Matrix Structure North American Area Canadian Division

Mexican Division

United States Division

European Area British Division

French Division

Chemicals product group

Consumer goods product group

Automobile product group

Individual business division

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Pacific Area Japanese Division

Taiwan Division

Matrix Organization at Stewart Martha Merchandising Group

Media Group

Specialt y/ Retailing Sears Paint

Catalog Line

K-mart Line

Network/ Cable TV

Radio/ Newspa per

Internet

Books

Magazin es

Area Speciali sts

Cooking Entertain ment Weddings Crafts Gardenin g Home Holidays Children 6 - 29

Relationships between headquarters & subsidiaries

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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

Different aspects of relationship      

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