Determinants of Control Strategies and Organisational Structures of Multinational Enterprises

Seminar Paper 2003 25 Pages

Business economics - Business Management, Corporate Governance



Figures and Tables

1. Introduction

2. Organisational Strategies
2.1. Determinants of Control Strategies
2.1.1. Internal Environment
2.1.2. External Environment PEST Analysis Porter’s Five Forces
2.2. Locus of decision making
2.3. Control strategies
2.3.1. International Strategy
2.3.2. Global Strategy
2.3.3. Multidomestic Strategy
2.3.4. Transnational Strategy

3. Organisational Structures and Mechanisms
3.1. Organisational Structures
3.1.1. International Division Structure
3.1.2. Functional Division Structure
3.1.3. Global Product Division Structure
3.1.4. Global Area Structure
3.1.5. Global Matrix Structure
3.2. Integrating Mechanisms
3.3. Control Mechanism

4. Synthesis

5. Cases

6. Conclusion

Appendix I


Figures and Tables

Figure 1: Four Basic Strategies

Figure 2: International Division Structure

Figure 3: Functional Division Structure

Figure 4: Global Product Division Structure

Figure 5: Global Area Structure

Figure 6: Global Matrix Structure

Figure 7: Organization Chart Bayer

Table 1: Synthesis

Table 2: Advantages and disadvantages of control strategies

1. Introduction

“The fundamental purpose of any business firm is to make a profit” (Hill, 2002, p. 379). Especially for multinational companies it is difficult to operate due to the distance, dynamic and diversity. To reach this aim and to compete effectively in an international environment a multinational enterprise has to pursue an appropriate strategy.

In the following, factors that determine the strategy a company pursues will be regarded. In addition, different strategies will be explained as well as different structures for implementing those strategies. Moreover, two companies will be compared regarding their strategies and structures.

2. Organisational Strategies

The strategy, which a Multinational Enterprise chooses, must be appropriate to its environment. Therefore the determinants must be considered.

2.1. Determinants of Control Strategies

The environment of a company consists of many different influences. For identifying them a company must consider its internal and external environment.

2.1.1. Internal Environment

A SWOT analysis can be used as an instrument to inform a company about its environment. SWOT stands for

illustration not visible in this excerpt

In the following, only the strengths and weaknesses will be regarded, because they relate to the internal factors.

The strengths of a company provide a significant market advantage. They can be found in the finance, human resource, production, R&D or marketing sector as well as in the firms operations (Smith, p. 12-13). The strengths of BMW for instance are “its skilled workforce, innovative engineers, and reputation for producing high-quality automobiles” (Griffin & Pustay, 1995, p. 356).

The weaknesses can usually be found in the above-mentioned sectors as well. They hinder a company’s competitiveness. An example for the weaknesses of BMW is its high labour cost (Griffin & Pustay, 1995, p. 356).

2.1.2. External Environment

For identifying the influence factors of the external environment, two different analysis can be used. The PEST analysis deals with the remote environment, whereas Porter’s five forces handles with the competitive environment. PEST Analysis

The objective of the PEST analysis is to identify through which environmental influences the development or performance of a company in a foreign country could be affected. Therefore the p olitical, e conomical, s ocio-cultural and t echnological influences are considered (Johnson & Scholes, 1999, p. 98).

Political factors

Political factors include for example the system, government stability, law and regulations (Johnson & Scholes, 1999, p. 104).

Economical factors

For the economical situation, among others the unemployment rate, growth prospects, inflation and interest rate as well as the availability of resources and the disposable income should be regarded (Smith, p. 14).

Socio-cultural factors

Socio-cultural factors include for instance the population demographics, consumerism, level of education attitudes, values and beliefs as well as income distribution (Johnson & Scholes, 1999, p. 104).

Technological factors

Technological factors include for example the level of industrialization, level of information and communication technology and the transportation standard like railways, shipping or air travel (Stonehouse et al., 2001, p. 33). Porter’s Five Forces

According to Porter is the competition in an industry influenced by five forces.

These forces are the

- threat of new entrants to the industry
- threat of substitute products
- bargaining power of customers
- bargaining power of suppliers and
- rivalry among current competitors in the industry.

To some extent, all of these competitive forces reflect environmental factors which are facing the company. Together they determine the performance of the company and the attractiveness of the industry. However, with the appropriate strategy a firm can influence these factors (Rugman, Lecraw, Booth, 1985, p. 332).

In the following those forces will be regarded in more detail:

Threat of new entrants to the industry

The easier it is for competitors to enter a market, the more intensify the competition will be, which might have a further impact on pricing and profitability. The ability to enter a market depends on the entry barriers an industry has. Typical barriers for example are:

- Economies of scale. They are very important for instance in the fast-moving consumer goods industry for sales and marketing.
- Differentiation and brand loyalty. The user regards a product or service as more valuable than that of a competitor.
- Required start up capital. Which is important for example in the pharmaceutical industry for the high R&D costs.

An example for entry barriers is the luxury car market. In this industry a brand name or reputation is extremely important as well as a network of suppliers and distributors (Johnson & Scholes, 1999, pp. 115-118).

Threat of substitute products

There are different types of substitutes. Examples therefore are the product-for-product substitution, which can be seen regarding fax and e-mail, or the substitution of needs (Johnson & Scholes, 1999, p. 120). Butter and margarine satisfy for instance the same needs of customers (Stonehouse, et al., 2001, p. 87).

Bargaining power of customers

The bargaining power of customers can affect pricing and thus reduce margins. This power is high if for instance the customers are large purchasers, when they easily are able to switch to a substitute or if they are able to threaten with backward integration (Stonehouse, et al., 2001, p. 88).

Bargaining power of suppliers

The power of suppliers can influence the organisation’s pricing as well. This is possible if for example switching costs to another supplier are high and services or products of a supplier are very important for the company or if there is a threat of a forward integration (Stonehouse, et al., 2001, p. 87).

Rivalry among current competitors in the industry

There are different forms of rivalry among competitors. The most common are product development, price competition, product differentiation as well as promotion and advertising. When the growth of the industry is limited, the brand loyalty is low and the competitors roughly have the same size rivalry will be greatest (Stonehouse, et al., 2001, pp 88-89).

2.2. Locus of decision making

A company has to choose the location of decision making, governing the relationships between the parent company and their subsidiaries.

On the one hand, centralization has the advantages that all decisions were made according the company’s overall needs. Furthermore, coordination is easier and duplications of activities are avoided. Moreover, the top-level management has the means to make organisational changes.

On the other hand, decentralization has advantages as well. In a decentralized organisation the top-management is not overburdened with routine issues but it can focus on the essential issues. Moreover, a subsidiary is able to react faster to environmental changes on local markets and motivation increases among employees due to individual freedom and control over their work. Additionally, relatively autonomous, self-contained subunits can be established within an organization (Hill, 2002, pp. 403-404). However, “the choice of centralization and decentralisation is not absolute. It frequently makes sense to centralize some decisions and to decentralize others, depending on the type of decision and the firm's strategy” (Hill, 2002, p. 404).

2.3. Control strategies

According to Hill, there are four basic strategies for competing in the international environment. Which strategy suits best for a company depends

on the extent of pressures for local responsiveness and cost reduction, which is illustrated in Figure 1 (Hill, 2002, p. 390). Advantages and disadvantages of these control strategies are shown in appendix 1.

illustration not visible in this excerpt

Figure 1: Four Basic Strategies

(Source: Hill, 2002, p. 392)

2.3.1. International Strategy

A characteristic for companies with an international strategy is that they centralize their core competency like R&D and that they decentralize operating decisions. Moreover, in their major host countries they establish marketing and manufacturing functions. However, the headquarters tends to have tight control over all functions, whether they are centralized or decentralized.

This strategy is suitable for companies, where their core competencies don’t exist in foreign markets and which have weak cost and customisation pressure. It is inappropriate for companies in the manufacturing industry due to high operating costs caused by the manufacturing facilities which exist in every major host country (Hill, 2002, pp. 391-392). Microsoft is an example for a firm with an international strategy. The core architecture for their products were developed in the United States and the majority of their computer codes was written there as well. However, its subsidiaries are allowed to customize products to meet the local customers needs and to develop their own distribution and marketing strategies (Hill, 2002, p. 392).



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Determinants Control Strategies Organisational Structures Multinational Enterprises




Title: Determinants of Control Strategies and Organisational Structures of Multinational Enterprises