Lecture 3. Structures and controls for overseas expansion

Introduction: adapting organizational structure and controls

Many emerging-market companies have followed the principle of ‘think global, act local’. Their managers are becoming good citizens, and are adapting products and services responsibly to local markets. Companies such as Embraer, Haier Group, Lenovo, Mittal Steel, Orsacom and overseas Chinese business networks are changing also to become part of international business. Increasingly, emerging-market companies from Asia, Latin America and Eastern Europe will seek internationalization in their own unique ways, leading to hybrid structures and fast-growth entities.

Whether companies are based in emerging economies or developed countries, the process of international expansion follows similar lines. Having decided on the strategic direction for the company, international managers then adapt appropriately two key variables: the organizational structure, and its accompanying control and coordination mechanisms.

MANAGEMENT CHALLENGE: ALIGNING STRATEGY AND STRUCTURE

Raymond Levitt is only one of many writers discussing the importance of aligning organizational strategy with structure and culture in dynamic markets. In other words, the management challenge is that structure must fit with strategy, based on organizational culture, or it will not work.

The design of any company, as with the management of all its functions, should be flexible enough to allow for contingencies even after considering major variables such as strategy, size, appropriate technology and relevant environment. Given the increased complexity of international contexts it is difficult to design structures and subsystems suitable for all environments. Geographic dispersion, as well as differences in time, language, cultural attitudes and business practices, introduce further layers of complication. Lecture shows that most international managers find it easier to decide on strategy to develop the structure to carry it out.

ORGANIZATIONAL STRUCTURES

Evolution and change in multinational firms

Internationalization for most firms in the developed countries has been a process of gradual change in response to international competition, domestic market saturation and the desire for expansion. new markets and diversification. Managers weigh alternatives and decide on appropriate methods of entry. Kenichi Ohmae has identified five stages in the process of companies' internationalization:

1. Firms have a strong product to export, using local dealers and distributors.

2. Managers set up marketing and sales support companies in the local-market country.

3. They relocate the production base to the local-market country (developing a global mentality where decisions are shared between center and local company).

4. They move more aspects of the company to the local-market country, for instance, research and development, financing and engineering.

5. The true globalization phase begins, where some core functions such as global branding are returned to the center to develop a strong global brand and global identity.

At each stage organizational structures need to be redesigned in accord with overall strategy. Changes are made to the nature of tasks and relationships: authority is redesignated, together with responsibilities, lines of communication and geographic dispersal of units.

Ohmae’s model of structural evolution has become known as the 'stages model’: but many firms – and in particular, firms from developing countries – do not follow the stages model. Their managers may begin to expand overseas at a higher level of involvement – perhaps a full-blown global joint venture without ever having exported.

All enterprises, whether emergent or mature, make changes from time to time. These may be a result of moves from global to regional activities, or an effort to improve efficiency and effectiveness.

Often the creation of an international division is the beginning of a global strategy. Managers allocate and coordinate resources for foreign activities under one roof, enhancing the firm's ability to respond, both reactively and proactively, to market opportunities. However, some conflicts may arise among the divisions of the firm because more resources and management attention tend to go to international rather than domestic divisions, and because of the different perceptions of various division managers of the relative importance of domestic versus international operations.

A political example of domestic resentment against investment in overseas operations is provided by a submission to a Senate Select Committee of the Australian government by Oxfam Community Aid Abroad (OCAA) in 2002. OCAA is an independent, secular Australian entity that in February 2002 published Adrift in the Pacific: the implications of Australia's refugee solution. Its submission to the Select Committee concerned agreements between Australia and Nauru and Papua New Guinea on the presence of Australian-funded detention camps in those countries for processing asylum seekers who tried to enter Australia in late 2001 (the so-called ‘Pacific solution’).

OCAA’s argument was that establishment of the detention camps was accompanied by pledges of special financial assistance to the host nations, for example, the promise of $30 million to Nauru, and that this represented a major shift in policy for the Australian government. The amount was greater than all funds provided to Nauru between 1993 and 2001 by the Australian Agency for International Development (AusAl D), and such a policy shift raised serious questions about AusAlD’s priorities and their impact on relations with Pacific countries.

OCAA's submission was that this problem was already evident in Nauru, and that in a radio interview on 13 March 2002, Nauruan Member of Parliament Anthony Audoa stated that the presence of the detention centers in Nauru was causing ‘division and resentment' at a time of ongoing economic problems for the country.

On the other hand, Chris Callus, then Parliamentary Secretary to the Foreign Minister, stated that AusAlD’s development assistance program was totally separate from the program to establish detention camps for asylum seekers in the Pacific islands.

This case illustrates some of the moral as well as practical issues in international managers’ decisions – be they from the public or private sector – on how to apportion funds for overseas projects.