Quiz 10: Organizational Design and Control


Transfer pricing refers to the process of setting the price of goods and services sold between different divisions of an enterprise. Company GC operates in the computer software industry. Company GC is headquartered in the US. It has subsidiaries across more than 100 countries across the world. Sixty percent of the company's revenue is generated from the US operations; however sixty percent of its EBT is generated in international markets. With the help of transfer pricing, the company has saved more than $500 million in its worldwide tax. Transfer pricing results in ethical, legal, political, and other issues for an organization. Transfer pricing helps in maximizing the post-tax result of an individual. Hence, the shareholders of the company could get higher return on investment with the help of transfer pricing. Therefore, it is much likely that a shareholder of Company GC would be supportive of the company's transfer pricing approach. The government representative of the subsidiary country, i.e., Country I would not be supportive of the company's approach. Company GC is unethically using transfer pricing to save its tax. Subsidiary of company GC in Country I licenses software from its parent company at low percentage rate; later on, it charges much higher fees from the other subsidiaries. In country I the tax rate much lower than that of the US. Hence, using this approach the company is generating high levels of revenues and taxable income in Country I, but paying less tax. In order to preserve its fiscal substance and prevent the economic substance of local subsidiaries from draw off, the government of Country I would not support this approach. As per the mentioned scenario, Company GC is generating sixty percent of its revenue from the US operations; however sixty percent of its EBT is generated in international markets. Hence, the US government is getting substantially less tax, than it should ideally receive. Therefore, the representative of US government would not support the company's transfer pricing approach. Government of other nations in Europe would also oppose this approach used by the company.

SCI specializes in manufacturing electronic and electrical components which are used in automobile and telecommunication systems, home appliances and computers. The company has its manufacturing facility in its home country and exports to Asian markets. There were rumors in the market that a new entrant is looking for a licensor to supply manufacturing technology in electronic and electrical component industry. To cement its place in the Asian markets, SCI set up its first manufacturing plant in T. The company decided to hire marketing and financial experts with knowledge of local markets and set up an international division at the headquarters to oversee international operations. They believed that manufacturing facilities can be replicated in other regional markets as well. To keep an eye on competition the firm had an international division, which was responsible for monitoring competitor's moves. To set up a manufacturing facility in a different country, the company was required to reorganize to handle new foreign production facilities. SCI entered a foreign market first by exporting its products, and then as sales grew, set up a manufacturing plant overseas. Initially the company had a small international division which looked after the operations in the overseas market. Gradually as sales grow, the company can contemplate moving away from having an international division to forming an organizational structure based on product. The domestic product division can be given responsibility of global operations. Depending on the product range, there can be one division for each category of product manufactured. Responsibility can be allocated to middle level managers for each division, and these managers can be asked to report to the headquarters. There should be a clear allocation of responsibility for these managers to not only oversee production line, but also keep a tab of competitors, besides regulatory changes that may occur from time to time. Another feature that can be incorporated in the new organizational structure is that of a horizontal structure. In such a structure, employees plan create and market products by carefully cultivating a system of interrelationship. In such a structure, the marketing team is allowed to get in touch directly with the production team, without having to seek permission from people stationed at the headquarters. This helps the production team in reducing time required to make any product modifications as may be required by the marketing team. As the company lags behind competitors in developing new product range, having such a structure would enable the company to take quicker decisions related to developing new products and making certain modifications as may be required. Thus, it is imperative for the management to change the organizational structure depending on the needs of the foreign market and changing competitor dynamics.

For any business, organizational structure becomes important, more so for companies with operations in multiple countries and for those who have clients or vendors in other countries. Each country has its own set of statutory regulations that standardize business in each country. There are some countries which have different laws for domestic and international firms. As such companies which operate across international borders must be aware of these differences and must organize themselves accordingly. Not just for legal and accounting purpose, organizational structure is necessary as foreign markets are qualitatively different from domestic ones. Products that are popular in domestic market may not be in demand in other countries. For example, manufacturing product with American market in mind like kitchen appliance would not work in Japanese market, where space is at a premium. Therefore, companies must reorganize and restructure into different divisions that are consistent with characteristics of differing markets. Productivity of a department depends on a manager's ability to ensure continuous flow of raw material and information. Decision making can be challenging when foreign operations are involved. Organizational structure should be clearly defined to indicate hierarchy of each department. The workflow and reporting structure in an organization is determined by organizational structure. For a multinational company, organizational structure gives a clear idea of the reporting structure. A clear hierarchy improves organizational efficiency, as every department can focus their time and tasks on improving productivity. Thus, setting up an organizational structure helps and organization run its operations efficiently, taking into consideration regulations in each country and market needs in each geography.