International Business Study Set 9

Business

Quiz 10 :

Organizational Design and Control

Quiz 10 :

Organizational Design and Control

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Why is organizational structure an important issue for international companies?
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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.

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You are the CEO of Mancon Incorporated, and you have just acquired Pozoli, an Italian small-appliance maker (electric shavers, small household and personal care appliances). It has been in business for more than 40 years and has manufacturing plants in Italy, Mexico, Ireland, and Spain. Its output is sold in more than 100 markets worldwide, including the United States. Your company is now organized into two product groups-shaving and personal care-along with an international division at the top level. How are you going to include Pozoli in your organization? Explain your rationale.
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Being the COE of MI which has just acquired P, with markets in more than 100 countries and manufacturing facilities in different countries, the first challenge would be to create an organizational structure for this new acquired company. P is a manufacturer of small appliances like electric shavers and personal care items, hence there's a need to structure the organization as per products sold and geographies served.
There are two options that the CEO can look into. One is merging P into the international division of MI. Operations of the newly acquired company, be it manufacturing or marketing can come under international division of the parent company. This international division can possibly look into marketing and export of all products of both companies.
Another option that can possibly be considered is establishing P as a separate division. As P has been in the business for years, the brand is already well known. The organizational structure of this new division can be broken down into personal care and small appliances. Each of these can be headed by an individual who would report to the CEO.
Thus, there are multiple ways which the CEO could use to include operations of P into the parent organization. One can be by merging P's operations into the international division and the other could be to make P a separate division in itself.

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SemiConnected, Inc. manufactures specialized electronic and electrical connectors used on such diverse products as computers, home appliances, telecommunications, and the air bag and antiskid systems of automobiles. The company has been in business since 1984. The accompanying table provides a summary of the important financial information for the last five years. For some time, SemiConnected has been exporting to Asia, where its major markets are Australia, Singapore, Malaysia, Thailand, South Korea, China, and Taiwan. When its foreign sales were confined to exports, the company functioned well with an export department whose manager reported to the company's marketing manager. In 2010, however, another American firm tried to enter the Taiwan market, and there were rumors that a Taiwanese firm from a related industry was searching for a licensor in the United States to supply it with manufacturing technology. As a result, SemiConnected decided to set up its first foreign plant in Taiwan. When it did, it hired financial and marketing people with Asian experience and established an international division at headquarters to oversee the Taiwan operation. The president felt that the situation would be repeated in China, Singapore, and perhaps other nations. These were all good export markets at the time, but it was reasonable to suppose that some competitor would soon set up manufacturing facilities in one or more of them, which could dramatically affect the potential for exporting to these markets. Having a small international division with some Asian expertise responsible for monitoring these markets would help the firm avoid being surprised by a competitor's move. After the Taiwan SemiConnected plant was in production, more firms in that nation were willing to do business with the company than had been the case when it had served the market through exports. In fact, the major portion of the 2011 sales increase was due to improved sales to Taiwan. However, the new customers also brought the company into a new, higher level of competition than it had known before. Other Taiwanese competitors were bringing out new products at a considerably faster rate than SemiConnected. The president wondered if horizontal linkages across functions, such as the linkages automakers have used to reduce their design time, might help his firm. Also, on his trips to Taiwan, the marketing people told him things about the market and the competitors that were not being sent to the SemiCon-nected home office. It was obvious to the president that overseas production and growth in overseas sales demanded a reorganization of the firm. Even though the company had only one plant overseas, in Taiwan, the president was confident that other plants would soon be needed. How should the company be organized to handle the new foreign production facilities? How can SemiConnected reduce the time needed to bring new designs to market? img
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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.

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What measures can be utilized to control subsidiaries that are less than 100 percent owned by the firm or joint venture partners in which the firm has no ownership?
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Your company's matrix organization isn't working; decisions are taking too long, and it seems to you that instead of best solutions, you're getting compromises. What can your company's CEO do to address this problem?
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Use the globalEDGE site (http://globalEDGE.msu.edu/) to complete the following exercises: You work at a U.S.-based food and beverage company that is currently planning to expand operations to other parts of the world. To design the structure of the international organization, management has requested additional information on the food and beverage sector abroad. Use the Industry Profiles in the globalEDGE website to prepare a risk assessment of the Food and Beverage industry that can help management gain a better understanding of the external environment in foreign markets.
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Compare and contrast geographic and product structures for international companies.
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GlobalSoft: Profiting from International Transfer Pricing GlobalSoft Inc. is a leading competitor in the international computer software industry. The company is headquartered in the United States and has subsidiaries in more than 100 nations of the world. More than 80 percent of Global-Soft's long-lived assets are located in the United States, and 60 percent of its revenues of $58 billion are generated from the U.S. operations. However, 60 percent of the company's $25 billion of income before taxes is generated in international markets, with much of that coming from nations with corporate tax rates that are much lower than the 35 percent tax rate that GlobalSoft is subject to in the United States. One way that GlobalSoft has reduced the level of taxes that it pays is through the careful use of transfer pricing. For example, the company established a subsidiary in Ireland, where the corporate tax rate in 2011 was only 12.5 percent, one of the lowest levels in Europe. This subsidiary, called Emerald Isle Enterprises (EIE), serves as the regional headquarters for the licensing of GlobalSoft's software to European customers. Although most of GlobalSoft's software development occurs in the United States, the American organization then licenses this software at a relatively low rate to EIE. The outcome of this transfer pricing decision is that a lower level of revenues-and corresponding taxable income-is earned by GlobalSoft's American operations from EIE's activities. As a result, GlobalSoft pays a smaller amount of taxes in the United States than would be the case if it charged a higher license fee to EIE. Although EIE licenses GlobalSoft's software from its parent company at a relatively low percentage rate, EIE charges a much higher fee to GlobalSoft's other European subsidiaries for this software. This approach to pricing allows EIE to have a high level of revenues and taxable income in Ireland, where the tax rate is low. The high license fee also reduces the level of taxable income in the other European subsidiaries, which are located in nations that charge higher tax rates than Ireland. Due to tax treaties, the after-tax profits of EIE are not subject to further taxation when they are transferred to the company's headquarters in the United States. Through the creative use of transfer pricing techniques such as this, it is estimated that GlobalSoft has been able to reduce its worldwide tax bill by more than $500 million per year. If you were a shareholder in GlobalSoft, would you be supportive of the company's approach to transfer pricing? Why or why not?
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Use the globalEDGE site (http://globalEDGE.msu.edu/) to complete the following exercises: Fortune magazine conducts an annual survey and publishes the rankings of the "World's Most Admired Companies." Locate the most recent publicly available ranking, follow the link to the best and worst companies, and focus on the nine factors highlighted by Fortune magazine. Based on these data, prepare an executive summary of the strategic and organizational success factors of a company of your choice.
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Some companies use standardized organizational controls across their entire organization, in that the same control systems are used for each unit or operation worldwide. For example, companies such as Starbucks, Kentucky Fried Chicken, or McDonald's apply the same rigid quality controls throughout all aspects of their organizations, even as they expand internationally. Why would a company such as these impose rigorous corporate quality standards, regardless of the country in which it operates? What modifications in these quality standards, if any, should the company permit because of differences across nations or regions of the world? Why is the company allowing these modifications to occur?
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What are the main strengths and weaknesses of the use of an international division as part of a company's organizational structure? Under what circumstances might such a structure be an appropriate choice for a company?
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Regarding issues of control in an international company: a. What are some decisions that could result in detriment for a subsidiary but greater benefit for the enterprise as a whole? b. In such circumstances, where will the decision be made-at IC headquarters or at the affected subsidiary?
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In determining whether decisions will be made by the parent company or by its subsidiaries, what are the considerations when equipment and products are standardized worldwide rather than tailored to individual national circumstances and markets?
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It is obvious that in formulating new strategies, management may uncover a need to change its organization. Can you describe some situations in which the reverse may be true?
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