MULTINATIONAL

CORPORATIONS

Module - 6
Objectives of the module
 Multinational Corporations

 Organization , design and structures

 Head quarters and subsidiary relations in

multinational corporations
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 co-ordinate global
management. Very large multinationals have
budgets that exceed those of many small countries.
 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.
Foreign capital : Need
 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
Organization Structure
 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.
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 – integrating mechanisms
Vertical Differentiation
 VD determines where in its hierarchy the decision
making power is concentrated

 E.g., Are production, marketing & finance

decisions are centralized to the top-level managers
or decentralized to low level managers

 Let’s discuss on arguments for centralization and

decentralization
Arguments for Centralization
1. Centralization can facilitate coordination

2. Centralization can help ensure that decisions are

consistent with organizational objectives

3. Centralization can give top-managers the means to

bring about needed organizational changes

4. 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

 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

 The head office must make decision about where to

locate R&D office, production & marketing & so on

 The globally dispersed web of value creation activities

that facilitates a global strategy must be coordinated.
This creates pressure for centralizing some operation
decisions
 In contrast, the emphasis on local responsiveness in
multi-domestic firms creates strong pressures for
decentralizing operating decisions to foreign
subsidiaries

 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

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

 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 Manufacturing Marketing Finance Advertising

Branch Branch Branch Branch Branch Branch

unit 1 unit 2 unit 3 Unit 4 Unit 5 Unit 5
 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 line
 Product Divisional Structure
Structure
Headquarters

Division-Product Division Division Product

Line A Product Line B Line C

Dept. Dept. Dept. Dept. Dept. Dept.

Purcha Manufac Marketin Finance Product adverti
sing turing g ion sing
 International Divisional
Structure
Headquarters
Domestic Internatio
Domestic Domestic
Division GM Division
Divisio
Division- GM Division –GM
Product Line Cc GM
Product Line A Product Line B

Country 1 Coun
GM GM
Product A,B,C Product
Worldwide Area Structure

North
North American
American Latin
Latin American
American
Area
Area Area
Area

European
Multinational
Multinational Middle
Middle Eastern
Eastern
European Area
Area African
Headquarters
Headquarters African Area
Area

Middle
Middle East
East Far
Far East
East Area
Area
area
area
 Worldwide Product Division
Structure
Worldwide
Worldwide Worldwide
Worldwide
Products
Products Products
Products
Division
Division AA Division
Division BB

Area
Area 11
Domestic
Domestic
Worldwide
Worldwide Multinational Worldwide
Worldwide
Products
Products
Multinational Products
Products
Division
Division FF Headquarters
Headquarters Division
Division C
C
Area
Area 22
ernational
ernational

Worldwide
Worldwide Worldwide
Worldwide
Products
Products Products
Products
Division
Division EE Division
Division D
D
 Global Matrix Structure

North American Area European Area Pacific Area

Canadian Mexican United British French Japanese Taiwan

Division Division States Division Division Division Division
Division

Chemicals
product
group

Consumer
goods
product group

Automobile
product
group

Individual business division

23 8-
 Relationships between
headquarters & subsidiaries
 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
 IT provide on line facility to co-ordinate & control the
activities
