The organization structure appropriate for a company that is entering a foreign market at the investment level will depend on several variables. These variables include product, product line, geographical dispersion of the MNC's activities, company philosophy, and external environmental demands.
In general, a firm that engages in direct foreign investment will choose one of the following alternative forms of organization:
- Organization by function
- Organization by product
- Organization by geographical area
- Organization by combination (matrix )
Historically most MNCs started with an organization based on functions, one of which was international trade. Subsequently, as international activities picked up and the number of products produced and marketed overseas increased, the product and geographical forms of organization became very popular. In the seventies most progressive MNCs adopted the matrix form of organization structure. Recently mounting dissatisfaction with the matrix arrangement has led many MNCs to abandon it in favor of the product form of organization structure.
Organization by Function. Figure 11.3 illustrates a functional organization. Firms that organize their global activities by function subscribe to the idea that management functions (production, finance, marketing, personnel, research and development, and public relations) are the same the world over, and functional expertise is more relevant than product knowledge. Thus, for example, once an executive has mastered the details of production capacity utilization, production runs, and the like at a Peoria, Illinois plant, he or she could conceivably hop on a jet plane and a few hours later "troubleshoot" a production line in Paris, France.
Organization by Product. Figure 11.4depicts a product-oriented organization. Under this type of organizational scheme, a single executive is put in charge of a specific product or product line. This executive, the product manager, is assisted by a "multifunctional team." Many European companies (Philips in the Netherlands and Volvo in Sweden, for example) have switched over to product organization.
The rationale behind product organization is that because of the tremendous increase in the rate at which products become obsolescent, today's managers must continually improve current product design and invent new products and processes in order to stay ahead of the competition. When the technical life of products was longer, the functional organizational structure was more appropriate. But now that the life cycle of most products has been shortened considerably, the advantages associated with a technological lead have diminished.
As Ohmae pointed out, the waterfall model, whereby a product is introduced first in the United States, then in the OECD countries, and finally in less developed countries, is no longer appropriate. 1
Today products are introduced simultaneously in all the OECD countries. Thus there often is little time to explain the product to finance, marketing, personnel, and produ!2tion managers before production begins. Teams must first "learn the language" of the product and then must think the same product, dream the same product, live the same product.
Therein lies what some observers consider to be one of the most important disadvantages of a product-oriented organization: people's identification with the product. When carried to excess, product centeredness takes on an emotional overtone that may lead executives to become ethnocentric. They may come to believe in the inherent superiority of their own country as much as they do in that of their product. 2
Organization by Geographical Area. Executives who organize their firms' activities by geographical region believe that different regions call for different styles of management and, therefore, different skills and talents. As Figure 11.5shows, under this approach one manager is put in charge of one geographical region. Usually, the manager reports directly to the president at the headquarters. A geographical organization structure is generally selected only by firms that produce consumer goods, which depend on stable and wellknown technology but demand considerable marketing ability. It stands to reason that a company would want to give a local manager considerable responsibility to market such a product. The activities of all these regional managers are often coordinated by a product specialist located at the headquarters or some other central point.
Organization by Combination (Matrix). The matrix organization structure evolved out of the desire to combine product, geographical, and functional expertise into a harmonious whole without sacrificing clear lines of authority. Firms that espouse the matrix organizational form are said to have a geocentric management philosophy. Even though the matrix organization structure has lost some of its glamour, it still has the potential to solve some dilemmas in MNC management. Much of the disillusionment seems to have been due to the failure of firms to provide the superimposed administrative structure (a superstructure) needed to manage the matrix organization.
Rutenberg describes most eloquently the basic facets of a matrix organization. Structurally, there is a dual rather than a single chain of command. Some managers report to two individuals rather than to the traditional single boss. Behaviorally, there is lateral (dual) decision making and a chain of command that fosters conflict management and a balance of power.
Matrix organizations usually contain three key positions, as depicted in Figure 11.6. At the top is the top leadership-the general executive-whose role is similar to that of the CEO in traditional organizations. The matrix managers, who share common subordinates, are located on the sides of the diamond. In an MNC's international operations, one of the matrix managers is likely to be a product-oriented manager and the other an international, regional, or country manager. In a pure matrix organization, matrix managers are fairly equal in power and importance. Jointly, they hammer out business plans and are responsible for meeting the goals set by the top leadership.
Two-boss managers report to both matrix managers, which means that they must learn to accommodate simultaneous-and sometimes competing--demands. The two-boss managers are each responsible at the regional or country level for the normal functions of the business, such as general management, manufacturing, marketing, and finance. Thus, they are each at the apex of their own pyramid, which they manage in traditional ways. The matrix format, therefore, does not affect everyone in an organization; in fact, only a small number of people are affected.
Matrix organization is intended to bring together expertise in geographic, product, and function areas. Decisions are made jointly by representatives from the national offices and function and product representatives from headquarters. Each product or product line is a revenue/profit center; the functional activities of finance, production, and so on are the cost centers. The functional areas sell their services to the profit centers.
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