Organizational structures of international companies

Network structures of multinational organization vary greatly depending on the industry and the overall organization’s strategy. In general, the structures of any organization can be conceptually functional, product oriented, matrix or flat. In functional structures, hierarchical relationships between employees are formed according to their functions, for example, subordinates to the chief executive officer are the production department, marketing department, sales department, each of which has its own manager, for example, vice president for production, vice president for marketing, vice president for sales (Baligh, 1994). In product or project structures, the chief executive officer subordinated the managers of individual products or projects, who manage departments, for example, in an electronics industry it would be the household appliances department, and the mobile phone department. This division is also called linear, and each product is called a business line there. Matrix structures are essentially a hybrid of functional and product-based structures that include both functional managers and product or project managers.

Ex. 11‑10 Four main typical structures of any organization

Keywords: organizational structure, function, product, matrix

In a matrix structure, functional department heads assign their subordinates to specific product or project manager requests and jobs. Matrix structures ensure better cooperation between product managers and functional managers, achieving greater synergy from sales, marketing, production and other functions. The fourth organizational structure is called flat, it avoids multi-level hierarchical relationships, and employees are accountable to the head of the organization.

However, this system only works in companies of limited size, but it is hard to imagine in an organization with thousand employees. It is considered that one manager can have up to seven employees under him, if there are more employees, then the manager not only will not be able to allocate the necessary time to everyone, delegate tasks, but also may not know everyone if it is a large organization. These main four structures (Exhibit 11-10) are suitable and more or less enough for any organization operating in same country, but if it is multinational and operates as a network of related firms at global level, these four types are not sufficient, because the factor of different countries comes into picture, which create value differently in product development, product production and product distribution as it depend on the industry and the business concept.

In addition to these four organizational structures, process-based (Vanhaverbeke & Torremans, 1999), circular and other specific structures are also sometimes used. In industries where production is more centralized and distribution is complex due to the wide assortment, decentralization of distribution functions to individual regions or countries is very important. In industries that require narrow and specific specialization in the production or services process, factories are often located in the most suitable countries, so the structure is more product-based.

Six types of international organizational structures can be identified:

• Structure of internationalized functions.
• Structures of internationalized industries/product lines.
• Structures of the separated international sales department.
• Structures of the separated international supply unit.
• Absolute internationalization.
• Hybrid structure.

The structure of internationalized functions is focused on the fragmentation and delegation of function to a specific region or country (Exhibit 1-11). In this case, the main functions of the entire multinational organization, such as production and sales, are separated into different departments, and they are led by vice presidents under the chief executive officer. Vice-presidents act also as the chief officers of these functions for the entire network of organizations. So, to the vice president for marketing or sales reports directly the heads of functional regional divisions, in this case it may be the marketing manager for Europe, the marketing manager for Asia. The most common further geographical division of functional management is organized usually by continent, by region or by country. However, the chief marketing officer of the entire international network could hardly manage the marketing managers of a hundred countries, so only in countries with a very large market is common to find country-level marketing managers reporting directly to the chief marketing officer, who is vice-president of entire multinational organization.

As consequence, regional divisions such as Northern Europe, Central and Eastern Europe are quite common for in global structures. Thus, the marketing manager is responsible for sales in Central and Eastern Europe, takes care of sales and advertising specifically for this region, and at the same time reports directly to the chief marketing officer of entire multinational organization. Organizing marketing, sales, distribution in this way makes sense, because due to the diversity of cultures, these functions have to be adapted to the needs, attitudes, traditions and even values of a specific cultural cluster, which are examined in chapter 9. Thus, advertising and distribution approaches and techniques for the same product may differ between the US and the Arab cultural cluster market. Very often, people who are native of cultural cluster are appointed as managers of the functional-regional division, so they know the market and its needs better, as well as all the details and peculiarities that can lead to sales success or failure.

Ex. 11‑11 Structure by internationalized functions

Keywords: function, structure

In certain industries, there are other functions that can be equally important as production and sales; they are research and development, innovation and new product development. Some organizations consider it as a part of manufacturing, but with the increasing customization of products and to meet the specific needs of consumers, in some industries the role of the sales department is very important for research and development and new product development. Thus, while framing organizational structures and subordinate hierarchies, it is important to ensure horizontal connections between departments, especially at the level of information exchange. Thus, the marketing functional unit operating in a certain country can form specific tasks for production to adapt the product exactly to the needs of buyers in that country.

Ex. 11‑12 Structure by internationalized industries / products

Keywords: industry, product, structure

This scheme is quite popular in industries where the same marketing, sales or distribution department can successfully offer different products and the differences between the products are not very significant. Thus, manufacturer of computers, smart phones and domestic electric appliances may have a sales department for a specific region, and it will handle sales for all product lines in this region. A car manufacturer also often organizes activities by having sales, marketing or distribution departments for a specific region.
If the multinational organization produces highly diversified products, such as airplanes, automobiles and electrical engineering equipment, then structuring according to the internationalization of functions is very rare. The same sales, marketing or distribution department could hardly distribute cars, wind turbines and airplanes efficiently. Therefore, product- or industry-based internationalization organizational structures are more often used in this type or common cases.

Structures based on internationalized industries/product lines are used in cases where the scope of activities and the scope of industries of a multinational organization are very broad (Exhibit 1-12). Very often, the head of the entire multinational organization has deputy vice presidents responsible for the entire industry, and each vice president organizes the industry’s research and development, production, and sales of the industry at his own discretion. It is not uncommon for different industries of the same multinational organizations to be based in different countries. A vice president for a specific industry or product has the authority to organize functions in a way that is most beneficial for that particular industry.

Ex. 11‑13 Structure by internationally separated sales unit

Keywords: sales unit, structure

Thus, for instance a vice-president of a wind turbine manufacturing business line may delegate his sales functions to regions differently than a vice-president of an automobile manufacturing business line. Due to very different market segments, it is quite difficult for different industries and very different products to achieve synergies by operating in the same countries or regions.

Structures of a separate international sales unit are typical of those multinational organization that are strongly based on home country business – local production or sales in the local market (Exhibit 1-13). This is also typical of organization in the early stages of internationalization and this structure acts as a transitional one. When an organization concentrates research and development and production in its home country and starts international expansion, the first step is often the establishment of an international division, which is often called as an export division. The United States and United Kingdom often use the “overseas division” name because they consider exports to be “overseas trade”. Thus, an organization with a product/project-based structure establishes an international department, which is responsible for the export of all products – marketing, distribution and sales abroad.

Ex. 11‑14 Structure by internationally separated supply unit

Keywords: supply unit, structure

The structures of a separate international supply unit are similar to those of a separate international sales unit, but the task of the international unit is to ensure the supply of certain components or raw materials necessary for production (Exhibit 1-14). For example, the vice president of an international supply division of a car manufacturer may be in charge of component production units in different countries, producing brake parts in one country and electronic parts in another country.

Ex. 11‑15 Structure by absolute internationalization

Keywords: internationalization, structure

However, when it comes to the structures of international companies, it is very important to mention that companies decide whether to procure components from their controlled subsidiaries in foreign countries, or to procure them from a non-equity vertical alliance partner that specifically manufactures these components according to a long-term contract. Another aspect is the dynamics of such structures, as they change depending on the organization’s strategy.
Formerly independent suppliers are sometimes acquired and become a structural part of the multinational organization. For a multinational organization to be able to supply itself with all the necessary components, a hybrid system is usually used, where some of the suppliers are subsidiaries are located abroad, and few of the suppliers are independent.
The assembling of the final product and the manufacturing of components are usually low value-added businesses, and the highest value creation is created in such activities as research and development and branding, as well as in marketing, sales and distribution. This leads to multinational organizations striving to maintain high quality activities in their structure and ownership. Manufacturing and assembly abroad is usually outsourced to a non-equity alliance partner or an independent contract manufacturer.
The structure of absolute internationalization is designed in such a way that the heads of structural divisions located in individual continents, regions or countries report to the chief executive officer of the entire multinational organization (Exhibit 1-15). Thus, at the primary level of the hierarchy, the separation is only geopolitical and the division into more detailed functional or product or project units are made in each country, region or continent afterwards. This type of structure is very common in the service sector; this is how international consulting companies, international audit companies, and law firms operate. The common feature of these businesses is that production and sales are usually carried out in the same country, and it is hardly possible to separate individual functions into individual countries.