Another important role of organization design is to enable the firm to more effectively manage its control function. Control is the process of monitoring ongoing performance and making necessary changes to keep the organization moving toward its performance goals. Control is conceptually similar to a thermostat. A thermostat monitors room temperature and then turns on the cooling or heating system when the actual temperature moves too far from the ideal temperature. When the desired room temperature is reached, the system is turned off until it is needed again.
There are three main levels at which control can be implemented and managed in an international business. These three key levels of control are the strategic, organizational, and operations levels. Although each is important on its own merits, the three levels also are important collectively as an organizing framework for managers to use in approaching international control from a comprehensive and integrated perspective.
Strategic Control
Strategic control is intended to monitor both how well an international business formulates strategy and how well it goes about implementing that strategy. Strategic control thus focuses on how well the firm defines and maintains its desired strategic alignment with the firm’s environment and how effectively the firm is setting and achieving its strategic goals. For example, a few years ago Germany’s largest automobile manufacturer, Daimler-Benz, bought Chrysler, the third largest automaker in the United States. At the time this decision seemed very logical. For instance, managers believed that the firms could learn from each other, that their existing product lines and organizational strengths complemented one another, and that the combined firm would be able to compete more effectively in global markets with other behemoths such as General motors, Ford, and Toyota. As it turned out, though, this ended up being a poor strategic decision. The anticipated synergies and efficiencies could never be achieved and so Chrysler was subsequently sold to a group of private investors.
Strategic control also plays a major role in the decisions firms make about foreign-market entry and expansion. This is especially true when the market holds both considerable potential and considerable uncertainty and risk. For example, in the wake of India’s overtures for foreign direct investment, many firms are expanding their operations in that country. Hindustan lever, Unilever’s Indian subsidiary, has increased its capacity for soap and detergent manufacturing and launched new food-processing operations as well. These steps represent a strategic commitment by the firm to the Indian market. As this strategy is implemented, strategic control systems will be used in making decisions about future operations there. If opportunities in the Indian market continue to unfold, Unilever no doubt will continue to expand. However, if uncertainty and risk become too great, the firm may become cautious, perhaps even reversing its expansion in India.
Often the most critical aspect of strategic control is control of an international firm’s financial resources. Money is the driving force of any organization, whether that money is in the form of profits or of cash flow to ensure that ongoing expenses can be covered. Moreover, if a firm has surplus revenues, managers must ensure that those funds are invested wisely to maximize their payoff for the firm and its shareholders. Thus it is extremely important that an international firm develop and maintain effective accounting systems. Such systems should allow managers to fully monitor and understand where the firm’s revenues are coming from in every market in which the firm operates, to track and evaluate all its costs and expenses, and to see how its parts contribute to its overall profitability.
Poor financial control can cripple a firm’s ability to compete globally. For example, Mantrust, an Indonesian firm, bought Van Camp Seafood, packager of Chicken of the Sea tuna, for $300 million. Most of that money was borrowed from Indonesian banks. Mantrust’s owner was unskilled at managing debt, and the firm had difficulties making its loan payments. Both Mantrust and Van Camp struggled for years until Mantrust sold van Camp to Tri-Union Seafood, a limited partnership owned by investors in the United States and Thailand.
Financial control is generally a separate area of strategic control in an international firm. Most firms create one or more special managerial positions to handle financial control. Such a position is usually called controller. Large international firms often have a corporate controller responsible for the financial resources of the entire organization. Each division within the firm is likely to have a divisional controller who is based in a country where the division operates and who oversees local financial control. Divisional controllers usually are responsible both to the heads of their respective divisions and to the corporate controller. These control relationships are managed primarily through budgets and financial forecasts.
A special concern of an international controller is managing the inventory of various currencies needed to run the firm’s subsidiaries and to pay its vendors. For example, Coca-Cola has to manage its holdings of over 150 currencies as part of its daily operations. Each foreign subsidiary of an international firm needs to maintain a certain amount of local currency for the subsidiary’s domestic operations. Each also needs access to the currency of the parent corporation’s home country to remit dividend payments, reimburse the parent for the use of intellectual property, and pay for other intracorporate transactions. The subsidiary further must be able to obtain other currencies to pay suppliers of imported raw materials and component parts as their invoices are received.
Given the possibility of exchange rate fluctuations, the controller needs to oversee the firm’s holdings of diverse currencies to avoid losses if exchange rates change. Many multinational corporations (MNCs) centralize the management of exchange rate risk at the corporate level. However, other, such as the Royal Dutch/Shell Group, allow their foreign affiliates to use both domestic and international financial and commodity markets to protect the affiliates against exchange rate fluctuations. Firms that decentralize this task need to maintain adequate financial controls on their subsidiaries or face financial problems. For example, a few years ago Shell’s Japanese affiliate reported a loss of over $i billion. Clearly, Shell’s internal controls had broken down and failed to detect the speculative activities. As a result, corporate officials implemented new procedures and tighter controls to better manage the firm’s financial resources.
Another type of strategic control that is increasingly important to international firms is control of joint ventures and other strategic alliances. Strategic alliances, particularly joint ventures, are being used more often by, and becoming more important to, international firms. It follows that strategic control systems also must account for the performances of such alliances. By definition a joint venture or other strategic alliance is operated as a relatively autonomous enterprise; therefore, most partners agree to develop an independent control system for each alliance in which they participate. The financial control of these alliances then becomes an ingredient in the overall strategic control system for each partner’s firm. That is, the alliance maintains its own independent control systems, but the results are communicated not only to the managers of the alliance but also to each partner.
Organizational Control
Organizational control focuses on the design of the organization itself. As discussed earlier, there are many different forms of organization design that an international firm can use. However, selecting and implementing a particular design does not necessarily end the organization design process. For example, as a firm’s environment or strategy changes, managers may need to alter the firm’s design to better enable the firm to function int eh new circumstances. Adding new product lines, entering a new market, or opening a new factory-all can dictate the need for a change in design.
The most common type of organizational control system is a decentralized one called responsibility center control. Using this system, the firm first identifies fundamental responsibility centers within the organization. Strategic business units are frequently defined as responsibility centers, as are geographical regions or product groups. Once the centres are identified, the firm then evaluates each on the basis of how effectively it meets its strategic goals. Thus a unique control system is developed of each responsibility center. These systems are tailored to meet local accounting and reporting requirements, the local competitive environment, and other circumstances.
Nestle uses responsibility center control for each of its units, such as Poland Spring, Alcon Labs, and Nestle-Rowntree. These subsidiaries regularly provide financial performance data to corporate headquarters. Managers at Poland Springs, for example, file quarterly reports to Nestle headquarters in Switzerland so that headquarters can keep abreast of how well its U.S subsidiary is doing. By keeping each subsidiary defined as a separate and distinct unit and allowing each to use the control system that best fits its own competitive environment, corporate managers in Switzerland can see how each unit is performing within the context of its own market. Each report must contain certain basic information, such as sales and profits, but each also has unique entries that reflect the individual subsidiary and its market.
A firm may prefer to use generic organizational control across its entire organization; that is, the control systems used are the same for each unit or operation, and the locus of authority generally resides at the firm’s headquarters. Generic organizational control most commonly is used by international firms that pursue similar strategies in each market in which they compete. Because there is no strategic variation between markets, responsibility center control would be inappropriate. The firm is able to apply the same centralized decision making and control standards to the strategic performance of each unit or operation. Moreover, international firms that use the same strategy in every market often have relatively stable and predictable operations; therefore, the organizational control system the firms use also can be relatively stable and straightforward. For example, United Distillers PLC markets its line bourbon products in the United States, Japan, and throughout Europe. Because the product line is essentially the same in every market and the characteristics of its consumers vary little across markets, the firm uses the same control methods for each market.
A third type of organizational control, which could be used in combination with either responsibility center control or generic organizational control, focuses on the stratefic planning process itself rather than on outcomes. Planning process control calls for a firm to concentrate its organizational control system on the actual mechanics and processes the firm uses to develop strategic plans. This approach is based on the assumption that if the firm controls its strategies, desired outcomes are more likely to result. Each business unit may then concentrate more on implementing its strategy, rather than worrying as much about the outcomes of that strategy.
Nortel Networks uses this approach for part of its organizational control process. Whenever a unit fails to meet its goals, the head of that unit meets with the firm’s executive committee. The meeting focuses on how the original goals were set and why they were not met. Throughout the meeting the emphasis is on the process that was followed that led to the unsuccessful outcome. The goal is to correct shortcomings in the actual process each unit uses. For example, a unit might have based is unmet sales goals on outdated market research data because there were insufficient funds for new market research. Planning process control would focus not on correcting the sales shortfall but on enabling more accurate forecasting in the future.
There are clear and important linkages between strategic control and organizational control in an international firm. When a firm adopts a centralized form of organization design, strategic control is facilitated as a logical and complementary extension of that design. When a firm uses a decentralized design, strategic control is not as logically connected with that design. A decentralized design gives foreign affiliates more autonomy and freedom while making it more difficult for the parent to maintain adequate control. The challenge facing managers of the parent is to foster the autonomy and freedom that accompany a decentralized design while simultaneously maintaining effective parent control of operating subsidiaries.
For a large international firm organizational control must be addressed at multiple levels. At the highest level the appropriate form of organization design must be maintained for the entire firm. At a lower level the appropriate form of organization design must be maintained of each subsidiary or operating unit. The firm also must ensure that theses designs mesh with each other.
Operations Control
The third level of control in an international firm is operations control. Operations control focuses specifically on operating processes and systems within both the firm and its subsidiaries and operating units. The firm also may need an operations control system for each or its manufacturing facilities, distribution centers, and administrative centers.
Strategic control often involves time periods of several years, while organizational control may deal with periods of a few years or months. Operations control, however, involves relatively short periods of time, dealing with components of performance that need to be assessed on a regular-perhaps daily or even hourly-basis. An operations control system is also likely to be much more specific and focused that strategic and organizational control systems.
For example, a manufacturing firm may monitor daily output, scrappage, and worker productivity within a given manufacturing facility, while a retail outlet may measure daily sales. A firm that wants to increase the productivity of its workforce or enhance the quality of its products or services primarily will use operations control to pursue these goals. Operations control usually focuses on the lower levels of a firm, such as first-line managers and operating employees.
Consider Aldi, a German grocery chain. Although people in the United States are used to sprawling, full-line supermarkets that carry everything from apples to zippers, typical European grocery stores tend to be smaller and less service oriented, to carry fewer productions control system that relies heavily on cost control and efficiency. Aldi stores do not advertise or even list their numbers in telephone directories. Products are not unpacked and put on shelves but instead are sold directly form crates and boxes. The no-frills stores are also usually located in areas where rents are low. Customers bring their own sacks (or pay Aldi 5c each for sacks), bag their own purchases, and rent shopping carts for 25c (refunded if the customer returns the cart to the storage rack). Aldi does not accept checks or coupons and provides little customer service, but this austere approach allows the firm to charge rock-bottom prices. Aldi has effectively transferred its control methods to its U.S operation. The result? Aldi’s net profit margins and sales per square foot in the United States are about double the industry norm with over 800 stores operating in 27 U.S. states (primarily from Kansas to the east coast), Aldi has become one of the country’s most profitable grocery chains.
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