Multinational companies are faced with two opposing forces when designing the structure of their organization. They are faced with the need for differentiation that allows them to be specialized and competitive in their local markets. They are also faced with the need to integrate. The structures adopted therefore have to find a balance between these opposing needs and also remain in strategic alignment for the company to thrive. Multinational companies have therefore evolved many structural permutations to suit their business needs.
Owning foreign subsidiaries is one of the most basic structural models of a multinational company. The subsidiaries are self-contained units with their own operations, finance and human resource functions. Thus the foreign subsidiaries are autonomous allowing them to respond to local competitive conditions and develop locally responsive strategies. The major disadvantage of this model however is the decentralization of strategic decisions that makes it difficult for a unified approach to counter global competitive attacks.
Organizational structure of the multinational company in this case is developed on the basis of its product portfolio. Each product has its own division that is responsible for the production, marketing, finance and the overall strategy of that particular product globally. The product organizational structure allows the multinational company to weed out product divisions that are not successful. The major disadvantage of this divisional structure is the lack of integral networks that may increase duplication of efforts across countries.
Organization using this model is again divisional in nature, and the divisions are based on the geographical area. Each geographical region is responsible for all the products sold within its region. Therefore all the functional units for that particular region namely finance, operations and human resources are under the geographical region responsibility.This structure allows the company to evaluate the geographical markets that are most profitable. However communication problems, internal conflicts and duplication of costs remain an issue.
Functions such as finance, operations, marketing and human resources determine the structure of the multinational company in this model. For example, all the production personnel globally for a company work under the parameters set by the production department. The advantage of using this structure is that there is greater specialization within departments and more standardized processes across the global network. The disadvantages include the lack of inter department communication and networking that contributes to more rigidity within the organization.
Matrix organizational structure is an overlap between the functional and divisional structures. The structure is characterized by dual reporting relationships in which employees report both to the functional manager and the divisional manager. Work projects involve cross-functional teams from multiple functions such as finance, operations and marketing. The members of teams would report both to the project manager as well as their immediate supervisors in finance, operations and marketing. The advantage of this structure is that there is more cross-functional communication that facilitates innovation. The decisions are also more localized. However there can more confusion and power plays because of the dual line of command.
Evolution of the matrix structure has led to the transnational network. The emphasis is more on horizontal communication. Information is now shared centrally using new technology such as “enterprise resource planning (ERP)” systems. This structure is focused on establishing “knowledge pools” and information networks that allow global integration as well local responsiveness.
Subha Varadan has a bachelor's degree in architecture from India and an M.B.A in finance and supply chain management from California State University East Bay (CSUEB). Varadan won the "Outstanding Graduate Achievement Award " for her M.B.A. She has primarily written on financial topics for Demand Studios from 2008 and has been published on eHow.