CHAPTER THREE GLOBAL

ORGANIZATION, COORDINATION AND CONTROL

INTRODUCTION
♦ In this chapter we outline how strategic change is reflected in changes to the
firm's organizational structure and control system.
♦ The accounting and information systems of a firm, in turn, are presented as an
integral part of the firm's control system.

ORGANIZATIONAL STRUCTURE
♦ The managerial challenge of the 21st century is to co-ordinate the
growing network of interdependent international activities.
♦ There are two major classifications of mechanisms for coordinating activities in
MNEs:
• structural and formal mechanisms; and
• informal and subtle.
♦ In practice, control is shifting from the formal to the more informal
ways of co-coordinating activities.
♦ We will now outline how a firm’s organizational structure is likely to
develop as it changes the nature of its global business.

Stages of Development I– Domestic Group

♦ The typical MNE starts as a purely domestic firm involved in export
activities in the form of occasional, unsolicited orders from foreign buyers.
♦ In this domestic frame the firm no one in the purely domestic company
has much, if any, knowledge about exporting therefore external experts, such
as export management companies and freight forwarders, are used to
develop an export strategy.
♦ As exports grow in volume, the use of external experts can become
increasingly expensive, and the firm may, decide to internalize the export
activities by hiring new personnel for what becomes an export department
see Figure 3.1.
♦ As foreign market opportunities and sales increase, this export group
grows, commensurately in size and sophistication and several internal
problems occur:
 Who is responsible for exports?
 Does the export group only advise domestic divisions, or is it empowered
to make commitments? Export group may therefore need to rely on the
product and technical expertise of the larger domestic divisions, which
puts strain on the domestic staff
 There may be disputes over production allocation, scheduling, product
adaptations, and transfer pricing.

Stage II - International Division Structure

♦ As exports grow it often becomes advisable to establish foreign production
facilities.

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 ♦ Many of the previous disputes over production allocation, scheduling,
product adaptations, and transfer pricing diminish because previous export
markets are now served by foreign rather than domestic production.
♦ There are new problems of responsibility and control.
 someone or some group must take responsibility for the growing foreign
operations,
 control becomes more difficult because changes occur in at least two
operating environments (domestic and foreign).
♦ Typically, international division replaces the old export division. See
Figure 3.2.

Stage III- Global Structure

♦ To minimize conflicts and potential sub-optimization, in Stage III a firm typically
undergoes a major reorganization, adopting a global product structure or global
geographic structure (see Figures 3.3 and 3.4).
• In the global product structure;
 Previous distinctions between domestic and international divisions are
eliminated.
 Product division managers are given responsibility and control over the
worldwide production and sale of their products.
• In the global geographic structure, existing domestic and international
operations become part of one of several geographic divisions.

Stage IV – Global Matrix

To better co-ordinate and control global operations, still another organizational
structure emerged - that of the global grid/matrix structure (see Figure
3.5).
In this three-dimensional structure, product divisions, geographic areas, and
functional areas share power and responsibilities.
However, the matrix has not turned out to be the solution to organization dilemmas.
Part of the reason may be that the solution to the organizational dilemma is more
complex than organizational structure; it involves the attitude toward the
role between the parent company and the different affiliates worldwide
(the centralization /decentralization dilemma) as well as the frame of
mind of top management (the informal and subtle mechanisms).
These organizational issues strongly influence the managerial accounting system of
the firm, including:
the nature of the information system
the establishment of accounting policies,
the internal controls established to ensure compliance and the evaluation of the
performance of foreign operations and their managers.
the attitude toward the role between the parent company and the different
affiliates worldwide (the centralization /decentralization dilemma)
the frame of mind of top management (the informal and subtle mechanisms)

CENTRALIZATION VERSUS DECENTRALIZATION

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• In addition to the base structural issues in designing a global organization,
a company must decide to what extent:
o decision making should be held in a few key centers
(centralized) or
o distributed to a large number of business units (decentralized)
• The problem with centralization versus decentralization is that the very
terms connote a mutually exclusive situation decision-making must be either
centralized or decentralized. However, the global environment is too complex
for such a simple dichotomy.
• The relationship between multi-domestic/global dichotomy and
centralization/decentralization is that as a company becomes more global, the
emphasis shifts toward greater centralization.
• However this is not a given: you may wish to compare
o the fairly centralized US firm Procter and Gamble (www.pg.com)
and
o the much more decentralized Anglo-Dutch firm Unilever
www.unilever.com.

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 ♦ Bartlett and Ghoshal (1989) identify three global imperatives that
influence organizational structure and the organizational culture of the firm.
These are :
 Forces for global integration: to local differences for efficiency.
 Forces for local differentiation: require responsiveness to local differences
including
♠ National and local government interference
♠ different market structures and
♠ consumer preferences require closer attention.
 Forces for worldwide innovation: to local differences for learning.

♦ The problem for firms is that they need to deal with all three imperatives rather
than focus on just one.
• For example, it is possible for a company to have to focus on integrating
some areas while still needing to be responsive to different markets in
different countries.

♦ Bartlett and Ghoshal (1989) believe that firms need to move to a transnational
strategy rather than a multi-domestic or global strategy to deal most effectively
with the three imperatives just described.
• In this approach, corporate assets are dispersed, interdependent, and
specialized.
• This contrasts with multi-domestic companies, which are decentralized and
independent, or global companies which are highly centralized and globally
scaled.

FIRM STRUCTURE AND THE ACCOUNTING FUNCTION

Centralization, Strategy and the Accounting Function
♦ Accounting and control derive their value from what they can provide to the
firm's strategy,
♦ Accounting and control systems are also affected by the structure of the firm.
 For example, the degree of centralization may also affect the nature of
the accounting and control function.
 Multi-domestic firms face local differences in environmental constraints
that require that they adapt to the way business is done, control systems
at each subsidiary may be quite different from the parent company or
subsidiaries in other countries.

Informal vs. Formal Controls

♦ The key to informal internal control is to develop a corporate culture that allows
the firm to be competitive globally.
♦ Three key methods used by successful managers to develop a global orientation
are the following:
 Develop and communicate a clear and consistent corporate vision.
 Manage human resource tools effectively to broaden individual
perspectives and develop identification with corporate goals.
 Integrate individual thinking /activities into a broad corporate agenda
by co-option

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♦ These rules are as true in accounting as they are in marketing or any other
function.
♦ Accountants need to understand the information needs of the MNE to avoid the
narrow parent company perspective so common in globally centralized firms.

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 MANAGEMENT INFORMATION SYSTEMS AND THE GLOBAL FIRM

♦ A rapidly emerging field is electronic data interchange (EDI).

 EDI is the movement of business data electronically between or within
firms (including their agents or intermediaries) in a structured, computer
processable data format.
 EDI involves the direct transmission of data between firms.
 EDI permits data to be transferred without re-keying from a
computer-supported business application in one location to a
computer-supported business application in another.
♦ Developments in information technology are dramatically affecting the speed
and form in which information is transmitted:
• As well as communications with the outside world, the Internet is also being
used for internal corporate communications.
 For Example >>> Price Waterhouse Coopers, a global audit firm, uses
Lotus Notes® to permit several offices to work on a single set of audit
documents.
♦ However, the Internet has been slow to penetrate developing countries because
telephone lines there are too rare, unreliable, and expensive to support the
high-speed communication demanded by Internet applications.

Theories and Realities of Global Information Processing

♦ Egelhoff (1991) identifies four dimensions or types of information processing
that are relevant for MNEs:
• Routine: Inputs are frequent and homogeneous.
 It is appropriate to have rules and programs, standard operating
procedures, and so on.
• Nonroutine: This type of information is relatively unique and infrequent.
• Sequential: Information flows in a predetermined direction across parties to
an information-processing event.
• Reciprocal: Information flows back and forth between parties in a kind of
give-and-take manner not previously determined.

♦ In general, accounting information for MNEs tends to be relatively routine and

sequential.
♦ The key is to figure out how to share information across organizational lines
internationally.
♦ Drawing on the work of Bartlett and Ghoshal (1989) we pointed out that in
approaching the global market firms can adopt a transnational or decentralized
(multi domestic) approach.
• MNE’s that follow a multi-domestic approach tend not to integrate their IT
platforms to the same extent as firms that have a more global orientation.
• MNEs that follow Bartlett and Ghoshal (1989)'s transnational model tend to
be more interactive.
 This implies a flow of information that is more reciprocal than sequential,
a situation especially common in the budgeting process.
MNEs and Trans-border Data Flows

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♦ The free flow of information across national borders is vital to the
successful operation of an MNE’s management information system (MIS) and,
by extension, the operation of the MNE itself.
♦ To MNE’s the management of this information flow is as important as
the management of company assets and production.
♦ Governments also affect the flow of information through the
infrastructure of the Information Superhighway and regulation.
♠ It doesn't make sense for companies to invest millions of dollars to
establish an internal network that combines data, video and voice
communications when the system grinds to a halt outside the building.
♠ Foremost among the many concerns of nation-states over trans-border
data flows (TBF) are privacy, economics, and national security.
♠ Some governments have sought to force MNE’s restrict TBF.