Global organizational structures: product, geographic, functional, and customer models

International Organizational Structures

Companies engaging in global business ideally adopt business structures/models that give a significant competitive edge over other worldwide companies. Four of the major structures/models employed globally focus on Product, Geographic Area, corporate Functions or specific Customer groups (also known as "verticals"). Research shows that specific business adopt one or more of these models based on corporate circumstances and with varying degrees of success.

Global Product Structure/Model and Example

Global Product Structure configures business divisions along product lines. Allowing each division manager to handle all aspects of production and distribution for his/her division's product, the system also makes the product division manager fully responsible for worldwide success of his/her division's product. Global Product Structure is a commonly used framework because it provides several key advantages, given here in no particular order of importance. First, by controlling all functions of production and distribution for his/her product, the division manager is better able to quickly see and handle that division's unique international opportunities and problems. Secondly, this framework gives top corporate managers an extensive perspective on global competition, allowing the corporation to quickly respond to worldwide market dynamics. Third, this configuration allows an international company, particularly one dealing in global production and sale of standard products in all markets, to standardize production, marketing and advertising and achieve cost advantages through their expansion ("economies of scale"). There are some significant drawbacks to the Global Product Model: separate product divisions within a corporation may compete rather than cooperate with each other; since the division manager is responsible for all aspects of production and distribution, he/she may disregard or under-regard some countries (Daft, 2009, p. 220).

One international corporation using the Global Product Structure is Eaton Corporation. Founded more than 100 years ago, Eaton Corporation is a diversified power management corporation employing approximately 73,000 people, doing business in 150+ countries, and reporting sales of $16.0 billion in 2011. Eaton boasts an extensive energy-related product line, including but not limited to: electrical and hydraulic components, systems and services; aeronautic fuel, hydraulics and pneumatic systems for commercial and military customers; and drivetrain and powertrain systems for trucks and automobiles (Eaton Corporation, 2012). Eaton maintains separate groups (divisions) for such products as automotive components and/or electrical components and each group is responsible for global manufacture/sale of its product line (Daft, 2009, p. 220). Eaton chose the Global Product Structure because the company deals in worldwide production and sale of standard electrical, hydraulic, aeronautic, automotive and truck products across the globe. The Global Product Structure allows Eaton to standardize its production, marketing, advertising and distribution of its products worldwide. Eaton counteracts and neutralizes the possible problems of the Global Product Structure in its international markets by using regional coordinators who: enhance cooperation in manufacture and distribution across product groups throughout their regions, ensure that countries across their regions are included, and answer directly to Eaton's vice president of its international division (Daft, 2009, p. 220).

Global Functional Structure/Model and Example

The Global Functional Structure divides business activities according to specialization, with a sales department engaging only in sales activities, an engineering department that only engages in engineering activities, and a marketing department that engages only in marketing activities, for several examples. Within this Global Functional Framework, processes are significantly standardized and authority is concentrated at the top of the company, with each department ultimately reporting to top management (Accounting CPE, 2012). Larger companies tend to use Global Functioning Structure due to volumes of sales and production so large that this structure is far more efficient than other Models. The most effective situations for the Global Functional Framework involve: large volumes of standardized products/service and large fixed asset bases; relatively little change in the industry; minimal new product lines and minimal changes based on fashion, taste or technology; competition based primarily on cost (Accounting CPE, 2012). The Global Functioning strategy is advantageous in that: allowing a division's concentration on one specialty significantly increases efficiency in that specialty, as the process flow and management focus on the most effective methods for that specialty; there is a clear chain of command, allowing individuals in the company to know which decisions they may make and which decisions require supervisory guidance; career paths and progress are more easily set and monitored; employees allowed to specialize can develop into extraordinarily strong experts in that area; employee training is more easily developed and monitored (Accounting CPE, 2012). The Global Functional Framework is disadvantageous in that: modifications for changing market conditions may be more slowly facilitated; processes involving multiple divisions may be slowed due to the unique processes within each division; it is more difficult to pinpoint problems within a division when the entire division is involved in all its processes; there may be poor communication between specialized divisions; it is difficult for specialists in a somewhat isolated division to see the company's "big picture." (Accounting CPE, 2012).

An example of a company using the Global Functioning Framework was NetLogic Microsystems, purchased in 2011 by Broadcom (Murph, 2011). NetLogic Microsystems was organized according to specialized processes within the company, with a clear chain of command from: the board of directors at the top; to the CEO; to vice presidents in charge of product development, business development and operations, marketing, sales, systems architecture and the chief financial officer; the director of manufacturing operations and the director of intellectual property management and legal affairs, both of whom reported to the vice president of business development and operations; a controller who reported to the chief financial officer (Czinkota & Ronkainen, International Marketing, 2007, p. 221). Dealing in "knowledge-based processors, multi-core embedded processors, and digital front-end processors" (Murph, 2011), NetLogic Microsystems was able to take full advantage of the Global Functional framework because it manufactured and sold large volumes of processors with relatively little change in the industry, minimal changes in the technology and its competition was based primarily on cost. NetLogic Microsystems employed the Global Functioning Model so well that it was purchased for $3.7 billion in cash by a corporation that was intent on readily absorbing NetLogic's critical product lines into its own product offerings.

Global Customer Structure/Model and Example

The Global Customer Structure is employed by companies dealing with distinct customer groups stretching across the globe (Czinkota & Ronkainen, 2007, p. 218). Though the company's products may be identical or similar for all groups, the selling/buying processes for these groups are so unique to each group that corporations develop a specialized division for selling to each group (Czinkota, Ronkainen, & Moffett, Fundamentals of international business, 2008, p. 310). These groups may be divided along consumer/business/government lines (Czinkota, Ronkainen, & Moffett, Fundamentals of international business, 2008, p. 310) and/or industry lines such as automotive/printing/mining industries (Hisrich, 2010, p. 200) with each customer group being called a "vertical." An example of differentiation in buying can be found in private industry vs. government groups. The government tends to buy through soliciting and accepting proposed bids, often emphasizing lower cost and government-required specifications, criteria which is often distinct from the requirements of private industry buyers. To that end, company divisions dealing with the government-as-consumer, for example, will employ specialists in the area of properly manufacturing and submitting proposals for government customers. The advantage of this configuration is that these specialized divisions can become easily conversant with the specific needs and requirements of the division's customer group. The disadvantages of this framework is: it adds layers of management in order to sometimes redundantly deal with the same issues within different divisions and, therefore also increases cost structure of the company; it decreases local accountability as each division pursues its customer group worldwide; it slows the introduction of new research and development due to the complexity of the company structure (Ainsworth & Shact, 2011, p. 8).

An example of a company that used but eventually abandoned the Global Customer Structure is Xerox. Established approximately 70 years ago (Xerox, 2012), Xerox manufactured for and sold to several distinct global customer groups, such as private industry and the government. In an effort to cater to distinct buying patterns of its many customer groups, Xerox adopted a Global Customer Structure, delegating pricing and sales decisions to global teams focused on specific customer groups or "verticals." Unfortunately, the increased layers of middle management, lack of local accountability and slowness of introducing new R&D to these specialized sales teams added significant expense and was otherwise leading to the downfall of Xerox. Consequently, Xerox abandoned its Global Customer Structure and opted for a "Country Structure" that strikingly simplified the company's structure, eliminated layers of middle management, shifted more decision-making to top management, cut almost $1 billion from Xerox's cost structure in approximately 2 years, increased local accountability and hastened the switch from analog to digital products, which reportedly turned Xerox around (Ainsworth & Shact, 2011, p. 8). In sum, though the Global Customer Structure once served Xerox's legitimate business purchases, that framework was eventually leading to Xerox's downfall and was wisely abandoned for a simpler, more efficient, less costly framework.

Conclusion

In an effort to effectively globally compete, companies have adopted structures or models including but not limited to: Global Product Structure/Model; Global Area Structure/Model; Global Functional Structure/Model; and Global Customer Structure Model. The Global Product Structure/Model used by Eaton Corporation, for example, configures business divisions along product lines, allowing each division manager to handle all aspects of production and distribution for his/her division's product. The Global Area (or "Geographic") Structure Model employed by Nestle, for example, is designed for emphasis on serving needs of local or regional markets with multiple domestic strategies. The Global Functional Structure/Model once followed by NetLogic Microsystems, for example, divides business activities according to specialization. Finally, the Global Customer Structure/Model once used by Xerox, for example, focuses on distinct customer groups with unique buying processes. Just as research shows the advantages and disadvantages of each Structure/Model, it also shows that changing external and internal conditions have sometimes forced companies to shift from one model to another in order to sharpen a competitive edge and survive.