Structural Design of Multinational Enterprises(MNEs)

Organizational structure gives the framework or lines of communication, authority, responsibility and accountability. Organizational structure specifies the firm’s reporting relationships, procedures, controls and authority and decision processes. It is a critical component of effective strategy implementation process. Organizational structure provides for specialization and interfaces among specializations for collaborative synergism and competitive dynamism. For Multinational Enterprises(MNEs) deciding the organization structure is very important because it cannot be the same for all units and at the same time cannot be just one design for all. Whatever the design, it must be organic enough to adapt to situations. The structure must have stability to facilitate day to day activities to go on consistently and flexibility to facilitate taking advantage of opportunities that environment throws up.

While it is becoming true that form must follow function, there are some traditional/ classical organizational structures that are followed; besides new structures are experimented with. Multinational Enterprises(MNEs) are having wide options, for different geo-locations may suit/dictate different structures. How much variety? How much uniformity? Variety in which aspects? Uniqueness in which aspects? Where variety? Where uniformity? How is the balance hit upon? These are certain issues that prop up right here. Structural designs are important for MNEs for they affect synergies, cost, control, responsiveness, competitive strength, etc. companies change structures to gain more and mitigate disadvantages.

Organizational structure is a representation of the formal reporting relationships within an organization and its affiliating entities. Organizational structure refers to the way that an organization arranges people and jobs so that its work can be performed and its goals can be met. Organizational structure  is a composite term covering three important aspects namely, differentiation, formalization and centralization.


If we take differentiation alone, there are three dimensions, the horizontal, the vertical and the spatial. Horizontal differentiation arises due to differences in orientation, nature, tasks, skills of the organizational constituents. Vertical differentiation refers to the depth of the structure and the number of hierarchical levels.

Spatial differentiation refers to the geographical spread of an organization. A multi-location, multi-nation organization like an MNE has all the three differentiation. With more locations and distances among them, spatial differentiation increases. Whatever the type of differentiation be, differentiation as a structural factor influences organizational style, culture, climate, decision orientation, etc. Greater the differentiation, greater is the complexity – complexity in communication, conduct, coordination and control of organizational functions. This complexity complicates flow of work and relationships. Size and differentiation go together; Task variety and differentiation go together; so do differentiation and complexity.

Is there a way out? Matrix organization is suggested. The MNE, Johnson & Johnson, USA has proved to the world that size is not the factor that needs extremely differentiated structure, have autonomous units around the globe. Instill the value you cherish among those units and let them have operational freedom. This results in amicable relations and a good performance too. Complex structures, matrix or otherwise, charges the climate with more heat, than light.


The second structural aspect is formalization which refers to the adherence to set rules and procedures. Actually, formalization tries to reduce the complexity and confusion resulting from differentiation referred to above, by prescribing intended behavior on the part of constituents. This helps in knowing and foreseeing behavior of each by all and thereby helps to tuning up one’s own behavior. So, formalization brings about understanding, a factor that positively affects organizational functioning. But, the point is that all organizational functions cannot be formalized; nor such formalization is desirable. Over-done formalization makes the organization more mechanic/ compartmentalized and less organic or social. So, greater the dose of formalization, lesser the degree of adaptability to the emerging business order of extended competition.

Organizational events are diverse and therefore require varying authority, practice, procedure and all, whereas formalization deprives all these and forces only rigidity. Is there a solution? Yes. Instead of specific rules and procedures, the structure should develop alternative approaches from which one can choose the right one or develop a mix as circumstances warrant. This sort of structural pattern gives both direction and freedom and thus creates a congenial climate for the functionaries.


Centralization, namely the degree to which decision making is concentrated at a single or relatively a few points, is another aspect of structure. In a tight-centralized organization more is the degree of concentration of decision-making authority. What is the effect of this? Decisions are taken at points remote to their points of execution. The executives at the task points have to look up for orders and directions. In this sort of situations, the functionaries are reduced to mere media to carryout things, they having nothing to do with any aspect of the things carried out. A situational adaptation may be needed, but there is no way. A kind of ‘militarization or regimental syndrome’ results eventually. In course of time, a detachment sense would prevail in the whole of organization.

Differentiation, formalization and centralization all no doubt give shape, orderliness and uniformity to organizations. But these are not all that always wanted. An over dose of any or all of these structural factors make the structure rigid, mere physical creations devoid of dynamism. If that results, organizations lose their charm, their synergistic effect and their human side. What can managers do about this? Managers generally inherit a certain structure from predecessors. If they find that the structure is rigid the same has to be loosened and if it is too loose it must be tightened a little.

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