Question: David Javier was reviewing the consulting firm’
David Javier was reviewing the consulting firm’s proposed changes in organization structure for Rhinebeck Industrial (RI). As Javier read the report, he wondered whether the changes recommended by the consultants would do more harm than good for RI. Javier had been president of RI for 18 months, and he was keenly aware of the organizational and coordination problems that needed to be corrected in order for RI to improve profits and growth in its international businesses.
Company Background
Rhinebeck Industrial was started in the 1950s in South- ern Ontario, Canada, by Robert Rhine, an engineer who was an entrepreneur at heart. He started the business by first making pipe and then glass for industrial uses. As soon as the initial business was established, however, he quickly branched into new areas such as industrial sealants, coatings, and cleaners, and even into manufacturing mufflers and parts for the trucking industry. Much of this expansion occurred by acquiring small firms in Canada and the United States during the 1960s. RI had a conglomerate-type structure with rather diverse subsidiaries scattered around North America, all reporting directly to the Ontario headquarters. Each subsidiary was a complete local business and was allowed to operate independently so long as it contributed profits to RI.
During the 1970s and 1980s, the president at the time, Clifford Michaels, brought a strong international focus to RI. His strategy was to acquire small companies worldwide with the belief that they could be formed into a cohesive unit that would bring RI synergies and profits through low cost of manufacturing and by serving businesses in inter- national markets. Some of RI’s businesses were acquired simply because they were available at a good price, and RI found itself in new lines of business such as consumer products (paper and envelopes) and electrical equipment (switchboards, light bulbs, and security systems), in addi- tion to its previous lines of business. Most of these prod- ucts had local brand names or were manufactured for major international companies such as General Electric or Corning Glass.
During the 1990s, a new president of RI, Sean Rhine, the grandson of the founder, took over the business and adopted the strategy of focusing RI on three lines of business—Industrial Products, Consumer Products, and Electronics. He led the acquisition of more international businesses that fit these three categories and divested a few businesses that didn’t fit. Each of the three divisions had manufacturing plants as well as marketing and distribution systems in North America, Asia, and Europe. The Industrial Products division included pipe, glass, industrial sealants and coatings, cleaning equipment, and truck parts. The Electronics division included specialty light bulbs, switchboards, computer chips, and resistors and capacitors for original equipment manufacturers. Consumer Products included dishes and glassware, paper and envelopes, and pencils and pens.
Structure
In 2010 David Javier replaced Sean Rhine as president. He was very concerned about whether a new organization structure was needed for RI. The current structure was based on three major geographic areas—North America, Asia, and Europe—as illustrated in Exhibit 6.12. The various autonomous units within those regions reported to the office of the regional vice president. When several units existed in a single country, one of the subsidiary presidents was also responsible for coordinating the various businesses in that country, but most coordination was done through the regional vice president. Businesses were largely independent, which pro- vided flexibility and motivation for the subsidiary managers.
The headquarters functional departments in Ontario were rather small. The three central departments— Corporate Relations and Public Affairs, Finance and Acquisitions, and Legal and Administrative—served the corporate business worldwide. Other functions such as HR management, new product development, marketing, and manufacturing all existed within individual subsidiaries and there was little coordination of these functions across geographic regions. Each business devised its own way to develop, manufacture, and market its products in its own country and region.
EXHIBIT 6.12
Rhinebeck Industrial Organization Chart
Organizational Problems
The problems Javier faced at RI, which were confirmed in the report on his desk, fell into three areas. First, each subsidiary acted as an independent business, using its own reporting systems and acting to maximize its own profits. This autonomy made it increasingly difficult to consolidate financial reports worldwide and to gain the efficiencies of uniform information and reporting systems.
Second, major strategic decisions were made to benefit individual businesses or for a country’s or region’s local interests. Local projects and profits received more time and resources than did projects that benefited RI worldwide. For example, an electronics manufacturer in Singapore refused to increase production of chips and capacitors for sale in the United Kingdom because it would hurt the bottom line of the Singapore operation. However, the economies of scale in Singapore would more than offset shipping costs to the United Kingdom and would enable RI to close expensive manufacturing facilities in Europe, increasing RI’s efficiency and profits.
Third, there had been no transfer of technology, new product ideas, or other innovations within RI. For example, a cost-saving technology for manufacturing light bulbs in Canada had been ignored in Asia and Europe. A technical innovation that provided homeowners with cell phone access to home security systems developed in Europe had been ignored in North America. The report on Javier’s desk stressed that RI was failing to disperse important innovations throughout the organization. These ignored innovations could provide significant improvements in both manufacturing and marketing worldwide. The report said, “No one at RI understands all the products and locations in a way that allows RI to capitalize on manufacturing improvements and new product opportunities.†The report also said that better worldwide coordination would reduce RI’s costs by seven percent each year and increase market potential by 10 percent. These numbers were too big to ignore.
Recommended Structure
The report from the consultant recommended that RI try one of two options for improving its structure. The first alternative was to create a new international depart- ment at headquarters with the responsibility to coordinate technology transfer and product manufacturing and marketing worldwide (Exhibit 6.13). This department would have a product director for each major product line—Industrial, Consumer, and Electronics—who would have authority to coordinate activities and innovations worldwide. Each product director would have a team that would travel to each region and carry information on innovations and improvements to subsidiaries in other parts of the world.
The second recommendation was to reorganize into a worldwide product structure, as shown in Exhibit 6.14. All subsidiaries worldwide associated with a product line would report to the product line business manager. The business manager and staff would be responsible for developing business strategies and for coordinating all manufacturing efficiencies and product developments worldwide for its product line.
This worldwide product structure would be a huge change for RI. Many questions came to Javier’s mind. Would the subsidiaries still be competitive and adaptive in local markets if forced to coordinate with other subsidiaries around the world? Would business managers be able to change the habits of subsidiary managers toward more global behavior? Would it be a better idea to appoint product director coordinators as a first step or jump to the business manager product structure right away? Javier had a hunch that the move to worldwide product coordination made sense, but he wanted to think through all the potential problems and how RI would implement the changes.
EXHIBIT 6.13
Proposed Product Director Structure
EXHIBIT 6.14
Proposed Worldwide Business Manager Structure
Questions
1. Which of the three organizational problems—separate reporting systems, business self-interest, no technology transfer—would you address first? Explain.
2. What do you see as the pros and cons of a new head- quarters’ international department to coordinate across geographic regions?
3. Do you support the proposal to reorganize into a worldwide product structure? What implementation challenges do you foresee? Explain.
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> Why do you think the tension between a desire for global uniformity and local responsiveness is greater today than in the past?
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> Name some companies that you think could succeed today with a globalization strategy and explain why you selected those companies. How does the globalization strategy differ from a multi-domestic strategy?
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