Strategic Management Accounting W12

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ACCG330: Strategic Management Accounting

LECTURE 12
CONTROL PROBLEMS AND PRACTICES IN
MULTINATIONAL ORGANISATIONS

ACCG330
Readings: Anthony & Govindarajan (2007, pp.678-696)

ACCG330 Strategic Management
Accounting Session 1, 2012

Learning Objectives
1. Describe management control problems and practices
in multinational corporations.
2. Explain problems and issues associated with global
organisations:
i.

Cultural differences and their impact on management
controls.
ii. Transfer pricing and related issues in multinational
corporations.
iii. Effects of exchange rates on multinational corporations and control system design issues.

ACCG330 Strategic Management
Accounting Session 1, 2012

1

Nature of Multinational Corporations (MNCs)
• What is a Multinational Corporation?
– A corporation that owns and operates production facilities in two or more countries. OR
– A corporation with power to coordinate and control
operations in two or more countries without owning them.

• Typically have Headquarters in the country of origin
• Build or acquire affiliates or subsidiaries in other
countries (the host nation)

ACCG330 Strategic Management
Accounting Session 1, 2012

Basic Structures of MNCs
• A number of basic structures exist that permit an MNC to operate and compete internationally
– Structure must meet the need of both the local market and the home-office strategy of globalization
– Basic structures of MNCs:
• Domestic structure plus foreign subsidiary, or with an:
a) International division
b) Export department
• Global product (divisional) structure, or Functional structure • Global geographic (area) structure

ACCG330 Strategic Management
Accounting Session 1, 2012

2

Domestic Plus Foreign Subsidiary

Global Product Division

Global Geographic Structure

Companies that
operate in multiple
countries are often
decentralized

ACCG330 Strategic Management
Accounting Session 1, 2012

Centralization vs Decentralization in MNCs

ACCG330 Strategic Management
Accounting Session 1, 2012

3

Management Control Practices in MNCs
• Regardless of the degree of decentralization, MNCs use
one or a mix of the four types of responsibility centers:
– Cost centers
– Revenue centers
– Profit centers
– Investment centers
• Contingency theory suggests effectiveness of management
controls within MNCs depends on:
– Structure, strategy, environment (Internal and
External), technology and organisational culture
ACCG330 Strategic Management
Accounting Session 1, 2012

Nature of Organisational Culture
• Shared values, beliefs and assumptions
that enable members to understand their
roles and the norms of the organisation,
including:
– Rules that dictate the do’s and don’ts of
employee behavior relating to areas such as
productivity, customer relations, and
intergroup cooperation.
– Organisational climate, or the overall
atmosphere as reflected by the way that
participants interact with each other,
conduct themselves with customers, and
feel about the way they are treated by
higher-level management.

Types of cultures
Clan
(Friendly)

Hierarchy
(Formal)

Adhocracy Market
(Competitive)
(Creative)

ACCG330 Strategic Management
Accounting Session 1, 2012

4

Effect of culture on controls
• Individualism – prefer individual oriented rather
than group oriented work arrangements,
performance evaluations, and compensation
• Collectivism – prefer group work and rewards
based on corporate performance (less likely to see
dysfunctional behaviour)
• High (low) uncertainty avoidance – more (less)
elaborate formal planning and budgeting systems;
more rigid performance standards and less
subjectivity in performance evaluations.
ACCG330 Strategic Management
Accounting Session 1, 2012

Effect of culture on controls
• High power distance – accept centralization more
and less participation in decision making
• Low power distance...
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