Chapter 6 & 7 Business Cntrol and Ethics

CHAPTER 6
Approach to International
Business. Control
Introduction
• Control mechanisms play an important role in any business
organization, without which the roles of managers get
constrained.
• Control is required for achieving the goals in a predefined
manner because it provides the instruments which influence the
performance and decision-making process of an organization.
• Control is in fact concerned with the regulations applied to the
activities within an organization to attain expected results in
establishing policies, plans, and practices.
• Control mechanisms can be set according to functions, product

attributes, geographical attributes, and the overall strategic and
financial objectives
Objectives of Control
In 1916, Henri Fayol defined management control as follows −
“Control of an undertaking consists of seeing that everything is being carried out
in accordance with the plan which has been adopted, the orders which have
been given, and the principles which have been laid down. Its object is to point
out mistakes in order that they may be rectified and prevented from recurring”
• There are three major objectives for having a control mechanism in

an international firm. These are :
 To get data and clues for the top management for monitoring,
evaluating, & adjusting their decisions and operational objectives.
 To get clues based on which common objectives can be set to get
optimum coordination among units.
 To evaluate the performance metrics of managers at each level.
Types of Control Mechanisms
 There are various modes of control. The most influential ones are the
following:
Personal Controls
• Personal controls are achieved via personal contact with the
subordinates.
• It is the most widely used type of control mechanism in small firms for
providing direct supervision of operational and employee management.
• Personal control is used to construct relationship processes between
managers at different levels of employees in multinational companies.
• CEOs of international firms may use a set of personal control policies to
influence the behavior of the subordinates.
Cont’d
Bureaucratic Controls
• These are associated with the inherent bureaucracy in an international firm. This
control mechanism is composed of some system of rules and procedure to direct
and influence the actions of sub-units.
• The most common example of bureaucratic control is found in case of capital
spending rules that require top management’s approval when it exceeds a certain
limit.
Output Controls
• Output Controls are used to set goals for the subsidiaries to achieve the targeted
outputs in various departments.
• Output control is an important part of international business management
because a company’s efficiency is relative to bureaucratic control.
• The major criteria for judging output controls include productivity, profitability,
growth, market share, and quality of products.
Cont’d
Cultural Controls
• Corporate culture is a key for deriving maximum output and
profitability and hence cultural control is a very important
attribute to measure the overall efficiency of a firm.
• It takes form when employees of the firm try to adopt the
norms and values preached by the firm.
• Employees usually tend to control their own behavior following
the cultural control norms of the firm.
• Hence, it reduces the dependence on direct supervision when
applied well.
• In a firm with a strong culture, self-control flourishes
automatically, which in turn reduces the need for other types of
control mechanisms.
Approaches to Control Mechanisms
• There are seven major approaches for controlling a business organization. These
are discussed below:
 Market Approach
• The market approach says that the external market forces shape the control
mechanism and the behavior of the management within the organizational units
of an MNC.
• Market approach is applied in any organization having a decentralized culture. In
such organizations, transfer prices are negotiated openly and freely.
• The decision-making process in this approach is largely directed and governed by
the market forces.
 Rules Approach
• The rules approach applies to a rules-oriented organization where a greater part
of decision-making is applied to strongly impose the organizational rules and
procedures.
• It requires highly developed plan and budget systems with extensive formal
reporting.
• Rules approach of control utilizes both the input and output controls in an
organized and exclusively formalized manner.
Cont’d
Corporate Culture Approach
• In organizations that follow the corporate culture approach, the employees
internalize the goals by building a strong set of values. This value-syndication
influences the operational mechanism of the organization.
• It has been observed that even when some organizations have strong norms
of behavioral controls, they are informal and less explicit.
• Corporate culture approach requires more time to bring the aimed changes
or adjustments in an organization.
Reporting Culture
• Reporting culture is a powerful control mechanism. It is used while allocating
resources or while the top management wants to monitor the performance
of the firm and the employees.
• Rewarding the personnel is a common practice in such approaches of control.
• However, to get the maximum out of reporting approach, the reports must
be frequent, correct, and useful.
Cont’d
Visits to Subsidiaries
• Visiting the subsidiaries is a common control approach. The disadvantage is that all the information cannot
be exchanged via visits.
• Corporate staff usually and frequently visit subsidiaries to confer and socialize with the local management.
• Visits can enable the visitors to collect information about the firm which allows them to offer advice and
directives.
Management Performance Evaluation

• Management performance Evaluation is used to evaluate the subsidiary managers for the subsidiary’s
performance.
• However, as decision-making authority is different from the operational managers, some aspects of
control cannot be managed via this approach.
• Slow growth rates of firms and risky economical and political environment requires this kind of approach.
Cost and Accounting Comparisons

• Cost and Accounting Comparisons is a financial approach. It arises due to the difference in expenditure
among various units of the subsidiaries.
• A meaningful comparison of the operating performances of the units is necessary to get the full output
from this approach.
• Cost accounting comparisons use a set of rules that are applicable to the home country principles to meet
local reporting requirements
Constraints of Control Approaches
• Control mechanisms can never be uniform in every country. International firms have to face
severe constraints based on which they modify their control mechanisms in every country.
• Here is a list of major constraints that affect an organization in setting its managerial
control mechanism:
Distance − Geographical distances and various forms of cultural disparities is a big
constraint of control systems. Nowadays, email and fax transmissions have
replaced the human communication, changing the meaning of distance among
units and employees of an organization.
Diversity − It is hard to apply a common control system to everyone due to

diversity. It requires the managers to be locally responsive to address the needs of
the country in which the firm operates. Diverse attributes may exist in the form of
labor, cost, currency, economic factors, business standards, etc.
Degree of Uncertainty − Data relating to the reporting mechanism may be
inaccurate and incomplete, raising serious challenges to control mechanisms. Due
to uncertainties, control mechanisms must focus on setting goals and developing
plans to meet the goals.
Chapter 6
Ethics in International
Business
Business Ethics
• Ethics - accepted principles of right or wrong that govern
– the conduct of a person
– the members of a profession
– the actions of an organization
• Business ethics - accepted principles of right or wrong
governing the conduct of business people
• Ethical strategy - a strategy, or course of action, that does
not violate these accepted principles
Ethical Issues in IB
• The most common ethical issues in business
involve
1. Employment practices
2. Human rights
3. Environmental regulations
4. Corruption
5. The moral obligation of multinational companies
Environmental Pollution
• Ethical issues arise when environmental regulations in
host nations are far inferior to those in the home nation
• The environment are a public good that no one owns, but
anyone can despoil
• The tragedy of the commons occurs when a resource held
in common by all, but owned by no one, is overused by
individuals, resulting in its degradation
Ethical Dilemmas
• Ethical dilemmas - situations in which none of the
available alternatives seems ethically acceptable
– real-world decisions are complex, difficult to frame,
and involve consequences that are difficult to quantify
– the ethical obligations of an MNE toward employment
conditions, human rights, corruption, environmental
pollution, and the use of power are not always clear cut
– the right course of action is not always clear
Corruption
• The Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions adopted
by the Organization for Economic Cooperation and
Development (OECD), obliges member states to make
the bribery of foreign public officials a criminal offense
Corruption
• Some economists believe that in a country where
preexisting political structures distort or limit the
workings of the market mechanism, corruption in the
form of black-marketeering, smuggling, and side
payments to government bureaucrats to “speed up”
approval for business investments may actually enhance
welfare
• Other economists have argued that corruption reduces the
returns on business investment and leads to low
economic growth
Moral Obligations
• The idea that business people should take the social
consequences of economic actions into account when
making business decisions
• There should be a presumption in favor of decisions that
have both good economic and good social consequences
• Social responsibility can be supported for its own sake
simply because it is the right way for a business to behave
• honorable and benevolent behavior that is the
responsibility of successful companies
• Companies give something back to the societies and the
land that have made their success possible
Manager’s Behavior
• Several factors contribute to unethical behavior
including:
1. Personal ethics - the generally accepted
principles of right and wrong governing the
conduct of individuals
2. Decision-making processes - the values and norms that
are shared among employees of an organization
3. organization culture
4. Unrealistic performance expectations - encourage
managers to cut corners or act in an unethical manner
Cont’d …
5. Leadership - helps establish the culture of an
organization, and set the examples that others
follow
– when leaders act unethically, subordinates may act
unethically, too
6. Societal culture
Cont’d …
Determinants of Ethical Behavior
Philosophical Approaches To Ethics
• There are several different approaches to business
ethics
• Straw men approaches deny the value of business
ethics or apply the concept in an unsatisfactory
way
– Friedman doctrine: Profit maximization – no CSR
– Cultural relativism: When in Rome do as Romans -
no universal standard of morality
– Righteous moralist: Your standards prevail in all the
countries you do business
– Naïve immoralist: Do what everyone else does
Cont’d …
• Others approaches:
– Utilitarian ethics: Moral worth of an action/practice is
determined by its consequence
– Kantian ethics: Action/practice have their own
absolute moral worth
– Rights theories: Humans have transcendental rights
& privilege
– Justice theories: attainment of a just distribution of
economic goods and services
Managers Ethical Decisions
1. Hire and promote people with a well grounded
sense of personal ethics
2. Build an organizational culture that places a high
value on ethical behavior
3. Make sure that leaders within the business
articulate the rhetoric of ethical behavior and act
in a manner that is consistent with that rhetoric
4. Put decision making processes in place that
require people to consider the ethical dimensions
of business decisions
Cont’d …
• But, not all ethical dilemmas have a clean and obvious
solution and firms must rely on the decision making
ability of managers

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CHAPTER 6

• Control mechanisms can be set according to functions, product

• There are three major objectives for having a control mechanism in

Management Performance Evaluation

Cost and Accounting Comparisons

Diversity − It is hard to apply a common control system to everyone due to

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