CHAPTER 13 The Organization of International Business.

CHAPTER 13

The Organization of International

Business

Learning Objectives

Define and identify different forms of the organizational architecture that international businesses use to manage their global operationsExplore the various components of the architectureDescribe the control systems and integrating mechanism available to multinational firmsDiscuss the advantages and disadvantages of centralized versus decentralized decision systemsLook at ways to match architecture and competitive strategy to achieve high performance

IBUS 330 Dr. Nini Yang

Organizational Architecture and Profitability

Organizational architecture is the totality of a firm’s organization, including

StructureControl systems and incentivesProcessesCulturePeople

Superior enterprise profitability requires three conditions:

An organization’s architecture must be internally consistent.Strategy and architecture must be consistent.Strategy, architecture and competitive environments must be consistent.


Organization Architecture

Structure

People

Culture

ProcessesControls & Incentives

Figure 13.1


Organization Architecture

Control systems:Metrics used to measure subunit performanceMake judgments about managers’ abilities to run unitsIncentives are devices to reward appropriate managerial behavior.

Processes:Manner in which decisions are madeManner in which work is performedConceptually distinct from location of decision-making responsibility


Organizational Architecture

Culture:Norms and value systems shared by the employees

People:Not just current employees, but also the strategy to recruit, compensate, and retain individuals with necessary skills, values and orientation

If a firm is going to maximize its profitability, it must pay close attention

to achieving internal consistency among the various

components of its architecture.IBUS 330 Dr. Nini Yang

Organizational Structure at Unilever

European Business Group

Detergents Frozen Food Margarine

France

Germany

Spain

Figure 13.2

Minimize component inconsistencies

through intelligent design.


Vertical Differentiation

Centralization:Facilitates coordinationEnsure decisions consistent with organization’s objectivesTop-level managers have means to bring about organizational changeAvoids duplication of activities

Decentralization:Give top management time to focus on critical issuesMotivational research favors decentralizationPermits greater flexibilityCan result in better decisionsCan increase control

Concerned with where decisions are made.Concerned with where decisions are made.


International

Centralize for core competenciesDecentralize for

operating decisions

Strategy and Centralization

Multi-domestic

Decentralize

Global

Centralize

Transnational

Both CentralizeAnd Decentralize


Horizontal Differentiation

How a firm divides itself into subunits

Geographicalarea

Function

Type ofbusiness

A firm must reconcile

conflict between product and

location.


A Typical Functional Structure

Figure 13.3

Purchasing Manufacturing Marketing Finance

TopManagement

Buying units

Plants Branch sales units

Accountingunits


The Functional Structure

Typically, the structureevolves in a company’s

early stage.

Coordination and control rests with top management.


A Typical Product Division Structure

Figure 13.4

DepartmentPurchasing

DepartmentManufacturing

DepartmentMarketing

DepartmentFinance

Buying units Plants Branchsales units

Accountingunits

Division Product line A

Headquarters

Division Product line B

Division Product line C


Product Division Structure

Probable next stage of international businessdevelopment. Reflects company growth into

new products.

Eases coordination and control problems.

Each unit responsible for

a product. Semi-autonomous and

accountable for its performance.


International Division Structure

Figure 13.5

Domestic DivisionGeneral Manager

Product Line A

International DivisionInternational DivisionGeneral ManagerGeneral Manager

Area LineArea Line

Headquarters


Product Line B


Product Line C

Country 1Country 1General ManagerGeneral Manager

(Product A, B and/or C)(Product A, B and/or C)

Country 2Country 2General ManagerGeneral Manager

(Product A, B and/or C)(Product A, B and/or C)

Functional units

Functional units


International Division

Widely used.Growth can

lead to worldwide structure.

Can create conflict between domestic and foreign operations.

Implied lack of coordination between domestic and foreign operations.


Worldwide Area Structure

Favored by firms with low degree of diversification.

Area is usually a country, and

largely autonomous.

Facilitates local responsiveness.

Encouragesfragmentation.


The International Structural Stages Model

Global Matrix

(“Grid”)

Area Division

Worldwide Product Division

International Division

Alternate Paths of Development

H

Foreign Product Diversity

L Foreign Sales as a Percentage of Total Sales H Figure 13.4


L

Worldwide Area Structure

Figure 13.5

Regional VPEurope

Regional VPMiddle East/Africa

Regional VPFar East

Headquarters

Regional VPNorth America

Regional VPLatin American

President Subsidiary

1


1


2


2


3


3


A Worldwide Product Division Structure

WorldwideProduct Groupor Division A

Worldwide Product Group or Division C

Headquarters

Worldwide Product Group or Division B

Area 1(domestic)

Area 2(international)

Functional unitsFigure 13.6

Functional units


Product Division

Reasonably diversified

firms.Attempts to overcome international division and worldwide area structural problems.

Believe that product value

creation activities should be coordinated

worldwide.

Weak local responsiveness.


A Global Matrix Structure

Figure 13.7

HeadquartersHeadquarters

Area 1Area 1 Area 2Area 2 Area 3Area 3

Product Product Division ADivision A

Product Product Division BDivision B

Product Product Division CDivision C

Manager herebelongs to Division Band Area 2


May not work as well as theory predicts.

Matrix Structure

Attempts to meetneeds of

transnational strategy.

Conflict and power struggles.

“Flexible” matrix structures.


Integrating Mechanisms

Need for Coordination:

Impediments:Different managerial orientations, e.g.

Labor relations Legal conditions Cultural environment

Differing goalsTime zones, distance, nationalityLow

High

Multidomestic

International

Global

Transnational


Formal Integrating Mechanisms

Increasing complexity of integrating mechanism

Direct contact

Liaison roles

Teams

Matrix structures

Figure 13.8

Low

High


A Simple Management Network

Figure 13.9

GB

C D

A F

E

Informal contacts between managers within an enterprise.

Informal contacts between managers within an enterprise.


Control Systems and Incentives

Types of controls:

PersonalBureaucraticOutputCultural

Incentives:Depends on employee and his/her tasks.Can be used to improve managerial coordination between units.Need to account for national differences in institutions and culture.Beware of the rule of unintended consequences.


Performance Ambiguity

It is a function of the interdependence

among subunits.

MultinationalOutput/Bureaucratic Global/Transnational

Cultural

Control Systems


Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business

Strategies

StrategyStrategy Inter-dependence

PerformanceAmbiguity

Costs ofControl

Multi-Multi-domesticdomestic

Low Low

InternationalInternational Moderate Moderate

GlobalGlobal High High

TransnationalTransnational

Low

Moderate

High

Very high Very high Very high

Table 13.1


Processes

The manner in which decisions are made and work is performed within an organization

Cut across national boundaries as well as organizational boundariesCan be developed anywhere within the firm’s global operations network


Organizational CultureValues and norms shared among peopleSources:

Founders and important leadersNational social cultureHistory of the enterpriseDecisions that result in high performance

Cultural maintenance:Hiring and promotional practicesReward strategiesSocialization processesCommunication strategy


Organizational Culture and Performance

A “strong” culture:

Not always goodSometimes beneficial, sometimes notContext is important

Adaptive cultures

Culture must match an organization’s architecture.Culture does not necessarily translate across borders.

Cu

lture

Transnational

Multidomestic

Global International

Strong

Weak


A Synthesis of Strategy, Structure and Control Systems

Multi-domestic International Global Transnational

Verticaldifferentiation

Decentralized Core competency;

rest decentralizedSomecentralized

Mixedcentralized anddecentralized

Horizontaldifferentiation

Worldwidearea structure

Worldwide product division

WorldwideProductdivision

Informal matrix

Need forcoordination Low Moderate High Very high

Integratingmechanisms None Few Many Very many

Performanceambiguity Low Moderate High Very high

Need forCultural controls Lo

wModerate High Very high

Structure and controls

Table 13.2


Organizational ChangeChange to match competitive and strategy environmentHard to change:

Existing distribution of power and influenceCurrent cultureManagers’ preconceptions about the appropriate business model or paradigmInstitutional constraints

Principles for changeUnfreeze the organizationMoving to the new stateRefreezing the organization


Implications

An organization’s architecture should be consistent internally and externally.The consistencies are critical to organizational performance and profitability.Organizational architecture should be flexible and adapt according to organizational strategy, growth, the external changing environment.Changes may face resistance, and managers need to learn principle methods in order to launch and implement necessary changes successfully.


CHAPTER 13 The Organization of International Business.

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