International Business

Chapter Fifteen

The Organization of International Business

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Chapter Objectives

•To profile the evolving understanding of the organization of international business

•To describe traditional and contemporary organizational structures

•To study the systems used to coordinate and control operations

•To profile the role of organizational culture•To examine special situations in the

organization of international business

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Introduction

Organization: the complementary mix of formal structure, coordination and control systems, and cultural values needed to create value and implement an organization’s strategy

• An insightful strategy is a necessary but insuf-ficient condition for long-term organizational success.

• Building an organization to implement an effective strategy requires the integration of different people, teams, groups, and units into a smoothly functioning whole.

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Fig. 15.1: The Organization of International Business

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The Causes of Organizational Change

Revolutionary changes in the environment and the nature of work challenge managers to downsize, delayer, restructure, reengineer, and reinvent the organization.

• globalization: changes the opportunity set and efficiency frontier for firms

• knowledge: an increasingly important engine of sus-tainable comparative advantage

• the Internet: an efficient and effective global organi-zation of knowledge, people, and other resources that challenge conventional notions of control

[continued]

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• the conduct and context of employees’ jobs: the creation of value that exhibits astonishing variability, problem solving, and intellectual content

• worldwide employee empowerment: decentralized decision-making and the development of common ideas and ideals to ensure that all employees act in the best interests of the firm

• an expanded social contract between employees and organizations: includes greater employee participation in problem-solving and decision-making

• increasingly sophisticated corporate strategies: new combinations of key activities leading to new organi-zational requirements

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Organizational Structure

Organizational structure: the formal arrangement of roles, responsibilities, and relationships within an organization

Organizational differentiation: the way in which different units and subunits within a firm are organized and assigned to work on different levels and kinds of tasks

• A company’s choice of structure depends upon:– the configuration of its value chain in

terms of the location(s) and type(s) of its foreign facilities

– the impact of international operations on total corporate performance

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Vertical DifferentiationVertical differentiation: the way in which an

organization balances centralized vs. decentralized decision-making alternatives [the locus of power]

Centralization: the degree to which high-level managers (usually above the country level) make decisions and then pass them down to lower levels for implementation

Decentralization: the degree to which lower-level managers (at or below the country level) make and implement important decisions

• Usually, centralized decision-making is associated with an international or global strategy, decentralized decision-making with a multidomestic strategy, and a combination of the two with a transnational strategy. All organizations must determine who will have

what authority to make which decisions.[continued]

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• The reason for choosing one type of decision-making authority over another is partly a function of attitude.

[see Chapter Two regarding the cultural environment]– ethnocentric attitude: encourages an international or

global firm to develop core competencies in its home country and then closely supervise their transfer and use abroad i.e., centralized decision-making

– polycentric attitude: encourages a multidomestic firm to grant decision-making authority to foreign subsidiaries, i.e., decentralized decision-making

– geocentric attitude: encourages a transnational firm to creatively balance the competing needs for centralized and decentralized decision-making in order to respond to both global and local pressuresDecision-making should occur at the level of the people most directly affected and who have the most intimate knowledge

about the problem—the current trend is toward more decentralized structures.

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The Principles and Practice of Centralization and DecentralizationCENTRALIZATION DECENTRALIZATION Premises PremisesDecisions should be made by Decisions should be

made by senior managers. lower-level employees.

The effectiveness of the value The effectiveness of the value chain depends on headqtrs.’ chain depends on local retaining authority. managers’ authority.

Centralized decisions ensure Decentralized decisions ensure that operations in different that operations in different countries help achieve global countries help achieve global objectives. objectives by first meeting national goals.

[continued]

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The Principles and Practice of Centralization and DecentralizationCENTRALIZATION DECENTRALIZATION Advantages AdvantagesCoordination of the value chain Decisions are made by those

is facilitated. who are directly involved.Decisions are consistent with Lower-level managers are

corporate objectives. allowed to exercise initiative. Duplicate activities are pre-. Lower-level employees are

empted. motivated to perform better.The risk of costly, wrong, lower- Flexible responses to rapid level

decisions is reduced. changes are enabled.Consistent dealing with stake- Subsidiary managers are held

holders is ensured. more accountable.[continued]

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The Principles and Practice of Centralization and Decentralization

CENTRALIZATION DECENTRALIZATION Disadvantages DisadvantagesInitiative among lower-level The organization is put at

risk employees is discouraged. if bad, lower-level decisions are made.

Demoralized lower-level workers Cross-unit coordination and wait for instructions. strategic fit are impeded.

Information flows from the top Subsidiaries likely favor their down; thus, bottom-up own projects at the expense innovation is pre-empted. of global performance.

[continued]

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The Principles and Practice of Centralization and DecentralizationCENTRALIZATION DECENTRALIZATIONEncouraging Factors Encouraging FactorsCorporate policies call for global Conditions call for local re-

integration and uniformity. sponsiveness and adaptation.

Interdependent subsidiaries The firm is geographically share value activities. dispersed.

Firms need to move resources Economies of scale can be from one activity to another. achieved nationally.

Upper-level managers are more Lower-level managers are more experienced decision-makers. capable decision-makers.

Decisions are important and Decisions are relatively minor the risk of loss is great. but must be made quickly.

The need for foreign nationals to reach headqtrs. is low.

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Horizontal Differentiation

Horizontal differentiation: the way in which a firm is divided into discrete units and sub-units that are assigned responsibility for specialized tasks

• Horizontal differentiation describes the way in which a firm designs its formal structure in order to:– specify the total set of organizational tasks– logically divide those tasks into jobs, departments,

subsidiaries, and/or divisions– assign authority and reporting relationships in ways

that are designed to support the firm’s strategies

Traditionally MNEs have resolved these issues on the basis of function, type of business/product, geographic

region, or some combination of the three.

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The Design of the Formal StructureFunctional Structure:

groups specialized jobs according to traditional business functions [specifies roles and relationships according to inputs]– maximizes scales economies by arranging work

responsibilities and relationships in the most efficient format

– is ideal when a company’s products share a common technology (a narrow product line) and competitive pressures push for a cost-leadership strategyThe long chain of command that spans many levels of hierarchy does not build the knowledge-generating and decision-making relationships necessary to respond to environmental changes requiring coordination across departments.

[continued]

CEO

Production MarketingFinance/

Accounting

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The Design of the Formal StructureDivisional Structures:

establish groups according to units, products, customers, or regions [specifies roles and relationships according to outputs]

• International Division: creates a critical mass of international expertise, but may struggle to get resources

• Product Division: creates synergies between foreign and domestic operations, is well-suited for diverse product lines, but lacks the means for one division to learn from another

• Geographic Division: creates economies of scale on a regional basis, works well when foreign operations are large but not dominated by a single region or country, but leads to the costly duplication of similar value-added activities [continued]

CEO

Diesel GroupPower

Systems Group

HydroelectricGroup

CEO

EuropeNorth and

South AmericaAsia

CEO

Diesel Division

ElectronicsDivision

International Division

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The Design of the Formal StructureMatrix Structure:

– simultaneously attains the benefits of the functional and divisional forms [theoretically equips an MNE to capture the benefits of both integration and responsiveness]

– gives functional, product, and geographic groups a common focus

– has dual reporting relationships rather than a single chain of command, thus ensuring the exchange of information and resources Blurred lines of responsibility and relationships confuse the clarity of the chain of command, even though groups are required to compete for resources and control.

Mixed Structure: each is idiosyncratic, reflecting legacies, executive preferences, and/or circumstances [a combi- nation of functional, regional, and product dimensions]

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Fig. 15.2: Placement of International Activities within the Organizational

Structures for International Businesses

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Contemporary StructuresContemporary Structures: learning organizations that

champion limitless spans of control, ad hoc teams, and self-organizing groups by eliminating vertical, horizontal, and external boundaries that hinder information flows

• Network Structure: a small, core organization that outsources certain value activities to key partners in order to focus on those activities in which it creates maximum value

Japanese keiretsus rely heavily upon long-term personal relationships among high-level managers in different companies.

• Virtual Organization: a temporary arrangement among partners that can be easily reassembled to adapt to market changes [permits organizations to acquire resources and/or strategic capabilities by creating a temporary cluster of partners]

• Project Structure: all work is project based—teams form, disband, and form again as the flow of work requires

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Fig. 15.3: A Simple Depiction of the Network Structure

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Coordination Systems

Coordination systems: link the operations of inter-dependent units and individuals of a firm

• Coordination by standardization:– sets universal rules and procedures that apply to units

worldwide [a prescriptive, day-to-day infrastructure]– enforces consistency in the performance of activities

across geographically dispersed units– helps a firm leverage its core competencies and bring

the advantages of scale to its operations – is ideally suited for strategies that champion constancy

and predictability in industries that are more stable than volatile, i.e., an international or geocentric strategy

[continued]

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• Coordination by plan: – requires interdependent units to meet common

deadlines and objectives– is ideally suited for firms that create value by

adapting operations to local conditions, i.e., a multidomestic strategy

• Coordination by mutual adjustment:– requires managers to interact with counterparts to

enable the flexible exchange of ideas– requires that firms adopt a formal structure and

install standardization and planning systems– is ideally suited for firms that find value in creating

more opportunities and incentives for interdependent parties to communicate with one another, i.e., when firms face new problems that cannot be defined with customary rules or procedures

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Control Systems

Control process: directs and monitors the activities of individuals in order to compel actions that support the goals of the firm

• Control methods:– market control: uses external market mechanisms

to establish internal performance benchmarks and standards [complements a geocentric strategy]

– bureaucratic control: uses centralized authority to install an extensive set of rule and procedures to govern a broad range of activities

– clan control: relies upon share values among all employees to idealize and moderate preferred employee behaviors [complements a transnational strategy]

[continued]

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• Control mechanisms– reports: should be timely to allow an effective response– subsidiary visits: should balance information collection

and sharing with the offering of advise and directives – management performance evaluation: should

separate a manager’s performance from a subsidiary’s performance

– cost and accounting comparability: should interpret different costs and accounting practices fairly

– evaluative measurements: should include a reliable combination of financial and non-financial indicators

– information systems: should periodically reevaluate information needs in order to minimize costs and ensure relevancy

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Organization Culture

• Organization culture: the set of fundamental assumptions about an organization, its goals, and its practices that employees share

• Key features of a firm’s organization culture include:– managerial values and principles – the work climate and atmosphere– patterns of “how things are done around here”– traditions– ethical standards

Studies confirm a significant link between organization culture and the financial performance of a firm.

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Strategy and Organization Culture• The shared values of an organization influence both

employees’ perceptions as well as the ways in which they respond to the world.

• Sustainable benefits and lasting competitive advantage can only be realized when a firm exhibits a complemen-tary organization culture: – an international strategy: requires rules, regulations,

and uniformity– a global strategy: requires standardizing employees’

views– a multidomestic strategy: requires greater tolerance of

the local interpretation of corporate goals– a transnational strategy: requires a strategic blending of

standardization and adaptation, i.e., dynamic flexibility

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Fig. 15.4: Organizational Culture Aspects of Types of

Strategies

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Special Situations

• Acquisitions: the culture of an acquired organi-zation may differ because of both company and national practices

• Shared ownership: decision-making is limited and assumptions and behavior will likely differ when two or more entities share ownership

• Dynamic nature of performance: as a firm’s international business evolves, both its organiza-tional structure and its coordination and control systems must also evolve

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The Role of Legal Structures

When operating abroad, firms choose among legal forms that affect their decision-making power, their tax exposure, their ability to protect intellectual property, and their legal liability.

• Foreign branch: a wholly-owned foreign oper-ation that remains legally part of the parent company

• Subsidiary: a legally separate company, i.e., a foreign direct investment, whose liability is usually limited to the subsidiary’s assets

[continued]

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• Types of subsidiaries and operating form, i.e., distinc-tions to be heeded in designing a foreign operation:– the ability of the parent to sell its ownership– the number of stockholders required to establish a

subsidiary– the percentage of foreigners who can serve on the

board of directors– the amount of required public disclosure– whether equity may be acquired by noncapital

contribu-tions such as goodwill– the types of businesses (products) that are eligible– the minimum capital required for establishing a

subsidiary

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Implications/Conclusions

• Organization is an integrated function of formal structure, coordination and control systems, and organizational culture.

• The degree of centralization in an MNE is influenced by pressures for global integration versus local responsiveness, the competence of headquarters versus subsidiary personnel, as well as decision importance, expediency, and quality expectations.

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• Artfully engineering an organization that configures globally dispersed resources to meet the mandates of multinational operations is the frontier of inter-national business.

• While traditional organizational structures rely on hierarchical formats, contemporary structures eliminate the horizontal, vertical, and/or external boundaries that block the development of knowledge-generating and decision-making relationships.

• MNEs need to develop coordination and control mechanisms that prevent the duplication of efforts, ensure that headquarters does not withhold the best resources from international operations, and include insights from across the entire firm.