Chapter 14 - The Organization of International Business

Organizational Architecture

totality of a firm’s organization, including formal organizational structure, control systems and incentives, processes, organizational culture, and people

3 Conditions for superior enterprise profitability

different elements of a firm’s organizational architecture must be internally consistent

organizational architecture must match or fit the strategy of the firm - strategy & architecture must be consistent

strategy & architecture of the firm must not only be consistent with each other but also make sense given the competitive conditions prevailing in the firm’s markets - strategy, architecture, and competitive environment must all be consistent

Organizational Structure

the formal division of the organization

the location of decision-making responsibilities

the establishment of integrating mechanisms

Organizational Culture

organizations are societies of individuals who come together to perform collective tasks

distinct patterns of culture and subculture

3 Dimensions of Organizational Structure

vertical differentiation

horizontal differentiation

integrating mechanisms

Vertical Differentiation - Centralization & Decentralization

the location of decision-making responsibilities

Arguments for Centralization

facilitates coordination and integration of operations

helps ensure that decisions are consistent with organizational objectives

gives top-level managers to bring change

avoids the duplication of activities that occurs when similar activities are carried on by various subunits

Arguments for Decentralization

gives top management time to focus on critical issues by delegating more routine issues to lower-level managers

motivational research favors decentralization

permits greater flexibility

can result in better decisions

can increase control

Global Strategy & Centralization

typically centralized - overall firm strategy, major financial expenditures, financial objectives, & legal issues

may be decentralized - operating decisions, such as those relating to production, marketing, R&D, and human resource management

Global Standardization Strategy - centralization or decentralization

high pressure for centralization

Localization Strategy - centralization or decentralization

high pressure for decentralization

International Strategy - centralization or decentralization

centralization over core competencies, decentralization over decisions of foreign subsidiaries

Transnational Strategy - centralization or decentralization

both centralization and decentralization

Horizontal Differentiation

how the firm divides itself into subunits

conflicting demands for different products (low-cost) and different national markets (localization)

Functional Structure - horizontal differentiation

functions reflecting the firm’s value creation activities (e.g. production, marketing, R&D, sales)

Product Divisional Structure - horizontal differentiation

each division is responsible for a distinct product line (business area)

The International Division - horizontal differentiation

tends to be organized by geography

division responsible for a firm’s international activities

typically replicates the structure in the home market

dual structure can create conflict and coordination problems

Worldwide Area Structure - horizontal differentiation

favored by firms with a low degree of diversification and a domestic structure based on functions

geographic divisions

Worldwide Product Divisional Structure - horizontal differentiation

favored by firms that are reasonably diversified and originally had domestic structures based on product divisions

helps overcome coordination problems

Global Matrix Structure - horizontal differentiation

horizontal differentiation proceeds along two dimensions: product division & geographic area

dual decision making

often clumsy and bureaucratic

Impediments to Coordination

managers have different orientations (production, marketing) and goals

Formal Integrating Mechanisms

the greater need for coordination, the more complex the formal integrating mechanisms need to be

from low to high

• direct contact

• liaison roles

• teams

• matrix structures

Informal Integrating Mechanism: Knowledge Networks

can be used as a nonbureaucratic conduit for knowledge flows within a multinational enterprise

make use of distributed computer and telecommunications information systems

managers must share a strong commitment to the same goals, norms, and values

Types of Control Systems

personal control

bureaucratic controls

output controls

cultural controls

Personal Control

most widely used in small firms

structures the relationships between managers at different levels in multinational enterprises

Bureaucratic Controls

most important of this is subunits within multinational firms are budgets and capital spending rules

approval or denial for capital spending requests that are at variance with its strategy

Output Controls

relatively objective performance metrics such as profitability, productivity, growth, market share, and quality

managers judged by their ability to achieve these goals

goals are normally established through negotiation between subunits and headquarters

Cultural Controls

employees “buy into” the norms and value systems of the firm and control their own behavior

can reduce the need for other control systems

e.g. McDonald

Incentive Systems

devices used to reward appropriate employee behavior

usually closely tied to performance metrics used for output controls

type varies depending on employees/tasks

requires significant cooperation between managers in different subunits

often adjusted to account for national differences in institutions and culture

can have unintended consequences

Performance Ambiguity

tends to occur when there is a high degree of interdependence between subunits within the organization

Strategy, Interdependence, and Ambiguity - Localization Strategy

performance ambiguity is low

Strategy, Interdependence, and Ambiguity - International Strategy

higher level, integration is necessary

Strategy, Incentives, and Strategy Global Standardizatioin Strategy

higher still, many activities are interdependent

Strategy, Interdependence, and Ambiguity Transnational Strategy

highest level of performance ambiguity, high degree of joint decision making

Implications for Control and Incentives

costs defined as amount of time top management devotes to monitoring and evaluating subunits’ performance

costs are greater when performance ambiguity is greater

Processes

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

diverse ones

• formulating strategy

• allocating resources

• evaluating employee performance

core competencies or valuable skills embedded in

efficient and effective processes can lower the costs of value creation and add additional value to a product

Managing Processes in an International Business

cut not only across organizational boundaries, embracing several different subunits, but also across national boundaries

a multinational enterprise should recognize that valuable new processes that might lead to a competitive advantage can be developed anywhere within the organization’s global network of operations

Organizational Culture

a system of values and norms that are shared among people

creating and maintaining

• founders or leaders have a profound impact

• the broader social culture of the nation

• the history of the enterprise

Culture is maintained by

hiring and promotional practices of the organization

reward strategies

socialization processes - formal or informal

communication strategy - corporate mission statements

Strong Cultures

all managers share a consistent set of values and norms that have a clear impact on work performance

strong doesn’t necessarily mean good

Adaptive Cultures

most managers care deeply about and value customers, stockholders, and employees

Localization Strategy

focus on local responsiveness

operating decisions are decentralized to functionally self-contained country subsidiaries

need for coordination or integrating mechanisms is low

Vertical differentiation(VD) - decentralized

horizontal differentiation (HD) - worldwide area structure

need for coordination - low

integrating mechanisms - none

performance ambiguity - low

need for cultural controls - low

International Strategy

firms attempt to create value by transferring core competencies from home to foreign subsidiaries

headquarters maintains centralized control over firm’s core competency, other decisions are decentralized

moderate need for coordination

VD - core competency, more centralized; rest decentralized

HD - worldwide product divisions

Need for Coordination - moderate

Integrating mechanisms - few

performance ambiguity - moderate

need for cultural controls - moderate

Global Standardization Strategy

firms focus on the realization of location and experience curve economies

headquarters typically maintains ultimate control over most operating decisions

the need for integration is high

need for a strong organizational culture

incentive systems typically linked to performance metrics at the corporate level

VD - some centralized

HD - worldwide product divisions

need for coordination - high

integrating mechanisms - many

performance ambiguity - high

need for cultural controls - high

Transnational Strategy

focus is on the simultaneous attainment of location and experience curve economies, local responsiveness, and global learning

some operating decisions are centralized (production, R&D)

need for coordination is high

need a strong culture an incentive to promotion cooperation

VD - mixed centralization and decentralization

HD - informal matrix

need for coordination - very high

integrating mechanisms - very many

performance ambiguity - very high

need for cultural controls - very high

Organizational Inertia May be Caused by

existing distribution of power and influence within an organization

existing culture expressed in norms and value systems

senior managers’ preconceptions about the appropriate business model or paradigm

institutional constraints

Implementing Organizational Change

unfreezing the organization

• Bing bang theory, incremental change is often no change

moving to the new state

• requires actions

refreezing the organization

• requires new culture

• management education system