The Organization of International Business

Chapter 14: The Organization of International Business

Learning Objectives

• 14-1: Explain what is meant by organizational architecture.

• 14-2: Describe the different organizational architecture choices that can be made in an international business.

• 14-3: Explain how the organizational architecture can be matched to global strategy to improve performance.

• 14-4: Discuss what is required for an international business to change its organizational architecture so it better matches its global strategy.

Introduction to Organizational Architecture

• Three 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 and architecture must be consistent.
    - The strategy and architecture of the firm must make sense, given the competitive conditions prevailing in the firm’s markets—strategy, architecture, and competitive environment must all be consistent.

Organizational Architecture Defined

• Organizational Architecture:
    - The totality of a firm’s organization, which includes:
      - Formal Organizational Structure: The official structure that defines roles, responsibilities, and the hierarchy within the organization.
      - Control Systems: The metrics and measures established to assess performance and guide management decisions.
      - Incentives: Mechanisms designed to motivate and reward specific managerial and employee behaviors.
      - Organizational Culture: The shared norms and values that influence how employees interact and work together.
      - Processes: The methods and procedures through which decisions are made and tasks are executed.

Components of Organizational Architecture

• 1. Organizational Structure:
    - Formal division of the organization.
    - Location of decision-making responsibilities.   - Establishment of integrating mechanisms to facilitate coordination.

• 2. Control Systems:
    - Metrics used to measure the performance of subunits within the organization.

• 3. Incentives:
    - Tools used to reward desired managerial behaviors, aligned with corporate goals.

• 4. Processes:
    - Procedures that govern how decisions are made and how work is carried out.

• 5. Organizational Culture:
    - Shared norms and values among employees, impacting overall organizational effectiveness.

Organizational Structure Explained

• Three Dimensions of Organizational Structure:
    - Vertical Differentiation:
      - Centralization vs. Decentralization of decision-making powers.
    - Horizontal Differentiation:
      - The division of the firm into various subunits based on functions or products.
    - Integrating Mechanisms:
      - Tools used to achieve coordination between subunits.   

Vertical Differentiation

• Arguments for Centralization:
    1. Facilitates coordination and integration of operations.   2. Ensures decisions align with organizational objectives.   3. Provides top management with the ability to implement strategic change.   4. Avoids activity duplication within subunits.

• Arguments for Decentralization:   1. Allows top management to focus on strategic issues by delegating routine operational decisions.   2. Motivational studies indicate decentralization improves employee engagement and satisfaction.   3. Provides greater operational flexibility to respond to local conditions.   4. Can lead to superior decision-making by empowering lower-level managers.   5. Potentially increases overall control and accountability.

• Impact of Global Strategy on Centralization:   - Typically centralized functions: overall firm strategy, major financial decisions, financial objectives, and legal matters.   - Can be decentralized concerning operational aspects, like production, marketing, R&D, and human resources.

Horizontal Differentiation

• In Domestic Firms:
    - Functional Structure: Divides the firm into functions like production, marketing, R&D, each reflecting its value creation stages.   - Product Divisional Structure: Each division oversees a distinct product line and associated functions.

• International Division Structure:
    - Organized primarily based on geographic regions, reflecting operations of the home market.
    - Can lead to conflict and coordination issues due to dual structures.

• Worldwide Area Structure:
    - Suitable for firms with low diversification; structured by geographic areas.

• Worldwide Product Divisional Structure:
    - Ideal for diversified firms with initial product divisional structures; addresses coordination challenges.

• Global Matrix Structure:
    - Features dual decision-making across product divisions and geographic areas.
    - Often bureaucratic and challenging to manage.

Integrating Mechanisms

• International Strategy and Coordination Needs:   - Coordination requirements range from low in localization strategies to high in transnational strategies.

• Impediments to Coordination:
    - Differences in managerial goals and departmental orientations can hinder effective communication between subunits.

• Formal Integrating Mechanisms:
    - Complexity of integrating mechanisms increases as coordination needs rise:
      1. Direct contact.     2. Liaison roles.     3. Project teams.     4. Matrix structures.

• Informal Integrating Mechanism:
    - Knowledge networks foster informal communication channels among managers to facilitate information sharing across the organization.

Control Systems and Incentives

• Types of Control Systems:   1. Personal Controls: Direct oversight and interaction with subordinates; common in smaller firms.   2. Bureaucratic Controls: Established rules and procedures directing behavior; essential aspects include budgets and capital spending rules.   3. Output Controls: Set performance metrics such as profitability and market share; managers are evaluated based on these metrics.   4. Cultural Controls: Encourage self-regulation among employees aligned with organizational values.

• Incentive Systems:
    - Tools used to reward performance related to metrics set by output controls; they vary by employee and organizational function.

• Performance Ambiguity:
    - Difficulties in identifying the causes of performance variations, which increase with the complexity of the strategy:     - Localization Strategy: Low ambiguity.     - International Strategy: Moderate ambiguity; integration needed.     - Global Standardization Strategy: High ambiguity; significant interdependence.     - Transnational Strategy: Highest ambiguity, characterized by complex joint decision-making.

Organizational Change

• Organizational Inertia:
    - Resistance to change may stem from:     - Established power dynamics.     - Prevailing cultural norms and values.     - Senior management's adherence to existing paradigms.     - Institutional regulations.

• Implementing Organizational Change Steps:   1. Unfreezing the Organization: Senior management must articulate the need for change.   2. Moving to the New State: Significant and rapid adjustments are necessary.   3. Refreezing the Organization: Establishing a new culture and dismantling the old is a long-term process.

Synthesis: Strategy and Architecture

• Localization Strategy:
    - Emphasizes local responsiveness with decentralized operating decisions; low need for coordination.

• International Strategy:
    - Transfers core competencies to foreign subsidiaries, retains central control over core competencies, decentralized other decisions; moderate coordination needed.

• Global Standardization Strategy:
    - Focuses on optimizing location and experience curve economies; high integration and organizational culture required.

• Transnational Strategy:
    - Simultaneously aims for local responsiveness and experience curve economies while encouraging international learning; complex coordination and culture needed.

• Environment, Strategy, Architecture, and Performance:
    - Alignment of the firm’s strategy and architecture with the operational environment is critical for success.