Strategic Analysis: The Organization of International Business

Opening Case: Unilever

  • Founded in 1930 via a merger between Dutch margarine producer Margarine Unie and British soapmaker Lever Brothers.
  • Owns over 400 brands.
  • Dual-listed company: Unilever NV + Unilever PLC, operating as a single business with a shared board.
  • Different shareholder constituencies; shares are not convertible or exchangeable between the two companies.
  • Managed through Foundation Agreements, ensuring unity of management, operations, shareholders’ rights, purpose, and mission.
  • Equalization Agreement regulates common shareholder rights between NV and PLC, ensuring similar positions.
  • Integration coordinated via the Unilever Group through various agreements.
  • Architecture gives power, responsibility, and accountability to both parents.
  • Central management ensures country operations serve overall global business interests while recognizing the importance of cultural interfacing with customers and local project cooperation.
  • Gains from globalization are reaped while paying attention to local responsiveness through scale and location economies.

Organizational Architecture

  • Refers to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people.
  • Key components:
    • Structure
    • Incentives and Control
    • Processes
    • Culture
    • People

Organizational Structure

  • Location of decision-making responsibilities (centralized or decentralized).
  • Formal division into subunits (product divisions, national operations, functions).
  • Establishment of integrating mechanisms to coordinate subunit activities (e.g., cross-functional teams).

Control Systems

  • Metrics used to measure subunit performance (profitability, ROE, ROI).

Incentives

  • Devices used to reward appropriate managerial behavior.
  • Relationship between incentives and performance metrics.

Processes

  • How decisions are made and work is performed within the organization.

Organizational Culture

  • Norms and value systems shared among employees.
  • Significant impact on firm performance.

People

  • Employees of an organization (skills, values, orientations).
  • Strategy used to recruit, compensate, and retain employees.

Three Dimensions of Organizational Structure

  • Vertical differentiation: location of decision-making responsibilities.
  • Horizontal differentiation: formal division of the organization into subunits.
  • Integrating mechanisms: mechanisms for coordinating subunits.

Vertical Differentiation: Centralization

  • Centralization facilitates coordination and integration of operations.
  • Ensures decisions align with organizational objectives.
  • Provides top-level managers the means to bring about major organizational changes.
  • Avoids duplication of activities.

Vertical Differentiation: Decentralization

  • Top management can become overburdened with centralized decision-making, resulting in poor decisions.
  • Motivational research favors decentralization; people are believed to do more when they have a greater degree of freedom and control over their work.
  • Flexibility: decentralization allows for more rapid response to changes in the environment.
  • Better decision making: decisions made by individuals with better information about specific tasks or events.
  • Decentralization can be used to establish autonomous subunits.

Global Strategy and Centralization

  • Choice between centralization and decentralization is not absolute.
  • Firms pursuing a global standardization strategy must decide how to disperse value creation activities globally to realize location and experience economies, requiring coordination and some centralization of operating decisions.
  • Firms pursuing a localization strategy face strong pressures for decentralizing operating decisions to foreign subsidiaries to better accommodate local tastes and preferences.
  • Firms pursuing an international strategy tend to maintain centralized control over core competencies and decentralize other decisions to foreign subsidiaries.
  • Firms pursuing transnational strategies face increased challenges, requiring some centralized control over global production centers and decentralization of many operating decisions.
    • Some operating decisions are centralized, while others are decentralized in transnational firms.

Horizontal Differentiation

  • How the firm divides itself into subunits; typically based on functions, type of business, or geographic area.
  • Domestic firms usually start with no formal structure, run by single entrepreneurs.
  • As they grow, they split into functions reflecting value creation activities (e.g., production, R&D), coordinated and controlled by top management.
  • Decision making is centralized.
  • Further horizontal differentiation may be required if the firm significantly diversifies its product offering (entering new business areas).
  • Functional structure can trigger coordination and control problems; it may become difficult to identify the profitability of each distinct business area; supervision may be challenging.
  • Many firms at this stage choose a product divisional structure.

International Division

  • When firms expand abroad, they usually group all their international activities into an international division.
  • This has tended to be the case for firms organized on the basis of functions and on the basis of product divisions.
  • Regardless of its domestic structure, its international division tends to be organized geographically.

Drawbacks of International Division

  • The dual structure it creates contains inherent potential for conflict and coordination problems between domestic and foreign operations.
  • Heads of foreign subsidiaries are not given as much voice in the organization as the heads of domestic functions (in the case of functional firms) or divisions (in the case of divisional firms).
  • Lack of coordination between domestic operations and foreign operations, which are isolated from each other in separate parts of the structural hierarchy.
  • This can inhibit the worldwide introduction of new products, the transfer of core competencies between domestic and foreign operations, and the realization of location and experience curve economies.

The international structural stages model by Stopford and Wells

  • Alternate Paths of Development
    • International Division
    • Worldwide Product Divisional Structure (WPDS)
    • Global Matrix («Grid»)
    • Worldwide Area
      • Structure (WAS)

Worldwide Area Structure (WAS)

  • Favored by firms with a low degree of diversification and a domestic structure based on functions.
  • Under this structure, the world is divided into geographic areas (i.e., country or group of countries).
  • Each area represents an autonomous entity with its own set of value creation activities (e.g., its own production, marketing, R&D).
  • Decisions related to these activities are decentralized to each area, with headquarters retaining authority for the overall strategic direction and the finances of the firm.
  • Facilitates local responsiveness.
  • However, this structure also encourages fragmentation of the organization into highly autonomous entities.
  • Such fragmentation may hamper the transfer of core competencies between areas and the realization of location economies and experience curve economies.
  • Consistent with a local standardization strategy but makes it difficult to realize the benefits of global standardization.

Worldwide Product Divisional Structure (WPDS)

  • Adopted by firms that are reasonably diversified and have domestic structures based on product divisions.
  • Designed to overcome the coordination problems that arise with the international division and worldwide area structures.
  • Provides an organizational context that enhances the consolidation of value creation activities at key locations necessary for realizing location and experience curve economies.
  • Facilitates the transfer of core competencies within a division’s worldwide operations.
  • The main problem with the structure is the limited voice it gives to area or country managers since they are seen as subservient to product division managers – with the result being a lack of local responsiveness.

WAS and WPDS: strengths and weaknesses

  • WAS
    • Strength: facilitates local responsiveness
    • Weaknesses: inhibit realization of location and experience economies and transfer of core competencies
  • WPDS
    • Strength: facilitates realization of location and experience economies.
    • Weaknesses: lack of local responsiveness
  • Localization strategy
  • Global standardization strategy

Global Matrix Structure

  • In this matrix, horizontal differentiation proceeds along two dimensions: product division and geographic area.
  • Responsibility for operating decisions pertaining to a particular product should be shared by the product division and the various areas of the firm.
  • The nature of product offering, marketing strategy, and business strategy to be pursued in area 1 for the products produced by division A are determined by a conciliation between division A and area 1 management.
  • Drawbacks
    • Requires too many meetings (time-consuming)
    • Slow decision-making
    • Few flexibility, inability to rapidly respond to changes in the environment
    • Conflict and power struggle in view of dual-hierarchy structure
    • Lack of accountability

The need for coordination

  • Firms pursuing a localization strategy are primarily concerned with local responsiveness.
  • In this case, as each area is established as a stand-alone entity, the need for coordination between areas is minimized.
  • Such a need is greater in firms pursuing an international strategy and trying to profit from the transfer of core competencies between home and abroad.
  • This need is also greater for firms pursuing global standardization strategies.
  • Greatest need for coordination in transnational firms.

Formal integrating mechanisms:

  • Direct contact
  • Liaison roles
  • Teams
  • Matrix structures
  • Increasing complexity of integrating mechanism
  • Managers of the various subunits contact each other to solve common issues.
    • Not effective if managers have different orientations
  • Coordination may be improved by giving a person in each subunit responsibility for coordinating with another subunit on a regular basis.
    • As such, people involved establish permanent relationships.
  • Useful when any aspect of operations or strategy requires the cooperation of two or more subunits.
    • In which all roles are integrating roles

Informal integrating mechanisms

  • KNOWLEDGE NETWORKS: a network for transmitting information within an organization that is based not on formal organizational structure but on informal contacts between managers within a firm and on distributed information systems.
  • A network exists when managers with different locations within the firm are at least linked to each other indirectly.

Control systems

  • Key to ensuring that the various subunits of the firm implement actions that are consistent with the overall firm’s goals.
  • Four main types:
    • PERSONAL CONTROL
    • BUREAUCRATIC CONTROL
    • OUTPUT CONTROL
    • CULTURAL CONTROL

PERSONAL CONTROL

  • Through personal contacts with subordinates (very common in small firms).
  • This kind of control also structures relationships between managers at different levels in multinational firms.

BUREAUCRATIC CONTROL

  • Through a system of rules and practices that determines the actions of subunits (e.g., budget and capital spending rules).
  • Budgets allow headquarters to specify the amount a subunit can spend in a given year; capital spending rules give headquarters additional control over how the money is spent.

OUTPUT CONTROL

  • Setting goals for subunits to achieve and expressing those goals in terms of metrics such as profitability, productivity, etc.
  • The performance of subunits managers is evaluated based on the ability to reach these goals (rewards, corrective actions).
  • CONTROL ACHIEVED BY COMPARING ACTUAL PERFORMANCE AGAINST TARGETS AND ACCORDINGLY TAKE ACTIONS

CULTURAL CONTROL

  • Norms and values according to which employees tend to control their own behavior.

Incentive Systems

  • Devices used to reward appropriate employee behavior (e.g., annual bonus pay).
  • Closely linked to performance metrics.
  • Vary depending on employees and their tasks
  • BASIC PRINCIPLE: incentive scheme for an individual employee is linked to an output target that he or she has some control over and can influence.
  • May help ensure coordination between different managers: link managers rewards to profitability of the firm.
  • Need to be adjusted to account for the national differences in institutions and culture
  • Managers need to acknowledge that incentive systems can have unintended consequences

Incentive and performance

  • Cobra effect
  • Blood donor effect

Cobra Effect

  • The British government was concerned about the number of venomous cobras in the city of Delhi, and so it offered a reward for every dead cobra.
  • Successful at the beginning as large numbers of snakes were killed for the reward.
  • Overtime, however, some citizens started to breed cobras to get income from their killing.
  • When the government acknowledged this, it stopped the reward program -> cobra breeders set the worthless snakes free and the cobra population further increased.

Blood Donor Effect

  • Suppose we want to increase the volume of blood donations, so we introduce monetary incentives (extrinsic rewards) to pay donors.
  • Scholars and scientific evidence shows that this system decreases the number of blood donors as people that donated as they perceived it was the right thing to do did not donate anymore as it was now a paid service and the financial incentive was not enough for them -> INTRINSIC MOTIVATION REDUCED.

Performance Ambiguity

  • Causes of subunit’s poor performance are not clear.
  • This comes to be common particularly when there is significant interdependence among subunits within the organization.
  • In such a situation, a subunit that achieves poor performance can blame another subunit which is strictly related to, and this subunit can do the same – top management will not easily know who to blame!

Performance Ambiguity and Global Strategy

  • LOCALIZATION STRATEGY: as its national operation constitutes a stand-alone entity, performance ambiguity is low.
  • INTERNATIONAL STRATEGY: since it is important to grant the transfer of core competencies from foreign subsidiaries to home country, there is a higher level of interdependence, so there might be performance ambiguity.
  • GLOBAL STANDARDIZATION STRATEGY: the existence of a global network of value creation activities, many of whom are highly interdependent, so high performance ambiguity.
  • TRANSNATIONAL STRATEGY: extremely high level of integration of subunits require a high degree of joint decision-making and interdependencies, so very high performance ambiguity.

Costs of control

  • The amount of time top management must devote to monitoring and evaluating subunits’ performance.
  • Directly proportional to performance ambiguity.
  • Firms pursuing global standardization and transnational strategies face higher costs of control (compared to firms pursuing localization and international strategies).

To sum up

  • STRATEGY INTERDEPENDENCE PERFORMANCE AMBIGUITY COSTS OF CONTROL
    • Localization Low Low Low
    • International Moderate Moderate Moderate
    • Global High High High
    • Transnational Very high Very high Very high

Processes

  • The way in which decisions are made and work is performed within a firm.
  • There exist different kinds of processes (i.e., strategy formulation, resources allocation, operations).
  • Core competencies and skills are embedded within these processes.
  • Processes span organizational boundaries (embracing different subunits and national boundaries)
  • Processes that lead to a firm's competitive advantage may be developed anywhere in the global network of operations

Organizational Culture

  • Culture: a system of values and norms that are shared among people.
  • Values: abstract ideas about what a group believes to be right.
  • Norms: social rules and guidelines that prescribe appropriate behavior in particular situations.

What impacts on organizational culture?

  • Leadership
  • Broader social culture
  • History of the firm

MECHANISMS THAT MAINTAIN CULTURE

  • Hiring and promotional practices of the organization
  • Reward strategies
  • Socialization processes
  • Communication strategy

Organizational culture and international business

  • Strong organizational culture: almost all managers share a relatively consistent set of values and norms that have a clear impact on the way work is performed.
  • New employees adopt these values very quickly, and those who do not fit in with the core values tend to leave. (these organizations usually are seen by outsiders as having a certain way of going things -> Amazon)
  • STRONG = GOOD
  • STRONG = HIGH PERFORMANCE

To sum up

  • Structure and control Localization International Global standardization Transnational
    • Vertical differentiation Decentralized Mixed Some centralization Mixed
    • Horizontal differentiation WAS WPDS WPDS Informal matrix
    • Need for coordination Low Moderate High Very high
    • Integrating mechanisms None Few Many Significant mechanisms required
    • Performance ambiguity Low Moderate High Very high
    • Need for cultural controls Low Moderate High Very high

Organizational Change and Inertia

  • Multinational firms often need to change to adapt to shifting conditions in the environment.
  • However, they may face organizational inertia, in view of:
    • Distribution of power and influence
    • Culture as expressed in norms and values
    • Senior managers’ preconceptions about appropriate business models or paradigms
    • Institutional constraints