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

  • Organizational Architecture:   - Involves the framework of a company that consists of its structure, culture, processes, and people.

  • Three Conditions for Superior Enterprise Profitability:   - Internal Consistency: Different elements of a firm’s organizational architecture must align well with each other.   - Strategic Fit: Organizational architecture must align with the firm's strategy.   - Competitive Position Consistency: The strategy and architecture must be sensible given current competitive market conditions.

Organizational Architecture Defined

  • Defined as the totality of an organization including:   - Formal Organizational Structure: How the organization is divided and how decisions are made.   - Control Systems: Metrics for measuring performance across subunits.   - Incentives: Mechanisms to reward managerial performance.   - Culture: Norms and values inherently shared by the organization's employees.   - Processes: The methods and mechanisms for decision-making and task performance.

Organizational Structure

Dimensions of Structure

  1. Vertical Differentiation:    - Centralization vs. Decentralization of decision-making responsibilities.   

  2. Horizontal Differentiation:    - Division of the organization into subunits.   

  3. Integrating Mechanisms:    - Coordination tools used between subunits.

Vertical Differentiation Arguments
Centralization:

  • Facilitates overall operational coordination.

  • Ensures consistency in decision-making relative to organizational objectives.

  • Empowers top-level managers to enact change.

  • Characteristics to avoid operational duplication among subunits.

Decentralization:

  • Frees top management to focus on critical issues.

  • Fosters motivation among lower-level managers.

  • Promotes operational flexibility.

  • Contributes to improved decision-making.

  • Can potentially increase control efficiencies.

Centralization in Global Strategy

  • Generally centralized for:   - Overall firm strategy.   - Major financial decisions and corporate governance.

  • May be decentralized for:   - Operational decisions, particularly in production and marketing.

Horizontal Differentiation Organizational Structures

  1. Functional Structure:    - Organized by function (e.g., production, marketing, R&D).

  2. Product Divisional Structure:    - Divisions are structured around distinct product lines.

  3. International Division:    - Typically organized geographically, replicating home market elements, but this can create coordination conflicts.

  4. Worldwide Area Structure:    - Best for firms with low diversification, based on functions.

  5. Worldwide Product Divisional Structure:    - Favored by firms with reasonable diversification based on product divisions.

  6. Global Matrix Structure:    - Incorporates differentiation in both product line and geographic area leading to clumsy bureaucratic methods.

Integrating Mechanisms

  • Addressing the need for coordination varies by international strategy:   - Localization Strategy: Low coordination need.   - International Strategy: Moderate coordination requirement; some centralization.   - Transnational Strategy: Highest need for coordination.

Impediments to Coordination

  • Divergent managerial orientations and goals.

  • Lack of mutual respect between subunits hindering effective communication.

Formal Integrating Mechanisms

  • Increase complexity based on the degree of coordination needed:   - Direct Contact: Straightforward interactions between managers.   - Liaison Roles: Designated individuals serve to facilitate cooperation.   - Teams: Specialized groups to handle larger collaborative projects.   - Matrix Structures: Complex framework requiring dual reporting lines.

Informal Integrating Mechanisms: Knowledge Networks

  • Created through informal contacts among managers.

  • Can serve as a conduit for knowledge sharing across the multinational enterprise.

  • Requires commitment to shared values and goals.

Control Systems and Incentives

Types of Control Systems

  1. Personal Controls:
       - Through personal interactions typically seen in smaller firms.

  2. Bureaucratic Controls:
       - Enforced through established rules and budgetary processes.

  3. Output Controls:
       - Use objective performance metrics related to profitability and productivity.

  4. Cultural Controls:
       - Control through the shared norms and values of the firm that encourages self-regulation among employees.

Incentive Systems

  • Rewards tied closely to performance metrics established in output controls.

  • Responsive to employee tasks and requires cooperation across subunits.

  • Adapted to account for cultural and institutional differences among nations.

Performance Ambiguity

  • Defined as uncertainty around the causes of performance outcomes.   - Localization: Lowest ambiguity associated with performance.   - International Strategy: Moderate performance ambiguity.   - Global Standardization: High and increasing interdependencies.   - Transnational: Highest ambiguity needing joint decision-making.

Processes

  • Consist of various decision-making and work performance components:   - Strategy formulation.   - Resource allocation.   - New product evaluations.   - Handling customer interactions and enhancing product quality.

  • Emphasize efficiency to lower operational costs and improve value creation.

Managing Processes in an International Business

  • Many managerial processes extend beyond organizational boundaries, traversing national limits, enhancing competitive advantage through innovation across the global network.

Organizational Culture

Creating and Maintaining Organizational Culture

  • Culture embodies the shared values and norms within the organization.

  • Influences stem from:   - Founders or leaders' impact.   - Broader societal influences and enterprise history.

Maintaining a Strong Culture

  • Through:   - Recruitment and promotions reflecting cultural values.   - Strategic reward systems.   - Processes facilitating socialization and communication within the firm.

Assessing Culture and Performance

  • Strong cultures manifest when managers hold consistent values impacting overall performance positively, regardless of whether the values are constructive.

  • Adaptive cultures prioritize customer and employee value, fostering positive transformations.

Synthesis: Strategy and Architecture

Various Strategies Defined

  1. Localization Strategy:    - Emphasis on local responsiveness with decentralized country-specific operational decisions.

  2. International Strategy:    - Transfer of core competencies with centralized control for core decision-making; moderate need for coordination.

  3. Global Standardization Strategy:    - Focus on achieving economies based on location and experience; strong central oversight required.

  4. Transnational Strategy:    - Strives for simultaneous efficiencies in multiple areas with significant operational centralization and high coordination need.

Environmental Fit

  • The need for firm strategy and architecture to consistently align with the environment in which it operates.

Organizational Change

Causes of Organizational Inertia

  • Inertia can arise from:   - Existing power distribution.   - Established cultural norms and values.   - Senior management biases towards specific business models.   - National regulatory constraints.

Steps for Implementing Change

  1. Unfreezing:    - Requires clear articulation of the need for transformation.

  2. Transition:    - Implementing significant changes promptly.

  3. Refreezing:    - Establishing new cultural values while dismantling old ones requires ongoing efforts.

Macro Environment Impact

  • Increase in corporate strategies emphasizing global and transnational approaches, contrasting with previous trends favoring localization.

  • International business strategies evolved in response to the shifting macro environment.