Organization of International Business
Organizational Architecture
Overview
Organizational architecture encompasses the entire organization of a firm, including:
Organizational structure: Defines the formal reporting relationships and grouping of activities.
Control systems and incentives: Mechanisms used to measure performance and motivate employees.
Processes, organizational culture, and people: The routines, values, and human capital within the organization.
For optimal profitability:
The elements of the organizational architecture must be internally consistent: They should support and reinforce each other.
The organizational architecture must align with the firm's strategy: It should facilitate the achievement of strategic goals.
The strategy and architecture must be consistent with each other and with competitive conditions: They must adapt to the external environment.
Components of Organizational Architecture
Organizational structure: The formal framework of the organization.
Control systems and incentives: Performance measurement and motivational tools.
Processes: How work is done and decisions are made.
Organizational culture: Shared values and norms.
People: Human capital and skills.
Dimensions of Organizational Structure
Organizational structure has three dimensions:
Vertical differentiation: Location of decision-making responsibilities within the structure.
Centralized decision-making: Decisions made at the top of the organization.
Decentralized decision-making: Decisions delegated to lower levels.
Horizontal differentiation: Formal division of the organization into sub-units.
Integrating mechanisms: The mechanisms for coordinating sub-units.
Horizontal Differentiation
Initially, most firms lack a formal structure but develop a functional structure as they grow.
Firms may switch to a product divisional structure, where each division is responsible for a distinct product line.
When firms expand internationally, they often group all their international activities into an international division.
Structure Types
Functional structure: Groups activities by function (e.g., marketing, finance).
Product divisional structure: Organizes activities around product lines.
International divisional structure: Separates domestic and international activities.
Further Expansion
Firms that continue to expand may adopt:
Worldwide product divisional structure: Suited for reasonably diversified firms.
Worldwide area structure: Favored by firms with a low degree of diversification and a domestic structure based on function.
Global matrix structure: Aims to minimize the limitations of the worldwide area structure and the worldwide product divisional structure.
Integration of Subunits
Regardless of the structure type, firms require a mechanism to integrate subunits.
Formal integrating mechanisms range from direct contact to complex integrating mechanisms.
Many firms use informal integrating mechanisms, such as a knowledge network.
Formal Integrating Mechanisms
Increasing complexity of integrating mechanisms:
Direct contact: Managers interact directly to coordinate.
Liaison roles: Specific individuals are responsible for communication between subunits.
Teams: Temporary groups formed to address specific issues.
Matrix structure: Dual reporting relationships to foster integration.
Informal Integrating Mechanisms
Knowledge network: Informal relationships among managers for information sharing.
Control Systems and Incentives
Types of control systems:
Personal controls: Direct supervision.
Bureaucratic controls: Rules and procedures.
Output controls: Performance targets.
Cultural controls: Shared values and norms.
Incentive systems:
Incentives depend on employees and their tasks.
Link incentives to performance at a higher level in the organization.
Adapt to national differences in institutions and culture.
Take into account unintended consequences.
Processes
Processes: The manner in which decisions are made and work is performed within the organization.
Can be found at many different levels within an organization.
Core competencies or valuable skills of a firm are often embedded in its processes.
Efficient and effective processes can lower the costs of value creation and add additional value to a product.
Organizational Culture
Organizational culture: The values and norms that employees are encouraged to follow.
Evolves from:
Founders and important leaders
National social culture
The history of the enterprise
Decisions that resulted in high performance
Managers in companies with a “strong” culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed.
Strategy and Architecture
Firms pursuing a localization strategy focus on local responsiveness.
Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries.
Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies.
Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning.
Environment, Strategy, Architecture, and Performance
A “fit” between strategy and architecture is necessary for a firm to achieve high performance.
The firm’s strategy must be consistent with the environment in which the firm operates.
The firm’s organization architecture must be consistent with its strategy.
Organizational Change
Organizational inertia: Resistance to change within an organization.
To implement organizational change:
Unfreeze the organization through shock therapy.
Move the organization to a new state through proactive change in architecture.
Refreeze the organization in its new state.