Fourth Edition International Business. CHAPTER 13 The Organization of International Business.

Fourth Edition

InternationalBusiness

CHAPTER 13

The Organization of International Business

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Chapter Focus

Identifying the organization architecture that international businesses use to manage their global operations.Discuss the concepts of organization architecture and fit.Explore the various components of the architecture.Look at ways to match architecture and competitive strategy to achieve high performance.

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Organization Architecture and Profitability

Organization architecture is the totality of a firm’s organization, including structure, control systems and incentives, processes, culture and people.Superior enterprise profitability requires three conditions;

An organization’s architecture must be internally consistent.Strategy and architecture must be consistent.Strategy, architecture and competitive environments must be consistent.

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Organization Architecture

Structure

People

Culture

ProcessesControls

&Incentives

Figure 13.1

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Organization ArchitectureControl Systems:

Metrics used to measure subunit performance.Make judgments about managers’ abilities to run units.Incentives are devices to reward appropriate managerial behavior.

Processes:Manner in which decisions are made.Manner in which work is performed.Conceptually distinct from location of decision-making responsibility.

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Organization ArchitectureCulture:

Norms and value systems shared by the employees.

People:Not just employees, but the strategy to recruit, compensate, and retain individuals with necessary skills, values and orientation.

If a firm is going to maximize its profitability,

it must pay close attention to achieving internal consistency among the various

components of its architecture.

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Functional Organization Structure at Unilever

European Business Group

DetergentsFrozenFood Margarine

France

Germany

Spain

Figure 13.2

Minimize component inconsistencies through

intelligent design.

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Vertical Differentiation

Centralization:Facilitates coordination.Ensure decisions consistent with organization’s objectives.Top-level managers have means to bring about organizational change.Avoids duplication of activities.

Decentralization:Overburdened top management.Motivational research favors decentralization.Permits greater flexibility.Can result in better decisions.Can increase control.

Concerned with where decisions are made.

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Strategy and Centralization

Global

CentralizeMulti-domestic

Decentralize

International

Centralize for core competencies

Decentralize for operating decisions

Transnational

Both CentralizeAnd Decentralize

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Horizontal Differentiation

geographicalarea

How a firm divides itself into subunits

function

typeof

business

International mustreconcile conflict between product

and location.

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A Typical Functional Structure

Figure 13.3

Purchasing Manufacturing Marketing Finance

TopManagement

Buying units

Plants Branchsales units

Accountingunits

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The Functional Structure

Typically, the structurethat evolves in a

company’s early stages.

Coordination and control rests with top management.

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A Typical Product Division Structure

Figure 13.4

DepartmentPurchasing

DepartmentManufacturing

DepartmentMarketing

DepartmentFinance

Buying units

Plants Branchsales units

Accountingunits

Division productline A

Headquarters

Division productline B

Division productline C

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Product Division Structure

Probable next stage of development. Reflects company growth into

new products.

Eases coordination and control problems.

Each unit responsible for a product.

Semiautonomous and accountable for its performance.

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One Company’s International Division Structure

Figure 13.5

DomesticDomesticDivisionDivisionGeneral General Manager Manager

Product line AProduct line A

InternationalInternationalDivisionDivisionGeneralGeneralManagerManagerarea linearea line

HeadquartersHeadquarters

DomesticDomesticDivisionDivisionGeneral General Manager Manager

Product line BProduct line B

DomesticDomesticDivisionDivisionGeneral General Manager Manager

Product line CProduct line C

Country 1Country 1GeneralGeneralManagerManager

(product A, B, (product A, B, and / or C)and / or C)

Country 2Country 2GeneralGeneralManagerManager

(product A, B, (product A, B, and / or C)and / or C)

Functional units

Functional units

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International Division

Widely used.

1. Can create conflict between domestic and

foreign operations.2. Implied lack of

coordination between domestic and foreign

operations.Growth can lead

to worldwide structure.

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The International Structural Stages Model

Global Matrix

(“Grid”)

Area Division

Worldwide Product Division

International Division

Alternate Paths of Development

Foreign Product Diversity

Foreign Sales as a Percentage of Total Sales

Figure 13.4

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Worldwide Area Structure

Figure 13.5

Europeanarea

Middle East /Africa area

Far East area

Headquarters

North Americanarea

Latin Americanarea

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Worldwide Area Structure

Favored by firms with low degree of diversification.

Area is usually a country. Largely

autonomous.

Facilitates local responsiveness.

Encouragesfragmentation.

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A Worldwide Product Division Structure

Worldwideproduct groupor division A

Worldwide product group or division C

Headquarters

Worldwide product group or division B

Area 1

(domestic)

Area 2

(international)

Functional units

Figure 13.6

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Product Division

Reasonably diversified firms.

Attempts to overcome international division and worldwide area structure problems.

Believe that product value creation activities should

be coordinated worldwide.

Weak local responsiveness.

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A Global Matrix Structure

Figure 13.7

HeadquartersHeadquarters

Area 1Area 1 Area 2Area 2 Area 3Area 3

Product Product division Adivision A

Product Product division Bdivision B

Product Product division Cdivision C

Manager herebelongs to division Band area 2

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Matrix Structure

Attempts to meet needs of transnational

strategy.

Doesn’t work as well as theory predicts.

Conflict and power struggles.

“Flexible” matrix structures.

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Integrating MechanismsNeed for coordination:

Impediments;Different managerial orientations.Differing goals.Time zones, distance, nationality.

Low

High

Multidomestic

International

Global

Transnational

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Formal Integrating Mechanisms

Increasing complexityof integrating mechanism

Direct contact

Liaison roles

Teams

Matrix structures

Figure 13.8

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A Simple Management Network

Figure 13.9

GB

C D

A F

E

Informal contacts between managers within an enterprise.

Informal contacts between managers within an enterprise.

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Control Systems and Incentives

Types of controls:Personal.BureaucraticOutput.Cultural.

Incentives:Depends on employee and his/her tasks.Can be used to improve manager coordination between units.Need to account for national differences in institutions and culture.Caveat: beware of the rule of unintended consequences.

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Performance Ambiguity

A function of the interdependence among

subunits.

MultinationalOutput/Bureaucratic Global/Transnational

Cultural

Control Systems

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Interdependence, Performance Ambiguity, and the Costs of Control for the Four

International Business Strategies

Strategy Inter-dependence

PerformanceAmbiguity

Costs ofControl

Multi-domestic

Low Low

International Moderate Moderate

Global High High

Transnational

Low

Moderate

High

Very high Very high Very high

Table 13.1

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Processes

The manner in which decisions are made and work is performed within an organization.”

Cut across national boundaries as well as organizational boundaries.Can be developed anywhere within the firms global operations network.

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Organization Culture

Values and norms shared among people.Sources:

Founders and important leaders.National social culture.History of the enterprise.Decisions that result in high performance.

Cultural maintenance:Hiring and promotional practices.Reward strategies.Socialization processes.Communication strategy.

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Organization Culture and Performance

A “Strong” Culture:Not always good.Sometimes beneficial, sometimes not.Context is important.

Adaptive cultures.

Culture must match an organization’s architecture.Culture does not necessarily translate across borders.

Cu

lture

Transnational

Multidomestic

GlobalInternational

Strong

Weak

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A Synthesis of Strategy, Structure and Control Systems

Multi-domestic International Global Transnational

Verticaldifferentiation

DecentralizedCore competency;rest decentralized

Somecentralized

Mixedcentralized anddecentralized

Horizontaldifferentiation

Worldwidearea structure

Worldwide productdivision

Worldwideproductdivision

Informal matrix

Need forcoordination

Low Moderate High Very high

Integratingmechanisms

None Few Many Very many

Performance

ambiguityLow Moderate High Very high

Need forcultural

controls

Low Moderate High Very high

Structure and

control

Table 13.2

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Organizational ChangeChange to match competitive and strategy environment

Hard to change:Existing distribution of power and influence.Current culture.Manager’s preconceptions about the appropriate business model or paradigm.Institutional constraints.

Principles for change;Unfreeze the organization.Moving to the new state.Refreezing the organization.