13
The Organization of International Business
Learning objectives
l Identify the different kinds of organizational structures and internal control mechanisms that international businesses can use to manage global operations.
l Discuss the advantages and disadvantages of centralized and decentralized decision systems.
l Present the basic types of organizational forms that multinational firms use.
l Describe the control systems and integrating mechanisms available to multinational firms
l Show how the organizational architecture, control systems, integrating systems, and decision making choices multinational firms have available must be consistent with their strategy and industry environment
This chapter identifies the organizational architecture that international businesses use to manage and direct global operations. The core argument outlined in this chapter is that superior enterprise profitability requires three conditions:
First, the different elements of a firm’s organizational architecture must be internally consistent.
Second, the organizational architecture must match or fit the strategy of the firm—strategy and architecture must be consistent.
Third, the strategy and architecture of the firm must be consistent with competitive conditions prevailing in the firm’s markets.
OUTLINE OF CHAPTER 13: THE ORGANIZATION OF INTERNATIONAL BUSINESS
Opening Case: A Decade of Organizational Change at Unilever
Introduction
Organizational Architecture
Organizational Structure
Vertical Differentiation: Centralization and Decentralization
Horizontal Differentiation: The Design of Structure
Integrating Mechanisms
Control Systems and Incentives
Types of Control Systems
Incentive Systems
Control Systems, Incentives, and Strategy in the International Business
Processes
Organizational Culture
Creating and Maintaining Organizational Culture
Organizational Culture and Performance in the International Business
Synthesis: Strategy and Architecture
Localization Strategy
International Strategy
Global Standardization Strategy
Transnational Strategy
Environment, Strategy, Architecture, and Performance
Organizational Change
Organizational Inertia
Implementing Organizational Change
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: Strategic and Organizational Change at Black & Decker
TEACHING SUGGESTIONS
In order to get students thinking about the trade-off implicit in any strategic choice, this small group or individual exercise can be used at the beginning of class.
You’ve developed very popular up-scale but reasonably priced clothing fashion line for young people, producing designs in a number of countries, manufacturing in low-cost locations, and with retail outlets in major US and European cities. Demand is popping and you have access to plenty of production capacity and capital. How should you organize the business outside the U.S.? Should you set up reasonably independent companies, subsidiaries, in each foreign market? What would that do and not do for you? Or do you want to impose a strict brand image, procedures, and central planning from headquarters, where your offices are? What are the plusses and minuses of that approach?
TRANSITION
The connection with the Unilever Opening Case is clear. They began with a decentralized system and have been rapidly moving towards increasing integration.
l Unilever is a $50 billion company selling more than 1000 products in virtually every country.
l Historically Unilever was organized into decentralized subsidiaries in each major national market. In the early 1990s there were 17 Unilever subsidiaries in Europe.
l Decentralization allowed local managers to respond to its unique market conditions and was a source of strength.
l Unilever worked hard to build a common culture to knit together a decentralized disparate organization.
l By the mid 1990s Unilever’s decentralized structure was working against its efforts to build global brands and cut costs in the face of competition.
l In 1996 Unilever introduced a new structure based on regional business groups.
l The 17 European companies relinquished autonomy in their markets to help develop a unified pan-European strategy.
LECTURE OUTLINE FOR CHAPTER 13
This teaching outline follows the PowerPoint presentation provided along with this instructor’s manual. The
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slides include extensive notes that are printable under view—notes page. What follows is a summary.
Slide 13-3 Opening Case: Organizational Change at Unilever
When its structure was decentralized, Unilever used meetings and conference to create a common culture. However, there was still a lot of waste related to redundancy in the organization. The 1996 reorganization by regional business groups and the use of programs such as Lever Europe developed new capabilities in cost reduction as well as global product introduction.
Slide 13-4 Introduction
Organization architecture includes structure, control systems, incentives, processes, culture and people. Three consistency conditions must be satisfied for an organization to deliver profitability: architecture must be internally consistent; strategy and architecture must be consistent; strategy and architecture together must be consistent with the competitive environment of the firm.
Slides 13-5, 13-6, 13-7 Organizational Architecture
Structure and control systems establish decision-making responsibilities and integration mechanisms. Control systems measure and evaluate managerial performance and the performance of sub-units. Incentives connect to control systems, and processes need to be consistent with the strategic objectives of the organization. Efforts to shape values and norms in an organization are intricately linked to human resource practices, especially at the selection and recruitment stages.
Slide 13-8 Organizational Structure
Vertical differentiation locates descision-making. Horizontal differentiation locates control boundaries (units/sub-units). Integrating mechanisms provide for coordination.
Slide 13- 9 Centralization v. Decentralization
The trade-offs here are control and local responsiveness.
Slide 13-10 Horizontal Differentiation (HD)
The typical entrepreneurial firm begins with no formal structure. As the firm grows, when the decision load becomes too intense for one person to handle, the firm is split into functions representing value creation activities. If growth continues, eventually the complexities of size push for the re-structuring of the firm into a divisional form.
Slide 13-11 Typical Functional Structure
Slide 13-12, 13-13 International Division
The International Division structure is organized by geography.
Slide 13-14 Problems with the International Structure
These have to do with conflict between foreign and domestic, foreign managers given a secondary role, and lack of coordination.
Slide 13-15 International Structural Stages Model
Slides 13-16, 13-17 Worldwide Area Structure
The world is divided into areas. An area may be a country or a group of countries. Each area is self-contained and autonomous. While this structure supports local responsiveness, it can lead to fragmentation because of lack of coordination across the areas.
Slides 13-18, 13-19 Worldwide Product Divisional Structure
Some firms shift to a worldwide product divisional structure as international growth increases. Each product division is autonomous and responsible for its own value creation activities. This gives managers latitude to realize location and experience curve economies. However, area or country managers tend to have little voice in this structure and this can have a devastating effect on local responsiveness.
Slides 13-20, 13-21 Global Matrix Structure
When a firm’s strategy simultaneously demands location and experience curve economies, local responsiveness, and internal transfer of core competencies the global matrix structure does the best job. It is an attempt to simultaneously capture the benefits of the worldwide area structure and the worldwide product divisional structure. The balancing act of the global matrix structure comes with its own challenges. It slows down decision making, increases the likelihood of conflict between the area structure and the product structure, and accountability is always a challenge when each manager has to wear 2 hats – one area-specific and one product-specific.
Slide 13-22 Integrating Mechanisms
Different strategies make different demands on the manager in terms of the need for coordination.
Slide 13-23 Impediments to Coordination
Differing goals and lack of respect; different orientations due to different tasks; differences in nationality, time zone and distance.
Slides 13-24, 13-25 Formal Integrating Systems
Direct contact, liaison roles, teams, and matrix structures
Slides 13-26, 13-27 Informal Integrating Mechanisms
Informal integration is a way around problems with the formal systems. It requires the organization have a teamwork spirit that embraces as many managers as possible in order to make informal mechanisms work. Two common techniques that are used to establish informal networks are; (1) the use of an appropriately designed information system (2) the use of management development policies that promote network behavior.
Slide 13-28 Control systems and incentives
Slide 13-29 Factors that Influence Incentive Systems
(1) The seniority of the employee and the nature of work done (2) The output target set for the employee and the degree of influence (3) The amount of cooperation between subunit managers (4) National differences in institutions and culture.
Slides 13-30, 13-31 Performance Ambiguity
Performance ambiguity exists when the causes of a subunit’s poor performance are not clear and it is caused by the high degree of interdependence between subunits within the organization.
Slide 13-32 Implications for Control and Incentives
The costs of controlling transnational firms are higher than the costs of controlling firms pursuing other strategies.
Slide 13-33 Processes
In a global enterprise many processes pose severe challenges to managers because they cut across organizational boundaries as well as national boundaries (e. g: product development). Also, valuable new processes that could create significant competitive advantage could develop anywhere in the firm’s global network.
Slide 13-34 Organizational Culture
Organizational culture is a social construct, a system of values and norms shared among people.
Slide 13-35 Culture and Performance
Strong cultures and adaptive cultures. The “correct” culture is context-specific.
Slide 13-36 Synthesis of strategy and Architecture
Slide 13-37, 13-38 Organizational Change
Change is often difficult to achieve due to organizational inertia. The inertia may arise from several sources: possible redistribution of power and influence among managers; strong existing culture; senior manager’s preconceptions about the appropriate business model; institutional constraints such as national regulations including local content rules regarding layoffs. Unfreeze-move to new state-refreeze.
Slide 13-39 Looking Ahead to Chapter 14
Entry Strategy and Strategic Alliances
ANSWERS TO CRITICAL THINKING AND DISCUSSION QUESTIONS FOR CHAPTER 13
QUESTION 1: "The choice of strategy for a multinational firm to pursue must depend upon a comparison of the benefits of that strategy (in terms of value creation) with the costs of implementing that strategy (as defined by organizational architecture necessary for implementation). On this basis, it may be logical for some firms to pursue a multi domestic strategy, others a global or international strategy, and still others a transnational strategy." Is this statement correct?
ANSWER 1: Yes, this statement is correct. There is a cost-benefit trade-off with strategy choice. The costs of structure and controls for different strategies can differ widely. Transnational is usually very high, while localization is quite low. On the other hand, a localization strategy does not confer the many benefits of international, global, or transnational strategies. Remember that the strategy must fit with the competitive environment of the firm and the organizational structure and control systems of the firm must be consistent with its strategy. (See Table 13.2)
QUESTION 2: Discuss this statement. "An understanding of the causes and consequences of performance ambiguity is central to the issue of organizational design in multinational firms."
ANSWER 2: Organizational design creates interdependence, which may lead to performance ambiguities. Different organizational designs can remove performance ambiguities, shift them to a different level in the hierarchy, or create new performance ambiguities. It makes sense to analyze the cause of performance ambiguities as a part of the organizational design process. It also makes sense to analyze the opportunities for performance ambiguity that a new design might present. How an international company is organized (its architecture) may be a main reason a company does or does not perform well.
QUESTION 3: Describe what organizational architecture a transnational firm might adopt to reduce the costs of control.
ANSWER 3: A transnational, like all multinational firms, can use bureaucratic and output controls to some extent. However, the use of output controls is limited due to performance ambiguities. Bureaucratic controls are less effective when there are multiple lines of responsibility. Incentives for cooperation are one way to address this challenging issue. Another is the development of a strong culture. This culture could encourage cooperation by encouraging managers to buy into norms and value systems related to high performance. Such a culture could also give managers from interdependent sub-units an incentive to look for ways to work out any problems that might arise between them. A strong, success-oriented culture would lead to lower control costs.
QUESTION 4: What is the most appropriate organizational architecture for a firm that is competing in an industry where a global strategy is appropriate?
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