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2. Chapter 13 Organization of International Business
3. Organizational Architecture The totality of a firm’s organization,
including the structure, control systems
and incentives, processes, culture and people
4. Organizational Architecture 3 Conditions Required for
Superior Enterprise Performance
Different elements of the organizational architecture are internally consistent
Organizational architecture matches or fits the strategy of the firm
Strategy and architecture of the firm are consistent with each other, and consistent with competitive conditions
5. Organizational Architecture
6. Organizational Structure Formal division of the organization into subunits
Location of decision-making responsibilities within that structure (centralized versus decentralized)
Establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams or pan-regional committees
7. Control Systems Metrics used to measure performance of subunits and to make judgments about how well managers are running those subunits
8. Incentives Devices used to reward appropriate managerial behavior
Incentives are closely tied to performance metrics
9. Processes Manner in which decisions are made and work is performed within the organization
While both processes and decision-making both involve decisions, processes are conceptually distinct from the location decision-making responsibilities within an organization
10. Organizational Culture Norms and value systems that are shared among the employees of an organization
Organizations are societies of individuals who come together to perform collective tasks
Organizations have their own distinctive patterns of culture and subculture
Has a significant impact on how a firm performs
11. People Not just the employees of the organization
Also the strategy used to recruit, compensate, and retain those individuals and the type of people they are in terms of their:
skills
values
orientation
12. Organizational Architecture
13. Organizational Structure Three Dimensions
Vertical Differentiation
Location of decision-making responsibilities within a firm
Horizontal Differentiation
Formal division of the organization into subunits
Integrating Mechanisms
Mechanisms for coordination between subunits
14. Vertical Differentiation Centralization And Decentralization
Vertical differentiation determines where in the firm’s hierarchy is the decision-making power concentrated
15. Vertical Differentiation Arguments for Centralization
Facilitates coordination
Helps ensure that decisions are consistent with the organization’s objectives
Gives top-level managers the means to bring about organizational change
Avoids duplication of activities across subunits
16. Vertical Differentiation Arguments for Decentralization
Relieves the burden of centralized decision-making
Individuals with freedom and control are motivated
Permits greater flexibility to environmental changes
Results in better decisions made closer to the situation
Increases control by creating subunit accountability
17. Strategy and Centralization The choice between centralization and decentralization is not absolute and depends on the:
type of decision being made
firm’s strategy
18. Horizontal Differentiation: The Design Of Structure Concerned with how the firm decides to divide itself into sub-units
The decision is usually based on:
organizational function
type of business
geographical area
19. Structure of Domestic Firms Most firms begin with no formal structure
As they grow, the organization is split into functions reflecting the firm’s value creation activities
Functions are typically coordinated and controlled by top management and decision-making tends to be centralized
Resulting in a typical functional structure
20. Functional Structure
21. Structure of Domestic Firms If the firm diversifies its product line, further horizontal differentiation may be necessary
The functional structure may become too clumsy and create problems of coordination and control
Firms may switch to a product divisional structure where each division is responsible for the operating decisions and performance of a distinct product line
22. Product Divisional Structure
23. International Divisional Structure When firms expand internationally, they often group all of their international activities into an international division
In time, it might prove viable to manufacture the product in each country resulting in firms with a:
functional structure which replicate the functional structure in every country in which they do business
divisional structure which replicate the divisional structure in every country in which they do business
This dual structure contains inherent potential for conflict and coordination problems between domestic and foreign operations
24. International Divisional Structure
25. Adopting a Worldwide Structure As firms continue to expand internationally, they will abandon the international division structure and its inherent problems and adopt a either a:
worldwide area structure which is favored by firms with a low degree of diversification and a domestic structure based on functions
worldwide product divisional structure which is favored by diversified firms that have domestic product divisions
26. International Structural Stages Model
27. Worldwide Area Structure Divides the world into self-contained, autonomous geographic areas which:
decentralizes operational authority
facilitates local responsiveness
Encourages fragmentation of the organization into highly autonomous entities which:
restricts the transfer of core competencies within the firm
limits the ability to realize location and experience curve economies and gains associated with global standardization
Consistent with a localization strategy
28. Worldwide Product Divisional Structure Each division is self-contained and autonomous
Each division coordinates its value creation activities of each product division
Helps realize location and experience curve economies
Facilitates the transfer of core competencies and simultaneous worldwide product introductions
Country managers are subservient to product division managers which limits local responsiveness
29. Worldwide Product Divisional Structure
30. Global Matrix Structure Reduces the limitations of the worldwide area structure and the worldwide product divisional structure
Allows for differentiation along two dimensions;
product division
geographic area
Product divisions and geographic areas have equal decision-making responsibility for operating decisions that can result in:
a bureaucratic and slow organization
power struggles between areas and product divisions
lack of accountability with finger-pointing between divisions when something goes wrong
31. Global Matrix Structure
32. Integrating Mechanisms As firms divide themselves into subunits, firms need formal and informal mechanisms to integrate their subunits
Need for coordination between subunits varies with the strategy of the firm:
localization strategy (lowest)
international strategy
global standardization strategy
transnational strategy (highest)
33. Integrating Mechanisms Coordination can be complicated by differences in the orientation and goals of subunits
These differences can result in a lack of respect and inhibit communication between the managers of subunits
Differences in subunit orientations can be reinforced by the separations of:
time zone
distance
culture
34. Formal Integrating Mechanisms
35. Informal Integrating Mechanism Knowledge Networks
Network for transmitting information within a firm that is based not on formal organization structure, but on informal contacts between managers within an enterprise and on distributed information systems
Non-bureaucratic conduit for knowledge flows within a multinational enterprise nurtured by information systems and management development programs
Successful knowledge networks embrace as many managers as possible who adhere to a common set of norms and share common goals that override their subunits goals
36. Simple Management Network
37. Organizational Architecture
38. Control Systems and Incentives A major task of a firm’s leadership is to control the various subunits of the firm to ensure their actions are consistent with the firm’s overall strategic and financial objectives
Multinational firms use four types of control systems:
personal controls
bureaucratic controls
output controls
cultural controls
39. Types of Control Systems Personal Controls
Control by personal contact with subordinates
Mostly used in small firms
Bureaucratic Controls
System of rules and procedures that directs the actions of subunits
Most prevalent are budgets and capital spending rules
40. Types of Control Systems Output Controls
Setting of goals for subunits to achieve and express them in terms of relatively objective performance metrics
Control is achieved by comparing actual vs. targeted performance and intervening selectively to take corrective action
Cultural Controls
exist when employees “buy into” the norms and value systems of the firm which reduces the need for direct supervision
41. Incentive Systems Devices used to reward appropriate employee behavior that are usually closely tied to performance metrics
Type of incentive used often varies and should:
match the employees and the work being performed
promote cooperation between sub-unit managers
reflect national differences in institutions and culture
recognize that they can have unintended consequences
42. Performance Ambiguity Exists when the causes of a subunit’s performance are not clear
Common when a subunit’s performance is partly dependent on the performance of another subunit
High levels of strategic interdependence between subunits creates high levels of performance ambiguity
localization strategy (lowest)
international strategy
global standardization strategy
transnational strategy (highest)
43. Interdependence, Performance Ambiguity and Cost of Control
44. Organizational Architecture
45. Processes Many processes cut across national boundaries as well as organizational boundaries and can be developed anywhere within a firm’s global operations
Often core competencies or valuable skills of a firm are embedded in its processes
Efficient and effective processes can lower the cost of value creation and add additional value to the product
Formal and informal integrating mechanisms can help firms leverage these processes
46. Organizational Architecture
47. Organizational Culture Organizations have their own values and norms that employees are encouraged to embrace and follow
Organizational culture tends to change very slowly
Emerges from:
founders and important leaders
national social culture
history of the enterprise
decisions that resulted in high performance
48. Maintaining Organizational Culture Firms generally maintain their culture through its:
hiring and promotional practices
reward strategies
socialization processes
communication strategy
49. Organizational Culture and Performance Managers in firms with a “strong culture” share a relatively consistent set of values and norms that have a clear impact on the way work is performed
A “strong culture” may not:
always be good
lead to a high level of performance
always be beneficial in all contexts
Firm’s with “adaptive cultures” tend to have the highest levels of performance
50. Organizational Culture and Performance Need for a common organization culture that is the same across a multinational’s global network varies with the strategy of the firm
Shared norms and values can facilitate coordination and cooperation between individuals from different subunits
Strong common cultures may lead to goal congruence among subunits
51. Synthesis: Strategy and Architecture
52. Localization Strategy Firms pursuing a localization strategy:
focus on local responsiveness
tend to operate with a worldwide area structure
have a low need for integrating mechanisms
have low performance ambiguity and control costs
53. International Strategy Firms pursuing an international strategy:
create value by transferring core competencies from home to foreign subsidiaries
tend to operate with a worldwide product division structure
have a moderate need for control and integrating mechanisms
have low performance ambiguity and control costs
54. Global Standardization Strategy Firms pursuing a global standardization strategy:
focus on the realization of location and experience curve economies
tend to operate with a worldwide product division
maintain control of most decisions by headquarters
have a high need for integrating mechanisms
encourage strong organizational cultures
55. Transnational Strategy Firms pursuing a transnational strategy :
focus on the simultaneous attainment of location and experience curve economies, local responsiveness, and global learning
tend to operate with a matrix structure with some decisions centralized and others decentralized
have a high need for coordination utilizing an array of formal and informal integrating mechanisms and encourage a strong culture
have high performance ambiguity and control costs
56. Environment, Strategy, Architecture, and Performance There must be a “fit’ between the strategy and architecture of the firm to achieve high performance
Firm’s strategy must be consistent with its environment
Firm’s organization architecture must be consistent with its strategy
57. Organizational Change Firms need to alter their architecture to conform to the changes in the environment in which they are competing and the strategy they are pursuing
Organizations are difficult to change due to their organizational inertia
58. Organizational Inertia Sources of inertia include the existing:
distribution of power and influence
culture (norms and values) of the organization
senior managers’ preconceptions about the appropriate business model or paradigm
institutional constraints (national regulations)
59. Implementing Organizational Change Although all firms suffer from inertia, the complexity and global spread of many multinationals make it particularly difficult for them to change their strategy and architecture
Yet the trend toward globalization in many industries has made it more critical than ever that the multinational firms do just that as their competitive environments change
60. Basic Principles for Successful Organization Change Unfreeze the organization through shock therapy by taking bold actions like plant closures or dramatic structural reorganizations
Quickly move the organization to a new state through proactive change in the architecture so that it matches the desired new strategic posture
Refreeze the organization in its new state and establish a new culture and socialize employees into the new way of doing things
