Int

BM & HRM 2020 - 22 | Session 14

Organizational
Structure: A Recap
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Organizational Structures!

• Functional (U- Form)

• Divisional (M-Form)
• Matrix or some hybrid structure

Source: Nohria (1995); HBR Note of Organization Structure

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Functional Form
• Activities are grouped together by common function and coordinated
vertically
• Requires a good deal of information processing among the functions:
cross-functional information processing is often the responsibility of
general management (GM). GM also mediates conflicts that may arise
among the functions
• Promotes Economies of Scale – effective in a stable environment
• Not-so-efficient, due to coordination mechanisms across functions, in
responding to environmental changes

Source: Nohria (1995); HBR Note on Organization Structure

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Functional Form

• Williamson’s critique:
– Contribution to each functional department
to corporate profits is neither observable
nor measurable à information asymmetry
– Resource allocation is a bargaining process
between departmental heads – might lead
to managerial slacks
– Leads to agency problems – separation of
ownership and control
Nobel Prize in 2009
– Structure itself is a limit to diversified
growth
Source: Hill (1985) – Williamson and M-Form Firm – A critical review
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Principal-Agent Problem
(Recap from Strategic Management Course)

• Say, in a sharecropping setting, a farmer crops a plot belonging to a

landowner
• Landowners would be principals, farmers would be agents
• What would be the possible contract?
• The farmer should pay a fixed rent - Residual claimant
• Who is bearing the risk?
– A farmer’s livelihood is bound to –nature, health, crop prices
• Safe crop and risky crop?
• What about cooperative farming?
• Separation of Ownership and Control leads a condition where the
interests of owner(s) and managers may, and often do, diverge

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Divisional Form (M-Form)

• Economic historian Alfred Chandler documented the emergence of

multidivisional firms (such as Du Pont, General Motors, Standard Oil
and Sears Roebuck) in the first half of twentieth century
• Williamson labeled this type of organization as M-Form organization
• Structure follows Strategy
• Four basic principles of M-Form organization:
– The firm is organized in separate business units
– Business unit managers are accountable for creating economic
value
– Resources are allocated unequivocally to business units
– The task of corporate parents (i.e., headquarter) is to coordinate
among divisions add value to the activities of the business units

Source: Strikwerda & Stoelhorst (2009); California Management Review

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 M-Form: Williamson’s Argument
• The responsibility for operating decisions is assigned to functionally self-
contained operating divisions.
• Corporate office is principally concerned with strategic decisions
• M-form allows to exploit Financial Synergies & Economies of Scope
(like corporate R&D) à because they have better access to information
• Internal Capital Market: operating divisions are like autonomous profit
centers and head office performs capital market functions à stimulates
entrepreneurship
• H-form: (financial holding) where parent only pursues financial
synergies – risk spreading or reduced cost of capital

• Critique: Rather than creating shareholder value, many parents were

destroying value around late 1980s. For instance, H-form might not
create value if external capital market is efficient
Source: Hill (1985) & Strikwerda & Stoelhorst (2009);
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Theoretical Debate About …
Structure follows Strategy
- Chandler, A.D. Jr. (1962)

Strategy Follows Structure

-Hall & Saias (1980)

Structure follows strategy ... as the left foot

follows the right!
- Henry Mintzberg (1990)

For Further Reading: Galbraith (2012). The evolution of enterprise organization designs.
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Journal of Organization Design
Move towards M-Form Organization!!

Source: CNNMoney
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int
BM & HRM 2020 - 22 | Session 14

Transnational
Organizations
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Strategy and Structures of MNCs

• Where should power be located within the firm?

• Range of replies has generally included
– At a national level (subsidiaries with absolute autonomy)
– At a global level (headquarters with absolute power)
– Or a mixed system?
• Stephen Hymer, a young economist, noted in his dissertation
that organizational paradigms have shifted over time
– Initially with an international division as an ‘appendages to
dominant domestic operation’ à U-Form organization à
M-Form Organization

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage I: International Organization

• Most firms began with few key managers working on single

product out of single location
• First moves abroad would be run out of an ‘international
division’
• Very rare nowadays

Domestic HQ

Domestic Functional International

Division Operations Divisions

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage II: Functional or ‘U-form’

• Main driver behind internationalization is to achieve ‘monopoly

advantages’ through value chain management
• HQ (the centre) controls all functions in subsidiaries (the
periphery) who simply implement/obey instructions
• Can be applicable in firms with narrow product ranges/little need
for differentiation

Executive

Production Marketing Finance HRM

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage III: Multidivisional or ‘M-form’

• Response to global consumers’ differentiated demands

• Need for greater flexibility
• Product Organization: Divisions as independent profit centres due
to lack of product overlaps (conglomerates)
Group HQ

Product Product
Division A Division B

Area 1 Area 2 Area 1 Area 2

Functions Functions Functions Functions

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage III: Multidivisional or ‘M-form’

• Geographic Organization: highlights responsiveness to local

circumstances; empowers subsidiaries
• Multi-domestic logic – Can adapted to local contexts but expensive
(duplications)
• Lacks global vision
Group HQ

Area 1 Area 2

Product A Product B Product A Product B

Functions Functions Functions Functions

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Lessons from Philips

• Decentralized Federations
– Was in a better position to respond to the increased demands
from host governments or adapting to shifts in consumer
preferences
– Thus, highly sensitive to its local market
– But faces difficulties in coordinating and controlling
worldwide operations in order to respond to the global forces
• Use of a cadre of entrepreneurial expatriates
• Integration of technical and marketing functions within each
subsidiary
• Decentralized authority and dispersed responsibility

Source: Bartlett and Ghoshal, 1988, California Management Review

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Lessons from Matsushita

• Centralized hub model

– Operations concentrated in the home country
– Ability to capture the opportunities presented by the global
forces
– World was considered as an integrated whole
– Less sensitive and responsive to the countervailing forces of
localization
• Gaining subsidiary input - multiple linkages
• Linking directions to needs - market mechanism
– Technology-driven versus market-driven
• Managing Responsibility Transfer: Personnel Flows
Source: Bartlett and Ghoshal, 1988, California Management Review
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Choosing a Global Strategy
High

Global
Strategy Global
Standard
ization
Pressures for
Cost Reduction

Home
Localizat
Replicati Multi-domestic
International ion
on Strategy
Strategy

Low High
Need for Local Responsiveness

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Approach and its shortcomings

• Global Approach was buzzword by 1980s

– GATT and reduction in barriers to trade
– Notion of global convergence to serve global customers and achieve
economies of scale
– Reassertion of HQ power over subsidiaries
– Consequently, less independent thinking by subsidiary managers à
knowledge transmitted only vertically, not horizontally
• MNEs have regionalized more than they have globalized
– In most MNEs region of origin accounts for 70% of total revenues
(Rugman, 2005)
– Clustering or near-sourcing of manufacturing activities
– Strong ‘home bias’: Managers (customers) more comfortable with
familiar environments (brands)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Multi-domestic Versus Global

Organizational Multidomestic/ Global/ Global International/

Characteristics Localization Standardization Home Replication
Sources of core
Configuration of Decentralized and competencies
Centralized and
Assets and nationally self- centralized and
globally scaled
capabilities sufficient others decentralized

Adapting and
Sensing and
Role of Overseas Implementing Parent leveraging parent
exploiting local
Operations Company strategies company
opportunities competencies

Knowledge Knowledge
Development and Knowledge developed and
development and
Diffusion of developed and transferred to
retained within each
Knowledge retained at the center overseas unit
unit
Source: Bartlett & Ghoshal (1998)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 So, how to bridge the gap?

• Rejection of excess devotion to any one structure

• Must be capable of both global integration & local adaptation
• Promote two-way flows between HQ/subs and subs/subs
• Search for organizational compromise:
– Centralize some functions (R&D / Manufacturing /
Finance?)
– Decentralize others (Design /Sales / HRM?)
• Thus, efforts to develop a hybrid MNE configuration
– Transnational organization (Bartlett 1986; Bartlett and Ghoshal,
1988)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Choosing a Global Strategy
High

Global
Strategy Global
Trans-
Standard
national
ization
Pressures for
Cost Reduction

Home
Localizat
Replicati Multi-domestic
International ion
on Strategy
Strategy

Low High
Need for Local Responsiveness

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Choosing a Global Strategy
High

Global
Strategy Global
Trans-
Standard
national
ization
Pressures for
Cost Reduction

Home
Localizat
Replicati Multi-domestic
International ion
on Strategy
Strategy

Low High
Need for Local Responsiveness

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Strategies

S4 S1 S4 S1 S4 S1

HQ HQ HQ

S3 S2 S3 S2 S3 S2

Multi-domestic Global Standardisation Transnational

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Case:
Levendary Cafe

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Where should power be located
within the MNC?

OR

What should Foster do about Chen?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
What is Levendary selling in China?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 U.S. Coffee Market in late 1980s..

It was a commodity industry, marked by heavy price-cutting and an

ongoing battle for market share – thin profit margins and low growth

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Coffee: An Emotional Experience

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Decline in US Retail Book Industry in 1980s

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Book Superstore: A Total Experience

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Movie Industry & DVDs

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Let’s probe Foster’s ‘Stage Theory’

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A