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International Business

Chapter Fifteen
The Organization of
International Business
Chapter Objectives

• To profile the evolving understanding of the


organization of international business
• To describe traditional and contemporary
organizational structures
• To study the systems used to coordinate and
control operations
• To profile the role of organizational culture
• To examine special situations in the organization
of international business

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Introduction
Organization: the complementary mix of
formal structure, coordination and control
systems, and cultural values needed to
create value and implement an organization’s
strategy
• An insightful strategy is a necessary but
insuf-ficient condition for long-term
organizational success.
• Building an organization to implement an
effective strategy requires the integration of
different people, teams, groups, and units
into a smoothly functioning whole.
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Fig. 15.1: The Organization of
International Business

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The Causes of Organizational
Change
Revolutionary changes in the environment and the
nature of work challenge managers to downsize,
delayer, restructure, reengineer, and reinvent the
organization.
• globalization: changes the opportunity set and
efficiency frontier for firms
• knowledge: an increasingly important engine of sus-
tainable comparative advantage
• the Internet: an efficient and effective global organi-
zation of knowledge, people, and other resources that
challenge conventional notions of control
[continued]

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• the conduct and context of employees’ jobs: the creation of
value that exhibits astonishing variability, problem solving,
and intellectual content
• worldwide employee empowerment: decentralized decision-
making and the development of common ideas and ideals to
ensure that all employees act in the best interests of the firm
• an expanded social contract between employees and
organizations: includes greater employee participation in
problem-solving and decision-making
• increasingly sophisticated corporate strategies: new
combinations of key activities leading to new organi-zational
requirements

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Organizational Structure
Organizational structure: the formal
arrangement of roles, responsibilities, and
relationships within an organization
Organizational differentiation: the way in
which different units and subunits within a
firm are organized and assigned to work
on different levels and kinds of tasks
• A company’s choice of structure depends upon:
– the configuration of its value chain in
terms of the location(s) and type(s) of
its foreign facilities
– the impact of international operations
on total corporate performance

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Vertical Differentiation
Vertical differentiation: the way in which an
organization balances centralized vs. decentralized
decision-making alternatives [the locus of power]
Centralization: the degree to which high-level managers
(usually above the country level) make decisions and
then pass them down to lower levels for implementation
Decentralization: the degree to which lower-level
managers (at or below the country level) make and
implement important decisions
• Usually, centralized decision-making is associated with an
international or global strategy, decentralized decision-making
with a multidomestic strategy, and a combination of the two
with a transnational strategy.
All organizations must determine who will have
what authority to make which decisions.
[continued]

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• The reason for choosing one type of decision-making
authority over another is partly a function of attitude.
[see Chapter Two regarding the cultural environment]
– ethnocentric attitude: encourages an international or global
firm to develop core competencies in its home country and
then closely supervise their transfer and use abroad i.e.,
centralized decision-making
– polycentric attitude: encourages a multidomestic firm to
grant decision-making authority to foreign subsidiaries, i.e.,
decentralized decision-making
– geocentric attitude: encourages a transnational firm to
creatively balance the competing needs for centralized and
decentralized decision-making in order to respond to both
global and local pressures
Decision-making should occur at the level of the people most directly
affected and who have the most intimate knowledge about the problem—the
current trend is toward more decentralized structures.

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The Principles and Practice of
Centralization and
Decentralization
CENTRALIZATION DECENTRALIZATION
Premises Premises
Decisions should be made by Decisions should be made by
senior managers. lower-level employees.
The effectiveness of the value The effectiveness of the value
chain depends on headqtrs.’ chain depends on local retaining
authority. managers’ authority.
Centralized decisions ensure Decentralized decisions ensure
that operations in different that operations in different countries
help achieve global countries help achieve global objectives.
objectives by first meeting national goals.
[continued]

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The Principles and Practice of
Centralization and
Decentralization
CENTRALIZATION DECENTRALIZATION
Advantages Advantages
Coordination of the value chain Decisions are made by those is
facilitated. who are directly involved.
Decisions are consistent with Lower-level managers are corporate
objectives. allowed to exercise initiative.
Duplicate activities are pre-. Lower-level employees are empted.
motivated to perform better.
The risk of costly, wrong, lower- Flexible responses to rapid level decisions
is reduced. changes are enabled.
Consistent dealing with stake- Subsidiary managers are held holders is
ensured. more accountable.
[continued]

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The Principles and Practice of
Centralization and
Decentralization
CENTRALIZATION DECENTRALIZATION
Disadvantages Disadvantages
Initiative among lower-level The organization is put at risk
employees is discouraged. if bad, lower-level decisions are
made.
Demoralized lower-level workers Cross-unit coordination and wait for
instructions. strategic fit are impeded.
Information flows from the top Subsidiaries likely favor their down;
thus, bottom-up own projects at the expense innovation is pre-
empted. of global performance.
[continued]

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The Principles and Practice of
Centralization and
Decentralization
CENTRALIZATION DECENTRALIZATION
Encouraging Factors Encouraging Factors
Corporate policies call for global Conditions call for local re- integration and
uniformity. sponsiveness and adaptation.
Interdependent subsidiaries The firm is geographically share value
activities. dispersed.
Firms need to move resources Economies of scale can be from one activity to
another. achieved nationally.
Upper-level managers are more Lower-level managers are more experienced
decision-makers. capable decision-makers.
Decisions are important and Decisions are relatively minor the risk of loss is
great. but must be made quickly.
The need for foreign nationals to reach headqtrs. Is low.

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Horizontal Differentiation
Horizontal differentiation: the way in which a firm is
divided into discrete units and sub-units that are
assigned responsibility for specialized tasks
• Horizontal differentiation describes the way in which a firm
designs its formal structure in order to:
– specify the total set of organizational tasks
– logically divide those tasks into jobs, departments,
subsidiaries, and/or divisions
– assign authority and reporting relationships in ways that
are designed to support the firm’s strategies
Traditionally MNEs have resolved these issues on the basis of
function, type of business/product, geographic region, or some
combination of the three.

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The Design of the Formal
Structure
Functional Structure:
groups specialized jobs according CEO

to traditional business functions


[specifies roles and relationships
according to inputs] Production Marketing
Finance/
Accounting

– maximizes scales economies by arranging work


responsibilities and relationships in the most efficient
format
– is ideal when a company’s products share a common
technology (a narrow product line) and competitive
pressures push for a cost-leadership strategy
The long chain of command that spans many levels of hierarchy does
not build the knowledge-generating and decision-making
relationships necessary to respond to environmental changes
requiring coordination across departments.
[continued]

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The Design of the Formal
Structure
Divisional Structures:
establish groups according to units, products, customers, or
regions [specifies roles and relationships according to outputs]
• International Division: creates a critical mass
of international expertise, but may struggle CEO

to get resources Diesel


Division
Electronics
Division
International
Division

• Product Division: creates synergies between foreign and


domestic operations, is well-suited for diverse
product lines, but lacks the means for one CEO

division to learn from another Power

• Geographic Division: creates economies of scale on a


Hydroelectric
Diesel Group Systems
Group
Group

regional basis, works well when foreign operations


are large but not dominated by a
single region or country, but leads to theCEO

costly duplication of similar value-added activities [continued]


Europe
North and
Asia
South America

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The Design of the Formal
Structure
Matrix Structure:
– simultaneously attains the benefits of the functional and
divisional forms [theoretically equips an MNE to capture
the benefits of both integration and responsiveness]
– gives functional, product, and geographic groups a
common focus
– has dual reporting relationships rather than a single
chain of command, thus ensuring the exchange of
information and resources
Blurred lines of responsibility and relationships confuse the clarity of
the chain of command, even though groups are required to compete
for resources and control.
Mixed Structure: each is idiosyncratic, reflecting legacies,
executive preferences, and/or circumstances [a combi-
nation of functional, regional, and product dimensions]

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Fig. 15.2: Placement of International
Activities within the Organizational
Structures for International Businesses

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Contemporary Structures
Contemporary Structures: learning organizations that
champion limitless spans of control, ad hoc teams, and
self-organizing groups by eliminating vertical, horizontal,
and external boundaries that hinder information flows
• Network Structure: a small, core organization that outsources
certain value activities to key partners in order to focus on those
activities in which it creates maximum value
Japanese keiretsus rely heavily upon long-term personal relationships
among high-level managers in different companies.
• Virtual Organization: a temporary arrangement among partners
that can be easily reassembled to adapt to market changes
[permits organizations to acquire resources and/or strategic
capabilities by creating a temporary cluster of partners]
• Project Structure: all work is project based—teams form,
disband, and form again as the flow of work requires

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Fig. 15.3: A Simple Depiction
of the Network Structure

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Coordination Systems

Coordination systems: link the operations of inter-


dependent units and individuals of a firm
• Coordination by standardization:
– sets universal rules and procedures that apply to units
worldwide [a prescriptive, day-to-day infrastructure]
– enforces consistency in the performance of activities across
geographically dispersed units
– helps a firm leverage its core competencies and bring the
advantages of scale to its operations
– is ideally suited for strategies that champion constancy and
predictability in industries that are more stable than volatile,
i.e., an international or geocentric strategy
[continued]

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• Coordination by plan:
– requires interdependent units to meet common
deadlines and objectives
– is ideally suited for firms that create value by adapting
operations to local conditions, i.e., a multidomestic
strategy
• Coordination by mutual adjustment:
– requires managers to interact with counterparts to
enable the flexible exchange of ideas
– requires that firms adopt a formal structure and install
standardization and planning systems
– is ideally suited for firms that find value in creating
more opportunities and incentives for interdependent
parties to communicate with one another, i.e., when
firms face new problems that cannot be defined with
customary rules or procedures

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Control Systems
Control process: directs and monitors the
activities of individuals in order to compel
actions that support the goals of the firm
• Control methods:
– market control: uses external market mechanisms to
establish internal performance benchmarks and
standards [complements a geocentric strategy]
– bureaucratic control: uses centralized authority to
install an extensive set of rule and procedures to
govern a broad range of activities
– clan control: relies upon share values among all
employees to idealize and moderate preferred
employee behaviors [complements a transnational
strategy]
[continued]

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• Control mechanisms
– reports: should be timely to allow an effective response
– subsidiary visits: should balance information collection and sharing
with the offering of advise and directives
– management performance evaluation: should separate a manager’s
performance from a subsidiary’s performance
– cost and accounting comparability: should interpret different costs and
accounting practices fairly
– evaluative measurements: should include a reliable combination of
financial and non-financial indicators
– information systems: should periodically reevaluate information needs
in order to minimize costs and ensure relevancy

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Organization Culture
• Organization culture: the set of fundamental
assumptions about an organization, its goals,
and its practices that employees share
• Key features of a firm’s organization culture include:
– managerial values and principles
– the work climate and atmosphere
– patterns of “how things are done around here”
– traditions
– ethical standards
Studies confirm a significant link between organization culture
and the financial performance of a firm.

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Strategy and Organization
Culture
• The shared values of an organization influence both
employees’ perceptions as well as the ways in which they
respond to the world.
• Sustainable benefits and lasting competitive advantage can
only be realized when a firm exhibits a complemen-tary
organization culture:
– an international strategy: requires rules, regulations, and
uniformity
– a global strategy: requires standardizing employees’ views
– a multidomestic strategy: requires greater tolerance of the
local interpretation of corporate goals
– a transnational strategy: requires a strategic blending of
standardization and adaptation, i.e., dynamic flexibility

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Fig. 15.4: Organizational
Culture Aspects of Types of
Strategies

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Special Situations
• Acquisitions: the culture of an acquired organi-
zation may differ because of both company and
national practices
• Shared ownership: decision-making is limited and
assumptions and behavior will likely differ when
two or more entities share ownership
• Dynamic nature of performance: as a firm’s
international business evolves, both its organiza-
tional structure and its coordination and control
systems must also evolve

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The Role of Legal Structures
When operating abroad, firms choose among legal forms
that affect their decision-making power, their tax
exposure, their ability to protect intellectual property,
and their legal liability.
• Foreign branch: a wholly-owned foreign oper-ation
that remains legally part of the parent company
• Subsidiary: a legally separate company, i.e., a
foreign direct investment, whose liability is usually
limited to the subsidiary’s assets
[continued]

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• Types of subsidiaries and operating form, i.e., distinc-
tions to be heeded in designing a foreign operation:
– the ability of the parent to sell its ownership
– the number of stockholders required to establish a
subsidiary
– the percentage of foreigners who can serve on the board of
directors
– the amount of required public disclosure
– whether equity may be acquired by noncapital contribu-
tions such as goodwill
– the types of businesses (products) that are eligible
– the minimum capital required for establishing a subsidiary

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Implications/Conclusions

• Organization is an integrated function of formal


structure, coordination and control systems, and
organizational culture.
• The degree of centralization in an MNE is
influenced by pressures for global integration
versus local responsiveness, the competence of
headquarters versus subsidiary personnel, as well
as decision importance, expediency, and quality
expectations.

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• Artfully engineering an organization that configures
globally dispersed resources to meet the mandates
of multinational operations is the frontier of inter-
national business.
• While traditional organizational structures rely on
hierarchical formats, contemporary structures
eliminate the horizontal, vertical, and/or external
boundaries that block the development of
knowledge-generating and decision-making
relationships.
• MNEs need to develop coordination and control
mechanisms that prevent the duplication of efforts,
ensure that headquarters does not withhold the
best resources from international operations, and
include insights from across the entire firm.

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