The Organization of International Business

Organizational Architecture
• Refers to the totality of the firms organization, including organizational
structure , control systems and incentives , organizational culture process
and people.

Structure

Incentives&
Processes People Controls

Culture
The Organization of International Business
Organizational Structure:
• Refers to 3 things
1. Formal Division of Organization into subunits such as product divisions,
national operations and functions
2. Location of decision making responsibilities with in the structutre (
centralized or decentralized)
3. Establishment of integrating mechanism to coordinate the activities of sub
units.
Control Systems
• Metrics used to measure the performance of sub units and make judgements
about how well the managers are running those sub units
• Example-Unilever used to measure the performance of national operating
subsidiary companies according to profitability
The Organization of International Business
Incentives
• Devices used to reward appropriate managerial behavior.
• These are closely tied to performance metrics
Processes
• Manner in which decisions are made and work is performed with in the
organization.
• Examples include decisions about allocation of resources within the firm
Organizational Culture
• Norms and value systems that are shared among the employees of an
organization
People
• Refers not only to the employees of the organization , but also the strategy used
to recruit , compensate and retain those individuals
 The Organization of International Business
ORGANIZATIONAL STRUCTURE
• Organizational structure can be thought of in terms of 3 dimensions
1. Vertical Differentiation ( refers to location of decision making responsibilities
within a structure)
2. Horizontal Differentiation ( Refers to formal division of organization into subunits
3. Integrating Mechanisms ( Mechanisms for coordinating units)
VERTICAL DIFFERNETIATION ( Centralization and
Decentralization)
Arguments for Centralization
a. It facilitates coordination – a firm has component manufacturing operation
in Thailand and assembling operation in Pakistan, needs to have
coordination to facilitate smooth flow of operations
b. Centralization helps ensure that decisions are consistent with
organizational objectives
c. Centralization can give top line managers means to bring about needed
major organizational changes
d. Helps avoid duplication of activities
Arguments for Decentralization
a. Top management can become over burdened when there is centralization
b. Motivational research shows people work better when they have a greater
degree of individual freedom and control over work
c. Decentralization allows greater flexibility, response to changes can be rapid
d. Better decision making , people make decisions on the spot.
e. Helps increase control ( managers at various locations are more
accountable )
HORIZONTAL DIFFERENTIATION ( The Design of Structure)
• This is concerned with how firms decides to divide itself into sub units.
• This decision is normally made on the basis of :
Function
Type of Business
Geographical Area
Structure of Domestic Firms
• Begin with no formal structure.
• Run by a single Entrepreneur or a small team of individuals.
• As these grow management becomes too great for individual , at this time
organization is split into functions reflecting firms value creation activities
(production , marketing R&D , sales)
• Decision making is centralized.
• Further horizontal differentiation may be required if firm significantly
diversifies its product offering.
• To solve the problems of coordination and control , at this stage most firms
switch to a product divisional structure
TYPICAL FUNCTIONAL STRUCTURE

Top Mgt.

Manufacturin
Purchasing g
Marketing

Buying Branch Accounti

Plants Sales Units
Units ng Units
TYPICAL PRODUCT DIVISIONAL STRUTURE

Headquarters

Div. Product Division Product Div. Product Line

Line A Line B C

Dep.
Dep. Dep Dep.
Manufactur
Purchasing Marketing Finance
ing
 The International Division
• When firms expand abroad , they often group all their international activities
into an International Division
• Regardless of firms domestic structure , its international division tends to be
organized on geography.
• Many manufacturing firms expand internationally by exporting the product
manufactured at home to foreign subsidiaries to sell.
• Domestic divisions of various product lines will be handled by domestic
management .
• International division would handle operations in foreign markets.
• Each foreign market would have some sort of management structure reporting
to international division.
Problems Associated with International Division Structure
 Heads of foreign subsidiaries not given as much voice in organization as heads of
domestic divisions.
 Implied lack of coordination between domestic operations and foreign
operatons.
WORLDWIDE AREA STRUCTURE
• Favored by firms with low degree of diversification
• Under this structure world is divided into geographical areas.
• An area may be country or group of countries ( MENA region for example)
• Each area tends to be self contained , autonomous entity with its own set of
value creation activities
• This structure facilitates local responsiveness. Since decision making is
decentralized , each area can customize product offerings , marketing strategy
and business strategy.
 WORLDWIDE PRODUCT DIVISIONAL STRUCTURE
• Adopted by firms that are reasonably diversified and originally had domestic
structures based on product divisions.
• Each division is self contained
• Headquarters retains responsibility for overall strategic development and financial
control of firm.
• Helps enhance realizing location and experience curve economies.
GLOBAL MATRIX STRUCTURE
• Horizontal differentiation proceeds along two dimensions product division and
geographical area
• A product division acts as lead for various geographical locations.
• Matrix helps operations to be responsive to both local market needs and
corporate objectives.
 INTEGRATING MECHANISMS
• Strategy and Control in International Business
• Need for coordination varies with strategy of the firm
• This need is lowest in firms pursuing a localization strategy
• Highest in Global and transnational companies
• It is higher in companies pursuing an international strategy and trying to
profit from transfer of core competencies and skills between units at home
and abroad.
• Need for coordination is highest in transnational companies , which pursue
local responsiveness, location and experience curve economies and
multidirectional transfer of core competencies and skills among all firms
sub units.
• Impediments to Coordination
• Production people have different tasks from marketing people , this can
lead to lack of coordination.
• Lack of respect between various sub units .
• Difference in goals of various sub units ( headquarter wants standardized
products, local subsidiary wants a non standard product)
 FORMAL INTEGRATING MECHANISMS
• Direct contact between sub unit managers. May not be effective if
managers have different orientations.
• Liaison roles are a bit more complex. When volume of contacts
between sub units increases , coordination can be increased by
giving a person in each sub unit responsibility for coordinating with
another sub unit on regular basis.
• Teams composed of individuals from various sub units may be used
to achieve a higher level of coordination.
• Matrix Structure is a structure in which all roles are seen as
integrating roles. The most common matrix in multi national firms is
based on geographic area and worldwide product divisions.
• Knowledge Network is an informal network for transmitting
information with in an organization. Its greatest strength is that it
can be used as a non bureaucratic way of transmitting information
and knowledge within a multinational enterprise.
 CONTROL SYSTEMS
• Personal Controls
• Control by persona; contact with subordinates. Widely used in small firms.
• Bureaucratic Controls
• Control through a system of rules and procedures that directs the actions
of sub units .
• Examples are budgets and capital spending rules
• Output Controls
• Objective performance metrics such as profitability , productivity , growth ,
market share and quality.
• Cultural Controls
• These exist when employees “buy into” the norms and value systems of
the firm.
 INCENTIVE SYSTEM
• Incentives vary according to the tasks being performed by
workers/employees.
• Incentive systems used within an organization need to be adjusted
to account for national differences in institutions and cultures.
• For example piecework rates may work in USA but in Germany they
are illegal.
 STRATEGY , INTERDEPENDENCE AND AMBIGUITY
STRATEGY INTERDEPENDENCE PERFORMANCY COSTS OF
AMBIGUITY CONTROL
Localization Low Low Low
International Moderate Moderate Moderate
Global High High High
Transnational Very High Very High Very High
 PROCESSES
• Manner in which decisions are made & work is performed with in
the organization.
• Often the core competencies or valuable skills of the firm are
embedded in its processes.
• Efficient and effective processes can lower the costs of value
creation and add additional value to a product
• An example is Japanese Manufacturing enterprises of 1980’s , Their
global success was based in part on :
Early adoption of TQM, JIT concepts.
 CREATING & MAINTAINING ORG. CULTURS
• Sources of Culture:
Founders or Leaders can impact org. culture
Broader social culture of the nation where the firm was founded.
History of the enterprise. ( Philips and World War 2) Head office was in
occupied territories , this lead to a devolved culture for each sub unit.
• Maintaining the Culture
Hiring and Promotional practices of the organization
Reward strategies
Communication Strategy
Socialization Process.
• Socialization can be formal ( orientation or training programs to teach
employees core values of the organization)
• Informal socialization is in the shape of help and advice from peers and
supervisors.
 SYNTHESIS OF STARTEGY STRUCTURE & CONTROL
STRATEGY
Structures and LOCALIZATION INTERNATIONAL GLOBAL TRANSNATIONAL
Control STANDARDIZATION
Vertical Decentralized Core competency Some Mixed
Differentiation more centralized, Centralization Centralization &
rest decentralized Decentralization
Horizontal Worldwide area Worldwide Worldwide Informal Matrix
Differentiation structure product divisions product divisions

Need For Low Moderates High Very High

Coordination
Integrating None Few Many Very Many
Mechanisms
Performance Low Moderate High Very High
Ambiguity
Need for Low Moderate High Very High
Cultural Controls
 ORGANIZATIONAL CHANGE
• Multinational firms have to change their architecture so that it conforms to
changes in the environment in which they are competing
• Organizational Inertia
• Organizations are difficult to change . Within most organizations are strong inertia
forces.. Some of the sources of these are as follows:
Existing distribution of power and influence within the organization.
Existing Culture of the organization.
Preconception of senior managers about business model.
Institutional constraints ( National regulations , laws , policies related to layoffs)
 IMPLEMENTING ORGANIZATIONAL CHANGE
Unfreezing the Organization
• Senior managers must explain the need for change
• Take bold actions to make people realize why change is needed.
• Obtain senior managers commitment .
• Moving to the New State
• Take actions.
• Re organize the structure , re assign responsibilities , changing control incentive
and reward system.
• Seek employees opinion , involve them in change effort.
• Refreezing the Organization
• This takes a longer time period.
• Requires that employees be socialized into the new way of doing things.
• Management Education programs can be one way of doing this.
• Hiring policies may need change as well.
• Keep the pressure on for change ( it takes time)
 INCENTIVE SYSTEM
• Incentives vary according to the tasks being performed by
workers/employees.
• Incentive systems used within an organization need to be adjusted
to account for national differences in institutions and cultures.
• For example piecework rates may work in USA but in Germany they
are illegal.