1. The Organization of International Business
CHAPTER 13
The Organization of International Business

2. Learning Objectives
Define and identify different forms of the organizational architecture that international businesses use to manage their global operations
Explore the various components of the architecture
Describe the control systems and integrating mechanism available to multinational firms
Discuss the advantages and disadvantages of centralized versus decentralized decision systems
Look at ways to match architecture and competitive strategy to achieve high performance
IBUS 330 Dr. Nini Yang

3. Organizational Architecture and Profitability
Organizational architecture is the totality of a firm’s organization, including
Structure
Control systems and incentives
Processes
Culture
People
Superior enterprise profitability requires three conditions:
An organization’s architecture must be internally consistent.
Strategy and architecture must be consistent.
Strategy, architecture and competitive environments must be consistent.
IBUS 330 Dr. Nini Yang

4. Organization Architecture
Structure
Controls &
Incentives
People
Processes
Culture
Figure 13.1
IBUS 330 Dr. Nini Yang

5. Organization Architecture
Control systems:
Metrics used to measure subunit performance
Make judgments about managers’ abilities to run units
Incentives are devices to reward appropriate managerial behavior.
Processes:
Manner in which decisions are made
Manner in which work is performed
Conceptually distinct from location of decision-making responsibility
IBUS 330 Dr. Nini Yang

6. Organizational Architecture
Culture:
Norms and value systems shared by the employees
People:
Not just current employees, but also the strategy to recruit, compensate, and retain individuals with necessary skills, values and orientation
If a firm is going to maximize its profitability, it must pay close attention to achieving
internal consistency among the various components of its architecture.
IBUS 330 Dr. Nini Yang

7. Organizational Structure at Unilever
European Business Group
Detergents
Frozen Food
Margarine
France
Minimize component
inconsistencies
through intelligent
design.
Germany
Spain
Figure 13.2
IBUS 330 Dr. Nini Yang

8. Vertical Differentiation
Concerned with where decisions are made.
Centralization:
Facilitates coordination
Ensure decisions consistent with organization’s objectives
Top-level managers have means to bring about organizational change
Avoids duplication of activities
Decentralization:
Give top management time to focus on critical issues
Motivational research favors decentralization
Permits greater flexibility
Can result in better decisions
Can increase control
IBUS 330 Dr. Nini Yang

9. Strategy and Centralization
Global
Centralize
Transnational
Both Centralize
And Decentralize
International
Centralize for
core competencies
Decentralize for
operating decisions
Multi-domestic
Decentralize
IBUS 330 Dr. Nini Yang

10. Horizontal Differentiation
How a firm
divides itself
into subunits
Function
A firm
must reconcile
conflict between
product and
location.
Type of
business
Geographical
area
IBUS 330 Dr. Nini Yang

11. A Typical Functional Structure
Top
Management
Purchasing
Manufacturing
Marketing
Finance
Buying
units
Plants
Branch
sales units
Accounting
units
Figure 13.3
IBUS 330 Dr. Nini Yang

12. The Functional Structure
Typically, the structure
evolves in a company’s
early stage.
Coordination and
control rests with
top management.
IBUS 330 Dr. Nini Yang

13. A Typical Product Division Structure
Headquarters
Division
Product line A
Division
Product line B
Division
Product line C
Department
Purchasing
Department
Manufacturing
Department
Marketing
Department
Finance
Branch
sales units
Accounting
units
Buying units
Plants
Figure 13.4
IBUS 330 Dr. Nini Yang

14. Product Division Structure
Probable next stage of
international business
development. Reflects
company growth into
new products.
Each unit
responsible for
a product.
Semi-autonomous and
accountable for
its performance.
Eases
coordination
and control
problems.
IBUS 330 Dr. Nini Yang

15. International Division Structure
Headquarters
Domestic Division
General Manager
Product Line A
Domestic Division
General Manager
Product Line B
Domestic Division
General Manager
Product Line C
International Division
General Manager
Area Line
Functional units
Country 1
General Manager
(Product A, B and/or C)
Country 2
General Manager
(Product A, B and/or C)
Functional units
Figure 13.5
IBUS 330 Dr. Nini Yang

16. International Division
Widely used.
Growth can
lead to
worldwide
structure.
Can create conflict between domestic and foreign operations.
Implied lack of coordination between domestic and foreign operations.
IBUS 330 Dr. Nini Yang

17. Worldwide Area Structure
Favored by firms with
low degree of
diversification.
Area is usually
a country, and
largely
autonomous.
Encourages
fragmentation.
Facilitates local
responsiveness.
IBUS 330 Dr. Nini Yang

18. The International Structural Stages Model
Foreign Product Diversity
Worldwide Product Division
Global Matrix
(“Grid”)
Alternate Paths of Development L
Area Division
International Division
L Foreign Sales as a Percentage of Total Sales H
Figure 13.4
IBUS 330 Dr. Nini Yang

19. Worldwide Area Structure
Headquarters
Regional VP
North America
Regional VP
Europe
Regional VP
Far East
Regional VP
Latin American
Regional VP
Middle East/Africa
President Subsidiary 1
President Subsidiary 2
President Subsidiary 3
Figure 13.5
IBUS 330 Dr. Nini Yang

20. A Worldwide Product Division Structure
Headquarters
Worldwide
Product Group
or Division A
Worldwide
Product Group
or Division B
Worldwide
Product Group
or Division C
Area 1
(domestic)
Area 2
(international)
Functional units
Functional units
Figure 13.6
IBUS 330 Dr. Nini Yang

21. international division
Product Division
Reasonably
diversified
firms.
Attempts to overcome
international division
and worldwide area
structural problems.
Weak local
responsiveness.
Believe that
product value
creation activities
should be coordinated
worldwide.
IBUS 330 Dr. Nini Yang

22. A Global Matrix Structure
Headquarters
Area 1
Area 2
Area 3
Product
Division A
Division B
Division C
Manager here
belongs to Division B
and Area 2
Figure 13.7
IBUS 330 Dr. Nini Yang

23. transnational strategy.
Matrix Structure
Attempts to meet
needs of
transnational strategy.
May not work as well
as theory predicts.
“Flexible” matrix
structures.
Conflict
and power
struggles.
IBUS 330 Dr. Nini Yang

24. Integrating Mechanisms
Need for Coordination:
Impediments:
Different managerial orientations, e.g.
Labor relations
Legal conditions
Cultural environment
Differing goals
Time zones, distance,
nationality
High
Transnational
Global
International
Multidomestic
Low
IBUS 330 Dr. Nini Yang

25. Formal Integrating Mechanisms
Low
Direct contact
Liaison roles
Teams
Matrix structures
High
Increasing complexity of integrating mechanism
Figure 13.8
IBUS 330 Dr. Nini Yang

26. A Simple Management NetworkB C D A F E
Informal contacts between
managers within an enterprise.
Figure 13.9
IBUS 330 Dr. Nini Yang

27. Control Systems and Incentives
Types of controls:
Personal
Bureaucratic
Output
Cultural
Incentives:
Depends on employee and his/her tasks.
Can be used to improve managerial coordination between units.
Need to account for national differences in institutions and culture.
Beware of the rule of unintended consequences.
IBUS 330 Dr. Nini Yang

28. Performance Ambiguity
It is a function of
the interdependence
among subunits.
Control Systems
Multinational
Output/Bureaucratic
Global/Transnational
Cultural
IBUS 330 Dr. Nini Yang

29. Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies
Strategy
Inter-
dependence
Performance
Ambiguity
Costs of
Control
Multi-domestic
Low
International
Moderate
Global
High
Transnational
Very high
Table 13.1
IBUS 330 Dr. Nini Yang

30. Processes
The manner in which decisions are made and work is performed within an organization
Cut across national boundaries as well as organizational boundaries
Can be developed anywhere within the firm’s global operations network
IBUS 330 Dr. Nini Yang

31. Organizational Culture
Values and norms shared among people
Sources:
Founders and important leaders
National social culture
History of the enterprise
Decisions that result in high performance
Cultural maintenance:
Hiring and promotional practices
Reward strategies
Socialization processes
Communication strategy
IBUS 330 Dr. Nini Yang

32. Organizational Culture and Performance
A “strong” culture:
Not always good
Sometimes beneficial, sometimes not
Context is important
Adaptive cultures
Culture must match an organization’s architecture.
Culture does not necessarily translate across borders.
Culture
Transnational
Strong
Global International
Weak
Multidomestic
IBUS 330 Dr. Nini Yang

33. A Synthesis of Strategy, Structure and Control Systems
Multi-
domestic
International
Global
Transnational
Vertical
differentiation
Decentralized
Core competency;
rest decentralized
Some
centralized
Mixed
centralized and
decentralized
Horizontal
Worldwide
area
structure
Worldwide product
division
Product
Informal
matrix
Need for
coordination
Low
Moderate
High
Very high
Integrating
mechanisms
None
Few
Many
Very many
Performance
ambiguity
Cultural controls
Structure
and controls
Table 13.2
IBUS 330 Dr. Nini Yang

34. Organizational Change
Change to match competitive and strategy environment
Hard to change:
Existing distribution of power and influence
Current culture
Managers’ preconceptions about the appropriate business model or paradigm
Institutional constraints
Principles for change
Unfreeze the organization
Moving to the new state
Refreezing the organization
IBUS 330 Dr. Nini Yang

35. Implications
An organization’s architecture should be consistent internally and externally.
The consistencies are critical to organizational performance and profitability.
Organizational architecture should be flexible and adapt according to organizational strategy, growth, the external changing environment.
Changes may face resistance, and managers need to learn principle methods in order to launch and implement necessary changes successfully.
IBUS 330 Dr. Nini Yang