The Organization of International Business Chapter Thirteen The Organization of International Business

Opening Case One of world’s oldest multinational corporations Organized on a decentralized basis Annual conferences on company strategy and executive education sessions establish connections between managers Duplication of facilities and high cost structure a problem in new competitive environment 1996: introduced structure based on regional business groups “Lever Europe” established to consolidate the company’s detergent operation in order to reduce costs and speed up new product information

Introduction Organizational architecture includes the totality of a firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people Superior enterprise profitability requires three conditions The different elements of a firm’s organizational architecture must be internally consistent The organizational architecture must match or fit the strategy of the firm The strategy and architecture of the firm must not only be consistent with each other but they also must be consistent with competitive conditions

Organizational Architecture Organizational structure refers to three things The formal division of the organization into sub-units The location of decision-making responsibilities within that structure The establishment of integrating mechanisms to coordinate the activities of subunits Control systems are the metrics used to measure the performance of sub-units and make judgments about how well managers are running them Incentives are the devices used to reward appropriate managerial behavior

Organizational Architecture Processes are the manner in which decisions are made and work is performed within the organization Organizational culture refers to the norms and value systems that are shared among the employees of an organization People are not just the employees of the organization; the term refers also to the strategy used to recruit, compensate, and retain those individuals and the type of people they are in terms of their skills, values, and orientation

Organizational Architecture The term organizational architecture refers to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people. This figure illustrates these different elements. Figure 13.1, p. 442

Organizational Structure This should be thought of in terms of three dimensions Vertical differentiation: the location of decision-making responsibilities within a structure Horizontal differentiation: the formal division of the organization into sub-units Establishment of integrating mechanisms: mechanisms for coordinating sub-units

Centralization Versus Decentralization Facilitates coordination Ensure decisions consistent with organization’s objectives Top-level managers have means to bring about organizational change Avoids duplication of activities Decentralization: Overburdened top management Motivational research favors decentralization Permits greater flexibility Can result in better decisions Can increase control

Horizontal Differentiation: The Design of Structure Horizontal differentiation is concerned with how the firm decides to divide itself into sub-units. The decision is normally made on the Basis of function Type of business Geographical area

Typical Functional Structure Most firms begin with no formal structure and are run by a single entrepreneur or a small team of individuals. As they grow, the demands of management become too great for one individual or a small team to handle. At this point the organization is split into functions reflecting the firm’s value creation activities (e.g., production, marketing, R&D, sales). These functions are typically coordinated and controlled by top management (see Figure 13.3). Decision making in this functional structure tends to be centralized. Figure 13.3, p. 446

The International Division Many manufacturing firms expanded internationally by exporting the product manufactured at home to foreign subsidiaries to sell In time it might prove viable to manufacture the product in each country The result could be that Firms with a functional structure at home would replicate the functional structure in every country in which they do business Firms with a divisional structure would replicate the divisional structure in every country in which they do business

The International Division When firms initially expand abroad, they often group all their international activities into an international division. This has tended to be the case for firms organized on the basis of functions and for firms organized on the basis of product divisions. Regardless of the firm’s domestic structure, its international division tends to be organized on geography. Figure 13.5 illustrates this for a firm whose domestic organization is based on product divisions. p. 447

Problems with the International Structure Potential for conflict and coordination problems between domestic and foreign operations Heads of foreign subsidiaries are not given as much voice in the organization as the heads of domestic functions The international division is presumed to be able to represent the interests of all countries to headquarters Lack of coordination between domestic operations and foreign operations To combat these problems firms choose one of the following structures Worldwide product divisional structure which tends to be adopted by diversified firms that have domestic product division Worldwide area structure which tends to be adopted by undiversified firms whose domestic structures are based on functions

The International Structural Stages Model As a result of such problems, many firms that continue to expand internationally abandon this structure and adopt one of the worldwide structures we discuss next. The two initial choices are a worldwide product divisional structure, which tends to be adopted by diversified firms that have domestic product divisions, and a worldwide area structure, which tends to be adopted by undiversified firms whose domestic structures are based on functions. These two alternative paths of development are illustrated in Figure 13.6. The model in the figure is referred to as the international structural stages model and was developed by John Stopford and Louis Wells.10 p. 449

Worldwide Area Structure Favored by firms with low degree of diversification and domestic structure based on function World is divided into autonomous geographic areas Operational authority decentralized Facilitates local responsiveness Fragmentation of organization can occur Consistent with multi-domestic strategy

Worldwide Area Structure Figure 13.7, p. 450

Worldwide Product Divisional Structure Adopted by firms that are reasonably diversified Original domestic firm structure based on product division Value creation activities of each product division coordinated by that division worldwide Help realize location and experience curve economies Facilitate transfer of core competencies Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness

Worldwide Product Divisional Structure Figure 13.4, p. 447

Global Matrix Structure Helps to cope with conflicting demands of earlier strategies Two dimensions: product division and geographic area Product division and geographic areas given equal responsibility for operating decisions Problems Bureaucratic structure slows decision making Conflict between areas and product divisions Difficult to make one party accountable due to dual responsibility

Global Matrix Structure Figure 13.9, p. 452

Integrating Mechanisms Need for coordination follows the following order on an ascending basis Localization International Global Transnational

Impediments to Coordination Differing goals and lack of respect Different orientations due to different tasks Differences in nationality, time zone, and distance Particularly problematic in multinational enterprises with their many sub-units both home and abroad

Formal Integrating Systems Direct contact between sub-unit managers Liaison roles: an individual assigned responsibility to coordinate with another sub-unit on a regular basis Temporary or permanent teams from sub-units to achieve coordination Matrix structure: all roles viewed as integrating roles Often based on geographical areas and worldwide product divisions

Formal Integrating Systems Figure 13.10, p. 456

Informal Integrating Mechanisms Informal management networks supported by an organization culture that values teamwork and a common culture Non-bureaucratic flow of information It must embrace as many managers as possible Two techniques used to establish networks Information systems Management development policies Rotating managers through various sub-units on a regular basis

Informal Integrating Mechanisms Managers A, B, and C all know each other personally, as do managers D, E, and F. Although manager B does not know manager F personally, they are linked through common acquaintances (managers C and D). Thus, we can say that managers A through F are all part of the network, and also that manager G is not. Imagine manager B is a marketing manager in Spain and needs to know the solution to a technical problem to better serve an important European customer. Manager F, an R&D manager in the United States, has the solution to manager B’s problem. Manager B mentions her problem to all of her contacts, including manager C, and asks if they know of anyone who might be able to provide a solution. Manager C asks manager D, who tells manager F, who then calls manager B with the solution. In this way, coordination is achieved informally through the network, rather than by formal integrating mechanisms such as teams or a matrix structure. Figure 13.11, p. 457

Control Systems and Incentives Types of control systems Personal controls Bureaucratic controls Output controls Cultural controls Incentive systems Refer to devices used to reward appropriate behavior Closely tied to performance metrics used for output controls A major task of a firm’s leadership is to control the various subunits of the firm—whether they be defined on the basis of function, product division, or geographic area—to ensure their actions are consistent with the firm’s overall strategic and financial objectives. Firms achieve this with various control and incentive systems.

Factors that Influence Incentive Systems Seniority and nature of work Reward linked to output target that the employee can influence Cooperation between managers in sub-units Link incentives to profit of the entire firm National differences in institutions and culture Consequences of an incentive system should be understood

Performance Ambiguity Key to understanding the relationship between international strategy, control systems and incentive systems is performance ambiguity Caused due to high degree of interdependence between sub-units within the organization Level of performance ambiguity depends on number of sub-units, level of integration, and joint decision making Descending order of ambiguity in firms Transnational companies Global companies International companies Multi-domestic corporations

Performance Ambiguity The costs of control can be defined as the amount of time top management must devote to monitoring and evaluating subunits’ performance. This is greater when the amount of performance ambiguity is greater. When performance ambiguity is low, management can use output controls and a system of management by exception; when it is high, managers have no such luxury. Output controls do not provide totally unambiguous signals of a subunit’s efficiency when the performance of that subunit is dependent on the performance of another subunit within the organization. Thus, management must devote time to resolving the problems that arise from performance ambiguity, with a corresponding rise in the costs of control. Table 13.1 reveals a paradox. We saw in Chapter 12 that a transnational strategy is desirable because it gives a firm more ways to profit from international expansion than do localization, international, and global standardization strategies. But now we see that due to the high level of interdependence, the costs of controlling transnational firms are higher than the costs of controlling firms that pursue other strategies. Unless there is some way of reducing these costs, the higher profitability associated with a transnational strategy could be canceled out by the higher costs of control.

Implications for Control and Incentives Costs of control Time top management must devote to monitoring and evaluating performance of sub-units Performance ambiguity increases cost of control Creates conflicts as the costs of controlling transnational strategy are much higher Cultural controls Incentive pay of senior managers should be linked to the entity to which both subunits belong

Processes Manner in which decisions are made and work is performed Cut across national boundaries as well as organizational boundaries Can be developed anywhere within the firm’s global operations network

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

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

Synthesis: Strategy and Architecture Table 13.2, p. 469

Organizational Change Firms need to periodically alter their architecture to conform to changes in environment and strategy Hard to achieve due to organizational inertia Sources of inertia Possible redistribution of power and influence among managers Strong existing culture Senior manager’s preconceptions about the appropriate business model Institutional constraints such as national regulations including local content rules regarding layoffs

Organizational Change Change to match competitive and strategy environment Hard to change Existing distribution of power and influence Current culture Manager’s preconceptions about the appropriate business model or paradigm Institutional constraints Principles for change Unfreeze the organization Moving to the new state Refreezing the organization

Looking Ahead to Chapter 14 Entry Strategy and Strategic Alliances Basic entry decisions Entry modes Selecting an entry mode Greenfield venture or acquisition Strategic alliances