1. International Business 10e
By Charles W.L. Hill
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. The Organization of International Business
Chapter 14
The Organization of International Business

3. What Is Organizational Architecture?
Organizational architecture is the totality of a firm’s organization including
Organizational structure
the formal division of the organization into subunits
the location of decision-making responsibilities within that structure
centralized versus decentralized
the establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams or pan-regional committees
LO 1: Explain what is meant by organizational architecture.

4. What Is Organizational Architecture?
Control systems and incentives
control systems - the metrics used to measure performance of subunits
incentives - the devices used to reward managerial behavior
Structure and control systems establish decision-making responsibilities and integration mechanisms.

5. What Is Organizational Architecture?
Processes, organizational culture, and people
processes - how decisions are made and work is performed within the organization
organizational culture - norms and values that are shared among the employees of an organization
people - the employees and 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

6. What Is Organizational Architecture?
To be the most profitable
the elements of the organizational architecture must be internally consistent
the organizational architecture must fit the strategy
the strategy and architecture must be consistent with each other, and consistent with competitive conditions

7. What Is Organizational Architecture?

8. What Are the Dimensions of Organizational Structure?
Organizational structure has three dimensions
Vertical differentiation - the location of decision-making responsibilities within a structure
Horizontal differentiation - the formal division of the organization into subunits
Integrating mechanisms - the mechanisms for coordinating subunits
LO 2: Describe the different organizational choices that can be made in an international business.

9. Why Is Vertical Differentiation Important?
Vertical differentiation determines where decision-making power is concentrated
Centralized decision making
facilitates coordination
ensures decisions are consistent with the organization’s objectives
gives managers the means to bring about organizational change
avoids duplication of activities

10. Why Is Vertical Differentiation Important?
Decentralized decision making
relieves the burden of centralized decision making
has been shown to motivate individuals
permits greater flexibility
can result in better decisions
can increase control

11. Why Is Horizontal Differentiation Important?
Horizontal differentiation refers to how the firm divides into subunits
usually based on function, type of business, or geographical area
Most firms begin with no formal structure, but as they grow, split into functions reflecting the firm’s value creation activities - functional structure
functions are coordinated and controlled by top management
decision making is centralized
product line diversification requires further horizontal differentiation
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. Decision making in this functional structure tends to be centralized.

12. What Is a Functional Structure?
A Typical Functional Structure

13. Why Is Horizontal Differentiation Important?
Firms may switch to a product divisional structure
each division is responsible for a distinct product line
headquarters retains control for the overall strategic direction of the firm and for the financial control of each division

14. What Is a Product Divisional Structure?
A Typical Product Divisional Structure

15. What Happens When Firms Expand Globally?
When firms expand internationally, they often group all of their international activities into an international division
Over time, manufacturing may shift to foreign markets
firms with a functional structure at home would replicate the functional structure in the foreign market
firms with a divisional structure would replicate the divisional structure in the foreign market
In either case, there is the potential for conflict and coordination problems between domestic and foreign operations
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.

16. What Is an International Division Structure?
One Company’s International Division Structure
Management Focus: The International Division at Walmart explores Walmart’s organizational architecture. When Walmart initially expanded into international markets, it established an international division. Over time, however, this structure proved to be problematic and was abandoned.

18. What Happens Next? Firms that continue to expand will move to either a
Worldwide product division structure - adopted by firms that are reasonably diversified
allows for worldwide coordination of value creation activities of each product division
helps realize location and experience curve economies
facilitates the transfer of core competencies
does not allow for local responsiveness

19. What Is a Worldwide Product Division Structure?
A Worldwide Product Divisional Structure

20. What Happens Next?
Worldwide area structure - favored by firms with low degree of diversification and a domestic structure based on function
divides the world into autonomous/separate geographic areas
decentralizes operational authority
facilitates local responsiveness
can result in a fragmentation/division of the organization
is consistent with a localization strategy

21. What Is a Worldwide Area Structure?

22. How Does Organizational Structure Change over Time?
The International Structural Stages Model
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 the figure. The model in the figure is referred to as the international structural stages model and was developed by John Stopford and Louis Wells.
The Closing Case: Philips NV explores how the Dutch multinational’s structure has changed over time as the company’s strategy has evolved.

23. How Does Organizational Structure Change over Time?
Organizational structure is the formal design of managerial hierarchies within a company, setting forth both reporting relationships and information flows.
Structure plays a large role in shaping organizational culture as well, and companies may find it necessary to change organizational structure to remain competitive or adapt to changes in the company, industry or marketplace.
1. Involve employees from all levels of your organization in the planning stage. Solicit feedback from key front-line managers and employees to gain deeper insight into practical operational issues.
2. Communicate planning progress across the organization regularly. Send company-wide updates via or your company newsletter to keep the change fresh in employees' minds for some time before the implementation phase. Avoid making employees feel blindsided by the change, especially if they are a target for downsizing.
3. Explain thoroughly the reasons for the change, as well as the benefits that the change will afford to individual departments and employees. Hold at least two meetings to detail the change; one with departmental managers and one with your entire office or organization, if possible.
4. Lead by example in the change initiative and enlist your top-level managers to do the same. Publicly show your commitment to the change through your informal conversations and the time that you spend planning for and communicating the details of the change.
5. Roll out the change one department at a time, if possible, to identify and address logistical issues early. Alter your change implementation plans if necessary after the first department is reorganized.

24. What Is the Global Matrix Structure?
The global matrix structure – tries to minimize the limitations of the worldwide area structure and the worldwide product divisional structure
allows for differentiation along two dimensions - product division and geographic area
has dual decision making - product division and geographic area have equal responsibility for operating decisions
can be bureaucratic and slow
can result in conflict between areas and product divisions
can result in finger-pointing between divisions when something goes wrong

25. What Is the Global Matrix Structure?
A Global Matrix Structure
Management Focus: The Rise and Fall of Dow Chemical’s Matrix Structure explores the organization architecture at Dow Chemical. For years, despite having difficulties when it was initially implemented, the company relied on a matrix structure. However, when the company changed its strategy, its structure had to change as well.

26. How Can Subunits Be Integrated?
Regardless of the type of structure, firms need a mechanism to integrate subunits
need for coordination is lowest in firms with a localization strategy and highest in transnational firms
coordination can be complicated by differences in subunit orientation/location and goals
simplest formal integrating mechanism is direct contact between subunit managers, followed by liaisons
temporary or permanent teams composed of individuals from each subunit is the next level of formal integration
the matrix structure allows for all roles to be integrating roles

27. How Can Subunits Be Integrated?
Formal Integrating Mechanisms

28. How Can Subunits Be Integrated?
Many firms use informal integrating mechanisms
A knowledge network - network for transmitting information within an organization that is based not on informal contacts between managers and on distributed information systems
a non-bureaucratic conduit for knowledge flows
must embrace as many managers as possible and managers must adhere to a common set of norms and values that override differing subunit orientations

29. How Can Subunits Be Integrated?
A Simple Management Network
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.

30. What Are the Different Types of Control Systems?
Personal controls –personal contact with subordinates
most widely used in small firms –
Strategy, structure and financial perfomance
Bureaucratic controls –a system of rules and procedures that directs the actions of subunits
budgets and capital spending rules
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.

31. What Are the Different Types of Control Systems?
Output controls – setting goals for subunits to achieve and expressing those goals in terms of objective performance metrics
compare actual performance against targets and intervene selectively to take corrective action
Cultural controls – exist when employees “buy into” the norms and value systems of the firm
strong culture implies less need for other forms of control

32. What Are Incentive Systems?
Incentives - devices used to reward behavior
usually closely tied to performance metrics used for output controls
should vary depending on the employee and the nature of the work being performed
should promote cooperation between managers in sub-units
should reflect national differences in institutions and culture
can have unintended consequences

34. What Is Performance Ambiguity?
Performance ambiguity exists when the causes of a subunit’s poor performance are not clear
is common when a subunit’s performance is dependent on the performance of other subunits
is lowest in firms with a localization strategy
is higher in international firms
is still higher in firms with a global standardization strategy
is highest in transnational firms

35. What Is the Link Between Control, Incentives, And Strategy?
Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies
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. The Table reveals a paradox.
We know 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.

36. What Are Processes?
Processes refer to the manner in which decisions are made and work is performed
many processes cut across national boundaries as well as organizational boundaries
processes can be developed anywhere within a firm’s global operations network
formal and informal integrating mechanisms can help firms leverage/control processes

37. What Is Organizational Culture?
Organizational culture - the values and norms that employees are encouraged to follow
Evolves from
founders and important leaders
national social culture
the history of the enterprise
decisions that resulted in high performance
Management Focus: Culture and Incentives at Lincoln Electric examines the incentive system and organizational culture at Lincoln Electric. The company believes in treating everyone equally and basing pay on individual output.

38. What Is Organizational Culture?
Organizational culture can be maintained through
hiring and promotional practices
reward strategies
socialization processes
communication strategies
Organizational culture tends to change very slowly

39. What Is Organizational Culture?
Managers in companies with a “strong” culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed
A “strong” culture
is not always good
may not lead to high performance
could be beneficial at one point, but not at another
Companies with adaptive cultures have the highest performance

40. What Is the Link Between Strategy And Architecture?
A Synthesis of Strategy, Structure, and Control Systems
LO 3: Explain how organization can be matched to strategy to improve the performance of an international business.

41. What Is the Link Between Strategy And Architecture?
Firms pursuing a localization strategy focus on local responsiveness
they do not have a high need for integrating mechanisms
performance ambiguity and the cost of control tend to be low
the worldwide area structure is common

42. What Is the Link Between Strategy And Architecture?
Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries
the need for control is moderate
the need for integrating mechanisms is moderate
performance ambiguity is relatively low and so is the cost of control
the worldwide product division structure is common

43. What Is the Link Between Strategy And Architecture?
Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies
headquarters maintains control over most decisions
the need for integrating mechanisms is high
strong organizational cultures are encouraged
the worldwide product division is common

44. What Is the Link Between Strategy And Architecture?
Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning
some decisions are centralized and others are decentralized
the need for coordination and cost of control is high
an array of formal and informal integrating mechanism are used
a strong culture is encouraged
matrix structures are common

45. How Are the Environment, Strategy, Architecture and Performance Related?
For a firm to succeed
The firm’s strategy must be consistent with the environment in which the firm operates
The firm’s organization architecture must be consistent with its strategy
firms need to change their architecture to reflect changes in the environment in which they are operating and the strategy they are pursuing

46. How Can Firms Implement Organizational Change?
To implement organization change
Unfreeze the organization through shock therapy
requires taking bold actions like plant closures or dramatic structural reorganizations
Move the organization to a new state through proactive change in architecture
requires a substantial and quick change in organizational architecture so that it matches the desired new strategic posture
Refreeze the organization in its new state
requires that employees be socialized into the new way of doing things
LO 4: Discuss what is required for an international business to change its organization so that it better matches its strategy.

47. How Can Firms Implement Organizational Change?
Organizations can be difficult to change because of
the existing distribution of power and influence
the current culture
managers’ preconceptions about the appropriate business model or paradigm
institutional constraints