International Business 8e

International Business 8e
By Charles W.L. Hill Welcome to International Business, Eighth Edition, by Charles W.L. Hill.

The Organization of International Business
Chapter 13 The Organization of International Business Chapter 13: The Organization of International Business McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

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 Control systems and incentives control systems - the metrics used to measure performance of subunits incentives - the devices used to reward managerial behavior Have you ever thought about how responsibility is assigned to carry out a firm’s strategy, or who makes sure that things get done the way they’re supposed to? In this chapter, we’ll be answering these questions as we explore how firms are organized. The term organizational architecture refers to the totality of a firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people. What is organization structure? Organization structure refers to the formal division of the firm into subunits, the location of decision-making responsibilities within that structure, and the establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams or pan-regional committees. Control systems are the metrics used to measure performance of subunits and make judgments about how well managers are running those subunits. So, for example, you might use profitability to measure performance. Incentives are the devices used to reward appropriate managerial behavior. Usually, incentives are closely linked to performance metrics.

Processes, organizational culture, and people Processes - the manner in which decisions are made and work is performed within the organization Organizational culture - the norms and value systems 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 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 Processes are the manner in which decisions are made and work is performed within the organization. You might think of how strategy is formulated, or the how resources are allocated, for example. Organizational culture refers to the norms and value systems that are shared among the employees of an organization. This can have a real impact on firm performance! Finally, people refers to not only the employees of the firm, but also the strategy used to recruit, compensate, and retain individuals, and the type of people they are in terms of their skills, values, and orientation. As you’ll see as we move through the chapter, its critical to a firm’s success that the different elements of the organizational architecture are internally consistent, that the organization architecture matches or fits with the strategy of the firm, and that the strategy and architecture of the firm are consistent with each other, and consistent with competitive conditions. In other word, if the firm is pursuing a localization strategy, it has to have an organization structure in place that supports that strategy. Keep in mind, that if the localization strategy is not the best choice given the environment the firm is operating in, it won’t matter whether the structure supports the strategy or not. Recall from the opening case for example, that Nestle had to change both its strategy and its structure to better fit the competitive environment it was facing.

Here you can see the different elements of organizational architecture. Notice that the different elements are not independent of each other.

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 sub-units Integrating mechanisms - the mechanisms for coordinating sub-units As we mentioned before, you can think of organizational structure in terms of three dimensions: First, vertical differentiation which refers to the location of decision-making responsibilities within an organization. Second, horizontal differentiation which refers to the formal division of the organization into subunits. Finally, the establishment of integrating mechanisms, or mechanisms for coordinating subunits. Let’s start with vertical differentiation.

Why Is Vertical Differentiation Important?
Vertical differentiation determines where decision-making power is concentrated Centralized decision-making facilitates coordination ensures decisions are consistent with organization’s objectives gives managers the means to bring about organizational change avoids duplication of activities 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 When you think of vertical differentiation, think about where decision-making power is concentrated. Is it centralized at headquarters or decentralized to the subsidiary level? You might be wondering which method is better. The answer is both have some advantages. Centralized decision-making facilitates the coordination of a firm’s activities. It ensures that decisions are consistent with the firm’s objectives. Centralized decision-making can also help managers bring about organizational change, and avoid a duplication of activities. In contrast, decentralized decision-making can motivate managers who feel they have some true input toward the success of the firm. It’s also more flexible than centralized decision-making. In addition, decentralized decision-making can lead to better decisions, allows managers to avoid the burden of centralized decision-making, and can increase control.

Why Is Horizontal Differentiation Important?
Horizontal differentiation refers to how the firm divides into sub-units usually based on function, type of business, or geographical area Most firms begin with no formal structure, but as they grow, the organization is 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 Firms may switch to a product divisional structure where each division is responsible for a distinct product line Now, recall that horizontal differentiation is concerned with how the firm divides itself into subunits. How things are divided can depend on the function, the type of business, or the geographical area. So, for example, if there is strong pressure to be locally responsive, a firm might organize around geographic area. When firms start out, they don’t usually have a formal structure. Over time, as the firm grows, it gets split into functions that reflect the value creation activities. Top management usually coordinates and controls the functions, and decision-making is centralized. If necessary, the firm will divide by product line. N.V. Phillips, the Dutch multinational, began as a lighting company for example, and later diversified into a number of other areas that required its structure to change. So, Phillips has a division for lighting, for consumer electronics, for industrial electronics, and so on.

What Is A Functional Structure?
A Typical Functional Structure Here you can see an example of a functional structure.

What Is A Product Divisional Structure?
A Typical Product Divisional Structure This is an example of a typical product divisional structure.

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 Firms that expand internationally usually create an international division. As you’ll see in the Management Focus in your text, Wal-Mart created an international division when it set up its operations in Mexico in 1991. Over time, however, an international division can be problematic because it creates a division between domestic operations and foreign operations. Countries managers are effectively relegated to being second tier managers, and coordination between the domestic and foreign operations can be difficult. Many firms shift to a worldwide structure instead.

What Is An International Divisional Structure?
One Company’s International Divisional Structure Here is an example of an international division structure.

What Happens Next? Firms that continue to expand will move to either a
Worldwide product divisional 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 Worldwide area structure - favored by firms with low degree of diversification and a domestic structure based on function divides the world into autonomous geographic areas decentralizes operational authority facilitates local responsiveness can result in a fragmentation of the organization is consistent with a localization strategy Companies that abandon their international division will move to either a worldwide product division structure, or a worldwide area structure. The worldwide product division structure is typically adopted by diversified firms that already have domestic product divisions, while the worldwide area structure is adopted by firms that have functional domestic structures. Let’s look at each of these more closely. Why choose a worldwide product division structure? The worldwide product division structure is adopted by firms that are reasonably diversified, and have domestic structures based on product divisions. This structure is attractive because it allows for worldwide coordination of value creation activities of each product division and helps the firm realize location and experience curve economies. In addition, the worldwide product division structure facilitates the transfer of core competencies, and facilitates the simultaneous worldwide introduction of new products, but does not allow for local responsiveness. Why choose a worldwide area structure? The worldwide area structure is favored by firms with low degree of diversification and domestic structure based on function. This structure divides the world into autonomous geographic areas, and then each area establishes its own set of value creation activities. The worldwide area structure then decentralizes operational authority for those activities. The structure is attractive because it facilitates local responsiveness, but keep in mind that this can result in a fragmentation of the organization where it can be difficult to realize location and experience curve economies. Finally, this structure is consistent with a localization strategy.

What Is A Worldwide Product Division Structure?
A Worldwide Product Divisional Structure Here you can see an example of the worldwide product division.

What Is A Worldwide Area Structure?
Here you can see an example of the worldwide area structure.

How Does Organizational Structure Change Over Time?
The International Structural Stages Model Here you can see the stages a firm goes through as it moves from the international structure to either the worldwide product division structure or the worldwide area structure, and finally to the global matrix structure.

What Is The Global Matrix Structure?
The global matrix structure is an attempt 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 So, firms with high pressure for local responsiveness might adopt the worldwide area structure, while firms with high pressure for cost reductions might adopt the worldwide product division structure. What do firms that face both pressure for local responsiveness and pressure for costs reductions do? Well, they might consider adopting the global matrix structure which is designed to overcome some of the weakness of the worldwide product division structure and the worldwide area structure. This structure allows for differentiation along two dimensions - product division and geographic area, and has dual decision–making – the product division and the geographic area have equal responsibility for operating decisions. Keep in mind that this structure is much more complex that either the worldwide area structure or the worldwide product structure, and it can be bureaucratic and slow. The structure can also promote conflict between areas and product divisions, and result in finger-pointing between divisions when something goes wrong. The Management Focus in your text reveals some of the problems Dow Chemical experienced with its global matrix structure.

What Is The Global Matrix Structure?
A Global Matrix Structure Here is an example of the global matrix structure. Notice the dual lines of command.

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 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 Now, let’s go on to the second element of organization structure—integrating mechanisms. Regardless of how firms divide themselves, they’ll need a way to coordinate the subunits. This is where integrating mechanisms come into play. There are both formal and informal integrating mechanisms, and firms need to implement the ones that fit with their strategy and structure. Keep in mind that the need for coordination is lowest in firms with a localization strategy and highest in firms pursuing a transnational strategy. In addition, coordination can be complicated by differences in subunit orientation and goals. Production managers, for example, are concerned with production issues, whereas marketing managers focus on marketing issues. There are four formal integrating mechanisms. The simplest is direct contact between subunit managers where the managers simple gets in contact with another individual. Next, liaisons who are responsible for interfacing with another unit on a regular basis. Then, temporary or permanent teams composed of individuals from each subunit, and finally, the matrix structure allows for all roles to be integrating roles.

Formal Integrating Mechanisms Here you can see the four formal integrating mechanisms.

Many firms are using informal integrating mechanisms A knowledge network is a network for transmitting information within an organization that is based not on formal organization structure, but on informal contacts between managers within an enterprise 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 Many firms today have adopted informal integrating mechanisms. A knowledge network is a network for transmitting information within an organization that is based not on formal organization structure, but on informal contacts between managers within an enterprise and on distributed information systems. Knowledge networks are attractive because they’re non bureaucratic conduits for knowledge flows. Keep in mind, that to be successful, a knowledge network must embrace as many managers as possible and managers must adhere to a common set of norms and values that override differing subunit orientations. In other words, everyone needs to be on the same page working toward the same goals!

A Simple Management Network Here you see an example of a simple management network.

What Are The Different Types Of Control Systems?
Personal controls –personal contact with subordinates most widely used in small firms Bureaucratic controls –a system of rules and procedures that directs the actions of subunits budgets and capital spending rules 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 Now, let’s go on to the third task of organization structure – control systems and incentives. A key for a firm’s leaders is to control the subunits of the firm, and ensure that that subunit is supporting the firm’s goals and objectives. There are four main types of control systems. Personal controls refers to control by personal contact with subordinates, This is a common type of control in small firms, but some multinational companies also use it. Jack Welch, the former CEO of General Electric, for example, met regularly with the heads of the company’s businesses to discuss the status of the division. The second type of control, bureaucratic control, refers to control through a system of rules and procedures that directs the actions of subunits. The most important bureaucratic controls are budgets and capital spending rules. Leaders can control the growth of subunits by manipulating their budgets. The third type of control, output control involves setting goals for subunits to achieve and expressing those goals in terms of relatively objective performance metrics. Leaders can then assess the performance of subunits by comparing actual performance against targets and then, intervene selectively to take corrective action where needed. Finally, cultural controls exist when employees “buy into” the norms and value systems of the firm. Firms with strong culture have less need for other forms of control. McDonald’s, for example, promotes organizational norms and values among its franchisees and suppliers. McDonald’s figures that if everybody is on board with the same set of goals, the company has a better chance to succeed.

What Are Incentive Systems?
Incentives are the 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 How can leaders encourage certain behaviors? They can use incentives, or devices designed to reward behavior. You’re probably already familiar with many types of incentives like bonus pay and profit sharing. Usually, incentives are closely tied to the performance metrics that are used for output controls. When using incentives, managers need to vary them according to the employee and the nature of the work involved. For example, a senior manager should have a different incentive program then an individual working on the factory floor. Incentives should also be designed to promote cooperation between managers and sub-units. So, instead of linking incentives to the performance of a particular unit, incentives might be linked to the performance of the entire firm. Incentives should also reflect differences in institutions and cultural differences. Incentives that are based on individual efforts, for example, may not be effective in a country with a group orientation. Finally, managers should recognize that sometimes incentives have unintended consequences. Managers need to consider exactly what type of behavior an incentive will promote.

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 What is the link between international strategy, control systems, and incentive systems? Well, to understand the link, we need to look at performance ambiguity, which exists when the causes of a subunit’s poor performance aren’t clear. In other words, if a subsidiary is failing to achieve its goals, who is to blame? Is it the fault of the another subsidiary that’s allegedly supplying the first facility with poor goods? Or, is it that the first subsidiary is just bad at what’s it’s doing? When is performance ambiguity likely to occur? Performance ambiguity is more likely when a subunit’s performance is dependent on the performance of other subunits. It tends to be lowest in firms with a localization strategy because each unit is more likely to be judged as a stand alone entity. It more likely to occur in international firms because some integration is necessary to transfer core competencies and skills. It tends to be still higher in firms with a global standardization strategy because many activities in this type of firm are interdependent. Performance ambiguity is most likely to occur in firms following transnational strategies because of the high degree of joint decision making that is associated with this type of strategy.

What Is The Link Between Control, Incentives, And Strategy?
Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies Here you can see a summary of the discussion on interdependence, performance ambiguity, and the cost of control associated with the four basic international business strategies.

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 processes Now, let’s move on to talk about processes, or the manner in which decisions are made and work is performed. You can think of things like the process for formulating strategy or the process for allocating resources. Many processes cut across national boundaries as well as organizational boundaries. In other words, the design of a new product might require the cooperation of people in multiple units and multiple countries—R&D might be based in Silicon Valley, while production takes place in Mexico, and marketing in Britain. Processes can be developed anywhere within a firm’s global operations network, they don’t just have to be developed at the headquarters’ location. Firms can use formal and informal integrating mechanisms to help leverage processes.

What Is Organizational Culture?
Organizational culture refers to the values and norms that employees are encouraged to follow and evolves from founders and important leaders national social culture the history of the enterprise decisions that resulted in high performance Organizational culture can be maintained through hiring and promotional practices reward strategies socialization processes communication strategies Organizational culture tends to change very slowly We’ve talked a little bit about organizational culture already, but now let’s look at it more closely. Recall that culture refers to a systems of values and norms that are shared among people. Organizations have their own values and norms that employees are encouraged to follow. Where does organizational culture come from? Organizational culture comes from a number of sources including the firm’s founders and important leaders, the national social culture, the history of the enterprise, and from decisions that resulted in high performance. How does a firm promote and maintain its organizational culture? Firms can promote and maintain their organizational culture through hiring and promotional practices, reward strategies, socialization processes, and communication strategies. Keep in mind that just like national culture, organizational cultures can change, but they tend to do very slowly.

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 Should a company promote a “strong” culture? Not necessarily! 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. This type of culture may not lead to high performance. In the 1980s, for example, the corporate culture at General Motors discouraged lower level employees from demonstrating initiative and taking risks, and ultimately contributed to the poor performance of the company. A strong corporate culture may also be beneficial at one point in time, but not at another. IBM’s strong culture initially helped it become an industry leader, but later contributed to its downfall. In general, companies with adaptive cultures tend to have the highest performance. You can learn more about the impact of a strong culture at Lincoln Electric in the Management Focus in your text.

What Is The Link Between Strategy And Architecture?
A Synthesis of Strategy, Structure, and Control Systems Here you can see a synthesis of the material we’ve talked about so far. Let’s look at each of the strategies in light of firm 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 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 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, and the worldwide area structure is common. Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries. There is a moderate need for control and integrating mechanisms. Performance ambiguity is relatively low and so is the cost of control. Many firms following this strategy us a worldwide product division structure.

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 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 Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies. Control in this type of firm tends to be centralized at headquarters. Because of the complexities involved with this type of strategy, there is a high need for integrating mechanisms, and strong organizational cultures are encouraged. Many firms using a global standardization strategy have a worldwide product division structure. Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning. Some decisions in this type of organization are centralized, whereas others are decentralized. Companies pursuing a transnational strategy have a high need for coordination, and an array of formal and informal integrating mechanisms are used. This type of firm faces high costs for control, and encourages a strong culture. Many transnational firms opt for a matrix structure.

What Is The Link Between Environment, Strategy, Architecture, And Performance?
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 Remember, a key to all of this is to create a fit between strategy and architecture. In other words, firms need to ensure that their strategy is consistent with the environment in which they operate, and that their organization architecture is consistent with their strategy. Once a firm has achieve that “fit” is it good to go? No, the firm must continually assess the environment and make changes as necessary. Phillips, for example, shifted its strategy and architecture in the 1990s to better compete in an industry that had shifted from being fairly local to being global in nature.

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 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, and/or institutional constraints What’s the best way for an organization to change? There are three basic principles for successful organization change. First, unfreeze the organization through shock therapy! Effective change requires taking bold actions like closing plants or implementing dramatic structural reorganizations. Second, move the organization to a new state through proactive change in architecture. Be sure that the organizational architecture matches the desired new strategic posture. Finally, refreeze the organization in its new state. This means that employees have to be socialized into the new way of doing things. Is it difficult for an organization to change? Yes! There are several source of inertia in firms including the existing distribution of power and influence, the current culture, senior managers’ preconceptions about the appropriate business model or paradigm, and institutional constraints like national regulations on local content or layoffs.

Review Question Which of the following is not an advantage of
centralized decision-making? a) It facilitates coordination b) It motivates employees c) It gives top-level managers the means to bring about organizational change d) It avoids duplication of activities Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready? Which of the following is not an advantage of centralized decision-making? a) It facilitates coordination b) It motivates employees c) It gives top-level managers the means to bring about organizational change d) It avoids duplication of activities The answer is b.

Review Question Most firms begin their international
expansion with a(n) ________ structure. a) Matrix b) Worldwide product division c) Worldwide area division d) International division Most firms begin their international expansion with a(n) ________ structure. a) Matrix b) Worldwide product division c) Worldwide area division d) International division The answer is d.

Review Question Which type of organization structure has a
dual decision-making system? a) Matrix b) Worldwide product division c) Worldwide area division d) International division Which type of organization structure has a dual decision-making system? a) Matrix b) Worldwide product division c) Worldwide area division d) International division The answer is a.

Review Question Which is not one of the four types of control systems?
a) Cultural control b) Personal control c) Input control d) Bureaucratic control Which is not one of the four types of control systems? a) Cultural control b) Personal control c) Input control d) Bureaucratic control The answer is c.

Review Question Which type of organizational structure is
often associated with a transnational strategy? a) worldwide area division b) worldwide product division c) matrix d) international division Which type of organizational structure is often associated with a transnational strategy? a) worldwide area division b) worldwide product division c) matrix d) international division The answer is c.

Review Question The norms and value systems that are shared
among the employees of an organization are called a) processes b) organizational culture c) control systems d) incentives The norms and value systems that are shared among the employees of an organization are called a) processes b) organizational culture c) control systems d) Incentives The answer is b.

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