2. Chapter 13
The Organization of
International Business
3. Introduction
Organizational architecture refers to the totality of a firm’s
organization, including formal organization structure, control systems
and incentives, processes, organizational culture, and people
To be the most profitable, firms need to be sure:
the different elements of the organizational architecture are
internally consistent
the organizational architecture matches or fits the strategy of the
firm
the strategy and architecture of the firm are consistent with each
other, and consistent with competitive conditions
13-3
4. Organizational Architecture
Organizational structure refers to:
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 are the metrics used to measure
performance of subunits and make judgments about how
well managers are running those subunits
13-4
5. Organizational Architecture
Incentives are the devices used to reward appropriate
managerial behavior
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 refers to not just the employees of the
organization, but also 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
13-5
7. Classroom Performance System
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
13-7
8. Organizational Structure
Organizational structure has three dimensions:
1. Vertical differentiation - the location of decision-making
responsibilities within a structure
2. Horizontal differentiation - the formal division of the
organization into sub-units
3. The establishment of integrating mechanisms - the
mechanisms for coordinating sub-units
13-8
9. Vertical Differentiation:
Centralization And Decentralization
Vertical differentiation determines where decision-making
power is concentrated
Centralized decision-making:
facilitates coordination
ensure decisions consistent with organization’s objectives
gives top-level managers the means to bring about
organizational change
avoids duplication of activities
13-9
10. Vertical Differentiation:
Centralization And Decentralization
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
It can be worthwhile to centralize some decisions and
decentralize others
13-10
11. Classroom Performance System
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
13-11
12. Horizontal Differentiation:
The Design Of Structure
Horizontal differentiation is concerned with how the firm
decides to divide itself into sub-units
The decision is usually based on:
function
type of business
geographical area
13-12
13. Horizontal Differentiation:
The Design Of Structure
Most firms begin with no formal structure
As they grow, the organization is split into functions
reflecting the firm’s value creation activities (functional
structure)
The functions are typically coordinated and controlled by
top management
Decision-making tends to be centralized
If the firm diversifies its product line, further horizontal
differentiation may be necessary
Firms may switch to a product divisional structure where
each division is responsible for a distinct product line
13-13
15. Horizontal Differentiation:
The Design Of Structure
Figure 13.3: A Typical Product Divisional Structure
13-15
16. Horizontal Differentiation:
The Design Of Structure
When firms expand internationally, they often group all of
their international activities into an international division
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 and firms with a
divisional structure would replicate the divisional structure
in every country in which they do business
The creates the potential for conflict and coordination
problems between domestic and foreign operations
13-16
17. Horizontal Differentiation:
The Design Of Structure
Figure 13.4: One Company’s International Divisional
Structure
13-17
18. Horizontal Differentiation:
The Design Of Structure
Many firms that continue to expand will abandon their
international division structure and move to either a:
Worldwide product divisional structure - tends to be
adopted by diversified firms that have domestic product
division
Worldwide area structure - tends to be adopted by
undiversified firms whose domestic structures are based on
functions
13-18
19. Horizontal Differentiation:
The Design Of Structure
Figure 13.5: The International Structural Stages Model
13-19
20. Horizontal Differentiation:
The Design Of Structure
The worldwide area structure:
is 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
13-20
21. Horizontal Differentiation:
The Design Of Structure
The worldwide product division structure:
is 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
13-21
22. Horizontal Differentiation:
The Design Of Structure
Figure 13.6: A Worldwide Product Divisional Structure
13-22
23. Horizontal Differentiation:
The Design Of Structure
The global matrix structure is an attempt to minimize the
limitations of the worldwide area structure and the
worldwide product divisional structure
The global matrix 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
13-23
25. Classroom Performance System
Most firms begin their international expansion with a(n)
________ structure.
a) Matrix
b) Worldwide product division
c) Worldwide area division
d) International division
13-25
26. Classroom Performance System
Which type of organization structure has a dual decision-
making system?
a) Matrix
b) Worldwide product division
c) Worldwide area division
d) International division
13-26
27. Integrating Mechanisms
Regardless of the type of structure, firms need a
mechanism to integrate subunits
The 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
The 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
Finally, the matrix structure allows for all roles to be
integrating roles
13-27
29. 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 knowledge network is a non bureaucratic conduit for
knowledge flows
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
13-29
31. Controls Systems And Incentives
A firm’s leaders need to ensure that the actions of
subunits are consistent with the firm’s overall strategic and
financial objectives
This is achieved through control and incentive systems
13-31
32. Types Of Control Systems
There are four main types of control systems:
1. Personal controls – control by personal contact with
subordinates
Most widely used in small firms
2. Bureaucratic controls – 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
13-32
33. Types Of Control Systems
3. Output controls – setting goals for subunits to achieve
and expressing those goals in terms of relatively objective
performance metrics
Control is achieved by comparing actual performance
against targets and intervening selectively to take
corrective action
4. 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
13-33
34. Classroom Performance System
Which is not one of the four types of control systems?
a) Cultural control
b) Personal control
c) Input control
d) Bureaucratic control
13-34
35. Incentive Systems
Incentives are the devices used to reward behavior
Incentives are usually closely tied to performance metrics used for
output controls
Incentives:
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
13-35
36. Control Systems, Incentives, And
Strategy In The International Business
The key to understanding the relationship between
international strategy, control systems and incentive
systems is performance ambiguity - which exists when the
causes of a subunit’s poor performance are not clear
The cost of control rises as performance ambiguity
increases
13-36
37. Control Systems, Incentives, And
Strategy In The International Business
Performance ambiguity:
is common when a subunit’s performance is dependent
on the performance of other subunits
is lowest in firms with a localization strategy
higher in international firms
still higher in firms with a global standardization strategy
and highest in transnational firms
13-37
38. Control Systems, Incentives, And
Strategy In The International Business
Table 13.1: Interdependence, Performance Ambiguity, and the
Costs of Control for the Four International Business Strategies
13-38
39. 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
13-39
40. Organizational Culture
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
Organizational culture tends to change very slowly
13-40
41. Creating And Maintaining
Organizational Culture
Organizational culture comes 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
13-41
42. Organizational Culture And Performance
In The International Business
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
13-42
43. Synthesis: Strategy And Architecture
What is the interrelationship between the four basic
strategies (localization, international, global
standardization, and transnational) and organization
architecture?
13-43
44. Synthesis: Strategy And Architecture
Table 13.2: A Synthesis of Strategy, Structure, and Control
Systems
13-44
45. Localization Strategy
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 tends to
be low
The worldwide area structure is common
13-45
46. International Strategy
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
13-46
47. Global Standardization Strategy
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
13-47
48. Transnational Strategy
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 is high
An array of formal and informal integrating mechanism
are used
The cost of control is high
A strong culture is encouraged
Matrix structures are common
13-48
49. Environment, Strategy,
Architecture, And Performance
For a firm to succeed, two conditions must be met:
1. the firm’s strategy must be consistent with the
environment in which the firm operates
2. the firm’s organization architecture must be consistent
with its strategy
13-49
50. Organizational Change
Firms need to change their architecture to reflect
changes in the environment in which they are operating
and the strategy they are pursuing
13-50
51. Organizational Inertia
Organizations are difficult to change
Sources of inertia include:
the existing distribution of power and influence
the current culture
senior managers’ preconceptions about the appropriate
business model or paradigm
institutional constraints
13-51
52. Implementing Organizational Change
There are three basic principles for successful organization change:
1. Unfreeze the organization through shock therapy
Effective change requires taking bold actions like plant closures or
dramatic structural reorganizations
2. Moving the organization to a new state through proactive change in
architecture
Movement requires a substantial change in the form of a firm’s
organizational architecture so that it matches the desired new strategic
posture
Movement should be done quickly
3. Refreeze the organization in its new state
Refreezing requires that employees be socialized into the new way of
doing things
13-52
53. Classroom Performance System
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
13-53
Notas do Editor
Structure and control systems establish decision-making responsibilities and integration mechanisms.
The answer is b.
The answer is b.
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.
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.
Management Focus: The International Division at Wal-Mart Summary This feature explores Wal-Mart’s organizational architecture. When Wal-Mart initially expanded into international markets, it established an international division. Over time, however, this structure proved to be problematic, and was abandoned. Discussion of the feature can revolve around the following questions: 1. Why did the centralization of decisions at the headquarters of Wal-Mart’s international division create problems for the company’s different national operations? Has Wal-Mart’s response been appropriate? Answer: When Wal-Mart began its international expansion, it set up an international division to handle all foreign operations. However, over time, this approach proved to be challenging. Managers in foreign countries had to get permission from Bentonville before they could make any changes in strategy or operations. Not only did this approach slow decision-making, also meant that decisions were being made by managers who were removed from the local situation. Wal-Mart began to change this approach when it acquired Britain’s ASDA supermarket chain. Today, the company has given greater responsibility to local managers particularly in merchandising and operations. 2. Do you think that having an international division is the best structure for managing Wal-Mart’s foreign operations? What problems might arise with this structure? What other structure might work? Answer: Most students will probably suggest that while the international division may have been a good strategy at the beginning of Wal-Mart’s expansion into foreign markets, as foreign revenues have grown, approach no longer works. Many students will probably suggest that Wal-Mart consider moving towards a transnational approach where it could respond to local markets and at the same time, respond to the pressure to minimize costs. Another Perspective: To learn more about Wal-Mart’s foreign operations, go to the company’s web site at {http://www.walmart.com}.
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.
Management Focus: The Rise and Fall of Dow Chemical’s Matrix Structure Summary This feature 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. Discussion of the feature can revolve around the following questions: 1. Why did Dow first adopt a matrix structure? What were the problems with this structure? Do you think these problems are typical of matrix structures? Answer: Dow Chemical initially adopted the matrix structure because it would allow the company to be responsive to both local market needs and corporate objectives. However, when it was first adopted, the structure did not work well. The dual chain of control led to turf battles and a lack of accountability, however, Dow felt that by making the structure more flexible it could still work. The company had moved into the pharmaceuticals business where local responsiveness was important as was the need to conscious of costs. Many students will probably agree that the dual chain of command associated with the matrix structure makes it challenging, however at least according to Dow, there are ways to make it work. In fact, Dow credits the structure for much of its success prior to the mid-1990s. b) What drove the shift away from the matrix structure in the late 1990s? Does Dow’s structure now make sense given the nature of its businesses and the competitive environment it competes in? In the mid-1990s, Dow divested itself of its pharmaceuticals activities, and changed its structure to reflect its new strategy. The company shifted to global business divisions as way to reduce costs and streamline decision-making. Dow felt that given its new focus on bulk chemicals, the new structure would work better. Another Perspective: To find out more about Dow Chemical’s current strategy and organizational architecture, go to the company’s web site at {http://www.dowchemical.com}.
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.
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.
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.
Management Focus: Culture and Incentives at Lincoln Electric Summary This feature examines the incentive system and organizational culture at Lincoln Electric. The company believes in treating everyone equally, and basing pay on individual output. Discussion of the feature can revolve around the following questions: 1 To what extent are the organization culture and incentive systems of Lincoln Electric aligned with the firm’s strategy? Answer: Lincoln Electric stresses that individuals should be rewarded for their individual efforts, and that everyone who works for the company should be treated equally. Accordingly, employee pay depends on individual output, everyone eats in the same cafeteria, parks in the same lot, and so on. Because employees can boost their pay significantly by working harder and being innovative, the company as a whole becomes more productive. 2. How was the culture at Lincoln Electric created and nurtured over time? Answer: Lincoln Electric has a long tradition of equality and fairness. Since 1934, employees have been assessed both objectively and subjectively. Objective criteria include the level and quality of an individual’s output, while subjective criteria include attitudes and dependability. Workers actually have the ability to double their base pay. Even so, because productivity is so high, Lincoln Electric is the low cost leader in the industry. 3. Why did the culture and incentive systems work well in the United States? Why did it not take in other nations? Answer: In the United States, a country that encourages individualism, Lincoln Electric’s emphasis on individual performance has been very successful. However, in other countries, this approach has met with some resistance. In some countries, Lincoln Electric’s pay-per-output approach was considered exploitative. In Germany, it was actually illegal! In addition, in some countries the incentive of more money for more output was not valued. Many European placed a greater value on more leisure time for example. In countries where Lincoln Electric expanded through acquisition, unionized employees opposed the compensation approach. Another Perspective: For additional information on Lincoln Electric, go to the company’s web site at {http://www.lincolnelectric.com}.
