International Business 10 e By Charles W. L. Hill Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.
Chapter 14 The Organization of International Business
What Is Organizational Architecture? Ø Organizational architecture is the totality of a firm’s organization including 1. Organizational structure Ø the formal division of the organization into subunits Ø the location of decision-making responsibilities within that structure Ø centralized versus decentralized Ø the establishment of integrating mechanisms to coordinate the activities of subunits including crossfunctional teams or pan-regional committees 14 -3
What Is Organizational Architecture? 2. Control systems and incentives Ø control systems - the metrics used to measure performance of subunits Ø incentives - the devices used to reward managerial behavior 14 -4
What Is Organizational Architecture? 3. Processes, organizational culture, and people Ø processes - how decisions are made and work is performed within the organization Ø organizational culture - norms and values that are shared among the employees of an organization Ø 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 14 -5
What Is Organizational Architecture? Ø To be the most profitable Ø the elements of the organizational architecture must be internally consistent Ø the organizational architecture must fit the strategy Ø the strategy and architecture must be consistent with each other, and consistent with competitive conditions 14 -6
What Is Organizational Architecture? Organizational Architecture 14 -7
What Are the Dimensions of Organizational Structure? Ø 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 subunits 3. Integrating mechanisms - the mechanisms for coordinating subunits 14 -8
Why Is Vertical Differentiation Important? Ø Vertical differentiation determines where decision-making power is concentrated Ø Centralized decision making Ø facilitates coordination Ø ensures decisions are consistent with the organization’s objectives Ø gives managers the means to bring about organizational change Ø avoids duplication of activities 14 -9
Why Is Vertical Differentiation Important? Ø Decentralized decision making Ø relieves the burden of centralized decision making Ø has been shown to motivate individuals Ø permits greater flexibility Ø can result in better decisions Ø can increase control 14 -10
Why Is Horizontal Differentiation Important? Ø Horizontal differentiation refers to how the firm divides into subunits Ø usually based on function, type of business, or geographical area Ø Most firms begin with no formal structure, but as they grow, split into functions reflecting the firm’s value creation activities - functional structure Ø functions are coordinated and controlled by top management Ø decision making is centralized Ø product line diversification requires further horizontal differentiation 14 -11
What Is a Functional Structure? A Typical Functional Structure 14 -12
Why Is Horizontal Differentiation Important? Ø Firms may switch to a product divisional structure Ø each division is responsible for a distinct product line Ø headquarters retains control for the overall strategic direction of the firm and for the financial control of each division 14 -13
What Is a Product Divisional Structure? A Typical Product Divisional Structure 14 -14
What Happens When Firms Expand Globally? Ø When firms expand internationally, they often group all of their international activities into an international division Ø Over time, manufacturing may shift to foreign markets Ø firms with a functional structure at home would replicate the functional structure in the foreign market Ø firms with a divisional structure would replicate the divisional structure in the foreign market Ø In either case, there is the potential for conflict and coordination problems between domestic and foreign operations 14 -15
What Is an International Division Structure? One Company’s International Division Structure 14 -16
What Happens Next? Ø Firms that continue to expand will move to either a 1. Worldwide product division structure adopted by firms that are reasonably diversified Ø allows for worldwide coordination of value creation activities of each product division Ø helps realize location and experience curve economies Ø facilitates the transfer of core competencies Ø does not allow for local responsiveness 14 -18
What Is a Worldwide Product Division Structure? A Worldwide Product Divisional Structure 14 -19
What Happens Next? 2. Worldwide area structure - favored by firms with low degree of diversification and a domestic structure based on function Ø divides the world into autonomous/separate geographic areas Ø decentralizes operational authority Ø facilitates local responsiveness Ø can result in a fragmentation/division of the organization Ø is consistent with a localization strategy 14 -20
What Is a Worldwide Area Structure? A Worldwide Area Structure 14 -21
How Does Organizational Structure Change over Time? The International Structural Stages Model 14 -22
How Does Organizational Structure Change over Time? Ø Ø Ø Ø 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 email 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. 14 -23
What Is the Global Matrix Structure? Ø The global matrix structure – tries to minimize the limitations of the worldwide area structure and the worldwide product divisional structure Ø allows for differentiation along two dimensions product division and geographic area Ø has dual decision making - product division and geographic area have equal responsibility for operating decisions Ø can be bureaucratic and slow Ø can result in conflict between areas and product divisions Ø can result in finger-pointing between divisions when something goes wrong 14 -24
What Is the Global Matrix Structure? A Global Matrix Structure 14 -25
How Can Subunits Be Integrated? Ø Regardless of the type of structure, firms need a mechanism to integrate subunits Ø need for coordination is lowest in firms with a localization strategy and highest in transnational firms Ø coordination can be complicated by differences in subunit orientation/location and goals Ø simplest formal integrating mechanism is direct contact between subunit managers, followed by liaisons Ø temporary or permanent teams composed of individuals from each subunit is the next level of formal integration Ø the matrix structure allows for all roles to be integrating roles 14 -26
How Can Subunits Be Integrated? Formal Integrating Mechanisms 14 -27
How Can Subunits Be Integrated? Ø Many firms use informal integrating mechanisms Ø A knowledge network - network for transmitting information within an organization that is based not on informal contacts between managers and on distributed information systems Ø a non-bureaucratic conduit for knowledge flows Ø must embrace as many managers as possible and managers must adhere to a common set of norms and values that override differing subunit orientations 14 -28
How Can Subunits Be Integrated? A Simple Management Network 14 -29
What Are the Different Types of Control Systems? 1. Personal controls –personal contact with subordinates Ø most widely used in small firms – Ø Strategy, structure and financial perfomance 2. Bureaucratic controls –a system of rules and procedures that directs the actions of subunits Ø budgets and capital spending rules 14 -30
What Are the Different Types of Control Systems? 3. Output controls – setting goals for subunits to achieve and expressing those goals in terms of objective performance metrics Ø compare actual performance against targets and intervene selectively to take corrective action 4. Cultural controls – exist when employees “buy into” the norms and value systems of the firm Ø strong culture implies less need for other forms of control 14 -31
What Are Incentive Systems? Ø Incentives - devices used to reward behavior Ø usually closely tied to performance metrics used for output controls Ø should vary depending on the employee and the nature of the work being performed Ø should promote cooperation between managers in sub-units Ø should reflect national differences in institutions and culture Ø can have unintended consequences 14 -32
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What Is Performance Ambiguity? Ø Performance ambiguity exists when the causes of a subunit’s poor performance are not clear Ø is common when a subunit’s performance is dependent on the performance of other subunits Ø is lowest in firms with a localization strategy Ø is higher in international firms Ø is still higher in firms with a global standardization strategy Ø is highest in transnational firms 14 -34
What Is the Link Between Control, Incentives, And Strategy? Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies 14 -35
What Are Processes? Ø Processes refer to the manner in which decisions are made and work is performed Ø many processes cut across national boundaries as well as organizational boundaries Ø processes can be developed anywhere within a firm’s global operations network Ø formal and informal integrating mechanisms can help firms leverage/control processes 14 -36
What Is Organizational Culture? Ø Organizational culture - the values and norms that employees are encouraged to follow Ø Evolves from Ø Ø founders and important leaders national social culture the history of the enterprise decisions that resulted in high performance 14 -37
What Is Organizational Culture? Ø Organizational culture can be maintained through Ø Ø hiring and promotional practices reward strategies socialization processes communication strategies Ø Organizational culture tends to change very slowly 14 -38
What Is Organizational Culture? Ø 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 Ø A “strong” culture Ø is not always good Ø may not lead to high performance Ø could be beneficial at one point, but not at another Ø Companies with adaptive cultures have the highest performance 14 -39
What Is the Link Between Strategy And Architecture? A Synthesis of Strategy, Structure, and Control Systems 14 -40
What Is the Link Between Strategy And Architecture? 1. Firms pursuing a localization strategy focus on local responsiveness Ø they do not have a high need for integrating mechanisms Ø performance ambiguity and the cost of control tend to be low Ø the worldwide area structure is common 14 -41
What Is the Link Between Strategy And Architecture? 2. Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries Ø the need for control is moderate Ø the need for integrating mechanisms is moderate Ø performance ambiguity is relatively low and so is the cost of control Ø the worldwide product division structure is common 14 -42
What Is the Link Between Strategy And Architecture? 3. Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies Ø headquarters maintains control over most decisions Ø the need for integrating mechanisms is high Ø strong organizational cultures are encouraged Ø the worldwide product division is common 14 -43
What Is the Link Between Strategy And Architecture? 4. Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies, local responsiveness, and global learning Ø some decisions are centralized and others are decentralized Ø the need for coordination and cost of control is high Ø an array of formal and informal integrating mechanism are used Ø a strong culture is encouraged Ø matrix structures are common 14 -44
How Are the Environment, Strategy, Architecture and Performance Related? Ø For a firm to succeed 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 Ø firms need to change their architecture to reflect changes in the environment in which they are operating and the strategy they are pursuing 14 -45
How Can Firms Implement Organizational Change? Ø To implement organization change 1. Unfreeze the organization through shock therapy Ø requires taking bold actions like plant closures or dramatic structural reorganizations 2. Move the organization to a new state through proactive change in architecture Ø requires a substantial and quick change in organizational architecture so that it matches the desired new strategic posture 3. Refreeze the organization in its new state Ø requires that employees be socialized into the new way of doing things 14 -46
How Can Firms Implement Organizational Change? Ø Organizations can be difficult to change because of Ø the existing distribution of power and influence Ø the current culture Ø managers’ preconceptions about the appropriate business model or paradigm Ø institutional constraints 14 -47
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