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Learning Objectives
14-1 Explain what is meant by organizational architecture.
14-2 Describe the different organizational architecture choices
that can be made in an international business.
14-3 Explain how the organizational architecture can be matched
to global strategy to improve performance.
Chapter 14 14-4 Discuss what is required for an international business to
change its organizational architecture so it better matches its
The Organization of global strategy.
International Business
naqiewei/DigitalVision Vectors/Getty Images
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Opening Case A Sharing Economy
Bird, Lime, and Organizing Globally A peer-to-peer based activity of acquiring, providing, or sharing
• Bird: a dockless scooter-sharing company in California.
access to products and services facilitated among providers and
• Provide electric scooters in over 100 cities in North America, Europe, and Asia
customers via a community based on-line platform (e.g., a
• Lime: provide bikes which users find and unlock via a mobile app
• Vibrant communities that have less traffic, cleaner air, and safer streets. smartphone app).
• Recharged by “Bird Chargers” and “Lime Juicers” at night.
• Combination of technology usage and network of independent contractor.
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Organizational Structure 5 Figure 14.1 Organization Architecture
Organization architecture: the totality of a firm’s organization,
including the formal organizational structure, control systems and
incentives, organizational culture, processes, and people.
Organizational structure:
• The formal division of the organization into subunits.
• The location of decision-making responsibilities within that structure
(formalized/flexible, and/or specialized).
• The establishment of integrating mechanisms to coordinate the
activities of subunits including cross-functional teams and or pan-
regional committees.
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Organizational Structure 6 Organizational Structure 6
• Controls: metrics used to measure the performance of subunits
• Vertical differentiation: the location of decision-making
and make judgments about how well the subunits are run.
• Incentives: devices used to reward appropriate managerial responsibilities within a structure.
behavior.
• Horizontal differentiation: the formal division of the
• Processes: manner in which decisions are made and work is
performed. organization into subunits.
• Organizational culture: norms and value systems that are
shared among the employees. • Integrating mechanisms: mechanisms for coordinating
• People: employees and the strategy used to recruit, subunits.
compensate, and retain those individuals.
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Vertical differentiation Vertical differentiation
Concerned with where decisions are
made.
Concerned with where decisions
are made Centralization: Decentralization:
• Where is decision • Facilitates coordination. • Overburdened top
making power • Ensure decisions management.
consistent with • Motivational research
concentrated? organization’s favors
Two Approaches objectives.
decentralization.
• Centralization • Top-level managers
have means to bring • Permits greater
• Decentralization about organizational flexibility.
change. • Can result in better
• Avoids duplication of decisions.
activities. • Can increase control.
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Strategy and organization structure Functional organizational structure at
Major strategic decisions are centralized at the firm’s Unilever
headquarters while operating decisions are
decentralized
Global strategy : aim to International firms: maintain
realize location and centralized control over
their core competency and
experience economies decentralize other decision
• Centralization of some to foreign subsidiaries
operating decisions Transnational firms: aim to
realize location and
Multi-domestic firms: aim for experience curve
local responsiveness economies
• Decentralizing • Centralized control over
global production
operating decisions to centers
foreign subsidiaries
• Need to be locally
responsive
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Horizontal Differentiation: Structure The functional structure
of the domestic firm
Concerned with structure design
Decisions made on basis of function, type of business or
geographical area
Structure of domestic firms
Typically, the structure
• Single entrepreneur or small team of individuals therefore a that evolves in a
centralized structure company’s early stages.
• With introduction of more product lines, product divisional
structure introduced
• Each division responsible for single product line Coordination and
control rests with
• Self-contained, largely autonomous entities top management.
• Responsible for operating decisions and performance
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A typical functional structure Product division structure
Probable next stage of
development. Reflects
Each unit responsible
company growth into
new products. for a product.
Semiautonomous and
accountable for
its performance.
Eases coordination
and control
problems.
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A typical product divisional International division
structure
Widely used.
1. Can create conflict
between domestic and
foreign operations.
2. Implied lack of
coordination between
domestic and foreign
operations.
Growth can lead
to worldwide
structure.
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Horizontal Differentiation: Structure of One Company’s international
the international division division structure
International division
• Organized on geography
• Initially export goods to foreign subsidiary but later outsource
production
Problems
• Heads of foreign subsidiaries relegated to second-tier position
• Lack of coordination between domestic and foreign operations
Therefore, firms begin adopting worldwide structures
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The International structural stages Worldwide area structure
model
Favored by firms with
low degree of
diversification.
Area is usually
a country. Largely
autonomous.
Facilitates local
responsiveness.
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Worldwide area structure A worldwide area structure
Worldwide area structure
• Favored by firms with low degree of diversification & domestic
structure based on function
• World is divided into autonomous geographic areas
• Operational authority decentralized
• Facilitates local responsiveness
• Fragmentation of organization can occur
• Consistent with multidomestic strategy
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Product division World wide product divisional
structure
Adopted by firms that are reasonably diversified
Original domestic firm structure based on product
Reasonably division
diversified firms.
Value creation activities of each product division
Attempts to overcome coordinated by that division worldwide
international division
and worldwide area • Help realize location and experience curve economies
structure problems.
• Facilitate transfer of core competencies
Weak local Believe that product value Problem: area managers have limited control,
responsiveness. creation activities should subservient to product division managers, leading to
be coordinated lack of local responsiveness
worldwide.
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A worldwide product division Matrix structure
structure
Attempts to meet needs
of transnational
strategy.
Doesn’t work as well
as theory predicts.
“Flexible” matrix
Conflict and structures.
power struggles.
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Horizontal differentiation: Global A Global matrix structure
matrix structure
Helps to cope with conflicting demands of earlier
strategies
Two dimensions: product division and geographic
area
Product division and geographic areas given equal
responsibility for operating decisions
Problems
• Bureaucratic structure slows decision making
• Conflict between areas and product divisions
• Difficult to make one party accountable due to dual
responsibility
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Integrating mechanisms Integrating mechanism
Need for coordination follows the following order Impediments to coordination
on an ascending basis • Differing goals and lack of respect
• Different orientations due to different tasks
High
• Transnational • Differences in nationality, time zone & distance
• Particularly problematic in multinational enterprises with its many
• Global companies subunits both home and abroad
• International companies
• Multi domestic corporations
Low
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Formal integrating mechanisms Formal integrating systems
Direct contact between subunit managers
Liaison roles: an individual assigned responsibility to coordinate with
another subunit on a regular basis
Temporary or permanent teams from subunits to achieve coordination
Matrix structure: all roles viewed as integrating roles
• Often based on geographical areas and worldwide product divisions
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Informal integrating Informal integrating mechanisms
mechanisms
Fig 13.11 Informal management networks supported by
an organization culture that values teamwork
and a common culture
Non-bureaucratic flow of information
It must embrace as many managers as
possible
Two techniques used to establish networks
• Information systems
• Management development policies
• Rotating managers through various subunits on a regular basis
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Control systems & incentives Factors influencing incentive system
Types of control systems Seniority and nature of work
• Personal controls • Reward linked to output target that the employee can influence
• Bureaucratic controls Cooperation between managers in subunits
• Output controls • Link incentives to profit of the entire firm
• Cultural controls
National differences in institutions and culture
Incentive systems
Consequences of an incentive system should be understood
• Refer to devices used to reward appropriate behavior
• Closely tied to performance metrics used for output controls
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Performance ambiguity Strategy, interdependence and
ambiguity
Key to understanding the relationship between
• Level of performance ambiguity depends on number of subunits,
international strategy, control systems and level of integration & joint decision making
incentive systems
• Caused due to high degree of interdependence • Ascending order of ambiguity in firms
High
between subunits within the organization • Transnational companies (highest
• Global companies
A function of the Control Systems
interdependence among • International companies
subunits. Multinational • Multi domestic corporations
Output/Bureaucratic Global/Transnational Low
Cultural
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Costs of control for the four Implications for control and
International business strategies incentives
Costs of control:
• Time top mgt. must devote to monitoring and
evaluating subunits performance
• Performance ambiguity increases cost of control
• Creates conflicts as the costs of controlling
transnational strategy are much higher
• Cultural controls
Incentive pay of senior managers should be linked
to the entity to which both subunits belong
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Processes Organizational culture
Values and norms shared among people
Sources:
Manner in which decisions are made and work is performed • Founders and important leaders
• Cut across national boundaries as well as • National social culture
organizational boundaries • History of the enterprise
• Decisions that result in high performance
• Can be developed anywhere within the firms global
operations network Cultural maintenance:
• Hiring and promotional practices
• Reward strategies
• Socialization processes
• Communication strategy
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Synthesis of strategy, structure and Organization culture and
control systems performance
A “Strong” Culture:
• Not always good Strong Transnational
• Sometimes beneficial,
sometimes not
Culture
• Context is important Global
Adaptive cultures. International
Culture must match an
organization’s architecture Multidomestic
Weak
Culture does not necessarily
translate across borders
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Organizational change Organizational change
Firms need to periodically alter their architecture to Change to match competitive and strategy
conform to changes in environment & strategy environment
Hard to achieve due to organizational inertia • Hard to change:
• Existing distribution of power and influence.
Sources of inertia • Current culture.
• Possible redistribution of power and influence • Manager’s preconceptions about the appropriate business model or
paradigm.
among managers
• Institutional constraints.
• Strong existing culture
Principles for change;
• Senior manager’s preconceptions about the • Unfreeze the organization.
appropriate business model
• Moving to the new state.
• Institutional constraints such as national regulations
including local content rules regarding layoffs • Refreezing the organization.
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Summary
In this chapter, we have
• Explained the concept of international business strategy.
• Recognized how firms can increase revenue and profit by
expanding globally.
• Understood how pressures for cost reductions and local
responsiveness influence strategic choice.
• Identified the different international strategies for competing and Because learning changes everything. ®
their pros and cons.
• Explained the pros and cons of using strategic alliances to
support international strategies.
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