International Business

11e

By Charles W.L. Hill

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 Chapter 14

The Organization of
International Business

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

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 What Is
Organizational Architecture?
2. Control systems and incentives
 control systems - the metrics used to
measure performance of subunits
 incentives - the devices used to
reward managerial behavior

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 What Is
Organizational Architecture?
3. 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 employees for their skills, values,
and orientation

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 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
consistent
the strategy and architecture must be
with each other, and consistent with
competitive conditions

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 What Is
Organizational Architecture?
Organizational Architecture

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 What Are the Dimensions of
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 subunits
3. Integrating mechanisms - the
mechanisms for coordinating subunits

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 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
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 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

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 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

butMost firms begin with no formal structure

later 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
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 What Is a
Functional Structure?
A Typical Functional Structure

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 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

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

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 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
andIncoordination
either case, there is the potential for conflict
problems between domestic and
foreign operations

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 What Is an International
Division Structure?
One Company’s International Division Structure

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 How Does Organizational
Structure Change over Time?
The International Structural Stages Model

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 What Happens Next?
 Firms that continue to expand will move to
either a
1. 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

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

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 What Happens Next?
2. 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

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 What Is a
Worldwide Area Structure?
A Worldwide Area Structure

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 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

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 What Is the
Global Matrix Structure?
A Global Matrix Structure

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 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
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 How Can Subunits
Be Integrated?
Formal Integrating Mechanisms

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 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
and must embrace as many managers as possible
managers must adhere to a common set of norms
and values that override differing subunit orientations
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 How Can Subunits
Be Integrated?
A Simple Management Network

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

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 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
 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
 strong culture implies less need for other forms of
control

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 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

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 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

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 What Is the Link Between Control,
Incentives, And Strategy?
Interdependence, Performance Ambiguity, and the Costs of Control for the
Four International Business Strategies

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 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
canformal and informal integrating mechanisms
help firms leverage processes

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 What Is
Organizational Culture?
norms
Organizational culture - the values and
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

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 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

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 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

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The case of Lincoln Electric’s difficult international
expansion illustrates some of the problems that can arise
when attempting to transmit a company culture to foreign
subsidiaries.

Imagine that you are the head of a profitable Silicon Valley

software company seeking to expand into the Chinese
market by acquiring an existing Chinese firm. Like Lincoln
Electric, your company culture is highly decentralized and
unbureaucratic. Performance incentives include extra
vacation time. What difficulties do you anticipate with
transmitting your company culture to your Chinese
subsidiary? What strategies might you use to make the
process less painful and costly?
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 What Is the Link Between
Strategy And Architecture?
A Synthesis of Strategy, Structure, and Control Systems

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

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 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
 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

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 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
decisions
headquarters maintains control over most

 the need for integrating mechanisms is high

 strong organizational cultures are
encouraged
 the worldwide product division is common
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 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
 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

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 How Are the Environment, Strategy,
Architecture, and Performance
Related?
 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
 firms need to change their architecture to
reflect changes in the environment in which they
are operating and the strategy they are pursuing
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 How Can Firms Implement
Organizational Change?
 To implement organization change
1. Unfreeze the organization through shock therapy
 requires taking bold actions like plant closures or
dramatic structural reorganizations
2. Move the organization to a new state through proactive
change in architecture
organizational
requires a substantial and quick change in
architecture so that it matches the
desired new strategic posture
3. Refreeze the organization in its new state
 requires that employees be socialized into the new way
of doing things

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 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

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