Chapter 13

The Organization of
International Business

McGraw-Hill/Irwin
 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
 the establishment of integrating mechanisms to coordinate the
activities of subunits including cross-functional teams or pan-
regional committees
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 - 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

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 What Is
Organizational Architecture?
Organizational Architecture

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 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. Integrating mechanisms - the mechanisms
for coordinating sub-units

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 Vertical Differentiation
 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

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 Strategy and
Centralization/Decentralization
 Choice between centralization and decentralization is not
absolute
 Pursuing global standardization strategy creates strong
pressures for centralizing some operating decisions
 Pursuing local responsiveness strategy creates strong
pressures for decentralizing some operating decisions
 Pursuing International strategy require to maintain
centralize control over core competence and to
decentralize other decisions
 Pursuing transnational strategy requires some operating
decisions to be centralized, while others to be
decentralized. 13-7
 Horizontal Differentiation
 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

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 What Is A
Functional Structure?
A Typical Functional Structure

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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
 In either case, there is the potential for conflict
and coordination problems between domestic and
foreign operations

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 What Is An International
Divisional Structure?
One Company’s International Divisional Structure

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

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 What Is A
Worldwide Area Structure?
A Worldwide Area Structure

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

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 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
 To avoid these issues, firms pursuing transnational
strategy tried to build flexibility through enterprise wide
management knowledge network and a shared culture and
vision.
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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 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

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 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
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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 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

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 Control Systems, Incentives,
and Strategy
 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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Control, Incentives, and Strategy
Interdependence, Performance Ambiguity, and the Costs of Control for the Four International Business Strategies

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 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

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 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

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 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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 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
 performance ambiguity and the cost of control tend to be low
 the worldwide area structure is common
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
 headquarters maintains control over most decisions
 the need for integrating mechanisms is high
 strong organizational cultures are encouraged
 the worldwide product division is common
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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 What Is The Link Between Environment,
Strategy, Architecture, And Performance?
 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
 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
 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
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