International Business: Competing in the Global Marketplace Fifth Edition Chapter 13
The Organization of International Business
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International Business: Competing in the Global Marketplace Fifth Edition Chapter 13
Learning objectives
· Identify the different kinds of organizational structures and internal control mechanisms that international businesses can use to manage global operations.
· Discuss the advantages and disadvantages of centralized and decentralized decision systems.
· Present the basic types of organizational forms that multinational firms use.
· Describe the control systems and integrating mechanisms available to multinational firms
· Show how the organizational architecture, control systems, integrating systems, and decision making choices multinational firms have available must be consistent with their strategy and industry environment
This chapter identifies the organizational architecture that international businesses use to manage and direct their global operations.
The core argument outlined in this chapter is that superior enterprise profitability requires three conditions to be fulfilled.
First, the different elements of a firm’s organizational architecture must be internally consistent.
Second, the organizational architecture must match or fit the strategy of the firm—strategy and architecture must be consistent.
Third, the strategy and architecture of the firm must not only be consistent with each other, but they also must be consistent with competitive conditions prevailing in the firm’s markets—strategy, architecture, and competitive environment must all be consistent.
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International Business: Competing in the Global Marketplace Fifth Edition Chapter 13
WebeSource http://fpeng.peopledaily.com.cn/200012/18/eng20001218_58146.html
OUTLINE OF CHAPTER 13: THE ORGANIZATION OF INTERNATIONAL BUSINESS
Opening Case: Organizational Change at Unilever
Organizational Architecture
Organizational Structure
Vertical Differentiation: Centralization and Decentralization/ Horizontal Differentiation: The Design of Structure/ Integrating Mechanisms
Control Systems and Incentives
Types of Control Systems/ Incentive Systems/ Control Systems, Incentives, and Strategy in the International Business
Processes
Organizational Culture
Creating and Maintaining Organizational Culture/ Organizational Culture and Performance in the International Business
Synthesis: Strategy and Architecture
Multi domestic Firms/ International Firms/ Global Firms/ Transnational Firms/ Environment, Strategy, Architecture, and Performance
Organizational Change
Organizational Inertia/ Implementing Organizational Change
Chapter Summary
Critical Discussion Questions
Closing Case: Organizational Change at Royal Dutch/Shell
TEACHING SUGGESTIONS
In order to trigger discussion you can ask the students to think of organizational structure as a management decision that has pros and cons:
1) If you had to design the structure of a global consumer products company that sells its products in almost every single country in the world, how would you do it?
2) If you allowed each country subsidiary to be completely independent and autonomous in the way it served its market, what are the advantages and disadvantages you might expect?
3) If you required each country subsidiary to strictly conform to a centrally planned set of imperatives from headquarters, what are the advantages and disadvantages you might expect?
TRANSITION
After students have shared their perspective you can transition into the chapter by discussing some of the facts from the Opening Case.
-Unilever is a $50 billion company selling more than 1000 products in virtually every country.
-Historically Unilever was organized into decentralized subsidiaries in each major national market. In the early 1990s there were 17 Unilever subsidiaries in Europe.
-Decentralization which allowed local managers to respond to its unique market conditions was considered a source of strength.
-Unilever worked hard to build a common culture to knit together a decentralized disparate organization.
-By the mid 1990s Unilever’s decentralized structure was working against its efforts to build global brands and cut costs in the face of competition.
-In 1996 Unilever introduced a new structure based on regional business groups.
- The 17 European companies relinquished autonomy in their markets to help develop a unified pan-European strategy.
LECTURE OUTLINE FOR CHAPTER 13
Slide 13-2 Opening Case: Organizational change at Unilever
When its structure was decentralized Unilever used meetings and conference to create a common culture. However, there was still a lot of waste related to redundancy in the organization. The 1996 reorganization by regional business groups and the use of programs such as Lever Europe, helped develop new capabilities in cost reduction as well as global product introduction.
Slide 13-3 Organization architecture and profitability
The concept of Organizational Architecture embraces structure, control systems, incentives, processes, culture and people. 3 consistency conditions must be satisfied for an organization to deliver profitability: architecture must me internally consistent; strategy and architecture must be consistent; strategy and architecture must together be consistent with the competitive environment of the firm.
Slide 13-4 Organizational architecture
The linkages and consistencies between strategy, architecture and competitive environment can be depicted pictorially as shown in this diagram.
Slide 13-5 Organizational architecture
The first 2 components of organizational architecture are structure and control systems. When a manager structures an organization it is formally broken up into sub-units with clearly assigned decision-making responsibilities and integration mechanisms to ensure the appropriate communications take place. Control systems are consistent approaches to measuring and evaluating managerial performance and the performance of sub-units.
Slide 13-6 Organizational architecture
The next 2 components of organizational architecture are incentives and processes. Managers must connect the incentives used to reward employee behavior with the metrics that are used in the control system. Additionally managers must carefully processes – the way decisions are made and work is performed in the organization – to be consistent with the strategic objectives of the organization.
Slide 13-7 Organizational architecture
The next 2 components of organizational architecture are culture and people. Managers can shape the culture in an organization by paying careful attention to the values and norms shared among employees. Efforts to shape values and norms in an organization are intricately linked to human resource practices, especially at the selection and recruitment stage. Once on board, the employees of an organization have to be managed in a way that is consistent with the values and objectives of the organization.
Slide 13-8 Vertical differentiation
The level of vertical differentiation in a firm determines the level in its hierarchy at which decision-making is located. In a Centralized firm the decision making is concentrated relatively high up in the hierarchy. In a Decentralized firm decision making is concentrated relatively low in the hierarchy and may even be at the line level.
Slide 13-9 Vertical differentiation
The table in this slide compares the benefits associated with Centralization with those associated with Decentralization. This can serve as a guide for determining the kind of Vertical Differentiation that would match the strategy of the organization
Slide 13-10 Functional organizational structure at Unilever
This describes the way the Functional Structure is used at Unilever.
Slide 13-11 Strategy and organization structure
Depending on which of the 4 strategies the global corporation adopts (see Ch 12) there are different aspects of the firm’s which will require centralized control and decentralized autonomy. This slide summarizes the Vertical Differentiation that fits each of the 4 strategies.
Slide 13-12 HD: Structure of the domestic firm
HD = Horizontal Differentiation, which is concerned with how the firm decides to divide itself into sub-units. The typical entrepreneurial firm begins with no formal structure. As the firm grows, when the decision load becomes too intense for 1 person to handle, the firm is split into functions representing value creation activities. If growth continues, eventually the complexities of size push for the re-structuring of the firm into a divisional form.
Slide 13-13 The functional structure
The slide describes the characteristics of the functional structure.
Slide 13-14 A typical functional structure
Figure 13.3 is generic description of a functional structure
Slide 13-15 Product division structure
The slide describes the characteristics of the product divisional structure where each division is responsible for a distinct product line (business area).
Slide 13-16 A typical product divisional structure
Figure 13.4 is a generic description of a product divisional structure.
Slide 13-17 International division
In this structure the firm groups all its international activities into a separate division.
Slide 13-18 HD: Structure of the international division
The International Division Structure is organized by geography. Usually it begins a domestic manufacturing firm expanding internationally by exporting. As volume grows this eventually transforms into a series of foreign subsidiaries that produce for their own markets. The typical problems experienced in this structure are: (1) lack of voice for foreign subsidiaries because they are second-class citizens with respect to the domestic operations of the firm and (2) lack of coordination.
Slide 13-19 One Company’s international division structure
Figure 13.5 contains a generic description of a company with an International Division structure.
Slide 13-20 The International structural stages model
Figure 13.6 shows the alternate paths that a firm may take in its progression as foreign product diversity increases and foreign sales as a percentage of total sales increases. And International Division structure may evolve to a Worldwide Product Division structure before becoming a Global Matrix if Foreign Product Diversity increases at a faster pace than Foreign Sales as a Percentage of Total Sales. Alternatively, the International Division structure may evolve into an Area Division structure before becoming a Global Matrix if Foreign Sales as a Percentage of Total Sales increases at a faster pace than Foreign Product Diversity
Slide 13-21 Worldwide area structure
This slide describes the characteristics of a Worldwide area structure.
Slide 13-22 HD: Worldwide area structure
A Worldwide Area structure is preferred by firms with a low degree of diversification and a domestic structure based on functions. The world is divided into areas. An area may be a country or a group of countries. Each area is self-contained and autonomous. While this structure supports local responsiveness, it can lead to fragmentation because of lack of coordination across the areas.
Slide 13-23 A worldwide area structure
Figure 13.7 is a generic description of a Worldwide area structure.
Slide 13-24 Management focus-Abbott Laboratories
Management Focus Case: In 2002 Abbott Laboratories was an $18.8 billion, global healthcare company. In the 1960s Abbott had a Divisional structure with 3 divisions – pharmaceuticals, hospital products, and nutritional products. By the late 60s international growth had been so significant that they added an international division. Between the 70s and 2002 a brand new division – diagnostics – grew rapidly into a $4billion business organized as a Global product structure. Executives in Abbotts International division favor reorganizing geographically to eliminate the Global product structure of the diagnostics business. The heads of Abbott’s Product divisions favor reorganization to eliminate the International division and move to a pure Global product structure. Each move has its pros and cons. Top management feels there is no perfect answer and the current set up, imperfect as it is works too well to justify a major change.
Slide 13-25 Product division
This slide describes the characteristics of a Product division.
Slide 13-26 HD: Worldwide product divisional structure
Horizontal Differentiation: Worldwide product divisional structure. If a domestic company originally had a reasonably diversified product base organized in a Product division structure, it will most likely shift to a Worldwide product divisional structure as international growth increases. Each product division is autonomous and responsible for its own value creation activities and this gives managers the latitude they need to realize location and experience curve economies. However, area or country managers tend to have little voice in this structure and this can have a devastating effect on local responsiveness.
Slide 13-27 A worldwide product division structure
Figure 13.8 is a generic description of a Worldwide product divisional structure.
Slide 13-28 Matrix structure
This slide describes the characteristics o a Matrix structure.
Slide 13-29 Horizontal differentiation: Global matrix structure
When a firm’s strategy simultaneously demands location and experience curve economies, and local responsiveness, and internal transfer of core competencies the Global matrix structure does the best job. It is an attempt to simultaneously capture the benefits of the Worldwide area structure and the Worldwide product divisional structure. The balancing act of the Global matrix structure comes with its own challenges. It slows down decision making, it increases the likelihood of conflict between the area structure and the product structure, and accountability is always a challenge when each manager has to wear 2 hats – one area-specific and one product-specific.
Slide 13-30 A Global matrix structure
Figure 13.9 is a generic description of a Global matrix structure.
Slide 13-31 Integrating mechanisms
Different strategies make different demands on the manager in terms of the need for coordination. Accordingly, managers must design integrating mechanisms to match the demands of the strategy. When you move from Global company to International company to Multi domestic company to Transnational company the intensity of coordination that integrating mechanisms must deliver increases at each stage.
Slide 13-32 Integrating mechanism
Any manager that is designing Integrating Mechanisms must recognize that these mechanisms have to overcome a number of impediments in global organizations. This slide lists the typical impediments a manager would encounter: differing goals and lack of respect; different orientations due to different tasks; differences in nationality, time zone & distance which are particularly problematic in multinational enterprises with its many subunits both home and abroad.
Slide 13-33 Formal integrating mechanisms
This slide lists Direct Contact, Liaison Roles, Teams, and Matrix Structures – the kinds of formal integrating mechanisms available to a manager listed in order of increasing complexity.
Slide 13-34 Formal integrating systems
Direct contact between subunit managers is the simplest integrating mechanism, one in which managers simply contact each other when they have a common concern. Liaison roles are used when the volume of communications increase to a point where an individual is assigned responsibility to coordinate with another subunit on a regular basis. Temporary or permanent teams are used when the volume of communications and coordination increase even further. Matrix structure based on geographical areas and worldwide product divisions are used when the need for integration is the highest.
Slide 13-35 Informal integrating mechanisms
Figure 13.11 shows a simple management network, an informal integrating mechanism.