Chapter 13: The Organization of International Business

What Happens when Firms Expand Globally?

- When firms expand internationally, they often group all their internationally activities into 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 a the potential for conflict and coordination problems between domestic and foreign operations

decentralized decision making

- relives the burden of centralized decision making - has been shown to motivate individuals - permits greater flexibility - can result in better decisions - can increase control occurs when important decisions are made by middle and lower level managers

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

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 Top management decides the major choices

How can firms implement Organizational 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

Worldwide Product Division Structure

Adopted by firms that are reasonably diversified and product divisions -Centralized - 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

Why is vertical differentiation important?

Determines where decision-making power os concentrated Centralized Decision-making Decentralized Decision-making

Cultural Controls

Exist when employees buy into norms and value systems of the firm Strong culture implies less need for other forms of control

What is the Link Between Strategy and Architecture

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 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 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 attains location and experience curve economies, loyal responsiveness and global learning - some decisions are centralized and others are decentralized - an array of formal and informal integrating mechanism are used - a strong culture is encouraged - matrix structures are common

What Happens Next?

Firms that continue to expand will either adopt a world wide product divisional structure

What is the link between environment strategy architecture and performance

For a firm to succeed 1. The. Forms strategy must be consistent with the environment in which the firm operates 2. The firms organization architecture must be consistent with strategy Firms need to change their architecture to reflect changes in the environment in which they are operating and the strategy they are pursuing

What Are the Dimensions of Organizational Structure?

Has three different dimensions Vertical differentiation Horizontal Differentiation Integrating Mechanisms

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 Most firms 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 differentiation requires further horizontal differentiation Firms may switch to a product divisional structure where each division is responsible for a distinct product line

What are incentive systems

Incentives are the devices used to reward behavior - usually closely to tied to performance metrics used for output controls - should vary depending on the employee and the nature of the working being performed - should promote corporation between managers in sub-units - should reflect national differences in institutions and culture - can have unintended consequences

What is the Global Matrix Structure?

Is an attempt to minimize the limitation 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 producing division and geographic area have equal responsibility for operating decisions - can be bureaucratic and slow - can result in conflict between areas and product division - can result in finger-pointing between divisions when something goes wrong

How can subunits be integrated?

Knowledge Network

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

What is performance ambiguity

Performance ambiguity exists when the causes of a subunits poor performance are not clear - is common when a subunits 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

What are the Different Types of Control Systems

Personal Controls Bureaucratic controls Output Controls Cultural Controls

Personal Controls

Personal contract with subordinates Used in small firms

What are Processes

Processes refer to the manner in which decisions are made and work is performed - many processes cut across national boundaries - processes can be developed anywhere within a firm's global operations network - formal and informal integrating mechanisms can help firms leverage processes

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 those individuals and the type of people they are in terms of their skills, values, and orientation

How can subunits be integrated?

Regardless of the type of structure firms need a mechanisms to integrate subunits - need for coordination is lowest in firms with a localization strategy and highest in transitional 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

Output Controls

Settings goals for subunits to achieve and expressing those goals in terms fo objective performance metrics Compare actual performance against targets and intervene selectively to take corrective action

horizontal differentiation

The formal division of the organization into sub-units

Integrating mechanisms

The mechanisms for coordinating sub units

What is organizational architecture

The totality of a firms organization organizational structure control systems incentives processes organizational culture people

organizational structure

a 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

knowledge network

a network for transmitting information within an organization that is based not on formal organizational 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

Bureaucratic Controls

a system of rules and procedures that directs the actions of subunits budgets and capital spending rules

Control systems and incentives

control systems - the metrics used to measure performance of subunits incentives - the devices used to reward managerial behavior

Worldwide Area Structure

favored by firms with low degree of diversification and a domestic structure based on function - Decentralized - decides the world into autonomous geographic areas - decentralized operational authority - facilitates local responsiveness - fails with location curve economies and core competencies - can result in a fragmentation of the organization - is consistent with a localization strategy

What is organizational culture?

refers to the values and norms that employees are encouraged to flow and evolves from - founder 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

vertical differentiation

the location of decision-making responsibilities within a structure