Chapter 14 - The Organization of International Business
How can organization be matched with a strategy to improve the performance of an international business?
- Localization strategy For the localization strategy, the decision-making processes should be decentralized in order to achieve best possible local responsiveness. It should also be divided into an area division structure, again to focus on local responsiveness over cost reductions. Given how all subunits work independently, producing the full product group in each separate entity, the need for coordination and integrating mechanisms are low, which also results in low performance ambiguity thus all entities are responsible for their own production and no need for cultural controls. - International strategy For an international strategy, decision-making should be partially centralized and decentralized, with important functions such as R&D centralized to head quarter and production functions decentralized to a few major facilities in favorable locations. Worldwide product divisional structure is prefered to this strategy as it does not need to focus on local responsiveness, but rather keeping cost low in order to achieve high profitability. The strategy requires some coordination in order to transfer core competencies and skills between subsidiaries, which indicates a certain need for integrating mechanisms as well as cultural controls. Performance ambiguity exists in a moderate scale. - Global standardization strategy Given how global standardization focuses on standardized products, it requires some centralization in decision-making in order to achieve consistency in its R&D, production and marketing. Furthermore, this strategy is most likely to function the best with a worldwide product divisional structure since it focuses on realizing economies of scale, learning effects and location economies to reduce costs. Given how this strategy requires a firm to disperse its value creation activities across the globe, high coordination is necessary and that means many integrating mechanisms, high performance ambiguity and need for cultural controls. - Transnational strategy Finally, the transnational strategy, focusing on both low cost and differentiation, needs both centralized and decentralized decision-making. It should apply a global matrix structure to facilitate both goals, but this increases the need for coordination greatly which furthermore increases performance ambiguity and the need to integrating mechanisms and cultural controls.
What different organizational choices can be made in an international business? (Integrating mechanisms)
Integrating mechanisms These mechanisms are applied when managers find it hard to coordinate on their own, and is therefore a tool which can through formal and informal ways help achieve coordination. When is coordination necessary? The need is the lowest in firms pursuing a localization strategy and increases from international to global standardization to finally the transnational strategy which requires the most. The reason is that transfer of core competencies requires coordination, as well as dispersing value creation activities to achieve location and experience curve economies → least important in localization strategy and increasingly important until transnational strategy. Impediments to coordination arise from managers and employees not "speaking the same language", literally and practically. It can also be if goals of the firm are pursued differently. - Formal integrating mechanisms Direct contact → managers contact each other directly when there is an issue. Liaison roles → subunits coordinated by two persons with responsibilities. Teams → when further coordination is necessary, teams are put together to coordinate. Matrix structures → maximum coordination, geographical areas and product divisions. - Informal integrating mechanisms Knowledge network → transmission of information through an informal network based on relationships between managers and employees and includes a lot of trust.
What is meant by organizational architecture?
Refers to the totality of the firm's organization and consists of the following; → Organizational structure Horizontal differentiation The formal division of a firm into subunits like product divisions, national operations, and functions. Vertical differentiation The location of decision-making. Integrating mechanisms The establishment of integrating mechanisms to coordinate the activities of subunits. → Incentives & control systems Incentives are tools used to encourage and reward employees for good behaviour, such as bonuses and pay raises. Control systems helps a firm achieve consistency in the overall strategic and financial objectives. Personal control → personal contact with subordinates and common in small firms. Bureaucratic controls → control through a system of rules that direct actions of subordinates. Output controls → control is measured by the performance of reaching goals. Cultural controls → the belief is that each employee controls their own behaviour and performance. Performance ambiguity = when the cause of a subunit bad performance is unknown → often occurs when subunits are highly dependent upon each other. → Processes They way that decisions are executed within the firm and that valuable processes can be found on all levels of the firm, across country and cultural borders. → Organizational Culture Depends much upon the social culture of the firm, the history of the firm, the perceptions about good management by the current managers as well as founders and decisions that have proofed successful. → People The employees, but also the strategy for recruitment and retaining valuable individuals.
What different organizational choices can be made in an international business? (Horizontal Differentiation)
The Horizontal differentiation Begins when a company decides to start assigning specific job functions to different employees rather than having all employees performing all necessary tasks. The firm can organize itself according to process, product, functions, service, location, and client. - Domestic structure Functional structure Organization is split into functions, which reflect the value creation activities of the firm(R&D, production, marketing, and sales) when demand of management increases. Product divisional structure When the firm not only needs to split into functions, but into different divisions in order to coordinate a large product offering(producing many different products). Each product is split into its own division with separate functions that focus on the specific product. - International division structure Once a firm decides to go international, companies add a new international division which groups all international activities. This division is normally organized according to geography where each division is in charge of a country or an area with one or several products. In time and if demand increases, it might serve for a firm to introduce the domestic structure worldwide rather than divide according to geographical areas. Problems? Dual structure → conflict and coordination problems between domestic and international operations. Domestic managers might not be the best suited to make foreign decisions, but due to hierarchy do which relegates foreign managers to second tier and is inconsistent with a strategy that tries to expand internationally. Also, transfer of core competencies and innovational thinking can be inhibited by the lack of coordination between domestic and foreign operations. - Worldwide area structure Favored by firms who produce products with low diversification and has a domestic structure based on functions → divides itself internationally into geographical areas where each area is responsible for all parts of R&D, production, marketing, sales, HR and finance functions. The worldwide area structure is favored by firms who aim for a strategy that focuses on local responsiveness over cost reductions, e.g localization strategy. The power of decision-making is decentralized to each geographical area and division. It is not as suitable for a global standardization strategy since the high fragmentation and difficulties in transferring core competencies makes it harder to achieve location and experience curve economies and therefore cost reductions. - Worldwide product divisional structure Often adopted by firms that have a larger diversification between its products, and originally had a domestic structure based on product division. Each product or product group is divided into its own division and then located in optimal locations for the value creation activities. This structure helps overcome the coordination problems related to the area structure, as this one helps firms realize location and experience curve economies as well as facilitating transfer of core competencies within subsidiaries. The worldwide product divisional structure is favored by firms pursuing an international strategy but mainly global standardization strategy. It does not consider local responsiveness, but rather favors cost reductions in all possible ways. - Global matrix structure For firms pursuing a transnational strategy, none of the above structures will support both of the goals of the firm - low cost and local responsiveness. The global matrix structure is designed to combine the two, area and product division, in order to create a structure that facilitates both low cost and local responsiveness. The idea is that operating decisions for a product will be shared by the product division and the various areas of the firm. Although good in theory, this structure becomes slow and bulky in practice, since all decisions take longer with more people involved. This makes the organization unable to respond quickly to shifts in demand and react to innovative ideas.
What different organizational choices can be made in an international business? (Vertical Differentiation)
Vertical differentiation - Centralized decision-making Facilitates greater coordination and integration of operations, helps ensure that all decisions made are consistent with organizational objectives, makes it easier to avoid duplication of activities and therefore keeps costs low, and finally helps managers maintain enough power to enforce radical decisions such as strategic aggressive pricing or organizational changes. - Decentralized decision-making By decentralizing decision-making, a firm is able to relief top managers of certain decisions which allows them to focus on more important issues. Decisions made by managers of the local production might be able to make greater decisions based on familiarity and previous knowledge, as well as responding quicker to urging issues. Finally, greater freedom is a motivational force which can encourage employees to work more efficiently.
What is required for an international business to change its organization so that it better matches its strategy?
Within most organizations is a strong organizational inertia(=tendency of an established organization to continue with old habits). These origin from a range of different factors such as the distribution of power and influence, the existing culture of the firm, manager's preconceptions of the right way to conduct business and institutional constraints, either by government or firm itself. So how can a business overcome the inertia in order to change its organization? → Unfreezing the organization by shock therapy and clearly articulate the means of change. → Transfer process means redesigning the whole system and involving employees in the process. → Refreezing the process, which takes longer as it means allowing the new culture to establish itself while slowly forcing the old one out.