Chapter 13 The Organization of International Business 2

Chapter 13 The Organization of International Business

2 Case: Organizational change at Unilever n n n One of world’s oldest multinational corporations Organized on a decentralized basis Annual conferences on company strategy and executive education sessions, establish connections between managers Duplication of facilities and high cost structure a problem in new competitive environment 1996: introduced structure based on regional business groups “Lever Europe” established to consolidate the company’s detergent operation in order to reduce costs and speed up new product information Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

3 Organization architecture and profitability n n Totality of a firm’s organization, including structure, control systems, incentives, processes, culture and people. Superior organization profitability requires three conditions: n n n An organization’s architecture must be internally consistent. Strategy and architecture must be consistent. Strategy, architecture and competitive environments must be consistent. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

4 Organizational architecture Fig 13. 1 To maximize profitability a firm must achieve consistency between the various components of its architecture n Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

5 Organizational architecture n Organizational structure: Location of decisionmaking responsibilities within the structure (vertical differentiation) n n n Formal division of the organization into subunits e. g. product divisions (horizontal differentiation) Establishment of integrating mechanisms including cross -functional teams and or pan-regional committees Control systems : metrics used to measure performance of subunits and judge managerial performance Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

6 Organizational architecture n Incentives: Devices used to reward appropriate employee behavior n n Closely tied to performance metrics Processes: Manner in which decisions are made and work is performed Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 Organizational architecture n Organizational culture: Values and norms shared among employees of an organization n n Strategy used to manage human resources People: Employees n Strategy used to recruit, compensate, and retain individuals with necessary skills, values and orientation Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

8 Vertical differentiation n Concerned with where decisions are made n n Where is decision making power concentrated? Two Approaches n n Centralization Decentralization Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

9 Vertical differentiation Concerned with where decisions are made. n Centralization: n n Facilitates coordination. Ensure decisions consistent with organization’s objectives. Top-level managers have means to bring about organizational change. Avoids duplication of activities. Mc. Graw-Hill/Irwin International Business, 5/e n Decentralization: n n n Overburdened top management. Motivational research favors decentralization. Permits greater flexibility. Can result in better decisions. Can increase control. © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

10 Functional organizational structure at Unilever Fig 13. 2 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

11 Strategy and organization structure Major strategic decisions are centralized at the firm’s headquarters while operating decisions are decentralized n n Global strategy : aim to realize location and experience economies n Centralization of some operating decisions Multi-domestic firms: aim for local responsiveness n Decentralizing operating decisions to foreign subsidiaries Mc. Graw-Hill/Irwin International Business, 5/e n n International firms: maintain centralized control over their core competency and decentralize other decision to foreign subsidiaries Transnational firms: aim to realize location and experience curve economies n Centralized control over global production centers n Need to be locally responsive © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

12 HD: Structure of the domestic firm n n n Concerned with structure design Decisions made on basis of function, type of business or geographical area Structure of domestic firms n n n Single entrepreneur or small team of individuals therefore a centralized structure With introduction of more product lines, product divisional structure introduced Each division responsible for single product line Self-contained, largely autonomous entities Responsible for operating decisions and performance Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

13 The functional structure Typically, the structure that evolves in a company’s early stages. Coordination and control rests with top management. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

14 A typical functional structure Fig 13. 3 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

15 Product division structure Probable next stage of development. Reflects company growth into new products. Each unit responsible for a product. Semiautonomous and accountable for its performance. Eases coordination and control problems. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 A typical product divisional structure Fig 13. 4 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

17 International division Widely used. 1. Can create conflict between domestic and foreign operations. 2. Implied lack of coordination between domestic and foreign operations. Growth can lead to worldwide structure. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

18 HD: Structure of the international division n International division n Problems n n n Organized on geography Initially export goods to foreign subsidiary but later outsource production Heads of foreign subsidiaries relegated to second-tier position Lack of coordination between domestic and foreign operations Therefore firms begin adopting worldwide structures Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

19 One Company’s international division structure Fig 13. 5 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

20 The International structural stages model Fig 13. 6 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

21 Worldwide area structure Favored by firms with low degree of diversification. Area is usually a country. Largely autonomous. Facilitates local responsiveness. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

22 HD: Worldwide area structure n n n n Favored by firms with low degree of diversification & domestic structure based on function World is divided into autonomous geographic areas Operational authority decentralized Facilitates local responsiveness Fragmentation of organization can occur Consistent with multidomestic strategy Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

23 A worldwide area structure Fig 13. 7 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

24 Management focus-Abbot Laboratories n n n One of world’s largest health care companies Originally consisted of three divisions n Pharmaceuticals, hospital products & nutritional products Added international division on geographic lines to handle growing foreign sales Later added global product division to handle diagnostic businesses Abbot aims to build global products that can be launched simultaneously around the world Which structure should be adopted? n Geographic division or global product division? Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

25 Product division Reasonably diversified firms. Attempts to overcome international division and worldwide area structure problems. Weak local responsiveness. Mc. Graw-Hill/Irwin International Business, 5/e Believe that product value creation activities should be coordinated worldwide. © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

26 H D: World wide product divisional structure n n n Adopted by firms that are reasonably diversified Original domestic firm structure based on product division Value creation activities of each product division coordinated by that division worldwide n n n Help realize location and experience curve economies Facilitate transfer of core competencies Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

27 A worldwide product division structure Fig 13. 8 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

28 Matrix structure Attempts to meet needs of transnational strategy. Doesn’t work as well as theory predicts. Conflict and power struggles. Mc. Graw-Hill/Irwin International Business, 5/e “Flexible” matrix structures. © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

29 Horizontal differentiation: Global matrix structure n n Helps to cope with conflicting demands of earlier strategies Two dimensions: product division and geographic area Product division and geographic areas given equal responsibility for operating decisions Problems n n n Bureaucratic structure slows decision making Conflict between areas and product divisions Difficult to make one party accountable due to dual responsibility Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

30 A Global matrix structure Fig 13. 9 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

31 Integrating mechanisms n Need for coordination follows the following order on an ascending basis High Transnational companies n Global companies n International companies n Multidomestic companies n Low Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

32 Integrating mechanism n Impediments to coordination n n Differing goals and lack of respect Different orientations due to different tasks Differences in nationality, time zone & distance Particularly problematic in multinational enterprises with its many subunits both home and abroad Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

33 Formal integrating mechanisms Fig 13. 10 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

34 Formal integrating systems n n Direct contact between subunit managers Liaison roles: an individual assigned responsibility to coordinate with another subunit on a regular basis Temporary or permanent teams from subunits to achieve coordination Matrix structure: all roles viewed as integrating roles n Often based on geographical areas and worldwide product divisions Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

35 Informal integrating mechanisms Fig 13. 11 Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

36 Informal integrating mechanisms n n Informal management networks supported by an organization culture that values teamwork and a common culture Non-bureaucratic flow of information It must embrace as many managers as possible Two techniques used to establish networks n n Information systems Management development policies n Rotating managers through various subunits on a regular basis Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

37 Control systems & incentives n Types of control systems n n n Personal controls Bureaucratic controls Output controls Cultural controls Incentive systems n n Refer to devices used to reward appropriate behavior Closely tied to performance metrics used for output controls Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

38 Factors influencing incentive system n Seniority and nature of work n n Cooperation between managers in subunits n n n Reward linked to output target that the employee can influence Link incentives to profit of the entire firm National differences in institutions and culture Consequences of an incentive system should be understood Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

39 Performance ambiguity n Key to understanding the relationship between international strategy, control systems and incentive systems n Caused due to high degree of interdependence between subunits within the organization A function of the interdependence among subunits. Mc. Graw-Hill/Irwin International Business, 5/e Control Systems Multinational Output/Bureaucratic Global/Transnational Cultural © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

40 Strategy, interdependence and ambiguity n Level of performance ambiguity depends on number of subunits, level of integration & joint decision making n Ascending order of ambiguity in firms High n Transnational Low companies (highest n Global companies n International companies n Multi domestic corporations Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

41 Costs of control for the four International business strategies Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

42 Implications for control and incentives n Costs of control: n n n Time top mgt. must devote to monitoring and evaluating subunits performance Performance ambiguity increases cost of control Creates conflicts as the costs of controlling transnational strategy are much higher Cultural controls Incentive pay of senior managers should be linked to the entity to which both subunits belong Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

43 Processes n Manner in which decisions are made and work is performed n n Cut across national boundaries as well as organizational boundaries Can be developed anywhere within the firms global operations network Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

44 Organizational culture n n Values and norms shared among people Sources: n n n Founders and important leaders National social culture History of the enterprise Decisions that result in high performance Cultural maintenance: n n Hiring and promotional practices Reward strategies Socialization processes Communication strategy Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

45 Synthesis of strategy, structure and control systems Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

46 Organization culture and performance n A “Strong” Culture: n n n Adaptive cultures. n Culture must match an organization’s architecture Culture does not necessarily translate across borders n Mc. Graw-Hill/Irwin International Business, 5/e Transnational Strong Culture n Not always good Sometimes beneficial, sometimes not Context is important Weak Global International Multidomestic © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

47 Organizational change n n n Firms need to periodically alter their architecture to conform to changes in environment & strategy Hard to achieve due to organizational inertia Sources of inertia n n Possible redistribution of power and influence among managers Strong existing culture Senior manager’s preconceptions about the appropriate business model Institutional constraints such as national regulations including local content rules regarding layoffs Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

48 Organizational change n Change to match competitive and strategy environment n Hard to change: n Existing distribution of power and influence. n Current culture. n Manager’s preconceptions about the appropriate business model or paradigm. n Institutional constraints. n Principles for change; n n n Unfreeze the organization. Moving to the new state. Refreezing the organization. Mc. Graw-Hill/Irwin International Business, 5/e © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.