International Business Chapter Fifteen The Organization of International

International Business Chapter Fifteen The Organization of International Business 15 -

Chapter Objectives • To profile the evolving understanding of the organization of international business • To describe traditional and contemporary organizational structures • To study the systems used to coordinate and control operations • To profile the role of organizational culture • To examine special situations in the organization of international business 2

Introduction Organization: the complementary mix of formal • • structure, coordination and control systems, and cultural values needed to create value and implement an organization’s strategy An insightful strategy is a necessary but insufficient condition for long-term organizational success. Building an organization to implement an effective strategy requires the integration of different people, teams, groups, and units into a smoothly functioning whole. 3

Fig. 15. 1: The Organization of International Business 4

The Causes of Organizational Change Revolutionary changes in the environment and the nature of work challenge managers to downsize, delayer, restructure, reengineer, and reinvent the organization. • globalization: changes the opportunity set and efficiency • • frontier for firms knowledge: an increasingly important engine of sustainable comparative advantage the Internet: an efficient and effective global organization of knowledge, people, and other resources that challenge conventional notions of control [continued] 5

• the conduct and context of employees’ jobs: the • creation of value that exhibits astonishing variability, problem solving, and intellectual content worldwide employee empowerment: decentralized decision-making and the development of common ideas and ideals to ensure that all employees act in the best interests of the firm • an expanded social contract between employees and organizations: includes greater employee participation in problem-solving and decision-making • increasingly sophisticated corporate strategies: new combinations of key activities leading to new organizational requirements 6

Organizational Structure Organizational structure: the formal arrangement of roles, responsibilities, and relationships within an organization Organizational differentiation: the way in which different units and subunits within a firm are organized and assigned to work on different levels and kinds of tasks • A company’s choice of structure depends upon: – the configuration of its value chain in terms of the location(s) and type(s) of its foreign facilities – the impact of international operations on total corporate performance 7

Vertical Differentiation Vertical differentiation: the way in which an organization balances centralized vs. decentralized decision-making alternatives [the locus of power] Centralization: the degree to which high-level managers (usually above the country level) make decisions and then pass them down to lower levels for implementation Decentralization: the degree to which lower-level managers (at or below the country level) make and implement important decisions • Usually, centralized decision-making is associated with an international or global strategy, decentralized decision-making with a multidomestic strategy, and a combination of the two with a transnational strategy. All organizations must determine who will have what authority to make which decisions. [continued] 8

• The reason for choosing one type of decision-making authority over another is partly a function of attitude. [see Chapter Two regarding the cultural environment] – ethnocentric attitude: encourages an international or global firm to develop core competencies in its home country and then closely supervise their transfer and use abroad i. e. , centralized decision-making – polycentric attitude: encourages a multidomestic firm to grant decision-making authority to foreign subsidiaries, i. e. , decentralized decision-making – geocentric attitude: encourages a transnational firm to creatively balance the competing needs for centralized and decentralized decision-making in order to respond to both global and local pressures Decision-making should occur at the level of the people most directly affected and who have the most intimate knowledge about the problem —the current trend is toward more decentralized structures. 9

The Principles and Practice of Centralization and Decentralization CENTRALIZATION DECENTRALIZATION Premises Decisions should be made by senior managers. The effectiveness of the value chain depends on headqtrs. ’ retaining authority. Centralized decisions ensure that operations in different countries help achieve global objectives. Decisions should be made by lower-level employees. The effectiveness of the value chain depends on local managers’ authority. Decentralized decisions ensure that operations in different countries help achieve global objectives by first meeting national goals. [continued] 10

The Principles and Practice of Centralization and Decentralization CENTRALIZATION DECENTRALIZATION Advantages Coordination of the value chain is facilitated. Decisions are consistent with corporate objectives. Duplicate activities are pre-. empted. The risk of costly, wrong, lowerlevel decisions is reduced. Consistent dealing with stakeholders is ensured. Decisions are made by those who are directly involved. Lower-level managers are allowed to exercise initiative. Lower-level employees are motivated to perform better. Flexible responses to rapid changes are enabled. Subsidiary managers are held more accountable. [continued] 11

The Principles and Practice of Centralization and Decentralization CENTRALIZATION DECENTRALIZATION Disadvantages Initiative among lower-level employees is discouraged. Demoralized lower-level workers wait for instructions. Information flows from the top down; thus, bottom-up innovation is pre-empted. The organization is put at risk if bad, lower-level decisions are made. Cross-unit coordination and strategic fit are impeded. Subsidiaries likely favor their own projects at the expense of global performance. [continued] 12

The Principles and Practice of Centralization and Decentralization CENTRALIZATION Encouraging Factors DECENTRALIZATION Encouraging Factors Corporate policies call for global Conditions call for local reintegration and uniformity. sponsiveness and adaptation. Interdependent subsidiaries The firm is geographically share value activities. dispersed. Firms need to move resources Economies of scale can be from one activity to another. achieved nationally. Upper-level managers are more Lower-level managers are more experienced decision-makers. capable decision-makers. Decisions are important and Decisions are relatively minor the risk of loss is great. but must be made quickly. The need foreign nationals to reach headqtrs. is low. 13

Horizontal Differentiation Horizontal differentiation: the way in which a firm is divided into discrete units and sub-units that are assigned responsibility for specialized tasks • Horizontal differentiation describes the way in which a firm designs its formal structure in order to: – specify the total set of organizational tasks – logically divide those tasks into jobs, departments, subsidiaries, and/or divisions – assign authority and reporting relationships in ways that are designed to support the firm’s strategies Traditionally MNEs have resolved these issues on the basis of function, type of business/product, geographic region, or some combination of the three. 14

The Design of the Formal Structure Functional Structure: groups specialized jobs according to traditional business functions [specifies roles and relationships according to inputs] CEO Production Marketing Finance/ Accounting – maximizes scales economies by arranging work responsibilities and relationships in the most efficient format – is ideal when a company’s products share a common technology (a narrow product line) and competitive pressures push for a cost-leadership strategy The long chain of command that spans many levels of hierarchy does not build the knowledge-generating and decision-making relationships necessary to respond to environmental changes requiring coordination across departments. [continued] 15

The Design of the Formal Structure Divisional Structures: establish groups according to units, products, customers, or regions [specifies roles and relationships according to outputs] • International Division: creates a critical mass of international expertise, but may struggle to get resources Product Division: creates synergies between foreign and domestic operations, is well-suited for diverse product lines, but lacks the means for one division to learn from another Geographic Division: creates economies of scale on a regional basis, works well when foreign operations are large but not dominated by a single region or country, but leads to the costly duplication of similar value-added activities [continued] Diesel Division • CEO Electronics Division International Division CEO Diesel Group • Power Systems Group Hydroelectric Group CEO Europe North and South America Asia 16

The Design of the Formal Structure Matrix Structure: – simultaneously attains the benefits of the functional and divisional forms [theoretically equips an MNE to capture the benefits of both integration and responsiveness] – gives functional, product, and geographic groups a common focus – has dual reporting relationships rather than a single chain of command, thus ensuring the exchange of information and resources Blurred lines of responsibility and relationships confuse the clarity of the chain of command, even though groups are required to compete for resources and control. Mixed Structure: each is idiosyncratic, reflecting legacies, executive preferences, and/or circumstances [a combination of functional, regional, and product dimensions] 17

Fig. 15. 2: Placement of International Activities within the Organizational Structures for International Businesses 18

Contemporary Structures: learning organizations that champion limitless spans of control, ad hoc teams, and self-organizing groups by eliminating vertical, horizontal, and external boundaries that hinder information flows • Network Structure: a small, core organization that outsources certain value activities to key partners in order to focus on those activities in which it creates maximum value Japanese keiretsus rely heavily upon long-term personal relationships among high-level managers in different companies. • Virtual Organization: a temporary arrangement among • partners that can be easily reassembled to adapt to market changes [permits organizations to acquire resources and/or strategic capabilities by creating a temporary cluster of partners] Project Structure: all work is project based—teams form, disband, and form again as the flow of work requires 19

Fig. 15. 3: A Simple Depiction of the Network Structure 20

Coordination Systems Coordination systems: link the operations of interdependent units and individuals of a firm • Coordination by standardization: – sets universal rules and procedures that apply to units worldwide [a prescriptive, day-to-day infrastructure] – enforces consistency in the performance of activities across geographically dispersed units – helps a firm leverage its core competencies and bring the advantages of scale to its operations – is ideally suited for strategies that champion constancy and predictability in industries that are more stable than volatile, i. e. , an international or geocentric strategy [continued] 21

• Coordination by plan: – requires interdependent units to meet common deadlines and objectives – is ideally suited for firms that create value by adapting operations to local conditions, i. e. , a multidomestic strategy • Coordination by mutual adjustment: – requires managers to interact with counterparts to enable the flexible exchange of ideas – requires that firms adopt a formal structure and install standardization and planning systems – is ideally suited for firms that find value in creating more opportunities and incentives for interdependent parties to communicate with one another, i. e. , when firms face new problems that cannot be defined with customary rules or procedures 22

Control Systems Control process: directs and monitors the activities of individuals in order to compel actions that support the goals of the firm • Control methods: – market control: uses external market mechanisms to establish internal performance benchmarks and standards [complements a geocentric strategy] – bureaucratic control: uses centralized authority to install an extensive set of rule and procedures to govern a broad range of activities – clan control: relies upon share values among all employees to idealize and moderate preferred employee behaviors [complements a transnational strategy] [continued] 23

• Control mechanisms – reports: should be timely to allow an effective response – subsidiary visits: should balance information collection and sharing with the offering of advise and directives – management performance evaluation: should separate a manager’s performance from a subsidiary’s performance – cost and accounting comparability: should interpret different costs and accounting practices fairly – evaluative measurements: should include a reliable combination of financial and non-financial indicators – information systems: should periodically reevaluate information needs in order to minimize costs and ensure relevancy 24

Organization Culture • Organization culture: the set of fundamental assumptions about an organization, its goals, and its practices that employees share • Key features of a firm’s organization culture include: – – – managerial values and principles the work climate and atmosphere patterns of “how things are done around here” traditions ethical standards Studies confirm a significant link between organization culture and the financial performance of a firm. 25

Strategy and Organization Culture • The shared values of an organization influence both • employees’ perceptions as well as the ways in which they respond to the world. Sustainable benefits and lasting competitive advantage can only be realized when a firm exhibits a complementary organization culture: – an international strategy: requires rules, regulations, and uniformity – a global strategy: requires standardizing employees’ views – a multidomestic strategy: requires greater tolerance of the local interpretation of corporate goals – a transnational strategy: requires a strategic blending of standardization and adaptation, i. e. , dynamic flexibility 26

Fig. 15. 4: Organizational Culture Aspects of Types of Strategies 27

Special Situations • Acquisitions: the culture of an acquired organi • • zation may differ because of both company and national practices Shared ownership: decision-making is limited and assumptions and behavior will likely differ when two or more entities share ownership Dynamic nature of performance: as a firm’s international business evolves, both its organizational structure and its coordination and control systems must also evolve 28

The Role of Legal Structures When operating abroad, firms choose among legal forms that affect their decision-making power, their tax exposure, their ability to protect intellectual property, and their legal liability. • Foreign branch: a wholly-owned foreign operation that remains legally part of the parent company • Subsidiary: a legally separate company, i. e. , a foreign direct investment, whose liability is usually limited to the subsidiary’s assets [continued] 29

• Types of subsidiaries and operating form, i. e. , distinctions to be heeded in designing a foreign operation: – the ability of the parent to sell its ownership – the number of stockholders required to establish a subsidiary – the percentage of foreigners who can serve on the board of directors – the amount of required public disclosure – whether equity may be acquired by noncapital contributions such as goodwill – the types of businesses (products) that are eligible – the minimum capital required for establishing a subsidiary 30

Implications/Conclusions • Organization is an integrated function of formal structure, coordination and control systems, and organizational culture. • The degree of centralization in an MNE is influenced by pressures for global integration versus local responsiveness, the competence of headquarters versus subsidiary personnel, as well as decision importance, expediency, and quality expectations. 31

• Artfully engineering an organization that configures • • globally dispersed resources to meet the mandates of multinational operations is the frontier of international business. While traditional organizational structures rely on hierarchical formats, contemporary structures eliminate the horizontal, vertical, and/or external boundaries that block the development of knowledge-generating and decision-making relationships. MNEs need to develop coordination and control mechanisms that prevent the duplication of efforts, ensure that headquarters does not withhold the best resources from international operations, and include insights from across the entire firm. 32