Organizations of International Business

Objectives

Understand what is meant by or organization architecture.

Be familiar with the different organizational choices that can be made in an international business.

Explain how organization can be matched to strategy to improve the

performance of an international business.

Be able to discuss what an international business requires to change its organization to better

match its strategy.

ContentI. Organizational ArchitectureII. Organizational Structure1. Vertical Differentiation2. Horizontal DifferentiationIII. Control Systems and IncentivesIV. ProcessesV. Organizational CultureVI. Synthesis: Strategy and ArchitectureVII. Organization ChangeVIII. Case Study and Questions

Organizational ArchitectureOrganizational

Structure

• The formal divisions into subunits

• The location of decision-making responsibilities

• The establishment of integrating mechanisms

Control systems and Incentives

• Measure the performance of subunits

• Used to reward appropriate managerial behavior

Processes

• Processes for formulating strategy,

• for deciding how to allocate resources within a firm

• for evaluating the performance of managers and giving feedback.

Organizational Culture

• The norms and value systems that employees of an organization share

People

• Employees of an organization

• The strategy used to recruit, compensate, and retain people

Organizational Architecture

People

Structure

Incentives and

Controls

Culture

Processes

Objectives

Understand what is meant by or organization architecture.

Be familiar with the different organizational choices that can be made in an international business.

Explain how organization can be matched to strategy to improve the

performance of an international business.

Be able to discuss what an international business requires to change its organization to better

match its strategy.

ContentI. Organizational ArchitectureII. Organizational Structure1. Vertical Differentiation2. Horizontal DifferentiationIII. Control Systems and IncentivesIV. ProcessesV. Organizational CultureVI. Synthesis: Strategy and ArchitectureVII. Organization ChangeVIII. Case Study and Questions

Organizational Architecture

People

Structure

Incentives and

Controls

Culture

Processes

I. ORGANIZATIONAL STRUCTURE

• The formal division of the organization into subunits

• The location of decision-making responsibilities

within structure

• The establishment of integrating mechanisms to

coordinate the activities of subunits

1. Vertical differentation:

• Determines where decision- making power is

concentrated

• 2 kinds of decision: centralized and decentralized

decision

Centralized decision• Facilitates coordination

• Ensures decision are consistent with organization’s

objectives

• Give managers the means to bring about

organizational change

• Avoids duplication of activities

Decentralized decision

• Relieves the burden of centralized decision

• To motivate individuals

• Permits greater flexibility

• Can result in better decisions

• Can increase control

2. Horizontal differentiation

• Refers to how the firm divides into subunits

• Based on function, type of business, geographicial

area

• The organization is split into functions reflecting the

firm’s value creation activities

• The functions are typically coordinated and

controlled by top management

• Decision-making is centralized

• Product line diversification requires futher

horizontal differentiation.

A typical funtional structure

A typical product divisional structure

• When firms expand internationally, they often group all of their international activities into an international division

• Many firms that continue to expand will abandon

their international division structure and move to

Worldwide product divisional structure

Worldwide area structure

Worldwide product divisional structure

• Tends to be adopted by diversified firms that have

domestic product division

• Helps realize location and experience curve

economies

• Facilitates the transfer of core competencies

• Does not allow for local responsiveness

Worldwide product divisional structure

Worldwide area structure

Worldwide area structure• Tends to be adopted by undiversified firms whose

domestic structures are based on funtions

• Divides the world into autonomous geographic areas

• Decentralizes operational authority

• Facilitates local responsiveness

• Can result in a fragmentation of the organization

• In consistent with a localization strategy

• The global matrix structure is an attempt to minimize the limitation of the worldwide area structure and the worldwide product divisional structure

• Allows for differentation along two dimensions- product division and geographic area

• Has dual decision-making: product division and geographic area have equal responsibility for operating decisions

INTEGRATING MECHANISMS

1• Strategy and Coordination in the International

Business

2• Impediments to Coordination

3• Formal Integrating Mechanisms

4• Informal Integrating Mechanisms: Knowledge

Networks

Strategy and Coordination in the International Business

Transnational

Strategy

Global Strategy

International Strategy

Localization Strategy

Impediments to Coordination

Different Orientations, Tasks

Production managers Marketing

managers

Impediments to CoordinationDifferent Goals

Formal Integrating Mechanisms

The formal mechanisms used to integrate subunits vary in complexity from simple direct contact and liaison roles, to teams, to a matrix structure .

Formal Integrating Mechanisms

• This is the simplest integrating mechanisms. Managers of the various subunits just contact each other wherever they have a concern.

Direct contact

• this is a bit more complex than direct contact. As the need for coordination between subunits incease, integration can be improved by assigning a person in each subunit to coordinate with another subunit.

Liaison roles

• When the need for coordination is greater still, firms use temporary or permanent teams composed of individuals from the subunits that need to achieve coordination.

Teams

• When the need for integration is very high, firms may institute a matrix struture, in which all roles are viewed as integrating roles.

Matrix Structure

Informal Integrating Mechanisms: Knowledge Networks

• A Knowledge Networks: is a network for transmitting information within an organization that is based not on formal organization structure, but on informal contacts between managers within an enterprise and on distributed information systems.

• A Knowledge Networks: is a non bureaucractic conduit for knowledge flows.

• To be successful, a knowledge network embrace as many managers as possible and managers must adhere to common set of norms and values that override differing subunit orientations.

040301 02

OUTPUT CONTROLS

CULTURAL CONTROLS

BUREAUCRATIC CONTROLS

PERSONAL CONTROLS

TYPES OF CONTROL SYSTEMS

01

02

03

04

BUREAUCRATIC CONTROLSA system of rules and produces that directs the actions of subunits.Budget and capital spending rules.

PERSONAL CONTROLSPersonal contact with subordinates.Most widely used in small firms.

CULTURAL CONTROLS

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

OUTPUT CONTROLSSetting goals for subunits to achive and expressing those goals in terms of objective performance metrics.Compare actual performance against targets and intervene selectively to take corrective action.

WHAT ARE INCENTIVE SYSTEMS

Should reflect national

differences in situations and

culture.

Should vary depending on the employee

and the nature of the work being

performed.

Should promote cooperation

between managers in

different subunits.

Can have unintended

consequences.

Usually closely tied to performance metrics used

for output controls.

1

2

3

4

5

PERFORMANCE AMBIGUITY

Is common when subunit’s 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 transnation

al firms.

Interdependence, Performance Ambigiuty, and the Costs of Control for the Four International Business Strategies

PROCESSES

PROCESSESDefinition: Processes are the manner in which decisions are made and work is performed within the organization. Processes have many different levels like: processes for formulating strategy, processes for allocating resources, processes for improving product quality, processes for evaluating employee performance,…

PROCESSES

lower the costs of value creation

add additional value to a product

Effective processes

ProcessesThe core competencies

The valuable skills

Two basic remarks about managing processes

• Many processes cut not only across headquater, among different subunits, but also across national boundaries.

• It is particularly important for a multinational enterprise to recognize new valuable processes which might lead to a competitive advantage and can be developed anywhere within the organization’s global network of operations.

Organizational Culture

ORGANIZATION CULTURE

Culture

Values: abstract ideas about what a group believes to be good, right, and desirable.

Norms: mean the social rules and guidelines that prescribe appropriate behavior in particular situations.

Creating and maintaining Organizational culture

Creating organization culture• Wide agreement between founders and

important leaders. • The broader social culture of the nation where

the firm was founded.• The history of the enterprise.

Creating and maintaining organizational culture

Maintaining organization culture • Hiring and promotional

practices of the organization.• Reward strategies.• Socialization processes.• Communication strategy.

Organizational culture and performance in the international business

• Strong culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed.

• Adaptive culture care deeply about and value customers, stockholders, and employees.

• Common culture have the same across a multinational global network of subsidiaries probably varies with the strategy of the firm.

A DECADE OF ORGANIZATIONAL

CHANGEAT UNILEVER

Summary• One of the oldest multinational corporation in the

world.• Annual revenue in excess of USD $50 billion (2008)• Unilever was organized on a decentralized basis. In

the early 1990s, in Western Europe, the company had 17 subsidiaries, each focused on a different national market.

• Each subsidiary– profit center – accountable for own performance

Summary• By the mid-1990s, the decentralized structure was

increasingly out of step with competitors in a rapidly changing environment.– Lots of duplication, particularly in manufacturing– Lack of scale economies– High cost structure– Slow to introduce new product lines.

Summary• It introduced a new structure based on business

groups, each focusing on a specific category of products. For example, Lever Europe consolidated the production of detergents.– 17 companies relinquished autonomy– Cut European plants manufacturing soap from 10

to 2– Product sizing and packaging was harmonized

Summary• As a result of that:

− It saved as much as $400 million

− Speeded up new product introduction• By 2000, Unilever realized that their present strategy

were still lagging behind their competitors; so they

decided to reorganize.

• So that, they introduced a new structure based on

regional business groups.

Summary• Each business group included a number of divisions,

each focusing on a specific category of products.

• These groups and divisions coordinated the

activities of national subsidiaries within their region

to drive down operating costs and speed up the

process of developing and introducing new products.

DISCUSSION QUESTION

1. Why did Unilever’s decentralized organizational structure make sense from the 1950s through the 1970s? Why did this structure start to create problems for the company in the 1980s?

2. What was Unilever trying to do when it introduced a new structure based on business groups in the mid1990s? Why do you think that this structure failed to cure Unilever’s ills? 

3. In the 2000s Unilever has switched to a structure based on global product divisions. What do you think is the underlying logic for this shift? Does the structure make sense given the nature of competition in the detergents and food business?

Question 1: Why did Unilever’s decentralized organizational structure make sense from the 1950s through the 1970s? Why did this structure start to create problems for the company in the 1980s.

•  Decentralized make sense from the 1950s through the 1970s because at first it drive to the localization which means this structure allowed the local manager to match product offerings and marketing strategy to local taste and preferences. It also alter sales and distribution strategies to fit the prevailing retail system.

• This structure start to create problems for the company in the 1980s because there are existence of a lot of duplication in manufacturing, a lack of scale economies and need high cost structure. It also resulting Unilever falling behind its rivals in term of bring new product to the market.

Question 2: What was Unilever trying to do when it introduced a new structure based on business groups in the mid1990s? Why do you think that this structure failed to cure Unilever’s ills? 

• Unilever introduced structure based on business

groups actually are to cut down operating and

purchasing costs and tp speed up the introduction of

new product.

• Based on my opinions, this structure failed to cure

Unilever’s ills because the manager are no longer

allowed to match product offerings and marketing

strategy to local tastes and preferences.

Question 3: In the 2000s Unilever has switched to a structure based on global product divisions. What do you think is the underlying logic for this shift? Does the structure make sense given the nature of competition in the detergents and food business?

• Unilever tried to improve its product availability and flexibility for its local responsiveness, and at the same time wanted to reduce operation costs while creating global brands.Since both the food and detergent industry are very competitive, it requires great local responsiveness.

• Moving from a de-centralized localization strategy to a more centralized transnational strategy made sense because of the reduction of operation costs as well as better communication and efficiency. By cutting back the brands from 1600 to 400 they were able to focus more on their global and regional brands as well as raising its local responsiveness standards.