978-0134200057 Chapter 16 Lecture Notes

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CHAPTER SIXTEEN

THE ORGANIZATION OF INTERNATIONAL

BUSINESS

OBJECTIVES

16-1 Profile the evolving idea of organization in the MNE

16-2 Interpret classical organization structures

16-3 Interpret neoclassical organization structures

16-4 Differentiate the systems used to coordinate international activities

16-5 Differentiate the systems used to control international activities

16-6 Explain the purpose and characteristics of organizational culture

CHAPTER OVERVIEW

Structuring organizations is a complex task made even more complex when those

organizations span national boundaries. Chapter Sixteen examines the ways in which

firms group their operations in order to implement their strategies and control processes,

as well as the role of organizational culture. The chapter begins with a discussion of the

principles of organization and then explores the dynamics of various organizational

structures. It considers the trade-offs between centralizing and decentralizing the

decision-making process and discusses the various mechanisms that can be used to help

ensure control measures are in fact implemented. The chapter concludes with an

examination of organization in special situations such as acquisitions and shared

ownership as well as the role of legal structures.

CHAPTER OUTLINE

OPENING CASE: Organizing Global Operations: The “Gore Way”

Since 1958, W. L. Gore & Associates have built a global reputation as “the

world’s most innovative company.” Notwithstanding its discoveries, many contend that

Gore’s supreme invention is setting and sustaining a stunningly effective global

organization. Gore’s locations in China, France, Germany, Italy, Korea, Sweden, and the

UK have been named one of the respective nation’s best workplaces. Globally, Gore

gains accolades. Assessment centered on issues of mutual trust, esprit de corps and

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camaraderie, and supportiveness of the work environment. Gore, headquartered in

Newark, Delaware, is one of the 200 largest privately held companies in the United

States; it had more than $3 billion in sales in 2016. Since its establishment, the company

founder, Bill Gore, puts into play then, and still today, far-reaching

management ideas on organization, enterprise, accountability, and authority. Or, in

company shorthand, the “Gore Way.” He installed a flat organization whereby everyone

could freely talk with anyone else, no matter their role or rank. Everyone was and, to this

day, is an “Associate.” Liberated from a rigid bureaucracy, Associates make decisions

based on knowledge and initiative rather than seniority and titles. Continuing growth,

fueled by expanding internationalization, has led Gore to formalize some elements of its

organization. Going forward, Associates look to meld the Gore Way with the

transformational connection, communication, and collaboration technologies unleashed

by the Internet.

I. INTRODUCTION

Organizational challenges abound in this era of globally dispersed resources and

operations. International managers must create structures, systems, and a culture that

will effectively implement their company’s strategies around the world. Formulating

the appropriate strategy is merely the first step of a long process that includes

crafting an organization that will work to implement that strategy.

II. CHANGING TIMES, CHANGING ORGANIZATIONS

Environmental differences, technology trends, executive practices, and labor markets

challenge how managers organize an MNE.

1. Expanding Scope of IB. The growth of global business changes MNEs’

opportunity sets and efficiency frontiers. Markets once predominant, like

the United States, Japan, and Germany, transition to new positions. Markets

once on the periphery, such as China, Indonesia, and Rwanda, move toward

center stage. MNEs respond by redeploying operations and engaging

strategies that impose intricate workflow patterns. Implementation requires

new approaches to coordination, collaboration, and control. These choices

demand far more sophisticated organizations than MNEs have traditionally

used.

2. The Internet as a Design Standard. The growing importance of the

Internet as an organization metaphor pushes managers to rethink many of

their assumptions of how they get people to do their jobs.

3. Managerial Standards. Change in the nature of work has changed the

nature of management. Senior executives face growing pressure to empower

employees.

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4. Social Contract. Competitive changes and performance expectations

have changed the social contract between employee and organization.

Employees want professional mobility, participative management, and

challenging assignments.

5. Change and Challenge: MNES Respond. These trends push MNEs to test

the best mix of structure, systems, and values when building a “magical”

organization. Different MNEs apply different approaches to create magic.

III. CLASSICAL ORGANIZATION STRUCTURES

The formal arrangement of roles, responsibilities, and relationships in the MNE

represents its organization structure. Managers configure the elements of the

company’s workflow to stipulate the lines of authority and communication, assign

rights and duties, and set connections between units. These decisions often spell the

difference between success and failure. Designing an organization typically begins

by determining the ideal structure for arranging individuals and units to implement

the MNEs strategy—indeed, a long-running thesis in management theory holds that

“structure follows strategy”. Making sense of the strategy-structure situation forces

a cascade of decisions. Many managers begin by resolving (1) the degree of vertical

differentiation (deciding who has what authority to make which decision) and (2)

the degree of horizontal differentiation (the task of specifying which people in

which units do which jobs).

A. Vertical Differentiation

No matter the mix of markets, products, or ambitions, MNEs face competing

calls for global integration and local responsiveness. They key question is who

has the authority to make what decision. If the plan is to make those issues

headquarters’ call, then managers must build an organization that supports that

outlook. Conversely, if the plan is to have those calls made by local subsidiaries,

then, again, managers must build an organization to support that outlook. More

formally, managers reconcile this tension by vertically differentiating the

company’s structure in terms of the centralization (how high up) versus the

decentralization (how low down) of decision-making [see Table 16.1].

1. Structure Follows Strategy. The choice of centralization versus

decentralization is not an either-or proposition. Some activities spur

centralized decision-making. Likewise, other activities encourage

decentralized decision-making.

2. Technology, Balance, and Globality. Technology increasingly alters the

calculus of who should have the authority to make which decision. The

Internet, for example, progressively makes it easier for executives at

headquarters as well as subsidiaries to track global conditions and local

performance in real time. Consequently, MNEs fine-tune

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decision-making for growing globality in which “business flows in every

direction.

B. Horizontal Differentiation

Vertically speaking, MNEs run from top (the CEO) to the bottom (the

entry-level worker). Horizontally speaking, MNEs run sideways from function

to function, such as research to production to marketing to finance. Horizontal

differentiation involves assigning specific tasks to specific people in specific

functions. Horizontally differentiating on the basis of business activity anchors

the functional structure; doing so on the basis of product or geography installs a

divisional structure, and doing so on the basis of a combination results in a

matrix or mixed structure. The long-running use of these formats by MNEs

designates them as classical structures.

C. Functional Structure

A functional structure [see Figure 16.2] group people based on common

expertise and resources, MNEs with a narrow range of products, particularly

those whose capital-intensive operations create steep scale effects, find

functional structures appealing.

1. Limits. Horizontally differentiating people and processes by business

function constrains the development of cross-functional

knowledge-generating and decision-making relationships.

Consequently, coordinating different functional units, in response to a

market disruption or strategic change, is difficult.

D. Divisional Structure.

Divisional structures divide employees based on the product type, customer

segment, or geographical location, duplicate functions and resources across

divisions, and fit the organizational demands of the MNE that manages

conventionally differentiated activities.

1. International Division. An MNE prefers this format when its

international activities represent a small share of its total activity. It charges

a separate, stand-alone operating unit with responsibility for overseas

activities [see Figure 16.3].

a. Limits. Disaggregating an MNE into domestic-international

divisions can fan “us versus them” tensions, thereby blocking

cross-division connections. Conflict between domestic and

international units obstructs sharing competencies, leveraging

best practices, and exploiting experience effects.

2. Worldwide Product Division Structure. Product divisions are

very popular among international companies today because most

companies’ businesses involve a variety of diverse products. This structure

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is well suited for a global strategy and enhances a company’s ability to sell

or spin off certain product lines. [see Figure 16.4].

a. Limits. The autonomy of each product division means that

different subsidiaries from different product divisions within the

same foreign country often report to different executives at

headquarters. Unless safeguarded, coordination problems create

inefficiencies.

3. Worldwide Area Division. An MNE uses geographic divisions

when its sales are not dominated by a single country or region. Typically, its

activities are evenly distributed across multiple markets. In this scenario, an

MNE horizontally differentiates activities by geography, whereby Division

Alpha is responsible for region/country A, Division Beta takes

region/country B, and so on. [see Figure 16.5].

a. Limits. Conducting similar organizational activities in several

places increases administrative inefficiency.

4. Global Matrix Structure. A global matrix structure horizontally

differentiates the MNE along two dimensions; in Figure 16.6, those

dimensions are geography and product. Interlacing different types of

divisions integrates units that are sensitive to competing pressures.

Requiring managers from both divisions to negotiate mutually agreeable

plans, goes the reasoning, infuses both perspectives into decision-making,

thereby more effectively reconciling integration and responsiveness

pressures.

a. Limits. In principle, the global matrix structure promotes

cross-divisional communication and multifunctional

collaboration. In practice, organizational politics fans competition

for resources and rewards. Unchecked, gamesmanship threatens

collaboration, thereby short circuiting the knowledge-generating

and decision-making relationships that were the original promise

of the matrix. Conducting similar organizational activities in

several places increases administrative inefficiency. A matrix

structure also institutes a dual hierarchy that runs afoul of the

unity-of-command principle. This notion holds that an

unbroken chain of command should flow through the levels of

the hierarchy, beginning with the CEO down to the entry-level

employee. Giving one worker two bosses, by blurring lines of

responsibility, creates conflicting lines of command and nebulous

accountability

5. Mixed Structure. Firms seldom if ever get all of their activities to neatly

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correspond to a single organizational structure. A mixed structure

combines various functional, area, and product dimensions, particularly

with respect to foreign operations, due to legacies, executive preferences,

and other circumstances.

IV. NEOCLASSICAL STRUCTURES

Some MNEs adopt neoclassical structures to organize different approaches to

horizontal and vertical differentiation that broaden relationships, expand

communication, and promote collaboration. In absolute terms, neoclassical formats

serve the same purpose as do their classical counterparts. They stipulate how an

MNE organizes its workplace, utilizes resources, administers systems, and specifies

authority, rights, and responsibilities. However, neoclassical structures do so in

ways that differ radically, notably moving from organizing the boundaries that define

a hierarchy to achieving the boundarylessness that marks a heterarchy.

A. The Challenge of Boundaries. In practical terms, boundaries are (1)

vertical divisions that separate employees into specific slots, each marked by

explicit superior-subordinate roles, in the hierarchy and (2) horizontal

divisions that follow from having specific employees do specific jobs in

specific units. In a classical structure, vertically and horizontally

differentiating the workflow leads to specifying precise rules,

responsibilities, and relationships—each, in turn, institutes a boundary.

B. The Goal of Boundarylessness. In practical terms, boundaries are (1)

vertical divisions that separate employees into specific slots, each marked by

explicit superior-subordinate roles, in the hierarchy and (2) horizontal

divisions that follow from having specific employees do specific jobs in

specific units. In a classical structure, vertically and horizontally

differentiating the workflow leads to specifying precise rules,

responsibilities, and relationships—each, in turn, institutes a boundary.

C. Network Structure. The network structure, a leading neoclassical

format, arranges roles, relationships, and responsibilities in a patterned flow

of activity that allocates people and resources to decentralized projects. [see

Fig 16.7]. The network structure minimizes rules and regulations processes

in order to preempt potential boundaries.

1. Networks Aren’t New. The network structure is not unprecedented.

Japanese MNEs have long used the so-called keiretsu format, an

integrated collective of nominally independent companies in which

each owns a share of the others. Keiretsus rely on long-term

personal relationships among the companies’ executives.

D. Virtual Organization. A virtual organization uses technologies to

connect otherwise detached entities (from employees to entire enterprises).

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E. Neoclassical Structures in Action. Company history, CEO preference,

or legal constraints make some prefer less dramatic change, opting instead

to create a global virtual headquarters from which to locate key functions in

high-priority markets. Customers, meanwhile, care less where work is done

provided the results satisfy contract specifications.

F. Pitfalls of Neoclassical Structures. Like its classical counterparts,

neoclassical structures have limits. Networks are intrinsically dynamic

structures, spurring adaptive reconfiguration, responsive coordination, and

real-time control. Organizing something that continually evolves poses

problems.

POINT—COUNTERPOINT:

The Hierarchical Structure: The Superior Format

POINT: Proponents of hierarchy argue that this format is the enduring foundation for

how managers across the world determine the optimal degree of work specialization.

Since the early twentieth century, hierarchical structures have provided a powerful

framework that has guided the international expansions of thousands of companies. The

absolute clarity of hierarchy enables companies to develop sophisticated planning and

control systems. Supporters of a hierarchy system of organization recognize that

technological and other changes require some adaptation in structure, but not the

discarding of the basic principles.

COUNTERPOINT: In contrast, some argue that a new organizational form helps

companies identify and exploit opportunities ahead of their competitors. Often, hierarchy

organizes information flows in ways that work against integrating all the pieces.

Hyperarchy can unleash the intrinsic motivation of employees and increase innovation.

The hyperarchy structure also provides a format that remedies the intrinsic limitations of

the hierarchy as well as positions a company to better deal with the emerging

environment of globalization. Changes in the environment have ushered in a need for

organizational change. In our view, the neoclassical heterarchy, not the classical

hierarchy, meets the challenge of changing market situations, shifting technological

frontiers, and radical workflow resets

_____________________________________________

V. COORDINATION SYSTEMS

Systems are the framework of processes and procedures used to ensure that an

organization can fulfill all tasks required to achieve its objectives. MNEs use several

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coordination and control systems to synchronize, integrate, and regulate value

activities across the units of its organization.

A. Coordination by Standardization

Companies with widely dispersed operations often standardize the ways that

employees do their jobs and deal with customers. Standardization sets universal

rules and procedures that apply worldwide and enforces consistency in

performance of activities in geographically dispersed units. Rules and

regulations about how employees interact, also called formalization, aims to

reduce workplace uncertainty and simplify the exchange of ideas and resources.

Standardization is undermined when frequent exceptions to rules are made, and

is best suited for strategies that champion constancy and predictability in stable

industries.

1. Challenges. Differences in industry conduct and host-government attitudes

complicate coordination by standardization. Market circumstances, strategic

goals, or workflow patterns often prevent specifying universal policies and

procedures. Too, often they do not fit every situation in every unit in every

country.

B. Coordination by Plan. This type of coordination requires interdependent

units to meet common deadlines and objectives. MNEs following a

multidomestic strategy may opt to establish objectives and schedules that give

interdependent units greater discretion in developing coordination systems.

1. Challenges. Notwithstanding a plan’s brilliance, the unexpected is

ever-present. Market disruptions, government regulations, mergers and

acquisitions, to name just a few, cause big changes. Cultural differences

routinely pose complications. Absent rules regulating relationships, cultural

divergence increases the time, expense, and errors in cross-national exchange.

C. Coordination by Mutual Adjustment. Coordination by mutual adjustment

requires managers to interact with counterparts to enable flexible coordination

mechanisms, largely informally. MNEs that opt to encourage mutual

adjustment also adopt a formal structure and install standardization and planning

systems, but they see great value in engaging an adaptable approach to

coordination that involves creating more opportunity and incentive for parties to

work with one another. Mutual adjustment can be a very effective coordination

tool when an MNE faces new problems that cannot be defined with customary

rules or procedures. Coordination by mutual adjustment taps various methods.

1. Challenges. Coordination by mutual adjustment imposes tough demands,

especially as globalizing markets press companies to support customers through

traditional methods as well as virtual formats. The MNE opting for coordination

via mutual adjustment must facilitate collaboration among associates in different

parts of the world.

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VI. CONTROL SYSTEMS

Every MNE must regulate what its employees can and cannot do in order to avoid

spinning out of control. Control systems must ensure that people are doing what

they are supposed to do and not doing what they are not supposed to do.

A. Bureaucratic Control. Bureaucratic control emphasizes organizational

authority and relies on rules and regulations.

B. Market Control. Market control uses external market mechanisms to set

standards that regulate performance.

C. Clan Control. Clan control uses shared values and ideals to moderate employee

behavior.

D. Control Mechanisms. Effective control requires objective mechanisms.

Presently, MNEs support their control system with the following sorts of tools.

a. Reports. Decisions on how to allocate capital, personnel, and

technology continue without interruption, so reports must be timely,

accurate, and informative. The global diffusion of standardized software

packages, often in the form of enterprise resource planning platforms, from

SAP, Oracle, IBM, Microsoft, and Red Hat, organize many report systems.

Standardizing the format worldwide, by leveraging corporate management’s

familiarity, improves the real-time performance of reporting controls. Also,

reports that share the same format ease comparing the performance of

different units.

b. Visits to Subsidiaries. Face-to-face meetings, formal budget

reviews, and planning seminars fortify responsibility and accountability.

Old-school subsidiary visits, awash with strategizing and socializing,

promote communication between headquarters and local managers.

Increasingly, technologies expand managers’ options. Teleconference

innovations, supported by wikis, social networking, and web-based

collaboration services, help MNEs reduce travel, save time, boost

productivity, and tighten controls

c. Information Systems. Technology platforms, by expediting information

exchange, provide useful control tools. MNEs use enterprise resource

planning to monitor activities, such as product planning, parts purchasing,

maintaining inventories, customer service, and order fulfillment.

. D. Which Control System When? Generally, as structure follows strategy, so

too does control. MNEs following a global strategy prefer market controls, given that

they can apply standard, objective benchmarks to evaluate performance in any

market. Alternatively, transnational companies find value in clan control; the

necessity of open exchange among geographically diffuse workers encourages

control based on common values and norms. In any scenario, managers adjust their

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control system for the contingencies posed by the competing pressures of global

integration and local responsiveness.

VII. ORGANIZATION CULTURE

Organizational culture refers to the ideologies, symbols, and core values that

employees, no matter their location in the MNE’s worldwide operations, regard as

legitimate.

A. A Key Piece of the Performance Puzzle

Analyses and anecdotes of corporate performance indicate that building a

resourceful organization is a challenging balancing act: an MNE must find ways

to inspire employees worldwide to develop and apply new ideas but ensure that

they implement them in ways that fit the MNE’s vision and mission.

1. Sophisticated Strategy, Sophisticated Culture. Expanding to

increasingly diverse markets with increasingly diverse workplace norms

calls for boosting the flexibility and versatility of an organization. Managing

sophisticated resources, capabilities, and competencies escalate demands on

MNEs’ structure and systems. There are low odds of successfully meeting

those demands without a supportive organizational culture.

B. The Power of Common Cause. An effective organizational culture stimulates

people to identify with the company’s vision, do their jobs well, and collaborate

with others while lessening the need to regulate their behaviors with elaborate

structures and systems. Its capacity to power individual performance beyond that

motivated by monetary incentives puts the onus on executives to build a

company that people do not want to merely work for, but aspire to belong to.

C. Developing an Organizational Culture. The overlapping practices of cultural

exemplars, notably Gore, J&J, Google, Infosys, and Toyota, highlight the

importance of hiring, rewarding, and promoting people who support the MNE’s

vision and then, “walk the talk” implementing its mission. Leading through

example, they promote socialization processes and communication practices that

diffuse as well as fortify the idealized values and norms.

1. Tools and Techniques. Rather than relying on chance encounters among

employees to develop common cause, MNEs proactively set and sustain

their idealized organizational culture with fascinating methods.

a. Setting the System. Overcoming hurdles calls for arranging

closer contact among managers from different countries to unify

values. Cross-national teams are a prevalent tool.

b. Sustaining the System. Ad hoc approaches effectively set the

standards of an organization’s culture. Sustaining that calls for

instituting outlooks and systems. Instead of letting the

organization’s culture emerge naturally, many managers do as

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they do with structure and systems: purposefully and proactively

develop the system of shared values that supports the MNE’s

vision and mission.

LOOKING TO THE FUTURE: The Rise of Corporate Universities

Many companies believe that managers must develop and monitor their shared values.

This has led to a variety of new approaches, most notably, the corporate university.

Corporate universities are growing by leaps and bounds in the U.S., thriving in Europe,

and developing in Asia. The number of U.S. corporate universities grew from around 400

in 1993, to 2,000 in 2001, to nearly 4,000 today. Whereas some MNEs attach their

university to headquarters, others sprinkle them worldwide. Increasingly, MNEs break

free of geography, running virtual online universities where employees e-learn via live

webcasts, online discussion groups, webinars, video-conferences, and interactive

sessions. The goal of coupling executive learning to the company’s strategy drives the

recent and projected growth of the corporate university model. Now a growing mandate

for corporate universities is integrating diverse workforces and developing future leaders

for the company. Whether real or virtual, the growing power of the corporate university

as an agent of ideas may ultimately usher in a new crucible of company strategy.

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