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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
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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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