Chapter 14 – The Organization of International Business
The Organization of International Business
Learning objectives
Explain what is meant by organizational architecture.
Describe 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.
Discuss what is required for an international business to change its organization so
that it better matches its strategy.
This chapter identifies the organizational architecture that international businesses use to
manage and direct global operations. The core argument outlined in this chapter is that
superior enterprise profitability requires three conditions:
First, the different elements of a firm’s organizational architecture must be internally
consistent.
Second, the organizational architecture must match or fit the strategy of the firm—
strategy and architecture must be consistent.
Third, the strategy and architecture of the firm must be consistent with competitive
conditions prevailing in the market place.
The opening case explores the reorganization and streamlining of U.S. household
products conglomerate Procter & Gamble, which began under the guidance of CEO Alan
“A.G.” Lafley in 2014. The closing case explores the evolution of Koninklijke Philips
NV’s structure. Since World War II, the company has moved from its national
organizational approach to one in which three global divisions are responsible for product
strategy, global marketing, and production systems.
OUTLINE OF CHAPTER 14: THE ORGANIZATION OF
INTERNATIONAL BUSINESS
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Chapter 14 – The Organization of International Business
Opening Case: P&G – Strength in Architecture
Introduction
Organizational Architecture
Organizational Structure
Vertical Differentiation: Centralization and Decentralization
Management Focus: Walmart International
Horizontal Differentiation: The Design of Structure
Management Focus: Dow—(Failed) Early Global Matrix Adopter
Integrating Mechanisms
Control Systems and Incentives
Types of Control Systems
Incentive Systems
Control Systems, Incentives, and Strategy in the International Business
Processes
Organizational Culture
Creating and Maintaining Organizational Culture
Organizational Culture and Performance in the International Business
Management Focus: Lincoln Electric and Culture
Synthesis: Strategy and Architecture
Localization Strategy
International Strategy
Global Standardization Strategy
Transnational Strategy
Environment, Strategy, Architecture, and Performance
Organizational Change
Organizational Inertia
Implementing Organizational Change
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: Koninklijke Philips NV
CLASSROOM DISCUSSION POINT
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Chapter 14 – The Organization of International Business
Pick a few companies with international operations like The Gap, Nestlé, and Toyota.
Ask students to identify what issues are important for these companies as they develop
their strategies. Try to get students to think in terms of the trade-offs between pressure for
cost reduction and pressure for local responsiveness.
Then, ask students to think about how each company should be organized in order to
successfully carry out their strategy. Jot the responses on the board in a diagram form
following the framework presented in the text.
Finally, using company web sites, explore how close students got to each firm’s actual
organization structure. If there are significant differences exist between expected
structure and the actual structure, discuss why.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slides 14-3 through 14-7 What Is Organizational Architecture?
Organizational architecture refers to the totality of a firm’s organization, including
formal organization structure, control systems and incentives, processes, organizational
culture, and people.
Three conditions must be satisfied for an organization to deliver profitability: architecture
must be internally consistent; strategy and architecture must be consistent; and strategy
and architecture together must be consistent with the competitive environment of the
firm.
Organizational structure refers to:
the formal division of the organization into subunits
the location of decision-making responsibilities within that structure (centralized
versus decentralized)
the establishment of integrating mechanisms to coordinate the activities of
subunits including cross-functional teams or pan-regional committees
Control systems measure and evaluate managerial performance and the performance of
subunits. Incentives connect to control systems, and processes need to be consistent with
the strategic objectives of the organization. Efforts to shape values and norms in an
organization are intricately linked to human resource practices, especially at the selection
and recruitment stages.
Slide 14-8 Dimensions of Organizational Structure
Organizational structure has three dimensions:
1. Vertical differentiation – the location of decision-making responsibilities within a
structure
2. Horizontal differentiation – the formal division of the organization into subunits
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McGraw-Hill Education.
Chapter 14 – The Organization of International Business
3. The establishment of integrating mechanisms – the mechanisms for coordinating
subunits
Slides 14-9 and 14-10 Vertical Differentiation: Centralization and Decentralization
Vertical differentiation determines where decision-making power is concentrated.
Slides 14-11 through 14-14 Horizontal Differentiation: The Design of Structure
Horizontal differentiation is concerned with how the firm decides to divide itself into
subunits.
The typical entrepreneurial firm begins with no formal structure. As the firm grows, when
the decision load becomes too intense for one person to handle, the firm is split into
functions representing value creation activities. If growth continues, eventually the
complexities of size push for the restructuring of the firm into a divisional form.
Slides 14-15 through 14-21 Global Expansion
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 either a:
Worldwide product division structure – tends to be adopted by diversified firms
that have domestic product division
Worldwide area structure – tends to be adopted by undiversified firms whose
domestic structures are based on functions
Slides 14-22 and 14-23 Global Matrix
The global matrix structure is an attempt to minimize the limitations of the worldwide
area structure and the worldwide product divisional structure.
Slides 14-24 through 14-27 Integrating Mechanisms
Regardless of the type of structure, firms need a mechanism to integrate subunits.
The simplest formal integrating mechanism is direct contact between subunit managers,
followed by liaisons. The next level of formal integration is temporary or permanent
teams composed of individuals from each subunit. Finally, the matrix structure allows for
all roles to be integrating roles.
Many firms are using informal integrating mechanisms. A knowledge network 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.
Slides 14-28 and 14-29 Control Systems
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Chapter 14 – The Organization of International Business
A firm’s leaders need to ensure that the actions of subunits are consistent with the firm’s
overall strategic and financial objectives. This is achieved through control and incentive
systems.
There are four main types of control systems:
1. Personal controls – control by personal contact with subordinates
2. Bureaucratic controls – control through a system of rules and procedures that directs
the actions of subunits
3. Output controls – setting goals for subunits to achieve and expressing those goals in
terms of relatively objective performance metrics
4. Cultural controls – exist when employees “buy into” the norms and value systems of
the firm
Slide 13-30 Incentive Systems
Incentives are the devices used to reward behavior. Incentives are usually closely tied to
performance metrics used for output controls.
Slides 14-31 and 14-32 Performance Ambiguity
The key to understanding the relationship between international strategy, control systems
and incentive systems is performance ambiguity, which exists when the causes of a
subunit’s poor performance are not clear.
The costs of controlling transnational firms are higher than the costs of controlling firms
pursuing other strategies.
Slide 14-33 Processes
Processes refer to the manner in which decisions are made and work is performed.
Slides 14-34 through 14-36 Organizational Culture
Organizational culture is a social construct, a system of values and norms shared among
people.
Organizational culture comes from:
founders and important leaders
national social culture
the history of the enterprise
decisions that resulted in high performance
Organizational culture can be maintained through:
hiring and promotional practices
reward strategies
socialization processes
communication strategies
Managers in companies with a “strong” culture share a relatively consistent set of values
and norms that have a clear impact on the way work is performed.
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Chapter 14 – The Organization of International Business
Another Perspective: A recent Microsoft study reveals that the use of social media tools
increases employee productivity. To learn more, go to
{http://www.networkworld.com/community/blog/microsoft-study-shatters-myth-says-soc
ial-media-use-increases-work-productivity}.
Another Perspective: Toyota’s legendary corporate culture enabled the company to
become a leader in the global auto industry. To learn more about the company’s strong
culture and how it helped the company through its recent quality problems go to
{http://www.businessweek.com/managing/content/jun2011/ca20110624_657612.htm}.
Slide 37 Think Like a Manager: Transmitting an Organizational Culture
Slides 14-38 through 14-42 Synthesis of Strategy and Architecture
What is the interrelationship between the four basic strategies (localization, international,
global standardization, transnational).
Firms pursuing a localization strategy focus on local responsiveness, do not have a high
need for integrating mechanisms, have low performance ambiguity and control costs.
Firms pursuing an international strategy create value by transferring core competencies
from home to foreign subsidiaries. They have moderate needs for control and integrating
mechanisms. Performance ambiguity is relatively low and so is the cost of control.
Firms pursuing a global standardization strategy focus on the realization of location and
experience curve economies. Headquarters maintains control over most decisions, the
need for integrating mechanisms is high, and strong organizational cultures are
encouraged.
Firms pursuing a transnational strategy focus on simultaneously attaining location and
experience curve economies, local responsiveness, and global learning. Some decisions
are centralized and others are decentralized, coordination needs are high, and an array of
formal and informal integrating mechanisms are used.
Slide 14-43 Environment, Strategy, Architecture, and Performance
For a firm to succeed, two conditions must be met:
1. the firm’s strategy must be consistent with the environment in which the firm operates
2. the firm’s organization architecture must be consistent with its strategy
Firms need to change their architecture to reflect changes in the environment in which
they are operating and the strategy they are pursuing.
Slides 14-44 and 14-45 Implementing Organizational Change
There are three basic principles for successful organization change:
1. Unfreeze the organization through shock therapy
2. Move the organization to a new state through proactive change in architecture
3. Refreeze the organization in its new state
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Chapter 14 – The Organization of International Business
Sources of inertia include:
the existing distribution of power and influence
the current culture
senior managers’ preconceptions about the appropriate business model or
paradigm
institutional constraints
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