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CHAPTER 10
The Organization of Global Business
Chapter Outline
• Introduction
• The Stateless Corporation
• Organizing Global Business
• Export Departments and International Divisions
o Creating an Export Department
o International Division
• Four Organizational Structures for Global Business
o Functional Structure
o Divisional Structure
o Hybrid Structure
o Matrix Structure
Teaching Objectives
After covering this chapter, the student should be able to:
• Discuss the concept of stateless corporations.
• Describe the importance of organizational structures for global businesses.
• Discuss the role that export departments and international divisions play in the
organization of global businesses.
• Define functional, divisional, hybrid, and matrix structures, and illustrate their advantages
and disadvantages for global business.
COMPREHENSIVE LECTURE OUTLINE
I. Introduction. To achieve sustainable competitive advantage on a worldwide scale,
global businesses rely on their ability to organize people and resources. This ability is
reflected in organizational structure. Organizational structures can help companies
fail or succeed.
CLASS ACTIVITY: Use the Cultural Perspective vignette as an opportunity to allow students
to explore the impact of organizational design on a company’s competitive advantage.
II. Stateless Corporation. Firms that transcend international boundaries are called
stateless corporations. Many major corporations have a global presence. Stateless
corporations are different because they attempt to transcend nationality altogether.
Stateless corporations represent the fourth stage of globalization:
• In the first stage, global companies produce goods in one country and export them to
other countries.
• In the second stage, global companies establish foreign subsidiaries to handle the
exports from their home countries.
• In the third stage, global firms set up operations in other countries.
• In the fourth stage, stateless corporations locate their core corporate functions and
top executives in different countries in order to achieve competitive advantage via
access to talent, capital, low costs, or proximity to their most important customers.
When stateless corporations organize this way, they are no longer limited to the strengths nor
constrained by the weaknesses of a single country.
DISCUSSION STARTER: REALITY CHECK 1.
More and more global business firms are becoming stateless corporations. Do you think this
may benefit the world economy? Why or why not?
III. Organizing Global Business. An organization can be defined as a tool that people use
to coordinate their actions to obtain something they seek of value. Organizational structure can
be defined as the formal system of task and authority relationships that control how people
coordinate their actions and use resources to achieve organizational goals. The organizational
structure serves the following purposes:
• It allows the members of the organization to perform a wide variety of activities based
upon a division of labor that leads to the departmentalization, standardization, and
specialization of functions and tasks.
• It permits the organization members to coordinate their activities via integration
mechanisms such as hierarchical supervision, formal rules and procedures, and training
and socialization.
• It determines the boundaries of the organization and regulates its interfaces with the
environment and its interactions with other organizations.
A division, or a business subunit, consists of a collection of functions or departments that share
responsibility for producing a particular product or service.
DISCUSSION STARTER: REALITY CHECK 2.
Do you think that there is an “optimal” organizational structure for each company? If not,
why not? If yes, how can the company find its optimal organizational structure?
ECONOMIC PERSPECTIVES: Inflated Figures at Mahindra Satyam. Use the Ethical
Perspectives case as an opportunity to discuss the impact of opaque organizational structure at
Satyam Computer Services on the ability of its founder to mask fraud and inflict major economic
damage to his company.
Questions:
1. Do you agree that the organizational structure under B. Ramalinga Raju was conducive
2. How would you propose to change the organizational structure to prevent fraud in the
IV. Export Departments and International Divisions. One finds a variety of organizational
structures. The early stages of a company’s process toward becoming globalized are represented
by export departments and international divisions.
• Creating an Export Department. The first step a domestic firm takes when entering the
global arena is usually to export some of its products. Sometimes the employees handling
the exports may primarily work within another function, such as Marketing or
Operations. As the demand for the exported products grows, the number of people
needed to handle the job increases as well, which leads to the formation of an export
department. Exhibit 10.1 • An Organizational Structure with an Export Department
Under Sales.
• International Division. As the volume of exports grows, it may become feasible for the
firm to manufacture and sell the products in the countries where the exports are being
shipped. Expertise in foreign markets becomes important as well. The export department
becomes the international division. Exhibit 10.2 • An Organizational Structure with
an International Division.
An international division is advantageous because it permits global business to
concentrate all international efforts and expertise in one location. If the organizational
division is at the same level as domestic operations, it signals to international customers
their importance to the company. It fosters a global mindset in the people working within
the division. However, an international division also can have disadvantages. One major
disadvantage is the potential conflict between domestic and international operations.
Other disadvantages come from separating domestic and international operations,
resulting in a lack of communication and coordination. Exhibit 10.3 • The
Organizational Structure of Wal-Mart.
DISCUSSION STARTER: REALITY CHECK 3.
Find a company with an export department and a company with an international division.
How are these companies similar and how are they different?
V. Four Organizational Structures for Global Business. When a company evolves
beyond its need for an international division, it may be considered a global enterprise. At this
stage in its development, it may have any of several organizational structures:
• Functional Structure. Firms start with a functional organizational structure. This
structure creates an initial division of labor with regard to the main activities that must be
performed by the organization to continue conducting business. In a functional structure,
activities are grouped by a common function, from the bottom to the top of the
organization. The functional structure is an organizational structure that groups people
together because they hold similar positions in a company, perform a similar set of tasks,
or use the same kinds of skills. Exhibit 10.4 • A Functional Organizational Structure
for a Global Business. Global businesses that use a functional structure typically have a
narrow product line or a highly integrated product mix. Exhibit 10.5 • The
Organizational Structure of Boeing Commercial Airplanes. The functional structure
has several advantages: it promotes economies of scale and in-depth skill development,
and it encourages collaboration, efficiency, and quality within the function.
Disadvantages include the inability to respond to environmental changes that require
coordination between the functional areas, promoting a restricted view of the
organization’s goals among employees, and possibly leading to local optimization at the
expense of global optimization. Finally, accountability is diffused because profit and loss
accounts are calculated for the entire firm rather than for each function.
• Divisional Structure. A divisional structure refers to one type of organizational
structure in which functions are grouped together to serve the needs of products,
markets, or geographical regions. The divisional structure is organized according to the
various outputs of the global business. Exhibit 10.6 • A Divisional Structure for a
Global Business with Three Divisions. Although normally each division is managed as
a separate business, coordination across the divisions is overseen by a group of managers
at corporate headquarters who are responsible for allocating resources among divisions
and deciding upon the long-term strategy of the firm. One of the primary issues in a
divisional structure is the degree of autonomy granted to the divisions when making
decisions. Advantages of the divisional structure include the fact that functions are able
to focus their activities on a specific kind of product, market, or geographical region.
This allows the division to create high-quality products. Divisions also develop a
common identity and approach to problem solving, which increases cohesiveness and
results in improved performance. Because each division has the full complement of
functional resources, it can respond to the requirements of individual products, markets,
or regions and quickly adapt as the needs change. Each division can be held accountable
for its performance. The primary disadvantage of the divisional structure is that it
requires high operating and managing costs, which is a consequence of each division
having its own set of functions, in addition to the corporate headquarters.
Communication problems may arise as various managers in different divisions attempt to
coordinate their activities. Additionally, divisions may start to compete for
organizational resources and may start pursuing divisional goals at the expense of the
goals of the company as a whole.
o A product structure is a particular kind of divisional structure that groups
products into separate divisions according to their similarities or differences.
Exhibit 10.7 • A Product Structure for a Global Business with Four Product
Divisions.
o A market structure is a particular kind of divisional structure that groups
products into separate divisions according to the needs of different customers.
Exhibit 10.8 • A Market Structure for a Global Business with Three Market
Divisions.
o A geographical region structure is a particular kind of divisional structure that
groups products into separate divisions according to the needs of the different
geographical regions the company serves. Geographical region structure is also
called area structure. Exhibit 10.9 • A Geographical Region Structure for a
Global Business with Three Divisions.
• Hybrid Structure. As global businesses grow in reach and depth, sometimes they adopt
a combination of organizational structures that best fit their needs. This combination of
organizational structures is called a hybrid structure. Exhibit 10.10 • A Global Business
with a Hybrid Structure.
• Matrix Structure. For most firms, hybrid structures provide enough flexibility to
achieve the goals of the organization. However, in special cases, companies need the
simultaneous benefits of both the functional and the divisional structures: the
technological expertise within functions and the horizontal coordination across functions.
The matrix structure is an organizational structure in which people are grouped
simultaneously by function and by division. Exhibit 10.11 • A Global Business with a
Matrix Structure.
The functional managers and the division managers have equal authority within
the organization, and employees report to both managers. The matrix structure is
advantageous because it allows the company to meet multiple demands from the
environment and allows employees the opportunity to acquire both functional and
division-related skills. It also facilitates innovation and creativity and provides a work
setting in which employees with different functional expertise can cooperate to solve
problems. A basic problem of the matrix structure is determining the responsibility and
authority relationships between the functional and divisional managers. Matrix
structures also limit opportunities for promotion because most employees move
laterally, from division to division, and not vertically to upper management. Matrix
structures are used only by companies that depend upon rapid product development for
their survival, or by firms that manufacture products designed to meet specific customer
needs.
ETHICAL PERSPECTIVES: Ethics at ConocoPhillips. Use the Economic Perspectives case
as an opportunity to discuss the place of the ethics office in organizational structure.
Suggestion: You could ask students to do this case as individuals or in teams as a class activity.
Have the students read the case presented in the text and answer the questions at the end of the
case.
Questions:
1. Do you think that ethics should be part of a staff position, a line position, or both?
2. What are some of the advantages and disadvantages of placing ethics in the audit and
DISCUSSION STARTER: REALITY CHECK 4.
Locate in the business press a recent case of a company changing its organizational structure.
Identify the former and later organizational structures.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Assignments
End-of-Chapter Discussion Questions
1. Why are global businesses evolving toward stateless corporations? Answer:
2. Organizational structures can help a company fail or succeed. Why do you
think that is the case? Answer: Organizational structure allows members of
3. What is the difference between export departments and international
divisions? Answer: As the volume of exports grows, it may become feasible
4. Compare and contrast the following organizational structures: functional
structure, product structure, market structure, and geographical region
structure. Answer: A product structure is a particular kind of divisional
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
113
company serves. A functional structure is an organizational structure that
groups people together because they hold similar positions in a company,
perform a similar set of tasks, or use the same kinds of skills. While a
functional structure is appropriate for companies with a narrow product line
or highly integrated product mix, the other organizational structures serve
the needs of diverse products, markets, or geographic regions.
5. Which type of company often adopts hybrid structures? Answer:
6. A matrix structure may provide the advantages of the functional and
divisional structures, but it may also provide the disadvantages of these two
structures. Argue in favor of or against this assertion. Answer: The goal of
Mini-Case Synopsis and Questions
Royal Dutch Shell p.l.c. is one of the six “supermajor” oil and gas companies.
Shell is unique for its organizational structure and its global presence. It was
characterized as one of the world’s three most international organizations. Shell’s
organizational structure is very complex. It comprises four types of company: the
parent companies, the group holding companies, the service companies, and the
operating companies. Shell created a tri-dimensional matrix structure known as the
Shell Matrix, which had functions, regions, and sectors. In 1995, a radical
reorganization of Shell was announced. The new structure represented the move
from a geographically-based company to a business sector-based firm. The
restructuring also included elimination of more than 1,000 corporate positions, the
sale of a vast majority of its headquarters, and the redesign of its coordination and
control systems.
Questions:
1. What are some advantages and disadvantages of the Shell Matrix?
2. Why do you think Shell has undergone so many organizational
3. How would you decide what would be Shell’s best organizational structure?
Point/Counterpoint, Interpreting Global Business News, and Portfolio Projects
Students’ answers to these assignments will vary widely. Their writing should
reflect an understanding of the chapter’s basic concept, thorough research, and
logic and critical thinking skills.
