Chapter 14 ‒ The Organization of International Business
The Organization of International Business
Learning Objectives
• LO14-1: Explain what is meant by
organizational architecture.
• LO14-2: Describe the different
organizational architecture
choices that can be made in an
international business.
• LO14-3: Explain how the
organizational architecture can be
matched to global strategy to
improve performance.
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
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Chapter 14 ‒ The Organization of International Business
OUTLINE OF CHAPTER 14: THE ORGANIZATION OF
INTERNATIONAL BUSINESS
Opening Case: Bird, Lime, and Organizing Globally
Introduction
Organizational Architecture
Organizational Structure
Vertical Differentiation
Horizontal Differentiation
Management Focus: Dow—(Failed) Early Global Matrix Adopter
Integrating Mechanisms
Control Systems and Incentives
Types of Control Systems
Incentive Systems
Control Systems and Incentives
Processes
Organizational Change
Organizational Inertia
Implementing Organizational Change
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: Walmart International
Chapter 14 ‒ The Organization of International Business
CLASSROOM DISCUSSION POINT
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.
OPENING CASE: Bird, Lime, and Organizing Globally
Summary
The opening case explores two companies in the sharing economy, Bird and Lime. Both
companies claim their mission is to provide greater mobility. Both companies have
started to build an international presence, Bird operates in more than a dozen countries
and Lime operates in more than 20 foreign markets. Bird and Lime work with local
communities to set up parking spots for their scooters. Discussion of the case can begin
with the following questions:
QUESTION 1: Bird and Lime both use virtual, rather than traditional, organizational
architecture. Why have the scooter companies chosen this approach?
ANSWER 1: Like other companies in the sharing industry, Bird and Lime have very few
in-house employees. Instead, the two companies, using an app, rely on contract workers
QUESTION 2: Consider the flexibility associated with organizational architecture at
Bird and Lime. What are the advantages of this flexibility? Do you see any drawbacks?
ANSWER 2: Most students will probably agree that flexibility and fluidity are both
important qualities for companies in the sharing economy. Companies like Bird and Lime
are not burdened by more traditional organizational arrangements, and so have the ability
Chapter 14 ‒ The Organization of International Business
QUESTION 3: What challenges do Bird and Lime face as they continue their
international expansion?
ANSWER 3: Both Lime and Bird have successfully expanded into foreign markets
prompting the attention of U.S. competitors like Spin and Goat along with foreign
competitors like Tier and Voi. Most students will likely suggest that Bird and Lime
should expect stronger competition in markets where they already have a presence and in
new markets. Students may also suggest that like other companies in the sharing
economy, Lime and Bird should expect legal challenges both at home and abroad. The
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The following provides a brief overview of each Power Point slide
along with teaching tips and additional perspectives.
Slide 14-3 Introduction
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.
CONNECT
Case Analysis
Organizational Architecture at P&G
Summary
This activity focuses on organizational architecture at P&G, the world’s largest household goods
maker. The company is divided into four industry sectors and six core markets.
Chapter 14 ‒ The Organization of International Business
Activity
Students are asked to read a case on organizational architecture at P&G and then respond to a
series of questions related to the case.
Class Discussion
Understand the connection between organizational architecture and strategy implementation.
Discuss organizational architecture and how it can impact the successful execution of strategy.
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.
Slides 14-8 – 14-29 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
3. The establishment of integrating mechanisms—the mechanisms for coordinating
subunits
Vertical Differentiation
Vertical differentiation determines where decision-making power is concentrated.
Chapter 14 ‒ The Organization of International Business
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 area structure—tends to be adopted by undiversified firms whose
domestic structures are based on functions.
• Worldwide product division structure—tends to be adopted by diversified
firms that have domestic product division.
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.
CONNECT
Click and Drag
The Evolution of Organizational Structures
Summary
This activity focuses on the evolution of organizational structures. Research shows that firms
naturally progress through various structures beginning with the international structure. When
choosing a structure, firms must consider decision making responsibility, horizontal
differentiation, and strategy.
Activity
Students are asked to match various descriptions of organizational structure to the correct
structure.
Chapter 14 ‒ The Organization of International Business
Slides 14-30 – 14-36 Control Systems and Incentives
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.
Types of Control 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
Incentive Systems
Incentives are the devices used to reward behavior. Incentives are usually closely tied to
performance metrics used for output controls.
Control Systems and Incentives
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.
CONNECT
Click and Drag
Control Systems and Incentives
Summary
This activity focuses on control systems and incentives in the international business. Control
systems and incentives are important to the implementation and execution of strategy. Control is
used to measure performance, while incentives reward appropriate behavior.
Chapter 14 ‒ The Organization of International Business
Class Discussion
Discuss why it is important for international companies to have appropriate control and incentive
systems in place. What is the connection between strategy, structure, and control?
Slides 14-37 – 14-38 Processes
Processes refer to the manner in which decisions are made and work is performed.
Slides 14-39 – 14-41 Organizational Culture
Organizational culture is a social construct, a system of values and norms shared among
people.
Creating and Maintaining Organizational Culture
Organizational culture comes from:
• founders and important leaders
Organizational culture can be maintained through:
• hiring and promotional practices
• reward strategies
• socialization processes
• communication strategies
Organizational Culture and Performance
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.
Chapter 14 ‒ The Organization of International Business
Slides 14-42 ‒ 14-46 Synthesis: Strategy and Architecture
What is the interrelationship between the four basic strategies: localization, international,
global standardization, and transnational.
Localization Strategy
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.
International Strategy
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.
Global Standardization Strategy
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 need to change their architecture to reflect changes in the environment in which
they are operating and the strategy they are pursuing.
Chapter 14 ‒ The Organization of International Business
CONNECT
Click and Drag
Organizational Architecture
Summary
This activity focuses on organizational architecture. To successfully execute a strategy, a firm
must have the correct organizational architecture in place including structure, incentive and
control systems, culture, processes, and people.
Activity
Students are asked to match various elements and strategic challenges to the correct areas of
organizational architecture.
Slides 14-47 ‒ 14-48 Organizational Change
Multinational firms periodically have to alter their architecture so that it conforms to the
changes in the environment in which they are competing and the strategy they are
pursuing.
Organizational Inertia
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
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: “The choice of strategy for a multinational firm must depend on a
comparison of the benefits of that strategy (in terms of value creation) with the costs of
implementing that strategy (as defined by organizational architecture necessary for
implementation). On this basis, it may be logical for some firms to pursue a localization
Chapter 14 ‒ The Organization of International Business
strategy, others a global or international strategy, and still others a transnational strategy.”
Is this statement correct?
ANSWER 1: Yes, this statement is correct. There is a cost–benefit trade-off with strategy
choice. The costs of structure and controls for different strategies can differ widely.
QUESTION 2: Discuss this statement: “An understanding of the causes and
consequences of performance ambiguity is central to the issue of organizational design in
multinational firms.”
ANSWER 2: Organizational design creates interdependence, which may lead to
performance ambiguities. Different organizational designs can remove performance
ambiguities, shift them to a different level in the hierarchy, or create new performance
QUESTION 3: Describe the organizational architecture a transnational firm might adopt
to reduce the costs of control.
ANSWER 3: A transnational, like all multinational firms, can use bureaucratic and output
controls to some extent. However, the use of output controls is limited due to
performance ambiguities. Bureaucratic controls are less effective when there are multiple
QUESTION 4: What is the most appropriate organizational architecture for a firm that is
competing in an industry where a global strategy is most appropriate?
ANSWER 4: When a global strategy is appropriate, a company believes that its market is
the world, and that it seeks economies of scale through the development and manufacture
QUESTION 5: If a firm is changing its strategy from an international to a transnational
strategy, what are the most important challenges it is likely to face in implementing this
change? How can the firm overcome these challenges?
ANSWER 5: The most important challenges are likely to be related to control, as the firm
moves from at least a partial reliance on output measures and bureaucratic methods to
QUESTION 6: Reread the Management Focus on Dow Chemical; then answer the
following questions:
a. Why did Dow first adopt a matrix structure? What were the problems with this
structure? Do you think these problems are typical of matrix structures?
b. What drove the shift away from the matrix structure for companies such as Dow and
ABB? Does Dow’s structure now make sense given the nature of its businesses and the
competitive environment it competes in?
ANSWER 6:
a. Dow Chemical initially adopted the matrix structure because it would allow the
company to be responsive to both local market needs and corporate objectives. However,
when it was first adopted, the structure did not work well. The dual chain of control led to
b. In the mid-1990s, Dow divested itself of its pharmaceutical activities, and changed its
structure to reflect its new strategy. The company shifted to global business divisions as a
way to reduce costs and streamline decision making. Dow felt that given its new focus on
bulk chemicals, the new structure would work better.
QUESTION 7: Reread the Management Focus on Lincoln Electric; then answer the
following questions:
a. To what extent is the organizational culture of Lincoln Electric aligned with the firm’s
strategy?
b. How was the culture at Lincoln Electric created and nurtured over time?
c. Why did Lincoln Electric’s culture and incentive systems work well in the United
States? Why did it not take in other nations?
Chapter 14 ‒ The Organization of International Business
14-13
ANSWER 7:
a. Lincoln Electric stresses that individuals should be rewarded for their individual
efforts, and that everyone who works for the company should be treated equally.
Accordingly, employee pay depends on individual output, everyone eats in the same
cafeteria, parks in the same lot, and so on. Because employees can boost their pay
significantly by working harder and being innovative, the company as a whole becomes
more productive.
c. In the United States, a country that encourages individualism, Lincoln Electric’s
emphasis on individual performance has been very successful. However, in other
countries, this approach has met with some resistance. In some countries, Lincoln
Electric’s pay-per-output approach was considered exploitative. In Germany, it was
actually illegal. In addition, in some countries the incentive of more money for more
output was not valued. Many Europeans placed a greater value on more leisure time, for
example. In countries where Lincoln Electric expanded through acquisition, unionized
employees opposed the compensation approach.
CLOSING CASE: Walmart International
Summary
The closing case explores Walmart’s international expansion. As the world’s largest
global retailer, Walmart operates more than 11,000 stores across 28 countries. Some 40
percent of Walmart’s customers are located outside the United States and the company is
focused on growing its international presence. Currently, Walmart’s international
division is divided into three regions, Europe, Asia, and the Americas, and decision
making is decentralized to each of these areas. Discussion of the case can begin with the
following questions:
QUESTION 1: As one of the largest companies in the world, Walmart has a reasonably
limited international exposure—only 28 countries. What do you think Walmart can do to
have a broader platform in more of the world’s 195 countries?
ANSWER 1: Responses to this question will vary by student, but many are likely to point
out a key challenge facing Walmart as it tries to take its big box concept to foreign
markets. Not only does Walmart need a large physical space for its stores, it also needs to
Chapter 14 ‒ The Organization of International Business
QUESTION 2: Walmart operates via a number of brands around the world (e.g., ASDA
in the United Kingdom). Many companies are becoming more and more standardized in
their operations and have adopted organizational structures to support such
standardization. Can Walmart adopt a more effective global strategy and, if so, what type
of organizational structure should the company create to best serve its operations in the
global marketplace?
ANSWER 2: When Walmart began its international expansion, it set up an international
division to handle all foreign operations. However, over time, this approach proved to be
challenging. Managers in foreign countries had to get permission from Bentonville before
they could make any changes in strategy or operations. Not only did this approach slow
decision making, it also meant that decisions were being made by managers who were
removed from the local situation. Walmart began to change this approach when it
QUESTION 3: Walmart Stores Chief Operating Officer Judith McKenna was named
president and CEO of the company’s international unit effective February 1, 2018. The
role is seen as a stepping-stone to the top job at the world’s largest retailer, with current
CEO Doug McMillon and his predecessor Mike Duke having run the international unit
previously. If international is such an important part of the company, what can Walmart
do, should do, or must do, to leverage its position as the largest retailer in the world?
ANSWER 3: Many students may wonder whether Walmart is being ethnocentric with its
appointment of Judith McKenna to Chief Operating Officer. Students sharing this view
may argue that if the company truly wants to grow its international revenues, appointing
Chapter 14 ‒ The Organization of International Business
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
ongoing stream of updated video suggestions correlated by key concept and major topic.
Every new clip posted is supported by teaching notes and discussion questions. Please
feel free to leave comments in the library that you feel might be helpful to your
colleagues.
CONNECT
Geography
Summary
This activity is designed to test the student’s knowledge of geography. Questions related to
chapter material are asked, requiring students to understand the topics and the locations of the
countries involved.
Chapter 14 ‒ The Organization of International Business
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
Fortune conducts an annual survey and publishes the rankings of the world’s most
admired companies. Locate the most recent ranking available, and focus on the factors
used to determine which companies are most admired. Prepare an executive summary of
the strategic and organizational success factors for a company of your choice.
Exercise 2
You work at a European-based pharmaceutical company that is planning to expand
operations to other parts of the world. To design the structure of the organization as it
expands internationally, management has requested additional information on the
pharmaceutical sector worldwide. Use the Industry Profiles section on the globalEDGE™
site to prepare a risk assessment of the food and beverage industry that can help
management gain a better understanding of the external environment in foreign markets.
Answers to Exercises
Additional Info:
Fortune’s annual World’s Most Admired Companies ranking is a corporate reputation
ranking that is put together by surveying the Fortune Global 500 companies and asking
them to rate companies in their industry on nine criteria, from investment value to social
responsibility.
Exercise 2 Answer
Additional Info:
globalEDGE™ includes a write-up of the commercial risk inherent in each industry,
through an agreement with Coface, a French commercial risk insurance company. These
write-ups are available for most industries that globalEDGE™ covers, under the “Risk”
heading (left submenu item on each Industry page).