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Chapter 14 - The Organization of International Business
14-1
The Organization of International Business
Learning objectives
• Explain what is meant by
organizational architecture.
• Explain how organization can
be matched to strategy to
improve the performance of an
international business.
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
Third, the strategy and architecture of the firm must be
consistent with competitive conditions prevailing in the
market place.
14
Chapter 14 - The Organization of International Business
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OUTLINE OF CHAPTER 14: THE ORGANIZATION OF
INTERNATIONAL BUSINESS
Opening Case: Organizing Siemens to Compete Globally
Introduction
Organizational Architecture
Organizational Structure
Vertical Differentiation: Centralization and Decentralization
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
Organizational Change
Organizational Inertia
Implementing Organizational Change
Chapter Summary
Chapter 14 - The Organization of International Business
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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: Organizing Siemens to Compete Globally
Summary
The opening case explores the extensive reorganization undertaken in 2007 by Siemens,
the German engineering conglomerate. By the late 2000s, Siemens was struggling with
subpar performance relative to its global rivals such as GE, Honeywell, and United
Technologies. A new CEO was brought in, and he shifted the company’s emphasis from
the importance of country executive managers within the organization to a simpler, less
complex organizational structure. Discussion of the case can revolve around the
following questions:
1. What type of strategy did Siemens pursue until Peter Löscher came on board as CEO
in 2007? What were the drawbacks of the existing company structure?
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LECTURE OUTLINE FOR CHAPTER
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.
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:
Chapter 14 - The Organization of International Business
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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.
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
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.
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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
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.
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
Organizational culture can be maintained through:
• hiring and promotional practices
Chapter 14 - The Organization of International Business
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Slides 14-37 through 14-41 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 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 14-42 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
Chapter 14 - The Organization of International Business
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Sources of inertia include:
• the existing distribution of power and influence
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: “The choice of strategy for a multinational firm must depend upon 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
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
Chapter 14 - The Organization of International Business
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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
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
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 Walmart’s International Division and
answer the following questions:
a. Why did the centralization of decisions at the headquarters of Walmart’s international
division create problems for the company’s different national operations? Has Walmart’s
response been appropriate?
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ANSWER 6:
a. 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
QUESTION 7: Reread the Management Focus on the rise and fall of the matrix structure
at 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 in the late 1990s? Does Dow’s
structure now make sense given the nature of its businesses and the competitive
environment it competes in?
ANSWER 7:
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,
Chapter 14 - The Organization of International Business
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QUESTION 8: Reread the Management Focus on Lincoln Electric; then answer the
following questions:
a. To what extent are the organizational culture and incentive systems 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 the culture and incentive systems work well in the United States? Why did it
not take in other nations?
ANSWER 8:
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
CLOSING CASE: Philips NV
Summary
The closing case explores how multinational giant Philips NV has evolved over time.
The Dutch company, which was internationally oriented almost from the start, moved to
a national organization approach during World War II. This approach, which allowed the
company to tailor its product line and marketing to each national market, remained in
Chapter 14 - The Organization of International Business
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place for several decades, however, by the 1970s, the duplication of effort the approach
required began to cause problems and Philips shifted toward a product division structure
QUESTION 1: Why did Philips’ decentralized structure make sense in the 1950s and
1970s? Why did this structure start to create problems for the company in the 1980s?
ANSWER 1: By the start of World War II, Holland’s Philips Electronics already had a
global presence. Because Holland was occupied by Germany doing the war, its national
organizations in countries such as Britain, Australia, and the United States gained
QUESTION 2: What was Philips trying to achieve by tilting the balance of power in its
structures away from national organizations and toward the product divisions? Why was
this hard to achieve?
ANSWER 2: Philips was trying to achieve greater scale economies and hence lower costs
by establishing international production centers, which were under the direction of the
QUESTION 3: What was the point of the organizational changes made by Cor Boonstra?
What was he trying to achieve?
ANSWER 3: When Boonstra became CEO in the mid-1990s, he tried to streamline and
QUESTION 4: In 2008 Philips reorganized yet again. Why do you think it did this? What
is it trying to achieve?
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ANSWER 4: In 2008, the CEO at the time believed that Philips was still not sufficiently
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: World Bank: Brazil–Africa: Promoting Partnership in Trade,
Investment, and Knowledge
Run Time: 4:09
Notes: Strong cultural and social ties as well as similarities in geological and climatic
conditions are bringing sub-Saharan Africa and Brazil together. The World Bank reports
that these links make Brazil and sub-Saharan Africa natural partners for trade,
investment, and knowledge exchange. Indeed, between 2000 and 2010, Brazil’s trade
with sub-Saharan Africa increased from just $2 billion to some $12 billion. The World
Bank is now helping to develop a plan to help foster the growing partnership.
Investment is also coming from the private sector. Brazilian companies now operate in
over 17 different countries in Africa in key developing areas including energy,
agriculture, and infrastructure. Private investment is helping to construct the Mpanda
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Discussion Questions and Answers:
1. Discuss the growing partnership between Brazil and sub-Saharan Africa. What factors
are facilitating the relationship? What role does the World Bank play?
Answer: Strong cultural and social ties are facilitating the growing partnership between
Brazil and sub-Saharan Africa. Not only do they share common ethnic backgrounds—
2. What are the benefits to Brazil of investing in sub-Saharan Africa? How does Africa
benefit from the partnership?
Answer: Trade between Brazil and sub-Saharan Africa has increased substantially in
recent years from just $2 billion in 2000 to $12 billion in 2010. Sub-Saharan Africa offers
3. Brazil has partnered with Mozambique to build a pharmaceutical factory to produce
HIV-AIDS drugs. Discuss this investment and the importance of knowledge transfer in
addition to trade and investment.
Answer: Brazil’s FIOCRUZ and the government of Mozambique have partnered
together to build a factory where drugs to treat HIV-AIDS will be produced. The goal is
Chapter 14 - The Organization of International Business
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4. Reflect on the investment in sub-Saharan Africa. Why is it important for both the
private and the public sector to be involved? How will these investments help sub-
Saharan Africa in the future?
Answer: The growing partnership between Brazil and sub-Saharan Africa involves both
the public sector and the private sector. Many students will probably recognize that the
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
Fortune conducts an annual survey and publishes the rankings of the world’s most
Exercise 1 Answer
Search phrase: World’s Most Admired Companies
Resource Name: Fortune: World's Most Admired Companies
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
Chapter 14 - The Organization of International Business
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.
Exercise 2 Answer
Search phrase: Industry Profiles
Resource Name: Industry Insights: Food and Beverage
