Chapter 14 – The Organization of International Business
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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 evolution of Philips NV’s
structure. Since World War II, the company has moved
from its national organization approach to one in which
three global divisions are responsible for product strategy,
global marketing, and production decisions. The closing
case examines the reasons why Unilever shifted from a
highly decentralized organizational structure, to a more
regionally oriented approach with global product
divisions.
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Chapter 14 – The Organization of International Business
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OUTLINE OF CHAPTER 14: THE ORGANIZATION OF
INTERNATIONAL BUSINESS
Opening Case: The Evolution of Organization at Phillips NV
Introduction
Organizational Architecture
Organizational Structure
Vertical Differentiation: Centralization and Decentralization
Horizontal Differentiation: The Design of Structure
Integrating Mechanisms
Management Focus: The International Division at Wal-Mart
Management Focus: The Rise and Fall of Dow Chemical’s Matrix Structure
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: Culture and Incentives at Lincoln Electric
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
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Closing Case: A Decade of Organizational Change at Unilever
CLASSROOM DISCUSSION POINT
Pick a few companies with international operations like GAP, Nestle, 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.
OPENING CASE: The Evolution of Organization at Philips NV
The opening 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
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
that established international production centers. In the mid-1990s, a new CEO
implemented significant changes replacing Philips’ 21 product divisions with just seven
global business divisions. This new structure was further refined in 2008 to establish
three global divisions responsible for product strategy, global marketing, and production
decisions. Discussion of the case can revolve around the following questions:
1. What type of strategy did Philips pursue during and immediately following World War
II? How did the company implement this strategy?
2. What factors prompted Philips to change its strategy and structure in the 1990s? What
challenges did the company face with its new approach?
3. Consider Philips’ current approach. What type of strategy is the firm following today?
Does its structure fit this new strategy?
Another Perspective: To explore Philips’ operations in more depth, go to the company’s
web site at {http://www.usa.philips.com/}. Philips recently made some changes to its
international operations. Go to {http://www.businessweek.com/news/2011-10-
17/philips-to-cut-4-500-jobs-globally-seeks-eu800-million-savings.html} to learn more.
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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.
Slides 14-3-14-7 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; 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
sub-units. 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 sub-units
3. The establishment of integrating mechanisms – the mechanisms for coordinating sub-
units
Slides 14-9-14-10 Vertical Differentiation: Centralization and Decentralization
Vertical differentiation determines where decision-making power is concentrated.
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Slides 14-11-14-14 Horizontal Differentiation: The Design of Structure
Horizontal differentiation is concerned with how the firm decides to divide itself into
sub-units.
Slides 14-15-14-21 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:
Slides 14-22-14-23 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 14-24-14-27 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
Slides 14-28-14-29 Control Systems
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.
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There are four main types of control systems:
1. Personal controls – control by personal contact with subordinates
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 14-31-14-32 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.
Slide 14-33 Processes
Processes refer to the manner in which decisions are made and work is performed.
Slides 14-34-14-36 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
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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Another Perspective: Social media have changed the way individuals communicate
Another Perspective: Toyota’s legendary corporate culture enabled the company to
Slides 14-37-14-41 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 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.
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
Slides 14-43-14-44 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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Sources of inertia include:
• the existing distribution of power and influence
• the current culture
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
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
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QUESTION 3: Describe what 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 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 Wal-Mart’s International Division and
answer the following questions:
a) Why did the centralization of decisions at the headquarters of Wal-Mart’s international
division create problems for the company’s different national operations? Has Wal–
Mart’s response been appropriate?
b) Do you think that having an international division is the best structure for managing
Wal–Mart’s foreign operations? What problems might arise with this structure? What
other structure might work?
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ANSWER 6:
a) When Wal-Mart 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
b) Most students will probably suggest that while the international division may have
been a good strategy at the beginning of Wal-Mart’s expansion into foreign markets, as
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,
when it was first adopted, the structure did not work well. The dual chain of control led
to turf battles and a lack of accountability, however, Dow felt that by making the
b) In the mid-1990s, Dow divested itself of its pharmaceuticals activities, and changed its
structure to reflect its new strategy. The company shifted to global business divisions as
Chapter 14 – The Organization of International Business
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QUESTION 8: Reread the Management Focus on Incentives and Culture at Lincoln
Electric, then answer the following questions:
a) To what extent are the organization 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.
b) Lincoln Electric has a long tradition of equality and fairness. Since 1934, employees
have been assessed both objectively and subjectively. Objective criteria include the level
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
CLOSING CASE: A Decade of Organizational Change at Unilever
Summary
The closing case explores the changes in strategy and structure at Unilever. Unilever, a
$50 billion company selling more than 1000 products in virtually every country, was
historically organized into decentralized subsidiaries in each major national market. In
the early 1990s there were 17 Unilever subsidiaries in Europe! Decentralization allowed
local managers to respond to its unique market conditions and was a source of strength.
But, by the mid 1990s Unilever’s decentralized structure was working against its efforts
to build global brands and cut costs in the face of competition, and so in 1996 Unilever
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introduced a new structure based on regional business groups, and a unified pan–
European strategy. Discussion of the case can revolve around the following questions:
QUESTION 1: Why did Unilever’s decentralized structure make sense in the 1950s–
1970s? Why did this structure start to create problems for the company in the 1980s?
ANSWER 1: Unilever’s decentralized structure made sense in the 1950s-1970s because it
allowed each subsidiary the opportunity to cater to local needs. So, product offerings and
QUESTION 2: What was Unilever trying to do when it introduced a new structure based
on business groups in the mid-1990s? Why do you think this structure failed to cure
Unilever’s ills?
ANSWER 2: In the mid-1990s, Unilever introduced a new structure that was based on
regional groupings. Within the European Business Group, for example, there was a
QUESTION 3: In the 2000s Unilever has switched to a structure based on global product
divisions? What do you think is the underlying logic for this shift? Does this structure
make sense given the nature of competition in the detergents and food business?
ANSWER 3: Most students will probably suggest that Unilever’s new structure based on
global product divisions makes a lot of sense given the nature of the products involved.
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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: Chrysler Pays Back Billions In Bailout Loans: Is The Comeback
Complete?
Run Time: 11:50
Abstract: This video explores the return of U.S. automaker Chrysler to the global
playing field following its repayment of the bailout money the company was forced to
take after nearly collapsing two years ago.
Key Concepts: Foreign direct investment, strategic alliances, impact of the
multinational company on the host country, global production, global economy,
globalization, international marketing
Notes: Chrysler recently announced that it had repaid its debts to the U.S. government in
full. The global automaker had been forced to take bailout money from the government
in 2009 in order to avoid bankruptcy. The announcement not only quieted critics who
claimed that the investment by the government was a poor one, but it also signaled the
return of Chrysler to the global playing field. Like so many other companies, Chrysler
was hard hit by the 2008 recession that began in the United States and then swept through
Europe and Asia, but its troubles really began much earlier. In fact, one of the changes
made at the time of the bailout resulted in a new management team at Chrysler led by the
CEO of Italy’s Fiat, Sergio Marchionne. Fiat also made a significant investment in the
troubled automaker.
Initially, there was concern that the relationship between Fiat and Chrysler would be
doomed to follow the same path that the Daimler Chrysler venture took, but so far Fiat’s
presence in the company has proved to be positive and Fiat has since increased its stake
in Chrysler to 51 percent and expects to raise that even further in the future. Still,
Chrysler has a long way to go before it can return to its former position in the industry.
Already the company is changing its product line up to include fuel-efficient small car
Like other U.S. companies, Chrysler has been hurt by the competition among states to
attract foreign investment and the economic benefits it brings. Companies like Nissan
and BMW receive sizeable tax breaks from Tennessee and Alabama giving them a cost
Chapter 14 – The Organization of International Business
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advantage in the marketplace. Chrysler is now taking steps to improve its
competitiveness by combining its product development with that of Fiat with the ultimate
goal of benefiting from shared components, scale economies, and other synergies. It is
Discussion Questions:
1. Discuss the challenges that lie ahead for Chrysler as it continues its recovery. What
does Chrysler’s revival mean to other players in the industry? What does your response
imply about the nature of the industry?
2. Consider the relationship between Chrysler and Fiat. Why is the relationship
beneficial to Chrysler? What does Fiat gain?
3. Reflect on the tax breaks some states offer to foreign automakers in exchange for
investments. What does the state gain from the investments? Does this practice give
foreign companies an unfair advantage over domestic companies?
4. Chrysler is hoping to add some Fiat models that are popular in Europe to its U.S.
product line. Is it possible to standardize cars across markets? Is there such a thing as a
world car?
INCORPORATING globalEDGE™ EXERCISES
Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following
exercises:
Exercise 1
Fortune conducts an annual survey and publishes the rankings of its “Most Admired
Companies” in the world. Locate the most recent ranking available and focus on the
methodology used to determine which companies are most admired. Prepare an executive
summary of the strategic and organizational success factors involved in this survey.
Exercise 2
Globalization can present many challenges and opportunities for companies, cultures, and
countries. In fact, the globalEDGE website features a blog that includes current
discussions on globalization. Locate the globalEDGE Blog and find a recent blog post
that provides insights concerning the challenges and opportunities of globalization facing
firms from an emerging or developing economy. Prepare a description of the issue and
provide an examination of these challenges and opportunities on regional and global firm
operations for firms from your chosen economy.
Chapter 14 – The Organization of International Business
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Answers to the Exercises
Exercise 1
The World’s Most Admired Companies rankings can be located by searching for the
name of the ranking at http://globaledge.msu.edu/ResourceDesk/. The resource is titled
Exercise 2
The globalEDGE Blog can be accessed via the “Blog” menu link through the main