Discussion Question - MGT 457

****Selection from textbook****

Issues of Organizational Structure

Organizational structure is the way in which a company divides its activities among separate units and coordinates activities among those units. If a company’s organizational structure is appropriate for its strategic plans, it will be more effective in working toward its goals. In this section, we explore several important issues related to organizational structures and will examine several alternative forms of organization.

Centralization versus Decentralization

A vital issue for top managers is determining the degree to which decision making in the organization will be centralized or decentralized. Centralized decision making concentrates decision making at a high organizational level in one location, such as at headquarters. Decentralized decision making disperses decisions to lower organizational levels, such as to international subsidiaries.

Should managers at the parent company be actively involved in the decisions made by international subsidiaries? Or should managers intervene relatively little, perhaps, and only get involved in the most crucial decisions? Some decisions, of course, must be decentralized. If top managers involve themselves in the day-to-day decisions of every subsidiary, they are likely to be overwhelmed. For example, managers cannot get directly involved in every hiring decision or assignment of people to specific tasks at each facility. On the other hand, overall corporate strategy cannot be delegated to subsidiary managers because only top management is likely to have the appropriate perspective needed to formulate corporate strategy.

In our discussion of centralization versus decentralization of decision making, it is important to remember two points:

1. Companies rarely centralize or decentralize all decision making. Rather, they seek an approach that will result in the greatest efficiency and effectiveness.

2. International companies may centralize decision making in certain geographic markets while decentralizing it in others. Numerous factors influence this decision, including the need for product modification and the abilities of managers at each location.

With these points in mind, let’s take a look at some specific factors that determine whether centralized or decentralized decision making is most appropriate.

When to Centralize

Centralized decision making helps coordinate the operations of international subsidiaries. This is important for companies that operate in multiple lines of business or in many international markets. It is also important when one subsidiary’s output is another’s input. In such situations, coordinating operations from a single, high-level vantage point is more efficient. Purchasing is often centralized if all subsidiaries use the same inputs in production. For example, a company that manufactures steel filing cabinets and desks will need a great deal of sheet steel. A central purchasing department will get a better bulk price on sheet steel than would subsidiaries negotiating their own agreements. Each subsidiary would then benefit by purchasing sheet steel from the company’s central purchasing department at a lower cost than it would pay in the open market.

Some companies maintain strong central control over financial resources by channeling all subsidiary profits back to the parent for redistribution to subsidiaries based on their needs. This practice reduces the likelihood that certain subsidiaries will undertake investment projects when more promising projects at other locations go without funding. Other companies centrally design policies, procedures, and standards to encourage a single global organizational culture. This policy makes it more likely that all subsidiaries will enforce company rules uniformly. The policy also helps when companies transfer managers from one location to another because uniform policies can smooth transitions for managers and subordinates alike.

When to Decentralize

Decentralized decision making is beneficial when fast-changing national business environments put a premium on local responsiveness. Decentralized decisions can result in products that are better suited to the needs and preferences of local buyers because subsidiary managers are in closer contact with the local business environment. Local managers are more likely to perceive environmental changes that managers at headquarters might not notice. By contrast, central managers may not perceive such changes or would likely get a secondhand account of local events. Delayed response and misinterpreted events could then result in lost orders, stalled production, and weakened competitiveness.

Participative Management and Accountability

Decentralization can also help foster participative management practices. The morale of employees is likely to be higher if subsidiary managers and subordinates are involved in decision making. Subsidiary managers and workers can grow more dedicated to the organization when they are involved in decisions related to production, promotion, distribution, and pricing strategies.

Decentralization also can increase personal accountability for business decisions. When local managers are rewarded (or punished) for their decisions, they are likely to invest more effort in making and executing them. Conversely, if local managers must do nothing but implement policies dictated from above, they can attribute poor performance to decisions that were ill-suited to the local environment. When managers are held accountable for decision making and implementation, they typically delve more deeply into research and consider all available options. The results are often better decisions and improved performance.

Coordination and Flexibility

When designing the organizational structure, managers seek answers to certain key questions: What is the most efficient method of linking divisions to each other? Who should coordinate the activities of different divisions in order to achieve overall strategies? How should information be processed and delivered to managers when it is required? What sorts of monitoring mechanisms and reward structures should be established? How should the company introduce corrective measures, and whose responsibility should it be to execute them? To answer these types of questions, we must look at the issues of coordination and flexibility.

Structure and Coordination

As we have seen, some companies have a presence in several or more national business environments while some firms manufacture and market products practically everywhere. Others operate primarily in one country and export to, or import from, other markets. Each type of company must design an appropriate organizational structure. Each needs a structure that clearly defines areas of responsibility and chains of command—the lines of authority that run from top management to individual employees and that specify internal reporting relationships. Finally, every firm needs a structure that brings together areas that require close cooperation. For example, to avoid product designs that make manufacturing more difficult and costly than necessary, most firms ensure that R&D and manufacturing remain in close contact.

Structure and Flexibility

Organizational structure is not permanent but is often modified to suit changes both within a company and in its external environment. Because companies usually base organizational structures on strategies, changes in strategy usually require adjustments in structure. Similarly, because changes in national business environments can force changes in strategy, they too will influence company structure. It is especially important to monitor closely the conditions in countries characterized by rapidly shifting cultural, political, and economic environments. Let’s now explore four organizational structures that have been developed to improve the responsiveness and effectiveness of companies conducting international business activities.

Book Reference:

Wild, John J.; Wild, Kenneth L.. International Business: The Challenges of Globalization (Page 285-287). Pearson Education. Kindle Edition.