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International Business
Environments & Operations

15e

Daniels ● Radebaugh ● Sullivan

International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan

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Chapter 16

The Organization of International Business

Chapter 16: The Organization of International Business

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Learning Objectives

Profile the evolving process of organizing a company for international business
Describe the features of classical structures
Describe the features of neoclassical structures
Compare and contrast the idea of the hierarchy versus the hyperarchy

The Learning Objectives for this chapter are

Profile the evolving process of organizing a company for international business
Describe the features of classical structures
Describe the features of neoclassical structures
Discuss the systems used to coordinate and control international activities
Profile the role and characteristics of organization culture

Learning Objectives

Discuss the systems used to coordinate international activities
Discuss the systems used to control international activities
Profile the role and characteristics of organizational culture
Profile the role and characteristics of corporate universities

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Introduction

Learning Objective:

Profile the evolving process of organizing a company for international business

Learning Objective : Profile the evolving process of organizing a company for international business.

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Introduction

The goal of MNEs is to standardize activities to maximize global efficiency and at the same time adapt activities to maximize local effectiveness
To achieve this goal the MNE must establish the right structure to implement it

Once a firm has developed a strategy, it needs to establish a structure that will allow it to be implemented. Organizing is the process of creating the structure, systems, and culture needed to implement the company’s strategy.

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Introduction

Factors Affecting Organizing Operations

This Figure shows the different factors that can affect organizational operations. Note that the firm must specify the structure, install the systems to get it moving, and then promote a culture that will sustain it.

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Changing Situations,
Changing Organizations

Environmental trends, industry conditions, and market opportunities are forcing change
Expansion of international business
The Internet as a design standard
Managerial standards
Social contracts
Building a ‘magical’ organization

In the early 20th century, companies, responding to the environment around them, established hierarchical structures. Today, the growth and diffusion of international business is demanding more sophisticated organizations.

The Internet in particular has challenged managers to rethink traditional patterns of organization.

Knowledge gaps are also disappearing prompting companies to develop new coordination and control systems.

Similarly, changing social contracts are encouraging managers to reassess how they manage organizational culture.

Companies now try to build magical organizations with the best mix of structure, systems, and values.

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Organization Structure

Learning Objective:

Describe the features of classical structures

Learning Objective : Describe the features of classical structures.

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Organization Structure

Organizational structure
the formal arrangement of roles, responsibilities, and relationships in the MNE
Vertical differentiation
the balance between the centralization and decentralization of authority
Horizontal differentiation
involves specifying which people do which jobs in which units

Organizing involves building the structure, systems, and culture necessary to implement a strategy. Managers must consider vertical differentiation issues, or the balance between the centralization and decentralization of authority as well as horizontal differentiation which involves determining which people do which jobs in which units.

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Vertical Differentiation

Centralization versus Decentralization
Centralization
degree to which high-level managers make strategic decisions and delegate them to lower levels for implementation
Decentralization
degree to which lower-level managers make and implement strategic decisions

The question of where strategic decisions are made depends on the level of centralization in a firm. A company that is highly centralized concentrates decision making authority at the top of the organization while a decentralized structure allows decision making at the department and division levels.

Keep in mind that the centralization versus decentralization decision is not an either/or issue. Instead, it’s something that should be rebalanced as the situation in which the firm operates changes.

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Horizontal Differentiation

Horizontal differentiation
Specifies the set of tasks to accomplish
Divides the tasks among SBUs, divisions, departments, committees, teams, jobs, and individuals
Stipulates superior and subordinate relationships
Classical structures used to achieve this
functional, area or divisional, matrix or mixed

Vertical differentiation deals with the chain of command in a firm. Horizontal differentiation is concerned with how firms divide themselves into discrete units responsible for certain tasks. Common ways to achieve this are the functional structure, the area or divisional structure, and the matrix and mixed structures.

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Functional Structure

The functional structure
groups people based on common expertise and resources
is popular among companies with narrow product lines

The functional structure works well when global integration is more important than local responsiveness, industry structure encourages cost leadership, and companies have anchored their value chains in global or international strategies. Keep in mind though, that the structure may encourage a company to neglect local opportunities.

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Functional Structure

The Functional Structure

This Figure shows the functional structure.

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Divisional Structure

The divisional structure
divides employees based on the product, customer segment, or geographical location
duplicates functions and resources across divisions
International division
Global product structure
Worldwide area structure

The divisional structure assigns divisions responsibility for a different set of products or markets.

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Divisional Structure

The International Division Structure

This Figure shows the international division structure. It creates a critical mass of international expertise which competes with domestic divisions for resources.

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Divisional Structure

Product Division Structure

This Figure shows the product division structure.

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Divisional Structure

Geographic (area) Division Structure

This Figure shows the geographic division structure. It’s popular when a firm has significant foreign operations and when no single country or region dominates.

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Matrix Structure

The matrix structure
Institutes overlaps among functional and divisional forms
Gives functional, product, and geographic groups a common focus
Violates the unity of command principle
has dual reporting relationships rather than a single line of command

The matrix structure is often established in response to simultaneous pressures for both local responsiveness and global integration.

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Matrix Structure

Matrix Division Structure

This Figure shows the matrix structure. Notice the dual lines of control.

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Mixed Structure

The mixed structure
Combines elements of the functional, area, and product structures
Allows the firm to better adapt to market conditions worldwide

Some firms combine elements of each of the classical structures to build a mixed structure.

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Neoclassical Structures

Learning Objective:

Describe the features of neoclassical structures

Learning Objective : Describe the features of neoclassical structures.

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Neoclassical Structures

Neoclassical structures
emphasize coordination and cultivation not command and control
Network structure
arranges differentiated elements in patterned flows of activity that allocate people and resources to problems and projects in a decentralized manner

keiretsu, sogo shosha, chaebol

Virtual organization
dynamic arrangement among partners that efficiently adapts to market change

Unlike classical structures that focus on command and control, neoclassical structures emphasize coordination and cultivation. Vertical, horizontal, and external boundaries hindering the flow of information and formation of relationships are eliminated.

Keep in mind that neoclassical structures can be challenging because by definition they are fluid structures that are constantly changing.

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Neoclassical Structures

A Simplified Network Structure

This Figure shows a simplified network structure.

Neoclassical Structures

Virtual Organization

A virtual organization is a temporary arrangement among independent companies, suppliers, customers and rivals that “works across space time and organizational boundaries with links strengthened by webs of communication technology”

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A virtual organization is a temporary arrangement among independent companies, suppliers, customers and rivals that “works across space time and organizational boundaries with links strengthened by webs of communication technology”

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Coordinated Systems

Learning Objective:

Discuss the systems used to coordinate international activities

Learning Objective : Discuss the systems used to coordinate and control international activities.

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Coordinated Systems

Coordination by:
Standardization - relies on objectives and schedules to set rules and regulations
Plan - requires interdependent units to meet common deadlines and objectives
Mutual adjustment - depends on managers interacting extensively with their counterparts

Coordination helps ensure that a company uses its resources efficiently and makes decisions effectively. Coordination can be by standardization, by plan, and by mutual adjustment.

Control Systems

Learning Objective:

Discuss the systems used to control international activities

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Control Systems

Control systems
define how managers compare performance to plans, identify differences, and where found, assess the basis for the gap and impose corrections
Bureaucratic control
Market control
Clan control

Companies can use several different types of control systems including bureaucratic control which emphasizes organizational authority and relies on rules and regulations, market control which uses external market mechanisms to establish objective standards, and clan control which uses shared values and ideals to moderate employee behavior.

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Control Mechanisms

Control tools include
Reports
Visits to subsidiaries
Evaluative metrics
Information systems

Companies can use a variety of tools to support their control systems including reports, subsidiary visits, evaluative metrics, and information systems. The choice will depend on the company’s strategy.

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Organization Culture

Learning Objective:

Profile the role and characteristics of organizational culture

Learning Objective : Profile the role and characteristics of organization culture.

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Organization Culture

Organization culture
the coherent set of assumptions about an MNE and its goals and practices shared by its members
management values and principles
work climate and atmosphere
‘how we do things around here’ patterns
traditions
ethical standards

Successful companies establish an organization culture that defines company goals and values. Keep in mind that good organization culture doesn’t just happen – it’s carefully developed.

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Organization Culture
and Strategy

An organization’s culture
shapes its strategic moves
varies with the strategy the MNE pursues

A company’s organization culture must go hand-in-hand with its strategy.

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Organization Culture
and Strategy

Strategy and Organizational Culture in International Business

This Figure provides a summary of the different strategies and organizational culture in international business. Notice the need for “fit” between the different elements in the chart.

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Physical and Social Factors

Competitive Environment

Operating Environment

Organize Operations

Specify the Structure of Roles, Responsibilities, and Relationships

Develop Coordination and Control Systems

Promote Shared Understanding of the Company's Culture

Formulate a Strategy

Differentiated units to which headquarters delegates decision- making authority. These units, whether a local marketing subsidiary, international production center, or suppliers, are the front line of the network. They have responsibility for sensing, processing, and acting upon specialized as well as generalized information in entrepreneurial fashion.

The channels of exchange that facilitate and fine-tune the volume, content, and flow of hard data and soft information. These linkages animate the network by setting paths of interaction, coordination, collaboration, and integration among the differentiating yet interdependent functional, area, and product units.

The formal center of the network that coordinates and controls strategic objectives and operational policies across the differentiated units. This unit ensures the efficient flow of resources, supplies, components, and funds throughout the network. It creates value by effectively collecting, sorting, and distributing the network's accumulated wisdom, knowledge, and experiences.

Core Firm

Marketing

Producer

Designers Producer

Suppliers

Distribution

Strategic Objectives: Integration responsiveness, learning

Strategic Emphasis: Innovation, ideas, and collaboration

Dominant Attributes: Creativity, dynamism, flexibility

Leadership Style: Visionary, entrepreneurial, risk affinitive

Collaboration Standard: Multicultural, teambuilding

Strategic Objectives: Leverage core competencies

Strategic Emphasis: Control, stability, predictability

Dominant Attributes: Formal order, rules regulations uniformity

Leadership Style: Director, administrator, enforcer

Collaboration Standards: Rules, policies and procedures, clear expectations

INTERNATIONAL

Strategic Objectives: Local market responsiveness

Strategic Emphasis: Philosophical consensus, operational commitment

Dominant Attributes: Cohesiveness, trust, affiliation

Leadership Style: Adaptive, facilitator, mentor

Collaboration Standard: Egalitarianism, tolerance, mutual respect

P re

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f o r

G lo

b al

I n te

gr at

io n

High

Low

Pressure for Local Responsiveness

Strategic Objectives: Productivity and efficiency

Strategic Emphasis: Integration and consistency

Dominant Attributes: Standardized goal achievement, global competitiveness

Leadership Style: Production achievement oriented, decisive control orientation

Collaboration Standards: Objective goal orientation, efficiency driven

MULTIDOMESTIC

GLOBAL TRANSNATIONAL