Final Exam Study Notes - Chapter 13-The Organization of International Business

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12 Oct 2010
systems and incentives, processes, organizational culture, and people
x Core argument ± superior enterprise profitability requires 3 conditions to be fulfilled:
Ex. the control and incentive systems must be consistent with the structure
o Organizational architecture must match or fit the strategy of the firm ± strategy and architecture must
be consistent
If a firm is pursuing a global standardization strategy but has the wrong kind of organization
architecture in place, it is unlikely to be able to effectively execute that kind of strategy
o Strategy and architecture of the firm must not only be consistent with each other but also with
environment must be consistent
Ex. if a firm pursuing a localization strategy has the right kind of organizational architecture but
is competing in markets where cost pressures are intense and demands for local
responsiveness are low, will still have inferior performance because global standardization
strategy is more appropriate in this environment
Organizational Architecture
control systems and incentives, organizational culture, processes and people
x Organizational structure ± refers to 3 things:
o Formal division of the organization into subunits such as product divisions, national operations, and
functions (most organizational charts display this aspect of structure)
o Location of decision-making responsibilities within that structure (centralized or decentralized)
o Establishment of integrating mechanisms to coordinate the activities of subunits including cross-
functional teams and/or pan-regional committees
x Control systems ± the metrics used to measure the performance of subunits and make judgments about how well
managers are running those subunits
o Ex. profitability
x Incentives ± devices used to reward appropriate managerial behavior, very closely tied to performance metrics
o Ex. the incentives of a manager in charge of a national operating subsidiary might be linked to the
performance of that company
x Processes ± the manner in which decisions are made and work is performed within the organization
o Ex. processes for formulating strategy, deciding how to allocate resources within a firm, evaluating the
performance of managers and giving feedback
o Conceptually distinct from the location of decision-making responsibilities within an organization
o CEO might have ultimate responsibility for deciding the strategy of the firm (centralized), process they
use might include the solicitation of ideas and criticism from lower level managers
x Organizational culture ± norms and value systems that the employees of an organization share
o Societies of individuals who come together to perform collective tasks
o Have their own distinctive patterns of culture and subculture
o Organizational culture can have a profound impact on how the firm performs
x People ± not just the employees of the organization but also the strategy used to recruit, compensate and retain
those individuals and the type of people they are in terms of their skills, values and orientation
x Firms can choose proactive strategy ± hiring individuals whose internal values are consistent with those that the
firm wants to emphasize, so the people component of architecture can be used to reinforce the prevailing culture ±
or change it
x To maximize profitability, firm must pay close attention to achieving internal consistency between the various
components of its architecture
Organizational Structure
x 3 dimensions:
o Vertical differentiation ± refers to the location of decision-making responsibilities within a structure
o Horizontal differentiation ± refers to the formal division of the organization into subunits
o Integrating mechanisms ± mechanisms for coordinating subunits
Vertical Differentiation: Centralization and Decentralization
x Vertical differentiation determines where in its hierarchy the decision-making power is concentrated
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x Arguments for Centralization:
o Can facilitate coordination
o Can help ensure that decisions are consistent with organizational objectives
o Can give top-level managers the means to bring about needed major organizational changes
o Can avoid the duplication of activities that occurs when various subunits within the organization carry
on similar activities
x Arguments for Decentralization:
o Top management can become overburdened when decision-making authority is centralized, can result
in poor decisions
x Decentralization gives top managers time to focus on critical issues by delegating more
routine issues to lower-level people
o Motivational research favors decentralization
x Behavioral scientists argue that people are willing to give more to their jobs when they have
greater degree of individual freedom and control over their work
o Permits greater flexibility ± more rapid response to environmental changes because decisions do not
have to be referred up the hierarchy unless they are very significant
o Can result in better decisions ± decisions are made closer to the spot by individuals who have better
information than managers several levels up in a hierarchy
o Can increase control ± can be used to establish relatively autonomous, self-contained subunits within
an organization, and subunit managers can be held accountable for subunit performance
x The more responsibility subunit managers have for decisions that impact performance, the
fewer excuses they have for poor performance
x Strategy and Centralization in an International Business
o Often makes sense to centralize some decisions and decentralize others, depending on the type of
x Decisions regarding overall strategy, major financial expenditures, financial objectives and
legal issues are typically centralized at headquarters
x Operating decisions such as those relating to production, marketing, R&D, and HR may or
o Firms pursuing a global standardization strategy must decide how to disperse various value creation
activities around the globe so location and experience economies can be realized, head office must
make decisions about where to locate, must coordinate the globally dispersed web of value creation
activities and this creates pressure for centralizing some operating decisions
o Sometimes, local responsiveness is key ± strong pressures for decentralizing operating decisions to
foreign subsidiaries
o Firms pursuing an international strategy also tend to maintain centralized control over their core
competency and to decentralize other decisions to foreign subsidiaries
o Firms pursuing a transnational strategy is more complex ± need to realize location and experience
curve economies requires some degree of centralization, however the need for local responsiveness
dictates the decentralization of many operating decisions, particularly for marketing
x In these firms, some decisions are centralized while others are decentralized
x High degree of decentralization is required if subsidiaries are to have the freedom to learn
from foreign markets and develop their own skills and competencies
Horizontal Differentiation: The Design of Structure
x Horizontal differentiation is concerned with how the firm decides to divide itself into subunits
x The decision is normally made on the basis of function, type of business, or geographical area
x In some simpler cases, one of these areas is the dominant form of organizing the company
x In the case of multinational firms, where conflicting demands to organize the company around different products
and different national markets must be reconciled, more complex solutions are adopted
x The Structure of Domestic Firms;
o Most begin with no formal structure and are run by a single entrepreneur or small team
o As they grow, demands of management become too great for this small group, organization is split into
o Top management usually coordinates and controls these functions, decision making tends to be
o Further horizontal differentiation may be required if the firm significantly diversifies its product offering,
which takes the firm into different business areas
Ex. Phillips ± started out as light bulbs, then consumer electronics, industrial electronics,
medical systems
In this case, functional structure can be too clumsy, problems of coordination and control
arise, so most firms will switch to a product divisional structure
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x Each division is responsible for a distinct product line, self-contained large
autonomous entity with its own functions, responsibility for operating decisions
typically decentralized to product divisions, headquarters remains responsible for the
overall strategic development of the firm and financial control
x The International Division
o When firms initially expand abroad, they often group all their international activities into an international
Tends to be the case for firms organized on the basis of functions and product divisions
o Regardless of domestic structure, international division tends to be organized on geography
Many manufacturing firms expand internationally by exporting the product manufactured at
home to foreign subsidiaries to sell
Might prove viable to manufacture the product in each country and so production facilities
would be added on a country by country basis
Might need to replicate the functional or divisional structure used at home in every country
o International division structure can cause problems ± dual structure it creates contains potential for
conflict and coordination problems between domestic and foreign operations
Heads of foreign subsidiaries are not given as much voice in the organization as heads of
domestic functions or divisions
Head of the international division is presumed to be able to represent the interests of all
countries to headquarters
inconsistent with a strategy of trying to expand internationally and build a true multinational
o Implied lack of coordination between domestic operations and foreign operations which are isolated
from each other can inhibit the worldwide introduction of new products, transfer of core competencies,
and consolidation of global production at key locations to realize location and experience curve
o Many firms that continue to expand internationally abandon this structure and adopt one of the
following worldwide structures
x Worldwide Area Structure:
o Firms with low diversification and domestic structure based on functions prefer this structure
o World is divided into geographic areas ± may be a country or a group of countries
o Each tends to be self-contained, largely autonomous entity with its own set of value creation activities
o Operations authority and strategic decisions for each of these activities are typically decentralized to
each area, with headquarters retaining authority for the overall strategic direction of the firm and
financial control
o Structure facilitates local responsiveness because decision making responsibilities are decentralized
so that each area can customize product offerings, marketing strategy, and business strategy to local
o Encourages fragmentation of the organization into highly autonomous entities
o Can make it difficult to transfer core competencies and skills between areas and to realize location and
experience curve economies
o May encounter problems with this structure if local responsiveness is les critical than reducing costs or
transferring core competencies for creating a competitive advantage
x Worldwide Product Divisional Structure
o Firms that are reasonably diversified and originally have domestic structures based on product
divisions tend to adopt this structure
o Each division is self-contained, largely autonomous entity with full responsibility for its own value
creation activities
o Headquarters retains responsibility for the overall strategic development and financial control of the
o Belief that each product division should coordinate its value creation activities worldwide
o Worldwide product divisional structure designed to help overcome the coordination problems that arise
with the international division and worldwide area structures
o Provides an organizational context that enhances consolidation of value creation activities at key
locations necessary for realizing location and experience curve economies
worldwide introduction of new products
o Main problem ± limited voice given to area or country managers since they are subservient to product
division managers, result can be a lack of local responsiveness which leads to performance problems
x Global Matrix Structure
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