SLIDES ON TOPIC 3

INTERNATIONAL ORGANIZATIONS,
EXTERNAL ENVIRONMENT, STRATEGIES,
STRUCTURES AND CHANGE
Dr. William Degbey
eKVY Introduction to International Business, Spring 2020
Connetion to Topic 1
 Topic 1: IB strategy
 How operations should be executed to reach the
goals of the company, e.g., profitability &
competitive advantage on international scale
 Topic 3: IB organization
 How the company is structured to support the
strategy implementation and thereof the attainment
of goals in a changing environment
 Chapter 13 in course textbook (Hill, 7th Edition): “The
Organization of International Business”
 Organizational architecture –
The totality of firm’s organization

Structure
Division of
organization,
Decision-making
Employees layers and integrating
and Human mechanism
Resource
Management
Processes People Incentives
Ways of and Controls
Decision- Rewards and
Making and Performance
Working Measurement
Shared Norms
and Value
Systems
Culture
Defining organizational structure
 The formal division of
organization into subunits Vertical HQ
(products divisions, national Differentiation
operations & functions) Decision-
Making Layers
 The location of decision-
making responsibilities
within the structure
 The establishment of Horizontal Differentiation Division of Organization

integrating mechanisms to
coordinate the activities of SU SU SU SU SU

the subunits (cross-

functional teams or pan-
regional committees)
Organization structure
 Centralization
1. Facilitate coordination
2. Decisions consistent with organizational objectives
3. Concentrated power eases change implementation
4. Avoid duplication of activities
 Decentralization
1. Less-burdened & enhanced decision-making
2. Better work-commitment along freedom & control
3. Greater flexibility to external changes
4. Better access to information in decision-making
5. Subunits have close control over their own performance
Organization structure (cont’d)
 No clear division between centralized &
decentralized structure
 Often a mixture
 Centralized; the big picture:
 Overall firm strategy
 Major financial expenditures
 Financial objectives
 Legal issues
 Decentralized; detailed operations:
 Production
 Marketing
 R&D
 HRM
Horizontal differentiation –
How a company is divided into subunits
 Domestic firm structure
 International division

 Worldwide area

 Global matrix
Horizontal differentiation –
Functional structure
 Domestic firm structure
 Froman entrepreneur to centrally managed functions as the
company grows

Top Management

Purchasing Manufacturing Marketing Finance

Buying Units Plants Branch Sales Units Accounting Units

Horizontal differentiation –
Product divisional structure
 Domestic firm structure
 From functions to relatively autonomous divisions when the
product offering is diversified
Headquarters

Division Product Line Division Product Line Division Product Line

A B C

Department of Department of Department of Department of

Purchasing Manufacturing Marketing Finance

Buying Units Plants Branch Sales Units Accounting Units

Horizontal differentiation –
International division
 International division
 When companies internationalize their operations
 Moving from functions and divisions to functional units
Different roles among divisions
Headquarters Lack of coordination

Domestic Division Domestic Division Domestic Division International Division

General Manager General Manager General Manager General Manager
product Line A Product Line B Product Line C Area Line

Production
Sales
Functional Units Country 1 Country 2
General manager General Manager
Product A/B/C) (Product A/B/C)

Division structure
Functional structure

Functional Units
 Horizontal differentiation –
Worldwide area
 Worldwide area
 Firms with low diversification & based on functional domestic
structure
 Area: country or a group of countries
 In each area an autonomous set of value creation activities
 HQ maintains overall strategy & financial control
 High local responsiveness – consistent with localization strategy
 Transfer of core competences & skills between areas is
challenged
 Difficulty to attain standardization gains & introduce product
worldwide
 Inhibited realization of location & experience curve economies
 Horizontal differentiation –
Worldwide product division
 Worldwide product divisional structure
 Diversified firms based on domestic Headquarters

product divisions
 Autonomous product divisions with HQ Worldwide Worldwide Worldwide
caring of overall strategy Product Group
or Division A
Product Group
or Division B
Product Group
or Division C

 Each division coordinates its value creation

activities worldwide
 Possibility to transfer skills & competences
Area 1 Area 2
& launch products worldwide (Domestic) (International)

 Realization of location & experience

economies
 Possible lack of responsiveness
 Similarities with global standardization or Functional Functional
Units Units
internationalization strategies
Horizontal differentiation –
Global matrix
 Global matrix structure
 Tomeet the conflicting demands of a transnational strategy
 Horizontal diversification along product division & geographical area
 Responsibility over a product shared by areas & the product division
 Can be slow, conflicting & bureaucratic in practice

Headquarters

Area 1 Area 2 Area 3

Product offering, market

Product Division A
strategy & business strategy
for product A in area 1
decided together by managers
Product Division B from area 1 & product
division A

Product Division C
Subunit integration mechanisms
 Relationship between strategy & coordination in IB
 Low coordination in localization strategy – autonomous units
as the basis
 Relatively high in international strategy – profiting from skill
& competence transfer
 Even higher in global standardization strategy – profiting
from location & learning economies dispersed worldwide
 Smooth flow of products within the global value chain
 The highest in transnational strategy – simultaneous profiting
from location & learning economies, local responsiveness &
skill & competence transfer
 Coordination between subunit & dispersed value creation
activities
Subunit integration mechanisms (cont’d)

 Impediments and challenges

 Subunit managers focus on their core area creating
communication & preference problems
 Subunits have differing goals: e.g. localization vs. cost savings
 Cultural, nationality, time zone & distance separate subunits

 Centralization may not be effective enough, so;

 Formal integration mechanisms
 Direct contact, liaison roles, trans-subunit teams & matrix structures
 Informal integration mechanisms to facilitate formal integration
 Knowledge networks among different unit & function managers,
supported &facilitated by non-bureaucratic teamwork &
coordination oriented organization culture
 Layers of external environment

International Business Environment

External level
Technological
Political Strategic
Industry level Knowledge
Financial
Cultural
Competitors
Partners
Competitive
Company Legal Knowledge
Customers
Internal level
Economic Resources Product

Know-how Market
Trade & Social Knowledge
competition
Organization structures & external environment

 Companies operate in the nexus of internal and

external requirements
 Change the operating environment
 Proactive behaviour
 Operating environment forces changes to the company
 Reactive behaviour
 Mintzberg & Waters (1982): companies need to
balance between these two & choose strategically their
emphasis in each situation
What happens inside a company?
 According to Michael Porter (1998) On Competition.
Harvard Business School Press.
 Coordination of operations
 Integration of activities
 Performance measurement
 Portfolio management
 Restructuring of the organization
 Transferring skills and knowledge
 Sharing activities
 Control and incentives
Control systems
 Personal
 Personal control with subordinates & between managers
 Bureaucratic
 System of rules & procedures to direct subunit actions
 Output
 Subunitgoal setting: profitability, productivity, growth,
market share & quality
 Cultural
 Employees accept & comply with the company norms &
value systems
Incentive systems
 A form of control – supporting desired behaviour
 Connected to performance outcomes

 Share of profits, annual bonus pay

 Incentive type depends on employees & tasks

 Workable, if realistic & reachable

 Can also lead to undesired outcomes

Control, incentives & strategy
 Performance ambiguity
 A function of interdependence of subunit within an
organization
 How the subunit performance comes about
 The performance of a subunit depends on the performance of
other subunits
 E.g. sales subsidiary cannot sell without manufacturing
subsidiary’s production
 How to separate different subunit effects?
 How to correct & manage ambiguity?
Strategy, interdependence, ambiguity & control

Strategy Interdependence Performance Ambiguity Costs of Control

Localization Low Low Low
International Moderate Moderate Moderate
Global High High High
Transnational Very High Very High Very High

How clear or
How unclear are the How difficult is
connected the causes behind subunit
subunits are? subunit management?
performance?
Organizational processes
 How decisions are made and work is performed
 At different organizational levels

 Formulating strategy; allocating resources; evaluating

new ideas; handling customer relations; product
development; financial performance etc.
 Core competences often embedded in processes
 Effective & efficient processes increase profitability
 Requires control, incentives & clear strategy
Organizational culture
 Definition
 System of values (the ends) & norms (the means) shared
by employees often transferred as tacit knowledge
 Creation
 Originates from founder, country culture, company history
 Maintenance
 Hiring & promoting, rewarding & socialization of
employees & communication within the organization
 Performance in IB
 Strong culture can enhance profitability, but it can also
make the company inflexible to change
 Strategies, structures & controls
Structure & Localization International Global Transnational
Controls Strategy Standardization
Vertical Decentralized Core competence Some Mixed
differentiation centralized, rest centralization centralization &
decentralized decentralization
Horizontal Worldwide Worldwide Worldwide Informal matrix
differentiation area structure product divisions product divisions
Need for Low Moderate High Very high
coordination
Integrating None Few Many Very many
mechanisms
(interdependence)
Performance Low Moderate High Very high
ambiguity
Need for cultural Low Moderate High Very high
controls
Organizational change
 To conform with environmental changes
 E.g. technological, consumer tastes, economy, market
position & share, politics, prices & availability of
factors of production
 Organizational inertia
 The slow, reluctant & inefficient response to change,
also change resistance
 Sources: power distribution; organizational culture;
traditions, beliefs & attitudes; institutional constraints
in host countries
Implementing change
 Unfreezing
 Shock therapy to shake the old structures
 Convincing & committing staff to change

 Moving
 Proactive change architecture as a vehicle of change
 Closing operations, reorganizing structure, reassigning
responsibilities, changing control, incentive & reward
systems, redesigning processes, letting go people
 Refreezing
 Establishing a new culture & socializing staff
 Mobilizing all the changes into action
Summary
 Superior enterprise performance requires that:
1. The different elements of organizational structure
must be internally consistent
2. The organizational architecture must fit the company
strategy
3. The strategy and organizational architecture must
match with the competitive environment
4. Change should not be avoided