CHAPTER 13

The Organization of
International Business
 Learning Objectives
Define and identify different forms of the
organizational architecture that international
businesses use to manage their global operations
Explore the various components of the architecture
Describe the control systems and integrating
mechanism available to multinational firms
Discuss the advantages and disadvantages of
centralized versus decentralized decision systems
Look at ways to match architecture and competitive
strategy to achieve high performance

IBUS 330 Dr. Nini Yang

Organizational Architecture and
Profitability
Organizational Superior enterprise
architecture is the profitability requires
totality of a firm’s three conditions:
organization, An organization’s
including architecture must be
Structure internally consistent.
Control systems and Strategy and
incentives architecture must be
consistent.
Processes
Strategy, architecture
Culture and competitive
People environments must be
consistent.

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 Organization Architecture

Structure

Controls & People Processes

Incentives

Culture
Figure 13.1

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 Organization Architecture
Control systems: Processes:
Metrics used to Manner in which
measure subunit decisions are made
performance
Manner in which work
Make judgments
about managers’ is performed
abilities to run units Conceptually distinct
Incentives are from location of
devices to reward decision-making
appropriate responsibility
managerial behavior.

IBUS 330 Dr. Nini Yang

 Organizational Architecture
Culture:
Norms and value systems
shared by the employees
People:
Not just current
employees, but also the
strategy to recruit,
compensate, and retain
individuals with necessary
skills, values and
orientation

If a firm is going to maximize its profitability,

it must pay close attention to achieving
internal consistency among the various
components of its architecture.
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Organizational Structure at
Unilever
European
Business Group

Detergents Frozen Food Margarine

France

Germany
Minimize component
inconsistencies
through intelligent
design. Spain

Figure 13.2

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 Vertical Differentiation
Concerned with where decisions are made.
Centralization: Decentralization:
Facilitates coordination Give top management
Ensure decisions time to focus on
consistent with critical issues
organization’s Motivational research
objectives favors
Top-level managers decentralization
have means to bring Permits greater
about organizational flexibility
change Can result in better
Avoids duplication of decisions
activities Can increase control
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Strategy and Centralization

Global Transnational
Centralize Both Centralize
And Decentralize

International
Centralize for Multi-domestic
core competencies
Decentralize for Decentralize
operating decisions

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 Horizontal Differentiation

Function
How a firm
divides itself
into subunits
A firm
must reconcile Type of
conflict between business
product and
location. Geographical
area

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 A Typical Functional Structure

Top
Management

Purchasing Manufacturing Marketing Finance

Buying Plants Branch Accounting

units sales units units
Figure 13.3

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The Functional Structure

Typically, the structure

evolves in a company’s
early stage.

Coordination and
control rests with
top management.

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 A Typical Product Division Structure

Headquarters

Division Division Division

Product line A Product line B Product line C

Department Department Department Department

Purchasing Manufacturing Marketing Finance

Buying units Plants Branch Accounting

sales units units
Figure 13.4

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 Product Division Structure

Probable next stage of

international business Each unit
development. Reflects responsible for
company growth into a product.
new products. Semi-autonomous and
accountable for
Eases its performance.
coordination
and control
problems.

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 International Division Structure
Headquarters

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

Functional units
Country 1 Country 2
General Manager General Manager
(Product A, B and/or C) (Product A, B and/or C)

Functional units Figure 13.5

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 International Division

Widely used.
Growth can
lead to
 Can create conflict worldwide
between domestic and structure.
foreign operations.
 Implied lack of
coordination between
domestic and foreign
operations.

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 Worldwide Area Structure

Favored by firms with

Area is usually
low degree of
a country, and
diversification.
largely
autonomous.

Encourages
fragmentation. Facilitates local
responsiveness.

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 The International Structural Stages Model

Worldwide Global Matrix

Product (“Grid”)
Foreign Division
Product
Diversity
Alternate Paths
of Development
Area
International
Division
Division

Foreign Sales as a Percentage of Total Sales

Figure 13.4

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 Worldwide Area Structure
Headquarters

Regional VP Regional VP Regional VP

North America Europe Far East

Regional VP Regional VP
Latin American Middle East/Africa

President President President

Subsidiary Subsidiary Subsidiary
1 2 3
Figure 13.5

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A Worldwide Product Division Structure

Headquarters

Worldwide Worldwide Worldwide

Product Group Product Group Product Group
or Division A or Division B or Division C

Area 1 Area 2
(domestic) (international)

Functional units Functional units

Figure 13.6

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 Product Division

Reasonably
diversified Attempts to overcome
firms. international division
and worldwide area
structural problems.

Believe that
Weak local product value
responsiveness. creation activities
should be coordinated
worldwide.

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 A Global Matrix Structure

Headquarters

Area 1 Area 2 Area 3

Product
Division A
Product
Division B Manager here
belongs to
Product Division B
Division C and Area 2
Figure 13.7

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 Matrix Structure

Attempts to meet
needs of May not work as well
transnational strategy. as theory predicts.

“Flexible” matrix Conflict

structures. and power
struggles.

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 Integrating Mechanisms
Need for Impediments:
Coordination: Different
managerial
orientations
Transnational High Differing goals
Global Time zones,
distance,
International
nationality
Multidomestic Low

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Formal Integrating Mechanisms

Low Direct contact

Liaison roles

Teams
Matrix structures
High

Increasing complexity of integrating mechanism

Figure 13.8

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A Simple Management Network

G E
B
C D

A F
Informal
Informal contacts
contacts between
between
managers
managers within
within an
an enterprise.
enterprise.
Figure 13.9

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Control Systems and Incentives
Types of Incentives:
controls: Depends on employee and
his/her tasks.
Personal
Can be used to improve
Bureaucratic managerial coordination
Output between units.
Cultural Need to account for
national differences in
institutions and culture.
Beware of the rule of
unintended consequences.

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 Performance Ambiguity

It is a function of
the interdependence
among subunits.
Control Systems

Multinational
Output/Bureaucratic Global/Transnational
Cultural

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Interdependence, Performance Ambiguity, and the Costs
of Control for the Four International Business Strategies

Strategy Inter- Performance Costs of

dependence Ambiguity Control

Multi-domestic Low Low Low

International Moderate Moderate Moderate

Global High High High

Transnational Very high Very high Very high

Table 13.1

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 Processes
The manner in which decisions are
made and work is performed within
an organization
Cut across national boundaries as well as
organizational boundaries
Can be developed anywhere within the
firm’s global operations network

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 Organizational Culture
Values and norms shared among people
Sources:
Founders and important leaders
National social culture
History of the enterprise
Decisions that result in high performance
Cultural maintenance:
Hiring and promotional practices
Reward strategies
Socialization processes
Communication strategy

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Organizational Culture and Performance
A “strong” culture: Culture must match an
Not always good organization’s architecture.
Sometimes Culture does not
beneficial, necessarily translate
sometimes not across borders.
Context is
important Strong Transnational
Adaptive cultures
Culture
Global International

Weak Multidomestic

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 A Synthesis of Strategy, Structure and Control Systems

Structure Multi-
and controls domestic International Global Transnational

Vertical Decentralized Core competency; Some Mixed

differentiation centralized centralized and
rest decentralized
decentralized
Horizontal Worldwide Worldwide product Worldwide
area Informal
differentiation division
structure Product matrix
division
Need for
coordination Low Moderate High Very high
Integrating
mechanisms None Few Many Very many
Performance
ambiguity Low Moderate High Very high
Need for
Cultural controls Low Moderate High Very high
Table 13.2

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 Organizational Change
Change to match competitive and strategy
environment
Hard to change:
Existing distribution of power and influence
Current culture
Managers’ preconceptions about the appropriate
business model or paradigm
Institutional constraints
Principles for change
Unfreeze the organization
Moving to the new state
Refreezing the organization
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 Implications
An organization’s architecture should be
consistent internally and externally.
The consistencies are critical to organizational
performance and profitability.
Organizational architecture should be flexible
and adapt according to organizational strategy,
growth, the external changing environment.
Changes may face resistance, and managers need
to learn principle methods in order to launch and
implement necessary changes successfully.

IBUS 330 Dr. Nini Yang