International
Business
Fourth Edition
CHAPTER 13
The Organization of
International Business
13-3
Chapter Focus
Identifying the organization architecture that
international businesses use to manage their global
operations.
Discuss the concepts of organization architecture
and fit.
Explore the various components of the
architecture.
Look at ways to match architecture and
competitive strategy to achieve high performance.
McGraw-Hill/Irwin
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13-4
Organization Architecture and
Profitability
Organization architecture is the totality of a firm’s
organization, including structure, control systems
and incentives, processes, culture and people.
Superior enterprise profitability requires three
conditions;
An organization’s architecture must be internally
consistent.
Strategy and architecture must be consistent.
Strategy, architecture and competitive environments
must be consistent.
McGraw-Hill/Irwin
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13-5
Organization Architecture
Structure
Controls
&
Incentives
People
Culture
McGraw-Hill/Irwin
Processes
Figure 13.1
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
13-6
Organization Architecture
Control Systems:
Metrics used to measure
subunit performance.
Make judgments about
managers’ abilities to run
units.
Incentives are devices to
reward appropriate
managerial behavior.
McGraw-Hill/Irwin
Processes:
Manner in which decisions
are made.
Manner in which work is
performed.
Conceptually distinct from
location of decisionmaking responsibility.
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13-7
Organization Architecture
Culture:
Norms and value systems
shared by the employees.
People:
Not just employees, but
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.
McGraw-Hill/Irwin
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13-8
Functional Organization Structure
at Unilever
European Business
Group
Detergents
Frozen
Food
Margarine
France
Minimize component
inconsistencies through
intelligent design.
Germany
Figure 13.2
Spain
McGraw-Hill/Irwin
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13-9
Vertical Differentiation
Concerned with where decisions are made.
Centralization:
Facilitates coordination.
Ensure decisions
consistent with
organization’s objectives.
Top-level managers have
means to bring about
organizational change.
Avoids duplication of
activities.
McGraw-Hill/Irwin
Decentralization:
Overburdened top
management.
Motivational research
favors decentralization.
Permits greater
flexibility.
Can result in better
decisions.
Can increase control.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
13-10
Strategy and Centralization
Global
Multi-domestic
Centralize
International
Centralize for
core competencies
Decentralize for
operating decisions
McGraw-Hill/Irwin
Decentralize
Transnational
Both Centralize
And Decentralize
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13-11
Horizontal Differentiation
How a firm divides
itself into subunits
function
type
of
business
International must
reconcile conflict
between product
and location.
McGraw-Hill/Irwin
geographical
area
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13-12
A Typical Functional Structure
Top
Management
Purchasing
Buying
units
Manufacturing
Plants
Marketing
Branch
sales units
Finance
Accounting
units
Figure 13.3
McGraw-Hill/Irwin
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13-13
The Functional Structure
Typically, the structure
that evolves in a
company’s early stages.
Coordination and
control rests with
top management.
McGraw-Hill/Irwin
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13-14
A Typical Product Division Structure
Headquarters
Division product
line A
Department
Purchasing
Buying
units
Figure 13.4
McGraw-Hill/Irwin
Division product
line B
Department
Manufacturing
Plants
Division product
line C
Department
Marketing
Branch
sales units
Department
Finance
Accounting
units
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13-15
Product Division Structure
Probable next stage of
development. Reflects
company growth into
new products.
Each unit responsible
for a product.
Semiautonomous and
accountable for
its performance.
Eases coordination
and control
problems.
McGraw-Hill/Irwin
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13-16
One Company’s International Division Structure
Headquarters
Domestic
Division
General
Manager
Product line A
Figure 13.5
Domestic
Division
General
Manager
Product line B
Functional units
Domestic
Division
General
Manager
Product line C
Country 1
General
Manager
(product A, B,
and / or C)
International
Division
General
Manager
area line
Country 2
General
Manager
(product A, B,
and / or C)
Functional units
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13-17
International Division
Widely used.
1. Can create conflict
between domestic and
foreign operations.
2. Implied lack of
coordination between
domestic and foreign
operations.
Growth can lead
to worldwide
structure.
McGraw-Hill/Irwin
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13-18
The International Structural Stages
Model
Foreign
Product
Diversity
Figure 13.4
Worldwide
Product
Division
Global Matrix
(“Grid”)
Alternate Paths
of Development
International
Division
Area
Division
Foreign Sales as a Percentage of Total Sales
McGraw-Hill/Irwin
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13-19
Worldwide Area Structure
Headquarters
North American
area
European
area
Latin American
area
Middle East /
Africa area
Far East
area
Figure 13.5
McGraw-Hill/Irwin
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13-20
Worldwide Area Structure
Favored by firms with
low degree of
diversification.
Area is usually
a country. Largely
autonomous.
Encourages
fragmentation.
McGraw-Hill/Irwin
Facilitates local
responsiveness.
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A Worldwide Product Division
Structure
13-21
Headquarters
Worldwide
product group
or division A
Worldwide
product group
or division B
Worldwide
product group
or division C
Area 1
Area 2
(domestic)
(international)
Figure 13.6
Functional units
McGraw-Hill/Irwin
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13-22
Product Division
Reasonably
diversified firms.
Attempts to overcome
international division
and worldwide area
structure problems.
Weak local
responsiveness.
McGraw-Hill/Irwin
Believe that product value
creation activities should
be coordinated
worldwide.
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13-23
A Global Matrix Structure
Headquarters
Area 1
Area 2
Area 3
Product
division A
Product
division B
Product
division C
McGraw-Hill/Irwin
Manager here
belongs to
division B
and area 2
Figure 13.7
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13-24
Matrix Structure
Attempts to meet needs
of transnational
strategy.
Doesn’t work as well
as theory predicts.
Conflict and
power struggles.
McGraw-Hill/Irwin
“Flexible” matrix
structures.
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13-25
Integrating Mechanisms
Need for coordination:
Transnational
High
Different managerial
orientations.
Differing goals.
Time zones, distance,
nationality.
Global
International
Multidomestic
McGraw-Hill/Irwin
Impediments;
Low
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13-26
Formal Integrating Mechanisms
Direct contact
Liaison roles
Teams
Matrix structures
Increasing complexity
of integrating mechanism
McGraw-Hill/Irwin
Figure 13.8
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13-27
A Simple Management Network
G
B
C
A
McGraw-Hill/Irwin
E
D
Informal contacts between
managers within an enterprise.
F
Figure 13.9
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13-28
Control Systems and Incentives
Incentives:
Types of controls:
Personal.
Bureaucratic
Output.
Cultural.
McGraw-Hill/Irwin
Depends on employee and his/her
tasks.
Can be used to improve manager
coordination between units.
Need to account for national
differences in institutions and
culture.
Caveat: beware of the rule of
unintended consequences.
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13-29
Performance Ambiguity
A function of the
interdependence among
subunits.
Control Systems
Multinational
Output/Bureaucratic
McGraw-Hill/Irwin
Global/Transnational
Cultural
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13-30
Interdependence, Performance Ambiguity, and
the Costs of Control for the Four International
Business Strategies
Strategy
Multi-domestic
International
Global
Transnational
InterPerformance Costs of
dependence Ambiguity
Control
Low
Low
Low
Moderate
Moderate
Moderate
High
High
High
Very high
Very high
Very high
Table 13.1
McGraw-Hill/Irwin
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13-31
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 firms global
operations network.
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Organization 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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Organization Culture and
Performance
A “Strong” Culture:
Adaptive cultures.
Weak
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Transnational
Strong
Culture
Not always good.
Sometimes beneficial,
sometimes not.
Context is important.
Culture must match an
organization’s architecture.
Culture does not necessarily
translate across borders.
Global
International
Multidomestic
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
A Synthesis of Strategy, Structure and
Control Systems
Structure and
control
Vertical
differentiation
Horizontal
differentiation
Need for
coordination
Integrating
mechanisms
Performance
Multi-domestic International
Global
13-34
Transnational
Decentralized
Core competency; Some
Mixed
rest decentralized centralized centralized and
decentralized
Worldwide
Worldwide product Worldwide Informal matrix
area structure division
product
division
Low
Moderate
High
Very high
None
Few
Many
Very many
Low
Moderate
High
Very high
Low
Moderate
ambiguity
Need for
cultural
controls
McGraw-Hill/Irwin
High
Very high
Table 13.2
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13-35
Organizational Change
Change to match competitive and strategy environment
Hard to change:
Existing distribution of power and influence.
Current culture.
Manager’s preconceptions about the appropriate business
model or paradigm.
Institutional constraints.
Principles for change;
Unfreeze the organization.
Moving to the new state.
Refreezing the organization.
McGraw-Hill/Irwin
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