International Business

1
International Business

• Chapter Fifteen
• The Organization of International Business

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Chapter Objectives

• To profile the evolving understanding of the
  organization of international business
• To describe traditional and contemporary
  organizational structures
• To study the systems used to coordinate and
  control operations
• To profile the role of organizational culture
• To examine special situations in the organization
  of international business

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Introduction

• Organization the complementary mix of formal
  structure, coordination and control systems, and
  cultural values needed to create value and
  implement an organizations strategy
• An insightful strategy is a necessary but
  insuf-ficient condition for long-term
  organizational success.
• Building an organization to implement an
  effective strategy requires the integration of
  different people, teams, groups, and units into
  a smoothly functioning whole.

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Fig. 15.1 The Organization of International
Business
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The Causes of Organizational Change

• Revolutionary changes in the environment and the
  nature of work challenge managers to downsize,
  delayer, restructure, reengineer, and reinvent
  the organization.
• globalization changes the opportunity set and
  efficiency frontier for firms
• knowledge an increasingly important engine of
  sus-tainable comparative advantage
• the Internet an efficient and effective global
  organi-zation of knowledge, people, and other
  resources that challenge conventional notions of
  control
• continued

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• the conduct and context of employees jobs the
  creation of value that exhibits astonishing
  variability, problem solving, and intellectual
  content
• worldwide employee empowerment decentralized
  decision-making and the development of common
  ideas and ideals to ensure that all employees act
  in the best interests of the firm
• an expanded social contract between employees and
  organizations includes greater employee
  participation in problem-solving and
  decision-making
• increasingly sophisticated corporate strategies
  new combinations of key activities leading to new
  organi-zational requirements

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Organizational Structure

• Organizational structure the formal arrangement
  of roles, responsibilities, and relationships
  within an organization
• Organizational differentiation the way in which
  different units and subunits within a firm are
  organized and assigned to work on different
  levels and kinds of tasks
• A companys choice of structure depends upon
• the configuration of its value chain in
  terms of the location(s) and
  type(s) of its foreign
  facilities
• the impact of international operations
  on total corporate performance

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Vertical Differentiation

• Vertical differentiation the way in which an
  organization balances centralized vs.
  decentralized decision-making alternatives the
  locus of power
• Centralization the degree to which high-level
  managers (usually above the country level) make
  decisions and then pass them down to lower levels
  for implementation
• Decentralization the degree to which
  lower-level managers (at or below the country
  level) make and implement important decisions
• Usually, centralized decision-making is
  associated with an international or global
  strategy, decentralized decision-making with a
  multidomestic strategy, and a combination of the
  two with a transnational strategy.
• All organizations must determine who will have
  what authority to
  make which decisions.
• continued

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• The reason for choosing one type of
  decision-making authority over another is partly
  a function of attitude.
• see Chapter Two regarding the cultural
  environment
• ethnocentric attitude encourages an
  international or global firm to develop core
  competencies in its home country and then closely
  supervise their transfer and use abroad i.e.,
  centralized decision-making
• polycentric attitude encourages a multidomestic
  firm to grant decision-making authority to
  foreign subsidiaries, i.e., decentralized
  decision-making
• geocentric attitude encourages a transnational
  firm to creatively balance the competing needs
  for centralized and decentralized
  decision-making in order to respond to both
  global and local pressures
• Decision-making should occur at the level of the
  people most directly affected and who have the
  most intimate knowledge about the problemthe
  current trend is toward more decentralized
  structures.

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The Principles and Practice of Centralization and
Decentralization

• CENTRALIZATION DECENTRALIZATION
• Premises Premises
• Decisions should be made by Decisions
  should be made by senior managers.
  lower-level employees.
• The effectiveness of the value The
  effectiveness of the value chain depends on
  headqtrs. chain depends on local retaining
  authority. managers authority.
• Centralized decisions ensure Decentralized
  decisions ensure that operations in
  different that operations in different countries
  help achieve global countries help achieve global
  objectives. objectives by first meeting
  national goals.
• continued

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The Principles and Practice of Centralization and
Decentralization

• CENTRALIZATION DECENTRALIZATION
• Advantages Advantages
• Coordination of the value chain Decisions
  are made by those is facilitated. who
  are directly involved.
• Decisions are consistent with Lower-level
  managers are corporate objectives. allowed to
  exercise initiative.
• Duplicate activities are pre-.
  Lower-level employees are empted. motivated
  to perform better.
• The risk of costly, wrong, lower- Flexible
  responses to rapid level decisions is
  reduced. changes are enabled.
• Consistent dealing with stake- Subsidiary
  managers are held holders is ensured.
  more accountable.
• continued

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The Principles and Practice of Centralization and
Decentralization

• CENTRALIZATION DECENTRALIZATION
• Disadvantages Disadvantages
• Initiative among lower-level The
  organization is put at risk employees is
  discouraged. if bad, lower-level decisions
  are made.
• Demoralized lower-level workers Cross-unit
  coordination and wait for instructions.
  strategic fit are impeded.
• Information flows from the top Subsidiaries
  likely favor their down thus, bottom-up own
  projects at the expense innovation is
  pre-empted. of global performance.
• continued

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The Principles and Practice of Centralization and
Decentralization

• CENTRALIZATION DECENTRALIZATION
• Encouraging Factors Encouraging Factors
• Corporate policies call for global Conditions
  call for local re- integration and uniformity.
  sponsiveness and adaptation.
• Interdependent subsidiaries The firm is
  geographically share value activities. dispersed
  .
• Firms need to move resources Economies of
  scale can be from one activity to another.
  achieved nationally.
• Upper-level managers are more Lower-level
  managers are more experienced decision-makers.
  capable decision-makers.
• Decisions are important and Decisions are
  relatively minor the risk of loss is great. but
  must be made quickly.
• The need for foreign nationals
  to reach headqtrs. is low.

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Horizontal Differentiation

• Horizontal differentiation the way in which a
  firm is divided into discrete units and sub-units
  that are assigned responsibility for specialized
  tasks
• Horizontal differentiation describes the way in
  which a firm designs its formal structure in
  order to
• specify the total set of organizational tasks
• logically divide those tasks into jobs,
  departments, subsidiaries, and/or divisions
• assign authority and reporting relationships in
  ways that are designed to support the firms
  strategies
• Traditionally MNEs have resolved these issues on
  the basis of function, type of
  business/product, geographic region, or
  some combination of the three.

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The Design of the Formal Structure

• Functional Structure
• groups specialized jobs according
  to traditional business
  functions specifies
  roles and relationships
  according to inputs
• maximizes scales economies by arranging work
  responsibilities and relationships in the most
  efficient format
• is ideal when a companys products share a common
  technology (a narrow product line) and
  competitive pressures push for a cost-leadership
  strategy
• The long chain of command that spans many levels
  of hierarchy does not build the
  knowledge-generating and decision-making
  relationships necessary to respond to
  environmental changes requiring coordination
  across departments.
• continued

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The Design of the Formal Structure

• Divisional Structures
• establish groups according to units, products,
  customers, or regions specifies roles and
  relationships according to outputs
• International Division creates a critical mass
  of international
  expertise, but may
  struggle to get resources
• Product Division creates synergies between
  foreign and domestic operations, is well-suited
  for diverse product lines, but lacks
  the means for one
  division to learn from another
• Geographic Division creates economies of scale
  on a regional basis, works well when foreign
  operations are large but
  not dominated by a
  single region or country, but leads to
  the costly duplication of
  similar value-added activities continued

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The Design of the Formal Structure

• Matrix Structure
• simultaneously attains the benefits of the
  functional and divisional forms theoretically
  equips an MNE to capture the benefits of both
  integration and responsiveness
• gives functional, product, and geographic groups
  a common focus
• has dual reporting relationships rather than a
  single chain of command, thus ensuring the
  exchange of information and resources
• Blurred lines of responsibility and
  relationships confuse the clarity of the chain of
  command, even though groups are required to
  compete for resources and control.
• Mixed Structure each is idiosyncratic,
  reflecting legacies, executive preferences,
  and/or circumstances a combi- nation of
  functional, regional, and product dimensions

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Fig. 15.2 Placement of International Activities
within the Organizational Structures for
International Businesses
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Contemporary Structures

• Contemporary Structures learning organizations
  that champion limitless spans of control, ad hoc
  teams, and self-organizing groups by eliminating
  vertical, horizontal, and external boundaries
  that hinder information flows
• Network Structure a small, core organization
  that outsources certain value activities to key
  partners in order to focus on those activities in
  which it creates maximum value
• Japanese keiretsus rely heavily upon long-term
  personal relationships among high-level
  managers in different companies.
• Virtual Organization a temporary arrangement
  among partners that can be easily reassembled to
  adapt to market changes permits organizations to
  acquire resources and/or strategic capabilities
  by creating a temporary cluster of partners
• Project Structure all work is project
  basedteams form, disband, and form again as the
  flow of work requires

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Fig. 15.3 A Simple Depiction of the
Network Structure
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Coordination Systems

• Coordination systems link the operations of
  inter-dependent units and individuals of a firm
• Coordination by standardization
• sets universal rules and procedures that apply to
  units worldwide a prescriptive, day-to-day
  infrastructure
• enforces consistency in the performance of
  activities across geographically dispersed units
• helps a firm leverage its core competencies and
  bring the advantages of scale to its
  operations
• is ideally suited for strategies that champion
  constancy and predictability in industries that
  are more stable than volatile, i.e., an
  international or geocentric strategy
• continued

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• Coordination by plan
• requires interdependent units to meet common
  deadlines and objectives
• is ideally suited for firms that create value by
  adapting operations to local conditions, i.e., a
  multidomestic strategy
• Coordination by mutual adjustment
• requires managers to interact with counterparts
  to enable the flexible exchange of ideas
• requires that firms adopt a formal structure and
  install standardization and planning systems
• is ideally suited for firms that find value in
  creating more opportunities and incentives for
  interdependent parties to communicate with one
  another, i.e., when firms face new problems that
  cannot be defined with customary rules or
  procedures

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Control Systems

• Control process directs and monitors the
  activities of individuals in order to compel
  actions that support the goals of the firm
• Control methods
• market control uses external market mechanisms
  to establish internal performance benchmarks and
  standards complements a geocentric strategy
• bureaucratic control uses centralized authority
  to install an extensive set of rule and
  procedures to govern a broad range of activities
  
• clan control relies upon share values among all
  employees to idealize and moderate preferred
  employee behaviors complements a transnational
  strategy
• continued

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• Control mechanisms
• reports should be timely to allow an effective
  response
• subsidiary visits should balance information
  collection and sharing with the offering of
  advise and directives
• management performance evaluation should
  separate a managers performance from a
  subsidiarys performance
• cost and accounting comparability should
  interpret different costs and accounting
  practices fairly
• evaluative measurements should include a
  reliable combination of financial and
  non-financial indicators
• information systems should periodically
  reevaluate information needs in order to minimize
  costs and ensure relevancy

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Organization Culture

• Organization culture the set of fundamental
  assumptions about an organization, its goals,
  and its practices that employees share
• Key features of a firms organization culture
  include
• managerial values and principles
• the work climate and atmosphere
• patterns of how things are done around here
• traditions
• ethical standards
• Studies confirm a significant link between
  organization culture and the
  financial performance of a firm.

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Strategy and Organization Culture

• The shared values of an organization influence
  both employees perceptions as well as the ways
  in which they respond to the world.
• Sustainable benefits and lasting competitive
  advantage can only be realized when a firm
  exhibits a complemen-tary organization culture
• an international strategy requires rules,
  regulations, and uniformity
• a global strategy requires standardizing
  employees views
• a multidomestic strategy requires greater
  tolerance of the local interpretation of
  corporate goals
• a transnational strategy requires a strategic
  blending of standardization and adaptation, i.e.,
  dynamic flexibility

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Fig. 15.4 Organizational Culture Aspects of
Types of Strategies
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Special Situations

• Acquisitions the culture of an acquired
  organi-zation may differ because of both company
  and national practices
• Shared ownership decision-making is limited and
  assumptions and behavior will likely differ when
  two or more entities share ownership
• Dynamic nature of performance as a firms
  international business evolves, both its
  organiza-tional structure and its coordination
  and control systems must also evolve

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The Role of Legal Structures

• When operating abroad, firms choose among legal
  forms that affect their decision-making power,
  their tax exposure, their ability to protect
  intellectual property, and their legal liability.
  
• Foreign branch a wholly-owned foreign
  oper-ation that remains legally part of the
  parent company
• Subsidiary a legally separate company, i.e.,
  a foreign direct investment, whose liability is
  usually limited to the subsidiarys assets
• continued

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• Types of subsidiaries and operating form, i.e.,
  distinc-tions to be heeded in designing a foreign
  operation
• the ability of the parent to sell its ownership
• the number of stockholders required to establish
  a subsidiary
• the percentage of foreigners who can serve on the
  board of directors
• the amount of required public disclosure
• whether equity may be acquired by noncapital
  contribu-tions such as goodwill
• the types of businesses (products) that are
  eligible
• the minimum capital required for establishing a
  subsidiary

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Implications/Conclusions

• Organization is an integrated function of formal
  structure, coordination and control systems, and
  organizational culture.
• The degree of centralization in an MNE is
  influenced by pressures for global integration
  versus local responsiveness, the competence of
  headquarters versus subsidiary personnel, as well
  as decision importance, expediency, and quality
  expectations.

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• Artfully engineering an organization that
  configures globally dispersed resources to meet
  the mandates of multinational operations is the
  frontier of inter-national business.
• While traditional organizational structures rely
  on hierarchical formats, contemporary structures
  eliminate the horizontal, vertical, and/or
  external boundaries that block the development of
  knowledge-generating and decision-making
  relationships.
• MNEs need to develop coordination and control
  mechanisms that prevent the duplication of
  efforts, ensure that headquarters does not
  withhold the best resources from international
  operations, and include insights from across the
  entire firm.