Organization Design for International Business

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Organization Design for International Business
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Lesson Outline

• Introduction to organization design (OD)
• How OD changes over time as the firm's
  international activities expand
• Corollary approach, export department,
  international division
• Global organization design
• Comparing the features, strengths, and weaknesses
  of product, area, functional, customer, matrix,
  and hybrid global organization designs
• Matching strategy and OD

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Organization Design (OD)Introduction

• OD is the overall pattern of structural
  components and configurations used to manage the
  total organization.
• OD occupies a central role in strategy
  implementation because it allocates authority and
  resources, shapes the flow of information, and
  tends to exert a strong influence on what
  executives in the firm will have an incentive to
  value and reward.

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Introduction

• Organization design changes over time as the firm
  expands internationally.
• OD changes on an ongoing basis to reflect changes
  in a firms strategy.
• Trying to run a firm which has an inappropriate
  organizational design resembles trying to drive a
  car which has all four wheels pointed in
  different directions.

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Introduction

• There is no best organizational design. Need
  to select a design that best fits the needs of
  the organization. Factors influencing
  organization design include strategy, size,
  technology, environment, and cultures of the
  countries in which the firm operates.
• Consistently selecting an appropriate OD may be
  best viewed as a prerequisite to remaining
  consistently profitable, but not a guarantee.

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How OD changes over time as the firms
international activities expand

• The Initial Effects of International Operations
  on Organization Design

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Initial Effects of International Activities on OD

• Organization design changes as a firm expands
  internationally. At their start, many firms do
  not consider international markets in their
  strategies, and may in fact make their initial
  entrance to foreign markets through indirect
  exporting (see Chapter 11). As indirect export
  sales grow however, firms begin to consider
  pursuing opportunities in new markets.

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Initial Effects of International Activities on OD

• The Corollary Approach
• An initial response to international markets may
  be through the corollary approach whereby a firm
  delegates responsibility for processing
  international orders to individuals within an
  existing department, such as finance or
  marketing. International activities are likely
  not of central importance to the firms well
  being and are undertaken as a corollary to
  domestic activities, hence the name given above.

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Initial Effects of International Activities on OD

• The Export Department
• As export sales grow, firms may form a separate
  export department which takes responsibility for
  overseeing international operations, marketing
  products, processing orders, working with foreign
  distributors, and arranging financing when
  necessary. Eventually, the department may hold a
  similar status to other functional areas.

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Figure 13.1 An Export Department in aSmall
Manufacturing Firm
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Initial Effects of International Activities on OD

• The International Division
• As international sales continue to grow, the
  export department may not be in a position to
  handle all of a firms international activities.
  In fact, familiarity with foreign markets
  typically becomes more important as foreign sales
  rise, requiring new methods of organizing.

• Many firms establish an international division to
  cope with the firms international business
  activities. The division enables a company to
  allocate resources and create specialized
  programs and activities targeted for foreign
  markets, while at the same time, keeping that
  activity segregated from ongoing domestic
  activities.

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Figure 13.2 Banco Excel Economico
S.A.sInternational Division Design
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Global Organizational Design

• A firms international division is typically
  abandoned in favor of a global organization
  design as a firm moves from being domestically
  oriented with international sales to being a
  multinational corporation. A global design must
  enable a firm to integrate three types of
  knowledge area, product, and functional.

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Global Organizational Design

• A firm will usually select one of five common
  global organization designs (product, area,
  functional, customer, or matrix) depending on its
  situation in the market, its firm-specific
  advantages, and its managerial philosophy. Each
  of the design types typically emphasizes one type
  of knowledge (area, product and /or functional),
  and thus reflects a companys weighting of the
  importance of each.

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Global Organizational Design

• Global Product Design
• The most common organization design is the global
  product design which assigns responsibility for
  specific products or product groups to separate
  operating divisions within a firm. The design is
  most appropriate for firms that have diverse
  product lines or product lines that are sold in
  diverse markets.

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Global Organizational Design

• Global Product Design
• Firms typically take on an M-form design
  (multidivisional) if products are related, and an
  H-form design (holding company) if products are
  unrelated. The text notes that Unilever has an M
  form design, while Shougang Corporation has an H
  form.

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Figure 13.3 Shougang Corp.s Global Product Design
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Advantages of a Global Product Design

• Managers are able to gain expertise in all
  aspects of a product or products since a division
  focuses on a single product or product group.
• Efficiencies in production are easier to capture
  since products can be manufactured wherever
  manufacturing costs are lowest.
• Production can be coordinated at various
  facilities reflecting global demand and cost
  fluctuations.

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Advantages of a Global Product Design

• Managers, because of their extensive product
  knowledge, are in a position to incorporate new
  technologies into their product(s) and respond
  quickly and flexibly to technological changes
  that affect their market.
• A Global Product design facilitates global
  marketing.
• It facilitates geocentric corporate philosophies.

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Disadvantages of a Global Product Design

• It may encourage expensive duplication in
  functional areas and even in physical facilities.
  
• Each product group must develop its own knowledge
  about the local environment.
• Coordination and corporate learning across
  product groups is more difficult.

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Global Organizational Design

• Global Area Design
• The second most common form of global design, the
  global area design, centers the firms activities
  around specific areas or regions of the world.
  The design is particularly appropriate for firms
  with polycentric or multidomestic corporate
  philosophies. The global area design is typically
  used by firms whose products do not transfer well
  across regions.

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Procter Gambles Global Area Design
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Advantages of a Global Area Design

• The structure allows a firm to develop expertise
  about the local market and adapt its product mix
  and products accordingly.
• Thus, the global area design tends to be
  appropriate for firms whose strategy is
  marketing-driven rather than based on
  manufacturing efficiencies, technological
  innovation, or the reputation of its brand name
  products.

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Disadvantages of a Global Area Design

• The firm may sacrifice cost efficiencies that
  could be achieved through global production since
  the structure emphasizes the needs of the area
  market.
• Technology diffusion is slowed since innovations
  may not be adopted across the organization.

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Disadvantages of a Global Area Design

• Resources are duplicated since each area division
  has its own functional specialists, and in some
  cases, production facilities.
• Coordination across areas is expensive and global
  product planning is discouraged under this design.

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Global Organizational Design

• Global Functional Design
• Under the global functional design a firm creates
  departments or divisions that have worldwide
  responsibility for the common organizational
  functions. Firms that adopt this design
  typically have relatively narrow or similar
  product lines. The design is sometimes called a
  U-form design (unity).

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Figure 13.5 British Airways Global Functional
Design
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Advantages of a Global Functional Design

• Firms can develop and transfer expertise within
  each functional area.
• It is possible to maintain highly centralized
  control over functional operations.
• The design focuses attention on the key functions
  of the firm.

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Disadvantages of a Global Functional Design

• It is only practical when the firm has relatively
  few products or customers.
• It does not promote coordination between
  divisions.
• It may result in duplication of resources among
  managers.

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Global Organizational Design

• Global Customer Design
• The global customer design is used when a firm
  serves different customers or customer groups,
  each with specific needs calling for special
  expertise or attention.

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Figure 13.6 Eastman Kodaks Global Customer Design
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Advantages and Disadvantages of a Global Customer
Design

• The main advantages of the global customer design
  are that its allows a firm to use different
  marketing techniques when it targets diverse
  customer groups and it allows the firm to track
  how well it is doing within individual segments.
• The design does result in a duplication of
  resources however, and coordination between
  divisions is difficult.

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Global Matrix Design

• The most complex international organization
  design, a global matrix design, is the result of
  superimposing one form of organization design on
  top of an existing, different form.
• Can be an area design imposed on a product
  design, or any combination of pure designs
  discussed earlier.

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Figure 13.7 A Global Matrix Design
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Advantages of a Global Matrix Design

• The global matrix design allows firms to draw on
  the functional and product expertise of its
  employees because it brings together the
  functional, area, and product expertise of the
  firm into teams that can develop new products or
  respond to a changing market place.
• In addition, the design promotes organizational
  flexibility and promotes coordination and
  communication across divisions.
• People who develop under a matrix are relatively
  more likely to develop a matrix of the mind,
  becoming able to relatively easily grasp the
  importance of fundamentally different issues and
  viewpoints.

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Disadvantages of a Global Matrix Design

• It is inappropriate for firms that have few
  products and operate in relatively stable
  markets.
• Employees have more than one boss. Can lead to
  confusion and anxiety.
• The design can lead to gridlock in decision
  making.
• It tends to promote compromises or decisions
  based on the relative political clout of the
  managers involved. Thus, can end up with a paper
  matrix, wherein the matrix only exists on paper
  and does not serve the purposes it was intended
  to serve.

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Global Hybrid Design

• Most firms create some sort of hybrid design that
  fits their particular situations.
• The design adopted by a firm may combine some of
  the elements of the other structures.

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Figure 13.8 Nissan USAs Hybrid Design
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Matching strategy and OD

• OD shapes information flows, which affects
  learning. OD also affects where decision making
  power resides in an organization (its degree of
  centralization) and who coordinates with whom.
• Since these are all key issues for implementing
  particular strategies, OD and strategy are
  inextricably linked together.