International Business

Dr Nur Kamarul Hafiz bin Jamil

Chapter 12

The Organization of
International Business
 What Is
Organizational Architecture?
• Organizational architecture is the totality of a
firm’s organization including
1. Organizational structure
• the formal division of the organization into subunits
• the location of decision-making responsibilities within that
structure - centralized versus decentralized
• the establishment of integrating mechanisms to coordinate the
activities of subunits including cross-functional teams or pan-
regional committees
2. Control systems and incentives
• control systems - the metrics used to measure performance of
subunits
• incentives - the devices used to reward managerial behavior

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 What Is
Organizational Architecture?
3. Processes, organizational culture, and people
• Processes - the manner in which decisions are made and work is
performed within the organization
• Organizational culture - the norms and value systems that are
shared among the employees of an organization
• People - the employees and the strategy used to recruit,
compensate, and retain those individuals and the type of people
they are in terms of their skills, values, and orientation
• To be the most profitable
• the elements of the organizational architecture must
be internally consistent
• the organizational architecture must fit the strategy
• the strategy and architecture must be consistent with
each other, and consistent with competitive conditions
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 What Is
Organizational Architecture?
Organizational Architecture

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 What Are The Dimensions Of
Organizational Structure?
• Organizational structure has three dimensions
1. Vertical differentiation - the location of
decision-making responsibilities within a
structure
2. Horizontal differentiation - the formal division
of the organization into sub-units
3. Integrating mechanisms - the mechanisms for
coordinating sub-units

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 Why Is Vertical
Differentiation Important?
• Vertical differentiation determines where decision-making
power is concentrated
• Centralized decision-making
• facilitates coordination
• ensures decisions are consistent with organization’s objectives
• gives managers the means to bring about organizational change
• avoids duplication of activities
• Decentralized decision-making
• relieves the burden of centralized decision-making
• has been shown to motivate individuals
• permits greater flexibility
• can result in better decisions
• can increase control

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 Why Is Horizontal
Differentiation Important?
• Horizontal differentiation refers to how the firm divides into
sub-units
• usually based on function, type of business, or geographical area
• Most firms begin with no formal structure, but as they grow,
the organization is split into functions reflecting the firm’s
value creation activities - functional structure
• functions are coordinated and controlled by top management
• decision-making is centralized
• product line diversification requires further horizontal differentiation
• Firms may switch to a product divisional structure where
each division is responsible for a distinct product line

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 What Is A
Functional Structure?
A Typical Functional Structure

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 What Is A
Product Divisional Structure?
A Typical Product Divisional Structure

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 What Happens When Firms
Expand Globally?

• When firms expand internationally, they often

group all of their international activities into an
international division
• Over time, manufacturing may shift to foreign
markets
• firms with a functional structure at home would replicate
the functional structure in the foreign market
• firms with a divisional structure would replicate the
divisional structure in the foreign market
• In either case, there is the potential for conflict and
coordination problems between domestic and
foreign operations
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 What Is An International
Divisional Structure?
One Company’s International Divisional Structure

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 What Happens Next?

• Firms that continue to expand will move to either a

• Worldwide product divisional structure - adopted by firms that are
reasonably diversified
• allows for worldwide coordination of value creation activities of each product
division
• helps realize location and experience curve economies
• facilitates the transfer of core competencies
• does not allow for local responsiveness
• Worldwide area structure - favored by firms with low degree of
diversification and a domestic structure based on function
• divides the world into autonomous geographic areas
• decentralizes operational authority
• facilitates local responsiveness
• can result in a fragmentation of the organization
• is consistent with a localization strategy

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 What Is A Worldwide
Product Division Structure?
A Worldwide Product Divisional Structure

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 What Is A
Worldwide Area Structure?
A Worldwide Area Structure

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 How Does Organizational
Structure Change Over Time?
The International Structural Stages Model

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 What Is The
Global Matrix Structure?
• The global matrix structure is an attempt to minimize the
limitations of the worldwide area structure and the
worldwide product divisional structure
• allows for differentiation along two dimensions - product division and
geographic area
• has dual decision–making - product division and geographic area
have equal responsibility for operating decisions
• can be bureaucratic and slow
• can result in conflict between areas and product divisions
• can result in finger-pointing between divisions when something goes
wrong

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 What Is The
Global Matrix Structure?
A Global Matrix Structure

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 How Can Subunits
Be Integrated?
• Regardless of the type of structure, firms need a
mechanism to integrate subunits
• need for coordination is lowest in firms with a localization
strategy and highest in transnational firms
• coordination can be complicated by differences in subunit
orientation and goals
• simplest formal integrating mechanism is direct contact
between subunit managers, followed by liaisons
• temporary or permanent teams composed of individuals
from each subunit is the next level of formal integration
• the matrix structure allows for all roles to be integrating
roles

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 How Can Subunits
Be Integrated?
Formal Integrating Mechanisms

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 How Can Subunits
Be Integrated?
• Many firms are using informal integrating
mechanisms
• A knowledge network is a network for transmitting
information within an organization that is based not
on formal organization structure, but on informal
contacts between managers within an enterprise
and on distributed information systems
• a non bureaucratic conduit for knowledge flows
• must embrace as many managers as possible and
managers must adhere to a common set of norms and
values that override differing subunit orientations

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 How Can Subunits
Be Integrated?
A Simple Management Network

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 What Are The Different
Types Of Control Systems?
1. Personal controls –personal contact with subordinates
• most widely used in small firms
2. Bureaucratic controls –a system of rules and procedures
that directs the actions of subunits
• budgets and capital spending rules
3. Output controls – setting goals for subunits to achieve
and expressing those goals in terms of objective
performance metrics
• compare actual performance against targets and intervene
selectively to take corrective action
4. Cultural controls – exist when employees “buy into” the
norms and value systems of the firm
• strong culture implies less need for other forms of control

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 What Are Incentive Systems?

• Incentives are the devices used to reward behavior

• usually closely tied to performance metrics used for
output controls
• should vary depending on the employee and the nature
of the work being performed
• should promote cooperation between managers in sub-
units
• should reflect national differences in institutions and
culture
• can have unintended consequences

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 What Is
Performance Ambiguity?
• Performance ambiguity exists when the causes of a
subunit’s poor performance are not clear
• is common when a subunit’s performance is dependent
on the performance of other subunits
• is lowest in firms with a localization strategy
• is higher in international firms
• is still higher in firms with a global standardization
strategy
• is highest in transnational firms

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 What Is The Link Between Control,
Incentives, And Strategy?

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

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 What Are Processes?
• Processes refer to the manner in which decisions are made and work
is performed
• many processes cut across national boundaries as well as organizational
boundaries
• processes can be developed anywhere within a firm’s global operations
network
• formal and informal integrating mechanisms can help firms leverage
processes

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 What Is
Organizational Culture?
• Organizational culture refers to the values and norms that
employees are encouraged to follow and evolves from
• founders and important leaders
• national social culture
• the history of the enterprise
• decisions that resulted in high performance
• Organizational culture can be maintained through
• hiring and promotional practices
• reward strategies
• socialization processes
• communication strategies
• Organizational culture tends to change very slowly

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 What Is
Organizational Culture?
• Managers in companies with a “strong” culture
share a relatively consistent set of values and norms
that have a clear impact on the way work is
performed
• A “strong” culture
• is not always good
• may not lead to high performance
• could be beneficial at one point, but not at another
• Companies with adaptive cultures have the highest
performance

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 What Is The Link Between
Strategy And Architecture?
A Synthesis of Strategy, Structure, and Control Systems

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 What Is The Link Between
Strategy And Architecture?
1. Firms pursuing a localization strategy focus on local
responsiveness
• they do not have a high need for integrating mechanisms
• performance ambiguity and the cost of control tend to be low
• the worldwide area structure is common
2. Firms pursuing an international strategy create value by
transferring core competencies from home to foreign
subsidiaries
• the need for control is moderate
• the need for integrating mechanisms is moderate
• performance ambiguity is relatively low and so is the cost of
control
• the worldwide product division structure is common

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 What Is The Link Between
Strategy And Architecture?
3. Firms pursuing a global standardization strategy focus on the
realization of location and experience curve economies
• headquarters maintains control over most decisions
• the need for integrating mechanisms is high
• strong organizational cultures are encouraged
• the worldwide product division is common
4. Firms pursuing a transnational strategy focus on simultaneously
attaining location and experience curve economies, local
responsiveness, and global learning
• some decisions are centralized and others are decentralized
• the need for coordination and cost of control is high
• an array of formal and informal integrating mechanism are used
• a strong culture is encouraged
• matrix structures are common

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 What Is The Link Between Environment,
Strategy, Architecture, And Performance?

• For a firm to succeed

1. The firm’s strategy must be consistent with the
environment in which the firm operates
2. The firm’s organization architecture must be
consistent with its strategy
• firms need to change their architecture to reflect
changes in the environment in which they are
operating and the strategy they are pursuing

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 How Can Firms Implement
Organizational Change?
• To implement organization change
1. Unfreeze the organization through shock therapy
• requires taking bold actions like plant closures or dramatic structural
reorganizations
2. Move the organization to a new state through proactive change in
architecture
• requires a substantial and quick change in organizational architecture so that
it matches the desired new strategic posture
3. Refreeze the organization in its new state
• requires that employees be socialized into the new way of doing things
• Organizations can be difficult to change because of the existing
distribution of power and influence, the current culture, managers’
preconceptions about the appropriate business model or paradigm,
and/or institutional constraints

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