The structure that is typically set up when firms initially expand abroad is a

Week 7

The organization of multinational corporations

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What Is

Organizational Architecture?

Organizational architecture is the totality of a firm’s organization including

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

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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LO1: Explain what is meant by organization architecture.

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What Is

Organizational Architecture?

Processes, organizational culture, and people

processes - how decisions are made and work is performed within the organization

organizational culture - norms and values 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

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What Is

Organizational Architecture?

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

Organizational Architecture

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What Are The Dimensions Of Organizational Structure?

Organizational structure has three dimensions

Vertical differentiation - the location of decision-making responsibilities within a structure

Horizontal differentiation - the formal division of the organization into sub-units

Integrating mechanisms - the mechanisms for coordinating sub-units

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LO2: Describe the different organizational choices that can be made in an international business.

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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 the 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, 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

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Most firms begin with no formal structure and are run by a single entrepreneur or a small team of individuals. As they grow, the demands of management become too great for one individual or a small team to handle.

At this point the organization is split into functions reflecting the firm’s value creation activities (e.g., production, marketing, R&D, sales). These functions are typically coordinated and controlled by top management. Decision making in this functional structure tends to be centralized.

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What Is A

Functional Structure?

A Typical Functional Structure

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Why Is Horizontal

Differentiation Important?

Firms may switch to a (multi-) product divisional structure

each division is responsible for a distinct product line

headquarters retains control for the overall strategic direction of the firm and for the financial control of each division

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

One Company’s International Divisional Structure

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When firms initially expand abroad, they often group all their international activities into an international division. This has tended to be the case for firms organized on the basis of functions and for firms organized on the basis of product divisions.

Regardless of the firm’s domestic structure, its international division tends to be organized on geography.

In either case, there is the potential for conflict and coordination problems between domestic and foreign operations

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The International Division at Wal-Mart

Managers in foreign countries had to get permission from Bentonville (AK) before they could make changes in strategy or operations.

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*

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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

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What Is A Worldwide Product Division Structure?

A Worldwide Product Divisional Structure

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What Happens Next?

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 Area Structure?

A Worldwide Area Structure

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What Is The

Global Matrix Structure?

The global matrix structure – tries 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

*

Management Focus: The Rise and Fall of Dow Chemical’s Matrix Structure explores the organization architecture at Dow Chemical. For years, despite having difficulties when it was initially implemented, the company relied on a matrix structure. However, when the company changed its strategy, its structure had to change as well.

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How Does Organizational Structure Change Over Time?

The International Structural Stages Model

*

Many firms that continue to expand internationally abandon this structure and adopt one of the worldwide structures we discuss next. The two initial choices are a worldwide product divisional structure, which tends to be adopted by diversified firms that have domestic product divisions, and a worldwide area structure, which tends to be adopted by undiversified firms whose domestic structures are based on functions.

These two alternative paths of development are illustrated in the figure. The model in the figure is referred to as the international structural stages model and was developed by John Stopford and Louis Wells.

The Opening Case: The Evolution of Strategy at Philips NV explores how the Dutch multinational’s structure has changed over time as the company’s strategy has evolved.

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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 use informal integrating mechanisms

A knowledge network - network for transmitting information within an organization that is based not on informal contacts between managers 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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What Are The Different

Types Of Control Systems?

Personal controls –personal contact with subordinates

most widely used in small firms

Bureaucratic controls –a system of rules and procedures that directs the actions of subunits

budgets and capital spending rules

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

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

*

A major task of a firm’s leadership is to control the various subunits of the firm—whether they be defined on the basis of function, product division, or geographic area—to ensure their actions are consistent with the firm’s overall strategic and financial objectives. Firms achieve this with various control and incentive systems.

1-*

What Are Incentive Systems?

Incentives - 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 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 - the values and norms that employees are encouraged to follow

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

*

Management Focus: Culture and Incentives at Lincoln Electric examines the incentive system and organizational culture at Lincoln Electric. The company believes in treating everyone equally, and basing pay on individual output.

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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

*

LO3: Explain how organization can be matched to strategy to improve the performance of an international business.

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What Is The Link Between Strategy And Architecture?

1. 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?

2. 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

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What Is The Link Between Strategy And Architecture?

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

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What Is The Link Between Strategy And Architecture?

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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How Are The Environment, Strategy, Architecture And Performance Related?

For a firm to succeed

The firm’s strategy must be consistent with the environment in which the firm operates

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

*

1-*

How Can Firms Implement Organizational Change?

To implement organization change

Unfreeze the organization through shock therapy

requires taking bold actions like plant closures or dramatic structural reorganizations

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

Refreeze the organization in its new state

requires that employees be socialized into the new way of doing things

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LO4: Discuss what is required for an international business to change its organization so that it better matches its strategy.

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How Can Firms Implement Organizational Change?

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

institutional constraints

*

*

*

LO1: Explain what is meant by organization architecture.

*

*

*

LO2: Describe the different organizational choices that can be made in an international business.

*

*

Most firms begin with no formal structure and are run by a single entrepreneur or a small team of individuals. As they grow, the demands of management become too great for one individual or a small team to handle.

At this point the organization is split into functions reflecting the firm’s value creation activities (e.g., production, marketing, R&D, sales). These functions are typically coordinated and controlled by top management. Decision making in this functional structure tends to be centralized.

*

*

*

When firms initially expand abroad, they often group all their international activities into an international division. This has tended to be the case for firms organized on the basis of functions and for firms organized on the basis of product divisions.

Regardless of the firm’s domestic structure, its international division tends to be organized on geography.

In either case, there is the potential for conflict and coordination problems between domestic and foreign operations

*

*

*

*

*

*

*

*

Management Focus: The Rise and Fall of Dow Chemical’s Matrix Structure explores the organization architecture at Dow Chemical. For years, despite having difficulties when it was initially implemented, the company relied on a matrix structure. However, when the company changed its strategy, its structure had to change as well.

*

Many firms that continue to expand internationally abandon this structure and adopt one of the worldwide structures we discuss next. The two initial choices are a worldwide product divisional structure, which tends to be adopted by diversified firms that have domestic product divisions, and a worldwide area structure, which tends to be adopted by undiversified firms whose domestic structures are based on functions.

These two alternative paths of development are illustrated in the figure. The model in the figure is referred to as the international structural stages model and was developed by John Stopford and Louis Wells.

The Opening Case: The Evolution of Strategy at Philips NV explores how the Dutch multinational’s structure has changed over time as the company’s strategy has evolved.

*

*

*

*

A major task of a firm’s leadership is to control the various subunits of the firm—whether they be defined on the basis of function, product division, or geographic area—to ensure their actions are consistent with the firm’s overall strategic and financial objectives. Firms achieve this with various control and incentive systems.

*

*

*

*

Management Focus: Culture and Incentives at Lincoln Electric examines the incentive system and organizational culture at Lincoln Electric. The company believes in treating everyone equally, and basing pay on individual output.

*

*

LO3: Explain how organization can be matched to strategy to improve the performance of an international business.

*

*

*

*

*

*

LO4: Discuss what is required for an international business to change its organization so that it better matches its strategy.

*

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