The organization of International Business

1. The Organization of International Business
Sudhanshu Bhatt (https://www.linkedin.com/in/sudhanshu-bhatt-b3665115/)
MBA –IBA
11.05.2023
References
Bulatov, A. (2023). World Economy and International Business Theories, Trends, and Challenges. In Springer. https://doi.org/10.12737/16614
Hill, C. W. L. (2022). Global Business Today 12e Charles.
Hill, C. W. L. (2023). International Business: Competing in Global Marketplace. In McGraw Hill LLC. https://doi.org/10.4324/9780203879412
Shenkar, O., Luo, Y., & Chi, T. (2022). International Business, Routledge. Routledge.
Images sourced from the internet

2. What is Organizational Architecture?
Organizational architecture refers to the complete structure and design of a firm,
encompassing five subparts:
1.Organizational Structure: The formal division of the organization into subunits, the allocation of
decision-making responsibilities, and the integration mechanisms to coordinate activities
between subunits.
2.Control Systems: Metrics used to measure subunit performance and assess managerial
effectiveness, such as profitability or contribution to global divisions.
3.Incentives: Devices used to reward desirable managerial behavior, closely linked to
performance metrics, such as bonuses tied to exceeding performance targets.
4.Processes: The methods and procedures for decision-making and work execution within the
organization, including strategy formulation, resource allocation, performance evaluation, and
product development.
5.Organizational Culture: The shared norms, values, and belief systems among employees,
shaping their behavior and influencing performance. It includes the unique patterns of culture
and subculture within the organization.
These five components of organizational architecture are interdependent and mutually
influenced, requiring internal consistency for optimal performance. For example, the
people component, including recruitment, compensation, and retention strategies, can
reinforce the prevailing organizational culture and align with the desired values and
orientation of the firm.

3. Organizational Architecture

4. What are the dimensions of organization
structure?
Organizational structure has 3 dimensions
1. Vertical differentiation - the location of decision making
responsibilities within the structure
2. Horizontal differentiation - the formal division of the
organization into sub-units
3. Integrated mechanisms - the mechanisms for
coordinating sub-units

5. Why is vertical differentiation important?
Vertical differentiation determines where decision making power is
concentrated.
Centralised decision making
1. Facilitates coordination
2. Ensures decision of consistent with the organisations objective
3. Gives managers the means to bring about organisational change
4. Avoids duplication of activities
Decentralised decision making
1. Relieves the burden of centralised decision making
2. Has shown to motivate individuals
3. Permits greater flexibility
4. Can result in Peter decisions
5. Can increase control

6. Why is horizontal differentiation important?
• Horizontal differentiation refers to how the firm divides into subunits
– usually based on function, type of business or geographical area.
1. Functional structure
2. Product divisional structure
3. International divisional structure
4. Worldwide product divisional structure
5. Worldwide area structure
6. Global matrix structure

7. Functional structure
Most firms begin with no formal structure but as they grow they split
into functions reflecting firms value creation activities.
• Functions are coordinated and controlled by top management
• decision making is centralised
• Product line diversification requires further horizontal differentiation

8. Product divisional structure
• Firms may switch to product divisional structure to solve the problems of
coordination and control when they specialize into distinct business areas.
• Each division is responsible for a distant product line
• Headquarter retains control for overall strategic direction and financial
control.

9. International divisional structure
• When firms expand internationally they often group all of their
international activities into international divisions.
• Firms having functional structure or divisional structure at home
would replicate the same in the foreign market respectively.
• In such a scenario there is a potential for conflict and coordination
problem between the domestic and foreign operators.

10. International divisional structure

11. What happens next?
• Firms that continue to expand in global markets will move to either:
1. worldwide product divisional structure
2. Worldwide area structure

12. Worldwide product divisional structure
Adopted by firms that are reasonably diversified
• Allows for worldwide coordination of value creation
activities of each product division
• Helps realise location economies and experience curve
• Facilitates the transfer of core competencies
• Does not allow for local responsiveness

13. Worldwide product division structure

14. Worldwide area structure
This structure is favoured by firms with low degree of diversification
domestic structure based on function.
• Divides the world into autonomous geographic areas
• Decentralises operational authority
• Facilitates local responsiveness
• Can result in a fragmentation of the organization
• Is consistent with localization strategy

15. Worldwide area structure

16. What is the Global Matrix Structure?
The global matrix structure tries to minimise the limitation of the
worldwide area structure and the worldwide product divisional
structure.
• Allows for differentiation along 2 dimensions product division and
geographic area
• Has to world 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

17. The Global Matrix Structure

18. How does organisational structure change
over time?

19. What are the dimensions of organization
structure?
Organizational structure has 3 dimensions
1. Vertical differentiation - the location of decision making
responsibilities within the structure
2. Horizontal differentiation - the formal division of the
organization into sub-units
3. Integrated mechanisms - the mechanisms for
coordinating sub-units

20. Need for coordination – can sub-units be
integrated?
• Regardless of the type of structure firms need 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 sub unit
manager 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
• Many firms use informal integrating mechanisms
• A knowledge network is a network for transmitting information within an
organization that is based not on formal organizational structure, but on informal
contacts between managers within an enterprise and on distributed information
systems.

21. Formal Integrating Mechanisms

22. What are different types of control systems?
1. Personal controls – personal contact with subordinates used mostly
in small firms
2. Bureaucratic controls – a system of rules and procedures that
directs the actions of subunits.
3. Output controls – setting goals for subunits to achieve and
expressing those goals in terms of objective performance metrics.
4. Cultural controls – it exists when employees buy into the norms
and values system of the firm. Strong culture implies less need for
other forms of control.

23. What are incentive systems?
Incentives or devices used to reward behaviour
• Usually closely tied to performance metrics used for output controls
• Should vary depending on employee and the nature of the work
being performed
• Should promote cooperation between managers in subunits
• Should reflect national differences in institutions and culture.

24. What is performance ambiguity?
• Performance ambiguity exists when the causes of a subunits poor
performance are not clear
• It is common when subunits performance is dependent on
performance of other subunits
It is lowest in the firms with the localization strategy
It is higher in international firms,
still higher in firms with the global standardization strategy.
highest in transnational firms

25. Link between dependence performance ambiguity
and cost of control for the 4 international business
strategies

26. 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

27. What is organizational culture?
• Organizational culture refers to the values and norms that employees are
encouraged to follow
• Organizational culture evolves from
Founders and important leaders
National social culture
The history of the enterprise
Decisions that resulted in her performance

28. Maintenance of organisational culture
• Organizational culture can be maintained through
1. Hiring and promotional practices
2. Reward strategies
3. Socialization processes
4. Communication strategies
• Organizational culture tends to change very slowly

29. What is a strong 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
• Strong culture
I. Is not always good
II. May not lead to high performance
III. could be beneficial at one point but not at another.
• Companies with adaptive cultures have the highest performance

30. What is the link between Strategy and
Architecture

31. Link between strategy and architecture
Firms pursuing a localization strategy should 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

32. Link between Strategy and architecture
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

33. The link between strategy and architecture
Firms pursuing a global standardization strategy focus on the
realisation of location and experience curve economies
• Headquarters maintain control over most decisions
• The need for integrating mechanisms is high
• Strong organisational cultures are encouraged
• The worldwide product division is common

34. 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 centralised and others are decentralised
• The need for coordination and the cost of control is high
• An array of formal and informal integrating mechanisms are used
• A strong culture is encouraged
• Matrix structures of common

35. How are the environment strategy
architecture and performance related?
For a firm to succeed
1. the firms 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 pursued

36. How can firms implement organisational
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 organisational architecture so
that it matches the desired new strategic posture
3. Refreeze the organization in its new state
• Requires the employees to be socialised into the new way of doing things

37. Why organizations don’t change?
Organizations can be difficult to change because of:-
1. The current culture inertia
2. The existing distribution of power and influence
3. Manager’s preconceptions about the appropriate business model or
paradigm
4. Institutional constraints

38. • To be continued……………………