Kdqt eng chap013


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  • Structure and control systems establish decision-making responsibilities and integration mechanisms.
  • The answer is b.
  • The answer is b.
  • 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 (see Figure 13.3). 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. Figure 13.5 illustrates this for a firm whose domestic organization is based on product divisions.
  • Management Focus: The International Division at Wal-Mart Summary This feature explores Wal-Mart’s organizational architecture. When Wal-Mart initially expanded into international markets, it established an international division. Over time, however, this structure proved to be problematic, and was abandoned. Discussion of the feature can revolve around the following questions: 1. Why did the centralization of decisions at the headquarters of Wal-Mart’s international division create problems for the company’s different national operations? Has Wal-Mart’s response been appropriate? Answer: When Wal-Mart began its international expansion, it set up an international division to handle all foreign operations. However, over time, this approach proved to be challenging. Managers in foreign countries had to get permission from Bentonville before they could make any changes in strategy or operations. Not only did this approach slow decision-making, also meant that decisions were being made by managers who were removed from the local situation. Wal-Mart began to change this approach when it acquired Britain’s ASDA supermarket chain. Today, the company has given greater responsibility to local managers particularly in merchandising and operations. 2. Do you think that having an international division is the best structure for managing Wal-Mart’s foreign operations? What problems might arise with this structure? What other structure might work? Answer: Most students will probably suggest that while the international division may have been a good strategy at the beginning of Wal-Mart’s expansion into foreign markets, as foreign revenues have grown, approach no longer works. Many students will probably suggest that Wal-Mart consider moving towards a transnational approach where it could respond to local markets and at the same time, respond to the pressure to minimize costs. Another Perspective: To learn more about Wal-Mart’s foreign operations, go to the company’s web site at {http://www.walmart.com}.
  • 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 Figure 13.6. The model in the figure is referred to as the international structural stages model and was developed by John Stopford and Louis Wells.
  • Management Focus: The Rise and Fall of Dow Chemical’s Matrix Structure Summary This feature 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. Discussion of the feature can revolve around the following questions: 1. Why did Dow first adopt a matrix structure? What were the problems with this structure? Do you think these problems are typical of matrix structures? Answer: Dow Chemical initially adopted the matrix structure because it would allow the company to be responsive to both local market needs and corporate objectives. However, when it was first adopted, the structure did not work well. The dual chain of control led to turf battles and a lack of accountability, however, Dow felt that by making the structure more flexible it could still work. The company had moved into the pharmaceuticals business where local responsiveness was important as was the need to conscious of costs. Many students will probably agree that the dual chain of command associated with the matrix structure makes it challenging, however at least according to Dow, there are ways to make it work. In fact, Dow credits the structure for much of its success prior to the mid-1990s. b) What drove the shift away from the matrix structure in the late 1990s? Does Dow’s structure now make sense given the nature of its businesses and the competitive environment it competes in? In the mid-1990s, Dow divested itself of its pharmaceuticals activities, and changed its structure to reflect its new strategy. The company shifted to global business divisions as way to reduce costs and streamline decision-making. Dow felt that given its new focus on bulk chemicals, the new structure would work better. Another Perspective: To find out more about Dow Chemical’s current strategy and organizational architecture, go to the company’s web site at {http://www.dowchemical.com}.
  • Managers A, B, and C all know each other personally, as do managers D, E, and F. Although manager B does not know manager F personally, they are linked through common acquaintances (managers C and D). Thus, we can say that managers A through F are all part of the network, and also that manager G is not. Imagine manager B is a marketing manager in Spain and needs to know the solution to a technical problem to better serve an important European customer. Manager F, an R&D manager in the United States, has the solution to manager B’s problem. Manager B mentions her problem to all of her contacts, including manager C, and asks if they know of anyone who might be able to provide a solution. Manager C asks manager D, who tells manager F, who then calls manager B with the solution. In this way, coordination is achieved informally through the network, rather than by formal integrating mechanisms such as teams or a matrix structure.
  • 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.
  • The costs of control can be defined as the amount of time top management must devote to monitoring and evaluating subunits’ performance. This is greater when the amount of performance ambiguity is greater. When performance ambiguity is low, management can use output controls and a system of management by exception; when it is high, managers have no such luxury. Output controls do not provide totally unambiguous signals of a subunit’s efficiency when the performance of that subunit is dependent on the performance of another subunit within the organization. Thus, management must devote time to resolving the problems that arise from performance ambiguity, with a corresponding rise in the costs of control. Table 13.1 reveals a paradox. We saw in Chapter 12 that a transnational strategy is desirable because it gives a firm more ways to profit from international expansion than do localization, international, and global standardization strategies. But now we see that due to the high level of interdependence, the costs of controlling transnational firms are higher than the costs of controlling firms that pursue other strategies. Unless there is some way of reducing these costs, the higher profitability associated with a transnational strategy could be canceled out by the higher costs of control.
  • Management Focus: Culture and Incentives at Lincoln Electric Summary This feature examines the incentive system and organizational culture at Lincoln Electric. The company believes in treating everyone equally, and basing pay on individual output. Discussion of the feature can revolve around the following questions: 1 To what extent are the organization culture and incentive systems of Lincoln Electric aligned with the firm’s strategy? Answer: Lincoln Electric stresses that individuals should be rewarded for their individual efforts, and that everyone who works for the company should be treated equally. Accordingly, employee pay depends on individual output, everyone eats in the same cafeteria, parks in the same lot, and so on. Because employees can boost their pay significantly by working harder and being innovative, the company as a whole becomes more productive. 2. How was the culture at Lincoln Electric created and nurtured over time? Answer: Lincoln Electric has a long tradition of equality and fairness. Since 1934, employees have been assessed both objectively and subjectively. Objective criteria include the level and quality of an individual’s output, while subjective criteria include attitudes and dependability. Workers actually have the ability to double their base pay. Even so, because productivity is so high, Lincoln Electric is the low cost leader in the industry. 3. Why did the culture and incentive systems work well in the United States? Why did it not take in other nations? Answer: In the United States, a country that encourages individualism, Lincoln Electric’s emphasis on individual performance has been very successful. However, in other countries, this approach has met with some resistance. In some countries, Lincoln Electric’s pay-per-output approach was considered exploitative. In Germany, it was actually illegal! In addition, in some countries the incentive of more money for more output was not valued. Many European placed a greater value on more leisure time for example. In countries where Lincoln Electric expanded through acquisition, unionized employees opposed the compensation approach. Another Perspective: For additional information on Lincoln Electric, go to the company’s web site at {http://www.lincolnelectric.com}.
  • Kdqt eng chap013

    1. 1. InternationalBusiness 7e by Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Chapter 13 The Organization of International Business
    3. 3. IntroductionOrganizational architecture refers to the totality of a firm’sorganization, including formal organization structure, control systemsand incentives, processes, organizational culture, and peopleTo be the most profitable, firms need to be sure: the different elements of the organizational architecture are internally consistent the organizational architecture matches or fits the strategy of the firm the strategy and architecture of the firm are consistent with each other, and consistent with competitive conditions 13-3
    4. 4. Organizational ArchitectureOrganizational structure refers to:the formal division of the organization into subunitsthe location of decision-making responsibilities within thatstructure (centralized versus decentralized)the establishment of integrating mechanisms tocoordinate the activities of subunits including cross-functional teams or pan-regional committeesControl systems are the metrics used to measureperformance of subunits and make judgments about howwell managers are running those subunits 13-4
    5. 5. Organizational ArchitectureIncentives are the devices used to reward appropriatemanagerial behaviorProcesses are the manner in which decisions are madeand work is performed within the organizationOrganizational culture refers to the norms and valuesystems that are shared among the employees of anorganizationPeople refers to not just the employees of theorganization, but also the strategy used to recruit,compensate, and retain those individuals and the type ofpeople they are in terms of their skills, values, andorientation 13-5
    6. 6. Organizational ArchitectureFigure 13.1: Organizational Architecture 13-6
    7. 7. Classroom Performance SystemThe norms and value systems that are shared among theemployees of an organization are calleda) processesb) organizational culturec) control systemsd) incentives 13-7
    8. 8. Organizational StructureOrganizational structure has three dimensions:1. Vertical differentiation - the location of decision-makingresponsibilities within a structure2. Horizontal differentiation - the formal division of theorganization into sub-units3. The establishment of integrating mechanisms - themechanisms for coordinating sub-units 13-8
    9. 9. Vertical Differentiation: Centralization And DecentralizationVertical differentiation determines where decision-makingpower is concentratedCentralized decision-making:facilitates coordinationensure decisions consistent with organization’s objectivesgives top-level managers the means to bring aboutorganizational changeavoids duplication of activities 13-9
    10. 10. Vertical Differentiation: Centralization And DecentralizationDecentralized 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It can be worthwhile to centralize some decisions anddecentralize others 13-10
    11. 11. Classroom Performance SystemWhich of the following is not an advantage of centralizeddecision-making?a) It facilitates coordinationb) It motivates employeesc) It gives top-level managers the means to bring aboutorganizational changed) It avoids duplication of activities 13-11
    12. 12. Horizontal Differentiation: The Design Of StructureHorizontal differentiation is concerned with how the firmdecides to divide itself into sub-unitsThe decision is usually based on:functiontype of businessgeographical area 13-12
    13. 13. Horizontal Differentiation: The Design Of StructureMost firms begin with no formal structureAs they grow, the organization is split into functionsreflecting the firm’s value creation activities (functionalstructure)The functions are typically coordinated and controlled bytop managementDecision-making tends to be centralizedIf the firm diversifies its product line, further horizontaldifferentiation may be necessaryFirms may switch to a product divisional structure whereeach division is responsible for a distinct product line 13-13
    14. 14. Horizontal Differentiation: The Design Of StructureFigure 13.2: A Typical Functional Structure 13-14
    15. 15. Horizontal Differentiation: The Design Of StructureFigure 13.3: A Typical Product Divisional Structure 13-15
    16. 16. Horizontal Differentiation: The Design Of StructureWhen firms expand internationally, they often group all oftheir international activities into an international divisionIn time it might prove viable to manufacture the product ineach countryThe result could be that firms with a functional structureat home would replicate the functional structure in everycountry in which they do business and firms with adivisional structure would replicate the divisional structurein every country in which they do businessThe creates the potential for conflict and coordinationproblems between domestic and foreign operations 13-16
    17. 17. Horizontal Differentiation: The Design Of StructureFigure 13.4: One Company’s International Divisional Structure 13-17
    18. 18. Horizontal Differentiation: The Design Of StructureMany firms that continue to expand will abandon theirinternational division structure and move to either a:Worldwide product divisional structure - tends to beadopted by diversified firms that have domestic productdivisionWorldwide area structure - tends to be adopted byundiversified firms whose domestic structures are based onfunctions 13-18
    19. 19. Horizontal Differentiation: The Design Of StructureFigure 13.5: The International Structural Stages Model 13-19
    20. 20. Horizontal Differentiation: The Design Of StructureThe worldwide area structure:is favored by firms with low degree of diversification anda 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 13-20
    21. 21. Horizontal Differentiation: The Design Of StructureThe worldwide product division structure:is adopted by firms that are reasonably diversifiedallows for worldwide coordination of value creationactivities of each product divisionhelps realize location and experience curve economiesfacilitates the transfer of core competenciesdoes not allow for local responsiveness 13-21
    22. 22. Horizontal Differentiation: The Design Of StructureFigure 13.6: A Worldwide Product Divisional Structure 13-22
    23. 23. Horizontal Differentiation: The Design Of StructureThe global matrix structure is an attempt to minimize thelimitations of the worldwide area structure and theworldwide product divisional structureThe global matrix structure:allows for differentiation along two dimensions - productdivision and geographic areahas dual decision–making - product division andgeographic area have equal responsibility for operatingdecisionscan be bureaucratic and slowcan result in conflict between areas and product divisionscan result in finger-pointing between divisions whensomething goes wrong 13-23
    24. 24. Horizontal Differentiation: The Design Of StructureFigure 13.7: A Global Matrix Structure 13-24
    25. 25. Classroom Performance SystemMost firms begin their international expansion with a(n)________ structure.a) Matrixb) Worldwide product divisionc) Worldwide area divisiond) International division 13-25
    26. 26. Classroom Performance SystemWhich type of organization structure has a dual decision-making system?a) Matrixb) Worldwide product divisionc) Worldwide area divisiond) International division 13-26
    27. 27. Integrating MechanismsRegardless of the type of structure, firms need amechanism to integrate subunitsThe need for coordination is lowest in firms with alocalization strategy and highest in transnational firmsCoordination can be complicated by differences insubunit orientation and goalsThe simplest formal integrating mechanism is directcontact between subunit managers, followed by liaisonsTemporary or permanent teams composed of individualsfrom each subunit is the next level of formal integrationFinally, the matrix structure allows for all roles to beintegrating roles 13-27
    28. 28. Integrating MechanismsFigure 13.8: Formal Integrating Mechanisms 13-28
    29. 29. Integrating MechanismsMany firms are using informal integrating mechanismsA knowledge network is a network for transmittinginformation within an organization that is based not onformal organization structure, but on informal contactsbetween managers within an enterprise and on distributedinformation systemsA knowledge network is a non bureaucratic conduit forknowledge flowsTo be successful, a knowledge network must embrace asmany managers as possible and managers must adhere toa common set of norms and values that override differingsubunit orientations 13-29
    30. 30. Integrating MechanismsFigure 13.9: A Simple Management Network 13-30
    31. 31. Controls Systems And IncentivesA firm’s leaders need to ensure that the actions ofsubunits are consistent with the firm’s overall strategic andfinancial objectivesThis is achieved through control and incentive systems 13-31
    32. 32. Types Of Control SystemsThere are four main types of control systems:1. Personal controls – control by personal contact withsubordinatesMost widely used in small firms2. Bureaucratic controls – control through a system of rulesand procedures that directs the actions of subunitsThe most important bureaucratic controls are budgetsand capital spending rules 13-32
    33. 33. Types Of Control Systems3. Output controls – setting goals for subunits to achieveand expressing those goals in terms of relatively objectiveperformance metricsControl is achieved by comparing actual performanceagainst targets and intervening selectively to takecorrective action4. Cultural controls – exist when employees “buy into” thenorms and value systems of the firmFirms with strong culture have less need for other formsof control 13-33
    34. 34. Classroom Performance SystemWhich is not one of the four types of control systems?a) Cultural controlb) Personal controlc) Input controld) Bureaucratic control 13-34
    35. 35. Incentive SystemsIncentives are the devices used to reward behaviorIncentives are usually closely tied to performance metrics used foroutput controlsIncentives:should vary depending on the employee and the nature of the workbeing performedshould promote cooperation between managers in sub-unitsshould reflect national differences in institutions and culturecan have unintended consequences 13-35
    36. 36. Control Systems, Incentives, And Strategy In The International BusinessThe key to understanding the relationship betweeninternational strategy, control systems and incentivesystems is performance ambiguity - which exists when thecauses of a subunit’s poor performance are not clearThe cost of control rises as performance ambiguityincreases 13-36
    37. 37. Control Systems, Incentives, And Strategy In The International BusinessPerformance ambiguity:is common when a subunit’s performance is dependenton the performance of other subunitsis lowest in firms with a localization strategyhigher in international firmsstill higher in firms with a global standardization strategyand highest in transnational firms 13-37
    38. 38. Control Systems, Incentives, And Strategy In The International BusinessTable 13.1: Interdependence, Performance Ambiguity, and theCosts of Control for the Four International Business Strategies 13-38
    39. 39. ProcessesProcesses refer to the manner in which decisions aremade and work is performedMany processes cut across national boundaries as wellas organizational boundariesProcesses can be developed anywhere within a firm’sglobal operations networkFormal and informal integrating mechanisms can helpfirms leverage processes 13-39
    40. 40. Organizational CultureCulture refers to a systems of values and norms that areshared among peopleOrganizations have their own values and norms thatemployees are encouraged to followOrganizational culture tends to change very slowly 13-40
    41. 41. Creating And Maintaining Organizational CultureOrganizational culture comes from:founders and important leadersnational social culturethe history of the enterprisedecisions that resulted in high performanceOrganizational culture can be maintained through:hiring and promotional practicesreward strategiessocialization processescommunication strategies 13-41
    42. 42. Organizational Culture And Performance In The International BusinessManagers in companies with a “strong” culture share arelatively consistent set of values and norms that have aclear impact on the way work is performedA “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 highestperformance 13-42
    43. 43. Synthesis: Strategy And ArchitectureWhat is the interrelationship between the four basicstrategies (localization, international, globalstandardization, and transnational) and organizationarchitecture? 13-43
    44. 44. Synthesis: Strategy And ArchitectureTable 13.2: A Synthesis of Strategy, Structure, and Control Systems 13-44
    45. 45. Localization StrategyFirms pursuing a localization strategy focus on localresponsiveness.They do not have a high need for integratingmechanismsPerformance ambiguity and the cost of control tends tobe lowThe worldwide area structure is common 13-45
    46. 46. International StrategyFirms pursuing an international strategy create value bytransferring core competencies from home to foreignsubsidiaries.The need for control is moderateThe need for integrating mechanisms is moderatePerformance ambiguity is relatively low and so is the costof controlThe worldwide product division structure is common 13-46
    47. 47. Global Standardization StrategyFirms pursuing a global standardization strategy focus onthe 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 13-47
    48. 48. Transnational StrategyFirms pursuing a transnational strategy focus onsimultaneously attaining location and experience curveeconomies, local responsiveness, and global learning.Some decisions are centralized and others aredecentralizedThe need for coordination is highAn array of formal and informal integrating mechanismare usedThe cost of control is highA strong culture is encouragedMatrix structures are common 13-48
    49. 49. Environment, Strategy, Architecture, And PerformanceFor a firm to succeed, two conditions must be met:1. the firm’s strategy must be consistent with theenvironment in which the firm operates2. the firm’s organization architecture must be consistentwith its strategy 13-49
    50. 50. Organizational ChangeFirms need to change their architecture to reflectchanges in the environment in which they are operatingand the strategy they are pursuing 13-50
    51. 51. Organizational InertiaOrganizations are difficult to changeSources of inertia include:the existing distribution of power and influencethe current culturesenior managers’ preconceptions about the appropriatebusiness model or paradigminstitutional constraints 13-51
    52. 52. Implementing Organizational ChangeThere are three basic principles for successful organization change:1. Unfreeze the organization through shock therapyEffective change requires taking bold actions like plant closures ordramatic structural reorganizations2. Moving the organization to a new state through proactive change inarchitectureMovement requires a substantial change in the form of a firm’sorganizational architecture so that it matches the desired new strategicpostureMovement should be done quickly3. Refreeze the organization in its new stateRefreezing requires that employees be socialized into the new way ofdoing things 13-52
    53. 53. Classroom Performance SystemWhich type of organizational structure is often associatedwith a transnational strategy?a) worldwide area divisionb) worldwide product divisionc) matrixd) international division 13-53