The Organization of International Business

Question 1

What does the term organizational architecture include?

Answer 1

Formal organizational structure
Control systems and incentives
Processes
Organizational culture
People

Question 2

Explain formal organizational structure

Answer 2

a. The formal division of the organization into subunits (product divisions, national operations, and functions. Often this is displayed in an organizational chart.
b. The location of decision-making responsibilities within that structure (i.e., centralized or decentralized)
c. The establishment of integrating mechanisms to coordinate the activities of subunits, including cross-functional teams and pan-regional committees.

Question 3

Explain control systems and incentives

Answer 3

a. Control systems are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits.
b. Incentives are the devices used to reward appropriate managerial behavior.

Question 4

Explain processes

Answer 4

are the way decisions are made and work is performed within the organization.

Question 5

Explain organizational culture

Answer 5

refers to the norms and value systems that are shared among the employees of an organization.

Question 6

Explain people (in the context of organizational architecture)

Answer 6

doesn’t only include the employees of the organization, but also the HR-strategy used to recruit, compensate, and retain those individuals.

Question 7

Vertical differentiation

Answer 7

refers to the location of decision-making responsibilities within a structure.
- Generally, overall firm strategy, legal issues, etc. is left to top-management, and operating decisions may or may not be decentralized.

Question 8

Give some arguments for centralization

Answer 8

1. Can facilitate coordination and integration of operations.
2. Can help ensure that decisions are consistent with organizational objectives- Minimizing the chance of decisions that are at variance with top management’s goals.
3. By concentrating power and authority in one individual management team, can give top-level managers the means to bring about needed major organizational change.
4. Avoid duplication of activities that occurs when similar activities are carried on by various subunits within the organization.

Question 9

Give some arguments for decentralization

Answer 9

1. Top management can become overburned when decision-making authority is centralized -> poor decisions
2. Motivational research favors decentralization -> willing to give more to their jobs when they have a greater degree of individual freedom and control.
3. Decentralization permits greater flexibility – more rapid response to environmental changes
4. Can result in better decisions -> decisions are made closer to the spot by individuals who have better information than managers.
5. Can increase control. Subunit managers can be held responsible for subunit performance - > fewer excuses for poor performance.

Question 10

Rational decision making

Answer 10

Whenever a manager makes a decision, we assume that he can make the right decision at the right time (rational decision making).

Question 11

What does Herbert Sion say?

Answer 11

• Challenges the above (rational decision making) by saying that we cannot assume that managers have the rationale (right information) to make right decisions at all times.
• Instead we are bounded, not fully rational

Suboptimal decisions
o We want to satisfy our peers/bosses, and not always do what’s best.
o The way we make decisions is often by deciding, and then looking at problems, rather than making a decision based on analysis of the problem.
o We step away from complexity and try to simplify problems.

Question 12

Horizontal differentiation

Answer 12

refers to the formal division of the organization into subunits. The decision is normally made based on function, type of business, or geographic area.

Question 13

The structure of domestic firms

Answer 13

• Often, as firms grow, the organization is split into functions (marketing, sales, etc.).
  o These functions are most often coordinated and controlled by top management.
• This is difficult, when the firm diversifies its product offering, which takes the firm into different business areas.
  o At this stage most firms switch to a product divisional structure (each division is responsible for a distinct product line/business area)

Question 14

The international division

Answer 14

When firms initially expand abroad, they often group all their international activities into an international division, organized on geography.
- This means replicating the functional structure in every country for firms organized based on functions and for firms organized by product divisions it means replicating the divisional structure in every country.
- However, an international division structure can give rise to problems:
o The dual structure means potential for conflict and coordination problems between domestic and foreign operations.
- As a result of such problems, many firms that continue to expand internationally abandon this structure and adopt one of the worldwide structures:

Question 15

Worldwide area structure

Answer 15

Divides the world into geographic areas which are largely autonomous, and thus, decisions are decentralized to the areas.

• Favored by firms w. low diversification (of products) and with functional structure.
• Difficult to transfer core competencies between areas.
• More appropriate if the firm is pursuing a localization strategy

Question 16

Worldwide Product Divisional Structure

Answer 16

Spreads into the geographic areas by divisions that follow the, where each division is a self-contained entity with full responsibility for its own value creation activities.

• However, each product division is coordinated by that division worldwide, meaning that the voice of area managers is limited since they are under product division managers.
• Easy to transfer core competencies between areas.
• More appropriate for firms pursuing global standardization or international strategies

Question 17

Global Matrix structure

Answer 17

In the classic global matrix structure, horizontal differentiation proceeds along two dimensions: product division and geographic area (dual responsibility)
- Individual managers thus belong to two hierarchies (a divisional hierarchy and an area hierarchy) and have two bosses (a divisional boss and an area boss).
o This makes it ineffective and too bureaucratic to work in practice.

Question 18

What are integrating mechanisms?

Answer 18

Mechanisms for coordinating subunits
- The need for coordination between subunits varies with the strategy of the firm. It’s most needed in international firms pursuing location and experience curve economies, local responsiveness, and the transfer core competencies and skills between subunits.

Question 19

Formal integrating mechanisms

Answer 19

Direct contact – managers of subunits contact each other when they have common concerns
Liaison roles – giving a person in each subunit the responsibility for coordinating with another subunit
Teams – composed of individuals from subunits to coordinate product development and introduction -> useful in any aspect of operations or strategy
Matrix structure – all roles are viewed as integrating roles. Facilitate maximum integration among subunits.

Question 20

Informal integrating mechanism

Answer 20

Knowledge network – transmitting information within an organization based on informal contact between managers within and enterprise.
The figure shows how managers are linked through common acquaintances
Knowledge networks may not be efficient enough in itself to achieve coordination.

The great strength of such a network is that it can be used as a nonbureaucratic conduit for knowledge flows within a multinational enterprise
- Needs many managers in the network to work
- Establishing companywide knowledge networks is difficult
o Two techniques being used to establish networks are information (IT) systems and management development policies.
- To work, firms must have a strong organizational culture that promotes teamwork and cooperation.

Question 21

Distance

Answer 21

makes integration of companies complicated, read about CAGE framework

Question 22

What are some control systems?

Answer 22

Personal controls, bureaucratic controls, output controls, and cultural controls.

Question 23

Personal controls

Answer 23

Personal contact with subunits – mostly used in small firms

Achieved by personal contact between top management and subordinate managers

Question 24

Bureaucratic controls

Answer 24

A system of rules and procedures that directs the actions of subunits (e.g. capital spending rules)

Question 25

Output controls

Answer 25

Involves top-management setting goals for subunits, and only intervening when goals aren’t met (management by exception)

Question 26

Cultural controls

Answer 26

When employees “buy into” the norms and value systems of the firm, and thus commit themselves to achieving these, they don’t need as much ‘guidance’ from other systems
self-control can reduce the need for other control systems.

Question 27

Talk about incentive systems

Answer 27

Reward appropriate employee behavior. May e.g., set a goal and give a share of profits above the goal.
Type of incentive must match the type of work being done.
Basic principle -> incentive scheme for an individual employee is linked to an output target that he or she has some control over.
Help encourage managers to cooperate with linking incentives to performance at a higher level of the organization.
Incentive systems used within an mne often have to be adjusted to account for national differences in institutions and culture.

• Can be stick or carrot
  o Stick is more effective according to research
• Are different from employee to employee (as they must reflect the type of work)
• In organizations with high interdependence between subunits, managers of the two are sometimes rewarded by the success of the entire firm, or their divisions combined.
• Are adjusted for national differences
• It is important for managers to recognize that incentive systems can have unintended consequences. E.g. if one is rewarded by number of units, he would produce many units of low quality.

Question 28

How does control and incentive systems relate to international business strategies?

Answer 28

• Performance ambiguity exists when the causes of a subunit’s poor performance are not clear (often when they’re dependent of other subunits – e.g. manufacturer in one country, sales in another. Sales are stagnating because of poor sales or poor product?)
  o The level of performance ambiguity gets higher the more international a firm is, as it gets more and more dependent on subsidiaries/units around the world.

Question 29

What does control, incentives and interdependence mean for management?

Answer 29

• The costs of control can be defined as the amount of time top management must devote to monitoring and evaluating subunits’ performance.

Question 30

Performance ambiguity

Answer 30

When the causes of a subunit’s poor performance are not clear. Common when a subunit’s performance is partly dependent on the performance of other subunits.
The level of performance ambiguity is a function of the interdependence of subunits in an organization.

Question 31

Strategy, interdependence and ambiguity

Answer 31

In firms pursuing a localization strategy, each national operation is a stand-alone entity and can be judged on its own merits. Level of performance ambiguity is low, level of interdependence is somewhat higher.
Global standardization strategy – levels of interdependence and performance ambiguity is high.
Transnational firms – the level of performance ambiguity is highest.

Question 32

Implications for control and incentives

Answer 32

Cost of control = the amount of time top management must devote to monitoring and evaluating subunit’s performance.
Performance ambiguity is low -> management can use output controls and a system og management
Performance ambiguity is high -> devote time to resolving the problems that arise from performance ambiguity with a corresponding rise in cost of controls.

Question 33

Processes

Answer 33

• In multinational enterprises, processes cut across divisions and countries. Therefore, it’s important to have a culture that promotes cooperation among individuals from different subunits and nations and incentive systems that reward that.
• A new, valuable process (anywhere in the enterprise) might lead to a competitive advantage.

Question 34

Organizational culture

Answer 34

• Organizational cultures are defined in the same way as societal cultures are.

Question 35

What are the sources of organizational culture?

Answer 35

o The founder/leader’s own set of values, which are imprinted in the culture.
o The broader social culture of the nation where the firm was founded and/or has significant operations.
 This influence is particularly tricky in countries that are by design going through significant culture change, as societal values can clash (e.g. in China, which is moving more towards market economy, but still has deep roots in communism).
 Makes it trickier to implement cultures across nations.
o The history of the enterprise, which over time may come to shape the values of the organization.
 E.g. if during a war, the subsidiaries of the organization became more autonomous, they’re likely to stay so after the war.
o Things that have improved the performance highly tends to set values
 E.g. one entrepreneurial employee came with successful new product  all employees get 15% time to spend on new ideas.

Question 36

Which mechanisms maintain culture?

Answer 36

o hiring and promotional/rewarding practices of the organization (hiring and promoting ppl. With right values)
o socialization processes (formal with training programs, or informal with advice)
o communication strategy (communicating the values through corporate mission statements etc.)

Question 37

When does a firm have a strong culture?

Answer 37

• A firm has a strong culture, when almost all managers share a relatively consistent set of values and norms that have a clear impact on the way work is performed.
  o New employees adapt these, and those who don’t tend to leave.
  o Here, subordinates and superiors alike can correct executives if they violate the values and norms of the organizational culture.

Question 38

Why is it more important to have a common culture in firms employing a transnational strategy than a localization strategy?

Answer 38

o Shared norms and values can facilitate coordination and cooperation between individuals from different subunit, and a strong common culture will help in situations of interdependence, performance ambiguities, and conflict among managers from different subsidiaries.

Question 39

Which conditions must be fulfilled for a firm to succeed?

Answer 39

1. The firm’s strategy must be consistent with the environment in which the firm operates (some industries require special strategies).
2. The organizational architecture must be consistent with firm strategy.
   o If this isn’t the case, the firm is likely to experience performance problems.
   See table 14.2 for fit between strategy and architecture

Question 40

Why is it difficult to change organizations?

Answer 40

o Because changing the organization often means a change in distribution of power and influence, the managers who are in charge often don’t want to lose that.
o If a cultural change needs to find place, workers will lose something (if they even accept that the culture is changed)
o Managers’ perceptions about appropriate business models often change slower than do the need for such.
o Institutional constraints: E.g. regulations about layoffs will make it ‘not-worth’ to close operations in a country even though the new strategy suggests it.

Question 41

Summarize briefly the principles for successful organizational change

Answer 41

o (1) unfreeze the organization through shock therapy (can be through the announcement of a dramatic structural reorganization).
 Change will not occur unless senior managers are committed to it and employees see that.
o (2) move the organization to a new state through proactive change in the architecture
 Things like closing operations; reorganizing the structure; reassigning responsibilities; changing control, incentive, and reward systems; redesigning processes; letting people go who are an impediment to change, etc.
o (3) refreeze the organization in its new state
 Requires that employees be socialized into the new way of doing things.
 Takes a long time