CHAPTER FIFTEEN
THE ORGANIZATION OF INTERNATIONAL
BUSINESS
Objectives
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Profile the evolving understanding of the organization of international business
Describe traditional and contemporary structures
Study the systems used to coordinate and control operations
Profile the role of organization culture
Examine special situations in the organization of international business
Chapter Overview
Structuring organizations is a complex task made even more complex when those
organizations span national boundaries. Chapter Fifteen examines the ways in which
firms group their operations in order to implement their strategies and control processes,
as well as the role of organizational culture. The chapter begins with a discussion of the
principles of organization and then explores the dynamics of various organizational
structures. It considers the trade-offs between centralizing and decentralizing the
decision-making process and discusses the various mechanisms that can be used to help
ensure control measures are in fact implemented. The chapter concludes with an
examination of organization in special situations such as acquisitions and shared
ownership as well as the role of legal structures.
Chapter Outline
OPENING CASE:
Johnson & Johnson
[See Map 15.1]
Since beginning operations in 1886, Johnson & Johnson (J&J) has evolved into the most
broadly based health-care corporation in the world. It markets its products in more than
175 countries, generates annual global revenues of more than $47 billion and employs
about 111,000 people (of which nearly 60% are located outside the United States). J&J’s
business strategy aims for leadership in the firm’s three core areas: pharmaceuticals,
medical devices, and consumer products. It pursues this strategy via a complex
organizational structure that combines responsibility across 37 product groups and 14
health-care areas (known as platforms) that act as staging areas from which J&J leverages
its knowledge, development skills, marketing expertise, and global reach. Formal
planning at the business-unit level includes initiatives on major issues such as
biotechnology, the restructuring of the health-care industry and globalization. Although
J&J’s operating units are largely decentralized, headquarters managers are responsible for
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coordinating production and marketing on a global basis and dealing with issues common
to many or all operating units. Successful employees are rotated among units. Selfdirected councils (research, operations, etc.) meet regularly to swap ideas.
Teaching Tip: Review the PowerPoint slides for Chapter Fifteen and select those
you find most useful for enhancing your lecture and class discussion. For additional
visual summaries of key chapter points, also review the figures in the text.
I.
INTRODUCTION
Organizational challenges abound in this era of globally dispersed resources and
operations. International managers must create structures, systems, and a culture that
will effectively implement their company’s strategies around the world. Formulating
the appropriate strategy is merely the first step of a long process that includes
crafting an organization that will work to implement that strategy. Figure 15.1
summarizes the challenge of integrating different elements into a unified whole.
II. THE CAUSES OF CHANGE
In the past, structuring the organization was thought to be merely a matter of
reorganizing the lines and boxes of the formal organizational chart. In times of rapid
change, however, it is necessary to jumpstart the development of knowledgegenerating and decision-making relationships rather than to wait for them to form
according to the prescribed organizational chart. Globalization has changed the
opportunity set and efficiency frontier for companies (see Chapter Eleven) and has
resulted in new strategies that demand more sophisticated organizations. Knowledge
has become the engine of sustainable competitive advantage, requiring MNEs to
build organizations that spread powerful ideas throughout their worldwide business.
Finally, workplace trends in which the conduct and context of jobs are changing
require that organizations change the nature of management and structure to fit the
changes in the nature of work.
III. ORGANIZATION IN THE INTERNATIONAL BUSINESS
Companies seek to develop a complementary mix of structure, coordination and
control systems, and organizational culture in order to thrive in the face of significant
environmental and workplace changes. Flexibility is fostered in many organizations
through the use of cross-functional task forces, dual reporting relationships, informal
networking, and incentive compensation tied to group performance.
IV. ORGANIZATION STRUCTURE
Organizational structure is the formal arrangement of roles, responsibilities, and
relationships within an organization and is a powerful tool with which to implement
strategy. A company’s choice of structure depends on many factors, including the
configuration of a company’s value chain in terms of the location and type of foreign
facilities, as well as the impact of international operations on total corporate
performance. Two central issues in organization structure are vertical and horizontal
differentiation.
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A. Vertical Differentiation: Centralization versus Decentralization
Vertical differentiation refers to the issue of determining where in the
company hierarchy is the authority to make what decisions. This issue becomes
a decision between centralization versus decentralization of decision making
authority. This relates to the discussion in Chapter 11, which illustrated the
issue of balancing global integration (centralization) with local differentiation
(decentralization). Centralization is the degree to which high-level managers,
usually above the country level, make important decisions and pass them down
to lower levels for implementation. Decentralization is the degree to which
lower level managers, usually at or below the country level, make and
implement important decisions (See Table 15.1). Centralized decision making is
usually associated with an international or global strategy, decentralized
decision making is usually associated with a multidomestic strategy, and a
transnational strategy usually relies on a combination of both.
B. Horizontal Differentiation: The Design of the Formal Structure
Horizontal differentiation describes how the company designs its formal
structure in order to (i) specify the total set of organizational tasks, (ii) divide
those tasks into jobs, departments, subsidiaries, and divisions, and (iii) assign
authority and reporting relationships.
C. Functional Structure
A functional structure groups personnel according to business function. It is
ideal when products and production methods are undifferentiated across
countries. However, as new and different products are added, the structure
becomes cumbersome.
D. Divisional Structures
Divisional structures specify roles and relationships within the company in terms
of outputs. Each division is assigned responsibility for a different set of
products or markets.
1. International Division Structure. An international division groups all
international activities into a single division within a firm. While this
structure creates a critical mass of international expertise, the relationship
between the international and domestic divisions is often complicated.
2. Product Division Structure. Product divisions are very popular among
international companies today because most companies’ businesses involve
a variety of diverse products. This structure is well suited for a global
strategy and enhances a company’s ability to sell or spin off certain product
lines. There will, however, likely be some duplication of activities among
product divisions and knowledge transfer between divisions is minimal.
3. Geographic (Area) Division Structure. A geographic division groups
activities on a regional basis and is used when a firm has extensive foreign
operations that are not dominated by a single country or area. The structure
is useful when maximum economies of scale and scope can be captured on
a regional rather than a global basis.
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E. Matrix Structure
A matrix structure is a two-tiered structure designed to give functional, product
and/or geographic groups a common focus. It is based on the theory that the
groups will become interdependent and thus will more readily exchange
information and resources with each other. However, the dual
reporting/oversight responsibilities can also create conflicts across groups with
differing objectives.
F. Mixed Structure
Firms seldom if ever get all of their activities to neatly correspond to a single
organizational structure. Most exhibit a mixed structure, particularly with
respect to foreign operations, due to legacies, executive preferences, and other
circumstances.
G. Contemporary Structures
Many companies are moving away from traditional structures as the demands
and opportunities of the international environment change. Some examples of
contemporary structures include those described as learning organizations,
virtual organizations, or modular structures. All of these share the same
premise: A structure should not be defined by, or limited to, the horizontal,
vertical, or external boundaries that block the development of knowledgegenerating and decision-making relationships in the company. Contemporary
structures aim to have few to no boundaries between different vertical ranks and
functions, different units in different geographical locations, and between the
firm and its suppliers, distributors, joint venture partners, strategic allies, and
customers. Other examples of contemporary structures include the network,
virtual, and project structures.
H. Network Structure
A network organization is a small core organization that outsources value
activities to key partners (see Figure 15.3). Many Japanese firms are linked
through keiretsus, i.e., networks in which each firm owns a small percentage of
the others in the network. Keiretsus may be either vertical or horizontal in
nature.
I. Virtual Organization
A virtual organization is a temporary arrangement among partners that can be
easily reassembled to adapt to market change. Operationally, the virtual
organization consists of a small core of full-time employees that temporarily
hires outside specialists to work on opportunities that arise. Market mechanisms
such as contracts, rather than hierarchy and authority, hold the virtual
organization together.
J. Project Structure
This type of organization has no departments or employee job titles. All work is
project based, with project teams forming, disbanding, and forming again as the
flow of work requires. This type of structure has proven difficult to sustain and
has at times given way to a more traditional matrix organization structure.
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POINT--COUNTERPOINT: Hierarchies or Hyperarchies?
POINT: Hierarchies are a tried and true form of organization proven to be effective with
complex tasks and in complex environments. Hierarchal corporate structures such as the
divisional form, first developed in the 1920s by GM, DuPont, Sears, Standard Oil, and
others, provide a powerful framework that allows top management to command and
control operations. Certainly, the business environment is changing, but the response to
these changes should not be to discard principles of hierarchy but instead to use these
principles as a foundation for future success. New programs and initiatives like total
quality management, scenario and contingency planning, supply chain management, and
Six Sigma can be implemented to update traditional organizational forms without
replacing them.
COUNTERPOINT: The global business environment has changed too dramatically to
be able to continue with the organizational status quo. Instead, a new form of
organization known as hyperarchy is necessary to deal with the new realities.
Hyperarchy is a “large-scale, self-organizing community that sets free unusually high
degrees of energy and engagement—despite the lack of clear or direct economic payoff
for participants.” Examples of hyperarchy include the Linux open source software
project in which voluntary contributions are made by individual programmers in a totally
transparent environment. Markets now reward companies that build boundaryless
organizations that can survive and even thrive under the stresses brought on by rapid
change.
V. COORDINATION AND CONTROL SYSTEMS
Systems are the framework of processes and procedures used to ensure that an
organization can fulfill all tasks required to achieve its objectives. MNEs use several
coordination and control tools to manage the strategic performance of their value
chains.
A. Coordination Systems
Coordination systems link the various activities of a company to counteract the
tendency of different groups of managers and employees to develop different
concerns and orientations based on their location and immediate responsibilities.
Managers tap several approaches to coordinate the operations of interdependent
units and individuals including coordination by standardization, by plans, and by
mutual adjustment.
1. Coordination by Standardization. Companies with widely dispersed
operations often standardize the ways that employees do their jobs and deal
with customers. Standardization sets universal rules and procedures that
apply worldwide and enforces consistency in performance of activities in
geographically dispersed units. Rules and regulations about how employees
interact, also called formalization, aims to reduce workplace uncertainty and
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simplify the exchange of ideas and resources. Standardization is
undermined when frequent exceptions to rules are made, and is best suited
for strategies that champion constancy and predictability in stable
industries. Companies with an international or geocentric strategy are
inclined to emphasize standardization.
2. Coordination by Plan. This type of coordination requires
interdependent units to meet common deadlines and objectives. MNEs
following a multidomestic strategy may opt to establish objectives and
schedules that give interdependent units greater discretion in developing
coordination systems. This process is often complicated by the difficulties
imposed by distance and cultural differences. Greater expense, time, and
possibility of error are inherent in planning across national boundaries.
3. Coordination by Mutual Adjustment. Coordination by mutual
adjustment requires managers to interact with counterparts to enable
flexible coordination mechanisms, largely informally. MNEs that opt to
encourage mutual adjustment also adopt a formal structure and install
standardization and planning systems, but they see great value in
encouraging the use of informal mechanisms that create more incentive for
parties to talk to one another. Mutual adjustment can be a very effective
coordination tool when an MNE faces new problems that cannot be defined
with customary rules or procedures. The frequent discussion and feedback
needed to make mutual adjustment work, however, can be costly in terms of
both time and money.
B. Control Systems
Every MNE must regulate what its employees can and cannot do in order to
avoid spinning out of control. Control systems must ensure that people are
doing what they are supposed to do and not doing what they are not supposed to
do. There are three prevalent methods of control:
• Market control which uses external market mechanisms to establish
objective standards
• Bureaucratic control which emphasizes organizational authority and relies
on rules and regulations
• Clan control that uses shared values and ideals to moderate employee
behavior
C. Control Mechanisms
1. Reports. Decisions on how to allocate capital, personnel, and technology
continue without interruption, so reports must be timely, accurate and
informative. Written reports are crucial for international operations because
subsidiary managers so often lack substantive personal contact with
corporate staff. To permit comparisons across operations, most MNEs use
reports for foreign subsidiaries that resemble those they use domestically.
The primary emphasis of an operations report is to evaluate a subsidiary’s
performance; the evaluation of its management should generally be of
secondary importance.
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2. Visits to Subsidiaries. Within many MNEs certain members of the
corporate staff spend considerable time visiting foreign subsidiaries in order
to collect information and provide direction.
3. Management Performance Evaluation. MNEs should evaluate a
subsidiary manager separately from the subsidiary’s performance so as not
to penalize or reward managers for conditions beyond their control. That
said, precisely what is within their control is frequently a matter for
disagreement.
4. Cost and Accounting Comparability. Headquarters needs to use
considerable discretion in interpreting the data it uses to evaluate and
change subsidiary performance, especially if it is comparing a subsidiary’s
performance with competitors from other countries whose currencies and
accounting methods are different from its own.
5. Evaluative Measurements. A system that relies on a combination of
measurements is more reliable than one that doesn’t. The most important
criteria tend to be budget-compared-with-profit and budget-compared-withrevenue. Other non-financial criteria such as market share, quality control,
and host government relations are also important.
6. Information Systems. With ever-expanding computer and global
telecommunications links, managers can share information more quickly
and easily than ever before. In fact, information technology can facilitate
both the centralization and the decentralization of operations. The primary
problems associated with information systems concern the cost of
information relative to its value, its redundancy, and its irrelevance.
VI. ORGANIZATION CULTURE
Organization culture is a system of shared values about what is important and
beliefs about how the world works. There is a significant link between
organization culture and the financial performance of a firm and can be the most
critical component of a company’s transition from “good” to “great” status. Key
features of culture include values and principles of management, work climate
and atmosphere, patterns of “how we do things around here”, traditions, and
ethical standards.
A. The Growing Importance of Culture
Organization culture often shapes the strategic moves a company will consider
and reject and can dramatically influence the success of corporate initiatives.
Culture is increasingly important as team based approaches to management and
reliance on individual-level behaviors such as learning and collaboration
become more commonplace. The shared values that make up organization
culture influence what employees perceive, how they interpret, and what they do
to respond to their world. When confronted with opportunities or threats,
organizational culture acts as a primary influence on how employees act and
react.
B. Challenges and Pitfalls
Companies increasingly develop and manage their cultures, rather than allowing
them to emerge naturally. This becomes increasingly difficult in an
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international context, where managers from different countries often have
different values than those endorsed by the company. Convergent values ease
the exchange of ideas between people from different countries, while different
values tend to create boundaries and barriers. To overcome these challenges,
many MNEs promote closer contact among managers from different countries
by rotating mangers among operations in different countries.
C. Strategy and Organization Culture
The type of strategy a company is pursuing both influences and is limited by the
principles and practices of its organization culture (see Figure 15.4). Companies
pursuing a global strategy often aim to develop a forceful culture that reinforces
standardized goals, priorities, and practices. Multidomestic strategies require
sensitivity to local outlooks and norms and do not lend themselves well to a
strong company-wide culture.
LOOKING TO THE FUTURE:
The Role and Rise of Corporate Universities
Corporate universities—physical and virtual institutions that lead training efforts,
facilitate continuous organizational learning, and help upgrade company competencies
and capabilities—have arisen as a mechanism for company’s to continually develop and
monitor their organization cultures. These entities are shifting from an historical focus on
teaching employees practical skills and workplace systems to instruments for inoculating
all employees with the values and culture that make the organization unique. Many
senior executives are leading regular courses for employees in order to facilitate greater
contact with employees and to have a more direct influence on company values. Some
companies are developing multiple learning sites around the world, while others prefer
virtual training mechanisms over a physical structure. E-learning tactics such as live
webcasts, online chat and discussion groups, videoconferences, and interactive sessions
help to accomplish the objectives of the corporate university over time and space. Some
see a future in which the corporate university becomes the strategic center for the
company and becomes the leading force for formulating strategy and developing
leadership.
VII. ORGANIZATION IN SPECIAL SITUATIONS
A. Acquisitions
An acquired company usually does not completely mesh with the existing
organization and requires changes in structures, control systems, and cultural
values in order to integrate more fully with the company’s other operations.
B. Shared Ownership
Shared ownership usually makes control harder than it would be with wholly
owned operations, but there are mechanisms that can work, such as spreading
the remaining ownership among many shareholders, contract stipulations that
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board decisions require more than a majority, dividing equity into voting and
nonvoting stock, and side agreements on who will control decision making.
C. Dynamic Nature of Performance
As companies grow, and particularly as they expand internationally,
organizational structure and control demands evolve. Companies change their
structures and control systems to meet the new requirements that come with
growth.
VIII.THE ROLE OF LEGAL STRUCTURES
When operating in a host country, companies may choose among legal forms that
affect their decision-making, taxes, maintenance of secrecy and legal liability. Most
choose a subsidiary form for which there are additional legal alternatives that vary by
country.
A. Branch and Subsidiary Organizations
A foreign branch is a foreign operation not legally separate from the parent
company. Branch operations are possible only if the parent holds 100 percent
ownership. A foreign subsidiary, however, is a separate legal entity, established
through foreign direct investment; the parent may or may not own all of the
voting stock. Because a subsidiary is legally separate from its parent, legal
authorities generally limit liability to the subsidiary’s assets. This concept of
limited liability is a major factor in the choice of the subsidiary form. With few
exceptions, claims against a firm for its actions are settled by courts either where
the actions occur or where the subsidiary is legally domiciled.
B. Types of Subsidiaries and Operating Form
When establishing a subsidiary in a foreign country, a firm can usually choose
from among a number of alternative legal forms. In addition to differences in
liability, forms vary in terms of:
• the ability of the parent to sell its ownership
• the number of stockholders required to establish a subsidiary
• the percentage of foreigners allowed to serve on a board of directors
• the amount of required public disclosure
• whether equity may be acquired by non-capital contributions
• the types of eligible businesses
• the minimum capital requirements for establishing a subsidiary.
WEB CONNECTION
Teaching Tip: Visit www.prenhall.com/daniels for additional information and
links relating to the topics presented in Chapter Fifteen. Be sure to refer your
students to the on-line study guide, as well as the Internet exercises for Chapter
Fifteen.
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CLOSING CASE: GE Hungary [See Figure 15.5]
1.
Define national and corporate cultures. How did GE’s and Tungsram’s cultures
differ? How did GE attempt to use its culture as a control mechanism in Hungary
and elsewhere?
National culture represents the amalgam of the cultures of various distinct groups
that reside within the borders of a country. If a country has only one predominant
ethnic group, then national culture and ethnic culture are one and the same.
Corporate culture consists of the common values shared by the employees of an
organization that both serve as an implicit control mechanism and help enforce other
explicit bureaucratic mechanisms. It represents the ways in which attitudes are
expressed and the ways in which employees are evaluated and rewarded. GE’s
corporate culture partly reflects U.S. national culture. It embodies such typical traits
as individualism, self-confidence, pragmatism, optimism, universalism, low power
distance, equality and a stronger orientation toward the present rather than the future.
Hungarians, however, are less confident, more pessimistic, more particular about
relationships than rules and more outer-directed. These national differences can
largely be explained by historical experiences. GE relies heavily on culture as a
control mechanism. It expects people to behave according to its cultural norms. The
company feels strongly that the more it is able to “internalize” its corporate values at
the subsidiary level, the more successful it will be in implementing its global
strategies and policies. After a cautious start, GE proceeded to embed its corporate
culture at Tungsram. Standardization of the manufacturing process for many of its
products is but one reason. This change in corporate culture is partly responsible for
impressive improvements in Tungsram’s productivity, quality and service.
Nonetheless, GE has been accused of heavy-handedness. Its decision to transfer its
corporate culture to Tungsram has been a source of such contention that it has
resulted in unfavorable publicity for GE throughout the host country.
2.
What were the pros and cons of changing GE’s European operations from
multidomestic to regional or global? Would such a change work the same for all of
GE’s product divisions?
Multidomestic operations are more flexible and can more easily accommodate
significant national differences among the countries where a firm is operating. The
disadvantage of multidomestic operations is that decisions made on the basis of local
considerations may not yield maximum benefits to the corporate organization as a
whole. Regional or global operations are better able to take advantage of economies
of scale and scope, facilitate the exchange of personnel and cross-country
experiences and provide better organizational means of control. The disadvantage is
that knowledge about local conditions might not be sufficiently factored into
decisions made centrally. However, the change of strategy would not affect all of
GE’s product divisions equally. While some products require minimal adaptation
across countries, others require extensive changes from country to country.
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3.
What factors might account for (a) GE’s initial acquisition and subsequent
expansion of light-source manufacturing and R&D in Hungary? and (b) GE’s
establishing new types of businesses in Hungary?
GE’s initial acquisition and subsequent expansion of its operations in Hungary were
largely due to the fact that light-source manufacturing and R&D fit well with one of
GE’s long-time established core businesses (lighting). In addition, Hungary is
strategically located in a region that GE wished to enter. Tungsram itself was
specifically attractive because of its historical presence in the East European market.
Over time the firm had developed a number of important lighting source innovations,
and it traditionally sold most of its production outside of Hungary. Although
Tungsram’s market position eroded during the closing era of Soviet rule, GE saw an
opportunity to effect a turnaround through the infusion of capital, production
technology and management know-how. GE then went on to establish several new
types of businesses in Hungary (banking, medical equipment, industrial equipment,
electrical switches and airplane engine repair) and combined them into a new
holding company, GE Hungary Inc. The purpose of the joint holding is to allow
GE’s manufacturing operations to negotiate with the government of Hungary as a
single voice, to centralize and standardize purchasing, accounting, human resource
management, and legal representation, thereby generating significant cost savings
and improving the firm’s competitive position.
4.
In what ways does GE attempt to gain synergy among its operations in different
countries and among its different businesses?
GE has decided to position Tungsram as a lower-priced brand and to introduce its
own brand as the premium quality product in Europe. The reason is that GE’s
corporate logo ties together all of its activities worldwide. Corporate-wide benefits
can be obtained through enlarged market shares, increased specialization, increased
cross-border teamwork, the sharing of R&D, technology and other overhead costs,
and because new business problems are created for competitors. While the pursuit of
such benefits was surely a part of GE’s pre-investment calculations, they are difficult
to quantify once realized.
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CHAPTER TERMINOLOGY:
organization structure, p. 526
vertical differentiation, p. 526
centralization, p. 526
decentralization, p. 526
horizontal differentiation, p. 528
network organization, p. 533
virtual organization, p. 535
hyperarchy, p. 536
coordination by mutual adjustment,
p. 539
market control, p. 540
bureaucratic control, p. 540
clan control, p. 540
organization culture, p. 543
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ADDITIONAL EXERCISES: The Organization of International Business
Exercise 15.1. A recent trend among MNEs is to replace expatriates in foreign
subsidiaries with local managers. Ask students to debate the implications of that
policy from the standpoints of (a) the development and implementation of global
strategies, (b) the control of foreign subsidiaries and (c) the development of
managers with significant international experience and expertise. Does it mean
decision-making will necessarily be decentralized?
Exercise 15.2. Refer students to five recent cases: GE Hungary and Johnson &
Johnson (Chapter 15), Cisco Systems (Chapter 14) and Carrefour (Chapter 13). Ask
the students to compare the apparent corporate cultures of the four MNEs. Then ask
them to propose and defend specific types of organizational structures for each of the
firms, given the nature and extent of their operations. Would decision-making be
centralized or decentralized?
Exercise 15.3. Historically, many foreign firms that competed in the European
marketplace established an extensive network of highly autonomous local
subsidiaries. However, as Europe has evolved into a single market via the EU, those
same firms have often been frustrated in their efforts to shift from a multidomestic to
a regional (European) strategy. Ask students to discuss the reasons for this and to
suggest mechanisms firms might use to accomplish the shift. Finally, have the
students compare the strategic advantages of a long-established multidomestic-type
organization to a newly established regionally oriented firm.
Exercise 15.4. Ask students if they would be more comfortable working in a
hierarchy or hyperarchy. Divide students into smaller groups having students of both
preferences. Have the students discuss the pros and cons of each organizational
mechanism and develop a list of circumstances in which hierarchy is preferable and
another list of conditions in which hyperarchy is preferable.
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