Chapter 2
The Organizational
Context
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Chapter Objectives
Examine how international growth places demands on
management and HRM
We will cover the following areas:
Structural responses to international growth
Control and coordination mechanisms, including culture
Mode of operation used in various international markets
Effect of responses on HRM approaches and activities.
We start with the premise that the HR functions do not operate in
a vacuum, and that HR activities are determined by, as well as
influence organisational factors.
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Figure
2-1
Demands on Management by
International Growth
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Wal-Mart German Retreat
 Wal-Mart International
 Entered Germany in 1997
 Global sales: $312 billion
 Taking over 95 stores
in 2005
 Number dropped to 85
 Net profit, $11.3 billion,
stores
in 2007
 Announced to sell them
 2,700 stores in 14
all to a German rival
countries outside the
Metro at a discount price
U.S.
($100 million less) in
2006
 Employees: 1.9 million
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Did Wal-Mart smile too much in
Germany?
 American model:
 Wal-Mart’s blames:
 “You have unions and
higher wages”
 “German government
regulations”
Service with a Smile
 Employee chanting:
W-A-L-M-A-R-T to raise
workplace morale
 An ethical code:
Banning “office romance”
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Is it culture or business competition?
What did the Germans say?
 “I don’t think it is a cultural
 “You really think that average
underpaid clerk at the Wal-Mart
store in the U.S. cares about how
you are doing? To the Germans
this is more or less upsetting ...”
 “I was too lazy to take the car if I
could do all my shopping by foot
in an Aldi …”
 “I never had somebody trying to
bag my groceries …”
 “Germans prefer … resusable
carriers … at least to pay a small
fee for the avoidable sin of
needing a plastic bag …”
problem … it is a problem of
competition. … Aldi and Lidl have
over 6,500 stores while Wal-Mart
has 85.”
 “… not that cheap like the German
stores … Their basic stuff that was
as cheap as Aldi’s never seemed
to be the same quality.”
 “If Wal-Mart is not going to
compete on price in Germany, as
it does in the U.S., then what on
earth were they doing here?”
 “There’s not enough quality and
Germans are a picky bunch.”
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The Path to Global Status
 As the nature and size of international activities
change, organizational structures response, due
to:
 The strain imposed by growth and geographical
spread
 The need for improved coordination and control
across business units
 The constraints imposed by host-government
regulations on ownership and equity
 The evolution path is common but the steps are
not normative
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Figure
2-2
Stages of Internationalization
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Stages of Internationalization:
 Exporting
 Typically
the initial stage of international
operations
 Usually handled by an intermediary
(foreign agent or distributor)
 Role of the HR department is unclear at
this stage
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Figure
2-3
Export department structure
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Sales Subsidiary
 Replacing foreign agents/distributors with own sales
subsidiaries or branch offices in the market countries
 May be prompted by:





Problems with foreign agents
Lack of local competence
More confidence in international activities
Desire for greater control
Give greater support to exporting activities
 PCNs may be selected, leading to some HR
involvement
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Figure
2-4
Sales subsidiary structure
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International Division
 Creation of a separate division in which all
international activities are grouped
 Resembles ‘miniature replica’ of domestic
organization
 Subsidiary managers report to head of international
division
 Objectives regarding foreign activities may determine
approaches to staffing of key positions

Expatriate management role of corporate HR
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Figure
2-5
International division structure
HRM
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Figure
2-5
International division Structure
Headquarters
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Global Product/Area Division
 Strain of sheer size may prompt structural
change to either of these global approaches
 Choice typically influenced by:


The extent to which key decisions are to be
made at the parent country headquarters or at
the subsidiary units (centralization versus
decentralization)
Type or form of control exerted by parent over
subsidiary
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Figure
2-6a
Global product division structure
HRM
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Global Product Division
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Figure
2-6b
Global area division structure
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Global Area Division
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The Matrix
 An attempt to integrate operations across
more than one dimension
 Considered to bring into the management
system a philosophy of matching the
structure to the decision-making process
 Violates Fayol’s principle of unity of
command
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Figure
2-7
Global matrix structure
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The Matrix
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Problems with the Matrix
 Dual reporting
 Proliferation of
communication
channels
 Overlapping
responsibilities
 Barriers of distance,
language, time and
culture
Tend to lead to conflict
and confusion
Creates informational
logjams
Produce turf battles and
loss of accountability
Make it very difficult to
resolve conflicts and
clarify confusion
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Beyond the Matrix
 Less hierarchical structural forms:
 Heterarchy
 Transnational
 Multinational as a network
 Networked firms





Delegation of decision-making authority
Geographical dispersal of key functions
Delayering organizational levels
Debureaucratization
Differentiation of work, responsibility and authority
across subsidiaries
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Figure
2-8
The networked organization
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Figure
2-9
The role of MNE culture of origin
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Control Mechanisms
“Globalization brings considerable challenges
which are often under-estimated….
Every morning when I wake I think about the
challenges of coordinating our operations
in many different countries”
Quote by Accor CEO
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Figure
2-10
Control strategies for multinational firms
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Mode of Operation and HRM
 Not just subsidiary operations
 Firms may also adopt contractual modes
 Licensing
 Franchising
 Management contracts
 Projects
 And cooperative modes (such as joint
ventures, strategic alliances)
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Chapter Summary
The purpose of this chapter is to identify the HR implications of
the various options and responses that international growth places
on the firm. The chapter focused on:
 The organizational context in which IHRM activities take
place, particularly different structural arrangements as the
firm moves along the path to multinational status – from export
department to more complex varieties such as the matrix,
heterarchy, transnational and networked.
 Control and coordination aspects – formal and informal
mechanisms, with emphasis on control through personal
networks and relationships, and control through corporate
culture, drawing out HRM implications.
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Chapter Summary (cont.)
 International growth affects the firm’s approach to
HRM
 Research suggests a pattern and a process of
internationalization but the stages of development and
organizational forms should not be taken as normative.


Firms vary from one another as they go through the stages of
international development, and
Country of origin influences the firm’s approach to
organizational structure.
 U.S. firms
 European firms
 Japanese firms
 Korean
 Chinese
 India
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Implications to IHRM
 Through the approach taken in this chapter, we
have been able to demonstrate that there is an
interconnection between IHRM approaches and
activities and the organizational context and that
HR managers have a crucial role to play.
 In order to perform this role better, it is important
that HR managers understand the various
international structural options – along with the
control and coordination demands imposed by
international growth.
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Discussion Questions
1. What are the stages a firm typically goes through as it
grows internationally and how does each stage affect the
HR function?
2. What are the specific HRM challenges in a networked
firm?
3. Country of origin influences the firm’s approach to
organization structure. As MNEs from China and India
internationalize, to what extent are they likely to differ
from that observed for Japanese, European and US
MNEs?
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