MGRECON401
Economics of International Business
and Multinationals
LECTURE 6
Choosing an Optimal
Organizational Architecture
12-2
Lecture Focus
Define the role of Organizational
Architecture
Centralization v. Decentralization
Organizational Form: Functional,
Multidivisional, Matrix
Role of Globalization in Optimal
Organizational Architecture
12-3
Determinants of Architecture
12-4
Organizational architecture
Organizational structure: Location of decisionmaking responsibilities within the structure (vertical
differentiation)
Formal division of the organization into subunits e.g.
product divisions (horizontal differentiation)
Establishment of integrating mechanisms including
cross-functional teams and or pan-regional
committees
Control systems : metrics used to measure
performance of subunits and judge managerial
performance
12-5
Organizational architecture
Incentives: Devices used to reward
appropriate employee behavior
Closely tied to performance metrics
Processes: Manner in which decisions are
made and work is performed
12-6
Centralization versus decentralization
benefits of decentralization
Effective use of local knowledge
local tastes and preferences
price sensitivities of particular customers
Conservation of management time
senior management focus on strategy
Training and motivation for local managers
12-7
Centralization versus decentralization
costs of decentralization
Potential agency problems
effective control systems may be expensive
Coordination costs and failures
Less effective use of central information
12-8
Early Expansion of Industry
Railroad companies
emerged around 1850
Organized around basic functions: finance, pricing,
traffic, and maintenance
Steel, tobacco, oil, meatpacking followed a similar
model
As these companies expanded geographically, they
fared poorly in product markets where they faced
smaller, more focused competitors
12-9
Early Expansion of Industry
Chandler:
… in the centralized, functionally
departmentalized operating company … the
operations of the enterprise became too
complex and the problems of coordination,
appraisal, and policy formulation too
intricate for a small number of top
officers to handle both long-run,
entrepreneurial, and short-run, operational
administrative activities.
12-10
Early Expansion of Industry
Companies like DuPont, General Motors, and
General Electric experimented with
different organizational forms
Eventually adoped the M form
(multidivisional)
12-11
AT&T
1980s AT&T
slow moving regulated environment
Adopted huge formal bureaucracy
Important decision made from top down
1990s new AT&T
Deregulation, increased competition, technological
change
Adopted large number of profit centers
Run autonomously
Pay-for-performance plans tied to units
12-12
Eastman Kodak
Prior to 1980s
monopoly in film production
Centralized, top down bureaucracy
1980s
Increased competition from Fuji and
generics
Technological explosion: communications,
design, robotics
Kodak lost market share and stock market
value
12-13
Eastman Kodak
1984 restructuring
17 new business units with profit and loss
responsibility
Managers given increased authority for new
products and pricing
Bonus payment system
12-14
Unilever
One of world’s oldest multinational corporations
Organized on a decentralized basis
Annual conferences on company strategy and executive
education sessions, establish connections between
managers
Duplication of facilities and high cost structure a problem
in new competitive environment
1996: introduced structure based on regional business
groups
“Lever Europe” established to consolidate the company’s
detergent operation in order to reduce costs and speed
up new product information
12-15
Changing Demand for
Organizational Structure
Jack Welch:
We had constructed, over the years, a
management apparatus that was right for
its time … Divisions, strategic business
units, groups, sectors, all were designed to
make meticulous calculated decisions and
move them forward and upward. The
system produced highly polished work. It
was right for the 70’s, a growing handicap
for the 80’s, and it would have been a
ticket to the boneyard for the 90s.
12-16
The functional structure
Typically, the structure
that evolves in a
company’s early stages.
Coordination and
control rests with
top management.
12-17
A typical functional structure
Fig 13.3
12-18
Product division structure
Probable next stage of
development. Reflects
company growth into
new products.
Eases coordination
and control
problems.
Each unit responsible
for a product.
Semiautonomous and
accountable for
its performance.
12-19
A typical product divisional structure
Fig 13.4
12-20
International division
Widely used.
1. Can create conflict
between domestic and
foreign operations.
2. Implied lack of
coordination between
domestic and foreign
operations.
Growth can lead
to worldwide
structure.
12-21
Structure of the international division
International division
Organized on geography
Initially export goods to foreign subsidiary but
later engage in FDI or outsource production
Problems
Lack of coordination between domestic and
foreign operations
12-22
One Company’s international division
structure
Fig 13.5
12-23
The International structural stages model
Fig 13.6
12-24
Worldwide area structure
Favored by firms with
low degree of
diversification.
Area is usually
a country. Largely
autonomous.
Facilitates local
responsiveness.
12-25
Worldwide area structure
Worldwide area structure
Favored by firms with low degree of
diversification & domestic structure based
on function
World is divided into autonomous geographic
areas
Operational authority decentralized
Facilitates local responsiveness
Fragmentation of organization can occur
12-26
A worldwide area structure
Fig 13.7
12-27
Management focus-Abbot Laboratories
One of world’s largest health care companies
Originally consisted of three divisions
Pharmaceuticals, hospital products & nutritional
products
Added international division on geographic lines to handle
growing foreign sales
Later added global product division to handle diagnostic
businesses
Abbot aims to build global products that can be launched
simultaneously around the world
Which structure should be adopted?
Geographic division or global product division?
12-28
Product division
Reasonably
diversified firms.
Attempts to overcome
international division
and worldwide area
structure problems.
Weak local
responsiveness.
Believe that product value
creation activities should
be coordinated
worldwide.
12-29
World wide product divisional structure
Adopted by firms that are reasonably diversified
Original domestic firm structure based on product division
Value creation activities of each product division
coordinated by that division worldwide
Help realize location and experience curve economies
Facilitate transfer of core competencies
Problem: area managers have limited control, subservient to
product division managers, leading to lack of local
responsiveness
12-30
A worldwide product division structure
Fig 13.8
12-31
Matrix structure
Attempts to meet needs
of transnational
strategy.
Doesn’t work as well
as theory predicts.
Conflict and
power struggles.
“Flexible” matrix
structures.
12-32
Horizontal differentiation:
Global matrix structure
Helps to cope with conflicting demands of earlier
strategies
Two dimensions: product division and geographic area
Product division and geographic areas given equal
responsibility for operating decisions
Problems
Bureaucratic structure slows decision making
Conflict between areas and product divisions
Difficult to make one party accountable due to dual
responsibility
12-33
A Global matrix structure
Fig 13.9
12-34
The Transformation of BP
How do you evaluate BP’s “Atomic Organization?”
What are its strengths and weaknesses?
What are the positives and the negatives of the
performance contracting system? If you were a
BP leader in BP, what influence would such a
system have on your behaviors?
BP claims to have significantly benefited from
the peer process: what are the requirements for
such processes to be effective? What advice will
you give to another company that is considering
implementations of peer assist and peer
challenges?
12-35
The Transformation of BP
Do you agree with the company’s
commitment to being a “force for good?”
Is this commitment consistent with the
role of a public company in a market
economy?
What role does top management play in
BP? How is this role different from the
role played by top management in
companies you know, or have some
experience with?
12-36
General Lessons from BP
Focus activities of a firm to a select set
Create business units with a clear scope of
responsibility and clear accountability
Give strong incentives for unit performance
Link units horizontally rather than requiring all
communication to pass up and down through the
hierarchy
12-37
General Lessons from BP
Flatten the hierarchy and increase the
span of control
Outsource
Improve information, measurement, and
communication systems
Create a culture that is oriented to
delivering performance