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MGMK 4710

INTERNATIONAL BUSINESS

Chapter 16. THE ORGANIZATION OF INTERNATIONAL BUSINESS

I. INTRODUCTION

It is challenging to organize operations that are located in multiple countries. MNEs’ managers must design structures, systems, and a culture that will contribute to an effective implementation of their company’s strategies around the world. Implementing an MNE’s international strategy involve such key issues as structure, coordination and control, and culture.

II. ORGANIZATION STRUCTURE

https://www.youtube.com/watch?v=wO_-MtWejRM&index=2&list=RDxcTtQ0hiHbE

https://www.youtube.com/watch?v=f60dheI4ARg&index=7&list=RDxcTtQ0hiHbE

Organization structure is the formal arrangement of roles, responsibilities, and relationships within an organization. Organization structure is a powerful tool with which to implement MNEs’ strategies. An MNE’s choice of structure depends on many factors, including the configuration of its value chain in terms of the location and type of foreign facilities, and the impact of international operations on total corporate performance. Two central issues in organization structure are vertical and horizontal differentiation.

A. Vertical Differentiation: Centralization versus Decentralization

Vertical differentiation refers to where the authority to make decisions stands in the

hierarchy of an MNE. How decision-making is distributed in the hierarchy raises the question

of centralization versus decentralization of decision-making authority.

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. Centralized

decision making is usually associated with a home replication or global strategy (most decisions

are made at the corporate headquarters). Decentralized decision making is associated with a

multidomestic strategy (more decisions are made at the subsidiary’s level). A combination of

centralized and decentralized decision making is associated with a transnational strategy.

B. Horizontal Differentiation: The Design of the Formal Structure

Horizontal differentiation describes the division of labor (how tasks are grouped

into departments, divisions and subsidiaries throughout the MNE. There are several types of

horizontal structures for MNEs:

1. International Division Structure. An international division groups all international

activities into a single division within a firm. This is usually the case when foreign operations

represent a small percentage of an MNE’s total revenues. The MNE will have several domestic

departments or divisions, and an international division. This type of structure is more

appropriate for MNEs that have adopted the home replication strategy.

2. Product Division Structure. A product division structure groups an MNE’s worldwide

operations by products. This type of structure is more appropriate for MNEs that have adopted

the global strategy. Each division coordinate worldwide operations for a particular product.

3. Geographic Division Structure. A geographic division structure groups activities on a

regional basis. It is used when a firm has extensive foreign operations that are not dominated by

a single country or region. This structure is more appropriate for MNEs that have adopted the

multidomestic strategy.

4. Matrix Structure. A matrix structure is a structure designed to give functional, product,

and/or geographic groups a common focus. This type of structure is more appropriate for MNEs

that have adopted the transnational strategy. This structure is referred to as a matrix structure

because the MNE will address two conflicting demands, pressures for local responsiveness and

pressures for global integration (cost reduction).

III. COORDINATION AND CONTROL SYSTEMS

MNEs have operations in several countries. Therefore, complex systems of coordination

and control must be developed. There are several coordination and control tools MNEs can

choose from.

A. Coordination Systems

Coordination systems are integration mechanisms that link various activities of an

MNE. Worldwide coordination is needed to counteract the tendency of different groups of

managers and employees to develop different concerns and orientations based on their location

and immediate responsibilities. MNEs’ managers can choose among several approaches to the

coordination of worldwide units. Approaches include coordination by standardization, by

plans, and by mutual adjustment.

1. Coordination by Standardization. Firms 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 procedures about how employees

interact (also called formalization) aim to reduce workplace uncertainty and simplify the

exchange of ideas & resources.

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 engaging an adaptable approach to coordination that involves creating more opportunity and incentive for parties to work with one another.

B. Control Systems

Control systems are mechanisms put in place to ensure that people are doing what they are supposed to do. Every MNE must clarify what its employees can and cannot do in order to avoid spinning out of control. Several control mechanisms are used to direct the activities of individuals toward the achievement of organizational goals.

1. Reports. Reports must be timely, accurate, and informative. Written reports are crucial for

international operations because subsidiary’s managers 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.

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 offer advice

and directives related to corrective actions (if needed).

3. Evaluative Metrics. A system that relies on a combination of metrics is more reliable than

one that does not. The most important criteria tend to be budget-compared-with-profit and

budget-compared-with-sales-value. Other non-financial criteria such as market share, quality

control, and host government relations are also important.

4. Information Systems. With ever-expanding computer and global telecommunications links,

managers can monitor dispersed units more quickly and easily than ever before.

IV. ORGANIZATION CULTURE

https://www.youtube.com/watch?v=zDV-LCjq_D0

Organization culture is a system of shared values about what is important and beliefs about how the world works. As such, it is an important part of how an MNE is organized.

1. Culture and Values. Key features of organizational culture include values and principles of management, work climate and atmosphere, patterns of “how we do things around here,” traditions, and ethical standards. The shared values that make up organization culture influence what employees perceive, how they interpret, and what they do to respond to their world.

2. Culture’s Increasing Importance. Studies have shown that there is a significant link between organization culture and financial performance. A firm culture often shapes the strategic moves an MNE will consider or reject, and it can dramatically influence the success of corporate initiatives. It is therefore crucial for the corporate headquarters to develop a strong culture that is shared by most organizational members

3. Building an Organizational Culture. Normally, firms develop and manage their cultures, rather than allowing them to emerge naturally. For MNEs however, this is challenging because managers from different countries often have different values than those of their MNE. Convergent values ease the exchange of ideas between people from different countries, while divergent values tend to create boundaries and barriers. To overcome these challenges, many MNEs promote closer contact among managers from different countries by rotating managers among operations in their various locations. Besides spreading best practices throughout the organization, rotating managers improves their understanding of the company's culture.

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