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Organization architecture and profitability
Totality of a firm’s organization, including structure, control systems, incentives, processes, culture and people. Superior organization profitability requires three conditions:
An organization’s architecture must be internally consistent. Strategy and architecture must be consistent. Strategy, architecture and competitive environments must be consistent.
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Organizational architecture
Fig 13.1

To maximize profitability a firm must achieve consistency between the various components of its architecture
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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

Organizational architecture

Incentives: Devices used to reward appropriate employee behavior
Closely tied to performance metrics

Control systems : metrics used to measure performance of subunits and judge managerial performance
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Processes: Manner in which decisions are made and work is performed

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Organizational architecture

Purpose of Organizational Structure to exercise control to establish division of labor to facilitate communications to facilitate coordination & integration to establish accountability to delegate responsibility to establish lines of authority and chain of command to establish rules and regulations

Organizational culture: Values and norms shared among employees of an organization
Strategy used to manage human resources

People: Employees
Strategy used to recruit, compensate, and retain individuals with necessary skills, values and orientation
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Vertical differentiation
Concerned with where decisions are made
Where is decision making power concentrated?

Key Dimensions of Organizational Structure
Specialization Standardization Centralization

Two Approaches
Centralization Decentralization
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Vertical differentiation
Concerned with where decisions are made.

Strategy and organization structure
Major strategic decisions are centralized at the firm’s headquarters while operating decisions are decentralized Global strategy : aim to realize location and experience economies Centralization of some operating decisions Multi-domestic firms: aim for local responsiveness Decentralizing operating decisions to foreign subsidiaries International firms: maintain centralized control over their core competency and decentralize other decision to foreign subsidiaries Transnational firms: aim to realize location and experience curve economies Centralized control over global production centers Need to be locally responsive
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Centralization:
Facilitates coordination. Ensure decisions consistent with organization’s objectives. Top-level managers have means to bring about organizational change. Avoids duplication of activities.
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Decentralization:
Overburdened top management. Motivational research favors decentralization. Permits greater flexibility. Can result in better decisions. Can increase control.
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Structure of the domestic firm
Concerned with structure design Decisions made on basis of function, type of business or geographical area Structure of domestic firms
Single entrepreneur or small team of individuals therefore a centralized structure With introduction of more product lines, product divisional structure introduced Each division responsible for single product line Self-contained, largely autonomous entities Responsible for operating decisions and performance
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The functional structure

Typically, the structure that evolves in a company’s early stages.

Coordination and control rests with top management.

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A typical functional structure
Fig 13.3

Product division structure

Probable next stage of development. Reflects company growth into new products.

Each unit responsible for a product. Semiautonomous and accountable for its performance.

Eases coordination and control problems.

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A typical product divisional structure
Fig 13.4

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.

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One Company’s international division structure
Fig 13.5

International Division Structure adopted in early stages of international business operations coordinate all IB activities develop international expertise & skills develop a global/international mindset champion of foreign business

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Disadvantages of Intl. Division dependent on domestic product divisions for R&D, engg., etc. conflict over pricing and transfer pricing power struggles in firm: intl Vs. domestic cannot handle too many products not appropriate if foreign sales over 25%

Worldwide area structure

Favored by firms with low degree of diversification.
Area is usually a country. Largely autonomous.

heads of foreign subsidiaries relegated to second-tier positions
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Facilitates local responsiveness.

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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 Consistent with multidomestic strategy
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A worldwide area structure
Fig 13.7

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Product division

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

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.
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Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness
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A worldwide product division structure
Fig 13.8

Matrix structure

Attempts to meet needs of transnational strategy. Doesn’t work as well as theory predicts. “Flexible” matrix structures.

Conflict and power struggles.

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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
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A Global matrix structure
Fig 13.9

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The International structural stages model
Fig 13.6

Integrating mechanisms

Need for coordination follows the following order on an ascending basis
High

Transnational Multi domestic corporations International companies Global companies

Low

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Integrating mechanism
Fig 13.10

Formal integrating mechanisms

Impediments to coordination
Differing goals and lack of respect Different orientations due to different tasks Differences in nationality, time zone & distance Particularly problematic in multinational enterprises with its many subunits both home and abroad

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Formal integrating systems
Direct contact between subunit managers Liaison roles: an individual assigned responsibility to coordinate with another subunit on a regular basis Temporary or permanent teams from subunits to achieve coordination Matrix structure: all roles viewed as integrating roles
Often based on geographical areas and worldwide product divisions
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Informal integrating mechanisms
Informal management networks supported by an organization culture that values teamwork and a common culture Non-bureaucratic flow of information It must embrace as many managers as possible Two techniques used to establish networks
Information systems Management development policies
Rotating managers through various subunits on a regular basis

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Control systems & incentives
Types of control systems
Personal controls Bureaucratic controls Output controls Cultural controls

Factors influencing incentive system
Seniority and nature of work
Reward linked to output target that the employee can influence

Cooperation between managers in subunits
Link incentives to profit of the entire firm

Incentive systems
Refer to devices used to reward appropriate behavior Closely tied to performance metrics used for output controls
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National differences in institutions and culture Consequences of an incentive system should be understood
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Performance ambiguity
Key to understanding the relationship between international strategy, control systems and incentive systems
Caused due to high degree of interdependence between subunits within the organization
A function of the interdependence among subunits. Control Systems Multinational Output/Bureaucratic

Strategy, interdependence and ambiguity
Level of performance ambiguity depends on number of subunits, level of integration & joint decision making
High

Ascending order of ambiguity in firms
Transnational companies (highest Global companies International companies Multi domestic corporations
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Global/Transnational Cultural

Low

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Costs of control for the four International business strategies

Implications for control and incentives
Costs of control:
Time top mgt. must devote to monitoring and evaluating subunits performance Performance ambiguity increases cost of control Creates conflicts as the costs of controlling transnational strategy are much higher Cultural controls

Incentive pay of senior managers should be linked to the entity to which both subunits belong
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Processes

Organizational culture
Values and norms shared among people Sources:

Manner in which decisions are made and work is performed
Cut across national boundaries as well as organizational boundaries Can be developed anywhere within the firms global operations network

Founders and important leaders National social culture History of the enterprise Decisions that result in high performance

Cultural maintenance:
Hiring and promotional practices Reward strategies Socialization processes Communication strategy
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Synthesis of strategy, structure and control systems

Organization culture and performance
A “Strong” Culture:
Not always good Sometimes beneficial, sometimes not Context is important
Strong

Transnational

Culture

Global International

Adaptive cultures.
Culture must match an organization’s architecture Culture does not necessarily translate across borders
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Weak

Multidomestic

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Organizational change
Firms need to periodically alter their architecture to conform to changes in environment & strategy Hard to achieve due to organizational inertia Sources of inertia
Possible redistribution of power and influence among managers Strong existing culture Senior manager’s preconceptions about the appropriate business model Institutional constraints such as national regulations including local content rules regarding layoffs
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Organizational change
Change to match competitive and strategy environment
Hard to change:
Existing distribution of power and influence. Current culture. Manager’s preconceptions about the appropriate business model or paradigm. Institutional constraints.

Principles for change;
Unfreeze the organization. Moving to the new state. Refreezing the organization.
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