Organizational Structure in International Business
- An organization can be defined by the formal structure, coordination and control systems, and the organization culture.
- It is the formal arrangement of roles, responsibilities and relationships within an organization.
- It is a powerful tool with which to implement strategy.
Organizational Structure – Reminder
Defines how job tasks are formally divided, grouped, and coordinated.
- Organizational structure is about definition and clarity.
- Organizational structures help everyone know who does what.
Centralization V/S Decentralization.
- There is always consideration in determining where in the hierarchy, the authority to make decisions stand.
- Centralization is the degree to which high level managers, usually above the country level, make strategic decisions and pass them over to lower levels for implementation.
- Decisions made at foreign subsidiary level are considered decentralized, and those made at HQ are considered to be centralized.
- Decisions made by senior level managers at HQ.
- Facilitates coordination of value chain
- Ensures decisions are consistent with strategic objectives.
- Senior executives have authority to direct major change.
- Preempts duplication of activities
- Reduces the risk of making wrong decisions at low level
- Ensures consistent dealings with all stakeholders.
- Discourages initiative among lower – level employees.
- Decisions made by employees, who are closest to the situation.
- Employees who directly deal with customers, markets, etc
- Motivates employees to exercise initiative.
- Enables more flexible response to rapid environmental changes.
- Permits to fix better accountability.
- Puts the org at risk for bad decision making.
Centralization V/S Decentralization
International Organizational Structures
- The design of an organization, as with any other management function, should be contingency based, taking into account the variables of that particular system at that specific point in time.
- Major variables include the firm’s strategy, size, and appropriate technology as well as the environment where the firm operates.
- Given the increased complexity of the variables involved in the international context, it is no easy task to design the most suitable organizational structure and subsystems.
Domestic Structures plus international activity
- Domestic structure plus export department – many firms—especially smaller ones—start their international involvement by exporting. They may simply use the services of an export management company for this, or they may reorganize into a simple domestic structure plus export department
- Domestic structure plus foreign subsidiary – To facilitate access to and development of specific foreign markets, the firm can take a further step toward worldwide operations by reorganizing into a domestic structure plus foreign subsidiary in one or more countries.
- To be effective, subsidiary managers should have a great deal of autonomy and be able to adapt and respond quickly to serve local markets. This structure works well for companies with one or a few subsidiaries located relatively close to headquarters.
Domestic Structure plus Foreign Subsidiary
International division – With further market expansion, the firm may then decide to specialize by creating an international division organized along functional, product, or geographic lines. With this structure, the various foreign subsidiaries are organized under the international division, and the subsidiary managers report to its head, who is typically given the title of Vice President, International Division. This vice president, in turn, reports directly to the CEO of the corporation. The creation of an international division facilitates the beginning of a global strategy.
- It permits managers to allocate and coordinate resources for foreign activities under one roof and, thus, enhances the firm’s ability to respond, both reactively and proactively, to market opportunities.
- Some conflicts may arise among the divisions of the firm because more resources and management attention tend to be channeled toward the international division than toward the domestic divisions and because of the different orientations of various division managers.
Global functional structure
- Global functional structure – The global functional structure is designed on the basis of the company’s functions – production, marketing, finance, and so forth. Foreign operations are integrated into the activities and responsibilities of each department to gain functional specialization and economies of scale.
- This form of organization is used primarily by small firms with highly centralized systems. It is particularly appropriate for product lines using similar technology and for businesses with a narrow spectrum of customers.
- This structure results in plants that are highly integrated across products and serve single or similar markets.
- Much of the advantage resulting from economies of scale and functional specialization may be lost if the managers and the work systems become too narrowly defined to have the necessary flexibility to respond to local environments. An alternative structure can be based on product lines.
Global product structure
- Global product structure – For firms with diversified product lines (or services) that have different technological bases and are aimed at dissimilar or dispersed markets, a global product (divisional) structure may be more strategically advantageous than a functional structure. In this structure, a single product (or product line) is represented by a separate division. Each division is headed by its own general manager, and each is responsible for its own production and sales functions.
- Usually, each division is a strategic business unit (SBU)—a self-contained business with its own functional departments and accounting systems. The advantages of this organizational form are market concentration, innovation, and responsiveness to new opportunities in a particular environment.
- It also facilitates diversification and rapid growth, sometimes at the expense of scale economies and functional specialization.
Global Product (Divisional) Structure
Global geographic (area) structure
- Global geographic (area) structure – In the global geographic (area) structure—the most common form of organizing foreign operations—divisions are created to cover geographic regions. Each regional manager is responsible for the operations and performance of the countries within a given region.
- In this way, country and regional needs and relative market knowledge take precedence over product expertise. Local managers are familiar with the cultural environment, government regulations, and business transactions. In addition, their language skills and local contacts facilitate daily transactions and responsiveness to the market and the customer.
- Although this is a good structure for consolidating regional expertise, problems of coordination across regions may arise.
- With the geographic structure, the focus is on marketing because products can be adapted to local requirements. Therefore, marketing-oriented companies, such as Nestlé and Unilever, which produce a range of products that can be marketed through similar (or common) channels of distribution to similar customers, will usually opt for this structure.
Global Geographic Structure
- Matrix structure – A matrix structure is a hybrid organization of overlapping responsibilities. The structure is developed to combine geographic support for both global integration and local responsiveness, and it can be used to take advantage of personnel skills and experience shared across both functional and divisional structures.
- In the matrix structure, the lines of responsibility are drawn both vertically and horizontally. Although this method of management and organization maximizes the focus of skills and experience in the company brought to bear on a particular product as well as a particular region, it often brings confusion, communication problems, and conflict over having more than one boss to whom to report as well as stress over prioritizing time among overlapping and conflicting responsibilities.
Matrix Geographic Structure
- Specialized jobs are grouped according to traditional business functions.
- Ideal for Co. having a narrow product line, sharing similar technology.
- Helps maximize economies of scale
- Highly efficient.
International division structure.
- Grouping each international business activity into its own division.
- Creates a critical mass of international expertise.
- Creates quick response to environmental changes enabling them to deal with different markets.
- Prevents duplication of activities.
- Often struggles to get resources from domestic divisions.
- This structure is suited for multidomestic strategies that demand little integration and standardization between domestic and foreign operations.
- Frustrates its ability to exploit economies of scale.
Product Division Structure
- These are popular among international companies with diverse products.
- Similar products are grouped under one product head e.g. Perfumes and Cosmetics, each focusing on a single product segment for its global market.
- Suited for a global strategy
- There may be duplicate functions and activities among divisions.
- No formal means by which one product division can learn from another international expertise.
Geographic (Area) Division Structure
- These are used when foreign operations are large and not dominated by a single country or region.
- Useful when managers can gain economies of scale on a regional rather than on global basis.
- Drawback is the potential of duplication of work among areas as the company locates similar value activities in several places rather than consolidating them in the most efficient place.
Matrix Division Structure
- This tries simultaneously to deal with competing pressures for global integration and local responsiveness.
- Institutes overlaps among functional and divisional forms.
- Gives functional, product, and geographic groups a common focus.
- It makes each group share responsibility for foreign operations and enables each group exchange information and resources more willingly.