2. IB UNIT 4 - The organisation of International Business.pptx

The organization of International Business

1. The O rganization of International Business Sudhanshu Bhatt ( https://www.linkedin.com/in/sudhanshu-bhatt-b3665115/ ) MBA –IBA 11.05.2023 References Bulatov , A. (2023). World Economy and International Business Theories, Trends, and Challenges. In Springer. https://doi.org/10.12737/16614 Hill, C. W. L. (2022). Global Business Today 12e Charles. Hill, C. W. L. (2023). International Business: Competing in Global Marketplace. In McGraw Hill LLC. https://doi.org/10.4324/9780203879412 Shenkar , O., Luo, Y., & Chi, T. (2022). International Business, Routledge. Routledge. Images sourced from the internet

2. What is Organizational Architecture ? Organizational architecture refers to the complete structure and design of a firm, encompassing five subparts: Organizational Structure : The formal division of the organization into subunits, the allocation of decision-making responsibilities, and the integration mechanisms to coordinate activities between subunits. Control Systems : Metrics used to measure subunit performance and assess managerial effectiveness, such as profitability or contribution to global divisions. Incentives : Devices used to reward desirable managerial behavior, closely linked to performance metrics, such as bonuses tied to exceeding performance targets. Processes : The methods and procedures for decision-making and work execution within the organization, including strategy formulation, resource allocation, performance evaluation, and product development. Organizational Culture : The shared norms, values, and belief systems among employees, shaping their behavior and influencing performance. It includes the unique patterns of culture and subculture within the organization. These five components of organizational architecture are interdependent and mutually influenced, requiring internal consistency for optimal performance. For example, the people component, including recruitment, compensation, and retention strategies, can reinforce the prevailing organizational culture and align with the desired values and orientation of the firm.

3. Organizational Architecture

4. What are the dimensions of organization structure? Organizational structure has 3 dimensions Vertical differentiation - the location of decision making responsibilities within the structure Horizontal differentiation - the formal division of the organization into sub-units Integrated mechanisms - the mechanisms for coordinating sub-units

5. Why is vertical differentiation important? Vertical differentiation determines where decision making power is concentrated. Centralised decision making Facilitates coordination Ensures decision of consistent with the organisations objective Gives managers the means to bring about organisational change Avoids duplication of activities Decentralised decision making Relieves the burden of centralised decision making Has shown to motivate individuals Permits greater flexibility Can result in Peter decisions Can increase control

6. Why is horizontal differentiation important? Horizontal differentiation refers to how the firm divides into subunits – usually based on function, type of business or geographical area. Functional structure Product divisional structure International divisional structure Worldwide product divisional structure Worldwide area structure Global matrix structure

7. Functional structure Most firms begin with no formal structure but as they grow they split into functions reflecting firms value creation activities. Functions are coordinated and controlled by top management decision making is centralised Product line diversification requires further horizontal differentiation

8. Product divisional structure Firms may switch to product divisional structure t o solve the problems of coordination and control when they specialize into distinct business areas. Each division is responsible for a distant product line Headquarter retains control for overall strategic direction and financial control.

9. International divisional structure When firms expand internationally they often group all of their international activities into international divisions . Firms having functional structure or divisional structure at home would replicate the same in the foreign market respectively. In such a scenario there is a potential for conflict and coordination problem between the domestic and foreign operators.

10. International divisional structure

11. What happens next? Firms that continue to expand in global markets will move to either: worldwide product divisional structure Worldwide area structure

12. Worldwide product divisional structure Adopted by firms that are reasonably diversified Allows for worldwide coordination of value creation activities of each product division Helps realise location economies and experience curve Facilitates the transfer of core competencies Does not allow for local responsiveness

13. Worldwide product division structure

14. Worldwide area structure This structure is favoured by firms with low degree of diversification domestic structure based on function. Divides the world into autonomous geographic areas Decentralises operational authority Facilitates local responsiveness Can result in a fragmentation of the organization Is consistent with localization strategy

15. Worldwide area structure

16. What is the Global Matrix Structure? The global matrix structure tries to minimise the limitation of the worldwide area structure and the worldwide product divisional structure. Allows for differentiation along 2 dimensions product division and geographic area Has to world decision making – product division and geographic area have equal responsibility for operating decisions Can be bureaucratic and slow Can result in conflict between areas and product divisions Can result in finger-pointing between divisions when something goes wrong

17. The Global Matrix Structure

18. How does organisational structure change over time?

19. What are the dimensions of organization structure? Organizational structure has 3 dimensions Vertical differentiation - the location of decision making responsibilities within the structure Horizontal differentiation - the formal division of the organization into sub-units Integrated mechanisms - the mechanisms for coordinating sub-units

20. Need for coordination – can sub-units be integrated? Regardless of the type of structure firms need mechanism to integrate subunits. Need for coordination is lowest in firms with a localization strategy and highest in transnational firms. Coordination can be complicated by differences in subunit orientation and goals Simplest formal integrating mechanism is direct contact between sub unit manager followed by liaisons Temporary or permanent teams composed of individuals from each subunit is the next level of formal integration The matrix structure allows for all roles to be integrating roles Many firms use informal integrating mechanisms A knowledge network is a network for transmitting information within an organization that is based not on formal organizational structure, but on informal contacts between managers within an enterprise and on distributed information systems.

21. Formal Integrating Mechanisms

22. What are different types of control systems? Personal controls – personal contact with subordinates used mostly in small firms Bureaucratic controls – a system of rules and procedures that directs the actions of subunits. Output controls – setting goals for subunits to achieve and expressing those goals in terms of objective performance metrics. Cultural controls – it exists when employees buy into the norms and values system of the firm. Strong culture implies less need for other forms of control.

23. What are incentive systems? Incentives or devices used to reward behaviour Usually closely tied to performance metrics used for output controls Should vary depending on employee and the nature of the work being performed Should promote cooperation between managers in subunits Should reflect national differences in institutions and culture.

24. What is performance ambiguity? Performance ambiguity exists when the causes of a subunits poor performance are not clear It is common when subunits performance is dependent on performance of other subunits It is lowest in the firms with the localization strategy It is higher in international firms, still higher in firms with the global standardization strategy. highest in transnational firms

25. Link between dependence performance ambiguity and cost of control for the 4 international business strategies

26. What are processes? Processes refer to the manner in which decisions are made and work is performed Many processes cut across national boundaries as well as organizational boundaries Processes can be developed anywhere within a firm’s global operations network Formal and informal integrating mechanisms can help firms leverage processes

27. What is organizational culture? Organizational culture refers to the values and norms that employees are encouraged to follow Organizational culture evolves from Founders and important leaders National social culture The history of the enterprise Decisions that resulted in her performance

28. Maintenance of organisational culture Organizational culture can be maintained through Hiring and promotional practices Reward strategies Socialization processes Communication strategies Organizational culture tends to change very slowly

29. What is a strong organizational culture? Managers in companies with a strong culture share a relatively consistent set of values and norms that have a clear impact on the way work is performed Strong culture Is not always good May not lead to high performance could be beneficial at one point but not at another. Companies with adaptive cultures have the highest performance

30. What is the link between Strategy and Architecture

31. Link between strategy and architecture Firms pursuing a localization strategy should focus on local responsiveness They do not have a high need for integrating mechanisms Performance ambiguity and the cost of control tend to be low The worldwide area structure is common

32. Link between Strategy and architecture Firms pursuing an international strategy create value by transferring core competencies from home to foreign subsidiaries. The need for control is moderate The need for integrating mechanisms is moderate Performance ambiguity is relatively low and so is the cost of control The worldwide product division structure is common

33. The link between strategy and architecture Firms pursuing a global standardization strategy focus on the realisation of location and experience curve economies Headquarters maintain control over most decisions The need for integrating mechanisms is high Strong organisational cultures are encouraged The worldwide product division is common

34. Link between strategy and architecture Firms pursuing a transnational strategy focus on simultaneously attaining location and experience curve economies local responsiveness and global learning. Some decisions are centralised and others are decentralised The need for coordination and the cost of control is high An array of formal and informal integrating mechanisms are used A strong culture is encouraged Matrix structures of common

35. How are the environment strategy architecture and performance related? For a firm to succeed the firms strategy must be consistent with the environment in which the firm operates. The firm’s organization architecture must be consistent with its strategy firms need to change their architecture to reflect changes in the environment in which they are operating and the strategy they are pursued

36. How can firms implement organisational change? To implement organization change 1 . Unfreeze the organization through shock therapy Requires taking bold actions like plant closures or dramatic structural reorganizations 2. Move the organization to a new state through proactive change in architecture Requires a substantial and quick change in organisational architecture so that it matches the desired new strategic posture 3. Refreeze the organization in its new state Requires the employees to be socialised into the new way of doing things

37. Why organizations don’t change? Organizations can be difficult to change because of:- The current culture inertia The existing distribution of power and influence Manager’s preconceptions about the appropriate business model or paradigm Institutional constraints

38. To be continued……………………