MGRECON401

Economics of International Business and Multinationals

LECTURE 6

Choosing an Optimal Organizational Architecture

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Lecture Focus

Define the role of Organizational Architecture

Centralization v. Decentralization

Organizational Form: Functional, Multidivisional, Matrix

Role of Globalization in Optimal Organizational Architecture

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Determinants of Architecture

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Organizational architecture

Organizational structure: Location of decision-making 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

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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

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Centralization versus decentralization

benefits of decentralizationEffective use of local knowledge

local tastes and preferencesprice sensitivities of particular customers

Conservation of management timesenior management focus on strategy

Training and motivation for local managers

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Centralization versus decentralization

costs of decentralizationPotential agency problems

effective control systems may be expensive

Coordination costs and failures

Less effective use of central information

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Early Expansion of Industry

Railroad companiesemerged around 1850Organized 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

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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.

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Early Expansion of Industry

Companies like DuPont, General Motors, and General Electric experimented with different organizational forms

Eventually adoped the M form (multidivisional)

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AT&T

1980s AT&T slow moving regulated environmentAdopted huge formal bureaucracyImportant decision made from top down

1990s new AT&TDeregulation, increased competition, technological changeAdopted large number of profit centersRun autonomouslyPay-for-performance plans tied to units

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Eastman Kodak

Prior to 1980smonopoly in film productionCentralized, top down bureaucracy

1980sIncreased competition from Fuji and genericsTechnological explosion: communications, design, roboticsKodak lost market share and stock market value

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Eastman Kodak

1984 restructuring17 new business units with profit and loss responsibilityManagers given increased authority for new products and pricingBonus payment system

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Unilever

One of world’s oldest multinational corporationsOrganized on a decentralized basisAnnual conferences on company strategy and executive education sessions, establish connections between managersDuplication of facilities and high cost structure a problem in new competitive environment1996: 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

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Changing Demand forOrganizational 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.

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The functional structure

Typically, the structurethat 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

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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.

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A typical product divisional structureFig 13.4

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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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Structure of the international division

International divisionOrganized on geographyInitially export goods to foreign subsidiary but later engage in FDI or outsource production

ProblemsLack of coordination between domestic and foreign operations

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One Company’s international division structure

Fig 13.5

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The International structural stages model

Fig 13.6

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Worldwide area structure

Favored by firms with low degree of diversification.

Area is usually a country. Largely

autonomous.

Facilitates local responsiveness.

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Worldwide area structure

Worldwide area structureFavored by firms with low degree of diversification & domestic structure based on functionWorld is divided into autonomous geographic areasOperational authority decentralizedFacilitates local responsiveness Fragmentation of organization can occur

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A worldwide area structure

Fig 13.7

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Management focus-Abbot Laboratories

One of world’s largest health care companiesOriginally consisted of three divisions

Pharmaceuticals, hospital products & nutritional products

Added international division on geographic lines to handle growing foreign salesLater added global product division to handle diagnostic businessesAbbot aims to build global products that can be launched simultaneously around the worldWhich structure should be adopted?

Geographic division or global product division?

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Product division

Reasonably diversified firms.

Attempts to overcome international division and worldwide area structure problems.

Believe that product value creation activities should

be coordinated worldwide.

Weak local responsiveness.

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World wide product divisional structure

Adopted by firms that are reasonably diversifiedOriginal domestic firm structure based on product divisionValue creation activities of each product division coordinated by that division worldwide

Help realize location and experience curve economiesFacilitate transfer of core competencies

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

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Matrix structure

Attempts to meet needs of transnational

strategy.

Doesn’t work as well as theory predicts.

Conflict and power struggles.

“Flexible” matrix structures.

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Horizontal differentiation: Global matrix structure

Helps to cope with conflicting demands of earlier strategiesTwo dimensions: product division and geographic areaProduct division and geographic areas given equal responsibility for operating decisionsProblems

Bureaucratic structure slows decision makingConflict between areas and product divisionsDifficult 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 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?

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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?

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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

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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