Adapting the overall organizational model in

step with increasing internationalization Nicolay Worren

Deloitte Consulting

© 2014 Deloitte AS

The organizational model needs to evolve as the level of internationalization

increases

2

• Typically, the scope of activitivies undertaken by subsidiaries gradually expands as the level of

internationalization increases (e.g., 1) sales office, 2) sales + distribution, 3), sales + distribution + production etc

• But in addition, the overall organizational model may also need to be adjusted.

Percentage of international vs. domestic

sales

HIGH

HIGH

LOW

LOW

Foreign product

diversity

© 2014 Deloitte AS

Research suggests that the choices leaders make with regards to the overall

model do matter

3

The degree of fit between the organization and the business environment is related to corporate

performance – see Attachment 1 for details

Source: Ghoshal & Nohria (1993), Sloan Mngtm Review.

Study of 41 international companies

0

1

2

3

4

5

6

7

8

9

10

Average return on net assets Revenue growth

Fit

Misfit

© 2014 Deloitte AS

We need to consider the overall organizational configuration, even when making

changes at the unit/functional level

4

Even changes that are made primarily to improve individual units or functions may necessitate a

change in the overall organizational model (e.g., to avoid creating an incoherent reporting structure

and or to avoid duplication of roles etc.)

A B C D

Country

manager

More efficient to

manage centrally

Should still be

managed regionally

Potentially report to (new)

manager in corporate

centre

© 2014 Deloitte AS

There are five main options with regards to the overall model

5

• A product based or geographical mode is in reality often a hybrid form - see attachment 2.

• There are other factors that are relevant too – see attachment 1.

5

CEO

International

BU BU 1

…

HR

Fin

CEO

…

HR

Fin

Geo 2

Geo 1

CEO

Product 1 Product 2

…

HR

Fin

Multidimensional or matrix model

International division

Product based

BU 2

Product 1 Product 2

Functional

CEO

…

HR

Fin

Sales Engineering Production

Geographical

CEO

…

HR

Fin

Geo

1

Geo

2

© 2014 Deloitte AS 6

Percentage of international vs. domestic

sales

HIGH

HIGH Matrix/ multidimensional

structure

International division

Global product

divisions

Geographic

divisions

LOW

LOW

Foreign product

diversity

The Stopford & Wells (1972) postulated that there should be a

relationship between structure and the degree of internationalization

© 2014 Deloitte AS

The main patterns we identified in our study of 16 international firms

headquartered in Norway conform to the framework – with some exceptions

7

The Stopford & Wells framework can explain some main patters, but also have some weaknesses

© 2014 Deloitte AS

The choices we make are partly based on how we interpret the market

8

8

CEO

International

BU BU 1

…

HR

Fin

CEO

…

HR

Fin

Geo 2

Geo 1

CEO

Product 1 Product 2

…

HR

Fin

Multidimensional or matrix model

International division

Product based

BU 2

Product 1 Product 2

Functional

CEO

…

HR

Fin

Sales Engineering Production

Geographical

CEO

…

HR

Fin

Geo

1

Geo

2

Quotes from interviews with oil services firms

”The procurement process and client preferences differ

from region to region…”

”Our customers are becoming more global and tell us they want to see the exact same

supplier organisation in different regions…”

© 2014 Deloitte AS 9

Brief example from a re-design process in a

global firm

© 2014 Deloitte AS

At the start of the project, the CEO described the organizational model as the “hot

potato among people here....”

CEO

Product A Product C

I

II

III EAME Unit A Unit B NSA AP Unit D Operations Unit C

IV Sub-unit B1 Product B

The key concern was related to the Product B unit and its organizational location. Managers had gradually

realized that Product B was of key strategic importance but relied on a different business model from

Product A (but did utilize the same production resources).

Other concerns were related to unecessary complexity and to «imblance» given different division sizes

Geographical Product/

Functional

Product B at level 4 in

organization

Revenues

Revenues

© 2014 Deloitte AS

A set of «design criteria» were defined to guide the development of a new model

and to serve as a basis for evaluation of alternative solutions

Promoting

growth in the

Product B

business

Creating a simple

organization with

few management

levels

Creating a more

”balanced”

organization with

a broader

management

team

© 2014 Deloitte AS

Two main alternatives were subsequently developed

CEO

Product A Product B Operations

Product line organization Version a-d

Product C

A product line structure was chosen based on the design criteria shown above

Geographical organization

CEO

Support EAME NSA AP Operations

Support

© 2014 Deloitte AS

To verify that a product line model would work, two key interfaces were considered

13

Customer interface Sales – operations interface

Product A Product B Product C

Oil company

A

Oil company

B

?

Product A

Product B

Operations

The conclusion was that there was

relatively little overlap with regards to

customers (with some exceptions)

The conclusion was that this interface was

potentially demanding

«Rules of engagement» were developed

to ensure that there were clear

expectations and criteria for prioritization

of assets

© 2014 Deloitte AS

Question for consideration

14

• Why is it difficult to align the organization with the market?

© 2014 Deloitte AS

Attachment 1

15

© 2014 Deloitte AS

The Global Integration – Local Responsivness framework can be used to

categorize market environments in four broad groups

16

Forces for

global

integration

Forces for local responsiveness

Transnational

environment

Global

environment

Multinational

environment

International

environment

HIGH

LOW

LOW HIGH

© 2014 Deloitte AS

Ghoshal & Nohria (1993) argued that each required a particular organizational form

17

Forces for

global

integration

Forces for local responsiveness

«Integrated variety» «Structural

uniformity»

«Differentiated fit» «Ad hoc variation»

HIGH

LOW

LOW HIGH

The key argument was to take into consideration the nature of the relationship between HQ and subsidiaries and that this

relationship might need to be different, depending on the global and local market environment (and the subsidiaries’ own

resources)

In addition to centralization-decentralization they thus also included the degree of differentiation between subsidiaries and the

degree of formalization (common standards, procedures, etc.)

© 2014 Deloitte AS

They then tested this model by considering the structure and business

environment for 41 firms (including 2 Norwegian ones)

18

Str

uctu

re

Environment

• General Foods • Emhart

• Norton

• Rio Tinto-Zinc

• Schneider

• Siemens

• Colgate-Palmolive

• Digital Equipment

• Freuhauf • Volvo

• Deere & Co.

• Hoechst

• Norsk Hydro

• Solvay

• Firestone

• Jacobs

Suchard

• Seagram

• Continental

Group

• Mannesmann

• Reckitt &

Colman

• Air Products and

Chemical

• Alcan

• DuPont

• Honeywell

• British-American

Tobacco

• BSN Groupe

• R.J. Reynolds

• United Biscuits

• Swedish Match • General Motors

• Glaxo

• ICI

• Electrolux • Baker Int.

• Bertelsmann

• Blue Bell

• Friedrich Krupp

• Timken

• Kodak • Caterpillar

• Cummins

The firms along the diagonal

= Higher degree of fit

between external demands

and the organizational

structure

=> Higher margin, return on

assets, and sales growth

compared to the firms in the

red boxes

Integrated

variety

Structural

uniformity

Differentiated

fit

Source: Ghoshal & Nohria (1993), Sloan Mngtm Review.

Ad hoc

variation

International Multinational Global Transnational

© 2014 Deloitte AS

Attachment 2

19

© 2014 Deloitte AS

Most international firms end up with a hybrid model – there are different grouping

criteria at level 2 and 3 – which leads to duplication (or triplication) of units

20

Product A

Region 1 Region 2 Region 3

Product B

Region 1 Region 2 Region 3

Product C

Region 1 Region 2 Region 3

CEO

Region 1

Product A Product B Product C

Region 2 Region 3

CEO

Product A Product B Product C Product A Product B Product C

Main grouping criterion: Products

Main grouping criterion: Regions

© 2014 Deloitte AS

The only way to avoid this is to choose a multidimensional structure, where the

units are represented at the same level

21

Product A Product B Product C

CEO

Region 1 Region 2 Region 3

Units representing two grouping criteria at same level

The key issue with a multidimensional structure is the separation of responsibilities between the two or more

dimensions, and the definition of the reporting structure

– A matrix reporting line may be used, but can often be avoided.

– For a detailed discussion of this, see Worren (2012).