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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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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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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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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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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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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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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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