The Organization of International Business

In this lesson, you’re expected to learn about:
– organizational architecture
– organizational structures
– decision-making in MNCs

Organizational Architecture

The term organizational architecture refers to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people. The figure below illustrates these different elements.

1) Organizational Structure

By organizational structure, we mean three things:

First, the formal division of the organization into subunits such as product divisions, national operations, and functions (most organizational charts display this aspect of structure).

Second, the location of decision-making responsibilities within that structure (e.g., centralized or decentralized)

Third, the establishment of integrating mechanisms to coordinate the activities of subunits, including cross-functional teams and pan-regional committees.

2) Control Systems and Incentives

Control systems are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits. For example, historically Unilever measured the performance of national operating subsidiary companies according to profitability.

Incentives are the devices used to reward appropriate managerial behavior. Incentives are very closely tied to performance metrics. For example, the incentives of a manager in charge of a national operating subsidiary might be linked to the performance of that company. Specifically, he might receive a bonus if his subsidiary exceeds its performance targets.

3) Processes

Processes are the manner in which decisions are made and work is performed within the organization. Examples are the processes for formulating strategy, for deciding how to allocate resources within a firm, or for evaluating the performance of managers and giving feedback. Processes are conceptually distinct from the location of decision-making responsibilities within an organization, although both involve decisions.

While the CEO might have ultimate responsibility for deciding what the strategy of the firm should be (i.e., the decision-making responsibility is centralized), the process he or she uses to make that decision might include the solicitation of ideas and criticism from lower-level managers.

4) Organizational Culture

Organizational culture refers to the norms and value systems that are shared among the employees of an organization. Just as societies have cultures, so do organizations.

Organizations are societies of individuals who come together to perform collective tasks. They have their own distinctive patterns of culture and sub­culture. As we shall see, organizational culture can have a profound impact on how a firm performs.

5) People

By people we mean not just the employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and the type of people that they are in terms of their skills, values, and orientation.

Interaction of Components of Organizational Architecture

As illustrated in the figure below, the various components of an organiza­tion’s architecture are not independent of each other: Each component shapes, and is shaped by, other components of architecture.

An example is the strategy regard­ing people. This can be used proactively to hire individuals whose internal values are consistent with those that the firm wishes to emphasize in its organization culture. Thus, the people component of architecture can be used to reinforce (or not) the prevailing culture of the organization.

What is an MNC?

MNCs are firms with significant foreign direct investment assets. They are characterized by their ability to derive and transfer capital resources worldwide and to operate facilities of production and penetrate markets in more than one country, usually on a global scale. Over the past 30 years, many writers have argued over the best name to use in referring to these companies.

“Multinational enterprise” (MNE) has been a popular term because it reflects the fact that many global firms are not, technically speaking, “corporations.” The terms “transnational corporation” and “supranational corporation” are often used within the United Nations system, where many internationalists argue that the operations and interests of the modern corporation transcend national boundaries.

Globalization of MNCs

One significant trend in business during the last half of the twentieth century has been the globalization of MNCs. At one time, MNCs were simply large domestic companies with foreign operations. Today, they are global companies.

They typically make decisions and enter into strategic alliances with each other without regard to national boundaries. They move factories, technology, and capital to those countries with the most hospitable laws, the lowest tax rates, the most qualified workforce, or abundant natural resources. They see market share and company performance in global terms. Foreign sales and operations are extremely profitable for many multinationals.

[Optional] The Effects of Globalization on Multinational Corporations

The organizational structure of the multinational corporation (MNC) evolves over time due to changes in economic policies, tax laws, government regulations, and political structures.

The organizational structure of the MNC varies, in which each manager’s level has a varied degree of authority and responsibility.

Forms of Organizations

Mueller and his co-authors suggest five common forms of organizations used by MNCs:

(1) International division/department
(2) Organization by product line
(3) Functional organization
(4) Geographic organization
(5) Global matrix organization

Let’s briefly look at each of these forms. 

1) The international division/department separates foreign operations from domestic operations. This international division is usually evaluated as an independent operation and compared with the domestic division.

Information flows typically occur from subsidiaries to the president of the international division.

2) Organization by product line results in the integration of domestic and foreign operations and the  evaluation of product lines based on worldwide results.

3) A company grouped by function (such as marketing, manufacturing, or accounting) is called a functional organization, and management maintains centralized control over the functions.

An example is that the president for marketing at U.S. headquarters would be responsible for the marketing function worldwide. This structure is not common but is popular among some companies, whose products are homogeneous.

4) Geographic organization separates operations into geographic areas such as North America, Europe, and Asia. A company would use this form of structure when it has substantial foreign operations that are not dominated by a particular country or area of the world.

U.S. MNCs do not use this form as often as European and Japanese MNCs do because U.S. MNCs are usually dominated by their domestic markets.

5) The global matrix organization blends two or more of the four forms just presented.

An example is that the general manager of a German subsidiary will report to the vice president for worldwide product lines and to the area vice president for Europe.

The  matrix organization avoids the problems inherent in either integrating or separating foreign operations.

Another dimension to the organization of MNCs is the attitude of management at headquarters toward multinational business.

These attitudes can be classified into three types:
1) Ethnocentric (home-country oriented)
2) Polycentric (host-country oriented)
3) Geocentric (world-oriented)

– The home country (parent country) refers to that nation in which an MNC establishes a subsidiary in a foreign country.
– The host country refers to that nation in which an MNC establishes a subsidiary in a local country.

1) An ethnocentric management thinks that home-country standards are superior and therefore applies them worldwide.

Automakers are an example of the ethnocentric management model.

2) A polycentric management assumes that host-country cultures are different and, therefore, allows local subsidiaries or affiliates to operate autonomously. Standards for performance evaluation and control functions are determined locally.

Pharmaceutical companies are an example of the polycentric model.

3) A geocentric management focuses on worldwide objectives and considers foreign subsidiaries as part of a whole. Standards for performance evaluation and control functions are determined both universally and locally.

It is an ideal model where decisions are considered globally while, at the same time, individual subsidiaries are able to respond to the demands of host governments and the local customer. “Think globally and act locally” is the basic tenet.

People of many different nationalities serve on the board of directors and senior management teams.

Philips and Unilever are good examples of the geocentric management model.

Types of Decision Making in MNCs

The attitudes of headquarters management also affect the location of decision-making. Basically, three types of decision-making may result:

1) Centralized
2) Decentralized
3) Semi-centralized or Semi-decentralized

A firm’s vertical differentiation determines where in its hierarchy the decision-making power is concentrated.

Are production and marketing decisions centralized in the offices of upper-level managers, or are they decentralized to lower-level managers? Where does the responsibility for R&D decisions lie? Are important strategic and financial decisions pushed down to operating units, or are they concentrated in the hands of top management? There are arguments for both centralization and decentralization.

1) Centralization

If decision-making authority rests with the headquarters, an MNC is said to be centralized. Even with this structure, an MNC generally does not make all decisions at one location but aims for a collaborative approach between headquarters and other business units.

2) Decentralization

If an MNC headquarters allows foreign subsidiaries to make important decisions, the corporation is considered to be decentralized. This structure is more common when global diversity is considered.

Managers of foreign subsidiaries are allowed a great deal of autonomy to plan, control, and evaluate their own operations at the local level.

3) Semi-Centralized or Semi-Decentralized

Not all MNCs are purely centralized or decentralized. Often, a mixture of organizations is necessary.

Semi-centralized or semi-decentralized decision-making arises when an MNC centralizes functions considered critical for success (e.g., research and development) and decentralizes those that are less critical (e.g., marketing and production).

[Optional] Centralized Vs. Decentralized Organizational Structure
Jim Rohn