MGRECON401 Economics of International Business and Multinationals LECTURE 6

1. MGRECON401Economics of International Business and MultinationalsLECTURE 6 Choosing an Optimal Organizational Architecture

2. Lecture Focus • Define the role of Organizational Architecture • Centralization v. Decentralization • Organizational Form: Functional, Multidivisional, Matrix • Role of Globalization in Optimal Organizational Architecture

3. Determinants of Architecture

4. 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

5. 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

6. Centralization versus decentralization benefits of decentralization • Effective use of local knowledge • local tastes and preferences • price sensitivities of particular customers • Conservation of management time • senior management focus on strategy • Training and motivation for local managers

7. Centralization versus decentralization costs of decentralization • Potential agency problems • effective control systems may be expensive • Coordination costs and failures • Less effective use of central information

8. Early Expansion of Industry • Railroad companies • emerged around 1850 • Organized 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

9. 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.

10. Early Expansion of Industry • Companies like DuPont, General Motors, and General Electric experimented with different organizational forms • Eventually adoped the M form (multidivisional)

11. AT&T • 1980s AT&T • slow moving regulated environment • Adopted huge formal bureaucracy • Important decision made from top down • 1990s new AT&T • Deregulation, increased competition, technological change • Adopted large number of profit centers • Run autonomously • Pay-for-performance plans tied to units

12. Eastman Kodak • Prior to 1980s • monopoly in film production • Centralized, top down bureaucracy • 1980s • Increased competition from Fuji and generics • Technological explosion: communications, design, robotics • Kodak lost market share and stock market value

13. Eastman Kodak • 1984 restructuring • 17 new business units with profit and loss responsibility • Managers given increased authority for new products and pricing • Bonus payment system

14. Unilever • One of world’s oldest multinational corporations • Organized on a decentralized basis • Annual conferences on company strategy and executive education sessions, establish connections between managers • Duplication of facilities and high cost structure a problem in new competitive environment • 1996: 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

15. 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.

16. Typically, the structure that evolves in a company’s early stages. Coordination and control rests with top management. The functional structure

17. A typical functional structure Fig 13.3

18. Probable next stage of development. Reflects company growth into new products. Each unit responsible for a product. Semiautonomous and accountable for its performance. Eases coordination and control problems. Product division structure

19. A typical product divisional structure Fig 13.4

20. 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. International division

21. Structure of the international division • International division • Organized on geography • Initially export goods to foreign subsidiary but later engage in FDI or outsource production • Problems • Lack of coordination between domestic and foreign operations

22. One Company’s international division structure Fig 13.5

23. The International structural stages model Fig 13.6

24. Favored by firms with low degree of diversification. Area is usually a country. Largely autonomous. Facilitates local responsiveness. Worldwide area structure

25. Worldwide area structure • Worldwide area structure • Favored by firms with low degree of diversification & domestic structure based on function • World is divided into autonomous geographic areas • Operational authority decentralized • Facilitates local responsiveness • Fragmentation of organization can occur

26. A worldwide area structure Fig 13.7

27. Management focus-Abbot Laboratories • One of world’s largest health care companies • Originally consisted of three divisions • Pharmaceuticals, hospital products & nutritional products • Added international division on geographic lines to handle growing foreign sales • Later added global product division to handle diagnostic businesses • Abbot aims to build global products that can be launched simultaneously around the world • Which structure should be adopted? • Geographic division or global product division?

28. Reasonably diversified firms. Attempts to overcome international division and worldwide area structure problems. Believe that product value creation activities should be coordinated worldwide. Product division Weak local responsiveness.

29. World wide product divisional structure • Adopted by firms that are reasonably diversified • Original domestic firm structure based on product division • Value creation activities of each product division coordinated by that division worldwide • Help realize location and experience curve economies • Facilitate transfer of core competencies • Problem: area managers have limited control, subservient to product division managers, leadingto lack of local responsiveness

30. A worldwide product division structure Fig 13.8

31. Attempts to meet needs of transnational strategy. Doesn’t work as well as theory predicts. “Flexible” matrix structures. Conflict and power struggles. Matrix structure

32. Horizontal differentiation: Global matrix structure • Helps to cope with conflicting demands of earlier strategies • Two dimensions: product division and geographic area • Product division and geographic areas given equal responsibility for operating decisions • Problems • Bureaucratic structure slows decision making • Conflict between areas and product divisions • Difficult to make one party accountable due to dual responsibility

33. A Global matrix structure Fig 13.9

34. 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?

35. 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?

36. 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

37. 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