Lesson Outline • Introduction to organization design (OD) • How OD changes over time as the firm's international activities expand • Corollary approach, export department, international division • Global organization design • Comparing the features, strengths, and weaknesses of product, area, functional, customer, matrix, and hybrid global organization designs • Matching strategy and OD
Organization Design (OD):Introduction • OD is the overall pattern of structural components and configurations used to manage the total organization. • OD occupies a central role in strategy implementation because it allocates authority and resources, shapes the flow of information, and tends to exert a strong influence on what executives in the firm will have an incentive to value and reward.
Introduction • Organization design changes over time as the firm expands internationally. • OD changes on an ongoing basis to reflect changes in a firm’s strategy. • Trying to run a firm which has an inappropriate organizational design resembles trying to drive a car which has all four wheels pointed in different directions.
Introduction • There is no “best” organizational design. Need to select a design that best fits the needs of the organization. Factors influencing organization design include strategy, size, technology, environment, and cultures of the countries in which the firm operates. • Consistently selecting an appropriate OD may be best viewed as a prerequisite to remaining consistently profitable, but not a guarantee.
How OD changes over time as the firm’s international activities expand The Initial Effects of International Operations on Organization Design
Initial Effects of International Activities on OD • Organization design changes as a firm expands internationally. At their start, many firms do not consider international markets in their strategies, and may in fact make their initial entrance to foreign markets through indirect exporting (see Chapter 11). As indirect export sales grow however, firms begin to consider pursuing opportunities in new markets.
Initial Effects of International Activities on OD • The Corollary Approach • An initial response to international markets may be through the corollary approach whereby a firm delegates responsibility for processing international orders to individuals within an existing department, such as finance or marketing. International activities are likely not of central importance to the firm’s well being and are undertaken as a “corollary” to domestic activities, hence the name given above.
Initial Effects of International Activities on OD • The Export Department • As export sales grow, firms may form a separate export department which takes responsibility for overseeing international operations, marketing products, processing orders, working with foreign distributors, and arranging financing when necessary. Eventually, the department may hold a similar status to other functional areas.
The International Division As international sales continue to grow, the export department may not be in a position to handle all of a firm’s international activities. In fact, familiarity with foreign markets typically becomes more important as foreign sales rise, requiring new methods of organizing. Many firms establish an international division to cope with the firm’s international business activities. The division enables a company to allocate resources and create specialized programs and activities targeted for foreign markets, while at the same time, keeping that activity segregated from ongoing domestic activities. Initial Effects of International Activities on OD
Figure 13.2 Banco Excel Economico S.A.’sInternational Division Design
Global Organizational Design • A firm’s international division is typically abandoned in favor of a global organization design as a firm moves from being domestically oriented with international sales to being a multinational corporation. A global design must enable a firm to integrate three types of knowledge: area, product, and functional.
Global Organizational Design • A firm will usually select one of five common global organization designs (product, area, functional, customer, or matrix) depending on its situation in the market, its firm-specific advantages, and its managerial philosophy. Each of the design types typically emphasizes one type of knowledge (area, product and /or functional), and thus reflects a company’s weighting of the importance of each.
Global Organizational Design • Global Product Design • The most common organization design is the global product design which assigns responsibility for specific products or product groups to separate operating divisions within a firm. The design is most appropriate for firms that have diverse product lines or product lines that are sold in diverse markets.
Global Organizational Design • Global Product Design • Firms typically take on an M-form design (multidivisional) if products are related, and an H-form design (holding company) if products are unrelated. The text notes that Unilever has an M form design, while Shougang Corporation has an H form.
Advantages of a Global Product Design • Managers are able to gain expertise in all aspects of a product or products since a division focuses on a single product or product group. • Efficiencies in production are easier to capture since products can be manufactured wherever manufacturing costs are lowest. • Production can be coordinated at various facilities reflecting global demand and cost fluctuations.
Advantages of a Global Product Design • Managers, because of their extensive product knowledge, are in a position to incorporate new technologies into their product(s) and respond quickly and flexibly to technological changes that affect their market. • A Global Product design facilitates global marketing. • It facilitates geocentric corporate philosophies.
Disadvantages of a Global Product Design • It may encourage expensive duplication in functional areas and even in physical facilities. • Each product group must develop its own knowledge about the local environment. • Coordination and corporate learning across product groups is more difficult.
Global Organizational Design • Global Area Design • The second most common form of global design, the global area design, centers the firm’s activities around specific areas or regions of the world. The design is particularly appropriate for firms with polycentric or multidomestic corporate philosophies. The global area design is typically used by firms whose products do not transfer well across regions.
Advantages of a Global Area Design • The structure allows a firm to develop expertise about the local market and adapt its product mix and products accordingly. • Thus, the global area design tends to be appropriate for firms whose strategy is marketing-driven rather than based on manufacturing efficiencies, technological innovation, or the reputation of its brand name products.
Disadvantages of a Global Area Design • The firm may sacrifice cost efficiencies that could be achieved through global production since the structure emphasizes the needs of the area market. • Technology diffusion is slowed since innovations may not be adopted across the organization.
Disadvantages of a Global Area Design • Resources are duplicated since each area division has its own functional specialists, and in some cases, production facilities. • Coordination across areas is expensive and global product planning is discouraged under this design.
Global Organizational Design • Global Functional Design • Under the global functional design a firm creates departments or divisions that have worldwide responsibility for the common organizational functions. Firms that adopt this design typically have relatively narrow or similar product lines. The design is sometimes called a U-form design (unity).
Advantages of a Global Functional Design • Firms can develop and transfer expertise within each functional area. • It is possible to maintain highly centralized control over functional operations. • The design focuses attention on the key functions of the firm.
Disadvantages of a Global Functional Design • It is only practical when the firm has relatively few products or customers. • It does not promote coordination between divisions. • It may result in duplication of resources among managers.
Global Organizational Design • Global Customer Design • The global customer design is used when a firm serves different customers or customer groups, each with specific needs calling for special expertise or attention.
Advantages and Disadvantages of a Global Customer Design • The main advantages of the global customer design are that its allows a firm to use different marketing techniques when it targets diverse customer groups and it allows the firm to track how well it is doing within individual segments. • The design does result in a duplication of resources however, and coordination between divisions is difficult.
Global Matrix Design • The most complex international organization design, a global matrix design, is the result of superimposing one form of organization design on top of an existing, different form. • Can be an area design imposed on a product design, or any combination of “pure” designs discussed earlier.
Advantages of a Global Matrix Design • The global matrix design allows firms to draw on the functional and product expertise of its employees because it brings together the functional, area, and product expertise of the firm into teams that can develop new products or respond to a changing market place. • In addition, the design promotes organizational flexibility and promotes coordination and communication across divisions. • People who develop under a matrix are relatively more likely to develop a “matrix of the mind”, becoming able to relatively easily grasp the importance of fundamentally different issues and viewpoints.
Disadvantages of a Global Matrix Design • It is inappropriate for firms that have few products and operate in relatively stable markets. • Employees have more than one boss. Can lead to confusion and anxiety. • The design can lead to gridlock in decision making. • It tends to promote compromises or decisions based on the relative political clout of the managers involved. Thus, can end up with a “paper matrix”, wherein the matrix only exists on paper and does not serve the purposes it was intended to serve.
Global Hybrid Design • Most firms create some sort of hybrid design that fits their particular situations. • The design adopted by a firm may combine some of the elements of the other structures.
Matching strategy and OD • OD shapes information flows, which affects learning. OD also affects where decision making power resides in an organization (its degree of centralization) and who coordinates with whom. • Since these are all key issues for implementing particular strategies, OD and strategy are inextricably linked together.