What different organizational choices can be made in an international business? (Horizontal Differentiation)
The Horizontal differentiation
Begins when a company decides to start assigning specific job functions to different employees rather than having all employees performing all necessary tasks. The firm can organize itself according to process, product, functions, service, location, and client.
- Domestic structure
Functional structure
Organization is split into functions, which reflect the value creation activities of the firm(R&D, production, marketing, and sales) when demand of management increases.
Product divisional structure
When the firm not only needs to split into functions, but into different divisions in order to coordinate a large product offering(producing many different products). Each product is split into its own division with separate functions that focus on the specific product.
- International division structure
Once a firm decides to go international, companies add a new international division which groups all international activities. This division is normally organized according to geography where each division is in charge of a country or an area with one or several products. In time and if demand increases, it might serve for a firm to introduce the domestic structure worldwide rather than divide according to geographical areas. Problems? Dual structure → conflict and coordination problems between domestic and international operations. Domestic managers might not be the best suited to make foreign decisions, but due to hierarchy do which relegates foreign managers to second tier and is inconsistent with a strategy that tries to expand internationally. Also, transfer of core competencies and innovational thinking can be inhibited by the lack of coordination between domestic and foreign operations.
- Worldwide area structure
Favored by firms who produce products with low diversification and has a domestic structure based on functions → divides itself internationally into geographical areas where each area is responsible for all parts of R&D, production, marketing, sales, HR and finance functions.
The worldwide area structure is favored by firms who aim for a strategy that focuses on local responsiveness over cost reductions, e.g localization strategy. The power of decision-making is decentralized to each geographical area and division. It is not as suitable for a global standardization strategy since the high fragmentation and difficulties in transferring core competencies makes it harder to achieve location and experience curve economies and therefore cost reductions.
- Worldwide product divisional structure
Often adopted by firms that have a larger diversification between its products, and originally had a domestic structure based on product division. Each product or product group is divided into its own division and then located in optimal locations for the value creation activities.
This structure helps overcome the coordination problems related to the area structure, as this one helps firms realize location and experience curve economies as well as facilitating transfer of core competencies within subsidiaries. The worldwide product divisional structure is favored by firms pursuing an international strategy but mainly global standardization strategy. It does not consider local responsiveness, but rather favors cost reductions in all possible ways.
- Global matrix structure
For firms pursuing a transnational strategy, none of the above structures will support both of the goals of the firm - low cost and local responsiveness. The global matrix structure is designed to combine the two, area and product division, in order to create a structure that facilitates both low cost and local responsiveness. The idea is that operating decisions for a product will be shared by the product division and the various areas of the firm.
Although good in theory, this structure becomes slow and bulky in practice, since all decisions take longer with more people involved. This makes the organization unable to respond quickly to shifts in demand and react to innovative ideas.