Business Explain: The Organization of International Business

What is required for an international business to change its organization so that it better matches its strategy?

Within most organizations is a strong organizational inertia(=tendency of an established organization to continue with old habits). These origin from a range of different factors such as the distribution of power and influence, the existing culture of the firm, manager's preconceptions of the right way to conduct business and institutional constraints, either by government or firm itself.

So how can a business overcome the inertia in order to change its organization?

Unfreezing the organization by shock therapy and clearly articulate the means of change.
Transfer process means redesigning the whole system and involving employees in the process.
Refreezing the process, which takes longer as it means allowing the new culture to establish itself while slowly forcing the old one out.

How can organization be matched with a strategy to improve the performance of an international business?

Localization strategy

For the localization strategy, the decision-making processes should be decentralized in order to achieve best possible local responsiveness. It should also be divided into an area division structure, again to focus on local responsiveness over cost reductions. Given how all subunits work independently, producing the full product group in each separate entity, the need for coordination and integrating mechanisms are low, which also results in low performance ambiguity thus all entities are responsible for their own production and no need for cultural controls.

International strategy

For an international strategy, decision-making should be partially centralized and decentralized, with important functions such as R&D centralized to head quarter and production functions decentralized to a few major facilities in favorable locations. Worldwide product divisional structure is prefered to this strategy as it does not need to focus on local responsiveness, but rather keeping cost low in order to achieve high profitability. The strategy requires some coordination in order to transfer core competencies and skills between subsidiaries, which indicates a certain need for integrating mechanisms as well as cultural controls. Performance ambiguity exists in a moderate scale.

Global standardization strategy

Given how global standardization focuses on standardized products, it requires some centralization in decision-making in order to achieve consistency in its R&D, production and marketing. Furthermore, this strategy is most likely to function the best with a worldwide product divisional structure since it focuses on realizing economies of scale, learning effects and location economies to reduce costs. Given how this strategy requires a firm to disperse its value creation activities across the globe, high coordination is necessary and that means many integrating mechanisms, high performance ambiguity and need for cultural controls.

Transnational strategy

Finally, the transnational strategy, focusing on both low cost and differentiation, needs both centralized and decentralized decision-making. It should apply a global matrix structure to facilitate both goals, but this increases the need for coordination greatly which furthermore increases performance ambiguity and the need to integrating mechanisms and cultural controls.

What different organizational choices can be made in an international business? (Integrating mechanisms)

Integrating mechanisms

These mechanisms are applied when managers find it hard to coordinate on their own, and is therefore a tool which can through formal and informal ways help achieve coordination.
When is coordination necessary? The need is the lowest in firms pursuing a localization strategy and increases from international to global standardization to finally the transnational strategy which requires the most. The reason is that transfer of core competencies requires coordination, as well as dispersing value creation activities to achieve location and experience curve economies → least important in localization strategy and increasingly important until transnational strategy. Impediments to coordination arise from managers and employees not "speaking the same language", literally and practically. It can also be if goals of the firm are pursued differently.

- Formal integrating mechanisms

Direct contact → managers contact each other directly when there is an issue.

Liaison roles → subunits coordinated by two persons with responsibilities.

Teams → when further coordination is necessary, teams are put together to coordinate.

Matrix structures → maximum coordination, geographical areas and product divisions.

- Informal integrating mechanisms

Knowledge network → transmission of information through an informal network based on relationships between managers and employees and includes a lot of trust.

What different organizational choices can be made in an international business? (Vertical Differentiation)

Vertical differentiation

- Centralized decision-making

Facilitates greater coordination and integration of operations, helps ensure that all decisions made are consistent with organizational objectives, makes it easier to avoid duplication of activities and therefore keeps costs low, and finally helps managers maintain enough power to enforce radical decisions such as strategic aggressive pricing or organizational changes.

- Decentralized decision-making

By decentralizing decision-making, a firm is able to relief top managers of certain decisions which allows them to focus on more important issues. Decisions made by managers of the local production might be able to make greater decisions based on familiarity and previous knowledge, as well as responding quicker to urging issues. Finally, greater freedom is a motivational force which can encourage employees to work more efficiently.