The Organisation of International Business

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THE ORGANISATION OF INTERNATIONAL BUSINESS

VERTICAL DIFFERENTIATION :- a firms vertical differentiation determineswhere in its hierarcy the decision-making power is concentrated. There arearguments for centralization and decentralization.

CENTRALISATION :-ADVANTAGES

1. Can facilitate co-ordination e.g. a firm has its componentmanufacture in Taiwan and its assembly in India then there is a needto co-ordinate the activities of these two locations. This can beachieved by a centralized production scheduling done at the headoffice.

2. Can help ensure that decisions are consistent with organizational

objectives. If decision making is decentralized it may lead to avariance with top management goals.3. Concentration of authority with the top management can give them

the means to bring about needed major organizational changes.4. Centralisation can avoid duplication of activities e.g. R & D functions

are centralization to avoid duplication of work . Similarly productdesigning, advertisement etc.

DECENTRALISATION :-ADVANTAGES

1. Top management can become over burdened when decision makingauthorities are centralized which can result in poor decisions. Thusdecentralization gives top management time to focus on criticalissues by delegating more routine issues to lower-level managers.

2. Behavioral scientists argue that people are willing to give more totheir jobs when they have a greater degree of individual freedom andcontrol over their work.

3. Permits greater flexibility more rapid response to environmentchange.

4. Can result in better decision making since decisions are made morecloser to the spot by managers who have better information on theissue.

5. Decentralisation can increase control it can be used to establishrelatively autonomous self contained sub-units within anorganization.

STRATEGY & CENTRALISATION IN IB

The choice between centralization and decentralization cannot be absolute.It makes sense to centralize some decisions and decentralize some


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depending on the type of decision and the firms strategy. Firms pursuingglobal strategies must decide how to disperse various value-creationactivities. The head office must take decisions on the location of R & D,production, marketing and so on. In addition the global web must be co-ordinated. Centralisation of some operating decisions may becomenecessary. In contrast emphasis on local responsiveness may create strong

pressures for decentralization.

Thus international firms tend to maintain centralized control over their corecompetencies like R & D and decentralize operating decisions to foreignsubsidiaries.

HORIZONTAL DIFFERENTIATION

Is basically concerned with how the firm decides to divide itself into submits.The decision is mainly made on the basis of function, types of business orgeographical area.

THE STRUCTURE OF DOMESTIC FIRMS

Most firms have no formal structure but as they grow the demands ofmanagement become too great for one individual to handle. At this point theorganization is split into functions reflecting the firms value-creation. Thesefunctions are typically co-ordinated and controlled by a top-managementteam.

TYPICAL FUNCTIONAL STRUCTURE

TOP MANAGEMENT

Buying Unit Plants Sales unit Accounting Unit

TYPICAL PRODUCTION DIVISION STRUCTURE

PURCHASING MANUFACTURING MARKETING FINANCE

DIV PRODUCT

LINE A

DIV PRODUCT

LINE B

DIV PRODUCT

LINE C

MARKETING

DEPT

MANUFACTURING

DEPT.

PURCHASE

DEPT.

FINANCE

DEPT.


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Branch Sales Units Plants Buying units Accountingunits

By its nature decision making in such firms is centralized. A differentstructure may be required if a firm diversifies its product offering. In such acase a functional structure can become very clumsy. Problems of co-ordination and control can arise when different business areas are managedunder a functional structure. At such a stage most firms switch to a productdivision structure. Here each product division is responsible for a distinctproduct line. Each product division is self-contained, with its own functions.

THE INTERNATIONAL UNITWhen firms expand abroad they typically group all their activities into aninternational division. Regardless of a firms domestic structure, its

international division tends to be organized on geography.

INTERNATIONAL DIVISION STRUCTURE

FUNCTIONAL UNITS

Many firms expand internationally by exporting the product manufactureddomestically. On time it may prove viable to manufacture the product ineach country.

HEAD QUARTERS

DOMESTIC

DIV I

DOMESTIC

DIV II

DOMESTIC

DIV III

INTERNATI ONAL

DIV IV

GM PRODUCT

LINE A

GM PRODUCT

LINE B

GM PRODUCT

LINE C

COUNTRY 1 COUNTRY 2

GM PRODUCT

LINE A,B &C

GM PRODUCT

LINE A ,B &C


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For firms with functional structure at home it means replicating the functionalstructure in every country in which the firm does business.

For firms with a divisional structure this might mean replicating the divisionalstructure in every country. This structure is followed by 60 % of all firms thathave expanded internationally as per a Harvard study. The dual structure

may create certain problems like conflicts and co-ordination problemsbetween domestic and foreign operations. The heads of foreign subsidiariesare not given as mush voice in the organization as the heads of domesticfunctions. Thus when a companies international operations grow thisstructure is dropped.

Worldwide Area Structure :- is preferred by companies that had diversifiedinto international market and have a domestic structure based on functions.

The worldwide area structure divides the world into areas. An area may be acountry or a group of countries. Each area tends to be self contained with itsown production, marketing, R & D , HR and finance functions, operationsauthority are decentralized. While the HO maintain overall financial &

strategic decision control.

The great strength of this structure is that it facilitates local responsiveness.Because decision-making responsibilities are decentralized. Each area cancustomize product offered, marketing and business strategy.

The weakness of the structure is that it encourages fragmentation of theorganization into highly autonomous entities. This can make it difficult totransfer core competencies between areas. Firms structured on this basismay encounter significant problems if local responsiveness is less.

WORLDWIDE PRODUCT DIVISION STRUCTURE

A worldwide product division structure tends to be adopted by firms that arediversified and have domestic structure based on product divisions. Theworldwide product division is designed to help overcome the problems of co-ordination that arise with the international division. The strength of thisstructure is that it provides an organization where it is easy to consolidatedvalue- creation activities at key location necessary. It also facilitates transferof core competencies.

The main problems is limited voice is given to area managers.AWORLD WIDE AREA STRUCTURE

HEAD QUARTERS

NORTH

AMERICA N

AREA

LATIN

AMERICAN

AREA

ASIAN

AREA

MIDDLE

EAST AREA


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WORLD WIDE PRODUCT DIVISION STRUCTURE

Functional units Functional units

GLOBAL MATRIX STRUCTURE

In the classic global matrix structure horizontal differentiation proceeds alongtwo dimensions product division and geographical area. The basic aim isthat responsibility for operating decisions pertaining to a particular productshould be shared by the product division & various areas.

Thus the nature of the product offered the marketing and business strategyto be pursued in Area / for products of Div A are determined by consultationbetween Div A & area management.

This dual decision making enables the firm to achieve its objectives.

The reality of the global matrix structure is that it does not work as well asthe theory predicts. The matrix often turns out to be clumsy. It can requireso many meetings that it is difficult to get any work done. The dual hierarchystructure can also lead to conflict and power struggles. Ascertainingaccountability is also tough.

WORLD WIDE

PRODUCT GR/

DIV A

WORLD WIDE

PRODUCT GR/

DIV B

WORLD WIDE

PRODUCT GR/

DIV C

AREA 1

DOMESTIC

AREA 2

INTERNATIONAL

HEAD QUARTERS


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Documents

The Organisation of International Business