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Chapter 11:
The organisation of international
business
Introduction

u Organisation structure is the formal division of an organization into sub-units, such as product
divisions or national operations.
u It also includes decision-making responsibilities and integrating mechanisms to coordinate
activities.
u These mechanisms can be formal or informal, such as reporting lines, role assignments, cross-
functional teams, and pan-regional committees.
u The advantages of centralised versus decentralized structures are discussed, as well as the
importance of strategic alignment in shaping structure.
u Four types of organisation structure are commonly used in internationalising companies, and
when most suitable.
u The larger the company's global commitment, coordination problems arise, necessitating the
development of integrating mechanisms, including skilled knowledge management.
u Managers must also consider the environment, strategy, structure, control systems, incentive
systems, processes, organisational culture, and people.
Aims of the Chapter

u Establish the important relationships between environment, strategy, structure and

their joint evolution for firms operating internationally
u Introduce the four types of structure international division, geographic area, global
product division and global matrix structure
u Demonstrate how a firm operating internationally needs to fit its structure to its
international business strategy in order to optimise business performance
u Establish the importance of integrating mechanisms in international business strategy,
and the role of knowledge management in achieving integration
u Identify the components of organisational architecture and the concept of ‘fit’ with
strategy and structure.
 Learning outcomes

u Define and assess when to employ four organisational structures commonly used in international
business
u Critically evaluate the strengths and weaknesses of international division, geographic area, global
product division and global matrix structures
u Discuss what an international business needs to change in its organisation structure to better
match its strategy and select a more optimal path
u Explain the role of knowledge management as an integrating mechanism and the knowledge
implications of different strategies and structures
u Define and discuss the concept of organisation architecture and the importance of fit for
company performance, and be able to apply the concept of fit in analysing real life examples
u Analyse a real-life organisation’s attempts to fit environment, strategy and organisation to achieve
superior performance, taking a contingency approach.
Essential reading

u Willcocks, L. Global business: management. (Stratford-upon-Avon, SB

Publishing, 2021b) Chapter 2.
Further reading

u Buckley, P. et al., ‘The internalisation theory of the multinational enterprise:

a review of the progress on a 30-year research agenda’, Journal of
International Business 40 2009, pp.1563–80.
u Goold, M. and A. Campbell ‘Do you have a well-designed organisation?’,
Harvard Business Review 80(3) 2002, pp.117–24 on types of organisation
structure.
u Malhotra, N. and C. Hinings ‘An organisational model for understanding
internationalisation processes’, Journal of International Business 41 2010,
pp.330–49.
u Peng, M. and K. Meyer International business. (London: Cengage Learning,
2019) Chapter 15, pp.423–31 on knowledge management.
Centralised or
decentralised structure?
Centralised or decentralised
structure?

u It is important to locate decision making in the most effective place in an organisation.

u It is not always best to have all the decisions made by a few senior managers at the
top of an organisation, not least because they rarely have all the information and
knowledge needed to make properly informed decisions about remote events and
locations.
u This becomes a real issue when companies are spreading around many locations and
activities across the globe
u Centralised: An organizational design in which authority and decision-making power
are concentrated at the top levels of the hierarchy.
u Decentralised: An organizational design where decision-making authority is dispersed
across various levels and units within the organization.
brand identity is much easier when the business is centralized

Arguments for Centralization

(Wilcocks, 2021b)
more control, more efficiency
u To facilitate coordination across countries and activities. For example, a company with a
manufacturing site in South Korea might have assembly factories in other countries. Centralised
decisionmaking allows these sets of activities and the related logistics to be coordinated more
closely.
guaranteed uniform with the core ideas of the business
u To ensure decisions are consistent with overall organisational objectives. Decentralisation can
lead to what is called goal displacement as each sub-unit has the power and inclination to
pursue its own interests and sub-goals that may clash with what is optimal for the whole company
u To give top management the capability to introduce necessary major organisational changes on
an international basis. sub divisions can hv certain autonomy, therefore this is better
u To avoid duplication of similar activities, thus gaining scale and resources for that activity (e.g.
centralising R&D or production in one or two locations around the globe instead of letting every
region do their own R&D). no more waste and overlap of r n d in the business
 Arguments for decentralization

u Top management can become overburdened when decision-making is centralised and this can
lead to poor decisions.
cultivating of personal involvement of workers to which also increases loyalty
u Motivational research suggests that people are more committed and work harder in their jobs
where they have a greater degree of discretion, control and freedom in their work.
u Decentralisation can increase control. If you establish autonomous, self-contained units within an
organisation, you can then hold the subunit managers accountable for sub-unit performance.
u Decentralisation can produce better decisions. Here decisions are made closer to the issues by
managers who typically have better quality (including informal) information than those higher up
the hierarchy, and who are typically more knowledgable in the relevant branch of operations.
u Decentralisation can offer greater flexibility and responsiveness. Cumbersome decision-making
processes can be avoided and wellinformed decisions made quickly.
 Revisiting international business
strategy (Chapter 7)

u A home replication strategy fits with an international

division structure.
u A localisation strategy fits with a geographic area ni

structure. the same

good can be
u A global standardisation strategy fits with a global priced
differently in
product division structure. different
countries

u A transnational strategy fits with a global matrix

structure.

product development, adaptation of the local market

The international division structure

centralized structure

u This structure is built to handle all international

operations by a division created for control.
u An international division structure is typically set up
when companies initially expand abroad, often when
engaging in a home replication strategy.
using the same strategy when entering into a new market or country
Issues with the international division
structure
managers don't have the power or a say in this structure
u Foreign subsidiary managers in the international division are not given
sufficient voice relative to the heads of domestic divisions.
u International division activities lack synergies because they are not
coordinated with the rest of the company that in any case focuses on,
and prioritises, domestic activities and results. treating different things as just one thing, as seeing as domestic or international therefore
inefficient strategy

u Companies often phase out this structure after initial market entry, and
limited expansion, so it may be regarded as temporary and gain little
commitment from even its own managers. short term gain as the market is not expansible as it is thought
Geographic area structure

decentralized structure

u MNEs are organized based on specific geographic areas, such as

countries or groups, with each area being a self-contained entity with its
own set of activities.
u This structure supports local responsiveness and is suitable for a localisation
strategy. product development to the local market
u For example, Mittal Steel, a Europe-based, Indian-owned steel company,
had country managers responsible for production, sales, and finance in
Poland, Germany, USA, Mexico, and Canada. After a merger with Arcelor
in 2007, the company moved to a mixed geographic/product division
structure.
 Problems with the geographic area
structure
dividing the product based on country location or geographic location

u The problem with this structure is that it encourages fragmentation of the

organisation into highly autonomous entities. This can have the following
consequences
the more power given the more unresistant for change they become
u The power base built up in an area can be difficult to control and may resist
change, when a more suitable structure is needed by the company as a whole.
u It can be difficult to transfer core competencies and skills between areas to
realise location and experience curve economies more widely in the company
 Global product division structure
separation of departments according to product
product and service segmentation

u The product divisions take responsibility for global operations in their

specific product area
u You assign employees into self-contained divisions according to the
particular line of products or services they produce
u For example, Unilever will have separate divisions for food, healthcare,
beauty, etc…
 Global matrix structure
consider the geographic and product and building a matrix out of it

u The global matrix structure is an attempt to

minimise the limitations of the worldwide
area and the worldwide product divisional
structure.
u The strategy aims to support a
transnational strategy where a company
focuses on location and experience curve
economies, local responsiveness, and
internal transfer of core competencies
worldwide.
Global matrix structure

u You will see that it has both product divisions

and geographic areas represented.
u Thus in the figure, Area 2 and Product Division
B management will determine jointly the
product offerings, marketing strategy, staffing
and resourcing and business strategy for B
products sold in Area A.
u As a result, an individual manager will belong
to two hierarchies – an area hierarchy and a
product division hierarchy – and so have two
bosses. This can create tensions in loyalties
and how time is prioritised among managers.
 Problems with global matrix structure
too decentralized

u They can be bureaucratic, clumsy and slow.

u They can result in conflicts and power struggles between areas and
product divisions due to joint responsibility, diverging interests and
viewpoints.
u They can result in finger-pointing between parties when something goes
wrong, because it is often difficult to establish accountability in this
structure.
the more division the business makes the more fractured the business becomes and the more the conflicts can occur
Evolution of structure and
the need for a
contingency approach
 Evolution of structure and the need for
a contingency approach

Companies that continue to expand into international markets and grow in size will tend to expand
from an international division structure to:
u Either a worldwide product divisional structure – adopted by companies that are quite diversified,
which:
1. allows for worldwide coordination of value creation activities of each product division
2. helps realise location and experience curve economies
3. facilitates the transfer of core competencies does not allow for local responsiveness.
u Or a worldwide area structure – favoured by companies with a low degree of diversification and a
domestic structure based on function, which:
1. divides the world into autonomous geographic areas decentralises operational authority
2. facilitates local responsiveness
3. can result in a fragmentation of the organisation is consistent with a localisation strategy
How organizational structures change
over time - Stopford and Wells (1972)

u Stopford and Wells' 1972 research

developed the Stopford-Wells framework,
which suggests that a company's structure
evolves towards the global matrix grid as
foreign product diversity increases and
foreign sales increase.
u This theory has been crucial in the
changing international business world, with
flatter hierarchical forms becoming
popular. Coordination and integration
mechanisms are essential for globally
operating companies.
Case Study: Nestle

u Read the following linked extract on how Nestle as an MNE as engaged in

organizational structure
u Link
Integrating mechanisms
and the role of
knowledge management
Integrating mechanisms and the role
of knowledge management specialized knowledge is communicated and aggregated and digitized

supply management systems

u Global standardisation and transnational strategies in multinational

enterprises (MNEs) create complexity and coordination problems.
u MNEs often have multiple sub-units with different orientations, working
methods, and goals.
u Unilever faced difficulties in introducing new products into Europe due to
disputes between national and product divisions.
u To address this, formal mechanisms for integrating sub-units include direct
contact between managers, developing liaison roles for coordination, and
forming cross-unit temporary teams for common projects requiring
resources from different sub-units.
 Integrating mechanisms and the role
of knowledge management

u But all these solutions have limitations and need to be supported by informal integrating
mechanisms
bunch of ppl getting together and pool in knowledge
u Most multinational enterprises (MNEs) are experimenting with knowledge networks, fostering a
culture of teamwork and cross-unit cooperation, often aided by information and
communications technologies, which have gained significant learning from the 2020-21
pandemic and economic crises.
u Knowledge management refers to the structures, processes, and systems that develop,
leverage, and transfer knowledge.
u It encompasses not just factual information but also the know-how and know-why embedded in
individuals and companies. Explicit knowledge is codifiable, allowing for easy storage and
transfer. not just storage of data but experience
u Information systems based on information and communications technologies are widely used in
international business for explicit knowledge storage and transfer. slack and discord
 Integrating mechanisms and the role
of knowledge management learn on the job knowledge is tacit knowledge
whereas the already coded knowledge is
explicit.

u The knowledge management challenge, then, for international businesses is to organise formal
systems and processes that deal with explicit knowledge (e.g. databases, intellectual property,
expert systems) and also create learning mechanisms by which tacit knowledge can be shared,
transferred and leveraged (e.g. knowledge networks, Zoom meetings, use of social media).
u Both integration strategies can be greatly enhanced by the use of information and
communications technologies in the globally operating company. One means is a knowledge
network. inherent level of competition so that knowledge transfer is blocked, the idea of groupism
u Another means of sharing knowledge is through Communities of practice, established between
groups of people doing similar or related work, enable informal experimentation and innovation.
u These communities, when IT-enabled, operate as virtual communities of practice.
u Organizations face difficulties in promoting knowledge sharing due to power dynamics. To
counter this, companies develop a strong, sharing, cooperative culture, supporting processes,
structures, and modes of knowledge development and communication.
u Incentives are also crucial for fostering such a culture.
Fitting strategy, structure
and organisation
architecture
Organisation architecture – Hill, 2021

1. Organisational structure
2. Control systems and incentives
3. Processes
4. Organisational culture
5. People
Organisational structure

u The formal division of the organisation into sub-units.

u The location of decision-making responsibilities within that structure –
centralised versus decentralised.
u The establishment of integrating mechanisms to coordinate the activities
of sub-units including cross-functional teams or panregional committees.
Control systems and incentives
integrated digital infrastructures that are control systems,

u The control metrics used to measure performance of sub-units, managers

and employees. The main control systems are personal controls,
bureaucratic controls, output controls and cultural controls (where an
employee buys into the norms and value systems of the company).
u The incentive devices used to reward sub-unit, managerial and employee
behaviour. For example, targets linked to profitability can be used to
measure sub-unit performance. Employees might be rewarded for
exceeding those targets (e.g. given a share of profits achieved beyond
targets). financial and non-financial benefits, fringe benefits or obsilary benefits that is insurance, travel allowance.
Processes the sequence of activity or the actual act of doing something

activities that are been done in a business in primary and supporting systems including strategy , what the employees do within the company
u Organizational processes involve decision-making and work execution at
various levels, including strategy formulation, resource allocation, customer
service, product quality improvement, and employee performance
evaluation.
u It's crucial to differentiate between core processes that determine a
company's mission and competitive advantage, and support processes
that enable but don't differentiate products or services.
u An end-to-end view of processes is essential for success, requiring cross-
organization cooperation and mechanisms.
u For instance, a software product may require R&D personnel in California,
production in Taiwan, and marketing in Europe, Asia, and North America.
Organisational culture

intendent organizational culture

u The norms and value systems that are shared among the employees of an
organisation.
u To integrate activity when operating worldwide, some companies try to
have strong cultures.
u For example, Accenture summarises its culture as ‘High performance.
Delivered.’
u Shared cultures stressing cooperation can help in rendering effective
informal integrating mechanisms such as knowledge networks.
u Note that strong cultures are not always supportive of, and may even
inhibit, strong international performance.
People

u The employees and the strategy used to recruit, compensate and retain
those individuals and the type of people they are in terms of their skills,
values and orientation.
Fitting strategy, structure and
organisation architecture

u Superior company profitability requires three things to happen: the

different elements of a company’s organisational architecture must be
internally consistent, the organisational architecture must fit the
company’s strategy, and the strategy and architecture of the company
must fit with competitive conditions prevailing in the company’s markets.
u We are dealing primarily with structure in this chapter and the other four
components of organisational architecture are dealt with in other
chapters.

take a look of the external environment into consideration when,