The Organization Of International Business Introduction, Architecture, Structure

Introduction

of $50 billion and sells more than 1,000 branded products in virtually every country. Detergents, which account for about 25 percent of corporate revenues, include well-known names such as Omo, which is sold in over 50 countries. Personal care products, which account for about 15 percent of sales, include Calvin Klein Cosmetics, Pepsodent toothpaste brands, Faberge hair care products, and Vaseline skin lotions. Food products account for the remaining 60 percent of sales and include strong offerings in margarine (where Unilever’s market share in most countries exceeds 70 percent), tea, ice cream, frozen foods, and bakery products.

Organizational Architecture Organizational Structure Vertical Differentiation: Centralization and Decentralization Horizontal Differentiation: The Design of Structure Integrating Mechanisms Control Systems and Incentives

Historically, Unilever was organized on a decentralized basis. Subsidiary companies in each major national market were responsible for the production, marketing, sales, and distribution of products in that market. In Europe the company had 17 subsidiaries in the early 1990s, each focused on a different national market. Each was a profit center and each was held accountable for its own performance. This decentralization was viewed as a source of strength. The structure allowed local managers to match product offerings and marketing strategy to local tastes and preferences and to alter sales and distribution strategies to fit the prevailing retail systems. To drive the localization, Unilever recruited ‘local managers to run local organizations; the U.S. subsidiary (Lever Brothers) was run by Americans, the Indian subsidiary by Indians, and so on.

Types of Control Systems Incentive Systems Control Systems, Incentives, and Strategy in the International Business Processes Organizational Culture How Is Organizational Culture Created and Maintained? Organizational Culture and Performance in the

To knit together the decentralized organization, Unilever worked to build a common organizational culture among its managers. For years, the company recruited people with similar backgrounds, values, and interests. The stated preference was for individuals with high Levels of “sociability” who embrace the company’s values, which emphasize cooperation and consensus building among managers. It is said that the company has been so successful at this that Unilever executives recognize one another at airports even when they have never met before. Unilever’s senior management believes this corps of likeminded people is the reason its employees work so well together, despite their national diversity.

International Business Synthesis: Strategy and Architecture Multidomestic Firms International Firms Global Firms Transnational Firms Environment, Strategy, Architecture, and Performance Organizational Change Organizational Inertia Implementing Organizational Change Closing Case: Organizational Change at Royal Dutch/Shell Organizational Change at Unilever Unilever is one of the world’s oldest multinational corporations with extensive product offerings in the food, detergent, and personal care businesses. It generates annual revenues in excess 11.154

Unilever has also worked hard to periodically bring these managers together. Annual conferences on company strategy and executive education sessions at Unilever’s management training center outside of London help establish connections between managers. The idea is to build an informal network of equals who know one another well and usually continue to meet and exchange experiences. Unilever also moves its young managers frequently, across borders, products, and division. This policy starts Unilever relationships early as well as increases know-how. By the mid-1990s, the decentralized structure was increasingly out of step with a rapidly changing competitive environment. Unilever’s global competitors, which include the Swiss firm Nestle and Procter & Gamble from the United States, had been

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LESSON 6 THE ORGANIZATION OF INTERNATIONAL BUSINESS-INTRODUCTION, ARCHITECTURE, STRUCTURE

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more successful than Unilever on several fronts-building global brands, reducing cost structure by consolidating manufacturing operations at a few choice locations, and executing simultaneous product launches in several national markets. Unilever’s decentralized structure worked against efforts to build global or regional brands. It also meant lots of duplication, particularly in manufacturing, a lack of scale economies, and a high cost structure. Unilever also found that it was falling behind rivals in the race to bring new products to market. In Europe, for example, while Nestle and Procter & Gamble moved toward pan-European product launches, it could take Unilever four to five years to “persuade” its 17 European operations to adopt a new product. Unilever began to change all this in the mid-1990s. In 1996, it introduced a new structure based on regional business groups. Within each business group are a number of divisions, each focusing on a specific category of products, Thus, within the European Business Group is a division focusing on detergents, another on ice cream and frozen foods, and so on. These groups and divisions have been given the responsibility for coordinatil1g the activities of national subsidiaries within their region to drive down operating costs and speed up the process of developing and introducing new products. “Lever Europe” was established to consolidate the company’s detergent operations. The 17 European companies now report directly to Lever Europe. Using its newfound organizational clout, Lever Europe consolidates the production of detergents in Europe in a few key locations to reduce costs and speed up new product introduction. Implicit in this new approach is a bargain: the 17 companies relinquished autonomy in their traditional markets in exchange for opportunities to help develop and execute a unified pan-European strategy. The number of European plants manufacturing soap has been cut from 10 to 2, and some new products will be manufactured at only one site. Product sizing and packaging are harmonized to cut purchasing costs and to accommodate unified pan-European advertising. By taking these steps, Unilever estimates it has saved as much as $400 million a year in its European detergent operations. Lever Europe is also attempting to speed development of new products and to synchronize the launch of new products throughout Europe. Nonetheless, history still imposes constraints. While Procter & Gamble’s leading laundry detergent carries the same brand name across Europe, Unilever sells its product under a variety of names. The company has no plans to change this. Having spent 100 years building these brand names, it believes it would be foolish to scrap them in the interest of pan-European standardization. Source: Guy de Jonquieres. “Unilever Adopts a Clean Sheet Approach,” Financial Times, October 21 1991, po 13; C, A. Bartlett and S. Ghoshal, Managing across Borders (Boston: Harvard Business School Press, 1989) H. Connon, “Unilever’s Got the Nineties Licked,” The Guardian, May 24,1998, p. 5; “Unilever: A Networked Organization,” Harvard Business Review, November-December 1996, p. 138; and C. Christensen, and J. Zobel, “Unilever’s Butter Beater: Innovation for Global

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Diversity, “ Harvard Business School Case # 9-698-O17, March 1998. Introduction This chapter identifies the organizational architecture that international business use to manage and direct their global operations. By organizational architecture we mean the totality of a firm’s organization, including formal organization structure, control systems and incentives, processes, organizational culture, and people. The core argument outlined in this chapter is that superior enterprise profitability requires three conditions to be fulfilled. First, the different elements of a firm’s organizational architecture must be internally consistent. For example, the control and incentive systems used, in the firm must be consistent with the structure of the enterprise, Second, the organizational architecture must match or fit the strategy of the firm-strategy and architecture must be, consistent. For example, if firm is pursuing global strategy but it has the wrong kind of architecture, in place, it is unlikely that it will be able to execute that strategy effectively, and poor performance may result. Third, the strategy and architecture of the firm must not only be consistent with each other, but they also must be consistent with competitive conditions prevailing in the firm’s markes-strategy, architecture, and competitive environment must all be consistent. For example, a firm pursuing a multidomestic strategy might have the right king of organizational architecture in place. However, if it competes in markets where cost pressures are intense and demands for local responsiveness are low, it will still have inferior performance because a global strategy is more appropriate in such an environment. The opening case on Unilever touches on some of the important issues here. Historically Unilever has competed in markets where local responsiveness has been very important. The production and marketing of food, detergent, and personal care products have traditionally been tailored to the tastes and preferences of consumers in different nations. Unilever-satisfied this environmental demand for local responsiveness by pursuing a, multidomestic strategy. Its organizational architecture reflected this strategy. Unilever operated with a decentralized structure that delegated responsibility for production, marketing, sales, and distribution decisions to autonomous national operating companies. This allowed local managers to configure product offerings, and marketing and sales activities, to the conditions prevailing in a particular nation. For a long time, this fit between strategy and architecture served Unilever well, helping it to become a dominant consumer products enterprise. However, by the early 1990s the competitive environment was changing. Trade barriers between countries were falling, particularly in the European Union following the creation of a single market in 1992. This made it possible to manufacture certain items such as detergents and margarine at favorable central locations in order to realize the benefits associated with location and experience curve economies. Also, new products in areas such as frozen foods and margarine were gaining regional or even global acceptance. Unfortunately for Unilever, some of its global competitors moved more rapidly to exploit this change in the competitive environment. Unilever found itself disadvantaged by a high cost structure (caused by the duplication of

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To explore the issues illustrated by Cases such as Unilever’s, we open the current chapter by discussing in more detail the concepts of organizational architecture and fit. Next we turn to a more detailed exploration of various components of architecture structure, control systems and incentives, organization culture, and processes-and explain how these components must be internally consistent. After reviewing’ the various components of architecture, we look at the ways in which architecture can be matched to strategy and the competitive environment to achieve high performance. The chapter closes with a discussion of organizational change, for as the Unilever case illustrates; periodically firms have to change their organization so that it matches new strategic and competitive realities. Organizational Architecture As noted in the introduction, the term organizational architecture refers to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people} Figure 3.1 illustrates these different elements. By organizational structure, we mean three things: First, the formal division of the organization into subunits such as product divisions, national operations, and functions (most organizational charts display this aspect of structure); second, the location of decisionmaking responsibilities within that structure (e.g., centralized or decentralized); and third, the establishment of integrating mechanisms to coordinate the activities of subunits including cross functional teams and or panregional committees. Control systems are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits. For example, historically Unilever measured the performance of national operating subsidiary companies according to profitability-profitability was the metric. Incentives are the devices used to reward appropriate managerial behavior.

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Figure 3.1 Organization Architecture

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manufacturing operations) and an inability to introduce new products in several national markets at once. In other words, the competitive environment changed, but Unilever did not change with it. By the mid-1990s, Unilever had recognized its problems and changed both its strategy and its organizational architecture so that it better matched the new competitive realities. Unilever began to adopt a transnational strategic orientation, seeking to balance local responsiveness in marketing and sales with the centralization of manufacturing and product development activities to realize scale economies and execute pan-regional product launches. To implement this strategy, Unilever introduced a new organizational architecture based on’ regional business groups, each of which contained product divisions. These divisions were given the responsibility for centralizing manufacturing and product development activities, which implied a reduction in the autonomy traditionally granted to operating subsidiaries. To reestablish a fit between strategy, architecture, and environment, Unilever had to embrace the difficult process of strategic and organizational change.

Structure

Controls and Incentives

Culture

Processes

People Incentives are very closely tied to performance metrics. For example, the incentives of a manager in charge of a national operating subsidiary might be linked to the performance of that company. Specifically, she might receive a bonus if her subsidiary exceeds its performance targets. Processes are the manner in which decisions are made and work is performed within the organization. Examples are the processes for formulating strategy, for deciding how to allocate resources within a firm, or for evaluating the performance of managers and giving feedback. Processes are conceptually distinct from the location of decision-making responsibilities within an organization, although both involve decisions. While the CEO might have ultimate responsibility for deciding what the strategy of the firm should be (i.e., the decision-making responsibility is centralized), the process he or she uses to make that decision might include the solicitation of ideas and criticism from lower-level managers. Organizational culture is the norms and value systems that are shared among the employees of an organization. Lusts as societies have cultures, so do organizations. Organizations are societies of individuals who come together to perform collective tasks. They have their own distinctive patterns of culture and sub, culture. As we shall see, organizational culture can have a profound impact on how a firm performs. Finally, by people we mean not just the employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and the type of people that they are in terms of their skills, values, and orientation. As illustrated by the arrows in Figure 3.1 the various components of an organization’s architecture are not independent of each other: Each component shapes, and is shaped by, other components of architecture. An obvious example is the strategy regarding people. This can be used proactively to hire individuals whose internal values are consistent with those that the firm wishes to emphasize in its organization culture. Thus, the people component of architecture can be used to reinforce (or not) the prevailing culture of the organization. This seems to have been the practice at Unilever, where an effort was made to hire individuals who were sociable and placed a high value on

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consensus and cooperation, values that the enterprise wished to emphasize in its own culture. If a firm to going to maximize its profitability, it must pay close attention to achieving internal consistency between the various components of its architecture. Let us look at how structure and control systems might be inconsistent with each other. Figure 3.2 shows an organizational chart for how Unilver’s European operations might be structured (this chart is hypothetical). Note that there are several country subsidiaries, one for France, one for Germany, one for Spain, and so on, each reporting to the European Business Group. There are also several pan-European product divisions, one for detergents, one for frozen food, one for margarine, and so on, again each reporting to the European Business Group. Within this structure, responsibility for marketing, sales, and distribution decisions might be given to the country subsidiaries, while responsibility for product manufacturing might be given to the product divisions. As for control systems, imagine that profitability is the metric used to evaluate the performance of the country subsidiaries. One problem with this set of arrangements is that the profitability of the country subsidiaries depends on manufacturing costs and new product development, and yet the managers running the various country subsidiaries are not responsible for those important functions-responsibility resides in the product divisions! Thus, if the managers of the product divisions do not do their job properly, production costs may rise and the profitability of the country subsidiaries might fall. In other words, the managers of the country subsidiaries are being evaluated according to a metric over which they do not have total control. Figure 3.2 Fictional organizational Structure at Unilever

If the performance of a subsidiary declines, they may argue that this is not their fault; it was due to the inability of the managers in the panEuropean product divisions to drive down manufacturing costs. Thus, there is a potential conflict between structure and the control systems used; they are potentially inconsistent. Some inconsistency is a fact of life in organizations. Perfection in the design of organization architecture is very difficult to achieve. Nevertheless, the inconsistency between different components of an organization’s architecture can be minimized through intelligent design. In the example just given, if the 72

performance of each product division were assessed on the basis of manufacturing costs, it would give the managers of the product division the incentive to optimize manufacturing efficiency. The problem might be further alleviated if the heads of both the country subsidiaries and the European product divisions were rewarded according to the profitability of the entire European Business Group (for example, by having their bonus pay linked to the profitability of the entire group). This would give the heads of the divisions a further reason to reduce manufacturing costs, and it would create an incentive for the heads of each subsidiary and division to share any best practices developed in their operation with colleagues across Europe to the betterment of the entire European Business Group. Internal consistency is a necessity but not a sufficient condition for high performance. Consistency between architecture and the strategy of the organization is also required; architecture must fit strategy. When Unilever began to emphasize cost reduction as a major strategic goal, the firm had to change its architecture to match this new strategic reality. It had to move away from a structure based primarily on standalone operating subsidiaries in each country and toward one that looks more like the structure depicted in Figure 3.2. Unilever had to create some entity, in this case the product divisions, that could reduce the duplication of manufacturing operations across country subsidiaries and consolidate manufacturing at a few choice locations. Such change is easier said than done. It is relatively easy for senior managers to announce a radical change in strategy, but it is much harder to actually put that change into action. Doing so requires a change in architecture. Strategy is implemented through architecture, and changing architecture is much more difficult than announcing a change in strategy. We shall discuss why it is hard to change architecture later in this chapter. As we shall see, a prime reason is that organizations tend to be relative inert; they are by nature difficult to change. Even with internal consistency and a fit between strategy and architecture, high performance is not guaranteed. The firm must also ensure that the fusion between its strategy and architecture is consistent with the competitive demands of the market, or markets, in which the firm competes. In the 1980s Unilever had a good fit between its strategy and architecture-it was pursuing a multidomestic strategy. A decentralized architecture composed of self-contained country subsidiaries was well suited to implementing this strategy. However, by the 1990s the strategy no longer made much sense due to a change in the competitive environment. Trade barriers between nations had fallen and more efficient global competitors were emerging. Unilever’s strategy no longer fit the environment in which it competed, so it had to change both its strategy and architecture to match the new reality. This type of organizational challenge is not unusual; markets rarely stand still, and firms often have to adjust their strategy and architecture to match new competitive realities. Organizational Structure Organizational structure means three things: (1) the formal division of the organization into subunits, which we shall refer to as horizontal differentiation;(2) the location of decisionmaking responsibilities within that structure, which we shall refer to as vertical differentiation; and (3) the establishment of

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Vertical Differentiation: Centralization and Decentralization A firm’s vertical differentiation determines where in its hierarchy the decision-making power is concentrated. Are production and marketing decisions centralized in the offices of upper-level managers, or are they decentralized to lower-level managers? Where does the responsibility for R&D decisions lie? Are strategic and financial control responsibilities pushed down to operating units, or are they concentrated in the hands of top management? And so on. There are arguments for centralization and other arguments for decentralization. Arguments for Centralization There are four main arguments for centralization. First, centralization can facilitate coordination. For example, consider a firm that has a component manufacturing operation in Taiwan and an assembly operation in Mexico. The activities of these two operations may need to be coordinated to ensure a smooth flow of products from the component operation to the assembly operation. This might be achieved by centralizing production scheduling at the firm’s head office. Second, centralization can help ensure that decisions are consistent with organizational objectives. When decisions are decentralized to lower-level managers, those managers may make decisions at variance with top management’s goals. Centralization of important decisions minimizes the change of this occurring. Third, by concentrating power and authority in one individual or a management team, centralization can give top-level managers the means to bring about needed major organizational changes. Fourth, centralization can avoid the duplication of activities that occurs when similar activities are carried on by various subunits within the organization. For example, many international firms centralize their R&D functions at one or two locations to ensure that R&D work is not duplicated. Production activities may be centralized at key locations for the same reason. Arguments for Decentralization There are five main arguments for decentralization. First, top management can become overburdened when decision-making authority is centralized, and this can result in poor decisions. Decentralization gives top management time to focus on critical is sues by delegating more routine issues to lower-level managers. Second, motivational research favors decentralization. Behavioral scientists have long argued that people are willing to give more to their jobs when they have a greater degree of individual freedom and control over their work. Third, decentralization permits greater flexibility more rapid response to environmental changes-because decisions do not have to be “referred” up the hierarchy” unless they are exceptional in nature. Fourth, decentralization can result in better decisions. In a decentralized structure, decisions are made closer to the spot by individuals who (presumably) have better information than managers several levels up in a hierarchy. Fifth, decentralization can increase control. Decentralization can be used to establish relatively autonomous, self-contained subunits within an 11.154

organization. Subunit managers can then be held accountable for subunit performance. The more responsibility subunit managers have for decisions that impact subunit performance, the fewer alibis they have for poor performance. Strategy and Centralization in an International Business The choice between centralization and decentralization is not absolute. Frequently it makes sense to centralize some decisions and to decentralize others, depending on the type of decision and the firm’s strategy. Decisions regarding overall firm strategy, major financial expenditures, financial objectives, and the like are typically centralized at the firm’s headquarters. However, operating decisions, such as those relating to production, marketing, R&D, and human resource management, mayor may not be centralized depending on the firm’s international strategy. Consider firms pursuing a global strategy. They must decide how to disperse the various value creation activities around the globe so location and experience economies can be realized. The head office must make the decisions about where to locate R&D, production, marketing, and so on. In addition, the globally dispersed web of value creation activities that facilitates a global strategy must be coordinated. All of this creates pressures for centralizing some operating decisions. In contrast, the emphasis on local responsiveness in multidomestic firms creates strong pressures for decentralizing operating decisions to foreign subsidiaries. In the classic multidomestic firm, foreign subsidiaries have autonomy in most production and marketing decisions. International firms tend to maintain centralized control over their core competency and to decentralize other decisions to foreign subsidiaries. This typically centralizes control over R&D and/or marketing in the home country and decentralizes operating decisions to the foreign subsidiaries. For example, Microsoft Corporation, Which fits the international mode, centralizes its product development activities (where its core competencies lie) at the Redmond, Washington, headquarters and decentralizes marketing activity to various foreign subsidiaries. Thus, while products are developed at home, managers in the various foreign subsidiaries have significant latitude for formulating strategies to market those products in their particular settings. The situation in transnational firms is more complex. The need to realize location and experience curve economies requires some degree of centralized control over global production centers (as it does in global firms). However, the need for local responsiveness dictates the decentralization of many operating decisions, particularly for marketing, to foreign subsidiaries. Thus, in transnational firms, some operating decisions are relatively centralized, while others are relatively decentralized. In addition, global learning based on the multidirectional transfer of skills between subsidiaries and between subsidiaries and the corporate center, is a central feature of a firm pursuing a transnational strategy. The concept of global learning is predicated on the notion that foreign subsidiaries within a multinational firm have significant freedom to develop their own skills and competencies. Only then can these be leveraged to benefit other parts of the organization. A substantial degree

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integrating mechanisms. We begin by discussing vertical differentiation, then horizontal differentiation, and then integrating mechanisms.

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of decentralization is required if subsidiaries are going to have the freedom to do this. For this reason too, the pursuit of a transnational strategy requires a high degree of decentralization. Horizontal Differentiation: The Design of Structure Horizontal differentiation is concerned with how the firm decides to divide itself into subunits. The decision is normally made on the basis of function, type of business or geographical area. In many firms, just one of these predominates, but more complex solutions are adopted in others. This is particularly likely in the case of international firms, where the conflicting demands to organize the company around different products (to realize location and experience curve economies) and different national markets (to remain locally responsive) must be reconciled. One solution to this dilemma is to adopt a matrix structure that divides the organization on the basis of both products and national markets (as Unilever apparently did in Europe). In this section we look at different ways firms divide themselves into subunits. The Structure of Domestic Firms Most firms begin with no formal structure and are run by a single entrepreneur or a small team of individuals. As they grow, the demands of management become too great for one individual or a small team to handle. At this point the organization is split into functions reflecting the firm’s value creation activities (e.g., production, marketing, R&D, sales). These functions are typically coordinated and controlled by top management (see Figure 3.3). Decision making in this functional structure tends to be centralized. Further horizontal differentiation may be required if the firm significantly diversifies its product offering, which takes the firm into different business areas. For example, Dutch multinational Philips NY began as a lighting company, but diversification took the company into consumer electronics (e.g., visual and audio equipment), industrial electronics (integrated circuits and other electronic components), and medical systems (CT scanners and ultrasound systems).In such circumstances, a functional structure can be too clumsy. Problems of coordination and control arise when different business areas are managed within the framework of a functional structure. For one thing, it becomes difficult to identify the profitability of each distinct business area. For another, it is difficult to run a functional department, such as production or marketing, if it is supervising the value creation activities of several business areas. To solve the problems of coordination and control, at this stage most firms switch to a product divisional structure (see Figure 3.4). With a product divisional structure, each division is responsible for a distinct product line (business area). Thus, Philips created divisions for lighting, consumer electronics, industrial electronics, and medical systems. Each product division is set up as a self-contained, largely autonomous entity with its own functions.

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Figure 3.3 A typical Functional Structure

The responsibility for operating decisions is typically decentralized to product divisions, which are then held accountable for their performance. Headquarters is responsible for the overall strategic development of the firm and for the financial control of the various divisions. Figure 3.4 A Typical Product Divisional Structure Headquarters

Division product line A

Department Purchasing

Buying Units

Division Product Line B

Department Manufacturing

Plants

Department Marketing

Division Product Line C

Department Finance

Branch Sales Units Accounting Units

The International Division When firms initially expand abroad, they often group all-their international activities into an international division. This has tended to be the case for firms organized on the basis of functions and for firms organized on the basis of product divisions. Regardless of the firm’s domestic structure, its international division tends to be organized on geography. Figure3.5 illustrates this for a firm whose domestic organization is based on product divisions. Many manufacturing firms expanded internationally by exporting the product manufactured at home to foreign subsidiaries to sell. Thus, in the firm illustrated in Figure 3.5, the subsidiaries in Countries 1 and 2 would sell the products manufactured by Divisions A, B, and C. In time, however, it might prove viable to manufacture the product in each country, and so production facilities would be added on a country-by country basis. For firms with a functional structure at home, this might mean replicating the functional structure in every country in which the firm does business. For firms with a

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This structure has been widely used; according to a Harvard study, 60 percent of all firms that have expanded internationally have initially adopted it. Nonetheless, it gives rise to problems. The dual structure it creates contains inherent potential for conflict and coordination problems between domestic and foreign operations. One problem with the structure is that the heads of foreign subsidiaries are not given as much voice in the organization as the heads of domestic functions (in the case of functional firms) or divisions (in the case of divisional firms). Rather, the head of the international division is presumed to be able to represent the interests of all countries to headquarter. This effectively relegates each country’s manager to the second tier of the firm’s hierarchy, which is inconsistent with a strategy of trying to expand internationally and build a true multinational organization. Another problem is the implied lack of coordination between domestic operations and, foreign operations, which are isolated from each other in separate parts of the structural hierarchy. This can inhibit the worldwide introduction of new products, the transfer of core competencies between domestic and foreign operations, and the consolidation of global production at key locations so as to realize location and experience curve economies. These problems are illustrated in the Management Focus that looks at the experience of Abbott Laboratories with an international divisional structure.

As a result of such problems, most firms that continue to expand international abandon this structure and adopt one of the worldwide structures we discuss next. The two initial choices are a worldwide product divisional structure, which tends to be adopted by diversified firms that have domestic product divisions, and a worldwide area structure, which tends to be adopted by undiversified firms whose domestic structures are based on functions. These two alternative paths of development are illustrated in Figure 3.6. The model in the figure is referred to as the international structural stages model and was developed by John Stopford and Louis Wells. Worldwide Area Structure A worldwide area structure tends to be favored by firms with a low degree of diversification and a domestic structure based on function (see Figure 3.7). Under this structure, the world is divided into geographic areas. An are may be a country (if the market is large enough) or a group of countries. Each area tends to be a self-contained, largely autonomous entity with its own set of value creation activities (e.g., its own production, marketing, R&D, human resources, and finance functions). Operations authority and strategic decision relating to each of these activities are typically decentralized to each area, with headquarters retaining authority of all overall strategic direction of the firm and financial control.

Headquarters

Domestic Division

Domestic Division

Domestic Division

International Division

General Manager Product Line A

General Manager Product Line B

General Manager Product Line C

General Manager Area line

Functional units

Country 1

Country 2

General Manager (Product A, B, C)

General Manager (Product A, B, C)

Figure 3.5 One Company’s International Divisional Structure

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divisional structure, this might mean replicating the divisional structure in every country in which the firm does business.

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This structure facilitates local responsiveness. Because decisionmaking responsilities are decentralized, each area can customize product offerings, marketing strategy, and business strategy to the local conditions. However, this structure encourages fragmentation of the organization into highly autonomous entities. This can make it difficult to transfer core competencies and skills between areas and to realize location and experience curve economies. In other words, the structure is consistent with a multidomestic strategy but with little else. Firms structured on this basis may encounter significant problems if local responsiveness is less critical than reducing costs or transferring core competencies for establishing a competitive advantage. Figure 3.6 The International Structural Stage Model Source: Adapted from John M.Stopford and Louis T. Wells, Strategy and Structure of the Multinational Enterprise (New York: Basic Books, 1972).

Alongside these four divisions, however, a new business has grown up that is organized differently. Abbott’s diagnostics business was established in the 1970s and became a world leader with global sales of $3 billion in 2000. Unlike the other divisions, the diagnostics business is organized on a global basis, operating in foreign countries through its own staff, rather than through the international division. Thus, Abbott handles global sales in two different ways-through an international division and through a global product division (the diagnostics business organization). The company is debating the best way of organizing international operations. This debate is being informed by two changes occurring in Abbott’s environment, changes that are pulling the company in different directions. One change is a shift toward global product development in the health care industry. To quickly recapture the costs of developing new products, which for pharmaceuticals can sometimes top $500 million, companies are trying to introduce new products as rapidly as possible worldwide. Abbott has found that developing products first for the U.S. market and then modifying those products for foreign customers is a slow and expensive process. Instead, across all four of the company’s businesses, Abbott is trying to build global products that can be launched simultaneously around the world. This change is pulling Abbott toward adopting global product divisions for all four of its businesses. Some argue that only global product divisions would give Abbott the tight control over product development and product launch strategy that is deemed necessary. On the other hand, bigger organizations with greater purchasing leverage, such as large hospital groups and health maintenance organizations, are coordinating their buying across a rang of product lines in both the United States and elsewhere. These powerful customers prefer to have a single contact point at Abbott. Abbott develops stronger relations with key customers by having a single marketing organization in each country in which the company does businesses. This organization sells the products from each of Abbott’s four product divisions.

Figure 3.7 A Worldwide area structure

Executives at Abbott’s international division support maintaining the geographic organization, while the heads of the product divisions favor a shift toward four global product divisions, Top management seems to have decided there is no perfect solution to the company’s organizational problems, and that imperfect as the current structure is, it works too well to contemplate a major change. The international Division at Abbott Laboratories With sales of about $14 billion in 2000, Abbott Laboratories is one of the world’s largest health care companies. The company split itself into three divisions-pharmaceuticals, hospital products, and nutritional products—in the 1960s, a structure that still exists. Each division operates as a profit center, and each is relatively autonomous and self-contained, with its own R&D, manufacturing, and marketing functions. By the late 1960s Abbott’s foreign sales were growing rapidly; the company added an international division to handle the firm’s non-U.S. operations on geographic rather than product lines.

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Sources: R. Walters, “Two’s Company,” Financial Times, July 7, 1995, p, 12; Abbott Laboratories 2000 Annual Report; and M. Santoli, “Patient Reviving,” Barron’s, February 28, 2000, pp, 2426. Worldwide Product Divisional Structure A worldwide product division structure tends to be adopted by firms-that are reasonably diversified and, accordingly, originally had domestic structures based on product divisions. As with the domestic product divisional structure, each division is a selfcontained, largely autonomous entity with full responsibility for its own value creation activities. The headquarters retains

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Underpinning the organization is a belief that the value creation activities of each product division should be coordinated by that division worldwide. Thus, the worldwide product divisional structure is designed to help overcome the coordination problems that arise with the international division and worldwide area structures (see the Management Focus on Abbott Laboratories for a detailed example). This structure provides an-organizational context that enhances the consolidation of value creation activities at key locations- necessary for realizing location and experience curve economies. It also facilitates the transfer of core competencies within a division’s worldwide operations and the simultaneous worldwide introduction of new products. The main problem with the structure is the limited voice it gives to area of country managers, since they are seen as subservient to product division managers. The result can be a lack of local responsiveness. Global Matrix Structure Both the worldwide area structure and the worldwide product divisional structure have strengths and weaknesses. The worldwide area structure facilitates local responsiveness, but it can inhibit the realization of location and experience curve economies and the transfer of core competencies between areas. The worldwide product division structure provides a better framework for pursuing location and experience curve economies and for transferring core competencies, but it is weak in local responsiveness. Other things being equal, this suggests that a worldwide area structure is more approiate if the firm’s strategy is multidomestic, while a worldwide product divisional structure is more appropriate for firms pursuing global or international strategies. However, other things are not equal. As Bartlett and Ghoshal have argued, to survive in some industries, firms must adopt a transnational strategy. That is, they must focus simultaneously on realizing location and experience curve economies, on local responsiveness, and on the internal transfer of core competencies (worldwide learning). Figure 3.8 A Worldwide Product Division Structure

Headquarters

Worldwide Product Group or Division A

Worldwide Product Group or Division B

Area 1 (Domestic)

Functional Units

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Worldwide Product Group or Division C

Area 2 (International)

Functional Units

Figure 3.9 A Global Matrix Structure

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responsibility for the overall strategic development and financial control of the firm (see Figure3.8).

Headquarters

Area 1

Area 2

Area 3

Product Division A Product Division B Product Division C

Manager Here Belongs to Division and Area 2

Many firms have attempted to cope with the conflicting demands of a transnational strategy by using a matrix structure (see Figure 3.2). In the classic global matrix structure, horizontal differentiation proceeds along two dimensions: product division and geographic area (see Figure 3.9). The philosophy is that responsibility for operating decisions pertaining to a particular product should be shared by the product division and the various areas of the firm. Thus, the nature of the product offering, the marketing strategy, and the business strategy to be pursued in Area 1 for the products pr0duced by Division A are determined by conciliation between Division A and Area 1 management. It is believed that this dual decision-making responsibility should enable the firm to simultaneously achieve its particular objectives. In a classic matrix structure, giving product divisions and geographical areas equal status within the organization reinforces the idea of dual responsibility. Individual managers thus belong to two hierarchies (a divisional hierarchy and an area hierarchy) and have two bosses (a divisional boss and an area boss). The reality of the global matrix structure is that it often does not work anywhere near as well as the theory predicts. In practice, the matrix often is clumsy and bureaucratic. It can require so many meetings that it is difficult to get any work done. The need to get an area and a product division to reach a decision can slow decision making and produce an inflexible organization unable to respond quickly to market shifts or to innovate. The dual-hierarchy structure can lead to conflict and perpetual power struggles between the areas and the product divisions, catching many managers in the middle. To make matters worse, it can prove difficult to ascertain accountability in this structure. When all critical decisions are the product of negotiation between divisions and areas, one side can always blame the other when things go wrong. As a manager in one global matrix structure, reflecting on a failed product launch, said, to the author, “Had we been able to do things our way, instead of having to accommodate those guys from the product division, this would never have happened.” (A manager in the product division expressed similar sentiments.) The result of such finger-pointing can be that accountability is

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compromised, conflict is enhanced, and headquarters loses control over the organization. In light of these problems, many transnational firms are now trying to build “flexible” matrix structures based more on firmwide networks and a shared culture and vision than on a rigid hierarchical arrangement. Dow Chemical, profiled in that accompanying Management Focus, is one such firm. Within such companies the informal structure plays a greater role than the formal structure. We discuss this issue when we consider informal integrating mechanisms in the next section. Note -

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