Chapter 13 Outline

Chapter Summary

This chapter identified the organizational structures and internal control mechanisms, both formal and informal, that international businesses use to manage and direct their global operations. A central theme of the chapter was that different strategies require different structures and control systems. To succeed, a firm must match its structure and controls to its strategy in discriminating ways. Firms whose structure and controls do not fit their strategic requirements will experience performance problems. This chapter made the following points:

1. There are four main dimensions of organizational structure: vertical differentiation, horizontal differentiation, integration, and control systems.

2. Vertical differentiation is the centralization versus decentralization of decision-making responsibilities.

3. Operating decisions are generally decentralized in multidomestic firms, somewhat centralized in international firms, and more centralized still in global firms. The situation in transnational firms is more complex.

4. Horizontal differentiation refers to how the firm is divided into subunits.

5. Undiversified domestic firms are typically divided into subunits on the basis of functions. Diversified domestic firms typically adopt a product divisional structure.

6. When firms expand abroad, they often begin with an international division. However, this structure rarely serves satisfactorily very long because of its inherent potential for conflict and coordination problems between domestic and foreign operations.

7. Firms then switch to one of two structures: a worldwide area structure (undiversified firms) or a worldwide product division structure (diversified firms).

8. Since neither of these structures achieves a balance between local responsiveness and location and experience curve economies, many multinationals adopt matrix-type structures. However, global matrix structures have typically failed to work well, primarily due to bureaucratic problems.

9. Firms use integrating mechanisms to help achieve coordination between subunits.

10. The need for coordination (and hence integrating mechanisms) varies with firm strategy. This need is lowest in multidomestic firms, higher in international firms, higher still in global firms, and highest in transnational firms.

11. Integration is inhibited by a number of impediments to coordination, particularly by differing subunit orientations.

12. Integration can be achieved through formal integrating mechanisms. These vary in complexity from direct contact and simple liaison roles, to teams, to a matrix structure. A drawback of formal integrating mechanisms is that they can become bureaucratic.

13. To overcome the bureaucracy associated with formal integrating mechanisms, firms often use informal mechanisms, which include management networks and organization culture.

14. For a network to function effectively, it must embrace as many managers within the organization as possible. Information systems and management development policies (including job rotation and management education programs) can be used to establish firmwide networks.

15. For a network to function properly, subunit managers must be committed to the same goals. One

way of achieving this is to foster the development of a common organization culture. Leadership by example, management development programs, and human relations policies are all important in building a common culture.

16. A major task of a firm's headquarters is to control the various subunits of the firm to ensure consistency with strategic goals. Headquarters can achieve this through control systems.

17. There are four main types of controls: personal, bureaucratic, output, and cultural (which foster self-control).

18. The key to understanding the relationship between international strategy and control systems is the concept of performance ambiguity. Performance ambiguity is a function of the degree of interdependence of subunits, and it raises the costs of control.

19. The degree of subunit interdependence--and, hence, performance ambiguity and the costs of control--is a function of the firm's strategy. It is lowest in multidomestic firms, higher in international firms, higher still in global firms, and highest in transnationals.

20. To reduce the high costs of control, firms with a high degree of interdependence between subunits (e.g., transnationals) must develop cultural controls.