Organizational Structure

Totality organization of international business, aka organizational architecture, contains 5 elements, the structure, incentives and controls, processes, cultures and people of the organization. To be successful in global expansion, organizational architecture should not only be internally consistent among 5 elements, match the strategy that firm conducted, but also fit the external environment where firm locates together with certain strategy. This essay will illustrate the 5 elements internally consistent, alignment of strategy and architecture, and best match among architecture, strategy and competitive environment.

First, 5 elements should be demonstrated respectively. Organizational structure could be viewed in 3 dimensions, vertical differentiation, horizontal differentiation and integrating mechanism, which correspondingly represents the distribution of power, the display of subunits and the system for subunits coordination. The vertical dimension could be either centralization or decentralization. Firms could benefit from centralization in lean production and decision-making. It is acceptable that centralization could facilitate the coordination of activities to improve cooperation and avoid duplication, could ensure the consistency among decisions, strategy and objectives, and could form an easier way to bringing changes in organization by top-level managers. Contrarily, decentralization is in favor of research purposes, as results of better decision made by local specific knowledge. In addition, this approach will stimulate employee to some extent through proper power delegation, which may enhance control by autonomous self-monitoring and relieve the burden of top managers. To grasp major advantages from both sides, Hill suggested that it is worthwhile to retain power in key aspects, like core competencies, financial accounting and objective setting, while to delegate some operating decisions to employees, for example, production and logistics. As architecture must match strategy and competitive environment, decentralization usually cooperates with high local responsiveness (localization strategy), while centralization goes along with high cost pressure (global standardization strategy).

Horizontal differentiation usually decides the division of subunits with 3 principles. First, the functions of subunits reflecting the value creation of firm are coordinated and controlled by up-level managers. Second, it will have further horizontal differentiation, if firm is initially divided by product. Third, horizontal structure is mainly determined by function, types of business and geographic area. According to these basic concepts, there are 4 types of horizontal differentiation. International division, the first type, means if firms at home are functional or divisional structure, the subsidiaries in foreign markets will replicate this format to do business. According to Harvard research, 60% of all the firms which have expanded internationally adopted this structure at first stage. However, this structure may lead to potential conflicts between domestic company and subsidiaries, because the voice of domestic offices overweighs that of foreign subsidiaries. The other problem relates to coordination between different markets, implicating that all markets are isolated from each other. Firms may have difficulties to promote policy or introduce new product throughout different markets. Consequently, to mitigate the problem, most firms transform to worldwide product division (product oriented) or worldwide area division (location oriented). Worldwide product division is initially diversified by product. Basing on the 2nd principle of horizontal differentiation, firms will have further area division below each product division. This approach will reinforce the coordination between value creation activities of each product division, prompt location economy and experience effects and facilitate the transfer of core competencies. However, it may constrain local responsiveness because area manager is supervised by product manager. Worldwide area division is diversified by geographic areas. Although this structure both highlights local responsiveness and leaves more authority to subsidiaries, it brings barriers for firm to transfer core competencies and to achieve location and experience economies. Two approaches both have pros and cons. As Bartlett and Ghoshal argued, firms should focus simultaneously on realizing cost reduction as well as local responsiveness. Therefore, it is necessary to introduce global matrix structure, which proceeds product and geographic area at same time. This type of structure facilitates location and experience economies and local responsiveness at same time, but also brings problems. Global matrix structure deteriorates bureaucracy and efficiency of decision-making, leaves conflicts and blurs the accountability between area and product divisions. Every structure matches with each of 4 business strategies. International strategy matches international division, localization strategy matches worldwide area division, global standardization strategy matches