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Organizational structure is the way in which a company divides its activities among separate units and
coordinates activities among those units. If a company’s organizational structure is appropriate for its
strategic plans, it will be more effective in working toward its goals. In this section, we explore
several important issues related to organizational structures and examine several alternative forms of
organization.
A vital issue for top managers is determining the degree to which decision making in the organization
will be centralized or decentralized. Centralized decision making concentrates decision making at a
high organizational level in one location, such as at headquarters. Decentralized decision making
dispenses decisions to lower organizational levels, such as to international subsidiaries.
Should managers at the parent company be actively involved in the decisions made by international
subsidiaries? Or should they intervens relatively little, perhaps only in the most crucial decisions?
Some decisions, of course must be decentralized. If top managers involve themselves in the day-to-
day decisions of every subsidiary, they are likely to be overwhelmed. For example, managers cannot
get directly involved in every hiring decision or assignment of people to spesific tasks at each facility.
On the other hand, overall corporate strategy cannot be delegated to subsidiary managers because only
top management is likely to have the appropriate perspective to formulate corporate strategy.
1. Companies rarely centralize or decentralize all decision making. Rather, they seek an
approach that will result in the greatest efficiency and effectiveness
2. International companies may centralize decision making in certain geographic markets while
decentralizing it in others. Numerous factors influence this decision, including the need for
product modification and the abilities of managers at each location.
With these points in mind, let’s take a look at some spesific factors that determine whether centralized
or decentralized decision making is most appropriate.
Some companies maintain strong central control over financial resourxes by channeling all subsidiary
profits back to the parent for redistribution to subsidiaries based on their needs. This practice reduces
the likelihood that certain subsidiaries will undertake investment projects when more promising
projects at other locations go without funding. Other companies centrally design policies, procedures,
and standards to encourage a single global organizational culture. This policy makes it more likely
that all subsidiaries will enforce company rules uniformly. The policy also helps when companies
transfer managers from one location to another because uniform policies can smooth transitions for
managers and subordinates alike.
Participative management and accountability. Decentralization can also help foster participative
management practices. The morale of employees is likely to be higher if subsidiary managers and
subordinates are involved in decision making. Subsidiary managers and workers can grow more
dedicated to the organization when they are involved in decisions related to production, promotion,
distribution, and pricing strategies.
Decentralization also can increase personal accountability for business decisions. When local
managers are rewarded (or punished) for their decisions, they are likely to invest more effort in
making and executing them. Conversely, if local managers must do nothing but implement policies
dictated from above, they can attribute poor performance to decisions that were illsuited to the local
environment. When managers are held accountable for decision making and implementation, they
typically delve more deeply into research and consider all available options. The results are often
better decisions and improved performance.
Coordination and Flexibility
When designing organizational structure, managers seek answers to certain key questions. What is the
most efficient method of linking divisions to each other? Who should coordinate the activaties of
different divisions in order to achieve overall startegies? How should information be processed and
delivered to managers when it is required? What sorts of monitoring mechanisms and reward
structures should be established? How should the company introduce corrective measures, and whose
responsibility should it be to execute them? To answer these types of questions, we must look at the
issues of coordination and flexibility.
STRUCTURE AND FLEXIBILITY. Organizational structure is not permanent but is often modified
to suit changes both within a company and in its external environment. Because companies usually
base organizational structures on strategies, changes in strategy usually require adjustments in
structure. Similarly, because changes in national business environments can force changes in strategy,
the same changes will influence company structure. It is especially important to monitor closely the
conditions in countries characterized by rapidly shifting cultural, political, and economic
environments. Let’s now explore four organizational structures that have been developed to improve
the responsiveness and effectiveness of companies conducting international business activities.
There are many different ways in which a company can organize itself to carry out its international
business activities. But four organizational structures tend to be most common for the vast majority of
international companies-division structure, area structure, product structure, and matrix structure.
Because the international division structure concentrates international expertise in one division,
divisional managers become specialists in a wide variety of activities such as foreign exchange, export
documentation, and host government relations. By consigning international activities to a single
division, a firm can reduce costs, increase efficiency, and prevent international activities from
disrupting domestic operations. These are important criteria for firms new to international business
and whose international operations account for a small percentage of their total business.
An international division structure can, however, create two problems for companies. First,
international managers must often rely on home-country managers for the financial resources and
technical know-how that give the company its international competitive edge. Poor coordination
between managers can hurt the performance not only of the international division but also of the
entire company. Second, the general manager of the international division typically is responsible for
operations in all countries. Although this policy facilities coordination across countries, it reduces the
authority of each country manager. Rivalries and poor cooperation between the general manager and
country managers can be damaging to the company's overall performance.
Headquarters
The international area structure is best suited to companies that treat each national or regional market
as unique. It is particularly useful when there are vast cultural, political, or economic differences
between nations or regions. When they enjoy a great deal of control over activities in their own
environments, general managers become experts on the unique needs of their buyers. On the other
hand, because units act independently, allocated resources may overlap and cross-fertilization of
knowledge from one unit to another may be less than desirable.
Each product division is then divided into domestic and international units. Each function-R&D,
marketing, and so forth-is thus duplicated in both the domestic and international units of each product
division.
The global product structure is suitable for companies that offer diverse sets of products or services
bercause it overcomes some coordination problem of the international division structure. Because the
primary focus is on the product, activities must be coordinated among a product division’s domestic
and international managers so they do not conflict.
GLOBAL MATRIX STRUCTURE. A global matrix structure splits the chain of command between
product and area divisions (see Figure 11.7). Each manager reports to two bosses-the president of the
product division and the president of the geographic area. A main goal of the matrix structure is to
bring together geographic area managers and product area managers in joint decision making. In fact,
bringing together specialists from different parts of the organization creates a sort of team
organization. The popularity of the matrix structure has grown among companies trying to increase
local responsiveness, reduce costs, and coordinate worldwide operations.
The matrix structure resolves some of the shortcomings of other organizational structures, especially
by improving communication among divisions and increasing the efficiencyof highly specialized
employees. At its best, the matrix structure can increase coordination while simultaneously improving
agility and local responsiveness.
However, the global matrix structure suffers from two major shortcomings. First, the matrix form can
be quite cumbersome. Numerous meetings are required simply to coordinate the actions of the various
divisions heads, let alone the activities within divisions. In turn, the need for complex coordination
tends to make decision making time consuming and slows the reaction time of the organization.
Second, individual responsibility and accountability can become foggy in the matrix organization
structure. Because responsibility is shared, managers can attribute poor performance to the actions of
the other manager. Moreover, the source of problems in the matrix structure can be hard to detect and
corrective action difficult to take.
There are other ways international companies can improve responsiveness and effectiveness. An
increasingly popular method among international companies is the implementation of work teams to
accomplish goals and solve problems. In the next section, we explore in detail the use of work teams.