Organizational Architecture PDF

BM1917 THE ORGANIZATION OF INTERNATIONAL BUSINESS Organizational Architecture Organizational architecture refers to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and pe...

BM1917 THE ORGANIZATION OF INTERNATIONAL BUSINESS Organizational Architecture 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 1 illustrates these different elements. Figure 1. Organizational architecture Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p. 395 By organizational structure, we mean three (3) things: (1) the formal division of the organization into subunits such as product divisions, national operations, and functions (most organizational charts display this aspect of structure); (2) the location of decision-making responsibilities within that structure (e.g., centralized or decentralized); and (3) the establishment of integrating mechanisms to coordinate the activities of subunits, including cross- functional teams and pan-regional committees. Control systems are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits. 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. Incentives are very closely tied to performance metrics. 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 how decisions are made, and work is performed within the organization. EXAMPLE: 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 09 Handout 1 *Property of STI  [email protected] Page 1 of 23  BM1917 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 refers to the norms and value systems that are shared among the employees of an organization. Just as societies have cultures, so do organizations. Organizations can be viewed as societies of individuals who come together to perform collective tasks. They have distinctive patterns of culture and subculture. Finally, by people, we mean not only 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 1, the various components of an organization’s architecture are not independent of each other: Each component shapes, and is shaped by, other elements of the architecture. An obvious example is a 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 organizational culture. Thus, the people component of architecture can be used to reinforce (or not) the prevailing culture of the organization. EXAMPLE: Unilever has historically made an effort to hire managers who were sociable and placed a high value on consensus and cooperation, values that the enterprise wished to emphasize in its own culture. P&G has made a concerted effort to hire people from countries in which it has operations; some 140 nationalities are represented in P&G’s workforce compared with the 180 countries in which it sells products. If a firm is going to maximize its profitability, it must pay close attention to achieving internal consistency between the various components of its architecture. Organizational Structure Organizational structure can be thought of in terms of three (3) dimensions: (1) Vertical differentiation, which refers to the location of decision-making responsibilities within a structure; (2) Horizontal differentiation, which refers to the formal division of the organization into subunits; and (3) Integrating mechanisms, which are mechanisms for coordinating subunits. 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 important strategic and financial decisions pushed down to operating units, or are they concentrated in the hands of top management? And so on. There are arguments for both centralization and decentralization. a. Centralization There are four (4) main arguments for centralization: i. Centralization can facilitate the coordination and integration of operations. For example, consider a firm that has a component manufacturing operation in Taiwan and an assembly operation in Mexico. The activities of these two (2) 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 the production schedule at the firm’s head office. ii. 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. The centralization of important decisions minimizes the chance of this occurring. 09 Handout 1 *Property of STI  [email protected] Page 2 of 23  BM1917 iii. 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. iv. 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 (1) or two (2) locations to ensure that R&D work is not duplicated. Production activities may be centralized at critical locations for the same reason. b. Decentralization There are four (4) main arguments for centralization: i. 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 issues by delegating more routine matters to lower-level managers. ii. 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. iii. 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. iv. 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. v. Decentralization can increase control. Decentralization can be used to establish relatively autonomous, self-contained subunits within an 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 excuses they have for poor performance. 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 legal issues are typically centralized at the firm’s headquarters. However, operating decisions, such as those relating to production, marketing, R&D, and human resource management, may or may not be centralized depending on the firm’s strategy. Horizontal Differentiation: The Design of Structure Horizontal differentiation is concerned with how the firm decides to divide itself into subunits. The decision is usually made based on function, type of business, or geographic area. a. 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 2). Decision making in this functional structure tends to be centralized. 09 Handout 1 *Property of STI  [email protected] Page 3 of 23  BM1917 Figure 2. A typical functional structure Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p. 400 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 Electronics NV began as a lighting company. Diversification took the company into consumer electronics (e.g., visual and audio equipment), industrial electronics (integrated circuits and other electronic components), and medical systems (MRI 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 challenging 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. Figure 3. A typical product divisional structure Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p.400 At this stage, most firms switch to a product divisional structure to solve the problems of coordination and control (Figure 3). 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 functions. 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 the financial control of the various divisions. 09 Handout 1 *Property of STI  [email protected] Page 4 of 23  BM1917 b. Internal 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 based on functions and for firms organized based on product divisions. Regardless of the firm’s domestic structure, its international division tends to be organized on geography. Figure 4 illustrates this for a firm whose domestic organization is based on product divisions. Figure 4. Internal division structure Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p.401 Many manufacturing firms expanded internationally by exporting the product manufactured at home to foreign subsidiaries to sell. Thus, in the firm illustrated in Figure 4, 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 divisional structure, this might mean replicating the divisional structure in every country in which the firm does business. Despite its popularity, an international division structure can give rise to problems. The dual structure it creates contains the 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). Instead, the head of the international division is presumed to be able to represent the interests of all countries to headquarters. 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 to realize location and experience curve economies. 09 Handout 1 *Property of STI  [email protected] Page 5 of 23  BM1917 As a result of such problems, many firms that continue to expand internationally abandon this structure and adopt one of the worldwide structures discussed next. The two (2) initial choices are worldwide product divisional structure, which tends to be adopted by diversified firms that have domestic product divisions; and worldwide area structure, which tends to be adopted by undiversified firms whose domestic structures are based on functions. These two (2) alternative paths of development are illustrated in Figure 5. The model in the figure is referred to as the international structural stages model and was developed by John Stopford and Louis Wells. Figure 5. International structural stages model Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p. 402 c. 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 functions (Figure 6). Under this structure, the world is divided into geographic areas. An area 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 production, marketing, R&D, human resources, and finance functions). Operations authority and strategic decisions relating to each of these activities are typically decentralized to each area, with headquarters retaining authority for the overall strategic direction of the firm and financial control. 09 Handout 1 *Property of STI  [email protected] Page 6 of 23  BM1917 Figure 6. Worldwide area structure Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p. 402 This structure facilitates local responsiveness. Because decision-making responsibilities are decentralized, each area can customize product offerings, marketing strategy, and business strategy to the local conditions. However, this structure encourages the fragmentation of the organization into highly autonomous entities. This can make it challenging 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 localization strategy but may make it difficult to achieve gains associated with global standardization. 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. d. 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 self-contained, largely autonomous entity with full responsibility for its value creation activities. The headquarters retains responsibility for the overall strategic development and financial control of the firm (see Figure 7). 09 Handout 1 *Property of STI  [email protected] Page 7 of 23  BM1917 Figure 7. Worldwide product divisional structure Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p. 403 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. 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 or country managers since they are seen as subservient to product division managers. The result can be a lack of local responsiveness, which can lead to performance problems. e. 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 appropriate if the firm is pursuing a localization strategy, while a worldwide product divisional structure is more suitable for firms seeking global standardization. However, other things are not equal. 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). 09 Handout 1 *Property of STI  [email protected] Page 8 of 23  BM1917 Figure 8. Global matrix structure Source: International Business: Competing in the Global Marketplace (12th ed.). 2018, p.404 Some firms have attempted to cope with the conflicting demands of a transnational strategy by using a matrix structure. In the classic global matrix structure, horizontal differentiation proceeds along two (2) dimensions: product division and geographic area (Figure 8). The philosophy is that responsibility for operating decisions about 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 produced 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 achieve its particular objectives simultaneously. In a classic matrix structure, giving product divisions and geographic areas equal status within the organization reinforces the idea of dual responsibility. Individual managers thus belong to two (2) hierarchies (a divisional hierarchy and an area hierarchy) and have two (2) bosses (a divisional boss and an area boss). The reality of the global matrix structure is that it often does not work, 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 compromised, conflict is enhanced, and headquarters loses control over the organization. In light of these problems, many firms that pursue a transnational strategy have tried to build “flexible” matrix structures based more on enterprise wide management knowledge networks, and a shared 09 Handout 1 *Property of STI  [email protected] Page 9 of 23  BM1917 culture and vision, than on a rigid hierarchical arrangement. Within such companies the informal structure plays a greater role than the formal structure. Integrating mechanisms The previous section explained that firms divide themselves into subunits. One way of coordinating these subunits is through centralization. If the coordination task is complex; however, centralization may not be very effective. Higher-level managers responsible for achieving coordination can soon become overwhelmed by the volume of work required to coordinate the activities of various subunits, mainly if the subunits are large, diverse, and/or geographically dispersed. When this is the case, firms look toward integrating mechanisms, both formal and informal, to help achieve coordination. This section introduces the various integrating mechanisms that international businesses can use. But first, we explore the need for coordination in international firms and some impediments to coordination. a. Strategy and coordination in international business The need for coordination between subunits varies with the strategy of the firm. The need for coordination is lowest in firms pursuing a localization strategy, is higher in international companies, higher still in global companies, and highest of all in transnational companies. Firms seeking a localization strategy are primarily concerned with local responsiveness. Such firms are likely to operate with a worldwide area structure in which each area has considerable autonomy and its own set of value creation functions. Because each area is established as a stand-alone entity, the need for coordination between areas is minimized. The need for coordination is greater in firms pursuing an international strategy and trying to profit from the transfer of core competencies and skills between units at home and abroad. Coordination is necessary to support the transfer of skills and product offerings between units. The need for coordination is also great in firms trying to profit from location and experience curve economies—that is, in firms pursuing global standardization strategies. Achieving location and experience curve economies involves dispersing value creation activities to various locations around the globe. The resulting global web of activities must be coordinated to ensure the smooth flow of inputs into the value chain, the smooth flow of semi-finished products through the value chain, and the smooth flow of finished products to markets around the world. The need for coordination is greatest in transnational firms, which simultaneously pursue location and experience curve economies, local responsiveness, and the multidirectional transfer of core competencies and skills among all the firm’s subunits (referred to as global learning). As with a global standardization strategy, coordination is required to ensure the smooth flow of products through the global value chain. As with an international strategy, coordination is required for ensuring the transfer of core competencies to subunits. However, the transnational goal of achieving multidirectional transfer of competencies requires much greater coordination than in firms pursuing an international strategy. Also, a transnational strategy involves coordination between foreign subunits and the firm’s globally dispersed value creation activities (e.g., production, R&D, marketing) to ensure that any product offering and marketing strategy is sufficiently customized to local conditions. b. Impediments to coordination Managers of the various subunits have different orientations, partly because they have different tasks. For example, production managers are typically concerned with production issues such as capacity utilization, cost control, and quality control. In contrast, marketing managers are concerned with marketing issues such as pricing, promotions, distribution, and market share. These differences can inhibit communication between managers. Quite simply, these managers often do not even “speak the 09 Handout 1 *Property of STI  [email protected] Page 10 of 23  BM1917 same language.” There may also be a lack of respect between subunits (e.g., marketing managers “looking down on” production managers, and vice versa), which further inhibits the communication required to achieve cooperation and coordination. Differences in subunits’ orientations also arise from their differing goals. For example, worldwide product divisions of a multinational firm may be committed to cost goals that require global production of a standardized product. In contrast, a foreign subsidiary may be committed to increasing its market share in its country, which will require a nonstandard product. These different goals can lead to conflict. Such impediments to coordination are not unusual in any firm, but they can be particularly problematic in the multinational enterprise with its profusion of subunits at home and abroad. Differences in subunit orientation are often reinforced in multinationals by the separations of time zone, distance, and nationality between managers of the subunits. c. Formal integrating mechanisms Figure 9. Formal integrating mechanisms Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p. 408 The formal mechanisms used to integrate subunits vary in complexity from simple direct contact and liaison roles, to teams, to a matrix structure (Figure 9). In general, the greater the need for coordination, the more complex the formal integrating mechanisms need to be. Direct contact between subunit managers is the simplest integrating mechanism. By this “mechanism,” managers of the various subunits simply contact each other whenever they have a common concern. Direct contact may not be effective if the managers have different orientations that act to impede coordination, as pointed out in the previous subsection. Liaison roles are a bit more complicated. When the volume of contacts between subunits increases, coordination can be improved by giving a person in each subunit responsibility for coordinating with another subunit regularly. Through these roles, the people involved establish a permanent relationship. This helps attenuate the impediments to coordination discussed in the previous subsection. When the need for coordination is greater still, firms tend to use temporary or permanent teams composed of individuals from the subunits that need to achieve coordination. They typically coordinate product development and introduction, but they are useful when any aspect of operations or strategy requires the cooperation of two (2) or more subunits. Product development and introduction teams are typically composed of personnel from R&D, production, and marketing. The resulting coordination aids the development of products that are tailored to consumer needs, and that can be produced at a reasonable cost (design for manufacturing). 09 Handout 1 *Property of STI  [email protected] Page 11 of 23  BM1917 When the need for integration is very high, firms may institute a matrix structure, in which all roles are viewed as integrating roles. The structure is designed to facilitate maximum integration among subunits. The most common matrix in multinational firms is based on geographic areas and worldwide product divisions. This achieves a high level of integration between the product divisions and the areas so that, in theory, the firm can pay close attention to both local responsiveness and the pursuit of location and experience curve economies. In some multinationals, the matrix is more complex still, structuring the firm into geographic areas, worldwide product divisions, and functions, all of which report directly to headquarters. Thus, within a company such as Dow Chemical, before it abandoned its matrix in the mid-1990s, each manager belonged to three (3) hierarchies. For example, a plastics marketing manager in Spain was a member of the Spanish subsidiary, the plastics product division, and the marketing function. In addition to facilitating local responsiveness and location and experience curve economies, such a matrix fosters the transfer of core competencies within the organization. This occurs because core competencies tend to reside in functions (e.g., R&D, marketing). A structure such as this, in theory, facilitates the transfer of competencies existing in functions from division to division and from area to area. However, such matrix solutions to coordination problems in multinational enterprises can quickly become bogged down in a bureaucratic tangle that creates as many problems as it solves. Matrix structures tend to be bureaucratic, inflexible, and characterized by conflict rather than the hoped-for cooperation. For such a structure to work, it needs to be flexible and to be supported by informal integrating mechanisms. The knowledge and skills of people are typically more important than the structural reporting lines in the global matrix hierarchy. Integration and coordination via a matrix organization structure should not override the flexibility to make decisions based on people’s knowledge and skills. d. Informal integrating mechanism: Knowledge networks In attempting to alleviate or avoid the problems associated with formal integrating mechanisms in general, and matrix structures in particular, firms with a high need for integration have been experimenting with an informal integrating mechanism: knowledge networks that are supported by an organizational culture that values teamwork and cross-unit cooperation. A knowledge network is a network for transmitting information within an organization that is based not on formal organizational structure, but informal contacts between managers within an enterprise and on distributed information systems. The strength of such a network is that it can be used as a nonbureaucratic conduit for knowledge flows within a multinational enterprise. For a network to exist, managers at different locations within the organization must be linked to each other, at least indirectly. For example, Figure 10 shows the simple network relationships between seven managers within a multinational firm. Managers A, B, and C all know each other personally, as do managers D, E, and F. Although manager B does not know manager F personally, they are linked through common acquaintances (managers C and D). Thus, we can say that managers A through F are all part of the network and also that manager G is not. 09 Handout 1 *Property of STI  [email protected] Page 12 of 23  BM1917 Figure 10. A simple management network Source: International Business: Competing in the Global Marketplace (12th ed.). 2018, p. 409 Imagine manager B is a marketing manager in Spain and needs to know the solution to a technical problem to serve an important European customer better. Manager F, an R&D manager in the United States, has the answer to manager B’s problem. Manager B mentions her problem to all of her contacts, including manager C, and asks if they know of anyone who might be able to provide a solution. Manager C asks manager D, who tells manager F, who then calls manager B with the solution. In this way, coordination is achieved informally through the network, rather than by formal integrating mechanisms such as teams or a matrix structure. For such a network to function effectively, however, it must embrace as many managers as possible. For example, if manager G had a problem similar to manager B’s, he would not be able to utilize the informal network to find a solution; he would have to resort to more formal mechanisms. Establishing companywide knowledge networks is difficult. Although, network enthusiasts speak of networks as the “glue” that binds multinational companies together, it is far from clear how successful firms have been at building companywide networks. Two (2) techniques being used to establish networks are information systems and management development policies. Firms are using their distributed computer and telecommunications information systems to provide the foundation for informal knowledge networks. Electronic mail, videoconferencing, high-bandwidth data systems, and web-based search engines make it much easier for managers scattered over the globe to get to know each other, to identify contacts that might help solve a particular problem, and to publicize and share best practices within the organization. Walmart, for example, now uses its intranet system to communicate ideas about merchandising strategy between stores located in different countries. Firms are also using their management development programs to build informal networks. Tactics include rotating managers through various subunits regularly so they develop their informal network and using management education programs to bring managers of subunits together in a single location so they can become acquainted. Knowledge networks by themselves may not be sufficient to achieve coordination if subunit managers persist in pursuing sub-goals that are at variance with companywide goals. For a knowledge network to function properly—and for a formal matrix structure to work also—managers must share a strong commitment to the same goals. To appreciate the nature of the problem, consider the case of manager B again and manager F. As before, manager F hears about manager B’s problem through the network. However, solving manager B’s problem would require manager F to devote considerable time to the 09 Handout 1 *Property of STI  [email protected] Page 13 of 23  BM1917 task. Insofar as this would divert manager F away from his regular tasks—and the pursuit of sub-goals that differ from those of manager B—he may be unwilling to do it. Thus, manager F may not call manager B, and the informal network would fail to provide a solution to manager B’s problem. To eliminate this flaw, the organization’s managers must adhere to a standard set of norms and values that override differing subunit orientations. In other words, the firm must have a strong organizational culture that promotes teamwork and cooperation. When this is the case, a manager is willing and able to set aside the interests of his own subunit when doing so benefits the firm as a whole. If manager B and manager F are committed to the same organizational norms and value systems, and if these organizational norms and values place the interests of the firm as a whole above the interests of any individual subunit, manager F should be willing to cooperate with manager B on solving her subunit’s problems. Control Systems and Incentives Types of Control Systems Four (4) main types of control systems are used in multinational firms: personal controls, bureaucratic controls, output controls, and cultural controls. In most firms, all four (4) are used, but their relative emphasis varies with the strategy of the firm. a. Personal controls Personal control is control achieved by personal contact with subordinates. This type of control tends to be most widely used in small firms, where it is seen in the direct supervision of subordinates’ actions. However, it also structures the relationships between managers at different levels in multinational enterprises. For example, the CEO may use a great deal of personal control to influence the behavior of his or her immediate subordinates, such as the heads of worldwide product divisions or major geographic areas. In turn, these heads may use personal control to influence the behavior of their subordinates, and so on down through the organization. Jack Welch, the legendary CEO of General Electric who retired in 2001, had regular one-on-one meetings with the heads of all of GE’s major businesses (most of which are international). He used these meetings to probe the managers about the strategy, structure, and financial performance of their operations. In doing so, he mainly exercised personal control over these managers and, undoubtedly, over the strategies that they favored. b. Bureaucratic controls Bureaucratic control is control achieved through a system of rules and procedures that directs the actions of subunits. The most important bureaucratic controls in subunits within multinational firms are budgets and capital spending rules. Budgets are a set of rules for allocating a firm’s financial resources. A subunit’s budget specifies with some precision how much the subunit may spend. Headquarters use budgets to influence the behavior of subunits. For example, the R&D budget usually specifies how much cash the R&D unit may spend on product development. R&D managers know that if they spend too much on one project, they will have less to spend on other projects, so they modify their behavior to stay within the budget. Most budgets are set by negotiation between headquarters management and subunit management. Headquarters management can encourage the growth of certain subunits and restrict the growth of others by manipulating their budgets. 09 Handout 1 *Property of STI  [email protected] Page 14 of 23  BM1917 Capital spending rules require headquarters management to approve any capital expenditure by a subunit that exceeds a certain amount. A budget allows headquarters to specify the amount a subunit can spend in a given year, and capital spending rules give headquarters additional control over how the money is spent. Headquarters can be expected to deny approval for capital spending requests that are at variance with overall firm objectives and to approve those that are congruent with firm objectives. c. Output controls Output control involves setting goals for subunits to achieve and expressing those goals in terms of relatively objective performance metrics such as profitability, productivity, growth, market share, and quality. The performance of subunit managers is then judged by their ability to achieve the goals. If goals are met or exceeded, subunit managers will be rewarded. If goals are not met, top management will normally intervene to find out why and take appropriate corrective action. Thus, control is achieved by comparing actual performance against targets and intervening selectively to take corrective action. Subunits’ goals depend on their role in the firm. Self-contained product divisions or national subsidiaries are typically given goals for profitability, sales growth, and market share. Functions are more likely to be given goals related to their particular activity. Thus, R&D will be given product development goals, production will be given productivity and quality goals, marketing will be given market share goals, and so on. As with budgets, goals usually are established through negotiation between subunits and headquarters. Generally, headquarters try to set goals that are challenging but realistic, so subunit managers are forced to look for ways to improve their operations. Still, they are not so pressured that they will resort to dysfunctional activities to do so (such as short-run profit maximization). Output controls foster a system of “management by exception,” in that so long as subunits meet their goals, they are left alone. If a subunit fails to attain its goals, however, headquarters managers are likely to ask some tough questions. If they don’t get satisfactory answers, they are likely to intervene proactively in a subunit, replacing top management and looking for ways to improve efficiency. d. Cultural controls Cultural control exists when employees “buy into” the norms and value systems of the firm. When this occurs, employees tend to control their behavior, which reduces the need for direct supervision. In a firm with a strong culture, self-control can lessen the need for other control systems. McDonald’s actively promotes organizational norms and values, referring to its franchisees and suppliers as partners and emphasizing its long-term commitment to them. This commitment is not just a public relations exercise; it is backed by actions, including a willingness to help suppliers and franchisees improve their operations by providing capital and/or management assistance when needed. In response, McDonald’s franchisees and suppliers are integrated into the firm’s culture and thus become committed to helping McDonald’s succeed. One result is that McDonald’s can devote less time than would otherwise be necessary to control its franchisees and suppliers. Incentive Systems Incentives refer to the devices used to reward appropriate employee behavior. Many employees receive incentives in the form of annual bonus pay. Incentives are usually closely tied to the performance metrics used for output controls. EXAMPLE: Setting targets linked to profitability might be used to measure the performance of a subunit, such as a global product division. 09 Handout 1 *Property of STI  [email protected] Page 15 of 23  BM1917 To create positive incentives for employees to work hard to exceed those targets, they may be given a share of any profits above those targeted. If a subunit has set a goal of attaining a 15 percent return on investment and it reaches a 20 percent return, unit employees may be given a share in the profits generated more than the 15 percent target in the form of bonus pay. First, the type of incentive used often varies depending on the employees and their tasks. Incentives for employees working on the factory floor may be very different from the incentives used for senior managers. The incentives applied must be matched to the type of work being performed. The employees on the factory floor of a manufacturing plant may be broken into teams of 20 to 30 individuals, and they may have their bonus pay tied to the ability of their team to hit or exceed targets for output and product quality. In contrast, the senior managers of the plant may be rewarded according to metrics linked to the output of the entire operation. The basic principle is to make sure the incentive scheme for an individual employee is linked to an output target that he or she has some control over and can influence. The individual employees on the factory floor may not be able to exercise much influence over the performance of the entire operation. Still, they can influence the performance of their team, so incentive pay is tied to output at this level. Second, the successful execution of strategy in the multinational firm often requires significant cooperation between managers in different subunits. EXAMPLE: Some multinational firms operate with matrix structures where a country subsidiary might be responsible for marketing and sales in a nation, while a global product division might be accountable for manufacturing and product development. The managers of these different units need to cooperate closely with each other if the firm is to be successful. One way of encouraging the managers to collaborate is to link incentives to performance at a higher level in the organization. Thus, the senior managers of the country subsidiaries and global product divisions might be rewarded according to the profitability of the entire firm. The thinking here is that boosting the profitability of the whole firm requires managers in the country subsidiaries and product divisions to cooperate on strategy implementation, and linking incentive systems to the next level up in the hierarchy encourage this. Most firms use a formula for incentives that links a portion of incentive pay to the performance of the subunit in which a manager or employee works and a part to the performance of the entire firm or some other higher-level organizational unit. The goal is to encourage employees to improve the efficiency of their unit and to cooperate with other units in the organization. Third, the incentive systems used within a multinational enterprise often have to be adjusted to account for national differences in institutions and culture. Incentive systems that work in the United States might not work or even be allowed in other countries. EXAMPLE: Lincoln Electric, a leader in the manufacture of arc welding equipment, has used an incentive system for its employees based on piecework rates in its American factories (under a piecework system, employees are paid according to the amount they produce). While this system has worked very well in the United States, Lincoln has found that the system is difficult to introduce in other countries. In some countries, such as Germany, piecework systems are illegal. In contrast, in others, the prevailing national culture is antagonistic to a system where performance is so closely tied to individual effort. Finally, managers need to recognize that incentive systems can have unintended consequences. Managers need to think carefully about what behavior certain incentives encourage. EXAMPLE: If employees in a factory are rewarded solely based on how many units of output they produce, with no attention paid to the quality of that output, they may produce as many units as possible to boost their incentive pay, but the quality of those units may be poor. 09 Handout 1 *Property of STI  [email protected] Page 16 of 23  BM1917 Control Systems, Incentives, and Strategy The key to understanding the relationship between international strategy, control systems, and incentive systems is the concept of performance ambiguity. a. Performance ambiguity Performance ambiguity exists when the causes of a subunit’s poor performance are not clear. This is not uncommon when a subunit’s performance is partly dependent on the performance of other subunits—that is, when there is a high degree of interdependence among subunits within the organization. Consider the case of a French subsidiary of a U.S. firm that depends on another subsidiary, a manufacturer based in Italy, for the products it sells. The French subsidiary is failing to achieve its sales goals, and the U.S. management asks the managers to explain. They reply that they are receiving poor- quality goods from the Italian subsidiary. The U.S. management asks the managers of the Italian operation what the problem is. They respond that their product quality is excellent—the best in the industry, in fact— and that the French simply don’t know how to sell a good product. Who is right, the French, or the Italians? Without more information, top management cannot tell. Because they are dependent on the Italians for their product, the French have an alibi for poor performance. U.S. management needs to have more information to determine who is correct. Collecting this information is expensive and time-consuming and will divert attention away from other issues. In other words, performance ambiguity raises the costs of control. Consider how different things would be if the French operation were self-contained, with its manufacturing, marketing, and R&D facilities. The French operation would lack a convenient alibi for its poor performance; the French managers would stand or fall on their own merits. They could not blame the Italians for their poor sales. The level of performance ambiguity, therefore, is a function of the interdependence of subunits in an organization. b. Strategy, interdependence, and ambiguity Now let us consider the relationships among strategy, interdependence, and performance ambiguity. In firms pursuing a localization strategy, each national operation is a stand-alone entity and can be judged on its own merits. The level of performance ambiguity is low. In an international firm, the level of interdependence is somewhat higher. Integration is required to facilitate the transfer of core competencies and skills. Since the success of a foreign operation is partly dependent on the quality of the competency transferred from the home country, performance ambiguity can exist. In firms pursuing a global standardization strategy, the situation is still more complicated. Recall that in a pure global firm the pursuit of location and experience curve economies leads to the development of a global web of value creation activities. Many of the activities in a global firm are interdependent. A French subsidiary’s ability to sell a product does depend on how well other operations in other countries perform their value creation activities. Thus, the levels of interdependence and performance ambiguity are high in global companies. The level of performance ambiguity is highest of all in transnational firms. Transnational firms suffer from the same performance ambiguity problems that global firms do. Also, since they emphasize the multidirectional transfer of core competencies, they suffer from the issues characteristic of firms pursuing an international strategy. The extremely high level of integration within transnational firms implies a high degree of joint decision making, and the resulting interdependencies create plenty of alibis for poor performance. There is lots of room for finger-pointing in transnational firms. 09 Handout 1 *Property of STI  [email protected] Page 17 of 23  BM1917 Processes Processes, defined as how decisions are made and work is performed within the organization, can be found at many different levels within an organization. There are processes for formulating strategy, processes for allocating resources, processes for evaluating new-product ideas, processes for handling customer inquiries and complaints, processes for improving product quality, processes for evaluating employee performance, and so on. Often, the core competencies or valuable skills of a firm are embedded in its processes. Efficient and effective processes can lower the costs of value creation and add additional value to a product. EXAMPLE: The global success of many Japanese manufacturing enterprises in the 1980s was based in part on their early adoption of processes for improving product quality and operating efficiency, including total quality management and just-in-time inventory systems. Today, the competitive success of General Electric can, in part, be attributed to several processes that have been widely promoted within the company. These include the company’s Six Sigma process for quality improvement; its process for “digitalization” of business (using corporate intranets and the Internet to automate activities and reduce operating costs); and its process for idea generation, referred to within the company as “workouts,” where managers and employees get together for intensive sessions over several days to identify and commit to ideas for improving productivity. An organization’s processes can be summarized using a flowchart, which illustrates the various steps and decision points involved in performing work. Many processes cut across functions, or divisions, and require cooperation between individuals in different subunits. EXAMPLE: Product development processes require employees from R&D, manufacturing, and marketing to work together cooperatively to make sure new products are developed with market needs in mind and designed in such a way that they can be manufactured at a low cost. Because they cut across organizational boundaries, performing processes effectively often requires the establishment of formal integrating mechanisms and incentives for cross-unit cooperation. A detailed consideration of the nature of processes and strategies for process improvement and reengineering is beyond the scope of this text. However, it is important to make two (2) basic remarks about managing processes, particularly in the context of international business. The first is that in a multinational enterprise, many processes cut not only across organizational boundaries, embracing several different subunits but also across national boundaries. Designing a new product may require the cooperation of R&D personnel located in California, production people located in Taiwan, and marketing located in Europe, America, and Asia. The chances of pulling this off are greatly enhanced if the processes are embedded in an organizational culture that promotes cooperation among individuals from different subunits and nations, if the incentive systems of the organization explicitly reward such cooperation, and if formal and informal integrating mechanisms are used to facilitate coordination among subunits. Second, a multinational enterprise needs to recognize that valuable new processes that might lead to a competitive advantage can be developed anywhere within the organization’s global network of operations. A local operating subsidiary may develop new processes in response to conditions about its market. Those processes might then have value to other parts of the multinational enterprise. The ability to create valuable processes matters, but it is also important to leverage those processes. 09 Handout 1 *Property of STI  [email protected] Page 18 of 23  BM1917 Organizational Culture Culture refers to a system of values and norms that are shared among people. Values are abstract ideas about what a group believes to be good, right, and desirable. Norms mean the social rules and guidelines that prescribe appropriate behavior in particular situations. Values and norms express themselves as the behavior patterns or style of an organization that new employees are automatically encouraged to follow by their fellow employees. Although an organization’s culture is rarely static, it tends to change relatively slowly. Cultural changes often come from doing something or behaving a certain way over time. Seldom do we adopt a cultural change, and then behaviors ensue without having ever been done before. Instead, repeated behaviors lead to revised values and norms, which, in turn, emphasize the new cultural makeup (whether it be at the country or organizational level). Creating and Maintaining Organizational Culture An organization’s culture comes from several sources. First, there seems to be wide agreement that founders or important leaders can have a profound impact on an organization’s culture, often imprinting their values on the culture. EXAMPLE: Konosuke Matsushita’s almost Zen-like personal business philosophy was codified in the “Seven Spiritual Values” of Matsushita that all new employees still learn today. These values are (1) national service through the industry, (2) fairness, (3) harmony and cooperation, (4) struggle for betterment, (5) courtesy and humility, (6) adjustment and assimilation, and (7) gratitude. A leader does not have to be the founder to have a profound influence on organizational culture. Jack Welch is widely credited with having changed the culture of GE when he first became CEO, primarily by emphasizing a countercultural set of values, such as risk taking, entrepreneurship, stewardship, and boundaryless behavior. It is more difficult for a leader, however forceful, to change an established organizational culture than it is to create one from scratch in a new venture. A blank slate on culture allows for the establishment of desired values and norms, while an existing culture and any change desired often results from implemented behaviors over time. Another important influence on organizational culture is the broader social culture of the nation where the firm was founded and/or has significant operations. EXAMPLE: In the United States, the competitive ethic of individualism looms large, and there is enormous social stress on producing winners. Many American firms find ways of rewarding and motivating individuals so that they see themselves as winners. The values of American firms often reflect the values of American culture. Similarly, the cooperative values found in many Japanese firms have been argued to reflect the values of traditional Japanese society, with its emphasis on group cooperation, reciprocal obligations, and harmony. Thus, although it may be a generalization, there may be something to the argument that organizational culture is influenced by national culture. This influence is particularly tricky in countries that are by design going through significant culture change (e.g., many eastern European countries). For example, China is more and more moving toward a market-based economy, while still having considerable influence from the communist system; such an economy can create inconsistent cultural makeups for companies, especially foreign companies trying to operate in China. The third influence on organizational culture is the history of the enterprise, which, over time, may come to shape the values of the organization. In the language of historians, organizational culture is the path-dependent product of where the organization has been through time. EXAMPLE: Koninklijke Philips Electronics NV, the Dutch multinational, long operated with a culture that placed a high value on the independence of national operating companies. The history of the company shaped this culture. During World War II, the Netherlands was occupied by the Germans. With the head office in occupied 09 Handout 1 *Property of STI  [email protected] Page 19 of 23  BM1917 territories, power was transferred by default to various foreign operating companies, such as Philips’ subsidiaries in the United States and Great Britain. After the war ended, these subsidiaries continued to operate in a highly autonomous fashion. A belief that this was the right thing to do became a core value of the company. A variety of mechanisms maintains culture. These include (1) hiring and promotional practices of the organization, (2) reward strategies, (3) socialization processes, and (4) communication strategy. The goal is to recruit people whose values are consistent with those of the company. To further reinforce values, a company may promote individuals whose behavior is consistent with the core values of the organization. Merit review processes may also be linked to a company’s values, which further reinforces cultural norms. Synthesis: Strategy and Architecture Localization Strategy Firms pursuing a localization strategy focus on local responsiveness. Figure 11 shows that such firms tend to operate with worldwide area structures, within which operating decisions are decentralized to functionally self- contained country subsidiaries. The need for coordination between subunits (areas and country subsidiaries) is low. This suggests that firms pursuing a localization strategy do not have a high need for integrating mechanisms, either formal or informal, to knit together different national operations. The lack of interdependence implies that the level of performance ambiguity in such enterprises is low, as (by extension) are the costs of control. Thus, headquarters can manage foreign operations by relying primarily on output and bureaucratic controls and a policy of management by exception. Incentives can be linked to performance metrics at the level of country subsidiaries. Since the need for integration and coordination is low, the need for common processes and organizational culture is also quite low. Were it not for the fact that these firms are unable to profit from the realization of location and experience curve economies, or the transfer of core competencies, their organizational simplicity would make this an attractive strategy. Figure 11. A synthesis of strategy, structure, and control systems Source: International Business: Competing in the Global Marketplace (12 th ed.). 2018, p.420 International Strategy Firms pursuing an international strategy attempt to create value by transferring core competencies from home to foreign subsidiaries. If they are diverse, as most of them are, these firms operate with a worldwide product division structure. Headquarters maintain typically centralized control over the source of the firm’s core competency, which is most typically found in the R&D and/or marketing functions of the firm. All other operating decisions are decentralized within the firm to subsidiary operations in each country (which in diverse firms report to worldwide product divisions). 09 Handout 1 *Property of STI  [email protected] Page 20 of 23  BM1917 The need for coordination is moderate in such firms, reflecting the need to transfer core competencies. Although such firms operate with some integrating mechanisms, they are not that extensive. The relatively low level of interdependence that results translates into a relatively low level of performance ambiguity. These firms can generally get by with output and bureaucratic controls and with incentives that are focused on performance metrics at the level of country subsidiaries. The need for a common organizational culture and common processes is not that great. An important exception to this is when the core skills or competencies of the firm are embedded in processes and culture, in which case the firm needs to pay close attention to transferring those processes and associated culture from the corporate center to country subsidiaries. Overall, although the organization required for an international strategy is more complex than that of firms pursuing a localization strategy, the increase in the level of complexity is not that great. Global Standardization Strategy Firms pursuing a global standardization strategy focus on the realization of location and experience curve economies. If they are diversified, as many of them are, these firms operate with a worldwide product division structure. Headquarters typically maintain ultimate control over most operating decisions to coordinate the firm’s globally dispersed web of value creation activities. In general, such firms are more centralized than enterprises pursuing a localization or international strategy. Reflecting on the need for coordination of the various stages of the firms’ globally dispersed value chains, the need for integration in these firms also is high. Thus, these firms tend to operate with an array of formal and informal integrating mechanisms. The resulting interdependencies can lead to significant performance ambiguities. As a result, in addition to output and bureaucratic controls, firms pursuing a global standardization strategy tend to stress the need to build a strong organizational culture that can facilitate coordination and cooperation. They also tend to use incentive systems that are linked to performance metrics at the corporate level, giving the managers of different operations a strong incentive to cooperate to increase the performance of the entire corporation. On average, the organization of such firms is more complex than that of firms pursuing a localization or international strategy. Transnational Strategy Firms pursuing a transnational strategy focus on the simultaneous attainment of location and experience curve economies, local responsiveness, and global learning (the multidirectional transfer of core competencies or skills). These firms may operate with matrix-type structures in which both product divisions and geographic areas have significant influence. The need to coordinate a globally dispersed value chain and to transfer core competencies creates pressures for centralizing some operating decisions (particularly production and R&D). At the same time, the need to be locally responsive creates pressure for decentralizing other operating decisions to national operations (particularly marketing). Consequently, these firms tend to mix relatively high degrees of centralization for some operating decisions with relatively high degrees of decentralization for other operating decisions. The need for coordination is high in transnational firms. This is reflected in the use of an array of formal and informal integrating mechanisms, including formal matrix structures and informal management networks. The high level of interdependence of subunits implied by such integration can result in significant performance ambiguities, which raise the costs of control. To reduce these, in addition to output and bureaucratic controls, firms pursuing a transnational strategy need to cultivate a strong culture and to establish incentives that promote cooperation between subunits. 09 Handout 1 *Property of STI  [email protected] Page 21 of 23  BM1917 Organizational Change Organizational Inertia Organizations are difficult to change. Within most organizations are strong inertia forces. These forces come from several sources. One source of inertia is the existing distribution of power and influence within an organization. The power and influence enjoyed by individual managers are, in part, a function of their role in the organizational hierarchy, as defined by structural position. By definition, most substantive changes in an organization require a change in structure and, by extension, a change in the distribution of power and influence within the organization. Some individuals will see their power and influence increase as a result of organizational change, and some will see the converse. EXAMPLE: Philips decided to increase the roles and responsibilities of its global product divisions and decrease the roles and responsibilities of its foreign subsidiary companies to combat organizational inertia. This meant the managers running the global product divisions saw their power and influence increase, while the managers running the foreign subsidiary companies saw their power and influence decline. As might be expected, some managers of foreign subsidiary companies did not like this change and resisted it, which slowed the pace of change. Those whose power and influence are reduced as a consequence of organizational change can be expected to resist it, primarily by arguing that the change might not work. To the extent that they are successful, this constitutes a source of organizational inertia that might slow or stop change. Another source of organizational inertia is the existing culture, as expressed in norms and value systems. Value systems reflect deeply held beliefs, and as such, they can be tough to change. If the formal and informal socialization mechanisms within an organization have been emphasizing a consistent set of values for a prolonged period, and if hiring, promotion, and incentive systems have all reinforced these values, then suddenly announcing that those values are no longer appropriate and need to be changed can produce resistance and dissonance among employees. Organizational inertia might also derive from senior managers’ preconceptions about the appropriate business model or paradigm. When a given paradigm has worked well in the past, managers might have trouble accepting that it is no longer appropriate. EXAMPLE: At Philips, granting considerable autonomy to foreign subsidiaries had worked very well in the past, allowing local managers to tailor product and business strategy to the conditions prevailing in a given country. Since this paradigm had worked so well, it was difficult for many managers to understand why it no longer applied. Consequently, they had difficulty accepting a new business model and tended to fall back on their established paradigm and ways of doing things. This change required managers to let go of long-held assumptions about what worked and what didn’t work, which was something many of them couldn’t do. Implementing Organizational Change To survive in this emerging competitive environment, multinationals must change not only their strategy but also their architecture so that it matches strategy in discriminating ways. The basic principles for successful organizational change can be summarized as follows: (1) unfreeze the organization through shock therapy, (2) move the organization to a new state through a proactive change in the architecture, and (3) refreeze the organization in its new state. a. Unfreezing the organization Because of inertia forces, incremental change is often no change. Those whose power is threatened by change can easily resist gradual change. This leads to the big bang theory of change, which maintains that effective change requires taking bold action early to “unfreeze” the established culture of an organization and to change the distribution of power and influence. Shock therapy to unfreeze the 09 Handout 1 *Property of STI  [email protected] Page 22 of 23  BM1917 organization might include the closure of plants deemed uneconomic or the announcement of a dramatic structural reorganization. It is also important to realize that change will not occur unless senior managers are committed to it. Senior managers must clearly articulate the need for change, so employees understand both why it is being pursued and the benefits that will flow from successful change. Senior managers must also practice what they preach and take the necessary bold steps. If employees see senior managers preaching the need for change but not changing their behavior or making substantive changes in the organization, they will soon lose faith in the change effort, which then will flounder. b. Moving to the new state Once an organization has been unfrozen, it must be moved to its new state. Movement requires taking action—closing operations; reorganizing the structure; reassigning responsibilities; changing control, incentive, and reward systems; redesigning processes; and letting people go who are seen as an impediment to change. In other words, movement requires a substantial change in the form of a multinational’s organizational architecture so that it matches the desired new strategic posture. For movement to be successful, it must be done with sufficient speed. Involving employees in the change effort is an excellent way to get them to appreciate and buy into the needs for change and to help with rapid movement. EXAMPLE: A firm might delegate substantial responsibility for designing operating processes to lower- level employees. If enough of their recommendations are then acted on, the employees will see the consequences of their efforts and consequently buy into the notion that change is occurring. c. Refreezing the organization Refreezing the organization takes longer. It may require that a new culture be established while the old one is being dismantled. Thus, refreezing requires that employees be socialized into the new way of doing things. Companies will often use management education programs to achieve this. At General Electric, where longtime CEO Jack Welch instituted a major change in the culture of the company, management education programs were used as a proactive tool to communicate new values to organization members. On their own, however, management education programs are not enough. Hiring policies must be changed to reflect the new realities, with an emphasis on hiring individuals whose personal values are consistent with that of the new culture the firm is trying to build. Similarly, control and incentive systems must be consistent with the new realities of the organization, or change will never take. Senior management must recognize that changing culture takes a long time. Any letup in the pressure to change may allow the old culture to reemerge as employees fall back into familiar ways of doing things. The communication task facing senior managers, therefore, is a long-term endeavor that requires managers to be relentless and persistent in their pursuit of change. One striking feature of Jack Welch’s two-decade tenure at GE, for example, is that he never stopped pushing his change agenda. It was a consistent theme of his tenure. He was always thinking up new programs and initiatives to keep pushing the culture of the organization along the desired trajectory. REFERENCES Hill, C. W., & Hult, G. T. (2018). International business: Competing in the global marketplace (12th ed.). New York: McGraw-Hill Education. 09 Handout 1 *Property of STI  [email protected] Page 23 of 23