Factors that influence organizational architecture



In this paper, we will discuss regarding the organization of international business. We will discuss regarding the organization itself. What is contained in the organization, what are the components that form the organization of international business and what kind of organizational architecture managers use to manage their business operations and directions.

By organizational architecture, we mean the entire organization, including organizational structure, control systems and incentives, processes, organizational culture and people. In this case, there are three conditions to be fulfilled by an organization to make the organization profitable. First, various elements of the organization shall be parallel to each other. Second, organizational strategy should always be consistent with the organizational structure, and finally, strategies and organizational structure must be consistent with the competitive conditions prevailing in the firm's market that are the strategy, architecture and competitive environment.

We will also look at factors that influence organizational architecture and what structure is suitable for the firm that is in line with its strategy to maximize profits in order to achieve the company's goal, the advantages and disadvantages of various structures. We will also discuss regarding processes in which decision making are made in the organization, its control and reward system and the organizational culture.

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Finally, we will look into what an international business requires to change its organization to better match its strategy and how organizations deal with changes.

Organizational Architecture

As noted above, the organizational architecture is the totality of the organization itself which consists of various components. The components are the structure, control systems and incentives, processes, organizational culture and people. Figure 2.1 illustrates these components. This paper will discuss all the components except the people aspect which will be touched by other group.

Figure 2.1 Organizational Architecture

The organizational structure is a formal organizational structure used to manage a firm. Control system is the system used to measure the performance of managers and units while the incentives are tools used to reward the performance of managers. Processes are the manner in which decisions are made and work is performed while the organizational culture is the values ​​and norms in the organization shared by its employees. We will discuss in details each of the components in this paper.

Factors Affecting Organizational Architecture

Before we discuss any further about the components of organizational architecture, we need to discuss factors affecting organizational architecture. There are five factors that influence the architecture organizational architecture which are size, strategy, technology, environment and country culture.

3.1 Size

The larger the organization, the more complex its structure. When a small organization such as a single grocery store, a two person consulting company or restaurants it can be a simple structure. In fact, if the organization is very small, it may not have a formal structure. It may not have or follow the organizational chart or a specific job function. The employees only operate based on what they like or do not like, their abilities, and needs. Rules and guidelines just exist in order to provide the parameters within which organizational members can make decisions. Small organizations are often organic systems.

However, as the organization grows, it becomes increasingly difficult to manage without a formal structure and delegation of powers within the organization. Therefore, large organizations will have a formal structure where the tasks performed have been determined and has the proper work procedures.

3.2 Strategy

As noted in an introduction, the strategy of organizations has to be consistent with the organizational structure. Whether it is differentiation strategy, cost-leadership strategy, cost reduction or local responsiveness, all the strategies requires a structure that help the organization achieve its objectives. In other words, the structure must fit the strategy.

3.3 Technology

The advances in technology of the organizations or area will also affect the structure of an organization. For example, in international business, a company based in a developed country with high technology, while its branches are located in a developing country which is not so advanced technologically, the organizational structure of Head Quarters and its branches could not be the same.

3.4 Environment

Environment usually described as either stable or dynamic. In a stable environment, firms will understand the needs and desires of its customers and often this condition would remain for an extended period. Therefore, its organizational structure does not need to change regularly.

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In a dynamic environment, customers' needs will always vary in which technology is also keep changing and need to be upgraded and improved as well as the organizational structure where it should be in line with the changes in firm's strategy.

3.5 Country Culture

Cultural environment is an essential component of the international business environment and one of the most difficult to understand. This is because the cultural environment basically cannot be seen, but it has been described as a shared commonly held body of values ​​that determine what is right for one group and what is not right. Companies need to understand what beliefs and values ​​they might find in countries where they do business for this will affect their strategy and structure of the organizations.

4.0 Organizational Structure

Organizational structure in international business consists of three elements which are vertical differentiation, horizontal differentiation and integrating mechanisms as illustrated in Figure 4.1.

Figure 4.1 Elements Of Organizational Structure

Vertical Differentiation

Vertical differentiation refers to the location of decision making responsibilities within a structure. It is either at the top or middle or lower management level. In other words, it determines where in it hierarchy the decision-making power is concentrated. It has two types which are centralization and decentralization.


There are four main arguments for centralization. First, the task for coordination in centralize decision making is much easier than decentralization. For instance, if the firm has the manufacturing operation in Malaysia while it assembly operation in Mexico, there must be point of coordination in operation scheduling and this task usually centralize at the firm's head quarters. Second, the decisions are always consistent with the firm's strategies and objectives. This is because the centralize power lies within the top level managers and these managers are often understand the firm's goals and objectives. Third, by focusing the power and authority in one individual or team management, it can give top management a means to bring key organizational changes needed. Lastly, centralization can avoid duplication of activities in various divisions within the organization.


There are five main arguments for decentralization. First, by centralization, managers need to spend much time thinking about all the organizational issues that arise regardless small or big whereas if the power of decision making has been delegated to a lower level managers, the burden is relatively light and managers just need to think on critical issues only. Second, this has to do with aspects of motivation which, according to psychologists, people are willing to give more when they have greater freedom and control over their work. Third, decentralization provides more flexibility in order to response to the environmental changes because managers do not need to refer all matters to top management level. If the environment changes rapidly managers can make immediate decisions without having to refer to top management level. Fourth, decentralization can produce better results. In a decentralized structure, the decision was made close to the spot of individuals who have better information than a few managers at the top level of the hierarchy. Finally, decentralization can increase control. Decentralization can be used to determine the relatively autonomous sub-units within an organization. Sub-unit managers then can be responsible for the performance of the sub unit.