04 The Transnational Corporation - LOVE

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04 The Transnational Corporation - LOVE ...

    Chapter 4

    The Transnational Corporation

“Building a global presence is never exclusively the result of a grand design.

    Nor is it just outcome of a sequence of opportunistic and random moves. The

    wisest approach which might be called directed opportunism maintains

    opportunism and flexibility within a broad direction set by a systematic

    framework that addresses four major issues: choice of products, choice of

    markets, mode of market entry and speed of global expansion.” 1 Anil Gupta and Vijay Govindarajan


    In their famous book „Built to last,‟ authors James C Collins and Jerry I Porras

    have argued that many visionary companies did not have a clear idea of what

    to do, when they started their operations. Yet, they thought big, defined their

    corporate purpose in terms of a broad overarching set of loosely defined goals

    and set themselves Big, Hairy & Audacious Goals (Bhags). Similarly, the

    evolution of many of today‟s transnational or truly global corporations has in

    more cases than not, been shaped by circumstances, rather than deliberate

    strategies. However, these companies have typically nurtured big ambitions

    right from the start and have had strong leaders to facilitate their global


     In this chapter, we shall look at various companies, some in the early

    stages and some in an advanced phase of globalisation. Through these

    examples, we shall try to understand the process of globalisation and the

    challenges involved. We will also examine the various conceptual issues in


    2 The process of globalisation

    Typically, the process of globalisation evolves through distinct stages.

     In the first stage, companies normally tend to focus on their domestic

    markets. They develop and strengthen their capabilities in some core areas.

    For example, Sony developed expertise in miniaturization of consumer

    electronics products. Toyota perfected its lean production system based on its

    „Just in time‟ philosophy. Ericsson learnt the art of designing switches for

    ==================================================================== 1 Survey - Mastering Global Business, Financial Times, January 29, 1998. 2 Read Kenichi Ohmae’s book “The Borderless World,” p 91 to know more

     about the process of globalisation.

    2 The Global C.E.O telecom equipment. A strong core capability acts as the launching pad for

    globalisation. Most Indian companies are in this stage and the challenge

    before them is to strengthen such core capabilities, and extend them to

    overseas markets.

    In the second stage, companies begin to look at overseas markets more seriously but the orientation remains predominantly domestic. The

    various options a company has in this stage are exporting its products, setting

    up warehouses abroad and establishing assembly lines in major markets. The

    idea is to get a better understanding of overseas markets, but without

    committing large amounts of resources.

    SONY: Evolution of a global company* Some of the most famous global companies today, were quite cautious during their early days of overseas expansion. Sony cofounder Akio Morita firmly believed that an overseas market had to be first understood carefully and a marketing network put in place before making heavy investments. Morita was particularly careful in the US market: “I always had an eye on producing in the United States, but I felt that we should do it only when we had a really big market, knew how to sell in it and could service what we sold. … That time came in 1971.” Around this time, setting up a

     factory became a matter of compulsion rather than choice, as Sony found its shipping

     costs increasing. Morita identified other advantages in an offshore plant: “We could

    fine tune production depending on the market trends and we could more easily adapt

    our designs to market needs in a hurry.” Sony started with an assembly operation, fed with components shipped from Japan. Later, Sony decided to source many of its components within the US, except for some critical components such as electron gun and some special integrated circuits. While Sony‟s globalisation proceeded in a cautious manner, the company was not found lacking in terms of vision. When it started marketing its transistors in the US in the mid 1950s, one retailer, Bulova offered to buy 100,000 units but insisted that they should be sold under the Bulova brand name. Even though Sony‟s headquarters initially favoured the acceptance of the order, Morita remained firmly against the idea.

     When Morita conveyed his stand, Bulova insisted: “Our company name is a famous

     brand name that has taken over fifty years to establish. Nobody has ever heard of your

    brand name. Why not take advantage of ours?” Morita, remained steadfast in his views

    and refused to accept the order. His rejoinder to Bulova: “Fifty years ago, your brand name must have been just as unknown as our name is today. I am here with a new product, and I am taking the first step for the next fifty years of my company. Fifty years from now I promise you that our name will be just as famous as your company name is today.”

     The Indian pharmaceutical company, Ranbaxy seems to be in this



     * Drawn from Akio Morita’s book “Made in Japan”.

    The Transnational Corporation 3

     In the third stage, the commitment to overseas markets increases. The company begins to take into account the differences across various markets to

    customise its products suitably. Different strategies are formed for different

    markets to maximise customer responsiveness. These may include overseas

    research & development centres and full-fledged country or region specific

    manufacturing facilities. This phase can be referred to as the multinational or

    multi domestic phase. The different subsidiaries largely remain independent

    of each other and there is little coordination among the different units in the


    Why firms go international Various reasons can prompt a company to think actively in terms of international

    expansion. Some of them are listed below.

    1. Saturated domestic market: When the domestic market becomes saturated, attempts to increase market share become increasingly inefficient. At this point, a

    company may think of capturing markets abroad to generate new growth

    opportunities. Many American and European automobile companies have made clear

    their intentions to exploit the Asian markets.

    2. Competitive factors: Sometimes, competition may be less intense in overseas markets than in the domestic market. Thus, international expansion would generate

    profitable business opportunities. In the case of other firms, overseas presence may

    become a compelling need in order to compete on an equal footing with competitors

    having a stronger international presence. Kodak‟s entry into Japan was meant to thwart Fuji's aggressive moves in the US.

    3. Excess capacity: When excess capacity exists, the burden of overheads can be killing. The firm comes under pressure for increasing sales by entering new markets.

    Tapping international markets through marginal cost pricing* makes sense. Many

    Japanese companies aggressively export their products, using marginal costing.

    4. Product life cycle: Typically, a product goes through four stages Introduction,

    Growth, Maturity and Decline. Different markets may be at different stages of

    development. If a product has reached the decline stage in the domestic market, a

    company could introduce it in another market, at a relatively early stage of the product

    life cycle.

    5. Diversification of risk: By having a presence in various markets, a firm can insulate itself from the ups and downs in individual regions. Ford, for example, might

    well have gone bankrupt in the late 1970s and early 1980s, had not its European

    operations generated enough profits to compensate for the losses in North America.

    6. Financial reasons: If attractive investment incentives or venture capital are available, overseas expansion may make sense. By tapping such financial resources,

    firms can generate new growth opportunities efficiently and without running into a

    resource crunch. ====================================================================

     * Price is equated with variable costs plus a margin without considering fixed costs.

    The Global C.E.O 4

     In the final stage, the transnational corporation emerges. Here, the

    company takes into account both similarities and differences across different

    markets. Some activities are standardised across the globe while others are

    customised to suit the needs of individual markets. The firm pursues a

    multidimensional approach and formulates different strategies for different

    businesses, to combine global efficiencies, local responsiveness and sharing of

    knowledge across different subsidiaries. A seamless network of subsidiaries

    across the world emerges, and it is very difficult to make out where the home

    country or headquarters is. We shall use the word transnational and global

    interchangeably in this book, from this point onwards.

    The characteristics of a transnational corporation

    Sundaram and Black* have pointed out that the distinguishing features of a

    multinational corporation are Multiple Sources of External Authority (MA) and Multiple Denominations of Value (MV). MA means MNCs are exposed to

    the regulatory environments of different countries. MV implies that the

    company incurs costs and generates profits in many currencies. Yet, it would

    be too much of a simplification to call a company transnational if it has a

    presence in several countries or has transactions in several currencies. The

    real quality of a transnational corporation is obviously the ability to deal with

     Table I

    The World's Most Valuable Companies

    (Market Capitalisation in $ Billion as on May 31, 2000)

    No. Company Market Value Rank in 1999 1 General Electric 520.25 2 2 Intel 416.71 8 3 Cisco Systems 395.01 9 4 Microsoft 322.82 1 5 Exxon- Mobil 289.92 4 6 Vodafone-Airtouch 277.95 70 7 Wal Mart Stores 256.66 6 8 NTT Docomo 247.24 27 9 Nokia 242.19 38 10 Royal Dutch Shell 213.54 5 11 Citi group 209.86 15 12 BP Amoco 207.51 10 13 Oracle 204.01 122 14 IBM 192.49 3 15 Nippon Telegraph & Telephone 189.16 13 16 Deutsche Telecom 187.25 23 17 Lucent Technologies 183.34 16 18 American International Group 173.50 17 19 Merck 172.87 12 20 Pfizer 171.52 18

    Source: "The Global 1000," Business Week, July 10, 2000. pg 49


     * In their book, “The International Business Environment.”

     5 The Transnational Corporation

    these peculiarities in a way that results in a judicious blend of local responsiveness through customisation, cost reduction through standardization and optimum value chain configuration. For example, a company with a well thought out manufacturing network in different countries, to make it currency neutral* would be more transnational that one which simply faces foreign exchange exposure and uses hedging tools to eliminate risk. Similarly, a company which develops a network of operations that make it less vulnerable to political risks in individual overseas markets, would be more transnational than one which does not have such a network. Transnational corporations combine various strengths that are well beyond the reach of companies which predominantly compete in their domestic markets. We now examine these strengths.


    Transnational companies, have the capability to combine global efficiencies, local responsiveness and the ability to disseminate knowledge across the worldwide system. A unidimensional approach which focuses exclusively on

    global efficiencies or local responsiveness or which considers all businesses to be alike is not appropriate. A flexible, multidimensional approach is the essence of a transnational corporation. Such a capability is typically built up over a period of time as the company evolves and learns to deal with various types of business problems in different overseas locations.

     Why is a multidimensional approach so critical in today’s global

    business environment? As markets become more competitive and customers

    become more demanding, efficiency has become important. Without

    efficiency, products become overpriced and go out of the reach of customers. Global companies, even when serving diverse markets, look out for opportunities to standardise products to the extent possible. Standardisation yields obvious benefits in the form of economies of scale, in activities such as product development, manufacturing and procurement. Yet, standardisation if carried too far, would mean loss of responsiveness to local markets. The trick is to standardise those aspects which customers do not perceive differently across the world and customise those which they do.


     * Currency neutral means operations are immune to foreign exchange rate

    fluctuations, with losses in some transactions being compensated by gains in others. Read Kenichi Ohmae, “The Borderless World,” pp 157-171 to understand more about foreign exchange markets and their impact on global corporations.

    6 The Global C.E.O

    1 Balancing globalisation and localisation: Morgan Stanley in Europe 2 Investment banker Morgan Stanley Dean Witter‟s (Morgan Stanley) success in Europe indicates how global capabilities backed by a thorough understanding of the local markets can pay rich dividends. Till recently, investment banking activities in Europe were handled mostly by local outfits. The launch of the Euro and the consequent unification of Europe‟s capital markets has changed the scenario dramatically. During 1999, the total value of mergers in Europe was more than $ 1 trillion. In this huge

    market which now rivals the US in size, Morgan Stanley‟s expansion offers useful lessons in globalisation. Morgan Stanley had been nurturing and developing its European client base right from the late 1970s. The investment banker used a combination of American expatriates and local executives to build deep roots in Europe. In some markets, where

    politicians were deeply suspicious of the American style of management, Morgan Stanley used local nationals to develop contacts. In France, for example, it recruited Patrice Vial, a top finance ministry official in an earlier French government. In Scandinavia, the investment banker developed strong relationships with the influential Wallenberg family which has stakes in several companies in the region.

    While local contacts have played an important role in strengthening Morgan Stanley‟s presence in Europe, they would have meant little without the company‟s global resources and capabilities. When deregulation in Europe put pressure on companies to restructure and access overseas capital markets, European companies needed an investment banker with the capability to sell their securities around the world. Morgan Stanley neatly fitted into this role. Its expertise in mergers and acquisitions, capability to design new financial instruments and huge capital resources have inspired the confidence of several European companies. The investment banker has been giving advice to Hoechst in connection with its $ 50 billion merger with

     France‟s Rhone Poulenc. It has also pioneered major securitisation deals for companies such as Canary Wharf. Morgan Stanley‟s skills in distributing securities and managing stock offerings are now widely respected. The company has also demonstrated its proactive capabilities by championing the cause of a unified European capital market. It has been putting pressure on national stock exchanges to become more efficient and actively supported electronic exchanges such as Easdaq, Europe‟s version of NASDAQ. Morgan Stanley, however, has still many concerns to address in Europe. It trails behind Goldman Sachs in Germany, Europe‟s largest economy. A slowdown in the process of unification of Europe‟s securities markets can hurt the company badly. The investment banker reportedly spends $ 1 million per hour to run its European operations. Any slowdown in growth will obviously pinch hard.

     Automobile companies have realised that too many models with

    minor variations result in ballooning development costs. They are now

    focusing on a few platforms around which cars of different shapes can be

    designed. Companies such as Ford and Toyota have mastered the art of

    standardising the „core product‟ while retaining the flexibility to customise

    and offer features to suit customer tastes in individual markets. Similarly, fast

    ==================================================================== 1 Draws heavily from the article, “The Deal Machine” in Business Week,

     November1, 1999, pp 24-30 2 The company has recently announced that it will rename itself Morgan Stanley.

    The Transnational Corporation 7

    moving consumer goods companies are looking at ways to standardise some of the elements of the marketing mix while customising the others for local markets. Nestle, Coke and Unilever actively look for opportunities to extend expensive advertising campaigns developed in one country, across markets, with minor customisation wherever required.

    Usinor’s New Global Strategy*

    The $14 billion French steel company, Usinor has embarked on an aggressive global expansion through acquisitions, since it was privatized in 1995. The turning point in the company‟s growth initiatives came in late 1998, when it acquired a 75% stake in the Belgian steel company, Cockerill Sambre SA. This not only doubled Usinor‟s flat rolled steel capacity but also made it one of the top five steel makers in the world. The acquisition of Cockerill also enabled Usinor to boost its market share for automotive steel, in Europe to 35 percent.

     Usinor‟s global reach is still skewed in favour of Europe. It generated only

    9% of its revenues during the first half of 1999 in the key markets of the US and Canada. The company, however, is taking several steps to strengthen its presence in North America. In 1999, Usinor acquired a 100% stake in Pittsburgh - based J&L Specialty steel. It has also set up a joint venture in Canada for making hot dip galvanized steel. On January 1, 2000, the US sales unit was renamed Usinor Steel Corporation, as part of the company‟s global branding efforts.

     Usinor has also made other acquisitions. These include La Magona d‟ Italica

    and Arvedi Group in Italy, Campanhia in Brazil, Acesita in Spain and Eko Stahl in Germany. Usinor is also building a stainless steel finishing unit near Shanghai in China. Since many of these entities have been operating under different names, Usinor is making efforts to create a global identity through the use of its corporate name.

     To strengthen its competitive position, Usinor has embarked on a major restructuring move. 23 small divisions have been created, to introduce an entrepreneurial approach to managing the business. According to Gerard Picard, Usinor president, “We decided to split the organisation into business units dedicated to specific markets or products….Each unit has its own profit and loss account and its own approach to the customer. But the business units share the same back office (support), so we have cost savings in terms of administrative or information system costs.”

     Truly global companies also do not treat their subsidiaries on a

    stand-alone basis. A global company can take full advantage of its entire

    worldwide capabilities when it makes a competitive move. It has the required ==================================================================== * Based on the article “New name new global strategy,” by John Sheridan in Industry Week, February 21, 2000.

    8 The Global C.E.O

    degree of organisational integration to transport capabilities across borders whenever needed. In other words, exchange of ideas, best practices and resources across subsidiaries is a key requirement in a transnational corporation.

    A slogan which has become very popular in recent times is „Think

    Global, Act Local.‟ The notion that global strategies have to be implemented locally, seems to imply that knowledge transfer is unidirectional from headquarters to the subsidiaries. A truly global company, on the other hand, needs to encourage local managers to share their best practices so that they can be applied globally. According to Jack Welch, CEO of General Electric*, “The aim in a global business is to get the best ideas from everyone. Each

    team puts up its best ideas and processes constantly. That raises the bar. Our culture is designed around making a hero out of those who translate ideas from one place to another, who help somebody else. They get an award, they get praised and promoted. The way we do this is transportable and translatable. The fact is, all we are talking about is human dignity and voice - giving people a chance to speak, to have their best idea. That is a global desire of all people who breathe. If you find a way to get rid of the hierarchical nonsense and allow ideas to flourish, it doesn‟t matter if you are in Budapest or Beijing." Ford has put in place a system on its Intranet to allow different manufacturing units to contribute ideas on best practices from time to time. This is obviously a result of the automobile giant‟s strong commitment to knowledge sharing across different units in its worldwide system. The oil giants Chevron and BP-Amoco have both developed best practices databases to facilitate knowledge sharing across subsidiaries.

     Flexibility lies at the heart of a multidimensional approach.

    Traditionally, Japanese companies have either used their global scale domestic facilities to supply to overseas markets or replicated these facilities on a smaller scale in strategically important markets. Matsushita Electric is a typical example. The company‟s centralised design and manufacturing facilities enabled it to become the world‟s most efficient consumer electronics manufacturer. Over the years, however, Matsushita has been delegating more responsibilities to its subsidiaries. On the other hand, many European companies due to their small home markets and their eagerness to expand overseas, offered considerable autonomy to country subsidiaries to encourage responsiveness to local needs. Till recently, both Philips and Unilever conformed to the multinational style of management. Of late however, these companies have put in place mechanisms to monitor and control the activities of different overseas units, to achieve global coordination. In other words, ==================================================================== *Financial Times, September 30, 1997

     9 The Transnational Corporation strategies need to change in a dynamic way, in response to changes in the


    An important element of flexibility is to retain what works and

    eliminate what does not, without any preconceived notions. Floris. A. Maljers, 1former CEO of Unilever once remarked: “Our organization of diverse

    operations around the world is not the outcome of a conscious effort to

    become what is now known among academics as a transnational. Since 1930,

    the company has evolved mainly through a Darwinian system of retaining

    what was useful and rejecting what no longer worked in other words

    through actual practice as a business responding to the market place.”

     One company which comes close to meeting the criterion of

    multidimensionality is ABB Asea Brown Boveri (ABB). This belongs to a

    small group of companies today which combine the best of global capabilities

    and local responsiveness. ABB‟s former CEO Percy Barnevik has described 2his company thus: “ABB is a company with no geographic centre, no national axe to grind. We are a federation of national companies with a global

    coordination center. We are a Swiss company. Our headquarters is in Zurich,

    but only 100 professionals work at the headquarters and we will not increase

    that number. Are we a Swedish company? I am the CEO and I was born and

    educated in Sweden. But our headquarters is not in Sweden and only two of

    the eight members of our board of directors are Swedes. Perhaps we are an

    American company. We report our financial results in US dollars and English

    is ABB‟s official language. We conduct all high level meetings in English.

    My point is that ABB is none of those things and all of those things. We are

    not homeless. We are a company with many homes.”

Value chain configuration

    A transnational company configures its value chain across different countries

    to ensure that activities are located in those countries where they can be most

    efficiently performed. Consider Li & Fung, Hong Kong‟s largest export

    trading company. It deals in items ranging from clothing and fashion

    accessories to toys and luggage. The way Li & Fung sources toys is revealing.

    The company has located high value adding activities such as design of the

    toys and fabrication of molds in Hong Kong. On the other hand, labour

    intensive activities such as injection of plastic, painting and manufacture of

    the doll‟s clothing are carried out in China. The company uses Hong Kong‟s

    ==================================================================== 1 Harvard Business Review, September October, 1992. 2 Harvard Business Review, March April, 1991

    10 The Global C.E.O

    well-developed banking and transportation infrastructure to market its products around the world. As chairman Victor Fung puts it, the labor intensive middle portion of the value chain is still done in southern China while Hong Kong does the front and back ends.

    Transnational companies develop the capability to demarcate

    activities that need to be tightly controlled by the headquarters and those which can be decentralised and delegated to national subsidiaries. The Swiss food giant, Nestle gives a lot of freedom to its country subsidiaries. Nestle‟s local units take decisions on adapting products to suit local tastes. Yet, there are some functions, which the company has chosen to control tightly. These include basic research, branding, financing decisions and many human resources policies. Peter Brabeck Letmathe*, who is currently Nestle‟s CEO,

    once remarked, “The R&D function is one of the few things we haven‟t decentralised, although over 18 R&D centers are physically located all over the world. All our research centres, wherever they are, are financed and controlled by headquarters and receive the necessary input mainly from the strategic business units, based upon requests from the markets.”


    A global company needs to have the capability to compete in any overseas market. While it can be selective about the markets it wants to enter (based on their structural attractiveness,) it should have the ability to compete in any market if global considerations demand this. To put it another way, a global company's decision not to have a presence in a particular country, would be by choice, rather than out of compulsion. Similarly, a global company might even make a strategic retreat from a market. This would, however, be a part of a global game plan rather than because it finds the going tough due to intense competition. TNCs constantly look around the world for market openings, process information on a global basis and constitute a potential threat even in countries where they have not yet entered.


     * The McKinsey Quarterly 1996, Number 2.

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