Part 1: The Strategic Imperatives

  1. Chapter 1: Expanding Abroad: Motivations, Means and Mentalities
  2. Chapter 2: Understanding the International Context: Responding to Conflicting Environmental Forces
  3. Chapter 3: Developing Transnational Strategies: Building Layers of Competitive Advantage

Part 2: The Organizational Challenge

  1. Chapter 4: Developing a Transnational Organization: Managing Integration, Responsiveness, and Flexibility
  2. Chapter 5: Creating Worldwide Innovation and Learning: Exploiting Cross-Border Knowledge Management
  3. Chapter 6: Engaging in Cross-Border Collaboration: Managing across Corporate Boundaries

Part 3: The Managerial Implications

  1. Chapter 7: Implementing the Strategy: Building Multidimensional Capabilities
  2. Chapter 8: The Future of the Transnational: An Evolving Global Role

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Chapter 1: Expanding Abroad: Motivations, Means and Mentalities

1. The MNE: Definition, Scope & Influence

1.1  Definition:

MNE is a company that embraces 03 features as follows:

-       Substantial direct investments in foreign countries (not just an export business);

-       Active management of these offshore assets (not simply holding them as a passive financial portfolio);

-       Management integration of operations located in different countries.

Thus, companies that source their raw materials offshore, license their technologies abroad, export their products into foreign markets, or even hold minor equity positions in overseas ventures without any management involvement are not regarded as MNEs.

In a nutshell, an MNE must have substantial, direct investment in foreign countries and actively manage and regard those operations as integral parts of the company, both strategically and organizationally.

1.2  Scope:

The definition of MNEs has been changed over times. In essence, this highlights the importance of both strategic and organizational integration, and thereby, the active, coordinated management of operations located in different countries, as the key differentiating characteristic of an MNE.

What is different about multinational management?

-       Multiple operating environments: diverse patterns of consumer preferences, channels, legal frameworks, etc.

-       Political demands and risks: need to mesh corporate strategy with host country policies.

-       Global competitive game: multiple markets, new strategic options

-       Currency fluctuation and exchange risk: economic performance measured in multiple currencies

-       Organizational complexity and diversity: need to manage complex demands across barriers of distance, time, language and culture.

1.3  Influence:

MNEs have been playing an increasing role in the global arena. It is estimated that the top 500 MNEs account for nearly 70% of world trade. Many industries are now donimated by MNEs.

2. The Motivations: Pushes & Pulls to Internationalize

There are many motives for a company to go international.

-       Tradition motivations: seeking new markets to fill capacity and develop scale, or resources to secure supplies and exploit factor cost differences

-       Emerging motivations: competitive positioning (need global operations to pre-empt others, secure profit sanctuaries, exchange hostages, etc), global scanning (accessing emerging trends, new technologies and best skills worldwide)

3. The Means of Internationalization: Prerequisites and Processes

3.1  Prerequisites:

03 conditions must be met for the existence of an MNE:

-       Foreign countries must offer certain location-specific advantages to provide the requisite motivation for the company to invest there.

-       The company must have some strategic competencies or ownership-specific advantages to counteract the disadvantages of its relative unfamiliarity with foreign markets.

-       The company must have some organizational capabilities to achieve better returns from leveraging its strategic strengths internally rather than through external market mechanisms such as contracts or licences.

3.2  The Process of Internationalization

In classic internationalization process, the company makes an initial commitment of resources to the foreign market, and through this investment, it gains local market knowledge about customers, competitors, and regulatory conditions. On the basis of this market knowledge, the company is able to evaluate its current activities, the extent of its commitment to the market, and thus the opportunities for additional investment…This is incremental process of increasing commitment and understanding of foreign markets.

However, today, many companies short-cut this process and many are even born global. The amount of resources committed to foreign market and the level of control over foreign activities increase from indirect export to direct export, franchising, licensing, joint venture with local partners and wholly-owned subsidiary.

4. The Evolving Mentality: International to Transnational

A gradual evolution has occurred in the strategic role that foreign operations play in emerging MNEs. We can categorize this evolutionary pattern into four stages that reflect the way in which management thinking has developed over time as changes have occurred in both the international business environment and the MNE as a unique corporate form.

4.1  Multinational perspective:

-       The company treats overseas markets as a portfolio of local opportunities and manages them as a decentralize federation.

4.2  International perspective:

-       The company leverages its domestic capabilities worldwide as a coordinated federation.

4.3  Global perspective:

-       The company views the world as a single unit of analysis and manages operations centrally.

4.4  Transnational perspective:

-       The company simultaneously responds to local needs, global demands, and cross-border learning opportunities and manages them as an integrated network

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Chapter 2: Understanding the International Context

Nowadays, MNEs are under pressure to respond to three simultaneous yet often conflicting sets of external demands: cross-market integration, national responsiveness and worldwide learning.

1. Forces for Global Integration and Coordination

1.1  Forces for Change:

-       Economies of Scale;

-       Economies of Scope;

-       Factor Costs;

-       Free Trade.

Economies of scale result in lower production cost for each product thanks to larger volumn while economies of scope imply better efficiency for a MNE in using resources to produce different products.

1.2  The Expanding Spiral of Globalization:

Globalization is a spiral process that requires MNEs to adapt continuously.

1.3  Global Competitors as Change Agents

-       MNEs are put on a “global chess” where competitive position in all markets ws linked by financial and strategic interdependence.

-       Regardless of consumer tastes or manufacturing scale economies, it was suggested that corporations with worldwide operations had great advantages over national companies, in that they could use funds generated in one market to subsidize their position in another.

2. Forces for Local Differentiation and Responsiveness

National environments differ on many dimensions. This forces MNEs to be sensitive and responsive to national, social, economic, and political characteristics of the host countries in which they operate.

2.1  Cultural Differences

When going global, MNEs must encounter differences in culture from country to country. According to Geert Hofstede, there are 04 key dimensions in cultural differences:

-       Power distance

-       Uncertainty avoidance

-       Individualism

-       Masculinity

These distinct cultural differences across countries result in wide variations in social norms and individual behavior and are reflected in the effectiveness of different organizational forms and management systems.

Cultural differences are also reflected in nationally differentiated consumption patterns, including the way people dress or the foods they prefer.

2.2  National Infrastructure

-       Technical standards

-       Distribution channels

2.3  Government Demands

To be effective global competitors, MNEs sought three important operating objectives: unrestricted access to resources and markets throughout the world; the freedom to integrate manufacturing and other operations across national boundaries; and the unimpeded right to coordinate and control all aspects of the company on a worldwide basis. The host government, in contrast, sought to develop an economy that could survive and prosper in a competitive international environment. At times, this led to the designation of another company as its standard bearer in the specific industry, bringing it into direct conflict with the MNE.

-       National laws and regulations

-       Host country pressures and demands

2.4  Growing Pressures for Localization

-       It is due to the fact that worldwide tastes, habits and preferences are not homogenous. In industry after industry, a large group of consumers has emerged to reject the homogenized product design and performance of standardized global products.

-       Other consumer and market trends are also emerging to counterbalance the forces of global standardization of products.  

3. Forces for Worldwide Innovation and Learning

In the emerging competitive game, victory often goes to the company that can most effectively harness its access to worldwide information and expertise to develop and diffuse innovative products and processes on a worldwide basis:

-       Shortening product life cycles.

-       Increased cost of R&D.

-       Emergence of global technology standards.

-       Competitors’ ability to develop and diffuse innovation globally.

4. Responding to the Diverse Forces Simultaneously

In some businesses, the economic forces of globalization were historically strong and dominated other environmental demands. However, strength of forces vary by industry, to be divided into 03 typical models.

4.1  Global industries:

-       Such industries, in which the economic forces of globalization are dominant, we designate as global industries. For example: consumer electronics

4.2  Multinational industries:

-       The dominance of national differences in cultural, social and political environments allow multiple national industry structures to flourish. For example: brand packaged products.

4.3  International industries:

-       It is the ability to innovate and appropriate the benefits of those innovations in multiple national markets that differentiates the winners from the losers.

5. Transition to Transnationality

In the emerging international environment, therefore, there are fewer and fewer examples of pure global, textbook multinational, or classical international industries. Instead, more and more businesses are driven by simultaneous demands for global efficiency, national responsiveness, and worldwide innovation. These are the characteristics of what we call a transnational industry. In such industries, companies need to develop their ability to respond effectively to all the diverse and conflicting forces at one and the same time to manage efficiency, responsiveness, and innovation without trading off any one for the other.

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Chapter 3: Developing Transnational Strategies:

Building Layers of Competitive Advantage

1. Worldwide Competitive Advantage: Goals and Means

1.1 Goals:

-       Global efficiency;

-       Multinational flexibility;

-       Worldwide learning.

1.1.1      Global efficiency:

-       Efficiency improvement is not just cost reduction but also revenue enhancement.

-       Efficiency = value of outputs / value of inputs.

-       Global efficiency is achieved by enhancing value of outputs or lowering cost of inputs.

-       In global context, cost of inputs is lower through global integration while value of outputs increased through local responsiveness.

1.1.2      Multinational flexibility

-       A worldwide company faces an operating environment characterized by diversity and volatility. Some ops and risks generated by this environment are endemic to all firms; others, however, are unique to companies operating across national borders. A key element of worldwide competitiveness, therefore, is multinational flexibility – the ability of a company to manage the risks and exploit the ops that arise from the diversity and volatility of the global environment.

-       There are 04 sources of diversity and volatility:

+ Macroeconomic risks

+ Political risks

+ Competitive risks

+ Resource risks.

-       In general, multinational flexibility requires management to scan its broad environment to detect changes and discontinuities and then respond to the new situation in the context of the worldwide business.

1.1.3      Worldwide learning

-       Capture external diversity

-       Leverage internal variety

-       MNEs need to develop a worldwide learning system: innovative capabilities as the emerging source of competitive advantage.

1.2 Means:

-       National differences.

-       Scale economies.

-       Scope economies.

1.2.1      National differences

-       Different nations have different factor endowments. This leads to intercountry differences in factor costs.

-       National differences may also exist in output markets where customer tastes and preferences vary from country to country. A firm can obtain higher prices for its output by tailoring its offerings to fit the unique requirements in each national market.

1.2.2      Scale economies

-       This helps reduce costs.

-       The higher volumn that helps a firm exploit scale benefits also allows it to accumulate learning, which leads to progressive cost reduction as the firm moves down its learning curve.

1.2.3      Scope economies

-       The concept of scope economies is based on the notion that certain economies arise from the fact that the cost of the joint production of 02 or more products can be less than the cost of producing them seperately.

-       The strategic importance of scope economies arises from a diversified firm’s ability to share investments and costs across the same or different value chains.

2. International, Multinational, Global and Transnational Strategies

2.1  International strategy

-       Companies with this strategy treat overseas units as offshoots of domestic strategy.

-       They focus on creating and exploiting innovations on a worldwide basis, using all the different means to achieve this end.

-       This approach is popular in the US.

2.2  Multinational strategy

-       Companies with this strategy treat the world as a portfolio of national opportunities.

-       They focus primarily on one means (national differences) to achieve most of its strategic objectives.

-       This approach is popular in Europe.

2.3  Global strategy

-       Companies with this strategy treat the world as a single integrated strategic unit.

-       They use all the different means to achieve the best cost and quality positions for their products.

-       This approach is popular in Japan.

2.4  Transnational strategy

-       The transnational company must develop a very different configuration of assets and capabilities than is typical of traditional multinational, international, and global company structures.

-       They develop global efficiency, multinational flexibility and worldwide learning capability simultaneously.

3. Worldwide Competitive Advantage: The Strategic Tasks

3.1  Defending worldwide dominance:

-       For many MNEs, the initial response to this new strategic challenge was to try to restructure the configuration of their assets and activities to develop the capabilities they lacked.

-       Then, most successful adaptors looked for ways to compensate for their deficiency or approximate a competitor’s source of advantage, rather than trying to imitate its asset structure or task configuration.

3.2  Challenging the global leader:

-       Firms with a low-profile foothold focused on developing strong competence in a narrow niche.

-       Next, they expanded their toehold to a foothold by limited and carefully selected expansion along both product and geographic dimensions and by extending the step-by-step improvement of both cost and quality to this expanded portfolio.

-       Once building blocks for worldwide advantage were in place, the challenger typically moved rapidly to convert its low-profile foothold into a strong permanent position in the worldwide business.

3.3  Protecting domestic niches:

-       The first approach is to defend against the competitor’s global advantage by influencing consumer preference to demand a more locally adapted or service-intensive product; it could imply tying up key distribution channels; or it might mean preempting local sources of critical supplies.

-       A second strategic option would be to offset the competitor’s global advantage by lobbying for government assistance in terms of tariff protections.

-       The third alternative is to approximate the competitors’ global advantages by linking up in some form of alliance or coalition with a viable global company.

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Chapter 4: Developing a Transnational Organization:

Managing Integration, Rsponsiveness, and Flexibility

1. Administrative Heritage

1.1  Decentralized federation:

-       Global efficiency;

-       Multinational flexibility;

-       Worldwide learning.

1.1.1      Global efficiency:

-       Efficiency improvement is not just cost reduction but also revenue enhancement.

-       Efficiency = value of outputs / value of inputs.

-       Global efficiency is achieved by enhancing value of outputs or lowering cost of inputs.

-       In global context, cost of inputs is lower through global integration while value of outputs increased through local responsiveness.

1.1.2      Multinational flexibility

-       A worldwide company faces an operating environment characterized by diversity and volatility. Some ops and risks generated by this environment are endemic to all firms; others, however, are unique to companies operating across national borders. A key element of worldwide competitiveness, therefore, is multinational flexibility – the ability of a company to manage the risks and exploit the ops that arise from the diversity and volatility of the global environment.

-       There are 04 sources of diversity and volatility:

+ Macroeconomic risks

+ Political risks

+ Competitive risks

+ Resource risks.

-       In general, multinational flexibility requires management to scan its broad environment to detect changes and discontinuities and then respond to the new situation in the context of the worldwide business.

1.1.3      Worldwide learning

-       Capture external diversity

-       Leverage internal variety

-       MNEs need to develop a worldwide learning system: innovative capabilities as the emerging source of competitive advantage.

1.2 Means:

-       National differences.

-       Scale economies.

-       Scope economies.

1.2.1      National differences

-       Different nations have different factor endowments. This leads to intercountry differences in factor costs.

-       National differences may also exist in output markets where customer tastes and preferences vary from country to country. A firm can obtain higher prices for its output by tailoring its offerings to fit the unique requirements in each national market.

1.2.2      Scale economies

-       This helps reduce costs.

-       The higher volumn that helps a firm exploit scale benefits also allows it to accumulate learning, which leads to progressive cost reduction as the firm moves down its learning curve.

1.2.3      Scope economies

-       The concept of scope economies is based on the notion that certain economies arise from the fact that the cost of the joint production of 02 or more products can be less than the cost of producing them seperately.

-       The strategic importance of scope economies arises from a diversified firm’s ability to share investments and costs across the same or different value chains.

2. International, Multinational, Global and Transnational Strategies

2.1  International strategy

-       Companies with this strategy treat overseas units as offshoots of domestic strategy.

-       They focus on creating and exploiting innovations on a worldwide basis, using all the different means to achieve this end.

-       This approach is popular in the US.

2.2  Multinational strategy

-       Companies with this strategy treat the world as a portfolio of national opportunities.

-       They focus primarily on one means (national differences) to achieve most of its strategic objectives.

-       This approach is popular in Europe.

2.3  Global strategy

-       Companies with this strategy treat the world as a single integrated strategic unit.

-       They use all the different means to achieve the best cost and quality positions for their products.

-       This approach is popular in Japan.

2.4  Transnational strategy

-       The transnational company must develop a very different configuration of assets and capabilities than is typical of traditional multinational, international, and global company structures.

-       They develop global efficiency, multinational flexibility and worldwide learning capability simultaneously.

3. Worldwide Competitive Advantage: The Strategic Tasks

3.1  Defending worldwide dominance:

-       For many MNEs, the initial response to this new strategic challenge was to try to restructure the configuration of their assets and activities to develop the capabilities they lacked.

-       Then, most successful adaptors looked for ways to compensate for their deficiency or approximate a competitor’s source of advantage, rather than trying to imitate its asset structure or task configuration.

3.2  Challenging the global leader:

-       Firms with a low-profile foothold focused on developing strong competence in a narrow niche.

-       Next, they expanded their toehold to a foothold by limited and carefully selected expansion along both product and geographic dimensions and by extending the step-by-step improvement of both cost and quality to this expanded portfolio.

-       Once building blocks for worldwide advantage were in place, the challenger typically moved rapidly to convert its low-profile foothold into a strong permanent position in the worldwide business.

3.3  Protecting domestic niches:

-       The first approach is to defend against the competitor’s global advantage by influencing consumer preference to demand a more locally adapted or service-intensive product; it could imply tying up key distribution channels; or it might mean preempting local sources of critical supplies.

-       A second strategic option would be to offset the competitor’s global advantage by lobbying for government assistance in terms of tariff protections.

-       The third alternative is to approximate the competitors’ global advantages by linking up in some form of alliance or coalition with a viable global company.

 

 
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