3
Developing Transnational Strategies
Building Layers of Competitive Advantage
In this chapter, we discuss how the numerous conflicting demands and pressures
described in the first two chapters shape the strategic choices that MNEs must make.
In this complex situation, an MNE determines strategy by balancing the motivations
for its own international expansion with the economic imperatives of its industry
structure and competitive dynamics, the social and cultural forces of the markets it
has entered worldwide, and the political demands of its home- and host-country
governments. To frame this complex analysis, this chapter examines how MNEs
balance strategic means and ends to build the three required capabilities: globalscale efficiency and competitiveness, multinational flexibility and responsiveness, and
worldwide innovation and learning. After defining each of the dominant historic
strategic approaches – what we term classic multinational, international, and global
strategies – we explore the emerging transnational strategic model that most MNEs
must adopt today. Finally, we describe not only how companies can develop this
approach themselves but also how they can defend against transnational
competitors.
The strategies of MNEs at the start of the twenty-first century were shaped by the
turbulent international environment that redefined global competition in the
closing decades of the twentieth century. It was during that turmoil that a number
of different perspectives and prescriptions emerged about how companies could
create strategic advantage in their worldwide businesses.
Consider, for example, three of the most influential articles on global strategy
published during the 1980s – the decade in which many new trends first emerged.1
Each is reasonable and intuitively appealing. What soon becomes clear, however, is
that their prescriptions are very different and often contradictory, a reality that
highlights not only the complexity of the strategic challenge that faced managers in
large, worldwide companies but also the confusion of advice being offered to them.
• Theodore Levitt argued that effective global strategy was not a bag of many tricks
but the successful practice of just one: product standardization. Here the core of a
1
See Theodeore Levitt, “The globalization of markets,” Harvard Business Review, 61:3 (1983), 92–102;
Thomas Hout, Michael E. Porter, and Eileen Rudden, “How global companies win out,” Harvard
Business Review, 60:5 (1982), 98–109; Gary Hamel and C. K. Prahalad, “Do you really have a global
strategy?” Harvard Business Review, 63:4 (1985), 139–49.
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Developing Transnational Strategies
global strategy lay in developing a standardized product to be produced and sold
the same way throughout the world.
• In contrast, an article by Michael Porter and his colleagues suggested that
effective global strategy required the approach not of a hedgehog, who knows
only one trick, but that of a fox, who knows many. These “tricks” include
exploiting economies of scale through global volume, taking preemptive
positions through quick and large investments, and managing interdependently
to achieve synergies across different activities.
• Gary Hamel and C. K. Prahalad’s prescription for a global strategy contradicted
Levitt’s even more sharply. Instead of a single standardized product, they
recommended a broad product portfolio, with many product varieties, so that
investments in technologies and distribution channels could be shared. Crosssubsidization across products and markets, and the development of a strong
worldwide distribution system were at the center of these authors’ view of how
to succeed in the game of global chess.
As we described in the preceding chapter, what was becoming increasingly clear
during the next two decades was that to achieve sustainable competitive advantage,
MNEs needed to develop layers of competitive advantage – global-scale efficiency,
multinational flexibility, and the ability to develop innovations and leverage
knowledge on a worldwide basis. And although each of the different prescriptions
focuses on one or another of these different strategic objectives, the challenge for
most companies today is to achieve all of them simultaneously.
Worldwide Competitive Advantage: Goals and Means
Competitive advantage is developed by taking strategic actions that optimize a
company’s achievement of these three different and, at times, conflicting goals.
In developing each of these capabilities, the MNE can utilize three very different
tools and approaches, which we described briefly in Chapter 1 as the main forces
motivating companies to internationalize. It can leverage the scale economies that
are potentially available in its different worldwide activities, it can exploit the
differences in sourcing and market opportunities among the many countries in
which it operates, and it can capitalize on the diversity of its activities and
operations to create synergies or develop economies of scope.
The MNE’s strategic challenge therefore is to exploit all three sources of global
competitive advantage – scale economies, national differences, and scope economies – to optimize global efficiencies, multinational flexibility, and worldwide
learning. And thus the key to worldwide competitive advantage lies in managing
the interactions between the different goals and the different means.
The Goals: Efficiency, Flexibility, and Learning
Let us now consider each of these strategic goals in a little more detail.
Worldwide Competitive Advantage: Goals and Means
153
Global Efficiency
Viewing an MNE as an input–output system, we can think of its overall efficiency as
the ratio of the value of its outputs to the value of its inputs. In this simplified view
of the firm, its efficiency could be enhanced by increasing the value of outputs (i.e.,
securing higher revenues), lowering the value of its inputs (i.e., lowering costs), or
doing both. This is a simple point but one that is often overlooked: efficiency
improvement is not just cost reduction but also revenue enhancement.
To help understand the concept of global efficiency, we use the global
integration–national responsiveness framework first developed by C. K. Prahalad
(see Figure 3.1).2 The vertical axis represents the potential benefits from the global
integration of activities – benefits that largely translate into lower costs through
scale and scope economies. The horizontal axis represents the benefits of national
responsiveness – those that result from the country-by-country differentiation of
product, strategies, and activities. These benefits essentially translate into better
revenues from more effective differentiation in response to national differences in
tastes, industry structures, distribution systems, and government regulations.
The framework can be used to understand differences in the benefits of integration and responsiveness at the aggregate level of industries, as well as to identify
and describe differences in the strategic approaches of companies competing in the
same industry. Also, as Figure 3.1 indicates, industry characteristics alone do not
determine company strategies. In automobiles, for example, Fiat historically pursued a classical multinational strategy, helping establish national auto industries
through its joint venture partnerships and host government support in Spain,
Poland, and many other countries with state-sponsored auto industries. Toyota,
by contrast, succeeded originally by developing products and manufacturing them
in centralized, globally scaled facilities in Japan. A “regional” strategy becomes
feasible when geographic regions or groups of countries are sufficiently large and
internally homogeneous markets but differ substantially from other regions or
groups. Honda has implemented such an approach by dividing its organization into
six autonomous geographical regions – North America, Japan, Europe, China, Asia,
and the Middle East. In addition to manufacturing and marketing global models
such as the Civic and the Accord, each region manages the full value chain for
specific regional models such as the Pilot in North America and the Brio series in
Asia. This sort of strategic choice to focus on the objective of global efficiency
(rather than local responsiveness) creates vulnerabilities and challenges as well as
clear benefits.
Multinational Flexibility
A worldwide company faces an operating environment characterized by diversity
and volatility. Some opportunities and risks generated by this environment are
2
For a detailed exposition of this framework, see C. K. Prahalad and Yves Doz, The Multinational
Mission (New York: The Free Press, 1987).
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Developing Transnational Strategies
Figure 3.1 The integration–responsiveness framework
Christopher A. Bartlett and Sumantra Ghoshal, Managing Across Borders: The Transnational Solution
(Boston: Harvard Business School Press, 1989).
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 opportunities that arise from the diversity and volatility of the global
environment.3
Although there are many sources of diversity and volatility, it is worth highlighting four that we regard as particularly important. First, there are macroeconomic
risks that are completely outside the control of the MNE, such as changes in prices,
factor costs, or exchange rates caused by wars, natural calamities, or economic
cycles. Second, there are political risks that arise from policy actions of national
governments, such as managed changes in exchange rates or interest rate adjustments, or events that are related to political instability. Third, there are competitive
risks arising from the uncertainties of competitors’ responses to the MNE’s own
strategies. And fourth, there are resource risks, such as the availability of raw
materials, capital, or managerial talent. In all four categories, the common characteristic of the various types of risks is that they vary across countries and change
over time. This variance makes flexibility the key strategic management requirement, because diversity and volatility create attendant opportunities that must be
considered jointly.
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. MNEs following this approach
exploit their exposure to diverse and dynamic environments to develop strategies –
and structures – in more general and more flexible terms so as to be robust to
different international environmental scenarios. For example, having a network of
affiliated subsidiaries that emphasize global exports rather than individual local
3
This issue of multinational flexibility is discussed more fully in Bruce Kogut, “Designing
global strategies: profiting from operating flexibility,” Sloan Management Review, Fall (1985),
27–38.
Worldwide Competitive Advantage: Goals and Means
155
markets provides a flexibility to shift production when a particular national market
faces an economic crisis.4
Worldwide Learning
Most existing theories of the MNE view it as an instrument to extract additional
revenues from internalized capabilities. The assumption is that the firm goes abroad
to make more profits by exploiting its technology, brand name, or management
capabilities in different countries around the world. And most traditional theory
assumes that the key competencies reside at the MNE’s center.
Although the search for additional profits or the desire to protect existing
revenues may explain why MNEs come to exist, it does not provide a complete
explanation of why some of them continue to grow and flourish. As we suggested in
Chapter 1, an alternative view may well be that a key asset of the multinational
is the diversity of environments in which it operates. This diversity exposes the
MNE to multiple stimuli, allows it to develop diverse capabilities, and provides it
with broader learning opportunities than are available to a purely domestic firm.
Furthermore, its initial stock of knowledge provides the MNE with strength that
allows it to create organizational diversity in the first place. In Chapter 5, we engage
in a detailed discussion of the approaches that MNEs use to deliver on the objective
of worldwide learning.
The Means: National Differences, Scale, and Scope Economies
There are three fundamental tools for building worldwide competitive advantage:
exploiting differences in sourcing and market potential across countries, exploiting
economies of scope, and exploiting economies of scale. In this section, we explore
each of them in more depth.
National Differences
In the absence of efficient markets, the fact that different nations have different
factor endowments (e.g., an abundance of labor, land, materials) leads to intercountry differences in factor costs. Because different activities of the firm, such as
R&D, production, or marketing, use various factors to different degrees, a firm can
gain cost advantages by configuring its value chain so that each activity is located
in the country that has the least cost for its most intensively used factor. For
example, R&D facilities may be placed in the UK because of the available supply
of high-quality, yet relatively modestly paid, scientists; manufacturing of laborintensive components may be undertaken in Malaysia to capitalize on the lower
cost, efficient labor force; and software development could concentrate in India,
4
Additional examples of multinational flexibility are discussed in Tony Tong and Jeffrey Reuer, “Real
options in multinational corporations: organizational challenges and risk implications,” Journal of
International Business Studies, 38:2 (2007), 215–30.
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Developing Transnational Strategies
where skilled software engineers are paid a fraction of Western salaries. Initially,
General Electric’s “global product concept” was set up to concentrate manufacturing
wherever it could be implemented in the most cost-effective way (while still
retaining quality). Over time, however, changes in cost structures, the threat of
imitators, and the pursuit of control over the supply chain eventually led the
company to move back some of the manufacturing sites to the United States.5 This
highlights the fact that global situations are rarely stable over long periods of time,
and that MNE strategy must above all be flexible and responsive to changing
differences in home- and host-country environments.
Market potential varies across countries
In the October 2016 World Economic Outlook (WEO) by the International Monetary
Fund (IMF), growth in emerging market and developing economies was expected to
account for more than three-quarters of projected world growth. In January 2017,
the IMF released an updated WEO, which projected emerging market and developing
economies growth at 4.5% in 2017. PwC predicts that the E7 economies (China,
India, Indonesia, Russia, Brazil, Turkey, and Mexico) could be double the size of the
G7 by 2050 in terms of purchasing power parity.6
National differences may also exist in output markets. As we have discussed,
distribution systems, government regulations, the effectiveness of different promotion strategies, and customer tastes and preferences may vary in different countries.
In order to exploit national differences, companies may need to reshuffle their
business models. For example, the growing middle classes in emerging markets will
have different needs and priorities than those that most of the current business
models address.7 They may still have very basic unmet needs (e.g., refrigeration and
clothes washing) that require a different value proposition versus the business model
existing in advanced markets. Much more of the average household income in
emerging markets is spent on food and transportation whereas this figure in the
United States is 25%. For companies operating in emerging economies, addressing
such needs is not a matter of transferring their existing business models and
adjusting them with small tweaks. Instead, MNEs will sometimes need to rethink
their business models, so as to solve problems such as accessibility and affordability.
To illustrate, consider whether consumer needs in emerging economies are basically
local or global. Fashion products and personal banking are examples of global
needs, while economy cars and basic and affordable home appliances are exemplars
of local needs in these markets. Depending on each of the four categories of the
needs and consumer combinations shown in Figure 3.2, companies can develop
strategies to better serve middle-class consumers there.
5
6
7
Jeffrey R. Immelt, “The CEO of General Electric on sparking an American manufacturing renewal,”
Harvard Business Review, 90 (2012), 43–6.
John Hawksworth, Hannah Audino, Rob Clarry, and Duncan McKellar, “The long view: how will the
global economic order change by 2050?” in The World in 2050 (PwC, 2017), p. 54.
David Court and Laxman Narasimhan, “Capturing the world’s emerging middle class,” McKinsey
Quarterly, 3 (2010), 12–17.
Worldwide Competitive Advantage: Goals and Means
157
Middle-class consumers’ needs
Middle-class
consumers’
ability to buy
High
Low
Local
Global
Shape or localize
Create a platform
Reinvent
business model
Target niche
Figure 3.2 Category-specific strategies to help companies serve middle-class consumers in
emerging economies
Source: Condensed from David Court and Laxman Narasimhan, “Capturing the world’s emerging
middle class,” McKinsey Quarterly, 3 (2010), 12–17.
As we will also see in many case examples, a firm can obtain higher prices for its
output by tailoring its offerings to fit the unique requirements in each national
market.
Scale Economies
Microeconomic theory provides a strong basis for evaluating the effect of scale on
cost reduction, and the use of scale as a competitive tool is common in industries
ranging from roller bearings to semiconductors. Whereas scale, by itself, is a static
concept, there may be dynamic benefits of scale through what has been variously
described as the experience or learning effect. The higher volume that helps a firm to
exploit scale benefits also allows it to accumulate learning,8 which leads to progressive cost reduction as the firm moves down its learning curve. So although
emerging Korean electronics firms were able to match the scale of experienced
Japanese competitors, it took them many years before they could finally compensate for the innumerable process-related efficiencies the Japanese had learned after
decades of operating their global-scale plants.
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 (or development or distribution) of
two or more products can be less than the cost of producing them separately.9 Such
cost reductions may take place for many reasons – for example, resources such as
information or technologies, once acquired for use in producing one item (television
sets, for example), are available without cost for production of other items (video
players, for instance).
8
9
For an understanding that accumulation of learning may differ across different firms, see Jaeyong
Song, “Subsidiary absorptive capacity and knowledge transfer within multinational corporations,”
Journal of International Business Studies, 45:1 (2014), 73–84.
For a detailed exposition of scope economies, see David J. Teece, “Economies of scope and the scope
of the enterprise,” Journal of Economic Behavior and Organization, 1:3 (1980), 223–47.
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Developing Transnational Strategies
Table 3.1 Scope economies in product and market diversification
Sources of scope economics
Shared physical
assets
Shared external
relations
Shared learning
Product diversification
Market diversification
Factory automation with flexibility to
produce multiple products (Ford)
Using common distribution channels for
multiple products (Samsung)
Shared R&D in computer and
communications business (NEC)
Global brand name (Apple)
Servicing multinational customers
worldwide (Citibank)
Pooling knowledge developed in
different markets (P&G)
Source: Adapted from Prahalad (1987).
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 –
a source of economies that competitors without such internal and external diversity
cannot match. Such sharing can take place across segments, products, or markets
and may involve the joint use of different kinds of assets (see Table 3.1).
Implicit with each of these tools is the ability to develop an organizational
infrastructure that supports it. As we discuss in later chapters, the organizational
ability to leverage a global network and value chain will differentiate the winners
and losers.
Mapping Ends and Means: Building Blocks for Worldwide
Advantage
Table 3.2 shows a mapping of the different goals and means for achieving worldwide competitiveness. Each goals–means intersection suggests some of the factors
that may enhance a company’s strategic position. Although the factors are only
illustrative, it may be useful to study them carefully and compare them against the
proposals of the three academic articles mentioned at the beginning of the chapter.
It will become apparent that each author focuses on a specific subset of factors –
essentially, some different goals–means combinations – and the differences among
their prescriptions can be understood in terms of the differences in the particular
aspect of worldwide competitive advantage on which they focus.
International, Multinational, Global, and Transnational
Strategies
In Chapter 2, we described how environmental forces in different industries shaped
alternative approaches to managing worldwide operations that we described as
international, multinational, global, and transnational. We now elaborate on the
International, Multinational, Global, and Transnational Strategies
159
Table 3.2 Worldwide advantage: goals and means
Sources of competitive advantage
Strategic objectives
National differences
Scale economies
Scope economies
Achieving
efficiency in
current
operations
Managing risks
through
multinational
flexibility
Benefiting from differences
in factor costs – wages
and cost of capital
Expanding and
exploiting potential
scale economies in
each activity
Balancing scale with
strategic and
operational
flexibility
Sharing of investments
and costs across
markets and
businesses
Portfolio diversification
of risks and creation
of options and side
bets
Benefiting from
experience – cost
reduction and
innovation
Shared learning across
organizational
components in
different products,
markets, or businesses
Innovation,
learning, and
adaptation
Managing different kinds
of risks arising from
market- or policyinduced changes in
comparative advantages
of different countries
Learning from societal
differences in
organizational and
managerial processes
and systems
distinctions among these different approaches, as well as their respective strengths
and vulnerabilities in terms of the different goals–means combinations we have just
described.
International Strategy
Companies adopting this broad approach focus on creating and exploiting innovations on a worldwide basis, using all the different means to achieve this end. MNEs
headquartered in technologically advanced countries with sophisticated markets
often adopted this strategic approach but limited it primarily to exploiting homecountry innovations to develop their competitive positions abroad. The international
product cycle theory we described in Chapter 1 encompasses both the strategic
motivation and competitive posture of these companies: at least initially, their
internationalization process relied heavily on transferring new products, processes,
or strategies developed in the home country to less advanced overseas markets.
This approach was common among US-based MNEs such as Kraft, Pfizer, P&G,
and General Electric. Although these companies built considerable strength out of
their ability to create and leverage innovation, many suffered from deficiencies of
both efficiency and flexibility because they did not develop either the centralized
and high-scale operations of companies adopting global strategies or the very high
degree of local responsiveness that multinational companies could muster through
their autonomous, self-sufficient, and entrepreneurial local operations. This deficiency has led some of the companies in this category to change. Kraft, for example,
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Developing Transnational Strategies
in an effort to leverage its iconic North American brands in the global snack
business, created a new subsidiary Mondelez International Inc. – hence its efficiency
stand. At the same time, its North America-focused grocery business aims to have
flexibility and local responsiveness in this line of business.
Johnnie Walkers in turn, pursued both a global and local (glocal) advertising strategy
with their “Keep Walking” campaign. The elements of the campaign were slightly
modified depending on the culture and market it appeared in; however, the underlying
message was retained. They have more than doubled their global business in ten years
and have changed the Johnnie Walker and Scotch whisky business globally.10
Multinational Strategy
The multinational strategic approach focuses primarily on one means (national
differences) to achieve most of its strategic objectives. Companies adopting this
approach tend to focus on the revenue side, usually by differentiating their products
and services in response to national differences in customer preferences, industry
characteristics, and government regulations. This approach leads most multinational companies to depend on local-for-local innovations, a process requiring
the subsidiary to not only identify local needs but also use its own local resources to
respond to those needs. Carrying out most activities within each country on a localfor-local basis also allows those adopting a multinational strategy to match costs
and revenues on a currency-by-currency basis.
Historically, many European companies, such as Unilever, ICI, Philips, and Nestlé,
followed this strategic model. In these companies, assets and resources historically
were widely dispersed, allowing overseas subsidiaries to carry out a wide range of
activities from development and production to sales and services. Their selfsufficiency was typically accompanied by considerable local autonomy. But, although
such independent national units were unusually flexible and responsive to their local
environments, they inevitably suffered problems of inefficiencies and an inability to
exploit the knowledge and competencies of other national units. These inefficiencies
have led some of these companies to change. The CEO of Unilever, for example, in its
2011 annual report expressed that: “We are changing the organization. Today we are
more agile, more consumer responsive and better able to leverage global scale.” Yet
by 2017, the same CEO said, “it has seen the world become more ‘multipolar’ with
local tastes and nationalism playing a bigger role in consumers’ lives.”
Global Strategy
Companies adopting the classic global strategic approach, as we have defined it,
depend primarily on developing global efficiency. They use all the different means
to achieve the best cost and quality positions for their products.
10
Jerry Wind, Stan Sthanunathan, and Rob Malcolm, “Great advertising is both local and global,”
Harvard Business Review, March 29 (2013). Accessed March 13, 2017, https://hbr.org/2013/03/
great-advertising-is-both-loca.
International, Multinational, Global, and Transnational Strategies
161
This means has been the classic approach of many Japanese companies such as
Toyota, Canon, Komatsu, and Matsushita (Panasonic). As these and other similar
companies have found, however, such efficiency comes with some compromises of
both flexibility and learning. For example, concentrating manufacturing to capture
global scale may also result in a high level of intercountry product shipments that
can raise risks of policy intervention, particularly by host governments in major
importer countries. Similarly, companies that centralize R&D for efficiency reasons
often find they are constrained in their ability to capture new developments in
countries outside their home markets or to leverage innovations created by foreign
subsidiaries in the rest of their worldwide operations. And, finally, the concentration
(most often through centralization) of activities such as R&D and manufacturing to
achieve a global scale exposes such companies to high sourcing risks, particularly in
exchange rate exposure. As an example, the 2011 earthquake in Japan was so
harmful to Canon that it announced it was pursuing a new regional headquarters
management system (one headquarters each in the United States, Europe, and
Japan) to manage its local product developments. Each has the authority to roll
out businesses globally.
The descriptions we have presented to this point regarding multinational versus
global strategies have been mostly described in their pure forms. In practice, of
course, many firms do adopt a regional strategy, focusing much of their international expansion on the home region, plus perhaps one or two other regions. Ford
Motor Company, for example, operates two manufacturing plants in India and has
invested over $2 billion since 1995. The Ford Next-Gen Figo, Aspire, and EcoSport
models are exported to over 40 markets.
Transnational Strategy
Beneath each of these three traditional strategic approaches lies some implicit
assumptions about how best to build worldwide competitive advantage. The global
company assumes that the best cost position is the key source of competitiveness;
the multinational company sees differentiation as the primary way to enhance
performance; and the international company expects to use innovations to reduce
costs, enhance revenues, or both. Companies adopting the transnational strategy
recognize that each of these traditional approaches is partial, that each has its own
merits, but none represents the whole truth.
To achieve worldwide competitive advantage, costs and revenues have to be
managed simultaneously, both efficiency and innovation are important, and innovations can arise in many different parts of the organization. Therefore instead of
focusing on any subpart of the set of issues shown in Table 3.2, the transnational
company focuses on exploiting each and every goals–means combination to
develop layers of competitive advantage by exploiting efficiency, flexibility, and
learning simultaneously.
To achieve this ambitious strategic approach, however, the transnational company
must develop a very different configuration of assets and capabilities than is typical
of traditional multinational, international, and global company structures. The
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Developing Transnational Strategies
global company tends to concentrate all its resources – either in its home country or
in low-cost overseas locations – to exploit the scale economies available in each
activity. The multinational company typically disperses its resources among its
different national operations to be able to respond to local needs. And the international company tends to centralize those resources that are key to developing
innovations but decentralize others to allow its innovations to be adapted worldwide.
The transnational, however, must develop a more sophisticated and differentiated
configuration of assets and capabilities. It first decides which key resources and
capabilities are best centralized within the home-country operation, not only to
realize scale economies but also to protect certain core competencies and provide
the necessary supervision of corporate management. Basic research, for example, is
often viewed as such a capability, with core technologies kept at home for reasons of
strategic security as well as competence concentration.
Certain other resources may be concentrated but not necessarily at home – a
configuration that might be termed “ex-centralization” rather than decentralization.
World-scale production plants for labor-intensive products may be built in a lowwage country such as Mexico or Bangladesh. The advanced state of a particular
technology may demand concentration of relevant R&D resources and activities in
Japan, Germany, or the United States. Such flexible specialization – or excentralization – complements the benefits of scale economies with the flexibility
of accessing low input costs or scarce resources and the responsiveness of accommodating national political interests. This approach can also apply to specific
functional activities. For example, McDonald’s moved its international tax base to
Britain. This holding company would receive royalties from licensing deals outside
the United States. Earlier, Amsterdam-based software company Irdeto opened a
second headquarters in Beijing to enhance the influence of its managers in the
fast-growing Chinese market on the company’s decision-making processes. To
underscore the commitment, the CEO and his family moved to China in 2007.
Some other resources may best be decentralized on a regional or local basis
because either potential economies of scale are small or there is a need to create
flexibility by avoiding exclusive dependence on a single facility. Local or regional
facilities may not only afford protection against exchange rate shifts, strikes,
natural disasters, and other disruptions, but also reduce logistical and coordination
costs. An important side benefit provided by such facilities is the impact they can
have in building the motivation and capability of national subsidiaries, an impact
that can easily make small efficiency sacrifices worthwhile.
Table 3.3 summarizes the differences in the asset configurations that support the
different strategic approaches of the various MNE models. We explore these
strategy–organizational linkages in more detail in Chapter 4.
Worldwide Competitive Advantage: The Strategic Tasks
In the final section of this chapter, we look at how a company can respond to the
strategic challenges we have described. The task will clearly be very different
Worldwide Competitive Advantage: The Strategic Tasks
163
Table 3.3 Strategic orientation and configuration of assets and capabilities in international,
multinational, global, and transnational companies
Strategic
orientation
Configuration
of assets
and
capabilities
International
Multinational
Global
Transnational
Exploiting parentcompany
knowledge and
capabilities
through worldwide
diffusion and
adaptation
Sources of core
competencies
centralized, others
decentralized
Building flexibility to
respond to national
differences through
strong, resourceful,
and entrepreneurial
national operations
Building cost
advantages
through
centralized,
global-scale
operations
Decentralized and
nationally selfsufficient
Centralized
and globally
scaled
Developing global
efficiency,
flexibility, and
worldwide
learning
capability
simultaneously
Dispersed,
interdependent,
and specialized
depending on the company’s international posture and history. Companies that are
among the major worldwide players in their businesses must focus on defending
their dominance while also building new sources of advantage. For companies that
are smaller, but aspire to worldwide competitiveness, the task is one of building the
resources and capabilities needed to challenge the entrenched leaders. And for
companies that are focused on their national markets and lack either the resources
or the motivation for international expansion, the challenge is to protect their
domestic positions from others that have the advantage of being MNEs.
Defending Worldwide Dominance
In recent decades, the shifting external forces we have described have resulted in
severe difficulties – even for those MNEs that had enjoyed strong historical positions
in their businesses worldwide.
Typically, most of these companies pursued traditional multinational, international, or global strategies, and their past successes were built on the fit between
their specific strategic capability and the dominant environmental force in their
industries. In multinational industries such as branded packaged products, in which
forces for national responsiveness were dominant, companies such as Unilever
developed strong worldwide positions by adopting multinational strategies. In
contrast, in global industries such as consumer electronics or semiconductor chips,
companies such as Panasonic or Hitachi built leadership positions by adopting
global strategies.
In the emerging competitive environment, however, these companies could no
longer rely on their historic ability to exploit global efficiency, multinational
flexibility, or worldwide learning. As an increasing number of industries developed
what we have termed transnational characteristics, companies faced the need to
master all three strategic capabilities simultaneously.
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Developing Transnational Strategies
The challenge for the leading companies was to protect and enhance the particular strength they had while simultaneously building the other capabilities.
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. For example, global companies with highly centralized resources
sought to develop flexibility by dispersing resources among their national subsidiaries; multinational companies, in contrast, tried to emulate their global competitors by centralizing R&D, manufacturing, and other scale-intensive activities. In
essence, these companies tried to find a new “fit” configuration through drastic
restructuring of their existing configuration.
Such a zero-based search for the ideal configuration not only led to external
problems, such as conflict with host governments over issues like plant closures, but
also resulted in trauma inside the company’s own organization. The greatest problem with such an approach, however, was that it tended to erode the particular
competency the company already had without effectively adding the new strengths
it sought.11
The complex balancing act of protecting existing advantages while building new
ones required companies to follow two fairly simple principles. First, they had to
concentrate at least as much on defending and reinforcing their existing assets and
capabilities as on developing new ones. Their approach tended to be one of building
on – and eventually modifying – their existing infrastructure instead of radical
restructuring. To the extent possible, they relied on modernizing existing facilities
rather than dismantling the old and creating new ones.
Second, 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. In searching for efficiency, multinational companies with a decentralized and dispersed resource structure found it
easier to develop efficiency by adopting new flexible manufacturing technologies in
some of their existing plants and upgrading others to become global or regional
sources, rather than to close those plants and shift production to lower cost
countries to match the structure of competitive global companies.
Similarly, successful global companies found it more effective to develop responsiveness and flexibility by creating internal linkages between their national sales
subsidiaries and their centralized development or manufacturing units, rather than
trying to mimic multinational companies by dispersing their resources to each
country operation and, in the process, undermining their core strength of efficiency.
Challenging the Global Leader
A number of companies have managed to evolve from relatively small national
players to major worldwide competitors, challenging the dominance of traditional
11
For a discussion about the dynamic capabilities perspective, see John Cantwell, “Revisiting
international business theory: a capabilities-based theory of the MNE,” Journal of International
Business Studies, 45:1 (2014), 1–7.
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leaders in their businesses. Dell in the computer industry, Magna in auto parts,
Electrolux in the domestic appliances business, and CEMEX in the cement industry
are examples of companies that have evolved from relative obscurity to global
visibility within relatively short periods of time.
The actual processes adopted to manage such dramatic transformations vary
widely from company to company. Electrolux, for example, grew almost exclusively
through acquisitions, whereas Dell built capabilities largely through internal
development, and Magna and CEMEX used a mix of greenfield investments and
acquisitions. Similarly, whereas Dell built its growth on the basis of cost advantages
and logistics capabilities, it expanded internationally because of its direct sales
business model and its ability to react quickly to changes in customer demand.
Despite wide differences in their specific approaches, however, most of these new
champions appear to have followed a similar step-by-step approach to building
their competitive positions.
Each developed an initial toehold in the market by focusing on a narrow niche –
often one specific product within one specific market – and developing a strong
competitive position within that niche. That competitive position was built on
multiple sources of competitive advantage rather than on a single strategic capability.
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. Such
expansion was sometimes focused on products and markets that were not of central
importance to the established leaders in the business. By staying outside the range
of the leaders’ peripheral vision, the challenger could remain relatively invisible,
thereby building up its strength and infrastructure without incurring direct retaliation from competitors with far greater resources. For example, emerging companies
often focused initially on relatively low-margin products such as small-screen TV
sets or subcompact cars.
While developing their own product portfolio, technological capabilities,
geographic scope, and marketing expertise, challengers were often able to build
up manufacturing volume and its resulting cost efficiencies by becoming original
equipment manufacturer suppliers to their larger competitors. Although this supply
allowed the larger competitor to benefit from the challenger’s cost advantages, it
also developed the supplying company’s understanding of customer needs and
marketing strategies in the advanced markets served by the leading companies.
Once these 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. Dramatic scaling up of production facilities
typically preceded a wave of new product introductions and expansion into the key
markets through multiple channels and their own brand names.
Another way a challenger may pursue rapid transition into a strong international
presence is through acquisitions, as Shuanghui International did in 2013 with the
acquisition of Smithfield Foods or as Qingdao Haier Company did in 2016 with the
acquisition of General Electric’s appliance business. These deals were valued at
$7.1 billion and $5.4 billion respectively.
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Protecting Domestic Niches
For reasons of limited resources or other constraints, some national companies may
not be able to aspire to such worldwide expansion, although they are not insulated
from the impact of global competition. Their major challenge is to protect their
domestic niches from worldwide players with superior resources and multiple
sources of competitive advantage.12 This concern is particularly an issue in developing markets such as India and China, where local companies face much larger, more
aggressive, and deeper pocketed competitors.
There are three broad alternative courses of action that can be pursued by such
national competitors. The first approach is to defend against the competitor’s global
advantage. Just as MNE managers can act to facilitate the globalization of industry
structure, so their counterparts in national companies can use their influence in the
opposite direction. An astute manager of a national company might be able to foil
the attempts of a global competitor by taking action to influence industry structure
or market conditions to the national company’s advantage. These actions might
involve 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. Many companies trying to
enter the Japanese market claim to have faced this type of defensive strategy by
local firms.
A second strategic option would be to offset the competitor’s global advantage.
The simplest way to do this is to lobby for government assistance in the form of
tariff protections. However, in an era of declining tariffs, this is increasingly
unsuccessful. A more ambitious approach is to gain government sponsorship to
develop equivalent global capabilities through funding of R&D, subsidizing exports,
and financing capital investments. As a “national champion,” the company would
theoretically be able to compete globally. However, in reality, it is very unusual for
such a company to prosper. Airbus Industrie, which now shares the global market
for large commercial airplanes with Boeing, is one of the few exceptions – rising
from the ashes of other attempts by European governments to sponsor a viable
computer company in the 1970s and then to promote a European electronics
industry a decade later. Also, General Electric’s lobbying activities in 2009 led to
its inclusion in the bailout program of the US government.
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.
Numerous such linkages have been formed with the purpose of sharing the risks and
costs of operating in a high-risk global environment. By pooling or exchanging
market access, technology, and production capability, smaller competitors can gain
some measure of defense against global giants. For example, in March 2017, a
memorandum of understanding was signed between Volkswagen and India’s Tata
Motors. This agreement will allow them to explore a partnership of developing auto
components and vehicles for the Indian market and more. Both companies have
12
For a detailed discussion, see Niraj Dawar and Tony Frost, “Competing with giants: survival strategies for
local companies competing in emerging markets,” Harvard Business Review, 77:2 (1999), 119–30.
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fallen behind in the Indian market against competitors such as Hyundai and Maruti
Suzuki. Similarly, the Indian telecom company Bharti has established a variety of
inbound alliances with foreign firms to create a winning strategy for the Indian
market and is now one of the top telecom companies in the world.
CONCLUDING COMMENTS
Although these three strategic responses obviously do not cover every possible
scenario, they highlight two important points from this chapter. First, the MNE
faces a complex set of options in terms of the strategic levers it can pull to achieve
competitive advantage, and the framework in Table 3.2 helps make sense of those
options by separating out means and ends. Second, the competitive intensity in
most industries is such that a company cannot solely afford to do something
different from what other companies do. Rather, it is necessary to gain competitive
parity on all relevant dimensions (efficiency, flexibility, learning) while also achieving differentiation on one. To be sure, the ability to achieve multiple competitive
objectives at the same time is far from straightforward and, as a result, we see many
MNEs experimenting with new ways of organizing their worldwide activities. And
this organization will be the core issue we will address in the next chapter.