European Management Journal (2008) 26, 305– 313
journal homepage: www.elsevier.com/locate/emj
A regional solution to the strategy and structure
of multinationals
Alan M. Rugman a,*, Alain Verbeke b
a
L. Leslie Waters Chair in International Business, Kelley School of Business, Indiana University, 1309 E. Tenth Street,
Bloomington, IN 47401 1701, USA
b
McCaig Research Chair in Management at the Haskayne School of Business, University of Calgary,
2500 University Drive, NW Calgary, Alberta, T2N IN4, Canada
KEYWORDS
Integration;
Internalization;
National responsiveness;
Regional strategy;
Upstream;
Downstream;
Transnational solution;
Regional solution
Summary The transnational solution developed by Bartlett and Ghoshal is shown to be
suitable for only a few special cases of multinational enterprise multinational enterprise
(MNE) strategy and structure. As MNEs have most of their assets and sales within their
home region, they are in need of regional, not transnational strategy and structure. Here
we provide data on the regional dimension of assets and sales of the world’s largest 500
multinationals. We explore how the empirical reality of a regional concentration of assets
and sales imposes a regional solution, rather than the transnational solution.
Ó 2008 Elsevier Ltd. All rights reserved.
Introduction
The mainstream literature on globalization and global strategies has consistently prescribed a broader geographic
scope of activities in order to reap the multiple benefits
from operating in international markets. These benefits include higher growth rates than achievable in the domestic
market, higher efficiency and profitability of current operations, improved opportunities for learning, and risk reduction advantages. Bartlett (1986) and Tallman and Yip
(2001) provide such descriptions.
Based on internalization theory thinking, we have suggested in earlier work that multinational enterprises (MNEs)
can use specific combinations of non-location bound firm
* Corresponding author. Tel.: +1 812 855 5415; fax: +1 812 855 9006.
E-mail address: rugman@indiana.edu (A.M. Rugman).
specific advantages (FSAs) and location bound FSAs, as strategies to achieve an optimal resource deployment across
borders, Rugman and Verbeke (1992, 2001a, 2003). Nonlocation bound or internationally transferable FSAs lead to
scale economies, scope economies and benefits of exploiting national differences. In contrast, location bound FSAs,
which have limited exploitation potential across geographic
space, generate benefits of national responsiveness. This
stylized version of reality is able to explain the geographic
expansion of three types of companies: multinational,
international and global, using the terminology adopted
by Bartlett and Ghoshal (1989). Each of these three archetypes operates with a specific combination of non-location
bound and location bound FSA bundles.
First, the multinational firms derive their strengths mainly
from the location bound FSAs embedded in their subsidiaries.
They are very nationally responsive in the various countries
0263-2373/$ - see front matter Ó 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.emj.2008.04.004
306
A.M. Rugman, A. Verbeke
where they operate. An example of this archetype is the
Dutch electronics company Philips. Second, the international
firms build competitive advantage through knowledge transfer across borders, i.e., the transfer of non-location bound
FSAs, and the subsequent production in host country subsidiaries. An example is Procter & Gamble, the US based producer
of consumer goods. Third, the so-called global companies engage in the worldwide export of their goods, and are supported by downstream oriented subsidiaries abroad. Their
non-location bound FSAs are mainly embodied in the final
products themselves. Those products are typically produced
in the home country and then sold across borders. An example
is the Japanese electronics firm Matsushita.
Bartlett and Ghoshal (1989) have advocated the adoption
of the transnational solution, as the optimal combination of
strengths derived from the three original archetypes, valid
especially for MNEs with widely dispersed assets and sales.
The transnational MNE deploys a complex mix of location
bound and non-location bound FSAs, whereby the latter can
also be developed, at least in part, out of host country subsidiaries, building upon their country specific advantages (CSAs),
Rugman and Verbeke (1992, 2001b). Asea Brown Bovery (ABB)
has often been identified as the quintessential transnational
company, (Bartlett and Ghoshal, 1998, pp. 259–272).
Bartlett and Ghoshal have argued that, in order to evolve
toward the transnational solution, managers should pursue
an incremental, path dependent trajectory of change. The
selectivity required to manage the transformation toward
a transnational company has three facets. First, respect
for the firm’s specific administrative heritage, i.e., each
MNE should build upon its existing strengths responsible
for the initial stages of international success. Second,
extensive socialization, meaning substantial attention devoted to the physiology and psychology of the organization,
rather than merely to the MNE’s organizational structure
with its strong focus on hierarchy and internal pricing tools.
Third, selectivity in terms of the roles assigned to national
subsidiaries, given the attractiveness of their location (or
lack thereof), and their contribution (or lack thereof) to
new, non-location bound knowledge development.
In addition to the fact that the above only makes sense for
large firms with widely dispersed assets and sales, the feasibility of implementing the transnational solution builds upon
three conditions that were not made explicit by Bartlett and
Ghoshal (1989). Those conditions suggest that the transnational solution, as developed by these authors, may need to
be adapted in order to be effective in practice. The three
conditions are the following. First, that new transnational
Table 1
Year
2001
2002
2003
2004
strengths can be built to complement existing, more unidimensional FSAs, without much need to focus on the differential requirements for changes in organizational structure,
faced by each of the three MNE archetypes. Second, that
socialization can be achieved throughout the company at a
rather low cost. Third, that the MNE can be simply decomposed into a portfolio of interdependent national units,
each of which can be assigned a specific role in the firm.
Given the above, this paper makes two points. First, we argue that most large MNEs have not been successful in replicating the market performance achieved at home in other
markets, especially distant host regions. This should not
come as a surprise, given that distant regional markets often
require a completely different FSA-CSA configuration than
the one that proved successful in the home market. Second,
we suggest that introducing a regional component in strategy
and structure may go a long way toward addressing the managerial challenges expected for firms with a vastly different
asset base and market position in various regions of the
world. Interestingly, when describing the evolution of ABB
toward a transnational, Bartlett and Ghoshal (1998, p. 260
and 266), mention twice the importance of regional
managers.
Empirical evidence on transnational versus
regional strategy
Rugman and Verbeke (2004) and Rugman (2005) have demonstrated, building upon empirical data of geographic sales
dispersion for 380 of the Fortune 500 global companies, that
only nine of these large firms had a truly global market presence in 2001. A global market presence is defined as having
less than 50% of sales in the home region of the triad, and at
least 20% in each of the three regions of the triad. These
nine firms were IBM, Sony, Royal Philips Electronics, Nokia,
Intel, Canon, Coca-Cola, Flextronics International, and Moët
Hennessy-Louis Vuitton (LVMH). Ohmae (1985) first argued
that three geographic zones in the world, namely the United
States, the European Union (then the European Community), and Japan, constitute the critical locations for MNEs
to build a significant market presence. These three locations, called the core triad, are the source of most innovations worldwide. They are characterized by high purchasing
power and sophisticated demand, and are the home of the
largest MNEs in most industries. A triad power is an MNE
capable of competing effectively in each of these three geographic markets. In contrast to Ohmae (1985), Rugman and
Regional sales of the world’s 500 largest firms, 2001–2004
Home region
Bi-regional
Host region
Global
% of firms
% Intra-regional
sales
% of firms
% intra-regional
sales
% of firms
% Intra-regional
sales
% of firms
% Intra-regional
sales
87
88
86
85
77
77
77
78
9
8
9
11
42
41
42
41
2
3
2
3
24
25
29
29
2
3
3
2
33
31
33
33
Source: Annual reports for 2001–2004.
Number of firms for which data are available: 290, 328, 337 and 313 for 2001, 2002, 2003, and 2004, respectively.
A regional solution to the strategy and structure of multinationals
Verbeke (2004) and Rugman (2005) used a broad triad of
North America, Europe and the Asia Pacific to classify and
analyze data on MNE regional sales dispersion.
Based on a database for 2001, Rugman and Verbeke
(2004) and Rugman (2005) have shown that most large MNEs
have not been able to establish a major market position in
all three regions of this broad triad. Most of the world’s
500 largest companies lack a significant market presence
in at least two legs of the triad. Perhaps even more significantly, at least 320 of the 380 firms, for which data are
available, have a majority of their sales in a single leg of
the triad. In 2001, these 320 firms derived an average of
80.3% of total sales from their home region (either North
America, Europe or the Asia Pacific). These home region
based companies include some of the world’s largest companies, such as Wal-Mart (94.1% of sales in home region),
Mitsubishi (86.8%) and Allianz (78%). In this paper the 2001
data used in Rugman (2005) are updated and new details
of the home region bias of the sales and assets of the
world’s 500 largest firms over 2001–2004 appear in Tables
1 and 2.
Tables 1 and 2 were developed using the same classification as in Rugman and Verbeke (2004) and Rugman (2005).
As noted above, those studies reported data on sales for
the year 2001. Tables 1 and 2 provide an update and extension with data for three later years. Data are now available
on the geographical dispersion of foreign assets (as well as
foreign sales) so these are also added in this paper. These
tables report that the vast majority of firms (between 85%
and 89%) are home region oriented in terms of both sales
and foreign assets. Indeed, their foreign assets average
78–79%, slightly larger than their foreign sales of 77–78%.
Table 2 demonstrates that the geographic coverage of
internalized production activities is just as narrow as is
downstream, sales based geographic coverage. The evidence is that virtually all large MNEs have a strong asset
base and market position in only a single triad region, with
the caveat that the above data do not cover the geographic
dispersion of external sourcing. There are only 1–2% of all
MNEs that can be classified as global in our framework,
and as a result might have some use for the transnational
solution. Instead, virtually all MNEs need a regional solution.
A framework of regional strategy and structure
The above data have five implications. First, most large
MNEs appear incapable of emulating their home region sales
Table 2
Year
2001
2002
2003
2004
307
success in the two other legs of the triad. Second, where
market presence in host regions is much weaker than in
the home region, or insignificant as a percentage of total
company sales, this is likely associated with different managerial attention devoted to the various regions. Host regions will thus not be treated in the same way as the
home region, nor should they be, given their continued limited importance in terms of company sales and overall cash
inflows. Third, if host triad regions are potentially very
important to competitiveness, but difficult to penetrate,
they should systematically receive differential managerial
treatment; such differentiation should include the adaptation of the MNE’s market strategy approach to host region
requirements and the creation of region based components
in the MNE’s coordination and control structure to address
the specific managerial challenges in those regions. Fourth,
if we assume that the two tools above, namely regional market strategy adaptation and a regional component in the
organizational structure, can improve host region market
penetration, then the question arises whether the normative messages contained in the transnational solution are
consistent with this approach. Fifth, the weak sales penetration in host regions appears associated with an equally
limited share of the MNE’s total asset base in those regions.
Such asset base concentration may result from a more discretionary set of choices made by the MNE’s senior management than is the case with the limited sales dispersion
(since the latter ultimately depends on consumer sovereignty), see Rugman and Verbeke (2004). However, the
home region asset base concentration reinforces the validity of a region-by-region approach to MNE strategy and
structure.
Here, three complexities supporting the limited usefulness of the transnational solution should be noted. The first
complexity is that the administrative heritage of most
MNEs, undoubtedly conducive to home region market success, may well constitute an administrative rigidity when
attempting to penetrate host regions. More specifically, an
‘institutionalization’ approach, whereby home region success recipes (i.e., the firm’s administrative heritage) are
replicated in host regions, and complemented incrementally
with additional routines from the other archetypes, as advocated by Bartlett and Ghoshal (1989) may be the wrong path
to achieve host region market success. Perhaps regional
adaptation is the key to stronger success overall, rather
than attempts by each MNE archetype to take on board
the strengths of the two other archetypes. Unfortunately,
Regional assets of the world’s 500 largest firms, 2001–2004
Home region
Bi-regional
Host region
Global
% of firms
% Intra-regional
assets
% of firms
% Intra-regional
assets
% of firms
% Intra-regional
assets
% of firms
% Intra-regional
assets
88
89
88
88
78
79
79
79
8
6
6
9
40
40
39
39
3
3
4
2
31
31
33
28
1
2
2
1
31
34
35
32
Source: Annual reports for 2001–2004.
Number of firms for which data are available: 238, 271, 282 and 268 for 2001, 2002, 2003, and 2004, respectively.
308
A.M. Rugman, A. Verbeke
even Bartlett and Ghoshal’s later published work does not
recognize in conceptual terms this potential of regional
adaptation, although a number of their cases do provide evidence of a substantial regional adaptation component (Bartlett et al., 2003).
A second, and related complexity, is that changes in
regional strategy and structure, addressing requirements
imposed by the regional host environment, including geographic divisions and region based transfer pricing schemes,
may be more conducive to market success in host regions
than attempts to increase socialization within the company.
Socialization again reflects an institutionalization approach,
which may be ill suited to penetrate distant markets in an
effective and timely fashion, Van Den Bulcke and Verbeke
(2001, Chapter 10).
Finally, a third complexity is that the MNE cannot be
simply decomposed into national units, depending upon
the national environment in which they operate and the
knowledge base embedded in each national unit. Here, each
triad market region is, as a region, of critical importance to
most large MNEs because of market size and the potential
competitive benefits derived from being a dominant player
in each of those markets, Rugman and Verbeke (2004) and
Rugman (2005). As regards required knowledge base to be
successful in one or more regions, this includes at least
two components, namely upstream and downstream FSAs.
Downstream or customer end FSAs refer to knowledge
strengths deployed in activities with a direct interface with
the customers, and are required to achieve successful market penetration. In contrast, upstream FSAs are deployed in
activities that lack this direct interface, but are critical to
creating an efficient internal production system.
An asymmetry may exist between a unit’s downstream
and upstream FSAs, mirrored in the MNE’s organizational
design, whereby many tasks within R&D, sourcing, manufacturing, and logistics operations are structurally divorced
from customer related subunits. This asymmetry explains
why many MNEs may have more discretion in terms of the
geographic dispersion across units of the upstream activities
(and FSAs) involved, but have simultaneously been incapable of capitalizing on such strengths at the downstream
end, in terms of sales achieved.
Fig. 1 constitutes an alternative to Bartlett and Ghoshal’s
(1989) economic integration/national responsiveness
framework on the so-called generic roles of national organizations in the MNE. It focuses on the importance of a regional component in MNE activities, and is therefore useful to
senior MNE management.
1 country
Downstream
FSAs
Geographic Scope of FSAs
1 region
2 regions
All regions
1
3
5
7
2
4
6
8
FSAs
Types
Upstream
FSAs
Figure 1
MNE upstream and downstream FSAs.
In line with the analysis above, Fig. 1 makes a distinction
among the various generic roles of strategic business units
within the company. The horizontal axis measures the
strength of the FSAs, embedded in each strategic business
unit, which may consist of either a single national affiliate,
or a set of affiliates, possibly located in various nations and
bundled into a geographic or product division. MNEs evaluate business operations at various levels; here, the relevant
level is the one at which performance is assessed as the basis of company wide capital budget allocation. A strategic
business unit’s FSAs may be deployable at the national level, in one triad region, in two triad regions, or in all triad
regions, as reflected in its business performance. In reality,
other regional sub-divisions than the triad based one could
be more relevant to particular MNEs, with typically a ‘rest
of the world’ set of assets and market performance as critical to success, but in this paper we focus solely on the
triad. Fig. 1 also makes a distinction, on the vertical axis,
between downstream or customer end, and upstream FSAs.
Strong upstream FSAs are required to create an efficient
internal production system within the nation, one region,
or interregionally. Strong downstream FSAs are necessary
to achieve market success in the market considered, again
at the national, regional, or interregional level. Conceptually, the individual strategic business units’ FSAs may be
unbundled into an upstream and a downstream component,
which may make them span two vertical cells in Fig. 1.
When using Fig. 1, we can identify the business units in
MNEs that perform the role of global market leaders inside
the firm, as measured, not by their location inside a large
national market per se, but by their ability to achieve a satisfactory market penetration in each of the three legs of the
triad. This is a reflection of strong downstream FSAs (cell 7).
The reality for most MNEs is that they may lack even a single
global market leader! In contrast, some MNEs have global
production units, with upstream activities spread across
continents, especially to take advantage of market imperfections in markets for raw materials, labor, components
and other intermediate goods, and even to source final
goods, but without an equivalent geographic distribution
of sales (cells 6 and 8). However, the data in Table 1 on
the dispersion of the MNEs’ asset base do moderate this perspective. Even in terms of their internal supply chain, most
MNE activities are still concentrated in the home region.
In addition, most Fortune 500 MNEs have units with the
status of national or intra regional market leaders (cells 1
and 3), but usually confined to the home region. Where
interregional market success is achieved, namely by a strong
position in at least a second triad market, this may occur
through a distinct strategic business unit (to be located in
cell 3 rather than cell 5). The strong market position in
the second leg of the triad then often reflects cooperative
behavior, such as joint venture activity, mergers and
acquisitions.
The relevance of Fig. 1, in terms of the distinct roles of
SBUs within the MNE, can be illustrated with the example of
the food industry giant, Nestlé. This MNE as a whole fits into
the bi-regional (Europe and Americas) MNE profile, according to Rugman and Verbeke (2004), but important variations
exist regarding the roles of the different SBUs. At the downstream end the beverages SBU, as well as the milk products,
nutrition, and ice cream SBU, are positioned in cell 7, with a
A regional solution to the strategy and structure of multinationals
strong, balanced performance in all triad regions. The chocolate, confectionery, and biscuits SBU, as well as the Nestlé
Waters SBU, can be positioned in cell 5. The PetCare SBU,
still strong in Europe, is dominated by the Americas and
can be positioned in cell 3. The prepared dishes and cooking
aids SBU falls in cell 5. But a unit such as Trinks in Germany,
mentioned as part of other activities in Nestlé’s Annual Reports, should be positioned in cell 1. Thus, from the downstream perspective, only two SBUs in Nestlé are truly global
leaders.
At the upstream end, we can use as a proxy for Nestlé’s
FSAs, the distribution of plants across the world. The geographic distribution of plants is only an indicative parameter, as nothing is said about the relative size of the
plants, or about the logistical linkages among them. With
the exception of two SBUs (PetCare and Nestlé Waters),
the other four SBUs have a substantial number of plants in
all triad regions and are therefore global players in cell 8.
The PetCare SBU is strongly represented in two regions,
but has only three plants in the Asia, Oceania and Africa region (one in Australia, one in New Zealand, and one in South
Africa), with no plants in Japan, a triad nation, positioning
the SBU in cell 6. In a later section we shall report data
on the FSAs of the world’s 500 largest MNEs in terms of
Fig. 1.
The normative message of Fig. 1 is threefold. First, it
may not always make sense to classify MNE operations solely
in terms of national units, nor to view their location in a
specific nation as necessarily critical. From a triad perspective, regional success, and especially host region success,
are also important, not only the size of a particular national
market. Especially in the EU and the NAFTA area, the region
is becoming an increasingly relevant unit of analysis to
determine market performance. This signifies the need to
augment location bound FSAs, in order to make them more
regionally deployable. It often also signifies the limited geographic deployability of so-called non-location bound FSAs.
Especially at the downstream end, there is little empirical
evidence that non-location boundedness would systematically transcend all three regions of the triad, let alone the
rest of the world. Second, the relative lack of market success across regions for most MNEs implies that decision making at the ‘global’ level may not always be appropriate to
address region specific challenges. These may be better
handled through region based strategies and organizational
structures. Third, interregional success in distributing and
integrating upstream activities, especially through exploiting imperfections in markets for several types of intermediate goods, may lead to a global product organization, but
this does not automatically translate into global market success, nor in the normative implication that downstream
strategy and structure should emulate upstream strategy
and structure.
The regional solution versus the transnational
solution
Bartlett and Ghoshal’s (1989) work likely represents the single most influential international management book of the
past two decades. The transnational solution concept,
meaning the simultaneous pursuit of worldwide innovation,
309
global scale economies and national responsiveness is now
described extensively in most modern international business
(IB) textbooks, as the panacea for success in the so-called
global market place. Indeed, Westney and Zaheer (2001) argue that the transnational solution framework has replaced
the IB literature’s earlier focus in Stopford and Wells (1972)
evolution of the MNE organizational structure.
Yet, an important limitation of Bartlett and Ghoshal’s
(1989) book is its oversimplified unbundling of geographic
space into only two components: national space and global
(meaning worldwide) space. The clearest expression of this
approach is found in Bartlett and Ghoshal’s (1989) conceptual framework for differentiating among subsidiary roles
and responsibilities. However, as we noted in the previous
section, this approach appears to suffer from a significant
weakness. It is not clear that CEOs and senior management
committees in MNEs consistently think in terms of global
(meaning worldwide) versus national components of strategy and structure. In fact, when contemplating international expansion plans, rationalization investments, and
plant closures etc., senior management often adopts a regional, rather than a global or merely national focus. For
example, Bayer reorganized its European activities into regional groups to improve its competitiveness in Europe,
and the company is also split along regional lines, with EMEA
(Europe, Middle East and Africa), the Americas and Asia Pacific regions. Similarly, Sony Music realigned its affiliates in
Poland, the Czech Republic, Slovakia, and Hungary into a
sub-regional division called Sony Music Central Europe. Sony
also took special measures to strengthen its regional strategies for East Asia, the Americas, and Europe.
Interestingly, Bartlett and Ghoshal (1986) wrote an article in the Harvard Business Review, specifically addressing
the classification of MNE subsidiaries. This article, which
was later embedded in their 1989 book, discussed two cases
(namely EMI and Proctor & Gamble). Both cases clearly, albeit implicitly, demonstrate the importance of region based
strategy and structure, though the authors went through
great efforts to force their data into their two-by-two integration/responsiveness matrix on the possible roles of national subsidiaries. In the case of UK based EMI, the main
reason for its failure in the medical scanning business was
its inability to manage properly the North American host region market. The case of Proctor & Gamble addresses the
appropriate process to organize and manage pan European
brand management teams in consumer household products.
We argue, building upon Ohmae (1985) and Rugman
and Verbeke (2004), that for most Fortune global 500
Components of Structure (locus of decisions)
Global
Regional
National
Components of
Strategy
(product
adaptation)
Figure 2
structure.
Global
1
4
7
Regional
2
5
8
National
3
6
9
Geographic components of MNE strategy and
310
companies, the triad constitutes a legitimate starting point
for regional analysis. The importance of a regional component in strategy and structure can be usefully illustrated
through Fig. 2. Fig. 2 presents a framework that distinguishes among the global, regional, and national components of market strategy and structure for large MNEs.
The vertical axis in this case refers to observed behavior
in the market place; it reflects the existence of market
strategies that can range from global product standardization to regional and national adaptation. In contrast, the
horizontal axis reflects organizational structure, with some
components of strategic decision makingto be concentrated
globally, and others dispersed across regions or countries.
More specifically, the horizontal axis measures whether
the MNE has a structure that supports centralized strategic
decision making (e.g., choice of product/market niches,
choice of strategic management tools to outperform rivals),
or whether it supports a dispersion of at least a substantial
portion of these decisions across nations and regions.
Fig. 2 is an extension of Rugman and Verbeke’s (1993)
framework on global strategies. They have argued that
MNEs can be usefully classified according to two elements.
First, the deployment of non-location bound versus location
bound FSAs needs to be investigated. This deployment is
evaluated here on the vertical axis by looking at the efforts
to engage in a market strategy of global product standardization, versus national and regional adaptation. Second, it
is critical to assess the number of locations where important
strategic decisions are taken. Here, we focus on the organizational structure on the horizontal axis of Fig. 2, as supporting decision making at various geographic levels. The
difference with Rugman and Verbeke’s (1993) resource
based perspective on the integration/national responsiveness model, is that Fig. 2 explicitly introduces a regional
dimension to the analysis, building upon the empirical evidence presented in the previous section. More specifically,
on the horizontal axis this regional dimension implies the
presence of organizational structure components that support strategic decisions at the regional, rather than merely
the global and national levels. The vertical axis implies
effectively deploying downstream FSAs at the geographic level of a region. These are region bound company strengths;
they can contribute to survival, profitability, and growth beyond the geographic scope of a single nation, but they are
still location bound, in the sense that they cannot be deployed globally (Morrison et al., 1991; Morrison and Roth,
1991).
Fig. 2 helps identify some of the more important mistakes
made by proponents of globalization and a global strategy
for MNEs. Here, we should emphasize that all nine cells
may be relevant to a single MNE at one point in time, as
different strategic business units may need tailored
approaches.
The proponents of globalization view as a reflection of a
global strategy not only cell 1, but also cells 2, 3, 4 and 7
(where other strategy structure combinations than global
product standardization and centralization are required).
In cell 1, globalization efforts indeed take place. In cells 2
and 3, the focus is still on the decisions and actions taken
at the corporate center. However, even if the organizational structure supports many corporate strategy decisions
to be taken centrally (left column of Fig. 1), cells 2 and 3
A.M. Rugman, A. Verbeke
reflect the existence of substantial regional and national
responsiveness regarding product/service offerings.
Even with a (partly) standardized, global product offering (top row of Fig. 2), not all the important market strategy
decisions are necessarily taken centrally. Bounded rationality constraints are likely to force corporate management to
delegate important decisions to components of the organizational structure at the regional and national levels, thereby positioning the firm closer to cells 4 and 7. Too much
focus on a multinational approach (using Bartlett and Ghoshal’s terminology) in cell 9 has now become unrealistic in
many industries, although this was characteristic of the
early international expansion of some European MNEs, such
as the automobile manufacturer Fiat (Bartlett, 1986). It may
lead to overlapping efforts and duplication in innovation,
inconsistent national strategies, opportunistic behavior by
subsidiary managers, and more generally a waste of resources and lack of clear strategic direction (Bartlett et
al., 2003). As a result, many firms have adopted pan European integration strategies, and the expression is now often
used in the European Union that ‘the country manager is
dead’. The great strength of an MNE is precisely that it
can overcome market imperfections characterizing national
markets and develop systemic, network related rather than
asset based FSAs (Dunning and Rugman, 1985). Even for
MNEs with a polycentric administrative heritage, cells 6
and 8 are likely much more relevant than cell 9.
In cell 6, attempts are made to achieve decision making
synergies across markets, by developing pan European, pan
American or pan Asian strategies in particular functional
areas (Rugman and Verbeke, 1991). In cell 8, national subsidiary managers pursue economies of scale and scope
themselves, through standardizing at the regional level
their product/service offering across those national markets
that have strong similarities in demand. In that case, subsidiary initiative is critical (Birkinshaw, 2000; Rugman and
Verbeke, 2001a). For example, a number of recent Honda
car models, produced and sold in the United States, were
specifically designed and marketed for North America, with
substantial local R&D and market research, placing these
activities in cell 8. More generally, Honda now functions
with five regional operations: (1) North America; (2) Europe,
the Middle and Near East and Africa; (3) Asia and Oceania;
(4) Japan; (5) China (newly established in April 2003). All regions have substantial autonomy in non-core research, manufacturing and sales, whereby products are tailored to the
requirements of each market, a clear example of the relevance of cell 5 in Fig. 2 for many Honda activities. For example, at Honda it was the Japanese R&D unit that developed
the global platform for the 1998 Accord series, but market
related decision making on the exact size of the car was delegated to regional centers. The North American region,
based on regional market research, decided to build a somewhat larger model than in Europe and Japan, placing this
strategy-structure combination in cell 5 of Fig. 1.
Bartlett and Ghoshal’s (1989) work is good at distinguishing between cells 1 and 9, but it has not addressed most of
the other cells. For example, the basic matrix of integration
(cell 1) and national responsiveness (cell 9) popularized by
Bartlett and Ghoshal (1989) distinguished between a pure
global cell 1 strategy and the act local national responsiveness strategy of cell 9. In addition, the key contribution of
A regional solution to the strategy and structure of multinationals
their transnational solution framework was the prescription
that MNEs should usefully combine strategies in cells 1 and
9. They should attempt to develop for each separate business, for each function within that business, and for each
task within that function, the capability to implement
either a national or a global approach.
Bartlett and Ghoshal’s (1989) framework thus can usefully explain cell 3 (a structure supporting centralized decision making combined with local market adaptation), i.e.,
the global think-local act approach, a strategy typical of
many Japanese companies such as Toyota. This constitutes
an approach likely adopted by the global and international
firms (using their terminology) evolving toward the transnational solution. The framework also permits the analysis of
less common cases in cell 7, whereby rather powerful
national subsidiaries are responsible for delivering global
products, but choose themselves which products have the
most potential internationally and largely take responsibility for the delivery. This is a typical approach found in formerly multinational archetypes evolving toward the
transnational.
Yet, Bartlett and Ghoshal’s framework cannot handle
cell 5, triad based strategy-structure combinations very
well, nor the intermediate cases of cells 2, 4, 6 and 8,
i.e., all cases in which the regional level is important.
Yet, regional elements are becoming increasingly important
in many MNEs, both in terms of organizational structure and
market approach. Even the operations of the original nine
firms (Kao, Procter & Gamble, Unilever, General Electric,
Matsushita, Philips, Ericsson, ITT and NEC), used by Bartlett
and Ghoshal as the empirical basis for the development of
the transnational solution, have a significant regional component in their strategy and structure. In fact, Bartlett
and Ghoshal referred, almost a decade after the publication
of their 1989 book, to the regionalization of trading blocks
as ‘‘a social, political and economic revolution . . . opening
up whole regions of the world for the first time . . .” (Bartlett
and Ghoshal, 1998, p. x).
Empirical evidence on the regional nature of
upstream and downstream FSAs
This is a paper about strategy and structure. It is, however,
difficult to make general statements concerning changes in
the organizational structures of the world’s largest 500
firms, because each firm typically uses its own jargon to describe its organizational design. In addition, the underlying
meaning of publicly available organization charts, in terms
of who decides what, is not always entirely clear, not even
to insiders in these firms. A similar comment can be made
about the standardization/adaptation of products. Although
many firms argue that they do engage in substantial product
adaptation across borders, it is difficult to assess directly
the extent of such adaptation and its actual efficiency in
the market place. Thus we are not able to test directly
the axes of Fig. 2.
Instead, we do have reliable data on the outcomes of the
strategies and structures of the world’s largest firms. These
data provide an approximation for each MNE’s strengths
across geographic space on both dimensions of Fig. 1, i.e.
the MNE’s downstream and upstream FSAs. The former
311
can be measured by assessing the MNE’s sales dispersion
across the triad. The latter can tentatively be assessed
based upon the MNE’s asset dispersion, even though the
MNE’s foreign assets may in principle cover the entire spectrum of value chain activities, and not only back end production, R&D etc.
Here we have updated the 2001 data described in Rugman and Verbeke (2004) and Rugman (2005). These data
suggest that most firms are home region oriented (with
50% or more of their sales in their home region). A small
set of firms is bi-regional (with less than 50% of sales in their
home region and more than 20% in any two regions of the
triad). Finally, only a handful of global firms were found
(those with over 20% of sales in each region of the triad
and less than 50% in their home region).
Of the world’s 500 largest firms data are available on
sales in 2004 for a total of 313 firms. Of these, 265 (85%)
are home region oriented. Such firms include: Wal-Mart,
Best Buy, Hitachi, Peugeot, Time Warner, etc. Only seven
of the world’s largest 500 firms are global according to
2004 sales data. The first four of these were already included in the 2001 list: Coca-Cola, Canon, Sony, Philips,
3M, Mazda and Hochteif. Finally, 33 of the firms are bi-regional, including BP, Unilever, HSBC, McDonald’s, Nissan,
Toyota, Dow Chemical, and Flextronics (this last firm was
classified as global in the 2001 ranking). Eight of the firms
are host region oriented, with over 50% of their sales in a
foreign region of the triad. An example is the U.S. firm Manpower, which had 70% of its sales in Europe.
Based on these 2004 data it is clear that the world’s largest firms continue to exploit their FSAs primarily in their
home region and are rarely able to emulate their market
success in other regions of the triad. Their strongly different
market position in different triad regions suggests that they
need to develop regional strategies and structures, not the
transnational solution. Bartlett and Ghoshal’s work (1998)
may be very relevant to our seven global firms, but they
did not develop a model with sufficient emphasis on the regional strategies and structures of MNE.
This conclusion on the lack of relevance of the transnational solution is confirmed by the data on asset dispersion
in Fig. 3. Here the MNE’s FSAs are split into downstream
FSAs, as expressed by sales, and more upstream FSAs, as
measured, albeit imperfectly, by the size of foreign assets
present in the MNE subsidiaries. The caveat is obviously that
the mere presence of assets in host region subsidiaries constitutes a less compelling proof of success in those host regions, than the sales figures at the downstream end. On the
other hand, the act of locating assets in a host region builds
Geographic Scope of FSAs
1 country
Downstream
FSAs
FSA
Type
Figure 3
2 regions
5
All regions
7
NA
265/305
(87%)
4
2
Upstream
FSAs
1 region
3
1
NA
6
236/262
(90%)
7/305
(2%)
33/305
(11%)
8
23/262
(9%)
3/262
(1%)
MNEs and their upstream/downstream FSAs.
312
upon the assumption that these assets will find their most
profitable exploitation there, thus reflecting the strength
of the firm’s FSAs, including the MNE’s ability to meld these
FSAs effectively with location advantages in the host region.
We explained the logic of Fig. 3 in the earlier discussion of
the theoretical version in Fig. 1.
The information on the 305 firms with sales data for 2004
is shown in the top row of Fig. 3. Here, we exclude the 8 host
region based firms, from the total of 313 with available data.
This leaves 305 firms. There are 265 home region based firms
from a total of 305. A further 33 operate in two regions of the
triad and are thus bi-regional. Yet, only seven of the firms
operate across all three regions of the triad.
Fig. 3 also introduces new data on the foreign assets of
these firms. Such data are available in 2004 for only 268 of
the 313 firms providing sales data. We excluded the 6 host
region oriented firms, leaving 262 to discuss. Of these 262
firms, the greatest number (236), produce mainly in their
home triad region. This is 90% of the firms reporting on their
geographic spread of assets. A further 23 operate mainly in
two regions of the triad. Finally, only three firms command
a balanced asset dispersion across all regions of the triad.
These three firms are: HSBC, Shell, and Amerada Hess.
The data reported in Fig. 3 show that the assets and sales
of the great majority of firms are concentrated in their
home region of the triad. Indeed, 90% of the firms are home
region based using asset data, and 87% using sales data.
There are only three global firms according to the asset
data, compared to seven using sales data. In Fig. 3, only
9% of firms based on asset data and 11% of firms based on
sales data can be classified as bi-regional firms.
One firm is has an unusual position. Amerada Hess is the
only firm, out of the 268 reporting asset data, to operate a
global production network, and to confine its sales mainly to
its home region. This is because it is a natural resources
firm, with mines all around the world but sales primarily
in North America. In contrast, five firms operate on a global
basis according to sales data, yet produce mainly on the basis of their assets in their home region. These firms are: 3M,
Canon, Mazda, Hocheif, and Vodafone. In general, the most
common pattern is that of symmetry between sales and asset positions, with the bulk of both in the home region.
One unexpected conclusion from Fig. 3 is that the world’s
largest 500 firms do not provide much evidence that they
operate truly global supply chains (subject to the consideration that we did not assess external supply chain linkages).
With truly global supply chains one would expect the foreign
asset data to provide a picture of more uniform activity
around the world, or at least consistent evidence of offshoring activities in one other region of the triad. Yet,
90% of these large firms produce mainly in their home region. Again, we are drawn to the conclusion that MNEs do
not operate globally. Fig. 3 suggests that there is no evidence to support the need for the transnational solution. Instead, the world’s largest firms need a regional solution to
strategy and structure.
Conclusions
In this paper, we have explored the implications of introducing a regional dimension when conceptualizing MNE
A.M. Rugman, A. Verbeke
strategy and structure. Such a regional dimension appears
warranted, given the observed geographic concentration
of assets and sales for most MNEs. The dominance of the
home region for most MNEs casts doubts on the validity of
the transnational solution model as the panacea for international corporate success. The main weakness of the transnational solution model is the underlying hypothesis that firms
have widely dispersed assets and sales, and can become global industry leaders only by (a) building upon their existing
administrative heritage, and complementing this with capabilities from the other MNE archetypes, (b) focusing on
socialization, at the expense of organizational structure,
to achieve coordination and control of their internal network, and (c) simply managing their national subsidiaries –
viewed as the relevant units of analysis – as a set of
interdependent businesses.
The reality is that assets and sales are usually very concentrated in geographic space, and introducing a transnational management approach may greatly increase the
complexity of internal MNE functioning. In contrast, regional components in strategy and structure can go a long
way toward addressing the idiosyncrasies many large MNEs
face when managing activities in distinct regions, with the
MNE typically commanding very different market positions
and asset structures in each region.
Another implication of our analysis is relevant especially
to smaller, so-called born global firms. Born globals should
recognize from the outset, when contemplating international expansion, the importance of introducing more selectivity in the geographic scope of their international
expansion, especially as far as downstream, or customer
end activities are concerned. Rather than engaging on a
path of rapid global roll out of their products and services,
these firms should learn from the experience of many of the
world’s largest MNEs: they should select a relatively narrow
geographic market focus, as well as a narrow product focus,
so as to maximize the probability of sustained international
success.
Acknowledgement
We are pleased to acknowledge the research assistance of
Chang Hoon Oh in the preparation of the data reported in
this paper.
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ALAN M. RUGMAN is the L. Leslie Waters
Chair of International Business at the Kelley
School of Business, Indiana University, and
Professor of International Business and Professor of Business Economics and Public
Policy. He is also part time Professor of
International Business at the University of
Reading. His recent books include: Inside
the Multinationals; reissued by Palgrave
Macmillan on its 25th Anniversary in 2006;
The Regional Multinationals (Cambridge University Press, 2005) and
Regional Aspects of Multinationality and Performance (Elsevier,
2007).
ALAIN VERBEKE holds the McCaig Chair in
Management at the University of Calgary
(Canada) and is Visiting Chair at the Rotterdam School of Management, EUR (The
Netherlands). He was previously the Director of the MBA programme, Solvay Business
School, University of Brussels (Belgium). He
has extensive practical experience in multinational strategic planning. His latest book
is International Business Strategy: Rethinking the Foundations of Global Corporate Success (Cambridge University Press). Alain is a Belgian citizen and can be reached at
averbeke@ucalgary.ca.