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Transnational corporations get a plethora of press throughout the world.
Stories of blockbuster mergers, Central American sweatshops, and environmental
degradation are common in today’s media. Unfortunately, however, the public at-
large begins to define international businesses by newspaper headlines and the
sweeping generalizations that they usually espouse—overlooking the many
differences that exist from corporation to corporation. One such difference can be
seen in the internal organization of TNCs. While many individuals may have been
led to believe, through generalizations made by the press, that all transnationals are
internally the same, it will be the aim of this work to demonstrate that there are almost
as many forms of international business organization as there are transnational
corporations.
To achieve this goal, the definition of a transnational corporation and the
evolution of TNC organization will be analyzed. This paper will then look at the
creation and motivations behind various international business strategies—all of
which lead transnationals to form different internal organizational structures based on
their particular situations. Finally, various transnational organizational designs will
be discussed to further demonstrate the many diverse ways in which a TNC can
structure their internal operations.
A first step in the right direction can be made by looking at the fact that
differences in internal organization are implied simply through the definition of a
transnational corporation. Economists define a transnational corporation as an
enterprise that owns or controls value-added activities in two or more countries. Most
of the time, this ownership and control comes by way of foreign direct investment—
direct ownership of actual assets in a foreign market—or through the means of
cooperative alliances with foreign firms. Obviously, TNCs that gain access into
foreign markets through FDI will have different needs than those involved in
cooperative alliances with other firms. It is also true that firms with different needs
will utilize different organizational styles to most effectively run their business. From
this, one can logically draw the conclusion that TNCs, because of the different ways
in which they do business in various foreign markets, are not organized internally in
the same fashion. This particular analysis may be broad, but it certainly begins to
show that inherent differences in organization can exist from firm to firm.
Economists did not actually coin the phrase “transnational corporation” until
the 1960s. Even before that time, however, studies were being conducted into the
history and evolution of transnational corporation organization. When these studies
were finally executed, it was shown that TNCs had different internal organizational
structures based on geographic location—even at their earliest stages in development.
For example, in looking at the history and evolution of U.S. transnational
corporations, it was found that most American TNCs exhibited a clear development
from a single, autonomous body (reporting straight to headquarters), to a small group
of affiliates divided internationally, to finally, companies with mostly global product
divisions. In all of these cases, overall power and control of these transnationals was,
on the whole, centralized. European TNCs showed something completely different—
a great reliance on a decentralized, parent-affiliate structure and on informal,
personalized control—effectively illustrating a major difference in early transnational
organization.
After these 1950s studies, economists around the world began to talk about the
further development of transnational corporations. They wondered what kinds of new
business practices and organizational strategies would eventually be created to most
effectively operate a TNC. During these discussions, the issue of dividing a company
along the dimensions of function, product, or geography was introduced—an issue
that would further serve to differentiate the organizational structures of modern
international businesses. But before modern transnational corporations can adopt any
organizational structures, they must first develop several strategies that will
effectively allow them to achieve their company goals (mainly, the acquisition of
profit).
Any good business strategy will work to exploit a firm’s advantages, and to be
sure, there are many advantages enjoyed by transnational corporations that simply are
not an option for other types of businesses—they are called “global efficiencies”.
There are three forms of global efficiencies: location efficiencies, economies of scale,
and economies of scope. In today’s global environment, transnational corporations
have the luxury of picking a choosing the best places to establish new branches of
their particular organization. By being extremely selective in choosing among
possible locations, TNCs can effectively find areas that will provide them the lowest
production and distributions costs, or that best improves the quality of service they
offer. By doing this, transnationals are effectively using economies of scale to their
advantage. Mercedes-Benz, instead of splitting up its productions of new sports
utility vehicles among many different factories, has decided to produce all of them at
a brand new assembly plant in Alabama. Economies of scope can be realized when a
firm lowers its production and marketing costs over time—greatly adding to their
bottom line. Carmaker Nissan is a great example of a firm that utilized economies of
scope over time. When Nissan first started selling automobiles in the United States, it
only brought out a single model and sold the car through dealerships owned by other
companies. This made the company’s distribution costs extremely high. As Nissan’s
reputation was established in the States, however, they gradually introduced other
models. Today, Nissan has its own North American sales and distribution network
that handles cars of all makes and models—resulting in the lowering of distribution
costs per vehicle.
Multinational flexibility is a tremendous asset enjoyed by TNCs. It allows
businesses to face the challenge of responding to multiple, diverse and changing
international environments. Tyson Foods (chicken) provides a great illustration of
this advantage. In recent years, there has been an increased demand for chicken
breasts by health conscious U.S. citizens. If, however, Tyson produces more chicken
breasts to handle the increased demand, they will also be producing more legs and
thighs, which are not in high demand in the States. For a domestic firm, this could
have been a huge problem; however, Tyson was able to cope with this change by
diverting $250 million of their stock of dark meat to Russia and China, where
apparently it is preferred to the leaner, whiter alternative.
The last efficiency that transnational corporations can take advantage of is
worldwide learning. Simply put, firms that have companies or subsidiaries spanning
the globe can learn something from one country, and then apply it to its various
branches. McDonalds did this earlier in its existence when they found that inner-city
franchises in Japan performed extraordinarily well when opening restaurants in
downtown office buildings. Before this time, McDonalds shied away from creating
inner-city franchises in the United States, preferring instead, freestanding enterprises
in suburbs. However, McDonalds used the information gleaned from its Japanese
franchises, started placing their restaurants in booming urban metropolises, office
buildings, Wal-Mart superstores, and even airplanes. Unfortunately for transnational
corporations, the attainment of all three of these efficiencies has proven to be very
difficult; however, each of these advantages serves as motivation toward the adoption
of a certain international business strategy or strategies.
To actually create an international strategy, firms follow a relatively well-
defined process. First, a company will develop a mission statement, which defines the
firm’s values, purpose and direction for the future. Mission statements are often
included in a firm’s annual report, and provide a company with a great avenue for
communicating with its stockholders. A more detailed analysis of these reports show
that they specify a firm’s target customers and markets, principal products or services,
geographic domain, core technologies, concerns for survival, plans for growth and
profitability, basic philosophy, and desired public image. Next, transnational
corporations perform what is called a SWOT analysis—assessing their company’s
Strengths, Weaknesses, Opportunities and Threats (hence…SWOT). After this
analysis, the firm sets strategic goals, and then develops tactical plans that will
facilitate the attainment of these goals. Last of all, the transnational corporation will
develop a control framework in which managerial and organizational systems and
processes will be formulated.
At every step in this process of strategic formation, international businesses
keep four distinct issues in mind. Primarily, TNCs look at their distinctive
competencies—namely—what the business does well compared to its competition.
Firms also look at their scope of operations, which is basically where they are
eventually going to do their business. Resource deployment is next on the agenda,
followed by a focus on synergy, where they try to make the entire corporations better
than the sum of its individual parts (pardon the cliché).
Lastly, in the formation of international business strategies, TNCs have to look
at the extent to which they are integrated. Some firms have the advantage of
controlling every step in the life of their products from beginning to end.
Corporations that have this very important characteristic are classified as ‘vertically
integrated’. TNCs that are vertically integrated produce outputs in some of its plants
that serve as inputs in other plants, have ownership of the raw materials that may be
necessary to create their products, and usually also own and control the means of
transporting their products to be sold. Vertically integrated corporations usually also
make use of the advantage of economies of scope, as ownership in virtually all
aspects of production and distribution serves to dramatically lower input prices over
time. Not all firms have this luxury, however. TNCs that are ‘horizontally
integrated’ only control one aspect of their products “life”, thus, not receiving as
many economic benefits over the long-term.
After an incredibly drawn out process, firms finally choose which
international strategy will facilitate optimal performance—strategies that have a direct
effect on a transnational corporation’s internal organization. Some firms utilize a core
competency developed domestically as its main competitive weapon in foreign
markets. These firms are practicing what is called an international strategy. An
alternate strategy can be seen when firms are made up of a collection of relatively
independent operating subsidiaries. These subsidiaries each focus on a specific
domestic market (in different countries). Due to this multi-domestic strategy,
transnational corporations can customize its products, marketing campaigns and
operating techniques in order to meet the needs of local customers. This choice is the
best option for companies that see clear differences in local markets, when economies
of scale for production, distribution, and marketing are low, and when there are high
coordination costs between parent companies and their foreign subsidiaries. Not
surprisingly, the multi-domestic strategy saw its peak in popularity in the pre-WWII
era, when communication and transportation technology were much lower than they
are today.
Firms utilizing the global strategy for international business see the world was
a single marketplace. The goal of many such corporations is the creation of
standardized goods and services uniformly address the needs of customers around the
world. As can easily be seen, this strategy, in its one-size-fits-all customer and
product approach, is almost directly opposed to the multi-domestic counterpart, which
emphasizes the differences of local customer needs. From this difference, it can
easily be seen how companies practicing the global strategy of international business
try to capture economies of scale in both production and marketing by focusing its
manufacturing activities in a small number of (hopefully) efficient factories.
Moreover, the creation of global advertising and marketing campaigns, another aspect
of this strategy, further serve to cut corporate organizational costs.
The “middle way”, as international strategies go, can be seen through
analyzing the transnational strategy. Corporations choosing this option attempt to
combine the benefits of global scale efficiencies (obtained by global firms), with the
benefits and advantages of local responsiveness (obtained by multi-domestic firms).
International businesses practicing this tactic assign responsibility for different
organizational tasks to a unit of the organization that is best able to carry out the task
with the most efficiency and flexibility. A mix of centralization and decentralization
of power is often seen in such companies, as they tend to centralize management and
decision-making functions, like research and development and financial operations,
and decentralize divisions such as human resources and marketing.
After firms create their overriding international strategy, they often find it
useful to create more sophisticated structures for three different levels within their
particular company—all of which directly effect the firm’s internal organization: a
corporate, business, and functional strategy. Corporate strategies attempt to define the
type of business the firm intends to operate—basically, what products to manufacture
and sell to consumers. Under this category, businesses will usually conform to one of
three options. The most common approach for transnational firms is called related
diversification, where firms operate in several different businesses, industries, or
markets at the same time. These operations, however, are all related to each other in
some way, shape, or form. Transnational Corporations that are in the opposite
situation will most likely take on the corporate strategy of unrelated diversification,
where the business operates in industries and markets that are in no way related.
These types of firms were extremely popular in the 1960s, and included General
Electric, a company that owned American TV giant NBC, lighting manufacturers,
medical technology firms, aircraft engine producers, semiconductor manufacturers,
and an investment bank! There are many advantages to this approach—chief among
them—efficiency and economies of scale, but firms that practice related
diversification find that coordination between subsidiaries often becomes difficult. A
company that takes on the single-business approach relies on a single business,
product, or service for its entire revenue stream. This allows the firm to concentrate
all of its resources to efficiently produce the product or service that it wants to sell;
however, these corporations often collapse under the pressure of stiff competition
since they only have one product or service to rely on.
These different corporate strategies serve to emphasize differences in TNC
internal organization. Obviously, firms that have their hands in as many pots as
General Electric will have to be organized in a way which is extremely different from
firms that only sell one product or service. These differences will be seen later, upon
the analysis of TNC organizational designs.
Whereas corporate strategy looks at strategic and organizational elements of
firms as a whole, business strategy focuses on specific businesses, subsidiaries, or
operating units within the firm. Through the creation of a business strategy, a
transnational corporation decides how to compete in markets that they choose to
enter. Firms who practice either related or unrelated diversification often bundle sets
of businesses together into strategic business units (SBUs) in order to most effectively
analyze specific business subdivisions. Like corporate strategy, business strategy is
divided into three different areas. The differentiation aspect of this strategy strives to
establish and maintain an image (real or perceived) that the strategic business units’
products or services are in some way unique from other products or services in the
same market. The two most common themes in differentiation tend to center around
either value (more bang for the buck), or quality. The second aspect of a business
strategy is overall cost leadership, which focuses a firm on achieving extremely
efficient operating procedures so that its costs are effectively lower than all of its
competitors. Obviously, if a firm achieves overall cost leadership, they will be able to
make dramatic reductions in the prices of their goods—driving up demand for their
products. The final element of a business strategy surrounds the idea of focus: a firm
must target specific types of products for certain customer groups or regions. These
distinctions can be drawn from geographic regions, ethnicity, purchasing power,
tastes in fashion, age, and a large variety of other factors. The manner in which a firm
decides to tackle each of these issues (distinction, cost leadership, and focus) will
have a great impact on the business’s internal organization.
Functional strategies also have a direct impact on internal organization, as
businesses decide how they will manage the functions of finance (capital structures
and investment policies), marketing (advertising levels and pricing), operations (plant
locations and technology levels), human resources (pay levels and labor relations),
and research and development in ways consistent with the corporate and business
strategies that they have already selected. Again here, firms will adopt different
organizational structures depending on the specific situation they find themselves in.
A firm that finds optimal success by completely computerizing its production will not
be as concerned with human resources as corporations who depend on a strong (and
content) labor force for the manufacturing of their products.
All of the things discussed up to this point—the advantages enjoyed by TNCs,
the formation of international strategies, and the breakdown of these strategies into
more specific divisions that show a greater focus on internal organizational elements
—combine to form a transnational corporation’s organization design. Through an
organization design, firms implement their various international strategies, allocate
organizational resources, assign tasks to its employees, instruct those employees
concerning the firm’s rules, procedures, and expectations about their job
performances, and collect and transmit information necessary for problem solving and
decision-making.
There are primarily three approaches to global organization designs. The
ethnocentric approach to organization can be seen through firms that operate
internationally the same way as they do domestically. Conversely, firms that
customize their operations for each foreign market that they enter would adopt the
polycentric approach to organization. Finally, in the geocentric approach to
organization, firms analyze the needs and wants of their customers worldwide and
then standardize all of their operations as a result. From these different approaches, it
seems clear that there is a vast variety of organization designs, and thus, many ways
in which transnational corporations can internally organize themselves depending on
their particular wants and needs.
The global product design is one approach to TNC organization. This design
assigns worldwide responsibility for specific products or product groups in order to
separate operating divisions within a firm. To better understand this organizational
option, two forms of global product designs, M-form (multidivisional) design and H-
form (holding company) design, can be analyzed. The M-form design harkens back
to the concept of related diversification discussed earlier. As a transnational
corporation competes in several distinct, yet related markets, each market has a self-
contained, autonomous organizational system. H-form designs work in the same
fashion; however, their self-contained units are not related to each other in any way.
This system works extremely well for corporations that produce many products and
that have customers all around the world. Shougang Corporation, a state-run Chinese
H-form corporation, has adopted this global product design. Here is a rough example
of Shougang’s internal organization—each representing a different product or service:
Not all TNCs are like this, however. Some corporations have products that are
not readily transferable across regional lines. For these companies, the global area
design is probably best, as it organizes a firm’s activities around specific areas or
regions of the world. A great example of such a firm is Bertelsmann, a magazine
company (among other things). Bertelsmann produces many English-language
magazines that probably wouldn’t go over well in Japan, and many Japanese
magazines that wouldn’t sell in the U.K. or the United States. For this reason,
Bertelsmann has divided itself along geographic or linguistic, and not product,
distinctions. Proctor and Gamble, another large TNC, also has adopted a global area
design. Here is a diagram of their internal organization—notice here how P&G’s
internal organization centers around four different divisions, each representing one
massive area of the globe:
Firms with extremely narrow or similar product lines may find it best to adopt
the global functional design, which creates departments that have worldwide
responsibility for common organizational functions. These functions can take the
form of finance, operations, marketing, research and development, and human
resources management…to name only a few. As these firms do not have many
products to worry about, this approach allows them to focus in on certain key
functions so that problems can be quickly found and corrected.
Still other firms may find that they serve completely different customers or
customer groups, each with their own set of needs that require special attention and
expertise. For these firms, the global customer design would be most effective
because it creates organizational divisions based solely on different customer groups.
Tire producer Bridgestone/Firestone, for example, sells tires to three distinct customer
groups: car manufacturers, individual consumers, and agricultural companies. For
this reason, it is not surprising that Bridgestone/Firestone has adopted the global
customer design as the most effective way to organize their business.
The last approach to organizing a TNC can be seen through the global matrix
design. This design is fundamentally the result of superimposing one form of
organizational design (global area design, for example) on top of an existing, different
form (global functional design), resulting in six possible outcomes that firms may
choose from based on their particular needs. Here is an example of a global matrix
design that combines the product and functional models:
These examples alone show that there are a number of different ways in which
transnational corporations are structured. Add to this the fact that the internal
organization of most TNCs turns out to be a hybrid of the global product, area,
functional, and customer designs, and you are left with virtually infinite
organizational possibilities—making the phrase “all transnational corporations are
organized internally in the same way”…laughable. McDonalds is obviously not
organized in the same way as Bertelsmann, who in turn, is not organized in the same
fashion as General Electric. The many reasons for such diversity in organization can
be filtered down to the different wants, needs, and advantages possessed by each
individual company.
Unfortunately, the assumption that all transnational corporations are organized
internally in the same way is a product of the mainstream media, and its attempts to
group all TNCs together in a sea of incorrect generalizations. However, through the
analysis of the definition of transnational corporations, the evolution of organizational
structures, the motivations for and the creation of international business strategies,
and the various organization designs for international corporations, the truth is finally
realized— there are almost as many forms of international business organization as
there are transnational corporations.
Bibliography
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Perspective. Addison-Wesley: 1999.
Frieden, Jeffrey A., and Lake, David A. International Political Economy. Routledge:
1995.
Dicken, Peter. Global Shift: The Internationalisation of Economic Activity. Paul
Chapman Publishing: 1999.
Michie, Jonathan and Smith, John Grieve. Managing the Global Economy. Oxford
University Press: 1995.
*Jones, Geoffrey. Transnational Corporations—a Historical Perspective.
International Thomson business Press: 1996.
*Dunning, John H. The Nature of Transnational Corporations and Their Activities.
International Thomson Business Press: 1996.
*Hedlund, Gunnar. Organizations and Management of Transnational Corporations
in Practice and Research. International Thomson Business Press: 1996.
* Each of these three articles are part of the larger work: Transnational
Corporations and World Development, published by International Thomson
Business Press on behalf of the UNCTAD Division on Transnational Corporations
and Investment, 1996.
The Internal Organization of Transnational Corporations:
Different Strokes for Different Folks
Ryan M. Martin
Globalization
Evans
7 March 2002