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    globalization 1.doc.doc.doc globalization 1.doc.doc.doc Document Transcript

    • 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 Griffin, Ricky W. and Pustay, Michael W. International Business: A Managerial 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