If globalization is considered a trend of the present it can be said that this trend has been growing more and more in the past and in the near present. The world has become more and more globalized and cultural differences have become less and less important. Globalization has the effect of lowering barriers and bringing markets closer and this is considered as positive, because more and more companies can easily compete internationally.
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This paper is using globalization and internationalization as a starting point and further it will develop its topic of research towards a specific internationalization strategy. Theory shows that there are mainly four types of international strategies or so called international companies. There are two types of pressures that influence a specific industry in a specific market at the same time and influence the type of internationalization. The first one is the need of local responsiveness of the products for a specific industry and the second one is the cost reduction pressure, which concerns the location of production of the products (Hill and Johnes, 1998). Accordingly, depending on the high or low strength of these pressures there are four positions in which a company can find it self. When both pressures are low which means there is no need for low cost and no need for high market customization then the company is international. If the need for customization is high and there is no need for lowering costs than the company is in a position of a multi-domestic company. The third position is the position of a global company, which means no need for customization, but a high need of cost effectiveness. The forth and most difficult however also most desirable position for international position happens when both pressures are extremely high. This means that there are companies that manage to benefit from cutting costs by producing in specific locations nevertheless at the same time they are operating an industry that is requiring relatively high local responsiveness. But not only that they are able to operate at highest efficiency and at high customization levels but also the transnational strategy is concerned with transfer of knowledge and continuous learning (Henry, 2008). This is considered the strategy of tomorrow and one of the hardest strategies to achieve and pursue. For years this strategy has been considered impossible to implement and to succeed however nowadays there are companies that prove the opposite and show that although it is unlikely to believe in, this strategy can really exist and be successful (Hout et al., 1982). Practice shows that although it is not as common it is still possible to have a cost effective and personalizing strategy at the same time.
Problem
The problem that will be proposed and hopefully solved by the end of the research is presented in the following question:
What is the essence of a transnational strategy and how do we know when a company implements it?
Purpose
The aim of this research paper is inspecting the theory behind transnational growth strategies and what makes them feasible. A real-life case will be used in order to inspect the application of the transnational strategy in practice.
Theoretical framework
Growth is the driving force of organizations and a source of higher sales, profits, returns or market share. Everyone has their own interpretation in terms of the proper strategies that organizations should choose and develop in order to grow. It is a common understanding that in order to grow internationally, companies first need to do well in their home markets and then to think about expanding to other markets. During their development process, companies need to analyze carefully the conditions, costs, revenues, growth potential, cultural factors, political risk, and environmental issues in order to able to make the right decision. There are more than one way of establishing growth strategies, like Uppsala model, transaction costs approach, born global model, etc. (Andersson, 2009). This research paper is focused on global strategies as a growth solution and especially in the application of the transnational strategy in detail.
When talking about the positive conditions for global expansion, according to Hill and Jones (1998), if the company benefits of distinctive competencies, location economies and experience curve ahead of competitors are gained, then the global expansion is seen as right-minded and approved. In order to achieve this goal, many of the multinational enterprises have developed corporate transnational strategies by mixing high levels of global standardization with high local responsiveness to a high extent over the last years (Engle et al., 2001).
This literature review will inspect the theoretical background of transnational growth strategies and this will be done by using the three-dimensional model of Barlett and Ghoshal (1989). There are tree types of organizations that are described by the authors: the global ones, which can be associated with a network striving for global productivity, the multinational ones, that are fighting for local responsiveness, and finally yet importantly the international ones, which are focusing their attention on worldwide learning within the network. However, Bartlett and Ghoshal (1989) also realized that the strategic requirements of markets and even industries are always changing, so that in many situations, one-dimensional strategies are no longer adequate. Instead, most of the companies need to gain capabilities in all three dimensions; they can no longer rely exclusively on global scale efficiency. There is also a need for local responsiveness, and worldwide knowledge distribution and adaptation. Companies willing to grow need to excel in all three areas. Bartlett and Ghoshal (1989) refer to the merging, in different proportions, of all three one-dimensional strategies as being the transnational solution.
The first dimension includes benefits of global integration, with the main of them being cost efficiency. The latter is main characteristic of global companies which produce standardized products. Improved efficiency due to global integration can also be applied by transnational companies (Bartlett and Ghoshal, 1989). According to Hennart (2001), the idea of a transnational company is that it uses employment to create mutual dependence between companies located in different countries. That implies that the costs of this organization are lower than benefits. Hennart (2001) states that according to transaction cost theory, there are several areas in which mutual dependence is beneficial for the firms within multinational company, namely some types of know-how, raw materials and components, marketing and distribution, and, in some cases, financial capital.
Figure 1. Three-dimensional model of transactional strategy (Bartlett and Ghoshal, 1989)
However, cost efficiency is not the only benefit of being global. For instance, Sugden (1991, as cited in Pitelis, 2002, p. 132) states that transnational firms gain control over working force and influence on trade unions. Besides, the mobility of TNC operations is contrasted with innate immobility of country-specific working force, which gives the former additional power to bargain for favorable conditions.
The second and most delicate dimension in this model is national responsiveness. According to Hill and Jones (1998), local responsiveness, which can be understood as national, includes differences in costumers’ tastes and preferences in infrastructure and traditional practices, distribution channels and demands of the host government. In this way, multinational enterprises create the competence centers or profit centers (Taylor, 1991) which are responsible for both success of the center and success of the MNE (Barteltt and Ghoshal, 1989). Trying to adjust to local circumstances, main people in the MNE also define the compensation strategy for payment which is from one side aligned to a corporate strategy, and from another side adjust to local system (Festing, Eidems and Royer, 2007). For the growth of the company, national or local responsiveness could be the main obstacle for expansion of the business.
The third dimension of this model which is uncommon to be seen in a strategic perspective model of strategy is the worldwide learning which consists of innovation and knowledge sharing which is done by the company. The worldwide learning is the main distinguishing factor between international strategy and other strategies, where distinctive competences are transferred from the home to foreign markets. On the other hand, by Bartlett and Ghoshal (1989), there is another understanding of worldwide learning. Transnational companies carry out global learning, defined as learning in both directions, from home country to foreign subsidiaries and vice versa which would make this a two way process. From the aspect of innovation and knowledge, they are transferred in both directions which constitute the question about their efficiency. From the point of central innovation, efficiency is accomplished by establishing multiple linkages between headquarters and subsidiaries, not only in terms of innovation, but also in terms of personal flow. By empowering local management and linking local managers to corporate decision-making processes there is support of the local innovation (Bartlett, Ghoshal and Beamish, 2008).
From the aspect of applied transnational growth strategies, multinational companies are simultaneously applying the cost-leadership and differentiation strategy with the transfer of knowledge and competences, which is, according to this model, combination of cost effectiveness, local responsiveness and worldwide learning (Hill and Jones, 1998). In this way balance between achieving global competitiveness and flexibility in international operation is accomplished (Bartlett and Ghoshal, 1989). However, all these cannot be managed without appropriate organization, which is as important as the strategy formulation. Thereby, they propose a transnational organization, as being a mixture of the three organizational structures mentioned, and who therefore fights for competitiveness in all three dimensions. This form or corporation is also called as “being local world-wide” (Berggren, 1995).
In this kind of an organization management structure is very specifically clarified. Global managers centralize resources such as products, people, information, in home and distribute others in foreign countries using integrated network (Henry, 2008). In the implementation process their role is also to assign the international tasks to specialist and managers such as worldwide functional manager and country subsidiary manager (Berggren, 1994, Bartlett et al., 2008). At this point the importance of the role of middle-managers in structures like this should not be underestimated (Judge and Stahl, 1995). In this part cultural issues and language play important role. According to Marschan, Welch and Welch (1997), language is incorporated in every aspect of the business, and it should not be ignored, rather be used in more strategic terms. As a part of communication field, language is seen also as tool for ensuring control and coordination over different and dispersed activities in multinational companies and can be understood as part of the third dimension (Bartlett and Ghoshal, 1989). Following this, it should be pointed out that if there is not a substantially well level of knowledge of a certain language among all of the employees, then there will be communication problems and also disability for knowledge transfer.
Transnational designs use socialization to build high levels of shared vision and to make employees identify with and further share the vision of the company. It is also important to gain a better understanding of how multinational organizations balance local and global pressures in designing and most important implementing an international compensation along with rewards systems (Bloom, Milkovich and Mitra, 2002). This strategic orientation is actually a case of high degree of internationalization, where global competitiveness can be best followed by simultaneously achieving different goals: standardization on the one side, and adaptation to local conditions, on the other.
After suitable definitions for the basics of the transnational growth strategy have been given, it is clear that the existence of the transnational strategy is closely connected with the ultimate power of globalization. These transnational companies aim to achieve global presence and influence by working at three dimensions and by taking one country at a time step by step. This strategy of working locally in order to get global has been successful for many companies and is promoted as the strategic way of tomorrow. However, there are authors like Douglas and Wind (1998) that recon that if we need to work locally in order to get global then that is not globalization. It is implied that if many local companies and businesses that operate only in a certain market and are owned by one company does not make the mother company global. Although this actually is the story of “the coin”, two sides of one same object, still it is important to be mentioned that there are other approaches to the transnational growth strategies.
Methodology
Denzin and Lincoln (2005, p.23) in their “Handbook of Qualitative Research” define the consequence of stages in the research process. We apply the logic of their plan to the description of our methodology and describe consequently the following: theoretical paradigm which we operate within, choice of research strategy, and methods of collecting and analyzing data.
This study is conducted within positivist paradigm, which implies that the researched phenomenon can be empirically investigated. Besides, positivism determines methods of scientific analysis that researchers should keep to, namely logic and deduction (Denzin and Lincoln, 2005, p.24).
According to the purpose of this study, qualitative research was chosen as a research method. Denzin and Lincoln (2005) describe qualitative research as emphasizing definite characteristics of the research object that cannot be measured in figures. This type of research prioritize “socially constructed nature of reality”, close connections between research subject and object, as well as taking in consideration actual situation while formulating inquiry (Denzin and Lincoln, 2005). Qualitative research is to provide understanding of the behavior of the object and reasons for this behaviour. As this type of investigation operates with data which will not be accumulated for any statistics, there is no need to use large sample. In fact, qualitative research makes it possible to study even single objects like particular cases, with the limitation that the results will be applicable only to them (Denzin and Lincoln, 2005; Churchill and Iacobucci, 2005).
The main factor which influenced our choice of research strategies was the ability of these strategies to provide us with the data most relevant to the purpose of the work. This is in consistence with Denzin and Lincoln (2005) who state that strategies should be connected with both theoretical paradigms and methods of data collecting. Thus, case analysis was selected as a main research strategy. Churchill and Iacobucci (2005) define case analysis as a “study of the selected case of the phenomenon under investigation” and stress the necessity to records all data concerning the researched phenomenon.
It is also should be mentioned that a literature search was used as an additional strategy aimed to find appropriate theories. The search was made in the catalogue of the university’s library and in the Science Direct database. The following keywords were used: organization strategy, transnational strategies, MNC, TNC, miltinational strategies, growth strategies, transnational corporation. As a result, we picked up several books and articles which covered the field of our study.
The strategy of case study comprises several sources of information, including interviewing, observing and document analysis. Time limitation does not allow us conduct interview and observations in the chosen company. Therefore, analysis of documents is the main method in this research. These documents represent external (i.e. not used solely inside the company) published secondary data, according to classification of Churchill and Iacobucci (2005), and include other scientific works on similar topics, interviews with company’s management, annual reports, etc.
However, a questionnaire for this company will be made and attached as a recommendation for future research.
Empirical data
ABB (Asea Brown Boveri) is a leading transnational company specializing in power and automation technologies. With almost 117,000 employees it is close to customers in around 100 countries (Unknown, 2010b). The company was created in 1987 by merging Swedish Asea and Swiss Brown Boveri, both leaders in their countries with hundred years history (Taylor, 1991). ABB started with active merges and acquisitions of the companies all over the world (Taylor, 1991), however, at present they have switched to more organic growth. Today ABB’s revenues are nearly at 60% generated by the markets outside Europe, and the company strives to increase its presence in emerging markets (Unknown, 2010a).
ABB’s strategy is “to be local world-wide”, which implies that the company strives to benefit from both global integration and local sensitivity (Taylor, 1991; Berggren, 1996).
On the global level, the company benefits from economy of scales achieved due to world-wide rationalization. The world-wide rationalization programme focused on customer and supported by time-based management and low-cost approach helped the company to gain global competitive advantage (Beggren, 1996). Another strategical focus of the corporation is local companies’ high product specialization which results in better quality control and, again, in cost advantages (Taylor, 1991). However, ABB’s orientation towards rationalization has the other side of the coin presented by company’s disposition to restructuring and downsizing of low-performing firms, which usually happens after acquisitions. This may stir up resentment in host countries, depending on the scale of downsizing and the importance of the acquired company for the country’s industry (Taylor, 1991; Beggren, 1996). However, these measures proved to be effective for ABB, as they allow to reorganize the work of ill-performing units, reduce excessive costs and thus to increase the profits as well as visibility and accountability of businesses (Taylor, 1991). One more benefit from global integration is that being an important purchaser, ABB has obtained significant power over its suppliers. The corporation reaches economy of scales buying standardized products in bulk from a limited number of sellers (annual report). Besides, ABB uses its influence to demand highest quality and favourable conditions, such as just-in-time deliveries and restricted price increases (Taylor, 1991).
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An important tool of control over whole corporation is ABB’s accounting system called Abacus. This system collects financial results from every local company which has own balance sheet and enables the managers in charge both to get all the necessary figures and to control the performance of every company, as well as to discover low performance and act promptly in order to eliminate it (Beggren, 1996; Redding, 1995).
As to the working locally, ABB created multidomestic organizations, the federation of national companies which facilitate the appliance of transnational strategy (Taylor, 1991). This organization has role to completely response to local requirements and to maintain productive relationship with stakeholders. ABB often builds products in the country where they sell them, recruiting specialists and talents from the local universities, and also having an agreement and maintaining productive relations with local government. Thereby, ABB is striving to make a “superlocal” business and specific competence or profit centers with local specialization in countries and locations which are most beneficial for a specific activity. From these locations ABB can supply other countries in cases where local specialization is not preferable option because of the legal constrains such as India (Taylor,1991).
ABB has strong focus on adjustment to local needs. Example of creating locomotives for the Swiss Federal Railways explains how they went deeply in analyzing all factors, taking in consideration even the terrain of Alpine, and the weather conditions in order to make appropriate product (Taylor, 1991).
In terms of people, knowledge and continuous learning, ABB is the place were employees get the chances to improve and develop if they wish to. Everyone is treated with respect and they are well trained and thought in order to fit into the ABB way of working. The official language that is used is English and everyone that is employes in ABB knows it (Berggren, 1996). People are given chances and opportunities for working round different ABB subsidiaries round the world just so they can exchange experience and learn more from it. This is also done so that employees interact more among themselves and so they can build their own networks of contacts. Information flows freely between the levels of information and the company tries to keep the hierarchy as low as possible and that there is high visibility in the organizations, that is why the matrix structure is actually used (Taylor 1991). In order to keep up the learning process ABB has implemented a special Time Based Management system that helps the company learn what customers want, need in order to improve their service and products (Berggren, 1996).
Organizational structure follows the strategy: the company acts according to three-dimensional strategical matrix. In this matrix, one dimension is a world-wide division by business areas, the second is a division by geographic region, while the third being division by projects (Taylor, 1991; Berggren, 1996).
At the business area level, product strategies are developed, production tasks are divided between factories, and export markets are defined for every factory. The division by business areas is aimed to implement total standardization of products and processes on all manufacturing units within one business area, thus making all manufactures interchangeable. In addition, it creates favourable conditions for spreading once found “best practices” as global standard among all plants (Beggren, 1996). The standardization is also important for sustaining the same quality level at every plant within one business area, without regards to the local conditions of the host country (Beggren, 1996). In general, business area dimension provides efficient integration and thus conditions for achieving global economies of scale (Egelhoff, 1999).
At the country level, ABB’s operations are organized as national companies which have to be responsible for their performance and to meet local requirements (Taylor, 1991). Local companies are to serve both domestic customers and export markets allocated by business area leader. Concerning management, ABB on local levels uses country managers who are in charge to develop customer based strategies, to form good relationship with local customers, governments and communities (Taylor, 1991). They have high degree of freedom to execute. Managers on local level are recruited from the host country, which enables ABB to get more knowledge and to adjust to local way of doing business. Payment systems are enforced for every competence center and management structure. Institutional, political and cultural factors as part of local system influence the payment strategy depending to the particular country. Local pressures play an important role when it comes to the defining the reward and compensation system.
As to the project dimension, it appeared as a response to large-scale orders that were multi-regional and needed involvement of the specialists from different business areas, therefore, they did not fit two-dimensional matrix (Berggren, 1996).
Analysis
The real life case on which the theory of transnational strategy will be applied in this research paper is the case of the Swedish-Swiss merger ABB. From an outsider’s perspective, a company that operates in more than 100 countries of the world and has more than 100 000 employees is to be considered a global company. And so it is, it is a fact that ABB is definitely global, however, this paper is more interested in the application of the transnational strategy and what are its implications. The analyses of ABB’s transnational strategy will be done by applying the transnational three-dimensional model. According to the three-dimensional model of Barlett and Ghoshal (1989), a real transnational company realizes its strategy in three dimensions: global integration, national responsiveness and world-wide learning.
Global integration
As it is seen from the empirical data, ABB has reached global efficiency in several areas: introduction of a single strategy within whole corporation, performance and structure optimization, global sourcing advantages, economies of scale, capabilities for competing for large-scale projects, geographic presence optimization. These advantages are in accordance with the model of Bartlett and Ghoshal (1989), who argue that improved efficiency is the main benefit of the company’s global integration. Besides, these areas of global efficiency can be compared with Hennart’s (2001) statement about factors sharing which transnational companies achieve some significant benefits, namely: know-how (see for instance ABB’s optimization and rationalization of the production process) and materials or components (in case of ABB – global sourcing and standardization). Besides, redistributing working tasks around the globe, ABB gained more control over working force than it would have operating in a single country. This happens due to the fact that country-specific working force is immobile by nature, it is “bound” to one country, while the operations of a transnational company are mobile, i.e. they can be moved easily to different countries (Sudgen, 1991, as cited in Pitelis, 2002, p. 132). In general, all mentioned above benefits from being global promoted, directly or indirectly, ABB’s cost-efficient performance.
Local responsiveness
As the structure follows strategy, ABB established multidomestic organization which enables their complete responsiveness to local conditions in creating the local business. Consequently, local responsiveness leads to the overall success of the global activities. The aim of ABB is to behave and to be seen as local citizen in host country by establishing local business with local employment, management, supply base, adjusting to local business practices and create social responsibility (Hill and Jones, 1998). In this way they can be concentrated on very narrow region. That is why CEO of ABB calls the business on this level as “superlocal”. By this ABB creates a specific competence centers or profit centers which are from one side profitable and independent, and from another side they contribute to the overall success and profitability of the MNE ( Bartlett and Ghoshal, 1989).
From the perspectives of the management structure and role, country managers (Berggren, 1994, Bartlett et al., 2008) are responsible for operating in their country, with the help of the ABB expertise from all around the world in a case of occurred problems. The success of profit centers turns on local recruited managers, their knowledge, talent and commitment, transfer of technology and attitude of team members (Unknown 2010a). Without good structure and defined roles of managers confusion in implementing transnational strategies would certainly arise.
When it comes to the point of the payment system in such complex entity, it is essential that the right one is applied. ABB applies payment system in every country with the influence of local system (Festing, Eidems and Royer, 2007). Employees need to feel equity in treatment in local as in global scene. ABB has to take all factors in consideration, especially in developing countries which mostly demand a lot of adjustments to political and legal systems.
From the aspect of adjusting to local needs, tastes and requirements defined by Hill and Jones (1998) ABB customized product for Swiss federal Railways. Making global products and in the same time successfully adjusting to local requirements, enables ABB to maintain competitive advantage and to grow constantly.
Worldwide learning
The third dimension and maybe the most specific for a transnational strategy is the continuous learning process and transfer of knowledge also called the world wide learning. How does ABB stay innovative and on top of it’s game in world wide dimensions has to do a lot with this so called third dimension of Barlett and Ghoshal’s model (1989). Research shows that ABB has a great respect towards Swedish culture and it tries to implement some of the characteristics of the Swedish way of doing business at every level of its organization. This is done by constant international training and by bringing awareness among the management level. All of ABB’s managers go through extensive management training that helps them get in accordance with the culture, values and belief of the corporations. Once these have been understood managers are able to lead the company in the right direction. ABB wants employees to feel as part of one big global family, to be able to develop the trust and belief in this family and to know that they can always count on it. The only way to develop this is by sharing information, experiences and by that developing knowledge that will be transferred from employee to employee for years to come. By the way ABB respect their middle management and invest in their well -being and their development it is obvious that the theory of the importance of middle management in a corporation, which is discussed by Judge and Stahl (1995), is supported by ABB.
At ABB, the management is trying as hard as possible to give people the opportunity to evolve and they challenge them to work in international conditions. Employees are allowed to apply for a work abroad and get their experience in another ABB office round the world. This complements the learning process and helps employees understand the real culture of the corporation and how actually global they are. This corresponds to the network style of managing people and other resources that is discussed by Henry (2008) in theory. In terms of Bloom, Milkovich and Mitra, (2002), ABB respects local compensation laws and always treats their employees fair when it comes to compensation according to their own compensation plan that the corporation has.
All of the previous said talks about a one way knowledge transfer and Barlett and Ghoshal’s model (1989) talks about world wide sharing which is suppose to be a two way process. ABB has put customer interests and care as the most important think in this strategy and they are always interested in satisfying the customers needs. By having this perspective ABB always tries to learn from its customers and to improve its products in accordance with customers requirements and that is why they have implemented the concept of Time Based Management. It can be said that ABB learns form its customers at all times and this is a presentation of the two way learning process. Moreover ABB tries to learn a bit from every country in which ABB’s model has been applied and that is why they also call their learning system a multi direction learning process. The issue of using one language is also of high importance
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