MNCs are complex organisations, difficult to manage, unpopular in the press and with the public, often decline into bureaucracy, inflexible and unresponsive, slow to change and sometimes guilty of fraud or corrpution (Enron etc). So what's the point?!
Well there are advantages. Strategic benefits include flexibility and options. In international competition, options allow you to choose between ways of doing things. Once you go global, you have a wider range of strategies available. For example, you can exploit market imperfections.
It's a fair point that if there was one global market, then global strategies would be irrelevant, they could be identical to your national strategy.
Trade barriers include high tariffs, import quotas, refusal to grant licences, nationalistic purchasing and ownership policies, centralise command economies and excessively nationalistic domestic demand. Your job as a global firm is to try and exploit the barriers which favour you and avoid those that don't
Governments are careful to tax at levels just high enough to produce useful revenue without being so high as to force corporations to shift investments elsewhere. They may actually try to convince you to invest through capital grants, regional grants (eg in low employment areas), tax free zones etc.
It can pay to be larger. Kogut (1985) points out that production shifting (eg outsourcing IT function to India), tax minimisation, financial markets, information arbitrage (transfer of knowledge), global co-ordination and reducing political risk are all options open to larger MNCs.
Example, Wipro, p59
Multinational companies have part of their activities located outside their home base and operate in international markets. The location is influenced by comparative costs, risks and regulatory contexts.
Trade may be carried out in different ways. The four types are exporting, foreign direct investment (FDI), licensing and joint ventures/strategic alliances. Rugman et al developed a rational decision tree for choosing between the various strategic options (1985, p130), u7p61.
International strategy and structure
Remember chandler said "structure follows strategy" - his view was that where there were economies of scale and scope to be had then these lead to national and international concentration, so competition becomes oligopolistic (only a few large organisations).
Stopford and Wells developed a simple descriptive model to illustrate the typical stages of development for companies progressively moving towards an international organisation structure. They saw this as a process driven by two dimensions.
1. Foreign product diversity, ie. the number of products sold internationally,
2. The importance of international sales to the company (foreign sales as a percentage of total sales)
They suggested that you should set up your international division at an early stage of internationalisation when the figures for diversity and percentage were low. Then you will follow either a pathway leading to a worldwide product division structure due to substantial foreign product diversity or if you expand overseas without increasing diversity you will adopt a geographical area structure. But when both foreign sales and the diversity of products are high you will have a global matrix. You often see MNCs with a geographic dimension and a product group dimension in a matrix structure.
Example: Nestlé, p63.
According to the Uppsala model (Johanson and Vahlne, 1977), you will increase your international involvement in stages, beginning in countries culturally most similar to yourself/your own before broadening out as you gain increased knowledge of and commitment to foreign markets.
Kogut (1985) says that once you become an MNC, you can take advantage of the comparative advantage of the nations in which you carry out FDI (foreign direct investment) and achieve competitive advantage by investing in your value chain. International configuration of the value chain allows you to identify sources of comparative (country) and competitive (firm) advantage.
Why internationalise? "Global strategies rest on the interplace of the competitive advantage of firms and the comparative advantage of countries" - Kogut 1985. An MNC may pick and choose between the comparative advantages of countries, a luxury not available to you if you stay local.
An organisation that competes internationally can benefit from the geographic dispersion of its activities through configuration of the international value chain. You must decide how to spread the activities of your value chain among countries. All organisations have a wide choice of how to configure their value chain, but if you operate across borders you should use your choice of configuration as a source of advantage.
You have different issues that arise depending on how you configure your value chain. For example, if you configure your value chain so that all R&D is centralised, you have few co-ordination issues, except to ensure it is in touch with all your markets. If it is distributed, you have to co-ordinate to ensure you are not duplicating effort, which can be costly.
High levels of co-ordination may result in higher costs. These additional costs must be weighed against the cost savings in other parts of the value chain. eg. Mexico's lower labour costs were almost cancelled out by the higher costs associated with its poor transport infrastructure. Grant says the benefits derived from breaking the value chain and locating individual activities in different countries must be traded off against the costs of weaker linkages between stages in the chain.
The configuration of the value chain will also depend on the type of strategy being pursued. For example, Dell Computers, with its strategy of fast delivery and customising for individual customer requirements, needs to locate manufacturing close to its markets. Conversely Acer competes mainly on price and has located its manufacturing mainly in Asia.
Three of the most common approaches to the international value chain are
A - seeking scale efficiencies - everything is geared to scale. Can form the basis of a global cost-based strategy
B - Seeking efficiency in each separate link in the chain. This treats each part of the chain equally
C - Seeking efficiency in the links and through the linkages.
Successful international competitors "seek out competitive advantages from global configuration/coordination anywhere in the value chain, and overcome the organisational barriers to exploiting them" (Porter, 1986, p56)
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