For many years, multinational corporations could compete successfully by exploiting scale and scope economies or by taking advantage of imperfections in the world’s goods, labor and capital markets. But these ways of competing are no longer as profitable as they once were. In most industries, multinationals no longer compete primarily with companies whose boundaries are confined to a single nation. Rather, they go head-to-head with a handful of other giants that are comparable in size, in their access to international resources and in worldwide market position. Against such global competitors, it is hard to sustain an advantage based on traditional economies of scale and scope.
Consider the oil industry. The industry is dominated by a handful of global players such as Exxon Mobil, BP, Shell and ChevronTexaco. They each have global exploration, refining and distribution operations, leaving little room for any company to gain competitive advantage with economies of scale. Similarly, they each have brands that are more or less equally well recognized the world over, reducing opportunities for a company to seize competitive advantage with an economy of scope based on its brand power. Such relative parity among multinational corporations can also be observed in consumer electronics, information technology, pharmaceuticals, banking, professional services and even retailing.
Under these circumstances, MNCs must seek new sources of competitive advantage. While multinationals in the past realized economies of scope principally by utilizing physical assets (such as distribution systems) and exploiting a companywide brand, the new economies of scope are based on the ability of business units, subsidiaries and functional departments within the company to collaborate successfully by sharing knowledge and jointly developing new products and services.1 Multinationals that can stimulate and support collaboration will be better able to leverage their dispersed resources and capabilities in subsidiaries and divisions around the globe.
Collaboration can be an MNC’s source of competitive advantage because it does not occur automatically — far from it. Indeed, several barriers impede collaboration within complex multiunit organizations. And in order to overcome those barriers, companies will have to develop distinct organizing capabilities that cannot be easily imitated.
Interunit collaboration is not only difficult to achieve but also poorly understood. However, a framework that links managerial action, barriers to interunit collaboration, and value creation in MNCs can help managers “unpack” the concept.
1. See B. Kogut and U. Zander, “Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology,” Organization Science 3, no. 3 (1992): 383–397; C. Hill, “Diversification and Economic Performance: Bringing Structure and Corporate Management Back Into the Picture,” in “Fundamental Issues in Strategy,” eds. R. Rumelt, D. Schendel and D. Teece (Boston: Harvard Business School Press, 1995), 297–322; and J. Nahapiet and S. Ghoshal, “Social Capital, Intellectual Capital and the Organizational Advantage,” Academy of Management Review 23, no. 2 (April 1998): 242–266.
2. For an in-depth look at BP on this issue, see S.E. Prokesch, “Unleashing the Power of Learning: An Interview With British Petroleum’s John Browne,” Harvard Business Review 75, no. 5 (September–October 1997): 146–168; and M.T. Hansen and B. Von Oetinger, “Introducing T-Shaped Managers: Knowledge Management’s Next Generation,” Harvard Business Review 79, no. 3 (March 2001): 106–116. The section on BP in the text draws on the latter article.
3. See P.R. Lawrence and N. Nohria, “Driven: How Human Nature Shapes Our Choices” (San Francisco: Jossey-Bass, 2002).
4. This section draws on M. Hansen, “Turning the Lone Star Into a Real Team Player,” Financial Times, Aug. 7, 2002, 11–13.
5. See, for example, M.B. Brewer, “Ingroup Bias in the Minimal Intergroup Situation: A Cognitive Motivational Analysis,” Psychological Bulletin 86 (1979): 307–324; and H. Tajfel and J.C. Turner, “The Social Identity Theory of Intergroup Behavior,” in “Psychology of Intergroup Relations,” 2nd ed., eds. S. Worchel and W.G. Austin (Chicago: Nelson Hall Publishers, 1986), 7–24.
6. See P.J. Oakes, S.A. Haslam, B. Morrison and D. Grace, “Becoming an In-Group: Reexamining the Impact of Familiarity on Perceptions of Group Homogeneity,” Social Psychology Quarterly 58, no. 1 (March 1995): 52–60; and D.A. Wilder, “Reduction of Intergroup Discrimination Through Individuation of the Out-Group,” Journal of Personality & Social Psychology 36 (1978): 1361–1374.
7. See R.H. Hayes and K.B. Clark, “Exploring the Sources of Productivity Differences at the Factory Level” (New York: Wiley, 1985); and R. Katz and T.J. Allen, “Investigating the Not Invented Here (NIH) Syndrome: A Look at the Performance, Tenure and Communication Patterns of 50 R&D Project Groups,” in “Readings in the Management of Innovation,” 2nd ed., M.L. Tushman and W.L. Moore, eds. (New York: HarperCollins Publishers, 1988), 293–309.
8. See also S. Ghoshal and L. Gratton, “Integrating the Enterprise,” MIT Sloan Management Review 44, no. 1 (fall 2002): 31–38.
9. See M.T. Hansen, “The Search-Transfer Problem: The Role of Weak Ties in Sharing Knowledge Across Organization Subunits,” Administrative Science Quarterly 44, no. 1 (March 1999): 82–111; and M.T. Hansen and B. Lovas, “How Do Multinational Companies Leverage Technological Competencies? Moving From Single to Interdependent Explanations,” Strategic Management Journal, in press.
10. For more details on knowledge management in management-consulting companies, see M.T. Hansen, N. Nohria and T. Tierney, “What’s Your Strategy for Managing Knowledge?” Harvard Business Review 77, no. 2 (March–April, 1999): 106–116.
11. See A.K. Gupta and V. Govindarajan, “Knowledge Flows Within Multinational Corporations,” Strategic Management Journal 21 (April 2000): 473–496.
12. See W. Tsai, “Social Structure of ‘Coopetition’ Within a Multiunit Organization: Coordination, Competition and Intraorganizational Knowledge Sharing,” Organization Science 13, no. 2 (March–April 2002): 179–190.
13. For a detailed description of these changes at Morgan Stanley, see M.D. Burton, T.J. DeLong and K. Lawrence, “Morgan Stanley: Becoming a ‘One-Firm’ Firm,” Harvard Business School case no. 9-400-043 (Boston: Harvard Business School Publishing, 1999); and M.D. Burton, “The Firmwide 360-Degree Performance Evaluation Process at Morgan Stanley,” Harvard Business School case no. 9-498-053 (Boston: Harvard Business School Publishing, 1998).
14. See M. Haas, “Acting on What Others Know: Distributed Knowledge and Team Performance” (unpublished Ph.D. diss., Harvard University, 2002).
15. For an in-depth look at inspiring common goals, see J. Collins and J. Porras, “Building Your Company’s Vision,” Harvard Business Review 74, no. 5 (September–October 1996): 65–77.
16. See M.T. Hansen and C. Darwall, 2003, “Intuit Inc.: Transforming an Entrepreneurial Company Into a Collaborative Organization,” Harvard Business School case 9-403-064 (Boston: Harvard Business School Publishing, 2003).
17. See R.H. Coase, “The Nature of the Firm,” Econometrica 4 (1937): 386–405.
18. See R.E. Caves, “Multinational Enterprise and Economic Analysis (Cambridge, United Kingdom: Cambridge University Press, 1982).
19. See C. Barnard, “The Functions of the Executive” (Cambridge, Massachusetts: Harvard University Press, 1939).