THE DEMANDS OF MANAGING in an international operating environment changed considerably over the past decade. In an increasing number of industries, the benefits of exploiting global economies of scale and scope enhanced the need for integration and coordination of activities. At the same time, volatile exchange rates, industrial policies of host governments, resistance of consumers to standardized global products, and the changing economies of flexible manufacturing technologies increased the value of more nationally responsive differentiated approaches.1 And with the emergence of competitive battles among a few large firms with comparable resources and skills in global-scale efficiency and nationally responsive strategies, the ability to learn— to transfer knowledge and expertise from one part of the organization to others worldwide—became more important in building durable competitive advantage. Managers of multinational companies (MNCs) are now faced with the task of optimizing efficiency, responsiveness, and learning simultaneously in their worldwide operations—which suggests new strategic and organizational challenges.
This is the first of two articles that explore this new situation; they are based on a research project that involved extensive discussions with more than 250 managers in nine of the world’s largest multinational companies.2 In this article we will describe the strategic challenges these companies faced because of increasing complexity of environmental demands, and the ways in which they tried to respond to those challenges. Our analysis suggests that, for most MNCs, limited organizational capability (rather than lack of analysis or insight) represents the most critical constraint in responding to new strategic demands. In the follow-up article, we will describe how companies are trying to overcome this constraint by building a very different kind of multinational organization, one that can cope with the increasing complexity of the international environment.
New Challenges: Mixed Responses
The international operations of all the companies we studied were in a state of transition. The 1980s brought new demands and pressures that forced them to question their worldwide strategic approach and to adapt their organizational capabilities. Some seemed to be managing the transitions successfully, others were simply surviving, and a few were encountering major difficulties.
- In the branded packaged goods industry, both Unilever and Procter & Gamble responded to the need for greater scale efficiency and more globally integrated marketing strategies and technology development by providing better coordination and control over their worldwide operations.
1. The tension between the strategic requirement for integration and differentiation has a long intellectual history, but is perhaps best captured in the classic Lawrence and Lorsch study [P. Lawrence and J. Lorsch, Organization and Environment (Boston: Harvard Business School Press, 1967)]. Their differentiation-integration framework was first applied to the international organization task by Prahalad [C.K. Prahalad, “The Strategic Process in a Multinational Corporation,” (Boston: unpublished doctoral dissertation, Harvard Graduate School of Business Administration, 1976)], and subsequently adapted by others, including Doz and Bartlett [see Y. Doz, National Policies and Multinational Strategic Management (New York: Praeger, 1979)]; and [C.A. Bardett, “Multinational Structural Evolution: The Changing Decision Environment” (Boston: unpublished doctoral dissertation, Harvard Graduate School of Business Administration, 1979)].
2. This research project consisted of three phases. The first aimed at identifying and describing the key challenges faced by managers of worldwide companies and documenting “leading practice” in coping with these challenges. That was also the hypothesis-generating phase, and the sample was selected to represent the greatest variety of strategic and organizational situations. In the consumer electronics industry, globalization offered the greatest benefits; in the consumer packaged products business, the forces of national responsiveness were especially strong; and in the telecommunications switching industry, both global and local forces were very important. Within each industry, we selected a group of firms that represented the greatest variety of administrative heritages, including differences in nationality, internationalization history, and corporate culture. The research sites we chose were Philips, Matsushita, and GE in consumer electronics, Kao, Procter & Gamble, and Unilever in consumer chemicals, and ITT, NEC, and L.M. Ericsson in telecommunications switching.
In each of these companies, we interviewed a great many managers in the corporate headquarters and also in a number of national organizations in the U.S., Brazil, U.K., Germany, France, Italy, Taiwan, Singapore, Japan, and Australia. In addition, we studied company documents, and also collected information about the industries and the companies from a range of external sources. This two-article series is written primarily on the basis of data collected in this first phase of the project.
In the next stage, we conducted detailed questionnaire surveys in three of these nine companies. The principal objective of the survey was to carry out a preliminary test of some hypotheses generated during the first phase of clinical research, to define the hypotheses more precisely, and to develop suitable instruments for testing them more rigorously. Approximately 100 managers each from NEC, Matsushita, and Philips participated in the survey.
Finally, in the third phase of the study, the hypotheses were tested through a large-sample mailed questionnaire survey that yielded data on 720 cases of headquarters-subsidiary relations in sixty-six of the largest U.S. and European multinational corporations.
The overall findings of the project are being reported in our forthcoming book, tentatively entided Managing across Borders: The Transnational Solution, to be published by the Harvard Business School Press.
3. The term “global,” applied to industries, companies, and strategies, has been subject to widely differing definition and usage. For further discussion, see M.E. Porter, “Competition in Global Industries: A Conceptual Framework,” in M.E. Porter, ed., Competition in Global Industries (Boston: Harvard Business School Press, 1986). We will use the term global strategy in its purest sense—one that defines product, manufacturing scale, technology, sourcing patterns, and competitive strategy on the assumption of a unified world market. It is the classic standardized product exported from a centralized global-scale plant and distributed according to a centrally managed global strategy.
4. See R. Vernon, “International Investment and International Trade in the Product Cycle,” Quarterly Journal of Economics, May 1966, pp. 190–207.
5. The internationalization processes and accompanying organizational attributes of many European multinationals have been described by L.G. Franko, The European Multinationals (Stanford, CA: Graylock, 1976).
6. For a detailed discussion of the management process in Japanese firms and their impact on strategy, see M.Y. Yoshino, Japan's Managerial System: Tradition and Innovation (Cambridge; MIT Press, 1968).
7. Readers with a particular interest in the history of international business will find a far richer historical analysis in A.D. Chandler, “The Evolution of Modern Global Enterprise,” in Competition in Global Industries, ed. M.E. Porter (Boston: Harvard Business School Press, 1986).
8. Documenting the postwar expansion of U.S.-based companies, Jean Jacques Servan-Schreiber attributed the Americans' success to their technological and managerial abilities. See J.J. Servan-Schreiber, The American Challenge (New York: Atheneum, 1968).
9. The issue of a management mind-set being critical to the task of managing MNCs was highlighted almost two decades ago by Perlmutter. See H.V. Perlmutter, “The Tortuous Evolution of the Multinational Corporation,” Columbia Journal of World Business, January–February 1969, pp. 9–18.