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.

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Dicken, Peter. Global Shift: The Internationalisation of Economic Activity. Paul

Chapman Publishing: 1999.

Michie, Jonathan and Smith, John Grieve. Managing the Global Economy. Oxford

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*Jones, Geoffrey. Transnational Corporations—a Historical Perspective.

International Thomson business Press: 1996.

*Dunning, John H. The Nature of Transnational Corporations and Their Activities.

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*Hedlund, Gunnar. Organizations and Management of Transnational Corporations

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* Each of these three articles are part of the larger work: Transnational

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The Internal Organization of Transnational Corporations:

Different Strokes for Different Folks

Ryan M. Martin

Globalization

Evans

7 March 2002