Ashridge

Virtual Learning Resource Centre

Managing across borders

Bookcover

by Christopher A. Bartlett and Sumantra Ghoshal, Random House Business Books, 1989.

Abstract

In the late 1980‘s this classic was early in providing a model of the transnational firm, distinguished from international, global and multinational firms, by its method of dispersing knowledge and innovation globally and combining global efficiency and local responsiveness. World markets were no longer just places to export to. A groundbreaking book in its time.

(Reviewed by Edgar Wille in June 1999)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

This is a seminal book which still offers the reader a new perspective on international business. It is based on five years of in depth research into the activity and development of nine international companies against the general background of international business and a wide study of relevant literature, by two prominent academics.

The companies closely studied were Unilever, Philips, ITT, Kao, Matsushita, NEC, Procter and Gamble, General Electric (US) and Ericsson. The aim was to see how they were responding to the changes in the world scene. Familiar words with new meanings were used to encapsulate their overall styles. Thus the first three were described as multinationals; the second three as global companies; the last three as international companies. All were said to be moving towards becoming TRANSNATIONALS. The authors are using the words rather in the spirit of Humpty Dumpty in 'Through the Looking Glass', who says: 'When I use a word, it means just what I choose it to mean - neither more nor less'.

The ascribing of specific defining power to these familiar words certainly does help the reader to remember the theme and to categorise any organisation with which one is concerned. Bartlett and Ghoshal use the terms broadly as follows:

  • MULTINATIONAL: A corporation which builds a strong local presence through sensitivity and responsiveness to national differences.
  • GLOBAL: A corporation which builds cost advantages through centralised global-scale operations.
  • INTERNATIONAL: A corporation which exploits parent company knowledge and capabilities through world-wide diffusion and adaptation.
  • TRANSNATIONAL: The definition of this is best given after we have looked a little more at the first three, but it incorporates an appropriate mix of all the above in one corporation.

As with most categorisation there is nothing really categorical about it; there is a lot of flexibility and even ambiguity, but corporations do display broad trends which can be usefully described under a simple word or phrase. The following paragraphs look at each in turn.

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Multinationals

In the sense that the authors use the term, multinationals develop a strategic posture and organisational capability that allows them to respond sensitively to the differences in national environments around the world. They give all their subsidiaries a clear sense of autonomy in the exercise of this sensitivity. The corporate headquarters maintains only a general financial decision making role and for the rest is advisory in its influence, rather than directive, though within a general acknowledgement of corporate mission.

In effect these corporations manage a portfolio of multiple national entities. Hence the choice of the word multinational to describe them. However some areas of industrial activity fit this type of overall management better than others. Thus organisations which deal in branded packaged products fit the multinational approach. They just have to take into account local tastes and adapt accordingly. The authors give examples of the category. Thus Unilever has allowed its overseas companies to operate quite independently. Many of the Philips Group are fairly self sufficient. ITT has been committed to building links to each host country's political infrastructure, not always with happy results, but nevertheless many of their companies are perceived as local companies.

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Global corporations

Another category of companies, especially the Japanese ones, such as Kao, Matsushita and NEC, have developed international operations which are driven by the need for global efficiency, the outcome of advantages from scale and uniform standards. These corporations are much more centralised in their strategic and operational decisions. They treat the world market place as an integrated whole and so are classic cases of the global corporation. They follow the philosophy of Theodore Levitt whereby world-wide consumer demand is the principal unit of analysis, in which there is a perceived commonality of requirement from consumers everywhere. Products are developed to exploit an integrated unitary world market, not to attract the custom of unique local markets.

Usually the expansion of global corporations into markets beyond their home territory has been export based, initially with production operations conducted at home and only gradually extending into the wider world. Even when manufacturing takes place in customer countries product development and manufacturing and marketing strategy is strongly centralised in the parent country. It is a matter for these corporations of leveraging home country assets.

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International firms

The third category has a strategy which is primarily based on the transfer and adaptation of the parent company's knowledge and expertise to foreign markets. The parent company still has plenty of influence and control, but less so than in the global corporation. National companies are allowed to adapt products and ideas coming from the centre, but are not as independent as those under the authors' multinational category. The new products developed in the home country for domestic markets are extended to others at roughly the same state of development or geographically close and then diffused throughout less developed countries. There is a step by step diffusion of innovation from nation to nation. That is why Bartlett and Ghoshal feel 'international' is the most appropriate word.

Procter and Gamble have thus set up miniature replicas of the home company to adapt the home products, but not to depart from the 'Procter way'. Ericsson have been very successful in transferring and adapting telecommunications technologies as the basis for international expansion. Though products are involved, it is essentially technologies that are provided by the centre to the outposts.

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Transnationals

However as the mid-eighties arrived it was increasingly found that the environmental forces had dramatically changed the nature of the strategic demands in many businesses. The traditional multinational, global and international approaches sketched out above, no longer worked adequately. The highly volatile, competitive and changing scenarios required a new approach. This is the one Bartlett and Ghoshal call the TRANSNATIONAL.

It is quite simple really. This fourth approach was to make a mix of the earlier three in ways appropriate to the situation, and not to just one situation in one area, but in response to a variety of situations, so that the mix would vary in different parts of the world and in different aspects of the corporate activity.

Previously a company could compete effectively by sticking to the strategy which most neatly fitted the nature of the business. However the forces of global integration, local differentiation and world-wide innovation became so strong that the only way ahead was to develop the first three basic strategies - global competitiveness, multinational flexibility and world-wide learning capability - simultaneously. The transnational centralises some of its resources at home, some abroad and distributes yet others among its many national operations; it integrates the dispersed resources through strong interdependencies. There is a move from the decentralised federation of the multinational, the centralised hub of the global corporation, the co-ordinated federation of the international - to the integrated network of the transnational.

Needless to say, this has created many problems. There has been the organisational challenge to break away from a traditional and well ensconced method of organising the total activity of the corporation. This also involved a change in the way managers thought and called for a transformation of corporate culture in many cases. New and complex demands could no longer be met by the old ways, by sticking to being the same kind of company with the same emphases as formerly. The implications for management development are considerable. Top management attention is vital.

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The learning organisation

All companies operating other than in their domestic markets and whether currently multinational, global or international in their focus, face the same challenges of 'building a learning and self-adaptive organisation' that is also 'competitive and flexible'. This involves a vast range of tasks, which the book describes and illustrates.

Particularly significant are the words 'a learning and self adaptive organisation'. This gives the phrase 'learning organisation' a powerful business orientation. The concept is not one which belongs merely to the so called soft human sciences but it is a matter of business survival. As Bartlett and Ghoshal say:

'The transnational is not a specific strategic posture or a particular organisational form. In essence, THE TRANSNATIONAL IS A NEW MANAGEMENT MENTALITY. The most fundamental objective of this book, therefore, is to describe, illustrate and advocate the transnational mentality; the one element of the transnational solution that we believe is necessary for every company which operates in an international environment.'

If we can grasp the theme of the book thus expressed, we shall become aware of a new way of seeing international business activity. Everything we have ever read or discussed on the subject will come under this quite simple template; new avenues and approaches will open up.

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The search for fit

Chapter two is particularly useful in holding the theme in one's mind. The idea is that in the past history of the nine companies (and they are representative of many others) they have sought with varying success to fit their international strategies to their type of industry.

The following paragraphs bring out some of the salient examples given by the authors of the search for fit in the branded packaged product industries, in consumer electronics and in telecommunications.

Branded packaged products

Thus branded packaged products thrived for many years on the basis of local responsiveness and this was the dominant strategic requirement of the company. Unilever achieved this. In laundry detergents, for example, they took into account that up to 1980 only 30% of British households had washing machines as against 85% in Germany, that the Northern countries preferred 'boil washing', but Mediterranean countries tended toward hand washing in cold water. Add to that local differences in water hardness, perfume preferences, fabric mix and phosphate legislation and in no way could the business think in terms of a unitary global market. Also marketing opportunities varied from country to country, with fewer large retail chains and strict control of television advertising in some.

On the other hand the fit was less precise in Kao which tried for a long while, with some success, to follow the Japanese recipe for highly efficient central plants in its detergent business. It treated the world as one large undifferentiated market and what worked in Japan was exported anywhere else. Corporate functional management ruled and overseas postings were not regarded as prestige appointments. Even recently the rate of Kao's overseas expansion has remained disappointing, because its dominant strategic capability has not matched the dominant strategic requirement of the industry of which it is a part. It illustrates the limitations of Levitt's 'global village' theory, which declares that 'the world's needs and desires have been irrevocably homogenised' and that 'the commonality of preferences leads inescapably to the standardisation of products, manufacturing and the institution of trade and commerce'.

Procter and Gamble, in their detergent business, found a half way house in which central R&D formulated the final products but left much of the ingredient research to the local manufacturing companies. The contribution of the centre was to transfer to the local companies strong technologies and well developed marketing expertise. However it had to learn to let go even more than this as it faced considerable difficulties when it tried to introduce Tide and other successful brands to other countries on the premise that its basic technology was appropriate for undifferentiated export.

Consumer electronics

Similarly, the development of the consumer electronic business to integrated circuits and beyond, reduced the number and cost of components and so made the centralised manufacture of the products for a global market the most appropriate fit. Matsushita, following the Japanese efficiency of scale approach, therefore found the fit and prospered, whereas Philips, sticking to the multinational, local responsiveness approach, found itself in some difficulties and had to learn to take on board some elements of the other two approaches. However even Matsushita had to learn to take local preference into account and to provide video tapes with two hour playing time to record US football games for later viewing.

GE had built on its strength in enabling local companies in its family to draw on the technological power of the centre and apart from this to operate largely on an independent basis. This however was no match for Matsushita and too late GE realised that the appropriate fit was in the global approach. It therefore withdrew from consumer electronics.

Telecommunications

Similar information is provided about the telecommunications industry, where Ericsson found the closest to an ideal fit. It recognised that its home market was too small to support the R&D efforts required for survival and built its strategy around an ability to transfer and adapt its innovative product and process technologies to international markets, avoiding both the strongly central global approach and what would have been the excessive autonomy for its industry of the highly localised multinational approach, (using the three terms, international, global and multinational in the Bartlett/Ghoshal way).

The difficulties experienced by the other two telecommunication corporations studied in depth, ITT and NEC, illustrate the problems of finding the fit. ITT was essentially multinational in its approach at a time when it needed to be international. It left its local companies to develop individually so long as their performance figures satisfied Harold Geneen, but did not recognise the strategic imperative to integrate the technological capabilities of the national entities to design a standard global product. Despite their head start in researching digital signal processing, the company failed to bring together their substantial but dispersed technical resources and knowledge. Thus ITT, the most widespread of all telecommunication companies, was forced to abandon its planned entry into the US switching market and then to sell its massive European telecommunication business.

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Beyond structural fit

For the full impact of the above stories there is no substitute for reading the book, but perhaps readers of this summary will at least have gained some awareness of the way in which it has become essential to avoid staying with any one perception of corporate strength. Also it is clear that we have to avoid a simplistic definition of what it means to be an international corporation or an international manager. The eighties were the period in which companies operating internationally had to learn that the previous strategic fit concept, which they had hardly absorbed, was already outdated by the complexity of the world. No firm could succeed by following a uni-dimensional strategic capability, emphasising only local responsiveness, global scale efficiency or the leveraging of parent company knowledge and competences. To win, a company has to achieve all three goals at once. And this is the requirement of the transnational corporation.

The authors of 'Managing across Borders' illustrate this theme of the triple act extensively. To take the detergent business, washing machines are becoming more universal, energy saving drives create a demand in the hot wash countries for the lower temperature approaches already favoured traditionally in other countries. Synthetic fabrics reduce the differences in washing practices. These factors make possible a more global and standardised approach, but on the other hand the demand for local variety continues, so that the dichotomy is best resolved by innovations being created jointly by headquarters and the national companies.

Thus the third - international - category is blended with the other two and gives the flavour of the learning organisation to the whole. Learning stems from the operational experience as well as from the central research, and we have a picture of such learning buzzing about all over the enterprise, giving it life and energy, so that in one sense all levels are involved in strategy. This is learning of the most comprehensive kind, embracing all levels of the company, shuttling back and forth across the continents in a systematic yet dynamic way, so that what is learned by doing in India finds application in, say, Nigeria and gives a clue to something that they are working on in the Netherlands.

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A new managerial mindset

To create this multidimensional, transnational corporation it is not sufficient to improve organisational structures. It is a matter of enabling the living organism to evolve. The nine companies of the study have had to reshape their core decision making processes, and in doing this to change the management processes of the corporation, its administrative systems, its communication channels and particularly its interpersonal relationships. The tools for managing such change were often more subtle than structural change and the structural fit described above became less relevant and harder to achieve. The rapidity of change and the mercurial nature of markets and tastes require a different kind of manager with a new management mentality, who can build multiple sources of competitive advantage which can be managed in a complementary and flexible manner.

In the absence of this transnational mentality, an attempt to adopt the Bartlett/Ghoshal framework mechanically would be counterproductive. Internal norms would be disrupted and bewildering ambiguity prevail. This is why the theme of the learning organisation is so important; learning is said to be the central game in consumer electronics and to be emerging as the key competitive capability in branded packaged goods. It has already proved itself in telecommunications. Companies are having to develop the ability to sense emerging trends, evolve creative responses and to diffuse their innovations world-wide. The authors call this the 'capability for WORLDWIDE LEARNING'.

The managers in the learning organisation recognise that different parts of the company possess different capabilities, often in response to local needs or even by chance. This exposure to a wide range of different environmental stimuli gives the world-wide company an important competitive advantage over the purely national company. 'The broader range of customer preferences, competitor behaviour, government demands, and technological stimuli can trigger learning and innovation within the organisation. Transnational managers see no reason to prevent resources outside the home environment from benefiting the entire corporation. Instead they foster the development of such organisational assets, and ensure that the whole firm has access to them.'

Instead of finding a central solution to an emerging global opportunity (as in a global or an international corporation), or different local solutions in each environment (as in a multinational), the transnational will pool the resources and the learning of the centre and of the many national subsidiaries to develop a world-wide solution for its dispersed organisation.

The task of management in the transnational is to legitimise diverse perspectives and capabilities. This is difficult for those in the global type of corporation. They have to develop multiple and flexible co-ordination processes. This may pose problems to those reared in the concept of the autonomous local subsidiaries. Finally management has to build a shared vision and individual commitment so that there is joint development and world-wide sharing of knowledge, which can be difficult in international companies where previously the technology all came essentially from the centre.

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The administrative heritage

This does not mean that companies can disregard their past. So Bartlett and Ghoshal refer to the role of the 'administrative heritage' of corporations, as both an inhibitor and a source of strength. 'A company's ability to build and manage the new strategic capabilities depends on its existing organisational attributes - its configuration of assets and capabilities, built up over the decades; its distribution of managerial responsibilities and influence, which cannot be shifted quickly; and an ongoing set of relationships that endure long after any structural change.'

This administrative heritage is an underlying source of the enterprise's key competences, but it is also a prime cause of resistance to needed change. It has frequently stood in the way of realignment and organisation's have had to learn by trial and error how to overcome these biases in ways consistent with the heritage - how to use their existing organisational capabilities for new, more complex and dynamic transnational postures. This poses fundamental questions for management development, how to move existing competences and perceptions forward without destroying them. In such organisation's management development has to be central to strategic development to ensure that the necessary adaptability is created in managers or that where there are choices those courses are followed which can most easily and effectively be developed in the managerial core.

Much of the book is taken up with the detail of how the nine companies responded to the challenges and the extent to which they have been approaching the transnational solution. This detail is particularly well handled in that one is never allowed to lose sight of the principles set out above. The detail reinforces the principles.

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Human resource management for the transnational?

Certain it is that the fundamental prerequisite for the integrated nature of the transnational is a sophisticated human resource management system. The transnational uses systems of recruitment, training and development, and career path management to help individuals cope with its diversity and complexity.

The key aims of human resource development in a transnational, or in order to become a transnational, are 'to broaden perspectives, build experience and develop relationships that result in management flexibility and close inter-unit linkages.' Note that these aims move beyond the development of individual skills to mental expansion and collective growth. They are not a question of teaching managers how to establish interpersonal relationships but of seeing the actual establishment of them as a management development function.

Many of the companies studied by the authors had 'consciously upgraded their personnel function from a low level, isolated staff function, focused on the administration of salary and benefit programs, to a central responsibility of all line managers, supported by qualified specialists and sophisticated systems integrated into the mainstream decision-making process.'

Bartlett and Ghoshal say that a central objective of the new human resource management programme is to develop an organisation in which the individual manager's perceptions, capabilities and relationships would become the basic building block for an integrated, yet flexible world-wide organisation.

The new approach to human resource management starts with recruitment and selection. Firms like Philips, Ericsson and Unilever, are seeing the whole world as their source of management recruitment. The top managers are more frequently being drawn from national subsidiaries and a range of nationalities. Japanese companies have found it difficult to implement this approach, though NEC are described as making good progress.

The chairman of Philips gave a New Year address in which he covered the question of the optimum selection of future managers:

'We must look not only for professional skill and business acumen as our criteria, but also for the capacity to be able and willing to listen to others, openness, accessibility and communication skills. Last, but not least, we must look for an understanding and knowledge of social developments. Managers no longer make the grade who treat society as something that bothers one, to be given a wide berth.'

Examples are given of the stated aims of training and development. Matsushita sought to provide cultural and spiritual training; Philips to inculcate organisational cohesion. All the cases aimed to develop shared vision and values, broaden perspectives and capabilities and to develop contacts and shape management relationships - the collective approach.

To achieve these manager development aims, Philips stresses the need to give those with responsibility for management development direct access to the most senior management of the company.

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A matrix in the mind of managers

Some of the companies studied saw even the issues of organisational restructuring in terms of human resource development. One senior manager said: 'It is not so much to change the structure into a matrix, as it is to create a matrix in the minds of our managers.' The more individuals can resolve complex and potentially contradictory issues, the less the organisational system has to cope with them. The emphasis is on team players rather than soloists and people are evaluated on the extent they co-operate and not only on their measurable output.

The traditional organisational chart is less applicable to the transnational. Often managers think they are doing something when they move boxes and redraw lines. 'Too often managers lose sight of the real organisation behind those structural representations. The boxes they casually shift around represent people with abilities, motivations and interests, not just formal positions with specified roles. The lines they redraw are not just formal reporting channels, but interpersonal relationships which may have taken years to develop'.The suggestion is that companies should focus first on modifying individual perspectives and interpersonal relationships before tackling the formal redistribution of responsibilities and power.

The book ends with the comment that it is crucial to change the mentality of members of the organisation. Diverse roles and dispersed operations must be held together by a management mindset that understands the need for multiple strategic capabilities, views problems and opportunities from both local and global perspectives and is willing to interact with others openly and flexibly. 'In the future a company's ability to develop a transnational organisational capability will be the key factor that separates the winners from the mere survivors in the international competitive environment.'

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