A transnational strategy is a set of planned actions defined by a company to have operations in markets abroad. This term generally applies to the methods and structures that allow a firm to initiate and maintain functions in foreign countries while preserving central coordination at one specific location.
What is Transnational Strategy?
Most manufacturers and service companies believe that a transnational strategy represents the ultimate means of exploiting global markets. Worldwide scale and scope are definitely appealing to managers. In fact, potential buyers have used this argument to pressure U.S. firms to divest U.S. operations or to move their headquarters abroad. Yet transnational firms can cause serious harm to local economies. For example, once a company has established a transnational strategy, how can local managers be given authority to respond to local competitive or market conditions?
With the major acquisition of the former Nabisco Co. by the Philip Morris Company in 2000, Philip Morris stated that it wanted to have a transnational strategy so that it could take advantage of the growing markets in developing nations. This, the company said, was the reason it was moving its headquarters to Switzerland. There was fierce resistance to this move, particularly by Swiss government officials and businesspeople. Nevertheless, the new transnational Philip Morris continues to make acquisitions on a global scale in such disparate locations as Australia, Canada, Portugal, Greece, Poland, Argentina, Pakistan, New Zealand, Hong Kong, Turkey, South Africa, and Mexico. The strategy of this firm is not just transnational, but global, covering the whole world.
Benefits of Transnational Strategy
There are a number of benefits of transnational strategy which are excellent for transnational firms.
♦ Reduction of costs: Transnationals conduct research, make capital investments, employ and train employees, and conduct other functions globally, hence reducing the costs of manufacturing through product and process innovation. This not only reduces overall costs, but also improves company profits.
♦ Possibility of retaining control: Despite the presence of thousands of distributors, transnational firms can retain control of their products by providing their key distributors with advertising incentives, such as price discounts and product exclusivity, as well as the market knowledge of the firm.
♦ Protection against failure: As a result of having a global footprint, companies are protected against failure in various regions.
♦ Protection against financial and political risk: The spread of assets and operations across countries can decrease the vulnerability of the firm against large adverse global economic changes. This is also true against political risk in countries that have weak governments with corrupt leadership.
Disadvantages of Transnational Strategy
There are also disadvantages of transnational strategy which may be significant enough to discourage firms from adopting this type of business strategy in certain situations.
♦ Cultural and social barriers: The management of transnational companies needs to be aware of cultural issues such as Western parents hiring nannies for their children from developing countries. They must also be cognizant of various Asian habits such as eating insects for lunch.
♦ High need of top leadership: Transnational companies need to have high-level executives with cross-country expertise. Managing these companies is complex since they have products in many markets.
♦ National and local pride: Many people do not want to purchase products made by foreign companies. Also, local governments often resist the presence of foreign firms.
♦ Security risks: Many firms have reported espionage attempts on their facilities by foreign competitors.
How Companies Apply Transnational Strategy
In order to successfully apply the transnational strategy, the organization must take care of the following five major components:
- Control mechanism
- Acquisitions and outsourcing
- Marketing and sales
The involvement of cross-country and cross-cultural managers at top management levels is a vital task for transnational companies. Top management must be prepared to have a global view of the company and, at the same time, to be a manager of specific products and markets.
The organizational structure of a transnational company must be flexible enough to endure the pressure of the larger-scale and more diverse operations. Typically, these firms have centralized corporate functions and decentralized operating units. The operating units are generally divided by geographic area into functional responsibility. They also set up a country team for each.
The control mechanism of a transnational strategy is complex. There is a great amount of potential for misunderstanding among managers in various locations. The company must set up means to coordinate progress and performance among the various managers. This could include conference calls, video conferences, e-mail, and reports delivered by third-party service providers.
The absence of control is a major risk in a worldwide business model. Without a balance between centralized and decentralized control, a transnational firm can quickly lose strategic control.
Acquisitions and Outsourcing
Transnational firms need to continuously integrate newly acquired companies and outsource non-core functions or products to lower-cost providers. The firm must also proactively seek out strategic acquisitions and business partners in all locations. However, the long-term benefits of joint ventures often outweigh the rewards of the acquisition strategy. The cost of integrating acquired companies is often greater than the cost of transferring existing activities to the third-party providers.
Marketing and Sales
Overall, a worldwide business strategy is the most profitable for a transnational firm with vast operations and a large customer base. However, it involves significant complexity and has a tremendous cost in terms of coordination and communication.
Risks of Transnational Strategy
In today’s era of global competition, firms are increasingly adopting sophisticated strategies to compete on a global scale. One of the most favored strategy is the transnational strategy. It is on the rise in US multinational firms as they try to outsource to global providers and embrace a mobile workforce. It is expected the continuing trend toward transnational strategy will eliminate most of the downsides. However, it will also raise the stakes for those firms, because if something goes wrong with one segment of your firm, the whole transnational operation could be disrupted.
The global nature of a transnational operation offers several advantages. It allows one to access a large pool of potential employees. It also gives access to various markets. Cutting costs is another advantage of a transnational strategy. A firm can cut costs through its global footprint by outsourcing its non-core activities or through its global supply chain. A company can also raise profits by using its global scope to cross-subsidize markets.
The risk of transnational strategy is that it is complex and expensive. It is difficult to ensure that a mobile workforce will be properly deployed, leading to productivity issues. Maintaining the unity of the company’s culture is also problematic. Another disadvantage is that the company is distanced from the consumers it’s serving in the countries where it’s making major capital investments.
Further, as the world moves increasingly towards globalism and away from the concept of multiculturalism, there is a risk that a transnational strategy may be ineffectual in various regions. Diversity is considered the force that drives innovation, creativity and collaboration. If a transnational corporation has to be consistent across the globe in its values, policies, strategies, and practices, it would end up disconnected from the ethnic and cultural reality of the diverse countries.
In fact, a transnational strategy could have inadvertently negative consequences. Instead of partnering with the local workers and innovators of a country to add value to the products, it could displace more local workers. Alternatively, it could lead to a country’s isolation from the global knowledge exchange that occurs among diverse populations.
Transnational Strategy and Different Firms
Transnationals usually form a strong power base in their home base, making it hard for other firms to compete. For example, MNCs such as Intel, Microsoft and Walmart have such a large power base in the US, that it makes it hard for other firms to compete. Intel for example have 60,000 employees based in the US compared to 30,000 based at its subsidiaries located in over thirty two countries. Therefore, there is a dominance and a spread of firms, whereas for local firms, there is no dominance and no spreed.
These transnational firms have their ownership spread across different countries. This ownership spreading across different countries makes it risky as no single country has any control over the firm. Whereas, for local firms, this risk is less as ownership is not spread across different countries.
These firms are large in size; thus they have the financial power that local firms don’t. For example, Intel has the financial power to retain US workers as the firm can offer them more money than local firms can. Whereas, for local firms, they cannot do this as the firm uses local workers and pays wages in local currencies.
The firms have developed a multicultural workforce. This mix of local and expats workers is advantageous to the firm but disadvantageous to local firms. This is so as the firm can transfer any easily trained worker to a new region and can retrain other workers by investing time in expats workers. Whereas, this is not possible for local firms as the firm has to find locals who are similar to expats and on top of that, the firm has to invest in time and money on training local workers.
Competitive Strategies Used by Transnational Firms
On the basis of global strategy, these firms have different competitive strategies. Some of these transnational companies have a globalized strategy such as in the case of Apple, and Dell. These firms are very dominant in their regional market. They are even more successful than local firms. For example, Apple is more successful in its regional market than local firms.
Some of the firms have local domestic firms that offer some competition. In such cases, the transnational firms compete with local firms. Local firms compete with transnational firms for global market shares. For example, when Toyota was in its early stages of development, where the firm competed with Austin Automobile Company on the basis of buildings and vehicles. Again, when Sony came into Nigeria, it competed with local firms on the basis of quality and price of their TV sets.
There are firms that chose to use an interactive strategy. These firms have regional subsidiaries with no central control. The firms interact with the local community and adapt to their culture and requirements.
There are some firms that use a progressive strategy. These firms adopted innovations and acted quickly on new developments. For example, when Dell computer came into the market, it used an innovative strategy to meet the expectations of customers. In this way, Dell adapted to changes and needs of the customer.
In some cases, some firms have no competition. For example, many firms that are related to global brands use a global strategy and are not many competitors.
There might also be some firms that do not have any competitor. For example, Microsoft has very strong competition using the global strategy in their global market. When a firm is dominant in its regional market, it might not have direct competitors.