Management > International Business Management > Introduction to International Business > Transformation of Business: Domestic to Global
Before understanding the transformation of business, we have to understand different types of companies in international business.
International Companies:
Companies that deal with foreign countries for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country. Such companies have no foreign direct investments (FDI) and make their product or service only in their home country. These companies are involved in exporting and selling their goods and/or services to other nations. But other than exporting (and/or importing, such as purchasing raw materials), they have no other investment in these other nations. Almost all the business functions and headquarters remain in the country of origin. There are no branches of the company overseas in any of the nations the business trades with. Due to this system the company streamlines its decision-making process. But it may cause the company to struggle with a lack of understanding of these particular global markets. Example, Apple. It produces consumer electronics products such as computers, tablets, mobile phones, etc. Apple sells its products around the world, but the headquarters and all product development are located within the U.S. It has some manufacturing capacity in China and Taiwan with arrangement with Foxconn. Small scale examples are retail shops that sell imported products, or small local manufacturers that export to neighboring countries.
Global Companies:
Companies, which invest in other countries for business and also operate from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets. Their focus is on economies of scale, and they homogenize products as much as the market will allow in order to keep costs low. Global companies usually have subsidiaries in many nations, meaning many production units around the world. A global company, however, is one where the central headquarters of the business makes the decisions for driving the business, and the same product(s) are offered in every country, regardless of local culture and tastes. Example, McDonald’s chain of restaurants. They are located across the globe and serve the same menu in all of their locations with some local customization.
Multinational Companies:
A multinational company has establishments in the nations it chooses to operate in, not just sales but for production and marketing of the goods and services. Multinational companies normally have fewer countries of interest than a global company has because they have to cater to local interest. Example: Honda, a Japanese company has established branches and production units all over the world.
Transnational Companies:
These are companies with heavy operations in multiple nations. In transnational businesses, each local branch has its own decision-making power, its own markets, and its own product selection. This type of worldwide operation offers the most flexibility and versatility. Example, Unilever is a British-Dutch consumer translational company which has country-specific operations world over. Another example is Nestle.
The main features of Transnational Corporations (TNC) and MNCs are:
Giant Size:
The assets and sales of transnational corporations are quite large. The sales turnover of some TNCs exceeds the gross national products of several developing countries. Thus TNCs are economically very wealthy and thus potentially more powerful than many of the world’s nation states.
Centralized Control and Professional Management:
A transnational corporation has its head quarter in the home country. TNC and MNC exercise control over all its branches and subsidiaries which operate within the policy framework of the parent corporation. To manage worldwide operations, TNCs/MNCs employs people with professional skills, specialized knowledge, and training.
International Operations:
TNCs seek competitive advantaged and maximization of profits by constantly searching for the cheapest and most efficient production locations across the world. A transnational corporation has production, marketing and other facilities in several countries. TNCs operates through a network of subsidiaries, branches, and affiliate in the host countries. A substantial part of their workforce is located in the developing world but often employed indirectly through subsidiaries. Thus TNCs have geographical flexibility because they can shift resources and operations to any location in the world. TNCs are found almost in all the countries of the world. On account of its vast resources and superior marketing skills, a transnational corporation has vast access to international markets. Therefore, it is able to sell whatever product or services it produces in different countries.
Flexibility:
To be able to meet the ever-changing demands of highly flexible and dynamic consumers and integrate worldwide operations, TNCs carry on their operations with flexibility and adaptability. The head office registered is usually in the country of origin, or a low business-tax country. Research and Development (R&D) often takes place in countries with highly skilled scientists and engineers and with world-class universities. Manufacturing of components takes place where a reliable product can be efficiently produced without threats to long-term continuity and at the cheapest rate. Assembly will often occur close to the major market for the final product. Sales, Marketing and Service: take place close to the main markets for the product and keeping in the mind the demography of the market. They perform varied activities.
Oligopolistic Power:
Due to their giant size, they occupy a dominant position in the market. They also take over other firms to acquire huge economic power. For example, Unilever has acquired Tata Oil Mills, Ponds India, etc.
Proximity to target international markets
It is beneficial to set up business in countries where the target market of a company is. It helps reduce transport costs, and it gives TNCs easier access to consumer feedback and information, as well as to consumer intelligence.
Sophisticated Technology:
When a company goes global, they need to make sure that their investment will grow substantially. In order to do achieve substantial growth, they need to make use of capital-intensive technology, especially in their production and marketing. TNCs use capital intensive advanced technology to provide world-class products and services. This technology is used in manufacturing and in marketing also. TNCs spend a large amount on research and development (R&D).
Transformation of Business:
The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in few selected foreign countries and a company that operates and markets its products across several countries and continents with manufacturing capabilities in several of these countries. Thus international company acquires the status of the global company.
Example of Transformation of Business: Domestic to Global:
The Swedish home-furnishings giant, IKEA, started out as one store in Sweden. Founded in 1943, it sold pens, picture frames, jewelry, and accessories. The company published its first catalog in 1951, opened its first furniture showroom in 1953, and its first full-fledged store – as a domestic company – in 1958. Thus its operations were of the domestic company. Twenty years after its founding, the first IKEA store outside Sweden opened in 1963, in Oslo, Norway, making the entry of the company in the international business. By 1984, IKEA had 167 stores in 16 countries, and by 1985 it opened a store in the United States. It became MNC. Today, the IKEA Group is a prime example of globalization, owning and operating 276 stores throughout the world. Thus it is a global company now.
Indian Examples of Transformation of Business: Domestic to International:
- Amul
- Vicco Laboratories
- Aditya Birla Group
- Mahindra and Mahindra
Indian Examples of Transformation of Business : Domestic to Global:
- TCS (Tata Consultancy Services)