Development Stages of a Transnational Corporation

There are five stages in the evolution of the transnational corporation. These stages describe significant differences in the strategy, worldview, orientation, and practice of companies operating in more than one country. One of the key differences in companies at these different stages is in orientation.

Stage One–Domestic

The stage-one company is domestic in its focus, vision, and operations. Its orientation is ethnocentric. This company focuses upon domestic markets, domestic suppliers, and domestic competitors. The environmental scanning of the stage-one company is limited to the domestic, familiar, home-country environment. The unconscious motto of a stage-one company is: “If it’s not happening in the home country, it’s not happening.” The world’s graveyard of defunct companies is littered with stage-one companies that were sunk by the Titanic syndrome: the belief, often unconscious but frequently a conscious conviction, that they were unsinkable and invincible on their own home turf.

The pure stage-one company is not conscious of its domestic orientation. The company operates domestically because it never considers the alternative of going international. The growing stage-one company will, when it reaches growth limits in its primary market, diversify into new markets, products, and technologies instead of focusing on penetrating international markets.

Stage Two–International

The stage-two company extends marketing, manufacturing, and other activity outside the home country. When a company decides to pursue opportunities outside the home country, it has evolved into the stage-two category. In spite of its pursuit of foreign business opportunities, the stage-two company remains ethnocentric, or home country oriented, in its basic orientation. The hallmark of the stage-two company is the belief that the home-country ways of doing business, people, practices, values, and products are superior to those found elsewhere in the world. The focus of the stage-two company is on the home-country market.

Because there are few, if any, people in the stage-two company with international experience, it typically relies on an international division structure where people with international interest and experience can be grouped to focus on international opportunities. The marketing strategy of the stage-two company is extension; that is, products, advertising, promotion, pricing, and business practices developed for the home-country market are “extended” into markets around the world.

Almost every company begins its global development as a stage-two international company. Stage two is a natural progression. Given limited resources and experience, companies must focus on what they do best. When a company decides to go international, it makes sense at the beginning to extend as much of the business and marketing mix (product, price, promotion, and place or channels of distribution) as possible so that learning can focus on how to do business in foreign countries.

A fundamental strategic maxim is that it is a mistake to attempt to simultaneously diversify into new customer and new-product/technology markets.

The international strategist observes this maxim by holding the marketing mix constant while adding new geographic or country markets. The focus of the international company is on extending the home-country marketing mix and business model.

Stage Three–Multinational

In time, the stage-two company discovers that differences in markets around the world demand an adaptation of its marketing mix in order to succeed. Toyota, for example, discovered the former when it entered the U.S. market in 1957 with its Toyopet. The Toyopet was not a big hit: Critics said they were “overpriced, underpowered, and built like tanks.” The car was so unsuited for the U.S. market that unsold models were shipped back to Japan. The market rejection of the Toyopet was chalked up by Toyota as a learning experience and a source of invaluable intelligence about market preferences. Note that Toyota did not define the experience as a failure. There is, for the emerging global company, no such thing as failure: only learning experiences and successes in the constantly evolving strategy and experience of the company.

When a company decides to respond to market differences, it evolves into a stage-three multinational that pursues a multi-domestic strategy. The focus of the stage-three company is multinational or in strategic terms, multi- domestic. (That is, this company formulates a unique strategy for each country in which it conducts business.) The orientation of this company shifts from ethnocentric to polycentric.

A polycentric orientation is the assumption that markets and ways of doing business around the world are so unique that the only way to succeed internationally is to adapt to the different aspects of each national market. Like the stage-two international, the stage-three multinational, polycentric company is also predictable. In stage-three companies, each foreign subsidiary is managed as if it were an independent city-state. The subsidiaries are part of an area structure in which each country is part of a regional organization that reports to world headquarters. The stage-three marketing strategy is an adaptation of the domestic marketing mix to meet foreign preferences and practices.

Philips and its Japanese competition was dramatic. Matsushita, for example, adopted a global strategy that focused its resources on serving a world market for home entertainment products.

Stage Four–Global

The stage-four company makes a major strategic departure from the stage-three multinational. The global company will have either a global marketing strategy or a global sourcing strategy, but not both. It will either focus on global markets and source from the home or a single country to supply these markets, or it will focus on the domestic market and source from the world to supply its domestic channels. Examples of the stage-four global company are Harley Davidson and the Gap. Harley is an example of a global marketing company. Harley designs and manufactures super heavyweight motorcycles in the United States and targets world markets. The key engineering and manufacturing assets are all located in the home country (the United States). The only Harley investment outside the home country is in marketing. The Gap is an example of a global sourcing company. The Gap sources worldwide for product to supply its U.S. retail organization. Each of these companies is operating globally, but neither of them is seeking to globalize all of the key organization functions.

The stage-four global company strategy is a winning strategy if a company can create competitive advantage by limiting its globalization of the value chain. Harley Davidson gains competitive advantage because it is American designed and made, just as BMW and Mercedes have traded on their German design and manufacture. The Gap understands the U.S. consumer and is creating competitive advantage by focusing on market expansion in the United States while at the same time taking advantage of its ability to source globally for product suppliers.

Stage Five–Transnational

The stage-five company is geocentric in its orientation: It recognizes similarities and differences and adopts a worldview. This is the company that thinks globally and acts locally. It adopts a global strategy allowing it to minimize adaptation in countries to that which will actually add value to the country customer. This company does not adapt for the sake of adaptation. It only adapts to add value to its offer.

The key assets of the transnational are dispersed, interdependent, and specialized. Take R&D, for example. R&D in the transnational is dispersed to more than one country. The R&D activities in each country are specialized and integrated in a global R&D plan. The same is true of manufacturing. Key assets are dispersed, interdependent, and specialized. Caterpillar is a good example. Cat manufactures in many countries and assembles in many countries. Components from specialized production facilities in different countries are shipped to assembly locations for assembly and then shipped to customers in world markets.