European Management Journal Vol. 17, No. 6, pp. 655–667, 1999 1999 Elsevier Science Ltd. All rights reservedPergamon

Printed in Great Britain0263-2373/99 $20.00PII: S0263-2373(99)00056-0

The Capabilities of theTransnational Firm:Accessing Knowledge andLeveraging Inter-firmRelationshipsANDREA LIPPARINI, Catholic University, MilanLUCIANO FRATOCCHI, University of L’Aquila, Italy

The nature of competition imposes a fundamentalre-examination of strategies, both at the corporateand business level. Observation of a large numberof firms reveals changes aimed at creating more per-meable boundaries for breaking down costs, whileincreasing efficiency in product innovation andmanufacturing. What appears to be relevant inmany of these efforts is the emergence of trans-national organisational architectures (TOA) inwhich the value-generating activities are distrib-uted among different countries and actors, and thenrecomposed at the corporate level without losingefficiency. In this paper, we put forward the prop-osition that relational capability represents a dis-tinctive competence for the transnational firm. Theability to access new knowledge or complementarycapabilities, and to leverage inter-firm relationshipsand opportunities wherever they arise emerges as acritical factor for success on a global scale. 1999Elsevier Science Ltd. All rights reserved

Introduction

In the early months of 1996, Japan’s car manufac-turers, headed by Honda Motor Co., outstrippedDetroit’s ‘Big Three’ (General Motors, Ford andChrysler), exporting over 167,000 cars from theirAmerican and Canadian plants, 5000 more than theirAmerican competitors (Business Week, 1996). Thecase of Japanese transplants to the United States is a

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good example of how activities in the value chain(Porter, 1985) can be replicated on an internationalscale, exploiting opportunities offered while at thesame time coping with the constraints connectedwith a strategy that requires considerable resources,skills and relationships at various levels.

To a less pronounced degree, the decentralisation ofsourcing, research, production or distribution activi-ties involves virtually every industrial sector. Obser-vation of a large number of firms reveals the emerg-ence of transnational organisational architectures(TOAs) in which value-generating activities are dis-tributed and then reconstituted at corporate levelwithout losing efficiency, emphasising the criticalnature of the strategic manoeuvre in co-ordinatingapparently independent and scattered actors. Theseorganisations demonstrate their skill at identifyingand exploiting potential advantages wherever theyarise and boast competencies that go beyond estab-lishing the economic expediency of such a strategy;mechanisms for the creation, consolidation anddevelopment of relational architectures and fabricsare brought to bear which imply deliberate and noteasily replicable designs.

The literature on multinational companies has beensensitive to relational aspects. The issues subjected toclosest scrutiny, apart from interpreting competitiveadvantage deriving from economies of scope achi-eved through a network of international relationships(Kogut, 1985; Teece, 1987), include research studies

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exploring relationships linking the holding companyand its various subsidiaries (Otterbeck, 1981; Hed-lund and Aman, 1984; Hedlund, 1984; Bartlett andGhoshal, 1986); co-ordination of the operational andstrategic activities of various units (Prahalad andDoz, 1981; Davidson and Haspeslagh, 1982; Bartlett,1984); circulation and integration of specific knowl-edge and competencies (Edstrom and Galbraith,1977; Gupta and Govindarajan, 1991); and manage-ment of human resources at the international level(Lorange, 1986; Doz and Prahalad, 1986). There isnow a number of conceptual schemes which see themultinational company as a network of transactions ofcapital, products and knowledge between units situ-ated in different countries (Sundaran and Black,1992), or as a network of inter-organisational relation-ships (Herbert, 1984; Ghoshal and Bartlett, 1993)which, within the logic of a learning network, allowsproduct, process or management innovations to betransferred between the units of a multinational com-pany (Bartlett and Ghoshal, 1989).

This study uses a relational perspective in order toanalyse the international dispersion and organisationprocesses of value-generating activities. Competence-building skills and leveraging of organisational archi-tectures as part of value chain reconfiguration stra-tegies are frequently a critical factor for success on aglobal scale. The underlying idea is that, in order tomanage successfully the recomposition of various‘pieces’ in the value chain, what is needed is a struc-ture — an organisational architecture — that is com-plex, but at the same time extremely flexible, in termsof reviewing configuration of its internal links(between functional activities or betweensubsidiaries) and its external links (with competitors,suppliers, customers, local authorities). This meta-structure, labeled as a TOA, has distinctive attributestypical of a system able to reconfigure the roles andrelationships between a constellation of actors inorder to achieve value creation in new ways and witha multiplicity of contributions. The ability to increasetheir range of responses to new developments via theleveraging of distributed competencies is the chiefattribute of the organisations studied (Lorenzoni andLipparini, 1999).

The Dissemination of Activities for theCreation of Value

One of the major factors appearing in the study ofinternational growth strategies of organisations is thespread in distinctive competency dissemination pro-cesses. One need only note the replication in severalcountries of Research and Development (R&D)Centres to realise that knowledge is multi-centredfollowing a specialisation logic. IBM, for example,conducts its superconductor research in Zurich andresearch into image processing technologies in

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Tokyo. Hewlett Packard conducts fibre optic researchin Germany, research into engineering process sup-port software in Australia, and laser printer researchin Singapore.

Company headquarters are no longer the sole reposi-tory of strategic skills and activities underpinning thecreation of value, such as development of new pro-ducts and manufacturing. Similarly, the ‘peripheries’are no longer assigned just sales and customer ser-vice tasks (Bartlett, 1984). Innovation can be gener-ated at different points inkeeping with the multi-centred ‘global’ model (Reich, 1991), in which thecompany has high added-value activities in severalcountries (Cantwell, 1989) and distributed skills andcompetencies designed to act as competitive leversfor the whole organisation. One of Canon’s most suc-cessful products, the AE-1 camera, was developed asa result of knowledge acquired by the Japanese com-pany in the United States. The first Philips colourtelevision was produced in Canada and not in Eur-ope, where the parent company is based; televisionwith Teletext was developed by the company’sEnglish subsidiary, while the first stereo TV set wasdeveloped in Australia.

Another key factor concerns methods chosen by com-panies to compete. These no longer involve just thecompany and its internal resources or the nationalvalue system, but a growing number of individualsand organisations with diverse cultures and experi-ences. The competencies, learning loops, and infor-mation creation and management processes, shouldbe interpreted from the viewpoint of a transnationalvalue system. The key to competitive advantage isnot any longer where a company decides to compete;with the spread of a form of global competition, thecritical factor is who does what and where this is done.One of the latest Boeing aircraft models was designedin the United States and Japan and assembled at anAmerican plant with English engines and functionalcomponents (e.g. the wings) produced in Canada,China and Italy. The Japanese company Mazda,designed the Miata car in California, financing it withfunds from its subsidiaries in Tokyo and New York.The prototype was then built in England, whileassembly was carried out in the state of Michigan andin Mexico, using electronic components developed inNew Jersey and built in Japan (Reich, 1991).

Companies tend to concentrate on internal resourcesand energies, on the activities which cover key com-petencies that can create unique value or ensure stra-tegic control over areas of specific competency andover relationships with external networks of cus-tomers, suppliers and other actors and organisations(Quinn, 1992). Companies like Apple, Sony, Nike,IBM, Matsushita and Honda have all followed thismodel. Relatively small initial investments are madein plant and heavy reliance on the outside. Appleperforms mainly the buying, assembly and testing ofmaterials and components, including the products

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built at facilities in Texas, California, and, since 1980,in Ireland. Quality control and final system controlis also carried out at these locations. Focusing on con-cept design, software, logistics and assembly, thecompany acts as a system integrator.

IKEA, the world’s biggest home furniture manufac-turer, is an example of how value can be created byrenouncing a number of activities in the value chainand focusing on its own competencies and onrelations with customers and suppliers. The IKEAformula comprises high quality design, a global sourc-ing system, products that the customers take homeand assemble, and sales outlets that are also enter-tainment and service points. The cost savings gener-ated by externalising activities like assembly andtransportation logistics allows the company to chargelower prices than its competitors. The company hasapproximately 2000 suppliers in over 50 countries,and 30 purchasing centres worldwide have the taskof seeking out suppliers able to fit into its value sys-tem with good-quality, low-cost products. The finaldecision is taken by designers at the Almhult designcentre, in Sweden, where IKEA’s operational HQ islocated. Suitable computerised international co-ordi-nation and support structures help suppliers sourceraw materials on the best terms.

These factors stress that knowledge-based and serviceactivities are critical elements, representing, for agrowing number of companies, the main platformfrom which to launch differentiation and entry bar-rier-raising strategies. This organisational behaviourpresupposes that the company concentrates ondeveloping skills acquired around a few com-petencies and relationships with external actors,organisations and institutions necessary in the lightof the outsourcing of key functions. This approach —development of core competencies and partnershipswith companies that have complementary com-petencies — is taken to its extreme whereby there isin every value-generating activity a service activity(Quinn, 1992) which the company shifts or entruststo whoever guarantees the best service.

The Determinants of the Replication ofthe Value Chain

Between the extreme cases of value chains concen-trated in a single country and entire value chain rep-lication strategies in several contexts, there is a con-tinuum of attitudes that vary not just from sector tosector, but from company to company, and fre-quently even within the same organisation.

The traditional interpretative schemes equate valuechains with disseminated activities with the need tosecure advantages in terms of cost, to access specificresources or specific markets. Our perspective, argued

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from an analysis of real cases, adds to this the opport-unity deriving from access to relationships and knowl-edge. The exploitation of comparative advantagesoffered by different countries may explain Kellogg’sstrategy of locating one of its largest productionplants in Italy, at Verolanuova, right at the heart ofa corn and rice producing area; or, again, the invest-ment by the German carmaker Audi in the Hung-arian factory at Gyoer for the assembly of the TTmodels and production of its V6 and V8 engines; orthe investments made by the Italian companiesDe’Longhi and Polti in Brazil, to take advantage ofnational policies encouraging production facilities.

Access to countries with advantageous cost con-ditions is the key to interpreting the decision byHonda Motor Co. to produce cars in Thailand,Indonesia, Malaysia and the Philippines (Japan,1996), or the forthcoming initiatives planned byHonda, Mitsubishi and Ford in India. Excessive costscan in some cases lead to abandonment of a location.The International Herald Tribune, published in Parissince 1887, is considering moving the bulk of its oper-ations out of France in order to cut costs. The editingfunctions would be transferred from Paris to NewYork, Washington and probably Asia.

One important factor concerns the effects of financialaspects, such as access to financial resources andoptimisation of the cost of capital, on modification ofarchitectural structures. The cost advantages of pro-duction in Taiwan, in addition to a strategic locationclose to Eastern markets and an industrial policywhich offers incentives to multinationals to open pro-duction plants in the country, are also evidenced inthe removal of taxes on profits, benefits for the con-struction of factories, and the opening of credit linesby the banks in Hong Kong. The salary of a workerin a computer factory is on average US$ 500, and upto 35 per cent less for women and girls. Moreover,under national legislation the minimum age forworking on an assembly line is 16, falling to 14 forteenagers who combine work and study. Acer, a Tai-wanese computer manufacturer, is expanding rap-idly, exploiting production efficiency and favourableconditions in various countries. Boards with elec-tronic components are assembled in Taiwan and air-freighted all over the globe. Other elements like cas-ings, keyboards and power supplies are shipped bysea at lower prices. Final assembly of the micropro-cessor is carried out in the destination country. Someproduction has been transferred to China, specificallythe Suzhou district near Shanghai, where averagewages are less than US$ 200 a month. Other compa-nies like Sony, Siemens, Philips and Epson are settingup manufacturing facilities in this district.

The transfer to the USA of a growing number of carmodels by Japanese manufacturers is also facilitatedby a low exchange rate (Y100/$1) which makes itmore expensive to develop the car in Japan and thenconvert the cost to dollars for sale in the USA (Ward’s

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Auto World, 1995). Thus, since 1992, Toyota, NissanMotors and Honda have expanded productioncapacity in the United States, as well as increasingthe purchase of parts from American suppliers andoutsourcing much of manufacturing activity.

It is rare for just one of the determinants outlinedabove to underpin the decision to configure anactivity in a given country. These determinants arecombined in various forms with the result that effectsof the configuration involve several activities in thevalue chain. Market and knowledge orientation isclearly evident in the behaviour of companies likeNissan, Toyota and Mitsubishi which have createdproject groups in California where national trendsappear to emerge with regard to styling, performanceand environmental control for the American car sec-tor. Research can also be conducted in a certain coun-try in order to secure advantages connected with thepresence in loco of the same company’s productionfacility. Toshiba has started conducting R&D activityin California where it was already manufacturinglap-top computers, telecommunications equipmentand electromedical products. Mazda has sited itsR&D centre close to the company’s new productionplant in Michigan.

Of the many examples of access to knowledge,Fujitsu has chosen Texas for the development andproduction of mobile phones because specific com-petencies exist there. Xerox has R&D laboratories inJapan, Europe and the United States, each of theminvolved with specific products (small-, medium-and high-speed photocopiers respectively). In thiscase, location is dictated by the position of variousmarkets at the cutting edge of technology vis-a-vis agiven product. The de-verticalisation of structuresguided by competencies of the network peripheriescan be illustrated by various examples. New Holland,Europe’s biggest tractor manufacturer, has chosenImola as its centre of excellence for production ofcomponents for all its earth-moving machines sold in140 countries. The ‘Imola project’ got under way atthe very time the company’s suppliers were awardeda specific competency for that mechanical compo-nent. The company CEO has clearly stated it wasmainly the quality of local related industries whichinduced the company to locate part of its operationin Imola. In 1996, the company, AGUSTA relocatedsignificant parts of its production process for theA109 Power helicopter to Swidnik, a Polish companyheaded up by the public corporation Pzl. Swidnikwill build four structural assemblies: central part ofthe cockpit, nose, tail section and tail member. Thecompany management say no weakness is envisagedand the operation is a simple move designed toimprove industrial flexibility without dangerouslyoverweighting the existing structure. The Italiandecision was influenced by competencies of Swidnik,formerly a helicopter designer and builder, and bythe high production potential afforded by a work-

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force of over 4000 employees, concentrated mainly inSwidnik, near Lublin.

Access to knowledge frequently calls for particularattention to be focused on agreements and relation-ships which often form the basis for the transfer ofother value-generating activities. The joint venturebetween General Motors and Toyota for productionin the United States of cars designed in Japan andsold under the Chevrolet brand is an example of howthe agreement has allowed Toyota to verify manage-ability of operations in the United States with refer-ence to adequacy of organisational skills developedin Japan. For General Motors, in addition to testingits own relational capabilities with strategic partners,the agreement has enabled the company to fill a gapin its product range and to exploit local distri-bution capabilities.

Agreements between companies from different coun-tries aimed at development of technology or research,promotional and distribution activities are frequentlya precondition enabling a company to concentrate onactivities which lie at the heart of its competitiveadvantage. Increasingly, these agreements involveactivities in the value chain which have nothing todo with commercialisation in the strict sense but lookat activities with higher technology and knowledgecontent levels. The American company Nike, a leaderin the sports footwear sector, with a volume of over70 million shoes sold in some 35 different models,typifies the ‘intelligent’ company concept. An analy-sis of the Nike value chain shows no productionactivity, including assembly, is conducted eitherdirectly or by companies in which Nike has a stake.In fact Nike focuses on research, design and market-ing, while the whole of the production process is out-sourced to a large number of subcontractors(production partners) located in different countries.

Apple has forged alliances with IT&T for the distri-bution of its products in Europe and with Bell &Howell for distribution in the United States, whilemarketing is performed by independent distributors.Honda has production facilities in Canada and theUnited States, while in Europe it collaborates withthe English Rover Group; in Thailand it manufac-tures motorcycles under joint ventures with localmanufacturers and builds cars under a technology-based collaboration agreement; in Indonesia it pro-duces motorcycles and cars, engines and othercomponents under joint ventures and technologyagreements.

The acquisition of the American companyLensCrafter, the largest optical chain, by the Agordo-based company Luxottica, should be seen not just asa financial investment but as a means of securingstrategic control over distribution in a country whereconsumption is moving towards eyewear as a fashionaccessory. The agreement between BMW of Germanyand the Italian company Aprilia, under the ‘Indian

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project’, is an example of technological, productionand commercial partnership in order to enter a newmarket. BMW will entrust to Hero in New Delhi theproduction of its 650 cc motorcycle, while Aprilia willhave to provide the know-how needed to start upindustrialisation and manage the flow of componentsupplies from Italy. In fact, approximately 80 per centof the German bike’s components come from Italiansuppliers, while the engine will be supplied by theAustrian company Rotax.

Production agreements offer an effective means ofentry into the United States for European firms.Chrysler and BMW have entered into a 50–50 jointventure for the construction of a US$500 million plantin the southern United States (the first for BMW) forconstruction of four-cylinder engines. This will allowengines to be supplied to Chrysler vehicles and tocars produced at the Rover plant in England. Inaddition, the project will meet small-engine needs ofthe two carmakers, in what is the fastest growing seg-ment of the market. The agreement allows the com-panies to achieve requisite economies of scale for pro-duction of 400,000 engines a year, a quantity whichwas twice their respective needs and would havemade production uneconomical.

Reassembling the Puzzle: Integrationand Co-ordination Skills

An attempt to apply inter-organisational theories todispersed organisational systems like those of multi-national companies (Ghoshal and Bartlett, 1993) is auseful way to examine the question of balancebetween components of the TOA. The multinationalis seen as a group of companies (organisation set)rather than as a single company, a network ofexchanges among different organisational unitswhich are set in a broader structural context, theexternal network, comprising all actors with whomvarious units of the multinational must interrelate.

The external network, comprising all members ofrelational sets of various units and containing themultinational network, is assigned a fundamentalrole not just because the survival of the companydepends on it, but because it is able to explainelements such as the configuration of the organis-ational resources and value-generating activities, aswell as the nature of exchange relationships betweenvarious units.

A number of field studies have directly assigned arole to the inter-organisational system of a multi-national (Hedlund, 1986; Bartlett and Ghoshal, 1989).In addition, reference is made to co-ordinated multi-national systems (Kogut, 1985), or the strategy–structure configuration is explained using a resource-dependence model (Herbert, 1984). Following the

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institutionalist theory, relational fabric plays animportant part in the structure and behaviour ofcompanies (Meyer et al., 1984), in relation to thedegree to which various units are set in differentcountries with differentiated relational networks(Westney, 1993).

Within the framework of its international expansionstrategy, the company must pay attention to thestates of balance it will affect at local level and therepercussions of such decisions on its activity at theglobal level (Krifa and Moulaert, 1991). The relation-ship creation phase is delicate since it will have abearing on mechanisms, rules and, more generally,consolidated behaviour and relationships that arecritical in contexts in which the outsourcing decisionsregard components and groups that have to be built,supplied and assembled according to a logic of func-tional and operational interdependence. If the com-pany already has a production facility in loco, thetask would appear to be more simple, since it alreadyhas a certain degree of credibility and understandinghow to manage the relationships. It can draw on anexisting group of suppliers, or it is already integratedin the system through employment of local man-power.

With reference to operational aspects, one canappreciate the difficulties encountered by Americanand European companies in entering Japanese sup-plier networks, since many qualified suppliers workexclusively for a single company. If local competitorsexist close to new or potential facilities, it gives riseto the problem of accessibility to sources of supplyfor the development of ‘delicate’ parts, even thoughcompetitors may have contributed to the creation ofa competent fabric. Tetra Pak regarded as crucial toits decision to locate its manufacturing in Italy theexistence of a fabric of companies specialising in pro-duction of components and groups able to carry outmanufacturing tasks using specialised machineswhich ensured high-quality standards. Indeed, themechanical engineering culture was widespread inEmilia Romagna, where firms operating in the pack-aging process had found and, very frequently, hadcreated, a skilled base of related industries. TheSwedish multinational benefited from competenciescreated by firms which had long been operating inthe packaging sector and which, very often, hadfinanced their suppliers through purchase of numeri-cal control machines.

The reassembling of contributions made by unitsscattered in several countries is an equally criticalaspect in the reconfiguration decision, and one whichis frequently permitted or influenced by ability todesign and implement global-level co-ordination.Sometimes co-ordination is vital to securing theadvantages of configuration of other activities. Thisis the case with a company which, through the useof common raw materials bound for the variousplants in different countries, facilitates purchasing ona global scale.

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Having information on costs at the local level, oncompetencies of suppliers, the available infrastruc-ture and availability of materials plays a critical partin the reconfiguration decisions and requires quiteconsiderable co-ordination efforts. One need onlyconsider the definition of connections at the inter-national level in order to optimise transfer of processand product technologies between various facilities,or co-ordination of research activities conducted atlaboratories in various parts of the world; or transferof information on products, markets and techno-logies between various countries and the need toensure quality standards and customer assistanceand service standards at the global level. The Amer-ican company Intel, a leader in the electronics sector,created a subsidiary in Malaysia in 1972 (Intel Tech-nology Penang) for production of microcontrollers,peripherals, personal computer components, con-sumer electronics and car components. In 1990, thesubsidiary won the Special Prime Minister’s QualityAward for the private sector, an award introducedby the Malaysian Government to reward companiesachieving best quality performance.

The strategic importance of co-ordinating activitieslocated in different countries worldwide is evidentin the behaviour of many companies. Mitsubishi hasimplemented the MIND logistics system to provideglobal support to group units with regard to pro-duction and distribution, recognising optimisation oflogistical and financial functions as a strategic pri-ority. The Swedish company SKF has set up a systemfor international accountability at product level in itsoverseas units: this system forms part of the widerGlobal Forecasting and Supply System (GFSS),initially applied to Europe and subsequentlyexpanded to the United States for co-ordination ofincreasingly numerous and complex productioncentres. In 1987 Toshiba opened a centre in Japan, towhich customers have direct access, for co-ordinationof a global network of 14 integrated circuit-boarddesign centres worldwide.

In order to support its global strategies at grouplevel, in 1987 Matsushita linked up dozens of pointsin Japan and the rest of the world via the MAXNETTII network (Nonaka, 1990). With reference to con-figuration and co-ordination of its sourcing activities,the system represented a crucial step forward. Thenetwork officers, located at strategic points aroundthe world, transmit information on materials andcomponents to the International Trading Division atJapanese HQ which then sends it out to the regionaldivisions. In this way, the company can source bestquality materials and parts at the lowest price within24 hours from any part of the world.

In 1989, Xerox set up a multinational organisation(Central Logistics and Asset Management) and fourmulti-functional groups with the task of integratingthe value chain between countries. The saving in glo-bal stocks was calculated at US$ 50 million. Another

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operations integration exercise, this time regardingdeliveries, was conducted in 1991 with the creation ofthe Western Hemisphere Distribution Center whichenabled the company to consolidate safety stockspreviously kept separate for the American, Canadianand Latin American markets. IKEA has an efficientlogistics system: the scattered nature of its procure-ment sources (the component parts of a chair, forexample, come from Poland, France and Spain) andneed to purchase large volumes, means thatefficiency in order procedures, parts integration anddelivery to warehouses is critical. The 14 warehouses,which operate as logistical control points and consoli-dation centres, form part of a global network co-ordi-nated by operational HQ.

Leveraging and Transfer ofCompetencies for the Development ofNew Products

There are many examples of product developmentbased on leveraging of areas of competency that acompany possesses in other countries. The Swedishcompany Tetra Pak develops, manufactures and mar-kets complete packaging systems for liquid and semi-liquid foods as well as equipment required for theirdistribution. In 1996 Tetra Pak produced over 60billion containers, generating a turnover in excess of$9 billion in more than 100 countries. The Tetra Pakarchitecture is derived from, and based on, relation-ships. The relational aspects that the company con-sidered when it set up a production activity in agiven country mainly concerned customer companiesor governments. Even today, Tetra Pak seeks tobecome part of local culture, rapidly acquiring a net-work identity which is the direct result of itsrelational capability.

Market-orientation leads to location of productionactivities where the need for a given product arises,for example, the creation of a paper-processingfacility in Brazil after verifying the demand for aTetra Rex type container, and to follow the cus-tomers who are given technical assistance and ongo-ing support. The customers are close to paper-pro-cessing plants which supply packaging material toover 6000 machines which package, fill, and seal,Tetra Pak cartons worldwide. The logistics functionis a critical factor in continuity of supplies, given thatthe customers must necessarily use Tetra Pakmaterial for their machines. IT links with their pack-aging material stocks enable Tetra Pak to predict there-order point and adjust production of the nearestpaper-processing facility.

With regard to circulation of knowledge which, inthe words of the company, makes up the bedrock ofthe development process, extensive transmission ofcompetencies can be observed between various

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actors in the value system at international level. Criti-cal elements like design and testing are conductedwith the customers, who attend meetings betweenproduction and R&D personnel. Also conductedtogether are adjustments and integration of compo-nents on existing systems. On the support side, 24training schools worldwide provide customers withrequisite know-how on issues such as mechanicaland electronic and bacteriological engineering. Thecustomers have access to a large mass of information,including market surveys. Technical assistance ser-vice networks generate additional flows of infor-mation, as do the expatriate program and relation-ships with universities, research centres and localorganisations and institutions.

The activities of peripheries of the TOA haveincreased with the opening of manufacturing plantsand research centres and the assignment of tasks thatgo beyond product assembly or modifications, butthe home base has always played an important part.In 1981, Tetra Pak Group Management moved toSwitzerland while AB Tetra Pak in Lund remainedthe group’s technology centre with over 2500research personnel, as well as the largest factory forpackaging material processing and machineassembly. In 1991, the main HQ was again moved toLund, where general administration and group co-ordination are managed and its commercial, techno-logical and financial orientation determined. Inaddition to defining the strategic architecture, this isalso where key products and components are pro-duced and much of research and development workis conducted. It is also the site of the largest trainingschool for client company technicians and for Inter-national Assistance Service personnel.

With regard to the configuration of Tetra Pak’sresearch and development activities, we note a rad-ical reversal with respect to the underlying logic.Initially, location was dependent upon the impor-tance of target markets. This led to similar researchbeing conducted in several centres, sometimes geo-graphically very distant from each other, andrequired a staff to co-ordinate the activity. Now,locating the ‘areas of excellence and expertise’depends upon specialisation in systems and pro-ducts. Thus the company has concentrated in Swedenall its research activities on the Tetra Classic con-tainer, the first to be made by the company and nowproduced primarily for the developing countries;Italy is the focus of research on the Tetra Brik, acontainer mainly designed for the European markets;in the USA, research is conducted on the Tetra Rex,designed for fresh products on the American market;lastly, the United Kingdom is the centre of R&Dactivity on the Tetra Top, a resealable container.The centres of excellence conduct research activityinto containers and machines, while other researchcentres (in Canada, Germany and Japan) focus onnew processes or on new packaging materials.

Of particular importance is relocation to Modena,

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Italy, of the Tetra Brik research and worldwide pro-duction centre. The R&D operation in Modena,where machines for the Italian and export marketsare manufactured, has long been distinguished as acentre generating innovations which are exploited byTetra Pak at global level: for example, mineral water,oil and tomato ketchup in cartons was implementedin Italy.

With reference to Hewlett Packard’s vast inter-national network, a significant example is that of thecompany’s production facilities in Bristol (UK) andStezzano (Italy). The two centres are responsible forthe production of Digital Audio Tape (DAT) andmedium-speed laser printers respectively. In bothcases, the initial product and process technology wasowned by the American parent company and trans-ferred to subsidiaries when the company made adirect investment overseas on a greenfield site. Asimilar solution was adopted by Texas Instrumentswith the AMOS site in Avezzano, which was givenresponsibility for Europe, Africa and the Middle Eastin the development and production of MOS memoryboards. In this case too, competencies and resourcesinitially transferred from headquarters were used todevelop new generations of ground-breaking pro-ducts.

Of particular interest is the case of the Nestle Group’sCasa Buitoni. The unit located in San Sepolcro wasinstructed by the Swiss parent company to developproducts typical of Italian cuisine, but designed forthe global market. Product development was under-taken using competencies and resources the Italiansubsidiary already possessed prior to its acquisitionby the Swiss giant. With regard to frozen food tech-nology, Casa Buitoni made use of the parent com-pany’s know-how which, thanks to its Findusdivision, was among the most comprehensive inthe world.

A more complex case of product development pro-cess management is that of Elsag Bailey ProcessAutomation (EBPA) which, prior to the acquisitionof the German company Hartmann and Braun, hadno fewer than seven centres of excellence, divided bymarket segment (2) and technology (5). In this com-pany, the centre of excellence has the specific task ofhandling product development but not production,which is usually assigned to specialist units that areidentified during the design phase. The case of EBPAexemplifies a different method of managing the pro-duct development process — one which is globally-linked. This method is characterised by the fact thatit ‘pools the resources and capabilities of many differ-ent components of the MNC — both at headquartersand subsidiary level — to create and implement aninnovation jointly. In this process, each unit contrib-utes its own unique resources to develop a truly col-laborative response to a globally perceived opport-unity’. This innovation management model isparticularly well suited to an environment in which

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the stimulus for innovation is distant from the com-pany’s response capability, or where the resources andcapabilities of several units can contribute todeveloping the most innovative response to anopportunity. By creating flexible linkages that allowefforts of multiple units to be combined, a companycan create synergies which can significantly leverageits innovation process. Of interest in this connection,is the case of development of the new generation oftransmitters by the French centre of excellence: sinceit was necessary to combine ‘mechanical’ expertise —in which the French engineers excel — with morestrictly electronic elements — in which Americanengineers lead the field — a joint working teamwas created.

The development of the Nuovo Pignone product byGeneral Electric (GE) was based entirely on com-petencies and resources possessed by the Italian sub-sidiary, which became part of the American giant fol-lowing an acquisition — privatisation implementedby ENI. These competencies and resources weredeveloped with regard to a business — namely 2 –30 MW gas turbines — in which GE had decided notto compete, since traditionally these turbines aredesigned for the gas and oil market, whereas theAmerican company’s focus is on power generation.Following the acquisition, top management of theAmerican conglomerate decided to transfer to itscentre in Florence its residual competencies in thisbusiness area, transferring to it the product and pro-cess technology of the Frame 9 turbine.

The Creation of an Integrated Networkof Relationships. The Case of Cork,Ireland

The process of integration in a local context andaccessing relationships may require considerableeffort, as in the case of replicating value chain activi-ties in areas where business development promotionis at a very early stage and there is not yet a sufficientlocal fabric in terms of related industries. The case ofCork, in Ireland, is useful in understanding recon-figuration decisions and importance of networkstructures at the local level. Attracting foreign capitalwas a key strategy for the government, since theagriculture-based Irish economy was not by itself suf-ficient to support population growth. In 1990, theelectronics industry employed fewer than 5000people. In 1993 it employed over 30,000 in more than250 firms, most of them foreign. Initially Ireland wasused as an assembly base by multinationals, but itquickly became a fully-integrated electronics indus-try in its own right.

With reference to the organisational architectures, inaddition to the impact this concentration had on cre-ation and reorganisation of local related industries,

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equally important were initiatives aimed at creatingnetworks between manufacturers and supplies ofelectronic products and components, with procure-ment and relational practices determining anintertwining of competencies and reciprocal supportrarely found elsewhere. The association of electronicsfirms (CEIA) implements formal programmes gearedto the introduction of ISO 9000 series standards as thestandard quality system for local and multinationalsuppliers. The adoption by all the members of just-in-time and World Class Manufacturing methodsprovides the electronics industry with an excellentand dependable service from its own local suppliers.It is interesting to note that, in addition to productand components manufacturers which enjoy worldleadership status (Apple, Logitech, Motorola, SCI),the association also includes university institutions,the Cork Regional Technical College and theNational Training and Employment Agency (FAS),which are directly involved in the provision of skilledresources and in research.

Figure 1 shows the organisation of relationships inwhich electronics companies are involved. The first,outermost level, concerns government agencies andinfrastructure, bearing out the assertion that localauthorities play a fundamental part in reconfigur-ation decisions of multinationals not just by imposingconstraints, but also by creating opportunities. Thesebodies include the IDA, the international link-up sys-tems, the Technology Park and the training andemployment authority (FAS). The training centre, thelargest in Ireland, provides free recruiting servicesand, via a Training Advisory Service, bespoke train-ing programmes.1

The second level of relationships concerns edu-cational support and R&D. One of the key advan-tages of the area is the presence of technically pro-ficient and trained people. One of the university’sown centres of excellence is the National Microelec-tronic Research Centre (NMRC) which, together withcompanies, conducts research into the design, manu-facture and testing of integrated circuit boards. Theseare joined by EOLAS, the National Science and Tech-nology Agency, which is responsible for the controland operation of the national R&D, technology trans-fer and technical services programme, as well as thepromotion of collaboration between schools andindustry. Furthermore, the National Standards Auth-ority is responsible for the implementation of Euro-pean and international standards and for ISO 9000implementation and certification.

The innermost level relates to manufacturing andsupport services. It covers relationships withassemblers, component manufacturers, softwaredevelopers, packaging material suppliers and others.The opportunity to have qualified suppliers and sub-contractors in loco is considered a crucial factorthanks to greater expertise and specialisation thisoffers. The local relational fabric for the company

CAPABILITIES OF THE TRANSNATIONAL FIRM

Figure 1 Strategic Ties in Fast Growing Contexts. The Case of Cork, Ireland

which decides to site one or more value-generatingactivities in a given country can therefore be vast anddiversified. The relational capability acquired canlater facilitate a reconfiguration extending to othercountries.

Roles and Competencies for theGovernance of TransnationalOrganizational Architectures

In order to manage organisational and relationalstructures like the ones shown, quite considerablecompetencies are required. The efficient functioningof an architecture based on a distributed intelligencesystem requires definition of roles assigned to vari-ous units. The literature has produced numerousattempts at systemisation which refer, more or lessdirectly, to the critical nature of positions of subsidi-aries vis-a-vis the ability to generate and distributeinformation and knowledge. In addition to under-scoring the importance of this phenomenon, a surveyof the various contributions also points up a numberof distinctive characteristics of the companies pos-itioned at the various levels of the architecture. Table1 shows the most important of these.

A number of ideas refer explicitly to the central actor,an actor of high relational intensity with inter-firmarchitecture management and leveraging functions.The need for the distribution of sensors and inno-vation centres can be found in the ‘global innovator’concept (Gupta and Govindarajan, 1991), while theimportance of consolidating a multiplicity of contri-butions is contained in the idea of the ‘global co-ordi-nator’ (Hedlund, 1986; Forsgren, 1990). In order todefine strategic manoeuvring and the ‘brain’ of the

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transnational organisation, the concepts of ‘strategicleader’ (Bartlett and Ghoshal, 1989) and ‘strategiccentre’ (Lorenzoni and Baden Fuller, 1995) areadvanced.

Concerning the role of subsidiaries, numerous ideashave been produced. Without going into the meritsof these, a common feature they all share is the ideaof the centre of excellence as a site capable of beingconsidered the repository of a certain knowledge andimportant for the proper functioning of inter-firmarchitecture. The centre of competency or excellence(Forsgren and Pedersen, 1996) in its various acceptedmeanings, identifies a strategic centre, an actor ableto develop knowledge. The definition of roles withina transnational organisational structure in the bestcases comes about by following a criterion based onthe possession of resources and competencies: thegroup’s dependence on the resources and com-petencies of a certain unit give it the status of a stra-tegic centre, with important relationships developedin the local context.

With regard to the central actor, which we canbroadly equate with headquarters, there is a numberof roles which require possession or development ofdetailed competencies (Table 2). An analysis ofexamples of the internationalisation and distributionof activities in the value chain underlines the criticalnature of strategic aspects: the orchestrator must bevisible within the architecture and justify leadershipstatus by initiating change and defining commonrules and values. The strategic orchestrator is respon-sible for defining direction of strategy and feedbackmechanisms, as well as for resolving conflicts.

Enhanced visibility and management ability must becombined with the role of ‘global scanner’, withidentification of ‘who’ can do ‘what’ and most suit-

CAPABILITIES OF THE TRANSNATIONAL FIRM

Table 1 The Roles of Subsidiaries: Contributions in the Literature

Definition Authors

Global co-ordinator Hedlund (1986); Forsgren (1990)Strategic centre Lorenzoni and Baden Fuller (1995); Forsgren and Pedersen (1996)Strategic leader Bartlett and Ghoshal (1989)Global innovator Gupta and Govindarajan (1991)Global scanner Vernon (1979)Spider’s web Quinn (1992)World product mandate Advisory Committee on Global Product Mandating (1980); Poynter and Rugman

(1982); Wolf (1983); Sarna (1984); Atkinson (1985); Birkinshaw and Morrison (1995)Subsidiary mandate Birkinshaw (1996)Global subsidiary mandate Roth and Morrison (1992)Product mandate Poynter and Rugman (1982)Integrated player Gupta and Govindarajan (1991)Active subsidiary Jarillo and Martinez (1990)Creative subsidiary Pearce (1996)Centre of activity Hedlund (1986)Centre of gravity Forsgren (1990); Forsgren et al. (1991)Centre of competence Porter et al. (1991)Functional centre Forsgren et al. (1991)Multi-functional centre of excellence Fratocchi and Holm (1996)Centre of excellence Forsgren and Pedersen (1996)Strategic centre of excellence Surlemont (1996)

Table 2 Roles and Competencies of the Centre of the Organizational Architecture

Strategic roles Competencies

Global scanner Identification of ‘who’ can make ‘what’Identification of favourable ‘local environments’ (‘where’)Dissemination of distinctive competencies abroad for the generation of innovation

Relationship builder Mobilisation of external competenciesCreation of agreements at the global levelTransfer of networking techniques to actors in the peripheries

Competencies combinator Leveraging of external knowledge to gain advantages at the product levelFunctional coordinator Synchronisation of different contributions with regard to time and cost dimensionsSystem integrator Integration of different contributions with regards to aspects related to technologyStrategic orchestrator Sponsorship of changes

Capability to emerge as visible referent within the networkAbility to solve conflicts by means of definition of rules and common valuesDefinition of strategic trajectories and feed-back mechanisms

able regional contexts for the creation of centres ofcontrol over various functional activities. This effortmust be followed up with dissemination of distinc-tive competencies for the generation of innovation indifferent contexts. At this stage it is crucial to berelationship builders, seeking international agree-ments, activating external competencies at variouslevels and, in the best cases, transferring the net-working culture to actors at the peripheries.

Once the actors in the architecture have been ident-ified and selected, other attributes are required:exploiting the competencies of individuals(competence combinator), co-ordinating the variousactors (functional co-ordinator), and integrating vari-ous subsystems or products (system integrator). Withregard to the first of these, the know-how of actorsin the architecture is leveraged to obtain the best

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possible product. Co-ordination, on the other hand,should be based on synchronisation of the contri-butions of various actors with reference to efficiencyparameters such as time and cost. Thirdly, inte-gration is necessary when contributions of the vari-ous actors require governance skills with respect tothe technological aspects.

Managerial Implications

The picture that emerges from the cases above is oneof organisations which, in their value chain designactivities, lay great emphasis not just on the func-tional activities which are directed towards places inwhich these activities can be maximised in terms ofcost, differentiation and knowledge; we observe

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actions which imply a widespread awareness of thestrategic importance of the organisational architec-tures. The thickening of the relational fabric is justi-fied by ever-greater needs in terms of productionflexibility and by the need to initiate a stable inte-gration process at local level. These are delicateaspects which call for a systematic and carefulapproach, since the various mechanisms have theirown timeframe for getting up to speed and beingredirected.

TOAs are characterised as metastructures whichembrace the external relational fabric; they haveorganisational and geographic boundaries which canrapidly be redefined, as can focal points and centresof excellence. The relational architectures for func-tioning of the system are not merely structuralresponses to the globalisation problem, but some-thing more complex: the dissemination and repli-cation of distinctive competencies comes aboutthrough development of relationships at various lev-els.

In these organisations, units operate with a high levelof independence, and the nodes are seen as reposi-tories of the organisation’s knowledge; the centredoes not necessarily generate information. Rather, itcollects and transfers information, acting as a collec-tor of knowledge and mobiliser of innovative inputs.Multiple relationships lay great emphasis on the roleof management which, according to theorists of hori-zontal organisations, is the global glue that holdscontributions together and directs them on theplanned strategic trajectory (White and Poynter,1990).

The companies forming part of transnational archi-tectures have various aspects in common with theconcept of ‘global scanner’ (Vernon, 1979) and ‘spider’sweb’ (Quinn, 1992), companies which implement anew type of organisation and operation control sys-tem. The key functions are geographically dispersed,but co-ordinated globally by means of regulatorymechanisms based on the exploitation of the organis-ation’s historical strengths and experimentation pro-grammes aimed at the identification of opportunitiesand rapid learning, inkeeping with the lessonslearned from their relationships with the local supplynetworks which are informal. Extremely apposite isthe concept of ‘multifocal organization’ (Prahalad andDoz, 1987), where key skills are connected with con-trol, strategic change and flexibility (Doz et al., 1990).These TOAs have the ability to anticipate, or rapidlyto interpret, changes in the marketplace and in rulesof competition, developing widespread awareness ofnew directions on which to embark. There are alsosimilarities with the heterarchical structure, suggestedas an extreme form for multinational companies(Hedlund, 1986).

In addition to the presence of several centres whichco-ordinate different organisation sets at local level

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and to the strategic role assigned to them, points ofcontact are also discernible: flexibility in selecting themost appropriate mode of governance — betweenmarket and hierarchy — by opting for the ongoingdesign, based on experience, of ad hoc institutionalsettings for specific purposes; the development of anability to redesign oneself, if necessary; the presenceof action plans aimed at identifying and generatingnew advantages on a global basis; and the relevanceof collaborative practices. The evidence shows thatorganisational architectures sometimes emerge spon-taneously and retain their original configuration,with adjustments in line with the internationalisationprocess initiated. Others, on the other hand, heavilyalter their structure in order to seize opportunities orto avoid constraints. What emerges is the lucidity ofthe design in the early stages which does not sacrificespeed of manoeuvre when substantial changesappear in rules of competition.

Acknowledgements

The authors wish to thank Gianni Lorenzoni and RobertGrant for their comments on an earlier version of the docu-ment.

Note

1. Public support for the industry is also evident in a 10 percent tax on production activity-generated profits guaran-teed up until 2010, in spite of the anticipated harmonis-ation of taxation in the European Union. Also providedare product and process research and development sub-sidies of up to 50 per cent of the costs incurred; and again,low costs for industrial relocation, business parks forinternational services, and 100 per cent coverage of train-ing programme costs.

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ANDREA LIPPARINI, LUCIANOIstituto di Economia Azien- FRATOCCHI,dale – Facolta di Economia, Dipartimento di Energetica,Universita Cattolica S. Universita dell Aquila,Cuore, Largo A. Gemelli, 1, Monteluco di Roio, 6710020123, Milan, Italy. L’Aquila, Italy.

Andrea Lipparini is a Pro- Luciano Fratocchi teachesfessor of Strategic Manage- Operations Management atment at the Catholic Univer- the University of L’Aquila.sity, in Milan. He was a He was a Visiting Scholar atVisiting Professor at the Bath University. His cur-

Wharton School of the University of Pennsylvania. His rent research interests focus on multinational compa-research interests focus on inter-firm networks and nies and centres of excellence. On these topics, he hasknowledge management. He is currently involved in published widely. He is currently involved in pro-programmes of management development. grammes of managerial development in multinational

companies.

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