SDA Professor of Strategic and Entrepreneurial Management
Many Italian firms have increased their international presence substantially in the past two decades. The challenge these firms face now is to take advantage of their international footprint without suffering from what McKinsey has labelled “the Globalization Penalty”.
They try to generate multinationality advantage by creating larger, more specialized production hubs that serve several countries, by reducing fixed costs through the creation of regional headquarters, by leveraging on knowledge generated in different geographies, or by exploiting a firm’s specific resources such as talents, brand equity, technologies, and patents across multiple markets to increase revenues, reduce costs or manage risks.
But many firms that operate across country boundaries – it seems – are less aligned than their local peers, they are slow in decision-making, and complex to deal with. These downsides of being big and multinational would not be that problematic if compensated by strong cross-border synergies. But also here many firms fail. The consequence: many local customers prefer to do business with smaller, local competitors.
Testing your Multinationality Advantage
To change this situation, we first need to define and measure the concept of multinationality advantage. Firms possess a multinationality advantage if the network of subsidiaries has a higher performance than the sum of the single, independent subsidiaries. There are several quick tests that you can use to understand whether a subsidiary profits from being part of a multinational firm:
Quick Test #1: Ask subsidiary managers if they are happy to see people from headquarters. If they are not happy, it means that the contribution of headquarters is perceived as being too weak. “They just come and control us, and if we see areas they could help, they charge unjustified transfer prices.” Not seldom, subsidiary managers hesitate to answer telephone calls that have headquarters’ country code.
Quick Test #2: Is the firm valued at a conglomerate discount? Is it possible to split the firm up into fairly independent geographic units? If yes, would the value of the sum of these stand-alone units be higher than the entire group? How many successful leveraged buy-outs have we seen in the past?
Quick Test #3: Can subsidiary managers express in a few words what the shared vision of the firm is? Firms that operate across borders find it often more difficult to engage local managers around a shared vision. To create multinationality advantage, the management team at headquarters needs to find ways to co-develop an effective vision, mission and strategy together with the local units or at least to communicate them appropriately. In other words, the multinational firm needs to create vertical alignment (see "Strategy Talk: How to organize strategy meetings that work").
Quick Test #4: Do subsidiaries effectively share knowledge? What is the level of alignment and integration among the different subsidiaries within a firm? Specifically, how well is local knowledge acquired by the subsidiaries, and how well is local knowledge generated and shared across units? How well does a firm’s governance model, the structure, the set of business processes, common practices, and the informal network foster integration and cooperation within the firm? How well is the firm horizontally aligned? (see "Knowledge Management: common sense, not common practice")
Quick Test #5: Is the firm perceived as a local player? The aim of this quick test is to understand the degree of external orientation of each subsidiary toward the local environment in which it operates. We assess the capabilities of both the subsidiary to develop solid business relationships with local entities and of the firm to understand the external environment and compete with local players. We attempt to measure a firm’s market alignment.
Quick Test #6: Do innovative ideas spread across borders? This last quick test explores to what extent subsidiaries engage in corporate entrepreneurship. It evaluates the ability of each subsidiary to introduce innovation and to diffuse it to the rest of a firm’s organization. (see "The Corporate Entrepreneurship Equation")
Where to start: making local subsidiaries more competitive
Not many firms pass all six quick tests, sometimes also due to industry differences: it is easier - and hence paramount - to develop multinationality advantage if you produce cars, flat screens or mobile phones. But firms that operate in the food industry, in retail banking or legal tax advisory can obtain above average returns compared to industry peers even if they are not taking advantage of their multinational presence at all. In fact, in these industries we still see many local champions that have not internationalized at all.
So, please, don’t get me wrong: developing multinationality advantage does not mean to centralize decision-making, but to make local subsidiaries more competitive because they are part of a larger set of firms. For many business decisions, this entails that firms need to do what Nestlè has summarized with the slogan “decentralize as much as you can, centralize as much as you have to”. Therefore, when you start your journey towards higher levels of multinationality advantage, keep in mind that your most important client for such projects are the local units.