The relaxing of trade barriers in many countries previously off-limits to international business created tremendous growth opportunities for small and medium-size businesses in countless product and service categories. According to Zurich-based consulting firm, KOF Institute, the share of the planet's population that makes up the international market was at 95 percent in the first decade of the millennium, up from 15-20 percent just 30 years earlier.
Despite the opportunities, many SMB operators get confused about the unique terminology used to describe the various business strategies used in international business. For example, some people may interpret transnational as a synonym of similar terms used to describe global companies. In fact, transnational describes one of four business strategies used by companies in global markets. Transnational is a hybrid strategy that incorporates element of the other three, but is quite dissimilar from the international strategy.
International and Transnational Business Strategies
The four primary business strategies companies use to address the above mentioned issues are:
- International Business Strategy
- Multinational Business Strategy
- Global Business Strategy
- Transnational Business Strategy
What is International Business?
These are basically importers and exporters. International businesses do not make direct investments in the host countries where they operate. International businesses may customize products or services for local markets on a limited basis, but customization is generally not a priority. All financial, operating and managerial decisions are centrally located at the company's main office. A typical example of the international business model is the small manufacturer that exports to neighboring countries.
What is a Multinational Business?
Often called a multidomestic strategy, multinational businesses make direct investments in host countries where they operate. Similarly, decision-making authority is delegated to host-country business units. Each business unit customizes products or services to suit local-market preferences.
What is a Global Business?
Companies that use the global business strategy operate as if the entire globe was one huge domestic market. Global companies have strong centralized management control and standardized, uniform products or services in all countries where they operate. Like multinationals, global businesses make direct investments in host countries when appropriate. However, management makes all investment decisions, which are mainly to achieve economies of scale as opposed to responding to local-market preferences.
What is a Transnational Business?
The transnational strategy uses a central control structure similar to international and global business models. However, the transnational strategy is different from the international strategy mainly because the “control” is more about coordinating the activities of local-market operating units to achieve integrated and interdependent synergies among the operating units.
Each operating unit specializes in what it does best to make its own contribution to the organization. For example, an operating unit in China might do the manufacturing. Another operating unit in India might be responsible for technical support.
One overarching theme of transnationals is adaptability to local markets. As such, they tend to be quite aggressive about being flexible and nimble to respond to local-market conditions. They develop standardized products and services that can be readily customized for local markets. Some transnationals take this a step further with mass-customized products made in mini-factories strategically dispersed around the globe.