The Global Enterprise System

The global enterprise is a company that (1) enters markets throughout the world by establishing its own sales and production subsidiaries in several countries and by using other entry modes, (2) exercises control over its subsidiaries, and (3) strives to design and execute corporate strategies in marketing, production, finance, and other functions from a global perspec­tive that transcends national and regional boundaries. A global enterprise is commonly called a multinational or transnational enterprise.

The global enterprise, its country subsidiaries, and the foreign entities with which it has long-term contractual arrangements together make up the global enterprise system. This system is depicted in Figure 20. The P circle represents the global enterprise, the headquarters company that owns, in whole or in part, the several foreign-country subsidiaries represented by the S circles. In some countries, the global enterprise has only agent/distributor arrangements (represented by the A/Dj circle), and in other countries, only licensing or other contractual arrangements (represented by the L/Q circle). These several elements of the global enterprise system are located in differ­ent countries, as indicated by the dashed lines in Figure 20.

As the parent company, the global enterprise is the control center for the entire system, setting the strategy of the system and its individual elements and controlling global and country operations in conformance with those strategies. The legal basis for the exercise of control over subsid­iaries is the parent company’s ownership claims on them; the legal basis of control over agents, distributors, licensees, and other independent parties is the parent company’s contractual claims on them. In general, the parent- company can exercise most control over fully owned subsidiaries, least control over independent contractual parties, and control somewhere be­tween these two extremes over partly owned subsidiaries (joint ventures). How the global company exercises its legal control over subordinate ele­ments of the system depends on its management philosophy, corporate strategy, and organization.

In designing foreign market entry strategies for a global system, man­agers need answers to some basic questions:

• Where in the world are the actual and potential markets for our final products?

• Where in the world should we locate production facilities to supply our final products to those markets? More generally, where in the world should we source our final products for country markets?
• Where in the world should we acquire inputs for production of our final products, such as raw materials, parts, components, and capital equipment?
• What should be our marketing strategies in individual country mar­kets? Should we design common strategies across country markets?
• How should we control operations at the country, regional, and global levels?

Decisions taken on these questions create a worldwide pattern of trans­fers of management, technology, product, and capital, both within the global enterprise system and between that system and its transactional environment comprising customers, suppliers, governments, labor unions, and other outside parties. In-system transfers are indicated in Figure 20 by solid lines connecting the system members.

Management and technology transfers from the parent company to subordinate system members are essential features of the global enterprise system. The most notable management transfers are entrepreneurial deci­sions that initiate new ventures, strategy decisions, and control decisions. Without central planning and control, the global enterprise system disinte­grates into something else; by its very nature, it is hierarchical. This state­ment does not gainsay that central planning and control are compatible with high levels of decentralized operations management at country and regional levels. Moreover, although the parent company must assume ulti­mate responsibility, strategy decisions may be “shared” in varying degrees with regional and country management. Indeed, a continuing issue for parent companies is how to reconcile the need for central direction and control with the need for operational flexibility.

The other indispensable transfer from the parent company to its subsid­iaries and other system elements is the transfer of technology, broadly defined as all knowledge that pertains to the production and marketing of products. Some global companies are more technology-intensive than oth­ers, but all must possess proprietary knowledge that allows them to com­pete successfully in foreign markets. To be effective, this knowledge must be transferred from the parent company to the rest of the system.

Other kinds of transfer from the parent company are contingent on circumstances: they may not occur at all, occur only occasionally, or occur only for some system members.¹ Most likely, the parent company is export­ing some intermediate or finished products to some country subsidiaries, as well as to foreign agents and distributors. But product transfers from the parent company are a probable, not an indispensable, feature of the global enterprise system. And the same is true of capital transfers. Most likely, some capital is transferred from the parent company to its subsidiaries (particularly for startup operations), but capital may also be sourced in a subsidiary’s country or in a third country. To illustrate, the parent company in Figure 20 transfers management and technology to all system members, but it transfers products only to (say) S₃, S₃, and A/Dj, and it transfers capital only to (say) Si₃ which is a new subsidiary.

The parent company is a receiver as well as originator of transfers. Apart from financial transfers from subsidiaries and other system members, it may also receive products and technology. For instance, in Figure 20, S₂ sends finished products to P, and S₃ sends technology on intermediate products to P. But a more striking feature of the global enterprise system is the transfer of products and technology among the subsidiaries and other subordinate system members. When managers at the parent company de­sign entry strategies from a global perspective, they act to build up intersub­sidiary transfers at regional and global levels to take advantage of similarities among country markets, economies of scale, and international specialization. Returning to Figure 20, S₃ ships intermediate products to S₂ and S_n, and S_n ships final product to A/Dj.

To introduce some concrete referents of the term “global enterprise system,” Table 9 shows the foreign content of 20 major corporations head­quartered in the United States, Europe, and Japan. This list could easily be extended to cover several hundred corporations.

Source: Root Franklin R. (1998), Entry Strategies for International Markets, Jossey-Bass; 2nd edition.