Carla I. Koen. Comparative International Management

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MULTINATIONAL CORPORATIONS: COMPARATIVE CORPORATE STRATEGY 481

loans became very difficult. Then the board took action and sent Messier home.

Rumour has it that it was French president Jacques Chirac personally, who asked

Jean-René Fourtou to save Vivendi Universal. Fourtou started a reorganization

programme and sold off large parts of the company. Vivendi Environment was the

first part to be sold. After that, the publishing subsidiaries were sold. Fourtou was

also planning to sell Universal Studios, Universal Music Group, and the US cable

network USA Networks. The new strategy of Vivendi Universal is to concentrate

on its telecoms business, Cegetel, and the French part of the cable network

CANAL.

To sum up, Vivendi had been a real conglomerate for a long time. However,

after the burst of the Internet bubble, the company was forced to limit its activi-

ties and concentrate on the telecoms business.

Siemens

In 1847, in Germany, Werner von Siemens and Johann Georg Halske founded the

company that later developed into Siemens AG. The German company grew into a

huge enterprise, with 426,000 employees, representation in 190 countries all over

the world, and net sales exceeding €84 billion (fiscal year 2002). Siemens was not

only big, but also very diverse. It divided its activities into eight broad business

segments: automation and control, information and communications, power,

transportation, medical, lighting, financing and real estate, and affiliates. In turn,

each segment consisted of a number of separate business groups. Together, they

supplied a large number of different products and services to various business

and consumer markets. Some examples of its products and services are process

automation, automotive parts, telephone and communications systems, power

plants, locomotives, imaging systems for medical diagnosis, lamps, insurance

products, mobile phones, computers and washing machines. This made Siemens

into an archetypal conglomerate.

Siemens’ corporate strategy was heavily criticized, particularly by stock ana-

lysts and investment bankers. They argued that the corporation lacked focus, that

it was slow and overly cautious, and that it was squandering opportunities for

growth. ABB, the result of a merger between Asea from Sweden and Brown-

Broveri from Switzerland, was set as an example to Siemens. Under the

leadership of its renowned CEO Percy Barnevik, ABB had concentrated on high-

growth businesses and sold the rest. For example, it had divested its traditional

activities in power-generation equipment, while making 160 acquisitions in other

areas.

Nevertheless, Siemens stuck to its corporate strategy. It refused to sell

boring activities such as power-generation equipment and ‘be drawn into the

excesses of the New Economy’, according to President and CEO Dr Heinrich von

Pierer in his letter to the shareholders (annual report 2002). Siemens’ businesses

were subject to different cycles. Many businesses – like power generation,

This case is based mainly on several articles from Business Week and NRC-Handelsblad, and the corporate

website of Siemens (www.siemens.com) and its annual reports.

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482 COMPARATIVE INTERNATIONAL MANAGEMENT

medical equipment and rail systems – were subject to long-term market cycles.

Others – like automation and lighting – were faced with regular short-term

market cycles. Then there were businesses, like information and communication,

that had to cope with sudden drops in demand. In sum, the diverse portfolio of

businesses stabilized overall financial results. This did not imply cross-subsidiza-

tion. Each group was responsible for its own profitability. If necessary, measures

like reorganization, alliances with other firms or divestment were taken. Apart

from risk reduction, several additional advantages of being a conglomerate were

pointed out by corporate officers. For example, the shared reputation and brand

name allowed the recruitment of talented employees all over the world. Also,

Siemens was able to offer customers integrated solutions for most of their needs.

A hospital, for instance, could go to Siemens for its needs in transportation,

lighting, communication, power and medical systems. Finally, Siemens’ world-

wide presence facilitated entry into new markets. If a subsidiary wanted to start

activities in China, for instance, it could depend on the support of the dozens of

joint ventures that other parts of Siemens had already established over there.

The corporate strategy seemed to work. Siemens was less affected than

other companies by the unfavourable macro-economic environment and high-

tech bust at the beginning of the twenty-first century. Despite a sharp decrease in

demand from telecoms operators, for example, the conglomerate still produced

satisfactory results, because it could rely on profits from the more traditional

activities. In contrast, ABB was struggling to survive. It had acquired huge debts

to finance the acquisitions, making it vulnerable to economic downturns.

Furthermore, one of the companies ABB had acquired was Combustion

Engineering, which was later to face asbestos-related claims that threatened the

very existence of the company.

In conclusion, Siemens is an example of a firm that withstood the perhaps

short-sighted interests of shareholders and stuck successfully to its corporate

strategy of extensive, unrelated diversification. Naturally, critics are never at a

loss for an argument. They claimed that Siemens’ returns on shares still lagged

behind those of General Electric, the well-known US-based conglomerate.

Tata

In 2003, the Tata Group comprised 80 companies, which were active in seven

broad sectors: materials, engineering, energy, chemicals, consumer products,

communications and information systems, and services. Some examples of the

activities of the 80 companies were steel manufacturing, advanced composites

manufacturing, commercial and passenger vehicle manufacturing, industrial

engineering and construction services provision, power generation, chemicals

and fertilizer production, tea and coffee manufacturing and marketing, chinaware

The information used in this case is primarily derived from the description of Tata Iron & Steel Co. Ltd in the

International Directory of Company Histories, Detroit, MI: St James Press, and the website of the Tata Group

(www.tata.com). The authors would also like to thank, in alphabetical order, Rejie George and Rekha Krishnan

for their help. Any remaining errors are the sole responsibility of the authors.

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MULTINATIONAL CORPORATIONS: COMPARATIVE CORPORATE STRATEGY 483

production, publishing, basic telephony, cellular and Internet services provision,

information technology consultancy, management consultancy, hotel chain oper-

ation, real estate development, life insurance coverage and asset management.

Given the number and scope of these activities, Tata clearly qualifies for the label

‘conglomerate’. However, the origination of Tata differs from that of a traditional

western conglomerate.

The foundations for Tata were laid in 1868, when Jamsetji Nusserwanji Tata

started a trading firm in India. In 1874, the first manufacturing activities began,

through the establishment of the first indigenous Indian textile mill. At the time,

since India was still under UK rule, its economy was dominated by UK economic

interests, which dictated that India should serve as supplier of the required raw

materials and buyer of its manufactured products. The advancement of an inde-

pendent India was an important motive behind Jamsetji Tata’s further plans.

Based on his international travels, he had identified three activities that he saw as

essential to a modern industrial economy: steel manufacturing, hydroelectric

power generation and technical education. Although he died before his plans for

any of these three activities bore fruit, he did lay the foundations on which later

generations of his family were able to realize his vision.

A few important milestones in this respect were: the birth of the Tata Iron and

Steel Company in 1907, the creation of the Tata Hydro-Electric Power Supply

Company in 1910, and the establishment of the Indian Institute of Science in 1991.

Other significant diversification moves were the entries into consumer goods

such as soaps, detergents and cooking oils (1917), commercial aviation (1932),

chemicals (1939), commercial vehicles (1945), cosmetics (1952), tea (1962), con-

sultancy (1968), publishing (1970), computer hardware (1977), passenger cars

(1985), telecoms hardware (1988), fertilizers (1989), insurance (1995) and tele-

coms services (1996). Several of these entries took the form of a joint venture with

a foreign partner. For example, the insurance activities were started together with

the American International Group from the USA. For a long time, a joint venture

was the only legal option for a foreign firm that wanted to enter India. Tata’s own

international expansion started modestly, with the establishment of a London

office in 1907, and increased gradually, culminating in the take-over in 2000 of the

Tetley Group, a tea company, from the UK. This represented the first major acqui-

sition of an international brand by a firm from India.

Meanwhile, in particular during the late 1960s and 1970s, Tata had been faced

with developments that posed a serious threat to its survival. The Indian govern-

ment appeared to prefer a Soviet-style centrally planned economy to one with

large private enterprises. Therefore, legislation became increasingly unfavour-

able or even hostile towards enterprises like Tata. For example, dividends were

restricted, expansion into certain industries was constrained, and attempts were

made to nationalize certain parts. As a result, Tata had to assume a low profile.

Until 1970, central control was achieved through the managing agency system.

According to this system, investments in India were managed by firms of agents

who, in return, received commission. After the abolishment of the system, formal

control was preserved through shares in the Tata companies owned by Tata

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484 COMPARATIVE INTERNATIONAL MANAGEMENT

Industries Ltd. whose chairman was a distant relative of the founder, Jamsetji

Tata. However, because of the unfavourable political environment, the group was

compelled to emphasize the independent character of all Tata companies. Also, it

was stressed that trusts set up to promote non-commercial goals held the

majority of the companies’ shares. In reality, however, the family managed to hold

the group together through informal consultation, the appearance of identical

names among the directors, and a shared office in Bombay.

Starting in the 1980s, government policy became less negative for private

enterprises. As a result, the ‘coming out’ of Tata could slowly commence. A

number of changes became apparent. In 1999, a new corporate mark and logo

were launched, which were to be centrally promoted and protected. Furthermore,

in 2001, a group executive office was set up. This office had to design and imple-

ment change in the group and guide the group’s future strategy. Finally, financial

performance was emphasized to a greater extent than it had been in the past. Tata

had often been accused of keeping all companies alive, irrespective of their prof-

itability. However, at the start of the new millennium the need to critically review

companies that were consistently underperforming was recognized. According to

Ratan N. Tata, the group chairman, the companies were faced with ever in-

creasing competitive pressures, both in domestic and foreign markets, due to the

growing integration of the Indian economy into the world economy.

To sum up, a number of differences between Tata and a typical western con-

glomerate, such as General Electric or Tyco, can be pointed out. First of all, Tata’s

mission was not single-minded profit or shareholder value maximization. It was

founded with the idealistic, anti-colonial motive of self-sufficiency for India. The

second, and related, difference is the path to growth. Tata did not rely on external

growth through the acquisition of existing companies; instead, most of its diver-

sification originated from its own internal start-ups and subsequent expansions

of new activities and, in addition, from domestic joint ventures with companies

from abroad. In fact, this seems to be the main reason for Tata’s survival and

success as a conglomerate. In countries with substantial market imperfections,

in particular in the capital and managerial labour markets, a conglomerate that

is capable of allocating capital and expertise to promising new ventures can

perform a very valuable role. Also, as probably the best-known and most

respected Indian company, Tata represented an attractive joint venture partner

for foreign firms that were not allowed to have wholly owned subsidiaries in the

country. Another difference is the structure, which does not entail a clearly

defined corporate office with hierarchical authority over a number of divisions

that are fully owned, but is much less explicit. For example, there are multiple

central coordinating companies. In addition, companies do not have to be fully

owned by a central holding company, but can also have their own public listing. A

final related difference is the influence of the family. While a western conglom-

erate is controlled by independent, professional managers, Tata is still controlled

by the family that gave the group its name. Nevertheless, as became clear in the

previous paragraph, a more mainstream government policy in India, in combi-

nation with increasing international competition, has caused Tata to adopt a

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MULTINATIONAL CORPORATIONS: COMPARATIVE CORPORATE STRATEGY 485

number of characteristics, which mean that it is starting to resemble a western

conglomerate.

Based on the firms discussed in this case, two general observations can be made.

First, their backgrounds show that the organization or governance of corporate

strategy differs between countries. In the firms from the USA and Europe, diver-

sification is mainly organized through formal control of subsidiaries active in

different industries by a central holding company, which is based on full, or at

least majority, ownership of the subsidiaries. In the examples from Asia, gover-

nance of diversification seems to be more informal, meaning that companies

active in different industries are grouped together via a number of mechanisms

like cross-shareholdings, officials with positions in several companies, and

companies that perform coordinating roles.

Next, in the USA, the successful conglomerate had become almost extinct by

the late 1980s. After that, ill-advised diversification moves were rapidly and

severely punished in a demanding capital market. The examples from the other

countries indicate that extensive diversification was sustainable for a much

longer period of time. However, in all those cases, conglomerates were under

mounting pressure to critically evaluate, and possibly restructure, the existing

portfolio of businesses.

Questions

1. Trace the differences and similarities in the corporate strategies of the five

companies studied in this case.

2. Explain whether you find more evidence of divergence or of convergence.

3. Provide, where possible, an institutional explanation for the corporate strat-

egies of the companies discussed in this case.

4. Evaluate whether and how the theories discussed in this chapter could be

used to explain the corporate strategies of the companies examined in this

case.

This article is especially interesting for its overview of several universalistic theories

of product diversification.

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Learning Objectives

By the end of this chapter you will be able to:

understand why networks and clusters are important for business life

analyse the positive and negative aspects of the network relationships of firms

explore how geographical clustering can enhance a firm’s competitive position

critically assess the insights of several theoretical frameworks for

understanding the concepts of networks and clusters

assess the argument that institutions are important in industrial districts

appreciate the difference between the sectoral approach and the cluster

approach.

Chapter

Networks and

Clusters of Economic

Activity

SJOERD BEUGELSDIJK AND GERT-JAN HOSPERS

490 COMPARATIVE INTERNATIONAL MANAGEMENT

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