government regulations. And even a simple difference such as climate can
influence the sort of product a company will be able to sell. For example, cer-
tain materials might be sensitive to large temperature swings. A firm can turn
these differences into a competitive advantage by tailoring its products to fit
the unique requirements of different national markets. This is known as a strat-
egy of national differentiation, and multidomestic companies (see later
chapters) know how to apply this strategy to their advantage.
Economies of scaleA second source of competitive advantage is economies of scale (see Section 3).
A firm can achieve scale economies by doing nothing more than expand the
volume of its output. In scale-sensitive industries, a firm may even be forced to
do this to retain its competitive viability. Otherwise, competitors will undercut
its market prices by building up their own cost advantages. The nice thing about
scale economies is that they can also lead to what is called the experience or
learning effect. By producing the same product a large number of times, the pro-
ducer will probably invent ways to make the production process more efficient.
As the scale of production increases, this will lead to progressive cost reductions.
While the concept of scale economies is not unique to multinational com-
panies, the sheer size of such concerns often makes it easier to exploit them.
Economies of scopeThe last source of competitive advantage is economies of scope, also called syn-
ergy effects. The basic notion here is that it can be less expensive to produce
two (or more) products within the same firm than to produce them separately.
Ghoshal distinguishes three important sources of economies of scope.
- The first is that the corporation must be diversified, that is produce
several different products, and share not only production equipment but also
cash or brand names across different companies and markets. Flexible manu-
facturing systems using robots to produce different items are an example of the
first; cross-subsidization of markets and exploitation of a global brand name are
examples of the second and third. - A second important source of economies of scope is shared external relations.
This applies to customers, suppliers, distributors, governments and other insti-
tutions. It is often easier to sell new products through existing distribution
channels to existing customers. - Finally, shared knowledge is the third important component of economies of
scope. The fact that NEC can share R&D in computers andcommunications
makes it possible for the company to create new products which give it a compe-
titive advantage over competitors who are technologically strong in only one of
The International Division of Labour 29