No matter what organizational philosophy an MNC follows, two goals guide the design and implementation of its organization structure: realizing economies of scale and spreading the risk. Economies of scale are realized by running large-scale, concentrated operations. Risk is spread by operating in different environments, so that adverse events in one environment are likely to be offset by favorable events in another.
Research by the Boston Consulting Group (BCG) in the early 1960s demonstrated that, in some firms, for every doubling of the output produced there is a decrease of 25 to 40% in the per-unit cost of production. Thus, the researchers argued, a firm can slide along a downward-sloping curve of perunit production cost by increasing its output. They named this curve the experience curve.
Unfortunately, this rather solid principle of economics was widely misinterpreted. First of all, it was assumed that the decline in the per-unit cost is due solely to the learning that occurs as employees and management repeat the same activities over and over again. In fact, the decline represents the combined effects of four related factors: learning, specialization, investment, and scale. 1 Second, managers concluded that any strategy that further reduced per-person labor costs would enhance the effect. This idea led quite a few MNCs to embark on a quest for cheap labor, which in turn led to costly decisions to move entire production facilities to countries in which wages were very low. Soon these managers discovered, much to their surprise, that rigid employment, educational, and training habits of some labor forces made improving productivity extremely difficult. They realized that it is easier to continually train and upgrade labor in a country where the labor force is educated and there is a good state or private adult education system.
During the past forty years or so, most MNCs, both American and European, have been searching for workable economies of scale that would contribute to declining experience curves. The three main stages in this search can be conceived of as the "Age of Exuberance," the "Age of Sobriety," and the "Age of Rationalization."
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