A foreign subsidiary managers perspective of subsidiary initiatives

Business is taking on an ever increasing global perspective. Global firms, referred to as multinational corporations (MNC), are rising and evolving into potent and persuasive establishments influencing international economies and policy making. Headquarter based managers though operating at the heart of the corporation and ultimately accountable for its performance has been the focus of a significant level of historical research.

Foreign subsidiaries can be seen to be the operational wing of an MNC, physically based outside the parent country yet still regulated by the MNC (Birkinshaw 1997, 1998), sometimes subordinate and operating to headquarter directives (Delany 2000).

This research takes the quieter journey of viewing MNC’s from the foreign subsidiary manager’s perspective, a story of bottom-up driven successes and failures, hoping to add incrementally to the knowledge that defines the value of foreign subsidiaries (Birkinshaw 2000). Birkinshaw and Hood (1997) propend that a bottom up perspective is based on viewing the entrepreneurial activities of subsidiary managers as they illustrate proficiency and an inclination to assume extra roles to the MNC headquarter management.

Effective subsidiary managers innately understand they have a say in the running of the organisation and strive to ensure their power is legitimised. Yet they find themselves balancing on the double edge sword of corporate citizenship and nonconformist (Birkinshaw 2000). As we move through the research we will focus on specific key areas, firstly subsidiary initiatives from a local, global and then internal perspective. Secondly we will investigate subsidiary mandates, building on this we will probe how subsidiary initiatives can impact the assigned mandate. Finally we will attempt to build on research advancing why some subsidiary initiatives fail specifically from the ‘corporate immune system’ (Birkinshaw and Ridderstrale, 1999, p.149) perspective.

This project hopes to provide a subtle shift in knowledge and understanding of how subsidiary managers develop their companies through initiatives and the process which the initiative was taken. Also potentially shining a light on the importance of role development for subsidiaries by understanding how subsidiary initiatives impact their mandates through indepth interviews.

Literature Review

Subsidiary initiatives can be observed to be entrepreneurial activities driven by foreign based, outside parent country, subsidiaries of MNC’s, (Birkinshaw and Ridderstrale, 1999; Birkinshaw 1997) progressing proactive approaches to corporation resource allocation and expansion (Miller, 1983; Kanter, 1982). Corporate entrepreneurs create and exploit change within an existing company for economic return by moving resources from low areas of productivity to higher areas attaining greater yield while accepting the higher degree of uncertainty and risk in doing so (Burns 2008; Parker 2011). This entrepreneurial activity drives a dynamic dominant logic providing the basis for conceptualising the subsidiary and the allocation of resources (Morris et al 2008)

Ultimately subsidiary initiative is the source of variety and the seeds of change for a MNC, but for the majority of firms it is not the modus operandi (Birkinshaw 2000). MNC’s have to ‘tap their subsidiaries for global reach’ (Ghoshal and Barlett 1986) listening and responding to subsidiary managers in multiple and differing markets to reap rewards of multinationality, though strategically obvious evidence suggests MNC’s disregard it. Its normative policy for headquarters to control subsidiaries to the point that they have no degree of freedom to identify or pursue new ideas. On the flipside subsidiary initiatives can be encouraged but eventually surpressed by a plethora of control forces (i.e. corporate immune system), so it is valuable in theory but hard to find in practise.

Birkinshaw (2000) propends that subsidiary initiatives come from the ‘locus of business opportunity’ (Birkinshaw, 2000, p.22) and they are a manifestation of corporate entrepreneurship. Importantly we should differentiate between internal divisions like research and development groups who have a mandate to innovate and other divisions who do not.

Building on this knowledge (Birkinshaw 2000) we can postulate that initiative is viewed as a discrete, proactive undertaking that advances a new way for the corporation to use or expand its resources, for this research we will also add that subsidiary initiatives must include some form of international responsibility to ensure activities are not solely taken to benefit the subsidiary in the local market. Kirzner (1973) contends that ‘altertness to hither to unnoticed market opportunities’ stimulates entrepreneurs to act.

Traditional views would convey subsidiaries act as ‘global scanners’ conveying signals to head office (Vernon 1979). Recently (Bartlett and Ghoshal 86, Hedlund 86)portray an image of uniqueness in subsidiaries with vital links to local customers and suppliers. In this situation subsidiaries ability to pursue local opportunities and exploit them on a global scale is an important capability.

Ghosal and Bartlett (1990) introduce the concept of an ‘interorganisational network’ in which subsidiaries have multiple links to other entities both inside and outside the formal MNC boundaries. Clearly illustrating subsidiaries arent limited to only having a local perspective but showing they sit at the axis of a local, global and internal market interface. Birkinshaw (1997) helps differentiate between these 3 markets by categorising their dimensions. Firstly the ‘locus of business opportunity’ meaning the market in which the initiative opportunity emerged and secondly the ‘locus of pursuit’ meaning the market in which the process was realised, these are co-incident and there is no ambiguity.

Birkinshaw (1997; 2000) contends that there are defining features under which subsidiary initiatives work in each market. Firstly under local markets, where the locus of opportunity is within the local market, the facilitating conditions must be balanced by a moderate level of autonomy and a fairly strong relationship with the parent company. Autonomy is required in sufficient degree allowing the subsidiary managers to apply resources to the opportunity without interference ,and a well established set of capabilities, switching to the stronger relationship with the parent company at advanced stages so higher levels of resource commitment can be achieved. Secondly the early efforts of a local market initiative are directed towards building product/service for local market

customers. Assuming this is successful the challenge is selling the proven concept back to managers in the parent firm building some legitamcy in it for the subsidiary. Finally local market subsidiary initiatives lead to new products/services for local customers, they can also be developed into new business opportunities for the firm as a whole as local customer base becomes global. They are part of the process of adaption and renewal in MNC’s providing variety for the MNC’s systems to select against. (Birkinshaw 1997; 2000)

Under global markets, where the locus of opportunity is outside the local market, a high degree of autonomy is of great importance because the subsidiary is typically building on existing business and needs to act swiftly, sometimes to deliver on its world product mandate. Since the line of business is global the subsidiary only requires proven capabilities in the relevant areas. This high degree of autonomy is normally matched by a more distant relationship with managerial counterparts in the parent company. Secondly the early efforts of a global market initiative are externally orientated and assuming the business is doing well significant investment permission will be granted. Finally and immediate effect of global market initiative is specific business areas and capabilities associated with it are developed further. ‘Centres of excellence’ can be created implying parent company and other subsidiaries stand to benefit from those capabilities (Birkinshaw 1997; 2000).

The final entity with the interorganizational network (Ghoshal and Bartlett 1990) is the internal market, where the locus of opportunity could be both inside or outside the local market, or are market opportunities identified in the corporate system. Firstly the most criticial facilitator is the credibility of the subsidiary in the eyes of the parent company. Matched by a geocentric approach by managers in head office who eliminate artifical roadblocks with regards to subsidiary initiatives. Secondly since the internal market initiative is inherently inward-looking the requirement for corporate approval for necessary resources is primary. Both horizontal and vertical selling of the process to build support is essential. Finally since internal market initiative are fundamentally geared towards reconfiguation and rationalizing the activity system in the MNC it needs to emphasise that overall revenue generating KPI’s are not substantially affect in the short term by internal market initiatives. Internal market initiatives can be seen

as symptomatic of an overall shift toward geographical concentration by value adding functions in MNC’s (Birkinshaw 1997; 2000).

When viewed with the interorganisational network (Ghoshal and Bartlett 1990) the subsidiary suddenly has the potential to enhance its role in local responsiveness, global integration and worldwide learning capabilities of the MNC. ‘Overtime a successful initiative taking subsidiary would expect to change its own strategic context (Burgelman 1983) and hence its perceived role within the MNC.Birkinshaw (1996) recognises this role as a subsidiary mandate contending the mandate to be a business, or part there of, which the subsidiary has responsibilities towards and is a participant but is beyond its national market boundaries. The mandate is a license to utilise its distinctive capabilities for the particular business or market opportunity. The initial mandate, or raison d’etre, is of primary importance being the basis for the existence of the subsidiary.

Birkinshaw et al (2005) contend that subsidiaries are started with the objective of being a market unit of the parent company, as the subsidiary grows it develops resources and capabilities of its own and takes on additional responsibilities by being innovative in the local market, and interacting with others in the local environment. This can eventually lead to uniqueness in its approach that not only helps the parent organization, but also drives the parent in a direction that was not considered initially. They further opine that in order to be held as superior when compared to sister subsidiaries the top management team of the subsidiary must constantly look for ways that will give them an edge over their internal competitors. Even when competing in an ‘internal’ competitive environment knowledge sharing across the different internal subsidiaries and parent should not be precluded as a normal activity.

Subsequently Birkinshaw (1996) and Delany (2000) hypothesize subsidiary mandate life cycles, Birkinshaw (1996) broadly classifying them as mandate gain, development, sustainability and loss which contrasts with Delany’s (2000) basic, intermediate and advanced or 8 stage models. The development of new mandates sometimes involves venturing into a broader area through proactive lobbying with the parent, from where the concept of ‘subsidiary initiative’ springs in.

Delaney’s (2010) 8 stage model though simplistic in presentation provides a stepping stone methodology illustrating how a subsidiary can slowly progress through different stages of development, finally reaching a stage where it becomes the ‘strategic apex’ of the corporate thereby establishing itself as an indispensible part of the whole corporate conglomerate of the MNC. This last stage could probably be termed as the goal of all the subsidiary initiatives as it gives the subsidiary an advantage that is beyond the comprehension of even headquarters, in effect a reverse takeover.

Building on these concepts we can view two distinct models of corporate entrepreneurship linked to subsidiary initiatives and subsidiary mandates. ‘Focused corporate entrepreneurship’ (Birkinshaw, 1997, p208) whose mandate is to identify and nurture new businesses and opportunites for corporations through semi-autonomous informally structured corporate venturing. Corporate headquarters will have already legitamised its existence and mandate.

The second model ‘dispersed corporate entrepreneurship'(Birkinshaw, 1997, p209) entails intrapreneurship or every individual in an organisation having capacity for both managerial and entrepreneurial behaviour. The dispersed approach sees development of entrepreneurial cultures or posture as the key antededent to subsidiary initiatives. This in turn leads to a greater diversity of opportunities sensed due to dispersed capabilities throughout the organisation. Birkinshaw (2000) believes that initiative is the ‘primary manifestation of dispersed corporate entrepreneurship’ and ‘the initiative process is bounded by the identification of an opportunity at the front end and the commitment of resources at the backend.’ (Birkinshaw, 1997, p.209) breaking this down further foreign subsidiaries can be placed into groups with differing roles (Birkinshaw 2000).

The ‘assigned’ subsidiary mandate is legitimised by the parent company (Bartlett and Ghoshal 1986) and their role is enacted through the definition of an appropriate set of co-ordination and control mechanisms. This role is enacted through the structural context of the MNC can be said to have ‘autonomy, local resources, normative integration and inter-unit communicaiton associated with innovation creation in subsidiaries but a negative association with adoption and diffusion (Ghoshal and Bartlett 1988).

Contrasted with the ‘assumed’ subsidiary mandate where there is a greater strategic choice on the part of subsidiary management than the subsidiary role perspective. Subsidiary strategy is constrained by structural context rather than defined and local managers have considerable latitude to shape strategy as seen fit. Roles are assumed by subsidiary managers rather than assigned by parent company managers. With a role aligned to the dispersed approach to corporate entrepreneurship the subsidiary has ongoing managerial responsibilities but responds to entrepreneurial opportunities as they arise. Creativity and innovation is endemic to these subsidiaries as the driver of their strategy.

The mandate development function of a subsidiary that ultimately leads to subsidiary initiatives is a part of the ‘autonomous bottom-up internal workings’ Burgleman (1983). Complementing the ‘autonomous internal-workings’ is the ‘structural context’ (Bartlett, 1979; Bower, 1970; Burgelman, 1983; Prahalad, 1976) of the subsidiary that consists of various facets of its relationship with the parent company. Ghoshal’s (1986) research on innovation in large multinationals highlight the aspects of parent-subsidiary relationship in increasing the subsidiary’s contributory role. He showed that the creation of innovation in subsidiaries was associated with high autonomy, high parent-subsidiary communication and high normative integration (similar parent-subsidiary behavioural patterns leading to integration).

Birkinshaw (1996) propounds that even though subsidiary mandate is not exactly the same as innovation creation they do share a similar set of relationship with respect to creation of autonomy within the boundaries of the parent-subsidiary communication channels that comes under the purview of normative-integration.

The other important factors that leads to world mandate winning strategy for the subsidiary includes credibility of the subsidiary in delivering on its promise (Bishop and Crookell, 1986), cross-fertilization of ideas (Hedlund, 1994), an internal context that fosters co-operation, initiative and learning (Ghoshal and Bartlett, 1994) which in turn leads to entrepreneurship inside a subsidiary sometimes called as intrapreneurship (Jong and Wennekers, 2008).

Subsidiary value-additive is an important concept with different that lead to value-additives for the subsidiary are resource inflows and outflows (Gupta and Govindarajan, 1991), strategic importance of the subsidiary (Bartlett and Ghoshal, 1986), international sales, level of integration with the parent company and existence of world mandate with the subsidiary (Roth and Morrison, 1992).

Finally delving on the issue of mandate loss, which could lead to the closure of the subsidiary vis-à-vis parent, Birkinshaw (1996) contends that it can occur mainly due to Subsidiary-Led Spin-Off, Parent-Driven Phase-Out, and Subsidiary-Driven Divestment. Each of these factors would lead us to theorize that subsidiary mandate from the parent is the primary foundation on which the subsidiary initiatives can occur, that if properly executed can lead to subsidiary becoming a strategic apex in the corporate conglomerate.

Birkinshaw et al. (2001) postulate innovation as the creation and realization of procedures or acts that is new and furthers multinational (MNC) organisations goals.

Innovation as a topic attracts interest amoungst management practitioners and academics alike. Innovation is an area most organisations strive to focus on hoping to excel and establish competitive advantage through its establishment within the organisation.

Link initiative to innovation

This ‘innovation at the edges’ (Birkinshaw and Hood, 2001, p.137) provides MNC’s with an opportunity to exploit diverse opportunities and create solutions to strategic challenges on a global scale.

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