multinational headquarters securing maximum value from their subsidiaries?
Dr. Collette Darcy
Written by: Derek Malone – Student Part Time MBA 2017/2018 ID: X16117875
Submission date: 29th January 2018 Number of
Characteristics of the Market
The overall aim of the research
will be to answer the research questions ” Can a subsidiary bring added
value beyond the original mandate to the parent organisation? How could subsidiary innovation, and
entrepreneurship be identified and tapped? Is there a strategic imperative for subsidiary
Research indicates that
subsidiaries do develop unique knowledge which can be of significant value to
the Multi-National Corporation (MNC). The fact that there is widely dispersed
business units, creates an environment which lends itself to the development of
strategic leaders (Barlett and Goshal,1989),
centres of excellence (Holm and Pedersen, 200) and centres of competence
(Solvell, Zander and Porter, 1991) which ultimately will lead to a competitive
advantage for the parent organisation.
A key researcher in the area of
subsidiary innovation from the London Business School is Julian Birkinshaw he
has maintained that despite its benefits the for the MNC, the topic of
subsidiary entrepreneurship has received inadequate research and attention (Birkinshaw, Hood
and Young, 2005).
Debate centres on how subsidiary
innovation is successfully identified and integrated and there is still work to
be done in this area.
The proposed research will be to
look at the advantages and disadvantages of promoting subsidiary innovations,
the types of models that can be used for identifying subsidiaries readiness for
innovation and/or entrepreneurship and the barriers which can arise.
Through interviews with industry
experts whom have advised top MNC’s on the topic of innovation and developing
subsidiaries it is anticipated to present real world examples of successfully
subsidiary innovations and applied academic models.
A case study will be examined
where different subsidiaries will assess their own stages of readiness for
The goal of the research will be
to demonstrate the effects that subsidiary innovation can have for the entire
organisation positively and negatively. It will attempt to offer practices
which could be applied to identify and utilise subsidiary resources where they
may present for the betterment of the complete organisation.
Why should subsidiaries concern themselves with innovation?
Traditionally subsidiaries of
Multi-National Corporations (MNC’s) have been viewed as units which only
deliver upon existing corporate goals and strategies as designed by
headquarters. There is evidence to suggest that the success of the MNC is dependent
on its ability to leverage the dispersed knowledge and innovative potential of
its subsidiaries (Reilly and
Sharkey Scott, 2014).
Key to success is the enablement
by headquarters (HQ) of subsidiaries to innovate. It is primarily the role of
the subsidiary to respond to the demands of the local market, but subsidiaries
can be uniquely positioned geographically or have unique skills which could add
value to the whole organisation through innovation and development of new
initiatives which may have global application or potential (Birkinshaw et al,
It is necessary for a MNC to be
open to flexibility and strategic autonomy at the subsidiary level in order to
be innovative and responsive at the global level. Subsidiaries with low levels
of local autonomy are unlikely to create or diffuse initiatives and companies
with high levels of centralisation will impede the organisations abilities to
create innovations. (Ghosal and Bartlett, 1988)
It is considered advantageous for
MNC’s to try and leverage the talent within subsidiaries for innovation and
entrepreneurship to advance the whole organisation. A MNC that does not attempt
to utilise subsidiaries in this way are missing out on a significant potential
resource. If a MNC is to effectively utilise its worldwide resources, it must
first identify what the resources are and where they are located (Bartlett and
Birkenshaw identifies that
subsidiaries are usually started with the goal of servicing their local market,
by selling the products or services of the parent company, but as the
subsidiary develops their own resources and capabilities they adapt to take on
additional responsibilities creating new opportunities and capabilities with which
the whole of the MNC organisation can draw on (Birkinshaw, Hood
and Jonnson, 1998).
The growth of scope of a
subsidiary is the increase in the variety of activities undertaken at a
subsidiary site on behalf of the parent organisation, this is key to the
strategic development of the subsidiary (Molloy and Delany, 1999).
(Bartlett and Ghoshal, 1986)
maintain that subsidiaries can be leaders or contributors to innovation
projects within the organisation that can produce major gains for the overall corporation.
Birkinshaw defined some terms to
describe subsidiaries whom contribute significantly to the overall organisation
above and beyond their original mandate:
Subsidiaries that do not
contribute significantly above original mandate are described as:
Molloy describes non-supporting
subsidiaries as “good boy scouts”, who do what they are mandated but do not
necessarily demonstrate any innovative or entrepreneurial ambition (Molloy and
Direction of people through
command and control leadership is the least effective way to direct the efforts
of an organisation (Leslie et al.,
In the emerging global markets the harnessing of the intellectual firepower,
creativity and drive of subsidiaries will be an essential competitive weapon
(Molloy and Delany, 1999).
A Hakala et al, 2016 study
demonstrates empirical evidence that subsidiaries with an entrepreneurial
orientation can indeed be a source of competitive capability for the complete
MNC (Hakala et al.,
What are the criticisms of encouraging subsidiary innovation?
Criticism of subsidiary
entrepreneurship has been that it leads to a lack of focus and creates a
problem of dealing with multiple performance challenges. One to the local
market and how the subsidiary is perceived by it and also performance as
recognised by the parent company. This added responsibility can lead to “goal
ambiguity” (Andersson et al, 2001) in what Birkinshaw defines as “competitive
arenas” ( Birkinshaw, 2000), competitive arenas develop where different subsidiaries
are competing to overtake a particular function of the organisation. An example
here would be if a service organisation decided to open an international
support desk and hold a competition to decide which subsidiary would be best
placed to develop this. These challenges of goal ambiguity and the creation of
competitive arenas should therefore be carefully considered before taking on
subsidiary initiatives or entrepreneurship.
Head office is often best placed
for defining strategy imperatives for the whole company, and therefore has
unique perspective on how best subsidiary resources should be applied to
achieve those strategic goals (Bower,1970).
Many subsidiaries management
teams are not inclined to demonstrate initiative due to their belief that such
activity would not be view positively by head office management, or that the
local management do not have the drive or expertise to pursue innovative
activities (Birkinshaw et
The concept of initiative could also raise concerns at head office relating to
the motivations of the subsidiary management team and whose interest they are
primarily aligned to, is it the subsidiary, the subsidiary country or the
What strategy should an innovating subsidiary pursue?
Subsidiary innovation and
entrepreneurship could involve a large range of activities with different
levels of involvement from small incremental value adding activities to larger
more radical innovations. All will require strategic planning and managerial
support to become realities.
Molloy and Delany argue that
subsidiaries must become strategy orientated and plan for an alternative future
in the organisation other than the original mandate they have been setup under.
To develop a strategic migration plan requires local management to question
what will be doing in the future and forces more radical and wide-range
thinking (Molloy and Delany, 1999). However, they caution the corporation must
be the ultimate beneficiary.
The most successful subsidiary
management teams have the ability to foresee where the critical value adding
activities will be in the future. They do not rely on corporate HQ’s solely for
the crafting of corporate strategy. Studies have shown that subsidiaries with
high levels of decision making autonomy show a strong correlation with
increased level of initiative (Hakala et al.,
Molloy and Delany develop a model
based on Porters five forces which helps to identify the internal forces which
can affect or determine the subsidiary competiveness, examples are sister sites
as rivalries, outsourcing and greenfield sites. (Molloy and Delany, 1999). A
threat analysis is therefore necessary if a forward thinking subsidiary is to
objectively assess its position or be able to offer innovative solutions which
are strategically valuable for the parent organisation.
Eddie Molloy has stated
“Influence comes out of the barrel of performance – but you have to use it” in
essence the power to influence is borne by initially performing the basic
functions exceptionally and only then will a parent organisation be willing to
encourage innovation in the subsidiary.
Birkinshaw identifies three
criteria which must be identified and realised for subsidiaries to be
effectively leveraged by the corporation for benefit of all countries:
resources must be specialised, offering a unique skillset that is not
replicated in other parts of the corporation. If they are not unique they must
be superior to comparative resources. Birkinshaw uses the term “contributory
role” to broadly refer to subsidiaries which have unique skillsets which could
be used across the corporation. A subsidiary could have a high or low
contributory role. Other designations are subsidiaries with a “world product
mandate” or “centre of excellence” role, these designations are criticised by
Birkinshaw as being restrictive due to their clear cut nature, i.e. a company
is either a centre of excellence or not. In reality a subsidiary could have a
much more loosely defined contribution which is as valuable therefore
must be obtained by corporate management. The parent organisations management
must recognise and accept the above mentioned specialised resources for use
across the organisation. Corporate recognition can be achieved through either
top down or bottom up processes. The top down method involves management
identifying high potential subsidiaries through interviews, key performance
indicators and benchmarking activities. Bottom up process is where the
subsidiary management presents and promotes themselves as having specialised
skills which could be of benefit to the organisation.
transfer and leverage of resources is key. It is possible that centres of
excellence are created without design about how they will feed the entire
organisation, therefore only existing to satisfy a political end. subsidiaries
can have a world product mandate which exists only in the minds of the
subsidiary management and is not universally accepted or used. Effective
transfer is likely not in the control of the subsidiary as transfer of
resources largely depends on the openness of the receptor to receiving the
Molloy and Delany advise
leveraging of internal and external resources as a possible strategy for
Leveraging internal resources
requires strategic vision and ambition from the subsidiary management. For
example if a subsidiary runs worldwide logistical operations, finance or HR for
the subsidiary, could they offer these services to the global organisation? .
Leveraging external resources
could be partnering with local universities, local government agencies, local
experts / consultants. Using local and international supplier arrangements for
the benefit of the larger organisation. International funding sources e.g. EU
grant aid etc.
(Molloy and Delany, 1999)
The research questions that will
be posed are:
a subsidiary bring added value beyond the original mandate to the parent
could subsidiary innovation, and entrepreneurship be identified and tapped?
there a strategic imperative for subsidiary innovation?
Although there is empirical
research which shows that subsidiaries whom proactively demonstrate innovation
will increase the global competiveness of the organisation and increase the
technical capabilities of the firm (Johnson and
Theories which look at the circumstances where a subsidiary identifies and
develops innovative practices, and the necessity for subsidiaries innovative
practices are still in their infancy.
Firms must innovate to survive, they
must plan for disruption, a disruptive innovation is one which uses a
combination of technology and a new business model to exploit the technologies
potential for rapid development. The reason why most established market leaders
can be overtaken by disruptive start-ups is that the large organisations have strong
forces that create filters for innovative proposals that do not directly enhance
the current product or service offering. Disruptive innovations often appear
financially unattractive for firms to consider (Powell, Olivier
and Li, 2015).
As a result the encouragement and
widespread mining of innovative ideas, and entrepreneurial ideas within current
global companies becomes an imperative. Research in this area would benefit
firms whom have underutilised subsidiary units.
Chapter 1: Introduction
Chapter 2: Issues and review of
Chapter 3: Research Methods
Chapter 4: Case Study Results :
Chapter 5: Expert Interviews
Chapter 6: Conclusion
Chapter 7: References
The methods used will be
qualitative and form a thematic approach to analysis.
It is proposed to measure the
organisations subsidiaries using an adaption of the Molloy and Delany audit
tools and Birkshaw et al, methodology. The findings will attempt to validate
the proposition that a subsidiary can add value above and beyond its original
mandate. It will make recommendations about how subsidiaries can innovate and
offer a potential guide to identify and undertake subsidiary innovative
A case study is a specific
instance that is frequently designed to illustrate a more general principle
(Nisbet and Watt, 1984). The general principle is this case is that using the
“Case study research is to
observe the characteristics of the individual unit. The purpose of which is to
probe deeply and to analyse intensely the multifarious phenomena that constitute
the life cycle of the unit.” (Cohen, Manion and Morrison, 2013)
How could we measure a subsidiaries readiness or ability to provide
value to the wider organisation using a case study?
Molloy and Delany offer a systems
and audit tools to identify and guide subsidiary strategic innovation.
Firstly is the strategic
management team audit which is used to identify the readiness and willingness
of the subsidiaries to engage in proactive promotion of the innovative
abilities of the subsidiary.
Secondly, they have modelled the
8 stages of development of the subsidiary to enable management to identify
their current stage and potentially the stage they aspire to take the company
Thirdly is the strategy audit,
that asks the questions management of a subsidiary that require to be answered
to ensure successful transformation to a “contributing subsidiary”.
Fourthly, aligning the subsidiary
ambition with the parent companies agenda. This audit interrogates the
subsidiary initiative proposal to test if it does indeed support the overall
organisational goals and therefore is worthy of pursuit.
(Molloy and Delany, 1999)
Birkinshaw et al, 1998 developed
construct measures to assess if a subsidiary has innovative capabilities which
could benefit the parent corporation for the paper “Subsidiary Initiative in
The following measures were
deemed relevant in the Birkinshaw et al, 1998 study, and formed part of the
questionnaire used to analyse the subsidiary units propensity to innovate:
Contribuitory role – subsidiaries are asked what
percentage of revenues were as a result of international activities.
Specialised Resources – subsidiaries rated 5 different
capabilities (e.g. Manufacturing, Marketing, Innovation, R&D, international
management) relevant to other subsidiaries
Subsidiary Initiative – 5 questions based on previous
studies used to unearth their different types of subsidiary initiative that may
exist in an organisation, from skunk works (small loosely structured groups) to
more programmed, prescriptive group formations.
Entrepreneurial Culture – 5 questions measuring the subsidiaries
openness to risk taking, innovation and entrepreneurship.
Subsidiary autonomy 0 Identified where decisions were
permitted to be made in the organisation , at subsidiary or HQ level.
Communication Frequency – the frequency of
communication between HQ and subsidiaries was considered critical to the
strength of working relations and the level of sharing of information between
Local competition – perception of subsidiary as related
to its own domestic competition was considered. Birkinshaw found that
subsidiaries with perceived low local competition were more likely to
contribute to the global organisation
Industry Globalisation – the extent to which the
industry was global affected the subsidiaries opportunity to add value to
A case study will be conducted on
my own organisation involving questionnaires to subsidiaries managing directors
based on the referenced Birkinshaw, 1998 study and Molloy and Delany, 1999 recommendations.
The case study will be used for analytic generalisation of subsidiary
innovation actualisation and the
problems it may face, and to develop the theory that for the benefit of the
whole organisation it is necessary for corporation management to empower the
subsidiary management to develop above and beyond their original mandates through
encouragement of innovative and entrepreneurial pursuits.
Expert Interviews(Johnson and Medcof, 2007)
During initial research into the
area of subsidiary innovation, Irish experts Dr.Eddie Molloy and Dr.Ed Delany were
identified as proponents in the field of subsidiary innovation and have done a
considerable amount of research in this area. Dr. Delany produced a doctoral thesis
on the subject. Dr. Molloy has consulted government and multinationals on
strategy relating to subsidiary innovation.
It is proposed to interview both
experts as to their current thinking on the subject with respect to :
Challenges that arise for subsidiaries when trying
Types of innovation best suited for subsidiaries,
identifying areas ripe for innovation
The innovation imperative : why it is essential to
strategise for innovation
The results of the interviews
will inform a analytical theory as to benefits of subsidiaries innovative
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