Subsidiary Strategy

 Subsidiary - “ a value-adding unit in a host country” (Birkenshaw & Hood, 1998)

Subsidiaries evolve over time -
– through the accumulation of resources
– Development of specialized capabilities

Whyte and Poynter (1984) examined the activities of foreign subsidiaries along three dimensions:

  1. Product scope: the degree of freedom in product policy (ie product line additions and extensions), varying from limited to absolute.
  2. Market scope: the geographical spread of markets served, varying from local to global.
  3. Value-added scope: the range of ways in which value can be added through development, manufacturing and/or marketing activities, varying from narrow to broad.

Using these three dimensions, they developed a classification system for examining subsidiaries strategies, each applying to a discrete business. Given that some subsidiaries have more than one line of business, they may employ a different strategy for each business.

They proposed five types of subsidiary strategy (see Tables below). The Table examines the activities performed by each different type of foreign subsidiary.

As you can see, a Marketing Satellite has a very limited role. It is simply responsible for marketing products manufactured elsewhere. This strategy is thus characterized by local market scope, and narrow scope for value added.

However, a Product Specialist and a Strategic Independent perform all the key activities.

Type of Foreign
Subsidiary
Product Scope Market Scope Value-added
scope
Marketing satellite None Local Narrow
Miniature replica Yes Local Broad
Rationalized manufacturer None Regional/global Limited
Product specialist Significant Global Broad
Strategic independent Substantial Global Broad

Subsidiary Type Service Sales & Marketing Distribution Production R&D
Marketing Satellite Yes Yes Yes No No
Miniature Replica Yes Yes Yes Yes No
Rationalized Manufacturer Yes Yes Yes Yes No
Product Specialist Yes Yes Yes Yes Yes
Strategic Independent Yes Yes Yes Yes Yes



The aim of a host country and the foreign subsidiary manager really should be to try and maximize the role of the foreign subsidiary.

Relatively few subsidiaries ever become a Product Specialist or a Strategic Independent, and there is a need for subsidiary entrepreneurship in order to maximize the chances of achieving this status.

Types of Foreign Subsidiary Strategy: Bartlett & Ghoshal

Bartlett & Ghoshal identified four types of organizational form (see Table below)

Organizational Form        

Role of overseas Operations
Multinational
  • Sensing & exploiting local opportunities
Global
  • Implementing parent company strategies
International
  • Adapting & leveraging parent company competencies
Transnational
  • Differentiated contributions by national units to integrated world-wide operations


They suggested that the competitiveness of companies is constrained by the multinational, international and even global management models. Their solution is a new organizational form, the transnational.

They suggested that companies generally treated subsidiaries in a uniform manner, even though they were not all of equal importance to the company; they refer to this as the 'United Nations model'. Furthermore, they noted that companies perceived very different roles for headquarters, and for subsidiaries. The former coordinated activities, the latter simply implemented central or HQ orders.

This situation, they argued, created tension if not conflict between HQ and subsidiaries. It also rendered international assignments increasingly unpopular amongst home country-based executives.

Above all though, they suggested it limited the organizational capability of foreign subsidiaries in three ways:

  1. The UN model and its accompanying doctrine of equal treatment 'results in an overcompensation for the needs of smaller or less crucial markets and a simultaneous under-responsiveness to the needs of strategically important countries'.
  2. By demoting the role of foreign subsidiaries to implementers of global strategy and adapters of global directives, the parent risks under utilizing its world-wide assets and capabilities.
  3. Parent encroachment on subsidiary autonomy deprives foreign subsidiary management of opportunities, and they feel demoted, perhaps even disenfranchised, leading to human resource management problems.

However, Bartlett & Ghoshal noted that some companies did not conform to this conventional approach. Instead they assigned subsidiaries differentiated rather than homogenous roles, dispersing responsibilities rather than centralising them.

They identified three criteria for determining the strategic importance of a subsidiary:

  1. the size of the market it serves;
  2. whether it is the home market of a competitor;
  3. whether the market is technologically advanced.

They then identified four types of foreign subsidiary (see Table below).

Table: Bartlett & Ghoshal on Types of Foreign Subsidiary

Type of Foreign
Subsidiary
Strategic
importance
of local
environment
Level of
local resources
& capabilities


Comments
Strategic leader High High
  • Subsidiary partners parent in developing & implementing strategy. This role can only be performed by a 'highly competent' subsidiary, located in a strategically important market
Contributor Low High
  • Subsidiary operates in a strategically unimportant market, but it possesses a distinctive capability. Lead roles may be assigned to such subsidiaries.
Implementer Low Low
  • Operates in a less strategically important market, and has just enough competence to maintain its local operation. Most subsidiaries fall into this category. Deprived by the parent of critical information and with limited resources, they lack the potential to become Contributors or Strategic Leaders. Despite this they are very important as they generate funds.
Black hole High Low
  • Has negligible market share in important markets where success is essential to maintain global position. This is an unacceptable position and it is necessary to move the subsidiary out of this classification. Encourages formation of JV, alliance, or if possible international acquisition.

Relationship Between Subsidiary Strategy and Corporate IB Strategy

Given that most MNCs operate a High Foreign Investment Extensive Co-ordination international business strategy, not surprisingly most foreign subsidiaries are rationalized manufacturers.

By this, once again, we mean that the MNC uses plant specialization and focuses upon a narrow product range.

                     Type of IB Strategy           Type of Subsidiary Strategy

Export-based strategy, decentralized marketing

                  Marketing satellite
Country centered                     Miniature replica
High foreign investment,
extensive co-ordination among subsidiaries                      
             Rationalized manufacturer
Purest global strategy        Product Specialist (possibly Strategic Independent)

Comment

You need to be a member of Mastering Business Strategy to add comments!

Join Mastering Business Strategy

© 2014   Created by Michael McDermott.

Badges  |  Report an Issue  |  Terms of Service