Lecture 3 (HQ-subsidiary realtions and business groups)

Question 1

4 subsidiary roles

Answer 1

Strategic leader:
This role can be played by a highly competent national subsidiary located in a strategically important market. In this role, the subsidiary serves as a partner of headquarters in developing and implementing strategy. It must not only be a sensor for detecting signals of change but also a help in analyzing the threats and opportunitites and developing appropriate responses.

Contributor:
Filling this role is a subsidiary operating in a small or strategically unimportant market but having a distinctive capability. That could be for example R&D, where the subsidiary has superior knowledge within a special field. Thereby they can help management with their expertise and channel it toward projects of corporate importance.

Implementer:
In the third situation, a national organization in a less strategically important market has just enough competence to maintain its local operation. The market potential is limited, and the corporate resource commitment reflects it. Most national units of most companies are given this role.
They are delivers of the companys value added, they have the important task of generating the funds that keep the company going and underwrite its expansion. The implementers efficiency is as important as the creativity of the strategic leaders or contributors – and perhaps more so, for it is this group that provides the strategic leverage that affords MNCs their competitive advantage. The implementers produce the opportunity to capture economies of scale and scope that are crucial to most companies’ global strategies.

The black hole:
Is not an acceptable strategic position. Unlike the other roles we have described, the objective is not to manage it but to manage ones way out of it. But building a significant local presence in a national environment that is large, sophisticated, and competitive is extremely difficult, expensive and time consuming.
One common task has been to create a sensory outpost in the black hole environment so as to exploit the learning potential, even if the local business potential is beyond reach.

Question 2

Value of competencies of upstream vs. downstream subsidiaries for the organisation

Answer 2

Upstream competence is often more “universal” (transferable to other markets)
→ subsidiary with this competence is more valued
– R&D
– Manufacturing

Downstream competence is often local-for-local (highly contextualized)
→ subsidiary is less valued – Marketing
– Sales

In relation to the Birkinshaw text the categories Specialized contributor and world mandate roles should have specialized capabilities in upstream activitites (such as R&D and manufacturing) whereas the local implementer typically specialize in downstream activities (such as sales and marketing).

Question 3

Value of competencies of upstream vs. downstream subsidiaries for the organisation

Answer 3

Upstream competence is often more “universal” (transferable to other markets)
→ subsidiary with this competence is more valued
– R&D
– Manufacturing

Downstream competence is often local-for-local (highly contextualized)
→ subsidiary is less valued – Marketing
– Sales

Question 4

subsidiary autonomy defined and the difference between Strategic and operational autonomy

Answer 4

The ability of units and sub-units “to take
decisions for themselves on issues that are
reserved to a higher level in comparable
organizations” (Brooke 1984)

The degree to which the foreign subsidiary of
the MNC has strategic and operational
decision-making authority (O’Donnell 2000)

strategic autonomy refers to deciding on markets or segments; while operational is how we achieve goals e.g. which suppliers; birkinshaw et al. found that there isn’t significant difference across subsidiary types; no matter if you have heterarchy or hierarchy, they have the same level of operational autonomy; for strategic autonomy-they found that mandates have the highest autonomy, while local implementer have the lowest strategic autonomy.

Question 5

Business groups defined

Answer 5

“Business groups are interorganizational networks of semi-autonomous firms bound through multiplex ownerships, buyer-supplier, director interlock, and/or social ties.”

“Business groups are hybrid organizational forms that “contain features of both markets and hierarchies. Affiliates are connected more tightly to one another than to outside firms, yet they are connected more loosely than the business units in hierarchies.”

Three defining features:

1. Complex corporate governance structures
2. Internal markets (exchange resources)
3. historical circumstance - focus on scale and scope economies.

Note: they are legally independent.

Question 6

Factors facilitating the formation (antecedents) of business groups

Answer 6

Many of the benefits seen in relation to the creation of business groups are due to weak institutions and therefore it is often seen that business are very fit formations in emerging markets. This is why 45 of the 50 largest companies in India are business groups. Here access to external capital can be complicated and there exists higher transaction costs due to corruption and weak institutions. Many of these issues can be approach by engaging in a business group. The benefits that come with the bigger size also enable groups to affect to political institutions in the country to their benefit.
Business group formation can be response to
- Weak factor markets - lack of resources (Finance, people, technologies might be hard to come by)
- Weak institutions (institutional voids)
o Laws governing business transactions do not exist or are bad or poorly enforce
o E.g. supplier contracts

Question 7

Advantages and disadvantages of product diversification at business groups

Answer 7

• Product differentiation creates stronger and more flexible internal markets to support growth.
• It increased the growth opportunities for the affiliates in a business group and permits economies of scale and scope to some extent.
• Broader product portfolios expand internal capital markets. The capital-intensive industries in countries with weak capital markets contained a higher portion of affiliates from more product diversified business groups.
• Product diversification allows business groups to extend competitive advantages into new markets. For example, it is found that business groups leverage intangible resources (brands) when going into new market. Especially when external finance is limited, and competition is fierce.
• Third, business groups may use product diversification to reduce risk by spreading their investments across a portfolio of businesses.
• This benefit is stronger in countries that are less developed and more volatile.

Negatives

• Product diversification can worsen business groups’ exposure to systemic economy-wide shocks, perhaps increasing risk and reducing affiliate performance (So not necessarily a benefit).
• Carney: “meta-analysis: business groups product diversification related negative to group performance. Affiliates product diversification relates negatively to affiliates performance.

Question 8

Advantage and potential downside of subsidiary autonomy.

Answer 8

Case: Should Content (construction firm) go for Holacracy?

Pro: Rogier - CEO

• Profits differ by location
• Good for the strategy in terms of how they acquire other firms.
• Greater sense of ownership. More agile and flexible company. Entrepreneurial culture
• More time for the CEO to focus on the acquisitions and expansions instead of keeping a constant eye on each of their current subsidiaries.

Con: Derek CFO
Vera - audits
- They are lacking the organizational setup, infrastructure to support a decentralized government. Best practices etc. are missing.
- Can’t maintain standards.
- combining back-office, project administration, and monitoring systems
- consistency in customer types.
- Consistency in values and ethics.

There are two aspect to take into account with pros/cons of decentralization vs. centralization. Both the cultural element (entrepreneurial culture, everchanging flexible diverse, vs. stable consistent values, ethics) and strategic elements (as mentioned above mostly).

Decentralization vs. Centralization  holacracy is not synonym to decentralization

Self-organizing teams  people defined by functions - automous teams - self-organizing. This is Holacracy.

How could the decentralization be implemented?

• Try some test market before going in big.