Unit 6: The Strategy of the Foreign Subsidiary PDF

SECTION 3 Unit 6: The strategy of the Foreign Subsidiary Internationalization of Businesses: Management and Strategies (EUS) Maite Ugalde Enríquez Contents 1. Definition of a foreign subsidiary 2. Typologies of subsidiaries and key elemen...

SECTION 3 Unit 6: The strategy of the Foreign Subsidiary Internationalization of Businesses: Management and Strategies (EUS) Maite Ugalde Enríquez Contents 1. Definition of a foreign subsidiary 2. Typologies of subsidiaries and key elements to appoint differentiated roles within the company 3. Development and evolution process of a subsidiary *Images in these slides have been downloaded from the internet for teaching purposes. They are property of third parties. 2 Contents 1. Definition of a foreign subsidiary 2. Typologies of subsidiaries and key elements to appoint differentiated roles within the company 3. Development and evolution process of a subsidiary 3 Definition of a foreign subsidiary Birkinshaw (2001) → Business unit operating overseas that is part and is owned by a MNC that develops a value added activity in a foreign country. Pla Barber (2016) → A company that is linked by ownership and capital link to a larger company (holding), that operates overseas and for which it develops value added activities. A company operating overseas that is part of a larger corporation with headquarters in a different country (often know as parent or holding company). The parent company usually holds at least 50-51% of the foreign subsidiaries shares/stakes. 4 Contents 1. Definition of a foreign subsidiary 2. Typologies of subsidiaries and key elements to appoint differentiated roles within the company 3. Development and evolution process of a subsidiary 5 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Classification of subsidiaries based on 2 dimensions: market and value reach 6 Commercial subsidiary Common to any strategic focus of international subsidiaries of a global and transnational mode Focused on commercial area and post sales Ex: HP, Xerox, Canon 7 Execution subsidiary Mostly common in global and transnational approaches. Focused on producing a limited number of products/ components to be exported Low autonomy, executes decisions adapted by other units Develops a function limited to primary value chain activities Executive management positions developed by nationals from the MNC’s country of origin (expats) No control over the production (i.e. type of products and their characteristics) Ex: Ford in Valencia, Spain https://www.youtube.com/watch?v=DtFOrLLuVz4 8 Local subsidiary Multidomestic approach High autonomy, but limited to the domestic market Tries to act as a domestic company Adapts the products to the local market and consumer Executive management positions are usually held by local personnel Suppliers and clients are positioned in the local market Ex: L’Oréal 9 Qualified subsidiary Usually developed under the transnational approach Develops strategic activities of high added value (i.e. R&D) It has strategic innovation capabilities and the capacity to influence the activity of other subsidiaries It has a diversity of highly skilled talent: centre of excellence, administrative centre, etc ○ It may become a sub-headquarters office 10 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Barlett and Goshal (1986) Strategic importance of the local market: How critical is the market where the subsidiary operates to the global competitiveness of the MNC? Subsidiary's capacity to contribute to the global network: How strong is the subsidiary in terms of resources, capabilities, or innovation to contribute to the success of the multinational corporation? 11 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Barlett and Goshal (1986) Aims to enable Executive Management at the HQ of the MNC to determine the strategic roles that certain subsidiaries should undertake. ○ The decision would depend on the sensitivity towards 2 types of pressures: (i) fragmenting ones that require a local adaptation to the market in order to be competitive or (ii) integrating and globalizing pressures resulting in achieving competitive advantages through international development, standardization, economies of scale and efficient processes. Based on the competitiveness of the subsidiary and how relevant the foreign market is for the overall strategy of the company ○ Competitiveness: not only understood as profitability → it should also consider skills, capabilities, know how, etc. It is not considered an static model, it can evolve over time. 12 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Jarillo and Martínez (1990) 13 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Jarillo and Martínez (1990) Focused on a transnational approach, analyses the level of integration and the localization that each activity of the MNC requires in order to be more efficient ○ The balance between integration and sensitive to the industry, due to localization and access to resources, are usually analysed at a global level, they can still vary from country to country Integration refers to the activities the subsidiary is dependant on other business units of the MNC Localization refers to the activities the subsidiary does in the domestic market as part of the MNC compared to the ones it would do as an “independent” company. 14 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Jarillo and Martínez (1990) and Taggart (1997) 15 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Gupta and Govindarajan (1991) 16 Typologies of subsidiaries and key elements to appoint differentiated roles within the company Gupta and Govindarajan (1991) Knowledge creation and its dissemination around the business units of the MNC is key to maintain the competitive advantage of the MNC. The position subsidiaries hold within the knowledge network of the MNC defines the access they have to that knowledge developed by others. Key elements: position held and capacity to absorb knowledge 17 Contents 1. Definition of a foreign subsidiary 2. Typologies of subsidiaries and key elements to appoint differentiated roles within the company 3. Development and evolution process of a subsidiary 18 Development and evolution process of a subsidiary Dynamic approach of the strategic role of the foreign subsidiary (Birkinshaw & Hood; 1998) 19 Development and evolution process of a subsidiary Evolution of the strategic role of the foreign subsidiary (Birkinshaw & Hood, 1997) 20