Encouraging entrepreneurial activity in multinational corporations

Business Horizons, May-June, 1995 by Julian Birkinshaw

How is the formation of regional trading blocks, such as the EU and NAFTA, affecting the organizational structure of large multinational corporations? The opportunity to integrate operations and benefit from previously unattainable economies of scale is greater today than ever before. To take advantage of this opportunity, some of the largest companies in the world--GE, ICI, Philips, and many others--have developed pan-European and North American strategies. The evidence suggests, however, that blind adherence to the mantra of globalization brings with it an associated risk, the essence of which is a potential failure to leverage or serve national markets effectively. Entrepreneurial activity, particularly at the level of the national subsidiary, is one way of mitigating that risk.

This article argues, first, that the multinational corporation faces competing imperatives for global integration and local sensitivity, and that to neglect the latter in favor of the former is myopic. I outline a number of organizational approaches that simultaneously address both imperatives, settling on the "world mandate" as the most effective of three alternatives. Second, I describe in detail an "emerging" role for national subsidiary managers, namely that of entrepreneur or initiative-taker, and the complementary role that should be taken by corporate managers. Third, the ramifications of these new roles, in terms of the characteristics of the parent-subsidiary relationship, are explored in depth. The underlying contention here is that a truly global strategy can only be realized when the opportunities and latent expertise in far-flung subsidiaries are harnessed.

This article is based on a multi-phase research project into the changing role of the national subsidiary in the multinational corporation (MNC). More than 100 senior managers were interviewed in approximately 20 corporations in the United States, Canada, and several European countries. Parent company and subsidiary perspectives were obtained. The evidence presented is drawn from the research interviews (in which the details have been disguised) and from public source documents.

Corporate Restructuring: A Convergence on Global Product Groups

Large multinationals, defined here as corporation operating in multiple countries with annual sales in excess of $5 billion, are facing an increasingly complex competitive environment. Much has been written on this matter, yet the impact of three factors in particular is worthy to note. First, the phenomenon of globalization has created a new set of demands in the form of converging customer needs, international buying groups, an falling trade barriers. Second, competition from new MNCs, particularly from the Far East, and from smaller locally or regionally focused competitors is increasing. Third, the economic slowdown of 1989-1993 has made cost control and value for money critical factors for success.

The organizational response of many MNCs to these trends has been to form regional or global product groups. Under this structure, a single "division manager" is typically accountable for the performance of a discrete product group for Europe, North America, or even the world. An example of this is Shell Chemical's European operations. Shell has traditionally been organized on a country-by-country basis. Recently, a set of European business units was established to cut across country lines and allow key executives to coordinate investment and production on a trans-European basis. Many other companies, including BP, lCI, Philips, and GE, have moved in the same direction. Whereas Asian, American, and European MNCs once had very distinct organizational forms, most have now moved toward product-division dominance as the favored structure.

This shift toward business-unit dominance has severely affected the role of the national subsidiary, which is increasingly seen as expensive overhead for the business units operating in that country. Such national subsidiaries as GE Canada, ICI Canada, and Rhone Poulenc UK have become extremely lean, typically with fewer than 100 employees who are country-specific (not part of a business unit). This shift is justified by the need to become cost-efficient and globally competitive. But it also begs an important question: Is national sensitivity being sacrificed for the sake of global efficiency?

A strong argument can be made that the need for national sensitivity is declining as a result of trade agreements and global product standardization. However, the role of the national subsidiary in the multinational is complex and multifaceted: it acts as a sensory outpost for changing customer demands; it allows the MNC to recruit local managers and train a cadre of executives internationally; it provides linkages to local companies and government bodies; and it offers unique ideas and solutions from which other subsidiaries can learn. Bartlett and Ghoshal's argument (1989) that the MNC's strategic imperatives are global integration, local responsiveness, and worldwide learning is important, but it does not do full justice to the scope of functions fulfilled by the national subsidiary. Multinationals pursuing a "lean subsidiary" strategy are potentially damaging their longer-term effectiveness in affected markets. The following section describes some of the tactics being pursued to address this concern.