CBS First semester 2004
IB40 Guðmann Ólafsson & Kasper Ørtvig
The Changing Role of
Subsidiaries
Within Multinational Corporations
Copenhagen Business School
IB 40 – Fall semester 2004
Instructor Lars Håkanson
Guðmann Ólafsson, 050176-4043
Kasper Ørtvig, 040877-2907
December 8, 2004
1. Index
3.3 Structural Changes – Towards an Integrated Network
Strategy
3.5 The Centers of Excellence
2. Introduction
One can pick any random business related book published after 1990 at a
good library, open it on page one and read about how the world has
gone through tremendous changes over the last few decades. The birth
of the Internet moved people and businesses around the globe closer
together, the increased availability of commercial air-travel, mass-
production, mass marketing, the lowering of trade barriers and tariffs,
and so on and so forth. Along this evolution the Multinational
Corporations (MNCs) have been growing in size and influence,
,expanding their global operations. MNCs have even in some instances
grown so large that the day-to-day operations have become too hard to
handle with their current structures, even though these structures have
endured the last century.
MNCs are more and more heading towards a flatter, more flexible and
interdependent structure that is more responsive to this new global
environment (Bartlett et al, 2003), adopting the strategy of the
transnational corporations (TNCs). MNCs, therefore, have more transfers
of all kinds between its units. This has led to more of a focus on, and
increased importance of, the subsidiary as a unit and its operations.
Simultaneously, this trend leads to more subsidiary independence and
more cooperation with other subsidiaries and the parent company.
This paper will, mainly, focus on two questions; why the role of the
subsidiary has changed; and moreover, how does its role change? This
will be done by reviewing, historically, the known structures of
international entities as a whole, as seen by Bartlett et al (2003), but with
emphasis on the subsidiary and their strengths and shortcomings.
When dealing with the concept of MNCs, researchers have been baffled
by its size and complexity. According to Birkinshaw (1994) research in
the field of MNCs, has mainly focused on the parent-subsidiary
relationship and the subsidiary role. In a subsequent paper Birkinshaw
and Hood (1998, p. 5, cited in Luostarinen and Marschan-Piekkari, 2001)
add a third stream of research: the subsidiary development, which
emphasizes more the evolutionary aspect of subsidiary activities. The
reason behind this third stream is the above-mentioned complexity of the
MNC, e.g. when research focuses on the MNC as a whole it tends to be
generalizing. However, when the focus is narrowed, for example on the
subsidiary role, it tends to disregard important variables.
All three streams will be covered in this paper. The first part of the paper
will address the parent-subsidiary relationship along with the subsidiary
role. The traditional role as well as the contemporary role will be
addressed here. An explanation of the third and last stream – the
subsidiary development – will then follow, since this factor is more
dynamic in nature, than the two other factors, and thus, explains the
continuous process of change, derived by the other two streams. This
will enable a better approach to answering how the activities of
subsidiaries in large and geographically dispersed MNCs are changing
over time.
, In the context of subsidiary evolution the concept of Centers of
Excellence will be introduced. Thus, this paper will focus on subsidiaries
in developed countries thereby delimiting the discussion from, for
instance, asset-exploiting subsidiaries of the less-developed countries.
The last part of the paper will present the case of LMD – the Danish
subsidiary of Ericsson. Here, four different competencies within LMD will
be presented and analyzed, and used in the context of our findings from
the preceding parts of the paper.
3. How has the role of the subsidiary changed?
As mentioned above, the global business environment went through
dramatic changes in the 1980s. This created a “mid-life-crisis” for many
large MNCs, which over the decades had developed into vast entities
with different operations all across the world. It became clear that the
structures that had carried the companies all this way were obsolete and
outdated. A wave of differently aimed restructuring and rethinking
approaches of the MNC swept over the business environment. For many
companies, it seemed that structure followed fashion more than
strategy (Bartlett et al, 2003).
1. The Administrative Heritage
“…each company is influenced by the path by which it developed – its
organizational history – and the values, norms, and practices of its
management – its management culture. Collectively, these factors
constitute a company’s administrative heritage. (Bartlett et al, 2003)”
A MNCs administrative heritage (Bartlett et al, 2003) is maybe the greatest
asset it has, but it can also be the worst thing a MNC has do carry into
the future – and sometimes both. In the majority of cases it is probably
both since it involves some factors that are the MNCs key competences,
but these competences might also be the very factors that halter
necessary change. This might, for example, be a manager or management
in a foreign subsidiary that refuses to adapt to new policies or ways in
management, set forth by the parent company. However, the same
manager might have been employed for a whole generation and been one
of the most value-adding assets the MNC has had. Thus, he has become
both the greatest asset and a serious obstacle towards change.
IB40 Guðmann Ólafsson & Kasper Ørtvig
The Changing Role of
Subsidiaries
Within Multinational Corporations
Copenhagen Business School
IB 40 – Fall semester 2004
Instructor Lars Håkanson
Guðmann Ólafsson, 050176-4043
Kasper Ørtvig, 040877-2907
December 8, 2004
1. Index
3.3 Structural Changes – Towards an Integrated Network
Strategy
3.5 The Centers of Excellence
2. Introduction
One can pick any random business related book published after 1990 at a
good library, open it on page one and read about how the world has
gone through tremendous changes over the last few decades. The birth
of the Internet moved people and businesses around the globe closer
together, the increased availability of commercial air-travel, mass-
production, mass marketing, the lowering of trade barriers and tariffs,
and so on and so forth. Along this evolution the Multinational
Corporations (MNCs) have been growing in size and influence,
,expanding their global operations. MNCs have even in some instances
grown so large that the day-to-day operations have become too hard to
handle with their current structures, even though these structures have
endured the last century.
MNCs are more and more heading towards a flatter, more flexible and
interdependent structure that is more responsive to this new global
environment (Bartlett et al, 2003), adopting the strategy of the
transnational corporations (TNCs). MNCs, therefore, have more transfers
of all kinds between its units. This has led to more of a focus on, and
increased importance of, the subsidiary as a unit and its operations.
Simultaneously, this trend leads to more subsidiary independence and
more cooperation with other subsidiaries and the parent company.
This paper will, mainly, focus on two questions; why the role of the
subsidiary has changed; and moreover, how does its role change? This
will be done by reviewing, historically, the known structures of
international entities as a whole, as seen by Bartlett et al (2003), but with
emphasis on the subsidiary and their strengths and shortcomings.
When dealing with the concept of MNCs, researchers have been baffled
by its size and complexity. According to Birkinshaw (1994) research in
the field of MNCs, has mainly focused on the parent-subsidiary
relationship and the subsidiary role. In a subsequent paper Birkinshaw
and Hood (1998, p. 5, cited in Luostarinen and Marschan-Piekkari, 2001)
add a third stream of research: the subsidiary development, which
emphasizes more the evolutionary aspect of subsidiary activities. The
reason behind this third stream is the above-mentioned complexity of the
MNC, e.g. when research focuses on the MNC as a whole it tends to be
generalizing. However, when the focus is narrowed, for example on the
subsidiary role, it tends to disregard important variables.
All three streams will be covered in this paper. The first part of the paper
will address the parent-subsidiary relationship along with the subsidiary
role. The traditional role as well as the contemporary role will be
addressed here. An explanation of the third and last stream – the
subsidiary development – will then follow, since this factor is more
dynamic in nature, than the two other factors, and thus, explains the
continuous process of change, derived by the other two streams. This
will enable a better approach to answering how the activities of
subsidiaries in large and geographically dispersed MNCs are changing
over time.
, In the context of subsidiary evolution the concept of Centers of
Excellence will be introduced. Thus, this paper will focus on subsidiaries
in developed countries thereby delimiting the discussion from, for
instance, asset-exploiting subsidiaries of the less-developed countries.
The last part of the paper will present the case of LMD – the Danish
subsidiary of Ericsson. Here, four different competencies within LMD will
be presented and analyzed, and used in the context of our findings from
the preceding parts of the paper.
3. How has the role of the subsidiary changed?
As mentioned above, the global business environment went through
dramatic changes in the 1980s. This created a “mid-life-crisis” for many
large MNCs, which over the decades had developed into vast entities
with different operations all across the world. It became clear that the
structures that had carried the companies all this way were obsolete and
outdated. A wave of differently aimed restructuring and rethinking
approaches of the MNC swept over the business environment. For many
companies, it seemed that structure followed fashion more than
strategy (Bartlett et al, 2003).
1. The Administrative Heritage
“…each company is influenced by the path by which it developed – its
organizational history – and the values, norms, and practices of its
management – its management culture. Collectively, these factors
constitute a company’s administrative heritage. (Bartlett et al, 2003)”
A MNCs administrative heritage (Bartlett et al, 2003) is maybe the greatest
asset it has, but it can also be the worst thing a MNC has do carry into
the future – and sometimes both. In the majority of cases it is probably
both since it involves some factors that are the MNCs key competences,
but these competences might also be the very factors that halter
necessary change. This might, for example, be a manager or management
in a foreign subsidiary that refuses to adapt to new policies or ways in
management, set forth by the parent company. However, the same
manager might have been employed for a whole generation and been one
of the most value-adding assets the MNC has had. Thus, he has become
both the greatest asset and a serious obstacle towards change.
