Building competence takes time and money. Subsidiaries of multinational corporations are therefore going to focus more on building competence that helps them, and not worry about other subsidiaries. However, parent companies can motivate subsidiaries to develop internationally useful competence by: making the creation of such competence part of a subsidiary’s mission, increasing the interface among subsidiaries, and granting them operational (but not strategic) autonomy.
It is not easy to motivate subsidiaries of multinational companies to create competence that can be useful to other subsidiaries, and for good reason. Developing competence, including know-how and technological expertise for example, takes time and money. Subsidiaries are responsible for maintaining their own bottom lines, so why should they worry about other subsidiaries? Parent companies realize, however, the benefit of sharing useful competence across the entire conglomerate. The challenge is to motivate individual subsidiaries to participate in developing and sharing this competence.
The first element is a home-base augmenting mission for each subsidiary — which essentially means that creating international competence, for instance by exploring new technological opportunities, collaborating with local universities or firms, or taking advantage of an excellent local R&D environment, is part of a subsidiary’s mission. A home-base augmenting mission is motivating for several reasons, including the fact that subsidiary managers know their compensation is tied to creating international competence. In addition, parent company managers are prepared to offer the subsidiary financial and non-financial support for these efforts, including seed money and connections to external partners. International useful competence creation can be a virtuous cycle: once subsidiaries see the benefit, they are motivated to continue to create even more competence.
The second element of the organizational architecture that parent companies can put in place to encourage competence creation involves cross-unit interfaces. Cross-unit interfaces, which can range from meetings among managers of different units to the designation of dedicated liaison personnel to job rotation programs, will create vital free-flow information channels among the units. It is often helpful to be aware of and build on previous knowledge from other units.
The final motivating organizational architecture element concerns the autonomy of subsidiaries. While operational autonomy encourages the creation of competence, strategic autonomy has the opposite effect.
Local management is in a better position, through their better understanding of the culture and preferences of their employees for example, to make the day-to-day operational decisions that ensure a more effective creation of competence. Operational autonomy also allows the subsidiary to manage the relationships with other subsidiaries themselves, without the intermediary of the parent company. This direct connection should create stronger ties among the subsidiaries.
In contrast, strategy that is led from the central office is more likely to encourage competence creation than strategic decisions devolved to the subsidiaries. The reason is intuitive: the parent company is going to set a strategy that encompasses its international units, while a subsidiary will set a strategy that is exclusively focused on its needs and goals.
Multinational companies who view their subsidiaries as a disconnected ‘archipelago’ of local companies are not benefiting from the potential of international competence creation. Parent companies should encourage the creation of such competence through their architectural organization decisions in three areas: including a home-base augmenting mission for each subsidiary, encouraging and enabling cross-unit interfaces, and giving subsidiaries operational autonomy while taking the lead on overall strategy.
It is also important that parent companies focus on ‘useful’ competence. Not every competence developed by a subsidiary can be leveraged internationally. However, parent company managers should make an effort — through appraisal and reward systems — to encourage the creation of competence that can be applied to other units of the company. A quantity of subsidiary-specific competence is of less value to the overall firm.
At the subsidiary level, managers should recognize the benefits, ranging from financial and nonfinancial support to a greater integration with other international units that come from creating internationally useful competence. If necessary, subsidiary managers should take the initiative and lobby the parent company to put in place the architectural structure that encourages competence creation, including operational autonomy. On the other hand, it is unlikely that subsidiaries will give up their strategic autonomy, but at the very least they should be careful not to let this autonomy close them off from other units.
Pull the Right Levers: Creating Internationally ‘Useful’ Subsidiary Competence by Organizational Architecture. Maximilian Palmié, Marcus Matthias Keupp & Oliver Gassmann. Long Range Planning (February 2014).
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