Prahalad & Doz

An Approach to Strategic Control in MNCs

Ruth Aguilera

September 2008

Prahalad & Doz An Approach to Strategic Control in MNCs

Dilemma: Centralization vs. decentralization

“Subsidiaries mature and become autonomous with respect to strategic resources, such as technology, capital, management, and access to markets, the HO’s ability to control the strategies of subsidiaries is significantly reduced” (p. 5).

An Approach to Strategic Control in MNCs

• What’s strategic control for the HO? – influence over a subsidiary concerning decisions that

affect their strategy– monitor subsidiary’s progress

• What are the typical decisions reflecting the strategy of a subsidiary?– choice of technology– definition of product market– emphasis in different product lines– allocation of resources– expansion and diversification of subsidiary operations– willingness to participate in a global network of product flows

among subsidiaries

Why should we care?

(1) Increasing share of sales & profits from overseas subsidiaries… need to send abroad larger part of their assets

(2) Often, higher growth potential than the home country

Impact of Global CompetitionHO manager wants to decentralize

Impact of Host Government DemandsHost gov’t demands penalize decentralization

Joint Ventures

Changing Nature of HO-Subsidiary Relationship

Tendency: Control TOO MUCH!!!!!!

HO must depend on mechanisms other than control over strategic resources (capital, technology, management, or access to markets) as a basis for strategic control.

STRATEGIC CONTROL DILEMMA:

1) Reciprocal dependence btw the HO and subsidiaries

2) Responsiveness and flexibility in strategy must coexist w/ desires for global rationalization

3) Strategy must be responsive to environment demands => satisfy resource commitments.

4) Support proactive changes in strategy =>5) HO and subsidiaries must perceive the

legitimacy of these changes

Subsidiary dependence should NOT be the basis for strategic control (resources)

Subtle Mechanisms => Creation of an Organizational Context.

New firms Mature Firms

Control Gap

S

S1

M

M

M1

O

O1

Dependence of HO on

Organizational Context

Dependence of subsidiary on HO for

Strategic

Resources

High High

Low Low

Shifts in Control Mechanisms in HO-Subsidiary Relationships

Figure 1:

Dependence of subsidiary on HO for strategic resources versus Dependence of HO on organizational context for controlling subsidiaries

Creating an Appropriate Organizational Context as a substitute for Substantive

control:• A complex organization is an aggregation of

four orientations (possibly aligned):– Cognitive– Strategic– Power – Administrative

• Organizational Mechanisms that managers use to manipulate these 4 orientations.

– Data Management Mechanisms– Manager Management Mechanisms– Conflict Resolution Mechanisms

STRATEGIC CONTROL DILEMMA IN MNCs

Goal: Coordination (Figure 2, p. 11) High

Low

AUTONOMOUS(B)

INTEGRATED(A)

FRAGMENTED(C)

DEPENDENT(D)

Low High

Org

aniz

atio

nal

Con

text

Strategic Resources

STRATEGIC CONTROL DILEMMA IN MNCs

Goal: Coordination (Figure 2, p. 11) High

Low

AUTONOMOUS(B)

INTEGRATED(A)

FRAGMENTED(C)

DEPENDENT(D)

Low High

Org

aniz

atio

nal

Con

text

Strategic Resources

Controlling and Coordinating MNE “Kentucky Fried Chicken (Japan), Ltd.”

(1) What should Dick Mayer do about Loy Weston?

(2) What does it take to succeed in the fast food franchising business?

(3) What implications does this have for the way KFC should manage its international operations?

(4) What recommendations would you make to Dick Mayer on the issues he raises at the end of the case?