Subsidiary Initiatives to Develop NewMarkets

Julian Girkinshaw • Nick Fry

Local initiatives

provide winning

opportunities and

new vitality for

MNCs. But man-

agers need tactical

savvy, persistence,

and luck to break

through corporate

barriers.

Julian Birkinshaw is assistant

prolessoi, Institute of

International Business.

Stockholm School of

Economics. Nick Fry is a pro-

fessor. Richard Ivey School ot

Business. University of

Western Ontario.

In 1980, NCR's .subsidiary in Dundee,Scotland, was on the verge of closure.The operation had been established as asecond-source manufacturer of NCRproducts, but a combination of techno-logical changes in the marketplace, alongwith internal problems, had caused it toshrink from 6,500 employees in 1969 to770 in 1980. Moreover, Dundee's mostpromising product, the automatic tellermachine (ATM), was struggling in theBritish marketplace because of seriousquality problems.

Jim Adamson. the newly appointed gen-eral manager, had a mandate to turn theoperation around — or close it. At an

operational level, Adamson worked onimproving manufacturing quality andrestoring the confidence of major cus-tomers. At a more strategic level, hebegan to develop a vision for Dundeeas NCR s strategic center for the ATMbusiness. Product development responsi-bility officially lay with headquarters(HQ) in Dayton, Ohio, but Adamsonbegan directing his res<iurces towardupgrading and renewing the Dundeeproduct line to meet the emergingdemands of its key customers, the bigBritish banks. In the face of active resis-tance from the development group inDayton, Adamson pursued a delicatestrategy of cooperating with people

51

Sloan Management ReviewSpflng 199B

Birkinshaw • Frv

Figure 1The External Initiative Process

52

Opportunity identifiedoutside the corporation,through interaction withcustomers, suppliers,competitors, or govern-ment bodies

Conditions of decentral-ized resource allocationand high subsidiaryautonomy

Strategies ofSubsidiary Managers

Small-scale investment,typically without blessingofHQ

Development of buy-inamong customefs

Request for corporateinvestment and supportonce viability of projectestablished

Reactions of HQManagers

Initial ignorance

Scepticism once initiativeis presetited; questionsregarding value of projectand subsidiary's ability topursue it

Competition from otfierunits if project is attrac-tive

Outcome (if successful)

Development of newbusiness activity

Leverage of subsidiarycapabilities on an interna-tional basis

there, while continuing privately to sponsor Dundee'sresearch program.

His persistence paid off. In 1982, Dundee launched asuccessful product upgrade and. eighteen months later,a next-generation ATM ihat set new standards in fiinc-tionality, reliability, and ser\ iceabilily. By 1984,Dundee had 20 percent of market share woddwide,and by 1985. headquarters officially transferred respon-sibility for tiie glolial ATM business to Dundee. By1986. Dundee boasted 3" percent of worldwide ship-ments, -surpassing competitors IBM and Diebold.

More than a good exatnple of turnaround managementand strong leadership, the Dundee success story pro-vides insight into the changing relationship betweenheadcjuarters and sul^sidiaries in large multinationalcorporations (MNCs). During a five-year period, NCRDundee developed from being a second-source manu-facturer, totally reliant on Dayton for product specifica-tions, to a self-sufficient operation with leading-edgeexpertise in ATM development. More important, theturnaround went far beyond what corporate manage-ment had requested; indeed, many people in the headoffice had resisted Adamson's .shift into product devel-opment, hanging on to their idea of Dayton as theglobal center for ATM development. Ultimately, it wasAdamson's deliberately unconventional and somewhatsubversive approach that provided the itnpetus forDundee's resurgence — and led to NCR's leading posi-tion in the global ATM indtistry.'

The NCR Dundee case is typical of v -hat we call siih-sidicuy initialiiv: the proactive and delibentle pursuit

oi a new business opportunity by a stibsidiary ccjm-pany, undertaken with a view to expand ihe sub-sidiary's scope of responsibility in a manner consis-tent with the MNC s strategic goals. Sulwidiary initia-tive is important for two reasons. First, it is the princi-pal means by which MNCs tap in to new opportuni-ties in markets around the world. Second, it enhancesoperational efficiency through internal competitionamong units. But, at the same time, subsidiaiy initia-tive is an elusive beast. Many of the MNCs we stud-ied actively discouraged entrepreneurial efforts intheir subsidiaries, while others agreed to the conceptin principle but hindered its development in practice.Subsidiary managers, it appears, need a lot of lactlcalsavvy, persistence, anti luck if they are to pursue ini-tiatives effectively. As one manager described it, a"corporate iintiiune system" lurks in tiiost large orga-nizations.- Its role is to kill off intruding initiatives forfear that they might infect the rest of the organism.

In this paper, we report otT a four-year research studyof subsidiary initiatives in five countries.* Our .studyexamined the strategies that subsidiary managers useto conquer the corporate immune system, as well asthe types of resistance they encountered. Our researchalso revealed a subtle shift in the locus of responsi-bility between headquarters and subsidiaries. Initia-tive is a .sign that SLibsidiaiy managers are beginningto take responsibility for their operations' destiny,which in turn suggests the need foi- a more centralrole for subsidiaty units in t!ie implementation of cor-porate strategy. Initiative activity also suggests newmanagement issues for parent-company executives,as they reappraise their innate suspicitjn o!' maverick

Birdinshaw • Fry Sloan Management Review

Spring 1998

Figure 2The Internal Initiative Process

Opporttinitv identifiedinside the corporation,activities currently per-formed by other units;planned corporate invest-ments

Conditions of centralizedresource allocation, low ,subsidiary autonomy, andstrong relationships withHQ managers

Strategies of SubsidiaTVManagers

High levels of selling ofproject to HQ managers

Use of personal retation-ships (where present) anddemonstration of sub-sidiary's capabilities tobuild credibility for project

Reactions of HQManagers

Initial disinterest andscepticism

If project appears attrac-tive, desire to evaluatealternative proposals

Explicit process ofapproval by funding com-mittee

Outcome (if successful)

Rationalization of existingactivities; removal of in-efficient practices

Optimal location for newinvestments

53

subsidiary managers and learn how to exploit, ratherthan stifle, latent entrepreneurship in their far-flungoperations,

Tvyo Distinct Forms of SubsidiaryInitiativeEarly in our research, we could see that subsidiary ini-tiative has two forms (see Figures 1 and 2).' One form— which the NCR Dundee case typifies — was exter-nally focused. It involved the identification of new orenhanced business opportunities through interactionwith customers, suppliers, and government etuities inthe subsidiary's marketplace. The other form wasinternally focused, involving the identification of newbusiness opportunities that the subsidiary could takeon within the existing boundaries of the ccjrporation.For example, we identified ca.ses of subsidiaries bid-ding internally for planned, global-scale investments,as well as subsidiaries identifying poody performingHQ-based activities that they could take over.

The common theme we saw in both extetnal andinternal initiatives was the entrepreneurial compcment.First, we saw the need for proactive, pushy, and some-times Machiavellian tactics on the part of subsidiarymanagers as they .sought to gain currency for their[-)r()iects in headquancrs. We also typically saw a skep-tical reaction from HQ managers, for whom subsidiaryinitiative was .something of an oxymoron. But, in manyrespects, the two forms of initiative were very differ-ent. They involved distinctly different tactics, faced dif-ferent forms of resistance, and had signiflcantly differ-ent impacts on the MNCs management ;is a whole.

External InitiativesExternal initiatives arose lyjiically out of customers'unmet demands in the local marketplace. In the NCRDundee case, Barclays and the other tnajor Britishbanks were investing heavily in ATMs. The Dundeedevelopment group worked with them to incorporatetheir product needs into the next generation of ATMs.We saw several variants on this theme:

• hi 1991, the busine.ss development manager at GHCanada responded to a government-sponsored pro-gram .seeking energy-efflcient lighting in federal build-ings by stalling a new enterprise called GE EnergyManagement.^• In 1992, Pharma's British subsidiary established ajoint venture with a small U.K. company to develop anew technology for transmitting drugs through theskin."• Using its international indu.stry contacts. Hewlett-Packard's Panacom subsidiaiy (in Waterloo, Canada)identified an emerging market for the "X terminal," aRISC-chip-based workstation, in 1989,

No less critical than the identification of an interestingbusiness opportunity was the need for a relatively highdegree of autonomy in the subsidiary. Faced with thestrong likelihood of rejection if the project were pre-sented to HQ management in its embryonic form, sub-sidiary managers preferred to do the initial develop-ment work with iheir own funds. During ihe 1980s, forexample, Hewlett-Packard CCanada) had access todevelopment funds for country-specific projects. Thosefunds facilitated development of the X terminal, aswell as several other projects. Many subsidiaries didn't

Sloan Management Review

Spring 1998

Birkinshaw • Frv

Initiative champions tested the idea in a

small way, using suhsidiary resources

and without the knowledge of headquar-

ters.

[lavc thi.s [evel of autonomy, however. Some were54 ah[e to assetnble .skunk-works groups ilial explored

the vial:)ihty of their ideas on their own time, but otli-ers, because they had no access to developmentfunds, saw their promising ideas languish.

A champion for the initiative always emerged in theearly stages. Typically he or she was the individualwho identified the business opportunity in the firstplace, although sometimes the subsidiary's generalmanager took ownership of the project because of itsimportance. Initiative chantpions adopted a surpris-ingly consistent strategy. First, they tested the idea ina small way, using subsidiary resources and withoutthe knowledge of headquarters. Then, as the projecttook .shape, they sought out allies —• typically localcustotners who were interested in buying the productor service, but sometimes, also, personal contacts ormentors in the home office. Finally, once they haddemonstrated dieir pnjject .s viability, they presentedit formally to HQ managers and asked for investmentfunds and support. We .saw this basic mode! in avariety of guises:

• At NCR Dundee, Jim Adatnson initiated his productdevelopment efforts again.st the will of the R&D groupin Dayton, but once Dundee's second-generationproduct was so obviously successful, HQ manage-ment bowed to the inevitable and transferred respon-sibility for ATM development to Dundee.

• In 1985, Hewlett-Packard (Canada)s foniier presi-dent Malcolm Gissing funded a small developmentgroup in Calgary to develop an oil-well data manage-ment system. The group existed as an "orphan" forseven years, without a line of reporting through oneof HP's business groups. It finally achieved corporatelegitimacy in 1992, when it became a business unitwithin tlie Test and Measurement division.• In 1987, a small group of engineers in HoneywellCanada bootlegged a PC interface for Honeywell'sTDC3000 proce.ss control system. The system, knownas PCNM, gained support quickly with a number ofCanadian customers. Subsequently, the development

group gained permission from HQ management inPhoenix to build PCNM as a standard product world-wide.

As these vignettes suggest, other parts of the corpora-tion almost universally opposed the subsidiary's ini-tiative. We termed this collective resistance the corpo-rate itnmune system to illustrate its apparent intentionto kill off the intruding initiative. The resistance toinitiative took a wide variety of forms:

• Pharma's British subsidiary encountered outrightopposition from a competing development group atheadquarters. The group even vetoed the project, butfortunately the British development group was ableto arrange alternative funding through the company'smarketing arm.• Two HP (Canada) initiatives, the X terminal andthe Calgary development group, were challenged byU.S.-based divisions that were undertaking develop-ment work in similar areas. In both cases, the U.S.division argued that the development fell under itscharter and urged that the Canadian operation be ter-minated.• GE Canada s energy management business wasalmost closed down when its parent division in theUnited States, GE Supply, rationalized its operationsin 1994. The problem was not that the energy man-agement business was performing badly; the parentsimply saw it as too small and too far from GESupply's core business area to survive the rationaliza-tion.

The combination of (jutright opposition, internalcompetition, and passive indifference was a challeng-ing set of obstacles for the initiative champions inour study. Just over half the initiatives survived thisprocess, but that probably overstates the situationbecause it represents only those stories that sub-sidiary managers shared with us willingly. Ourresearch focused on the latter parts of a long andmostly invisible process. Surely, many other initia-tives fell at the first hurdle — or never left the starl-ing blocks.

For those initiatives that survived, however, therewards were impressive. NCR Dundee became a $1billion operation; HP (Canada )'s X terminal businessreached sales of $120 million four years after itsinception; and GE Canada established a leading mar-ket position in the emerging energy efficiency indus-try. For the corporation as a whole, the rewards were

Birkinshaw • Fty Sloan Management ReviewSpring 1998

multifaccted. Most cjbviously, NCR. HP, GE, and oth-ers gained new and vilirant businesses in emergingarea.s. More subtly, they also benefited from thedevelopment und maturation of one of their foreignsubsidiaries. Scime might view this as a mixed bless-ing, but if we see business as becoming ever moreglobal, then the nurturing of new and valuable capa-bilities in outlying parts of the multinational networkcan oniy strengthen the corporation's global reach.

Internal Initiatives

Intt-rnal initiatives arose from opportunities that inno-vative subsidiary managers identified within the cor-poration. The subsidiary managers in our studyunderstood their own unit's strengths and weakness-es well and frequently were on the lookout for newactivities elsewhere in the corporation that dovetailedwith their capabilities. The following examples illus-trate their ideas' scope:

• IBM began manufacturing PCs in Greenock, Scot-land, in 1982. Toward the end of the 1980s, plantmanagers were looking for ways to extend the scopeof their operations. In 1991, they identified a smallmonitor development group near London that couldlie a logical complement to their manufacturing andsucceeded in getting it relocated to Greenock. Sub-sequently, they identified order fulfillment and helpcenter functions that could cover all Europe and becentralized in Greenock. Both initiatives were suc-cessful.• Back in 1972, as a Honeywell Canada factory man-ager toured the plant of a sister subsidiary in theUnited States that made a control switch, he saw anopportunity. He proposed to headquarters that theCanadian plant take over the manufacture of the con-trol switch with responsibility for sales throughoutNortli America.• In 1991, Monsanto Canada's top management iden-tified an interesting proposal in the corporation'slong-range plan, Monsanto was developing a newformulation for its best-selling agrochemical product,with the intention of bringing it to market around1996. Seizing the opportunity, Canadian managementargued — successfully — that the investment shouldbe made in Canada because of the country's strongagricultural industry.

Two conditions facilitated the development of inter-nal initiatives. First, and in marked contrast to exter-nal initiatives, internal initiatives needed relativelytight integration into the corporate system. Subsidiary

Unlike external initiatives, which typi-

cally avoided confrontation with HQ

managers in the early stages, internal

initiatives had to pursue a more orthodox

line of attack through the formal lines of

authority.

managers emphasized that it was important that theybe tied into the corporate network, so they couldhear about investment oppc^rtunities early. As onemanager said, "The best way to win a competitiveinvestment is to write the sp>ecifications." One 3MCanada manager heard about an embryonic invest-ment plan accidentally on a routine visit to St. Paul,Minnesota. That lucky break led to a $20 millioninvestment in Canada.

Second, the subsidiary liad to have, or be preparedto work hard for, a reputation as a trustworthy andreliable operation. Typically, subsidiary managersconfronted an implicit challenge: Why would we riskinvesting in a foreign country when we can stickwith tried-and-tested solutions closer to home? Oftenthey responded by trying to mitigate the risk by capi-talizing on personal contacts at headquarters. In othercases, such as at IBM Scotland, initiative success grewafter many years of manufacturing excellence. In theabsence of contacts or reputation, however, a sub-sidiary had very limited prospects.

Unlike external initiatives, which typically avoidedconfrontation with IIQ managers in the early stages,internal initiatives had to pursue a more orthcxioxline of attack through the formal lines of authority.The Monsanto Canada initiative led to the establish-ment of a group whose role was to assess four possi-ble locations for the new agrochemical investment.Similarly, 3M Canada pursued several initiativesaimed at winning new manufacturing investments inCanada, each of wMch had to pass through twooperating committees in the United States. Theprocess was methodical and incremental, with sub-sidiary management gradually moving up through thecorporate hierarchy, building support and commit-ment from all the key individuals. Frequently, thisprocess took as long as a year. In one case, the ini-tiative was put on hold for two years imtil the arrival

55

Sloan Management ReviewS|iriiiy igSS

Birkinshaw • Fry

Resistance from the corporate immune

systems was inevitahle, and it took a vari-

ety of forms.

of a new manufacturing director in the United States

WIKJ was more amenable to tlie proposal.

56 We observed two additional tactics with regard to

internal initiatives. One was a two-pronged approach.

The initiative champion made a formal proposal

through the official lines of authority. At the same

time, the subsidiary president utilized his or her per-

sonal contacts at a much higher level in tlie home

office to build legitimacy for the proposal and

smooth its course through the system. The second

tactic involved the use of a quid pro quo — some

son of concession by the subsidiary to compensate

the losing party. The best example of this was

Honeywell Canada's proposal in 1986 that it become

the sole North American manufacturer of zone valves

and • fan-and-limit" devices. The proposal enc<jun-

tered strong resistance from the plant in Minnesota

that was making those products for the United States.

The two parties negotiated a deal whereby the

Toronto plant would swap its other manufacturing

responsibilities for the exclusive production of zone

valves and fan-and-limit devices. Both plants ended

up shedding a few jobs, and both emerged with

higher volumes and more efficient operations.

Internal initiatives were competitive by nature. Either

the subsidiary was challenging other units for a new

investment, or it was proposing a transfer that would

leave the previous incumbent short. Resistance from

the corporate immune systems was inevitable, there-

tore, and it took a variety of forms:

• The first line of defense was passive disinterest —

It we ignore it, tnaybe it will go away. Honeywell

Canada's initial proposal for a manufacturing rational-

ization came back with "superficial comments." As

one manager noted, people considered it a "strategic

plan for the top shelf, not .something to incite quan-

tum change."

• Skeptici.sm about the subsidiary's abilities was the

second line ot defense, along with a suggestion to

consider other options, Monsanto Canada faced this

reaction initially when it proposed locating the new

agrochemical investment in Canada, but through an

innovative design, it was able to demonstrate a supe-

rior expected rate of return over the competing loca-

tion in the United States.

• Outright resistance was the third line of defen.se. In

one case, the magnitude of the loss that the U.S.

operation faced provoked strong arguments to halt

the initiative. As one manager recalled, "There was

an extreme amount of hxa l resistance — marketing,

engineering, everybody. How could you ship your

son to the foster child, how could you do thati' Look

at all the things that could go wrong! We've earned

the right to continue,"

At first glance, the outcome from internal initiatives

was less spectacular than that from external initia-

tives. For IBM Scotland, the result was an "extended

value chain" frtjin development to market support.

For 3M Canada, it was a robust, export-oriented man

ufacturing operation. For Monsanto Canada, it was a

significant greenfield investment in tlie heart of the

company's large prairie market. In each case, the net

impact for the corporation as a wliole appeared

small. No new products resulted, and no immediate

new customers. The cake was simply split in a differ-

ent way, with the subsidiary getting a larger slice.

But a simple anaiysis of the configuration of activities

before and after the initiative docsn t tell the whole

story. As Gordon Brown, the controller of IBM s

Greenock plant commented, 'By extending the value

chain and linking various activities together in one

location, w e saved millions of dollars, improved cus-

tomer satisfaction, and increased niarket share," In

essence, the process itself created a new vitality in

the initiative-taking subsidiary. Subsequent improve-

ments in performance were often spectacular.

The enduring value of internal initiatives was more

subtle. Subsidiary managers were like entrepreneurs,

looking for inefficient practices witliin the multina-

tional system and proposing solutions to better them.

For example, companies often retain their internal

sourcing relationships because they have always

done things that way. But guaranteed sales can make

a plant lazy, and before long the internal customer is

putting up with a substandard product or an inflated

price from its supplier. Internal initiatives provide a

mechanism for changing inefficient sourcing relation-

ships. And their threat fosters a more challenging

environment, which keeps manufacturing operations

on their toes. The same principle applies to other

value-adding activities. For example, we saw several

Birhinshaw • Fiy Sloan Management Review

Spring 1998

cases of product management jobs being shifted fromthe United States to Canada because a strong casewas made that the job would be handled tnore effi-ciently there.

Toward a Model of Internal CompetitionOur .study suggests two potentially important roles forforeign subsidiaries. The first is driven by externalinitiative and falls under the category of marketdevelopment. The role is well documented in the lit-erature.' The subsidiary both identifies and acts onnew business opportunities in its local market. The,sccond role is le.ss well understocKl We call it net-work optimization liecau.se the subsidiary .seeks outand eliminates inefficient activities within the multina-tional network. Internal initiative, of course, drivesthe process of network optimization. We believe that.some subsidiaries, by virtue of their history, theirlocal environment, or their management, will pursuemarket development roles, while others, for equallycircumstantial rea.sons, will pursue network optimiza-tion roles. A third group might choose neither role,but we believe that many more could move towardone or the other quite successfully.

The network optimization mode! has some far-reachingimplications. First, it suggests that many value-addingactivities that MNCs are undertaking are "contestable,"that is, potentially, they could be performed by anumber of different units. Of course, a lot of activitiesare firmly embedded in their local environment, orthey are so large and a.sset-specific that they couldnot be practically moved. But, in the course of ourstudy, as we saw examples of manufacturing, devel-opment, logistics, marketing, and business manage-ment activities change locations, we concluded thatmuch of what is dc ne inside the MNC is neutral withregard to physical location. MtJreover, increasingly,subsidiaries are seeking to "win" some of the moremobile activities that are not locked into a singlelocation. The trend, therefore, is toward internal com-petition as a mechanism through which activities arealknated and reallocated within the MNC.

We don't want to overstate this point because we areaware of the inertia tliat inhibits a high level of fluidi-ty within the corporate network, as well as the needfor collalxirative relationships among units. But wesee a numlxT of trends thai will push MNCs moreand more toward an organizational mode! liased onintemal competition. One is the greater globalization

of busine.ss, which reduces the cost of product andcapital flows across borders. Another is the growingu.se of internal benchmarking as a way to highlightthe relative efficiency levels of different units. Thistrend is particularly critical in Europe, where manyMNCs are still going through the painful process ofrationalizing their manufacturing networks. A third isthe growing level of initiative on the part of sub-sidiary managers, along with internal investmentagencies in pursuit of "mobile' investment.

Faced with such changes, many subsidiary managerswe interviewed were thinking hard about theirfutures. They were asking them.selves, "What is myunit's unique value in this corporation? What do wedo better than anyone else?" They were looking forwhat we might call their sustainahlc competitiiK'aduanta^^e vis-a-vis their internal com/x.'titors. Twoexamples clarify this idea:

• Motorola's Ea.st Kilbride. Scotland, operation wasone of sixteen around the world that fabricated sili-con wafers for semiconductors — and one of the cor-poration's best performers. All the key performancemeasures, sucli as cost, service, and quality were eas-i!y compared, so obviously the company made newinvestments in the top-performing sites. East Ki!bride"smanagers had a clear goa!, therefore: to ,stay ahead oftheir internal competitors on the most important per-formance metrics. If they could do that, their opera-tion would receive new investment when times weregocxl and avoid closure when times were tough.• I-Ioneywe!!'s Scottish subsidiary in Newhou.se man-ufactured a range of control valves and related itemsfor the European market. During the 1970s and early198()s, control valves were mechanical devices, butNewhouse's general manager realized the impendingshift toward electronic devices and invested discre-tionary funds in the development of an eiectronicmanufacturing capability. When, in 1991, corporatemanagement decided to inve.st in a global-scale facili-ty for electronic fan coils, Newhouse was the obviouslocation l>ecause al! the necessary capabilities werealready in place.

Fast Kilbride's strategy was to be the lowe.st-cost/highest-quality source for silicon wafers; Newhousechose to differentiate itself from its sister plantsaround the world by inve.sting in a new technology.**Both .strategies appeared to create su.stainahle posi-tions for the subsidiary. More important, both olTcredclearly defined benefits to the corporate parents.

57

Sloan Management ReviewSpnng 1998

Birkinshaw • Fiy

when viewed this way, initiative offers a win-winsolution; subsidiary growth also contributes to theMNCs competitive advantage. However, HQ and sub-sidiary managers' views are not always in harmony.Next we examine some perceptions — mostly thoseof HQ managers — which engendered uneasinesswhenever we discussed subsidiary initiative, andwhich underlay the resistance we observed in ourcase studies.

The Dangers in Initiative: Two ContraryViewsIn the course of our research, we oliserved manyinstances in which there were no signs of subsidiaryinitiative, and we heard many opposing arguments toour view that MNCs should encourage subsidiary ini-tiative. The arguments took two basic forms.

Some people argued that only those sub-

sidiaries at the more "evolved" end of the

spectrum should take initiative.

"Sometimes Acceptable"The first argument saw subsidiary initiative as accept-able under certain conditions. For example, most cor-porations accepted that different subsidiaries havedifferent roles— some are strategic centers, some havecontributory roles, others are just implementers ofcorporate strategy. Using such an approach, somepeople argued that only those subsidiaries at themore "evolved" end of the spectrum should take ini-tiative. Those units, they argued, had the capabilitieson which to base further development, ;ind the man-agement expertise necessary to drive initiatives tocompletion. The rest should focus on their imple-mentational roles.

We found considerable evidence to support this per-spective. Just under half the subsidiaries we surveyedclaimed to have pursued some form of initiative in thepast five years; the rest saw themselves as imple-menters. When asked why they had not pursued ini-tiatives, typically they answered, "We focus exclusivelyon meeting the needs of our local cu.stomers," or "It isnot appropriate for us at this stage," or "It is very diffi-cult because of the level of centralization in the corpo-ration." Clearly, there are fundamental differencesbetween the two groups that are based at least in

part on the level of the subsidiary's development.

But a difficult question arises: How does a passivesubsidiary transform itself into an initiative-takingone? Evidently, there is a development process thatsubsidiaries go through cjver time, in which theygradually build up resources, take on more and moreresponsibilities, and build their credibility within thecorporation. Our evidence suggests that initiative isan important step in the development process. How-ever, HQ executives may actively resist it. Initiative,after all, is easy to view as insubordination, which isgalling for a coqiorate parent accustomed to a moredocile and obedient subsidiary.

The "growing pains" experienced by Pharma's U.K.subsidiary were typical in this regard. This suiwidiarysaw itself as providing strategic leadership in onearea of drug development, while managers at head-quarters saw it as taking a much more modest mar-keting and drug-testing role. As a result, the twosides clashed repeatedly during a five-year period.The subsidiary proposed a series of initiatives, andbusiness unit managers at the home office stalled,challenged, or rejected them all. Tlie process was"exhausting and faistrating" for both sides, and, afterfive years, no clear progress had been made toward amore harmonious relationship. The situation at 3MCanada was more constructive. There, managementstarted by taking on small manufacturing operationsthat U.S. plants didn't want. Gradually, 3M Canadabuilt up its manufacturing capabilities, which led tosome measure of credibility south of the border.Eventually, the subsidiary had the self-confidence andlegitimacy to pursue more significant initiatives.

There is another problem with an approach that seessome subsidiaries as initiative takers and others aspassive implementers. If the objective of initiative isto identify and pursue new opportunities, how cancorporate executives know in advance where thoseopportunities will arise? If the Japanese, German, andBriti.sh subsidiaries are charged with market develop-ment and network optimization, what happens to thegreat new business opportunity that the Italian man-ager spots? We believe that every subsidiary needs tohave a latent entrepreneurial role, so they can pursueopportunities wherever tliey arise. This does notmean letting every subsidiary wander off to pursueits pet project, but it does mean that corporate sys-tems need to help long shots find their way throughcorporate barriers.

Bickinshaw • Ry Sloan Management ReviewSpnng 1938

Some managers felt that subsidiary initia-

tive was simply more trouble tban it was

wortb.

We want lo dwell on ihLs point a bit because it's usu-ally ihe least understooU. Taken to the extreme, anorganizational system that encourages initiative couldend up in anarchy. Initiatives could spring up inareas that lay far beyond the corporation's businessdomain, and head-office managers could he inundat-ed with proposals that made little or no strategicsense. We Uike a more measured approach. Clearly,MNCs need control systems to constrain the numberof poorly thought-out initiatives, but. increasingly,such systems should be based on the development ofa shared understanding of the corporation's strategicpriorities, rather than on intervention into subsidiaryaffairs.

The concept is similar to that of employee empower-ment. The corporation gives subsidiary' managers thetoots they need to manage their operation effectively,along with a clear indication of the boundaries oftheir responsibilities. Within those limits, they havefree rein to pursue opportunitie.s as they see fit, onthe assumption that they understand their operationand the local marketplace better than executives sit-ting in a distant head office. The subsidiary assumesnew roles and responsibilities, therefore, rather thanreceiving assignments from above — an importantdistinction." Control systems are necessary to make itwork, hut Ihe philosophy of empowerment underly-ing this miDdel shifts the headquarters-suiisidiaiy rela-tionship from one of mutual suspicion and interfer-ence toward one of trust and shared destiny.

"Pure Opportunism"Another opposition to initiative that we encoLmteredwas even less accommodating. Some managers feltthat subsidiary initiative was simply more troublethan it was worth. One HQ manager recounted anunfortunate episode in which a subsidiary manager inhis business area had undertaken a .series of invest-ments that he insisted were necessary to build marketpresence, but they had led to spiraling costs andslow decision making. The HQ manager viewed thatas pure opportunism and "empire building." Sincethen he has shifted toward a system of fairly tightcontrol over subsidiary expenditures.

That position is difficult to counter because there areoccasional cases of empire building, where the sub-sidiary manager's initiative is not consistent with thecorporation's best interests. One can never be surewhether a subsidiary manager is acting entrepreneuri-ally or opportunistically. The interpretation will de-pend a lot on whether there is a strong level of trustbetw een ihe indi\iduals in que.stion. Unfortunately,one bad experience can jaundice an HQ manager'sattitude forever.

We don't believe that all subsidiary initiatives are pro-posed in good faith. Most probably are. but HQ man-agers need to scrutinize all initiatives carefully and dotheir best to separate the wheat from tlie chaff. Wedo believe, though, that initiative has a critical role inthe transferal of information about dispersed .sourcesof expertise throughout the MNC. The discussions wehad with one Scottish subsidiary manager — let's callhim John Bryant — illustrate this point. Bryant was incharge of a large Scottish a.ssembly operation, a longway from the head office in Boston. He saw hisemployees' dedication and observed the high-qualityoutput that left the plant every day. He al.so knewthat corporate executives had a global network ofplants to manage and that they could not know indetail how each worked. He believed his operationwas one of the best and, as the leader of 500 petjple,was concerned about their Uvelihocjd.

When we a.sked him about initiative — Did heactively seek new investments for his plant? — he didnot hesitate. "It is my obligation to seek out newinvestment." he responded. "No one else is going tostand up for these workers in the head office. Theyare doing a great job, and I owe it to them to buildup this operation. I get angry with some of my coLm-terparts in other parts of Scotland, who just tow theparty line. They follow their orders to the letter, butwhen I visit tlieir plants, I see unfulfilled potentialeverywhere,"

ConclusionBefore subsidiary initiative becomes a legitimate andpei'vasive phenomenon in large MNCs. .subsidiaiy andparent-company managers have to make significant,though subtle, shifts in their roles.

For subsidiary managers, we see an emerging rolethat is fundamentally more entrepreneurial than hasbeen recognized historically. As one manager in our

59

Sloan Management ReviewSpring 199S

Birkinshaw • Frv

The subsidiary manager has to be pre-

pared to identify opportunities, then build

support for them in the head office.

study pointed out, "No one in the head office wakesup tliinking about whut they can do in Canadatoday." That responsibility lie.s with the subsidiary

60 manager He or she has to be prepared to identify

opportunities, then build support for them in thehead office. But the process is difficult, and managersTLin the risk of wasting their efforts if their initiative isnot chosen well. The following points are worthremembering:

• The magnitude of the initiative should be propor-tional to the subsidiary s reputation in the headoffice. One .subsidiary management team in our studyspent a decade pursuing a "big hit" investment, to noavail. Now the team is pursuing a host of smallerprojects with considerable success.

• Managers must understand the reasons why theyare encountering resistance and look for ways to mit-igate it. If the initiative threatens to put some peopleout of a job, they should look for some form of com-promise to create a win-win situation. If none of theHQ managers knows them personally, they shouldtry to involve someone with whom they already havea relationship.• Managers should not emphasize nationalistic argu-ments. As one person put it. "If I go there wrappedin my Canadian flag, I provoke all sorts of unneces-sary' challenges." Rather, they should focus on thetechnical or economic arguments as to why the loca-tion (which just happens to be in Canada) makessense.• Finally, it is important to recognize that initiativescan be either externally or internally focused, andthat most subsidiaries are good at one or the other.

The emerging role for HQ managers is no lessdemanding. We envision a subtle shift throughwhich executives become more open to new, chal-lenging ideas from the periphery of the organiza-tion. This does not mean abandoning the tried-and-tested systems by which they evaluate new propos-als, but it does call for a change in attitude that willencourage more subsidiaty managers to bring theirinitiatives forward for consideration. Again, a fewpoints to consider:

• Corporations can institute sy.stems that encouragethe flow of initiatives in a controlled manner. Somecorporations send out request-for-proposal invitationswhenever they plan major capital investments; othershave put in place ''challenge" mechanisms for chang-ing internal sourcing relationships.• Executives can introduce other systems to breakdown cross-national prejudices. Several corporationsthat we studied used global business teams or thesharing or transfers of senior managers, or they madea point of managing business units outside the homecountry. These approaches foster a more welcomingenvironment for subsidiary initiatives.• HQ executives need to be clear about the differ-ence between challenging or resisting an initiative.Challenging means seeking additional information,looking at alternatives, and coming to a decisionabout the initiative's merits. Resisting uses many ofthe same techniques, but it is fundamentally preju-diced and attaches greater importance to negativeevidence.

We set out to explore the strategies that subsidiarymanagers used in pursuit of initiative, understand theforms of resistance they typically encountered, andassess the implications of initiative for MNC manage-ment. We believe strongly in the value of subsidiaryinitiative as a means for developing new markets andas a mechanism for improving the allocation of activi-ties within the multinational. Yet there are still somestrong arguments against subsidiary initiative, andsubsidiary initiative remains a little-understood, riskyproposition in mo.st people's minds.

We hope we have clarified some of the mechanismsand benefits of initiative, as well as potential costs.Our research yielded some outstanding success sto-ries, and we believe there is potential for many more.We encourage the executives of multinational corpo-rations to consider ways to foster the changingbehaviors that enable initiatives to flourish.

Biikinshaw • Fry Sloan Management ReviewSpnng 1996

References

fhe authors thank Gunnar Hedlund. Bruce Kogut.and seminar participants at the Institute ofInternationa! Business. Stockholm School ofEconomics, for their helpful comments on drafts ofthis article. The research on which this paper isbased appeared in two previous articles: JM.Birkinshaw and N. Hood. "An Empirical Study ofDevelopment Processes in Foreign-OwnedSubsidiaries in Canada and Scotland. ManagementInternational Review, volume 37. number 4. 1997, pp339-364: and JM. Birkinshaw, "Entrepreneurship inMultinational Corporations: The Characteristics ofSubsidiary Initiatives." Strategic ManagementJournal, volume W. number 2. 1997. pp 207-230.

m ] The NCR Dundee story comes from personalinterviews, research by Graeme Martin at DundeeBusiness School, andJ. Kotter, A Force for Change (New York: Free Press,

199D]

• 2. The authors thank Gerhard Schmidt ofHewlett-Packard Company, who first suggested thisconcept of a corporate immune system. The theoreti-cal underpinnings of the concept were developedmore fully in a separate paper See:J.M Birkinshaw and J. Ridderstr^le, "Fighting theCorporate Immune System: A Process Study ofPeripheral initiatives in Large MultinationalCorporations" (Stockholm, Sweden: Institute ofInternational Business, Working Paper 96/03).

• 3. The research comprised two phases. First, weconducted 132 intensive case study interviews atboth the subsidiary and corporate headquarters lev-els in twenty subsidiaries and their parent compa-nies in the United States, Canada, Great Britain,Sweden, and Belgium. We focused on specific initia-tives that the subsidiaries had undertaken in order tounderstand how they came about, ttie resistancethey faced, and their impact on parent-companystrategies The second phase, a large-sample-questionnaire study of 260 subsidiary companies inthree countries (Great Britain, Canada, Sweden),sought to test empirically the hypotheses developedin the first phase. It focused on the role played bysubsidiary initiative as the mechanism through whichsubsidiaries gained international management recog-nition — for example, as "centers of excellence" orthrough "world product mandates."

• 4, The Canadian study identified four types of ini-tiative. See:

J. Birkinshaw, "Entrepreneurship in MultinationalCorporations: The Characteristics of SubsidiaryInitiatives," Strategic Management Journal volumet8, number 2.1997, pp 207-230.However, subsequent research in Scotland andSweden has indicated that a coarser distinction intotwo types is more generalizable.

• 5. This example is drawn from a teaching case.See:J. Birkinshaw, "The GE Energy ManagementInitiative" (University of Western Ontario, IveySchool of Business, 1934. 9-94-60051.

• 6- Pharma is the disguised name of a EuropeanPharmaceuticals corporation.

• 7. Bartlett and Ghoshal, for example, refer to con-tributor and strategic-leader subsidiaries, whilemany Canadian academics have used the concept of"world-mandate" subsidiaries. See:CA. Bartlett and S. Ghoshal, "Tap Your Subsidiariesfor Global Reach," Harvard Business Review, volume64, November-December 1986, pp. 87-94; andH. Etemad and L.S Dulude. Managing theMultinational Subsidiary {london: Croom Helm,1986).

• 8. It should be clear that this distinction parallelsMichael Porter's generic strategies as the basis forsustainable advantage vis-S-vis industry competitors.See:

ME. Porter. Competitive Strategy {UewXork: FreePress, 19801.

• 9 See P Hagstrom, The Wired MNC (Stockholm:Institute of International Business, Stockholm Schoolof Economics, 19931.

It should be pointed out that a key differencebetween the current work and the work of Bsrtiett,Ghoshal, and Nohria on the "differentiated network"is the suggestion that subsidiary units can assumeroles, rather than parent companies always assign-ing them. See:S. Ghoshal and N Nohria. "internal Differentiationwithin Multinational Corporations," StrategicManagement Journal, volume 10. pp. 323-337.

Reprint 3935

61

Sloan Management ReviewSpring 1998

Birkinshaw • Fry