Strategic and Operational Scope of Foreign Subsidiary Units
Abstract
A foreign subsidiary unit formulates the scope of its strategic and operating activities based upon: (a) its MNC headquarters, (b) its host country and regional environments, (c) the global influences of its industry, (d) its own internal organizational environments, and (e) its own strategic leadership. Strategic and operational scope formulation process is vital to the successful unit goal accomplishments. An effective MNC would not be an “empire” model, but a “commonwealth” model.
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Introduction
Multinational corporations (MNCs) should develop an effective scope of strategic and operational activities for its foreign subsidiary units. Units may undergo radical or evolutionary change in scope of strategic and operational activities. The stage in the unit’s life cycle determines the scope of its strategic and operating activities. Innovation in and knowledge sharing among foreign subsidiaries are important components for added overall MNC competitiveness in this context, and, they become important components of foreign subsidiaries’ strategic and operational scope (Filippova, 2014; Poon, Kedron and Bagchi-Sen, 2013).Also, important considerations are the subsidiary characteristics and autonomy as they would affect the morale and motivation of the subsidiary management in day-to-day working terms (Raziq, Borini, Perry, and Battisti, 2013).
When India abolished the managing agency system on April 2, 1970, the industrial house of Tatas, run by J.R.D. Tata, had to move his multi-industry enterprise from a centralized “empire” mode of management to a “commonwealth” mode. R.M. Lala, the author of J.R.D. Tata’s biography, entitled “From Empire to Commonwealth,” describes in Chapter XI, J.R.D. Tata’s management style thus: “Until 1970 J.R.D., under the Managing Agency System, ruled an Empire carrying on his shoulders its burden and its glory. From 2 April, 1970 the Empire had become a Commonwealth. J.R.D. found himself in the role of the Head of a Commonwealth where he had to rule with persuasion and influence. His writ no longer ran over all Tata companies, for the Board of Directors of each company was independent of the parent company, although many or some on the Board are from Tata’s and Tata’s still manage them on behalf of the shareholders of each company. In sum, when the Managing Agency System was abolished, an era had ended. As the years passed, powerful Managing Directors of individual companies stamped their own identities on the companies they ran. While J.R.D. is still alive, there was a sense of unity and continuing to knit the various companies together, and, what one might call the Tata ethos still holds sway - a Group identity that is greater than the sum of its many parts. This is so because when J.R.D. had previously ruled his Empire, he did so not as an autocrat but as a democrat who never imposed himself on his chief executives” (Lala, 1993, 272).
A multinational corporation (MNC) must be managed just like a commonwealth of foreign units. It should be managed through participation, discussion and persuasion. It should not be run autocratically. The CEO of an MNC should not command compliance from the chiefs of foreign units, but instead seek open discussions and (near) consensus. This approach of providing fuller local strategies and operational autonomy is vital for foreign units to effectively adjust to host environments.
Conclusion
MNCs should focus upon their global and foreign unit’s host environments in evolving their headquarters-subsidiaries relationship pattern. The more turbulent and competitive the environment, then the more decentralized should be the decision-making. The MNC should regard the foreign units definitely as a commonwealth, or a community, of almost equal members. This would lead to a more power sharing and equality model. The focus should be more to coordinate and cooperate on important on-going activities. The autocratic or “empire” approach of the headquarters is out of place in today’s dynamic, competitive environment.
The history of headquarters-units relationships would significantly influence the future trend of relationships. Happy, cordial helpful relationships of the pristine times tend to so continue. Close ties of consultative nature marked by supportive and reinforcing relationships similarly would continue. The greater the interdependence and resource dependence of the units upon or with the headquarters, then the greater would be the relative power of the headquarters. The focus of the units would move away from headquarters if they are capable of generating resources locally.
There are many issues upon which MNCs should focus if they are to be successful. These include: headquarters decentralizing unit’s local strategic and operational decision making so that each unit has greater strategic flexibility and operational autonomy in order to be competitive, proactive and profitable. The discussions between the headquarters and the units must be based upon factual data and clearly developed analyses so that the quality of decisions would be good. On all strategic decisions there should be substantial interaction between the headquarters and the units, with the headquarters seeking inputs form the units before decision-making. The resource allocation process must be open, fair and should follow a consistent rationale. The headquarters should be the integrator of analyses of competition, ethical, societal, human resource, technological. In this way, the MNC would formulate a comprehensive framework of strategic decision making.
The MNC, its headquarters and its foreign units should ideally function as a close-knit federation of organizations focusing on a common purpose and vision. This approach is preferred to an autocratic headquarters ruling over its subsidiary units. The focus on long term growth and development should guide on all issues, particularly: competitiveness, profitability, organizational development, human resource and capital investments. The future and external orientations should drive the organizational strategy.