BMAN73172 INSTITUTIONS AND FIRMS’

INTERNATIONALIZATION STRATEGY
Lecture 3 Managing Headquarter-Subsidiary Relations

Pei SUN

Professor of International Business

16 February 2024
 Outline of Todays’ Lecture
• Strategy and Structure in MNEs
• The integration-responsiveness framework
• Four organizational structures
• Strategic drivers of different types of HQ-subsidiary
relations

• Agency theory perspective into the HQ-subsidiary

relationship
• Principal: HQ
• Agents: Subsidiaries

• Developing subsidiary-level business strategies

and HQ-level control strategies
KFC vs Burger King in China
The Integration-Responsiveness
Framework

• It arises from the

tradeoff between
aggregation and
adaptation
strategies
• It involves how to
simultaneously
deal with two sets
of pressures for
global integration
and local
responsiveness
 Home Replication Strategy
• International replication of home country-based
competences
• Easy to implement, usually the first adopted when
companies venture abroad
• Disadvantage: Lack of local responsiveness
– Wal-Mart in Brazil
• A starting point for experimentation and learning on
how best to adapt while retaining the core features of
the business model
• Home country influence: US
 Localization (Multi-domestic)
Strategy
• Sacrificing global efficiencies, this strategy can be efficient
when there are clear differences between national and
regional markets and few pressures for global economies
of scale
• Some food, beverage, consumer goods, and entertainment
sectors
• Managed as a decentralized federation
• Drawbacks
– Cost disadvantages
– Excessive local autonomy; hard to implement corporate wide
changes
• Home country influences
 Global Standards
(Standardization) Strategy
• Relies on the development and distribution of
standardized products/services worldwide to reap the
maximum benefits from economies of
scale/scope/learning
• High-tech, IT, and industrial goods sectors
• Views world as a single unit of analysis
• Original equipment manufacturers (OEMs) usually use
this structure: Global key account
• Drawbacks: Allows for little customization and leads to
excessive central control
• Home country influence: US and Japan
 Transnational Strategy
• Aims to capture the best of both worlds by
endeavoring to be cost-efficient and locally
responsive.
• Promotes global learning and diffusion of
innovations
– Knowledge flows from host countries to home
country and subsidiaries in other host countries
• Organizationally complex and difficult to
implement; slow down decision speed
 Four Organizational Structures
1. International division is typically set up when
firms initially expand abroad, often engaging in a
home replication strategy.
2. Geographic area structure is an organizational
structure that organizes the MNE according to
different countries and regions.
3. Global product division is a structure that assigns
global responsibilities to each product division.
4. Global matrix is a structure used to alleviate the
disadvantages associated with both geographic
area and global product division structure.
Four Organizational
Structures
Levels of Global Strategy
 Levels of Global Strategy

• Corporate-level strategy deals with the question

of what business or businesses to compete in,
and the overall game plan of the multinational
firm.
• Subsidiary-level strategy refers to the game plan
of each subsidiary and is concerned with the
question of how a subsidiary positions itself
among local and international rivals to achieve its
strategic goals.
 Global Generic Strategies

Generic strategies Characteristics Examples

Cost leadership Competitive scope: broad target Ryanair

Competitive advantage: lower cost Low fares
Differentiation Competitive scope: broad target Mercedes cars
Competitive advantage: differentiation Quality
on quality, reliability, convenience or
speed of delivery

Focus cost Competitive scope: narrow target Charity shops

Competitive advantage: very low cost Affordability

Focus differentiation Competitive scope: narrow target Ferrari

Competitive advantage: differentiation Prestige
 Hybrid/Integrated Strategy

• Dual strategic emphasis: Seek to provide customers with the

best cost-value combination by appealing to value-conscious
customers who are sensitive to both price and value
• Marks & Spencer
• Japanese and South Korean firms in the auto and
electronic industries

• Risk of being stuck in the middle

• Flexible combination of strategies due to the global business

environment uncertainty
• More product lines
• Exploit cross-border differences
 Global Hybrid Strategy

• A standard product from

the West may be
positioned as a premium
brand in an emerging
economy, and thus be sold
using different marketing
and sales processes.

• Haagen-Dazs’ rebranding
success in China
 Types of Subsidiary-Level
Strategy
• Support and implementation subsidiaries
• Very limited strategizing required
• Success relies on operational efficiencies
• Product localization: Caterpillar’s bulldozer
production in a foreign country
• Autonomous subsidiaries
• Mini-replica role: Operates as small-scale replicas
of their parent firms
• Global product mandate: In charge of the full
development, production, and marketing of a
product line in a subsidiary of a multinational firm
 Strengths of Support and
Implementation Subsidiaries
• Cost leadership: Eliminates the sources of
additional costs through economies of scale
• Helps gain strengths in pursuing operational
efficiencies
• IKEA
• Enhances efficiency for the multinational firm by
producing fewer product varieties in longer
production runs in different national plants
• Apple
 Weaknesses of Support and
Implementation Subsidiaries
• The strategy is not suitable in industries or regions where
customers are increasingly more demanding and less
willing to accept standard global products and
compromise their specific needs and wants.
• The strategy is not adequate when subsidiaries face high
environmental uncertainty, or when they use non-routine
production technologies requiring complex and specific
knowledge located at the subsidiary.
• The strategy builds one sided headquarter-subsidiary
relationship and gives the impression that the parent
company lacks respect for, and confidence in, the
subsidiary managers ability to manage
 Strengths of Autonomous
Subsidiaries

• The more power subsidiaries have, the more

opportunity they have to develop a strategy that
fits their unique business environment
• Leads to better decisions at the subsidiary level,
since managers at subsidiary levels are likely to
have a clearer view of the business environment in
which they operate
• Speeds up decision-making
• Leads to subsidiaries accepting responsibility and
be accountable for their strategy and action
 Weaknesses of Autonomous
Subsidiaries

• High cost

• Too many product varieties in sub-optimally small

production runs.
• Higher level of investment in advertising and
marketing management
• Requires increased effort in market planning and
coordination between subsidiaries

20
 Agency Relationships

• A principal-agent, or agency, relationship occurs when one

party (the principal) hires another party (the agent) to take
actions or make decisions on the principal’s behalf, which
in turn affect the payoff to the principal. Examples in the
context of business firms,
• Shareholders → senior executives → employees
• Headquarters and subsidiaries
• Agency problems arise when
• Incentive incompatibility: The objectives of the
principal and the agent are different
• Information asymmetry: The actions of the agent or the
information possessed by the agent is hard to observe
by the principal – hidden information and hidden action
 Controlling Agency Problems

• In an ideal organization, decision-makers have (1) the

information necessary to make good decisions; and (2)
the incentive to do so
• In reality, if you centralize decision-making (move
decision rights up in the hierarchy, closer to those with
better incentives), you should find a way to transfer
information to those making decisions
• If you decentralize decision-making authority (move
decision rights down in the hierarchy, closer to those with
better information), you should strengthen incentives
through compensation and monitoring schemes
 Drivers for Subsidiary Autonomy

• Environmental uncertainty

• Complexity of operations and technology

• Adaptation to local conditions

• Power balance between HQ (home country) and

a specific subsidiary (host country)
• The “light touch” strategy of EMNEs in developed
country subsidiaries
 Types of HQ Control

• Personal control: relies on human interaction

such as use of expatriates using methods such
as direct supervision

• Impersonal control: carried out through formal

bureaucratic and written rules and procedures
such as written manuals
 Focus of HQ Control

• Output: uses performance metrics measures

• Behavioural: monitors the behaviour of staff at

the subsidiary level

• Cultural: involves the indoctrination of

subsidiary managers and employees into the
parent firm’s norms and value systems
 Barriers and Challenges to HQ
Control
• Cross cultural challenges
• Conformity to expected norms in each country vs. a
global mindset that defines an MNE’s DNA
• Lincoln Electric in Europe (Hastings, D. F. 1999.
Lincoln Electric’s harsh lessons from international
expansion, Harvard Business Review, May-June,
162-178)
• Subsidiary-level challenges
• Agency problems
• Headquarter-level challenges
• Absorptive capacity and open-mindedness of HQ
managers
 Essential Readings

• Chapter 15, Peng & Meyer (2023)

• Ambos et al. (2019), Birkinshaw & Morrison

(1995), Bell & Shelman (2011), Cantwell &
Mudambi (2005); Mudambi et al. (2014),
O’Donnell (2000) in the reading list

• Next week: Managing Global Innovation

Thank you!