CONFIGURATIONS OF STRATEGY AND STRUCTURE IN
SUBSIDIARIES OF MULTINATIONAL CORPORATIONS
Abstract. A three-fold typology of subsidiary roles
(world mandate, specialized contributor, local implementer) was induced from the
literature and its empirical validity was confirmed. Adopting a con-figurational
approach, we then explored the ways in which subsidiary 'structural context'
varied across subsidiary role types. Structural context characteristics were
determined through a discussion of the underlying principles of the 'hierarchy'
and 'heterarchy' models of multinational organization. The key findings were:
(a) higher strategic autonomy in world mandates than in local implementers; (b)
a more internationally configured value-chain in world mandates and specialized
contributors than local implementers; (c) lower levels of internal product flows
in world mandates than the other two types; and (d) a significantly lower
performance in specialized contributors. Implications for a configurational
model of subsidiary management, and for heterarchy as a higher level
conceptualization, are discussed.
Research into the Multinational Corporation (MNC)
evolved in two critical directions during the mid-eighties. First, a shift in
emphasis towards the multinational subsidiary as a unit of analysis created a
good understanding of the various strategic roles that subsidiaries take on
[Bartlett & Ghoshal 1986; Jarillo & Martinez 1990; Roth & Morrison
1992]. Second, researchers began to explore new conceptualizations of the MNC
that challenged many of the assumptions underlying traditional organizational
analysis [Hedlund 1986; Ghoshal 1986]. The parallel growth of these two lines of
inquiry is testament to their common empirical, and in many cases theoretical,
roots. However, what is surprising is the lack of work that specifically
addresses the linkages between the two. In essence, the former stream has
focused on the meaning of strategy in the MNC subsidiary, while the latter has
emphasized structure. If it is accepted that the interdependence between
strategy and structure is one of the cornerstones of strategic management, then
clearly the explicit reconciliation of these two bodies of work is a valuable
Some research, of course, has addressed
strategy-structure issues in the MNC. Through the seventies and early eighties
there was a substantial line of inquiry in the tradition of Chandler ,
that focused on the fit between structural form and corporate strategy (e.g.,
Daniels, Pitts & Tretter ; Egelhoff ; Stopford & Wells
). However this work took an explicit corporate perspective, so its
applicability to the specifics of the national subsidiary can only be inferred.
More recently, and from a clear subsidiary perspective, studies by Jarillo and
Martinez , Gupta and Govindarajan , and Roth and Morrison  all
examined facets of structure that related to subsidiary types. Very little
research, however, has attempted to place its operational measures of structure
in the context of the new conceptualizations such as 'heterarchy,' the
'horizontal organization' or the 'transnational,' though Leong and Tan  is
an important exception. Our approach here is to focus on the national
subsidiary, and to explore how the strategy, or role, of the subsidiary is
related to its 'structural context,' i.e., the set of formal and informal
management systems that determine the relationship of the subsidiary to its
parent and affiliates. The scope is broader than most of the studies identified
above, in that we are concerned with the full complexity of structural
characteristics that impact the subsidiary, but narrower than Leong and Tan
 in that we are focused on a subsidiary, rather than a corporate, level of
analysis. The research question that drove this study can be summarized as, In
what ways does the subsidiary's structural context vary according to its
This study takes a configurational approach to
subsidiary strategy and structure. Configurations are "tight constellations of
mutually supportive elements" [Miller 1986:236], the implication being that
certain structural arrangements may be more appropriate to specific subsidiary
strategies than others. The approach has been used in many areas of organization
and management research (e.g., Meyer, Tsui & Hinings ), but of greater
relevance here is a substantial body of work in strategic management that has
applied the configuration approach specifically to business level strategy and
structure (e.g. Miller & Friesen ; Miller [1986,1988]). The intention
here is to apply a similar methodology at the subsidiary level. Figure 1
illustrates the basic framework.
There has been much debate in the strategy literature
regarding the causal relationship between strategy and structure (most recently,
Amburgey & Dacin ). In the case of the national subsidiary, the
conventional wisdom of the process school [Bower 1970; Prahalad 1976] would
indicate that corporate top management define a structural context for the
subsidiary consistent with its strategic objectives which, in turn, shapes a
role or strategy for the subsidiary. Burgelman's  research, however, would
suggest that the autonomous actions of the subsidiary can also shape its
structural context. The reality is probably a 'reciprocal and non-linear'
relationship [Meyer et al. 1993: 1177], as argued by Hedlund and Rolander
. The impact of the "environment" on the structure-strategy configuration
is equally complex. According to the classic strategic management formulation
[Chandler 1962] strategy (and hence structure) is defined in relation to the
nature of the threats and opportunities in the environment. In the case of the
national subsidiary, the relevant environment includes not only external
entities but also elements of the corporate network as well [Ghoshal &
Bartlett 1991]. The structural context is defined (by parent management) in
relation to this environment, but it also takes into account a host of other
factors including the corporate strategy and the subsidiary's strengths and
weaknesses [Bartlett & Ghoshal 1986]. Thus, a "global" industry might be
associated, ceteris paribus, with tightly integrated subsidiaries, but within
the MNC as a whole one would still expect to see a differentiation of structural
contexts including some relatively autonomous subsidiaries [Ghoshal 1986]. Put
another way, the relevant facets of the corporate strategy and the external
environment are largely built in to the subsidiary's structural context, and it
is that context from which subsidiary management principally takes its cues.
Certainly the broader environment has some direct impact on the behaviour of
subsidiary managers as well, but for this research it is considered as a control
variable rather than as part of the configurational model.
While there is no shortage of literature on issues of
MNC strategy and structure, the body of empirical evidence is less impressive.
The overall tone of this paper is therefore exploratory. We have preferred to
use research questions rather than hypotheses. This indicates less an absence of
a priori expectations than a lack of established measures. Furthermore, data is
presented in its raw form, rather than a higher level of aggregation, to aid
interpretation. Appropriate statistical tests were also conducted.
The paper is organized as follows. First, the literature
on subsidiary strategies/ roles is reviewed, and a three-fold typology is put
together. The relationship between these types and the global business
environment is also discussed here. Second, MNC structural issues are explored,
starting with an overview of the idealized notions of 'hierarchy' and
'heterarchy'. These notions are then applied at the subsidiary level, and a set
of key characteristics of 'structural context' are thus defined. Research
questions regarding the variance of these characteristics across types are put
forward. Third, the issue of performance at the subsidiary level is examined.
The empirical portion of the paper describes the data collection methodology and
then explores the four research questions. Finally there is a discussion of the
implications of the findings at both subsidiary and MNC level. SUBSIDIARY
Much of the early literature on MNC subsidiaries
sidestepped completely the issue of strategy. The focus was typically on the
variables that were key to the dyadic parent-subsidiary relationship, such as
centralization (e.g., Schollhammer ) and integration [Brandt & Hulbert
1977; Cray 1984], and their relationship to external variables like parent
ownership and local environmental uncertainty. The results of these studies were
ambiguous though (e.g., Gates & Egelhoff ), and in retrospect it seems
likely that this was due to the inability of researchers to recognize the
different strategic roles taken by subsidiaries.
The concept of a subsidiary strategy per se arose
through the global strategy literature [Bartlett 1979; Pralahad & Doz 1981],
which focused on the conflicting demands for national sensitivity and global
integration. Jarillo and Martinez , for example, identified three
strategic roles for subsidiaries that mirrored Bartlett's  multinational
types and Porter's  multinational strategies. Roth and Morrison 
focused on the configuration and coordination demands of implementing a global
strategy to identify two subsidiary strategies. Earlier, White and Poynter
 and D'Cruz  proposed strategies for Canadian subsidiaries along
approximately the same dimensions. A somewhat different approach to subsidiary
strategy was developed by Bartlett and Ghoshal . Working on the basic
premise that each subsidiary has a unique role to play in the MNC, they modeled
subsidiary strategy as a function of the local environment and the subsidiary's
unique capabilities. More recently, Gupta and Govindarajan  built on
Bartlett and Ghoshal's notion of the MNC as a differentiated network through a
model in which subsidiaries were categorized on the basis of the knowledge flows
to and from the rest of the corporation.
In this literature the terms subsidiary 'strategy' and
subsidiary 'role' are often used interchangeably but the distinction is more
than semantic. Role suggests a deterministic process whereby the subsidiary
fulfils its 'imposed' function; strategy suggests a higher degree of freedom on
the part of subsidiary management to define its own destiny (e.g., Prahalad and
Doz ). On this basis, all of the above studies focused on subsidiary
roles, though several of them (e.g., White and Poynter ) explicitly
considered the ability of the subsidiary to take autonomous action. This paper
will thus use the term 'role' henceforth. Table 1 proposes a simple three-item
typology of subsidiary roles, and maps prior typologies onto it. This typology
integrates much of the prior research in this area, but inevitably it also fails
to pick up on some of the subtler distinctions made by certain academics. These
limitations will be considered after the three types have been described.
The Local Implementer. This subsidiary
has limited geographic scope, typically a single country, and severely
constrained product or value-added scope. White and Poynter  referred to
these as 'miniature replica' subsidiaries, in that the entire range of
value-adding activities were in that country. Jarillo and Martinez  used
the term 'autonomous,' and Gupta and Govindarajan  suggested 'local
innovator'. In many cases, however, various common value activities have been
integrated globally [Porter 1986], such that the local implementer strategy has
limited functional scope as well. Bartlett and Ghoshal's  and Gupta and
Govindarajan's  'implementer' subsidiaries loosely match this type. Both
are often more closely integrated with the international operations of the MNC.
In this context, the subsidiary's role is to adapt global products to the needs
of the local market. It is typically found (though not exclusively) in a
multidomestic strategy [Porter 1986].
The Specialized Contributor. This
subsidiary has considerable expertise in certain specific functions or
activities, but its activities are tightly coordinated with the activities of
other subsidiaries. Thus, it is characterized by a narrow set of value
activities and high levels of interdependence with affiliated subsidiaries [Roth
& Morrison 1992]. Jarillo and Martinez  called this subsidiary
'receptive,' and suggested that it occurs when the environmental pressures are
for high integration and low local responsiveness, thus mirroring Porter's 'pure
global' strategy. White and Poynter  proposed 'rationalized manufacturer'
and 'product specialist' for this type, depending on the value-added and product
scope of the subsidiary. For Bartlett and Ghoshal  the specialized
contributor approximates their contributor, though there are differences, as the
discussion below explains.
The World Mandate. Roth and Morrison
 stated that this subsidiary type "works with headquarters to develop and
implement strategy" [1992: 716]. The subsidiary has worldwide or regional
responsibility for a product line or entire business, and typically has
unconstrained product scope and broad value-added scope [White & Poynter
1984]. In this way it achieves 'decentralized centralization': activities are
integrated worldwide, but managed from the subsidiary, not head office. The
counterpart in Jarillo and Martinez's  typology was the 'active'
subsidiary, that achieved both global integration and local responsiveness.
Bartlett and Ghoshal's  comparable form was the 'strategic leader' that
operated in a strategically important market and had high levels of resources
and expertise. Both of these types have roles that are less clearly defined than
the global mandate of Roth and Morrison , but the underlying
characteristics are very similar.
A limitation of this typology is its failure to account
for Bartlett and Ghoshal's  black hole. The black hole is perceived to
offer high potential for country-specific advantage to the MNC, but has low
firm-specific capabilities [Rugman & Verbeke 1992]. As such it is probably a
low-performing world mandate subsidiary or a high-potential specialized
contributor in the current typology. Similarly, Bartlett and Ghoshal's
contributor is not entirely consistent with the specialized contributor
discussed here, because it is found only in non-critical markets. The second
significant limitation is that the local implementer type embraces two different
scenarios. White and Poynter's  miniature replica and Jarillo and
Martinez's  autonomous subsidiary are basically 'polycentric' [Perlmutter
1969] in that the corporate parent gives them a high level of local discretion
to implement a locally responsive strategy. Bartlett and Ghoshal  and
Gupta and Govindarajan's  implementers are much more 'ethnocentric" they
are closely integrated with the parent company and have a limited scope of
responsibilities, primarily around selling and marketing the standard corporate
product in the local market. To complete this line of thinking, both the
specialized contributor and world mandate types can be labelled 'geocentric'.
Notwithstanding these limitations, the current typology succeeds in integrating
most prior studies. The types are also easily operationalized by the subsidiary,
because they are defined in terms of product/geographical/ functional scope.
Bartlett and Ghoshal's emphasis on relative capabilities, in contrast, is far
more conducive to operationalization at the parent-company level. COMPETING
THEORIES OF MNC STRUCTURE
The past decade has seen the emergence of several new
conceptualizations of the MNC, most notably Hedlund's  Heterarchy and
Bartlett and Ghoshal's  Transnational. In this section we explore - from
the perspective of the MNC as a whole - first the organizational assumptions of
the classic 'hierarchy,' and then the assumptions behind these new models that
will be henceforth referred to as 'heterarchy'.[ 1]
We then move down to the level of the subsidiary, and explore the implications
of these contrasting models for the structural context of a single subsidiary.
Clearly it would be inappropriate to suggest that a single subsidiary is
'hierarchical' or 'heterarchical,' on account of the different levels of
analysis, but our premise is that a comprehensive set of structural context
characteristics can be derived from the higher level analysis.
The Hierarchy Model
Hedlund  undertook a detailed review of the
origins and assumptions of hierarchy. Noting that "Most organizational theorists
seem to regard hierarchy as a primitive concept not requiring much further
definition" [1993: 212], Hedlund's methodology was to examine in detail the
classical work of Dionysius the Areopagite, and Simon's  seminal
contribution, and thus to derive what appeared to be the underlying attributes
of hierarchy. This resulted in four assumptions, namely ( 1)
prespecified and stable relationships; ( 2)
instrumentality and additivity of parts; ( 3)
Unidirectionality and Universality; and ( 4)
the coincidence of action, knowledge and people hierarchies (a
'meta-assumption'). An alternative perspective on hierarchy was formulated
through the writings of Chandler [1962,1977] and Williamson . Chandler
documented the rise of the 'M-form' organization, the key features of which were
the delegation of operational decision making to separate divisions and the
creation of an HQ unit that was responsible for strategic decisions and
monitoring the performance of the divisions. Williamson  applied
transaction cost economics explicitly to internal organization, arguing that the
M-form had "the purpose and effect of economizing on transaction costs" [1981:
273]. Semi-autonomous divisions were created to economize on coordination costs,
but top management (in the HQ unit) monitored divisional management to minimize
opportunism. Williamson and Bhargava  applied similar logic to other
organizational forms (U-form, H-form) as well, also based around economizing
assumptions. Taken together, three basic assumptions of the Chandler-Williamson
model can be discerned: ( 1)
coordination costs are economized by grouping tasks according to the geographic
or product markets on which they are focused; ( 2)
critical resources (including management expertise) are held at the centre to
ensure the most efficient use of scarce resources; and ( 3)
the development of an appropriate system to monitor and control divisional
managers ensures that the likelihood of opportunistic behaviour on their part is
minimized [Chandler 1962:309-13; Williamson 1975:137]. While broadly consistent
with Hedlund's analysis, the two sets of assumptions cannot be matched in
specifics. Coordination, for example, is clearly a function of both stability
and instrumentality, while control is implied in unidirectionality but not
stated. For the purposes of this paper we follow the Chandler-Williamson
assumptions more closely, because they can be more immediately reconciled with
the characteristics of heterarchy, as discussed next.
The Heterarchy Model
The hierarchy model was embraced by a number of MNC
researchers who sought to expand Chandler's work into the international context,
including Stopford and Wells , Franko , Egelhoff [1982,1988], and
Daniels, Pitts and Tretter [1984,1985]. While not entirely inappropriate from
the perspective of the MNC headquarters, it became apparent to a number of
researchers at the beginning of the eighties that the hierarchical model was
unable to reflect adequately the full complexity of the MNC. Working at both
parent and subsidiary levels, a number of related bodies of work began to
explore the MNC in much greater detail than before, and in so doing challenged,
one by one, all of the assumptions underlying the hierarchy model of the MNC.
First, the work of Prahalad  and Prahalad and Doz
 focused on the inability of top management to fully understand the
complexities of their various subsidiaries and peripheral operations. While
retaining authority over strategic decisionmaking, top management delegated
authority and responsibility for local issues through their manipulation of
relative power within the formal and informal structure. Furthermore, Prahalad
and Doz  showed that one consequence of delegation was that subsidiaries
acquire resources and expertise of their own, further reducing the dependence of
the subsidiary on its parent. Second, Bartlett [1979,1983] showed that
macro-structure was a very crude tool for controlling the MNC's activities. The
use of multiple informal systems and mechanisms, such as lateral decision making
and normative integration, were far more effective. Subsequently, Bartlett and
Ghoshal  proposed that such informal systems, along with the
legitimization of multiple subsidiary roles, were key features of the
'Transnational,' an idealized MNC model. Finally, the work of Hedlund generated
similar findings to the above, culminating in the conceptualization of the MNC
as a 'Heterarchy'. This model saw the MNC as "actively seeking advantages
originating in the global spread of the firm" [Hedlund 1986: 20], and depicted a
number of key features such as centres with different attributes, loose coupling
between units, and normative control systems. More recently, White and Poynter
 adapted Porter's  notion of the "horizontal organization" to the
MNC, with very similar results. Taken together, the "heterarchy," the
"transnational," and the "horizontal organization" comprise an alternative
organizational theory of the MNC, labelled here a heterarchy.
Three aspects of heterarchy can be identified that
distinguish it from the hierarchical model of organization. First, resources,
managerial capabilities and decisionmaking are dispersed throughout the
organization rather than concentrated at the top. Control is achieved less
through 'calculative' mechanisms than through 'normative' integration [Etzioni
1961]. Second, lateral relationships exist between subsidiaries, in terms of
product, people and knowledge flows. In hierarchy, by contrast, lateral linkages
are avoided to keep coordination costs low. Third, activities are coordinated
along multiple dimensions, typically geography, product and function. Again,
this would be prohibitively costly in a hierarchy. Hedlund [1993,1994] has
analyzed these characteristics in greater depth.
Hierarchy and Heterarchy at the Subsidiary Level
There are translation problems associated with shifting
to a subsidiary level of analysis. Both hierarchy and heterarchy refer to a
corporate system. A key feature of heterarchy, for example, is that there are
many centres "with a mix of organizing principles" [Hedlund 1986: 22]. Just
because lateral relationships and normative integration are encouraged, for
example, it does not mean that all subsidiaries will exhibit such
characteristics. A heterarchical MNC could easily have certain subsidiaries that
were controlled in a 'hierarchical' (i.e., bureaucratic) manner.
Notwithstanding these concerns, the hierarchy-heterarchy
dichotomy can be usefully applied at the subsidiary level as an analytical
device. That is, the structural context of the subsidiary has certain
characteristics that can be inferred from the characteristics of hierarchy and
heterarchy identified above. If we have captured the principal features of the
big-picture conceptualizations, then we can be confident that our representation
of structural context is similarly comprehensive. Essentially the idea is to
define a set of structural context attributes such as 'level of strategic
autonomy' which may be 'hierarchy-like' (low autonomy) or 'heterarchy-like'
(high autonomy) for any given subsidiary. Once this has been achieved, it will
then be possible to move to the next stage of investigation, which is to examine
whether these attributes vary significantly across different subsidiary roles.
CONTEXT RESEARCH QUESTIONS
Vertical Linkages: Parent-Subsidiary Relationships
Parent-subsidiary relationships have been extensively
researched over the years, as discussed in the introduction. The central issue
is one of control, which can be defined as "regulating the activities within an
organization so that they are in accord with the expectations established in
policies, plans and targets" [Child 1973: 117]. Under the hierarchy model,
control is primarily 'bureaucratic' [Baliga & Jaeger 1984]: managers
performance and/or behaviour is monitored to preclude opportunistic behaviour.
The heterarchy model proposes a system of primarily 'normative' or cultural
control, whereby managers are imbued with the values and goals of the MNC and
thus act in accordance with them [Hedlund 1986; White & Poynter 1990].
Bureaucratic control is still necessary, but is of secondary importance. A
slight variant of this dichotomy is Bartlett and Ghoshal's  distinction
between formali-zation and centralization as types of bureaucratic control.
Their third type, socialization, is very similar to normative control.
The subsidiary literature would suggest that the
strategic contributor and local implementer roles are controlled primarily
through bureaucratic mechanisms, because their activities are closely integrated
with those of the MNC as a whole. The world mandate role, in contrast, should
rely more on normative control because the parent has ceded international
responsibilities to the subsidiary in question. However, the reality is that the
two control mechanisms are overlaid, such that any given subsidiary-parent
relationship will exhibit both types to varying degrees. Often it is the
'quality' of control, rather than the type, that is most important to the parent
company, and this relies on very subtle mechanisms. The dichotomy is further
confounded by Bartlett and Ghoshal's  argument that parent country of
origin matters. They proposed that, historically, socialization was predominant
in European MNCs, centralization in Japanese MNCs, and formalization in U.S.
MNCs. The point is that the relationship between control mechanism and
subsidiary role is ambiguous. Thus, we propose the following research question:
Research Question I: How - if at all - are
parent-subsidiary control mechanisms perceived to vary across subsidiary roles?
Lateral Linkages: Subsidiary-Subsidiary Relationships
The hierarchy model attempts to minimize lateral
linkages between divisions or subsidiaries primarily because they create
complexity. By contrast, the heterarchy model promotes their use. Two key
features of White and Poynter's  horizontal organization are lateral
decision processes and a horizontal network; and Hedlund  has written
recently about the need to combine activities and resources across intra-MNC
boundaries as a means of promoting innovation. Lateral linkages are also
symptomatic of 'multidimensionality' that is, coordination along functional,
geographic and product lines rather than just one of the three.
Subsidiary research would predict that only local
implementers of the 'miniature replica' variety do not have strong lateral
linkages. These subsidiaries are either self-sufficient or get resources from
the parent. For the more ethnocentric local implementer, and for specialized
contributor and world mandate types, high lateral linkages would be predicted.
Interestingly, there would be good reason to expect the specialized contributor
to have the highest level of lateral linkages, because it is most completely
integrated into the corporate system. The world mandate, by contrast, may rely
less on affiliates for product or technology flows. The following research
question addresses these issues:
Research Question 2: How - if at all - are the lateral
linkages between the subsidiary and its
corporate affiliates perceived to vary across
In the hierarchy model, divisions are specialized to the
extent that they are organized around specific products or markets. The
heterarchy model takes this one stage further, by suggesting that the division
or subsidiary gains such a high level of expertise that other entities in the
MNC draw on it for its specialized capabilities. As noted by Hedlund [1986: 22]
'Heterarchy implies different kinds of centres . . . there may be an R&D
centre in Holland, product division headquarters in Germany, a marketing centre
for Asia in Singapore.' These centres may be imposed by the parent company, or
they may grow up organically through the resource accumulation of the subsidiary
[Prahalad & Doz 1981].
Which subsidiary roles would be expected to exhibit high
levels of specialization? First of all, the existence of a meaningful typology
is itself testament to a certain level of specialization. Thereafter, the only a
priori hypothesis that could be advanced is that the specialized contributor and
world mandate roles should have specialized capabilities in upstream activities
(such as R&D and manufacturing) relative to local implementers that
typically specialize in downstream activities (such as sales and marketing). The
following research question is put forward.
Research Question 3: To what extent are specialized
capabilities perceived to vary across
Subsidiary performance is a complex construct, because
it depends on what the parent company is trying to achieve. New market entry,
for example, is typically associated with negative returns in the first few
years but the subsidiary manager in question would be expected to deliver on
market share growth. A well-established subsidiary, in contrast, might be
evaluated on contribution income or ROI. The hierarchy-heterarchy dichotomy
offers no insights on the relative performance of the subcomponents, though we
could speculate that a greater diversity of performance measures would be
appropriate in the heterarchy. Nonetheless it is fascinating to consider whether
there are performance differences across subsidiary roles. Thus:
Research Question 4: How - if at all - do perceptions of
performance vary across subsidiary roles?
METHOD AND DATA
A sample of industries was identified that had
previously been referenced as exhibiting a high degree of globalization [Porter
1980, 1986; Jolly 1988; Prahalad & Doz 1987; Roth & Morrison 1990;
Kobrin 1991]. Industries, defined at the four-digit SIC level, were as follows:
aircraft engines and engine parts, laboratory measuring and testing equipment,
fungicides and insecticides, mining equipment, pharmaceutical preparations,
radio and television broadcasting equipment, household audio and video
equipment, semiconductors, surgical and medical instruments, and telephone and
telegraph apparatus. Subsidiaries were identified through Dun and Bradstreet's
Principal International Businesses, America's Corporate Families, The Director),
of Corporate Affiliations, and Who Owns Whom. 578 subsidiaries were identified,
in six countries (U.S., Canada, U.K., France, Germany, Japan). Following the
development of a mail questionnaire, an initial mailing to the President or
Managing Director of the subsidiary, and two follow-up mailings, 126 usable
responses were obtained.
As stated at the outset, this is an exploratory study.
Rather than putting forward and testing a set of propositions, the approach here
is to report the data analysis process that was undertaken for the study. While
the questionnaire was developed using well-established measures in most cases,
the more interesting findings were often found at the single-item level rather
than at the level of aggregate constructs. Thus, multi-item measures are rarely
reported in the following section; when they are, reliability measures are also
provided. The only construct where a rigorous approach was deemed necessary was
Subsidiary Role. The three role types
were obtained through two questions: 1) Is your subsidiary currently selling
finished products outside your host country national market?, and 2) If yes, is
your product responsibility rationalization/specialization or world product
mandate? Descriptions of the two types followed question 2. While this
single-indicator measure captured the essence of our typology, two additional
tests were undertaken to confirm the validity of the classification. First,
measures were taken of (a) international sales as a percentage of the total, and
(b) number of countries in which products were sold. ANOVAs were performed to
confirm that the domestic-sales subsidiary (the local implementer) and the two
internationally focused subsidiaries were significantly different along these
dimensions. F-values of 15.1 and 4.7 respectively were attained, significant at
p < .0002 and p < 0.03, confirming the validity of the classification.
Second, a four-item scale was used to distinguish the specialized contributor
and global mandate forms, and this was found to correlate significantly with the
single-question measure (r = .63, p < .001). This classification process
resulted in forty-two local implementer, thirty strategic contributor, and
forty-three world mandate subsidiary. A further eleven questionnaires were
unusable because their answers to the above questions were incomplete.
Control Variables. The global business
environment was defined as a control variable for this research. Prior research
has shown that the business environment is one of several important variables
associated with subsidiary role [Jarillo & Martinez 1990], but the position
taken in this paper was that it should be considered as a control variable
rather than as a principal contingency (as indicated in the earlier discussion).
Respondents were asked to answer a set of questions about the principal industry
in which their subsidiary competed. Two constructs 'need for integration' and
'need for responsiveness' [Prahalad & Doz 1987] were derived by factor
analysis from this set of questions. ANOVAs were then performed for these two
constructs with subsidiary role as the independent variable. The results
indicated that: ( 1)
all subsidiary types reported an equally high need for global integration; and
pressures for national responsiveness were perceived to be significantly higher
in local implementer subsidiaries than the other two.2 These results confirmed
that some differences in business environment were perceived by subsidiary
managers, so the measures were used as control variables for all subsequent
How - if at all - are parent-subsidiary control mechanisms perceived to vary
across subsidiary roles?
Control mechanisms were assessed with three sets of
variables. First, we investigated several measures of bureaucratic control that
were identified from prior studies [Youssef 1975; Picard 1980]: (a) percentage
of equity in the subsidiary; (b) percentage of the subsidiary board of directors
from the parent; and (c) percentage of the top management team in the subsidiary
from the parent. ANOVAs yielded no significant differences in any of these
measures across subsidiary roles. Second, we explored the level of
decisionmaking autonomy in the subsidiary, on the basis that low autonomy
indicates a high level of bureaucratic control. Respondents were asked to
indicate at which level in the organization (subsidiary, subcorporate, or head
office) sixteen types of decisions were made. For the purpose of analysis they
were split into an eight-item 'strategic autonomy' scale (alpha = .74) and an
eight-item 'operational autonomy' scale (alpha = .69). The results of the ANOVAs
are in Table 2.
As one might predict, there were no significant
differences in operational autonomy. Both hierarchy and heterarchy models would
suggest that operational decisions are made at the subsidiary level. Strategic
autonomy, however, varied significantly (p < 0.05) between subsidiary role
with the world mandate type having the highest autonomy and the local
implementer type the lowest. When the industrial environment covariates were
added the difference fell to just below the p = .05 significance level. This is
an interesting result. First, it provides evidence that local implementer
subsidiaries conform more to the hierarchy-like model of bureaucratic control
than the world mandate type. Second, it suggests that a large part of the
difference is more the result of the different environments the subsidiaries
find themselves in than a result of the roles per se.
The third set of measures used to assess control
mechanisms was focused on the issue of normative integration. Two questions
asked subsidiary managers the extent to which 'managers share a common
mission/set of goals' and the extent to which 'managers share a common
organizational culture'. Table 3 reports the results of the ANOVAs. The results
indicate essentially no difference in reported values across subsidiary types,
though if anything local implementers reported higher levels of common
organizational culture (significant at p < 0.10). This highlights a concern
noted earlier, which is that all subsidiaries of large MNCs are likely to
exhibit significant levels of normative integration. Aside from the social
desirability concerns, organizational culture is -- like beauty -- in the eye of
the beholder. It may also be that cultural or normative integration cannot even
be approximated using perceptual measures of this variety, just because it is so
How -- if at all -- are the lateral linkages between the subsidiary and its
corporate affiliates perceived to vary across subsidiary roles?
Respondents were asked three questions relating to
product flows within the corporation, as indicated in Table 4. ANOVAs were
performed on each question, using subsidiary role as the independent variable.
This analysis yielded some very interesting findings. First, only 18% of world
mandate subsidiaries' production was common to the parent, whereas 69% was
common for local implementers and specialized contributors. The difference was
significant (p < .05). Second, subsidiary purchases from other entities
within the corporation yielded a similar finding, namely that world mandate
subsidiaries purchased significantly less from corporate affiliates than the
other two subsidiary types. Sales to internal affiliates were low in all cases
What this analysis suggests is that the world mandate
subsidiary is more freestanding than its local implementer or strategic
contributor counterparts. It does not rely on lateral product flows to anything
like the same extent, preferring instead to source its raw materials and sell
its products externally. The specialized contributor, as one would predict, is
well integrated into the corporate network, both laterally and vertically;
surprisingly, though, so is the local implementer. It seems that the 'miniature
replica' form of local implementer that serves just its own national market is
not very much in evidence in this sample. This is, in part, a function of the
sample which was restricted to global industries.
This data sheds some light on the nature of dependence
exhibited in the three subsidiary types. Clearly there is interdependence
[Thompson 1967] between these subsidiaries and their corporate affiliates,
because there are purchases from and sales to other entities. However, for
specialized contributors and local implementers the volume of purchases from
other entities far exceed the volume of sales to other entities. When combined
with the data on products that are also produced by the parent, the reality is
that both these types exhibit a relatively high level of one-way dependence (on
the parent). The world mandate subsidiary, in contrast, is relatively
A second aspect of the lateral linkages question was
addressed by looking at the configuration of different value-chain activities.
Respondents were asked, for each of seven value-chain elements, to state whether
the activity was performed in a single-country or multiple-country locations.
Obviously the 'multiple locations' answer indicated the existence of lateral
linkages between the focal subsidiary and the other countries in question. Table
5 provides the results of the ANOVAs, and Figure 2 is a graphical representation
of the data.
There are three interesting findings here. First, there
was no difference in configuration across subsidiary types for purchasing or
R&D. Second, there was a significantly greater level of international
configuration in specialized contributors than in local implementers for product
manufacturing. World mandate subsidiaries were intermediate. Third, there was a
significantly lower level of international configuration in local implementers
for all downstream elements (distribution, sales, service, advertising). These
results are in keeping with prior expectations, namely that the specialized
contributor and world mandate subsidiary types have important cross-border
linkages, particularly in downstream activities. When considered in conjunction
with the data on product flows, however, the implication is that world mandate
subsidiaries may have overseas linkages but they are not closely intertwined
with the activities of sister affiliates in those countries. In specialized
contributors, by contrast, there are both high internal product flows and
internationally configured value chains, suggesting a high level of integration
into the MNC network.
To what extent are specialized capabilities perceived to vary across
Respondents were asked to assess their subsidiaries'
relative capabilities for four activities, R&D, manufacturing, sales, and
service. However, no significant differences in any of these variables were
discerned across the three subsidiary roles. Why were no differences in
capabilities found? Several possibilities come to mind. First, there is a high
level of social desirability in having high capabilities, so self-report data
may be inappropriate here. Second, the questions were generic. All subsidiaries
claim to have high manufacturing flexibility, but that flexibility may be
specific to a certain product type. Specialization may actually occur at the
individual product or individual person level, rather than the subsidiary.
Third, it is quite reasonable to believe that all subsidiaries really do have
high levels of capability in all value-chain activities. Subsidiaries face
competition from within the company (from affiliates) and from outside (local
and global competitors) that will quickly highlight substandard activities. With
the possible exception of local implementer subsidiaries in which everything is
still configured locally, the need for world-class capabilities is very high.
How -- if at all-- do perceptions of performance vary across subsidiary
Table 6 provides data on the variation in three measures
of performance across subsidiary roles. One very interesting result surfaces,
namely that specialized contributors perform significantly worse than the other
two types, in terms of ROI and profit. A priori one would not expect any
significant differences across types, so this result begs an explanation. The
most likely possibility is that specialized contributors, as the results above
have shown, tend to be very well integrated with the rest of the MNC network.
For that reason, they may function more as cost centres than profit centres, so
profit or ROI would not be the objective. They may also be more susceptible to
transfer pricing issues which make it hard to gauge the true underlying
performance. The fact that the productivity measure does not differ
significantly across subsidiary types adds some weight to this suggestion.
Strategy-Structure Fit and Performance
In keeping with the configurational approach, the
existence of mutually supportive elements of environment, strategy and structure
should lead, ceteris paribus, to a superior performance. In other words, once a
set of configurations has been identified, the closer the subsidiary comes to
matching that ideal profile, the better it will perform. Unfortunately, the
quality of the findings from the foregoing analysis precluded the identification
of a meaningful ideal profile. It would certainly be premature to attempt an
analysis of fit without the precondition (i.e., a clear set of configurations)
in place. Consequently, no additional performance analysis was conducted. IMPLICATIONS
Figure 3 summarizes the results of the data analysis in
terms of the organizing framework presented in the introduction. Facets of
structural context and performance are reported where they are significantly
different across subsidiary roles at p<.05. Note that the depiction of "need
for responsiveness" as the only significant environmental influence is simply a
reflection of the variables we elected to measure. In reality there may be a
number of other environmental influences, including aspects of the corporate
strategy, that also have a significant impact on the subsidiary
The most interesting findings are concerned with the
lateral relationships between subsidiaries and their affiliates. World mandate
subsidiaries appear to be highly autonomous in terms of product flows but
configured internationally; specialized contributors are integrated in terms of
both product flows and configuration of value-adding activities; and local
implementers are integrated in terms of product flows but configured
domestically. In terms of parent-subsidiary relationships, the most interesting
finding is that strategic autonomy (a negative indicator of bureaucratic
control) is highest in world mandate subsidiaries and lowest in local
implementer subsidiaries. From a theoretical perspective, these findings offer
some support for a configurational approach to the study of subsidiary
management, because significant differences were identified. However, the lack
of significant findings in some other areas (e.g., normative integration)
suggests that we have some way to go before a meaningful profile of structural
context variables can be assembled.
The findings for world mandate subsidiaries are
especially interesting. The data on product flows showed that on average 18% of
world mandate subsidiaries' purchases are from other entities in the
corporation, and 11% of their sales are to those entities. These numbers
indicate a much higher level of independence from the MNC than would be
expected. Unfortunately the data were restricted to product flows: an
interesting related issue would be the extent to which the managerial and
supporting activities are coordinated with the corporate (i.e., head-office)
operations, because it seems likely that major strategic decisions, relating to
"global chess" [Prahalad & Hamel 1985] for example, would not be delegated
to the subsidiary even if routine decisions were delegated. Another explanation
for this finding is the presence of some cases of holding company arrangements,
whereby the subsidiary really does operate as an independent entity.
So what does this mean for hierarchy and heterarchy? The
two idealized models were used to define three dimensions of structural context
at the subsidiary level: ( 1)
In terms of subsidiary-parent relationships the world mandate was most
heterarchy-like by virtue of its higher level of strategic autonomy; ( 2)
In terms of lateral relationships, the specialized contributor was most
heterarchy-like, the other two types both displaying significantly greater
independence, either in product flows or value-chain configuration; ( 3)
Finally, in terms of subsidiary specialization, all of the subsidiary types were
hierarchy-like to the extent that they exhibited similar levels of capabilities.
Of equal importance, the results also provide some
insights into the higher-level conceptualizations of heterarchy and hierarchy.
First, it is clear that the three subsidiary roles, and even variants within
them, are very much in evidence. This study was unable to shed any light on the
differentiation of roles within a single MNC, but this has been done (e.g.,
Ghoshal & Nohria ) and is consistent with the results of this study.
To the extent that heterarchy is distinguished by asymmetry in reporting
relationships and multiple types of roles, its validity as an (idealized) model
of reality is confirmed. Second, the extent of lateral linkages observed for all
types of subsidiaries is indicative of the multidimensionality and
inter-affiliate interdependencies that heterarchy would predict. Thus, our
conclusion is that heterarchy as a unifying concept is very valuable in helping
to understand the MNC, but that its application at the subsidiary level is less
appropriate. As an analytical device for identifying characteristics of
structural context, the heterarchy-hierarchy dichotomy proved useful, but that
is as far as it can usefully be taken.
This study had a number of limitations that should be
discussed. First, there were certain facets of the structural context of the
subsidiary for which poor measures, or no measures at all were available.
Dimensions of coordination (i.e., by product, by function, by geography) and
formalization (as a control mechanism) could usefully have been measured, and
normative integration could have been much more effectively measured. Second,
the use of perceptual measures has certain drawbacks. The measures of subsidiary
capabilities and normative integration, for example, suffered from social
desirability biases and it is questionable whether they tapped into the real
phenomena. There is a strong argument, in fact, for getting head office ratings
of characteristics like relative capabilities, because head office managers are
likely to have a better understanding of the differences across subsidiaries. A
related issue is the possibility of common method bias from a single-respondent
questionnaire. Future research in this area should attempt to triangulate
measures where possible, e.g., by using multiple respondents, and a mixture of
perceptual and objective questions. Finally, the study could usefully have
included multiple subsidiaries from the same MNCs, to shed some light on the
different role types that exist within a single company. The current study
pooled data from ten global industries which enhanced the generalizability of
the findings[ 4]
but reduced the precision with which they could be interpreted.
One further issue that this study touches on is the
rather delicate question, What is a subsidiary? For the purposes of this
research the subsidiary was a legally distinct national entity, but casual
observation of what goes on in multinational corporations makes it clear that
the 'national subsidiary' is sometimes no more than a legal shell within which a
variety of value-adding operations, all with different reporting lines, happen
to reside. This is entirely consistent with Hedlund's Heterarchy but is less
easily reconciled with the notion of a subsidiary role. Put simply, a single
subsidiary is likely to have multiple roles, so the questionnaire data reported
here tapped into the aggregate role, rather than the multitude of subordinate
roles. The implications for future research are obvious: Research needs to focus
below the subsidiary level, preferably at a single value-adding function such as
a manufacturing operation or a product management group. At this lower level of
aggregation it may be possible to build up a well-defined set of configurations.
The first version of this paper was presented at the
Academy of International Business annual meeting, Maui, 1993. We would like to
thank Andrew Inkpen and three anonymous reviewers for comments on earlier
versions of this paper.
Received: January 1994; Revised: October 1994, February
& March 1995; Accepted: March 1995. NOTES
The Heterarchy label is used to suggest an alternative to hierarchy. Clearly
Hedlund's  conceptualization is not unique in this formulation, as the
literature review indicates. Other labels such as 'network' or 'horizontal'
would have been equally appropriate.
'Need for integration' consisted of three measures, 'business activities are
susceptible to scale economies,' 'international competition is intense' and
'competitors exist in all key markets' (Cronbach's alpha = .65). 'Need for
responsiveness' consisted of four measures, 'customer needs are standardized
worldwide,' competitors market a standard product worldwide,' and 'new product
introductions tend to occur in all major international markets simultaneously'
(Cronbach's alpha = .64). The ANOVA results are as follows: 'Need for
integration': local implementer, 5.40; specialized contributor, 5.88; world
mandate, 5.50; no significant differences. 'Need for responsiveness: local
implementer, 4.07; specialized contributor, 3.42; world mandate, 3.36; local
implementer significantly different from other two, p <.05.
It should be repeated that the sample was drawn exclusively from global
industries. This goes some way towards explaining the overriding use of
'vertical' control systems ahead of normative integration.
Generalizability was only achieved for global industries, of course. The results
do not shed any light on the nature of subsidiaries in industries that operate
in a multidomestic mode.
Subsidiary Strategy Typologies
Local Specialized World
Implementer Contributor Mandate
White & Poynter Miniature Replica Rationalized Global
 Manufacturer, Mandate
D'Cruz  Branch Plant Globally World
Bartlett & Ghoshal Implementer Contributor Strategic
Jarillo & Martinez Autonomous Receptive Active
Gupta & Local Innovator, Global innovator Integrated
Govindarajan  Implementor Player
Roth & Morrison Integrated Global
 Subsidiary Mandate
Strategic and Operational Autonomy by Strategy Type
Legend for Chart:
A - Local Implementer
B - Specialized Contributor
C - World Mandate
D - Pairs significantly different at p < .05 (ANOVA)
A B C D
Strategic autonomy 1.80 1.69 1.53 (LI,WM)
Operational autonomy 1.30 1.35 1.30 None
Note: ANOVA was also done with 'need for integration'
and 'need for responsiveness' as covariates. In this case, the null hypothesis
was rejected at p < 0.10.
Absolute values: 1 = decision made in subsidiary, 2 --
decision made at 'subcorporate' or divisional level, 3 = decision made at head
Aspects of Normative Integration by Strategy Type
Legend for Chart:
A - Local Implementer
B - Specialized Contributor
C - World Mandate
D - Pairs significantly different at p < 0.05 (AN OVA)
A B C D
"Managers share a 5.56 5.79 5.50 None
set of goals"
"Subsidiary managers 5.06 4.93 4.30 None
share a common
Absolute values: 1 = not characteristic, 7 = extremely
Interdependencies by Strategy Type
Legend for Chart:
A - Local Implementer
B - Specialized Contributor
C - World Mandate
D - Pairs significantly different at p < 0.05 (ANOVA)
A B C D
"% products also
produced by parent" 69.2% 69.1% 18.0% (LI, SC) (SC, WM)
"% Sub's sales made
to entities within
the corporation" 14.6% 12.0% 10.7% None (all covariates
"% Sub's purchases
from entities within
the corporation" 52.8% 41.6% 18.0% (LI, WM) (SC, WM)
Absolute values are self-explanatory.
Value-Chain Element Configuration by Strategy Type
Legend for Chart:
A - Local Implementer
B - Specialized Contributor
C - World Mandate
D - Pairs significantly different at p < 0.05 (ANOVA)
A B C D
Raw materials procurement 2.52 2.62 2.40 None
Research & development 2.30 2.40 2.30 None
Manufacturing operations 2.24 2.66 2.38 (LI,SC)
Product distribution 2.27 2.62 2.67 (LI, SC) (LI, WM)
Promotion and advertising 2.24 2.52 2.62 (LI, SC) (LI, WM)
Sales activities 2.31 2.67 2.76 (LI, SC) (LI, WM)
Customer service 2.18 2.62 2.64 (LI, SC) (LI, WM)
Absolute values: 1 = activity not performed by
subsidiary, 2 = performed in single country, 3 = performed in multiple country
Subsidiary Performance by Strategy Type
Legend for Chart:
A - Local Implementer
B - Specialized Contributor
C - World Mandate
D -Pairs significantly different at p < .05 (ANOVA)
A B C D
Return on Investment 4.72 3.65 4.68 (LI, SC) (SC, WU)
Productivity 4.78 4.54 4.95 None
Profit 4.47 3.85 4.83 (SC, WM)
Absolute values: 1 = significantly worse than parent, 7
= significantly better than parent
CHART: FIGURE 1: Organizing Framework
GRAPH: FIGURE 2: Graphical Representation of Differences
in Value-Chain Configurations across Subsidiary Type
CHART: FIGURE 3: Summary of Findings Superimposed on
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By Julian M. Birkinshaw and Allen J. Morrison
Julian M. Birkinshaw is Assistant Professor of
International Business at the Stockholm School of Economics, Stockholm, Sweden
Allen J. Morrison is Associate Professor at the American
Graduate School of International Management (Thunderbird), Glendale, Arizona.
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