Espacios. Vol. 33 (1) 2012. Pág. 4
Impact of Product Development on Subsidiary Strategy: a case in the Brazilian automotive sector
Impacto de desarrollo de productos bajo estrategia subsidiaria: un caso en el sector automotriz brasileño
Recibido: 27-03-2011 - Aprobado: 20-10-2011
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During more than 50 years in Brazil, and currently in many other emerging countries, the role of MNC subsidiaries in the automotive business has been to participate in the international product life-cycle (Vernon, 1966) as manufacturers of products of standardised or mature technology. This implies a technological gap between products being produced by headquarters and products produced by the subsidiary, which therefore does not require innovation capability and also relies on less expensive labour and standardised structures of reproduction in order to achieve basic factor advantages (Porter, 1986) and to compete internationally based on lower prices.
During the international product life-cycle, value-chain functions performed at the subsidiary level were basically limited to production and sales. The presence of an engineering function gradually became necessary for the automotive industry due to a necessity to adapt global projects to local environments, referring specifically to the “operational scenario” expression used by practitioners to denote poor infrastructure (i.e., roads and streets) in developing countries. The adaptations, and the engineering teams required, became important issues as the local market gained importance. When local production directs exports only to the “home” country, adaptation is not needed. For instance, most Mexican VW production is meant for the US market, and therefore does not require local adaptations. However, VW cars for local Mexican use are imported from Brazil, where models are projected (or adapted from global projects) to operate in tougher conditions.
The increasing importance of emerging markets forced the automotive industry to face the globalisation versus localisation dilemma (BARTLETT, 1986). In the 1970s and mid-1980s, the “global car” was the leading concept in the industry. However, the 1990s brought its failure. Localisation factors required adaptations, and the global car concept required a global platform with multiple regional projects which were adapted to local market conditions, operational scenarios, and regulations. Soon, automakers realised that facing all adaptations centrally in headquarters or in a few traditional PD Centres was impossible, so decentralisation of PD was necessary (DIAS; SALERNO, 2004).
Product development at the subsidiary level, combined with the new context in the global automotive industry and the Brazilian market, supports the role of engineering in subsidiaries and impacts the subsidiary’s role in the MNC’s global strategy.
The purpose of this paper is to identify the impact of PD in the subsidiary on the subsidiary strategy (or role), and analyse this impact on subsidiary.
The study was conducted using in-depth interviews. Researchers began with open questions about the research subject, and subsequent questions were asked on site according to interviewee answers by elaborating on relevant topics. The interviews were recorded, transcribed, and analysed according to Grounded Theory techniques (GLASERAND STRAUSS, 1967; STRAUSSAND CORBIN, 1998). Data, in the form of interview transcripts and transcriptions of recorded speeches, newspaper articles, and other sources, went through three codification steps. The first step, or open coding, consisted of labelling (or conceptualising) the facts of the text in order to identify the interviewee’s intent (or speaker’s, etc.) in the speech. The second step, or axial coding, consisted of grouping concepts around the “axis” of categories, characterising these categories in terms of properties, dimensions, and types. The third step, or selective coding, consisted of closing the analysis, selecting the main category, and establishing the relationship with other categories. Analysis was partially supported by Atlas-ti© qualitative data analysis software.
Our research focused on two automakers that had developed products in Brazilian subsidiaries: General Motors do Brasil (GMB) and Volkswagen do Brasil (VWB). Primary data was obtained through eleven interviews between January and December 2007 with executives involved in PD from the two automakers in the areas of Planning, Marketing, Design, Procurement, and Engineering. In addition to interviews, data was generated by promoting speeches of executives at our universities and recording speeches of automaker executives at events promoted by the Brazilian branch of the Society of Automotive Engineering (SAE). Secondary data included reports to investors from both companies and from newspaper news collected by the authors. The two cases were analysed separately according to the process described above, and then consolidated.
In the mid-1980s, Porter (1986) defined international competition as a continuum of industry types that varied from multi-domestic to global.
A multi-domestic industry is one in which, regardless of how companies are present in various countries, competition occurs inside national boundaries. An industry internationalised in this way is a collection of local industries with specific competitive patterns. This type of industry would embrace, for instance, consumer packaged goods, distribution, insurance, retail financing services, and others.
At the other extreme, global industries are characterised by mutual influence in competitive positions: position of a given company in one country is “significantly affected” by the position of the company in other countries. An industry internationalised in this way is not a collection of local industries, but a network of connected national industries where competitors compete on a global basis. Porter lists, as examples, global aviation, televisions, semiconductors, copy machines, watches, and automobiles.
Bartlett and Ghoshal (1987a) advanced a different taxonomy. According to these authors, firms had to respond to two different sources of pressure: globalisation forces, pressing scale and standardisation, and localisation forces, pressing local adaptations. During the entire 1970s and mid-1980s, industries emphasising globalisation were called global industries, in which companies should seek efficiency and global scales. Industries with emphasising localisation were called multinational industries, and companies in this environment should look for cultural adaptation in local environments. A third type of industry, international, would push companies to learn internationally in order to pace with technology and competition, behaving similar what Vernon (1966) described as international life-cycle management.
Bartlett and Ghoshal observed a change in the global competition and stated that companies should accomplish all three strategies, converging to a transnational solution. This model was empirically verified by Leong and Tan (1993).
Jarillo and Martinez (1990) deduce subsidiary strategies from models advanced by Bartlett (1986) and Bartlett and Ghoshal (1987a). The Spanish authors define two dimensions, 1) geographical localisation of value-chain activities and 2) the degree to which these activities are related to and integrated with the same activities in other countries and in headquarters. The first dimension is high if activities are performed in the focused subsidiary. The second dimension is high if the subsidiary depends on other units to perform the activity. The two dimensions are independent, and therefore, the subsidiary can score three positions in the framework (high-low, low-high, high-high; low-low is of no interest).
Thus, high localisation and low integration characterise the Autonomous Subsidiary. It will perform most value-chain activities in isolation from other units. This situation corresponds to a multi-domestic strategy at the corporate level. Low localisation and high integration characterise the Receptive Subsidiary. It conducts few value-chain activities (typically marketing and sales and sometimes manufacturing), and even these activities are performed in strict coordination with parent company, according to global standardisation. This strategy corresponds to a global strategy at the corporate level. The Active Subsidiary has high integration and high localisation. These subsidiaries perform a large number of value-chain activities in close cooperation with other units. This is aligned with a transnational strategy at the corporate level.
Jarillo and Martinez (1990) test this model on a Spanish sample of subsidiaries, evaluating eleven variables. Through factorial analysis, they produce three groups in the localisation versus integration matrix, validating their construct.
Bartlett and Ghoshal (1986) discuss subsidiary specialisation related to technological expertise and the local market and define two parameters: Competence of local organisation (high vs. low) and Strategic importance of local environment (high vs. low). With respect to these two variables, they identified four types of subsidiary roles: 1) Strategic Leader (high/high), corresponding to a highly competent subsidiary in a key country for the company who performs a role of headquarters partnership; 2) Contributor (high/low), corresponding to a subsidiary of high technological competence located in a modest market; 3) Implementer (low/low), which only has the necessary resources to remain in a non-critical market which generates cash flow for the company. The fourth position (low/high) was referred to as a “Black Hole”, and corresponds to an unacceptable position of having a subsidiary that is unprepared to act in an important market; thus, companies should “not . . . manage it but . . . manage one’s way out of it” (Bartlett and Ghoshal, 1986:91). The model is presented with qualitative discussion and illustrated by actual examples, with no concern for empirical testing. Additionally, this model does not communicate with the main variables of International Management, such as Integration and Responsiveness, and therefore there is difficulty in comparing it with other models in the field.
Nevertheless, Birkinshaw and Morrison (1995) advance a consolidated taxonomy from Jarillo and Martinez (1990), Bartlett and Ghoshal (1986), and four other models. The construct is a theoretical idealisation from the literature review, and does not have parameters to compose a framework. Birkinshaw and Morrison mix the “triads” commonly found in the literature as subsidiary types: Jarillo and Martinez’s (1990) Autonomous, Receptive, and Active Subsidiaries, Bartlett and Ghoshal’s (1986) Implementer, Contributor, and Strategic Leader, and other classifications. Birkinshaw and Morrison’s (1995) types are Local Implementer, Specialised Contributor and World Mandate, respectively.
The local implementer type of subsidiary has a restricted geographical scope, mainly to the host country, and also a restricted number of activities in the company’s value-chain. The other activities are globally performed (for instance, only marketing and sales, or marketing, sales, and manufacturing).
The specialised contributor type of subsidiary has important competences for the value-chain in at least one function and operates closely integrated and coordinated with other activities of the international group.
The world mandate type of subsidiary is a headquarters partner in implementing the company’s global strategy. It may have a global or regional responsibility for a product for an entire business, with no geographic limitations and with a broad value-adding scope (several or all value-chain activities). Birkinshaw and Morrison (1995) test this model on a sample of 126 subsidiaries in six countries. Not all tested characteristics were significantly discriminated throughout the three types, but consistent characteristics are shown in Table 1.
Table 1 – Abstract of Birkinshaw and Morrison’s 1995 results.
Concerning the Strategy/Role discussion, Birkinshaw and Morrison (1995) contend that although “Strategy” and “Role” have been used synonymously in the literature, “role” suggests passive activities and functions set by headquarters, while “strategy” suggests a greater deal of autonomy in subsidiary activities (Birkinshaw and Morrison, 1995:733). Birkinshaw later localises these different views in terms of streams in the subsidiary literature (Birkinshaw, 2001).
The classifications mentioned above consider a static position occupied by the subsidiary. But how does it evolve? Subsidiaries evolve either to a better condition in terms of role and capabilities (development), or to a worse condition (depletion). Birkinshaw and Hood (1998) advance a model of subsidiary evolution crossing charter changes with capabilities change. “Charter” is the set of functions the subsidiary performs with headquarters recognition. Assuming that the charter and a given amount of capabilities correspond, the change in charter position implies the same movement in capabilities. The important proposition of the authors (of our study) was the establishment of different paths of evolution. The subsidiary may change capability and then the recognition and the new charter assignment change (SDE – Subsidiary-driven charter extension). Or, the charter assignment may come first and then build capabilities to face their new responsibilities (PDI – Parent-driven investment). This may happen for depletion (atrophy by subsidiary neglect or parent-driven divestment). However, capabilities may be reinforced to assure charter maintenance (SDR – Subsidiary-driven charter reinforcement).
Frost, Birkinshaw, and Ensign (2002) are also concerned with the evolution of subsidiaries into Centres of Excellence (CE). In a study of Canadian MNC subsidiaries, these authors define CE as “an organisational unit that embodies a set of capabilities that has been explicitly recognised by the firm as an important source of value creation, with the intention that these capabilities be leveraged by and/or disseminated to other parts of the firm” (FROST; BIRKINSHAW; ENSIGN 2002:997). They then present a conceptual model, according to which competence-building is function of external elements, such as local Porter diamond forces and links with external sources of competences, internal elements, such as the relationship with other units, subsidiary autonomy and performance (the later measured in terms of profitability, competitiveness, innovation, learning, and knowledge transfer), and the parent company’s investment. Additionally, the Centre of Excellence concept is useful in addressing issues concerning taking subsidiaries as units of analysis, for instance, when one functional area receives a global or regional mandate while other areas remain headquarters-dependent. On the other hand, the concept introduces other issues because it is not necessarily attached to a physical unit, but is shared by a group that is spread across in the MNC.
In Brazil, Oliveira Junior, Borini, and Guevara (2005) carried out a study on 114 Brazilian subsidiaries of foreign MNCs, analysing the Brazilian environment and its impact on those subsidiaries. They conclude that 57% of the subsidiaries from their sample do not hold international responsibilities. Nevertheless, of the remaining 43%, 53% declare that they had obtained that responsibility through their own initiative. International responsibility, however, is still restricted to low value-added activities, particularly sales and manufacturing. Despite this, as will be shown, subsidiaries with international responsibility control a larger share of the value-chain and perform more activities linked to knowledge and innovation when compared to subsidiaries with no international responsibility. The activities performed by these subsidiaries are shown in Table 2. Note the difference in R&D figures between subsidiaries with and without international responsibility.
Table 2 – Activities performed by foreign subsidiaries in Brazil.
Vol. 33 (1) 2012