Evaluation of the integration-responsiveness framework: MNC manufacturing subsidiaries in the UK.
* This study is an evaluation of the integration-responsiveness framework at subsidiary level using data from a sample of 171 manufacturing subsidiaries of foreign MNCs in the UK. In particular, it seeks to review the three-way taxonomy evolved by Jarillo and Martinez (1990) in a study of manufacturing subsidiaries in Spain.
* A four-group taxonomy emerges from the analysis., including a low integration/low responsiveness classification. not described by Jarillo and Martinez. A number of structural and operational variables are analysed across the four groups of affiliates, suggesting that the proposed taxonomy is well defined and internally consistent.
The integration-responsiveness paradigm has proven to be a robust framework both for describing and analysing the strategies of international firms at corporate and subsidiary level. It owes its development to Prahalad (1975) and Doz (1976) individually, and jointly (1987). It has become one of the most dominant of international strategy models, and has been subject to vigorous empirical evaluation by, among others, Jarillo and Martinez (1990), Roth and Morrison (1990) and Johnson (1995). The framework visualises strategy as being evolved in two dimensions: integration of activities is the international firm's response to pressures to reduce overall costs and maximise return through exploiting the markets imperfections inherent in the multilocation aspect of the operations; market and regulatory forces in its many locations requires the firm to attenuate the rigours of standardisation and/or co-ordination as necessary, and thus become more locally responsive. By adjusting its position along these two dimensions as environmental factors change, the international firm attempts to create and sustain competitive advantage.
The purpose of this study is to carry out a critical assessment of the integration-responsiveness framework which has a role in classifying alternative international strategies and is also a means of allowing multinational corporations (MNCs) to adjust their positioning along the two dimensions as a means of competing effectively with other international players. In particular, this paper will carry out an evaluation and extension of the derived model of Jarillo and Martinez (1990) as it applies particularly to MNC manufacturing subsidiaries. To this end, the study uses a database developed from a sample of MNC affiliates in the UK. In terms of Roth and Morrison's (1990) methodological classification, this is a "medium-grained" analysis as opposed to the "finegrained" case study approach or the "course-grained" use of extremely large databases like COMPUSTAT or PIMS. This methodological approach is adopted with a view to comparisons with other similar studies, to make this study generalisable and replicable, and to attempt to develop the methodology in some particular respects.
With due respect to the rational, linear view of strategy (see, for example, Chaffe 1985) and synoptic models (Frederickson 1983), the search for an appropriate international strategy is likely to be more fluid, though it is unlikely to resemble closely the "emergent" concept of Mintzberg and Waters (1985) or the parallel notion of Quinn (1980). Contingency theory (Hofer/Schendel 1978, Ginsberg/Venkatraman 1985) tells us that "there is no one best way", and the constant quest of MNC managers to fit strategy to situation underlies a number of theoretical approaches. It drives Porter's (1986) configuration/co-ordination paradigm, it is characteristic of White and Poynter's (1984) model of subsidiary strategy, it relates to Bartlett and Ghoshal's (1989) multinational-global-international-transnational typology, and it informs the concept of the international hierarchic firm developed by Hedlund (1986) and Hedlund and Rolander (1990). It has strong links, too, with the integration-responsiveness grid which attempts to capture the international manager's constant search for the optimal balance of economies of scale and economies of scope.
The Integration-Responsiveness Framework
The building blocks of the Prahaland and Doz (1987) model -- through which they claim to offer a managerially meaningful method of capturing the key characteristics of MNC activity -- are global integration of activities, global strategic coordination, and local responsiveness. Hedlund (1981) was among the first to recognise the key role of integration, particularly when related to the degree of subsidiary autonomy. Integration plays a key part in international marketing (Hitt/Ireland 1987), especially in managing customer relationships, segmentation and physical product design (Takeuchi/Porter 1986). Ghoshal and Bartlett (1988) found a positive relationship between innovative capability and normative integration of parent and subsidiary. For Kobrin (1991), integration is operationalised as flows of resources between parent and subsidiaries and between the subsidiaries themselves. Martinez and Jarillo (1991) explored the relationship between integration and differentiation, and concluded that level of integration is correlated with the degree of co-ordinative activity within the MNC. In a recent study of German subsidiaries, Welge (1994) identified integration as the task-oriented resultant of co-ordination and conflict resolution; this linkage is made from the perspective of organisation theory, yet offers an interesting insight in the context of this paper.
While Leontiades (1986) correctly identified co-ordination of global resources as essential to successful MNC strategy, the first rigorous analysis was that of Porter (1986). He defined co-ordination in terms of the linkages between similar activities in different countries and/or different parts of the MNC's international network. He recognised that it allows for accumulation and sharing of knowledge across the network, it helps the MNC to gain international economies of scale, and also allows it to shift comparative advantage between countries where it is located. The concept is also recognised in specific international functions: manufacturing (Agthe 1990), marketing (Kashani 1990), and R & D (Dorrenbacher/Wortman 1991). Further, co-ordination is manifest in the pressure for consistency within the MNC (Rosenzweig/Singh 1991) and are a resultant of a tangible system of procedural justice between parent and subsidiary (Kim/Mauborgne 1991). Finally, as noted above, Martinez and Jarillo (1991) identified a relationship between integration and co-ordination, a finding that was confirmed en passant by Roth and Morrison (1992).
Bartlett (1981) emphasised the importance of national responsiveness in a situation of rapid international growth, and this has been confirmed time and again in the literature (e.g. White and Poynter 1984, Agathe 1990, Taylor 1991). According to Leontiades (1986), local responsiveness may be so well developed that it entirely differentiates subsidiary strategy from that of the parent. Bartlett and Ghoshal (1986) make much the same point, but with a different emphasis; in certain cases, corporate survival may depend on proactive development of such differentiating local responsiveness in international R & D, especially in an industry like pharmaceuticals where product specifications vary widely by country. Finally, Egelhoff (1988) identifies the key role of responsiveness from the perspective of organisational theory, and it has been specifically described as "pressure for isomorphism within the local environment" (Rosenzweig/Singh 1991).
Prahalad and Doz (1987) identify quite clear pressures for integration and local responsiveness, but have more difficulty with the need for co- ordination. They suggest a close link between integration and co-ordination, but recognise that locally responsive subsidiaries will also require a significant degree of co-ordination. However, without further discussion, they proceed to the working assumption that co-ordination is much more closely related to the need for integration, and these two broad variables are then combined as one dimension of the model, with local responsiveness being the other. This assumption has subsequently been justified by empirical studies.
The overall framework has also been subjected to supportive empirical testing, notably by Roth and Morrison (1990), and by Johnson (1995) who concentrated on a single industry. Both confirmed Prahaland and Doz' original prescription by identifying three clusters of strategy outcomes on the diagonal (see Figure 1) marking the high integration-low responsiveness to low integration-high responsiveness continuum.
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Integration-Responsiveness at Subsidiary Level
The framework was adapted slightly by Jarillo and Martinez (1990) for an empirical study of 50 Spanish subsidiaries of manufacturing MNCs. This model also has integration as the vertical dimension, but replaces responsiveness with localisation; the latter is, however, operationalised by six responsiveness-type variables. While accepting that subsidiaries could, in theory, be located in all four quadrants of their model, the authors posit only three classifications in the strategy space: active subsidiaries are highly integrated and highly responsive, autonomous subsidiaries are highly responsive but have low integration, while receptive subsidiaries have low responsiveness but are highly integrated (see Figure 2). Analysis of the sample did, in fact, identify three clusters of firms that correspond broadly to the proposed roles so, as well as confirming the diagonal strategy space hypothesised by Prahalad and Doz, the top right corner of the model was identified by an additional classification.
More recently, a study of 102 German manufacturing subsidiaries located in the British Isles supported the view that integration is a key strategy dimension at this level of the MNC, and identified two mutually orthogonal dimensions (Taggart/Hood 1995). These are decision-making autonomy of the subsidiary and market scope. While it may be argued that these two parameters could be closely linked to local responsiveness, it must be remembered that they are, in fact, mutually orthogonal and would therefore not resolve on to one resultant dimension, whether it be local responsiveness or otherwise. Further evidence comes from a study (Taggart 1996b) for 123 multinational manufacturing subsidiaries located in Scotland in which the key determinants were found to be market scope, coordination and integration; decision- making autonomy and local supply linkages were also identified as important.
From the discussion above and an examination of Figure 2, it is immediately obvious that an unexplained gap occurs in the strategy space, corresponding to low integration and low responsiveness; nor is there any explanation or discussion of this gap in any of the papers cited above. Bartlett and Ghoshal (1986) propose a role (,,implementer") for subsidiaries with a lower level of competence operating within a market that has low strategic importance for the parent corporation; it could be argued that low integration would occur in such an environment, and that low responsiveness may well be one consequence of lower subsidiary competence. Bartlett (1986) identified three corporate strategies (global, multinational, transnational) in three of the four quadrants of the integration-responsiveness framework; later, Bartlett and Ghoshal (1989) indicated a fourth variant -- the international firm -- which, by implication, lies in the fourth quadrant (low integration, low responsiveness)), though they do not say so specifically. Instead, they indicate that subsidiaries of international firms "exploit parent company knowledge and capabilities through worldwide diffusion and adaptation". Despite this indirect evidence, however, the gap in the strategy space in Figure 2 has not been fully evaluated previously in distinct terms of integration and responsiveness, most particularly with respect to Jarillo and Martinez (1990) who focused specifically on strategy on subsidiary level. There seems no prima facie reason why an MNC subsidiary should not adopt a low integration-low responsiveness strategy, either pro-actively or due to negligence on the part of the parent corporation. Indeed, Bartlett (1986) suggests that MNCs in the cement industry may well proactivity locate the majority of their subsidiaries in this lower left corner as they have "little incentive to build global scale plants due to logistical barriers, and limited ability to differentiate the product or operations nationally due to the mature commodity nature of the business". However, it should be borne in mind that this research is focused on evaluating and extending the derived model of Jarillo and Martinez (1990); thus, we arrive at the first principal research question (RQ) addressed here:
RQ1: Are there subsidiaries located in the low integration -- low local responsiveness strategy space?
For the sake of identification in the following discussion this strategy role will be labelled "quiescent subsidiary".
While multivariate analytical techniques using the integration and responsiveness constructs may yield a classification of subsidiaries, it would be rash to draw conclusions on this basis alone. It has been strongly advocated in the literature that alternative variables are used to test the validity of any such derived classification; in addition, this allows a richer interpretation of the results (Harrigan 1983, Venkatraman/Grant 1986, Morrison 1990, Roth/Morrison 1992). A summary of the variables used for this purpose, together with a note of the supporting research, is given in Figure 3. Thus, the second purpose of this paper is to evaluate the underlying taxonomy in terms of these variables, and we have the second research question:
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RQ2: Does the subsidiary taxonomy derived from the integration-responsiveness framework differentiate across the alternative variables in some systematic manner?
From Jordan's listing of US and other foreign-owned manufacturing firms in the UK, a sample of 500 was drawn at random. A postal questionnaire was sent to the Chief Executive of these subsidiaries. Overall, 279 questionnaires were returned; of these, 47 were returned by the postal service marked "gone away", and 61 responses were from firms that identified themselves as being in manufacturing services rather than manufacturing. This left a total of 171 valid responses, representing an effective response rate of 43.6%. Just over half of the responses came from Chief Executives, 23% from other Directors, and 23% from other executives. Eighty-five of the respondent firms were engaged in some form of engineering, 31 in chemicals, and 58 spread over other manufacturing classifications. They key characteristics of these firms are shown in Table 1.
Table 1. Structural Characteristics of Respondent Firms Average Years Since Establishment 22.6 Total Sales (million [pounds sterling]) 197.4 Total Exports (million [pounds sterling]) 74.1 Number of Employees 990
The integration and responsiveness dimensions were operationalised by six and five variables respectively; these were drawn from Prahalad and Doz (1987) and pre-tested with a sub-sample of 22 foreign subsidiaries for reliability and validity before inclusion in the final questionnaire. The six integration variables (Table 2, variables 1-6) are fairly standard and call for little comment. The five responsiveness variables (Table 2, variables 7-11) originally used by Prahalad and Doz have not been overtly criticised by subsequent researchers, nor have they been used without modification. It may be helpful, therefore, to re-establish the line of argument in favour of using these particular variables to measure the responsiveness construct. Variable 7 concerns the heterogeneity of customers; where customer needs are clearly identified and vary little between markets, where customers have a clear perception of the value of the product, where their decision processes are well established and familiar, and where market trends are well defined, then the need for local responsiveness is low. In the case of variable 8 which concerns diffusion of competitive characteristics, pressures for responsiveness will be low when competitors are few in number and easily identified, when their strategies can be distinguished and understood, and when they can be recognised as sharing some typical characteristics. Variable 9 relates to technology, and the need for local responsiveness is likely to be low where complex manufacturing processes are used in conjunction with stable product and manufacturing technology; in this case process improvements and cost reduction are important; the need for higher responsiveness will be reflected in a rapidly evolving technology accompanied by unpredictable changes in product and process. With variable 10, relating to the economics of manufacturing, pressures for responsiveness will be reduced when plant size and capacity utilisation become the key aspects of manufacturing cost and/or where locational advantages exist, particularly in the form of factor input availability. Variable 11 is concerned with the heterogeneity of the executive group, and a high need for local responsiveness will be reflected in a variegated management team that is not constricted by a uniform corporate culture operating throughout the MNC; in this case, the executive group is much more likely to respond rapidly and positively to local market stimuli even if -- lacking the required degree of autonomy -- they have to seek the co-operation of regional or global HQ.
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For the full sample of firms, the Cronbach alpha across the variables in each dimension is 0.88 for integration and 0.84 for responsiveness; these values are indicative of measurement reliability (Roth/Morrion 1990, 1992, Johnson 1995). All eleven variables were measured on a 5-point Likert-type scale. These variables have assumed equidistant intervals and may be considered interval-scaled (Martinez/Jarillo 1991). The two sets of variables were aggregated by yield mean dimensional scores for each respondent subsidiary (Ghoshal and Bartlett 1988).
The structural variables were measured as follows: time elapsed since establishment in years, sales in pounds sterling, exports as a percentage of sales, and employees in units. The operational characteristics were measured in three ways: first, respondents were given a six-classification choice of market scope ("mainly UK" to "world-wide"); second, a six-band scale of percentages was used to measure outputs and inputs to and from other group subsidiaries, and the proportion of sales wholly manufactured by the subsidiary-, third, the nature of production operations was measured by a 5-point Likert-type scale ("assembly only" to "fully fledged manufacturing").
Analysis was carried out in two stages. First, to evaluate RQ1. cluster analysis was used to investigate and identify the underlying group structure of the sample, based on the two aggregated dimensions of integration and responsiveness. This is a common approach to strategy studies used by, among others, Dess and Davis (1984), Robinson and Pearce (1988), Roth and Morrison (1990), Martinez and Jarillo (1991) and Johnson (1995). Then an analysis of variance was conducted to assist with the interpretation of cluster characteristics, though this cannot be regarded as a test of statistical significance in the normal sense as we are testing for differences that we know must exist. In the second stage of analysis, ANOVA and a series of post hoc tests were carried out using the structural and operational variables to test for significant differences between the clusters; this was designed to evaluate RQ2. The appropriate procedure here is Duncan's multiple-range test (Roth/Morrison 1990). Contrast analysis, or planned comparisons, is an alternative (Johnson 1995) but the post hoc approach is preferred here since RQ2 is not wholly determinant; this minimises the risk of inflation of Type 1 error levels (Hair et al. 1987, p. 283).
Having predicted the existence of four distinct clusters -- contrary to received wisdom (Jarillo/Martinez 1990) -- great care is needed to avoid the self-fulfilling prophesy syndrome. Accordingly, both hierarchical and non-hierarchial methods were used. The former indicated that a four- cluster solution was appropriate; nonhierarchical clustering, with its profusion of output statistics, was used in confirmation. Solutions were developed with 2, 3, 4, 5, 6 and 7 clusters, and a evaluation made of the proportion of between-groups variance. Thus, the two-cluster solution showed that 42% of all variance was due to the between-groups element, 58% for the three- cluster solution, 70% for four-cluster, and 73.5% for five clusters; thereafter, this proportion increased very slowly. As a broad parallel to Cattell's (1966) scree test for extracting the appropriate number of factors in factor analysis, this confirmed that the four-cluster solution was appropriate(1). This solution falls almost precisely in the middle of the range n/50 to n/30 considered to be acceptable (Roth/Morrison 1990). Variable means for each of the four clusters are shown in Table 2.
Finally, the research questions are constructed on the assumption that differences between the clusters reflect differences in strategy as prescribed by the integration-responsiveness framework rather than merely indicating differences based on industry membership and/or industry perspective. The clusters were examined for this industry-specific effect and it was found that the proportion of respondents from the three broad industry groupings described earlier did not vary significantly among the four clusters (difference among k-proportions, chisquare = 9.54, df = 6, p = 0. 13). Thus we can be more confident that differences between the four clusters are strategy- related. Table 3 gives a summary of characteristics of the four clusters of subsidiaries, adding to the evidence of a positive response to RQ1.
Before moving to the next stage of analysis, it should be noted that the results so far suggest a strong positive response to RQ1. This is not at all consistent with the categorisation put forward by Jarillo and Martinez, in that there is firm evidence of a non-industry-specific cluster of 45 firms - - or 26% of the sample -- in the low integration/low responsiveness strategy space, not discussed in their model. This is an interesting finding, as Jarillo and Martinez did focus specifically on MNC manufacturing subsidiaries, albeit located in Spain.
The second stage of the analysis involved carrying out ANOVA on the set of four structural variables, in order to test whether the new framework derived above (and confirmed by the foregoing analysis) is helpful in classifying and explaining differences on these variables. A post hoc test (Duncan's multiple-range) was used, though this may be a more conservative approach than is strictly necessary. The results are shown in Table 4.
A number of conclusions follow from this table. First, autonomous subsidiaries are significantly younger than receptive; receptive subsidiaries are, on average, slightly older than active, though not significantly so. Thus we must conclude that there is little indication of a life cycle or "stages of development" effect. Second, both quiescent and autonomous subsidiaries are significantly smaller employers than active affiliates: receptive subsidiaries also have higher employment levels, but not significantly so, indicating large variances on this variable. Third, sales of quiescent subsidiaries are significantly below those of active subsidiaries, So, taking these two pieces of evidence together, size emerges as a fairly significant determinant of strategy differences. Fourth, active and receptive subsidiaries, on average, export a higher proportion of sales than autonomous and quiescent subsidiaries, but the difference is significant only in the case of receptive and quiescent. The differences between quiescent and active (p = 0.08), and between autonomous and receptive (p = 0.07) are not quite significant.
Table 3. Summary of the Characteristics of the four Groups of Subsidiaries Cluster 1: Quiescent Subsidiaries Linkages with the parent or other parts of its network are very low in this group; manufacturing, product and quality decisions are not made with a view to serving the parent's customers in other markets. Most technology development is carried out centrally; the small local effort, where it exists at all, is not shared with sister subsidiaries. HQ applies virtually no control over quality, production or stocks. Customers and their requirements are easily identified, as are the identities and strategies of competitors. Technology is stable.. products are relatively mature, and the manufacturing process is well advanced along the learning curve. Managers have broadly similar backgrounds and adopt the "company solution" rather than being stimulated by local market problems. Cluster 2: Autonomous Subsidiaries This group is characterised by low network linkages and local decision making. There may be some sharing of technology with sister subsidiaries, at a fairly low level, and central control is much reduced. Unlike the quiescent subsidiary, customer needs are much more difficult to identify, as are competitors and their strategies. Technology is still evolving and the product line is still fairly new. The executive group have different backgrounds and do not identify closely with the organisation or its corporate culture. Cluster 3: Active Subsidiaries This group is the mirror-image of the quiescent subsidiary. Firms here show a high level of integration on all six variables, especially in the fact that they are called on to service the MNC parent's customers world-wide. Local responsiveness is also high, driven especially by substantial difficulty in identifying competitors and their strategies, and by the variety of unknowns in product and process specifications. Cluster 4: Receptive Subsidiaries These firms represent the converse of the autonomous subsidiaries. Integration factors are all high, especially in relation to the centralisation of technology. Local responsiveness variables are all fairly low, though perhaps the level of manufacturing sophistication is somewhat higher than for quiescent subsidiaries.
In phase three of the analysis ANOVA was carried out across the five operational variables to assess whether the derived taxonomy would assist in classifying and explaining these strategy-dependent constructs. Again the Duncan's multiple range post hoc test was used in order to avoid inflation of Type 1 error. The results are shown in Table 5.
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This table should be interpreted in the same way as Table 4, and it also gives rise to some important conclusions. The means for market scope show the kind of variation that is presupposed by the research question, but significant differences are associated only with quiescent subsidiaries which have lower market scope than all other types. We may conclude that subsidiary strategy determines market scope to some significant extent. Mean values for the proprotion of output sent to other group subsidiaries for further processing and/or final assembly are in line with expectations from RQ2 and, for the most part, significantly so. The proportion for quiescent subsidiaries is significantly lower than all other categories; that for active subsidiaries is significantly higher than for autonomous affiliates, but not significantly so compared to receptive subsidiaries. The third operating variable is the proportion of sales manufactured by the subsidiary itself. The mean values suggest further support for RQ2, and this is borne out by the results of the Duncan multiple range test. Autonomous subsidiaries do, indeed, manufacture a significantly higher proportion of their own sales than active affiliates, as do quiescent subsidiaries. Receptive subsidiaries manufacture the highest proportion, and significantly more than active subsidiaries. The converse is true of the fourth operational variable, the proportion of material inputs that come from other group subsidiaries. The mean values show the kind of relationships expected by RQ2. Active subsidiaries have a higher proportion than receptive affiliates, but not quite significantly so (p = 0.09), and the same applies to the autonomous-quiescent and receptive-autonomous comparisons. Likewise, the mean scores for level of production technology are broadly in line with RQ2, but the Duncan tests offer only partial support. Quiescent subsidiaries do, indeed, have significantly higher average levels than autonomous and active subsidiaries, and receptive affiliates have a significantly higher level than active; otherwise the comparisons are not statistically significant.
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The analyses summarised in Tables 4 an 5 go a considerable way to supporting the model, thus giving a positive response to RQ2, as every paired combination of subsidiary types is separated by at least two of the variables. We may therefore conclude that the taxonomy derived above has a substantial measure of validity.
Confirmation of RQ1 suggests that the Jarillo and Martinez (1990) model is incomplete; in addition to their three strategy classifications, a fourth exists which has been described here as "quiescent subsidiary". Just over a quarter of the sample firms fall within this classification and it is as clearly and distinctly defined as the three other strategy types which are similar to the Jarillo and Martinez taxonomy. The typical quiescent subsidiary has been established for just over twenty years, employs around 500, has annual sales of some 60 million [pounds sterling], of which it exports just over a quarter. Only a token amount of these exports (around 1 percent of sales) goes to other group plants for further processing and/or final assembly, though about 5 percent (by value) of the plant's material inputs come from sister subsidiaries. The quiescent subsidiary manufactures 63 percent by value of its own sales, and just under 40 percent of the product line was developed or adapted locally. Market scope is very narrow, being confined to the UK with some selected countries in continental Europe. The level of production technology is high, with fully fledged manufacturing techniques being employed; R & D, however, is limited in scope and is largely confined to the adaptation of manufacturing technology. Thus, this type of affiliate bears a strong resemblance to White and Poynter's (1984) miniature replica (adopter type) and to the starter subsidiary of Taggart and Hood (1995). No mode of formation data was collected in the current research, but Taggart and Hood's starter subsidiary was somewhat less likely than other types to have been originated by acquistion, and was perhaps more likely to have recently evolved from a successful distribution and servicing unit.
The active subsidiary is, in many ways, the opposite of the quiescent type. It has some similarities with Jarillo and Martinez' classification of the same name, but is much less bound to the parent's network. In this context, it has more similarities to the product specialist of White and Poynter or the integrated branch plant of Taggart and Hood. Perhaps "constrained independent" is a more apt term here. The typical receptive subsidiary is fairly close to the rationalised manufacturer of White and Poynter and has some similarities to the emergent regional supplier of Taggart and Hood. Jarillo and Martinez' interpretation of this type is limited. but the parallels are close enough to retain the terminology. The autonomous subsidiary is, in many ways, the mirror-image of the receptive subsidiary. It has some parallels with White and Poynter's miniature replica (innovator model) and shares elements of Taggart and Hood's strategic independent and emergent regional supplier types. Again, it is close enough to Jarillo and Martinez' interpretation to retain their terminology. The new model is shown in Figure 4.
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The Quiescent Subsidiary
Having confirmed the existence of the quiescent subsidiary, a final stage was added to the research process. Five subsidiaries from the postal sample, identified as quiescents, and located close to the cluster centroid, were interviewed at length to discuss the findings above and link these findings to a number of other subsidiary characteristics. As well as checking the position with regard to integration and responsiveness, each subsidiary was also asked about the degree of decision making autonomy it had, the extent of procedural justice (Kim/Mauborgne 1991) which evaluates how the subsidiary feels it is treated by HQ in the strategic management process, and how the subsidiary perceived its operations were guided or motivated by the extent of network coordination and configuration (Porter 1986). In each case the Chief Executive, who had also completed his firm's original postal research instrument, was interviewed.
Firm 1 is German owned and was established in the UK in 1985. Its annual sales are some 18 million [pounds sterling], of which 85% is exported. It was set up to manufacture vehicle parts in a low cost European location to serve the continental vehicle assembly industry. Most decisions are made by the subsidiary after consulting with HQ; financial decisions, however, are made largely by HQ. Relationships with HQ are generally good, though there has been a noticeable improvement in the last five years paralleled by a significant increase in subsidiary performance. Network coordination is generally low, except in terms of marketing; configuration is very low indeed, and the firm delivers its output directly to final customers. In many ways, these characteristics fit well with the firm's acknowledged low level of integration; the Chief Executive is aware of the low level of responsiveness, is unhappy with it, and is committed to making substantial improvements over the next five years. He believes that making the shift to higher responsiveness will be aided by two factors: first, the existing subsidiary-oriented decision making processes; second, the subsidiary's improved bargaining power with HQ due to rapidly increasing performance.
Firm 2 is US owned, established in 1955, and manufactures industrial textiles. It was originally set up to exploit the UK market, but is now exporting nearly half of its 47 million [pounds sterling] annual sales to wider markets. Like firm I it sells directly to its customers rather than using its international network. Decision making is shared with HQ, with whom the working relationship is very good. Levels of configuration and coordination are high, and the Chief Executive sees this as the reason for low responsiveness, in that he is now producing for many of HQ's European customers, broadly to HQ's specifications. He was somewhat surprised at being characterised as a quiescent subsidiary, but reconfirmed the original assessment of integration and responsiveness. The former is not seen as a key issue, but in discussion the Chief Executive agreed that his subsidiary was unlikely to meet its very ambitious sales targets over the next five years without a substantial increase in responsiveness. He had no clear idea of how this might be done.
Firm 3 is also US owned, and was set up in 1988 to access the European chemicals market. Its turnover has grown quickly to some 16 million [pounds sterling], and is projected to reach 25 million [pounds sterling] within five years; around 80 percent of the output is exported directly to customers who require fairly standardised products, though specialised products are seen as an area of real potential. Decision making is shared with HQ and the relationship is good, except insofar as HQ makes most decisions regarding the thrust of the subsidiary's R&D activities, and this causes some illwill. Levels of coordination and configuration are high, and the Chief Executive feels that these factors will gradully ease up the level of integration. He sees this as advantageous in terms of his subsidiary serving more of the group's existing customers, many of whom he cannot supply at the moment. In addition, he sees the need for increased local responsiveness, and feels that persuading HQ to release its control on his R & D facility is the key. He is keenly aware of his quiescent status, and was wryly amused by the terminology.
Firm 4 is a Swiss owned speciality food manufacturer, established in the UK in 1936. Its exports are minimal and its sales level is E12 million; growth in this figure has not matched inflation over the last five years, and the employment level has also fallen. The subsidiary is highly autonomous, and the levels of network coordination and configuration within which it operates are very low indeed. Overall, the Chief Executive seemed satisfied with the quiescent classification, and with the subsidiary's position on the other strategy dimensions discussed. The exception is the poor relationship with HQ, which has been exacerbated by poor operating performance. Low integration was not seen as an important factor but, after an extensive discussion, the Chief Executive acknowledged that increased local responsiveness was critical to achieving his future performance targets. Some of this can be achieved through the high autonomy situation, but a substantial input of group resources will also be necessary; the Chief Executive accepted that some attention to improving the subsidiary/HQ relationship would be necessary to lubricate this process.
Firm 5 is a Japanese manufacturer of food ingredients, set up originally in 1984 to service the UK market, but a third of its 7 million [pounds sterling] sales is now being exported to some continental European countries. The subsidiary had a high level of autonomy and relationships with HQ are excellent. Coordination of activities is high, and this is mainly reflected in constantly high flows of information and knowledge around the network. Configuration is low, as might be expected from a firm in this sector; together with the high level of autonomy, this was seen as the strategic imperative that orients the firm towards its market opportunities. The Chief Executive was surprised to find his firm low on responsiveness compared to other subsidiaries. Owing to the nature of his business and products, he sees this as a more important factor than integration. and quickly indicated a number of potential moves to increase his responsiveness, all of which fall within his autonomy scope, and all of which he was confident would have the support of HQ.
Inevitably, this selection of five firms is not wholly representative of the characteristics of the quiescent group as noted earlier. However, three general points worth highlighting emerge from these discussions. First, responsiveness was seen as the most important of the six strategic dimensions, followed by the level of autonomy; only procedural justice was thought to be less important than integration, though the former was seen as useful in seeking HQ resources to expand local responsiveness. Second, all of these firms are characterised by high autonomy and low responsiveness; since autonomy is an enabling factor in respect of responsiveness (Prahalad/Doz 1987), it may be that the most significant difference between quiescents and autonomous subsidiaries is that the latter are more willing to use their autonomy to maximise responsiveness. Third, none of the five quiescents wish to remain in this quadrant: four aim to become autonomous subsidiaries, with firm 3 working towards the constrained independent classification.
Perhaps the most interesting finding of this research is the definition and detailed description of the quiescent subsidiary type. This raises three questions: why is this strategy type not included in the model of Jarillo and Martinez; what are the implications of the quiescent subsidiary type; and what future role is there for a quiescent subsidiary? Jarillo and Martinez certainly make theoretical allowance for this type: "... these two dimensions are independent: a subsidiary may occupy any one of the chart's four corners". The most obvious explanation is that this type of subsidiary just does not occur in Spain, whose economy has developed and industrialised rapidly since the end of the Franco regime and the accesion to the European Community (EC). There has been a phase of strong internationalisation in which MNC subsidiaries have participated fully, which seems (according to Jarillo and Martinez) to have involved them in substantial changes of role and shift in competitive mode. Integration of Spain within the EC has encouraged integration of Spanish affiliates with sister subsidiaries in other member countries, and the opening of new European markets has encouraged standardisation at the expense of local responsiveness. This may be an inappropriate environment for the quiescent subsidiary as described previously. A number of methodological differences may also contribute. Jarillo and Martinez' sample was "non-probabilistic", that is, it was selected to include the most important foreign firms in eight industrial sectors. Also, the variables used were different, though this applies less to integration. This research used five responsiveness variables taken directly from Prahalad and Doz' original work, and perhaps they contribute to a more broadly-based construct; Jarillo and Martinez used three operational variables which may produce a more specific responsiveness construct, though one could also be interpreted as a measure of integration.
It is unlikely that a proactive management team would be content to run a quiescent subsidiary as described here; indeed, it may be argued that such a management team would either move on or quickly change the role of the subsidiary, and some evidence of this was gathered during the five post-test interviews. The quiescent subsidiary represents the worst of all scenarios; it neither participates fully in multinationality through international integration of activities that are coordinated effectively by headquarters, nor does it become a key player in the local economy by being able to make substantial resource commitments in response to local competitive opportunities or customer demands. Nor can it be tempting in terms of the career prospects of senior subsidiary managers, as it might be difficult to establish superior personal performance in such an environment that is relatively detached from the rest of the international network. For the multinational parent, too, it is difficult to envisage the quiescent subsidiary as an attractive proposition. It yields few of the economic benefits of multinationality, it seems to operate beyond the normal control web of headquarters, and it is unlikely to maximise commercial opportunities in the local market. As a permanent state of affairs, this would be virtually intolerable to most efficient MNCs, which leaves only two rational explanations; either it is an early development stage for a young subsidiary (but only 3 out of 45 quiescent subsidiaries are less than five years old), or it represents a transition stage between receptive and autonomous (or vice versa); again, some evidence of this was gathered during the five post- test interviews. This notion of a transition stage is a most interesting possibility that cannot be explored with the data from the present research. but might perhaps be the objective of a more fine-grained study. Quiescent subsidiaries will be no more attractive to host governments as they have fewer international linkages and less operational scope, particularly in terms of new technology and the subsequent leakage of that new technology into the local economy. Due to their apparently lower level of capability, these subsidiaries may develop fewer skilled personnel, and will almost certainly be poorer contributors to the exchequer. In summary, it is hardly likely that a regional or national development agency would spend much time or direct substantial resources into attracting this kind of subsidiary, so competition for such footloose inward investments would be muted.
Lastly, we may briefly consider the future role of a quiescent subsidiary. One clear possibility is termination of closure. This was the fate of the Commins engine plant in Scotland that was closed in 1995 following a period when it was progressively marginalised within its highly integrated international network, and during which period it experienced much reduced access to resources that would have allowed it to respond to changing customer and competitive pressures. The other possibility is the type of role transition referred to above, whether initiated by headquarters or motivated by subsidiary management itself. Some evidence of this was gathered during the five post-test interviews. Another good example is the Apple's European factor in Cork where the local management team has successfully increased the level of integration within the group by, almost clandestinely, increasing its innovative potential as a resource for the whole international network by developing a series of progressively complex software solutions for new hardware developed elsewhere. To use a well-worn phrase, the prescription for quiescent subsidiaries is "shape up or ship out".
The overall aim of this paper was to carry out a critical assessment of the integration-responsiveness framework. As with other studies of this nature, the two strategic dimensions have demonstrated a facility for describing the different positions in the strategy space that may be occupied by MNC subsidiaries; the framework may also allow more proactive and decentralised subsidiaries a way of reacting to changing competitive conditions by making compensatory alterations of positioning in the strategy space. More specifically, this research was intended as an empirical evaluation and extension of the Jarillo and Martinez (1990) model of subsidiary strategy, which was derived directly from the integration-responsiveness dimensions. That model was shown to be inadequate to encompass one of the clearly defined strategy positions that evolved from the current analysis, and a related paradigm was developed that more fully encapsulated the findings. Interpretation of this adapted paradigm showed a substantial degree of internal consistency, and was also shown to be consistent with elements of subsidiary strategy models developed by White and Poynter (1984) and Taggart and Hood (1995). The proposed model was also efficient in distinguishing the four groups of subsidiaries along a number of structural and operational variables. This is consistent with the advice of Jarillo and Martinez that their framework required refinement, and that studies in other countries would be illuminating.
Comparisons with the Jarillo and Martinez model are evident, but some qualifying factors should be noted. First, the two studies took place in different countries (Spain, UK); the sample for the first study was carefully selected, but was randomly selected for the second; overall, levels of integration among Spanish subsidiaries seem substantially higher than for the UK, though precise comparisons are difficult; also, the two economies are at different stages of development, and this may significantly affect the roles of MNC subsidiaries in each. Specifically, it may well be that the quiescent subsidiary is present in the UK but not in Spain due to the apparently higher levels of integration in the latter, and also to be possibly radically different reasoning behind locating a subsidiary in Spain (a rapidly developing manufacturing economy) and the UK (a more mature environment). The variables used to develop the Spanish constructs were somewhat different from the present study, a point that has been discussed previously. Finally, the difference in cultural environment between the UK and Spain may also explain the absence of quiescent subsidiaries in the latter. Welge (1994) and, to a lesser extent, Dirks (1995) have emphasised that culture may be an important discriminatory variable in particular cases; thus, the role of quiescent subsidiary may not be acceptable to management teams within Spanish subsidiaries and/or may not be preceived by MNC parents to be the appropriate role to allocate to subsidiaries operating within the Spanish business culture. Only further empirical research in Spain. UK and other countries will answer these questions satisfactorily.
(1) As both dimensions are measured on a five-point scale, the theoretical border between the taxonomy types is the midpoint of the scale (i.e. 3). The actual means for the sample are 2.26 for integration and 2.13 for responsiveness. This implies that, overall, UK subsidiaries are somewhat less integrated and less responsive than Prahalad and Doz might suggest for a global sample of subsidiaries. The actual breakpoints between the types are thus established by the mean values for the sample. The clusters derived are therefore relative to the UK environment, and could be fully validated only by a cross-country study.
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Manuscript received March 1996, revised July 1996, revised September 1996, revised January 1997
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|Title Annotation:||multinational corporations|
|Author:||Taggart, James H.|
|Publication:||Management International Review|
|Date:||Oct 1, 1997|
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