The Role of the Subsidiary in Harnessing Global Knowledge: New Research Indicates That Large International Companies Are Moving beyond Centralisation to Tap the Creativity and Brainpower of Their Foreign Subsidiaries. the Impact Is Proving Positive for Both the Centre and the Periphery

By Moore, Karl | European Business Forum, Winter 2005 | Go to article overview
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The Role of the Subsidiary in Harnessing Global Knowledge: New Research Indicates That Large International Companies Are Moving beyond Centralisation to Tap the Creativity and Brainpower of Their Foreign Subsidiaries. the Impact Is Proving Positive for Both the Centre and the Periphery


Moore, Karl, European Business Forum


Ten years ago, gaining economies of scale was probably considered the number one advantage of operating as a global company. Today, it is increasingly clear that the top advantage is the ability to harness learning and innovation from throughout the company's worldwide network.

A critical question is how to harness this potential. Research interviews I have done with several hundred executives of large multinational enterprises in Europe, North American and Japan suggests that the theory all too often far outruns reality.

Not always, however. Some leading global firms have been translating theory into a more profitable practice.

At the heart of the approach I am suggesting is an issue first raised by Japanese business analyst and writer Kenichi Ohmae. He made the important point a number of years ago that innovation comes exclusively from the Triad economies--western Europe, north America and a handful of key economies in east Asia (he would probably now include India in that list). He argued that a global firm must have activities in all three regions in order to optimise learning. Almost all of the Fortune Global 500 are based somewhere in the Triad. But this is no longer sufficient, as competitors are now introducing new products, approaches and business models from the other two Triad regions.

In the early days, holding a watching brief may have been sufficient participation in one of the three as long as you had considerable activities in the other two. Today that is passe, and leading firms need to harness capabilities in the other two non-home regions. I have done considerable work with Nokia in Helsinki. If you suggest to Finns that theirs is the only country that can produce mobile phone innovation, they would laugh at your naivety. They realise that other lead countries for mobile phone innovations include their next door neighbour, Sweden, where rival Ericsson is located, as well as Canada, Nortel's home country, and the US, with industry giant Motorola, and Korea and Japan. This example is an instructive one. With a small population base, Finns must recognise that there are several places they must learn from.

Learn to accept 'Not invented here'

In my experience, firms headquartered in the more dominant economies, the US and western Europe for example, sometimes lack the natural humility of the Finns. Long gone are the days when people thought that all new ideas in an industry originate from one place. Today, multinationals must be quick to adopt new ideas from Europe, north America and Japan and the Asian tigers, because these are the key areas for innovation and research and development.

The chart opposite illustrates the evolution of knowledge-sharing in multinationals. Traditionally, many global firms adopted one of two basic organisational models. One was a centre-driven approach (see Figure 1) in which the foreign affiliates were seen as adapting centrally-created products and services to their local clients' needs. The Japanese have traditionally followed this approach with ideas almost exclusively originating in Japan and the local subsidiaries acting effectively as local sales agents, modifying the products only as necessary. Clearly Japan was the centre and the subsidiaries the periphery.

The other was a country-focused approach (see Figure 2), in which the various foreign units shared a corporate name, but undertook their work with little or no interaction with their sister affiliates around the world. Here innovation occurred at the country level but stayed solely in country. Large consumer goods companies often took this approach, with soaps and other similar products being developed for the local market but only offered in the local market, even if the ideas could have been profitably adopted elsewhere.

With the gathering pace of globalisation, many firms are attempting to move towards a more global model in which knowledge, ideas, products and processes are shared and disseminated among a company's affiliates worldwide.

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The Role of the Subsidiary in Harnessing Global Knowledge: New Research Indicates That Large International Companies Are Moving beyond Centralisation to Tap the Creativity and Brainpower of Their Foreign Subsidiaries. the Impact Is Proving Positive for Both the Centre and the Periphery
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