Being in the “Out” Crowd

Why do some subsidiaries become isolated — and does it matter?

Many large multinational corporations are hardly a model of organizational efficiency, with the right hand frequently not knowing what the left is doing. A valuable solution developed at one location fails to spread to other sites struggling with a similar problem, so they continually have to reinvent the wheel. Knowledge management systems have helped, but the truth is that many business units still tend to operate more like stand-alone entities than interconnected members of a larger network. Why do some subsidiaries become isolated, and does that insularity indeed impair business performance?

To answer those questions, L. Felipe Monteiro, doctoral candidate, and Julian Birkinshaw, professor of strategic and international management, of the London Business School and Niklas Arvidsson, researcher of the Royal Institute of Technology in Stockholm investigated the knowledge flow of 171 marketing subsidiaries of six Swedish global corporations: Ericsson, Volvo, Sandvik Steel, Coromant, Pharmacia and Alfa Laval Agri. (Details of the study are contained in their article Knowledge Flows Within Multinational Corporations: Explaining Subsidiary Isolation and Its Performance Implications, in press at Organization Science.) Managers at the subsidiaries answered a questionnaire that helped determine the frequency of knowledge transfers between subsidiaries (horizontal flows) as well as between a subsidiary and headquarters (vertical flows). The authors also collected data on each subsidiary’s capabilities (with respect to its accumulation and use of knowledge about customers and competitors) and financial performance (revenues, profits and market share). The data were controlled for several variables, including the size, geographic location and age of the subsidiary.

The study looked specifically at the process of “problemistic search,” in which a subsidiary has a problem — for instance, how best to market a particular product to a new demographic of customers — and then looks for a solution. In an ideal world, the subsidiary finds another business unit that has successfully tackled that very problem and the two groups exchange the valuable knowledge.

Here, it is important to note that perceptions play a huge role. Specifically, people at the subsidiary that has the problem will tend to look for help where they think they will find it. And therein lies the rub: People’s assumptions of where important know-how resides in a large multinational corporation can be highly flawed, to say the least. After all, knowledge is an intangible asset that, by its very nature, is extremely difficult to evaluate.

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