Subsidiary Initiatives to Develop New Markets

In 1980, NCR’s subsidiary in Dundee, Scotland, was on the verge of closure. The operation had been established as a second-source manufacturer of NCR products, but a combination of technological changes in the marketplace, along with internal problems, had caused it to shrink from 6,500 employees in 1969 to 770 in 1980. Moreover, Dundee’s most promising product, the automatic teller machine (ATM), was struggling in the British marketplace because of serious quality problems. Jim Adamson, the newly appointed general manager, had a mandate to turn the operation around — or close it. At an operational level, Adamson worked on improving manufacturing quality and restoring the confidence of major customers. At a more strategic level, he began to develop a vision for Dundee as NCR’s strategic center for the ATM business. Product development responsibility officially lay with headquarters (HQ) in Dayton, Ohio, but Adamson began directing his resources toward upgrading and renewing the Dundee product line to meet the emerging demands of its key customers, the big British banks. In the face of active resistance from the development group in Dayton, Adamson pursued a delicate strategy of cooperating with people there, while continuing privately to sponsor Dundee’s research program. His persistence paid off. In 1982, Dundee launched a successful product upgrade and, eighteen months later, a next-generation ATM that set new standards in functionality, reliability, and serviceability. By 1984, Dundee had 20 percent of market share worldwide, and by 1985, headquarters officially transferred responsibility for the global ATM business to Dundee. By 1986, Dundee boasted 35 percent of worldwide shipments, surpassing competitors IBM and Diebold. More than a good example of turnaround management and strong leadership, the Dundee success story provides insight into the changing relationship between headquarters and subsidiaries in large multinational corporations (MNCs). During a five-year period, NCR Dundee developed from being a second-source manufacturer, totally reliant on Dayton for product specifications, to a self-sufficient operation with leading-edge expertise in ATM development. More important, the turnaround went far beyond what corporate management had requested; indeed, many people in the head office had resisted Adamson’s shift into product development, hanging on to their idea of Dayton as the global center for ATM development. Ultimately, it was Adamson’s deliberately unconventional and somewhat subversive approach that provided the impetus for Dundee’s resurgence — and led to NCR’s leading position in the global ATM industry.<

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References

1. The NCR Dundee story comes from personal interviews, research by Graeme Martin at Dundee Business School, and

J. Kotter, A Force for Change (New York: Free Press, 1990).

2. The authors thank Gerhard Schmidt of Hewlett-Packard Company, who first suggested this concept of a corporate immune system. The theoretical underpinnings of the concept were developed more fully in a separate paper. See:

J.M. Birkinshaw and J. Ridderstråle, “Fighting the Corporate Immune System: A Process Study of Peripheral Initiatives in Large Multinational Corporations” (Stockholm, Sweden: Institute of International Business, Working Paper 96/03).

3. The research comprised two phases. First, we conducted 132 intensive case study interviews at both the subsidiary and corporate headquarters levels in twenty subsidiaries and their parent companies in the United States, Canada, Great Britain, Sweden, and Belgium. We focused on specific initiatives that the subsidiaries had undertaken in order to understand how they came about, the resistance they faced, and their impact on parent-company strategies. The second phase, a large-sample-questionnaire study of 260 subsidiary companies in three countries (Great Britain, Canada, Sweden), sought to test empirically the hypotheses developed in the first phase. It focused on the role played by subsidiary initiative as the mechanism through which subsidiaries gained international management recognition — for example, as “centers of excellence” or through “world product mandates.”

4. The Canadian study identified four types of initiative. See:

J. Birkinshaw, “Entrepreneurship in Multinational Corporations: The Characteristics of Subsidiary Initiatives,” Strategic Management Journal, volume 18, number 2, 1997, pp. 207–230.

However, subsequent research in Scotland and Sweden has indicated that a coarser distinction into two types is more generalizable.

5. This example is drawn from a teaching case.

See:

J. Birkinshaw, “The GE Energy Management Initiative” (University of Western Ontario, Ivey School of Business, 1994, 9-94-6005).

6. Pharma is the disguised name of a European pharmaceuticals corporation.

7. Bartlett and Ghoshal, for example, refer to contributor and strategic-leader subsidiaries, while many Canadian academics have used the concept of “world-mandate” subsidiaries. See:

C.A. Bartlett and S. Ghoshal, “Tap Your Subsidiaries for Global Reach,” Harvard Business Review, volume 64, November–December 1986, pp. 87–94; and

H. Etemad and L.S. Dulude, Managing the Multinational Subsidiary (London: Croom Helm, 1986).

8. It should be clear that this distinction parallels Michael Porter’s generic strategies as the basis for sustainable advantage vis-à-vis industry competitors. See: M.E. Porter, Competitive Strategy (New York: Free Press, 1980).

9. See P. Hagström, The Wired MNC (Stockholm: Institute of International Business, Stockholm School of Economics, 1993).

It should be pointed out that a key difference between the current work and the work of Bartlett, Ghoshal, and Nohria on the “differentiated network” is the suggestion that subsidiary units can assume roles, rather than parent companies always assigning them. See:

S. Ghoshal and N. Nohria, “Internal Differentiation within Multinational Corporations,” Strategic Management Journal, volume 10, pp. 323–337.

Acknowledgments

The authors thank Gunnar Hedlund, Bruce Kogut, and seminar participants at the Institute of International Business, Stockholm School of Economics, for their helpful comments on drafts of this article. The research on which this paper is based appeared in two previous articles: J.M. Birkinshaw and N. Hood, “An Empirical Study of Development Processes in Foreign-Owned Subsidiaries in Canada and Scotland,Management International Review, volume 37, number 4, 1997, pp. 339–364; and J.M. Birkinshaw, “Entrepreneurship in Multinational Corporations: The Characteristics of Subsidiary Initiatives,” Strategic Management Journal, volume 18, number 2, 1997, pp. 207–230.