Heading: Global Key Account as a Vehicle for Diffusing Subsidiary Initiatives in Multinational Corporations

Transcription

1 Author: Jouni Lyly-Yrjänäinen, Petri Suomala and Olavi Uusitalo Heading: Global Key Account as a Vehicle for Diffusing Subsidiary Initiatives in Multinational Corporations Abstract section I: The objective of the paper is to analyze the role of the global key accounts in diffusing subsidiary initiatives and decreasing the effects of the corporate immune system in global parent organizations. Abstract section II: The use of a global key account as a vehicle for diffusing subsidiary initiatives seems to be an interesting alternative for subsidiaries struggling with reluctant global parents or rival subsidiaries. Author s line: Jouni Lyly-Yrjänäinen, Lic. Tech., Industrial Management, Tampere University of Technology, jouni@tut.fi, Petri Suomala, Ph. D, Industrial Management, Tampere University of Technology, petri.suomala@tut.fi, Olavi Uusitalo, Prof., Industrial Management, Tampere University of Technology, olavi.uusitalo@tut.fi Keywords Global Key Account Management, Innovation Management, Cost Management Proposal for heading: Diffusing Subsidiary Initiatives in Multinational Corporations 1

2 1. INTRODUCTION 1.1. Background of the Study Key account management has been a managerial buzzword for over a decade (Pegram, 1972 in Zupancic et. al., 2007). In key accounting management, the main idea is to analyze the customer portfolio and identify the most important customer relationships. These key accounts, then, are prioritized and managed in a coordinated way (Montgomery et al., 1998; Birkinshaw et. al. 2001). Global customers, however, are somewhat problematic from key account management point of view. The coordination of customer management across the borders, usually referred to as global account management (Montgomery et al., 1998; Birkinshaw et. al. 2001) or international key account management (Verra 1994, Zunpacip et al. 2007), has become one of the most prevalent corporate responses to globalization of business environment. Unfortunately, the literature on global key account management is still rather concise. Similar to global key account management, entrepreneurship in subsidiaries of multinational companies has received little research attention (Birkinshaw 1997). In other words, there is not much literature on how the innovations made by small subsidiaries can be implemented or diffused in the global parent companies. These subsidiary initiatives (innovations developed in subsidiaries) can be focused both externally to the markets and internally towards rationalization of existing activities or promotion of new ones (Birkinshaw, 1997). Unfortunately, very easily the corporate immune system prevents the diffusion of innovations (Birkinshaw & Ridderstråle, 1999), which applies also to parent-subsidiary relationships. In this paper we aim to contribute the literature focusing on the above mentioned areas. Using a case study, we illustrate how a global key account can be used as a vehicle to, first, increase the structural power of a subsidiary and second, reduce the corporate immune system of a parent organization Objective of the Paper The objective of the paper is to analyze the role of global key accounts in diffusing subsidiary initiatives and decreasing the effects of the corporate immune system in global parent organizations. Global parents simply might not be interested in the innovations made in small subsidiaries or there is some not-invented-here syndrome among the managers. In addition, there might be some politics or power struggles between the different subsidiaries, also restricting the global implementation of the subsidiary initiatives. However, a global key account can be used as a leverage to create market pull within the global organization. The idea of using a global key account as leverage in promoting subsidiary initiatives and reducing the corporate immune systems has not been discussed in the existing literature on either innovation management or global key account management. Therefore, the idea has potential for theoretical contribution Research Methodology Stake (1995) uses the term intrinsic to identify a certain type of case research, which is characterized by a strive for affecting the case itself in addition to but not instead of pursuing more general knowledge or understanding. For ensuring the quality of a case study, the most important is the depth of the analysis, both in terms of the number of factors studied and sources of information used (Yin, 1984). In addition to testing current theories, case studies can be used for identification of new issues and topics of further research (Eisenhardt 1989). Regarding data collection, case studies may apply rather versatile approaches. According to Eisenhardt (1989), suitable data collection methods include archive studies, interviews, questionnaires, and observations. Dyer & Wilkins (1991) among others that represent a classical view on case studies support also more intimate data collection methods such as participation and observation that can be best applied in a single case setting. The data collection of this research is based on a long-term interventionist action research study (Jönsson and Lukka 2005) with a company manufacturing hydraulic power units. Following the basic ideas of interventionist action research, the researchers have been involved in analyzing current business processes, development of a new product concept, and quantification of its potential cost effects. In addition, the researchers have also participated in the implementation process of the new product concept. In other words, the interventionist participation in the case company produced the innovation i.e. subsidiary initiative the internal diffusion of which is discussed in this paper. The interventionist participation is described in Figure 1. The researchers have visited the case company about 140 times and spent over 750 hours on site. 2

3 Figure 1. Interventionist participation in the case company The rest of the paper is divided into three sections. First, literature pertinent for our paper is discussed. Second the case company, the subsidiary initiative (a unique innovation) and the diffusion process of a subsidiary initiative are illustrated. Third, we present theoretical and managerial implications and introduced avenues for further research. 2. LITERATURE REVIEW Key account management (KAM) has been a managerial buzzword for decades (Pegram, 1972 in Zupancic et al., 2007). The strategically crucial customers i.e. key accounts would always be handled differently in comparison to other customers since these key accounts represent an important part of a company s business. In key accounting management, the main idea is to analyze the customer portfolio and identify the most important customer relationships, which, then, are prioritized and managed in a coordinated way (Montgomery and Yip, 1999). Recently, key account management in the international market has become increasingly important for industrial companies. The coordination of customer management across the borders is often referred to as global account management (GAM) or international key account management (IKAM). Montgomery et al. (1999) define global account management as an organizational form and process in multinational companies by which the worldwide activities serving a given multinational customer are coordinated centrally by one person or team within the supplying company. Zupancip et al. (2007), on the other hand, define international key account management, a term originally introduced by Verra (1994), as a concept to systematically analyze, select and manage (potentially) strategic important international customers, that have to be managed in a coordinated way, because of reciprocal relations between national markets. Global key account management has become one of the most prevalent corporate responses to globalization of business environment (Birkinshaw et. al. 2001). Unfortunately, the literature on global key account management is still rather concise. In other words, global key account management has so far attracted relatively little research interest in the field of international business (ibid.). Similar to global key account management, entrepreneurship in subsidiaries of multinational companies has received little research attention (Birkinshaw 1997). In other words, there is not much literature on how the innovations made by small subsidiaries can be implemented or diffused in the global parent companies. These subsidiary initiatives (innovations developed in subsidiaries) can be focused both externally to the markets and internally towards rationalization of existing activities or promotion of new ones (Birkinshaw, 1997). According to Birkinshaw (1997, 2000), subsidiary initiative process is bounded by the identification of the opportunity at the front end and the commitment of the resources to the undertaking at the back end. Moreover, existing innovation management literature on multinational companies has mainly focused on R&D units (Nobel et al. 1998) whereas subsidiary initiatives of other types of subsidiaries can be even more problematic. Birkinshaw & Ridderstråle (1999) have modeled the resistance from other organizational actors in the corporate immune system. The corporate immune system has a set of organizational forces that suppress the advancement of creation-oriented activities such as subsidiary initiatives. Birkinshaw & Ridderstråle (1999) have studied what kind of 3

4 strategies subsidiary unit managers can use to overcome the corporate immune system. Furthermore, resource-based power accrues to those who control valuable assets on which others depend (Pfeffer & Salancik, 1978). Based on the source of power, Prahalad & Doz (1981) distinguish between 'core' subsidiaries and 'peripheral' subsidiaries. The latter ones are situated away from the centre and, thus, are by definition low in structural power, though over time this situation most probably will change as the subsidiary develops unique resources or relationships of its own (Prahalad & Doz, 1981). On one hand, small subsidiaries are often close to the customers and can be good sources of innovations. On the other hand, their structural power might not be sufficient for diffusing their innovations in the global organization. In addition, especially different country units (sales offices) quite often can only operate within their own geographical markets and, therefore, the global implementation of their innovations is completely dependent on the parent company. This makes it vital that the subsidiaries have means to overcome the corporate immune system. 3. HYDRAULIC POWER UNITS AND THE SUBSIDIARY INITIATIVE 3.1. The Focal Company The case company (HC Finland in Figure 1) is a Finnish subsidiary of a globally operating hydraulic component manufacturer (HC A/S). The parent company has dozens of component factories and country units (sales offices) in over 100 countries. In addition to the component sales, about 50 of the country units also design and manufacture hydraulic power units, including the subsidiary in Finland. In this study, the focus is on hydraulic power unit business. Figure 2. Case company (HC Finland) and the global network of the parent company (HC A/S) The global manufacturing and sales network of the parent company is rather complex. Figure 2 demonstrates the different customer-supplier relationships in a very simple way. As illustrated in the figure, the components are delivered not only through the parent and country units but also directly to the country units. However, to make the network even more complicated, the most important OEM customers get their components delivered directly from the component factories. One can only imagine the challenges and complexities when trying to trace revenues and costs of the components produced in the dozens of component factories delivered through different channels to the globally scattered assembly plants of a single global key account The Innovation i.e. Subsidiary Initiative A hydraulic power unit is comparable to a pneumatic compressor. However, instead of pressurized air, it produces pressurized oil to be used in a hydraulic system. Hydraulic power units are usually customized and, therefore, engineered-to-order. In engineering-to-order (ETO) context, each order results in a unique design, set of part numbers, bill of material, and routing. Furthermore, products are not configured using existing modules and product options, but rather the product (or at least part of it) is engineered individually for each customer. The ETO approach usually requires close customer-supplier collaboration explaining why the parent company is manufacturing hydraulic power units in 50 subsidiaries. Interestingly, many of the subsidiaries manufacturing hydraulic power units have problems with profitability, profit visibility, and delivery times. 4

5 About tree years ago, the managers of the Finnish subsidiary were experiencing the very same problems. In order to solve these problems, the case company developed a new mass-customized power unit concept which enables customized power units to be delivered without any part-level engineering. The elimination of part-level engineering, on the other hand, results in significant cost reduction and cuts the delivery times in half. Conceptually, the new product concept enables the existing ETO context to be transferred into an assembly-to-order (ATO) context. In an ATO context, components are made based on predicted sales volumes, whereas the end products are assembled to order. The product and process innovations enabling the mass customization of hydraulic power units (and the transition to ATO operating model) constitute the subsidiary initiative discussed in this paper. The mass-customized power unit concept also represents new thinking in the industry and, therefore, has been patented Innovation Diffusion Global Key Account as a Vehicle for Global Implementation Despite the innovativeness of the new mass-customized power unit concept, the production volume and even the market potential of the Finnish subsidiary is too small for utilizing the full potential of it. However, because the Finnish subsidiary can only operate in its own geographical market, direct exportation is out of the question. Thus, considering the success of the innovation, either the parent or some other subsidiaries would also have to implement the new power unit concept. This, on the other hand, has two problems. First, it is not completely clear whether the parent company will be interested in the solutions developed in a small subsidiary without much structural power; the parent is known for its corporate immune system. Second, there are conflicting interests between different subsidiaries. Some other subsidiaries with more structural power are promoting their own solutions for global standards even though the elements of mass customization have been ignored. Furthermore, the new power unit concept also enables centralization of power unit manufacturing, which might not be in the interest of several subsidiaries (even though some subsidiaries have voluntarily given up their power unit production). In order to facilitate the diffusion of the subsidiary initiative in the global parent organization, the management of the Finnish subsidiary decided to use a global key account as a reference in negotiations with the parent and a few selected subsidiaries. At the moment, that particular OEM customer buys its power units primarily from a Finnish competitor. However, the customer has shown a great deal of interest in the new mass-customized power unit concept and a few ones have been tested in its global projects (Figure 3). Figure 3. The first deliveries to the global key account The cost and delivery time benefits offered by the new product concept have made the new power unit concept very attractive. However, the concept offers one additional benefit. The global key account would not like to buy its power units from Finland, but rather from one subsidiary in each continent, which is illustrated in Figure 4. 5

6 Figure 4. The visionary delivery chain for the hydraulic power units as requested by the global key account (right) Global deliveries, on the other hand, require that the power units made in different subsidiaries are rather similar. Therefore, this particular global key account has provided an excellent opportunity to sell the mass-customized power unit concept, first, within the global sales organization of the parent and, second, within the parent itself, as illustrated in Figure 5. The aim has been to use that global key account as a leverage to ease the change resistance and not-invented-here syndrome within the parent. Figure 5. The global key account can be used to create market pull within the global sales organization of the parent company When the first versions of the new power unit concept had been piloted with the global key account, a short five-page memo was sent to the manager with global responsibility of the hydraulic power unit business. The memo showed both the technical solutions and the cost reduction potential of the new product concept. Because the not-invented-here syndrome of the parent was known to be an important factor, the potential of the global key account was pointed out already in the first memo. As was expected, despite the significant cost reduction potential, the initiative did not advance. However, when the chairman of the board (responsible of global hydraulics business) was visiting Finland about six months later, the new power unit concept was introduced to him. He, on the other hand, pointed out that there had been some changes in the top management and the new managers would be more interested in ideas coming from smaller subsidiaries. The chairman of the board immediately set up a meeting with the new management team, which was arranged two months later. The atmosphere in that meeting was excellent the new management team recognized the potential of the solution. According to the managers, % of the global revenues could be generated with the new power unit concept with the cost reduction potential of over 10 %, which is a rather good achievement in a mature industry. However, despite of all the positive feedback, the parent is still considering whether it will adopt the new 6

7 power unit concept and, thus, it is hard to say whether the idea of using global key account as a tool for reducing the effects of corporate immune system worked the way as planned. 4. CONCLUSIONS In this paper, the global key account management perspective was brought to the literature focusing on entrepreneurship in multinational companies. The objective of the paper was to analyze the role of global key accounts in diffusing subsidiary initiatives and decreasing the effects of the corporate immune system in global parent organizations. In this study, the global key account was actively used as a means for increasing the structural power of a small subsidiary. Based on this study, the use of a global key account as a vehicle for diffusing subsidiary initiatives in global parent organizations seems to be an interesting alternative for subsidiaries struggling with reluctant global parents or rival subsidiaries. The idea of using a global key account purposefully as leverage in diffusing subsidiary initiatives in global parent organizations is relatively simple. As a matter of fact, it is rather self-evident for managers who often argue their ideas using key accounts as a reference, thus increasing their structural power at the personal level. However, the existing literature on entrepreneurship in subsidiaries of multinational corporations does not recognize the idea of using a global key account as a tool for increasing the structural power of a subsidiary in order to ease the diffusion of a subsidiary initiative. Hence, despite the simplicity of the idea, the study offers potential for scientific contribution. As many industries are becoming more concentrated, it is likely that companies are becoming more restricted with regards to global implementation of their ideas and, therefore, the idea introduced in this paper has relevant managerial implications. Unfortunately, the negotiation process with the parent company is in progress and the final outcome, thus, still remains unknown. However, it will be interesting to see, how the radical innovation developed in the case company will impact the position and role of this subsidiary within the global parent organization. REFERENCES Birkinshaw, J. (1997): Entrepreneurship in Multinational Corporations: The Characteristics of Subsidiary Initiatives, Strategic Management Journal, 18 (3), pp Birkinshaw, J. (2000): Entrepreneurship in the Global Firm, Sage Publications, London. Birkinshaw, J. and Ridderstråle, J. (1999): Fighting the corporate immune system: a process study of subsidiary initiatives in multinational corporations, International Business Review, 8, pp Birkinshaw, J., Toulan, O. and Arnold, D. (2001): Global Account Management in Multinational Cooperations: Theory and Evidence. Journal of International Business Studies 32 (2nd quarter), pp Dyer and Wilkins. (1991): Better stories, not better constructs to generate better theory: a rejoinder to Eisenhardt. Academy of Management Review, 16 (3), pp Eisenhardt, K. M. (1989): Building Theories From Case Study Research, Academy of Management Review 14 (4), pp Forsgren, M., Holm, U. and Johanson, J. (2005): Managing the Embedded Multinational, A business Network View, Cheltenham, Edward Elgar. Jönsson, H. and Lukka, K. (2005): Doing interventionist research in management accounting. GRI-rapport 2005:6. Gothenburg Research Institute, Gothenburg. Montgomery, D. B., Yip, G. S. and Villalonga, B. (1998): The use and performance effect of global account management: An empirical analysis using structural equations modeling. Stanford Research Paper, No Nobel, R. and Birkinshaw, J. (1998): Innovation in Multinational Corporations: Control and Communication Patterns in International R&D Operations, Strategic Management Journal, 19 (5), pp Pegram, R. (1972): Selling and servicing the national account, Report No New York: The Conference Board. Pfeffer, J., and Salancik, G. R. (1978): The external control of organizations: A resource dependence perspective, Harper & Row, New York. Prahalad, C. K., and Doz, Y. L. (1981): An approach to strategic control in MNCs. Sloan Management Review, Summer, pp Stake, R. E. (1995): The Art of Case Study Research, London, Sage. Verra, G.J. (1994): International Account Management: an organizational dilemma: an explorative study within the field of international business to business marketing, Nijenrode University Press, Breukelen. Zupancic, D. and Müllner, M. (2007): International key account management in manufacturing companies: An exploratory approach of situative differentiation, 2 nd International Conference on Business Market Management, Delft, the Netherlands, March Yin, R. K. (1994): Case study research: design and methods, Sage Publications Newbury Park, CA. 7