Overcoming the Liability of Outsidership—The Challenge of HQ of the Global Firm

Abstract

We conceptualize the global firm as being a loosely coupled network of far-flung subsidiaries with hierarchically acting headquarters (HQ) that design a global organization to ensure support of its global strategic agenda. We argue that the process of HQ management in the global firm is a process characterized by uncertainty. Drawing on the Uppsala model for managing under uncertainty, we suggest that the source of uncertainty is a liability of outsidership derived from the fact that HQ is often not knowledgeable about the networks and actions of its subsidiaries. We then offer various actions that need to be taken by HQs to resolve that liability to improve on the efficiency of the coordination and management of the global firm.

Introduction

The world is changing today and rapidly. “Most contemporary MNCs³ face challenging competitive environments, characterized by rapid technological and/or market change, growing international competition, new demands from customers and regulators, and overall more uncertainty” (italics added) (Egelhoff, 2010: 106). Today, innovative activities are distributed through clusters, located in many places around the globe, and dominated by small companies (Saxenian, 2010). Hence, to stay competitive, global firms cannot any longer rely on in-house innovation, but instead through their subsidiaries tap into these clusters where new knowledge is being developed. Also, the marketing and service related activities of global firms need to be closer to customers and manufacturing and located where the environment is best suitable to those activities. As a result, value chains of global firms increasingly are cut into pieces and located in very different places and far away from each other.

As we understand the literature, the configuration side of this coin is relatively well understood, while the coordination side is more complex (cf. Andersson and Holm, 2010). Thus, the role of the headquarters (HQ) needs further discussion and analysis (ibid.). It is our belief, referring to the headline, that HQ and the whole of the global firm is dependent on innovative and entrepreneurial activities of its important subsidiaries and that these activities are not easily managed by HQ due to the nature of the relationships of interdependence and uncertainty at the HQ about the local networks and activities of its subsidiaries. Further, at the other end of the relationship, that is, at the subsidiary, there remains uncertainty about how HQ will interpret the subsidiary activities so as to judge them as being consistent with or inconsistent with the overall strategy of the global firm. Moreover, as noted in the quote taken from Egelhoff (2010) above, global firms face overall more uncertainty connected with both innovative and entrepreneurial activities. It is the objective then of this paper to see if it is possible to find mechanisms that will decrease this uncertainty and improve on the efficiency of the coordination and management of the global firm from the HQ point of view.

The paper is structured as follows. We begin with a brief overview of the literature on the global firm in general and the relationship between the HQ and its subsidiaries in particular. We then use that overview to convey our—as insightly put by one of the reviewers—‘schizophrenic’ view of the global firm to understand the global firm as a loosely coupled network of far-flung subsidiaries with a hierarchically acting HQ that is trying to design a global organization to ensure proper support for its overall global strategic agenda. Drawing on the literature on subsidiary initiatives, we highlight and discuss the importance of subsidiaries’ exploration of their competences for the competiveness of the global firm and the subsequent coordination challenges of the HQ.

We end our discussion on the global firm and the role of HQ by arguing that these coordination challenges derive foremost from (1) the impossibility of the HQ to calculate the risk related to an opportunity identified through the relationship of a subsidiary to its local context; i.e., HQ experience uncertainty; and (2) the goal ambiguity experienced by HQ due to unclear subsidiary initiatives that do or do not allow for some leeway of interpretation. Hence, we define the process of HQ management of the global firm as a management effort characterized by both uncertainty and ambiguity. Thereafter, the paper proceeds with a brief presentation of the Uppsala model, which has proven to be a useful model for explaining other management processes instituted under uncertainty. We believe that the source of uncertainty is a liability of outsidership (Johanson and Vahlne, 2009) derived from the circumstance that HQ is not knowledgeable about the local network and actions of subsidiaries. Subsequently, conclusions, following from the model, are offered to indicate how the liability of outsidership can be decreased successfully.