By drawing on complementary fit logic (Cable and Edwards
2004; Ostroff
2012), it is possible to reconcile and contrast resource allocation strategies and subsidiary behavior into our current understanding of headquarter value creation. Specifically, we allow the traditional organizational structure of internal competition and internal cooperation to vary by polar opposite resource allocation strategies—winner-picking and cross-subsidizing—to better understand what these combinations might yield in terms of value creation for the organization as a whole.
Winner-picking resource allocation strategy and subsidiary behavior
The main advantage of a winner-picking resource allocation strategy can be understood as allocating the major part of resources to the subsidiaries that have proven to be the strongest achievers when it comes to presenting opportunities for investment (Andersson and Kappen
2010; Khanna and Tice
2001; Nell and Ambos
2013). Therefore, the winner-picking strategy promises the highest possible yield on the invested resources (Table
1).
Table 1
Framework of headquarter resource allocation strategy and subsidiary behavior
Winner-picking (+) Focus on highest performers and return (−) Narrow focus—subject to uncertainty | Competitive and winner-picking Combining these creates an over-focus on specialization and risk-taking, which is argued to be an extreme set-up. | Cooperative and winner-picking The relative complacency and slack characterizing cooperative subsidiaries will be balanced by the winner-picking strategy. |
Cross-subsidizing (+) Broad risk spread (−) Little focus on performance and return | Competitive and cross-subsidizing The risk and performance introduced by the competitive subsidiaries is mellowed by the cross-subsidizing, which spreads both risk and performance. | Cooperative and cross-subsidizing The soft steering of the cross-subsidizing strategy is reinforcing the lack of focus and performance of the cooperative subsidiaries. |
However, as a consequence of allocating large amounts of resources to only a few subsidiaries, the winner-picking resource allocation strategy also introduces higher levels of uncertainty. If headquarters misjudges either the subsidiaries or the market when picking these winners, the strategy might also introduce the highest possible risk to the MNC portfolio. In sum, winner-picking identifies a few star subsidiaries and then supports these subsidiaries to a considerably higher degree than it does the average performing subsidiaries. This strategy creates a focused allocation of resources that has the potential to yield the highest returns, but only if the assumptions made about the subsidiaries’ potential turn out to be correct. Thus, the winner-picking strategy is a high-risk/high-return resource allocation strategy.
Having explained how a winner-picking resource allocation more specifically shapes the MNC, we will now turn to how a winner-picking resource allocation strategy might influence value creation depending on the chosen organizational design—i.e., competitive or cooperative subsidiary behavior.
Considering a winner-picking strategy coupled with an organizational design that favors competitive subsidiary behavior, we suggest that competitive subsidiary behavior has similar effects to a winner-picking strategy on subsidiaries’ behavior by compounding the high risks associated with each context. Therefore, the combination will make for even more sharply focused subsidiaries that introduce even higher risk to the MNC portfolio. In other words, headquarters are, in practice, betting on a few extremely specialized subsidiaries that, while likely to yield great returns, make the investment subject to both the subsidiary risk of being highly specialized and the headquarters’ risk of putting many eggs in only a few baskets. The subsidiary is already straining itself as far as it can in its competitive environment, and as it becomes subject to an even more harshly competitive environment through winner-picking, the pressure might prove counter-productive and produce an organization with highly specialized, but ultimately frail, subsidiaries.
An illustration of this combination, building on the Philips Corporation example mentioned above (Bartlett
2009), is how it allocates resources disproportionally to the profitable country subsidiaries and where the subsidiaries themselves compete against each other based on profitability. In such a competitive situation scenario, it is easy to imagine how slack resources that could be directed towards more visionary innovation would be sacrificed. However, while this combination could create a particularly lean and efficient Philips Corporation, it would likely also mean that the subsidiary organizations had few resources to devote to experimenting with new products or other offerings as focusing on such potentially risky activities would put subsidiaries at a disadvantage in the context of the winner-picking resource allocation strategy.
Meanwhile, a winner-picking resource allocation strategy would force a comparably complacent cooperative subsidiary to introduce ambition into its low-risk operations. In this context, considerable slack might exist in relation to activities that lie between subsidiaries (i.e., where one subsidiary performs activities for another) as the costs might not be borne by the other subsidiary. In such a scenario, the winner-picking strategy might make such slack visible as both subsidiaries in this example make an account of their own cost and revenue drivers. Although the winner-picking strategy might force the cooperative subsidiary to focus more on its own performance, headquarters can temper the high-risk/high-reward profile of its resource allocation strategy by applying it to a portfolio of subsidiaries that are low-risk/low-reward to begin with. The likely result will be a more efficient group of subsidiaries that might not yield the highest returns but will also not be at the highest risk of allocation mistakes or industry change.
Imagining how this might play out in the cooperative subsidiary organization of Siemens AG (Pettigrew et al.
2003), we can expect that a winner-picking resource allocation strategy on behalf of headquarters would incentivize the otherwise friendly subsidiaries in different countries to make an inventory of their costs. For example, if the bearing of costs remains disorganized for several years in a cooperative climate, we could expect the cost control to become lax and a build-up of slack and inefficiency. A headquarter winner-picking resource allocation strategy would incentivize subsidiaries to identify such slack as well as to negotiate more vigorously with each other, leading them to apportion costs more correctly. The outcome of such a combination can be expected to be a more balanced organization with regard to both subsidiary and headquarter resource allocation risk.
Taken together, combining the winner-picking resource allocation strategy with either a competitive or cooperative subsidiary behavior suggests that when it comes to complementary fit between headquarter strategy and subsidiary behavior, we can propose the following proposition:
Proposition 1: A competitive (cooperative) subsidiary behavior will weaken (strengthen) the positive effect of a winner-picking resource allocation strategy on value creation.
Cross-subsidizing resource allocation strategy and subsidiary behavior
The main advantage of the cross-subsidizing resource allocation strategy is that it spreads the risks evenly across all the subsidiaries of the MNC. Consequently, cross-subsidization can be considered a resource allocation strategy that minimizes risk by avoiding the misallocation of resources on the part of headquarters (betting on the wrong horse) since funding all subsidiaries is betting on none. However, a potential drawback of the cross-subsidizing resource allocation strategy is the minimization of returns. Since subsidiaries receive resources on the premise of equality, relatively weak subsidiaries will receive a disproportionate amount of resources compared to stronger subsidiaries.
In sum, cross-subsidizing largely disregards potential performance and aims to support all subsidiaries, albeit to a lower extent due to resource constraints. This creates a widely dispersed allocation of MNC resources that are likely to yield modest returns. Although modest, the returns are likely to be stable as no particular predictions need to be realized for the return to materialize and there is little uncertainty involved in the allocation. Thus, the cross-subsidizing strategy is a low-risk/low-reward kind of resource allocation approach. Having specified how a cross-subsidizing resource allocation strategy more specifically affects the MNC, we now turn to how cross-subsidizing fits with a competitive or cooperative behavior in subsidiaries.
While a good match to a cross-subsidizing resource allocation strategy might appear to be a cooperative subsidiary behavior, we argue that this is misleading. As discussed previously, a cooperative subsidiary is characterized by a broad portfolio of skills and innovativeness allowed by organizational slack. This kind of behavior does not generally suggest high profitability, but spreads risks broadly. This would suggest that a cross-subsidizing resource allocation strategy combined with a cooperative subsidiary behavior would reinforce the strengths and, crucially, weaknesses of both.
Such a scenario can be illustrated using the construction equipment industry, which is characterized by cross-subsidizing resource allocation strategies (Haycraft
2002). Having cooperative subsidiaries would suggest that the strategy not only allows the weaker subsidiaries to stay in business but also encourages them to stay weak (or at least does not encourage them to become stronger/more competitive) by the cooperative relationships between the subsidiaries in different countries. Thus, the weaker subsidiaries would not be incentivized to catch up with their stronger sister subsidiaries, either by the dynamics between subsidiaries (cooperative) or by MNC headquarter resource allocation strategy (cross-subsidization), resulting in a comparatively inefficient company.
The combination of a cross-subsidizing resource allocation strategy and a competitive subsidiary behavior could result in the competitive subsidiary behavior being allowed a resource allocation context that is more conducive to experimentation and shooting for the stars as it is more forgiving of mistakes, while the cross-subsidizing resource allocation strategy is not very encouraging. This would suggest an additional acceptance of failure that might provide the competitive subsidiary with much appreciated freedom to innovate and experiment to meet requirements in the local market.
In a scenario where competitive subsidiaries are subjected to a cross-subsidizing resource allocation strategy, the drive to reduce slack and increase specialization of the subsidiaries would be blunted by the relative indifference of headquarters to their profit or loss. This de-emphasis on profits as the measure of subsidiary performance would allow for the build-up of a certain amount of slack in the subsidiaries, which might encourage innovation, cooperation, and broadening of capabilities driven by local market pressure. Again, using some of the major firms in the construction equipment industry as an example, this could be illustrated by the subsidiaries that, by virtue of their competitive behavior, guard their own profit and loss statements by closely tracking revenues and costs. The combination of competitiveness among subsidiaries and cross-subsidization on behalf of headquarters would keep subsidiaries lean and efficient while allowing the relative losers to stay in business due to the resource allocation strategy used. Consequently, we suggest the following proposition:
Proposition 2: A competitive (cooperative) subsidiary behavior will strengthen (weaken) the positive effect of a cross-subsidizing resource allocation strategy on value creation.