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The challenge of going global is not simply to sell products wherever customers are but to take advantage of bright ideas wherever they spring up. Indeed, growth-triggering innovation often emerges in foreign subsidiaries—from employees closest to customers and least attached to the procedures and politesse of the home office. NCR's automatic teller business, for instance, took off only when the development team shifted activities from corporate headquarters in Dayton, Ohio, to Dundee, Scotland. Under the guidance of a charismatic leader with scrappy persistence, NCR's Scottish operation became the largest manufacturer of ATMs in the world and brought the moribund Dundee manufacturing center back from the brink of extinction.
But as every multinational manager knows, making the most of foreign subsidiaries is tricky. Too often, heavy-handed responses from headquarters squelch local enthusiasm and drive out good ideas—and good people. Even when headquarters tries to do the right thing by democratizing the innovation process and ceding more power to subsidiaries, the results are not always stellar.
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| Distance can be an advantage. It allows foreign subsidiaries to experiment with unconventional or unpopular projects that would be closed down if they were more visible to headquarters. | |
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| —Birkinshaw & Hood |
For the last eight years, we have studied more than 50 multinational corporations to understand what companies can do differently to encourage innovation in foreign subsidiaries—what we call "innovation at the edges." Our observations suggest that when companies start to think of foreign subsidiaries as peninsulas rather than as islands—as extensions of the company's strategic domain rather than as isolated outposts—innovative ideas flow more freely from the periphery to the corporate center. (We first heard the peninsula concept articulated by managers at Monsanto Canada as they grappled with the challenge of redefining their role after the 1989 Free Trade Agreement with the United States.) But even more than a change in mind-set, corporate executives require a new set of practices, with two aims: to improve the formal and informal channels of communication between headquarters and subsidiaries and to give foreign subsidiaries more authority to see their ideas through. Only then can companies ensure that bright ideas—and the smart people who dream them up—don't end up marooned on desert islands.
Peninsulas, not islandsFostering innovation in foreign subsidiaries is a familiar goal, but it is extremely difficult to achieve in real life. In the past, multinationals recognized the need to tap into a few select subsidiaries, but today successful corporate executives recognize that good ideas can come from any foreign subsidiary. (See the sidebar "Three Eras of the Multinational.") The challenge is to find ways to liberalize, not tighten, internal systems and to delegate more authority to local subsidiaries. It isn't enough to ask subsidiary managers to be innovative; corporate managers need to give them incentives and support systems to facilitate their efforts. That's more easily said than done, of course, but our observations suggest four approaches:
- Give seed money to subsidiaries.
- Use formal requests for proposals.
- Encourage subsidiaries to be incubators.
- Build international networks.
When these practices are set in motion, we can expect far more creative and genuinely innovative ideas to emerge from the edges of the corporation.
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Three Eras of the Multinational
Excerpted with permission from "Unleash Innovation in Foreign Subsidiaries," Harvard Business Review, March 2001, Vol. 79, No. 3.
Multinationals have evolved through three phases over the past 50 years, both in terms of their geographic scope and the roles played by their foreign subsidiaries:
Paternalism. In the first half of the twentieth century, the dominant model for multinationals was to innovate in the home country and then roll out new products across the corporate empire. U.S. companies like Caterpillar, IBM, and Procter & Gamble became masters of this model. But as foreign markets for the established multinationals became more sophisticated and as the foreign subsidiaries in those countries grew stronger, it gradually became apparent that the home country did not have a monopoly on innovation and leading-edge thinking.
Expansionism. In the 1970s and 1980s, many multinational corporations set up "scanning units" to tap into the ideas coming out of key foreign markets, and they built R&D sites abroad to gain access to scientific communities. But welcome as they were, corporate investments of this type represented but a halfhearted attempt to tap into the ideas and opportunities in foreign markets. There were two major problems. First, scanning units and foreign R&D labs were attractive in principle but difficult to manage effectively. For example, many European multinationals, including Volkswagen, Volvo, and Ericsson, established development centers in California, but in most cases the units struggled to successfully transfer and integrate their ideas with those of their parent companies. Second, by defining certain units as responsible for picking up new ideas, corporate managers were implicitly signaling to all other foreign units that they did not have to bother. Such an approach limited growth opportunities to a few select markets or technologies and dampened the initiative of subsidiary managers in other foreign units.
Liberalism. A third model, now emerging, takes a more democratic approach to the pursuit of new opportunities. It builds on two basic arguments: first, useful new business ideas can emerge from anywhere in the world, particularly those parts of the organization that are in direct contact with customers, suppliers, and other external parties. Second, the greater the distance from the center, the less constrained individuals are by the traditions, norms, and belief structures of the corporation. This is the argument that subsidiaries should be viewed as peninsulas rather than islands. As multinationals take such an approach, we can expect far more creative and genuinely innovative ideas to emerge from the edge of the corporation than from the center. The challenge becomes one of tapping into the ideas and leveraging them effectively.