Performance Evaluation of Foreign Subsidiaries

Katharina Kretschmer Performance Evaluation of Foreign Subsidiaries

mir-Edition Herausgeber / Editors: Prof. Dr. Andreas Al-Laham Technische Universität Kaiserslautern, Prof. Dr. Johann Engelhard Universität Bamberg, Prof. Dr. Michael Kutschker Universität Eichstätt, Ingolstadt, Prof. Dr. Profs. h.c. Dr. h.c. Klaus Macharzina Universität Hohenheim, Stuttgart, Prof. Dr. Michael-Jörg Oesterle Universität Bremen, Prof. Dr. Stefan Schmid ESCP-EAP Europäische Wirtschaftshochschule Berlin, Prof. Dr. Martin K. Welge Universität Dortmund, Prof. Dr. Joachim Wolf Universität Kiel

In der mir-Edition werden wichtige Ergebnisse der wissenschaftlichen Forschung sowie Werke erfahrener Praktiker auf dem Gebiet des internationalen Managements veröffentlicht. The series mir-Edition includes excellent academic contributions and experiential works of distinguished international managers.

Katharina Kretschmer

Performance Evaluation of Foreign Subsidiaries With a foreword by Prof. Dr. Stefan Schmid

GABLER EDITION WISSENSCHAFT

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Dissertation, ESCP-EAP Europäische Wirtschaftshochschule Berlin, 2007 Dr. Katharina Kretschmer ist als Unternehmensberaterin bei The Boston Consulting Group tätig. Dr. Katharina Kretschmer works as Management Consultant at The Boston Consulting Group.

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Klaus Macharzina, Martin K. Welge, Michael Kutschker, Johann Engelhard

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Foreword

In International Business (IB) and International Management (IM) literature headquarters-subsidiary relationships have been an important topic for many decades. In some publications they are analyzed from the perspective of the hierarchically structured MNC, in other publications they are studied from the perspective of the network MNC. It is surprising, however, that the literature on headquarters-subsidiary relationships has not taken a central question into account: How are MNC subsidiaries evaluated when it comes to their performance, and does the role of a subsidiary have an influence on performance evaluation? The present contribution by Katharina Kretschmer aims at filling this gap. The research on which this publication is based is part of the research programme at my department which is devoted to exploring the management of foreign subsidiaries. Katharina Kretschmer shares the assumption that foreign subsidiaries can play various roles within the MNC. She uses the prominent typologies by Bartlett/Ghoshal and Gupta/Govindarajan to establish the link between the role of an MNC subsidiary and the way performance evaluation is carried out. To accomplish her objectives, Katharina Kretschmer develops a systematic conceptual framework on different components of performance evaluation. She formulates theoretically grounded propositions which are, later on, confronted with empirical data. By using a case study approach, involving two German MNCs in a transnational industry, Katharina Kretschmer’s contribution is manifold. First, unlike many other authors in the subsidiary role typology field within IB/IM research, Katharina Kretschmer studies various subsidiaries within MNCs (instead of analyzing subsidiaries across MNCs). Second, Katharina Kretschmer succeeds in finding empirical evidence for the fact that subsidiaries within an MNC are indeed having various roles. Third, the research carried out confirms that the role of a subsidiary can have an influence on the performance evaluation. The contribution of the current research is also highly relevant for management practice. While it was discovered during the research process that MNC subsidiaries have various roles and hence are also evaluated differently, managers did not always actively and deliberately use the differentiation potential. Instead, there is still reason to believe that some elements of performance evaluation are not fully linked to the role a subsidiary has. In other words: In the future, MNC top-management could benefit from even more considering the relationship between the subsidiary role and the related consequences. Good parents know that their children may differ, and hence they approach them differently. The same holds true for MNCs: Headquarters

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should not treat all subsidiaries alike – also when it comes to performance evaluation. I am sure that, given its high relevance, its obvious quality, and its innovativeness, the work by Katharina Kretschmer will not only influence future research in the IB/IM field, but can also be very valuable for management practice.

Berlin, July 2008

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Stefan Schmid

Preface

This thesis has been accepted as Ph.D.-Thesis at the ESCP-EAP European School of Management Berlin in 2007. Only minor formal corrections have been made for this publication. The thesis has been written during my work as research and teaching assistant at the Chair of International Management and Strategic Management at ESCP-EAP Berlin. I would like to use this preface to thank all persons who accompanied and supported this project. First of all, I would like to express my gratitude to my academic teacher and "Doktorvater" Prof. Dr. Stefan Schmid. He was always available and approachable as a discussion partner, provided fruitful ideas and came up with the right comments at the right time. By asking the relevant questions he guided this project into the right direction. Prof. Schmid did not only supervise my dissertation project, but constantly exemplified enthusiasm and joy to do research and teach students through his own life. Thereby, he inspired me throughout my exciting and instructive years at the Chair of International Management and Strategic Management. Thanks a lot! I am also much obliged to Prof. Dr. Michael-Jörg Oesterle who did not hesitate to act as second reviewer for my thesis. He already influenced the first milestones of this project when commenting my presentation at our joint doctoral colloquium. Prof. Oesterle provided helpful comments and was always concerned that the wood remained visible despite for all the trees. Thank you very much! The empirical part of this thesis is based on case studies with two multinational corporations. I am grateful for the support and energy the responsible persons put into this project. I would like to thank every single interview partner who took the time for lengthy and detailed discussions. Thank you for supporting this academic research project! Without these discussions the important and very interesting insights into how subsidiaries are evaluated in management practice would not have been possible. Conducting the interviews required a significant amount of travel which, of course, beared cost. The "Förderverein Kurt Fordan" provided me with a generous scholarship which made it possible to design the empirical research in an optimal way. For this and the opportunity to be part of a special network of entrepreneurial young people, I would like to express my gratitude to Kurt Fordan. In addition, I would like to thank my fellow research and teaching assistants who supported me extensively in a number of ways: On the one hand, they took over my duties and responsibilities at the Chair of International Management and Strategic Management so that I could spend half a year working exclusively on my thesis. On the other hand, they provided me with helpful comments and ideas for my own

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research. Furthermore, they revised selected chapters of this thesis with patience and attention so that Prof. Schmid's (very high) demands concerning structure and formal requirements could be met. My thanks go to: Dipl.-Psych. Andrea Daniel, Dipl.-Kffr. Julia Maurer, Dr. Matthias Daub, Dipl.-Kfm. Mario Machulik, Dipl.-Kffr. Monika Dammer, Dipl.-Kfm. Philipp Grosche, Dipl.-Kffm. Stephan Schulze, Dipl.-Kffr. Swantje Hartmann and Dipl.-Kfm. Thomas Kotulla. In this respect, I would also like to thank Renate Ramlau and Dipl.-Kffr. Bernadette Müller for their support! Input regarding structure, form and content is not sufficient to finalize a thesis: The required motivation and persistency were triggered by my family, my partner Matthias Hefter and my friends who accompanied my challenging journey called "Ph.D.thesis". Special thanks go to my parents who were sceptical about this project at first, but then supported it in all respects and with all possible efforts. They provided the necessary backing and support for this project to become a success. This thesis is dedicated to my parents and grandparents.

Bonn, July 2008

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Katharina Kretschmer

Overview of the Contents

1

Introduction ..............................................................................................................1 1.1 Performance Evaluation of Foreign Subsidiaries as a Management Problem ............................................................................................................1 1.2 Research Background and Research Questions..........................................2 1.3 Outline of the Study.........................................................................................4

2

Defining Performance Evaluation and Its Role as Control Mechanism...............7 2.1 Performance Evaluation as Control Mechanism...........................................7 2.2 The Concept of Performance Evaluation.....................................................17 2.3 An Integrative Concept of Performance Evaluation ...................................24

3

Review of the Literature on Performance Evaluation of Foreign Subsidiaries.27 3.1 Objectives and Methodology of the Literature Review...............................27 3.2 Descriptive Contributions on Performance Evaluation of Foreign Subsidiaries ...................................................................................................30 3.3 Explanatory Contributions on Performance Evaluation of Foreign Subsidiaries ...................................................................................................35 3.4 Conclusions and Implications of the Literature Review.............................42

4

The Research Framework......................................................................................45 4.1 A Contingency Framework of Role-Specific Performance Evaluation......45 4.2 Propositions on Role-Specific Performance Evaluation ............................68

5

The Empirical Study...............................................................................................91 5.1 Research Design............................................................................................91 5.2 Operationalization of the Elements of the Contingency Framework.........99 5.3 Data Collection.............................................................................................118 5.4 Data Analysis ...............................................................................................122 5.5 Review of the Research Approach .............................................................129

6

Empirical Findings ...............................................................................................133 6.1 Empirical Findings on “Eucom” .................................................................133 6.2 Empirical Findings on “Gloneer” ...............................................................181 6.3 Comparison of the Role-Specific Performance Evaluation at Eucom and Gloneer..................................................................................................289

7

Contributions, Limitations and Implications for Future Research...................293

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Contents

Figures ……………………………………………………………………………….……... XVII Tables ……………………………………………………………………………………… ...XIX

1

Introduction ..............................................................................................................1 1.1 Performance Evaluation of Foreign Subsidiaries as a Management Problem ............................................................................................................1 1.2 Research Background and Research Questions..........................................2 1.3 Outline of the Study.........................................................................................4

2

Defining Performance Evaluation and Its Role as Control Mechanism...............7 2.1 Performance Evaluation as Control Mechanism...........................................7 2.1.1 Control ..........................................................................................................7 2.1.2 Performance as Achievement of Legitimate Goals .....................................12 2.1.3 Evaluation as Control Step .........................................................................16 2.2 The Concept of Performance Evaluation.....................................................17 2.2.1 The Role of Performance Evaluation within the Control Mix .......................18 2.2.2 The Content of Performance Evaluation .....................................................20 2.2.3 The Process of Performance Evaluation ....................................................22 2.3 An Integrative Concept of Performance Evaluation ...................................24

3

Review of the Literature on Performance Evaluation of Foreign Subsidiaries.27 3.1 Objectives and Methodology of the Literature Review...............................27 3.2 Descriptive Contributions on Performance Evaluation of Foreign Subsidiaries ...................................................................................................30 3.2.1 Topics of Descriptive Contributions ............................................................31 3.2.2 Differentiation of Performance Evaluation in Descriptive Contributions ......32 3.2.3 Methodologies and Research Design of Descriptive Contributions ............34 3.3 Explanatory Contributions on Performance Evaluation of Foreign Subsidiaries ...................................................................................................35 3.3.1 Topics of Explanatory Contributions ...........................................................35 3.3.2 Differentiation of Performance Evaluation in Explanatory Contributions.....36 3.3.3 Methodologies and Research Design of Explanatory Contributions ...........40 3.4 Conclusions and Implications of the Literature Review.............................42 XV

4

The Research Framework......................................................................................45 4.1 A Contingency Framework of Role-Specific Performance Evaluation......45 4.1.1 Contingency Theory as Theoretical Background ........................................45 4.1.1.1 Introducing Contingency Theory ........................................................46 4.1.1.2 Excluding Other Organization Theories .............................................48 4.1.2 Developing a Contingency Framework of Role-Specific Performance Evaluation ...................................................................................................52 4.1.2.1 General Contingency Framework of Role-Specific Performance Evaluation ..........................................................................................52 4.1.2.2 Selection of Role Typologies to Specify the Contingency Factor.......54 4.1.2.3 Identification of Two Relevant Role Typologies .................................59 4.1.2.4 Specified Contingency Framework of Role-Specific Performance Evaluation ..........................................................................................64 4.1.3 Review of the Contingency Framework ......................................................65 4.2 Propositions on Role-Specific Performance Evaluation ............................68 4.2.1 Performance Evaluation of Subsidiaries in Bartlett and Ghoshal’s Role Typology .....................................................................................................69 4.2.1.1 Predictions for the Strategic Importance of the Market ......................69 4.2.1.2 Predictions for the Competence of the Local Organization ................72 4.2.1.3 Propositions on the Impact of the Subsidiary Roles on Performance Evaluation.....................................................................74 4.2.1.3.1 Strategic Leader ....................................................................74 4.2.1.3.2 Contributor ............................................................................75 4.2.1.3.3 Implementer ..........................................................................77 4.2.1.3.4 Black Hole .............................................................................78 4.2.2 Performance Evaluation of Subsidiaries in Gupta and Govindarajan’s Role Typology.............................................................................................79 4.2.2.1 Predictions for Knowledge Inflow .......................................................80 4.2.2.2 Predictions for Knowledge Outflow ....................................................81 4.2.2.3 Propositions on the Impact of the Subsidiary Roles on Performance Evaluation.....................................................................84 4.2.2.3.1 Integrated Player ...................................................................84 4.2.2.3.2 Global Innovator....................................................................86 4.2.2.3.3 Local Innovator......................................................................87 4.2.2.3.4 Implementor ..........................................................................88

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5

The Empirical Study...............................................................................................91 5.1 Research Design............................................................................................91 5.1.1 Rationale for a Qualitative Case Study Approach.......................................91 5.1.2 The Multiple Case Design...........................................................................93 5.1.2.1 Introduction on the Case Design........................................................93 5.1.2.2 The Selection of Business Units as Cases ........................................94 5.1.2.3 The Selection of Subsidiaries as Units of Observation ......................96 5.2 Operationalization of the Elements of the Contingency Framework.........99 5.2.1 Operationalization of the Role Typologies ..................................................99 5.2.1.1 Operationalization of Bartlett and Ghoshal’s Subsidiary Roles ........100 5.2.1.1.1 Background of the Classifying Dimensions .........................100 5.2.1.1.2 Strategic Importance of the Market .....................................102 5.2.1.1.3 Competence of Local Organization .....................................104 5.2.1.2 Operationalization of Gupta and Govindarajan’s Subsidiary Roles..107 5.2.2 Operationalization of the Performance Evaluation Concept .....................111 5.2.2.1 Operationalization of the Role of Performance Evaluation within the Control Mix.......................................................................................111 5.2.2.2 Operationalization of the Content of Performance Evaluation .........114 5.2.2.3 Operationalization of the Process of Performance Evaluation .........116 5.3 Data Collection.............................................................................................118 5.4 Data Analysis ...............................................................................................122 5.5 Review of the Research Approach .............................................................129

6

Empirical Findings ...............................................................................................133 6.1 Empirical Findings on “Eucom”.................................................................133 6.1.1 Introducing Eucom and Its Subsidiaries....................................................133 6.1.2 The German Subsidiary of Eucom............................................................135 6.1.2.1 The Roles of the German Subsidiary – Contributor and Global Innovator..........................................................................................136 6.1.2.2 The Evaluation of the Performance of the German Subsidiary ........139 6.1.3 The Spanish Subsidiary of Eucom............................................................148 6.1.3.1 The Roles of the Spanish Subsidiary – Implementer and Local Innovator..........................................................................................148 6.1.3.2 The Evaluation of the Performance of the Spanish Subsidiary ........152 6.1.4 The Finnish Subsidiary of Eucom .............................................................158 6.1.4.1 The Roles of the Finnish Subsidiary – Strategic Leader and Global Innovator..........................................................................................158 6.1.4.2 The Evaluation of the Performance of the Finnish Subsidiary .........162 XVII

6.1.5 Discussion of the Performance Evaluation at Eucom ...............................170 6.1.5.1 Performance Evaluation of the Eucom Subsidiaries in Bartlett and Ghoshal’s Role Typology .................................................................170 6.1.5.1.1 Performance Evaluation of the Strategic Leader.................170 6.1.5.1.2 Performance Evaluation of the Contributor .........................172 6.1.5.1.3 Performance Evaluation of the Implementer .......................173 6.1.5.2 Performance Evaluation of Eucom Subsidiaries in Gupta and Govindarajan’s Role Typology .........................................................174 6.1.5.2.1 Performance Evaluation of the Integrated Player................174 6.1.5.2.2 Performance Evaluation of the Global Innovator.................175 6.1.5.2.3 Performance Evaluation of the Local Innovator...................176 6.1.6 Standardization versus Role-Differentiation in Performance Evaluation at Eucom ......................................................................................................177 6.2 Empirical Findings on “Gloneer” ...............................................................181 6.2.1 Introducing Gloneer and Its Subsidiaries ..................................................181 6.2.2 The Gloneer Subsidiary “Germany L” .......................................................186 6.2.2.1 The Roles of Germany L – Strategic Leader and Local Innovator ...186 6.2.2.2 The Evaluation of Germany L’s Performance ..................................190 6.2.3 The Gloneer Subsidiary “USA L” ..............................................................198 6.2.3.1 The Roles of USA L – Strategic Leader and Local Innovator...........198 6.2.3.2 The Evaluation of USA L’s Performance..........................................199 6.2.4 The Gloneer Subsidiary “Switzerland” ......................................................206 6.2.4.1 The Roles of “Switzerland” – Contributor and Local Innovator.........206 6.2.4.2 The Evaluation of “Switzerland’s” Performance ...............................210 6.2.5 The Gloneer Subsidiary “Germany S”.......................................................216 6.2.5.1 The Roles of Germany S – Contributor and Local Innovator ...........216 6.2.5.2 The Evaluation of Germany S’ Performance....................................218 6.2.6 The Gloneer Subsidiary “Sweden”............................................................224 6.2.6.1 The Subsidiary “Sweden” – Contributor and Local Innovator...........224 6.2.6.2 The Evaluation of “Sweden’s” Performance.....................................226 6.2.7 The Gloneer Subsidiary “Germany P”.......................................................231 6.2.7.1 The Roles of Germany P – Contributor and Global Innovator..........232 6.2.7.2 The Evaluation of Germany P’s Performance..................................235 6.2.8 The Gloneer Subsidiary “Great Britain”.....................................................241 6.2.8.1 The Roles of “Great Britain” – Implementer and Local Innovator .....241 6.2.8.2 The Evaluation of “Great Britain’s” Performance .............................244 6.2.9 The Gloneer Subsidiary “China” ...............................................................250 XVIII

6.2.9.1 The Roles of “China” – Black Hole and Implementor .......................251 6.2.9.2 The Evaluation of “China’s” Performance ........................................255 6.2.10 The Gloneer Subsidiary “India” .................................................................263 6.2.10.1 The Roles of “India” – Black Hole and Implementor.........................263 6.2.10.2 The Evaluation of “India’s” Performance..........................................265 6.2.11 Discussion of the Performance Evaluation at Gloneer..............................270 6.2.11.1 Performance Evaluation of the Gloneer Subsidiaries in Bartlett and Ghoshal’s Role Typology .................................................................271 6.2.11.1.1 Performance Evaluation of the Strategic Leaders ...............271 6.2.11.1.2 Performance Evaluation of the Contributors........................274 6.2.11.1.3 Performance Evaluation of the Implementer .......................277 6.2.11.1.4 Performance Evaluation of the Black Holes ........................277 6.2.11.2 Performance Evaluation of Gloneer Subsidiaries in Gupta and Govindarajan’s Role Typology .........................................................279 6.2.11.2.1 Performance Evaluation of the Global Innovator.................280 6.2.11.2.2 Performance Evaluation of the Local Innovators.................281 6.2.11.2.3 Performance Evaluation of the Implementors .....................283 6.2.11.3 Standardization versus Role-Differentiation in Performance Evaluation at Gloneer ......................................................................284 6.3 Comparison of the Role-Specific Performance Evaluation at Eucom and Gloneer..................................................................................................289 7

Contributions, Limitations and Implications for Future Research...................293

Appendices ................................................................................................................. 301 References .................................................................................................................. 331

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Figures

Figure 1:

The Determination of Performance in Relation to Organizational Goals ......................................................................................................14

Figure 2:

Control Objects and Their Requirements................................................20

Figure 3:

Conceptual Framework of Performance Evaluation................................24

Figure 4:

Contingency Framework of Performance Evaluation of Foreign Subsidiaries ............................................................................................39

Figure 5:

Basic Framework of Contingency Theory ...............................................46

Figure 6:

General Contingency Framework of Role-Specific Performance Evaluation of Foreign Subsidiaries .........................................................53

Figure 7:

Bartlett and Ghoshal's Role Typology.....................................................63

Figure 8:

Gupta and Govindarajan's Role Typology ..............................................63

Figure 9:

Specified Contingency Framework of Role-Specific Performance Evaluation ...............................................................................................65

Figure 10: Research Design ....................................................................................99 Figure 11: Initial Category Schema for the Analysis of Role-Specific Performance Evaluation........................................................................125 Figure 12: Final Category Schema for the Analysis of Role-Specific Performance Evaluation........................................................................126 Figure 13: Legal Organization of Eucom................................................................134 Figure 14: The Roles of the Eucom Subsidiaries ...................................................135 Figure 15: The Level of Competence of the German Subsidiary of Eucom ...........138 Figure 16: Knowledge Inflows and Knowledge Outflows at the German Subsidiary of Eucom .............................................................................139 Figure 17: The Level of Competence of the Spanish Subsidiary of Eucom ...........150 Figure 18: Knowledge Inflows and Knowledge Outflows at the Spanish Subsidiary of Eucom .............................................................................152 Figure 19: The Level of Competence of the Finnish Subsidiary of Eucom.............160 Figure 20: Knowledge Inflows and Knowledge Outflows at the Finnish Subsidiary of Eucom .............................................................................162 Figure 21: Role-Specific Performance Evaluation at Eucom According to Bartlett and Ghoshal’s Role Typology...................................................177 Figure 22: Role-Specific Performance Evaluation at Eucom According to Gupta and Govindarajan’s Role Typology ............................................178 Figure 23: Legal Organization of Gloneer ..............................................................182 Figure 24: The Roles of the Gloneer Subsidiaries (I/II) ..........................................184 Figure 25: The Roles of the Gloneer Subsidiaries (II/II) .........................................185

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Figure 26: The Competence Level of the Gloneer Subsidiary Germany L.............188 Figure 27: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary Germany L ..........................................................................190 Figure 28: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary USA L..................................................................................199 Figure 29: The Competence Level of the Gloneer Subsidiary "Switzerland" .........208 Figure 30: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “Switzerland” .......................................................................210 Figure 31: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary Germany S ..........................................................................218 Figure 32: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “Sweden”.............................................................................226 Figure 33: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary Germany P ..........................................................................234 Figure 34: The Level of Competence of “Great Britain” .........................................243 Figure 35: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “Great Britain”......................................................................244 Figure 36: The Competence Level of the Gloneer Subsidiary “China”...................253 Figure 37: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “China” ................................................................................255 Figure 38: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “India” ..................................................................................264 Figure 39: Role-Specific Performance Evaluation at Gloneer According to Bartlett and Ghoshal’s Role Typology...................................................285 Figure 40: Role-Specific Performance Evaluation at Gloneer According to Gupta and Govindarajan’s Role Typology ............................................286

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Tables

Table 1:

Synopsis of Definitions of Control .............................................................9

Table 2:

Synopsis of Definitions of Coordination ..................................................11

Table 3:

Performance Approached from Various Perspectives ............................16

Table 4:

Organizational Control ............................................................................25

Table 5:

Overview of Relevant Descriptive Studies (in Chronological Order). ......29

Table 6:

Overview of Relevant Explanatory Studies (in Chronological Order). .....30

Table 7:

Simplified Comparison of the Suitability of Selected Organization Theories..................................................................................................49

Table 8:

Overview of Role Typologies ..................................................................56

Table 9:

Selected Role Typologies .......................................................................60

Table 10:

Criticism of Traditional Contingency Approaches ...................................66

Table 11:

Bartlett and Ghoshal’s Role Typology Dimensions and Performance Evaluation ...............................................................................................74

Table 12:

Predictions on Role-Specific Performance Evaluation of Strategic Leaders, Contributors, Implementers and Black Holes ...........................79

Table 13:

Gupta and Govindarajan’s Role Typology Dimensions and Performance Evaluation..........................................................................84

Table 14:

Predictions on Role-Specific Performance Evaluation of Integrated Players, Global Innovators, Local Innovators and Implementors ............89

Table 15:

The Classifying Dimensions of the Role Typologies Presented by Bartlett, Ghoshal and Nohria.................................................................102

Table 16:

Potential Measures of Strategic Importance of the Market ...................104

Table 17:

Measurement Approaches for the Level of Competence ......................106

Table 18:

Potential Measures of the Level of Competence ..................................107

Table 19:

Measurement Approaches for Knowledge Flows..................................109

Table 20:

Possible Measures of Knowledge Inflows and Outflows .......................110

Table 21:

Possible Operationalizations of the Control Mix....................................113

Table 22:

Possible Content of Performance Evaluation........................................115

Table 23:

Possible Operationalizations of the Process of Performance Evaluation .............................................................................................117

Table 24:

Strengths and Weaknesses of Interviews as Data Collection Technique .............................................................................................119

Table 25:

Comparison of Two Interview Modes....................................................122

Table 26:

Comparison of Approaches to Content Analysis...................................123

Table 27:

The Control Mix Used for Eucom’s German Subsidiary........................143 XXIII

Table 28:

The Content of Performance Evaluation of Eucom’s German Subsidiary .............................................................................................145

Table 29:

The Performance Evaluation Process of Eucom’s German Subsidiary .............................................................................................147

Table 30:

The Control Mix Used for Eucom’s Spanish Subsidiary........................155

Table 31:

The Content of Performance Evaluation of Eucom’s Spanish Subsidiary .............................................................................................156

Table 32:

The Performance Evaluation Process of Eucom’s Spanish Subsidiary .............................................................................................157

Table 33:

The Control Mix Used for Eucom’s Finnish Subsidiary .........................166

Table 34:

The Content of Performance Evaluation of Eucom’s Finnish Subsidiary .............................................................................................167

Table 35:

The Performance Evaluation Process of Eucom’s Finnish Subsidiary .............................................................................................170

Table 36:

Appropriateness of the Propositions on the Performance Evaluation of Strategic Leaders at Eucom..............................................................171

Table 37:

Appropriateness of the Propositions on the Performance Evaluation of Contributors at Eucom ......................................................................173

Table 38:

Appropriateness of the Propositions on the Performance Evaluation of Implementers at Eucom ....................................................................174

Table 39:

Appropriateness of the Propositions on the Performance Evaluation of Integrated Players at Eucom.............................................................175

Table 40:

Appropriateness of the Propositions on the Performance Evaluation of Global Innovators at Eucom..............................................................176

Table 41:

Appropriateness of the Propositions on the Performance Evaluation of Local Innovators at Eucom..............................................176

Table 42:

The Control Mix Used for the Gloneer Subsidiary Germany L ..............193

Table 43:

The Content of Performance Evaluation of the Gloneer Subsidiary Germany L ..........................................................................195

Table 44:

The Performance Evaluation Process of the Gloneer Subsidiary Germany L ............................................................................................197

Table 45:

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary USA L.....................................198

Table 46:

The Control Mix Used for the Gloneer Subsidiary USA L .....................202

Table 47:

The Content of Performance Evaluation of the Gloneer Subsidiary USA L ...................................................................................................203

Table 48:

The Performance Evaluation Process of the Gloneer Subsidiary USA L ...................................................................................................205

Table 49:

The Control Mix Used for the Gloneer Subsidiary “Switzerland”...........213

Table 50:

The Content of Performance Evaluation of the Gloneer Subsidiary “Switzerland”.........................................................................................214

X XIV

Table 51:

The Performance Evaluation Process of the Gloneer Subsidiary “Switzerland”.........................................................................................216

Table 52:

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary Germany S .............................217

Table 53:

The Control Mix Used for the Gloneer Subsidiary Germany S..............221

Table 54:

The Content of Performance Evaluation of the Gloneer Subsidiary Germany S............................................................................................222

Table 55:

The Performance Evaluation Process of the Gloneer Subsidiary Germany S............................................................................................224

Table 56:

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary “Sweden”................................225

Table 57:

The Control Mix Used for the Gloneer Subsidiary “Sweden” ................228

Table 58:

The Content of Performance Evaluation of the Gloneer Subsidiary “Sweden” ..............................................................................................229

Table 59:

The Performance Evaluation Process of the Gloneer Subsidiary “Sweden” ..............................................................................................231

Table 60:

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary Germany P .............................232

Table 61:

The Control Mix Used for the Gloneer Subsidiary Germany P..............237

Table 62:

The Content of Performance Evaluation of the Gloneer Subsidiary Germany P ..........................................................................239

Table 63:

The Performance Evaluation Process of the Gloneer Subsidiary Germany P............................................................................................241

Table 64:

The Control Mix Used for the Gloneer Subsidiary “Great Britain” .........247

Table 65:

The Content of Performance Evaluation of the Gloneer Subsidiary “Great Britain” .......................................................................................248

Table 66:

The Performance Evaluation Process of the Gloneer Subsidiary “Great Britain” .......................................................................................250

Table 67:

The Control Mix Used for the Gloneer Subsidiary “China” ....................258

Table 68:

The Content of Performance Evaluation of the Gloneer Subsidiary “China” ..................................................................................................260

Table 69:

The Performance Evaluation Process of Gloneer’s Subsidiary “China” ..................................................................................................262

Table 70:

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary India .......................................264

Table 71:

The Control Mix Used for the Gloneer Subsidiary “India”......................267

Table 72:

The Content of Performance Evaluation of Gloneer’s Subsidiary “India”....................................................................................................268

Table 73:

The Performance Evaluation Process of Gloneer’s Indian Subsidiary ..270

Table 74:

Appropriateness of the Propositions on the Performance Evaluation of Strategic Leaders at Gloneer ............................................................272 X XV

Table 75:

Appropriateness of the Propositions on the Performance Evaluation of Contributors at Gloneer (I/II) .............................................................275

Table 76:

Appropriateness of the Propositions on the Performance Evaluation of Contributors at Gloneer (II/II) ............................................................276

Table 77:

Appropriateness of the Propositions on the Performance Evaluation of Implementers at Gloneer ..................................................................277

Table 78:

Appropriateness of the Propositions on the Performance Evaluation of Black Holes at Gloneer .....................................................................278

Table 79:

Appropriateness of the Propositions on the Performance Evaluation of Global Innovators at Gloneer ............................................................280

Table 80:

Appropriateness of the Propositions on the Performance Evaluation of Local Innovators at Gloneer..............................................................281

Table 81:

Appropriateness of the Propositions on the Performance Evaluation of Implementors at Gloneer ..................................................................283

Table 82:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Strategic Leaders .................................................................289

Table 83:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Contributors and Global Innovators ......................................290

Table 84:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Implementers........................................................................291

Table 85:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Local Innovators ...................................................................292

X XV I

1 Introduction

1.1 Performance Evaluation of Foreign Subsidiaries as a Management Problem Today, many Multinational Corporations (MNCs) generate more turnover abroad than in their home countries. Their value chain activities are spread across the globe (Porter 1986: 23) and foreign subsidiaries play a crucial role in creating value within and for the MNC. While some MNCs are aware of their subsidiaries’ performance, others have only a vague idea. Evaluation of performance, however, is one central aspect in international management. But why is performance evaluation so important for MNCs and their management? For decision making as well as the development and implementation of strategy, the management at headquarters needs to know how subsidiaries are performing (Mauriel 1969: 35, Chung et al. 2002: 112). Thus, for instance, when taking strategic decisions on international expansion, it is important to consider the performance of the subsidiaries. Performance evaluation is essential to obtaining a true picture of subsidiaries’ activities since it shows both successful and unsuccessful developments. While best practices can be revealed when the result of the evaluation is positive, performance evaluation provides early warnings in the case of difficulties (Choi/Czechowicz 1983: 15, Rolander et al. 1989: 1015). Furthermore, performance evaluation is necessary for motivating subsidiaries, and in particular subsidiary managers (Mintzberg 1979b: 151, Abdallah 1984: 3, Bergmann 1996: 56). Performance evaluation is not only important at the level of each single subsidiary, it is also an integrating mechanism throughout the MNC (Chang/Taylor 1999: 542). As executives primarily engage in favour of the evaluation criteria, performance evaluation can foster compatible actions towards common organizational goals when these are formulated as subsidiary targets (Böttcher 1995: 339). Furthermore, the top management of the MNC has to decide on how to allocate scarce resources within the MNC. This allocation is frequently based on the performance evaluation of the subsidiaries (Czechowicz et al. 1982: 10, Watty/Terzioglu 1999: 11). In spite of its practical importance, research on the assessment of subsidiary performance is limited (Roth/O'Donnell 1996: 687). “The strategic opportunities of subsidiaries seem to generate more attention than their results” (Andersson et al. 2001: 5). Therefore, more conceptual and empirical research is needed on

K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1_1, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

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“performance evaluation systems measuring the whole spectrum of desirable behaviour on the subsidiary level“ (Böttcher 1995: 341).

1.2 Research Background and Research Questions In academic literature as well as in management practice, conflicting statements concerning the standardization and differentiation of performance evaluation are to be found. On the one hand, researchers and managers argue that standardization of performance evaluation of foreign subsidiaries can be beneficial (Mirow 1996: 354355, Müller 1996: 120-122, Pausenberger 1996: 194, Melching 1997: 247, Ernst 2000: 140). On the other hand, they present arguments for differentiating performance evaluation according to context and/or strategy1 at corporate and/or subsidiary level (Bierich 1988: 43, Appleyard et al. 1990: 407, Liedl 1994: 123, Welge/Holtbrügge 1999: 570-571, Berens/Hoffjan 2003: 231, Littkemann 2004: 33, Persson 2006). It is widely accepted that performance evaluation can be influenced by various contingent factors (Pausenberger/Glaum 1994: 100-109, Berens et al. 2000: 21, Chung et al. 2002: 110): Consequently, the size of the subsidiary, the development stage of the subsidiary, the product portfolio, the geographical and cultural distance between headquarters and the subsidiary, the nationality of the MNC and the economic as well as the legal situation in the host country can influence performance evaluation. Whereas many other factors could have an influence on performance evaluation, it is often claimed that strategy should have a very strong impact. Strategy might even be the most important source of contingencies for control systems (Govindarajan/Gupta 1985: 51, Littkemann 2002: 339). Within academia, different efforts have already been made to link corporate and business unit strategy to management control systems (see Langfield-Smith 1997, Kald et al. 2000 for overviews). Simons was able to show that management control systems differ between prospector and defender companies (Simons 1987). The budget evaluative style as one aspect of performance evaluation varies across business units following a low cost strategy and business units following a differentiation strategy (Govindarajan 1988: 840, 844). More empirical studies 1

2

Following the classical distinction, context refers to the external environment and incorporates, for instance, economic, political, legal, cultural and financial factors or customers, competitors, suppliers and regulatory groups (Bourgeois III 1980: 33, Schmid 1996: 17, Noerreklit/Schoenfeld 2000: 416). Strategy is distinct from this context and “should mirror the most critical or constraining elements of that environment” (Egelhoff 1982: 435). This classical approach reflects a deterministic view of strategy and management since the latter need to be adapted to the context (Kutschker/Schmid 1995: 11-12, Dähn 1996: 17). In contrast, the voluntaristic perspective assumes that managers have strategic choices so that corporations can influence their context as well (Bourgeois III 1984: 591-592, Dähn 1996: 18). Further details on the relationship between context and strategy will be provided in section 4.1.

recognize the influence of strategy on management control (e.g. Govindarajan/Gupta 1985, Gupta 1987, Bruggeman/van der Stede 1993, St. John et al. 1999, Hoque 2004). In general, matching control systems with strategy is expected to lead to superior performance (Govindarajan 1988: 829, Hoque 2004: 496). This need for fit also applies to performance evaluation which forms part of control (Egelhoff 1984: 73): It is claimed that performance evaluation needs to fit strategy (Eccles 1991: 134, Neely et al. 1995: 83, Slater et al. 1997: 37, Otley 1999: 367, Chung et al. 2002: 110). Especially modern performance measurement systems, such as the Balanced Scorecard or Performance Pyramid, are explicitly linked to strategy and aim at implementing strategy (Anthony/Govindarajan 2001: 441, Baum et al. 2004: 339, Pun/White 2005). Within MNCs, subsidiaries can take on specific strategic roles (e.g. Schmid et al. 1998, Birkinshaw 2001: 389). They can be, for example, Strategic Leaders, Implementers, Contributors or Black Holes (Bartlett/Ghoshal 1986: 90-91). It has often been suggested that subsidiaries ought to be controlled according to their specific role (Govindarajan/Fisher 1990: 280, Harzing 1999: 309). This makes it possible for the subsidiary to better leverage its resources and capabilities, thus enhancing its own performance and that of the MNC as a whole (Macharzina 1993a: 31, Nohria/Ghoshal 1994: 499). Applying the claim of fit between strategy and control at the subsidiary level to performance evaluation indicates that each subsidiary should be evaluated according to its role. As the goals and strategies require appropriate performance measures (Kaplan 1984: 100, Otley 1999, Andersson et al. 2005: 525), the performance of Strategic Leaders would be evaluated differently than the performance of an Implementer, a Contributor or a Black Hole. So far, only suggestions concerning the appropriate control mechanisms for specific subsidiaries have been made and in part empirically tested (e.g. Bartlett/Ghoshal 1986: 94, 1989: 236, Gupta/Govindarajan 1991: 775-786, Martínez/Jarillo 1991, Gupta/Govindarajan 1994). When comparing findings on the impact of contingent factors on output control and performance evaluation, results are ambiguous (Bergmann 1996: 94-101). We do not know which context and/or strategic factors have a decisive impact on performance evaluation. This might be due to the fact that the different strategic roles of subsidiaries are not taken into account (Birkinshaw/Morrison 1995: 732). The relationship between performance evaluation and subsidiary roles has not yet been studied. Although the need to link subsidiary roles to specific control mechanisms has already been expressed, no extensive work has been done on this specific research topic so far (Andersson et al. 2002: 131, Kammer 2005: 44). Hence, the objective of this dissertation is to find out, if there is any relationship between the strategic role of the subsidiary and its performance evaluation. This

3

general research objective is further specified by formulating specific research questions in the following. However, two prior remarks are needed to determine the background for the research questions: First, the considered subsidiaries are confined further: Even though many role typologies have been developed based on subsidiaries of different MNCs, the differing roles of subsidiaries within one MNC seem much more interesting (Schmid 2004: 247). This project, therefore, sheds light on the performance evaluation of different subsidiaries within single MNCs. Second, the performance evaluation concept used in this study is briefly introduced. It incorporates three dimensions: the role of performance evaluation within the control mix, the content of performance evaluation and the process of performance evaluation. Based on this performance evaluation concept, the general objective to examine the potential link between foreign subsidiary roles and performance evaluation is broken down into three research questions: Research Question 1: (How) does the role of performance evaluation within the control mix differ according to the subsidiary role within an MNC? Research Question 2: (How) does the content of performance evaluation differ according to the subsidiary role within an MNC? Research Question 3: (How) does the process of performance evaluation differ according to the subsidiary role within an MNC?

1.3 Outline of the Study This dissertation intends to enhance knowledge in academia and management practice on the performance evaluation of foreign subsidiaries. The objective is to bridge existing research gaps and to explain the (potential) impact of the strategic role of subsidiaries on their performance evaluation. More specifically, three objectives can be formulated: First, performance evaluation of foreign subsidiaries is clarified by elaborating a new integrative concept of performance evaluation within the MNC. Accordingly, existing contributions on the topic will be reviewed. In addition, factors influencing performance evaluation will be identified. This is beneficial for academia since the state of the art in this research area is made explicit and critically reflected. It is also relevant for management practice: The performance evaluation concept and its influencing factors will provide managers with the relevant characteristics of

4

performance evaluation and help them to identify the crucial issues in conducting and/or designing the performance evaluation of foreign subsidiaries. However, the dissertation will not provide answers to the question of how foreign subsidiaries can best be evaluated since the link to MNC performance is not the subject of this research. Second, this dissertation aims at empirically identifying subsidiary roles within an MNC. This advances the research stream on role typologies since so far most researchers have been concentrating on assessing subsidiary roles of different MNCs (Schmid 2004: 247). It will also be beneficial for the managers of the analyzed business units and subsidiaries as characteristics of the subsidiaries will become apparent and possibly existing perception gaps (Arvidsson 1999: 102-104, Birkinshaw et al. 2000, Chini et al. 2005) will be identified. In general, management practice can become more aware of subsidiary roles and their specificities. Third, it is the objective of this dissertation to extend the research stream on role typologies even further by examining the relationship between the roles of subsidiaries and their performance evaluation. The performance evaluation of subsidiaries with different roles will be described in detail in order to reach a deep understanding of the role, content and process of their performance evaluation. In addition, the empirical findings will be compared to initial propositions to explain the potential impact of the subsidiary roles on performance evaluation within the boundaries of the cases. For management practice, the empirical findings will present valuable details on how performance of foreign subsidiaries can be evaluated. To reach these objectives, the dissertation will begin with a conceptual analysis. First, performance evaluation will be defined and a new concept of performance evaluation rooted in organization literature will be developed in chapter 2. This concept will help to classify existing literature which will be thoroughly reviewed in chapter 3. Proceeding from this background, a contingency framework of role-specific performance evaluation will be built in chapter 4. In the same chapter, propositions will be elaborated which will then guide the empirical part of the dissertation. On the basis of this conceptual background, the research design and the research steps will be introduced in chapter 5. A qualitative multiple case study design will be chosen to examine the link between subsidiary roles and their performance evaluation empirically. Subsequently, the empirical findings from two case studies will be described, analyzed and discussed in great detail in chapter 6. The previously elaborated propositions will be compared to the empirical findings in order to illustrate them and potentially reach initial support within the boundaries of the cases. The dissertation will conclude by addressing contributions, limitations and avenues for future research in chapter 7.

5

2 Defining Performance Evaluation and Its Role as Control Mechanism After having introduced the research background and objectives of this study, this chapter clarifies the conceptual background. To this end, central concepts, such as performance evaluation, control and coordination, are defined in section 2.1. Then, the elements of the concept of performance evaluation used in this study are described in section 2.2. This leads to the elaboration of an integrative framework of performance evaluation which is presented in section 2.3.

2.1 Performance Evaluation as Control Mechanism The objective of this introductory section is to define performance evaluation and classify it as a control and coordination mechanism. In doing so, different research areas are taken into account: Coordination and control have been topics of interest to international business researchers for decades (for instance Dobry 1983, Cray 1984, Egelhoff 1984, Roth/Nigh 1992, Hennart 1993, Macharzina 1993b, Taggart 1998b, Macharzina/Oesterle 2002b). While international business (IB) literature provides us with a host of relevant insights, additional input is rooted in management control and management accounting literature (for instance Brownell 1987, Lube 1997, Pausenberger 1997, Liedl 1999, Hoffjan et al. 2005). In order to achieve the objective of this section, the term “control” is first specified and established as a coordination mechanism (subsection 2.1.1). Second, performance is precisely defined (subsection 2.1.2), and evaluation is described as one step within the control process (subsection 2.1.3).

2.1.1

Control

Performance evaluation forms part of control and coordination within MNCs (Egelhoff 1984: 73). In international business literature, many different concepts of control and coordination exist (see Martínez/Jarillo 1991, Wolf 1994: 116, Harzing 1999: 7-30 for overviews), and the diversity of definitions confuses the interested reader (Leksell 1981a: 76). To clarify their application in this dissertation, the two terms – control (1) and coordination (2) – are defined as follows: (1) Control: According to Baliga, Jaeger and Child, “control is essentially concerned with regulating the activities within an organization so that they are in accord with the K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1_2, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

7

expectations established in policies, plans and targets” (Child 1973: 117, cited in Baliga/Jaeger 1984: 25)2. Table 1 provides additional definitions of control from IB literature (e.g. Leksell 1981a: 76, Harzing 1999: 8), organization literature (e.g. Ouchi 1979: 833, Child 1984: 136) and management control literature (e.g. Anthony 1965: 17, Berry et al. 1995b: 4).3 Control is mostly referred to as a process of regulating and/or influencing behaviour and activities of members of the organization (e.g. Leksell 1981a: 76, Gupta/Govindarajan 1991: 775). As such, control incorporates feedback and feedforward elements (Jaeger 1983: 92). Accordingly, the impact of control is always directed towards a clear objective (e.g. Anthony 1965: 17, Ouchi 1979: 833): the achievement of organizational goals. This final objective of control is shared between organization, management and accounting literature (Daft/Macintosh 1984: 44). Furthermore, control implies a vertical relation between a higher ranked person or unit (e.g. managers or headquarters) and a lower ranked person or unit (e.g. employees or subsidiaries). This relationship is either explicitly stated (e.g. Gupta/Govindarajan 1991: 775, Harzing 1999: 8) or implicitly assumed (e.g. Hulbert/Brandt 1980: 112, Kreder/Zeller 1988: 58) in the definitions.

In spite of this common ground, the definitions of control differ to a certain degree: While Hulbert and Brandt make a distinction between planning and control (Hulbert/Brandt 1980: 112), Mundel, Daniels and Radebaugh see planning as part of control (Mundel 1967: 160, Daniels/Radebaugh 2001: 517). The positioning of planning in relation to control remains unclear in several definitions of control (e.g. Anthony 1965: 17, Gupta/Govindarajan 1991: 775). On the one hand, planning is indispensable for control because the organizational objectives have to be set in advance; otherwise, control lacks direction. On the other hand, plans lose their effect without control. To quote Mintzberg: “Planning and control go together like the proverbial horse and carriage” (Mintzberg 1979b: 148). Despite their interrelatedness, planning and control can be seen as separate processes (Zahn 1997: 67, Fisher 1998: 48). For this dissertation, planning does not form part of control.

2

3

8

Baliga and Jaeger (and later on also Roth/Nigh 1992: 282) cite Child’s control definition according to Child 1973: 117 even though this article consists only of pages 1-17. Still, the definition is attributed to Child. He formulates a similar definition in a later publication (see Table 1, Child 1984: 136). The definitions show that the English term “control” differs from the German term “Kontrolle”. While “Kontrolle” concentrates on the comparison of the status quo to a pre-established target, “control” additionally incorporates regulating aspects which are covered by the German term “Steuerung” (Winterhalter 1981: 18, Hoffmann 1992: 10, Kirsch 1997: 337, Zahn 1997, Macharzina 2003: 347).

Defining Control Anthony 1965: 17

“Management control is the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.”

Mundel 1967: 160

“Control, briefly described, means the creating of a plan, the carrying out of this plan, the constant comparing of performance to plan, and the taking of corrective action, as needed, to constrain performance to match plan with occasional changes in the plan as an alternative.”

Ouchi 1979: 833

Organizational control refers to “mechanisms through which an organization can be managed so that it moves towards its objectives.”

Hulbert/Brandt 1980: 112

“Controls are the means by which we attempt to ensure that actual results are those which were established as objectives in the plan.”

Leksell 1981a: 76

“The organization employs a set of instruments and processes designed to influence the behaviour and performance of organizational members, groups, subunits and/or the organization as a whole towards goal congruence and goal achievement. The sets of instruments and processes are designated herein as either control systems or control instruments.”

Jaeger 1983: 92

“Organizational control can be conceptualized as the central activity of monitoring which is supported by selection and training.”

Child 1984: 136

“Control within organizations is a process whereby management and other groups are able to initiate and regulate the conduct of activities so that their results accord with the goals and expectations held by those groups.”

Kreder/Zeller 1988: 58

“Control as the process of influencing actions includes setting goals, giving orders, setting up procedures, and monitoring results.”

Gupta/Govindarajan 1991: 775

“The term control mechanisms is interpreted here broadly and used to represent not only the formal control system but also other powerful formal and informal organizational mechanisms that generally are available to corporation headquarters for shaping the decisions and actions of subsidiaries.”

Berry et al. 1995b: 4

“`Management control is the process of guiding organisations into viable patterns of activity in a changing environment.´ Thus, managers are concerned to influence the behaviour of other organizational participants so that some overall organisational goals are achieved.”

Harzing 1999: 8

Two main characteristics of control are: “First, management can use it to direct behaviour of individuals in an organisation towards the goals of this organisation. Second, there is an element of power in this relationship.”

Daniels/Radebaugh 2001: 517

“Control is management’s planning, implementation, evaluation, and correction of performance to ensure that the organization meets its objectives.”

Table 1:

Synopsis of Definitions of Control

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Frequently, management control and accounting researchers do not consider control in general, but focus on control systems (for instance Todd 1977, Anyane-Ntow 1991, Oyon/Mooraj 1999, Boulianne 2002). Accordingly, they refer to “formalized procedures and systems that use information to maintain or alter patterns in organizational activity” (Simons 1987: 358). This restriction to formal control systems is not adopted here; rather a broader view of control is taken which is often found in organization literature and in IB literature (for instance Jaeger 1983, Gupta/Govindarajan 1991: 775, Harzing 1999). Generally, in Anglo-American literature the term control is widespread, while in German literature the term coordination is more frequently used (Kutschker/Schmid 2005: 989). Often the two terms are used interchangeably (for instance Hoffmann 1992: 12, Harzing 1999: 10). What is meant by coordination and how does coordination relate to control? (2) Coordination: Coordination is referred to as a process of linking and integrating units of the organization towards a common goal (e.g. Martínez/Jarillo 1991: 431, Harzing 1999: 9). More generally, coordination can be defined as the reciprocal adjustment of the elements of a system to optimize the system (Rühli 1992: 1165, Kutschker/Schmid 2005: 987). Table 2 shows further definitions of coordination presented in IB literature (for instance Martínez/Jarillo 1991: 431, Harzing 1999: 9) and organization literature (e.g. Hoffmann 1980: 305, Rühli 1992: 1165). The definitions show close similarities to control: Coordination is also defined as a process directed towards the achievement of common objectives (e.g. Drumm 1990: 570, Harzing 1999: 9). Furthermore, coordination is an integrating mechanism like control (e.g. Martínez/Jarillo 1991: 431, Harzing 1999: 9). However, one important difference between coordination and control also becomes apparent. Coordination is conceived as a linking mechanism between interdependent units (e.g. Cray 1984: 86, Meckl 2000: 22).Thus, no coordinating unit is explicitly defined. In contrast, control within organizations implies a vertical relationship with the management as controlling unit (Child 1984: 136, Berry et al. 1995b: 4). Coordination does not automatically imply this vertical relationship between units, but also covers horizontal and lateral relationships (Kutschker/Schmid 2005: 989). Thus, coordination is conceived as a wider concept than control (Kutschker/Schmid 2005: 989): Control is one possible coordination mechanism. As performance evaluation implies a vertical relationship between an evaluating unit and a unit which is being evaluated, performance evaluation is a control mechanism. As such performance evaluation is also conceived as a coordination mechanism.

10

Defining Coordination Hoffmann 1980: 305 (translated from German)

Coordination is the necessary and conscious adjustment and alignment of decentralized general and specific activities and decisions taken by organizational units in order to achieve organizational goals. Coordination is reached via the use of structural, technocratic and personal coordination mechanisms.

Cray 1984: 86

“Coordination is seen more as an enabling process which provides the appropriate linkage between different task units within the organization.”

Mascarenhas 1984: 94 referring to Tuggle/Saunders 1979

“Coordination of subunits may be defined as the function of insuring that subunits’ behaviours are properly interwoven, sequenced, and timed so as to accomplish some joint activity or task completion.”

Drumm 1990: 570

“Coordination is regarded as the harmonisation of intellectual processes and physical activities towards the achievement of goals.”

Martínez/Jarillo 1991: 431

“Coordination is defined as the process of integrating activities that remain dispersed across subsidiaries.”

Roth/Nigh 1992: 280

Coordination refers to “the linkage of value activities within an organization.”

Rühli 1992: 1165 (translated from German)

In general, coordination refers to reciprocal adjustment of elements of a system for optimizing the system.

Macharzina 1993b: 78, Macharzina/Oesterle 2002b: 710 (translated from German)

Coordination refers to the process and to the result of adjustment activities, which can either be conducted centrally or locally.

Morrison/Roth 1993: 799

“Coordination pertains to the integration or interdependence of value activities within a business.”

Wolf 1994: 25 (translated from German)

Coordination is understood as the goal-oriented alignment of interdependent activities.

Harzing 1999: 9

Coordination is characterized by “the integration, harmonisation or linking of different parts towards a common goal.”

Meckl 2000: 22 (translated from German)

Coordination means that hitherto unrelated but interdependent processes or elements are actively related in order to reach an overarching goal.

Table 2:

Synopsis of Definitions of Coordination

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2.1.2

Performance as Achievement of Legitimate Goals

Performance, like control, is an ambiguous term and needs to be defined clearly and unequivocally for this dissertation. This subsection starts by challenging the common assumption that performance is the same as financial performance. This argumentation is followed by a broader definition of performance which is adopted in this dissertation. Performance is often equated with financial performance (see, for instance, SchmidtSudhoff 1967: 140, Glaum 1996: 138-139, Otley 1999: 3-4). However, there are examples, such as studies on management control systems (1) and joint venture performance (2) as well as literature on performance management systems (3), which reveal the limitations of financial measures and question their (often assumed) superiority over other performance concepts. The following elaborations show that these restrictions can also be true when considering the performance of subsidiaries within MNCs. (1) Besides other topics, research on management control systems analyzes the impact of contingency factors on management control systems (e.g. Anyane-Ntow 1991, Chow et al. 1999, Hoque 2004). For uncertain environments, for example, a need for non-financial performance measures was revealed (Chenhall 2003: 137138). As the foreign locations of some subsidiaries are associated with a higher degree of uncertainty (Gray/Morris 1984: 107, 119, Berens/Hoffjan 2003: 213), nonfinancial targets might also be important for foreign subsidiaries. Furthermore, nonfinancial measures, such as time, quality and flexibility, are associated with contemporary manufacturing technologies, such as just-in-time systems and flexible manufacturing systems (Chenhall 2003: 141-143). Thus, it can be assumed that not only financial performance is relevant for subsidiaries with production sites. In addition, evidence from research on management control systems establishes a link between strategy and the characteristics of management control (Chenhall 2003: 150-151). More subjective control measures are, for example, found in companies pursuing build rather than harvest strategies (Chenhall 2003: 151). Transferring these findings to the MNC context leads to questioning the restrictive interpretation of performance in financial terms for subsidiaries pursuing different strategies. (2) Literature on the performance of international joint ventures raises doubts about concentrating on financial goals (Anderson 1990, Geringer 1991: 250-251, Oesterle 1993: 515-518, 1995: 990-991, Blanchot/Mayrhofer 1998: 10, Hoffjan et al. 2000: 234, Child/Yan 2003: 285-287). A great variety of motives leads to the setting up of international joint ventures (Kutschker/Schmid 2005: 863-866). International joint ventures which are formed with the aim of absorbing or developing technologies or for entering new markets might perform poorly in financial terms. Nevertheless, they meet their objectives by making technological progress or getting to know the new

12

country, its market and culture. Thus, the consideration of non-financial and qualitative aspects is argued to be adequate for some international joint ventures (Geringer 1991: 251, Mohr 2006: 250). The same can apply to foreign subsidiaries. They are set up for various reasons and fulfil differing roles within the MNC (Paterson/Brock 2002: 142-147, Schmid 2004, Kutschker/Schmid 2005: 880). Thus, financial performance goals might not be adequate or too restrictive for all subsidiary types. (3) Research on performance management systems adds further question marks to the restrictive interpretation of performance as financial performance (e.g. Fisher 1992: 33-34, Klingebiel 1999: 2, Gleich 2001: 7-10). In spite of their apparent objectivity, financial measures can be manipulated and often draw the intended picture of company performance (Brown/Laverick 1994: 90-91, Otley 2002: 20). Concentrating on financial goals is argued to lead to short-term orientation (Gleich 2001: 8, Neely/Al Najjar 2006: 112). In addition, it might cause local optimization and other dysfunctional behaviour (Neely 1998: 31, Bourne et al. 2000: 754). Johnson and Kaplan even argue that short-term profit can be meaningless (Johnson/Kaplan 1987: 254-256). These problems have been identified for the whole organization, but they can also hold true for its units, such as subsidiaries. Financial data on subsidiary performance can, for example, be manipulated by the local management. A shortterm and local orientation can be fostered when the performance of subsidiaries is interpreted only in financial terms. Based on these exemplary arguments, the restrictive definition of performance in terms of profit, profitability or other financial measures is abandoned. Shareholder value4, too, is not seen as a key yardstick of performance. Nevertheless, these performance measures are not neglected altogether. Rather, a broader view of performance is adopted in this dissertation and deduced in the following. According to the rational goal approach, performance relates to the ability to achieve goals (Cunningham 1977: 465, Otley 1999: 364). Thus, performance is judged in relation to established targets (Schmidt-Sudhoff 1967: 141, Milgrom/Roberts 1992: 22). Figure 1 visualizes the concept of performance as the degree of goal achievement. It remains open, which goal is at the centre of attention.

4

Starting in the 1980s shareholder value maximization has been propagated as a primary company goal (e.g. Bühner 1994, Copeland et al. 1994: 3-4, Rappaport 1995: 12-13). See Achleitner/Bassen 2000, Lötters et al. 2004 for the dissemination of the shareholder value concept and Schmid 1998 for criticism of the shareholder value concept.

13

Performance as Achieving the Goal

goal dimension result1

high performance result2

goal low performance

result3

time

Figure 1:

The Determination of Performance in Relation to Organizational Goals5

The rational goal approach is limited because it does not explain which goals are chosen (Scholz 1987: 15). This gap is filled by the effectiveness approaches (see Cunningham 1977: 465-469, Scholz 1987: 15-17, Näther 1993: 125-139, Grüning 2002: 4 for overviews). In general, effectiveness refers to the degree of goal achievement (Georgopoulos/Tannenbaum 1957: 534, Hoffmann 1980: 71, Scholz 1987: 15, Näther 1993: 117, Schrank 2002: 12).6 The effectiveness approaches focus on the organizational level. They provide details about the concrete content of organizational goals and partly also about their determination. Table 3 summarizes these approaches enriching the rational goal approach.

5 6

14

Adapted from Grüning 2002: 5. Sometimes the degree of goal achievement is defined as efficiency rather than effectiveness (e.g. Staehle/Grabatin 1979: 89, Fritz 1992: 219). Here, efficiency is contrasted to effectiveness and refers to a certain relationship between input and output (Hoffmann 1980: 71, Schrank 2002: 12). Goal achievement is efficient when it is reached with the lowest possible amount of input. See Näther 1993: 117-123 for further details on the difference between efficiency and effectiveness.

Approach

Key Elements  Organizational goals are conceived as official

Formal model

goals of the organization which are documented (for instance in mission statements or annual reports).  Performance is achieved when these formally established goals are met. Functional model

7

 Organizational goals are derived from the over-

arching functions an organization has within its system (market, society, economy).  Performance is interpreted as reaching social goals. Contingency approach es

General contingency approach

 Organizational goals are dependent on the

Industry 8 model

 Organizational goals are seen as industry-specific.

situation.  Performance is also dependent on the situation.  Performance is interpreted relative to competitors

within the same industry and determined via benchmarking. Systems approaches

Pluralistic interest approaches

7

8

Survival model

 The ultimate organizational goal is seen in the

System resource approach

 The organization strives to reach a high availability

Effectiveness model

 Effectiveness incorporates organizational goals

Multiple constituency approach

 Organizational goals depend on the evaluating

long-term survival of the organization.  Performance is seen in the stability of the organizational system. of resources which strengthens its bargaining position.  Performance is interpreted as success factors based on certain resources. and the activities undertaken to achieve them.  Productivity, flexibility and pressure for efficient actions are relevant system variables determining performance. constituencies which are directly or indirectly linked to the organization and can affect its activities.  For each constituent, performance is achieved when his own evaluative criteria are met.

Details Yuchtman/Seashore 1967: 892895

Yuchtman/Seashore 1967: 895897

Steers 1975: 555556 Hirsch 1975: 330342, Scholz 1987: 16-17 Drucker 1958: 8587, Caplow 1959: 96 Yuchtman/Seashore 1967: 897903, Cunningham 1977: 465-466 Georgopoulos/ Tannenbaum 1957

Connolly et al. 1980

Scholz equates the functional model with the stakeholder approach and terms it “social approach” (Scholz 1987: 16). Both approaches are addressed separately here because the stakeholder approach implies the identification of relevant stakeholder groups and their interests, while the functional model concentrates on overarching social goals without addressing legitimate groups enforcing them. Näther interprets the industry model as a systems approach (Näther 1993: 128-129), while Scholz interprets it as a separate approach (Scholz 1987: 16). Here, it is classified as a contingency approach because the survival logic immanent in all systems approaches is not at the centre of interest in the industry approach and in addition industry can be interpreted as contingency factor.

15

Table 3:

Interactionoriented or stakeholder approach

 Organizational goals correspond to the objectives

Dominant coalition approach

 Organizational goals are determined by the

of relevant stakeholder groups.  Performance is achieved when stakeholder claims are satisfied. dominant coalition in a bargaining process. The dominant coalition controls the critical resources within the organization.  Performance is achieved when the goals of the dominant coalition are reached.

Performance Approached from Various Perspectives

Staehle/Grabatin 1979: 94-97, Staehle 1999 Kirsch 1969: 668672, Wilkinson 1983: 119-121, Kirsch 1997: 460463

9

The different effectiveness approaches do not stand by themselves (Scholz 1987: 17, Fritz 1992: 220). For this study, the rational goal approach is supplemented by the dominant coalition approach and the contingency approach. These approaches help to explain the origin of the organizational goals and as such the performance anchor for the MNC context. Based on the dominant coalition approach, the interested members of the organization propose their demands in a political process (Kirsch 1969: 670). Depending on the power distribution certain goals prevail. They become organizational goals by authorization of the top level bodies of the organization (Kirsch 1969: 670, 1997: 460-461). Applied to the MNC, the top management approves the goals and priorities providing a guideline for action for the subsidiaries (Bartlett 1989: 447-448). With the contingency approach, the goals are expected to depend on the situation. Thus, targets can be contingent on influencing factors at company and/or at subsidiary level.10 Summarizing this subsection, performance is conceived as goal achievement whereby the goals are assumed to be determined by the top level bodies of the organization. Additionally, contingency factors can interplay and affect the goals which are established as performance anchor.

2.1.3

Evaluation as Control Step

According to the cybernetic control process, three control steps can be distinguished (Ouchi 1977: 97, Jaeger/Baliga 1985: 116, Govindarajan/Fisher 1990: 260, Simons

9

10

16

The approaches are summarized from overviews presented by Hoffmann 1980: 72-81, Scholz 1987: 15-17, Fritz 1992: 219-221, Näther 1993: 125-139. Additional – but less prominent – approaches are the managerial process approach and the organizational development approach (see Cunningham 1977: 466-467 for further details). Thereby, the goals can be written down as assumed in the formal goal approach, but this formalization is not a necessary requirement.

2000: 61): monitoring, evaluation and feedback.11 This three-step control process is used in organizational literature, in management literature and in accounting literature alike (Daft/Macintosh 1984: 44). Monitoring refers to the collection of information on performance (O'Donnell 2000: 526). The following step – evaluation – involves the comparison of the performance status quo to the pre-established goal (Grüning 2002: 9). Accomplishments are detected and deviations are identified. The third step consists in rewarding good performance and sanctioning poor performance (Hrebiniak/Joyce 1984: 196-198). Corrective actions might be initiated for improving performance in the future (Lorange/Morton 1974: 49). Evaluation is one important control step, but it is not restricted to measurement. Performance measurement refers only to the measurement of the degree to which the objective is achieved (Flamholtz 1979: 293). Evaluation not only incorporates the comparison of the actual results and the expected results (Todd 1977: 66), but also implies a further weighing up of the circumstances and significance of possible deviations (Hrebiniak/Joyce 1984: 197, Macharzina 2003: 371). Evaluation incorporates a subjective element which is disregarded in measurement. In a concise control process, evaluation is closely linked to the other two elements of the control process: The content monitored is the same as that which is to be evaluated and provided feedback upon. Similarly, goal setting should be interrelated with the control process (Lorange/Morton 1974: 42, Hrebiniak/Joyce 1984: 198). Unless targets are set or agreed on in advance, it is impossible to monitor, evaluate and reward performance properly (Hrebiniak/Joyce 1984: 198, Otley 1999: 367). Despite these interdependencies, goal setting is not further addressed in the following since the focus of this dissertation is on performance evaluation.

2.2 The Concept of Performance Evaluation This section aims at elaborating a three-dimensional concept of performance evaluation. To this end, performance evaluation is first integrated within the control mix of MNCs in subsection 2.2.1. Proceeding from Baliga and Jaeger and their control concept, it is argued that performance evaluation can be conceived as output control in contrast to input control and behaviour control (Baliga/Jaeger 1984: 25-29). 11

This control process can be illustrated by the thermostat analogy (Egelhoff 1984: 73-74, Anthony 1988: 8, Simons 1995: 60): Information on what is happening is observed (monitoring), compared to a standard (evaluating) and followed by corrective action if necessary (feedback). However, control processes are in reality more complicated than the comparison to the thermostat suggests since control does not work automatically (Berry et al. 1995a: 9-11, Anthony/Govindarajan 2001: 45): It requires, for instance, interaction of the individuals involved, the standards have to be derived and the necessary action has to be determined.

17

In subsection 2.2.2, the content of performance evaluation is specified by addressing potential performance measures. Subsection 2.2.3 then characterizes the process of performance evaluation by distinguishing between formal, personal and cultural types of control. These three dimensions – the role within the control mix, the content and the process – will constitute the concept of performance evaluation which is presented in section 2.3. The concept has already been presented in a previous publication (Schmid/Kretschmer 2006b). Extensions and adaptations are made explicit in the following.

2.2.1

The Role of Performance Evaluation within the Control Mix12

Most MNCs do not rely on a single control and coordination mechanism. Rather, they use a mix of several mechanisms for controlling and coordinating subsidiaries (Edström/Galbraith 1977: 260, Child 1984: 158, Kutschker/Schmid 2005: 1005-1032). Based on Ouchi, Maguire, Baliga and Jaeger, two possible objects of control can be differentiated (Ouchi/Maguire 1975: 559, Baliga/Jaeger 1984: 26): output and behaviour.13 When output control is used, the focus of control lies on the ends and not on the activities undertaken to achieve them, as it is the case for behaviour control (Ouchi 1977: 97, Baliga/Jaeger 1984: 26, Bronner/Asgarian 2005: 169-170). Besides output and behaviour, a third control object can be distinguished: input (Jaeger/Baliga 1985: 118, Snell 1992: 297, Hamilton III/Kashlak 1999: 172). This control object refers to the entrance of organizational members (Jaeger/Baliga 1985: 118). Aspirants are monitored, evaluated and rewarded before they enter an organization.14 Input can be added as a third control object. Performance evaluation does not require a specification of the exact means that lead to a certain performance. As performance is reached when objectives are achieved, it can be interpreted as being similar or identical to output. Some authors, such as Mintzberg, actually refer to output control as performance control (Mintzberg 1979b: 149). Behaviour control by contrast would require defining the way in which performance is to be reached. In the case of input control, a third way is effective (Jaeger/Baliga 1985: 118, Snell 1992: 297-298) which is based on either explicit or implicit standards implying a fit between the individual and the organization. Hence, this fit is expected to foster performance.

12

13

14

18

This chapter corresponds to section 4.1 in the joint publication (see Schmid/Kretschmer 2006b: 67) and is slightly adapted and extended here. This distinction is frequently adopted in literature on control in MNCs (i.e. Egelhoff 1984: 74, Brownell 1987: 3-4, Martínez/Jarillo 1989: 491, Chung et al. 2000: 648). Input here and in the following is restrictively interpreted as human resource input. Additionally, one can think of input in terms of raw material, preliminary products, components or services (Simons 2000: 62).

Within the control mix of any MNC, performance evaluation can play a rather important or a rather subordinate role compared to other control mechanisms. The efficient use of performance evaluation as a control mechanism depends on specific conditions which are required for the use of output control. Ouchi himself specifies certain conditions for the application of each control object (Ouchi 1977: 97-98, Eisenhardt 1985: 135-136)15: Output control is effective when output measures are available. For behaviour control, knowledge of cause-and-effect relationships or of the transformation processes is required (Ouchi/Maguire 1975: 564, Govindarajan/Fisher 1990: 261, Snell 1992: 295). If both requirements – the availability of output measures and the process knowledge – are satisfied, output or behaviour control can be applied. In the case where neither condition can be fulfilled, input control is the best option within the control mix (Ouchi 1977: 98). The requirements for each of the three control objects are summarized in Figure 2. In addition to output measurability and knowledge of the transformation process, cost and the desired level of innovation can be considered when deciding which object to control (Simons 2000: 64-66, Yu et al. 2006: 1240). If the requirements for output control are met, performance evaluation is expected to play an important role within the control mix. If behaviour control or input control is required, performance evaluation only plays a complementary role within the control mix.

15

Ouchi adapts Thompson’s four assessment situations which are determined by two dimensions (Thompson 1967: 85-97): the standards of desirability (crystallized or ambiguous) and the beliefs about cause and effect knowledge (complete or incomplete). In addition to these two dimensions, cost and the desired level of innovation could also be considered when deciding which object to control (Simons 2000: 64-66).

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high

Output control

Behaviour control or Output control

Input control

Behaviour control

Output measurability

low low

Figure 2:

2.2.2

Knowledge of the transformation process

high

Control Objects and Their Requirements16

The Content of Performance Evaluation17

The control object – performance – which has been discussed in the preceding subsection requires further detailing. What is understood by performance can differ substantially (McGuire et al. 1986: 128, Meyer/Gupta 1994: 317-324). Various performance measures exist which have been categorized in numerous ways by different authors (Neely et al. 1995: 83-84). Despite the heterogeneity of performance measures, an often used and widely accepted distinction is that between quantitative and qualitative performance measures (Blau/Scott 1963: 178, Grüning 2002: 142, Burger/Ulbrich 2005: 343, Pun/White 2005: 51).18 Most quantitative measures are considered to be objectively measured,19 while qualitative measures imply a certain degree of subjectivity. Due to their nature, qualitative criteria are usually more difficult to measure than quantitative criteria (Pun/White 2005: 51). 16 17

18

19

20

Adapted from Ouchi 1977: 98, Ouchi 1979: 843, Snell 1992: 295. This subsection corresponds to section 5.1 in the joint publication (see Schmid/Kretschmer 2006b: 10-11). The distinction between qualitative and quantitative measures is not always clear-cut: Qualitative concepts are operationalized and turned into “quantifiable” measures. Employee satisfaction, for example, is a qualitative criterion which can be measured with an index based on answers to survey questions. Nevertheless, we will stick to the classical distinction and illustrate it by listing examples. The objectivity often expected from financial measuring is only partly true because each measure or ratio can be differently defined and involves measurement problems which are solved by subjective judgement (Otley 2002: 20).

Quantitative measures can be non-financial or based on financial data (Fisher 1992: 32, Simons 2000: 60). Financial measures are frequently categorized into two groups (Ittner/Larcker 1998: 209-210, Gladen 2003: 39-50): on the one hand traditional, accounting-based measures, such as profit and return on investment, and on the other hand value-based measures, like economic value added (EVA) or cash flow return on investment (CFROI). Non-financial performance measures are often grouped into two categories – internally determined measures or externally determined measures (for instance Keegan et al. 1989: 48, Neely et al. 2000: 11221123). While productivity is an internal non-financial measure, for example, market share is interpreted as an externally assessed measure. Qualitative criteria used for performance evaluation can again be classified into either internal qualitative criteria (such as employee satisfaction) or external qualitative criteria (such as customer loyalty) (Gregory 1993: 281-287). For performance measures to have explanatory power, a basis for meaningful comparison has to be established. Four standards of comparison are commonly used within MNCs (Appleyard et al. 1991: 117, Bergmann 1996: 84-86): comparison to the budget, comparison to the past, comparison to other subsidiaries within the MNC (internal benchmarking) and comparison to other companies outside the MNC (external benchmarking). Many studies on performance evaluation of foreign subsidiaries consider specific characteristics of internationalization. The most common topics are the currency in which performance measures are assessed (e.g. Morsicato 1980, Demirag 1988, 1990), the consideration of inflation (e.g. Czechowicz et al. 1982: 43-56, Choi/Czechowicz 1983: 20), the effect of different accounting standards (for instance Gray 1995) and the impact of transfer pricing (for instance Yunker 1983). In the scope of this dissertation, these aspects are not at the centre of the investigation (see Plasschaert 1996, Amshoff 2003: 347-348, Berens/Hoffjan 2003: 214-229, Chan/Lo 2004, Kammer 2005, Kutschker/Schmid 2005: 1024-1030, Brühl 2006: 498-504, Ho/Lau 2006 for further details on these topics). One reason for this restriction is that currency choice, inflation, accounting standards and the impact of transfer pricing are only relevant for financial measures and not for non-financial and qualitative measures. Hence, focusing strongly on these aspects would only be appropriate for parts of the framework. Furthermore, accounting standards and transfer prices depend to a high extent on legal rules and regulations in each host country. They are not at management’s discretion and thus not in the focus of this dissertation. In summary, the content of performance evaluation is characterized by distinguishing between different performance measures, which then require the definition of standards of comparison to be used in performance evaluation.

21

2.2.3

The Process of Performance Evaluation20

Baliga and Jaeger not only differentiate various control objects, but they also use a second dimension within their control concept: the type of control. They restrict their distinction to bureaucratic (formalized) and cultural types of control (Baliga/Jaeger 1984: 26-27). Their concept of cultural control covers control by socialization and personal control (Baliga/Jaeger 1984: 26). Since socialization and personal control are distinct, they are separated into two categories. Here, the term cultural control is restricted to control by socialization. Baliga and Jaeger use the terms “bureaucratic” and “formalized” interchangeably (Baliga/Jaeger 1984: 28). The latter is adapted for this study and referred to as “formal” type of control. As a result, three control types – formal, personal and cultural – are differentiated. Baliga and Jaeger identify their control types to look at control processes (Jaeger/Baliga 1985: 118). Although they are ideal types (Baliga/Jaeger 1984: 26, Jaeger/Baliga 1985: 118), the control types are considered “a useful tool for the conceptualization of organizational processes” (Baliga/Jaeger 1984: 26). The control types determined above are also used for characterizing control processes. Control consists of three steps (Egelhoff 1984: 74): monitoring, evaluation and feedback. Output control can therefore be further subdivided into performance monitoring, performance evaluation and performance feedback. As evaluation is one important step of the control process, the three types of control can also characterize the process of performance evaluation: Formal, personal and cultural performance evaluation of foreign subsidiaries is distinguished. Formal performance evaluation is based on codified rules, regulations and procedures (Baliga/Jaeger 1984: 26-27). In more general terms, the degree of formalization within an organization can be defined as “the extent to which procedures, rules, instructions, and communication are written down” (Child 1972b: 164, 1973: 3). Examples of formal performance evaluation are written performance reports and/or performance management systems, such as the Balanced Scorecard, the Tableau de Bord, the Performance Pyramid, Data Envelopment Analysis, Quantum Performance Measurement Concept, Ernst & Young Performance Measurement Model, Results and Determinants Matrix and Integrated Performance Measurement Framework (Gleich 2001: 46, Pun/White 2005: 54).21 The second type of performance evaluation is personal whereby performance is evaluated personally. For instance, headquarters representatives use phone calls for personal communication and visit subsidiaries (Jaeger 1983: 95). Meetings, such as

20

21

22

This subsection corresponds to section 6.1 in the joint publication (see Schmid/Kretschmer 2006b: 13-14). These tools can, however, also be used for monitoring and feedback purposes.

management audits and feedback sessions, take place at headquarters or at subsidiary level or via phone conferences or video conferences. Besides formal and personal evaluation, a third type of performance evaluation can be distinguished: cultural performance evaluation.22 Cultural performance evaluation does not rely on codified rules or personal interaction, but on shared values and standards within a corporation (Ouchi 1980: 137, Baliga/Jaeger 1984: 26-28). Workshops, trainings, superordinates as model and adequate individual or group rewards may foster this shared performance culture (Chatman/Cha 2003: 27-28). In (international) business literature, the term “normative integration” is often used to refer to the cultural dimension of control and coordination (Ghoshal/Bartlett 1988: 365, Ghoshal/Nohria 1989: 326, Kutschker/Schmid 2005: 1023). In management practice, the formal, personal and cultural evaluation types do not exist in their pure forms. In reality, different performance evaluation processes are simultaneously found in MNCs with one type dominating (Child 1984: 158).

22

As cultural control is a non-cybernetic form of control (Egelhoff 1988: 156), cultural control cannot be subdivided into monitoring, evaluating and feedback. For consistency reasons, the term “cultural evaluation” is used and refers to cultural control in general.

23

2.3 An Integrative Concept of Performance Evaluation A single concept of performance evaluation is extracted from the preceding subsections. It reflects the understanding of performance evaluation used in this dissertation and is presented in Figure 3 (see also Schmid/Kretschmer 2006b: 23).

Control objects

Behaviour

Output

Input

Control steps

Performance monitoring

Performance evaluation

Performance feedback

Content

Quantitative measures financial

non-financial

traditional

internal

value-based

external

Process

Qualitative measures internal

external

Formal

Personal

Cultural

Performance reports

Management audits

Shared norms of performance

Standards of comparison actual compared to budget

Figure 3:

actual compared to past

internal benchmarking

external benchmarking

Conceptual Framework of Performance Evaluation

This performance evaluation framework can be interpreted in a broader context of organizational control. When combining not only output control with different control processes, but also behaviour control and input control, nine different control mechanisms result. Thereby, the objects of control or the processes do not mutually replace each other. Control “strategies are not alternatives but cumulative stages” (Edström/Galbraith 1977: 260). They can be built upon each other and be used simultaneously (Macharzina 1993b: 97). Table 4 provides an overview of this extended conceptualization of control.

24

Control Process Control Object

Formal

Personal

Cultural

performance reports

management audit/feedback session

shared norms of performance

Behaviour

company manuals/activitiesoriented job descriptions

direct supervision

shared philosophy

Input

application forms/ documents

assessment centre, interviews

signalling of the company image and culture

Output

Table 4:

Organizational Control23

In literature, the distinction between the control object and the control process is often missing. First of all, output control is often equated to formal control (e.g. Egelhoff 1984: 74, Martínez/Jarillo 1989: 491). Second, behaviour control is frequently argued to imply personal control (e.g. Martínez/Jarillo 1989: 491, Harzing 1999: 21). Third, input control is linked to cultural control when employees with the “right values” are selected for the MNC or expatriate managers are sent to subsidiaries as missionaries of the MNC culture (e.g. Edström/Galbraith 1977: 251, Pucik/Katz 1986: 122, Fenwick et al. 1999: 111, 119). Still, these interpretations are too restrictive. Shared norms of performance are also used to control output culturally (Baliga/Jaeger 1984: 28). Company manuals are an alternative – more formal – way to control behaviour (Baliga/Jaeger 1984: 28). In addition, bureaucratic screening mechanisms are used for input control (Snell 1992: 297). Therefore, the broader concept presented in Table 4 shows a more complete picture of organizational control. The framework of performance evaluation within the context of organizational control serves as conceptual background for this dissertation. This framework helps to demonstrate that performance evaluation has several dimensions. Only by specifying which dimension is of interest, research can lead to meaningful findings. In addition, this framework is helpful for classifying existing literature and gives structure to the field.24 It establishes the boundaries for the literature review presented in the following chapter.

23

24

The table is adapted from Baliga/Jaeger 1984: 28 and extended by the control object “input”, the “cultural” control process and their corresponding fields within the matrix. The so far missing structure is criticized by Egelhoff: “One characteristic of the research in MNCs is that each study has tended to look at different aspects of control so that at present there is a wide base and little height to the structure of the field” (Egelhoff 1984: 73).

25

3 Review of the Literature on Performance Evaluation of Foreign Subsidiaries The discussion of the conceptual background is followed by a review of the relevant literature. Thereby, the earlier publication Schmid/Kretschmer 2006b is extended in this chapter. Section 3.1 sets out the objectives of the chapter and summarizes the methodology of the literature review. The following two sections cover the relevant literature: Descriptive contributions are described in section 3.2, while explanatory studies are addressed in section 3.3. At the end of the chapter, the conclusions and implications of the literature review are summarized in section 3.4.

3.1 Objectives and Methodology of the Literature Review In reviewing existing literature on performance evaluation three objectives are especially aimed at: (1) First, the key topics of the existing literature are summarized. Descriptive and explanatory contributions will be addressed to provide an overview of the state of knowledge on performance evaluation of foreign subsidiaries. This is intended to give a comprehensive background for the research undertaken in this dissertation. While aiming at this objective, the concept of performance evaluation which was elaborated in section 2.2 is exposed to existing literature. This helps to reveal whether it is meaningful as a classification scheme of past literature and as a point of departure for future research. (2) Second, the literature review aims at revealing insights into the differentiation of performance evaluation. All external and/or internal factors which have been studied in the literature during the last years and potentially cause a differentiation will be identified (see Schmid/Kretschmer 2006b for an overview). Following the research questions of this dissertation, the main focus will be placed on the consideration of subsidiary roles as influencing factors on performance evaluation. Contributions on this topic will be looked at in detail. (3) Third, the research methodologies and research designs of existing studies on performance evaluation of foreign subsidiaries will also be reflected in the literature review. In this area, shortcomings and limitations of past contributions are addressed in order to build a constructive background for the empirical part of this dissertation.

K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1_3, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

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All included publications have to fulfil certain selection criteria. First, the present chapter intends to provide an up-to-date overview: Only publications on performance evaluation of foreign subsidiaries published between 1980 and 2005 are taken into account. Second, the international dimension of all potentially relevant publications is evaluated. Contributions lacking an international dimension cannot provide insights into the specific characteristics of MNCs and are thus not considered. Third, not all publications on control of foreign subsidiaries are taken into account, but only those which distinguish between different types of control and which address performance evaluation as one form of control. As the majority of MNCs use the same criteria and comparison standards for evaluating subsidiary managers as for evaluating foreign subsidiaries (Abdallah/Keller 1985: 30, Bergmann 1996: 92), studies concentrating on management performance evaluation in foreign subsidiaries were not excluded (i.e. Yunker 1983, Hamilton III/Kashlak 1999). The relevant literature was identified in a sequential process. First, interesting review articles from the IB field were analyzed to find articles which correspond to the defined selection criteria. The most important literature overviews on coordination and control in MNCs stem from Harzing, Martínez and Jarillo and Wolf (Martínez/Jarillo 1991, Wolf 1994: 116, Harzing 1999: 7-30). Additional findings can be drawn from management control and management accounting literature. In this field, literature overviews on performance evaluation of foreign subsidiaries have been presented by Holzer, Weber and Bergmann (Holzer 1986, Weber 1991: 214219, Bergmann 1996: 61-120). By applying these selection criteria to the contributions addressed in the six review articles, 36 publications of interest for this chapter could be identified. In a next step, the online databases EBSCO Business Source Premier and Proquest ABI/Inform were used to identify articles addressing performance evaluation of foreign subsidiaries.25 The titles, keywords and abstracts were searched for combinations of the following terms: “performance evaluation”, “performance measurement”, “performance measure/s”, “control” and “coordination” together with “subsidiary/ies”, “foreign operations”, “international firm/s”, “multinational corporation/s” and “MNC”. This led to the inclusion of another 17 publications which fulfilled the selection criteria outlined above. Additionally, three contributions were added which were recommended by researchers commenting on earlier versions of the joint paper Schmid/Kretschmer 2006b. They stem from conference proceedings (in the case of Rolander et al. 1989 and Madureira 2004) and the German journal “Controlling” (in the case of Welge/Holtbrügge 1999). In total, 56 articles, book chapters and monographs are covered and will be analyzed in the present chapter.

25

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EBSCO Business Source Premier and Proquest ABI/Inform are comprehensive business databases which include the key business and management journals. EBSCO Business Source Premier covers more than 8,000 serials while Proquest ABI/Inform includes 5,000 serials.

The extracted contributions can be grouped according to their research goal into descriptive contributions and explanatory contributions. Descriptive studies provide a picture of how the performance of foreign subsidiaries is evaluated in MNCs. Table 5 provides an overview of the 16 descriptive articles, book chapters and monographs.

Selected Descriptive Studies Concerning Performance Evaluation within MNCs  Leksell 1981a, 1981b

 Donaldson/Pai 1984

 Rubino 1986

 Evans 1986

 Schoenfeld 1986a, 1986b

 Miller 1982

 Kang/Park 1986

 Appleyard et al. 1990, 1991

 Abdallah 1984,

 Miller 1986

 Duangploy/Gray 1991

 Czechowicz et al. 1982

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Abdallah/Keller 1985 Table 5:

Overview of Relevant Descriptive Studies (in Chronological Order).

Table 6 covers 40 explanatory contributions which are conducted in the tradition of contingency theory.27 These studies look for explanatory factors in the context of performance evaluation and constitute an important part of literature on performance evaluation of foreign subsidiaries. Conceptual studies which cover the impact of influencing factors on performance evaluation mechanisms as one form of coordination and control were also included (e.g. Hamilton III/Kashlak 1999, Welge/Holtbrügge 1999, O'Clock/Devine 2003). Comparing the publication form of all selected contributions shows that 30 are articles in IB, management and accounting journals (for instance Demirag 1988, Gupta/Govindarajan 1994, Welge/Holtbrügge 1999). A further 13 of them are monographs (for instance Abdallah 1984, Kenter 1985, Harzing 1999), and 12 contributions are chapters in edited books (for instance Hedlund 1981, Rubino 1986, Madureira 2004). The high number of relevant contributions in monographs and edited books justifies the chosen sequential process. A selection procedure limited to considering publications in leading journals28 would have provided only a restricted view of contributions in the field of performance evaluation of foreign subsidiaries. 26

27

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Czechowicz et al. describe eight cases (Czechowicz et al. 1982: 93-156): Hewlett-Packard, General Electric, ITT, BOC, Company X, ESAB, Health Care Company and ICI. Details on each case are provided separately in the Appendix I. As they additionally present their findings from a survey-based comparison of performance evaluation within US and non-US MNCs, their book also forms part of the explanatory studies listed in Table 6. These studies have already been reviewed in the joint publication Schmid/Kretschmer 2006b. While the earlier publication concentrates on extracting influencing factors on performance evaluation, a broader approach is chosen here (see subsection 3.1 for the objectives of the literature review). See, for example, Peng’s and Newbert’s reviews of the resource-based view (Peng 2001, Newbert 2007) or Homburg/Koschate’s review of marketing literature on behavioural pricing (Homburg/Koschate 2005) for this approach.

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Instead, by departing from review articles, a broader approach to literature selection was adopted here: Not only (rigourous?) research which got accepted in high-rank journals – which might sometimes lack relevance (Kogut 2005: 66, Vermeulen 2005: 979) – is included but also monographs and contributions to edited books.29

Selected Explanatory Studies Concerning Performance Evaluation within MNCs  Hulbert/Brandt 1980

 Brownell 1987

 Hamilton III/Kashlak 1999

 Morsicato 1980

 Demirag 1988, 1990

 Harzing 1999

 Welge 1980, 1981

 Egelhoff 1988

 Muralidharan/Hamilton III

 Hedlund 1981

 Ghoshal/Nohria 1989

1999

 Horvath et al. 1981

 Rolander et al. 1989

 Welge/Holtbrügge 1999

 Negandhi/Baliga 1981

 Hosseini/Rezaee 1990

 Chung et al. 2000

 Czechowicz et al. 1982

 Coates et al. 1991, 1992

 O'Donnell 2000

 Choi/Czechowicz 1983

 Martínez/Jarillo 1991

 Chung et al. 2002

 Dobry 1983

 Gupta/Govindarajan 1994

 Tseng et al. 2002

 Yunker 1983

 Gencturk/Aulakh 1995

 Harzing/Sorge 2003

 Egelhoff 1984

 Hamilton III et al. 1996

 O'Clock/Devine 2003

 Mascarenhas 1984

 Muralidharan 1998

 Madureira 2004

 Kenter 1985

 Chang/Taylor 1999

Table 6:

Overview of Relevant Explanatory Studies (in Chronological Order).

The classification of relevant contributions into descriptive and explanatory contributions also guides the following subsections of the literature review. In section 3.2, descriptive contributions are reviewed, and in section 3.3, an overview of the explanatory contributions is provided.

3.2 Descriptive Contributions on Performance Evaluation of Foreign Subsidiaries The review of the descriptive contributions is divided into three subsections. First, the topics of the descriptive publications are summarized (subsection 3.2.1). Second, the descriptive contributions are screened for possible differentiation of performance evaluation to discover the potential implications of subsidiary roles (subsection 3.2.2).

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This integration of diverse sources reflects the liberal research perspective of this dissertation. At the same time, it does not support the on-going Americanization of (international) management research by extending the review beyond articles published in American A-Journal (see Schmid 2003b: 10-13 for details on the Americanization phenomenon).

Third, their underlying methodologies and research designs are reviewed since they might reveal valuable insights for this study (subsection 3.2.3).

3.2.1

Topics of Descriptive Contributions

Descriptive studies based on standardized questionnaires were conducted to list the performance criteria in use and to find out which currency was dominantly used in performance evaluation as well as how inflation was taken into account (e.g. Abdallah/Keller 1985, Appleyard et al. 1990, 1991, Duangploy/Gray 1991). Case study research added more detailed knowledge on performance evaluation within MNCs (see Holzer/Schoenfeld 1986 and Czechowicz et al. 1982 for several case studies). To get an overview of the subjects covered by the descriptive contributions, the latter are now classified into the performance evaluation framework. Detailed information on these contributions is provided in Appendix I. (1) Role of performance evaluation: When comparing the descriptive studies to the framework of performance evaluation elaborated in section 2.2, it becomes evident that the authors refrain altogether from addressing different control objects. Their aim is not to describe different control mechanisms within the MNC, but rather they proceed from an accounting perspective and focus primarily on the reporting system. In some cases, the authors choose an even more specific topic, describing in detail a particular accounting, reporting or evaluation method in a case study (for instance the local capital charge approach at Company X presented by Czechowicz et al. 1982: 114-115 or the inflation accounting approach at FMC presented by Evans 1986: 7579). (2) Content of performance evaluation: In the descriptive studies, the content of performance evaluation is of major interest. The authors of the survey-based studies reveal which performance measures are most frequently used. The cases provide company-specific details on the same topic. Lists of performance measures are frequently presented in the case studies (e.g. Kang/Park 1986: 68-69, Rubino 1986: 29, Schoenfeld 1986a: 138-139, 1986b: 154-159). When comparing the use of performance measures, it becomes evident that most companies do not rely on single measures, but use a bundle of performance criteria for evaluating foreign subsidiaries. Profit measures (such as net income, earnings before tax or operating results) and return on investment are most frequently used as financial performance measures (e.g. Abdallah/Keller 1985: 27, Duangploy/Gray 1991: 300). Market share is a common non-financial measure (e.g. Czechowicz et al. 1982: 105, Choi/Czechowicz 1983: 116). When qualitative measures are assessed – which is only seldom the case –, host country relations are emphasized (e.g. Czechowicz et al. 1982: 105, Appleyard et al. 1990: 406, 1991: 116). These measures are either compared to the budget or to the past, while internal and external benchmarking are

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used to a lesser degree (e.g. Leksell 1981b: 218, Appleyard et al. 1990: 406, 1991: 117, Duangploy/Gray 1991: 302). (3) Process of performance evaluation: While the survey-based studies do not reveal details on the process of performance evaluation, the descriptive case studies fill this gap, informing about the performance evaluation systems of foreign subsidiaries in greater detail. Elements of formal performance evaluation systems, such as monthly reports and manuals are described (e.g. Leksell 1981b: 212-219, Rubino 1986: 2530). In addition, two authors address personal processes of performance evaluation when highlighting the importance of personal visits and communication (e.g. Leksell 1981b: 223, Rubino 1986: 30). The contest for the best performing subsidiary described in the Nixdorf case (Schoenfeld 1986b: 159-162) can be interpreted as cultural process of performance evaluation because it supports a shared performance culture. In the descriptive contributions, the elements of the performance evaluation framework are addressed, except for the distinction of control objects. However, the focus of the descriptive studies is clearly on the content of performance evaluation.

3.2.2

Differentiation of Performance Evaluation in Descriptive Contributions

The surface picture which is drawn by the presented survey-based studies is one of standardized performance evaluation. But beneath this surface, intended or unintended differences appear. A closer look at the case studies (see Holzer/Schoenfeld 1986 and Czechowicz et al. 1982) indicates differences in reporting lines (1) and inconsistencies in the definition of performance measures (2). Within a few MNCs, differences in performance evaluation between subsidiaries (3) are revealed. (1) Case studies show that reporting lines do not necessarily coincide with the subsidiaries as legal entities (see Czechowicz et al. 1982: 116, 122, Rubino 1986: 14-15 for this approach). Foreign units are often grouped by business unit and/or product line for evaluation purposes (e.g. Czechowicz et al. 1982: 94, 109, Miller 1986: 45). Only a limited number of companies groups the subsidiaries by business unit and/or product line and at the same time by country and/or region (e.g. Czechowicz et al. 1982: 124, Schoenfeld 1986a: 110). The reporting line can also differ depending on the activities of the subsidiary in question. At General Electric, for example, diversified subsidiaries report to the international division, while nondiversified subsidiaries report to their product group(s) (Czechowicz et al. 1982: 104).30 At ICI, reporting lines differ according to the host country. While reporting by 30

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Subsidiaries with both characteristics report to the international division and the product group(s) (Czechowicz et al. 1982: 104).

product line and secondarily by subsidiary is common in Western Europe, reporting by subsidiary is found for other countries, such as Brazil and Australia (Czechowicz et al. 1982: 124). (2) The comparison of the case studies also shows that the definitions of performance measures differ substantially between companies (Bergmann 1996: 108). Profit or net income, for example, are defined differently and return on investment can also differ regarding the denominator (Bergmann 1996: 102). When comparing the case studies, inconsistencies in calculations become apparent, too. In some MNCs, company-specific calculation schemes are even developed for selected measures (e.g. Czechowicz et al. 1982: 114-115, 116-121). (3) In their descriptive studies, most authors find that foreign and domestic subsidiaries are treated equally (e.g. Czechowicz et al. 1982: 95, Abdallah 1984: 43, Abdallah/Keller 1985: 28, Miller 1986: 46, Appleyard et al. 1990: 407). Nevertheless, differences in performance evaluation within the MNCs are discovered: The host country impacts the performance evaluation when companies use risk-adjusted capital cost in evaluating the performance of foreign subsidiaries (Czechowicz et al. 1982: 104, 110, 114). They expect a higher return from subsidiaries located in risky environments. Similarly, Abdallah and Keller reveal that environmental differences between the subsidiaries are considered at least to some extent (Abdallah 1984: 44, Abdallah/Keller 1985: 30). Further cases show how performance evaluation criteria are adapted to the function and responsibility of subsidiaries (e.g. Czechowicz et al. 1982: 95, Miller 1986: 46). Korean GoldStar, for example, applies other performance measures for its manufacturing subsidiary than for its marketing subsidiary, and no formal evaluation system has yet been elaborated for a newly established subsidiary (Kang/Park 1986: 64, 68-69). Summarizing this subsection on descriptive contributions, it can be stated that reporting lines and performance measures might differ when comparing MNCs. In addition, authors reveal potential causes for differentiating performance evaluation between subsidiaries within one MNC. Although there has been no large-scale testing (so far), first potential influencing factors are discovered. The explanatory power of the descriptive findings is limited because they cannot explain why performance evaluation of foreign subsidiaries is conducted the way it is. Section 3.3 redresses this shortcoming by reviewing contingency studies on performance evaluation of foreign subsidiaries. But first, a brief summary of the methodology and research designs of the descriptive contributions is presented in the following subsection.

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3.2.3

Methodologies and Research Design of Descriptive Contributions

The research designs and research methodology of the descriptive contributions on performance evaluation can be characterized along the following dimensions: the research design (1), the method of data collection (2) and the perspective adopted in the research (3). (1) Concerning the research design, two groups of descriptive contributions can be distinguished: Either researchers concentrate on one case only (e.g. Czechowicz et al. 1982: 112-113, Donaldson/Pai 1984) or they compare performance evaluation between different MNCs (e.g. Leksell 1981a: 191-208, 1981b, Abdallah 1984: 41-45, Abdallah/Keller 1985). In both cases, the USA predominates when comparing the regional distribution of the MNCs. European MNCs are considered to a lesser degree and Asian MNCs are almost completely neglected (see Kang/Park 1986 for one exception). (2) Two methods of data collection are used in the descriptive contributions: either surveys (e.g. Abdallah 1984: 34-35, Duangploy/Gray 1991: 300) or interviews (e.g. Leksell 1981a: 18, 1981b: 211, Abdallah/Keller 1985: 26, Appleyard et al. 1990: 404, 1991: 111). Some of the case studies are mainly based on the experience of the authors who describe the performance evaluation system used within their own company (i.e. Evans 1986, Kang/Park 1986, Rubino 1986; see Holzer/Schoenfeld 1986: 259-263 for the authors’ biographies). However, in most of the case studies the data collection method remains unclear. The authors unfortunately do not explicitly state their sources. (3) The descriptive contributions proceed mainly from a headquarters perspective. Surveys are answered by headquarters representatives from the accounting department and by international division managers at headquarters (Abdallah 1984: 35, Appleyard et al. 1990: 404, 1991: 111). Almost all the case studies address the overall performance evaluation and reporting system within the MNC from a headquarters’ point of view; only the Alldelphi case describes performance evaluation from the perspective of a subsidiary (see Schoenfeld 1986a). Both approaches seem to be restrictive because perception gaps are ignored (Arvidsson 1999: 102-104, Birkinshaw et al. 2000). Leksell integrates both perspectives by conducting interviews at both headquarters and at subsidiary level (Leksell 1981a: 18, 1981b: 211). As a result, he reaches a far deeper understanding of performance evaluation compared to the other two approaches. This summary of the research designs and methodology used in descriptive studies reveals first implications for future research. First of all, European MNCs are underrepresented in the descriptive studies. Thus, the analysis of performance evaluation of subsidiaries within European MNCs holds considerable potential.

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Furthermore, clear and concise descriptions of the methodology are often missing in the case studies. This quality attribute of qualitative research should not be neglected in future research. Lastly, integration of the headquarters perspective and the subsidiary perspective on performance evaluation seems to be promising.

3.3 Explanatory Contributions on Performance Evaluation of Foreign Subsidiaries The review of the explanatory contributions follows the same structure as the previous section. The topics of the explanatory contributions are addressed first (subsection 3.3.1). Then the differentiation of performance evaluation is analyzed to gain insights into the potential influence of subsidiary roles (subsection 3.3.2). Finally, implications for the research design of this study are derived by reviewing the methodologies and the research designs of the explanatory contributions (subsection 3.3.3). Further details on the contributions are presented in Appendix II.31

3.3.1

Topics of Explanatory Contributions

The explanatory contributions use contingency approaches to study the impact of influencing factors on performance evaluation of foreign subsidiaries (see on contingency theory, for instance, Schreyögg 1980: 305-309, Frese 1992: 112-197, Schmid 1994: 11-14, Kieser 2002b: 169-182; see on contingency theory in the context of the MNC, for instance, Welge 1980, Egelhoff 1982, Kieser 1989: 15781584). The extent to which the explanatory contributions address the three dimensions of performance evaluation – the role (1), the content (2) and the process (3) – is now considered in detail: (1) Role of performance evaluation: In contingency studies, performance evaluation is seldom addressed in an explicit way. As performance evaluation can be regarded as part of output control, articles examining the use of output control either by itself or in comparison to other control objects are of interest. Behaviour control (e.g. Gencturk/Aulakh 1995: 758-759), input control (e.g. Chang/Taylor 1999: 546) or both (e.g. Hamilton III et al. 1996: 858-859) are taken into account next to output control. Some authors not only study or propose the impact of selected influencing factors on control objects, but simultaneously consider the control process (e.g. Harzing 1999, Tseng et al. 2002). (2) Content of performance evaluation: The authors of the explanatory contributions who are interested in the content of performance evaluation always take financial 31

The same explanatory contributions are displayed in a different order in Schmid/Kretschmer 2006b.

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performance measures into account (see Appendix II). The impact of influencing factors on the use of non-financial measures is integrated in the analysis to a lesser degree (e.g. Yunker 1983: 56, Rolander et al. 1989: 1035). Qualitative performance measures are only considered in a small number of contributions (e.g. Coates et al. 1992: 143, O'Clock/Devine 2003: 24). Similarly, the standards of comparison are neglected by several authors (e.g. Hulbert/Brandt 1980, Chung et al. 2002). The findings on the content of performance evaluation are similar to the findings of the descriptive contributions. (3) Process of performance evaluation: Even though the process of performance evaluation is rarely analyzed in literature, control processes or control types in general are addressed. Some authors analyze or propose the impact of contingency factors on one control process only (e.g. Hedlund 1981: 66-75), while others address two different control processes, such as formal and personal control (e.g. Negandhi/Baliga 1981: 30-35, Dobry 1983), formal and cultural control (e.g. Ghoshal/Nohria 1989: 326, Martínez/Jarillo 1991: 431-432) or personal and cultural control (e.g. Kenter 1985, Gupta/Govindarajan 1994: 447). Mascarenhas and O’Donnell even integrate formal, personal and cultural control processes in their analysis (Mascarenhas 1984: 95, O'Donnell 2000: 535-536). In the explanatory contributions, all three dimensions of the performance evaluation framework are addressed. Although the framework is not covered exhaustively in any one study, the publications can be clustered according to the three elements. The authors do not stop at the description of the role, content and process of performance evaluation, they also analyze influencing factors. These will be the subject of subsection 3.3.2.

3.3.2

Differentiation of Performance Evaluation in Explanatory Contributions

Three levels of influencing factors can be distinguished: the MNC level (corporate level),32 the subsidiary level and the environment level. As can be seen from the information in Appendix II, studies often analyze influencing factors at MNC and/or subsidiary level. In the contingency studies, environmental factors are included to a lesser degree. In the following, factors that influence the role of performance evaluation (1), the content of performance evaluation (2) and the process of performance evaluation (3) are summarized. (1) Influencing factors on the role of performance evaluation (Schmid/Kretschmer 2006b: 7-9): At MNC level, typical factors are nationality, size, industry and the degree of internationalization (e.g. Egelhoff 1988: 161). Additional examples of 32

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The corporate level and the MNC level characteristics are grouped into one category because the corporate level can be interpreted as part of the MNC level.

influencing factors include the interdependence (Gencturk/Aulakh 1995: 759), the parenting style (Chung et al. 2000: 653-654) and the level of diversification (Harzing 1999: 193). At subsidiary level, size, country, age and interdependence are commonly interpreted as influencing factors and, hence, included in many contingency studies. Among the environmental factors which are addressed, variables, such as environmental uncertainty (Brownell 1987: 2), perceived host market attractiveness or perceived host market risk (Gencturk/Aulakh 1995: 759), can be found. (2) Influencing factors on the content of performance evaluation (Schmid/Kretschmer 2006b: 11-12): The number of influencing factors studied across all three levels varies; some studies concentrate on one variable, while others include a broad range of different variables. Thus, whereas Czechowicz et al. draw comparisons based only on MNC nationality (Czechowicz et al. 1982: 77-87), Demirag examines several factors at MNC level (Demirag 1990: 276): the degree of internationalization, the organizational structure, the locus of decision-making and the industry. When the subsidiary level is considered, the number of subsidiary characteristics is often limited to a few variables or even to just one variable (e.g. Hulbert/Brandt 1980, Morsicato 1980, Welge/Holtbrügge 1999). At subsidiary level, size, country and strategic objectives are analyzed with regard to their impact on the content of performance evaluation. (3) Influencing factors on the process of performance evaluation (Schmid/Kretschmer 2006b: 14-16): In some studies, MNC nationality is again examined as the only influencing factor (e.g. Negandhi/Baliga 1981: 30-35, Dobry 1983: 293). Furthermore, size and degree of internationalization are major variables to be analyzed at MNC level (e.g. Harzing 1999: 284). Industry effects are also considered as is the impact of technology, R&D intensity, market share and competition intensity (e.g. Kenter 1985: 226). Similar to the MNC level, country, size and technology are also covered at subsidiary level. Additional subsidiary-specific contingencies are ownership, form of market entrance, level of local resources, knowledge transactions, autonomy, market share and performance. When analyzing how often each of the influencing factors is examined, subsidiary interdependence crystallizes as being of major interest to scholars in the field. It is difficult in most cases to determine the specific consequences of the influencing factors (Schmid/Kretschmer 2006b: 16). Some findings partly support one another, while others contradict earlier results. These contradictions might be explained through different conceptualizations and operationalizations. For instance, Egelhoff measures output control by assessing the frequency with which headquarters receive values for 16 different performance measures from their foreign subsidiaries (Egelhoff 1984: 158). Gencturk and Aulakh rely on a less detailed measurement concept by assessing headquarters managers’ influence on foreign market activities

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on a seven-point scale and assuming output control in the case of a low level of influence or no influence (Gencturk/Aulakh 1995: 769). There are many other reasons for the existence of inconsistent findings which are linked to the general weaknesses inherent in contingency studies (see subsection 4.1.3). In addition, most studies fail to look at various or indeed all (potential) factors in their combination. Therefore, it remains virtually impossible to determine the exact impact of each factor on the performance evaluation of foreign subsidiaries. The potential influencing factors can be summarized in a contingency framework of performance evaluation without claiming a complete picture and without claiming specific law-like patterns in terms of direction, extent and magnitude of the influence. The contingency framework is presented in Figure 4. It should be kept in mind that the listed factors are extensive, but not exhaustive (see, for example, Borchers 2000: 62-68, Littkemann/Derfuß 2004: 78-95, for additional factors). Role typologies of foreign subsidiaries are addressed only by a limited number of authors. Martínez/Jarillo, Gupta/Govindarajan and Harzing33 include subsidiary roles as influencing factors in their studies and argue that they are a major influencing factor on control (Martínez/Jarillo 1991, Gupta/Govindarajan 1994, Harzing 1999: 309). In doing so, different control conceptualizations are used, and the authors are interested in the overall control level (see Martínez/Jarillo 1991: 433-434, Harzing 1999: 104-107). In addition, the use of selected control mechanisms is analyzed for different subsidiary roles (Gupta/Govindarajan 1994: 448, Harzing 1999: 296), but the authors do not broach the issue of performance evaluation.34 Only one conceptual contribution establishes a link between subsidiary roles, which are determined according to selected value-chain activities, and performance evaluation, although no empirical assessment is made (Welge/Holtbrügge 1999).

33

34

.

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Harzing does not include explicit questions concerning the subsidiary role in her survey (Harzing 1999: 104). Nevertheless, she assesses the dimensions “level of interdependence” and “local responsiveness” and integrates them in the role typology put forward by Martínez and Jarillo to determine subsidiary roles (Harzing 1999: 104). Harzing elaborates hypotheses on the relationship between subsidiary roles and behaviour control as well as cultural control (Harzing 1999: 107-108). Gupta and Govindarajan relate their subsidiary roles to the use of personal and cultural control (Gupta/Govindarajan 1994: 448).

General • nationality • size • length of experience abroad • degree of internationalization • ownership

Strategy & Management Structure & integration • • • • •

mission statement strategy parenting style strategic complexity short-run profit orientation

• level of diversification

• organizational structure/model • locus of decisionmaking • interdependence • task-related demands

Market & Technology • • • • • • •

industry R&D intensity technology product type market share growth competition intensity

Environment • accounting standards change • environmental uncertainty/ complexity • turbulence • perceived environmental variability

MNC level Control objects Input

Output

Behaviour

Control steps Performance monitoring

Performance evaluation

Performance feedback

Content Quantitative measures

financial

Qualitative measures

non-financial

traditional

internal

value-based

external

Process

internal

external

Formal

Personal

Cultural

Performance reports

Management audits

Shared norms of performance

Standards of comparison actual compared to budget

actual compared to past

internal benchmarking

external benchmarking

Subsidiary level • geographic location by country/region • size • age • ownership • development stage • form of market entrance

General

Figure 4:

35

• • • • • •

objectives strategy subsidiary roles value chain activity local resources specialized knowledge • strategic change • local responsiveness

• autonomy • (perceived) dependence • frequency of conflict with HQ • interdependence • knowledge flows • product flows • capital flows • product flow integration

Strategy & Management Structure & Integration

• technology • market share • performance

Market & Technology

• cultural characteristics • cultural distance • (perceived) market risk • (perceived) market attractiveness • environmental complexity, change and perceived uncertainty Environment

Contingency Framework of Performance Evaluation of Foreign Subsidiaries35

Schmid/Kretschmer 2006b: 17.

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3.3.3

Methodologies and Research Design of Explanatory Contributions

To link contingency factors to performance evaluation of foreign subsidiaries two research approaches are taken: Researchers either use quantitative empirical designs (e.g. Brownell 1987, Chang/Taylor 1999) or they opt for conceptual approaches (e.g. Muralidharan 1998, Muralidharan/Hamilton III 1999, Welge/ Holtbrügge 1999). The quantitative empirical designs are more common and are therefore described in greater detail in this subsection. The research methodology of these explanatory contributions on performance evaluation can also be characterized in terms of the research design (1), the method of data collection (2) and the perspective adopted in the research (3). (1) When considering the research design, the empirical studies focus mainly on the MNC and/or the subsidiary as research object/s. The sample size for the MNCs starts with six in the case of Welge (Welge 1980: 65, 1981: 6) and as many as 88 in Czechowicz et al.’s work (Czechowicz et al. 1982: 5, Choi/Czechowicz 1983: 15). The MNCs are mostly from the US and Western European countries (e.g. Egelhoff 1984: 75, Coates et al. 1992: 134). Larger sample sizes are chosen, when subsidiaries are the research object (e.g. Chang/Taylor 1999: 553, Harzing 1999: 196). Ghoshal and Nohria even cover 618 subsidiaries in 66 MNCs (Ghoshal/Nohria 1989: 330). The host countries of the subsidiaries are diverse. Not only US subsidiaries of foreign MNCs (e.g. Negandhi/Baliga 1981: 8), but also Spanish (Mascarenhas 1984: 93, Martínez/Jarillo 1991: 434), Korean (Chang/Taylor 1999: 552), Australian (Chung et al. 2000: 654) and Taiwanese subsidiaries (Tseng et al. 2002: 220) are analyzed. In contrast to these studies which focus on the MNC level or the subsidiary level, Gencturk and Aulakh take a different approach (Gencturk/Aulakh 1995: 766): They consider business units as their research objects. This is because often national subsidiaries no longer exist and value-chain activities are spread according to the needs of the business units (Birkinshaw 2001: 381).36 (2) As in the descriptive studies, two modes of data collection prevail: surveys and interviews. When comparing their frequency of use, surveys are seen to be used to a higher degree. Interviews are chosen less frequently. In a few cases, a mixed approach based on survey and interviews is taken (e.g. Morsicato 1980: 71, Hedlund 1981: 25-26, Brownell 1987: 5). Thereby, authors tend to start out with the survey. They then select a number of respondents for the interviews to glean more detailed information (e.g. Morsicato 1980: 71, Brownell 1987: 5). Hedlund’s study is an exception to this rule because he chooses to interview subsidiary managers first and send out a survey to headquarters representatives afterwards (Hedlund 1981: 25-26). Compared to the large-scale surveys, the interview-based studies reveal deeper

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40

The descriptive studies reviewed above support this development: Foreign units are often grouped by business unit and/or product line for evaluation purposes.

insights.37 In addition, the collection of company data, such as reports, is promising for obtaining deep insights into performance evaluation of foreign subsidiaries (Leksell 1981a: 16-20). (3) The explanatory contributions also proceed either from the headquarters or from the subsidiary perspective. On the one hand, surveys are answered or interviews conducted with key informants at headquarters.38 On the other hand, top executives in the subsidiaries are the respondents (e.g. Mascarenhas 1984: 93, Martínez/Jarillo 1991: 435, Gupta/Govindarajan 1994: 449, Tseng et al. 2002: 220). Thus, the uniform headquarters perspective which dominates the descriptive studies is abandoned. However, to consider only the subsidiary point is also problematic since subsidiary managers might suffer from perception gaps (Arvidsson 1999: 102-104, Birkinshaw et al. 2000). Only a small number of studies integrate the two perspectives by sending out questionnaires or conducting interviews at both headquarters and subsidiary level. Coates at al. interviewed, for example, headquarters and subsidiary representatives (Coates et al. 1991: 445, 1992: 135). Welge and Hedlund chose a similar approach (Welge 1980: 66, Hedlund 1981: 2526). This research design seems to be most promising as it has the potential to validate findings by considering two perspectives. This review of the research designs and methodology of the contingency studies has important implications for future research. First of all, more attention should be given to the business unit level instead of the MNC level (see Gencturk/Aulakh 1995: 766). The evaluating unit can often not be found at the MNC headquarters, but at the business units’ headquarters. Second, the prevailing use of large-scale surveys to study influencing factors on the performance evaluation of subsidiaries leads to unsatisfactory results. It may turn out that a different research approach has to be taken. By switching to more qualitative variations of contingency approaches, it would be possible to gain greater insight into the interplay of different variables. In a more qualitative approach, the parallel assessment of the headquarters’ point of view and the subsidiary perspective on performance evaluation shows high potential.

37

38

Leksell, for instance, provides details on the attitudes of subsidiary managers and headquarters managers towards the financial reporting systems (Leksell 1981a: 199-206). These can be top executives of the MNC (e.g. Welge 1980: 66, Horvath et al. 1981: 175, Coates et al. 1991: 445), top executives in international divisions (e.g. Morsicato 1980: 72, Egelhoff 1988: 46) or financial executives (e.g. Choi/Czechowicz 1983: 15, Demirag 1988: 260, Rolander et al. 1989: 1013).

41

3.4 Conclusions and Implications of the Literature Review39 This section started out with three objectives which are now resumed and reflected upon: (1) First, it was shown that the performance evaluation framework serves as a useful scheme for classifying existing descriptive and explanatory contributions. It is fruitful to differentiate between the object, the content and the process of performance evaluation. Such an approach helps to clarify that performance evaluation has several dimensions. Only by specifying which dimension is of interest can research lead to meaningful findings. The integrative framework of performance evaluation has not yet been empirically assessed along all three dimensions. The dissertation intends to fill this gap by departing from this more complete concept of performance evaluation. (2) Second, many influencing factors have been identified. This leads to a categorization of contingency factors at MNC and at subsidiary level. Creating awareness of the impact of influencing factors on decisions and actions is one important contribution of contingency approaches. However, it has been shown that researchers reveal either contradictory results or no significant impact at all. It is therefore debatable how far the contingency factors which have been investigated at MNC level and at subsidiary level are explanatory variables for performance evaluation. One open question is: Do we need additional variables? Subsidiary roles can be interpreted as examples of a new category of influencing factors which has so far been insufficiently addressed. However, subsidiary roles are related to the factors summarized above since they can incorporate contingencies in their classifying dimensions: Jarillo and Martínez as well as Taggart, for example, use the “degree of localization” (Martínez/Jarillo 1991: 503, Taggart 1996a: 6, 1997a: 300), Hoffmann determines subsidiary roles partly based on “MNC strategy” (Hoffman 1994: 75) and Taggart uses “autonomy” in his second role typology (Taggart 1997b: 57). Still, subsidiary roles do not only incorporate one influencing factor, but rather combine two or more. This might strengthen their impact as a contingency factor on the performance evaluation of subsidiaries. Acknowledging the positive reception and wide distribution of role typologies in international business research (see Paterson/Brock 2002: 142-147, Schmid 2004 for overviews), and in light of the hitherto neglected link between performance evaluation and subsidiary roles, this potential relationship is at the centre of this dissertation. (3) Third, first requirements for an empirical study on the relationship between subsidiary roles and performance evaluation can be extracted from the existing 39

This section includes arguments outlined in Schmid/Kretschmer 2006b.

42

empirical research. Given the unsatisfactory results so far, it may be necessary to turn towards more qualitative variations of the contingency approach. Case study research, for instance, is seen as promising (Otley 1980: 425). At the same time, a limited number of descriptive and explanatory contributions show the potential of incorporating the headquarters and the subsidiary perspective. These implications of the literature review are taken into account when elaborating the research framework in chapter 4 and the research design in section 5.1.

43

4 The Research Framework This chapter aims at establishing the research framework for the present study. First, a contingency framework of role-specific performance evaluation is elaborated in section 4.1. This is followed by a detailed discussion of the relationship between subsidiary roles and performance evaluation in section 4.2. Propositions on rolespecific performance evaluation are then derived.

4.1 A Contingency Framework of Role-Specific Performance Evaluation To build the research framework the theoretical background first has to be clarified. Contingency theory is identified as suitable organization theory and introduced in subsection 4.1.1. Based on this theoretical background, a contingency framework of role-specific performance evaluation is elaborated in subsection 4.1.2 and subsequently critically reviewed (subsection 4.1.3).

4.1.1

Contingency Theory as Theoretical Background

Several organization theories are applied to the study of control in organizations and/or to the study of the headquarters-subsidiary relationship: In the literature review the high number of relevant contributions demonstrated a frequent use of contingency theory (see section 3.3). In addition, new institutional economic theories, such as agency theory and transaction cost theory, have also been applied to the headquarters-subsidiary relationship (for instance Hennart 1993, Roth/O'Donnell 1996, Björkman et al. 2004). Furthermore, (macro-)institutional theory is argued to have high potential for analyzing MNCs (Westney 1993). Literature on management control often grounds in cybernetics (Hofstede 1978: 451) so that this theory might also be relevant for examining performance evaluation as a control mechanism. This subsection shows that of these organization theories contingency theory provides the appropriate theoretical background for this study. To this end, contingency theory is first introduced in subsection 4.1.1.1. This is followed by a review and consequently rejection of other organization theories which cannot be applied to the phenomenon under question (subsection 4.1.1.2).

K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1_4, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

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4.1.1.1

Introducing Contingency Theory

Contingency theory (Lawrence/Lorsch 1967, Thompson 1967) has its roots in systems theory. It argues that situation and context have an impact on the structure of the organization and the behaviour of its members.40 In addition, the situation, the organizational structure and the behaviour in organizations influence the efficiency of the organization. These ideas are summarized in the basic framework of contingency theory which is visualized in Figure 5. Researchers explore and test causal linkages between the situational factors as independent variables and the structure and/or behaviour and/or efficiency as dependent variables. The idea of contingency theory is that there is “no one best way” (Donaldson 1985: 155). Applied to management research, it can be expressed as follows: “The optimum management practice is contingent on the company situation” (Shetty 1974: 129).

Situation of the Organization

Organizational Structure

Behaviour in the Organization

Efficiency of the Organization

Figure 5:

Basic Framework of Contingency Theory41

Schreyögg reconstructs three underlying premises of traditional contingency approaches (Schreyögg 1980: 305-309, 1994: 159-172): First, the existence of only one optimal organizational structure is assumed which is determined by the context. 40

41

46

See, for example, for overviews of contingency theory Welge 1987: 76-90, Kieser/Kubicek 1992: 45-65, Schmid 1994: 11-20, Kieser 2002b, Kieser/Walgenbach 2003: 43-46. Translated and adapted from Kieser/Kubicek 1992: 57.

Second, organization structure and behaviour of organizational members have no impact on the situation which consequently is premised as given. Third, a mandatory efficiency level is assumed to ensure organizational survival. These premises have drawn criticism (see, for instance, Otley 1980: 419, Schreyögg 1980, Zey-Ferrell 1981, Schmid 1994: 14-20, Kieser 2002b: 183-191) which will be addressed in subsection 4.1.3 when reviewing the research framework. At the same time, it will be shown how the criticism is overcome to a certain extent within this study. In the study of organizations, contingency theory is considered to be the most widely used organization theory (Welge 1987: 78, Kieser/Kubicek 1992: 47, Scott 1998: 97). Especially the so-called Aston-program made valuable contributions to the field (see, for instance, Pugh et al. 1968, Pugh/Hickson/Hinings 1969, Pugh/Hickson/Hinings et al. 1969, Inkson et al. 1970, Pugh/Hickson 1971, Child 1976 and Pugh 1981 for an overview). Contingency theory is also widely accepted in both international business research (Doz/Prahalad 1991: 151, Forsgren 2004: 19 see, for instance, Lemak/Bracker 1988, Schmid/Kretschmer 2006b for overviews) and management control research (Welge 1987: 54 see, for example, Waterhouse/Tiessen 1978, Fisher 1998, Chenhall 2003 for overviews). Contingency theory also meets the demands of the present study. This becomes apparent when exposing contingency theory to the following requirements, which are relevant for assessing the suitability of an organization theory for this study:  First of all, the theory has to be applicable to MNCs as this is the research object of this study. In contingency theory, variety is central (Wolf 1994: 91-100, Kieser 2002b: 185). This enhances the relevance of the approach for studying MNCs as multicultural organizations (Schmid 1996) with a variety of activities in various countries.  Second, the headquarters-subsidiary relationship is at the centre of interest so that the organization theory should be applicable to intra-organizational relations. Contingency theory suggests an open framework which can be adapted to the research problem at hand (Bufka 1997: 69, Kieser/Walgenbach 2003: 213). Thus, intra-organizational relationships can be covered.  Third, subsidiary roles play a major role in this study. Therefore, the premises of the organization theory should not contravene the underlying assumptions of subsidiary roles. Contingency theory is compatible with differentiated strategies and structures (Doz/Prahalad 1991: 151). Thus, none of the premises is in conflict with the concept of subsidiary roles in MNCs.  Fourth, performance evaluation as outlined for this study has its roots in a complex conceptualization of control which should be compatible with the organization theory. Contingency theory offers both an applicable (Doz/Prahalad 1991: 152) and open research framework (Kieser/Kubicek 1992: 62, Bufka 1997: 69). Based on the research questions, the framework has to be filled with relevant variables (Kieser/Walgenbach 2003: 213). Thus, both central elements – the

47

subsidiary role and the performance evaluation concept – can be accommodated within the contingency theory framework.  Fifth, the theory should be capable of operationalization because an empirical assessment is essential for this study. Contingency theory is empirically accessible. Indeed, contingency approaches have their roots in empirical studies and have contributed to the development of empirical methods (Kieser 2002b: 170-171). Proceeding from the incorporated concepts, operationalizations can be derived and used for an empirical study. As the above arguments show, a contingency approach is suitable for the research problem of this study. However, at first sight, additional organization theories might also be relevant. The suitability of these theories is assessed in the following subsection.

4.1.1.2

Excluding Other Organization Theories

Apart from contingency theory, four additional organization theories are commonly applied in research related to control in MNCs and/or the study of headquarterssubsidiary relationships: agency theory, transaction cost theory, institutional theory and cybernetics. In the following, these four organization theories are systematically examined in terms of their applicability to the research questions. The theoretical approaches are not described in detail because concise overviews can be found elsewhere (see, for instance, Scott 1998: 31-120, Schreyögg 1999: 27-97, Kieser 2002a on organization theories in general and Doz/Prahalad 1991, Ghoshal/Westney 1993, Westney 1997 on the application of selected organization theories in International Business). Five relevant requirements for the suitability of an organization theory to this study were addressed in the previous subsection. These are integrated in Table 7 which provides an overview of all mentioned organization theories and their appropriateness to the research problem. In the following, agency theory (1), transaction cost theory (2), institutional theory (3) and cybernetics (4) are briefly outlined before explaining why they do not meet the requirements of this study.

48

(1) Agency Theory

(2) Transaction Cost Theory

(3) (Macro-) Institutional Theory

(4) Cybernetics

MNC as research object







(-)



Applicable to intraorganizational relationship





-





Compatible with the concept of subsidiary roles

-

-

-

-



Compatible with a complex control mix

-

-







(-)

(-)

(-)

-



Requirements

42

Capable of operationalization

Table 7:

Contingency Theory

Simplified Comparison of the Suitability of Selected Organization Theories

(1) Agency theory (Berle/Means 1962, Jensen/Meckling 1976, Fama/Jensen 1983a, 1983b, Eisenhardt 1989b) assumes divergent goals between a principal and an agent. Proceeding from this basis, it considers how the principal can control the agent’s behaviour and foster an alignment of interests. The principal-agent relationship has frequently been transferred to the headquarters-subsidiary relationship (for instance Roth/O'Donnell 1996, Chang/Taylor 1999, O'Donnell 2000, Björkman et al. 2004, Kim et al. 2005). Nevertheless, the agency approach has certain limitations which affect its applicability to this study43:  The compatibility of agency theory with the concept of subsidiary roles is limited for two reasons: First, the simple hierarchical relationship between headquarters and subsidiaries neglects relationships between subsidiaries (Doz/Prahalad 1991: 148-149, O'Donnell 2000: 541). These relations between subsidiaries frequently determine subsidiary roles (e.g. Gupta/Govindarajan 1994, Forsgren/Pedersen 1997, 1998, Randøy/Li 1998), making the agency approach disadvantageous for this study. Second, opportunistic behaviour on the part of the managers is incompatible with the underlying assumptions of subsidiary roles. When subsidiaries fulfil strategic roles, responsibility and authority is voluntarily granted to subsidiary level (Doz/Prahalad 1991: 148-149, O'Donnell 2000: 541). This implies a relationship of trust in place of a cautious scepticism which is inherent in principal-agent relationships. If a subsidiary is a Strategic Leader, for instance, it can even be involved in the development of strategies for the whole MNC. It is 42

43

Similary to Meckl (see Meckl 2000: 86), certain requirements are predefined in order to analyze the suitability of the organization theories for the specific research problem instead of presenting a general review of the theories. Some authors even question if agency theory can provide useful insights into the management of subsidiaries of MNCs at all (Doz/Prahalad 1991: 148-149, O'Donnell 2000: 542). This general scepticism is not shared since research based on agency theory might foster new findings in IB. However, its potential usefulness certainly depends on the specific research question.

49





difficult to imagine this kind of freedom and autonomy in combination with strong constraints against opportunistic behaviour. Thus, the basic assumption of agency theory is difficult to combine with the underlying rationale of subsidiary roles. The dichotomised distinction between monitoring and incentives neglects more complex control types (Doz/Prahalad 1991: 148-149, O'Donnell 2000: 541). Cultural control processes and the simultaneous use of several control mechanisms are ignored. For this reason, the performance evaluation concept developed in section 2.2 is based on Ouchi, Baliga and Jaeger who include more complex control mechanisms and accept their simultaneous adoption (Eisenhardt 1985: 135-139, Anderson/Oliver 1987: 80-81).44 A broader approach to control is adopted within this study than that proposed by the agency approach. Furthermore, it is difficult to operationalize agency costs (Meckl 2000: 94, Ebers/Gotsch 2002: 224-225). Residual costs especially are not quantifyable (Ebers/Gotsch 2002: 224). Therefore, agency theory can be useful to derive qualitative statements, but it remains difficult to apply it empirically.

(2) Transaction cost theory (Coase 1937, Williamson 1976, 1979) is used to determine the efficient choice between the economic institutions “market” and “organization” by comparing the transaction costs of both solutions. While the market solution is primarily governed by the price, hierarchy principally governs the organization. Transaction cost theory has also been transferred to the headquarterssubsidiary relationship. It is, for example, used to explain headquarters’ control of subsidiaries on a general level (see Hennart 1993) or to clarify the application of one particular control mechanism as, for instance, the use of expatriates (Benito et al. 2005, Bonache Pérez/Pla-Barber 2005, Tan/Mahoney 2006). In spite of numerous achievements (see Ebers/Gotsch 2002: 241-243 for an overview), transaction cost theory is difficult to transfer to managerial issues within organizations (Doz/Prahalad 1991: 148) and in particular within multinational corporations (Wolf 1994: 56-57).45 It is not applicable to this study for the following reasons:  The premises of transaction cost theory contradict the underlying assumptions of subsidiary roles. As in agency theory, opportunistic actors are assumed in transaction cost theory (Barney 1990: 384, Donaldson 1990: 371-373). This behavioural premise is believed to be fairly limited because in reality humans behave not only according to their own best interest (Ghoshal/Moran 1996, Meckl 2000: 90). Trust-embedded approaches provide a more realistic understanding of intra-organizational relationships (Beccerra/Gupta 1999). Thus, the opportunism premise is also believed to be too restrictive for analyzing the impact of subsidiary roles on performance evaluation within MNCs. 44

45

50

Björkman, Barner-Rasmussen and Li chose a different approach by combining agency theory and socialisation theory in order to circumvent the restrictive control concept of agency theory (Björkman et al. 2004). This procedure is questionable because socialization theory proceeds from assumptions which differ from agency theory (see Van Maanen/Schein 1979: 214-216 for an outline of the underlying assumptions of socialization theory). Rugmann and Verbeke oppose this when incorporating Bartlett and Ghoshal’s transnational MNC into transaction cost theory (Rugman/Verbeke 1992).





By concentrating on price and hierarchy, shared goals are neglected as a control and coordination mechanism (Ghoshal/Moran 1996: 35-36). Thus, like agency theory transaction cost theory also ignores cultural control mechanisms which can play an important role within MNCs (Martínez/Jarillo 1989: 507-509, Welch/Welch 2006: 16-19) and especially within network MNCs (see, for instance, Bartlett 1986: 395-396, Hedlund 1986: 24, White/Poynter 1989b: 59).46 In addition, transaction costs are difficult to operationalize and measure (e.g. Ebers/Gotsch 2002: 241-243, Kutschker/Schmid 2005: 450-451). While the transaction costs of “market” as solution might still be assessable, the costs of “organization” are far more difficult to measure (Jones 1997: 17). This is also the case when trying to compare the transaction costs of certain control or coordination mechanisms within MNCs (Meckl 2000: 90).

(3) Institutional theory (DiMaggio/Powell 1983, Scott 1987, Scott/Meyer 1991) argues that organizations obey the expectations of their environment.47 To obtain legitimacy, organizations adopt their structures to institutionalized rules and demands. The conceptualization of institutional theory helps formulate problems pertaining to interactions, information and behaviour within MNCs (Doz/Prahalad 1991: 150). While potential is seen in analyzing IB issues from an institutional perspective, this theory has not yet often been applied to research on MNCs (Westney 1997: 307-309, Tempel/Walgenbach 2007: 11). Institutional theory is inappropriate for this study for the following reasons:  The applicability of institutional theory to the intra-organizational level is not given. The level of analysis of institutional theory is seen in the macro-environment of the specific organization (Westney 1993: 54, 1997: 306). In contrast, the research focus here is placed on the micro-level – on the MNC and its subsidiaries.  The question of the impact of subsidiary roles on performance evaluation cannot be addressed from an institutional perspective. In general, strategic actions, such as, for instance, establishing subsidiary roles, are neglected in institutional theory (Walgenbach 2002: 350-351, Bamberger/Wrona 2004: 74).  Further difficulties are encountered with institutional approaches in empirical research. Defining organizational fields and operationalizing institutionalization is fairly problematic (Westney 1993: 57). (4) Cybernetics theory (Ashby 1961, Wiener 1963) is concerned with regulatory feedback within complex systems. The feedback mechanism is also used to explain control inside organizations (Beer 1972, Otley/Berry 1980, Otley et al. 1995: 34-35). In defining performance evaluation and the different control steps – monitoring, evaluation and feedback, general implications of cybernetics are incorporated (Otley/Berry 1980: 235-237, Otley 1983: 62-68). However, the mechanical and self46

47

Hennart as a proponent of transaction cost theory encounters for this limitation when building his own concept of control by integrating socialization as control mode (Hennart 1993: 170-172). Following Westney, the macro-institutional approach is adopted here (Westney 1997: 307-309). See Walgenbach 2002: 342-347 for details on the micro-institutional approach.

51

regulating closed-loop system inherent in early cybernetic approaches is not adopted here (Gharajedaghi/Ackoff 1985: 282-285, Schreyögg 1999: 91). The following reasons disqualify cybernetics from building the overall theoretical background for this study:  Cybernetics cannot reflect MNC reality (Kutschker/Schmid 2005: 991) and are not compatible with the concept of subsidiary roles. This is due to the strict hierarchical relationship immanent in cybernetics (Probst 1987: 47, Macharzina/Oesterle 2002b: 710). By incorporating subsidiary roles which are mostly based on network conceptions of the MNC (Schmid et al. 1998: 97), this strict hierarchical relationship is abandoned here. Vertical, horizontal or lateral relationships can exist within the MNC alongside the one selected hierarchical relationship – headquarters’ performance evaluation of subsidiaries.  The abstractness of cybernetics seriously limits its empirical observability (Otley et al. 1995: 34). Even the definition of the constitutive elements of cybernetics models, such as system, information and structure, raises problems (Ulrich 1968: 100-101). This disqualifies cybernetics from its application in a real setting. All in all, agency theory, transaction cost theory, institutional theory and cybernetics are not sufficient for finding answers to the research questions which are at the centre of interest within this study. By contrast, contingency theory fulfils all five requirements and provides the appropriate theoretical framework for studying the impact of subsidiary roles on performance evaluation. Still, contingency approaches have their limitations which will be addressed in subsection 4.1.3.

4.1.2

Developing a Contingency Framework of Role-Specific Performance Evaluation

On the basis of contingency theory, this subsection aims at elaborating a contingency framework of role-specific performance evaluation. First, a general model is defined in subsection 4.1.2.1. This is followed by the specification of subsidiary roles as contingency factor. To this end, role typologies are presented and their suitability to the research problem is discussed (subsection 4.1.2.2). Three potentially relevant role typologies are discovered and reviewed in greater detail in subsection 4.1.2.3. Finally, this leads to the identification of two suitable role typologies that specify the contingency framework which is presented in subsection 4.1.2.4.

4.1.2.1

General Contingency Framework of Role-Specific Performance Evaluation

Contingency theory has been singled out as the appropriate organization theory. Consequently, a contingency framework is elaborated for the study of role-specific

52

performance evaluation of foreign subsidiaries.48 On the one hand, it incorporates the subsidiary roles as independent variable. On the other hand, performance evaluation with its three dimensions – the role in the control mix, the content of performance evaluation and the process of performance evaluation – is integrated as dependent variable. The general framework is presented in Figure 6. It includes a simplified version of the performance evaluation concept visualized in Figure 3. The research focus here is on the relationship between subsidiary roles and performance evaluation, covering only one part of the basic model of contingency theory. The link of these two elements to behaviour in organizations and organizational effectiveness is not the subject of this research. While performance evaluation has been conceptualized in detail in section 2.2, the framework still lacks a specification of the influencing factor “subsidiary role” which is addressed in the following subsection.

Role in the control mix

Subsidiary role

Performance evaluation

Content

Figure 6:

Process

General Contingency Framework of Role-Specific Performance Evaluation of Foreign Subsidiaries

48

Contingency frameworks have been similarly established before. See, for example, Gordon/Miller 1976, Otley 1980: 419-422, Littkemann 1997, Littkemann/Derfuß 2004: 694-696.

53

4.1.2.2

Selection of Role Typologies to Specify the Contingency Factor

Subsidiary roles are defined in role typologies. These consist of two to three classifying dimensions which determine subsidiary roles and as such also the contingency factor for this study. Many different role typologies have been developed during the last decades (see overviews presented by Schmid et al. 1998, Paterson/Brock 2002: 142-147, Schmid/Kutschker 2003, Schmid 2004). Table 8 presents a consolidated list of the role typologies addressed in the mentioned publications (Schmid et al. 1998, Paterson/Brock 2002: 142-147, Schmid/Kutschker 2003, Schmid 2004).49 Recent role typologies – Papanastassiou/Pearce 2005, Schmid/Daub 2005, Hogenbirk/Van Kranenburg 2006 – complete the list. In this study, not all the role typologies described in these publications are taken into account. Rather, the role typologies are systematically narrowed down to identify the relevant subsidiary roles as contingency factor. Specifically, typologies are not considered which build explicitly upon existing role typologies (1). The remaining “original” role typologies need to fit the research questions in terms of the type of subsidiaries addressed (2), the classifying dimensions characterizing the different roles (3) and the direction of the research implications (4). (1) When comparing the classifying dimensions used in the role typology research stream, overlaps become visible. This is partly due to the fact that authors do not start from scratch, but build their subsidiary roles upon existing typologies:  Taggart starts out by “augmenting Jarillo and Martinez” (Taggart 1996a: 1) because he intends to empirically test their role typology. In fact though, Taggart uses different operationalizations for the degree of localization and the degree of integration than Jarillo and Martínez and comes up with one additional subsidiary role (Schmid et al. 1998: 56-60).  Delany bases his typology on White/Poynter 1984. He changes the Rationalized Manufacturer to the Rationalized Operator and introduces the Enhanced Mandate as additional subsidiary role (Delany 2000: 225-227).  Compared to Delany, Hogenbirk and Van Kranenburg neglect the dimension “product scope” and focus on the “value added scope” and “market scope”, distinguishing Local Satellites, Truncated Miniature Replicas, Regional or World Mandated Hubs and Export Platforms (Hogenbirk/Van Kranenburg 2006: 55-56).  Tavares and Pearce also proceed from White/Poynter 1984 and additionally refer to D'Cruz 1986 for determining Truncated Miniature Replica, Rationalised Product and Product Mandate subsidiaries (Tavares/Pearce 1999: 6).

49

54

One of the articles Paterson and Brock present in their overview of role typologies is not included here (Paterson/Brock 2002: 146): a contribution by Roth and Morrison published in the Journal of International Business Studies in 1992. Roth and Morrison analyze characteristics of global subsidiary mandates without distinguishing further types of subsidiaries (Roth/Morrison 1992) and are therefore not part of Table 8.

Author/s

Dimensions50

Focus 

market scope product scope  value added scope 

White/Poynter 1984

subsidiaries

D'Cruz 1986, Typology I

subsidiaries

D'Cruz 1986, Typology II

subsidiaries

Bartlett/Ghoshal 1986, 1989

subsidiaries

Marcati 1989

(manufacturing) subsidiaries

Ferdows 1989, 1997

manufacturing subsidiaries

Jarillo/Martínez 1990

subsidiaries

Hoffman 1994

subsidiaries

Chiesa 1996

research and development units

degree of dispersion of firm’s R&D resources  degree of dispersion of external sources of knowledge

Kuemmerle 1997, 1999

research and development units



Medcof 1997

research and development units

Taggart 1996a, 1997a

subsidiaries

Taggart 1997b

subsidiaries

Taggart 1998a

subsidiaries

Nobel/Birkinshaw 199851

research and development units

   

annual business plans strategic plans decision-making autonomy extent of market involvement



strategic importance of local environment  competence of local organization      

(level of coordination) (dependence from HQs) primary strategic reason for the site extent of technical activities at the site/ site competence degree of localization degree of integration



MNC strategy subsidiary capabilities  local environment of the subsidiary  

50

51

objective of establishment



type of technical work functional area of collaboration  geographic area of collaboration       

degree of localization degree of integration autonomy procedural justice coordination of activities configuration of activities



nature of the activities geographic scope  linkages to other entities 

Most of the role dimensions are explicitly addressed within the contributions, but some dimensions are only used implicitly. The latter are in parentheses to indicate their implicit appearance. Nobel and Birkinshaw do not present a new typology but base their classification on existing role typologies (Nobel/Birkinshaw 1998: 480-483). In spite of using three dimensions, they only extract three types of research and development units (not eight). The dimensions are used for describing the characteristics of local adaptors, international adaptors and international creators.

55

Gupta/Govindarajan 1991, 1994

subsidiaries

Birkinshaw/Morrison 1995

subsidiaries

Forsgren/Pedersen 1997, 1998

product mandates

Surlemont 1998

coordination centers

Randøy/Li 1998

subsidiaries

Birkinshaw 1996a

world product mandates

Beechler et al. 1998

subsidiary development

Mudambi 199952

subsidiaries

Tavares/Pearce 1999

subsidiaries

Delany 200053

subsidiary development stages

Jones/Davis 2000

research and development units

Benito et al. 2003

subsidiaries

Papanastassiou/Pearce 2005

research and development units

Schmid/Daub 2005

offshoring subsidiaries

Hogenbirk/Van Kranenburg 2006

subsidiaries

               

outflow of knowledge inflow of knowledge (market scope) (combination of product scope and value added scope) corporate embeddedness external embeddedness domain of influence scope of influence outflow of resources inflow of resources strategic relatedness distinctive value-added dominant management perspective size of changes/learning extent of strategic decision-making extent of responsibilities



Table 8:

52 53

54

market scope product scope  value-added/functional scope  

market scope product scope  value added scope  

motivation focus geographic orientation  R&D mission         

scope of activities level of competence (scope of activities) (integration) network integration strategic relevance market scope value-added scope

Overview of Role Typologies54

Mudambi bases his typology on D’Cruz and Moore (D'Cruz 1986, Moore 1995). Delany bases his typology on White/Poynter 1984. He slightly changes their terminology and introduces the enhanced mandate as additional subsidiary role before forming three groups of subsidiary roles (Delany 2000: 225-227). Adapted and extended from Schmid et al. 1998, Paterson/Brock 2002: 142-147, Schmid/Kutschker 2003, Schmid 2004.

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Mudambi integrates two other role typologies – one of D’Cruz’ typologies (see D'Cruz 1986: 80-84) and the role typology presented by Moore (Moore 1995) – to determine six subsidiary roles (Mudambi 1999: 199).  Nobel and Birkinshaw build not only upon one or two existing role typologies, but use five role typologies of research and development units as basis for their typology (Nobel/Birkinshaw 1998: 481). They group existing strategic roles and extract three common roles: the Local Adaptor, the International Adaptor and the Global Creator (Nobel/Birkinshaw 1998: 481-483).  Even more role typologies – six in total – are integrated into Birkinshaw and Morrison’s concept. Again, subsidiary roles are partly excluded and grouped together so that Birkinshaw and Morrison come up with three subsidiary types: the Local Implementer, the Specialized Contributor and the World Mandate (Birkinshaw/Morrison 1995: 733). In this research project, emphasis will be placed on the “original” role typologies. “Original” does not necessarily mean that the dimensions, the (possibly existing) theoretical background and the subsidiary roles are all new, but the role typologies do not proceed from or integrate existing subsidiary role typologies. Extended or adapted versions might be helpful for interpreting the strategic roles and assessing their relevance, but for clarity and systematic reasons they are not at the centre of attention. The remaining “original” role typologies are narrowed down further. 

(2) The research questions consider subsidiaries in general. There is no special focus in the dissertation on research and development units or production sites or centres of excellence. Focus is generally on the relationship between performance evaluation and subsidiary roles. Therefore, it is possible to include a number of diverse subsidiaries. Hence, role typologies which address special types of subsidiaries within the MNC are excluded:  Ferdows analyzes production sites based on a distinction of the primary strategic reason for the site and the site competence (Ferdows 1989, 1997).  Production is not the only function of interest, but many authors have also developed typologies for the area of research and development (i.e. Chiesa 1996, Kuemmerle 1997, Medcof 1997, Nobel/Birkinshaw 1998, Kuemmerle 1999, Jones/Davis 2000, Papanastassiou/Pearce 2005, see also Schmid 2000: 12-13 for more typologies of research and development units).  An additional example of a focused role typology is presented by Forsgren and Pedersen who concentrate on subsidiaries holding product mandates based on the dimensions corporate embededdness and external embededdness (Forsgren/Pedersen 1997, 1998).  Surlemont concentrates on Belgian coordination centres as his topic and distinguishes them according to their domain and scope of influence (Surlemont 1996, 1998).  Birkinshaw assesses different types of world product mandates in relation to their strategic relatedness and their distinctive value-added and thus focuses on specific subsidiary types, too (Birkinshaw 1996b). 57

The recent role typology developed by Schmid and Daub, which is based on the network integration and strategic relevance of subsidiaries, is not included since it addresses specifically offshoring subsidiaries (Schmid/Daub 2005). In summary, broad role typologies are of major interest for this research. Still, this is not the only restriction: Not only the type of subsidiary needs to fit the research questions, but also the classifying dimensions. The exclusion criteria concerning the role typology dimensions will be explained in the next paragraph.



(3) The present study analyzes the relationship between subsidiary roles and performance evaluation as a potential control mechanism. In the subsidiary research stream, role typologies can be found which explicitly consider control or coordination mechanisms as classifying dimensions of subsidiaries. Trying to link these role typologies to performance evaluation would imply a circular reasoning. One of the role typologies presented by D’Cruz can serve as an example (D'Cruz 1986). D’Cruz uses annual business plans and strategic plans as classifying dimensions for distinguishing four subsidiary roles (D'Cruz 1986: 76-78): the Truncated Business, the Miniature Replica, the Mature Non-strategic Subsidiary and the Strategically Managed Subsidiary. Formal planning is the basis for the role typology, therefore asking for the characteristics of the process of performance evaluation should result in a high degree of formalization as established by the classifying dimension. The typology dimension as independent variable would be too similar to the performance evaluation system as dependent variable. Comparable circular statements would result when considering one of Taggart’s role typologies which is based on the coordination of activities and the configuration of activities (Taggart 1998b) and Marcati’s role implicitly considering the level of coordination as dimensions (Marcati 1989). (4) When considering these three restrictions, the number of relevant role typologies is reduced to nine: White/Poynter 1984, Bartlett/Ghoshal 1986, D'Cruz 1986, Jarillo/Martínez 1990, Gupta/Govindarajan 1991, Hoffman 1994, Taggart 1997b, Randøy/Li 1998, Benito et al. 2003. All these role typologies are developed in a certain context and with a certain aim. As this dissertation considers subsidiary roles in the context of coordination and control, six of these role typologies are excluded due to their differing focus:  White and Poynter as well as D’Cruz develop their typology for economic and/or political reasons (White/Poynter 1984: 59, D'Cruz 1986: 75, Schmid et al. 1998: 10-11). They search for new strategies for foreign subsidiaries in Canada to enhance the competitiveness of the Canadian economy. Benito et al. build their typology in a political context, too (Benito et al. 2003). They are interested in the effect of economic integration on subsidiary roles. None of the three typologies considers issues of coordination and control within MNCs.  Hoffman aims at developing a comprehensive typology (Hoffman 1994: 69). He incorporates the MNC strategy when determining his subsidiary roles, but does not address the context of coordination and control in MNCs. 58

With his remaining typology, Taggart tries to achieve two aims: First, he intends to prove the existence of the four subsidiary types and second, he tries to link them to several strategic dimensions (Taggart 1997b, Schmid et al. 1998: 60). Thus, strategies and not coordination and control mechanisms are his chief interest.  The typology put forward by Randøy and Li is elaborated in the context of global integration (Randøy/Li 1998). The authors analyze intra-firm flows of resources as indicators of global integration and do not broach the issue of coordination and control of the subsidiaries. The three remaining role typologies are of major interest, namely the typology presented by Bartlett and Ghoshal (Bartlett/Ghoshal 1986), the role typology presented by Gupta and Govindarajan (Gupta/Govindarajan 1991, 1994) and the typology presented by Jarillo and Martínez (Jarillo/Martínez 1990, Martínez/Jarillo 1991). These are analyzed in greater detail in the following subsection. 

4.1.2.3

Identification of Two Relevant Role Typologies

The role typologies put forward by Bartlett and Ghoshal, Gupta and Govindarajan as well as Jarillo and Martínez have one important aspect in common: Apart from describing strategic roles of subsidiaries, the authors elaborate on the implications for the control and coordination mechanisms of these subsidiaries (Schmid 2004: 246). Thus, the determined subsidiary roles could possibly be integrated as contingency factor into the research framework. But first, the three role typologies are further characterized (see Table 9 for an overview) and discussed. The typology presented by Jarillo and Martínez differs from the other two role typologies in terms of its origin and its assessment of coordination mechanisms. It suffers from a number of restrictions which cause it to be less suitable for the research problem. The following limitations are revealed and addressed in greater detail: The classifying dimensions originally belong to the organizational level of the MNC (1), the existence of the subsidiary roles is only partly proven (2), coordination mechanisms are not differentiated (3), the direction of coordination remains unclear (4) and the hypotheses lack explanations (5). (1) Jarillo and Martínez proceed from Bartlett’s integration-responsiveness framework (Bartlett 1989: 428-438, Jarillo/Martínez 1990: 502-503). They transfer this model from the organizational level to the subsidiary level. Thus, they no longer distinguish global, transnational and multinational organizations, but receptive, active and autonomous subsidiaries. This transfer is questionable because the dimensions “forces for global integration” and “forces for national responsiveness” characterize firm level structure and strategy.55 While integration-localization decisions can be 55

Bartlett derives this framework based on Porter’s configuration-coordination framework (Porter 1986: 23-29, Bartlett 1989: 428-438). He transfers Porter’s model from industry level to firm level.

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effectuated at MNC level, they are difficult to imagine at subsidiary level (Schmid et al. 1998: 57). Therefore, the stated dimensions are less applicable to subsidiary level than the dimensions used by both Bartlett and Ghoshal and Gupta and Govindarajan. The latter typologies were originally developed for differentiating subsidiary roles.

Author/s

Bartlett/Ghoshal 1986, 1989

Dimensions

 strategic importance of

local environment

Jarillo/Martínez 1990, Martínez/Jarillo 1991  degree of integration  degree of localization

 competence of local

Gupta/Govindarajan 1991, 1994  outflow of

knowledge  inflow of knowledge

organization Origin of the Dimensions

 classification of

subsidiary level strategy

 classification of firm

level strategy and structure

 transactions

between units within the MNC network

 Strategic Leader

 Autonomous

 Local Innovator

 Contributor

 Global Innovator

 Black Hole

Subsidiary  Receptive Subsidiary  Active Subsidiary

 conceptual in nature

 structured personal

 questionnaire

inspired by case studies  survey classifying subsidiaries according to environmental complexity and local resources  sample: 618 subsidiaries; 66 MNCs

interviews  sample: 50 subsidiaries

 sample: 359

Empirical Evidence of the Subsidiary Roles

 conceptual in nature;

 only partly proved

 all four types are

Dependent variable

 various coordination

Coordinating and controlling unit

 headquarters

 unclear

 headquarters

Coordinated and controlled unit(s)

 subsidiaries

 unclear

 subsidiaries

Subsidiary Roles

 Implementer

Empirical Base

Table 9:

56

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empirical assessment of subsidiary roles only for differing dimensions

and control mechanisms

because subsidiary types are not discovered in their pure forms  intensity of

coordination mechanisms

 Implementor  Integrated Player

subsidiaries of 79 MNCs

discovered

 various coordination

and control mechanisms

Selected Role Typologies56

The characterization of the role typologies is based on the cited articles and Schmid et al. 1998: 33, Schmid 2004: 242-243.

(2) Even if one accepts the possibility of a transfer of the localization-integration classification to subsidiary level, a subsidiary with a low degree of localization and at the same time with a low degree of integration is difficult to imagine.57 Thus, Jarillo and Martínez distinguish only three subsidiary roles in their two-dimensional matrix. In their empirical investigation, they conduct cluster analysis which leads to a distinction of three groups of subsidiaries (Jarillo/Martínez 1990: 506). These groups do not entirely correspond to the conceptually defined subsidiary roles because no extremes are discovered. Only one receptive subsidiary is found in a sample of 50 subsidiaries and no clear active subsidiaries are identified (Jarillo/Martínez 1990: 506). The same limited empirical proof is true of Bartlett and Ghoshal’s role typology. Differing subsidiary roles are not empirically analyzed within the dimensions “strategic importance of the local environment” and “competence of the local organization”. The authors only prove the existence of differing subsidiary roles within the dimensions “environmental complexity” and “local resources” (Bartlett/Ghoshal 1989: 232-233). In contrast to these partial empirical proofs, Gupta and Govindarajan empirically discover all four roles of their typology (Gupta/Govindarajan 1994: 451). (3) When comparing the three role typologies, differences in the level of detail of the dependent variables become evident. While Jarillo and Martínez address implications of their subsidiary roles for the intensity of coordination, Bartlett and Ghoshal as well as Gupta and Govindarajan suggest certain coordination and control mechanisms for each subsidiary role. Bartlett and Ghoshal, for example, recommend control and coordination mechanisms, such as formalization, socialization and centralization, for each of the strategic subsidiary roles (Bartlett/Ghoshal 1986: 94, Schmid/Kutschker 2003: 175). Similarly, Gupta and Govindarajan determine which control and coordination mechanisms are used for Global Innovators, Local Innovators, Implementors and Integrated Players (Gupta/Govindarajan 1994). In contrast, Jarillo and Martínez concentrate on the intensity of coordination when hypothesizing the highest use of coordination mechanisms for active subsidiaries and a higher use of coordination mechanisms for Receptive Subsidiaries compared to Autonomous Subsidiaries (Martínez/Jarillo 1991: 433).58 When considering the research questions of the dissertation, the focus is not placed on the overall level of coordination or control, but on different control mechanisms and their use. Here, the context of the role typologies presented by Bartlett and Ghoshal as well as Gupta and Govindarajan provide a better fit than Jarillo’s and Martínez’ role typology.

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When “augmenting Jarillo and Martínez”, Taggart finds the so-called quiescent subsidiary within this position of low integration and low responsiveness (Taggart 1996a: 12-16, Taggart 1997a: 305309). Taggart uses different operationalizations than Jarillo and Martínez and relates the quiescent subsidiary to a relatively stable environment (Taggart 1996a: 12, Taggart 1997a: 307, Schmid et al. 1998: 58-60). A distinction of different coordination mechanisms is only made indirectly when the authors argue for a higher difference in subtle mechanisms compared to formal mechanisms between the subsidiary roles (Martínez/Jarillo 1991: 434).

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(4) Jarillo and Martínez argue for role-specific coordination of the subsidiaries. Nevertheless, it remains vague how different units are involved in coordination (Schmid et al. 1998: 55). The literature review suggests that the authors focus on headquarters’ coordination of subsidiaries (Martínez/Jarillo 1991: 431-433). When generating their hypotheses, a contradictory impression arises because the authors suggest certain levels of coordination used by the subsidiaries (Martínez/Jarillo 1991: 433). Nor does the description of the operationalizations of the dependent variables shed light on this ambiguity (Martínez/Jarillo 1991: 436). Overall, it remains unclear in the publication which unit(s) is/are coordinated and which unit(s) coordinate/s. In contrast, it is evident that headquarters coordinate and control subsidiaries in the role typologies presented by Bartlett and Ghoshal as well as Gupta and Govindarajan. (5) In addition to the missing explanation of the units involved in coordination, the explanations of the hypotheses are limited. Active subsidiaries which are highly integrated and operate with a high degree of localization are, for example, hypothesized to “make the heaviest use of coordination mechanisms” (Martínez/Jarillo 1991: 433). Unfortunately, the reader is left in the dark as to where the authors obtain this hypothesis from. This unclear derivation of hypotheses limits the usefulness of the role typology for this dissertation because no consistent propositions for the use of performance evaluation can be gained from Jarillo’s and Martínez’ lines of argumentation. In contrast to Jarillo and Martínez, Bartlett and Ghoshal derive their propositions on coordination and control of subsidiaries from qualitative case studies and at least partly explain the logic supporting their observations (Bartlett/Ghoshal 1989: 171-173, 216-226). Gupta and Govindarajan provide very detailed explanations for their propositions and hypotheses (Gupta/Govindarajan 1991: 776-786, 1994: 446-449). (6) For these reasons, the typology presented by Jarillo and Martínez is not taken into further account. Rather, the role typologies put forward by Bartlett and Ghoshal as well as Gupta and Govindarajan are chosen for further consideration and presented in Figure 7 and Figure 8.

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high

Competence of local organization

Contributor

Strategic Leader

Implementer

Black Hole

low

low

Strategic importance of the local environment

high

Bartlett and Ghoshal's Role Typology59

Figure 7:

high

Outflow of knowledge

Global Innovator

Integrated Player

Local Innovator

Implementor

low

low

Figure 8:

59 60

high

Inflow of knowledge

60

Gupta and Govindarajan's Role Typology

Adapted from Bartlett/Ghoshal 1986: 90. Adapted from Gupta/Govindarajan 1991: 774.

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4.1.2.4

Specified Contingency Framework of Role-Specific Performance Evaluation

The role typologies put forward by Bartlett and Ghoshal and Gupta and Govindarajan have been shown to be most relevant for this research. These two role typologies are not only the “survivors” of the argumentation in the preceding subsection, but also two promising typologies: Bartlett and Ghoshal’s role typology is promising since it integrates an inside-out and an outside-in perspective and thereby two important theoretical streams in (international) strategic management. While the dimension “importance of the local environment” is rooted in an industrial organization thinking (Porter 1980, 1985), the dimension “level of competence” reflects the resource-based view (Wernerfelt 1984, Grant 1991, Peng 2001). The typology is innovative since it promoted role-specific coordination for the first time in IB literature (Macharzina/Oesterle 2002b: 722). No less potential is grounded in Gupta and Govindarajan’s role typology61 because it captures knowledge flows which have gained increasing importance in management and (international) business literature (Argote et al. 2000: 2, Schreyögg/Geiger 2007: 77-78, see, for instance, Nonaka/Takeuchi 1995, Zander/Kogut 1995, Macharzina et al. 2001, Andersson/Holm 2002, Schlegelmilch/Chini 2003, Mahnke/Pedersen 2004, Adenfelt/Lagerström 2006, Ambos et al. 2006, Harzing/Noorderhaven 2006, Makela et al. 2007). Further details on the role typologies are presented in the section 4.1.3, when propositions pertaining to their potential impact on performance evaluation are elaborated. The two role typologies determine the relevant strategic subsidiary roles for this dissertation. They are integrated in the general contingency framework of rolespecific performance evaluation (see Figure 6) leading to the specified framework presented in Figure 9. The independent variable is the “subsidiary role” which is expected to have an impact on performance evaluation as dependent variable. Before presenting predictions on the link between both variables in section 4.2, limitations of the contingency framework and contingency theory in general are addressed in the next subsection.

61

64

More than one hundred citations of the conceptual article are reported in the Social Science Citation Index (Harzing/Noorderhaven 2006: 196).

• Competence of the local organization

• Strategic Leader

• Strategic importance of the market*

• Implementer

• Contributor

• Black Hole

Subsidiary role

• Outflow of knowledge • Inflow of knowledge

Role in the control mix

Performance evaluation

• Integrated Player • Global Innovator • Local Innovator

Content

Process

• Implementor

* See subsection 4.2.2.1 on the adaptation of the original dimension “strategic importance of the local environment“ presented by Bartlett and Ghoshal to the more appropriate dimension “strategic importance of the market“.

Figure 9:

4.1.3

Specified Contingency Framework of Role-Specific Performance Evaluation

Review of the Contingency Framework

Since, in contrast to other organization theories, contingency theory lends itself to the research problem, a contingency based research framework has been built in the preceding subsections. Contingency theory is also met with criticism which is addressed now and evaluated in the context of the research problem of this study and with respect to the developed contingency framework. Disadvantages and limitations of contingency theory are found both at the conceptual level and methodological levels as well as at the level of the results (see Schmid 1994: 14-20 for a concise overview). Table 10 summarizes frequently expressed criticism on these levels. In the following, the criticism is qualified both in general and with particular respect to this study. Thereby, it is shown that this research acknowledges the weaknesses of the contingency approach and how these are partly overcome. This is done for the conceptual level (1) and for the level of the method and results (2).

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Concept  structural determinism  view of humans as non-volitional  disregard of corporate policies, corporate

culture, individual goals and power  premise of only one optimal organizational

structure  static view and disregard of adaptation processes  assumption of an obligatory effectiveness level  conservative study of existing structures without searching for new solutions Table 10:

Method and Results  search for correlations in spite of a limited

theoretical basis  selective incorporation of contingency factors

and organizational dimensions  ill-defined variables and differing

operationalizations from study to study  mostly unproven link to organizational

effectiveness  contradictory findings  abstract results without implications for business practice (“it all depends”)

Criticism of Traditional Contingency Approaches62

(1) In general, contingency theory can be adapted to overcome some of its limitations. It is explained below how these adaptations are taken into account in this study:  The imputed structural determinism and non-volition of humans are narrowed by considering that management is able to influence certain context factors (Wolf 1994: 91-100, Schreyögg 1999: 64, Kieser 2002b: 185).63 This is done here by incorporating subsidiary roles as contingency factor. Subsidiary roles can be assigned by the top management of the MNC or assumed by the subsidiaries (Schmid 2003a: 283-284, Young/Tavares 2004: 221-224) whereas the level of influence differs with regard to the role typology. Hoffmann, for example, considers the local environment as one of three classifying dimensions (Hoffman 1994: 76). In this case management’s discretion is reduced to the initial decision of establishing a foreign subsidiary. In contrast, management at headquarters and/or subsidiary level has a high influence in the case of White and Poynter’s role typology dimensions – market, product and value-added scope – since they determine the subsidiary scope (White/Poynter 1984: 59-60).  In addition, corporate policies, corporate culture, individual goals and power can be integrated into a contingency framework as intervening variables (Kieser/Kubicek 1992: 417-418). While these or similar intervening variables are not integrated into the research framework from the start, they might appear at a later stage. Due to the qualitative design of the empirical study, additional variables can be identified in the course of the analysis (Kelle/Kluge 1999: 99).

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63

66

The criticism is summarized from Otley 1980: 419, Schreyögg 1980, Zey-Ferrell 1981, Kieser/Kubicek 1992: 410-416, Schmid 1994: 14-20, Schreyögg 1994: 159-221, Kieser 2002b: 183191. The strategic choice model (Child 1972a, Child 1997) incorporates, for example, this idea and grants certain autonomy to management (Kieser/Kubicek 1992: 425-427).









Longitudinal studies help to redress the criticized static view (Wolf 1994: 93-94).64 However, this approach is not adopted here and the criticism remains valid. As this study analyzes the impact of subsidiary roles on performance evaluation for the first time, it is too early to opt for a longitudinal design. The premise of only one optimal organizational structure is partly overcome by the Gestalt-approach. In this area, researchers look for configurations characterized by a match of context and organizational variables (Miller/Friesen 1977, Wolf 2000: 20-27). Due to equifinality several efficient “gestalts” are allowed in place of only one best solution as assumed in traditional contingency theory (Meyer et al. 1993: 1177-1178, Veliyath/Srinivasan 1995: 210, Scherer/Beyer 1998: 334-337). Yet, that approach is not adopted here. As the study at hand proposes a specific performance evaluation according to the subsidiary role (see the propositions in the next subsection) this particular critized aspect is not eliminated. Markets are not always perfect and therefore suboptimal organizations – and MNCs – can survive, too (Kieser 2002b: 185). Consequently, the obligatory level of effectiveness which is premised in contingency theory can be critized. However, insolvencies and acquisitions show how markets penalize suboptimization. Thus, this criticism is not believed to be crucial for this study. The final criticism is that of conservatism. Contingency approaches lead to studying existing structures without searching for new solutions. This is certainly true for this study, but at the same time required. As the relationship between subsidiary roles and performance evaluation is examined for the first time, existing structures need to be looked at first before aiming at innovative solutions.

(2) The criticism at the methodological level and at the level of the results does not affect the fundamentals of contingency theory, but rather concerns the application of contingency theory in research. Accordingly, the criticism is taken into account and partly overcome in this study:  Instead of deliberately searching for statistically significant correlations, additional organization theories and concepts are incorporated in the contingency approach enhancing its theoretical basis (Wolf 1994: 91-100, Kieser 2002b: 185). Here, the concept of performance evaluation and the subsidiary roles are integrated into the contingency framework. Both elements are grounded in literature so that an adequate conceptual basis is elaborated before assessing the research problem empirically.  In order to better reflect the complexity of organizations, multi-causal approaches have replaced the mono-causal approaches (Wolf 1994: 91-100, Kieser 2002b: 185). In addition, the organizational structure is often captured in several dimensions (Kieser/Kubicek 1992: 411). Similarly, the performance evaluation concept is more realistic than previous conceptualizations since it integrates three dimensions. Closeness to reality is further enhanced by considering that 64

Researchers using the Gestalt-approach (Miller/Friesen 1977, Miller/Friesen 1978, Miller/Friesen 1980, Miller 1981) or the GAINS-paradigm in IB (Macharzina/Engelhard 1991, Macharzina 1997) frequently use these longitudinal studies (Meyer et al. 1993: 1177-1178).

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subsidiaries can take more than one role simultaneously (Schmid 2004: 248-249). However, the contingency framework remains a model which has to simplify and cannot cover all facets of reality. Despite more sophisticated definitions and operationalizations, the comparability of the research findings is limited because researchers tend to apply new combinations of variables and new research designs instead of replicating existing studies (Wolf 1994: 91-100, Kieser 2002b: 185). This has also been shown in the literature review (see section 3.3). For the study at hand, the criticism can be reduced for three reasons: First, a replication is not possible because no study has analyzed the relationship between subsidiary roles and performance evaluation so far. Second, the concept of performance evaluation is based on existing definitions and elaborations (see subsection 2.2). Third, the subsidiary roles are for the most part operationalized according to their authors (see subsection 5.2.1). Contingency studies often neglect organizational effectiveness as dependent variable which is also true of this study. The focus here is on analyzing the relationship between subsidiary roles and performance evaluation without taking into account the “performance” of the performance evaluation of the subsidiary. Contradictory findings have already been revealed in the literature review (see subsection 3.4). They are an argument in favour of a qualitative research design for this study (see subsection 5.1.1 for further reasons). The qualitative approach is expected to lead to deeper insights into the research problem and to foster interpretations which are adequate for the context of the study. The qualitative design leads to specific and detailed results in place of often critized “abstract” research results. At the same time, however, it draws new criticism: the lack of generalizability. How this aspect is addressed will be discussed in subsection 5.5 when the qualitative research approach is reviewed.

Several limitations of contingency theory could be eased. Based on the elaborated contingency framework, propositions are derived on the influence of subsidiary roles on performance evaluation in the next section.

4.2 Propositions on Role-Specific Performance Evaluation Following the introduction to the contingency model of role-specific performance evaluation, this section addresses the potential impact of the subsidiary roles on performance evaluation by elaborating propositions. These propositions are necessary to guide data collection in the empirical study (Hartley 1994: 217, Yin

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2003: 22).65 They have a tentative or preliminary character (Ghauri/Grønhaug 2002: 175-176) and thus differ from fully elaborated hypotheses which are to be tested in a quantitative empirical study (see Wrona 2005: 19-22 for further details). Where possible, the propositions are linked to the existing literature and empirical findings. Suggestions and findings on characteristics of coordination and control mechanisms in general are then applied to the specific mechanism in question – performance evaluation. This is done for both role typologies: Propositions on the performance evaluation of Strategic Leaders, Contributors, Implementers and Black Holes are elaborated in subsection 4.2.1, while predictions for Integrated Players, Global Innovators, Local Innovators and Implementors are developed in subsection 4.2.2.

4.2.1

Performance Evaluation of Subsidiaries in Bartlett and Ghoshal’s Role Typology

In order to develop propositions for each subsidiary role, the impact of the classifying dimensions on performance evaluation is first assessed in subsections 4.2.1.1 and 4.2.1.2. On the basis of these elaborations, propositions on the role-specific performance evaluation for each subsidiary type are deduced in subsection 4.2.1.3.

4.2.1.1

Predictions for the Strategic Importance of the Market

The first dimension of Bartlett and Ghoshal’s role typology is the “strategic importance of the local environment”. The strategic importance is determined by the market importance, the competitive importance, the customer importance and the technological importance of the local environment (Bartlett/Ghoshal 1986: 90). 66 Thereby, the latter was originally seen as the country market in which the subsidiary operates (Bartlett/Ghoshal 1986: 90). This becomes especially evident when considering that according to the two authors smaller country markets are found in Latin America and Africa, while examples of larger country markets are the United Kingdom, Japan and the United States (Bartlett/Ghoshal 1989: 109). Nowadays, it seems inadequate to equate the environment of a subsidiary with the country market in which it operates. Expert interviews showed that subsidiaries often do not serve just one market. Rather, they have a larger geographic extension of their business or a larger “market scope” (White/Poynter 1984: 59). Their targeted market can range from the home market to the regional market and the global market 65

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In contrast to this statement, Eisenhardt argues for a more open approach to case study research (Eisenhardt 1989a: 536): Potential hypothesis shall not be anticipated. This is possible in case study research aiming primarily at exploration (Yin 2003: 22). For explanatory case studies – as they are used here, propositions are essential (Ghauri/Grønhaug 2002: 176). More details on the four indicators which constitute the strategic importance according to Bartlett and Ghoshal will be provided in subsection 5.2.1.1.2.

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or it can cover a certain number of international markets (Taggart 1996b: 467, Schmid et al. 1998: 11, Belderbos 2002: 109). Thus, the strategic relevance for the MNC is not restricted to the relevance of the country market in which the subsidiary is located, but is rather determined by the whole market which the subsidiary targets. For this study, therefore, Bartlett and Ghoshal’s initial definition of the dimension is adapted to “strategic importance of the market”. In this subsection, predictions regarding performance evaluation as a function of the strategic importance of the market are developed. First, propositions pertaining to the impact of the strategic importance of the market on the role of performance evaluation within the control mix are elaborated (1). Second, the impact of the strategic importance of the market on the content of performance evaluation (2) and third, its impact on the process of performance evaluation is predicted (3). (1) The strategic importance of the market can affect the choice of control objects. The knowledge of transformation processes is unlikely to be restricted by market importance, and output measurability is expected to be given in the case of both strategically relevant and strategically irrelevant markets. The resulting choice between output control and behaviour control is expected to be decided in favour of output control in the case of strategically irrelevant markets. For efficiency reasons, headquarters then refrain from controlling activities and wait for results (Simons 2000: 64). In strategically important markets, behaviour control of subsidiaries is expected to be more important to ensure fast intervention and induce appropriate behaviour at subsidiary level (in accordance with Bronner/Asgarian 2005: 173). Furthermore, input control can be relevant for subsidiaries in strategically important markets in order to select the right employees and managers for this challenging environment.67 Performance evaluation is presumed to have the highest relative weight in the case of subsidiaries in strategically irrelevant markets. In strategically relevant markets, performance evaluation is predicted to have a low to medium relative weight within the control mix. The higher the strategic importance of the market, the less relative weight is attributed to performance evaluation within the control mix compared to other control objects. (2) The specific content of performance evaluation is expected to differ between subsidiaries in strategically more or less important markets. For subsidiaries in strategically irrelevant markets, headquarters are expected to look mainly at financial performance indicators. As these markets provide no additional benefit to the corporation, their financial viability is particularly relevant. When markets are 67

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As it can be assumed that input control prevents performance problems from the start (Snell 1992: 297), the right managers have to be found for this demanding environment. Nevertheless, there is admittedly no guarantee that the chosen managers will meet the expectations (Snell 1992: 297).

strategically relevant, the picture changes. In such cases, financial indicators only partly reflect the relevant performance of the subsidiary. Rather, quantitative nonfinancial external indicators gain importance because they reveal the position of the subsidiary within the important market. These external indicators, for example, show how the subsidiary is performing in this large market or in this home market of a competitor. Additionally, qualitative external indicators are expected to be used in the case of technologically relevant markets or highly demanding markets. In summary, the following prediction can be made: The higher the strategic importance of the market, the higher the use of quantitative non-financial external measures and qualitative external measures. (3) The importance of the market is also expected to affect the process of performance evaluation. Bartlett and Ghoshal find mainly formal procedures for managing Implementers and moderate formalization in the case of Contributors (Bartlett/Ghoshal 1989: 236).68 This indicates a preference for formal performance reports where subsidiaries operate in markets of low importance. Efficiency gains explain this preference for formalization in strategically less relevant markets.69 Formal performance reports might be sufficient for subsidiaries serving only one irrelevant market, but as the importance and/or number of markets increases, international responsibility is transferred to subsidiary level. In this case, emphasis upon shared norms of performance is expected to increase (Birkinshaw/Morrison 1995: 738). Bartlett and Ghoshal also argue in favour of socialization as a coordination mechanism in strategically relevant markets (Bartlett/Ghoshal 1989: 172).70 This recommendation is extended to the performance evaluation process. The higher the strategic importance of the market, the more cultural the process of performance evaluation.

68

69

70

These empirical findings are not derived for subsidiary roles determined by the “strategic importance of the local environment” and “competence of the local site” but for the dimensions “environmental complexity” and “local resources” (see subsection 5.2.1.1.1 for further details). Nevertheless, the dimensions are expected to have similar implications so that Bartlett and Ghoshal’s findings are integrated into the argumentation. Formal mechanisms are expected to be cheaper to institutionalize than cultural mechanisms (Ghoshal/Nohria 1987: 10). Still, it cannot be ignored that formal mechanisms require resources to establish them. In contrast to personal mechanisms, the same formal mechanisms can be used for a longer period of time and for several subsidiaries with low competences. This leads to decreasing costs for formal mechanisms over time, while the costs of personal control can be expected to remain almost constant. Contrary to their expectations Bartlett and Ghoshal find a high degree of formalization in subsidiaries operating in complex environments (Bartlett/Ghoshal 1989: 233). One possible explanation for this result is the existence of a certain formalization which is necessary for operating effectively (Bartlett/Ghoshal 1989: 233).

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4.2.1.2

Predictions for the Competence of the Local Organization

The second dimension of Bartlett and Ghoshal’s role typology is the “competence of the local organization”. The competence of the local organization can exist in any one or in several functional areas (Bartlett/Ghoshal 1986: 90). They can be “in technology, production, marketing or any other area” (Bartlett/Ghoshal 1986: 90). Predictions regarding performance evaluation as a function of this dimension are developed in this subsection. First, propositions on the impact of the competence of the local organization on the role of performance evaluation within the control mix are elaborated (1). This is followed by implications of the level of competence for the content (2) and for the process of performance evaluation (3). (1) Concerning the role of performance evaluation within the control mix, a differentiation based on competences of the local organization seems to be likely. Knowledge on transformation processes in subsidiaries with low competences exists at headquarters since the latter understand the processes involved when transforming inputs into outputs at subsidiary level. This leads to the frequent use of behaviour control (in accordance with Ouchi/Maguire 1975: 564, Snell 1992: 295). In contrast, this know-how is limited in the case of competent subsidiaries. Output measurability is expected to be given in both cases. Therefore, a choice between behaviour control and output control is predicted in the case of a low competence level, while output control only is expected for competent subsidiaries. Output control is also a suitable mechanism for motivating the managers of the competent subsidiary to high performance (Merchant/Van der Stede 2003: 28). This indicates that the relative weight of performance evaluation as control mechanism will be higher for subsidiaries with distinctive competences in one or several functional areas than for subsidiaries with low competences.71 For the latter, a low to medium relative weight of performance evaluation in the control mix is expected. The higher the competence of the local organization, the higher the relative weight of performance evaluation within the control mix compared to other control objects. The content of performance evaluation can be affected by the specific competence of the subsidiary. It is expected that subsidiaries with low competences are evaluated mainly on the basis of financial measures. These financial indicators only indicate past performance which seems sufficient for subsidiaries with low competences. By contrast, qualitative measures serve as indicators for future performance (Johnson/Kaplan 1987: 259, Gladen 2003: 202, Sandt 2004: 109). This is important in the case of competent subsidiaries (in accordance with Lube 1997: 168-170). 71

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One exception to this prediction concerns highly competent R&D subsidiaries. In this case, processes are largely unspecified and output is difficult to measure especially when the unit concentrates on basic research. Additionally, behaviour control is unsuitable (Harzing 1999: 108109). Therefore, emphasis needs to be placed on input control by choosing the right experts and specialists for these units.

Thus, qualitative measures are expected to be used for assessing these competences. The indicators are expected to mainly take an internal perspective for considering the internal contribution of the subsidiary within the MNC. Similarly, Welge and Holtbrügge suggest internal performance measures for assessing the performance of subsidiaries with special competences, for instance, in research and development or production (Welge/Holtbrügge 1999: 571, 2003: 272-274). The higher the competence of the local organization, the higher the use of qualitative internal measures in performance evaluation. (2) The process of performance evaluation within subsidiaries with low competences is likely to be formal for efficiency reasons. Bartlett and Ghoshal’s findings on coordination and control of subsidiaries support this proposition in the case of the Implementer (Bartlett/Ghoshal 1989: 236). Personal mechanisms are expected to be more frequent in competent subsidiaries because they support the knowledge transfer from subsidiaries to headquarters.72 Know-how and expertise can be rendered transparent and thus useable for the MNC as a whole (Forsgren et al. 2005: 158). At the same time, personal performance evaluation is expected to be used for motivating subsidiary managers (in accordance with Kreder/Zeller 1988: 62). Additionally, cultural performance evaluation processes might be important in the case of competent subsidiaries to ensure that their competences are used in line with headquarters’ expectations and values.73 Common cultural values also facilitate the transfer of competences to other units of the MNC (Bartlett/Ghoshal 1989: 172, Tsai/Ghoshal 1998: 457).74 In summary, a higher level of personal and cultural performance evaluation is predicted for competent subsidiaries. The higher the competence of the local organization, the less formal and the more personal and cultural the performance evaluation process. The tentative predictions on the impact of the strategic importance of the market and the competence of the local organization on performance evaluation of subsidiaries are summarized in Table 11. Based on these predictions, propositions on the role, content and process of performance evaluation for Strategic Leaders, Contributors, Implementers and Black Holes will be derived in the next subsection.

72

73

74

Headquarters-subsidiary communication, for example, has been shown to be positively related to the adoption of innovations (Bartlett/Ghoshal 1989: 229). This prediction is supported by the fact that Bartlett and Ghoshal find a coordination based on a mix of mechanisms including high socialization for Strategic Leaders (Bartlett/Ghoshal 1989: 236). This positive relationship between shared values and knowledge transfer is also proposed by Forsgren et al. (Forsgren et al. 2005: 158-159). Nevertheless, they empirically discover no significant relationship; this can partly be due to their restrictive operationalization and to the concentration on shared values between subsidiaries and headquarters without taking other subsidiaries into account (Forsgren et al. 2005: 164-166).

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Predictions for Performance Evaluation Role Typology Dimensions Strategic Importance of the Local Environment

Competence of the Local Organization

Role within the Control Mix

Content

Process

low

high relative weight

financial measures only

formal

high

low to medium relative weight

more quantitative nonfinancial external measures and qualitative external measures

cultural

low

medium relative weight

financial measures only

formal

high

high relative weight

more qualitative internal measures

personal and cultural

Table 11:

Bartlett and Ghoshal’s Role Typology Dimensions and Performance Evaluation

4.2.1.3

Propositions on the Impact of the Subsidiary Roles on Performance Evaluation

The two classifying dimensions determine the strategic roles of subsidiaries. Based on the propositions elaborated above, predictions on the role, the content and the process of performance evaluation are derived for each of the four subsidiary roles in the following. The Strategic Leader is addressed first (subsection 4.2.1.3.1). This is followed by propositions for the Contributor (subsection 4.2.1.3.2) and the Implementer (4.2.1.3.3). Finally, predictions are developed for the Black Hole (subsection 4.2.1.3.4).

4.2.1.3.1 Strategic Leader A subsidiary with the role of a Strategic Leader operates in a strategically important market and is highly competent (Bartlett/Ghoshal 1986: 90). This role is linked to the responsibility for scanning the environment and developing strategies for the whole MNC (Bartlett/Ghoshal 1989: 105-106, Schmid et al. 1998: 36). For Strategic Leaders, the role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) are predicted below: (1) The role of performance evaluation within the control mix: As headquarters’ knowledge of the transformation processes at Strategic Leaders is limited, the role of behaviour control is restricted (in accordance with Ouchi/Maguire 1975: 564, Snell 1992: 295). While the output of the Strategic Leader can be measured by 74

headquarters from an external perspective, the output resulting from internal responsibilities and functions of the Strategic Leader is difficult to assess. Thus, input control becomes highly relevant in the case of Strategic Leaders, too. Consequently, performance evaluation is predicted to have a medium relative weight within the control mix of Strategic Leaders. (2) The content of performance evaluation: As Strategic Leaders operate in strategically relevant markets, their market performance is expected to be of great significance to headquarters. Additionally, the internal role of Strategic Leaders in developing strategy and assuming responsibility for all other units within certain areas is of high relevance (Schmid et al. 1998: 36). These internal duties can be evaluated on the basis of internal qualitative measures. The latter are also necessary for assessing and securing the distinctive competences of the Strategic Leader (in accordance with Lube 1997: 168-170). In summary, quantitative non-financial external measures and qualitative internal measures are expected to be used for evaluating Strategic Leaders. (3) The process of performance evaluation: The situation of Strategic Leaders can be described as rather complex compared to the other three subsidiary roles. In this case, the use of personal and cultural control is argued to be beneficial (Ghoshal 1986: 483-484, Macharzina et al. 1998: 157). Accordingly, loose control in terms of socialization is recommended for Strategic Leaders (Bartlett/Ghoshal 1989: 172, Schmid/Kutschker 2003: 175). Since the autonomy of highly competent subsidiaries should not be restricted (Schmid 2003a: 286, Young/Tavares 2004: 221, Birkinshaw et al. 2005: 235), shared norms of performance set the right framework for the activities of Strategic Leaders.75 Personal processes might also be fostered by the high competences, in which headquarters representatives are expected to be interested. Thus, the use of cultural and personal performance evaluation is predicted for Strategic Leaders.

4.2.1.3.2 Contributor The Contributor has a distinctive competence which is of considerable interest to the whole MNC, but is active in a market of low strategic importance for the MNC (Bartlett/Ghoshal 1986: 90-91). Predictions on the role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) of Contributors are obtained in the following:

75

At individual level, cultural control is felt to be far less constraining than formal or personal control (O'Reilly 1989: 12). The same is expected to be true at organizational level and guarantees the (perceived) autonomy for Strategic Leaders. However, a high level of cultural control can also have constraining effects, when members of an organization become possessed by the culture (Soeters 1986: 302).

75

(1) The role of performance evaluation within the control mix: As the Contributor is highly competent, headquarters probably lack the relevant knowledge on the transformation processes. Furthermore, headquarters are dependent on the contribution of these subsidiaries and should not discourage the managers and employees of Contributors by monitoring all their activities (Bartlett/Ghoshal 1986: 94, Simons 2000: 65-66). At the same time, the output of Contributors is expected to be measurable. This leads to favouring output control (in accordance with Ouchi 1977: 97). In addition, output control is recommendable for Contributors because it fosters innovation and motivates subsidiary managers (Simons 2000: 65-66, Merchant/Van der Stede 2003: 28). As the market is of low strategic importance, headquarters are assumed to focus more on output control than on behaviour control. Thus, a high relative weight of performance evaluation within the control mix is predicted for Contributors. (2) The content of performance evaluation: If the Contributor fulfils its role and provides distinctive competences to the whole MNC, its financial performance in the local market is of minor importance. Concentrating only on financial measures could cause focus to be put on wrong priorities because the competences of the Contributor should not be wasted for a strategically irrelevant market (Bartlett/Ghoshal 1989: 172). As headquarters will endeavour to channel the Contributor’s competences towards the MNC (Bartlett/Ghoshal 1986: 91), qualitative internal performance measures are predicted to be used in addition. (3) The process of performance evaluation: For Contributors, the redirection of local resources is of major interest (Macharzina/Oesterle 2002b: 721). While the strategic irrelevance of the market fosters a formal process of performance evaluation, the high competences of the Contributor trigger personal and cultural processes. 76 Headquarters representatives are eager to know the Contributor’s competences. The relevant information can partly be formally supplied, but personal interaction is expected to a similar extent. Based on this knowledge, headquarters are able to effectively maximize the subsidiary’s contribution to the whole MNC. Additionally, a shared performance culture is essential for keeping activities within the goals of the MNC and supporting the transfer of competences to other units (Chatman/Cha 2003: 23, Welch/Welch 2006: 18).77 In summary, a mix of formal, personal and cultural performance evaluation of Contributors is expected.

76

77

76

Generally, more subtle coordination in contrast to formal mechanisms is recommended for Contributors (Macharzina/Oesterle 2002b: 721). Tsai and Ghoshal find a positive indirect relationship between shared vision and the exchange of resources (Tsai/Ghoshal 1998: 472): The shared vision enhances trust which positively affects the exchange of resources. By analogy, shared values are also expected to enhance the transfer of competences.

4.2.1.3.3 Implementer Implementer subsidiaries have a low level of competences and are positioned in strategically unimportant markets (Bartlett/Ghoshal 1986: 91). Implementers cannot be expected to contribute to strategy formation in the MNC. Still, these subsidiaries fulfil an important function because they generate the necessary funds for the MNC and allow the MNC to realize economies of scale (Bartlett/Ghoshal 1986: 91, Schmid et al. 1998: 38). Predictions on the role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) of Implementers are presented below: (1) The role of performance evaluation within the control mix: Headquarters are expected to know about the transformation processes of Implementers because the competences of the latter are low. At the same time, their output is assumed to be measurable so that either behaviour or output control could be central (in accordance with Ouchi 1977: 98). The low importance of the market might lead to a preference for output control because headquarters can wait to assess the outputs in an irrelevant market. For efficiency reasons, corporate representatives are expected to refrain from controlling the specific activities which are undertaken at subsidiary level (in accordance with Simons 2000: 64). Thus, a high relative weight of performance evaluation within the control mix of Implementers is expected. (2) The content of performance evaluation: Implementers operate in a market with low strategic relevance for the MNC. However, they are responsible for generating cash-flows and achieving economies of scale on a worldwide basis (Schmid et al. 1998: 38). Consequently, headquarters are expected to be mainly interested in their financial performance. As the competence level of Implementers is low, no additional assessment of qualitative measures is anticipated. It is predicted that mainly financial measures are used for evaluating Implementers. (3) The process of performance evaluation: Implementers are presumed to be managed exceptionally efficiently (Bartlett/Ghoshal 1986: 94). As many subsidiaries are expected to fulfil an Implementer role (Schmid et al. 1998: 38), the performance evaluation process is expected to be highly formalized.78 Bartlett and Ghoshal also argue for formal coordination and control of Implementers (Ghoshal 1986: 484, Bartlett/Ghoshal 1989: 171-172, Schmid/Kutschker 2003: 175).

78

This argument is in line with an assumed standardization of formal performance evaluation across the Implementers within the MNC. This standardization is becoming easier and more efficient due to the developments in information technology (see Oesterle 2005 for further details on information and communication technology influencing the MNC).

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4.2.1.3.4 Black Hole The Black Hole is the only subsidiary type in Bartlett and Ghoshal’s role typology in an unfavourable position. Its position in a strategically relevant market, but without the required competences is only acceptable in the short term when corporations enter a new market (Bartlett/Ghoshal 1986: 91, Schmid et al. 1998: 38-39). Even though this subsidiary type is sometimes intentionally established as a sensory outpost, this position is not viable for a strategically relevant market (Bartlett/Ghoshal 1989: 110). The role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) are expected to be as follows: (1) The role of performance evaluation within the control mix79: The output of Black Holes should be measurable, but headquarters aim at changing the role of Black Holes considerably and might prefer to exert influence on the activities. Intensive trainings and transfer of knowledge are needed to get the subsidiary out of the “black hole” (Bartlett/Ghoshal 1986: 94). As headquarters are expected to dispose of the relevant knowledge on transformation processes, behaviour control is likely to be used (in accordance with Ouchi/Maguire 1975: 564, Ouchi 1977: 97-98). Furthermore, input control is proposed to be relevant for this strategically relevant market. Only by finding the right managers and employees performance problems can be prevented (Snell 1992: 297). Due to the expected high use of behaviour and input control, the relative weight of performance evaluation within the control mix is predicted to be low. (2) The content of performance evaluation: When it comes to the content of performance evaluation, an external focus is expected because the performance of Black Holes in the strategically relevant market is of interest. Headquarters either decide to abandon the Black Hole or focus on developing the subsidiary. Therefore, financial measures seem to be of lower significance for evaluating Black Holes. Instead, a comparison with competitors and an assessment of the market positioning in terms of non-financial external measures is predicted to be of high importance (in accordance with Sandt 2004: 109). Additionally, qualitative external measures are anticipated to provide an accurated picture of the performance of a Black Hole. (3) The process of performance evaluation: In the case of the Implementer, the low competence level is argued to foster the use of formal performance evaluation. For the Black Hole, this prediction is also made (Macharzina/Oesterle 2002b: 721-722). Additionally, as the Black Hole operates in a strategically relevant market, knowledge transfer and integration are encouraged to enhance the competence level of the 79

78

The Black Hole can either be abandoned or assisted in improving its position within the strategically relevant market. The latter option is assumed for the following argumentation because the use of control mechanisms would be unnecessary if headquarters opt to withdraw from the market.

subsidiary. Thus, socialization is found to be an important coordination mechanism for Black Holes (Bartlett/Ghoshal 1989: 236) which is also expected to be true of performance evaluation. Therefore, a formal and cultural performance evaluation process is predicted for Black Holes. While some subsidiary roles are expected to have common characteristics in terms of the role of performance evaluation, the content of performance evaluation and the process of performance evaluation, differences are also predicted to exist. All the propositions presented above are summarized in Table 12. An empirical assessment is indispensable for confronting the predictions with corporate reality and shedding light onto the actual performance evaluation.

Strategic Leader

Contributor

Implementer

Black Hole

Strategic importance of the market

high

low

low

high

Competence of the Local Organization

high

high

low

low

medium relative weight

high relative weight

high relative weight

low relative weight

Content of performance evaluation

more quantitative non-financial external and qualitative internal indicators

financial and qualitative internal indicators

financial measures only

quantitative non-financial external and qualitative external indicators

Process of performance evaluation

more personal and cultural

formal, personal and cultural

more formal

more formal and cultural

Subsidiary Role

Role of performance evaluation within the control mix

Table 12:

4.2.2

Predictions on Role-Specific Performance Evaluation of Strategic Leaders, Contributors, Implementers and Black Holes

Performance Evaluation of Subsidiaries in Gupta and Govindarajan’s Role Typology

For Gupta and Govindarajan’s role typology, the same structure and procedure is adopted as in the preceding subsection. Before deriving the propositions for each subsidiary role, the impact of the classifying dimensions is predicted. Therefore, the propositions are elaborated for the knowledge inflow (subsection 4.2.2.1) and for the knowledge outflow (subsection 4.2.2.2). Based on these, role-specific propositions are then derived (subsection 4.2.1.3).

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4.2.2.1

Predictions for Knowledge Inflow

Gupta and Govindarajan use the inflows of globally relevant knowledge as classifying dimensions for their role typology (Gupta/Govindarajan 1991: 773-775, 1994: 445446). These flows cover codified or explicit as well as tacit knowledge (see Nonaka/Takeuchi 1995: 8-11, Von Krogh/Köhne 1998: 237, Cantwell/Mudambi 2004: 42 on the distinction of the two types of knowledge and Bendt 2000: 16 for additional classifications of knowledge). They can either be internal, such as capabilities and expertise, or external, such as market data (Gupta/Govindarajan 1991: 773, Schmid et al. 1998: 65). While internal knowledge can exist in all value chain activities of the subsidiary, external knowledge covers know-how and expertise concerning competitors, customers and suppliers (Gupta/Govindarajan 1991: 773).80 Further details on knowledge flows and their constituents will be provided in subsection 5.2.1.2. Having introduced the dimension, predictions regarding performance evaluation as a function of the inflow of knowledge are developed. First, propositions on the impact of the inflow of knowledge on the role of performance evaluation are elaborated (1). Second, the impact of the knowledge inflow on the content (2) and third, on the process of performance evaluation is proposed (3). (1) Concerning the role of performance evaluation, differences depending on the level of knowledge inflow can be predicted. When knowledge inflow is low, the subsidiary acts autonomously and based on its own competences. When, on the other hand, the inflow of knowledge is high, the subsidiary depends on the knowledge input from headquarters or other subsidiaries. In this case, the output does not really reflect the activities undertaken by the subsidiary (Bendt 2000: 97, Chung et al. 2000: 650). For this reason, a lower degree of outcome measurability is expected when knowledge inflow is high (Chung et al. 2000: 650). As long as headquarters are the knowledge provider, it is assumed that headquarters representatives understand the processes involved when transforming inputs into outputs at subsidiary level. This means that the relevant cause-and-effect relationships are known at corporate level which leads to the frequent use of behaviour control (in accordance with Ouchi/Maguire 1975: 564, Ouchi 1977: 97-98). When other units of the corporation provide the knowledge, only input control remains feasible for headquarters. Thus, a lower relative weight of output control and performance evaluation compared to other control objects is expected with an increase in knowledge inflows. The higher the inflow of knowledge, the lower the relative weight of performance evaluation within the control mix compared to other control objects. 80

80

This illustrative definition of knowledge is also adopted here. See Gueldenberg/Helting 2007, Schreyögg/Geiger 2007, Tywoniak 2007 for (philosophical) reflections on the concept of knowledge.

(2) The content of performance evaluation refers to the measures in use which might also be affected by the magnitude of knowledge inflows. When knowledge inflows are low, subsidiaries’ financial outputs can be evaluated separately and show the actual picture of the performance. Therefore, a frequent use of financial measures is predicted. When knowledge inflows are high, subsidiaries are not fulfilling their tasks independently. A part of their financial performance does not stem from the subsidiaries themselves, but from other units of the corporation. For this reason, financial measures often do not mirror the true performance of the subsidiary because the knowledge inflows are not reflected in the income statement (Gladen 2003: 158-160). Thus, more quantitative non-financial internal and qualitative internal measures are expected to be used by headquarters to evaluate subsidiary performance. The higher the inflow of knowledge, the higher the use of quantitative non-financial internal measures and qualitative internal measures. (3) The process of performance evaluation can also be influenced by the magnitude of knowledge inflows. In the case of low knowledge inflows, a formal process is expected. The inflow of knowledge and socialization are positively correlated (Gupta/Govindarajan 1994: 453, Chung et al. 2000: 657). This finding on control and coordination can also be true of performance evaluation. The inflow of knowledge might foster cultural integration or to put it differently: The knowledge flow can additionally incorporate certain values which are transferred simultaneously. This is expected to be frequent when headquarters are the knowledge provider. The success of the knowledge transfer might also depend on a common cultural understanding (Sørensen 2002: 76, Welch/Welch 2006: 15). Therefore, it is predicted that a high magnitude of knowledge inflow is positively linked to shared norms of performance and a cultural process of performance evaluation. The higher the inflow of knowledge, the more cultural the process of performance evaluation.

4.2.2.2

Predictions for Knowledge Outflow

The second dimension of Gupta and Govindarajan’s role typology is the “outflow of knowledge”. It consists of the same knowledge types as the inflow of knowledge, but takes the opposite direction. Predictions regarding performance evaluation as a function of this dimension are proposed in this subsection. First, propositions on the impact of the knowledge outflow on the role of performance evaluation are elaborated (1). This is followed by implications of the outflow of knowledge for the content (2) and for the process of performance evaluation (3).

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(1) The level of knowledge outflow is presumed to affect the control object and thus the role of performance evaluation within the control mix. In the case of low knowledge outflows, subsidiary output is measurable. But where there are high knowledge outflows, determining subsidiary output by itself is too restrictive. The knowledge transfers from the subsidiary to headquarters or from other subsidiaries indirectly affect the output of the receiving units. The contribution of the subsidiary which acts as knowledge provider is difficult to assess and measure (Bendt 2000: 217, Chung et al. 2000: 650). Output measurability is, therefore, low. When headquarters are the knowledge recipient, knowledge of the transformation process is probably low at headquarters. This leads to a preference for input control (in accordance with Snell 1992: 295). If other units are receiving the knowledge, knowledge of the transformation process can be given at headquarters. Thus, behaviour control would be expected. For these reasons, it is proposed that the relative weight of output control and performance evaluation within the control mix decreases when knowledge outflow increases.81 The higher the outflow of knowledge, the lower the relative weight of performance evaluation within the control mix compared to other control objects. (2) The outflow of knowledge can also affect the content of performance evaluation. The subsidiary managers’ willingness to provide knowledge to other MNC units is expected to augment when headquarters attach importance to the respective knowledge transfer in terms of specific performance evaluation measures (Björkman et al. 2004: 446). Where knowledge outflows are low, subsidiaries’ financial measures reveal a true and measurable picture of performance, and the use of financial measures is most likely. When, in the opposite case, knowledge outflows are high, subsidiaries additionally provide their competences to other units of the corporation. Despite their importance for the MNC, these knowledge outflows do not usually appear on the income statement.82 Financial measures cannot reveal a true picture of the performance of the knowledge provider. Nor would external financial measures reflect its performance because it transfers its knowledge internally.83 Thus, in the case of high knowledge outflows, internal non-financial measures and internal qualitative measures are proposed to gain importance.

81

82

83

82

Gupta and Govindarajan follow the same logic when proposing a lower reliance on outcome controls for Global Innovators and Integrated Players which are both characterized by a high outflow of knowledge (Gupta/Govindarajan 1991: 782-783). If transfer prices are used, they would still insufficiently reflect the value of the knowledge flows. This is, for example, true of R&D centres of excellence which provide their innovations and knowledge to other units and cannot be evaluated on the basis of financial and external measures (Schmid/Kutschker 2003: 176). The knowledge provider could be evaluated in terms of financial and external non-financial performance of the knowledge receiving units. Nevertheless, this alternative is not pursued for two reasons: First, there is a certain time lag before the knowledge is really incorporated. Second, the contribution of the knowledge provider is difficult to assess separately.

The higher the outflow of knowledge, the higher the use of quantitative non-financial internal and qualitative internal measures. (3) The process of performance evaluation can also be influenced by the outflow of knowledge from the focal subsidiary to other units of the MNC. When the outflow of knowledge is low, communication between the focal subsidiary and other units of the MNC is negligible. The opposite is the case when knowledge outflows are high (Gupta/Govindarajan 1991: 778, O'Donnell 2000: 533). Then communication is not only necessary between the knowledge providing unit and the knowledge receiving unit, but also between headquarters and the knowledge provider. For strategic decision making and evaluation purposes, headquarters need to know the knowledge available at the subsidiaries (Birkinshaw et al. 2000: 341). The relevant information can partly be provided formally to headquarters, but personal interaction is expected to a larger extent (in accordance with Oesterle 2005: 212). It has been shown that integration via task forces, permanent committees and liaison positions has a positive impact on the outflow of knowledge (Gupta/Govindarajan 2000: 486-488). The more time headquarters representatives spend in management meetings, feedback sessions and similar gatherings with subsidiary managers, the better they can fully assess the potential knowledge transfer of the subsidiaries (Andersson et al. 2002: 120). Then they can use this information effectively for maximizing the subsidiary’s contribution to MNC performance. Therefore, it is proposed that the use of formal performance evaluation diminishes when the magnitude of knowledge outflows increases. At the same time, the use of personal performance evaluation is expected to increase. The higher the outflow of knowledge, the more personal the process of performance evaluation. The tentative predictions on the impact of knowledge inflows and knowledge outflows on performance evaluation of subsidiaries are summarized in Table 13. In the table, the extreme values on each dimension are presented even though in reality more subsidiaries will be found which hold in-between positions. Based on these predictions, tentative propositions on the role, content and process of performance evaluation for Integrated Players, Global Innovators, Local Innovators and Implementors are derived in the next subsection.

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Predictions for Performance Evaluation Role Typology Dimensions Knowledge Inflow

Knowledge Outflow

Role within the Control Mix

Content

Process

low

high relative weight

financial measures only

more formal

high

low to medium relative weight

more quantitative nonfinancial internal and qualitative internal measures

more cultural

low

high relative weight

financial measures only

more formal

high

low relative weight

financial, quantitative non-financial internal and qualitative internal measures

more personal

Table 13:

Gupta and Govindarajan’s Role Typology Dimensions and Performance Evaluation

4.2.2.3

Propositions on the Impact of the Subsidiary Roles on Performance Evaluation

Having outlined the potential impact of the magnitude of knowledge outflows and the magnitude of knowledge inflows on performance evaluation of the respective subsidiary, predictions concerning the four different subsidiary roles are deduced in the following. Subsection 4.2.2.3.1 starts with the Integrated Player. The Global Innovator is addressed subsequently (subsection 4.2.2.3.2). This is followed by the propositions relating to the Local Innovator (subsection 4.2.2.3.3) and the Implementor (subsection 4.2.2.3.4).

4.2.2.3.1 Integrated Player A high magnitude of knowledge inflows and knowledge outflows characterizes the Integrated Player. Its lateral interdependence is higher than the lateral interdependence of the other three subsidiary types (Gupta/Govindarajan 1991: 776777, 1994: 447). The Integrated Player is also expected to be evaluated according to its role. The detailed predictions for the role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) are presented in the following: (1) The role of performance evaluation within the control mix: When knowledge outflows are high, output measurability is restricted. The same effect is expected from the high knowledge inflows (Chung et al. 2000: 650). This reduces the importance of output control (in accordance with Snell 1992: 296-297). As long as headquarters are 84

the knowledge provider, the transformation processes are known at corporate level. This fosters the relevance of behaviour control (in accordance with Ouchi/Maguire 1975: 564, Ouchi 1977: 97). When the inflow of knowledge is received from other units of the corporation, only input control remains feasible. However, a certain level of output control is most likely in place since for external reporting and internal accounting purposes, (mainly financial) output has to be assessed (in accordance with Kammer 2005: 178-180). Thus, for Integrated Players behaviour control and input control are predicted to effective in addition to output control. Consequently, the relative weight of performance evaluation is expected to be medium for Integrated Players. (2) The content of performance evaluation: Subsidiary managers can be motivated to transfer relevant knowledge when headquarters attach importance to it and rely on specific performance measures (Björkman et al. 2004: 446, 450). As the knowledge outflows are directed towards headquarters and other subsidiaries, an internal focus is predicted for the content of performance evaluation of Integrated Players. The high intensity of knowledge transfer is anticipated to foster the use of qualitative indicators because knowledge flows are difficult to measure quantitatively (Bendt 2000: 214217, Gladen 2003: 158-160). However, to enhance the objectivity qualitative dimensions are likely to be supplemented with quantitative measures. All in all, internal non-financial and internal qualitative measures are expected for Integrated Players. (3) The process of performance evaluation: The high inflow of knowledge is accompanied by a transfer of shared norms of performance. This common understanding is also necessary for a successful outflow of knowledge.84 Hence, the process of performance evaluation is expected to have a cultural component.85 This is supported by Harzing and Noorderhaven who find that Integrated Players have the highest level of control by socialization (Harzing/Noorderhaven 2006: 209). Additionally, headquarters representatives are interested in the knowledge available at the Integrated Player and try to assess it in meetings and similar personal interaction (Andersson et al. 2002: 120). In return, integration through personal contacts, joint teams and liaison positions even enhances the outflow of knowledge (Gupta/Govindarajan 2000: 486-488, Björkman et al. 2004: 451). Consequently, a high outflow of knowledge is expected to trigger personal interactions. When combining both elements, it can be proposed that the process of performance evaluation is personal and cultural for Integrated Players.

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Reagans and McEvily find a positive relationship between strong ties of individuals and the transfer of knowledge between them (Reagans/McEvily 2003: 259). This relationship is also true at organizational level (Sørensen 2002: 76) supporting the link between knowledge outflows and shared norms of performance. High knowledge inflows and outflows signal a high degree of interdependence which is argued to be positively related to socialization, too (Ghoshal/Nohria 1987: 8, Chung et al. 2000: 650-651).

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4.2.2.3.2 Global Innovator The Global Innovator is characterized by a high outflow of knowledge and a low inflow of knowledge. This subsidiary type provides its competences to other units of the MNC (Gupta/Govindarajan 1991: 776-777, 1994: 445, 447). Again, performance evaluation is expected to be consistent with the Global Innovator role. The predicted role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) of Global Innovators are described below: (1) The role of performance evaluation within the control mix: As the knowledge inflow is limited, headquarters probably do not have complete knowledge of the transformation process. This limits the relevance of behaviour control (in accordance with Ouchi/Maguire 1975: 564). Still, the output of Global Innovators is only partly measurable because the knowledge outflows are difficult to assess (Bendt 2000: 217). As output measurability is low and the knowledge of cause-and-effectrelationships is limited, input control is most effective (in accordance with Ouchi 1977: 98, Snell 1992: 297-298). Thereby, headquarters try to secure the right managers at subsidiary level. At the same time, some control of financial output is proposed to be in place for external reporting and internal accounting purposes (in accordance with Kammer 2005: 178-180). Therefore, the relative weight of performance evaluation within the control mix is expected to be at a medium level for Global Innovators. (2) The content of performance evaluation: The low magnitude of knowledge inflows means that activities and output can clearly be attributed to the Global Innovator itself; at the same time, by focusing on internal performance measures, headquarters can motivate subsidiary managers to transfer the relevant knowledge (Björkman et al. 2004: 446). This makes an internal perspective in performance evaluation highly relevant and leads to predicting the frequent use of financial measures and quantitative non-financial internal measures as well as qualitative internal measures for evaluating Global Innovators. (3) The process of performance evaluation: While low formalization is predicted for the process of performance evaluation in the case of Integrated Players, the process is expected to be more formal for Global Innovators. The limited inflow of knowledge towards the Global Innovator corresponds to restricted socialization (in accordance with Chung et al. 2000: 657). For this reason, no cultural performance evaluation is expected. However, the high magnitude of knowledge outflows is likely to attract headquarters representatives leading to a more personal process of performance evaluation (Andersson et al. 2002: 120). In summary, the process of performance evaluation of Global Innovators is predicted to be formal and personal.

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4.2.2.3.3 Local Innovator The Local Innovator is characterized by a low knowledge outflow and a low knowledge inflow. Subsidiaries of this type are largely autonomous (Gupta/Govindarajan 1991: 775, 1994: 446): They create the relevant knowledge themselves and apply it locally. The three dimensions of performance evaluation are expected fit the Local Innovator role. Predictions on the role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) of Local Innovators are presented in the following: (1) The role of performance evaluation within the control mix: Headquarters have no knowledge of transformation processes in Local Innovators. Therefore, behaviour control cannot be recommended (in accordance with Ouchi 1977: 97). At the same time, their output is measurable. Therefore, a high relative weight of output control and performance evaluation within the control mix compared to other control mechanisms is expected for Local Innovators. As a result, innovations are encouraged because the Local Innovator is not restricted by tight behaviour control (Simons 2000: 65-66). Tseng et. al.’s findings support this prediction because they find more output control for subsidiaries with a low knowledge transaction intensity within the MNC compared to subsidiaries with a high knowledge transaction intensity (Tseng et al. 2002: 219, 224-225). (2) The content of performance evaluation: Local Innovators are not connected to other subsidiaries or headquarters in terms of knowledge transfers. They do not contribute internally by providing knowledge to headquarters or other subsidiaries. Hence, headquarters are expected to concentrate on financial measures and equate performance of Local Innovators with financial performance as it is frequently done (see, for instance, Schmidt-Sudhoff 1967: 140, Glaum 1996: 138-139, Otley 1999: 34). Thus, Local Innovators are expected to be mainly evaluated on the basis of financial measures. (3) The process of performance evaluation: It is assumed that headquarters do not show much interest in the subsidiary-specific competences of Local Innovators because they are not relevant for other units of the MNC. Based on this assumption, the use of personal performance evaluation is unlikely. The limited knowledge transfer from and to Local Innovators also restricts the simultaneous transfer of culture (Chung et al. 2000: 657). Additionally, a common understanding between Local Innovators and other units of the MNC is not as necessary since knowledge transfer is limited. Harzing and Noorderhaven find support for this low level of cultural control in the case of Local Innovators (Harzing/Noorderhaven 2006: 209). To sum up, personal and cultural processes of performance evaluation are expected to be

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less frequent in the case of Local Innovators. Rather, a formal process of performance evaluation is predicted.

4.2.2.3.4 Implementor The Implementor role is characterized by a high inflow of knowledge and a low outflow of knowledge. As for the Global Innovator, the lateral interdependence of the Implementor is at a medium level (Gupta/Govindarajan 1991: 776-777, 1994: 447). The Implementor is expected to be evaluated according to its role. Predictions on the role of performance evaluation within the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) of Implementors are deduced in the following: (1) The role of performance evaluation within the control mix: As knowledge outflows are limited, the measurability of the output of Implementors should be high. This supports the relevance of output control for Implementors. Still, the high knowledge inflows make it difficult to attribute the output to subsidiary action (in accordance with Chung et al. 2000: 650). This raises ambiguity of output measures and restricts the use of output control (in accordance with Ouchi 1977: 97). When headquarters are the knowledge provider, the high magnitude of knowledge inflows signalizes the relevant knowledge of the transformation processes at corporate level. This additionally makes behaviour control more important. In the case of other subsidiaries transferring knowledge, the knowledge of the transformation processes is limited at headquarters. This restricts the relevance of behaviour control (in accordance with Ouchi/Maguire 1975: 564, Snell 1992: 294-296). When summarizing the reasoning, a medium relative weight of output control and performance evaluation can be expected for Implementors which might frequently be accompanied by behaviour control. (2) The content of performance evaluation: As the Implementor does not engage in knowledge transfers to other units, its performance can be quantitatively measured. Still, it might be difficult for headquarters to assess the real performance of the subsidiary because the Implementor heavily depends on knowledge inflows from other units. Financial measures only provide a partial view of the Implementor’s performance since knowledge inflows are not accounted for (Gladen 2003: 158-160). Therefore, quantitative non-financial internal measures are expected to be used as well as qualitative internal measures which help in assessing the real performance of the Implementor. (3) The process of performance evaluation: The high magnitude of knowledge inflows is expected to transfer common performance standards to Implementors (in accordance with Chung et al. 2000: 657). Implementors are found to have the highest level of socialization compared to the other three subsidiary roles 88

(Gupta/Govindarajan 1994: 453). The lack of knowledge outflows restricts the relevance of personal interaction from the headquarters point of view (Andersson et al. 2002: 120). Additionally, the activities performed by Implementors are not new to headquarters representatives. Thus, formal performance reports are expected to be used for Implementors in addition to the shared norms of performance. The predictions on the impact of the subsidiary roles on performance evaluation are summarized in Table 14.

Subsidiary Role

Integrated Player

Global Innovator

Local Innovator

Implementor

Inflow of knowledge

high

low

low

high

Outflow of knowledge

high

high

low

low

Role of performance evaluation within the control mix

medium relative weight

medium relative weight

high relative weight

medium relative weight

Content of performance evaluation

quantitative nonfinancial internal and qualitative internal indicators

financial and quantitative nonfinancial internal as well as qualitative internal indicators

financial measures only

financial, quantitative nonfinancial internal and qualitative internal indicators

Process of performance evaluation

more personal and cultural

more formal and personal

more formal

more formal and cultural

Table 14:

Predictions on Role-Specific Performance Evaluation of Integrated Players, Global Innovators, Local Innovators and Implementors

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5 The Empirical Study

5.1 Research Design This section provides details on the design and methodology of the empirical part of the dissertation. Zalan and Lewis as well as Andersen and Skaates argue for more transparency in qualitative methods (Andersen/Skaates 2004, Zalan/Lewis 2004). In accordance with their recommendations, this section includes the justification and rationale for choosing a qualitative research approach (subsection 5.1.1) and details on the multiple case design (subsection 5.1.2). After these introductory sections more information is provided on the detailed operationalizations of the contingency framework (section 5.2). These operationalizations are essential for the subsequent data collection and data analysis which again need to be explained in detail (Andersen/Skaates 2004: 480-481). First, the data collection via semi-structured interviews is described in section 5.3. The interview guide was elaborated based on the previous operationalizations of the contingency framework. Second, section 5.4 presents how the collected data was handled and analyzed based on a categorization schema deduced from the operationalizations of the contingency framework. Interpretation procedures are clarified in this section, too. The final section concludes with an evaluation of the chosen empirical approach (subsection 5.5).

5.1.1

Rationale for a Qualitative Case Study Approach

The literature review in chapter 3 has already implied a qualitatively-oriented contingency approach. Qualitative research is also appropriate for this study for the following reasons: The research topic shall be analyzed in all of its complexity (1) and in its real context (2). The third argument for qualitative research is the unavailability of detailed hypotheses (3). Last but not least, the potential of this open approach to discover additional and new insights drive the decision for a qualitative approach (4). All four arguments are detailed in the following. (1) Performance evaluation of foreign subsidiaries is a complex topic which has only been selectively studied so far. In this present context, the complexity of performance evaluation along several dimensions of performance evaluation is of interest. Detailed insights into the content, process and role of performance evaluation should be revealed. One reason for the complexity is that „different elements are added by different people at different times” (Otley 1999: 379) when it comes to coordination K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1_5, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

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and control mechanisms within organizations. Further complexity is added by the cross-cultural context of the research. Qualitative studies facilitate the handling of this complexity (Wright 1996: 69, Marschan-Piekkari/Welch 2004: 8, Wrona 2005: 10, 1718). In place of selective points, in-depth information on the phenomenon can be extracted (Marshall/Rossman 1989: 46, Patton 1990: 14, Ghauri/Grønhaug 2002: 112). (2) A qualitative approach makes it possible to study a phenomenon in its real setting (Merchant 1985: 82, Denzin/Lincoln 2000: 3). In this project not the “official answers” are of interest, but the reality of performance evaluation is analyzed. Mintzberg argues for this “direct research” when he asks: “Was it better to have less valid data that were statistically significant?” (Mintzberg 1979a: 583). By using qualitative research, aspects which remain hidden in survey-based research, such as informal linkages, can be examined (Marshall/Rossman 1989: 46). (3) Altough the research field is not completely new, the exact link between subsidiary roles and performance evaluation has not yet been addressed in literature. No testable hypotheses can be deduced. However, based on the relevant concepts presented in literature, tentative propositions can be elaborated. As common in qualitative research, the state of knowledge in this area was made explicit in previous chapters (Wrona 2005: 19): The performance evaluation concept was elaborated based on existing research (see section 2.2). Subsequently, the role typologies were derived from the literature and integrated into the contingency model of role-specific performance evaluation of foreign subsidiaries (see subsection 4.1.2). Proceeding from this background, tentative propositions were deduced (see section 4.2). (4) Moreover, a qualitative approach can provide “freshness in perspective” (Eisenhardt 1989a: 548) in a research area which has been dominated by quantitative research designs. An open and broad perspective on the research object is taken so that new and so far unaddressed aspects can be discovered in the material (Kelle/Kluge 1999: 99). From several qualitative methods (see, for instance, Lamnek 1995, Mayring 2002: 40-64, Flick 2004 for overviews), the case study method is chosen for the empirical study. The case study method involves a detailed investigation of the phenomenon under question including its context and process (Yin 1981: 59, Hartley 1994: 208209, Pauwels/Matthyssens 2004: 126). It incorporates all four aspects mentioned in favour of a qualitative research approach in general. First, case study research can provide in-depth insights into performance evaluation within MNCs and helps in understanding the processes involved (Otley 1980: 425, Hartley 1994: 212, Otley/Berry 1998: 105-106, Chung et al. 2002: 124). Second, performance evaluation can be studied in its real setting (Cepeda/Martin 2005: 852). The actual performance evaluation is examined in place of ideal techniques and procedures (Scapens 1990:

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264). Third, in this relatively new field, qualitative data can serve to illustrate initial propositions. Within the boundaries of the case, predictions can be supported or rejected (Ghauri/Grønhaug 2002: 175-176, Ghauri 2004: 121). Fourth, new insights into the topic can be gained.

5.1.2

5.1.2.1

The Multiple Case Design

Introduction on the Case Design

In this subsection, the selected qualitative case study approach is detailed. First of all, the unit of observation needs to be determined: Specifically, the subsidiary is the research object and unit of observation. But what does “subsidiary” mean? Many studies focus on “national subsidiaries” as units of observation; but often national subsidiaries no longer exist nowadays (Birkinshaw 2001: 381). In developed countries, MNCs tend to spread their value-chain activities according to the needs of their business units and functions (Birkinshaw 2001: 381). The definition of “subsidiary” therefore follows Birkinshaw’s definition as a “discrete value-adding activity outside the home country” (Birkinshaw 2001: 381). Based on this definition, subsidiaries, for example, are R&D centres, outlets, plants or service units in foreign countries.86 As earlier studies on performance evaluation did not reveal large differences between evaluating subsidiaries in the home country and in foreign countries (Bergmann 1996: 72-79), home country subsidiaries are not completely neglected in this study. Despite focusing on foreign subsidiaries, subsidiaries in the home country of the MNC are also analyzed. The relevant boundaries of a subsidiary are defined by headquarters when designing the reporting structure.87 The subsidiaries as units of observation could either stem from one MNC or from different MNCs. To reduce complexity and concentrate on the influencing factors at subsidiary level, variables at corporate level need to be controlled (Otley 1980: 425). Therefore several subsidiaries of one MNC instead of the subsidiaries of different MNCs are included. This “might provide important access to headquarters-subsidiary relationships, holding the headquarters variable “constant”” (Chung et al. 2002: 125). Whereas random samples are commonly used for quantitative empirical designs, the case selection has to follow specified criteria in qualitative designs (Kelle/Kluge 1999: 86

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This functional characterization of subsidiaries is only one possible distinction. Many additional criteria, such as the age, the mode of establishment, the size and the primary reason for the existence of the subsidiary, can be used to differentiate subsidiaries (Schmid/Kutschker 2003: 166168). In some countries, “subsidiaries” may as well correspond to “national subsidiaries”. In contrast, several subsidiaries might be legally bound within one national subsidiary despite being managed separately by the business unit they belong to. In this case, several “subsidiaries” with discrete activities can be found within one national subsidiary.

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39-40). The goal is not to reach statistical representativeness, but to find typical cases (Merkens 2000: 291). The sampling process is described in the following. As typical for international business studies (Pauwels/Matthyssens 2004: 129), sampling is necessary not only at subsidiary level, but also at MNC level. The latter is described in subsection 5.1.2.2. It is followed by details on the selection of the subsidiaries in subsection 5.1.2.3.

5.1.2.2

The Selection of Business Units as Cases

The selection of the cases is not conducted randomly, but has a traceable origin since it is based on predefined criteria (Maxwell 1996: 70-73, Pauwels/Matthyssens 2004: 129). By this means, exogenous factors can be controlled for, while at the same time limits of generalization are defined (Eisenhardt 1989a: 537). The selection follows qualitative criteria at industry level (1) and at the level of the organizational structure (2). (1) Relevant industries are defined in order to support the selection of the cases which is critical for the conceptual background of this study (Patton 1990: 174, Maxwell 1996: 72). Role differentiation is primarily expected in network MNCs (Forsgren et al. 1999: 182-183, Schmid 2003a: 278, 2004: 238). Therefore transnational corporations are of interest which equally challenge integration and localization advantages (Bartlett/Ghoshal 1989: 59-61, Meier 1997: 17).88 These MNCs are likely to operate in transnational industries. Examples of such industries are the following (Rall 1986, Bamberger/Wrona 2004: 179): telecommunication, missile and generator business. On a more general level transnational characteristics are attributed to the telecommunication industry, the defence industry and the engineering industry (Meffert 1986: 693, Meffert/Bolz 1994: 64, Kutschker/Schmid 2005: 293).89 Thus, the MNC should stem from one of these industries. (2) In MNCs, control mechanisms can differ between businesses or divisions (Birkinshaw et al. 2000: 333). Thus, the scope of the analysis is restricted to business unit level instead of company level (Paul 1997: 215).90 Depending on the degree of diversification, several business units within one MNC might operate in different 88

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The terms “globalization advantages” and “local adaptation/responsiveness” are equally used as a two-dimensional scheme for classifying companies and industries (see Dähn 1996: 76-83 for an overview and criticism of these matrix-based classifications). The listed industries are examples which are debatable. Meffert and Bolz, for instance, see integration and differentiation advantages also for railway, post and partly for the pharmaceutical industry (Meffert/Bolz 1994: 64). In addition, the industry requirements can change over time (see Prahalad/Doz 1987: 29 for examples). Often this distinction is not made explicit in international business research when authors refer to one MNC even though data is collected for one business unit of the MNC only (Marschan-Piekkari et al. 2004: 256). As subsidiaries might fulfil differing roles depending on the product or business unit in question (Bartlett/Ghoshal 1989: 173), this concentration on the business unit level is also beneficial for attributing subsidiary roles consistently.

industries. Thus, again the industry of the business unit has an impact on its relevance for this research. In addition, the business unit to be selected should encompass several subsidiaries with differing activities and responsibilities. One prominent and truly European company is considered to be interesting for this research: the European Aeronautic Defence and Space Company (EADS) which is a French-German corporation with headquarters in France and in Germany. It was created in 2000 by merging the German DaimlerChrysler Aerospace, the French Aerospatiale Matra and the Spanish CASA (see Schmid et al. 2006 for details on EADS and its large division Airbus). EADS is not only active within a transnational industry, but due to its origin it also encompasses many subsidiaries with differing activities, competences and responsibilities. EADS consists of several divisions which are further divided into business units and lines of business. With the support of a gatekeeper,91 one transnational line of business with several subsidiaries was identified: “Eucom”92. Eucom is active in the telecommunication industry and executes large projects to install communication systems. It also provides support and services for the installed systems. In 2005, Eucom reached a turnover of almost 500 mio. € with about 1,300 employees. Two members of the management team of Eucom were contacted and agreed to support this study. As outlined above, in-depth insights are aimed at in this study. Although much can be learned from one particular case (Stake 2000: 444) and a single-case study of Eucom could be more easily carried out within the limited time and resource frame, comparisons between MNCs and/or business units would not be possible. Thus, a second “case” is added to strengthen the research on the potential differentiation of performance evaluation within MNCs (Hartley 1994: 214, Yin 2003: 53). Consequently, the empirical analysis is not restricted to one business unit, but rather includes business units of two MNCs and their subsidiaries.93 For explanatory purposes, the phenomenon of interest (namely performance evaluation) is studied in several contexts to contrast and compare it (Ghauri/Grønhaug 2002: 173). Applying the same selection criteria, a second case was searched for in an industry that was also transnational and comparable to the telecommunication business of

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Gatekeepers are frequently used when conducting qualitative case studies (see, for instance, Buchanan et al. 1988: 56, Wilkinson/Young 2004: 209). Here, the gatekeeper provided information on the organizational structure of the MNC, on the set-up of the business units and their international activities as well as on the responsibilities of subsidiary management and subsidiary controlling. After jointly identifying a relevant business unit, he named the relevant target person in that business unit. For confidentiality reasons, the real name of the business unit is not disclosed. This small number of cases is justified because each case consists of several “mini-cases” (Eisenhardt 1989a: 545).

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Eucom. Three German MNCs94 from related industries were chosen from the DAX 3095. Again, gatekeepers were identified first before contacting target persons in management positions. Personal discussions followed in all three MNCs. Headquarters representatives of one MNC declined to participate because of difficulties in identifying a comparable business unit with particular subsidiaries. Within the other two MNCs, relevant business units were identified, but only the business unit managers of one of them agreed to take part.96 The selected business unit “Gloneer” belongs to a division of a German DAX 30MNC.97 Gloneer is active in the engineering industry. It executes large projects to plan and construct industrial plants partly for another division of the MNC as intra-group business, but to a larger degree for external customers. In addition, Gloneer provides support and services for its plants. Two members of the management team of Gloneer were contacted and agreed to support the study.

5.1.2.3

The Selection of Subsidiaries as Units of Observation

The international operations of the two selected business units are further addressed in order to define the units of observation. Accordingly, the head offices of the two business units are conceived as “headquarters” from now on. First, the international presence of Eucom and Gloneer is presented (1). This is followed by a description of how the relevant units of observation were selected by classifying the subsidiaries according to the role typologies (2) and systematically reducing their number (3). (1) Eucom and Gloneer have the following international operations: Eucom has five subsidiaries and in addition eleven branch offices. Furthermore, six representative offices are operated. Four of the subsidiaries are clearly considered as “discrete value-adding activity outside the home country” (Birkinshaw 2001: 381), while one is located at the headquarters site in France. The CEO of this French “subsidiary” is also the CEO of Eucom. Thus, the French subsidiary is not really perceived as an independent subsidiary and is not further included. The representative offices have a narrow activity spectrum and are not considered to be subsidiaries either. The branch offices have an in-between



94

95

96

97

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“Eucom” perceives itself as a transnational organization and is difficult to tie to national borders. Despite being headquartered in France, Eucom can, like its parent company, be classified as both a German and French company. Thus, acknowledging the importance of home country effects (Harzing 1999: 357, Harzing/Sorge 2003: 201-203) a decision was taken in favour of German MNCs. The DAX 30 is the major German stock index. It reflects the performance of the 30 largest German stock corporations in terms of their market capitalization and number of exchange transactions. The second business unit was going through major organizational changes. For this reason, a member of the business unit management wanted to postpone the project. Because of the tight time schedule the business unit could not be included. In order to secure confidentiality, the name of the MNC and the name of the business unit are not disclosed. For the same reason, the activities and size of the MNC are not described.



position. With only 5 to 10 employees, they provide support services and execute smaller projects. From a headquarters’ point of view, the branch offices are not seen as self-contained subsidiaries98 and are therefore not included in this study. Gloneer has 13 subsidiaries99 and eight representative offices. Again, the representative offices are not managed as subsidiaries and therefore not further taken into account. Four of the subsidiaries are located in Germany. Despite their not being “foreign” subsidiaries, they are included in this study. This is due to empirical findings which mostly reveal no systematic difference between the evaluation of foreign subsidiaries and subsidiaries within the home country (Bergmann 1996: 72-79). The same notion was detected in expert interviews which were conducted up front. Thus, all domestic and foreign subsidiaries of Gloneer are seen as potential units of observation.

(2) In total, 17 subsidiaries of Eucom and Gloneer were identified as potential units of observation. The subsidiaries of Eucom and Gloneer were classified separately along the dimensions “strategic importance of the market” and “competence of the local site”. Subsidiaries’ positionings were determined via self-typing by headquarters representatives (Snow/Hambrick 1980: 534-535). Thus, the headquarters perspective was decisive as in Bartlett and Ghoshal’s role typology (Bartlett/Ghoshal 1989: 228).100 Based on the headquarters representatives’ opinions, the initial position of the subsidiary was determined. The perceptions of subsidiary managers were not neglected and were assessed later on.101 In the case of deviations between the headquarters and subsidiary perspective, further discussion with headquarters representatives was used to define the final positioning of the subsidiary in question. Following the same procedure, the subsidiaries were also classified according to Gupta and Govindarajan’s role typology. (3) Inclusion of all subsidiaries of Eucom and Gloneer in the detailed analysis would lead to difficulties in data handling, data management and data analysis (Eisenhardt 1989a: 545).102 Still, more than one subsidiary per role of the typology has to be 98

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100

101

102

The branch offices are not managed as self-contained subsidiaries. Rather, the employees are managed within their function by headquarters. The branch office manager, for instance, reports to the person responsible for marketing and sales at headquarters. Since the beginning of 2006, Gloneer even has 14 subsidiaries because one representative office in China founded by the Chinese subsidiary was turned into a legally stand-alone unit. Therefore, two subsidiaries of Gloneer are now operating in China. However, they are still managed by the same CEO and often jointly treated by headquarters. This is also done here by addressing the two Chinese subsidiaries – China P and China L – jointly as one unit “China”. When headquarters representatives rank their subsidiaries according to the role typology dimensions, the subsidiary position is determined relative to the average level within the MNC (Ghoshal/Nohria 1987: 15). The measures are no absolute anchors. In contrast, they are determined as relative anchors within the context of each MNC. Furu, for example, chooses to rely only on the subsidiary perception (Furu 2001: 141). This might cause perception gaps (Birkinshaw et al. 2000) and does not reflect the hierarchical controlrelationship between headquarters and subsidiaries which is relevant here. For theory generation, Eisenhardt argues for a number of cases between 4 and 10 (Eisenhardt 1989a: 545). Hartley also warns against the inclusion of too many cases and sets a limit at 12 (Hartley 1994: 214).

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selected in order to facilitate literal replication (Eisenhardt 1989a: 542, Lee 1999: 78, Yin 2003: 47). Although no sample size can be recommended (Miles/Huberman 1994: 30, Ghauri/Grønhaug 2002: 177, Yin 2003: 51), it is the goal to have each role represented two times within the sample. Thus, a criterion-based selection is again applied (Patton 1990: 176-177, Pauwels/Matthyssens 2004: 129). To make particular comparisons possible, the number of subsidiaries was reduced according to the positionings within the role typology. The selected subsidiaries should spread within the role typologies so that (if existent) two to three subsidiaries of each type could be selected. In the case of Eucom, one subsidiary was excluded because it was sharing its position with another subsidiary. As eight subsidiaries of Gloneer were classified as Contributors within Bartlett and Ghoshal’s role typology, four of them were not further included.103 In summary, the research design can be characterized as a multiple case design (see Yin 2003: 40 for further details) consisting of two cases with multiple embedded units – 3 subsidiaries of Eucom and 9 subsidiaries of Gloneer. Figure 10 provides an overview of the resulting case design.

103

98

When only considering Bartlett and Ghoshal’s role typology, a further reduction would have been possible. But as the spread of the subsidiaries in Gupta and Govindarajan’s role typology was also taken into account, four Contributor subsidiaries with partly differing roles in Gupta and Govindarjan’s typology were included.

Eucom

Germany

Gloneer

Spain

Finland

China

Germany L

Germany P

Germany S

Great Britain

India

Sweden

Switzerland USA L

Role within the Control Mix Performance evaluation Content

Process

Figure 10: Research Design

5.2 Operationalization of the Elements of the Contingency Framework The contingency model of role-specific performance evaluation was presented in Figure 9. The elements of the contingency framework need to be operationalized for the empirical part of this study (Kieser/Kubicek 1992: 63). The operationalizations serve as the point of departure for formulating interview questions which are relevant for data collection (see section 5.3). Furthermore, they are used to develop the initiatial categorization scheme which is essential for data analysis (see section 5.4). The following subsections address the operationalization of the contingency framework in terms of the role typologies as independent variable (subsection 5.2.1) and the performance evaluation concept as dependent variable (subsection 5.2.2).

5.2.1

Operationalization of the Role Typologies

First, the role typologies as independent variables are operationalized: Details on operationalizing Bartlett and Ghoshal’s role typology are provided in subsection 5.2.1.1. This is followed by a description of the indicators relevant for Gupta and

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Govindarajan’s role typology in subsection 5.2.1.2. The role typologies are operationalized according to their authors to a large degree; the respective interview questions are adapted.

5.2.1.1

Operationalization of Bartlett and Ghoshal’s Subsidiary Roles

Relevant publications are looked at to be able to decide how to operationalize Bartlett and Ghoshal’s role typology. Hence, the background of the classifying dimensions is first reviewed (subsection 5.2.1.1.1): The operationalization of the strategic importance of the market is addressed in subsection 5.2.1.1.2 and the competence of the local organization in subsection 5.2.1.1.3.

5.2.1.1.1 Background of the Classifying Dimensions Bartlett and Ghoshal’s role typology is more conceptual than empirically determined (Schmid et al. 1998: 32-34). In Bartlett and Ghoshal’s article “Tap Your Subsidiaries for Global Reach” published in the Harvard Business Review (Bartlett/Ghoshal 1986), no possible operationalizations of the dimensions “strategic importance of the local environment” and “competence of the subsidiary” are addressed. Still, other publications by the authors shed some light on the dimension and thus provide the background for the following operationalizations. Especially, two publications are relevant: Ghoshal’s dissertation “The Innovative Multinational: A Differentiated Network of Organizational Roles and Management Processes” (1) and the book “Managing Across Borders: The Transnational Solution” (2). (1) In his dissertation, Ghoshal explores the relations between headquarters and subsidiaries which foster innovations (Ghoshal 1986). He argues in favour of an internal differentiation of subsidiaries and develops a role typology which bears similarities with the role typology published in the Harvard Business Review (Schmid et al. 1998: 31). Its differentiation is based on the dimensions “learning opportunities in the local environment” and “slack resources of local subsidiary” (Ghoshal 1986: 419). The names of the dimensions are later changed to “learning potential in external environment” and “extent of local resources” in the empirical analysis (Ghoshal 1986: 437). The respondents are directly asked in the survey to indicate the overall level of “technological and managerial capabilities” at the national subsidiaries on a scale from 1 (low resources and capabilities) to 5 (high resources and capabilities) (Ghoshal 1986: 538). For the learning opportunities or learning potential, Ghoshal aggregates three indicators: the competitive intensity, the technological dynamisms and the strategic importance. When taking a look at the survey questions, it becomes evident that these three indicators are not independent of each other. “Strategic importance” can be affected by the size of the market, its sourcing implications and also by its technological sophistication and its competitive intensity 100

(Ghoshal 1986: 534). Correlation analysis between the three items also reveals a reliable correlation between them (Ghoshal 1986: 434). (2) In their book “Managing Across Borders: The Transnational Solution”, Bartlett and Ghoshal elaborate on their famous transnational firm (Bartlett/Ghoshal 1989). In doing so, they also refer to specialized subsidiary roles and their role typology (Bartlett/Ghoshal 1989: 105-113). In the conceptual part, the “importance of the local environment” and “level of local resources and capabilities” are used as classifying dimensions for the role typology (Bartlett/Ghoshal 1989). The dimensions are not identical to the dimensions used in the empirical design where subsidiary roles are determined via cluster analysis (Bartlett/Ghoshal 1989: 232-234).104 Here, the corresponding classifying dimensions are called “environmental complexity” and “local resources” (Bartlett/Ghoshal 1989: 232-233). The first dimension is measured based on two indicators (Bartlett/Ghoshal 1989: 232-233): competitive intensity and technological dynamism. Direct indicators which remain unknown to the reader were used for measuring the second dimension (Bartlett/Ghoshal 1989: 232). Data collected in Ghoshal’s dissertation was certainly integrated here (Ghoshal 1986: 536537, Schmid et al. 1998: 35), but the role dimensions were renamed and a different selection of indicators and measures was used. Even more dimensions and their operationalizations can be supplemented when looking at additional publications by Ghoshal and Nohria. All these dimensions are summarized in Table 15. Thus, not one but several similar role typologies exist. Their operationalizations are confusing and cannot be easily transferred. In the following subsections 5.2.1.1.2 and 5.2.1.1.3, adapted operationalizations for both dimensions of the original role typology presented by Bartlett and Ghoshal in 1986 are presented. They proceed from the original definitions and partly integrate the operationalizations used in Ghoshal’s dissertation.

104

The authors refer to Ghoshal’s dissertation and an INSEAD working paper for details on the methodology and present it partly in the appendix (Bartlett/Ghoshal 1989: 213-237).

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Method

Dimension 1

Dimension 2

Bartlett/Ghoshal 1986: 90

conceptual framework

strategic importance of local environment

competence of local organization

Ghoshal 1986: 419

conceptual framework

learning opportunities in local environment

slack resources of local subsidiary

Ghoshal 1986: 437

cluster analysis

learning potential in external environment

extent of local resources

Ghoshal/Nohria 1987: 10, 16, Ghoshal/Nohria 1989: 328, 332

conceptual framework and cluster analysis

environmental complexity

local resources

Bartlett/Ghoshal 1989: 106

conceptual framework

strategic importance of local environment

level of local resources and capabilities

Bartlett/Ghoshal 1989: 233

cluster analysis

environmental complexity

local resources

Table 15:

The Classifying Dimensions of the Role Typologies Presented by Bartlett, Ghoshal and Nohria

5.2.1.1.2 Strategic Importance of the Market The original definition of the “strategic importance of the local environment” put forward by Bartlett and Ghoshal is: “A large market is obviously important, and so is a competitor’s home market or a market that is particularly sophisticated or technologically advanced.” (Bartlett/Ghoshal 1986: 90). This definition includes four indicators for the strategic importance: (1) market importance, (2) competitive importance, (3) customer importance and (4) technological importance. These indicators are detached from their implicit link to the country market and adapted for measuring the “strategic importance of the market”. For each area, one measure is defined in the following paragraphs. (1) Market importance is determined by the size of the market, whereby size is not restricted to the country market, but encompasses the whole market scope of a subsidiary. The size of this market in terms of its volume partly determines the strategic relevance of the market. (2) The market in which a subsidiary operates can be highly competitive or not competitive at all. Highly competitive markets foster innovation and new developments (Birkinshaw et al. 2005: 229, 235). If an MNC succeeds in a highly competitive market, it strengthens its position against competitors and can build or enhance its competitive advantage (Porter 1985: 202-207). The MNC might be able

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to benefit from that in other markets as well. Therefore, competition intensity in the market is used as measure of competitive importance. (3) The sophistication of a market is partly determined by its customers. Customers demand certain products and services. These needs can range from being demanding to being easily satisfied which corresponds to a high versus low customer demand intensity. Customers’ requests can trigger new solutions, for instance, in terms of new product developments, technology advancement or improved distribution which can increase the MNC’s competitiveness (Andersson et al. 2007). The level of customer demand is used by Furu as an indicator for measuring the competitiveness of the environment (Furu 2000: 208, 2001: 141)105, but it is separately assessed here. Customer demand intensity is used as measure of customer importance and partly determines the strategic importance of the market. (4) The technological advancement of a market impacts its importance for the MNC. Markets can be technological leaders or followers in an industry depending on their innovativeness. These innovations can either be product or process innovations. The technological dynamism in terms of the rate of product and process innovations in a market is used as measure of technological importance (Ghoshal/Nohria 1989: 335). In summary, four indicators determine the strategic importance of the market: market importance, competitive importance, customer importance and technological importance. The indicators and their possible measures are summarized in Table 16. The respondents are asked to describe the market volume, competition intensity, customer demand intensity and technological dynamism of their market. Their descriptions are evaluated for each indicator on a five-point scale between “not at all” and “to a very high extent”.106 The resulting value for the strategic importance of the market is an average value across all four indicators.107

105

106

107

Furu uses Bartlett and Ghoshal’s role typology for classifying R&D subsidiaries, but he assesses the “competitiveness of the local environment” based on three indicators (Furu 2001: 135, 141): the level of customer demand, the level of competition and the quality of suppliers. See Ghoshal/Bartlett 1988: 374, Bartlett/Ghoshal 1989: 220 for a similar approach when assessing created, adopted and diffused innovations. The five-point-scale allows for a certain differentiation without asking too much of the judging person. This might explain why five-point-scales are frequently preferred (Bortz/Döring 2002: 179-180). In the end, however, the number of points on a scale does not affect the quality of the rating (Bortz/Döring 2002: 179). Certainly, this approach is simplifying (Bortz/Döring 2002: 144). On the one hand, one could think of additional indicators for assessing this construct, such as supplier importance or resources importance. On the other hand, the equal weight of each indicator can be critized (see Schmid/Daniel 2006: 15, 33, Schmid/Kretschmer 2006a: 9-10 for a similar challenge with regard to the board internationalization index).

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Strategic importance of the market Indicator

Measure

Scale

market importance

market volume

five-point scale

competitive importance

competition intensity

five-point scale

customer importance

customer demand intensity

five-point scale

technological importance

technological dynamism

five-point scale

Table 16:

Potential Measures of Strategic Importance of the Market

5.2.1.1.3 Competence of Local Organization The original definition of the “competence of local organization” put forward by Bartlett and Ghoshal is (Bartlett/Ghoshal 1986: 90): “The organizational competence of a particular subsidiary can, of course, be in technology, production, marketing, or any other area.” When looking at the value chain, subsidiaries can have competences in only one function, such as research and development or production, or in several primary or secondary functions. Here, Bartlett and Ghoshal use a functional competence definition that can be understood as “the subsidiary’s ability to perform value activities” (Roth/Morrison 1992: 722). While referring to competences here, they refer to resources and capabilities elsewhere (see subsection 5.2.1.1.1). The terminological confusion between “resources”, “capabilities” and “competences” is common in business literature. It is partly caused by the variety of definitions of these terms which exist (Bresser 1998: 306-308, Schmid/Schurig 2003: 757). Resources are “anything which could be thought of as a strength or weakness of a given firm” (Wernerfelt 1984: 172). They can be subdivided into four groups (Bamberger/Wrona 1996: 132-134)108: physical, intangible, financial and organizational resources. Intangible resources, such as copyrights, patents, brands or knowledge, can be further subdivided into intangible assets and skills (Hall 1992: 136-140, Bamberger/Wrona 1996: 133, Gouthier/Schmid 2001: 227). While the company “has” intangible assets, skills refer to an activity which employees can “do” (Hall 1993: 611). Capabilities and competences are skills and therefore form a subgroup of (intangible) resources (Bamberger/Wrona 1996: 133, Gouthier/Schmid 2001: 227). These are attached to individuals, but organizations can hold them as well (Schmid/Schurig 2003: 758). The terms “capabilities” and “competences” can be used interchangeably (see, for instance, Bartlett/Ghoshal 1986: 90, Hall 1992: 139). As Bartlett and Ghoshal use the “competence of local organization” in their original conceptual article, this label for the classifying dimension is used here instead of the 108

For other classifications of resources, see, for example, Barney 1991: 101, Grant 1991: 119, Schmid/Schurig 2003: 757-758.

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broader concept of “local resources”. This focus is supported by the description of the four subsidiary roles, where the authors address the competences and capabilities of the subsidiaries and do not refer to their resources (Bartlett/Ghoshal 1986: 90-92). Furthermore, competences can be transferred between individuals or organizations without diminishing, in contrast to physical or tangible resources (Bamberger/Wrona 1996: 132-134). This is of special interest in the case of Strategic Leaders and Contributors which are expected to use their competences on behalf of the whole company and/or transfer their competence to the corporate level (Bartlett/Ghoshal 1986: 90-91). By transferring, teaching and reflecting them, competences can even grow (Bamberger/Wrona 1996: 132-134). Additionally, the concentration on competences implies a concentration on intangible resources. As intangible assets are often argued to be more important than tangible resources for building competitive advantage (Gouthier/Schmid 2001: 227), the focus is placed on this strategically relevant subgroup of “resources”. Capabilities (and competences) are frequently developed in the functional areas of a corporation (Amit/Schoemaker 1993: 35). Table 17 summarizes relevant measurement concepts. The one used here follows Moore and Benito et al.’s approach (Moore 2000, 2001, Benito et al. 2003). They measure the “level of competence” in seven functional areas (Moore 2000: 161, 2001: 285, Benito et al. 2003: 450): research, development, production of goods and services, marketing/sales, logistics/distribution, purchasing and human resource management. Subsidiaries’ competences can range from “not at all” to “to a very high extent” in each area.109 This measurement concept is slightly adapted here. First, research and development are combined into one competence area. Second, when comparing the activity areas used by the authors to Porter’s value chain, it becomes evident that one of Porter’s supporting activities is not included: the firm infrastructure accounting for general management, planning and financing (Porter 1985: 43).110 As management capabilities or competences are often argued to be one of the most important resources within the firm (Aaker 1989, Lado et al. 1992: 82-84, Bamberger/Wrona 2004: 43), general management is included here as an area of competence.

109

110

Ferdows chooses a different way of measuring the competence of production sites (Ferdows 1989: 13, Ferdows 1997: 79): The competence level is determined by explicitly listed evolutionary steps which subsidiaries can take. All other activity areas are (at least partly) covered (Porter 1985: 39-43, Benito et al. 2003: 450): While inbound and outbound logistics are integrated into one area (logistics/distribution), technology development is assessed within the area “research and development”. Service might be integrated into marketing/sales and procurement is denoted as purchasing.

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Author(s) Roth/Morrison 1992: 725, Moore/Heeler 1998: 8-9

Concept R&D and manufacturing competence as well as marketing competence

Indicator(s)  capability or distinctive competence in product R&D  capability or distinctive competence process R&D  capability or distinctive competence manufacturing

capacity  capability or distinctive competence manufacturing flexibility  capability or distinctive competence advertising/promotion level and quality

Scale Sevenpoint Likerttype scale

 capability or distinctive competence in sales force

coverage and quality  capability or distinctive competence in scope of

service provided  capability or distinctive competence in quality of

service Holm/Pedersen 2000a

level of competence

 competence in research  competence in development  competence in production  competence in marketing and sales

Sevenpoint Likerttype scale

 competence in logistics and distribution  competence in purchasing

Moore 2000: 161, 2001: 285

level of competencies

 competence in research  competence in development  competence in production of goods or services  competence in logistics/distribution

Sevenpoint Likerttype scale

 competence in marketing/sales  competence in purchasing  competence in human resource management

Benito et al. 2003: 450

level of competence

 competence level in research  competence level in development  competence level in production of goods and services  competence level in marketing/sales

Sevenpoint Likerttype scale

 competence level in logistics/distribution  competence level in purchasing  competence level in human resource management

Kutschker et al. 2002: 16, Schmid/Schurig 2003: 767

Table 17:

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(critical) capabilities

 level of competence in development  level of competence in production  level of competence in marketing  level of competence in logistics

Sevenpoint Likerttype scale

Measurement Approaches for the Level of Competence111

The similarity of the measurement approaches is due to the collaboration of the researchers (except for Roth/Morrison 1992: 725, Moore/Heeler 1998: 8-9) in the so-called “Centers of Excellence Project” (see Holm/Pedersen 2000b for further details).

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This leads to six indicators which determine the competence level of a subsidiary: competence in research and development, competence in purchasing, competence in logistics and distribution, competence in production, competence in marketing and sales, competence in general management and competence in human resource management. All indicators and their possible measures are summarized in Table 18. To assess the overall level of competence, the competence areas in which a subsidiary is active are selected. For these activities, the measures are rated on a five-point scale from “not at all competent” to “competent to a very high extent“.112 The resulting value for the level of competence is an average value across the subsidiary’s different competence areas (Benito et al. 2003: 450).113

Level of competence of the local organization Indicator

Measure

Scale

competence in research and/or development

level of competence in research and/or development

five-point scale

competence in purchasing

level of competence in purchasing

five-point scale

competence in logistics and/or distribution

level of competence in logistics and/or distribution

five-point scale

competence in production

level of competence in production

five-point scale

competence in marketing and/or sales

level of competence in marketing and/or sales

five-point scale

competence in general management

level of competence in general management

five-point scale

competence in human resource management

level of competence in human resource management

five-point scale

Table 18:

Potential Measures of the Level of Competence

5.2.1.2

Operationalization of Gupta and Govindarajan’s Subsidiary Roles

While some authors have a restrictive perception of knowledge flows and concentrate on technical knowledge by assessing patent data (Macharzina et al. 1999, Andersson et al. 2005: 528),114 Gupta and Govindarajan use a broad concept of knowledge flows. They operationalize knowledge flows with nine indicators (Gupta/Govindarajan 112

113

114

Again the often used five-point-scale is chosen since it allows for a certain differentiation without asking too much of the judging person (see Bortz/Döring 2002: 179-180 for further details). This measurement approach neglects the fact that subsidiary roles might differ depending on the function under consideration (Schmid et al. 1998: 69). The main interest here is on the overall competence level of the subsidiary. Still, a special competence level within one functional area can correspond to a higher competence level in all functions (Moore/Heeler 1998: 9-10). Cantwell and Piscitello, for example, assess the technological competence of a company by the overall size of patenting (Cantwell/Piscitello 2000: 33).

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1994: 450): market data on customers, market data on competitors, product designs, process designs, marketing know-how, distribution know-how, packaging design/technology, purchasing know-how and management systems and practices. Inflows of knowledge can be either from the parent company or from another subsidiary (Gupta/Govindarajan 1994: 450). Outflows of knowledge take the opposite direction being transmitted from the subsidiary to the rest of the MNC.115 As knowledge inflows and outflows differ only in their direction, the same indicators and measures are used for the inflow and outflow of knowledge. As Table 19 shows, other authors also adopt this broad view of knowledge and use similar measurement approaches to assess knowledge flows.116 Differences become evident in terms of the scale and number of indicators in use. As each author uses a different break-up of the value chain, knowledge flows are identified in three to five areas. By distinguishing knowledge flows in nine areas, Gupta and Govindarajan choose a more detailed approach. They asked the respondents to rate the extent of both knowledge outflows and the extent of knowledge inflows for each indicator on a seven-point Likert-type scale (Gupta/Govindarajan 1994: 450).117

115

116

117

Gupta and Govindarajan concentrate on internal knowledge transfers within the MNC and neglect spillover effects from the subsidiary to the subsidiary location (see Cantwell/Mudambi 2004: 45 for further details on this type of knowledge flow). They do not explicitly consider the absorption of knowledge from the subsidiary location either (Cantwell/Mudambi 2004: 45, Gammelgaard et al. 2004: 195), even though this knowledge can form part of subsidiary knowledge which then flows to other units of the MNC. Anderson and Forsgren classify subsidiaries according to Gupta and Govindarajan’s role typology (Andersson/Forsgren 1994: 9-13). Unfortunatly, their exact measurement approach remains unclear so that their approach cannot be included in the table. In spite of distinguishing between different types knowledge flows, the dimensions of interest are primarily the existence and the intensity of the flows. Consequently, other dimensions, such as criticality, genesis or nature of flows which might also be interesting to study, are neglected (Schmid et al. 2002: 68).

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Author(s)

Concept

Chung et al. 2000: 656

knowledge inflow/outflow

Indicators  inflow/outflow of purchasing knowledge  inflow/outflow of manufacturing knowledge  inflow/outflow of marketing knowledge  inflow/outflow of research and development

knowledge

Scale sevenpoint Likerttype scale

 inflow/outflow of market intelligence knowledge

Schulz 2001: 667-668

knowledge outflows

 magnitude of knowledge outflow regarding

Forsgren et al. 2005: 159

transfer of subsidiary knowledge

 subsidiary importance for co-subsidiaries product

technologies  magnitude of knowledge outflow regarding marketing and sales  magnitude of knowledge outflow regarding strategy development  subsidiary importance for co-subsidiaries production-process development  subsidiary importance for co-subsidiaries technical information  subsidiary importance for co-subsidiaries information about market activities

five-point Likerttype scale

five-point scale

 subsidiary importance for co-subsidiaries new major

business contacts Björkman et al. 2004: 448

outward transfer of subsidiary knowledge

 extent of use of R&D competence  extent of use of manufacturing competence  extent of use of marketing and sales competence  extent of use of service competence

sevenpoint Likerttype scale

 extent of use of general management competence

Gammelgaard et al. 2004

knowledge transfer

 extent of research knowledge being of use to other

MNC units  extent of development knowledge being of use to other MNC units  extent of production knowledge being of use to other MNC units  extent of marketing and sales knowledge being of use to other MNC units

sevenpoint Likerttype scale

 extent of logistics knowledge being of use to other

MNC units  extent of purchasing knowledge being of use to

other MNC units  extent of HRM knowledge being of use to other

MNC units Harzing/Noorderhaven 2006

knowledge flows

 product design knowledge  marketing knowledge  distribution knowledge  management systems and practices knowledge

Table 19:

sevenpoint Likerttype scale

Measurement Approaches for Knowledge Flows

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Gupta and Govindarajan use separate questions for knowledge flows to headquarters and to other subsidiaries, leading to a total of 36 questions. Responses are averaged across the nine items and combined into one composite measure of knowledge inflows and one composite measure of knowledge outflows (Gupta/Govindarajan 1994: 450). To cross-check the classification of the subsidiaries with corporate-level representatives, Gupta and Govindarajan adapt this approach (Gupta/Govindarajan 1994: 451): They neglect the distinction between knowledge flows from or to headquarters and from or to other subsidiaries. Hence, a measurement approach with nine items for each knowledge flow direction remains.118 This approach is slightly adapted here: The knowledge inflow and outflow of packaging design/technology is not taken into account since it is not considered to be relevant to the selected cases.119 Thus, eight indicators are adopted here and summarized in Table 20.

Knowledge inflow/outflow Indicator

Measure

Scale

market data on customers

magnitude of inflow/outflow of market data on customers

five-point scale

market data on competitors

magnitude of inflow/outflow of market data on competitors

five-point scale

product designs

magnitude of inflow/outflow of product designs

five-point scale

process designs

magnitude of inflow/outflow of process designs

five-point scale

marketing know-how

magnitude of inflow/outflow of marketing know-how

five-point scale

distribution know-how

magnitude of inflow/outflow of distribution know-how

five-point scale

purchasing know-how

magnitude of inflow/outflow of purchasing know-how

five-point scale

management systems and practices

magnitude of inflow/outflow of management systems and practices

five-point scale

Table 20: 118

119

Possible Measures of Knowledge Inflows and Outflows

In addition to this detailed measurement, Gupta and Govindarajan also ask the respondents to choose between four statements which indicate the position of the subsidiary within the role typology without distinguishing knowledge types (Gupta/Govindarajan 1994: 450-451). Gupta and Govindarajan are able to significantly reject the possibility of differing results between this and the detailed classification approaches (Gupta/Govindarajan 1994: 451). Thus, a classification based on a choice between four possible statements can also be used for categorizing subsidiaries. This approach can be helpful when a larger number of subsidiaries has to be classified. The inflow and outflow of packaging design/technology was initially asked for in the interviews, but it soon became evident that the interviewees could not apply it to their business. Consequently, this type of knowledge is not taken into account when assessing the level of knowledge inflows and outflows.

110

For each indicator, a value between “not at all” to “to a very high extent” is assessed on a five-point scale.120 Following Gupta and Govindarajan who aggregate their indicators (Gupta/Govindarajan 1994: 451), the resulting overall value of knowledge inflow or outflow is averaged across the eight different types of knowledge flows.121

5.2.2

Operationalization of the Performance Evaluation Concept

Performance evaluation has been conceptualized in section 2.2. Now it will be operationalized in greater detail for the empirical part of the dissertation. The studies reviewed in chapter 3 provide an extensive basis for extracting possible operationalizations.122 In the following, details are provided for the operationalization of the role of performance evaluation (subsection 5.2.2.1), the content of performance evaluation (subsection 5.2.2.2) and the process of performance evaluation (subsection 5.2.2.3).

5.2.2.1

Operationalization of the Role of Performance Evaluation within the Control Mix

Performance evaluation is one possible control mechanisms. In addition to or in place of this output control, input control and/or behaviour control can be used. In order to determine which role output control and performance evaluation play within the control mix compared to other control objects, the importance of all three – input, behaviour and output control – has to be determined. Knowing more about the use of input and behaviour control helps to assess the relative weight of output control and consequently also performance evaluation within the control mix. The potential indicators derived from the contributions presented in the literature review are summarized in Table 21. These indicators are further grouped into 120

121

122

Corresponding to the operationalizations of Bartlett/Ghoshal’s role typology dimensions, the fivepoint scale is adopted here, too. This ensures stability for the judging person and makes comparisons between the dimensions and typologies easier. Nevertheless, subsidiary roles might differ depending on the type of knowledge flow under consideration (Schmid et al. 1998: 69). Andersson and Forsgren reveal these differences when comparing Local Innovators, Global Innovators, Integrated Players and Implementers classified based on the inflow and outflow of two types of knowledge flows – knowledge on product development and knowledge on production development (Andersson/Forsgren 1994: 9-12). Here, the “average” role of the subsidiary is of interest and no distinction is made between various flows of knowledge. Most of the conceptual studies do not provide details on the possible operationalization of the variables (e.g. Muralidharan 1998, Muralidharan/Hamilton III 1999, Madureira 2004). Only Hamilton III and Kashlak supply potential measures for their constructs in spite of their contribution being conceptual in nature (Hamilton III/Kashlak 1999: 172). In addition, Horvath et al. do not shed light on the operationalizations used in their study (Horvath et al. 1981), and Dobry’s operationalizations remain ambiguous (Dobry 1983). Almost all other studies shed light on the operationalization of the three dimensions of the performance evaluation framework.

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relevant categories. In doing so, operationalizations of the control mix are derived for input control (1), behaviour control (2) and output control (3). The operationalizations are similar to those suggested by Hamilton and Kashlak who explicitly distinguish all three control objects (Hamilton III/Kashlak 1999: 172). In addition, indicators used by other authors are selectively added. (1) Within the dimension of input control, three main forms of input control can be distinguished:  Headquarters send expatriate managers to the subsidiaries (Chang/Taylor 1999: 554, Tseng et al. 2002: 224). These home country nationals can be assigned to the top position of the subsidiary or to a management function.  In addition, headquarters can involve themselves in the hiring process and evaluate the candidates applying for a management job in the subsidiary (Hamilton III/Kashlak 1999: 172).  Trainings are provided for managers working at the subsidiary (Tseng et al. 2002: 224) especially before they assume responsibility (Hamilton III/Kashlak 1999: 172). These trainings are not provided by the subsidiary itself but by headquarters. (2) Behaviour control can be effectuated in many different ways. Some authors interpret the use of expatriates as behaviour control (i.e. Egelhoff 1984: 76, Brownell 1987: 11, Chung et al. 2000: 656, Harzing/Sorge 2003: 209-210). As stated above, this control mechanism is regarded as input control. Behaviour control is seen to take the following three forms:  The personal surveillance headquarters execute towards the subsidiary is one form of behaviour control (Harzing 1999: 187, Harzing/Sorge 2003: 209-210).  The degree to which procedures and processes are predefined by headquarters indicates behaviour control (Hamilton III/Kashlak 1999: 172, Harzing 1999: 187, Harzing/Sorge 2003: 209-210).  Furthermore, the degree to which employees are held accountable for their behaviour regardless of the outcome shows the existence or non-existence of behaviour control (Hamilton III/Kashlak 1999: 172).

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Dimension Input control

Behaviour control

Output control

Category

Measures

use of expatriate managers

 home country nationality of the

training provided by headquarters

 MNC provides substantial training

influence of headquarters on the hiring process of subsidiary managers

 MNC performs multiple

behaviour surveillance of subsidiary managers by headquarters

 degree of personal surveillance

predefinition of procedures

 degree to which there is concern

accountability for actions

 an employee is held accountable

link of performance judgement to results

 performance is linked to concrete

presidents of the subsidiary  number of expatriate managers before assuming responsibility  headquarters’ training of local managers  MNC provides opportunities for broadening a skill set of an employee evaluations before hiring an individual

that headquarters execute towards the subsidiary  resources expended in monitoring how individual marketing activities performed in a foreign country for procedures or methods  degree of autonomy for the subsidiary to decide its own strategies and policies (reversed scored) regardless of the outcome

    

Table 21:

results use and frequency of information on selected output figures degree of continuous evaluation of the results of the subsidiary reliance on meeting the budget concern with costs and revenues numerical records are used as indices of effectiveness

use of preestablished targets for evaluating subsidiary managers

 appraisals are based on

performance-related pay for subsidiary managers

 pay is based on performance

achieving goals and lack of achievement will result in low ratings  pre-established targets are used for evaluating personnel

Authors Chang/Taylor 1999: 554, Tseng et al. 2002: 224 Hamilton III/Kashlak 1999: 172, Tseng et al. 2002: 224

Hamilton III/Kashlak 1999: 172

Gencturk/Aulakh 1995: 769, Harzing 1999: 187, Harzing/Sorge 2003: 209-210 Hamilton III/Kashlak 1999: 172, Harzing 1999: 187, Harzing/Sorge 2003: 209-210 Hamilton III/Kashlak 1999: 172 Egelhoff 1984: 75-76, Brownell 1987: 6, Egelhoff 1988: 158, Chang/Taylor 1999: 554, Hamilton III/Kashlak 1999: 172, Harzing 1999: 187188, Chung et al. 2000: 655, Tseng et al. 2002: 224, Harzing/Sorge 2003: 210 Hamilton III/Kashlak 1999: 172

Hamilton III/Kashlak 1999: 172

Possible Operationalizations of the Control Mix

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(3) Output control can become effective in many different ways. Authors either refer to general indicators for output control (e.g. Hamilton III/Kashlak 1999: 172, Tseng et al. 2002) or they relate output control to the use of certain output measures (e.g. Egelhoff 1984: 75-76, 1988: 158, Chang/Taylor 1999: 554, Chung et al. 2000: 655). Output control is reflected by the following indicators:  The degree to which headquarters link their performance judgement to concrete results of the subsidiary indicates the level of output control (Hamilton III/Kashlak 1999: 172) and is reflected in the use and frequency of information on output measures (e.g. Egelhoff 1984: 75-76, 1988: 158, Chang/Taylor 1999: 554, Chung et al. 2000: 655).  Furthermore, output control is indicated by the use of pre-established targets for evaluating subsidiary managers (Hamilton III/Kashlak 1999: 172).  Performance-related pay is a third important indicator of output control (Hamilton III/Kashlak 1999: 172). The indicators presented here are explicitly integrated into the interview guide which is presented in Appendix IV. Nevertheless, additional indicators for input, behaviour and output control can emerge from the empirical data.

5.2.2.2

Operationalization of the Content of Performance Evaluation

The content of performance evaluation refers to the measures in use for evaluating subsidiaries. Many studies on performance evaluation reveal the use of certain performance measures. Table 22 summarizes these indicators. Three groups of performance indicators can be relevant (see subsection 2.2.2) and are explicitly asked for in the interview guide: financial measures, non-financial measures and qualitative indicators. In analyzing the content of performance evaluation, not only is the type of performance measure of interest, but also the frequency of its use and its importance. Furthermore, the measures cannot stand by themselves, but need to be compared in order to be meaningful. Thus, the different standards of performance evaluation, such as comparison to the budget, comparison to the past, internal benchmarking and external benchmarking (Czechowicz et al. 1982: 182), are of interest, too.

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Category Financial measures

traditional

Measures  net income  EBIT  EBITDA  EBT  ROI  ROE  ROA  ROS  RI  ROCE  contributions to EPS  operating CF

 CF from subsidiary          

to parent sales profitability sales growth cost reduction working capital ratio gearing dividend cover development cost production cost labour cost

Authors e.g. Hulbert/Brandt 1980: 116, Morsicato 1980: 104-108, Yunker 1983: 56, Rolander et al. 1989: 1032, Hosseini/Rezaee 1990: 45, Coates et al. 1992: 140-141

 orders

value based

 EVA

e.g. O'Clock/Devine 2003: 24

 Value added  NPV

Nonfinancial quantitative measures

external

 market share  number of customer complaints

internal

 production volume

 development time

 JIT ratios

 time for order

 labour turnover  productivity  reject rate  lead time  new product

innovation  number of registered products  production technology innovation Qualitative measures

external

    

processing and delivery number of regular customers order bookings capital turnover inventory turnover number of employee suggestions for improvement

 relationship with the host government  environment compliance  name recognition  customer service

internal

 quality control

 employee

 quality

development  community service  employee qualification

 cooperation with other

units  employee safety

Table 22:

e.g. Rolander et al. 1989: 1032, Coates et al. 1992: 140-141, Welge/Holtbrügge 1999: 571, O'Clock/Devine 2003: 24 e.g. Yunker 1983: 56, Rolander et al. 1989: 1032, Welge/Holtbrügge 1999: 571

e.g. Czechowicz et al. 1982: 162, Coates et al. 1992: 143, Welge/Holtbrügge 1999: 571 e.g. Czechowicz et al. 1982: 162, Rolander et al. 1989: 1032

Possible Content of Performance Evaluation

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5.2.2.3

Operationalization of the Process of Performance Evaluation

The studies presented in the literature review mainly consider control processes in general. Their operationalizations are adapted here for the process of performance evaluation as one possible control process. The modified operationalizations are presented in Table 23. Again, they are grouped into relevant categories. Specifically, operationalizations are derived for the formal process of performance evaluation (1), the personal process of performance evaluation (2) and the cultural process of performance evaluation (3). (1) Within the category of formal control, written reports on performance are the main indicator of a formal process of performance evaluation. Written reports can be characterized as impersonal written documents, numerical documents and standardized forms (Daft/Lengel 1986: 560). Their use and frequency is of interest:  The formalization in terms of written performance reports that headquarters demand from the subsidiary indicates the presence of a formal process in performance evaluation (modified from Ghoshal/Nohria 1989: 335, Harzing 1999: 187, Harzing/Sorge 2003: 210).  The frequency with which formal reports are used for performance evaluation adds an important aspect when judging the importance of formal performance evaluation processes (modified from Negandhi/Baliga 1981: 30-31, 123, Mascarenhas 1984: 104, Tseng et al. 2002: 224). (2) Not only formal evaluation processes, but also personal evaluation processes can be in place for performance evaluation purposes.  Performance evaluation can be conducted in management meetings or similar gatherings at headquarters and/or at the subsidiary site (modified from Welge 1980: 225-229, Negandhi/Baliga 1981: 32, 120, Mascarenhas 1984: 104). Their existence and frequency indicates a personal process of performance evaluation.  In addition to meetings, personal interaction in terms of face-to-face communication and phone calls can be used for performance evaluation purposes (modified from Mascarenhas 1984: 104, Gupta/Govindarajan 1993: 344, 1994: 457). Personal documents, such as letters, memos or e-mails,123 can also be interpreted as personal communication media (Daft/Lengel 1986: 560) supporting a personal process of performance evaluation.

123

Despite being “written”, e-mails imply a personal interaction between the sender and the recipient. Therefore, they are judged as personal and not as formal performance evaluation process.

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Dimension Formal process

Personal process

Category

Measures

formalization in performance evaluation

 degree to which headquarters have

formal reports on performance

 frequency with which formal reports in

management meetings on performance issues

 frequency of group meetings on

personal appraisals

 frequency of face-to-face

provided a fairly well-defined set of rules and policies on performance reporting  degree of standardization in reporting required from headquarters  extent of formalization of policies and systems on performance evaluation each functional area of business are required by corporate headquarters  periodical reports  budget and expense control performance issues  visits at the subsidiary and at headquarters for evaluation purposes

communication on performance  frequency of telephone communication on performance  frequency of electronic or paperbased letters or memos on performance Cultural process

shared performance goals

 extent of shared values  degree to which executives in the

subsidiary share the company’s main values  intensity of socialization in terms of a shared performance culture  emphasis placed on developing a strong organizational culture to ensure that all subsidiaries know and share the main goals of the firm and values of top management informal communication

Table 23:

124

 informal communication

Authors124 Ghoshal/Nohria 1989: 335, Harzing 1999: 187, Harzing/Sorge 2003: 210

Negandhi/Baliga 1981: 30-31, 123, Mascarenhas 1984: 104, Tseng et al. 2002: 224 Welge 1980: 225229, Negandhi/Baliga 1981: 32, 120, Mascarenhas 1984: 104 Mascarenhas 1984: 104, Gupta/Govindarajan 1993: 344, 1994: 457

Kenter 1985: 414415, Ghoshal/Nohria 1989: 335, Martínez/Jarillo 1991: 438, 441, Harzing 1999: 188, Chung et al. 2002: 118, Harzing/Sorge 2003: 211

Martínez/Jarillo 1991: 438, 441, Harzing 1999: 188, O'Donnell 2000: 548, Harzing/Sorge 2003: 211

Possible Operationalizations of the Process of Performance Evaluation

The operationalizations are extracted from the cited articles and adapted to the performance evaluation process.

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(3) The third element of control processes is cultural. Although performance evaluation is difficult to be employed culturally, common values and goals can be in place which foster a shared performance culture.  The existence of informal communication among headquarters and subsidiary executives indicates the existence of a shared performance culture (modified from Martínez/Jarillo 1991: 438, 441, Harzing 1999: 188, O'Donnell 2000: 548, Harzing/Sorge 2003: 211).  In addition, it is of interest to which degree the executives of the subsidiary share the corporate values and common performance goals with headquarters executives (modified, for example, from Ghoshal/Nohria 1989: 335, Martínez/Jarillo 1991: 438, 441, Chung et al. 2002: 118, Harzing/Sorge 2003: 211).

5.3 Data Collection Data collection is based on multiple sources (Yin 2003: 97-101): interviews at different levels, company data, reports and documents on the internal reporting systems. These multiple sources allow for triangulation (Yin 2003: 99): Misinterpretations are limited because cross checks are possible (Scapens 1990: 275, Wright 1996: 75). Different perspectives can be taken into account and hence the substance of the findings as well as their validity are reinforced (Eisenhardt 1989a: 538, Yeung 1995: 314, Andersen/Skaates 2004: 477-478, Daniels/Cannice 2004: 200, Ghauri 2004: 115-116). Interviews are one of the most important sources of case study data (Yin 2003: 89, Eisenhardt/Graebner 2007: 28).125 Very frequently, qualitative IB research relies on interviews for data collection (Marschan-Piekkari/Welch 2004: 13; see, for instance, Yeung 1995, Welch et al. 2002: 616-624, Young et al. 2002, Brock/Barry 2003, Hutzschenreuter et al. 2005). This direct conversation between the researcher and respondents either personally or by phone (Daniels/Cannice 2004: 185) is also chosen here especially because of the following strengths: Besides the formal answers to questions, the respondent can provide relevant information informally through verbal hints, tone of voice and gestures (Scapens 1990: 274). Additional themes can come up which would be neglected in survey-based data collection (Peterson 2004: 34-35). The reliability of the answers is enhanced because the questions can be explained to the respondent (Healey/Rawlinson 1993: 341, Andersson 2003: 432). This advantage is of high relevance in the cross-cultural context (Ghauri 2004: 111): Equivalence can be established during interviews because researcher and respondent are able to rephrase their questions or answers 125

See, for instance, Marshall/Rossman 1989: 79-108, Flick 1995: 115-183, Mayring 2002: 72-84 for other modes of collecting qualitative data.

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and keep on asking to prevent misunderstandings and misinterpretations. Further strengths of interviews are summarized in Table 24. In addition, several weaknesses are listed in the table which are believed to be clearly outweighed by the strengths of this mode of data collection.

Strengths  permits face-to-face encounter with informants  generates large amounts of expansive data

Weaknesses  is open to misinterpretation due to cultural

differences

quickly  facilitates access for follow-up data collection

 depends upon the cooperation of a small

 facilitates cooperation from research subject

 is difficult to replicate

 reveals complex interconnections in social

 is affected by subjective observer effects

   

relationships permits data collection in natural setting provides data on non-verbal behaviour and communication facilitates analysis, validity checks and triangulation facilitates discovery of nuances in culture

group of key informants

 can cause discomfort for researcher  depends upon the honesty of those providing

the data  depends upon the ability of the researchers to

be resourceful, systematic, and honest to control bias

 provides for flexibility in the formulation of

hypotheses  provides background context for more focus

on activities, behaviours and events  helps to reveal the subjective side

Table 24:

Strengths and Weaknesses of Interviews as Data Collection Technique

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From the end of May until the beginning of September 2006, in total 24 interviews were conducted with 28 interview partners (see Appendix III for more details on the interview partners).127 The type of interview (1), the incorporation of different perspectives (2), the language of the interviews (3) and the interview mode (4) are further described. (1) Semi-structured interviews were conducted. This type of interview covers characteristics of the qualitative or non-standardized research interview and the structured or standardized interview (Healey/Rawlinson 1993: 342-344, King 1994: 15-16). Proceeding from the operationalizations presented in section 5.2 and preliminary conversations with persons involved in subsidiary management, an interview guide was elaborated. This interview guide is presented in Appendix IV.

126 127

Adapted from Marshall/Rossman 1989: 102-105. Most interviews were conducted with one manager. Only twice were two managers interviewed simultaneously and on one occasion three managers were present at one interview session. After the interviews, additional information was collected from some interview partners either by e-mail or by phone.

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(2) In order to identify potential perception gaps between headquarters and subsidiaries (Arvidsson 1999: 102-104, Birkinshaw et al. 2000), both levels were taken into account leading to so-called “unit triangulation” (Marschan-Piekkari et al. 2004: 254). Interviews were conducted in a predetermined order. The interviews at headquarters level were followed by the subsidiary level interviews. To take full advantage of the opportunity to talk to the right people,128 interview partners were selected with care. The interviews at headquarters level were conducted with managers responsible for finance and controlling. This concentration on one function within the MNC might lead to a constrained perspective on performance evaluation. However, the topic of performance evaluation is mainly attributed to the finance and controlling function which became evident in the preceding expert interviews.129 As the subsidiary management set-up differs slightly between Eucom and Gloneer, the approached interview partners at headquarters also hold different positions:  At Eucom, the chief financial officer of the business unit is mainly responsible for controlling, coordinating and evaluating the subsidiaries. In addition, he is involved in the operating business and could provide overall insights into the activities of Eucom.  At Gloneer, the controlling department is responsible for the controlling of subsidiaries. The head of controlling and his employees responsible for subsidiary controlling and strategic controlling were interviewed. The relevant subsidiaries were identified in the initial interviews at headquarters level. The interview partners were then asked to provide further contacts at subsidiary level. A mixture of “cascading” and “snowballing”130 was used to set up further interviews within the company. This mixed approach is helpful in order to restrict the influence of a sponsor at headquarters (Welch et al. 2002: 624). Again, the relevant interview partners at Eucom and Gloneer differ slightly in their positions:  At Eucom, the chief financial officers of the subsidiaries were identified as target interview partners. They were informed about the project by headquarters representatives or the CFOs of other subsidiaries. They were then contacted by e-mail and asked directly to collaborate. In two of the three subsidiaries, the CEOs were also available and provided their input.  At Gloneer, the target interview partners were the managing directors (presidents, CEOs) of the subsidiaries. Contacts to most of them were provided by 128

129

130

Qualitative personal interviews have the big advantage that researchers are able to talk to the target person (Healey/Rawlinson 1993: 341, Yeung 1995: 329). In survey research, by contrast, it is difficult to guarantee that the right persons answer the questionnaire. When approaching an MNC on a general management level, experts from finance and controlling were recommended as appropriate contact persons. In addition, the topic of performance evaluation arose most interest in this function. While “cascading” implies the authorization of a higher-ranked person, “snowballing” refers to the additional identification of relevant interviewees through recommendations of the interview partners (Welch et al. 2002: 620).

120

headquarters representatives and dates for personal or telephone interviews were set up. In addition, the manager responsible for finance and controlling (depending on the subsidiary this could be CFOs, vice president responsible for finance, commercial managers or financial managers) of the subsidiaries were contacted and asked to collaborate. In all but two subsidiaries of Gloneer, both targeted persons could be won for an interview.131 (3) The interview language differed depending on the interviewees. As is common in international business research, English was chosen as the primary language. Since the target persons were top and middle managers, good English skills were expected (Marschan-Piekkari/Reis 2004: 233). Nevertheless, whenever the respondents and the interviewer shared the same mother tongue (here German), this language was chosen for reaching linguistic equality. Thus, a “multilingual approach” (see Marschan-Piekkari/Reis 2004 for further details) was adopted. One-third of the interviews were conducted in English and two-thirds in German. (4) Two interview modes can be distinguished: the in-person interview and the telephone interview. Table 25 summarizes the advantages of the two modes. This study used personal interviews as the primary mode of interviewing. As the selected MNCs are located in Europe, in-person interviewing at headquarters level was feasible. Nevertheless, the locations of relevant subsidiaries were partly in the USA or Asia. This would have increased travelling expenses substantially. At the same time, an exclusion of interesting subsidiaries from the study because of their locations would have restricted foreign subsidiaries to a single region (Europe). This regional focus was not intended because all selected subsidiaries of Eucom and Gloneer were of interest for this study. Therefore, subsidiaries located outside Europe were included, but the mode of data collection was changed to telephone interviewing for reasons of cost-efficiency. In addition, three interview partners in subsidiaries in Europe did not agree to a personal meeting because of their tight time schedule and preferred to be interviewed by phone. In total, therefore, 18 managers were interviewed in-person and 10 were interviewed by phone. Interview data was recorded and then transcribed after each interview. The final text was rechecked by listening to the audio-tape of the interview and comparing it to the transcript. The collected material was tentatively analyzed after each interview to allow for an interrelated process of data collection and data analysis (Glaser/Strauss 1979: 94-95, Eisenhardt 1989a: 539). More details on the data analysis are provided in the next subsection.

131

In one subsidiary, a new person had just assumed his responsibilities for finance and controlling and had to be acquainted with the new position before being available for an interview. In the other subsidiary, the relevant person was unavailable due to vacation.

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Advantages of In-Person Interviewing  more accurate responses owing to contextual    

naturalness greater likelihood of self-generated answers symmetrical distribution of interactive power greater effectiveness with complex issues more thoughtful responses

Advantages of Telephone Interviewing  reduced interviewer effects  better interviewer uniformity in delivery  greater standardization of questions  greater interviewer safety  greater cost-efficiency  faster results

 more accurate results owing to lower

interviewer workload  better response rate

Table 25:

Comparison of Two Interview Modes132

5.4 Data Analysis The interview transcripts and the additional data have been analyzed in detail (see Appendix III for an overview of the material). Qualitative content analysis has been conducted based on the thematic coding approach. Table 26 presents an overview of thematic coding in comparison to grounded theory and Mayring’s qualitative content analysis. Thematic coding is appropriate for structured qualitative research (Kuckartz 2005: 92) which is conducted here. It applies to the comparison of groups – here determined by the role typologies (Flick 2005: 310). In addition, it supports explanatory analysis to reveal if cases meet or contradict elaborated propositions (Kuckartz 2005: 87). In contrast to grounded theory, thematic coding incorporates previous knowledge. Consequently, this approach has been chosen due to its applicability to this study.133 Four main steps characterize thematic coding134: the development of a category schema (1), the coding (2), the case description (3) and the case comparison (4). They were applied to this study as follows:

132

133

134

Extracted from Shuy 2001: 540-544. Shuy also lists additional advantages of in-person interviews, such as “better for marginalized respondents”, which do not apply to the research focus of this study and are therefore not included (Shuy 2001: 542-543). As the mentioned authors apply thematic coding differently, the method is not as concisely defined as grounded theory or Mayring’s qualitative content analysis. However, central aspects of the method are defined and adapted to this empirical study. Kuckartz neglects the individual case analysis in the first place and lists “deep analysis of selected cases” as fourth step (Kuckartz 2005: 87). However, here emphasis is put on the analysis of each individual case following Flick 2005: 273. The research steps are in line with the more general distinction of data reduction, data display and conclusion drawing used by Miles/Huberman 1994: 10-11.

122

Characteristics

Grounded Theory

Thematic Coding

Mayring’s Qualitative Content Analysis

Openness towards the data

open coding

principle of case analysis

analysis rendering the content explicit

Structuring of the data

axial coding, selective coding, W-questions

thematic structure for the case analysis

subsuming and structuring

Contribution to interpretation methods

induction and deduction combined, openness and structuring combined

group comparison after the case analysis

explicit rules for reducing the data

theory building

comparison of groups

large amount of data in different areas

 time-consuming due

 difficult application of

Application Problems and limitations

 fuzzy criteria for

defining codes  practical experience

to separate case analysis

needed to get to know the flexibility of the methodology

 limited to studies with

Authors

Glaser/Strauss 1967, Glaser 1978, Glaser/Strauss 1979, Strauss/Corbin 1990, Glaser 1992a, 1992b135

Hopf/Schmidt 1993: 57-63, Miles/Huberman 1994, Flick 1996: 160165, Kuckartz 2005: 85-94

Table 26:

Comparison of Approaches to Content Analysis136

predefined groups

the rules  geared to

quantitative methodology Mayring 2002: 114121, 2003, 2005

(1) Existing theories, concepts and know-how are used to elaborate a category schema (Hopf/Schmidt 1993: 58-61, Miles/Huberman 1994: 58-61, Cepeda/Martin 2005: 859, Kuckartz 2005: 87-88).137 The operationalizations of the contingency framework which have been outlined in section 5.2 are summarized within one schema as a point of departure for the analysis of the empirical data. Figure 11 provides an overview of the initial category schema. The three dimensions of the performance evaluation framework are subdivided into categories. Each category is determined by several indicators which are extracted from the

135

136 137

See also Eckert 2004 for a concise overview of grouded theory and Locke 2001 for the application of grounded theory in management research. Extracted, adapted and translated from Flick 2005: 310. In contrast, Flick’s description of thematic coding based on Strauss neglects an initial category schema. Codes are developed when analyzing the first cases; they are subsequently refined and finally lead to a common category schema (Flick 2005: 272-274).

123

operationalizations and used as codes for the content analysis.138 Similarly, the independent variable “subsidiary role” is broken up into two dimensions for each subsidiary role. The level of competence, the inflow of knowledge and the outflow of knowledge are directly used as codes. A further distinction of competence areas and types of knowledge flows in the coding would have implied twenty additional codes and would thus have considerably complicated the handling of the codes.139 (2) For each subsidiary, text elements and/or sections of the interviews were codified according to this category schema (Kelle/Kluge 1999: 58-60, Ghauri/Grønhaug 2002: 207-209). The coding process can be subsidivided into three steps (Wirth 2001: 161): selecting, classifying and monitoring. First, relevant text passages were identified (“selecting”). Second, codes were attributed to the selected text elements (“classifying”) using the software ATLAS.ti.140 Third, the codes and the category schema were closely observed (“monitoring”) and eventually adapted. The choice between single versus multiple classifications (Weber 1990: 32-36) was decided in favour of multiple codings. Selected words, sentences or paragraphs could either represent only one code or several codes. This procedure ensured that no relevant data was neglected. Apart from the codes for the elements of the contingency framework which are part of the category schema, supplementary codes were used to facilitate the analysis with ATLAS.ti. A code for each subsidiary was introduced. This was necessary due to interviews on headquarters level where several subsidiaries were addressed. These subsidiaries had to be distinguished in the analysis. In addition, several codes for the background of the subsidiaries, such as activities, products, history and partners, were incorporated. These codes are not relevant for the analysis of the propositions, but are helpful for the initial case description.

138

139

140

The standards of comparison relevant for the content of performance evaluation (comparison to the budget, comparison to the past, internal benchmarking and external benchmarking) are also used as codes but are not visualized in the schema. This is due to the fact that no propositions were elaborated for the standards of comparison. The standards of comparison are thus only addressed in the case description and not part of any further analysis. At the same time, the measurement approach is not changed. Statements coded with “level of competence”, “knowledge inflow” or “knowledge outflow” are analyzed and their extent is individually assessed for each relevant competence area and each type of knowledge flow. The software ATLAS.ti is used for coding and retrieving as common in manual indexing techniques. However, the software-based coding is beneficial when handling a large amount of data material. It ensures a systematic and structured way of analyzing the data and thus enhances the validity of the findings (Kelle 2000a: 488, 499-500). See Kelle 2000a, Kelle 2000b, Kuckartz 2005 for further details on the use of content analysis software.

124

Competition intensity

Market volume

Level of competence

Outflow of knowledge Inflow of knowledge

Strategic importance of the market

Technological dynamism

Customer demand intensity

Subsidiary role has an impact on?

Influence of HQ on hiring process Use of expatriate managers

Training by HQ

Formal reports

Performance evaluation

Formalization Formal evaluation

Role of input control

Content Process

Role in the control mix Financial measures

Non-financial measures

Role of behaviour control Qualitative indicators Personal evaluation

Behaviour surveillance

Cultural evaluation

Accountability for actions Predefinition of procedures

Role of output control

Management meetings Personal appraisals

category code determines consists of

Performance-related pay

Informal communication

Pre-established targets Shared performance goals

Link of performance judgement to results

Figure 11: Initial Category Schema for the Analysis of Role-Specific Performance Evaluation

New codes emerged during the analysis, and they were added to the initial categorization (King 1994: 26, Miles/Huberman 1994: 61-62, Kelle/Kluge 1999: 6365). In two occasions, the existing categories were further subdivided when new subcategories appeared (Kelle/Kluge 1999: 67-68). This added to the concreteness of the categories and helped coding the empirical material in a comprehensible way (Kelle/Kluge 1999: 67-70, Ghauri 2004: 119). Finally, a common category schema was refined in the course of the analysis which is presented in Figure 12. Overall, 60 codes were used, 25 of which represent elements of the contingency framework and nine characterize the roles of the subsidiaries. Besides these “central” codes which are presented in Figure 12, four codes indicate the four standards of comparison, 16 are names of subsidiaries141 and six codes indicate background information on the subsidiaries.

141

Not only the 12 included subsidiaries are addressed in the interviews, but interview partners also mention additional subsidiaries. Their names are attributed as codes for revealing potentially interesting relationships between them and the selected 12 subsidiaries.

125

It has to be noted that the coding process involves interpretation (Wirth 2001, Wrona 2005: 29). Selecting text passages from the transcripts comprises interpretation (Früh 2004: 113) because only those text elements are chosen which are judged to be relevant for the context of the research problem. In addition, the classification according to the category schema implies interpretation since the meaning of the selected word, sentence or paragraph is believed to correspond to a certain code (Früh 2004: 115). However, several ways are used in this study to reduce subjectivitiy and constrain the room for interpretation (see the review of the research approach in section 5.5 for further details).

Geographic market

Competition intensity

Level of competence

Outflow of knowledge

Market volume Inflow of knowledge

Strategic importance of the market

Balanced Scorecard Technological dynamism

Subsidiary role

Customer demand intensity

Management reports Project reports

has an impact on?

Influence of HQ on hiring process Use of expatriate managers

Reporting system

Performance evaluation

Training by HQ

Formalization

Formal reports

Formal evaluation

Role of input control

Content Process

Role in the control mix Autonomy

Financial measures

Non-financial measures

Role of behaviour control Qualitative indicators Personal evaluation

Behaviour surveillance

Cultural evaluation

Interaction Internal audits Predefinition of procedures

Role of output control

Management meetings Personal appraisals

Performance-related pay

Shared performance goals

category code determines consists of

Informal communication

Pre-established targets

Link of performance judgement to results Concern with costs and revenues

Importance of output measures

Figure 12: Final Category Schema for the Analysis of Role-Specific Performance Evaluation

(3) Following the coding of the data material, each subsidiary was analyzed in detail. First, the analysis concentrated on each unit of observation separately in order to understand the subsidiary situation in depth, describe its characteristics and examine its performance evaluation on the basis of the codified interviews and additional material. The case description and analysis is the subject of chapter 6. This report presents detailed descriptions of each case including citations from the interviews in order to provide deep insights into the cases and render the analysis transparent and traceable. Yet, the general procedure of data analysis is clarified here in advance:

126

For each element of the contingency framework, the underlying codes are separately analyzed. All statements – from the interviews and additional data material – belonging to one code are examined. Potentially, new subelements of the initially codified elements emerge. The coded elements of the framework and their constituents are described and analyzed. For assessing the relevance of each element within the framework, the amount and frequency of their use is determined. Considering all equally coded statements and combining them in a concise argumentation finally leads to estimating the existence of the element on a five-point scale from “not at all” to “to a very high extent”.142 By taking into account all the evidence from the material, an estimation which is valid within the context of the case is reached (Scapens 1990: 275). Thus, the scale is no absolute scale, but only applicable to this empirical study. It is developed and refined in the course of the analysis in order to compare the subsidiaries and their performance evaluation.143 This procedure of data analysis is illustrated by two examples – the inflow of knowledge and the personal process of performance evaluation:  For determining the subsidiary role, the data material coded with the same code is separately analyzed for each subsidiary. For instance, all text passages coded as “inflow of knowledge” for the subsidiary in question are selected. Then, the statements on knowledge inflow are distributed according to the eight types of know-how used as indicators (see subsection 5.2.1.2). The interviewees at subsidiary level have been asked to rate each inflow on a five-point scale from “not at all” to “to a very high extent” so that a level of knowledge inflow can easily be derived. However, this estimation is not adopted without reflection.144 Supporting statements are searched in the other statements coded as “inflow of knowledge”. In the case of contradictions between interviewees, average values are adopted when they are conceived as trustable. Wherever estimations from the subsidiary perspective oppose the headquarters’ point of view, priority is granted to the headquarters’ point of view since headquarters representatives are able to compare the subsidiaries and thus provide the (for this research) decisive impression of the subsidiary role.145 Despite of the final classification according to the headquarters’ impression, different opinions on the subsidiary role are

142

143

144

145

The five-point-scale is chosen again since it is differentiated but not excessively detailed. Further subdividing the scale does not seem to be reasonable since the classification has to remain traceable. See Hutzschenreuter et al. 2005 for a similar approach. As one step in his “typological analysis”, Kuckartz also proposes to attach values to the categories or codes in order to be able to conduct comparisons later on (Kuckartz 2005: 103). Scrutinizing and questioning is essential for qualitative data analysis to reach correct conclusions (Hartley 1994: 220-221). The same procedure was applied for determining the outflow of knowledge as well as the level of competence. For revealing the “strategic importance of the market”, it was slightly adapted since no rating was asked from the interviewees. Rather, the relevant statements on market volume, competition intensity, customer demand intensity and technological dynamism were analyzed to estimate their level on a five-point scale.

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addressed explicitely in the case description. They are understood as different facets of reality and displayed accordingly.146 In order to find out how headquarters execute the performance evaluation of each subsidiary, possible formal, personal and cultural components are separately analyzed. A personal process is, for instance, indicated by management meetings and personal appraisals covering performance evaluation. However, it is not only of interest to state that certain meetings or appraisals are held, but their number and frequency are considered in order to determine which possible way of evaluating performance – formal, personal or cultural – prevails. Therefore, all statements coded as “management meeting” and “personal appraisals” are analyzed. Different kinds of regular or irregular meetings and appraisals related to performance evaluation are discovered and described. Possible contradictions are again solved in favour of the headquarters perspective as evaluating unit. Then, depending on the amount and frequency of management meetings and personal appraisals, an overall rating for the personal element in performance evaluation on a five-point scale from “not at all” to “very large” is deduced.147 The evolving scales for the personal performance evaluation as well as for the formal and cultural elements are illustrated in Appendix V.

In the case that contradictions could not be solved by considering the statements attached with the same code or unordinary gaps became apparent during the analysis, interviewees were contacted again. Additional questions were asked to get a better impression of the relevant issue. The new answers were added to the previous interview material, and the analysis of the category and/or codes in question was conducted again. The final data material is the basis for the case description presented in chapter 6. Proceeding from the unit-by-unit examination, pattern matching which is common for causal case studies is conducted (Scapens 1990: 275-276, Ahrens/Dent 1998: 2730, Lee 1999: 76, Ghauri/Grønhaug 2002: 176). The performance evaluation of each subsidiary is compared to the predictions on its role in order to find out if systematic patterns exist. A proposition can be accepted if a supporting systematic pattern is found (Ghauri/Grønhaug 2002: 215). When several subsidiaries fulfil the same role, 146

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Thereby, it is intended to treat differing perspectives not as true or false, but to present them as they occur (Ghauri 2004). Based on different indicators and codes, the same procedure is used for describing and assessing formal and cultural performance evaluation. Similarly, the content of performance evaluation is analyzed, too. A more complex approach is necessary for revealing the role of performance evaluation. Here, the use of each control object is separately assessed first. The statements coded with the relevant indicators are analyzed to determine their use. This is, for instance, the use of expatriates, predefined procedures or pre-established targets. Based on the interviewees’ statements, the amount and/or frequency of the control mechanism are determined and lead to a rating for each indicator on a five-point scale from “not at all” to “to a very high extent”. The use of input, behaviour and output control is then derived as average of the values of the relevant indicators. Finally, the role of performance evaluation is determined by comparing the use of output control to the use of the other two control objects.

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the case-specific findings on performance evaluation are also compared to one another in order to determine their consistency. After this individual analysis of each case, an analysis across the subsidiaries of Eucom and Gloneer is conducted. The performance evaluation of the subsidiaries fulfilling the same role is compared and contrasted with the propositions. This crosscase analysis aims at enhancing understanding and explanation (Miles/Huberman 1994: 173). Although statistical generalization cannot and is not intended to be reached, the comparison can enhance confidence in the findings through replication (Scapens 1990: 270, Yin 1993: 50, Hartley 1994: 226).

5.5 Review of the Research Approach Proceeding from the detailed description of the research design and research process the chosen approach is reviewed in this section. Following Yin, four criteria to evaluate qualitative case study research are distinguished and applied to this study (Yin 2003: 33-39): construct validity (1), internal validity (2), external validity (3) and reliability (4). These evaluation criteria which are known from assessing the quality of quantitative empirical studies are adapted to the qualitative research approach.148 (1) Construct validity refers to assessing a construct based on correct indicators. Clearly identifying indicators, using multiple data sources, presenting a chain of evidence and providing a draft version of the case report to key informants are ways of enhancing construct validity (Bryman 1989: 164-165, Brownell 1995: 61-62, Yin 2003: 35-36). They are used as follows:  By largely relying on existing operationalizations derived from literature (see section 5.2) to build the initial category schema, indicators for assessing the elements of the contingency framework were defined. New indicators which emerged during the data analysis were made explicit in the final category schema. In addition, the attributed statements were compared for each code in order to guarantee their belonging to the code and their accurate targeting of the indicator.149  Data was collected from multiple sources at headquarters level and at subsidiary level. The aim was to gain deep insights and reach a profound understanding of the cases. This was achieved by combining findings from interviews at 148

149

Emphasizing the differences between quantitative and qualitative empirical research, some authors opt for formulating “new” evaluation criteria which are argued to be more specific to qualitative research (see, for instance, Flick 1995: 252-258, Steinke 1999). Brühl and Buch, in contrast, argue in favour of adopting the same evaluation criteria in quantitative and qualitative empirical research (Brühl/Buch 2006). Miles and Humberman combine the “new” terms for qualitative research with the “traditional” criteria from quantitative research which is also done here (Miles/Huberman 1994: 277-280). This is similar to the idea of semantic validity addressed by Weber 1990: 21.

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headquarters and subsidiary level and by asking additional questions in the case of gaps or unexplainable contradictions. Thereby, the combination between personal and telephone interviews proved to be valuable.150 It has to be admitted that the analysis relies to a lesser degree on additional material besides the interview transcripts. This is due to two reasons: First, the majority of the interview partners did not agree on providing copies of excel-tabels with (confidential) financial data, balanced scorecards or similar written documents. Second, in the case of gaining access to this type of data, interview statements were essential to understand its real relevance. At one subsidiary, for example, where a Balanced Scorecard is implemented, the interviewees clearly expressed that this instrument is of limited use and relatively low importance for performance evaluation. Analyzing the data material by itself would lead to wrong conclusions. Instead, meaningful insights can only be reached by combining data material with the findings from the interviews. The chains of evidence will become apparent in the following chapter, when detailed descriptions of the cases are presented. Each chain of evidence was established by describing the role and performance evaluation of each subsidiary according to each element of the contingency framework. Conclusions on the values of the indicators were drawn based on systematic argumentations. Despite of aiming at very high transparency, some interpretations with regard to the coding process and the analysis remain hidden to the reader.151 Key informants at headquarters level were asked for their feedback on the findings. After the collection of subsidiary managers’ perceptions, the subsidiary roles were discussed again with them (see P10: 816-1219). This led to a concluding determination of the subsidiaries’ positionings (see P12). In addition, the final case report was provided to key informants within both companies. While no changes or additional input was provided from the key informant at Eucom, one Gloneer representative made some additional comments which were added to the case description.

(2) Internal validity is achieved when potential rival explanations are eliminated. This requirement implies credibility and authenticity of qualitative research (Miles/Huberman 1994: 278-279). Pattern matching is a recommended strategy to enhance internal validity (Festing 1996: 192, Yin 2003: 36)152 and is thus conducted 150

151

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When comparing the number of codes per interview, no difference in their number could be revealed between interviews conducted in person and interviews conducted by phone. The information intensity seemed to be more related to the interview partner. While some interviewees provided extensive background information and answered interview questions at great length, others were more short-spoken no matter if the interview was conducted in person or by phone. These subjective judgements are inherent in the methodology of a qualitative content analysis (Wirth 2001, Früh 2004: 106-118). Pattern matching is suitable to this research since it departs from tentative propositions, aims at explanation and uses group comparisons. Consequently, other possible approaches like iterative explanation building, time-series analysis and logic models are ruled out (see Brownell 1995: 6264, Yin 2003: 120-133 for details on these strategies).

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after the individual analysis of each subsidiary. The empirical findings are compared to the initial propositions (see subsection 6.1.5 for the Eucom subsidiaries and subsection 6.2.11 for the Gloneer subsidiaries). Deviations are analyzed and might cause a refinement or rejection of the predictions. (3) External validity refers to the generalizability of the findings. This implies the transferability or fittingness of qualitative findings to other contexts (Miles/Huberman 1994: 279). Often, case study research is criticized for its lack of generalizability due to small sample sizes (Wrona 2005: 11). This criticism implies statistical generalization which is not possible and not even conceived as a goal of qualitative case study designs (Brownell 1987: 64-65). In contrast, according to Yin, case studies follow the logic of analytical generalization since empirical findings ought to be generalized to theory (Yin 2003: 37-38). Replicating initial findings is considered as an adequate strategy for achieving analytic generalization and thus external validity (Festing 1996: 192, Yin 2003: 37). Replication is also aimed at here by relying not only on one case study, but conducting two case studies. In addition, so-called face generalizability can be achieved when “there is no obvious reason not to believe that the results apply more generally” (Maxwell 1996: 97). When initial support for the propositions is found in the two cases, they might also be applicable to other cases. (4) In case study research, reliability concerns the whole research process. A third person should be able to replicate the case study and reach the same conclusions (Brownell 1995: 65). Due to the context specificity and the constitutive interaction between the researcher and the research object, a full replication is difficult to achieve. However, audibility and inter-subject comprehensibility can be reached (Miles/Huberman 1994, Steinke 2004: 186-188). Detailed documentation is considered as an adequate means for tracing the research process and making it “audible” (Miles/Huberman 1994: 278, Yin 2003: 38) and recoding of the material can confirm the reliability of the data analysis (Weber 1990: 17, Steinke 2004: 187).  The actual chapter on the empirical study aims at making the research procedure explicit for the interested reader. In addition, the cases are documented in detail by presenting each subsidiary individually in chapter 6. This case description is made anonymous for confidentiality reasons. However, all used data material including codified transcripts of all interviews and additional documents are handed over to the supervisor of this dissertation. The statements are partly quoted153 and referred to in the case description by citing the paragraphs of the interviews and/or the pages of the additional documents.  More than half of the interviews were recoded in order to assess the stability of the content analysis. The time frame of one week between the first and the second coding guaranteed impartiality. A stability or intra-coder reliability of more

153

When the real company names are mentioned, they are replaced by their alias used for this study in the quotation.

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than 90%154 was reached which is considered as an adequate level (Miles/Huberman 1994: 64). After having read this dissertation until the section on data analysis, a third person should also be able to recode the material since the conceptual background (see chapter 2 on the concept of performance evaluation and also chapter 4 on the contingency framework), the operationalizations (see section 5.2) and the coding schema (see section 5.4) are described in great detail. General evaluation criteria can be used to assess the “quality” of the chosen research design. In summary, it is shown that the selected approach meets the frequently demanded evaluation criteria. Proceeding from this presentation and reflection of the research design, the next chapter presents the empirical findings.

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According to Diekmann 2000: 493, the reliability is calculated as follows: r = 2E/(C1+C2) with r= reliability, E=number of equal codes, C1=total number of codes in the first coding, C2=total number of codes in the second coding.

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6 Empirical Findings Proceeding from the description of the research steps and the operationalizations of the elements of the contingency framework, this chapter presents the empirical findings. The first case “Eucom” is described, analyzed and discussed in section 6.1. This is followed by the second case “Gloneer” in section 6.2. Finally, both cases are compared and conclusions are drawn on the empirical findings in section 6.3.

6.1 Empirical Findings on “Eucom”

6.1.1

Introducing Eucom and Its Subsidiaries

Eucom offers communication networks for authorities, rescue services, security forces and enterprises. Thereby, it concentrates on project development (planning the network), project processing (installing the network) and after-sales services (maintaining the network). Almost all operational activities are outsourced so that production is in most cases limited to installation and putting into service (P3). The relevant market for Eucom is dominated by two different technologies. As Eucom took over one business unit of a competitor, it is now able to provide customized solutions based on both technologies (P2). The legal organization of Eucom is visualized in Figure 13 and can be characterized as follows: A holding structure is established with the Eucom headquarters located in France and several subsidiaries in France, Germany, Finland, Spain and Mexico. In spite of this legal set-up, a real distinction between headquarters and the French subsidiary is difficult to draw because functions and positions are partly overlapping. The CEO of Eucom is, for instance, also the CEO of the French subsidiary. The finance department is responsible for controlling the French business as well as the subsidiaries, branch offices and representative offices. Only a separate marketing and sales team is set up for the French market. However, Eucom’s global marketing function is also located at headquarters.

K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1_6, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

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French Subsidiary

German Subsidiary

Eucom HQ

Finnish Subsidiary

Spanish Subsidiary

BranchOffice Office Branch Branch Office

Representative Representative Representative Office Office Office

Mexican Subsidiary

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Figure 13: Legal Organization of Eucom

As the French subsidiary is not conceived as a stand-alone subsidiary and the Mexican subsidiary is in exactly the same position as the Spanish subsidiary, the following analysis concentrates on the German, the Finnish and the Spanish subsidiaries. These three subsidiaries can be classified according to Bartlett and Ghoshal’s as well as Gupta and Govindarajan’s role typology (see Figure 14). How these positions are exactly determined is shown in the next subsections. In the following, each subsidiary is separately introduced before describing its roles within Eucom in detail. Then, the performance evaluation of each subsidiary is analyzed. Following the order of the interviews, the German subsidiary is presented first (subsection 6.1.2). Subsequently, the roles and the performance evaluation of the Spanish subsidiary are described (subsection 6.1.3). Finally, the Finnish subsidiary is the subject of subsection 6.1.4. After having analyzed each subsidiary separately, the findings will be discussed and compared to the initial propositions (subsection 6.1.5).

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Adapted and simplified from an internal Eucom document (P8: 11).

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Bartlett/Ghoshal

very high

Contributor

Strategic Leader

very high

Global Innovator

Integrated Player

Outflow of knowledge

Competence of local organization

Finland Germany Spain

Implementer not at all

Gupta/Govindarajan

Black Hole

Strategic importance of the market*

Germany

Spain

Local Innovator very high

not at all

Finland

Implementor

Inflow of knowledge

very high

* See subsection 4.2.2.1 on the adaptation of the original dimension “strategic importance of the local environment“ presented by Bartlett and Ghoshal to the more appropriate dimension “strategic importance of the market“.

Figure 14: The Roles of the Eucom Subsidiaries

6.1.2

The German Subsidiary of Eucom

The German subsidiary of Eucom has around 400 employees (P2). It is slightly exceptional within Eucom for two reasons: First of all, the German Eucom subsidiary consists of several regional branch offices conducting sales and support activities within Germany and has thus a decentralized organizational structure (P2). Second, the German subsidiary offers two speciality product lines which no other unit provides within Eucom (P1, P2). This special set-up of the German subsidiary is planned to be changed. Activities are supposed to become more centralized in the German national headquarters (P2). In addition, a further concentration on the core business of Eucom is pushed forward and goes hand in hand with abandoning the speciality product lines (P2). In order to compensate for this, new customers in selected industries are addressed with solutions based on the two core technologies (P2). In the following, the roles of the German subsidiary are described (subsection 6.1.2.1) before providing details on how the Eucom headquarters evaluates the performance of the German subsidiary (subsection ).

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6.1.2.1

The Roles of the German Subsidiary – Contributor and Global Innovator

According to the Eucom headquarters, the German subsidiary is seen as Contributor (P1). The same position is also attributed by the CEO of the subsidiary (P2). In the following, the Contributor role of the German subsidiary is illustrated by arguing for a lower than medium strategic importance of the market (1) and a higher than medium level of competence (2). (1) The lower than medium strategic importance of the German market results from a medium to high market volume, medium competition intensity, medium customer demand intensity and low technological dynamism.  The German subsidiary of Eucom is responsible for the German market (P2). This is the largest country market for Eucom products in Europe (P2, P6). However, the French as well as the Finnish subsidiary target the world market with their technologies so that, in comparison, the market volume of the German subsidiary is only seen at a medium to high level.  Within its market, the German subsidiary competes mainly with three competitors, but considers itself to be the main player (P2). Competition for the main national network in Germany was very intense, though in the end, it was decided in favour of the German subsidiary. In one of its speciality product lines, the German subsidiary is the only remaining player, while in the other speciality product line it is second behind one competitor (P2). Thus, the overall competition intensity for the German subsidiary of Eucom is considered to be medium.  According to a subsidiary representative, it is often argued that German customers are exceptionally demanding (P2). Still, these high demands are unlikely to be specific for Germany (P2). Rather, all Eucom customers request secure and reliable solutions with state-of-the-art technology (e.g., P2, P5). Due to the specifications demanded by the customers, the demand intensity is seen at a medium level.  While authorities in many European countries have already opted for new digital technology for their main network, the German national network is still based on analogue technology (P2). Finally, a large project was awarded for changing to digital technology. Nevertheless, this late adoption reveals a low technological dynamism in the German market compared to other country markets. (2) The German subsidiary of Eucom is active in research and development, logistics and distribution, purchasing, production, marketing and sales, human resource management and general management. Its higher than medium level of competence derives from these value-chain activities and is summarized in Figure 15:  Research and development: The German subsidiary of Eucom has a technological competence (P1) which is less of a research and more of a development competence (P2). A further reduction of the development activities in the German subsidiary is planned for the near future (P2). Nevertheless, the

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current level of competence in research and development is seen at a medium level (P1). Purchasing: In purchasing, the German subsidiary benefits from belonging to the EADS organization and mostly purchases within EADS frame contracts (P2). The only purchasing competence of the local organization is in execution (P2). Thus, the German subsidiary is conceived as competent “to a little extent” in purchasing (P2). Logistics and distribution: Logistics and distribution is no core activity at the German subsidiary, and the competence level is considered to be adequate for this (P6). Thus, a medium level of competence is stated for the German subsidiary (P6). Production: The only remaining production unit within Eucom is in Germany (P1). As production is no longer a core activity at Eucom (P2, P3), these operations are planned to be abandoned (P2). Nevertheless, the production competence is still needed because the German subsidiary cannot completely rely on existing external suppliers. Rather, it is looking for a long-term partner taking over its production activities (P2). In addition, the German subsidiary has a long experience in the latest part of production, which consists of installing the network and putting it into service (P2). All in all, the German subsidiary currently has a high level of competence in production (P6). Marketing and sales: The German subsidiary has built up strong relationships with its customers during the last 40 years (P2). This customer base is used for marketing purposes and for selling new products (P2). Furthermore, the German subsidiary is seen as a competence centre for business development in selected industries – for example airports (P2). In collaboration with the global marketing function at the Eucom headquarters, the German subsidiary approaches airports also in the home countries of other subsidiaries (P2). Thus, the overall competence level in marketing and sales is seen as high (P2). Human resource management: The administrative part of human resource management is conducted as shared services within the division Eucom belongs to (P8). A local human resource manager is responsible for the management of people in the German subsidiary (P8). Potential for improvement in human resource management for the German subsidiary is seen in terms of “empowerment” of people, integration of new employees and the definition of key personnel (P2). Therefore, the level of competence in human resource management is medium (P2).

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General management: The level of competence in general management is considered to be very high from the subsidiary perspective (P6). However, the complexity of the business of the German subsisidary is lower than the one which the French and Finnish subsidiaries face (P1). Consequently, the level of competence is argued to be high in comparison with the other Eucom units (P1).

Competence Level of the German Subsidiary of Eucom to a very high extent

to a high extent

Competent

medium

to a little extent

not at all

Research Purchasing & development

Logistics & distribution

Production

Marketing & sales

Human General resource management management

Relevant Value-Chain Activities

Figure 15: The Level of Competence of the German Subsidiary of Eucom

The German subsidiary is not only seen as a Contributor in Bartlett and Ghoshal’s role typology, but also as a Local Innovator and almost a Global Innovator in Gupta and Govindarajan’s role typology (P1, P2). When analyzing the knowledge inflows and outflows in detail, a low to medium inflow and a slightly above medium level of knowledge outflows is found, supporting a Global Innovator position of the German subsidiary. The knowledge flows are characterized as follows and illustrated in Figure 16:  Market data on customers: The inflow of market data on customers is established to a little extent between the German subsidiary and other units of Eucom (P2). The outflow of this knowledge is also considered to be low (P2). As several customers are specific to the German subsidiary (P1), this knowledge flow is restricted (P2). But when taking industrial clients into account, where the German

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subsidiary can rely on experience (P2), a medium to high level of outflow is derived. Market data on competitors: At the same time, the inflow and the outflow of market data on competitors are considered to be high (P2). As Eucom has primarily one major competitor, an exchange of information is easy. Product designs and process designs: These types of know-how are understood as knowledge on the technology and the Eucom products for project development and execution (P2). Here, one subsidiary manager sees knowledge inflows to a little extent (P2). Incorporating the technology inflows provided by the Finnish and French subsidiaries as technology owners and process provider (P1, P2), the level of knowledge inflow is argued to be at a medium level. At the same time, the German subsidiary provides this type of knowledge to other units within Eucom to a high extent (P1, P2). This is possible due to the technological competence available at the German subsidiary as well as its long experience (P1, P2).

Inflow of knowledge

Eucom: German Subsidiary

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs

Marketing know-how

Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 16: Knowledge Inflows and Knowledge Outflows at the German Subsidiary of Eucom



Marketing know-how: Marketing know-how is to a high extent provided by other units to the German subsidiary (P2). The outflow of this type of knowledge departing from the German subsidiary is considered to be even higher (P2). Based on its past experience, the German subsidiary has, for example, an

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extensive knowledge about airports and tries to provide this knowledge to other units for addressing potential customers outside Germany (P2). Purchasing know-how: In contrast, purchasing knowledge is transferred in neither direction (P2). In addition, no knowledge flow concerning distribution is detected between the German subsidiary and other Eucom units (P6). Management systems and practices: This type of know-how is flowing to the German subsidiary to a medium extent (P1, P2), while best-practices are transferred the other way around from the German subsidiary to other units of Eucom only to a little extent (P2).

6.1.2.2

The Evaluation of the Performance of the German Subsidiary

In this subsection, the performance evaluation of the German subsidiary is described. This is done within all three dimensions of performance evaluation: the role of performance evaluation in the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3). (1) By describing the control mix used by headquarters towards the German subsidiary, the role of performance evaluation is derived. The level of input control and the level of behaviour control are assessed before revealing the level of output control and consequently also the role of performance evaluation. Input Control: For the German subsidiary, a low level of input control can be stated since no expatriate managers are used, the Eucom headquarters has a medium influence on the hiring process and no trainings are provided by headquarters.  In general, the use of expatriates is not conceived as control mechanism (P2). “This should not be seen as a management instrument but as an integration topic“156 (P2). Rather, the transfer of managers for integration purposes throughout Eucom is favoured (P1, P2). “And we now need to accomplish an exchange in this group. That a Finn comes to Germany, a German goes to Finland or France or the other way around”157 (P2). Currently, however, these transfers are limited (P2) and no managers are sent from the French headquarters to the German subsidiary (P1, P2).  A special overlap in positions secures headquarters’ influence on hiring at the German subsidiary (P2): The manager responsible for human resource management in the board of Eucom is also the local human resource manager at the German subsidiary. Still, it is stated “that we have plenty of rope”158 (P2). No 156

157

158

Translation of “Das ist nicht als Führungsinstrument, sondern als Integrationsthema zu sehen.“ (P2). Translation of “Und wir müssen das jetzt schaffen, dass wir einen Austausch in dieser Gruppe finden. So dass ein Finne nach Deutschland kommt, ein Deutscher nach Finnland geht oder nach Frankreich und andersrum.“ (P2). Translation of “dass wir freie Hand haben“ (P2).

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explicit headquarters’ approval for new hires is required (P2). Still, a certain amount of coordination on a more informal level is undertaken between headquarters and the German subsidiary (P2). Therefore, the overall influence level on hiring is argued to be medium. Trainings are restricted to technical trainings which are either provided at the French or the German subsidiary (P1). The Eucom headquarters itself does not provide special trainings to German managers or employees (P1, P2).

Behaviour control: Three different aspects of behaviour control – behaviour surveillance, predefinition of procedures and interaction – become apparent. Comparing their use helps to reveal a high level of behaviour control for the German subsidiary:  The subsidiary managers contrast behaviour surveillance with “empowerment” and argue that “there should be no guidelines – you have to do this or that today; rather achieving the goals individually and for the group”159 (P2) is what is supposed to count (P2). Nevertheless, the current practice at the German subsidiary deviates from this ideal to some extent: The Eucom headquarters is (still) observing “how the respective unit implements its goals and tries to influence it”160 (P2). In addition, not all project decisions can be taken by the German subsidiary itself. Approval thresholds are defined throughout Eucom (P1) so that designated headquarters representatives survey offers, bids and projects of a defined volume (P1, P8). In summary, behaviour surveillance is seen at a medium level.  Throughout Eucom a so-called “Blue Book” was implemented (P8). This handbook provides details on the structure of Eucom and its key processes (P8). Furthermore, it defines detailed rules for bids, offers, approvals of projects as well as inter-company trades and demands for the formal documentation of these activities (P8). The high level of detail provided by the Blue Book calls for a high predefinition of procedures in all Eucom subsidiaries. Consequently, projects are conducted according to the headquarters’ rules at the German subsidiary (P2). In addition to these procedures required by the Eucom headquarters, there are company and business unit-wide rules in reporting as well as in risk management (P8). “There are rules. And thus, our holding, our headquarters has to fulfil these requirements. And you can only fulfil them when you transfer the requirements to the particular subsidiaries.”161 (P2). Considering the Blue Book and the additional rules, the predefinition of procedures by headquarters is conceived to be high for the German subsidiary. 159

160

161

Translation of “Es sollte keine Vorgaben geben, du musst heute das machen und jenes machen, sondern einfach nur die Ziele individuell und für die Gesamtgruppe zu erreichen.“ (P2). Translation of “wie setzt die jeweilige Einheit diese Ziele um und versucht es mit zu beeinflussen“ (P2). Translation of “Dort gibt es Vorgaben. Und dementsprechend muss unsere Holding, unsere Muttergesellschaft diese Anforderungen erfüllen können. Und die können Sie nur dann erfüllen, wenn Sie diese Vorgaben, die hier erfolgen auch weitergeben und weiterreichen an die einzelnen Töchter.“ (P2).

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A certain behaviour control can also be seen in the frequent interaction between headquarters and the German subsidiary. A tight meeting structure is set up: Once every quarter the CEO of the German subsidiary meets his fellow CEOs from France and Finland as well as the management board of Eucom and the heads of all functions at headquarters (P1, P2). In addition, the CEO of Eucom visits the German subsidiary every two months (P6). Furthermore, meetings are established at the functional level when, for instance, the CFO of Eucom meets the CFOs of the subsidiaries every two months (P1). These meetings are used for reviewing the current business, but also to address “the presentation of and decisions on special topics”162 (P1). In addition to these planned meetings, headquarters and subsidiary representatives of the German subsidiary meet spontaneously in the case it is needed (P2). Projects and activities are discussed: “There we have got a problem, how do we handle it, what are we going to do?”163 (P2). These interactions are expected to be used by headquarters to exert influence on the activities and behaviour at the German subsidiary. Due to its frequency, the interaction between headquarters and the German subsidiary is seen at a very high level.

Output control: The high level of output control at the German subsidiary is reflected in a high use of pre-established targets, in a medium use of performance-related pay and in a very high link of performance judgement to (financial) output:  The German subsidiary is evaluated against pre-established targets at two levels (P2): the subsidiary level and the individual level.164 For the subsidiary level, targets are agreed between the management board of Eucom and the management of the German subsidiary in a so-called target setting conference (P6). These financial, non-financial and qualitative targets are then further broken down to the different departments within the German subsidiary (P6). Thus, goals are also pre-established at functional level within the MNC. As a second component, target agreements are set for the individual managers (P1, P2). “These can be financial goals, these can be project goals, these can be organizational goals”165 (P2). These individual targets are signed by each top manager of the German subsidiary and his line manager at headquarters. The CFO of Eucom, for instance, agrees on individual targets with the CFO of the German subsidiary (P2). Individual target agreements are also implemented at lower hierarchical levels in the German subsidiary (P2). As targets are set both at subsidiary and at individual level and cascaded down in both cases, the use of pre-established targets for the German subsidiary is seen as high. 162 163 164

165

Translation of “Spezialthemen, über die hier berichtet und entschieden wird“ (P1). Translation of “Da haben wir ein Problem, wie gehen wir damit um, was machen wir?“ (P2). In addition, one of the interviewees mentioned so-called “service-level-agreements” as targets for each department at the German subsidiary (P2). As these agreements cover the usage of support functions of the group, they are not set between the Eucom headquarters and the German subsidiary and thus are not conceived as target agreements here (P6). Translation of “Das können finanzielle Ziele sein, das können Projektziele sein, das können Organisationsziele sein.“ (P2).

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The pay of the first management tier at the German subsidiary has a variable portion which is performance-based (P1, P2). “That is the carrot”166 (P2) – the incentive to trigger performance of the management. Due to German tariff law, it is difficult to implement performance-related pay also at lower hierarchical levels (P2). Thus, the use of performance-related pay is seen at a medium level because only the top management tier is affected. For each top manager at subsidiary level, the pre-established targets are then used to judge his performance from a headquarters perspective (P2). Very often a certain sales volume and EBIT level are set as targets (P1). These “hard facts” have a higher importance than “softer” targets (P2). “For the time being, the soft goals are secondary”167 (P2). In addition to evaluating the individual “output”, the financial output of each project in terms of sales volume, cost of sales, gross margin and EBIT is assessed (P8). Overall, output measures – and especially financial output measures – are highly important for controlling the German subsidiary. Thus, the link between performance judgements and results is conceived to be very high.





In summary (see also Table 27), the control relationship between the Eucom headquarters and the German subsidiary is characterized by a low use of input control, a high use of behaviour control and a high use of output control. As output control and behaviour control are both used to a high extent, a medium relative weight in the control mix is indicated for performance evaluation.

Control Objects at the German Subsidiary Input Control

Behaviour Control

Output Control

 no use of expatriates

 medium level of behaviour

 high use of pre-established

 medium influence of

surveillance  high predefinition of procedures

 medium use of performance-

 very high interaction

 very high link of performance

headquarters on hiring new managers  no training provided by

targets related pay

headquarters  low use of input control

Table 27:

judgements to results  high use of behaviour control

 high use of output control

The Control Mix Used for Eucom’s German Subsidiary

(2) Having revealed an important role of performance evaluation for the German subsidiary, the content of this evaluation is analyzed now.

166 167

Translation of “das ist die Karotte“ (P2). Translation of “die Softziele sind z.Zt. noch ein bisschen so nebenbei.” (P2).

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Financial measures: The performance of the German subsidiary is mainly “measured in terms of hard key performance indicators, such as order intake, sales, margin and cash“168 (P2). In addition, EBIT is an important performance measure for the German subsidiary and all other Eucom subsidiaries (P2). EBIT is derived from the profit and loss statement (P&L), while the margin is calculated on a project basis and reflects the profit realized in projects (P2, P8). A strong focus on financial measures becomes apparent (P1, P2, P8). The main financial measures are even reported on a weekly basis and further details on the financial results are assessed every month (P2, P8). Thus, “the hard facts are currently those which really count”169 (P2). When it comes to the comparison standards used in evaluating the German subsidiary, the main focus is placed on the comparison to the budget for each month (P1). No official benchmarking is conducted between the subsidiaries, but indirectly the subsidiaries compare themselves with each other based on management reports (P2). “Everybody is asking the question: “Why is Spain at present in this situation, why does Germany look like this and why is France in that position?”170 (P2). Non-financial measures: Furthermore, order intake becomes more concrete when measuring the performance of the subsidiary in winning a specific project. Winning a certain contract can be formulated as a target at subsidiary level and is considered to be relevant for the performance judgement (P6). Qualitative indicators: Qualitative indicators play a minor role for the German subsidiary (P2). They can be found in the target agreements at subsidiary and/or at individual level when project or organizational goals are integrated (P2). “Presently, we are concerned with the soft topic of changing the management team and the culture as well as the customer approach and the customer focus”171 (P2). These topics are conceived as enabler of future financial performance (P2). The content of performance evaluation for the German subsidiary is summarized in Table 28. While less emphasis is placed on non-financial and qualitative indicators, a predominance of financial measures is observed.

168 169 170

171

Translation of “gemessen in harten KPIs, wie Auftragseingang, Umsatz, Marge, Cash“ (P2). Translation of “die Hard Facts sind zurzeit diejenigen, die entscheidend greifen.“ (P2) Translation of “stellt sich natürlich jeder die Frage `Warum ist Spanien derzeit so angesiedelt, warum sieht es in Deutschland so aus, warum ist Frankreich so angesiedelt?´“ (P2). Translation of “Wir haben z.Zt. so als softes Thema hier, dass wir den Umbau dieses ManagementTeams vorannehmen, einen Umbau der Kultur, ein Umbau des Kundenzugangs, des Kundenfokus.” (P2).

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Content of Performance Evaluation of the German Subsidiary Financial High emphasis on:  order intake  sales  EBIT  project margin

Non-financial Medium emphasis on:  winning certain contracts

Qualitative Low emphasis on:  additional indicators related to specific internal projects

 cash

Table 28:

The Content of Performance Evaluation of Eucom’s German Subsidiary

(3) The process of performance evaluation of the German subsidiary has formal, personal and cultural elements, which can be characterized as follows: Formal: The formal performance evaluation of the German subsidiary is conducted via written management reports, project reports, monthly flash reports and additional detailed monthly financial reports. All in all, these elements show a very large formal element of the performance evaluation process.  The German subsidiary sends weekly management reports to the CEO of Eucom (P1, P2, P6). These so-called “flash reports” cover “three to four points, which in our opinion have proceeded well or not”172 (P2). “If you have such a flash every week, you are relatively well informed about what is going on even if you are actually far away.”173 (P1).  In addition to the weekly flash reports, monthly project reports are provided by the German subsidiary so that the Eucom headquarters is able to evaluate performance of each project (P6, P8). Twice a year the project reports are supplemented with a “cost to completion”-calculation (P1, P8).  Usually at the end of each month, a so-called “flash report before closing” is supplied by the German subsidiary to headquarters with the aim of providing “a rough tendency on where the monthly result is going to be.”174 (P6). At the beginning of the following month, the so-called “flash report after closing” is required, where actual figures are reported (P6).  In addition, a fairly detailed financial report is provided by the German subsidiary to headquarters during the first week of each month (P8) “where you list all activities, explain why a deviation of the results has occurred, why the cashsituation differs from the plan to some degree, how the balance sheet looks like

172

173

174

Translation of “das sind drei-vier Punkte, wo wir sagen, die sind gut gelaufen, die sind schlecht gelaufen“ (P2). Translation of “Wenn Sie jede Woche so einen Flash haben, dann sind Sie relativ nah am Geschehen, obwohl man weit weg ist.“ (P1). Translation of “eine grobe Tendenz, wo wird das Monatsergebnis hinlaufen.” (P6).

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and so on.”175 (P2). Information on sales, order intake and margin by project are also included in this monthly financial report (P8). The same information is collected by headquarters every quarter as part of the budget revision process (P8). Personal: Besides these formal elements, performance evaluation is also part of frequent management meetings and conference calls. Furthermore, it becomes apparent in personal appraisals so that a large personal element is observed.  Every month, operative business reviews of all projects are conducted via conference calls (P1). The CEO, the CFO and the directorate of marketing and sales from the headquarters side and their counterparts at the German subsidiary participate (P1). “And then all projects are looked at on the basis of a reporting list. Many of them we look at and say: `Okay, nothing new to report.´ But then there are also some where we realize that the margin is dropping or additional business opportunities appear etc.”176 (P1). These conference calls are mainly established to evaluate the performance of each project conducted at subsidiary level.  In addition to the monthly financial report, a personal discussion is held on its content usually once a month (P2). “There are phone conferences, video conferences, there are plenty of possibilities. We from the finance function have decided to have a personal meeting at least once every quarter.”177 (P2). Thus, a personal discussion of the financial results is frequently undertaken.  Furthermore, regular CEO review meetings are held at the German subsidiary. The CEO of Eucom intents to visit the German subsidiary once a month (P2, P6). Due to his tight schedule, these review meetings are normally held only every two months (P6) but “then we conduct a review with him”178 (P2).  Targets between the top managers in the German subsidiary and the Eucom board members are agreed on at the beginning of each year. One year later, individual appraisals are conducted to reflect the actual situation and to provide feedback on the target achievement (P6). “Then both would say `We wanted to do this and that. Where are we standing today?´”179 (P2).

175

176

177

178 179

Translation of “wo Sie alle Aktivitäten aufführen, wo Sie darlegen, warum ist eine Ergebnisabweichung abgelaufen, wieso sieht die Cash-Situation ein bisschen anders aus als geplant, wie sieht die Bilanz aus usw.“ (P2). Translation of “Und dann werden anhand der Reporting-Liste die einzelnen Projekte durchgegangen. Da gibt es viele, die gehen wir durch und sagen: `Komm, nichts Neues, nichts zu berichten.´ Aber dann gibt es auch welche, wo man sieht, oh, da rutscht die Marge ab oder da gibt es ein Mehrgeschäft usw.” (P1). Translation of “Dafür gibt es Telefonkonferenzen, dafür gibt es Videokonferenzen, dafür gibt es viele Möglichkeiten. Mindestens ein Mal pro Quartal haben wir uns in der Finanzschiene vorgenommen, uns persönlich zu treffen.“ (P2). Translation of “dann machen wir mit ihm ein Review” (P2). Translation of “dann würden die beiden dann sagen: `Wir wollten das und das machen. Wo stehen wir da eigentlich heute?´“ (P2).

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Cultural: In addition to the formal and personal performance evaluation, a cultural process is established through informal communication and largely shared performance goals:  The frequent personal meetings which were addressed above (see “interaction“ as part of behaviour control) foster a common understanding (P2). There, informal communication with headquarters is noticed as well as during the frequent phone calls. Furthermore, the management linkages between headquarters and the German subsidiary trigger informal communication. The CFO of Eucom has, for instance, an office at the German subsidiary site and at headquarters. Additionally, the manager responsible for human resources at Eucom is also managing this function at the German subsidiary. All in all, informal communication between headquarters and the German subsidiary is seen at a high level.  In general, the German subsidiary follows the same performance goals as headquarters (P1, P2). Nevertheless, the cultural integration has not been completed yet (P2). “I believe we are really on the right track in this respect.”180 (P2). The CEO of Eucom visits the German subsidiary twice a year and speaks to all the employees in order to foster shared values and goals (P2, P3). Performance goals are not completely but largely shared since the management of the German subsidiary “is in line”181 (P1) with headquarters’ expectations. In summary, the process of evaluating the performance of the German subsidiary is dominated by formal and personal elements, while the cultural element becomes apparent to a smaller degree (see Table 29 for an overview).

Performance Evaluation Process of the German Subsidiary Formal

Personal

 weekly management reports

 monthly project review

 monthly project reports

conference calls  personal discussions of the monthly financial reports  regular business review meetings once per month to every two months

 monthly flash reports before

and after closing  detailed monthly financial

reports

Cultural  frequent informal

communication  largely shared performance

goals

 personal appraisals of target

agreements once a year  very large formal element

Table 29:

180 181

 large personal element

 medium to large cultural element

The Performance Evaluation Process of Eucom’s German Subsidiary

Translation of “also, ich glaube, dass wir da wirklich auf einem guten Weg sind.” (P2). Translation of “ist auf Linie.“ (P1).

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6.1.3

The Spanish Subsidiary of Eucom

The Spanish subsidiary of Eucom has more than 50 employees. During its existence of almost 50 years, it has experienced a lively history of takeovers. First, the unit belonged to a German telecommunication company then to a German conglomerate and finally to a French company before being moved into the EADS world (P4). The Spanish subsidiary is active in the core business of Eucom and has abandoned all other activities in recent years (P3). Its roles within Eucom are described next (subsection 6.1.3.1). Then details on the performance evaluation of the Spanish subsidiary are presented in subsection 6.1.3.2.

6.1.3.1

The Roles of the Spanish Subsidiary – Implementer and Local Innovator

From a headquarters perspective, the Spanish subsidiary is conceived as Implementer (P1). Due to a higher estimated level of competence, the subsidiary sees itself in a Contributor role (P3). The following discussion intents to establish first a low to medium strategic importance of the market (1) and then discusses the competence level of the Spanish subsidiary (2). (1) The market of the Spanish subsidiary is considered to have a low to medium strategic importance for Eucom. This is due to a low market volume, medium competition intensity, medium customer demand intensity and low technological dynamism.  A few years ago, the Spanish subsidiary was responsible for Spain, Portugal and Latin America (P3). But nowadays, it is primarily taking care of the Spanish market (P3). The main communication network in Spain has already been established by the Spanish subsidiary so that the future market potential is limited (P3) and seen at a low level compared to the markets of other Eucom subsidiaries (P6).  The Spanish subsidiary is in a favourable competitive situation because of having installed the main network in Spain (P3, P4). “We are in the driver’s position because we have most of the market” (P3). In addition, the Spanish subsidiary benefits from a strong partnership with the largest operator in Spain (P3). Still, the Spanish subsidiary needs to fight against competitors in order to win new (smaller) contracts (P3). For this reason, competition intensity is not seen at a low but at a medium level.182  For the Spanish subsidiary, customer demands are argued to be intense (P3). Due to extensive specifications and long awarding procedures, the maturity of new projects can take up years (P3). As these customer demands are not specific 182

From the subsidiary perspective, competition intensity is characterized as “very strong“ and “very tough“ (P3), but this statement is attributed to the competition for smaller local networks (P3). At the same time, maintenance and extensions of the main network are in the hands of the Spanish subsidiary (P2).

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to the Spanish market (P2) but confront Eucom in all countries, the customer demand intensity is considered to be medium. As the Spanish subsidiary has a dominant position in its market without having research and development activities (P1, P3), no special innovativeness is attributed to the Spanish market. In general, the market potential of public telecommunication networks is smaller than the private telecommunication market so that money and effort put into innovation are considered to be low (P3). In addition, the companies developing the technologies need to agree on common standards (P3). Consequently, the level of technological dynamism is conceived to be low.

(2) The competence level of the Spanish subsidiary is not easy to establish. It is estimated at a high level from the subsidiary, while the Eucom headquarters conceives it as low. The Spanish subsidiary is active in purchasing, logistics and distribution, the final part of production, marketing and sales, human resource management and general management. Research and development is not conducted by the Spanish subsidiary (P3, P4). The level of competence in the different value-chain activities is described in the following and deduced to be slightly lower than medium (see also Figure 17 for a summary):  Purchasing: The Spanish subsidiary receives most of its purchases through the EADS organization (P3, P4). Thus, only support activities are undertaken at the local level (P3). Therefore, the Spanish subsidiary is seen as competent in purchasing “to a little extent” (P4).183  Logistics and distribution: The competence in logistics and distribution is rated as “to a high extent” (P3, P4). This is caused by the experience of the Spanish subsidiary in the distribution business. Until recently, the Spanish subsidiary acted as a distributor in the Spanish market, but by now this activity has been abandoned (P4). However, this competence is transferred to the current activities of the Spanish subsidiary and is used to sell the new technology provided by the Finnish subsidiary in the Spanish market (P4).  Production: Only the latest step of “production” which can be seen in the installation and putting into service of the network is conducted by the Spanish subsidiary (P3, P4). All other production activities are outsourced (P3) so that the overall production competence is seen at a medium level (P4).  Marketing and sales: A high level of competence is also attributed to marketing and sales (P3, P4). Here, a major competence is seen in the knowledge about and cultural proximity to Latin American countries (P3, P4). In addition, the strong relationship to the largest Spanish operator is conceived as a chance to strengthen the position of Eucom in Latin America (P3). Nevertheless, the Eucom headquarters does not grant the market responsibility for Latin America to the Spanish subsidiary (P3). The high marketing and sales competence of the Spanish subsidiary seems to be either not valued or questioned by headquarters. 183

Nevertheless, for the local support activities the level of competence is judged to be high (P3).

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Thus, the overall competence level in marketing and sales is judged to be medium for the Spanish subsidiary. Human resource management: The level of competence in human resource management is stated as medium to high (P3, P4). At the same time, it is conceived as being negligible because of the small size of the company (P3). In this area, support is also received from the group (P3). Thus, the overall competence in human resource management is seen at a low to medium level. General management: From the subsidiary perspective, a high competence level is exposed in general management (P3, P4). However, the business complexity which the Spanish subsidiary faces is lower than the one confronting the other Eucom units (P1). Thus, the level of competence in general management is conceived to be medium compared to the other Eucom subsidiaries (P1).

Competence Level of the Spanish Subsidiary of Eucom to a very high extent

to a high extent

Competent

medium

to a little extent

not at all

Purchasing

Logistics & distribution

“Production”

Marketing & sales

Human resource General management management

Relevant Value-Chain Activities

Figure 17: The Level of Competence of the Spanish Subsidiary of Eucom

On average, the competence level of the Spanish subsidiary is conceived slightly lower than medium so that the Implementer role is substantiated. In addition to this position in Bartlett and Ghoshal’s role typology, the Spanish subsidiary fulfils a Local

150

Innovator role according to Gupta and Govindarajan (P4).184 The following low knowledge inflows and lower than medium knowledge outflows become apparent and are visualized in Figure 18:  Market data on customers: As the Spanish subsidiary solely deals with the Spanish market, it rarely receives knowledge on its customers from other units of Eucom (P4). At the same time, it benefits from its knowledge about Latin American markets and provides this know-how to other units to a high extent (P4).  Market data on competitors: The main competitors of the Spanish subsidiary are no local but global players (P3) so that inflow of market data on competitors is received to a medium extent (P4). As the Spanish subsidiary can rely on the experience of winning the contract for the nation-wide network against competitors, it can provide this know-how to other units to a high extent (P4).  Product designs and process designs: Knowledge on product and process designs is at the moment flowing into the Spanish subsidiary to a medium extent (P3, P4). As Spain is no technology provider within Eucom, technological product knowledge is received when necessary (P3). No outflow of these types of knowledge to other unit is stated (P4).  Marketing know-how: The Spanish subsidiary receives marketing know-how from other units to a medium extent (P4) and provides this type of knowledge to a higher extent (P4). For instance, marketing know-how on Latin America is transferred by the Spanish subsidiary (P4).  Distribution know-how: When the Spanish subsidiary built up its distribution network ten years ago, distribution know-how used to flow in to a high extent from headquarters (P4). But nowadays, no relevant distribution competence is found at headquarters so that the Spanish subsidiary is not receiving this know-how today (P4). At the same time, distribution know-how is not flowing out to other units within Eucom either (P4).  Purchasing know-how: A lot more purchasing know-how is received by the Spanish subsidiary since it has started to participate in an internal project regarding purchases (P4). This is a large one-way flow and no purchasing knowhow is provided to other units (P4).  Management systems and practices: The Spanish subsidiary receives knowledge on management systems and practices from other units to a high extent (P4). A similar outflow is seen from the subsidiary perspective (P4). The Spanish subsidiary was, for instance, involved in the development of a Blue Book for the whole Eucom organization (P4). However, the Spanish subsidiary is now less involved than it used to be (P4) so that the level of outflow is conceived to be medium.

184

Initially, the Spanish subsidiary was characterized as Implementor from the headquarters perspective (P1). However, the discussion of the findings from the interviews with the CFO of Eucom led to achkowledging the role of a Local Innovator as appropriate.

151

Inflow of knowledge

Eucom: Spanish Subsidiary

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs Marketing know-how Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 18: Knowledge Inflows and Knowledge Outflows at the Spanish Subsidiary of Eucom

6.1.3.2

The Evaluation of the Performance of the Spanish Subsidiary

After having characterized the Spanish subsidiary as Implementer and Local Innovator, the evaluation of the performance of the Spanish subsidiary is described in this subsection. First, the role of performance evaluation within the control mix is determined (1). Then, the content of performance evaluation (2) and the process of performance evaluation are analyzed (3). (1) The Eucom headquarters controls the Spanish subsidiary via different objects: input, behaviour and output. Their use is determined in the following in order to reveal the role of performance evaluation in the control mix. Input Control: For the Spanish subsidiary, a very low level of input control can be revealed because no expatriates are sent to Spain, headquarters’ influence hiring of new managers only to a little extent and no trainings are provided by headquarters:  Several years ago the last expatriate came to the Spanish subsidiary (P4). “But no, no we don’t have any other expatriates in order to control the company.” (P4). Thus, nowadays no managers from the Eucom headquarters are sent to the

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Spanish subsidiary (P3, P4). More frequently, Spanish employees are transferred to other units of Eucom: “There’s always two or three people working in other activities of the group” (P3). All members of the management team have been working at the Spanish subsidiary for more than five years (P4) so that no hiring activities at management level were recently undertaken. Nevertheless, one “can imagine that headquarters would influence the selection” (P4). Thus, the influence on hiring at the Spanish subsidiary is conceived as low. Trainings for new managers are not provided by headquarters to the Spanish subsidiary (P4). In addition, the representatives of the Spanish subsidiary do not judge this to be necessary since they “have a lot of experience in the market” (P4).

Behaviour control: Behaviour control of the Spanish subsidiary consists of low behaviour surveillance, a high predefinition of procedures and low interaction with headquarters. Overall, it is seen at a medium level:  The Spanish subsidiary has to respect the same approval thresholds as the German subsidiary (P1, P8). “We have to get authorization to certain level of investment, but we are taking care of that.” (P3). Apart from this the Spanish subsidiary is “now forgotten” (P4) to a certain degree. Urgent topics keep headquarters representatives busy in influencing activities in other subsidiaries (P4). As long as no problems appear at the Spanish subsidiary, they act independently (P3, P4) without much behaviour surveillance by headquarters. In summary, the level of behaviour surveillance towards the Spanish subsidiary is low.  For the Spanish subsidiary, procedures are also predefined by means of the Eucom Blue Book (P3, P4). “There are always recommendations for everything. We have a kind of Blue Book, and in this Blue Book is how we have to behave and to operate.” (P3). The subsidiary strictly follows the Blue Book: “In fact, we are applying these rules for everything.” (P4). In addition, there are “certain rules to manage the company and to manage people” (P4) related to human resource management (P4). In summary, this shows a high predefinition of procedures for the Spanish subsidiary.  The planned meeting-structure differs between the Spanish subsidiary and the other Eucom subsidiaries. Quarterly, local board meetings are held with the CEO, CFO and the directorate of marketing and sales of Eucom from the headquarters side and the CEO, the CFO and the person responsible for marketing and sales on the subsidiary side (P1, P4, P6). These meetings can have an impact on behaviour and activities at the Spanish subsidiary (P1). In general, there is interaction within each function (P3). For example, “there is a very strong coordination for operations, so our operation manager is in close contact with the operation managers for the group” (P3). Nevertheless, the “level of contacts has decreased” (P3) because the Eucom headquarters concentrates more on other subsidiaries (P3). “When everything is running without problems, we don’t have 153

any meeting, we don’t have any visit” (P4) except for the regular ones. Only when “you don’t get the results then everybody’s here like flies trying to understand what is happening.” (P3). As long as the Spanish subsidiary has “no bad news from here” (P3), the overall interaction is conceived as low. Output control: Output control is also highly important in the case of the Spanish subsidiary due to a high use of pre-established targets, a medium use of performance-related pay and a very strong link of performance judgements to (financial) output:  Like at the German subsidiary individual target agreements are used for evaluating the performance of the subsidiary managers (P1, P4). Individual target agreements are also implemented at lower hierarchical levels and monitored in an intranet-based system (P4). In addition, one management meeting of the Eucom board and the management team of the Spanish subsidiary in September or October is used to “establish the targets for the whole subsidiary for the next year” (P4, P8). These targets are set as budget for the year (P4, P8). This leads to stating that pre-established targets are used to a high extent at the Spanish subsidiary.  For the Spanish subsidiary, pay is also related to the individual targets for the top level subsidiary management (P1, P4) and therefore seen at a medium level, too.  When taking a closer look at the targets, a similar prevalence of financial measures can be revealed for the Spanish subsidiary and for the German subsidiary: The financial results of the Spanish subsidiary have a prominent position in the individual targets (P4). Financial results at divisional level, at business unit level, at the level of Eucom and at subsidiary level can account in total for 75% of the variable portion of pay (P4). Only the remaining 25% can be related to more qualitative targets (P4). This shows a high importance of (financial) output measures for the Spanish subsidiary. Additional statements like “but at the end of the day the only important thing is to have a big profit at the subsidiary” (P4)185 support the very high importance of (financial) output measures for the Spanish subsidiary. This reflects a very strong link between performance judgements and results. In summary (see also Table 30) a low use of input control, a low to medium use of behaviour control and a high use of output control is found in the control mix for the Spanish subsidiary. Due to the high use of output control and definitely lower use of input control and behaviour control, a high relative weight of performance evaluation in the control mix of the Spanish subsidiary is derived.

185

See also “but at the end, EBIT is what counts” (P3) and “the all-important thing for us is that here the consolidated P&L and Eucom P&L will be profitable” (P4).

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Control Objects at the Spanish Subsidiary Input Control

Behaviour Control

 no use of expatriates

 low level of behaviour

 low influence of

surveillance  high predefinition of procedures  low interaction

headquarters on hiring new managers  no training provided by headquarters  very low use of input control

Table 30:

Output Control  high use of pre-established

targets  medium use of performance-

related pay  very high link of performance

judgements to results  low to medium use of behaviour control

 high use of output control

The Control Mix Used for Eucom’s Spanish Subsidiary

(2) The content of the performance evaluation at the Spanish subsidiary consists mainly of financial measures which are accompanied to a very low extent by qualitative indicators and non-financial measures (see Table 31 for an overview). Financial measures: The Spanish subsidiary is evaluated to a high degree in terms of financial results (P1, P3, P4). “We are measured by these accounts we call consolidated or operational P&L” (P4). The projects of the Spanish subsidiary are consolidated in one profit and loss statement upon which evaluation of performance is based (P4). When considering the concrete performance measures, these are “EBIT, order intake and revenues, but order intake and revenues are the most important.” (P4). Order intake can also be divided into order intake by business to see “which market we need to improve” (P4). Furthermore, “margin is very interesting, very important measure” (P4) for the Eucom headquarters. Thus, financial measures are highly relevant for assessing the performance of the Spanish subsidiary. Non-financial measures: In addition to the financial measures, non-financial measures are selectively added (P4). “Yes, these financial targets are also linked to the headcount targets for instance.” (P4). Thus, a certain headcount has to be kept at the Spanish subsidiary. As for the German subsidiary, the comparison with the budget is the most important standard of comparison for the Spanish subsidiary (P3, P4). The high frequency of monthly comparisons between the actual results and the estimated results as well as detailed explanations of deviations from the budget (P1, P4, P8) substantiate its importance. The comparison to the past is also used (P4), while internal benchmarking is refused (P4). “It’s not possible to compare. We compare only with ourselves, (…) with our budget, that’s it.” (P4).

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Qualitative indicators: Apart from the financial measures, managers at the Spanish subsidiary also sometimes refer to the importance of good customer relations and quality for their performance (P3, P4). “It could be complaints from customers” (P3) that cause problems at subsidiary level. Nevertheless, these qualitative indicators are not incorporated in the overall performance measures for the subsidiary (P3) but can be relevant for the individual performance of the managers (P4).

Content of Performance Evaluation of the Spanish Subsidiary Financial High emphasis on:  order intake  sales  EBIT  project margin Table 31:

Non-financial

Qualitative

Low emphasis on:

Low emphasis on:

 number of employees

 customer relations  quality

The Content of Performance Evaluation of Eucom’s Spanish Subsidiary

(3) The process of evaluating the performance of the Spanish subsidiary has mainly formal, to a medium degree personal and to a very low degree cultural elements: Formal: The formal evaluation process for the Spanish subsidiary consists of weekly management reports (P1), flash reports which have to be provided at least twice a month (P1, P4), monthly project reports (P4) and detailed monthly financial reports (P3, P4). Furthermore, the Spanish subsidiary uses an intranet-based system for analyzing the target achievement and performance of its people (P4). However, this is only an internal tool and is not relevant for evaluating the performance of the subsidiary and its managers from the headquarters perspective. Consequently, the same very large formal element characterizes the performance evaluation of the Spanish and the German subsidiary. Personal: In addition, personal processes are conducted in terms of conference calls, local board meetings and performance appraisals with lower frequency compared to the German subsidiary.  The project reports are sent to headquarters. Then “all information is gathered in France, in the headquarters, and analyzed during the operations review.” (P4). Thus, the project reports are accompanied by a monthly business review per conference call (P1, P4). The project controller and the financial controller from the Spanish subsidiary participate in this conference call with headquarters representatives (P4). Here, the Spanish subsidiary has to provide details on its performance in each project (P1).

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Every quarter, a so-called “local board meeting” in Spain is used to review and evaluate the business activities of the Spanish subsidiary (P1, P3). “So they are very well aware of what is happening here - projects, operation, profitability, level of sales, we take everything” (P3). Besides the formal electronic system for tracking the goal achievement of each manager internally, personal performance appraisals are conducted at least once a year within the Spanish subsidiary (P4). The same applies to the top management of the Spanish subsidiary who gets evaluated individually by the respective line manager from headquarters once a year (P4).

Cultural: The cultural element of performance evaluation is not completely neglected at the Spanish subsidiary. A small cultural element becomes apparent through limited use of informal communication and partly shared performance goals:  The management meetings foster informal communication between the headquarters managers and all subsidiary managers (P3, P4). While the CEO of Eucom personally speaks to the employees in Finland, Germany and France twice a year, “the same communication is done in the other countries through us” (P3). In summary, informal communication between the Spanish subsidiary and headquarters is lower than at the German subsidiary.  It is stated that the Spanish subsidiary has the same performance goals as headquarters (P1, P3). Thus, “at the end of the day, we have the same targets.” (P4). Nevertheless, “there are differences because we have our own interests” (P4). Consequently, the performance goals are not conceived as being completely aligned between the Spanish subsidiary and headquarters. Overall, the process of performance evaluation of the Spanish subsidiary can be characterized as formal with some personal components and a small cultural element. Table 32 summarizes the findings.

Performance Evaluation Process of the Spanish Subsidiary Formal

Personal

 weekly management reports

 monthly project review

 monthly project reports

conference calls  local management meetings every quarter  personal appraisals of target agreements once a year

 monthly flash reports before

and after closing  detailed monthly financial

reports  very large formal element Table 32:

 medium personal element

Cultural  informal communication at

personal meetings  partly shared performance

goals

 small cultural element

The Performance Evaluation Process of Eucom’s Spanish Subsidiary

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6.1.4

The Finnish Subsidiary of Eucom

The Finnish subsidiary is the youngest subsidiary within the Eucom group. In 2005, Eucom bought this unit from a competitor and integrated it. Ever since, the Finnish subsidiary is of very high importance for Eucom due to a high technological competence. The Finnish subsidiary has around 200 employees and is active within the core business of Eucom (P7). The main activities of the Finnish subsidiary are the development of its technology and the provision of this technology for Eucom projects around the world. The roles of the Finnish subsidiary are described in detail next (subsection 6.1.4.1). After this, the performance evaluation of the Finnish subsidiary will be analyzed (subsection ).

6.1.4.1

The Roles of the Finnish Subsidiary – Strategic Leader and Global Innovator

According to the Eucom headquarters, the Finnish subsidiary is a Strategic Leader (P1). The same position is also derived from the interview statements and supported by the perspective of one of the interviewees from the German subsidiary (P2). Subsequently, the two dimensions determining this Strategic Leader position are described. First, the high strategic importance of the market of the Finnish subsidiary is deduced (1). This is followed by providing details on the high level of competence of the Finnish subsidiary (2). (1) The high strategic importance of the market is indicated by a very high market volume, high competition intensity, medium customer demand intensity and a medium technological dynamism.  The Finnish subsidiary has a strong position in its home market Finland, but today almost no more business can be generated there (P7). With its home market as reference, the Finnish subsidiary started to sell its technology to other countries as well. So far, the Finnish subsidiary has customers in Europe, Asia, the Middle East, North and South America (P7). Thus, in contrast to the Spanish and the German subsidiary, the Finnish subsidiary is targeting the global market (P1, P7). Consequently, the market volume is considered to be very high (P6, P7).  Within its home country, the Finnish subsidiary has no competitors (P7). Worldwide only a few suppliers exist since the technology of the Finnish subsidiary is difficult to develop (P7). For the same reason, no new competitors are able to offer competitive products (P7). However, the existing competitors fight for new contracts so that competition intensity is considered to be high (P7).  In spite of their diverse locations, the customers of the Finnish subsidiary are usually government or public organizations. They have specific but common requirements (P7). The Finnish subsidiary and its competitors are ready to meet

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these demands (P7). Consequently, customer demand intensity is considered to be at a medium level, like for the German and Spanish subsidiary. The relevant technology of the Finnish subsidiary was developed about eight or nine years ago (P7). Ever since, no additional large innovation has been presented so that the market is not considered to be very dynamic (P7). Nevertheless, the Finnish subsidiary and its main competitor are developing new features (P7). This shows some innovation so that the technological dynamism is considered to be medium.

(2) Having judged the strategic importance of the market, the level of competence of the Finnish subsidiary is deduced next. It is assessed for all the value chain activities and then summarized in Figure 19. All in all, the level of competence of the Finnish subsidiary is high.  Research and development: The Finnish subsidiary is the owner of one of the Eucom technologies and provides this technology to other units (P1, P2). This technological competence is argued to be exceptional and essential for the future evolution of Eucom's business (P4). As the Finnish subsidiary started to develop this technology eight years ago and continues to add new features (P7), its competence level in research and development is considered to be very high (P7).  Purchasing: When the Finnish subsidiary entered the Eucom organization, it had no own purchasing activities since those were taken care of by the former parent company (P7). With the support from headquarters, a new department was set up which is operating smoothly (P7). However, the level of competence of the Finnish subsidiary in purchasing is not exceptional and considered to be at a medium level (P7).  Logistics and distribution: The same is true of logistics and distribution (P7). This competence had to be built up at the Finnish subsidiary after the acquisition (P7). The new department is already handling all the relevant logistics and its level of competence is argued to be medium (P7).  “Production”: The Finnish subsidiary has no own production (P7). However, like the German and the Spanish subsidiary it is active in the instalment and putting into service of the networks (P1). Finnish employees are involved in the roll-outs of projects based on its technology (P1). Concerning its level of competence in this latest step of production, the Finnish subsidiary is at least in par with the other subsidiaries (P1). Consequently, it is judged slightly higher than the level of competence of the Spanish subsidiary and rated at a medium to high level.186  Marketing and sales: The international marketing and sales activities of the Finnish subsidiary are partly conducted by the local staff and partly by sales personnel spread around the world (P7). The level of competence of the Finnish subsidiary in marketing and sales is difficult to judge as there is a lot of interaction 186

A comparison to the German subsidiary is not easy since the latter is also active in the “early” steps of production.

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and cooperation with the headquarters and marketing departments of the other subsidiaries (P7). When taking into account the intense support in marketing and sales provided by the Finnish subsidiary to the other Eucom units (P7), a high level of competence is retrieved (P7).

Competence Level of the Finnish Subsidiary of Eucom to a very high extent

to a high extent

Competent

medium

to a little extent

not at all

Research Purchasing & development

Logistics & “Production” Marketing distribution & sales

Human General resource management management

Relevant Value-Chain Activities

Figure 19: The Level of Competence of the Finnish Subsidiary of Eucom





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Human resource management: Here, the Finnish subsidiary also used to benefit from belonging to a large corporation (P7). Human resource functions were only partly incorporated within the unit (P7). The situation is similar today and part of the human resource management is provided by the Eucom headquarters (P8). The remaining activities are conducted locally. Overall, the level of competence in human resource management is seen at a medium level (P7). General management: From the headquarters’ point of view, the Finnish subsidiary faces a relatively high complexity (P1). In comparison to the other Eucom subsidiaries, the level of competence in general management is therefore judged to be high to very high (P1).187

In contrast, from the subsidiary perspective, the competence level is only judged to be medium (P7). This is due to the fact that from the interviewee’s point of view general management on behalf of the subsidiary is of low relevance compared to the more important involvement in the global functions (P7).

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The Finnish subsidiary is conceived as a Strategic Leader. Besides this role in Bartlett and Ghoshal’s typology, it is an Integrated Player according to Gupta and Govindarajan’s role typology. When analyzing the knowledge inflows and outflows in detail, a slightly above medium level of knowledge inflows and outflows is derived. This shows the Integrated Player position of the Finnish subsidiary.188 The following knowledge inflows and knowledge outflows determine this subsidiary role (see Figure 20 for an overview).  Market data on customers: The Finnish subsidiary receives market data on customers from headquarters (P7). Through the integration of the local Finnish market team into the global marketing function (P7) not only an inflow of knowledge takes place, but also an outflow of knowledge. Both are stated to be at a medium level (P7).  Market data on competitors: An exchange of market data on competitors is also noticed. However, it is lower than the transfer of customer-related know-how. The inflow of market data on competitors is not conducted regularly, but more on an ad-hoc basis when it is asked for (P7). The same is expected for the knowledge outflow since both flows are rated at “to a little extent” (P7).  Product designs: As the Finnish subsidiary has a high technological competence, it provides know-how on product designs to other units (P1). An exchange of research and development know-how takes place between the French and the Finnish subsidiary (P1). This outflow is seen at a low level (P7). The additional transfer of know-how to other Eucom subsidiaries is not on details on research and development but more related to the functionalities and characteristics of the product (P7). Experts from the Finnish subsidiary with relevant product knowledge work together with other Eucom units locally (P7). Depending on the business and project needs, know-how on product designs is provided by these experts and/or directly by the Finnish subsidiary (P1, P7). Consequently, the outflow of product designs is seen at a very high level for the Finnish subsidiary (P1). At the same time, the Finnish subsidiary also learns from the French subsidiary (P1) so that a medium inflow of product designs is noticed on average (P1, P7).  Process designs: A low level of inflow is stated for process designs (P7). However, this inflow is conceived to be far higher from the headquarters’ point of view (P1). Especially know-how on quality management, related processes and relevant tools are provided by the Eucom headquarters to the subsidiaries (P1). The differences in perception between the subsidiary and headquarters can be explained as follows: Methods, rules and tools are sometimes developed at subsidiary level, but then transferred to headquarters that authorizes them and makes them available for all Eucom units (P1). This is also indicated by a statement on the development of new processes. Here the French and the Finnish subsidiary collaborate and try to find a joint solution (P1). Therefore, the inflow of process designs from other units is, on an average, seen at a high level. 188

Initially, the Finnish subsidiary was positioned as a Global Innovator from the headquarters perspective (P1). However, the discussion of the interview findings with the CFO of Eucom led to classifying the Finnish subsidiary as Integrated Player.

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At the same time, the outflow of process designs is lower (P1) and conceived to be medium (P7). Marketing know-how: The Finnish subsidiary receives support from headquarters and other Eucom units in marketing (P7). At the same time, the Finnish subsidiary provides marketing know-how concerning its technology to other Eucom units (P7). There is a strong collaboration within the global marketing function (P7). The Eucom head of marketing is based in France and his substitute is Finnish (P1). They work together, and the goal is to form a completely integrated marketing and sales team (P1). Consequently, a high level of inflow and outflow of marketing know-how is stated (P1).189



Inflow of knowledge

Eucom: Finnish Subsidiary

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs Marketing know-how Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 20: Knowledge Inflows and Knowledge Outflows at the Finnish Subsidiary of Eucom



189

Distribution know-how: Altough logistics know-how is only partly available at the Finnish subsidiary, it is used to working with distributors (P7). The know-how on how to build and maintain a distribution network is primarily available in Finland since the French subsidiary and the German subsidiary have only rarely conducted distribution business so far (P7). Thus, the Finnish subsidiary is At subsidiary level, the inflow and outflow of marketing know-how are only seen at a medium level (P7). However, related statements and the headquarters perspective support the high level of exchange. In the future, however, when the marketing function will be completely integrated, it might become difficult to identify the knowledge flows and distinguish between them.

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providing this type of knowledge to other Eucom units (P7). A medium outflow of distribution know-how is stated (P7). When considering logistics as part of distribution, it has to be taken into account that this logistics part had to be built up after the acquisition of the Finnish subsidiary with the support of the Eucom headquarters (P7). This also leads to arguing for a medium inflow of this type of knowledge to the Finnish subsidiary. Purchasing know-how: The purchasing department has just recently been built up at the Finnish subsidiary. This was done with the support of headquarters that provides know-how to a medium extent to the Finnish subsidiary (P7). As there is a strong cooperation with headquarters in the area of purchasing (P7), the Finnish subsidiary also transfers purchasing know-how to a little extent to the Eucom headquarters (P7). Management systems and practices: From the subsidiary perspective, management systems and practices are only flowing from other Eucom units to the Finnish subsidiary to a little extent (P7). As examples are the transfer of approval thresholds and set-up of authorizations (P7). This flow is again considered to be higher from the headquarters’ point of view, while the outflow is believed to be low (P1). In contrast, the outflow is conceived to be medium or even high from the subsidiary perspective (P7). The Finnish subsidiary is, for instance, elaborating a line management system for research and development and provides this to the other Eucom units (P7). Consequently, a medium inflow and outflow of management systems and practices is deduced from the partly opposing statements.

6.1.4.2

The Evaluation of the Performance of the Finnish Subsidiary

The performance of the Finnish subsidiary is analyzed in the following. Thereby, the role of performance evaluation in the control mix is derived by comparing the three control objects – input, behaviour and output (1). Furthermore, the content of performance evaluation is described (2) before providing details on the process of how the Eucom headquarters evaluates the Finnish subsidiary (3). (1) The role of performance evaluation in the control mix is determined in the following. To this end, the use of input, behaviour and output control is assessed for the Finnish subsidiary of Eucom. Input control: The Eucom headquarters tries to enhance the integration of the Finnish subsidiary. In so doing, some expatriates are sent to Finland and hiring is influenced by headquarters to a high extent. By contrast, no specific trainings are provided for Finnish managers.  As the Finnish subsidiary has just recently been bought, there are ongoing integration activities. In this context, expatriates are sent from the Eucom

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headquarters to Finland (P1, P7). At the same time, Finnish managers and employees are also sent to headquarters to work there for a certain period of time (P7). This enhances the integration of the Finnish subsidiary into Eucom: “It’s an exchange of processes, information about processes and to integrate the organizations and ways of doing things and, it’s also a transfer of knowledge and competence.” (P7). Thereby, no expatriates fill the top management positions of the Finnish subsidiary but rather lower management positions (P1). The top positions remain in the hands of Finnish managers (P1, P8). Thus, the use of expatriates is conceived to be low. Nevertheless, the Eucom headquarters exerts input control by influencing the hiring of new managers. The hiring of managers for the Finnish subsidiary is conducted by headquarters in each function. “They have a great impact on that because the hiring of managers or any persons is according to the global functions.” (P7). The CFO for Finland is, for instance, chosen by the CFO of Eucom (P1). This shows a high influence on hiring on behalf of the Eucom headquarters. Besides the training on the job experienced by Finnish delegates at headquarters (P7) and the expected knowledge transfer from expatriates sent to Finland (P1), no explicit trainings are provided for new or existing managers (P1).

Behaviour control: The Eucom headquarters does rarely execute behaviour surveillance, but predefines procedures to a medium extent. In addition, a very high level of interaction is found for the Finnish subsidiary.  The Finnish subsidiary is primarily responsible for sustaining and developing its technology and accounts for about half of the research and development activities of Eucom (P7). The CEO of the Finnish subsidiary is at the same time the Chief Technology Officer of Eucom being responsible for research and development within the group (P8). Due to this double function, some behaviour surveillance is directly effective. However, no behaviour surveillance is felt in the other functions (P7) so that the overall level is believed to be low.  At the beginning of the integration of the Finnish subsidiary, no procedures were imposed by headquarters. “Basically we had to figure out ourselves how to do things.” (P7). Now processes are predefined to a higher degree since throughout Eucom the Blue Book was implemented (P8). However, from the point of view of the Finnish subsidiary the predefinition of procedures is still limited (P7). At the company the Finnish subsidiary belonged to before, processes and procedures had been defined much more clearly (P1, P4, P7). Consequently, a medium level of predefinitions of procedures is derived.  The Finnish subsidiary interacts with headquarters to a very high extent. On the one hand, strong interaction is revealed at the functional level. For each function, such as finance, marketing and research and development, global meetings are held which foster interaction between headquarters and the subsidiary representatives (P1, P7). On the other hand, interaction takes place between the top management of the subsidiary and headquarters: Permanent interaction is 164

secured by the double function of the Finnish CEO, who is at the same time a member of the Eucom management board. Furthermore, an almost weekly interaction takes place when new projects are set up (P7). “So, that’s a very typical case when we have a conference call with the people from headquarters” (P7). In addition, the CEO and the CFO of Eucom visit Finland on average once every two months to discuss ad-hoc issues or strategic questions (P27). Once every quarter the management board of Eucom, the CEOs of the French, Finnish and German subsidiaries and the heads of all functions at headquarters meet at one of the subsidiary locations (P1, P2). Summing up, a very high level of interaction is found for the Finnish subsidiary. Output control: The Eucom headquarters controls the output of the Finnish subsidiary. This is indicated by a high use of pre-established targets, a medium to high use of performance-related pay and a high link of the performance judgement to results.  Targets are pre-established for the Finnish subsidiary at three levels: the subsidiary level, the functional level and the individual level. At subsidiary level, the budget is set as target (P7). However, targets for each function are considered to be much more important from the subsidiary perspective (P7). Here, the heads of the functions at the Finnish subsidiary agree with their line managers at headquarters on targets for the year (P7). For marketing and sales, “the number of new customers could be a typical target, or sales volume, things like that.” (P7). At the individual level, managers at the Finnish level sign personal target agreements with their line manager at headquarters or within the Finnish subsidiary depending on the hierarchical level (P1, P7). Ideally, the personal targets reflect the functional targets so that these are cascaded down within the organization (P7). All in all, the pre-established targets at three levels indicate a high use of pre-established targets for the Finnish subsidiary.  The individual target agreements are also linked to performance-related pay. Thereby, not the whole variable portion of pay is linked to the individual targets, but in addition the performance of Eucom and the business unit Eucom belongs to has an impact on the variable pay (P7). This applies to the top management of the Finnish subsidiary (P1). In addition, performance-related pay is implemented also for lower-rank managers who receive a bonus according to their individual target achievement (P7). It remains uncertain, however, if all other Finnish employees are given a bonus (P7). Overall, the use of performance-related pay is assumed to be medium to high since all managers are affected.  The performance judgement of headquarters is linked to results. However, this is not indicated by a high importance of the financial output of the subsidiary as it has been shown for the other Eucom subsidiaries. In contrast, the achieved development within the global functions is considered to be much more important (P7). In terms of its relevance, it is “really the operational global function that is the prime dimension.” (P7). For Finland, the output achieved in research and development is of special importance (P7). In addition, a high concern with costs 165

indicated the linkage of the performance judgement to results. Primarily, expenses are looked at in the budget, and research and development projects are checked for their costs (P7). Despite a slightly different relevant output, the performance judgement is linked to results to a high degree. When comparing the three control objects, an almost equal distribution of input and behaviour with a slightly higher use of output control within the control mix is derived (see Table 33). Consequently, a medium relative weight of performance evaluation in the control mix is deduced.

Control Objects at the Finnish Subsidiary Input Control

Behaviour Control

 low use of expatriates

 low behaviour surveillance

 high influence on hiring

 medium predefinition of

 no trainings provided by

procedures  very high interaction

headquarters

Output Control  high use of pre-established

targets  medium use of performance-

related pay  high link of performance

judgement to results  medium use of input control

Table 33:

 medium use of behaviour control

 high use of output control

The Control Mix Used for Eucom’s Finnish Subsidiary

(2) The content of performance evaluation mainly consists of financial and nonfinancial measures in the case of the Finnish subsidiary. In addition, low emphasis is placed on qualitative performance indicators. Table 34 provides an overview of the content of performance evaluation of the Finnish subsidiary. Financial measures: The performance of the Finnish subsidiary is evaluated on the basis of financial measures. The relevant financial measures are sales, cost, gross margin, inventories and receivables: “Maybe cost and gross margin and sales and also the balance sheet items like the receivables and inventories.” (P7). Furthermore, order intake and EBIT are always looked at (P1). For the evaluation of the projects, financial measures are used as well. “Again it’s in sales and gross margin against the budget figures and inventories, receivables; those are the main indicators for projects, for customer projects.” (P7). However, the financial performance of the subsidiary is not considered to be as relevant as the performance in each function (P7).190 Research and development is partly measured by comparing the actual costs to the budgeted costs of research and development projects (P7). 190

This is explained by the fact that the financial statement of the Finnish subsidiary gives no real impression of the business performance due to tax considerations and due to internal services provided by other subsidiaries and branch offices which are not accounted for (P7).

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Every month the financials of the subsidiary are compared with the budget (P1, P7, P8). Monthly comparisons of the actuals to the forecast are also drawn for the customer projects (P7). In addition, it is checked if research and development projects are within the budget (P7). Non-financial measures: As the Finnish subsidiary is responsible for half of the research and development activities within Eucom, the performance judgement of headquarters is linked to research and development projects (P7). Milestones are defined and their accomplishment is assessed and considered as performance indicator (P7). This is also the case for external projects; it is evaluated if the project execution is within the planned timeframe (P7). Additionally, the winning of a defined project can be considered as a relevant non-financial performance measure (P7). Qualitative indicators: In the functional and/or individual target agreements, special projects are incorporated which are linked to more qualitative indicators. To give an example, this is, for instance, the integration of the Finnish finance team into the Eucom finance function (P1, P7). However, as performance in this area is only assessed once a year (P7), the relevance is considered to be lower compared to the financial and non-financial measures.

Content of Performance Evaluation of the Finnish Subsidiary Financial High emphasis on:  sales  cost  gross margin  order intake  EBIT

Non-financial

Qualitative

High emphasis on:

Low emphasis on:

 achievement of milestones

 additional indicators related

in R&D projects  timetable of customer projects  winning certain contracts

to specific projects

 inventories  receivables

Table 34:

The Content of Performance Evaluation of Eucom’s Finnish Subsidiary

(3) The process of evaluating the performance of the Finnish subsidiary is highly formal, but also personal. Cultural components become almost not apparent at all. Formal: The formal performance evaluation of the Finnish subsidiary consists of weekly flashs, monthly project reports as well as financial reports. The latter are supplied in two ways: twice a month as flash reports and once a month as a more detailed financial report.

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The CEO of the Finnish subsidiary sends a weekly flash to the CEO of Eucom (P1). This flash covers important events and issues which have occurred during the previous week (P1). Project reports are provided by the Finnish subsidiary to headquarters every month (P7). “Yes, we prepare reports for the main projects; we do have quite a few projects, so we are not preparing project reports for all of them, but for the main projects we are preparing the reports.” (P7). Additional in-depth information on the large projects is provided every quarter (P7). On the basis of these reports, the Eucom headquarters is able to judge the performance of the Finnish subsidiary in the current customer projects (P7, P8). At the end of each month, a “flash report before closing” with key financials of the Finnish subsidiary, such as orders, sales and EBIT, is sent to headquarters (P7, P8). “And, then we have this so-called final flash, after the closing of the month having the actual sales and order intake figures.” (P7). So, the Finnish subsidiary sends two flash reports covering key financials per month to headquarters. In addition to these flashes, a fairly detailed financial report is provided once a month. This so-called “facts-report has all the details then: the balance sheet, functional costs, the gross margin and so on.” (P7). This report is the official financial report which is consolidated at the headquarters level and then integrated into the group reporting.

Personal: The formal reports are sometimes accompanied by management meetings. In addition, personal appraisals and conference calls are held to evaluate the performance of the Finnish subsidiary.  The financial flash reports are usually not accompanied by personal meetings. However, “there are some adjustments or I would say, some corrections and, sort of fine-tuning of the figures, but we do not have a systematic meeting to discuss those but it is sending back and forth emails.” (P7). In contrast, a personal discussion usually follows the detailed report of the financial figures. Either a meeting is set up or a conference call is organized to review the financials (P7). “Sometimes people from headquarters are coming to Finland to discuss those, but sometimes it’s a conference call.” (P7). A further platform for examining the financials is the so-called CFO meeting. Here, the CFO of Eucom and his counterparts at the Finnish, French and German subsidiary are coming together to discuss broader issues related to the finance function within Eucom (P1, P7). However, from time to time these meetings are used to review the financial figures (P7).  The project reports are sometimes accompanied by conference calls at top management level. “It depends on the need maybe. If there is a special issue with a project we set up a conference call to discuss that.” (P7). However, on a regular basis, projects are evaluated during monthly operative reviews (P1). Here, conference calls take place between the persons responsible for projects and customer care from the Finnish subsidiary and headquarters representatives (P7).

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No systematic review meeting is set up for the Finnish subsidiary (P7). However, the CEO of Eucom also visits the Finnish subsidiary on average every two months (P7). Furthermore, the CFO of Eucom travels to Finland usually every month (P7). As “usually there is some special reason for them to come over and it is not a systematic reason” (P7), reviewing and evaluating the performance of the Finnish subsidiary is from time to time part of these meetings (P7). Personal appraisals are conducted for the individual target agreements. These targets are “basically defined for one year and then they will be reviewed - in a discussion with the manager, and that discussion also includes the performance evaluation of that person, something like training and also the career development.” (P7). Thus, a personal discussion and appraisal is held between the Finnish manager and his line manager at headquarters.

Cultural: When considering the low level of informal communication and performance goals to be shared to a limited extent, it becomes apparent that the cultural element in performance evaluation is very restricted in the case of the Finnish subsidiary.  Informal communication is not common between the Finnish subsidiary and the Eucom headquarters. “I wouldn’t say that there is a lot of informal communication, but I would say it is quite little.” (P7). Still, phone calls and meetings are considered to be partly informal (P7). Consequently, little informal communication is found between the Finnish subsidiary and the Eucom headquarters.  As the integration of the Finnish subsidiary is still ongoing, performance goals are not always shared with headquarters. “They are, of course, their own man and they also cut their own path.”191 (P1). Differences in the mentality, values and goals between the Finnish subsidiary and the other Eucom units become apparent (P4, P7). Consequently, performance goals are considered to be shared to a limited extent. In summary, the process of evaluating the performance of the Finnish subsidiary is dominated by formal and personal elements, while the cultural element becomes only apparent to a very small degree (see Table 35 for an overview).

191

Translation of “Die haben natürlich ihren eigenen Kopf und die kochen auch ihr Süppchen.“ (P1).

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Performance Evaluation Process of the Finnish Subsidiary Formal

Personal

Cultural

 weekly flash reports

 personal discussions of the

 little informal communication

 monthly project reports

monthly financial reports  monthly project review conference calls  business review meetings from time to time  personal appraisals of target agreements once a year

 limited shared performance

 monthly flash reports before

and after closing  detailed monthly financial reports

 very large formal element Table 35:

6.1.5

 large personal element

goals

 very small cultural element

The Performance Evaluation Process of Eucom’s Finnish Subsidiary

Discussion of the Performance Evaluation at Eucom

When describing the performance evaluation of each Eucom subsidiary, differences in the role, content and process of performance evaluation became apparent. However, it is not yet clear if these differences are as expected and outlined in the propositions in section 4.2. Consequently, the performance evaluation of the subsidiaries is compared to the predictions in this subsection. First, Bartlett and Ghoshal’s role typology is considered in subsection 6.1.5.1. After that, the performance evaluation of the subsidiaries is compared according to Gupta and Govindarajan’s role typology (subsection 6.1.5.2). Finally, the role-specific performance evaluation within Eucom is reflected (subsection 6.1.6).

6.1.5.1

Performance Evaluation of the Eucom Subsidiaries in Bartlett and Ghoshal’s Role Typology

In this subsection, the performance evaluation of the subsidiaries is compared to the propositions for each subsidiary role of Bartlett and Ghoshal’s role typology elaborated earlier in subsection 4.2.1. First, the Strategic Leader is addressed (subsection 6.1.5.1.1). This is followed by the Contributor (subsection 6.1.5.1.2) and the Implementer (subsection 6.1.5.1.3). As no Black Hole is found within Gloneer, this subsidiary role cannot be covered.

6.1.5.1.1

Performance Evaluation of the Strategic Leader

The Finnish subsidiary is a Strategic Leader within Eucom. The performance evaluation concerning the role, content and process of the Finnish subsidiary is 170

summarized in Table 36. At the same time, the performance evaluation is compared to the propositions for Strategic Leaders. While the proposed medium relative weight of performance evaluation is illustrated by the Finnish subsidiary, only partial support is found for the expected content and process of performance evaluation. This can be explained by the strong emphasis on financial performance measures and their collection in a formal reporting process (1) and by the so far limited integration of the Finnish subsidiary within Eucom (2).

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Strategic Leader

medium relative weight

more quantitative nonfinancial external and qualitative internal indicators

more personal and cultural

Finland

medium relative weight

financial as well as nonfinancial external and internal measures

more formal and personal

Result

support of the proposition

partial support of the proposition

partial support of the proposition

Explanations

 “standard” emphasis

on financials (1)

Table 36:

 “standard” reporting as

large formal element (1)  limited integration (2)

Appropriateness of the Propositions on the Performance Evaluation of Strategic Leaders at Eucom

(1) The intense reporting imposed on all Eucom subsidiaries with flashes before and after closing as well as detailed monthly financial reports applies also to the Finnish subsidiary. Due to the high frequency, a large formal element in the performance evaluation process is evident. At the same time, the financial performance measures are emphasized in this “standard” reporting. However, their significance is questioned for the Finnish Strategic Leader since the support provided by the Finnish subsidiary to other units (P7) as well as the support received from other units is not accounted for. “Personally, we are using a lot of marketing support from other subsidiaries or branches, which we do not have, I mean those costs are not included in our business reports.” (P7). (2) The very small cultural component in performance evaluation can be caused by the limited integration of the Finnish subsidiary within Eucom. “They have their own

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ideas and they also have an axe to grind”192 (P1) or to put it differently “the spirit of this company, the people of this company is completely different” (P4). The Eucom headquarters has been very much fostering the integration (P1, P4, P5): “Headquarters focuses on integrating the Finnish subsidiary because the Finnish subsidiary is really important for our future” (P4). However, the integration is still ongoing. This is reflected in the limited communication and differences in the performance goals (P1). Overall, the situation of the Finnish subsidiary is not completely reflected in its performance evaluation. The special demands imposed on the Finnish Strategic Leader in terms of providing technology to all other Eucom units are only in part accounted for.

6.1.5.1.2

Performance Evaluation of the Contributor

In Table 37, the propositions for Contributors are presented and compared to the performance evaluation in place for the German subsidiary. While the predicted mixture of formal, personal and cultural elements in the performance evaluation process is found, the relative weight of performance evaluation is lower than expected. The content of performance evaluation of the German subsidiary partly corresponds to the prediction. The deviations can be explained by the critical project which the German subsidiary had to win (1) and a certain sceptical view of qualitative indicators (2). (1) The German subsidiary has been fighting for one large contract for several months. This contract is not only large for the German subsidiary, but also for Eucom as a group (P1, P6). The project is stated as one important reason for a strong interaction between headquarters and the German subsidiary (P1, P4): The keyaccount who is responsible for the large contract participates, for instance, in a monthly executive meeting in order to discuss the progress of the project. This close interaction adds to the behaviour control already in place: key processes are accurately predefined by the Blue Book (P8), and behaviour surveillance is frequent at the German subsidiary (P1, P2).193 Taken together, the importance of behaviour control in the control mix is high. Consequently, performance evaluation and output control do not take up the prominent position in the control mix of the German subsidiary which was expected for a Contributor. (2) A higher use of qualitative internal indicators was predicted in the case of Contributors. This type of content of performance evaluation is also discovered at the German subsidiary of Eucom, for instance, in terms of desired changes in the 192 193

Translation of “Die haben natürlich ihren eigenen Kopf und die kochen auch ihr Süppchen.“ (P1). See subsection for the details on behaviour control of the German subsidiary.

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company culture and in the customer approach (P2, P6). These indicators can be part of the individual target agreements, but they are not required (P2). This reflects a low importance of qualitative indicators.194 In addition, the “soft indicators” are met with certain criticism. This is due to the fact that qualitative indicators are not measurable (P2). They are (only) considered as enabler of future performance. “These are topics which help a company to become superior, faster, less expensive, more profitable, more successful”195 (P2). This can then be measured in terms of “hard facts”, such as financial and non-financal quantitative output (P2). Thus, “the hard facts do really count today”196 (P2) in contrast to the expected qualitative indicators.

Propositions for Contributors Germany

Result Explanations

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

high relative weight

financial and qualitative internal indicators

formal, personal and cultural

medium relative weight

mainly financial and additionally non-financial external measure

mainly formal and personal, but also cultural

no support of the proposition

partial support of the proposition

support of the proposition

 critical project to win

(1)

Table 37:

6.1.5.1.3

 sceptical view of

qualitative indicators (2)

Appropriateness of the Propositions on the Performance Evaluation of Contributors at Eucom

Performance Evaluation of the Implementer

After having compared the performance evaluation of the Strategic Leader and the Contributor within Eucom to the expectations, the same is now done for the Implementer. The Spanish subsidiary is an Implementer within Eucom. Its performance evaluation is summarized in Table 38 and compared to the predictions for Implementers. Thereby, it becomes evident that the propositions are entirely illustrated by the Spanish Implementer since performance evaluation has a high relative weight in the control mix, financial measures are the main performance measures and a formal performance evaluation process is conducted. 194

195

196

See subsection for further details on the content of performance evaluation of the German subsidiary. Translation of “sind das alles nur Themen, die eine Firma dahinführen, dass sie besser, schneller, günstiger, profitabler, erfolgreicher wird.” (P2). Translation of „die Hard Facts sind zur Zeit diejenigen, die entscheidend greifen“ (P2).

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Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Implementers

high relative weight

financial measures only

more formal

Spain

high relative weight

mainly financial measures

more formal

Result

support of the proposition

support of the proposition

support of the proposition

Table 38:

Appropriateness of the Propositions on the Performance Evaluation of Implementers at Eucom

6.1.5.2 Performance Evaluation of Eucom Subsidiaries in Gupta and Govindarajan’s Role Typology In addition to the roles in Bartlett and Ghoshal’s role typology, subsidiary roles according to Gupta and Govindarajan are attributed to the three Eucom subsidiaries. Now it is analyzed if the performance evaluation meets the role-specific expectations. First, the Integrated Player is addressed in subsection 6.1.5.2.1. This is followed by comparing the performance evaluation of the Global Innovator to the propositions (subsection 6.1.5.2.2). Finally, the Local Innovator is covered in subsection 6.1.5.2.3. The performance evaluation of the Implementor cannot be compared to the predictions since no Implementor was found within Eucom.

6.1.5.2.1

Performance Evaluation of the Integrated Player

The Finnish subsidiary is described as Integrated Player within Eucom. Table 39 summarizes the performance evaluation of the Finnish Integrated Player and contrasts it with the expectations. While the medium relative weight of performance evaluation in the control mix corresponds to the propositions, the internal focus of the performance measures is not found for the Finnish subsidiary. The process of performance evaluation partly reflects the expectations since the proposed personal component is relevant when evaluating the Finnish subsidiary. However, an additional formal element exists in contrast to the expected cultural component. These deviations can be explained by the “standard” reporting which is formal and concentrates on financial measures (1). The missing cultural element in the performance evaluation process can be explained by the limited integration of the Finnish subsidiary (2). Both arguments have been

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outlined above when explaining the deviations from the predictions for the Strategic Leader position of the Finnish subsidiary (see subsection 6.1.5.1.1).

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Integrated Player

medium relative weight

quantitative non-financial internal and qualitative internal indicators

more personal and cultural

Finland

medium relative weight

financial as well as nonfinancial external and internal measures

more formal and personal

Result

support of the proposition

no support of the proposition

partial support of the proposition

Explanations

 “standard” emphasis

on financials (1)

Table 39:

6.1.5.2.2

 “standard” reporting as

strong formal element (1)  limited integration (2)

Appropriateness of the Propositions on the Performance Evaluation of Integrated Players at Eucom

Performance Evaluation of the Global Innovator

While deviations from the predictions characterize the performance evaluation of the Integrated Player, a high correspondence is noted for the Global Innovator. The German subsidiary is a Global Innovator within Eucom and its performance evaluation is summarized in Table 40. The predictions for the Global Innovator are also included. When comparing these two elements of Table 40, support for almost all propositions is found. Only the content of performance evaluation of the German subsidiary of Eucom differs from the expectations. While financial measures are used as predicted, additional focus is placed on a non-financial external measure. At the same time, an internal perspective which was predicted in the case of a Global Innovator is completely neglected. This deviation can be explained by the critical large project which the German subsidiary had to win and to which the non-financial external measure is linked (1) and by a sceptical view of qualitative indicators (2). Both explanations have been addressed above (see subsection 6.1.5.1.2).

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Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Global Innovator

medium relative weight

financial and quantitative non-financial internal as well as qualitative internal indicators

more formal and personal

Germany

medium relative weight

mainly financial and additionally non-financial external measure

mainly formal and personal, but also cultural

support of the proposition

partial support of the proposition

support of the proposition

Result

 critical project to win

Explanation

(1)  sceptical view of

qualitative indicators (2) Table 40:

6.1.5.2.3

Appropriateness of the Propositions on the Performance Evaluation of Global Innovators at Eucom

Performance Evaluation of the Local Innovator

The Spanish subsidiary is characterized as Local Innovator within Eucom. The performance evaluation of the Spanish Local Innovator is compared to the predictions in Table 41. Thereby, a high correspondence to the expectations is derived. The high relative weight of performance evaluation, the focus on financial performance measures and the mainly formal performance evaluation process of the Spanish subsidiary illustrate the propositions for Local Innovators.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Local Innovator

high relative weight

financial measures only

more formal

Spain

high relative weight

mainly financial measures

more formal

Result

support of the proposition

support of the proposition

support of the proposition

Table 41:

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Appropriateness of the Propositions on the Performance Evaluation of Local Innovators at Eucom

6.1.6

Standardization versus Role-Differentiation in Performance Evaluation at Eucom

The preceding subsection showed that the Eucom subsidiaries serve to illustrate most of the propositions elaborated in section 4.2. Although support for the predictions is revealed in many cases, contradictions are also found. Figure 21 presents the evaluation of the performance of the Finnish Strategic Leader, the German Contributor and the Spanish Implementer. The performance evaluation conducted by the Eucom headquarters concerning the Finnish Integrated Player, the German Global Innovator and the Spanish Local Innovator is summarized in Figure 22.

high

Contributor

Competence of local organization

1) medium relative weight of performance evaluation 2) mainly financial and additionally non-financial external measures 3) mainly formal and personal, but also cultural process

Implementer

Strategic Leader 1) medium relative weight of performance evaluation 2) financial as well as nonfinancial external and internal measures 3) more formal and personal process

Black Hole

1) high relative weight of performance evaluation 2) mainly financial measures 3) more formal process

low

low

Strategic importance of the market

high

Figure 21: Role-Specific Performance Evaluation at Eucom According to Bartlett and Ghoshal’s Role Typology

By this means, the research questions formulated in the introduction have been answered. It has been revealed how the role of performance evaluation, the content of performance evaluation and the process of performance evaluation differ according to the subsidiary roles within Eucom. The Strategic Leader, the Contributor

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and the Implementer are to a certain degree evaluated differently within Eucom. This is also the case when contrasting the Integrated Player, the Global Innovator and the Local Innovator. Thus, for Eucom an influence of the subsidiary role on performance evaluation is observed. However, the differences in the performance evaluation of the Eucom subsidiaries are not as large as predicted for each subsidiary role. On the one hand, this can be caused by the fact that the subsidiaries are not positioned at the extreme ends of the role typologies. In contrast, they are all situated near the centre of the matrices. On the other hand, additional factors seem to have an impact on the performance evaluation and give rise to additional insights into the case. These are the high emphasis on the formal evaluation of the financial measures on behalf of headquarters (1) and special situations of the subsidiaries (2).

high

Global Innovator

Outflow of knowledge

1) medium relative weight of performance evaluation 2) mainly financial and additionally non-financial external measures 3) mainly formal and personal but also cultural process

Local Innovator

Integrated Player 1) medium relative weight of performance evaluation 2) financial as well as nonfinancial external and internal measures 3) more formal and personal process

Implementor

1) high relative weight of performance evaluation 2) mainly financial measures 3) more formal process

low

low

Inflow of knowledge

high

Figure 22: Role-Specific Performance Evaluation at Eucom According to Gupta and Govindarajan’s Role Typology

(1) The same formal performance evaluation is conducted for all three Eucom subsidiaries. This “standard” reporting is considered to constitute a large part of performance evaluation from the headquarters’ point of view and selectively also 178

from the subsidiary managers. However, from the perspective of two of the subsidiaries the significance of the financial measures is doubted (P7) and it is questioned whether the vast amount of financial reports can actually be analyzed in detail to get a thorough picture of the subsidiary performance (P4). But at the moment the formal financial reports are considered as important and therefore form part of the performance evaluation of all Eucom subsidiaries. (2) The Finnish and the German subsidiary are in special situations. The Finnish subsidiary was acquired in 2005 and its integration is not completed yet. This special situation might have an impact on the performance evaluation of the Finnish subsidiary. Despite belonging to Eucom for years, the German subsidiary is in a special situation due to the prospective large contract. Again, this might affect the performance evaluation in the short term. Apart from describing the differences and similarities in the performance evaluation at Eucom, it is interesting to find out whether differentiating the performance evaluation is intended or not. At headquarters and at subsidiary level, the interview partners at Eucom argue for standardizing the performance evaluation (P1, P2, P4). “Even if the companies were different, at the end of the day they are measured by EBIT, orderintake and … no I don’t think there’s a difference, no.” (P4). However, “as I said, we are not yet where we would like to be”197 (P2). Consequently, a further standardization of performance evaluation is planned at Eucom but is not reached yet (P2). This standardization is part of the on-going integration of Eucom. The Eucom headquarters does not only work on integrating the Finnish subsidiary, but enhances integration of all its activities (P1). Global product lines, global sales and marketing and global project management are planned to be established (P2). The integration is already partly effective in the case of sales and marketing and ongoing in the other functions. The legal entities in the countries lose their separated positions and are becoming more and more integrated within Eucom. It is even the goal of Eucom that “in daily business it should not become apparent at all if someone is employed in France or in China.”198 (P1). Thus, the management by function and product line gains more importance at Eucom in place of the management by country or region. Despite of favouring a completely standardized performance evaluation (P1), differences remain with regard to the performance measures. While being primarily evaluated based on the same indicators, their level can differ between the subsidiaries. “In this respect, there are different targets, but then they only differ 197 198

Translation of “wir sind, wie gesagt, noch lange nicht da, wo wir hinkommen wollen” (P2). Translation of “ob jetzt einer einen französischen Vertrag oder einen chinesischen Vertrag hat, das sollte eigentlich gar nicht offensichtlich werden im täglichen Business.” (P1).

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quantitatively.”199 (P1). This means that one subsidiary can be required to reach a higher return on sales in a certain project than another subsidiary (P1). In this manner, the Eucom headquarters intends to account for differences in the business of their subsidiaries without further differentiating the performance evaluation in the future (P1, P2). This whole section on the business unit Eucom can be summarized as follows: After having introduced Eucom and its subsidiaries, the roles of each subsidiary were identified and the performance evaluation was analyzed. Thereby, first differences in the performance evaluation became apparent when comparing the Eucom subsidiaries. A more detailed comparison with the propositions according to each subsidiary role followed. Most predictions were illustrated by the role, content and process of performance evaluation of the Finnish, German and Spanish subsidiary of Eucom. This showed a role-specific performance evaluation within the boundaries of the Eucom case. However, the influence of the subsidiary role was lessened by additional intervening factors which were also identified in this section. Unfortunately, there are no defined ways of testing these findings (Scapens 1990: 275, Ghauri/Grønhaug 2002: 176). For the moment, a pattern is derived from the Eucom case which will be further investigated in the following in-depth analysis of the second case “Gloneer”. After that, both cases are compared in a concluding section of the empirical part of this dissertation (section 6.3). If the pattern revealed for Eucom is replicated in the case of Gloneer, confidence in the findings would be enhanced (Scapens 1990: 270, Yin 1993: 50, Hartley 1994: 226).

199

Translation of “Insofern, es gibt schon andere Ziele, die sind dann aber nur quantitativ unterschiedlich.“ (P1).

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6.2 Empirical Findings on “Gloneer”

6.2.1

Introducing Gloneer and Its Subsidiaries

Gloneer offers engineering services primarily to gas, chemical and petrochemical companies. Gloneer and most of its subsidiaries concentrate on the project development (planning the plant), project processing (installing the plant) and the provision of after-sales services (maintaining the plant). Still, Gloneer also has production sites. One of the Gloneer subsidiaries produces core components of the plants, and, in addition, some of the subsidiaries have their own production. The legal organization of Gloneer is visualized in Figure 23 and can be characterized as follows200: The Gloneer headquarters is organized into five product lines and ten additional functional departments, such as research and development, procurement, finance/controlling and human resources. The Gloneer headquarters has 14 subsidiaries and additional representative offices worldwide of which nine were selected for this analysis (see subsection 5.1.2.3 for the selection process): “Germany P”201, “China”, “Germany L”, “Germany S”, “Great Britain”, “India”, “Sweden”, “Switzerland” and “USA L”. Gloneer is managed by a board of directors with three members. This board not only manages the activities at headquarters, but also governs the subsidiaries. Several headquarters representatives are involved in executing control and evaluating the performance of the subsidiary. On the one hand, a board is institutionalized for each subsidiary.202 On the other hand, the finance and controlling department is highly involved.  The subsidiary board203 is legally required and has a supervisory and advisory function. At least one member and sometimes two members of the Gloneer board of directors are sitting on this subisidiary board. A further position can be occupied by another headquarters representative who is responsible for one of the product lines or the production plants.  The Gloneer board of directors is supported in governing the subsidiaries by the finance and controlling department. Here, several managers and employees look after the subsidiaries, control their activities, evaluate their performance and 200 201

202 203

The following information is extracted from an internal Gloneer document (P9b). Germany P is no separate legal entity but legally integrated into headquarters (P27: 90). However, Germany P is managed like the other subsidiaries as independent unit so that it is included as subsidiary (P10: 166-173). One exception to this rule is “Germany P“ since this unit is no separate legal entity. This board does not correspond to the management board of the subsidiary.

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provide support to them. In addition, they act as an interface between the subsidiaries and the Gloneer board of directors. The finance and controlling department has the following mission concerning the subsidiaries: “The Controlling of Subsidiaries at Gloneer has the aim to minimize and early detect risks.”204 To this aim, several instruments can be used205: financial reporting, forecast, budget and mid-term planning, plan/actual comparison, project control, Balanced Scorecard, risk reporting, monthly directors’ report, internal audit reports and management letters from auditors.

Germany P

Gloneer HQ

“China”

Germany S

“India”

“Switzerland”

Germany L

“Great Britain”

“Sweden”

USA L

Branch Office Additional Branch Office Subsidiary

Representative Representative Representative Office Office Office

Figure 23: Legal Organization of Gloneer206

Having described the relevant actors at headquarters level, the focus is now shifted to the subsidiary level. Every subsidiary is managed by a managing director (“President”, “Chief Executive Officer”).207 In addition, chief financial officers, vice presidents or commercial managers support the managing directors and are responsible for finance and controlling at subsidiary level. The further set-up of the management depends on the subsidiary in question.

204 205 206 207

Internal Gloneer document (P9e). Internal Gloneer document (P9e). Information extracted from internal Gloneer documents (P9a, P9b). One Gloneer subsidiary (Germany L) has two managing directors.

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After this short introduction on the relevant actors at headquarters and subsidiary level, the subsidiaries themselves are described: The Gloneer subsidiaries are shortly introduced by describing their activities (1) and size (2) before presenting their roles within Gloneer according to Bartlett and Ghoshal (3) and according to Gupta and Govindarajan (4): (1) The Gloneer subsidiaries differ in terms of their activities. While Germany L, USA L and “China” are largely duplicates of headquarters in terms of their product lines, Germany S, “Switzerland”, “Sweden” and “Great Britain” offer discrete product lines. Germany P and “India” have a narrower activity spectrum: Germany P is a production unit which develops and manufactures components for headquarters and other Gloneer subsidiaries. “India” is an engineering service unit which is at the moment acting as a subcontractor for work packages of projects conducted by headquarters and by other Gloneer units. (2) Another distinction can be made regarding the size of the Gloneer subsidiaries. While Germany S, “Switzerland” and “Great Britain” operate with less than 100 employees, “China” and “India” have more than twice this size. With around 150 employees, the Swedish subsidiary fills the middle between these two groups. The largest subsidiaries in terms of the number of employees are Germany L, USA L and Germany P with more than 500 employees each. A similar distribution is also found when comparing the sales figures of these nine Gloneer subsidiaries.208 (3) As this section will show, the nine subsidiaries fulfil different roles within Gloneer. Figure 24 presents the subsidiary roles determined according to Bartlett and Ghoshal along the dimensions “competence of local organization” and “strategic importance of the market”. While the majority of the Gloneer subsidiaries (Germany P, Switzerland, Germany S and Sweden) are Contributors, Germany L and USA L fulfil Strategic Leader roles. In contrast, the British subsidiary is an Implementer and “China” as well as “India” are Black Holes. How these positions are exactly determined is described for each subsidiary individually in the following subsections.

208

For confidentiality reasons, the exact sales figures cannot be listed.

183

very high

Contributor

Competence of local organization

Germany P Switzerland Germany L Germany S

USA L

Sweden Great Britain

China India

Implementer not at all

Strategic Leader

Black Hole

Strategic importance of the market

very high

Figure 24: The Roles of the Gloneer Subsidiaries (I/II)

(4) In contrast to the relative diverse roles within Bartlett and Ghoshal’s role typology, a high concentration on the position as Local Innovator is observed for the Gloneer subsidiaries. “Switzerland”, Germany S, Germany L, USA L, “Sweden” and “Great Britain” are Local Innovators with low to medium knowledge outflows and inflows. Only Germany P is a Global Innovator and “China” as well as “India” are Implementors. Figure 25 presents the Gloneer subsidiaries in Gupta and Govindarajan’s role typology.

184

very high

Global Innovator

Integrated Player

Germany P

Outflow of knowledge

India

Germany L Great Britain

China

Sweden USA L Germany S Switzerland

Local Innovator not at all

Inflow of knowledge

Implementor very high

Figure 25: The Roles of the Gloneer Subsidiaries (II/II)

The subsidiaries, their roles and their performance evaluation are presented in detail in the following. Each subsection covers one subsidiary. Starting out with the Strategic Leaders, Germany L is addressed in subsection 6.2.2 and USA L in subsection 6.2.3. This is followed by the Contributors “Switzerland” (subsection 6.2.4), Germany S (subsection 6.2.5), “Sweden” (subsection 6.2.6) and Germany P (subsection 6.2.7). Then, the British subsidiary as an Implementer is covered in subsection 6.2.8. Finally, the Black Holes “China” (subsection 6.2.9) and “India” (subsection 6.2.10) are presented. For each subsidiary, its roles are described first. Thereby, for each strategic role one subsidiary with a relatively extreme position in the role typologies is chosen as a typical example and outlined in greater detail.209 The positioning of the remaining subsidiaries with the same role is not described at length, but briefly summarized. After having presented the subsidiary role, the performance evaluation of the subsidiary is thoroughly analyzed. For each subsidiary, the role of performance 209

These are the following for Bartlett and Ghoshal’s subsidiary roles: Strategic Leader – Germany L, Contributor – “Switzerland”, Implementer – “Great Britain” and Black Hole – “China”. For Gupta and Govindarajan’s subsidiary roles, three subsidiaries are selected first: Global Innovator – Germany P, Local Innovator – “Switzerland”, Implementor – “China”. As two-thirds of the Gloneer subsidiaries are Local Innovators, Germany L is chosen in addition since it has a Local Innovator position with some more knowledge inflows and outflows than “Switzerland”.

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evaluation, the content of performance evaluation and the process of performance evaluation are revealed. After having separately outlined the role and performance evaluation of each subsidiary, subsection 6.2.11 summarizes the findings to compare them for each subsidiary role and contrast them with the propositions elaborated in section 4.2. Thereby, it is revealed if and how Gloneer conducts a role-specific performance evaluation.

6.2.2

The Gloneer Subsidiary “Germany L”

“Germany L” was bought by Gloneer in 1990 (P17). It provides engineering services within the whole product portfolio of the Gloneer headquarters focusing on Eastern European countries, the former Soviet states and the Middle East (P10, P17). In addition, Germany L offers special plants for the gas and chemical industries which are not part of the product portfolio of the Gloneer headquarters (P10, P18). Twothirds of its sales are realized within this major product line, while one-third is attributed to two additional product lines – the pharmaceutical plants and the environmental plants (P17). The roles of Germany L are described first (subsection 6.2.2.1) before analyzing how the performance of Germany L is evaluated (subsection 6.2.2.2).

6.2.2.1

The Roles of Germany L – Strategic Leader and Local Innovator

From the headquarters perspective, Germany L is conceived as a Strategic Leader (P12). This view is supported by interview statements from the subsidiary (P17). In the following, Germany L is illustrated as a Strategic Leader by arguing for a high strategic importance of the market (1) and a high level of competence (2). (1) The market of Germany L is considered to have a medium to high strategic importance for Gloneer. This is due to a high to very high market volume, medium to high competition intensity, medium to high customer demand intensity and medium technological dynamism.  Germany L has a worldwide product responsibility for the two smaller product lines, but concentrates on the European market in these areas and the former Soviet states (P10, P17). In the target countries, the Gloneer headquarters sees a high potential and therefore argues for a high to very high market volume for Germany L (P10).  In the major product line, Germany L competes mainly against five competitors which are international companies penetrating the Eastern markets and local competitors in these countries (P17). Although new Chinese competitors might

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enter the market, the current market position of Germany L is strong (P17). In the smaller product lines, competition is conceived to be more intense, and Germany L has a less favourable position (P17, P19). All in all, competition intensity for Germany L is considered to be at a medium to high level. Germany L is confronted with different customer demands depending on their home countries (P17). Customers from Western countries tend to have very high demands requesting detailed specifications no matter if investing in their home country or in foreign countries (P17). Long negotiations are the rule before a project is awarded (P18). In contrast, local customers in Russia, for example, agree with country-wide standards and do not demand such highly specific plants (P17). At the same time, demands for low-cost plants arise which are very difficult to meet for Germany L (P17, P18). Thus, the customer demand intensity is seen at a medium to high level. In general, innovations are rare in the business Germany L and Gloneer operate in (P17). The relevant process innovations for Germany L are adopted from the Gloneer headquarters (P17). Nevertheless, some pressure for innovation is seen in the special product lines of Germany L. All in all, technological dynamism is conceived to be at a medium level.

(2) Germany L is active in all addressed value chain activities, but does not have production facilities where plant components are manufactured (P17). However, Germany L is “producing” in terms of designing, planning and setting-up plants. As this core competence cannot be neglected, the level of competence in “production” in terms of engineering is taken into account. The level of competence in these activities is determined on average at a medium to high level (see Figure 26 for a summary):  Research and development: The research and development activities of Germany L are restricted to the environmental plants. In its major product lines, process innovations are transferred from the Gloneer headquarters to Germany L (P17). Furthermore, Germany L is dependent on licensers and their developments (P17). Thus, the level of competence in research and development is rated at “to a little extent” (P17, P18).  Purchasing: Germany L conducts its purchasing activities to a large extent independently. In addition, Gloneer benefits from the purchasing competence of Germany L. As the subsidiary knows the Eastern European countries, the former Soviet countries and the Middle East, it takes over purchasing activities for the group, for instance in Russia (P17). Thus, the competence level in purchasing is high (P10, P17, P18).  Logistics and distribution: Logistics and distribution is not a core activity of Germany L (P18). Still, the competence level in logistics and distribution is considered as high compared to other subsidiaries (P10, P17).  “Production”: There is, indeed, no manufacturing activity at Germany L, but its engineering competence is rated here. Germany L conducts all engineering

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processes (P10). This leads to a medium to high level of competence attributed in this area to Germany L (P10). Marketing and sales: Germany L autonomously conducts its marketing and sales activities in the target region and worldwide for its special product lines (P10, P11). The competence in marketing and sales activities of Germany L is conceived to be high (P11, P17, P18). Human resource management: At Germany L, human resource management is conducted locally, but initiatives are mainly driven from headquarters (P17, P19). Activities in human resource management concentrate on job-specific trainings as well as on finding interesting and demanding positions for the personnel (P18: 17). Thus, the level of competence in human resource management is conceived to be at a medium level (P10, P17).210 General management: From the subsidiary and the headquarters perspective, it is pointed out that Germany L has a high competence in general management (P10, P11, P17, P18).

Competence Level of the Gloneer Subsidiary “Germany L“ to a very high extent

to a high extent

Competent

medium

to a little extent

not at all Research Purchasing & development

Logistics & “Production” Marketing distribution & sales

Relevant Value-Chain Activities

Figure 26: The Competence Level of the Gloneer Subsidiary Germany L

210

See P18 in contrast, ranking the competence level at “to a high extent”.

188

Human General resource management management

Germany L is conceived as Strategic Leader in Bartlett and Ghoshal’s role typology. In addition, it is attributed a Local Innovator role in the typology presented by Gupta and Govindarajan (P12). This is the result of knowledge inflows and outflows to a low to medium extent which are presented in Figure 27.  Market data on customers and market data on competitors: Germany L does not receive market data on customers and competitors in its core geographic markets – Eastern Europe, former Soviet countries and the Middle East – but provides this knowledge to other units within Gloneer (P17). Concerning other country markets, Germany L relies on the knowledge from headquarters and other subsidiaries (P17). At the same time, it cannot provide knowledge in this area to other units. Overall, the inflow and the outflow of market data on customers and market data on competitors are seen at a low to medium level (P17, P18).  Product designs and process designs: This type of know-how is relevant for the engineering activities. In the related product lines, Germany L receives knowledge from the Gloneer headquarters (P17), while there is no knowledge inflow in the product lines specific to Germany L (P17, P19). Thus, a low inflow level of product designs and process designs is found on average (P17, P18). The outflow of know-how in this area goes to subsidiaries with a lower competence level, such as “India”, and is at a medium level (P11, P17).211  Marketing know-how: Marketing knowledge is to a medium extent flowing from headquarters to Germany L (P17, P18). The outflow of marketing know-how exists, for instance, in the case of knowledge on Russia but only at a low level (P17).212  Distribution know-how: Knowledge on distribution is not considered to be relevant for Gloneer so that this kind of knowledge is neither flowing in nor out (P17, P18).  Purchasing know-how: Within the purchasing function, a high level of knowledge inflows is stated (P17, P18). For global sourcing, Germany L provides its knowhow on purchasing in the Eastern European and former Soviet countries to other units (P17). The overall outflow of purchasing know-how is rated at a medium level (P17, P18). 

Management systems and practices: When it comes to management systems and practices, the Gloneer headquarters often takes the initiative and/or is activated by the MNC headquarters (P17). Germany L, for instance, received information on the Balanced Scorecard from the Gloneer headquarters before having elaborated one for themselves (P17, P19). Still, this was no one-way knowledge flow. An exchange of the status quo in developing the Balanced Scorecard was established between headquarters and Germany L (P19). Overall, the Gloneer headquarters provides management systems and practices to a high degree to

211

212

Another interviewee at Germany L does not see these knowledge outflows (P18). Nevertheless, the strong collaboration with the Indian subsidiary and with a project unit in Saudi Arabia under the lead of Germany L fosters this knowledge transfer (P11). Again, the second interviewee does not see this type of knowledge outflow (P18).

189

Germany L (P17, P18), while the level of outflow is seen at a low to medium level.213

Gloneer: “Germany L“

Inflow of knowledge

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs Marketing know-how Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 27: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary Germany L

6.2.2.2

The Evaluation of Germany L’s Performance

In the following, the performance evaluation of Germany L is described within the three dimensions of performance evaluation. First, the role of performance evaluation is detailed (1), then the content of performance evaluation is described (2) and finally, the process of performance evaluation is analyzed (3). (1) The role of performance evaluation in the control mix used by headquarters towards Germany L is determined by comparing the use of the three control objects – input, behaviour and output:

213

Despite indicating no outflow of management systems and practices at all, one of the interviewees acknowledged that all demanded know-how is provided (P17). An exchange of knowledge between headquarters and Germany L is revealed for the development of IT-systems: While this know-how flows to a high extent from headquarters to Germany L, the Gloneer headquarters only incorporates the know-how and input from Germany L to a little extent (P18).

190

Input control: For Germany L, a medium to high level of input control is found due to a significant use of “expatriates”, a high headquarters’ influence on the hiring of managers and trainings provided by headquarters to a medium extent.  In the case of Germany L, it is inappropriate to consider the use of expatriates because managers are not sent from their home country to a foreign country. Nevertheless, the same idea in terms of input control is also immanent when managers are delegated from the Gloneer headquarters (in Germany) to Germany L. This happens from time to time at Germany L (P19). One of the two managing directors of Germany L was, for example, recently transferred from headquarters to Germany L (P19). More often, employees are delegated for a certain period of time to Germany L in order to meet personnel shortages (P17, P19). These transfers are not considered as input control. However, as at top level and at lower levels managers often refer to a previous career at headquarters (P19), the overall use of “expatriates” is seen at a high level.  The Gloneer headquarters also has an impact on the hiring of managers for Germany L (P17, P19). “They have a right of co-determination”214 (P17). This mainly concerns the first two hierarchical levels at Germany L (P19). Thus, the influence of headquarters on hiring managers is considered to be high.  The managers and employees of Germany L were trained “on-the-job” by headquarters after Germany L had been acquired by Gloneer in the early 1990s (P17). Due to a personnel shortage at headquarters, plenty of personnel was sent to headquarters and got to know the procedures and processes (P17). Nowadays, this training by headquarters has been clearly reduced. Managers and employees only selectively participate in the general training program, in technical trainings and development programs offered by Gloneer (P17, P18, P19). Six-Sigmatrainings carry more weight in the opinion of headquarters, and managers of Germany L are frequently invited to these trainings (P19). All in all, the trainings provided by headquarters are seen at a medium level. Behaviour control: Four types of behaviour control are used by the Gloneer headquarters for Germany L: Behaviour surveillance takes place to a very high extent, procedures are predefined to a high extent and interaction is at a medium to high level. This indicates a high use of behaviour control for Germany L.  Concerning the surveillance of behaviour at Germany L, the management is “initially relatively free”215 (P17). Four exceptions to this rule become apparent: First, approval thresholds are defined which the top management of Gloneer has to obey (P18). Second, Germany L respects the global product responsibility which is defined at headquarters for some of Germany L’s products (P17, P9c). In these cases, Germany L subordinates its sales activities to the respective product line manager at headquarters (P17). Third, the Gloneer headquarters has an eye on Germany L at the moment because the subsidiary is for the first time working 214 215

Translation of “Sie haben ein Mitbestimmungsrecht“ (P17). Translation of “Also, zunächst einmal relativ frei“ (P17).

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on extremely large projects (P19). Fourth, starting this year, internal audits of Germany L have been initiated by the Gloneer headquarters (P19).216 These audits aim at checking the execution of selected projects (P19) and are therefore also interpreted as a behaviour surveillance. All in all, behavioural surveillance of Germany L is seen at a very high level. Germany L operates according to a quality handbook provided by Gloneer in the early 1990s which has partly been changed during the last years and adapted to the needs of Germany L (P18). This handbook provides detailed procedures for all technical and commercial activities at Gloneer (P18). Furthermore, Germany L uses the same IT-systems as the Gloneer headquarters. “We largely work with the same systems. Thus, a good deal is predefined.”217(P19). This also leads to a predefinition of procedures (P19) which are – all in all – conceived to be high. There is frequent interaction between the Gloneer board of directors and the management of Germany L (P10, P18). This interaction is not conceived as behaviour surveillance but as an exchange of information (P17). “They constantly look at us. Yes, there is no ongoing control but an ongoing information process”218 (P17). Furthermore, Germany L is interacting with persons responsible for certain product lines at headquarters (P17). Hence, the level of interaction between headquarters and Gloneer is conceived to be already medium to high. Still, a further increase in interaction is demanded (P17).

Output control: The medium to high level of output control for Germany L is indicated by a high use of pre-established targets, a medium use of performance-related pay and a high link of performance judgements to results.  Germany L and its management are evaluated against pre-established targets. On the one hand, targets for the subsidiary in terms of financial results and manpower are set during the yearly planning process (P18). In addition, targets are set for key performance indicators incorporated in a recently implemented Balanced Scorecard once a year (P17). On the other hand, individual performance targets for the first two hierarchical levels of Germany L are agreed upon (P17, P18). The managers at lower hierarchical levels are not yet included (P18, P19). Improvement potential is seen in the area of the individual performance targets: “I would not say that it is still in its infancy, but it still has clear potential for improvement.”219 (P18). However, due to the existence of preestablished targets at subsidiary level in terms of the budget and the Balanced

216

217

218

219

Before, only the MNC headquarters has been conducting internal audits on different topics, such as IT-system-audits or cash-audits (P19). Translation of “Wir arbeiten großteils mit den gleichen Systemen. Da wird relativ viel vorgegeben.” (P19). Translation of “Es wird sich laufend angesehen. Ja, es wird laufend nicht kontrolliert, sondern informiert.“ (P17). Translation of “Ich würde nicht sagen, dass es in den Kinderschuhen steckt, aber es ist immer noch deutlich verbesserungsdürftig.“ (P18).

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Scorecard and at the first two hierarchical levels in terms of individual target agreements, their use for Germany L is conceived to be high. The achievement of personal targets is linked to the individual pay (P18). Again, this is restricted to the first two hierarchical levels at Germany L (P18). Therefore, the use of performance-related pay is seen to be medium. Several statements reflect a strong link of performance judgements to results on behalf of the headquarters. A high importance of output measures for Germany L and a strong concern with cost and revenues is observed: First of all, financial output at the MNC level and at the level of Gloneer as well as Germany L constitutes a large portion of the individual performance targets (P17, P18). Second, Germany L is mainly evaluated in terms of order intake and gross margin (P17). As these indicators are important for the external reporting at MNC level, they are essential for Gloneer (P18). This also becomes apparent when subsidiaries start competing against each other for new contracts because each subsidiary tries to maximize its order intake (P17). Furthermore, a strong concern with cost and revenues becomes apparent through a high emphasis on the current project costs (P18, P19). All in all, the link of performance judgements to results is considered to be high for Germany L.

Table 42 summarizes the control mix used by the Gloneer headquarters towards Germany L. A medium to high use of input control, a high use of behaviour control and a medium to high use of output control indicate that performance evaluation is just as important for Germany L as other control mechanisms. Consequently, a medium relative weight of performance evaluation in the control mix of Germany L is derived.

Control Objects at Germany L Input Control

Behaviour Control

Output Control

 high use of “expatriates”

 very high level of behaviour

 high use of pre-established

 high influence of

surveillance  high predefinition of procedures

 medium use of performance-

 medium to high interaction

 high link of performance

headquarters on hiring new managers  training provided by

headquarters to a medium extent  medium to high use of input control Table 42:

targets related pay judgement to results

 high use of behaviour control

 medium to high use of output control

The Control Mix Used for the Gloneer Subsidiary Germany L

(2) Having analyzed the role of performance evaluation in the control mix, the content of performance evaluation is looked at in the following. Financial, non-financial and qualitative indicators are used for evaluating the performance of Germany L. 193

Financial measures: The performance of Germany L is basically judged on four financial measures (P17, P18, P19): order intake, sales, EBITA and return on sales. High emphasis is placed on these measures (P17, P18, P19). They (and in addition return on capital employed – ROCE) are incorporated in the targets for the top management of Germany L (P17, P18). In addition, the evaluation of each project is important for evaluating Germany L (P18, P19). Here, the total cost and the projectresult-forecast – “the forecast of how the result of a project develops during its term”220 (P16) – are used (P18, P19). All mentioned measures and, in addition, cash flow, interest result and overhead cost absorption are integrated as key performance indicators in the Balanced Scorecard of Germany L (P17, P20). The financial performance of Germany L is mainly assessed in comparison to the budget (P17, P19). Once a year the budget is elaborated during the planning process and “then we go along with it. And the measurement is conducted from month to month, from quarter to quarter and from year to year.”221 (P18). The performance of each project is also measured in comparison to an initial budget (P19). An internal benchmarking is not officially conducted so that informal channels have to be used to compare Germany L to other subsidiaries (P19). Non-financial measures: The most important non-financial measure for assessing the performance of Germany L is the employed working capacity in engineering (P18). Most of the employees ought to be working on projects. In order to make sure that capacity is continuously occupied, headquarters representatives also scrutinize proposals and new projects (P18). “This means that you always need a well filled list of so-called `binding offers´ duly submitted and ready for negotiations.”222 (P18). Further effiency measures for sales, project execution, procurement and administration are included in the Balanced Scorecard (P19, P20).223 Qualitative indicators: To a lower degree qualitative indicators are taken into account for evaluating the performance of Germany L (P17, P18, P19). In the individual target agreements, qualitative-oriented targets are partly integrated. They cover, for instance, specific projects which are conducted during the course of the year (P18). Some additional qualitative indicators are mentionned by the interviewees, such as, for example, the development of existing customer relations, customer satisfaction and employee qualification (P17, P18).

220

221

222

223

Translation of “die Hochrechnung, wie sich das Ergebnis des Auftrages über die Laufzeit des Auftrages verändert“ (P18: 86). Translation of “Und dann laufen wir mit dem Ding. Und die Messung erfolgt eben Monat zu Monat, Quartal zu Quartal und Jahr zu Jahr“ (P19). Translation of “D.h. Sie brauchen immer eine prall gefüllte Liste so genannter “verbindlicher Angebote“, die Sie richtig abgegeben haben, die Sie verhandeln können.“ (P18). In addition, employee presence rate, employee retention rate, degree of internationalization and a percentage of kick-off meetings are integrated as key performance indicators in the Balanced Scorecard, but not all of them are regularly assessed (P20).

194

The content of performance evaluation of Germany L is summarized in Table 43. Although financial measures play the most important role for Germany L, emphasis is also placed on internal non-financial measures. Qualitative internal and external indicators are found, but not considered to play an essential role.

Content of Performance Evaluation of Germany L Financial

Non-financial

High emphasis on:  order intake

Medium emphasis on:  employed working capacity

 sales

 number of proposals and

new projects

 EBITA

Qualitative Low emphasis on:  development of customer

relations  customer satisfaction

 return on sales

 employee qualification

 ROCE

 additional indicators related

to specific projects

 total cost of each project  result-forecast of each

project Low emphasis on additional factors in the Balanced Scorecard (P20), such as for example 224: project result variance, cash flow Table 43:

Efficiency in sales and project execution

developing new markets, employee motivation

The Content of Performance Evaluation of the Gloneer Subsidiary Germany L

(3) The process of evaluating the performance of Germany L is highly formal and cultural, while it contains a medium to large personal element. Formal: The formal performance evaluation of Germany L consists of several elements: the reporting system, monthly management reports, project reports and the Balanced Scorecard.  A company-wide tool is used to report financial figures (P11, P18, P19). This is on the one hand used for external reporting purposes. On the other hand, it constitutes the formal basis for the evaluation of the financial performance of Germany L (P18). Every month, complete financial statements are provided to headquarters (P18). Every quarter even more detailed financial data is requested (P19).  Every month the top management of Germany L sends a management report – the so-called “directors’ report” – to headquarters (P17, P18). It provides information on all major projects, new project offers, the employed working capacity and key financials (P18, P19). “So, such essential issues are summarized there”225 (P18). 224 225

For confidentiality reasons not all Balanced Scorecard indicators are listed. Translation of “Also, so wesentliche Eckpunkte sind dort zusammengefasst“ (P18).

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In addition, monthly project reports are prepared on all projects which are executed at Germany L and exceed a certain threshold in terms of their sales volume (P11, P17). Furthermore, Germany L supplies information to global project reports when participating in a project another unit of Gloneer is responsible for (P17). These global project reports are provided to headquarters at least once every quarter (P17). “The essential part is the whole risk assessment. This can quickly assume vast proportions”226 (P17). In addition to the risk assessment, the project costs are addressed in detail in the project reports (P18, P19). With this information, the Gloneer headquarters is able to evaluate the performance of each major project (P9e).227 Furthermore, Germany L implemented a Balanced Scorecard (P10, P17, P20). A strategy map was designed, and all four perspectives of the scorecard – the financial, the customer, the process and the human resources perspective – were filled with strategic initiatives and key performance indicators (P20). Once a year, during the planning process, the Balanced Scorecard is set up (P19). Every quarter, the achievement level of the key performance indicators is communicated to headquarters (P19). Still, the feedback is limited (P18). So, at the moment the relevance of the Balanced Scorecard for performance evaluation (still) seems to be limited. 228

Personal: The formal elements of performance evaluation are selectively combined with personal elements. Management meetings and personal appraisals constitute the personal performance evaluation process of Germany L.  Two members of the Gloneer board of directors are members of the board of Germany L (P18). Official meetings between the management of Germany L and their board are only held once or twice a year (P17, P18). Quite frequently, but not in an established cycle, additional management meetings are scheduled for special topics at headquarters or at the subsidiary site (P18). These meetings are used for performance evaluation (P18): “And then we present our figures and the status quo.”229 (P18).  For Germany L, a personal performance evaluation element is attached to the adhoc-reports (P11, P18). “Of course, a discussion takes place then. `Could this have been avoided?´ or `What are you doing about it?´”230 (P18). Thus, the Gloneer headquarters does not only rely on the formal report, but also looks for 226

227

228

229 230

Translation of “Das Wesentliche ist die ganze Risikobetrachtung. Also, das kann ja schnell Dimensionen annehmen.“ (P17). Less standardized are the so-called “ad-hoc-reports” (P18). The management of Germany L has to warn the Gloneer board of directors and the management of the group when it realizes that the result of a certain project is deviating to a defined extent from the planned result (P18, P19). These alerts are established Gloneer-wide and form part of the Gloneer risk management (P15, P18). The management of Germany L is slightly sceptical about the impact of the Balanced Scorecard (P17, P18). However, the Gloneer headquarters attaches more weight to the Balanced Scorecard and is expected to push the Balanced Scorecard further (P9e, P11, P19). Translation of “Und dann präsentieren wir die Zahlen und unseren aktuellen Status.“ (P18). Translation of “Da findet natürlich auch eine Diskussion statt, ´Hätte man das vermeiden können´ oder `Wie steuert Ihr dagegen´“ (P18).

196

an explanation to avoid profit warnings in the future. Furthermore, feedback on achieving individual targets is provided personally twice a year (P17).231 Cultural: An important cultural element is also found in the performance evaluation. It is determined by informal communication and shared performance goals:  A high frequency of informal communication between the Gloneer headquarters and the management of Germany L is observed (P10, P17, P19). This informal communication is not only found at top management level, but also at lower hierarchical levels (P18, P19).  From the subsidiary perspective, the management of Germany L and Gloneer share the same performance goals (P17, P18). In the main product line of Germany L, headquarters and Germany L collaborate closely and even work together for the same customers (P17). This fosters a strong co-alignment of performance goals (P17). Furthermore, the management of Germany L conceives itself as part of Gloneer (P17): “we do not want to sub-optimize ourselves, rather we aim for the optimum in the accounting grid of the whole group”232 (P17). In summary, the performance evaluation process of Germany L can be characterized as formal, personal and cultural. The personal element of performance evaluation is only implemented to a slightly lower extent than the other two components. Table 44 provides an overview of the process of evaluating the performance of Germany L.

Performance Evaluation Process of Germany L Formal

Personal

 monthly financial reports;

 official management

quarterly add. financial data  monthly management reports

meeting once or twice a year; quite frequently additional management meetings  personal discussion of adhoc-reports and personal appraisal of individual targets twice a year

 monthly project

reports/quarterly global project reports  implementation of a Balanced Scorecard  large formal element

Table 44: 231

232

 medium to large personal element

Cultural  frequent informal

communication  shared performance goals

 large cultural element

The Performance Evaluation Process of the Gloneer Subsidiary Germany L

Throughout Gloneer, bilateral meetings with the responsible line manager take place (P17) so that except for the CEO-level these are internal appraisals at Germany L. Thus, only the personal performance appraisal for the CEOs of Germany L is considered as personal performance evaluation on part of headquarters. Translation of “Wir wollen uns nicht suboptimieren, sondern wir wollen den Gesamtbilanzkreis optimieren.“ (P17).

197

6.2.3

The Gloneer Subsidiary “USA L”

USA L is providing engineering services within the whole product portfolio of the Gloneer headquarters with a main geographical focus on the NAFTA-region (P10, P14, P15). In addition, it has worldwide product responsibility for small hydrogen plants where half of the sales were realized in 2005 (P15). Further worldwide responsibility is attributed to USA L for the refinery business (P10, P15). In total, around 500 employees work at USA L, and two production plants are in operation (P10, P15). The roles which USA L fufils within Gloneer are summarized in the following (subsection 6.2.3.1) before analyzing the performance evaluation of USA L (subsection 6.2.3.2).

6.2.3.1

The Roles of USA L – Strategic Leader and Local Innovator

From a headquarters perspective, USA L is a Strategic Leader in Bartlett and Ghoshal’s role typology (P10, P12). This is due to a high strategic importance of the market and a medium to high level of competence of USA L. Table 45 reveals how this positioning is substantiated by showing values for each relevant indicator and the sources supporting them.

Dimension Strategic importance of the market

Indicator market volume

high

P10, P15 P14, P15

high

P14, P15

medium to high

P14, P15, P27

level of competence in purchasing

medium

P10, P14, P15

level of competence in logistics and distribution

medium

P10, P15

level of competence in production

medium

P10, P15

level of competence in marketing and/or sales

high

P10, P14, P15

level of competence in human resource management

high

P10, P14, P15

level of competence in general management

medium to high

P10, P14, P15

technological dynamism

Table 45:

198

Sources

medium

competition intensity customer demand intensity

Level of competence

Value

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary USA L

In addition, like Germany L, USA L is positioned as a Local Innovator from the headquarters’ point of view (P12: 2). The same role is also attributed from the subsidiary perspective (P14, P15). Figure 28 provides an overview of the low to medium level of knowledge inflows and outflows between USA L and other units of Gloneer.

Gloneer:

Inflow of knowledge

Outflow of knowledge

“USA L“ Market data on customers Market data on competitors Product designs Process designs Marketing know-how Distribution know-how Purchasing know-how Management systems and practices

to a very high extent

medium

not at all

not at all

medium

to a very high extent

233

Figure 28: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary USA L

6.2.3.2

The Evaluation of USA L’s Performance

In the following, the performance evaluation of USA L is described in terms of its role (1), content (2) and process (3). (1) The role of performance evaluation in the control mix is now determined for USA L. All three control objects are described in detail in order to identify the relative weight of performance evaluation in the control mix.

233

The interviewees at subsidiary level differed slightly in their judgement on the knowledge inflows and knowledge outflows so that average values derived from P14, P15 are presented in the figure.

199

Input control: The Gloneer headquarters conducts a medium to high level of input control towards USA L. This is due to a medium use of expatriate managers, a high influence of headquarters on hiring and a medium provision of trainings.  The use of expatriates is at a medium level. Headquarters sent many expatriates to USA L a few years ago (P14, P15). Nowadays, managers are still delegated from Gloneer to USA L, but less frequently (P15: 80-83). Two top managers of USA L are, for instance, expatriates (P15). As a transfer of managers at lower hierarchical levels is not evident, the use of expatriates is seen at a medium level.  Concerning the hiring of new managers, there are discussions held between the management of Gloneer and the management of USA L (P15). “We discuss it with them, but in other words, there are no interviews set up through the corporate with the people whom we are hiring.” (P14). Despite not being directly involved in the interviews, a right of co-determination of the Gloneer management is in place when high-rank management positions are to be filled (P15). This applies to the first two and partly also the third hierarchical level (P15). Therefore, the impact of headquarters on hiring is conceived to be high.  Training is on the one hand provided by headquarters when employees are sent from headquarters to USA L in order to train their colleagues in the use of special software tools (P14, P15). On the other hand, employees or managers of USA L are frequently sent to the Gloneer headquarters (P14, P15). They are trained “onthe-job” at headquarters and come back to USA L after a few months (P15). As these trainings are not systematically provided by headquarters to the managers at USA L, but more on a case-by-case basis, the provision of trainings by headquarters is seen at a medium level. Behaviour control: The Gloneer headquarters uses behaviour control to a medium to high extent towards USA L. This is due to a high level of behaviour surveillance, a medium predefinition of procedures and a medium to high level of interaction.  In contrast to other subsidiaries, the Gloneer headquarters grants more autonomy to USA L in their daily business (P10). Still, behaviour surveillance on behalf of the management of Gloneer cannot be ignored: “My experience has shown that the reporting as well as the interference – please do not understand `interference´ negatively – but still, the interference in the business has grown” (P15). USA L has to obey approval thresholds (P15). In addition, the global product responsibility for several of the product lines USA L is active in is assigned to headquarters; there activities are influenced by headquarters (P9c, P15). An indepth internal audit was also conducted on behalf of headquarters at USA L to check internal processes and project execution (P11). These three ways of surveilling behaviour lead to judging its level to be high.  USA L is working on adapting its systems and processes to headquarters standards (P14). Thus, procedures are not (yet) completely predefined. Still, predefined procedures, for example, exist for risk management and contract forms (P15). So, the predefinition of procedures is argued to be medium.

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Frequent interaction takes place between the management of USA L and the Gloneer management (P10). “I would say it’s by reports, by telephone, conversations, by meetings. I think headquarters in Munich is very well aware of what we’re doing in this company.” (P14). This frequent exchange of information (P14) leads to judging the level of interaction to be medium to high.

Output control: The output of USA L is controlled by headquarters to a high extent. This is due to a very high use of pre-established targets, a medium to high use of performance-related pay and a high link of performance judgement to results.  The use of pre-established targets is highly relevant for USA L. The subsidiary implemented a Balanced Scorecard which is broken down to the product lines and departments and linked to the managers’ individual target agreements (P10, P14, P15, P16). All managers agree on targets for the year with their line managers which have to get approved by headquarters (P14, P15). These targets are posted on an individual intranet-page (P14). In addition, the budget for the whole subsidiary is formulated as target during the yearly planning process (P15: 61, P9e). As the Balanced Scorecard, the budget and individual target settings for all managers are being implemented, the overall use of pre-established targets is conceived to be very high.  The individual targets are linked to the variable portion of pay (P14, P15). This again applies to the top four tiers of management (P15) so that the use of performance-related pay is seen at a medium to high level.  A large portion of the performance targets is linked to financial output at the MNC level as well as the level of Gloneer and USA L (P15). When the performance of USA L is being judged, it is primarily based on financial results (P14). “There’s a few different areas that are looked at. First, of course, is results -- whether you talk about return on sales or pure order intake or so on.” (P14). This focus on output is also visible when USA L tries to win contracts against other units within Gloneer (P17). Overall, a high importance of output measures can be stated for Gloneer indicating a strong link of performance judgement to results. The control mix used by the Gloneer headquarters towards USA L is summarized in Table 46. Input control and behaviour control are both used to a medium to high extent. The use of output control is found to be only slightly higher for USA L. This indicates a medium relative weight of performance evaluation in the control mix.

201

Control Objects at USA L Input Control

Behaviour Control

 medium use of expatriates

 high level of behaviour

 high influence of

surveillance  medium predefinition of procedures  medium to high interaction

headquarters on hiring new managers  training provided by headquarters to a medium extent  medium to high use of input control Table 46:

Output Control  very high use of pre-

established targets  medium to high use of

performance- related pay  high link of performance

judgement to results  medium to high use of behaviour control

 high use of output control

The Control Mix Used for the Gloneer Subsidiary USA L

(2) The content of performance evaluation primarily consists of financial measures at USA L (P14). “But then there is also individual product development and also personnel development areas that are looked at in the performance.” (P14). Therefore, non-financial measures and qualitative indicators are also relevant for evaluating the performance of USA L. The content of performance evaluation is detailed below and then summarized in Table 47. Financial measures: Financial measures are emphasized at USA L: “Number one is order intake, the second would be sales, the third would be return on sales as a percentage, the other would be the absolute EBITA and then there is also return on the capital employed.” (P14). While the first four measures are reported to headquarters once per month (P14, P15), ROCE is assessed only on a quarterly basis (P15). The financial measures form also part of the managers’ individual target agreements (P15). Additional financial measures are incorporated in the Balanced Scorecard of USA L (P16). These are, for instance, project result variance and overhead cost absorption. Non-financial measures: Besides the financial measures, the number of proposals and new projects are provided to headquarters on a monthly basis (P14). Furthermore, the number of new patents is considered to be relevant for judging the area of product development (P14). Within the Balanced Scorecard, the efficiency in procurement, administration and project execution are taken into account as additional internal non-financial performance measures (P16). Qualitative indicators: Not only pure numbers are evaluated at USA L (P15). “To introduce products either to different markets or to different industries” (P14) can be set as a target for USA L and used for the performance evaluation of the subsidiary (P16). The personnel development in terms of trainings and appraisal sessions is also evaluated (P14, P15, P16). In addition, a motivating environment is considered

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as critical success factor in the Balanced Scorecard (P16). Furthermore, external qualitative indicators become relevant when the customer relationship and customer satisfaction are assessed once per year (P16). In the managers’ individual targets, concrete projects are incorporated and their completion is used to judge the individual performance of the managers (P15). The content of performance evaluation is, in the case of USA L, dominated by financial measures. Additionally, internal non-financial measures and qualitative measures are frequently used at USA L. Concerning the standards compared to which performance of USA L is assessed, the budget is most relevant. “But the most important is probably the comparison to the budget.”234 (P15). In addition, the quarterly financial results are compared to the past in terms of the same quarter of the previous year (P15). In the case of the indicators related to internal projects, their fulfilment is related to pre-defined milestones (P15). An internal benchmarking is conducted but not openly communicated (P15).

Content of Performance Evaluation of USA L Financial High emphasis on:  order intake  sales  EBITA  return on sales

Non-financial Medium emphasis on:  number of proposals and new projects  number of new patents

Qualitative Medium emphasis on:  developing new markets  additional indicators related

to projects

 roce

Medium emphasis on additional factors in the Balanced Scorecard (P16), such as for example 235: project result variance, overhead cost absorption Table 47:

efficiency in procurement and project execution

customer satisfaction, employee development

The Content of Performance Evaluation of the Gloneer Subsidiary USA L

(3) For the process of performance evaluation of USA L, a large formal element is found: “I believe that the formal way certainly is of utmost importance within the evaluation process”236 (P15). Nevertheless, personal and cultural elements can be detected as well.

234 235 236

Translation of “Aber das wichtigste ist wahrscheinlich der Vergleich zum Budget.“ (P15). For confidentiality reasons not all Balanced Scorecard indicators are listed. Translation of “Ich glaube, dass der formale Weg auf jeden Fall das schwerste Gewicht im Rahmen der Beurteilung hat“ (P15).

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Formal: The performance evaluation process of USA L consists of the standard reporting system and additional formal elements: monthly management reports, quarterly project reports and the Balanced Scorecard.  USA L has to supply its financials on a monthly basis via the standard reporting system (P11, P15). Additional financial data is required every quarter (P15). Based on these reports, the performance of USA L is assessed in comparison to the budget (P15).  The president of USA L sends monthly management reports to headquarters (P14). “They cover all facets of the company. There’s a section on financials, there’s a section on proposals, new projects. There’s a section on existing projects. There’s a legal section. There’s a risk section. So there’s a comprehensive report once a month.” (P14). This report is considered to be useful for reflecting all activities during one month and showing how the subsidiary is performing (P11, P14).  On a quarterly basis project reports are supplied to headquarters (P15). These reports mainly cover the key financials of the project, such as margin and costs (P15). The project reports do not have to be supplied for all projects, but only for the larger ones (P15).  The Balanced Scorecard is established at USA L within a three years’ timeframe (P15). The key performance indicators are partly reported once and partly twice a year to headquarters (P14). This by itself does not yet constitute the relevance of the Balanced Scorecard for evaluating the performance of USA L. But every year, the elements of the scorecard are presented at a management meeting to the subsidiary board (P15). Then, the subsidiary is evaluated on the basis of the key performance indicators incorporated in the Balanced Scorecard (P15). Personal: Personal performance evaluation of USA L is conducted through management meetings and personal appraisals.  Two members of the Gloneer board of directors are members of the board of USA L (P14). Official meetings with this board take place twice a year (P14). These meetings are used to review the key performance indicators of the Balanced Scorecard (P15). Furthermore, all important projects are evaluated (P15). “And then all larger projects are looked at, all project managers individually present the status of their project and present the remaining risks of their projects.”237 (P15).  Furthermore, personal communication is used to evaluate the performance of USA L when questions are asked on part of headquarters in order to clarify certain numbers and data provided in reports (P15). This is followed by: “On the side, feedback is gained just like that, in the course of a discussion.”238 (P15). This is considered as personal appraisal as part of the headquarters-subsidiary relationship. Furthermore, yearly personal appraisals of individual target 237

238

Translation of “Und da werden eben die größeren Projekte angesehen, da berichten die ProjektManager individuell über den Status ihrer Projekte und über die verbleibenden Risiken in ihren Projekten.” (P15). Translation of “Feedback bekommt man einfach so im Laufe eines Gesprächs.“ (P15).

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agreements which are signed between the Gloneer board of directors and the president of USA L are taken into account (P14, P15).239 Cultural: Besides the formal and limited personal element in the performance evaluation, a large cultural element is found for USA L. Informal communication frequently takes place and performance goals are shared to a large extent.  A high degree of informal communication is stated for USA L from headquarters’ point of view (P10). “Of course, there are many informal discussions on the phone, by e-mail etc. on several levels.”240 (P15). This informal communication is also considered to be important from the subsidiary perspective.241  Today, the managers of USA L share the same performance goals as the Gloneer headquarters (P14, P15). “The goals are identical. (…) Concerning the big picture, the same goals are certainly aimed at.“242 Nevertheless, there used to be differences, which now only exist in sub-goals (P14, P15). Therefore, the performance goals are not considered to be completely shared. Table 48 presents a summary of the performance evaluation process conducted at USA L. A large formal element is used. It is combined with personal elements to a lower extent. In addition, informal communication and shared performance goals substantiate a medium to large cultural element in the performance evaluation.

Performance Evaluation Process of USA L Formal

Personal

 monthly financial reports;

 management meetings

quarterly add. financial data  monthly management reports  quarterly project reports  Balanced Scorecard

twice a year  personal discussions concerning reported data and personal appraisal of individual targets at least once a year

 medium to large formal element Table 48: 239

240

241

242

 small to medium personal element

Cultural  frequent informal

communication  largely shared performance

goals

 medium to large cultural element

The Performance Evaluation Process of the Gloneer Subsidiary USA L

In addition, personal appraisals are held at USA L for lower-rank managers (P15): “And then we hold meetings, I hold meetings twice a year - once at the mid-point of the year and the other at the end of the third quarter, to review how the people are performing against their targets.” (P14). Translation of “Es gibt natürlich eine Menge informeller Telefongespräche, E-Mails usw. auf mehreren Ebenen.“ (P15). Despite this importance, it is not valued as highly as formal reports (P14): “Maybe not as important as monthly reports but it’s important because as you’re discussing items it’s more of a two-way feedback of learning more about what is going on over in Munich for instance.” (P14). Translation of “Die Ziele sind identisch. (…) Was aber das Big picture anbelangt, werden da sicherlich dieselben Ziele verfolgt.“ (P15).

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6.2.4

The Gloneer Subsidiary “Switzerland”

The Swiss subsidiary of Gloneer is a small but growing subsidiary with less than 100 employees (P26). Based on its special technology, “Switzerland” offers cryogenic equipment in four speciality product lines which are unique within Gloneer (P10, P26). The main customers are gas producers, research institutes and universities worldwide. In addition to planning and constructing cryogenic equipment for them, the Swiss subsidiary provides after-sales services (P26). With the aim of being able to address customers worldwide, “Switzerland” collaborates with other units within Gloneer, for instance with the subsidiaries in China and India, and with local firms, for instance in Japan (P26). They conduct selling activities as well as after-sales services locally for the Swiss subsidiary (P26). Within Gloneer, “Switzerland” is a Contributor and Local Innovator which is shown in the next subsection (subsection 6.2.4.1). This is followed by details on how “Switzerland’s” performance is evaluated (subsection 6.2.4.2).

6.2.4.1

The Roles of “Switzerland” – Contributor and Local Innovator

Within Gloneer, “Switzerland” plays a Contributor role. This role is attributed by headquarters and supported by statements from the CEO of Switzerland (P12, P26). A low to medium strategic importance of the market (1) and a high competence level (2) determine the Contributor role of the Swiss subsidiary: (1) The Swiss subsidiary of Gloneer is active in a market with a very low volume, with low competition intensity, high customer demands and low to medium technological dynamism. Thus, the market is of low to medium strategic relevance for Gloneer.  Despite a worldwide product responsibility, the main part of the business of the Swiss subsidiary is realized in Europe (P26). China, Japan and the USA are additional country markets for “Switzerland” but have a lower relevance so far (P26). In addition, the overall market volume is very small compared to other markets Gloneer operates in because it is a very specific market and no highvolume market (P26). Thus, the market volume is conceived to be very low.  In the market, “Switzerland” competes mainly against one large competitor (P26). Occasionally, small companies enter the market and compete for smaller projects without being a real threat to the two main players (P26). For the moment, the competition intensity is conceived to be low for the Swiss subsidiary. Nevertheless, in the near future new competitors might enter the growing market of “Switzerland” (P26).  The potential customers of the Swiss subsidiary know their suppliers and try to play “Switzerland” off against its main competitor (P26). They have very specific requirements (P26). The research institutes and universities have high demands when asking for completely new solutions (P26). New specific cryogenic

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equipment has to be developed for them. Thus, the overall customer demand intensity is seen at a high level for the Swiss subsidiary of Gloneer. Despite high customer demands, the technological change in the market is slow (P26). No major innovations have been realized during the last ten years (P26). Still, new applications of the same technology are developed and drive the market (P51). Therefore, the technological dynamism is considered to be low to medium.

(2) The competence level of the Swiss subsidiary is considered to be high. This is determined via the competence level in each functional area “Switzerland” is active in and summarized in Figure 29:  Research and development: Research and development activities are undertaken at the Swiss subsidiary and are conceived to be highly important for keeping a good market position (P26). When collaborating with universities and research institutes, “Switzerland” is involved in the development of completely new applications for its technology (P26). Thus, the Swiss subsidiary sees itself as competent “to a very high extent” in research and development (P26).  Purchasing: As the preliminary products needed at the Swiss subsidiary are highly specific, the subsidiary can only restrictively benefit from the purchasing competence at headquarters (P26). It has to precisely test and select its own suppliers (P26). Thus, it had to build up its own competence which is conceived at a medium level (P10, P26).  Logistics and distribution: The logistics activities at “Switzerland” go hand in hand with purchasing (P26). Due to the specific preliminary products, the Swiss subsidiary had to build up its own competence in this area, too. The competence level of “Switzerland” in logistics and distribution is seen as medium (P26).  “Production”: The Swiss subsidiary buys all components for its products, assembles and tests them (P26). In addition, quality inspections are conducted inhouse (P26). Within their production step and the engineering, the Swiss subsidiary is competent to a high extent (P10, P26).  Marketing and sales: The Swiss subsidiary has a high independence from the Gloneer headquarters in its marketing and sales activities. This is partly caused by the speciality of its product line (P26). In addition, “Switzerland” positions itself quite independently from Gloneer in the market and realizes fewer sales within the group than with competitors of the group (P26). While other subsidiaries rely on the brand “Gloneer” in their marketing and selling activities, this is not the case for “Switzerland” (P26). Thus, it is stated that the Swiss subsidiary has a high competence level in marketing and sales (P26). Still, the Swiss subsidiary is supported by other subsidiaries and external partners for marketing and selling activities outside its main market – Europe (P26). All in all, the competence level of “Switzerland” is seen at a medium to high level in marketing and sales.  Human resource management: The Swiss labour market differs from the German labour market not only in terms of the labour law, but also in terms of the wages and salaries (P26). Thus, “Switzerland” has its own handbook and concept for human-resource-management (P26). Furthermore, it adopted its own wage 207

system introducing performance-related pay for all managers (P26). Furthermore, it is difficult to recruit cryogenic experts on the labour market so that the new employees have to be specifically trained by the Swiss subsidiary (P26). Overall, the subsidiary is seen to be highly competent in human resource management (P26). 

General management: “Switzerland” is using a management system based on ISO 9001 which is not documented in handbooks but only available on the intranet (P26). The Swiss subsidiary introduced this system by itself without the support of headquarters (P26). Furthermore, the management of “Switzerland” independently developed a Balanced Scorecard (P26). Thus, in general management, the Swiss subsidiary is conceived to be competent to a very high extent (P10, P26).

Competence Level of the Gloneer Subsidiary “Switzerland“ to a very high extent

to a high extent

Competent

medium

to a little extent

not at all Research Purchasing & development

Logistics & “Production” Marketing distribution & sales

Human General resource management management

Relevant Value-Chain Activities

Figure 29: The Competence Level of the Gloneer Subsidiary "Switzerland"

Besides the Contributor role in Bartlett and Ghoshal’s role typology, the Swiss subsidiary is also playing a Local Innovator role. The headquarters perspective and the subsidiary perspective coincide on this positioning of “Switzerland” in Gupta and Govindarajan’s typology (P12, P26). The low knowledge inflows and outflows are addressed in the following and summarized in Figure 30.

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243

244

Market data on customers and market data on competitors: As the Swiss subsidiary is active in a special market, it cannot receive much market data on relevant customers and competitors from other units within Gloneer (P26). Thus, the inflow is in both cases rated as “not at all” (P26).243 In contrast, “Switzerland” provides this knowledge to headquarters as part of the strategic planning process once a year (P26).244 These flows are not interpreted as knowledge flows from the headquarters’ point of view since from this perspective the inflow is only seen at a very low level (P11). When considering both perspectives, the outflow of market data on competitors and market data on customers is seen at a low level. Product designs and process designs: Due to the special product lines, a flow of product designs and process designs is neither received from nor provided to other units within Gloneer (P26). Marketing know-how: The inflow of marketing know-how is rated at “medium” level because “Switzerland” receives certain knowledge of this type from headquarters (P26). Similarly, the Swiss subsidiary provides marketing know-how to headquarters during the strategic planning process to a high extent (P26). The monthly changes and activities in the area of marketing are also addressed in management reports (P26). Again, this outflow has a more informative character and is not considered as knowledge outflow from the headquarters’ point of view (P11). Therefore, the outflow of marketing knowledge is seen at a low level. Distribution know-how: The Swiss subsidiary receives and provides distribution know-how only “to a little extent” (P26). Purchasing know-how: In purchasing, “Switzerland” tries to selectively adapt know-how from headquarters to its purposes leading to a medium inflow of purchasing know-how (P26). In the opposite direction, no outflow of purchasing know-how from “Switzerland” to other units can be found (P26). Management systems and practices: The highest knowledge inflow is seen on management systems and practices. “Switzerland” is informed about new developments, for instance on the Balanced Scorecard or Six-Sigma (P26). In addition, when new systems are established, the Swiss subsidiary looks for input from other units and headquarters and receives it when available (P26). Thus, the inflow of management systems and practices is seen as “to a high extent” (P26). The Swiss subsidiary also provides its know-how in this area to other units (P26). Its intranet-based quality management system was, for example, provided to other units (P26). Thus, the outflow of management systems and practices is at a medium level (P26).

As there is an overlap between the customers of “Switzerland“ and one other division of the group next to Gloneer, an inflow of market data on customers from other units within the group would be beneficial (P26: 95). Still, this inflow does not exist either (P26). The subsidiary perception of these knowledge outflows at “to a high extent“ (P26) is reduced to “medium“ because market data on competitors and market data on customers is included in a strategy report and only presented once a year during a management meeting (P26).

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Inflow of knowledge

Gloneer: “Switzerland“

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs Marketing know-how Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 30: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “Switzerland”

6.2.4.2

The Evaluation of “Switzerland’s” Performance

In the following, the performance evaluation of “Switzerland” is described in terms of its role (1), content (2) and process (3). (1) By comparing the use of input, behaviour and output control, the role of performance evaluation in the control mix is determined for the Swiss subsidiary. As input and behaviour control are very restrictively used for “Switzerland”, the main control object is output. Input control: The input control of headquarters executed towards “Switzerland” is fairly limited due to no use of expatriates, a medium influence on hiring and no trainings provided by headquarters.  So far, the Gloneer headquarters has not initiated the transfer of expatriates to the Swiss subsidiary (P26). Nevertheless, the Swiss subsidiary tries to attract managers and employees from headquarters to fill its open positions (P26). “And during the last few months, I have been trying to get more and more people from

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Gloneer because I think we will both benefit.”245 (P26). One employee has actually joined the Swiss subsidiary. Nevertheless, input control through the use of expatriates does not exist. The Gloneer headquarters conducts input control of “Switzerland” by influencing the hiring process of new managers. In the case that top managers with power of procuration are hired, a member of the Gloneer board of directors is involved (P26). “If necessary, they come over. And they play a part in conducting an interview.”246 (P26). At lower management levels, the Gloneer headquarters has no impact (P26) so that the overall influence is considered to be at a medium level. No initial trainings are provided for new managers of the Swiss subsidiary by headquarters (P26). Technical trainings which are often provided by headquarters are not offered for “Switzerland” because the product portfolio differs to a great extent. Thus, the Swiss subsidiary has to train its employees and managers itself (P26).

Behaviour control: Although input control is almost not implied at all, the Gloneer headquarters does not opt for much behaviour control either. No behaviour surveillance is detected, and processes are defined locally. Interaction is the only factor indicating some behaviour control.  Behaviour surveillance towards the Swiss subsidiary seems to be non-existent. At the same time, a high autonomy is substantiated by several statements (P26). “The advantage is that we have large operative and strategic autonomy, and accordingly, we can take advantage of our opportunities.”247 (P26). This autonomy is caused by and necessary for the specific product lines “Switzerland” is active in (P26). Thus, there is no behaviour surveillance is in place for the Swiss subsidiary. Internal audits which have been initiated by Gloneer for several of its subsidiaries have not been executed in the Swiss subsidiary (P11).248  The same non-existence can be stated for the predefinition of procedures. As the Swiss subsidiary is relatively small and highly autonomous, the Gloneer headquarters tends not to predefine procedures for the Swiss subsidiary (P26). “This means that the pressure for Gloneer to impose its processes on us is not really high.“249 (P26). In contrast, “Switzerland” becomes active and introduces a new SAP-system or quality handbook itself (P26).  The only form of behaviour control which exists for “Switzerland” is some interaction with the Gloneer headquarters. “We are also in contact before 245

246

247

248

249

Translation of “Und in den letzten paar Monaten versuche ich immer mehr Leute aus Gloneer hierher zu kriegen, weil ich denke, wir profitieren beide.“ (P26). Translation of “Wenn es notwendig ist, kommen sie auch. Und führen das oder ein Vorstellungsgespräch mit.“ (P26). Translation of “Vorteil ist, dass wir uns operativ und strategisch relativ frei bewegen können und entsprechend unsere Chancen nutzen können.“ (P26). Nevertheless, the internal auditors for the group do not refrain from controlling procedures and processes at “Switzerland” (P26). Translation of “D.h. der Zwang von Gloneer ihre Prozesse auf uns überzustülpen ist nicht so groß.“ (P26).

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decisions are taken or an activity is chosen. There might be prior discussions, and advice is taken into account. (…) But apart from this, though, it is definitely no interference in the management of the business. That’s not the case. But rather an accompaniment, that’s how I would name it.”250 (P26). This interaction is mainly caused by a strong personal relationship between the managing director of “Switzerland” and one member of the Gloneer board of directors (P26). It is not required or initiated by other headquarters representatives (P10). Thus, the level of interaction is considered to be low. Output control: While input and behaviour control are almost not used at all as control objects, output control is stated to be important within the control mix of the Gloneer headquarters executed towards “Switzerland”. Output control is used in terms of preestablished targets, performance-related pay and a link of the headquarters’ performance judgement to results.  At the Swiss subsidiary, targets are established at two levels251: On the one hand, targets are set during the planning process once a year and combined in the budget (P26). “And the budget is the goal for the year”252 (P26). On the other hand, an individual target agreement is drawn between the managing director of the Swiss subsidiary and the management of Gloneer (P26). All in all, a medium use of pre-established targets can be stated.  The individual target agreement of the managing director is also linked to the variable portion of pay (P26). In addition, performance-related pay is implemented for all managers at “Switzerland” so that their bonus depends on the performance of the subsidiary (P26). Despite not being institutionalized by headquarters, this shows a high use of performance-related pay indicating the importance of output control at “Switzerland”.  It becomes evident that the performance judgement of headquarters is highly linked to the result in the case of the Swiss subsidiary. This is due to a high importance of output measures (P10, P26). What counts is the “result. Simply and safely the result.”253 (P26). All in all, no diverse control mix is found for “Switzerland” (see Table 49 for an overview). A low use of input and behaviour control in contrast to a high use of output control supports a high relative weight of performance evaluation in the case of the Swiss subsidiary.

250

251

252 253

Translation of “Unter Umständen kann es sein, dass man sich vorher austauscht und Beratungen auch reinzieht. (…) Aber ansonsten, also, es ist auf jeden Fall keine Einmischung in die Geschäftsführung. Das nicht. Sondern eine Begleitung, so würde ich das bezeichnen.“ (P26). Internally, the Swiss subsidiary additionally uses a Balanced Scorecard as management instrument, but no targets for the included key performance indicators are agreed on with the Gloneer headquarters (P26). Translation of “Und das Budget ist das Ziel für das Jahr“ (P26). Translation of “Ergebnis. Schlicht und einfach nur Ergebnis.“ (P26).

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Control Objects at “Switzerland” Input Control

Behaviour Control

 no use of expatriates

 no behaviour surveillance

 medium influence of

 no predefinition of

headquarters on hiring new managers  no training provided by headquarters

procedures  low interaction

 very low use of input control

Table 49:

Output Control  medium use of pre-

established targets  high use of performance-

related pay  high link of performance

judgement to results  very low use of behaviour control

 medium to high use of output control

The Control Mix Used for the Gloneer Subsidiary “Switzerland”

(2) At the Swiss subsidiary, the content of performance evaluation is concentrated on financial measures. Besides this, non-financial and qualitative indicators are used to a very low extent. “We have a mere figure reporting system. Internally, we also have a Balanced Scorecard covering different dimensions.”254 (P26). However, the Swiss subsidiary is not required to report their Balanced Scorecard to the Gloneer headquarters (P26). Financial measures: The performance of the Swiss subsidiary is basically evaluated in terms of financial measures (P26). “But the performance of the company is definitely measured based on the EBITA.”255 (P26). In addition to the EBITA, other financial measures, such as sales and order intake, are reported on a monthly basis (P26). The financial performance of “Switzerland” is assessed in comparison to the budget (P26). “Yes, there is a budget and it is compared to the actual. So, this is done every year.”256 The development in comparison to the past is judged, too (P26). An internal benchmarking is conducted by headquarters but not known at subsidiary level (P26). Non-financial measures: In spite of the prevailing position of financial measures, one non-financial measure is sometimes looked at as well: “How long is the project list?“257 (P26). In order to secure the performance in the long run, the Gloneer headquarters tries to make sure that new projects are acquired (P26). Qualitative indicators: The individual target agreement does not only include financial measures, but also more qualitatively oriented aspects. “There I do not only have financial targets, but also two other targets, like the introduction of a new system or 254

255 256

257

Translation of “wir haben ein reines Zahlenreporting. Wir machen auch bei uns eine Balanced Scorecard, wo verschiedene Dimensionen angeschaut werden.” (P26). Translation of “Aber der Unternehmenserfolg wird ganz klar an der EBITA-Zahl gemessen.“ (P26). Translation of “Ja, es gibt ein Budget und das wird auch mit dem Ist vergleichen. Also, das wird jedes Jahr gemacht.“ (P26). Translation of “Wie lang ist die Projektliste?“ (P26).

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whatever.”258 (P26). The individual performance of the CEO of “Switzerland” is evaluated against these targets (P26). Qualitative indicators are also incorporated in the Balanced Scorecard which the Swiss subsidiary uses internally as management tool (P26). But these indicators are not used by headquarters to evaluate the performance of “Switzerland” (P26). Therefore, the main indicator of the performance of the subsidiary remains to be the financial measures as described above. In summary (see Table 50 for an overview), financial measures dominate the content of performance evaluation. In addition, only one external non-financial indicator and selected internal qualitative indicators are detected.

Content of Performance Evaluation of “Switzerland” Financial High emphasis on:  order intake  sales  EBITA Table 50:

Non-financial

Qualitative

Low emphasis on:

Low emphasis on:

 number of proposals and

 additional indicators related

new projects

to specific projects

The Content of Performance Evaluation of the Gloneer Subsidiary “Switzerland”

(3) The evaluation of the primarily financial content is conducted through a formal process in combination with very small personal and small cultural elements. Formal: The formal performance evaluation is based on the standard reporting system and monthly management reports. The Balanced Scorecard which is internally used at “Switzerland” is not reported (P26) and therefore not considered as element of the formal performance evaluation.  The reporting system dominates the performance evaluation process (P11, P26). Every month, the Swiss subsidiary enters its financials into the online system which is used throughout Gloneer (P9e, P26).  In addition, “Switzerland” provides monthly management reports (“directors’ reports”) to headquarters (P26). From the subsidiary perspective, this report is conceived to be dominated by marketing issues (P26). So the Gloneer headquarters is informed about developments concerning customers, markets and product lines (P26). Furthermore, performance-relevant information on order intakes is provided in the management report: “It basically concerns order intake: What is the order intake, which order intakes are above x-million.”259 (P26). 258

259

Translation of “Da habe ich nicht nur finanzielle Ziele, sondern auch zwei andere Ziele, sprich ein System einführen oder was auch immer.“ (P26). Translation of “Da geht es eigentlich nur um Auftragseingang: Was ist der Auftragseingang, welche Auftragseingänge größer als x-Millionen.“ (P26).

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Personal: The formal process of performance evaluation is accompanied by a yearly management meeting and scarce personal appraisals.  Like the other Gloneer subsidiaries, the Swiss subsidiary has a board with two board members of the Gloneer board of directors (P26). Once a year a management meeting takes place where the management team of the Swiss subsidiary meets with this board. It is set for performance evaluation purposes as well as for discussions about strategy and future developments (P26). “There the whole year is looked at in retrospective, the result is passed, and it is also looked towards the future to see how we are to proceed.”260 (P26). This meeting is considered to be the one and only platform for evaluating the performance of the Swiss subsidiary in person (P26).  Although there is personal communication between the management of the Swiss subsidiary and headquarters, this is not usually used for evaluation purposes (P26). No feedback on performance is provided on these occasions (P26). The only type of personal appraisal becoming apparent at the Swiss subsidiary takes place before the annual financial statements are closed at headquarters (P26). “Normally we do not hear anything for eleven months and then shortly before the end of the year we receive feedback; where do you stand, are there any risks, is there any unforeseen event, anything we need to know before the end of the year?”261 (P26). Thus, personal appraisals are very seldom used for evaluating the performance of the Swiss subsidiary. Cultural: The cultural element of performance evaluation is almost not visible at the Swiss subsidiary either.  Informal communication takes place between the managing director of the Swiss subsidiary and one member of the Gloneer board of directors (P26). At other levels, the informal communication is restricted by the large autonomy of the Swiss subsidiary and by the limited use of shared systems, processes and procedures. “Switzerland” can, for example, not enter the intranet of Gloneer to which all other subsidiaries have access (P26).  The Swiss subsidiary sees itself as an autonomous unit and as a special case within Gloneer (P26). This autonomy also leads to differences in the performance goals (P26). The majority of performance goals are believed to be aligned with headquarters (P26). “But we have our own mission statement.”262 (P26). Due to the existing differences, the performance goals are conceived to be partly shared.

260

261

262

Translation of “Da wird das ganze Geschäftsjahr rückblickend betrachtet, das Ergebnis verabschiedet und auch in die Zukunft geschaut, wie geht es weiter.” (P26). Translation of “Im Normalfall hören wir elf Monate nichts und kurz vor dem Jahresabschluss kriegen wir dann schon Feedback, wo steht ihr, gibt es Risiken, gibt es Unvorhergesehenes, etwas was wir wissen müssen, bevor das Jahr zu Ende ist? “ (P26). Translation of “Aber wir haben unser eigenes Leitbild.“ (P26).

215

The process conducted by the Gloneer headquarters to evaluate the performance of the Swiss subsidiary is summarized in Table 51. It is mainly a formal process. Only a very small personal and a small cultural element are found.

Performance Evaluation Process of “Switzerland” Formal

Personal

Cultural

 monthly financial reports

 management meetings once

 limited informal

 monthly management

a year  almost no personal appraisals

 partly shared performance

reports

 medium formal element Table 51:

6.2.5

 very small personal element

communication goals  small cultural element

The Performance Evaluation Process of the Gloneer Subsidiary “Switzerland”

The Gloneer Subsidiary “Germany S”

Since the 1970s Germany S is a subsidiary of Gloneer (P24). Germany S offers incinerators and furnaces mainly for the petrochemical and chemical industry (P24). These plant components are partly included in plants built by the Gloneer headquarters, but also directly offered as stand-alone products to external customers (P10, P24, P25). The range of services goes from planning and designing the plant component to setting it up and providing after-sales services (P24). Besides Germany S, another Gloneer subsidiary located in the USA provides the same products (P10). The world market is distributed between the two subsidiaries partly on a country-by-country basis and partly derived from case-by-case decisions on who is taking care of a certain customer and/or project (P10, P24). Germany S effects more than half of its sales in Europe (P24). In addition, it is active in the former Soviet states, in the Middle East, in South Africa, India and China (P24). The subsidiary has more than 70 employees (P10). The roles of Germany S are now summarized in subsection 6.2.5.1. The performance evaluation of Germany S conducted by headquarters is then analyzed in subsection 6.2.5.2.

6.2.5.1

The Roles of Germany S – Contributor and Local Innovator

The headquarters representatives see Germany S in the same position as the Swiss subsidiary. Both are fulfilling a Contributor role (P12: 1). In the case of Germany S, this is explained by a lower than medium strategic importance of the market and a

216

medium to high level of competence. Table 52 shows how the Contributor role of Germany S is determined.

Dimension Strategic importance of the 263 market

Level of competence

Table 52:

Indicator

Value

Sources

low

P10

medium to high

P24

customer demand intensity

low to medium

P24

technological dynamism

low to medium

P24

level of competence in research and development

high

P10, P24

level of competence in purchasing

high

P10, P24

level of competence in logistics and distribution

medium

P10, P24

level of competence in “production”

high

P10, P24

level of competence in marketing and/or sales

medium

P10, P11, P24

level of competence in human resource management

low to medium

P10, P24

level of competence in general management

high

P10, P11, P24

market volume competition intensity

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary Germany S

Like the Swiss subsidiary, Germany S also plays a Local Innovator role when considering Gupta and Govindarajan’s role typology (P12). Knowledge inflows and outflows in terms of market data on competitors and customers, product and process designs as well as marketing know-how differ highly between the product lines at Germany S (P24). These types of knowledge are only provided and received for the product lines in which Germany S cooperates with headquarters (P24). With regard to the remaining product lines, where Germany S acts independently, neither inflows nor outflows are stated for the five types of knowledge (P24). As the intra-firm business and the external business are of similar size (P25), the average inflow and outflow of knowledge is considered to be decisive. When additionally incorporating all remaining knowledge flows, a low inflow and outflow of knowledge are derived. The knowledge flow distribution is presented in Figure 31. 263

The strategic importance of the market differs between Germany S and the other two German subsidiaries Germany L and Germany P since their target markets differ in terms of product scope and geographic scope.

217

Gloneer: “Germany S“

Inflow of knowledge

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs Marketing know-how Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 31: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary Germany S264

6.2.5.2

The Evaluation of Germany S’ Performance

In the following, the performance evaluation of Germany S is described within all the three dimensions of performance evaluation. Consequently, the role of performance evaluation (1), the content of performance evaluation (2) and the process of performance evaluation (3) are described. (1) For establishing the role of performance evaluation in the control mix of Germany S, the use of input, behaviour and output control is compared in the following. Input control: The Gloneer headquarters conducts input control towards Germany S to a low extent. “Expatriates” are not deliberately sent to Germany S, but a high impact on the hiring of new managers is revealed. At the same time, the provision of trainings on behalf of headquarters is at a medium level.

264

The inflows and outflows of knowledge are average values of the inflows and outflows of knowledge attributed to two product areas (P24).

218







In the case of Germany S, it is again inappropriate to consider the use of “expatriates”. Nevertheless, headquarters can conduct input control by delegating managers from headquarters to Germany S. In 1995, the activity spectrum of Germany S was enlarged. In this context, one team was transferred from headquarters to Germany S and brought in the relevant competences (P24). Several managers, including the managing director, worked at the Gloneer headquarters before joining Germany S (P24). Anyhow, transfers are not used in terms of input control, but rather when Germany S tries to fill open position at all levels and does not find an adequate person within the subsidiary (P24, P25). Only the transfer of the managing director is conceived as input control initiated by headquarters since the other managers were actively searched for by the managing director of Germany S (P24). Thus, the use of “expatriates” is low. Germany S also has a board consisting of two members of the Gloneer board of directors and the president of another Gloneer subsidiary. This board is involved in the selection of the managing director and also impacts the hiring of the second management level (P25). Apart from that, employments at lower hierarchical levels are conducted independently at Germany S (P24). When Germany S initiates the transfer of a manager or an employee from headquarters to Germany S, his or her former line manager needs to release this person (P24). All in all, the impact of headquarters on hiring managers is therefore seen at a high level. When new managers start working at Germany S, they are not sent for special trainings to headquarters (P24, P25).265 The general headquarters training program is also open for managers and employees of Germany S (P25). Participation is not required on behalf of headquarters but possible (P25). Only after having worked at Germany S for several years, employees can participate in a one-year technical exchange program with headquarters (P24). All in all, a medium level of training is provided by headquarters to the subsidiary Germany S.

Behaviour control: Behaviour control of Germany S is used to a low extent due to low behaviour surveillance, low to medium predefinitions of procedures and a medium level of interaction.  Germany S acts quite autonomously (P24, P25). “We do actually conduct our business by ourselves – that’s how I feel, and I think this is positive.”266 (P25). The management of Germany S has to obey approval thresholds (P24, P25). Apart from this, the Gloneer headquarters does not control the behaviour of the

265

266

New hires of Germany S join a training on security, fire prevention and emergency protection provided by headquarters (P25). However, this training is not understood in terms of input control but necessary according to the security requirements at the headquarters site where Germany S is located, too. Translation of “Es ist eigentlich schon so, dass wir unser Geschäft - das ist mein Gefühl und das ist ganz positiv, finde ich - allein bestreiten.“ (P25).

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management of Germany S.267 Thus, behaviour surveillance is considered to be low. Germany S often adapts headquarters processes and procedures to its needs. “Then we mostly look at what they have and adapt it to our needs, or perhaps even make it a little simpler.”268 (P25). Nevertheless, from the subsidiary perspective the Gloneer headquarters only predefines the procedures at Germany S to a little extent (P24, P25). There are, for instance, rules of how to conduct purchasing which Germany S incorporates into its internal quality management systems (P24). Still, some more predefinition becomes evident when taking into account that the Gloneer headquarters requires Germany S to conduct a strategic analysis for all its product lines and to implement a Balanced Scorecard (P24, P25). Thus, the predefinition of procedures is seen at a low to medium level. Interaction between the management of Germany S and one member of the Gloneer board of directors is frequent (P24, P25). On a case-by-case basis, relevant issues are addressed (P24). In the case of new developments, additional discussions are held: “There are further discussions. But that’s no report, no examination so to speak, rather joint development efforts.”269 (P24). In addition, the strong collaboration in one of the product lines fosters interaction (P24). Consequently, interaction is seen at a medium level.

Output control: In contrast to input and behaviour control, output control is more extensively used for controlling Germany S. Pre-established targets and performance-related pay are implemented to a medium extent while a high link of performance judgement to results is found.  The members of the top management team of Germany S individually agree on personal targets for the year with one of the board members (P24, P25). These target agreements are only systematically used for the top managers and not implemented at lower levels (P25). Furthermore, the budget is negotiated once a year setting goals for Germany S (P24). Thus, pre-established targets are used to a medium extent by headquarters to control Germany S.  The individual target agreements are linked to the variable portion of pay (P24). This is only the case for the top management of Germany S (P25). Therefore, the use of performance-related pay is at a medium level.  The performance judgement of headquarters is highly linked to results. On the one hand, the financial output is most relevant for headquarters (P24, P25). “And, of course, one can say, we compile the balance sheet and a profit and loss statement at the end of the year, and in the end, that is what counts”270 (P25). 267

268

269

270

An internal audit was conducted only once by the group and not at all by the Gloneer headquarters (P24). Translation of “Dann schauen wir uns meistens, was die haben und brechen es auf unsere Belange runter, machen es vielleicht auch ein bisschen einfacher.“ (P25). Translation of “Da gibt es mehr Gespräche. Aber das ist kein Bericht, keine Prüfung sozusagen, sondern das ist gemeinsames Entwickeln.” (P24). Translation of “Und natürlich kann man sagen, wir machen eine Bilanz und eine G&V am Jahresende und das zählt im Endeffekt und daran werden wir gemessen.“ (P25).

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Financial measures also form part of the individual target agreements (P24). On the other hand, output in terms of quality and customer satisfaction also counts for headquarters in the product lines where Germany S collaborates with headquarters (P24). In summary, the control mix used by headquarters towards Germany S is presented in Table 53. Output control is used more than input control and behaviour control. However, the difference between the three control objects is not high. This indicates a medium relative weight of performance evaluation in the control mix.

Control Objects at Germany S Input Control

Behaviour Control

 low use of “expatriates”

 low behaviour surveillance

 high influence of

 low to medium predefinition

headquarters on hiring new managers  training provided by headquarters to a medium extent

of procedures  medium interaction

 medium use of input control

 low to medium use of behaviour control

Table 53:

Output Control  medium use of pre-

established targets  medium use of performance-

related pay  high link of performance

judgement to results  medium to high use of output control

The Control Mix Used for the Gloneer Subsidiary Germany S

(2) After having determined a medium relative weight of performance evaluation, the content will be looked at in more detail now (see Table 54 for an overview). The content of performance evaluation is dominated by financial measures. Non-financial measures are used to a very low extent, while qualitative indicators play a supplementary role. Financial measures: Financial measures do not only form part of the individual target agreements (P24) but make up a large part of the performance evaluation of the whole subsidiary (P24, P25). “So, we elaborate quarterly forecasts, budget forecasts on the order intake, sales and profit. And, of course, this is also what we are evaluated on.”271 (P24). In addition, “as a rule, EBITA is the indicator of interest.”272 (P25). The concentration on financial measures becomes most evident in one statement: “Thus, I believe that there is no performance evaluation of the subsidiary – except for the financial result.”273 (P25). 271

272 273

Translation of “Also, wir machen quarterly forecasts, budget forecasts über AE, Umsatz und Gewinn. Und an denen werden wir natürlich auch gemessen.” (P24). Translation of “EBITA ist bei uns in der Regel die Kennzahl, die interessiert.“ (P25). Translation of “Also, ich glaube, so eine Erfolgsbeurteilung für die Firma gibt es nicht - außer dem Finanzergebnis.” (P25).

221

Non-financial measures: The predominance of financials cannot be ignored, but still one additional non-financial measure plays a subordinate role for evaluating the performance of Germany S: the employed working capacity (P24, P25). Qualitative indicators: Furthermore, qualitative indicators accompany the financial measures to a certain degree. The improvement of processes and the collaboration with other units within Gloneer are evaluated (P24). Innovativeness also plays a role when the frequently asked question for “what’s new, what will be new five years from now?”274 (P24) arises. In addition, a permanent evaluation of the professionalism of the management is observed: “That’s continuous or never, so, however you like to call it. Every day we are being evaluated. Every day, when we talk to them, he thinks: this way or not, plus or minus.”275 (P24). The financial measures are compared to the budget (P25). The qualitative indicators are not evaluated against such a standard of comparison due to their limited measurability: “And that is not measurable, no measurable performance indicator, but a factor causing a good feeling”276 (P24). Like the other Gloneer subsidiaries, Germany S is not openly benchmarked against other subsidiaries (P24, P25).

Content of Performance Evaluation of Germany S Financial

Non-financial

Qualitative

High emphasis on:

Low emphasis on:

Medium emphasis on:

 order intake

 employed working capacity

 intra-group collaboration

 sales

 innovativeness

 EBITA

 professionalism

Table 54:

The Content of Performance Evaluation of the Gloneer Subsidiary Germany S

(3) The process of evaluating the performance of Germany S has a medium formal and a slighty larger cultural element. This is combined with a small personal element. In summary, the performance evaluation process is presented in Table 55. Formal: The formal performance evaluation of Germany S is mainly conducted based on the reporting system. In addition, a management report is provided. The management of Germany S is working on the development of a Balanced Scorecard (P10, P24). “And then a basis is established for a systematic performance

274 275

276

Translation of “was macht ihr Neues, was macht ihr in fünf Jahren Neues.“ (P24). Translation of “Das ist continuous oder nie, also, wie man will. Jeden Tag werden wir beurteilt. Jeden Tag, wenn wir mit denen reden denkt er sich: so oder nicht, plus oder minus.” (P24). Translation of “Und das ist ja nicht messbar, kein messbares Erfolgskriterium, aber ein Wohlfühlfaktor.“ (P24).

222

evaluation.”277 (P25). But so far, this formal element has not yet been implemented or used for evaluation purposes.  The company-wide reporting system applies also to Germany S (P11, P24, P25). Germany S has to provide monthly financial reports and additional financial data, such as an analysis of the cash flow every quarter (P25). The reporting is considered intense and time-consuming (P25).  In addition, Germany S sends a monthly management report (“directors’ report”) to headquarters (P24). From the subsidiary perspective, this report does not give any additional information: “This is why we take the information we provided as data and put it into nice words again.”278 (P24). The option to integrate information on market development and employees is usually not used (P24). Thus, the management report is used to formally supply financial measures based on which the performance of Germany S is evaluated. Personal: Personal elements can also be found in the performance evaluation process of Germany S, but they are seldom used.  Once a year a management meeting is held between the top management and the board of Germany S which is, besides other topics, used for evaluation purposes (P24, P25). “This means, we then have a yearly board meeting (…), where we give account on the preceding year.”279 (P25).  Personal appraisals are sometimes conducted on the side: “How many times do you ask each other: `How is it going in general?´ because that’s actually it: twice a year.”280 (P24). Concerning the individual target agreements of the managing director, a mid-term discussion is held, and then the final evaluation is appointed for the end of the year (P24). Cultural: When looking for the cultural element in performance evaluation, a regular informal communication is found at the top management level as well as at lower levels. Furthermore, performance goals are largely shared.  A frequent informal communication is found between the managing director of Germany S and one of the board members (P23). In addition, informal communication is common when joint projects are conducted (P24). The local proximity to the Gloneer headquarters also fosters informal contacts.  Although no qualitative targets are set for Germany S together with headquarters or other units (P25), the overall performance goals are largely shared. This is partly due to a strong collaboration and interdependence in one of the product

277

278

279

280

Translation of “Und da wird eine Basis geschaffen, eine Beurteilung systematisch dann vorzunehmen.“ (P25). Translation of “Deswegen bereiten wir das, was wir an Daten geben, noch mal in schönen Worten auf.“ (P24). Translation of “D.h. wir halten da ein jährliches Board-Meeting ab (…), da legen wir Rechenschaft über das zurückliegende Jahr ab.“ (P25). Translation of “Wie oft fragt man sich “Wie geht es so im Allgemeinen?” Weil das ist es ja eigentlich: zwei Mal im Jahr.” (P24).

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lines of Germany S (P24). An additional co-alignment of goals is reached through the personal interaction (P24).

Performance Evaluation Process of Germany S Formal

Personal

 monthly financial reports;

 management meetings once

quarterly additional financial data  monthly management reports

a year  sometimes personal appraisals and appraisals concerning individual targets twice a year

 medium formal element

Table 55:

6.2.6

 small personal element

Cultural  frequent informal

communication  largely shared performance

goals

 medium to large cultural element

The Performance Evaluation Process of the Gloneer Subsidiary Germany S

The Gloneer Subsidiary “Sweden”

The Swedish subsidiary produces and sells cryogenic equipment for the storage, transportation and handling of liquefied gases. The products include customer tanks, storage equipment and pallet tanks (P10, P13). In addition, “Sweden” offers special after-sales and container rental services. The Swedish subsidiary has more than 150 employees (P13). Its main customers are companies in the gas and chemical industry as well as shipyards and submarine producers. “Sweden” is a Contributor and a Local Innovator which is shown in subsection 6.2.6.1 before describing how the performance of “Sweden” is evaluated (subection 6.2.6.2).

6.2.6.1

The Subsidiary “Sweden” – Contributor and Local Innovator

The Gloneer headquarters representatives see the Swedish subsidiary in a Contributor role (P12) which is supported by the subsidiary managers’ statements (P13). The Contributor role of “Sweden” is characterized by a low to medium strategic importance of the market and a slightly above medium level of competence. The indicators determining these levels are summarized in Table 56.

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Dimension Strategic importance of the market

Level of competence

Table 56:

Indicator

Value

Sources

low

P10, P13

competition intensity

medium

P13

customer demand intensity

medium

P13

technological dynamism

low

P13

level of competence in research and development

high

P10, P13

level of competence in purchasing

medium

P10, P13

level of competence in logistics and distribution

medium

P10, P13

level of competence in production

medium

P11, P13

level of competence in marketing and/or sales

low

P10, P13

level of competence in human resource management

medium to high

P10, P11, P13

level of competence in general management

medium to high

P10, P11, P13

market volume

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary “Sweden”

In Bartlett and Ghoshal’s role typology, the Swedish subsidiary is conceived as Contributor. In addition, it fulfils the role of a Local Innovator in Gupta and Govindarajan’s role typology. This role is attributed by headquarters representatives and corresponds to the subsidiary perspective (P12, P13). The Local Innovator role of “Sweden” is characterized by a low inflow of knowledge and a low outflow of knowledge (see Figure 32).

225

Gloneer: “Sweden“

Inflow of knowledge

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs

Marketing know-how

Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 32: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “Sweden”

This level of knowledge inflows and knowledge outflows is seen from the subsidiary perspective (P13) and mostly supported from the headquarters perspective (P11). Only in the case of product designs and process designs slight differences appear: From the subsidiary perspective, the level of inflow of product designs and process designs is considered to be low (P13). Still, a high dependence on input from the subsidiary Germany P becomes apparent (P10, P11). Germany P provides its production know-how to the Swedish subsidiary (P11, P13, P27). Thus, the inflow of process designs is seen at a high level. However, “Sweden” and Germany P have distinct products so that product designs are only flowing from Germany P to the Swedish subsidiary to a little extent (P11, P13). At the same time, product designs and process designs flow out to other Gloneer subsidiaries “to a little extent” (P11, P13).

6.2.6.2

The Evaluation of “Sweden’s” Performance

The performance evaluation of the Swedish subsidiary is addressed in this subsection. Again, the role of performance evaluation is described first (1). This is followed by analyzing the content of performance evaluation (2) and the process of performance evaluation (3) for “Sweden”. 226

(1) Performance evaluation plays an important role in the control mix of the Swedish subsidiary. This is revealed by comparing the use of input, behaviour and output control. Input control: A low level of input control is in place for the Swedish subsidiary. While no expatriates are sent to the Swedish subsidiary (P13) and no trainings are directly provided by headquarters281, the Gloneer headquarters influences the hiring to a little extent: The managing director is chosen by the board of “Sweden” (P13). Besides this, the “input” of personnel is restricted because the total number of employees is predefined by headquarters (P13). “They put a limit on the number and they can give visible guidelines that you are an engineering and a production company and remain like that.” (P13). Apart from this, the hiring of personnel is conducted autonomously by the Swedish subsidiary (P13). As the headquarters’ influence on hiring is restricted to the level of the managing director, it is considered to be low. In combination, input control is argued to be at a very low level. Behaviour control: Behaviour control towards the Swedish subsidiary is very limited in the case of “Sweden” due to a very low level of behaviour surveillance, no predefinition of procedures282 and a medium level of interaction.  In the case of the Swedish subsidiary, the Gloneer headquarters conducts behaviour surveillance to a very low extent. Last year, headquarters initiated an internal audit for the Swedish subsidiary (P13). Despite having been conducted by internal auditors from the group, the Gloneer headquarters in this case used the audit to analyze the processes and procedures of the Swedish subsidiary (P13). “There is a list of a lot of different things that we should be better in and we are trying to do those achievements, especially in projects because there is a lot of money.” (P13). Therefore, the internal audit is partly interpreted as behaviour surveillance in the case of the Swedish subsidiary.  One of the board members of “Sweden” frequently visits the subsidiary (P13). “He stays here for two days normally and we discuss different things in the organization in different areas, mainly within the production, but also within the order handling etc.” (P13). Based on this interaction, the board member has an impact on the activities and the development of “Sweden” (P13). In addition, phone calls between the managing director of the Swedish subsidiary and the chairman of the board – a member of the Gloneer board of directors – are held from time to time and constitute a second form of interaction (P13). All in all, interaction is seen at a medium level.

281

282

No training for managers or employees of the Swedish subsidiary is provided by headquarters. Still, some employees were sent to Germany P for a technical training once (P13). Apart from recommendations provided by the internal auditors, procedures are not predefined by headquarters for the Swedish subsidiary: “Not at all. No we have to work on our own” (P13).

227

Output control: In comparison to the other two control objects, output control is used to a higher degree in the case of “Sweden”. Targets are pre-established to a medium degree and performance-related pay is implemented to a low extent, while the performance judgement of headquarters is highly linked to results.  Like for the other subsidiaries, financial targets in terms of a budget are set during the planning process (P13). In addition, individual target agreements are settled between the board of the Swedish subsidiary and the managing director as well as between the managing director and the second management tier of “Sweden” (P13). As the individual target agreements only apply to the top management and the budget is the only target at subsidiary level, the use of pre-established targets is at a medium level.  In the case of the Swedish subsidiary, the individual target agreements are not linked to performance-related pay (P13). However, the managing director himself and one other manager received a bonus and thus have a variable component in their pay (P13). Taking this into consideration, performance-related pay is only used to a low extent at “Sweden”.  The headquarters judgement is highly linked to results (P13). This is substantiated by the importance of output measures for the Swedish subsidiary. “And I mean, I like to have open book and you work and improve and you develop and you hope that it’s good enough. But you never know. But you can read it on the EBIT level.” (P13). At large, “Sweden” is aiming for the financial output which the Gloneer headquarters requires from them (P13). Table 57 summarizes the control mix used by the Gloneer headquarters towards the Swedish subsidiary. A very low use of input control and a low use of behaviour control stand in contrast to a medium use of output control. Consequently, performance evaluation is considered to have a high weight in the control mix.

Control Objects at “Sweden” Input Control  no use of “expatriates”  low influence of

headquarters on hiring new managers  no training provided by headquarters  very low use of input control Table 57:

228

Behaviour Control  very low behaviour

surveillance

Output Control  medium use of pre-

established targets

 no predefinition of

 low use of performance-

procedures  medium interaction

 high link of performance

related pay judgement to results

 low use of behaviour control

 medium use of output control

The Control Mix Used for the Gloneer Subsidiary “Sweden”

(2) The content of performance evaluation is dominated by financial measures, but emphasis is also placed on qualitative indicators. Apart from this, non-financial measures are almost ignored. Financial measures: The Gloneer headquarters keeps observing sales and the EBIT of the Swedish subsidiary (P13). The relation of both – return on sales – is even believed to be the most important financial measure “Sweden” is evaluated on (P13). “Well, return on sales is the first and most important key figure.” (P13). Return on capital employed is additionally used for evaluating the Swedish subsidiary (P13). For the comparison of the financial content of performance evaluation, the budget is decisive (P13). Besides this, an internal benchmarking is again only conducted by headquarters and not communicated to the subsidiary (P13). Non-financial measures: Apart from the financial measures, non-financial measures are almost neglected. The Swedish subsidiary reports figures on employees, such as the number of employees per department and the absence rates (P13). But in contrast to the financials, these figures are not really used for evaluating the performance of the Swedish subsidiary (P13). Qualitative indicators: While non-financial measures are not considered for evaluation purposes in the case of “Sweden”, certain qualitative indicators are playing a role: “Of course if there is a technical issue that has failed, that will be evaluated, separately.” (P13). In addition to the product quality, the professionalism of the management of “Sweden” is evaluated, too (P13). “I think they evaluate how professional you are because if you don’t have any action against something that is running in the wrong direction. They evaluate that as unprofessional.” (P13). All in all, an emphasis is placed on financial performance indicators. While nonfinancial measures play almost no role for evaluating the Swedish subsidiary, qualitative internal measures are taken into account. Table 58 provides an overview of the content of performance evaluation for the “Swedish” subsidiary.

Content of Performance Evaluation of “Sweden” Financial

Non-financial

Qualitative

High emphasis on:  sales

Very low emphasis on:  number of employees

 product quality

 EBITA

 absence rate

 professionalism

Medium emphasis on:

 return on sales  ROCE

Table 58:

The Content of Performance Evaluation of the Gloneer Subsidiary “Sweden”

229

(3) In the case of Sweden, the process of performance evaluation consists of a large formal element which is accompanied by a decent personal process. A cultural component is only part of the performance evaluation to a low extent. Formal: The formal performance evaluation process consists of the standard monthly reporting and a monthly management report. Occasionally, an additional technical report is required. As “Sweden” has no contracts above a defined threshold, it does not have to provide detailed forecasts on the project results (P13). Furthermore, it is not planned to implement a Balanced Scorecard at “Sweden” in the near future (P13).283  The Swedish subsidiary has to supplement its financials through the standard reporting system every month (P11, P13). Additional information has to be provided every quarter (P13). For some subsidiaries, the standard reporting does not only cover financials, but also data related to health, safety and environment. Currently, this information is not provided by the Swedish subsidiary (P13). Still, the existing reporting system is difficult to handle for “Sweden” (P13).  In addition, the managing director of the Swedish subsidiary sends a monthly management report (“directors’ report”) to headquarters (P13). The report covers important aspects of the business activity: “Sales figures, and also human resource absence because of illness and things like that. So they have a lot of relevant figures in that report, for sure, but it’s more tiny than the previous one.” (P13).284  One additional report which can be relevant for judging the performance of the Swedish subsidiary is required by the Gloneer headquarters in the case of technical failures (P13). Personal: The formal performance evaluation is combined with personal elements in terms of management meetings and personal appraisals at the Swedish subsidiary.  Compared to other Gloneer subsidiaries, official board meetings are held quite often. “Three times a year is board meeting and then nothing.” (P13). Furthermore, one of the board members travels to “Sweden” from time to time for additional meetings (P13). Indirectly, this meeting fulfils evaluation purposes: “But, he’s also evaluating the company and he gives tomorrow report to ___ [name of one member of the Gloneer management team] and it means that there is a control also of the managing director, of the processes, the progress of developing the company and other factors that I don’t want to know.” (P13).  The formal reports can also from time to time motivate further questions and personal appraisals of the performance of the Swedish subsidiary (P13). Furthermore, personal communication on the phone or by e-mail between the managing director of the Swedish subsidiary and one member of the Gloneer 283

284

Two years ago, the Swedish subsidiary started to elaborate a Balanced Scorecard but did neither finish nor implement it (P13). The previous management report provided by “Sweden” covered more information on internal processes which is now being neglected (P13).

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management team is partly used for evaluation (P13). “It’s my impression of very open discussion and I like that and appreciate to have a direct and clear communication and get feedback when it’s bad and feedback when it’s good. And I must say that is the feeling I have for the moment that it’s clear feedback.” (P13). Cultural: The relatively important formal and personal elements in the performance evaluation process are only substantiated by a small cultural component.  At the Swedish subsidiary, informal communication with headquarters is limited at top management level as well as at lower hierarchical levels (P13). “I mean, why communicate if you don’t have to. I mean, you can say I communicate everything is okay each day or you can make the opposite. If something is not okay, I communicate.” (P13).  The corporate culture of the Swedish subsidiary still resembles the old times when “Sweden” was an internal supplier protected by its parent company (P13). It started to face competition and now puts a strong focus on reducing costs (P13). “Sweden” started to adopt the same performance goals as the Gloneer headquarters (P13), but there seems to be no complete alignment yet. All in all, the performance evaluation of the Swedish subsidiary follows mainly a formal process. However, smaller personal and cultural elements are detected. Table 59 provides an overview of the performance evaluation process.

Performance Evaluation Process of “Sweden” Formal

Personal

 monthly financial reports;

 management meetings

quarterly additional financial data  monthly management reports

three times a year and from time to time additional meetings  personal appraisals from time to time

 occasionally technical

Cultural  very limited informal

communication  partly shared performance

goals

reports  medium to high formal element Table 59:

6.2.7

 small to medium personal element

 small cultural element

The Performance Evaluation Process of the Gloneer Subsidiary “Sweden”

The Gloneer Subsidiary “Germany P”

The Gloneer headquarters and several subsidiaries have no own production facilities. Still, not all components for the plants are bought from external suppliers, but Germany P develops and produces special equipment for the Gloneer headquarters

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and for the other subsidiaries. In addition, Germany P offers its products to external customers. In terms of the geographic area, Germany P sells most of its products in Europe, Asia and the Middle East (P27). Within Gloneer, Germany P is found to be a Contributor and a Global Innovator. Subsection 6.2.7.1 shows how these roles are indicated and then subsection 6.2.7.2 provides details on the performance evaluation of Germany P.

6.2.7.1

The Roles of Germany P – Contributor and Global Innovator

Within Gloneer, Germany P is seen in a Contributor position (P12). The strategic importance of the market is slightly lower than medium, while the level of competence of Germany P is stated to be high (P12). The subsidiary acts as a technology centre and provides new developments to the other subsidiaries with production facilities (P27: 60). Indicators and their values determining the Contributor roles of Germany P are presented in Table 60.

Dimension Strategic importance of the 285 market

Level of competence

Indicator

Value

Sources

market volume

low to medium

P10, P27

competition intensity

medium

P11, P27

customer demand intensity

medium

P27

technological dynamism

medium

P27

level of competence in research and development

very high

P10, P27

level of competence in purchasing

medium

P10, P27

high to very high

P11, P27

level of competence in production

very high

P10, P27

level of competence in marketing and/or sales

medium

P10, P27

level of competence in human resource management

high

P10, P27

level of competence in general management

high

P10, P27

level of competence in logistics and distribution

Table 60:

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The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary Germany P

The strategic importance of the market differs between Germany P and the other two German subsidiaries Germany L and Germany S since their markets differ in terms of product scope and geographic scope.

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Besides playing a Contributor role, Germany P is also seen as Global Innovator (P12: 2). Germany P to a large degree provides knowledge to the subsidiaries with production facilities (P11, P27). Concerning the inflow towards Germany P, headquarters representatives see knowledge flows to a low to medium extent (P11, P12). In contrast, from the subsidiary perspective, Germany P receives higher knowledge inflows of different types from the headquarters (P27) and other subsidiaries (P27). Both perspectives are taken into account and high knowledge outflows as well as slightly lower than medium inflows are discovered. Thus, Germany P is no clear Global Innovator, but at the edge to an Integrated Player position. The various knowledge inflows and outflows are presented in Figure 33.  Market data on customers: As Germany P is a supplier to headquarters and other Gloneer subsidiaries, the latter provide market data on customers to Germany P. The inflow is stated to be medium (P11, P27). In the opposite direction, an outflow of knowledge can also be found. Germany P provides market data on customers to headquarters and other units to a high extent (P11).  Market data on competitors: From the headquarters perspective, no inflow of this market data is seen because the Gloneer headquarters as a customer of Germany P does not provide this type of knowledge on other potential customers to Germany P (P11). However, at subsidiary level this type of knowledge inflow is stated to be high (P27). When additionally considering the knowledge inflow from other units, such as “China” who provide market data on competitors (P27), a low to medium inflow of market data on competitors is derived on average. The outflow of this type of knowledge is stated to be high (P27).  Product designs: As Germany P is a competence centre for production, it provides product designs to the other production units within Gloneer, and especially to “Sweden” and “China” (P11, P27). This outflow of knowledge is at a very high level (P27). At the same time, it only receives this type of knowledge “to a little extent” (P11, P27).  Process designs: Concerning process designs, a large inflow of knowledge from headquarters towards Germany P is found (P27). This type of process designs is not flowing out from Germany P to other units (P27). However, designs for constructions and production processes are provided from Germany P to other Gloneer units to a high extent (P11, P27).  Marketing know-how: From the headquarters’ point of view, no inflow of marketing know-how is registered (P11). However, Germany P sees a certain inflow of this type of knowledge (P27). Again, the inflow from other units, for instance “China”, can count for some of the inflows which are seen at a low level. As Germany P is an internal supplier for the Gloneer headquarters and other units, it only transfers its marketing know-how restrictively (P27). The level of outflow is low.

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Gloneer: “Germany P“

Inflow of knowledge

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs

Marketing know-how

Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 33: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary Germany P







Distribution know-how: While the inflow is medium for distribution know-how (P27), the other Gloneer subsidiaries with production facilities can again benefit from Germany P’s know-how (P11, P27). Distribution know-how is expected to flow out to a high extent (P11). Purchasing know-how: In purchasing, an exchange of know-how between headquarters and Germany P takes place. While the Gloneer headquarters supports Germany P to a medium extent (P10, P27), Germany P tests intermediate products and qualifies suppliers for headquarters (P27). In addition, it provides purchasing know-how to “China”. Accordingly, a high outflow of purchasing know-how is stated (P27). Management systems and practices: The Gloneer headquarters provides management tools and practices to Germany P (P11, P27). The inflow of knowledge is at a medium to high level (P11, P27). Then, Germany P adapts the management tools to the requirements of a production unit and provides knowledge in this area to headquarters and the other production units (P11, P27). Therefore, a high outflow of management systems and practices is also found (P27).

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6.2.7.2

The Evaluation of Germany P’s Performance

In the following, the performance evaluation of Germany P is analyzed. Thereby, all three dimensions – the role of performance evaluation in the control mix (1), the content of performance evaluation (2) and the process of performance evaluation (3) are reflected. (1) To determine the role of performance evaluation for Germany P, the three control objects – input, behaviour and output – are compared. Input control: The Gloneer headquarters exerts a medium to high level of input control towards Germany P. This is due to a high influence on hiring and a high provision of training. Still, input control is not at a high or very high level because “expatriates” are rarely employed.  Again, the term expatriate is not appropriate for Germany P. Still, personnel is sometimes sent from the Gloneer headquarters to Germany P (P27). “And it happens from time to time, that someone comes here. But I would say one or two people a year.”286 (P27). Besides this, temporary transfers are conducted from headquarters to Germany P and vice versa (P27). “But this is a pure adjustment of capacity.”287 (P27). This exchange of personnel does not cover the management level (P27). This is supported by the fact that during the last ten years, only twice managers have been transferred to Germany P. Therefore, the assignement of “expatriates” is very low at Germany P.  While Germany P is conducting its recruiting autonomously, the Gloneer headquarters has an impact on the hires for the two highest hierarchical levels (P11, P27). The managing director (here the plant manager) is chosen by the Gloneer board of directors (P11). “And the other positions below the plant manager are certainly filled in close consultation with the general management.”288 (P11). Consequently, the influence of headquarters on hiring at Germany P is high.  The managers of Germany P are trained by headquarters. The Gloneer general training program is open to managers from Germany P (P27). Sometimes trainers are also sent from headquarters to Germany P to teach the managers on specific topics (P27). In addition, management development programs are offered by headquarters (P27). Candidates for management positions from Germany P participate in this program (P27). Summing up, the Gloneer headquarters provides training to a high extent to Germany P.

286

287 288

Translation of “Und es kommt immer wieder mal vor, dass jemand hierher runterkommt. Aber ich sage mal im Jahr ein-zwei Leute.“ (P27). Translation of “Aber das ist ein reiner Kapazitätsausgleich.“ (P27). Translation of “Und die anderen Positionen unterhalb der Werksleitung, die werden sicherlich im engen Einvernehmen mit der Geschäftsleitung besetzt.“ (P11).

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Behaviour control: A low level of behaviour surveillance characterizes behaviour control of Germany P. In contrast, procedures are highly predefined for the subsidiary, and interaction is considered to by high.  Germany P acts autonomously within established rules. “But fair enough, we have plenty of rope. Okay, we have got our rules, we have got our limits.”289 (P27). These limits are, for instance, certain approval thresholds (P27). Besides this, no additional behaviour surveillance is indicated so that it is seen at a low level for Germany P.  Quality handbooks, certification requirements and organization directives predefine the procedures for Germany P to a high extent (P27). Although processes and procedures differ to some extent from the Gloneer headquarters, they are agreed on (P27). “Yes, the processes are predefined, that is aligned, yes.”290 (P27). Thus, the predefinition of procedures is high for Germany P.  The Gloneer headquarters interacts with Germany P to a high extent. This is partly caused by the intra-firm business Germany P conducts (P27). There is interaction on new technology, new processes and new products (P27). Furthermore, Germany P does not have all support functions at its local site, but partly uses the headquarters functions (P27). The commercial manager of Germany P also participates in regular meetings of the commercial directors who are responsible for finance and controlling, procurement and contract management at headquarters (P11). These meetings are scheduled every week and the commercial manager of Germany P participates every second time (P11). In addition, meetings are held between the management of Germany P and headquarters representatives where the future strategy for Germany P is discussed and aligned (P27). Output control: Output control becomes effective for Germany P in terms of preestablished targets, performance-related pay and a strong link of the performance judgement by headquarters to results.  Targets are pre-established for Germany P at subsidiary level and at individual level for the top management. Targets for the subsidiary are established once a year as part of the yearly planning and broken down in a Balanced Scorecard (P27). In addition, each high rank manager at Germany P signs individual target agreements with his line manager (P27). This target setting is not established for lower management levels (P27). However, with the budget, the Balanced Scorecard and the individual target agreements at top management level, preestablished targets are used to a high extent.  The individual target agreements are linked to the variable portion of pay so that the high rank managers of Germany P receive a performance-related bonus (P27). However, this again only applies to the high rank management (P27) so that it is conceived at a medium level for Germany P. 289

290

Translation of “Aber wir haben ziemlich freie Hand. Gut, wir haben unsere Regeln, wir haben unsere Grenzen.“ (P27). Translation of “Ja, die Prozesse das ist vorgegeben, das ist abgestimmt, ja.“ (P27).

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The performance judgement of headquarters is highly linked to results. On the one hand, this becomes evident through a strong concern with costs and revenues. The results and costs of each project have to be presented in detail to the top management team of Gloneer and headquarters representatives every quarter (P27). On the other hand, the importance of output measures indicates that the Gloneer headquarters bases its judgement on results. This becomes apparent through the individual target agreements of the managing director of Germany P where (financial) output measures are agreed upon as primary targets (P27). These are also the targets for the subsidiary (P27). Within Germany P, they are further broken down for each product line (P27) which also supports the great importance of output measures.



In summary, the control mix used towards Germany P is almost equally distributed between all three control objects (see Table 61 for an overview). Input control is used slightly less often than behaviour control and output control. Consequently, the relative weight of performance evaluation in the control mix is medium.

Control Objects at Germany P Input Control

Behaviour Control

 very low use of “expatriates”

 low level of behaviour

 high influence of

surveillance  high predefinition of procedures  high interaction

headquarters on hiring new managers  training provided by headquarters to a high extent  medium use of input control

Table 61:

Output Control  high use of pre-established

targets  medium use of performance-

related pay  high link of performance

judgement to results  medium to high use of behaviour control

 medium to high use of output control

The Control Mix Used for the Gloneer Subsidiary Germany P

(2) The content of performance evaluation consists of financial measures, nonfinancial measures and qualitative indicators. A concentration on financial measures can be detected (see, for instance, P27). However, non-financial measures and qualitative indicators also play an important role in the case of Germany P.291

291

Unfortunately, it was not possible to take a closer look at the Balanced Scorecard of Germany P. Due to enclosed confidential figures, the management of Germany P did not agree on handing it over. Furthermore, the responsible person at headquarters did not want to provide it since changes are expected for the near future. As an example, only a draft version of the balanced scorecard of a smaller subsidiary which is not covered by this research could be obtained (P28). Thus, the balanced scorecard of Germany P could not be analyzed to extract additional information on the content of performance evaluation.

237

Financial measures: Like the other Gloneer subsidiaries, the evaluation of Germany P is based on financial measures. Primarily, sales and EBITA are looked at (P27). “We have a target for sales and a target for the operative result.”292 (P27). As a combination of both, the return on sales of Germany P is evaluated (P27). In addition, each project is evaluated separately by comparing the actual result with the forecast (P27). The financial measures are compared to a forecast or planned budget to assess the performance of Germany P (P27). No official internal benchmarking is conducted, but on-the-side information on the performance of Germany P compared to other production units is derived (P27). Non-financial measures: Besides the financial measures, non-financial measures are used for evaluating the performance of Germany P. On the one hand, the number of employees is judged by headquarters. It is supposed to be held constant in spite of demanded increases in sales (P27). On the other hand, Germany P is expected to realize competitive prices (P27). Therefore, Germany P is not only an internal supplier to the units of Gloneer, but also offers its product to external customers. In order to secure the competitiveness of Germany P, a determined part of the capacity should be used for external orders (P27). “But externally we have to approach the market (…); and thus Gloneer knows if we are competitive or not.”293 (P27).294 Qualitative indicators: Germany P is also evaluated on the basis of qualitative indicators. This, on the one hand, concerns product and technology development. The Gloneer headquarters, for instance, demands of Germany P to develop a certain new product (P27). In addition, Germany P has the obligation to transfer its technologies to other production units within Gloneer (P27). “We are obliged to transfer the technologies we develop to other production sites or plants as soon as they are ready for production, meaning we teach them so that they can work under the same conditions.”295 (P27). Furthermore, besides others, one target of the managing director is to increase the employees’ internationalization (P26). “We have to become more international.”296 This is also considered to be relevant for evaluating the performance of Germany P (P27). In summary (see Table 62 for an overview), the performance of Germany P is evaluated in terms of financial measures, an internal and an external non-financial measure as well as internal qualitative indicators. 292

293

294

295

296

Translation of “Wir haben eine Zielsetzung Umsatz und eine Zielsetzung operatives Ergebnis.“ (P27). Translation of “Aber extern ist das so, dass wir an den Markt gehen müssen, (…); und damit weiß Gloneer, ob wir konkurrenzfähig sind oder nicht.“ (P27). The importance of capacity as performance measure is lessened in the case of high order intakes at headquarters since this leads to higher internal orders for Germany P which the Gloneer headquarters expects to be executed prior to the orders from external customers (P27). Translation of “wir sind verpflichtet, dass wir die Technologien, die wir entwickelt haben, wenn sie produktionsreif sind, an die anderen Fabriken oder Werke weiterleiten, also, dass wir sie schulen, dass sie mit den gleichen Bedingungen arbeiten können.“ (P27). Translation of “Wir müssen internationaler werden“ (P27).

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Content of Performance Evaluation of Germany P Financial High emphasis on:  sales  EBITA  return on sales  result forecast for each project

Table 62:

Non-financial

Qualitative

Medium emphasis on:

Medium emphasis on:

 number of employees

 product development

 competitive prices/ certain

 technology transfer

capacity to external customers

 internationalization of the

personnel  additional indicators related to specific projects

The Content of Performance Evaluation of the Gloneer Subsidiary Germany P

(3) The process of performance evaluation toward Germany P is a mixture of formal, personal and cultural components. All of these are used at least to a medium extent (see Table 63 for an overview). Formal: In the case of Germany P, the formal performance evaluation is limited to quarterly financial reports, monthly risk reports and the Balanced Scorecard.  The standard reporting system does not apply to Germany P because for external reporting purposes its financials are consolidated within headquarters (P10, P11). Therefore, Germany P does not have to provide financial reports every month. Nevertheless, Germany P is managed as discrete profit centre and has to supply a financial report every quarter. “Four times a year it is the result, we always have to provide quarterly results.”297 (P27).  Although Germany P is not included in the monthly directors’ reporting, it provides a similar monthly report to headquarters (P11). This report is a risk report. “Of course, they also write some comments on the most important order intake, but the focus is on risk assessment.“298 (P11).  Furthermore, Germany P has implemented a Balanced Scorecard (P27). This formal instrument is revised every year and approved by headquarters (P27). It is part of the yearly performance evaluation of Germany P (P27). Personal: For Germany P, a medium to large personal element characterizes the performance evaluation process. This is indicated by quarterly management meetings for project reviews and frequent personal appraisals.  Every quarter, the top management team of Gloneer, additional headquarters representatives and the managing director of Germany P meet to discuss the projects (P27). “Every order is listed, but what do they do? They compare the

297 298

Translation of “Vier Mal ist es das Ergebnis, wir müssen immer Quartalsergebnisse machen.“ (P27) Translation of “sie schreiben natürlich auch über die wichtigsten Auftragseingänge ein paar Kommentare, aber im Vordergrund steht die Risikobetrachtung.“ (P11).

239





forecast to the actual.”299 (P27). The deviations are looked at in detail and discussed at this management meeting (P27). Before supplying the quarterly financial result to headquarters, the managing director of Germany P has a phone conversation with one of member of the Gloneer top management team. The financial results are discussed. “And then I hear, if they are satisfied or not. That becomes clear in the conversation.”300 (P27). Consequently, this discussion is interpreted as a quarterly personal appraisal on the performance of Germany P. In addition, personal appraisals are held on the individual target agreements at least twice a year (P27).

Cultural: In addition to formal and personal performance evaluation, a cultural element is apparent for Germany P. This is indicated by frequent informal communication and largely shared performance goals.  The interaction between Germany P as supplier and the Gloneer headquarters as customer fosters intense informal communication (P11). In addition, the meetings of the commercial managers at headquarters are combined with informal interaction and communication (P11). Therefore, informal communication is frequent in the case of Germany P.  The performance goals are largely shared between Germany P and the Gloneer headquarters (P27). In the case of internal orders, the profit is shared between headquarters as buyer and Germany P as supplier (P27). Thus, there is a strong alignment between headquarters and Germany P. Nevertheless, slight differences in performance goals appear when Germany P as a smaller company pushes new topics, for example concerning personnel, which headquarters cannot implement quickly due to its larger size and tighter regulation (P27).

299

300

Translation of “Jeder Auftrag ist aufgelistet, aber was tun Sie? Sie vergleichen Vorrechnung zur Hochrechnung.“ (P27). Translation of “Und da höre ich, ob man zufrieden ist oder nicht. Das kommt im Gespräch rüber.“ (P27).

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Performance Evaluation Process of Germany P Formal

Personal

 quarterly financial reports

 quarterly management

 monthly risk reports

meetings  quarterly personal discussions of financial results  personal appraisals of individual targets at least twice a year

 Balanced Scorecard

 medium formal element

Table 63:

6.2.8

 medium to large personal element

Cultural  frequent informal

communication  largely shared performance

goals

 medium to large cultural element

The Performance Evaluation Process of the Gloneer Subsidiary Germany P

The Gloneer Subsidiary “Great Britain”

The subsidiary “Great Britain” offers compact cryogenic plants and plant components in four specific product lines (P10). It has about 40 employees and sells its products within the group as well as to the external market (P10). The product lines of “Great Britain” are relatively new and were started about four years ago. The earlier core business was moved to the Swiss subsidiary. The main customers of the British subsidiary are oil and gas companies as well as the medical industries. Within Gloneer, “Great Britain” is the only “Implementer” and a Local Innovator like many other Gloneer subsidiaries. These roles are the subject of the following subsection 6.2.8.1. After that, subsection 6.2.8.2 addresses the evaluation of the performance of the British subsidiary.

6.2.8.1

The Roles of “Great Britain” – Implementer and Local Innovator

The British subsidiary of Gloneer is seen in an Implementer role from the headquarters’ point of view (P12). While subsidiary representatives agree on the low strategic importance of the market, the competence level is primarily established from the headquarters’ point of view. Drawing comparisons between different subsidiaries, the competence level of the British subsidiary is stated to be low to medium (P10). From the subsidiary perspective, it is seen a little higher – above medium (P31).301 However, the following discussion supports the low strategic importance of the market (1) and the lower than medium competence level (2).

301

This can partly be explained through limited comparability and a lack of information. While the Gloneer headquarters has an overview of all subsidiaries, the British subsidiary has only limited knowledge about the other units within Gloneer (P31).

241

(1) “Great Britain” conducts its business in a market with a very low volume, low to medium competition intensity, medium customer demand intensity and low technological dynamism. Consequently, the importance of the local environment is low for Gloneer.  The regional market the British subsidiary is active in cannot be restricted to Great Britain. The opposite is the case; “Great Britain” sells its products worldwide and realizes almost no sales at all within its local market (P31, P32). Despite a worldwide product responsibility, the volume of the market is limited because the British subsidiary operates in a special market segment with a very low volume compared to other Gloneer subsidiaries (P10, P31).  The competition intensity for “Great Britain” differs between the product lines. In its core product line, the subsidiary only indirectly acts on the external market since it supplies these products to another business unit within the group (P31). In another product line, the British subsidiary only competes against one competitor, but more competitors are found for the other product lines (P31). However, overall, “Great Britain” is in a strong position (P10) and the competition intensity is seen at a low to medium level.  The customer demands are not easy to meet for “Great Britain” (P32). The same high quality is required as common throughout Gloneer (P31). Therefore, no exceptional high customer demands can be found and they are conceived at a medium level.  Already 10 to 15 years ago, a technological innovation was reached on which the products of “Great Britain” are based (P31). Ever since, only incremental innovations have taken place so that the market segment is not considered to be very dynamic (P31). Still, smaller adaptations, optimizations and developments are found so that technological dynamism is seen at a low level. (2) The British subsidiary operates all value-chain activities. On average, the level of competence is found to be lower than medium (see Figure 34 for an overview).  “Great Britain” locally conducts research and development activities. From the subsidiary perspective, the competence level is rated as high (P31). In contrast, headquarters conceive it to be low when drawing comparisons to the research and development activities in other Gloneer subsidiaries (P10).  As the British subsidiary is active in a special product line, it conducts its purchasing autonomously without the support from headquarters (P10). The relevant purchasing competence exists at “Great Britain” and is seen at a medium level (P10, P31).

242

Competence Level of the Gloneer Subsidiary “Great Britain“ to a very high extent

to a high extent

Competent

medium

to a little extent

not at all Research Purchasing & development

Logistics & distribution

Production

Marketing & sales

Human General resource management management

Relevant Value-Chain Activities

Figure 34: The Level of Competence of “Great Britain”







“Great Britain” also has production facilities and is considered to be highly competent in producing its own plant components (P31). However, when comparing the overall competence level in production and engineering to other Gloneer subsidiaries, it is reduced to “medium” (P10). The same is the case for logistics and distribution (P10). When considering marketing and sales, the special situation of “Great Britain” as an internal supplier to another business unit within the MNC has to be taken into account (P10). For this part of the business, no real marketing and sales activities have to be conducted. However, the marketing and sales competence for targeting the external market should be enhanced (P10). Overall, the current level of competence is seen at a low to medium level (P10, P31). In the management functions – human resource management and general management, “Great Britain” is considered to be equal and more competent than in other value chain activities. A medium level of competence is deduced for human resource management and in general management (P10, P31).

In addition to the Implementer role, the British subsidiary of Gloneer is also attributed a subsidiary role within Gupta and Govindarajan’s role typology. As “Great Britain” on 243

average receives inflows of knowledge “to a little extent” and provides outflows of knowledge to a low to medium extent (P30), the subsidiary is a Local Innovator. This role is attributed by headquarters (P12) and corresponds to the subsidiary interviewee’s view (P30). The different knowledge flows are summarized in Figure 35.

Inflow of knowledge

Gloneer: “Great Britain“

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs

Marketing know-how

Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 35: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “Great 302

Britain”

6.2.8.2

The Evaluation of “Great Britain’s” Performance

This subsection analyzes how the Gloneer headquarters evaluates the performance of the British subsidiary. This is done by the role of performance evaluation in the control mix first (1), describing the content of performance evaluation (2) and analyzing the process of performance evaluation (3). (1) What role does performance evaluation play in the control mix of “Great Britain”? The use of input control and behaviour control is described first, before going into

302

P24.

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detail on the use of output control. This leads to determining the role of performance evaluation in the control mix. Input control: The Gloneer headquarters executes input control of “Great Britain” to a very low extent: Almost no expatriates are delegated, low influence on hiring is exerted and trainings are seldom provided by headquarters.  The managing director is the only expatriate delegated to the British subsidiary (P31). Besides him, “so far nobody was sent over from headquarters to conduct special project-related tasks.”303 (P31). Thus, the use of expatriates is low.  Furthermore, the Gloneer headquarters has no influence on hiring personnel and managers in the case of “Great Britain” (P31). Despite defining the total number of employees, it has not impact on the recruiting and the selection (P31). Only the managing director was chosen by headquarters so that a low level of influence on hiring is observed.  Before starting at the British subsidiary, the managing director was trained at headquarters to get to know the Gloneer business in detail (P31). In addition to this, “there are trainings, but relatively seldom.”304 (P31). Therefore, the trainings provided by headquarters are seen at a low level. Behaviour control: In contrast to the low use of input control, the Gloneer headquarters controls behaviour to a medium extent. This is indicated by medium behaviour surveillance, medium pre-definition of procedures and low interaction.  The subsidiary conceives itself to be autonomous in the daily business: “Headquarters does not influence the daily business, one can say.”305 (P31). Nevertheless, the Gloneer headquarters monitors the activities of the British subsidiary, and the board of directors partly formulates instructions on how to proceed (P10). In addition, an internal audit was conducted by the Gloneer headquarters last year to check the contracts and forecasts of the British subsidiary (P11, P32).306 Therefore, behaviour surveillance is seen at a medium level.  Procedures are partly predefined by headquarters for “Great Britain”, but the rules and regulations are not and cannot be completely followed. This is explained by the smaller size of the British subsidiary and limited resources (P32). Thus, the British subsidiary adapts the regulations to its purposes: “No, these procedures are not directly predefined, but they are at our disposal, and we are to adapt them

303

304

305

306

Translation of “Es ist bisher keiner vom Headquarter hierher entsandt worden, um irgendwelche speziellen projektbezogenen Aufgaben zu machen.“ (P31). Translation of “Es gibt Trainingsveranstaltungen, aber relativ selten.“ (P31). One example is a training on international accounting standards held at headquarters (P32). Translation of “Auf das Tagesgeschäft nimmt das Headquarter keinen Einfluss, kann man sagen.“ (P31). Every two to three years internal audits are conducted on behalf of the group (P31, P32). “They look a little at the processes within the company, yes. And there were a lot of questions asked about the way we do things.” (P32).

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to our requirements here.”307 (P31). This leads to a medium predefinition of procedures. Interaction between headquarters and the British subsidiary does take place, but at a low frequency compared to other Gloneer subsidiaries (P10). Interaction is conducted “at relevant occasions, yes, but not regularly once a week or once a month or so.”308 Thus, interaction is conceived to be low.

Output control: The use of output control is again higher than behaviour control in the case of the British subsidiary. In spite of a low use of pre-established targets, performance-related pay is implemented and a high link of the performance judgement to results becomes visible.  Targets for the British subsidiary are set once a year. The subsidiary elaborates a budget for the upcoming year and this is approved and decided on by the board of “Great Britain” (P31). As no targets are pre-established at the individual level (P31), the use of pre-established targets is considered to be low.  When no individual target agreements are set, pay cannot be related to their achievement. Nevertheless, there is a performance-related bonus in the case of the British subsidiary (P31). This bonus is linked to the financial performance of “Great Britain” and applies to the subsidiary management (P31). Thus, it performance-related pay is used to a medium extent.  The performance judgement of headquarters is highly linked to results. The importance of (financial) output measures is high (P11, P31, P32). “And the performance of the company is read off these figures.”309 (P31). Table 64 summarizes the control mix implemented by the Gloneer headquarters towards the British subsidiary. While input and behaviour control are used to a low and respectively to a low to medium extent, a medium use of output control is revealed. Consequently, the relative weight of performance evaluation in the control mix is medium for “Great Britain”.

307

308

309

Translation of “Ne, diese Prozeduren werden nicht direkt vorgegeben, aber diese Prozeduren werden uns zur Verfügung gestellt, und wir sind angehalten, die umzusetzen auf unsere Anforderungen hier.“ (P31). Translation of “Zu gegebenen Anlässen, ja, aber nicht regelmäßig ein Mal die Woche, ein Mal im Monat oder so.” (P31). Translation of “Und der Erfolg der Firma wird halt an diesen Zahlen abgelesen.“ (P31).

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Control Objects at “Great Britain” Input Control

Behaviour Control

 low use of expatriates

 medium behaviour

 low influence of

surveillance  medium predefinition of procedures  low interaction

headquarters on hiring new managers  training provided by headquarters to a low extent  low use of input control

Table 64:

Output Control  low use of pre-established

targets  medium use of performance-

related pay  high link of performance

judgement to results  low to medium use of behaviour control

 medium use of output control

The Control Mix Used for the Gloneer Subsidiary “Great Britain”

(2) The content of performance evaluation is dominated by financial measures, while non-financial measures and qualitative indicators play a subordinate role. “Yes, the indicators are clear. (…) They are strongly oriented towards the financial results suppressing accomplishments in other areas, I would say.”310 (P31). Financial measures: The key financial indicator for evaluating the performance of “Great Britain” is EBITA (P31, P32). Besides this, sales, order intake and return on sales are important performance measures (P31). “But the real performance measures are EBITA, return on sales. Yes, order intake and sales.”311 (P31). These measures are compared to the budget in order to determine the performance of “Great Britain” (P31, P32). Besides this, no internal benchmarking is used (P31, P32). Non-financial measures: One non-financial measure is also used for evaluating the British subsidiary. This is the absolute number of employees (P31).312 As for the financials, the number of persons is part of the budget and compared to it at the end of the year (P31). Qualitative indicators: Qualitative indicators are almost neglected (P31, P32). They are only partly presented to headquarters (P31). “That covers in general customer satisfaction, reliability of the plants; soft measures are also added.“313 (P31). Nevertheless, these qualitative measures are not considered to play a role in performance evaluation (P31). 310

311

312

313

Translation of “Sie sind halt sehr stark auf das finanzielle Ergebnis ausgerichtet, die andere Erfolge, die es daneben gibt, halt doch stark unterdrücken, sage ich mal.“ (P31). Translation of “Aber die eigentlichen Messgrößen des Erfolgs sind halt EBITA, Return on Sales. Ja, Auftrags-eingang und Sales.“ (P31). In addition, the employee fluctuation is reported to headquarters, but it is not considered to be relevant for performance evaluation (P31). Translation of “Da geht es allgemein um Kundenzufriedenheit, Anlagenzuverlässigkeit, da kommen auch die soft measures dazu.“ (P31).

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The content of performance evaluation of the British subsidiary is summarized in Table 65. Apart from the dominating financial measures, only very low to low emphasis is placed on non-financial internal and external qualitative measures.

Content of Performance Evaluation of “Great Britain” Financial High emphasis on:  order intake  sales  EBITA

Non-financial Low emphasis on:  number of employees

Qualitative Very low emphasis on:  customer satisfaction  plant reliability

 return on sales

Table 65:

The Content of Performance Evaluation of the Gloneer Subsidiary “Great Britain”

(3) The process of performance evaluation consists of a medium formal element, while the personal and cultural components are found to be smaller in the case of the British subsidiary. The elements of the performance evaluation process are detailed in the following and an overview is presented in Table 66. Formal: The formal performance evaluation process for “Great Britain” is characterized by the standard reporting system and monthly management reports. Seldom project reports have to be supplied to headquarters, so that, all in all, a medium formal component is found.  The British subsidiary supplies regular reports through the standard reporting system (P11, P31, P32). “There are various packages which have to be done monthly. And then there are additional packages every quarter.” (P32).  In addition, a management report is written and sent to headquarters every month. “Yes, there the respective indicators are integrated, (…) and besides that the focus is on order intake, whereas sales and order execution are not addressed at all.”314 (P31).  Besides these standard formal elements of performance evaluation, project reports are almost not used at all in the case of “Great Britain” (P31, P32). At the moment, reports are only required for two projects to reveal the project performance (P32). Personal: Besides the formal performance evaluation, some personal elements are in place for the British subsidiary. Two management meetings are held per year and personal appraisals are conducted to a low extent. 314

Translation of “Ja, da kommen halt die entsprechenden Kennzahlen rein, (…) und ansonsten liegt das Schwergewicht auf dem Auftragseingang, wobei Sales und Auftragsabwicklung überhaupt nicht beleuchtet werden.“ (P31).

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An official management meeting is held once a year (P31). There the management of “Great Britain” meets with its board. “There numbers are analyzed, too; Why they are the way they are? Why they deviate from the budget? Why, which direction? And what can be done to improve the result and these things.”315 (P31). One additional management meeting, a so-called strategy meeting, has recently been introduced (P31). This is planned to be held once a year (P31). The managing director of “Great Britain” travels to the Gloneer headquarters and holds “a strategy-presentation where the performance of the company is addressed as well as the strategy for the future”316 (P31). Members of the Gloneer board of directors and additional headquarters representatives are present to evaluate the performance and challenge the strategy. Personal appraisals are reluctantly used in the case of “Great Britain”. Communication between the managing director of “Great Britain” and two of the board members of the British subsidiary also incorporates feedback on performance (P31). Still, this communication is neither frequent nor regular (P31). The same is true of the finance department at “Great Britain”. Personal feedback is only applied in the case there is a problem (P32). “They check the figures and say, you know, what does this mean, what does that mean, why have you done that.” (P32).

Cultural: The cultural component of the performance evaluation process for the British subsidiary is detected at a very low level of informal communication and shared performance goals.  Informal communication between headquarters and “Great Britain” is considered to be very seldom (P10, P31). This is partly explained through the existence of language barriers: “And especially concerning informal communication, the barrier is higher than in the case of institutionalized communication.”317 (P31). Thus, informal communication concentrates on the managing director who is an expatriate (P31). However, this informal contact is also limited (P31).  The performance goals are believed to be shared between “Great Britain” and headquarters (P31). Nevertheless, certain scepticism becomes apparent (P31). “But I think, there we more or less pull together.”318 (P31). Therefore, the performance goals are conceived to be not completely the same but shared to a large extent.

315

Translation of “Da werden auch die Zahlen analysiert, warum die so sind? Warum weichen sie von Budget ab? Warum, welche Richtung? Und was kann man tun, um das Ergebnis besser zu machen und solche Sachen.” (P31). 316 Translation of “eine Strategy-Presentation, wo es auch um die Performance vom Unternehmen geht und um die Strategie für die Zukunft.“ (P31). 317 Translation of “Und gerade wenn es um informelle Kommunikation geht, dann ist das glaube ich noch eine höhere Hürde, als wenn es um institutionalisierte Kommunikation geht.“ (P31). 318 Translation of “Aber ich denke, da ziehen alle ungefähr am gleichen Strang.“ (P31).

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Performance Evaluation Process of “Great Britain” Formal

Personal

Cultural

 monthly financial reports;

 official management

 very limited informal

quarterly additional financial data  monthly management reports  scarce project reports

meetings twice a year  scarce personal appraisals

 largely shared performance

 medium formal element

Table 66:

6.2.9

communication goals

 small personal element

 small to medium cultural element

The Performance Evaluation Process of the Gloneer Subsidiary “Great Britain”

The Gloneer Subsidiary “China”

In 1995, Gloneer founded a subsidiary in China as a joint venture with a Chinese partner (P21, P22). With more than 200 employees, this Chinese subsidiary produces and sells plant components mainly for the Chinese market (P22, P23). In 2002, the Chinese subsidiary founded a representative office in another region in China to enhance engineering activities (P21). This representative office is today a stand-alone legal entity – China L (P21). Founded in 2005, China L is the youngest subsidiary within Gloneer and has around 100 employees. It plans and builds plants and plant components for gas and petrochemical companies mainly in China (P21, P22). Since the foundation of China L, the first Gloneer subsidiary in China – called China P from now on – concentrates further on its production activities which is highlighted by the recent inauguration of new production facilities (P10, P21, P22). China P supplies plant components to China L, but also offers its products to external customers (P21). Here, China P and China L are jointly addressed. This is due to the fact, that China L has just recently become a stand-alone subsidiary. In addition, China P and China L are still managed by the same president. Both legally separated subsidiaries collaborate strongly. Furthermore, they are frequently handled and addressed jointly on behalf of headquarters. Therefore, China P and China L are conceived to constitute the Gloneer subsidiary “China”. The roles of “China” are presented in subsection 6.2.9.1. Subsection 6.2.9.2 shows an analysis on how the performance of “China” is evaluated.

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6.2.9.1

The Roles of “China” – Black Hole and Implementor

“China” is characterized as Black Hole (P12: 1). This is explained in terms of a high strategic importance of the market (1) and a lower than medium level of competence at both Chinese subsidiaries (2). Both dimensions are discussed in the following. The competence level is rated slightly higher by the subsidiary managers (P22, P23). Still, support is found for the headquarters perspective ranking the subsidiaries at a lower than medium competence level. (1) A very high volume characterizes the Chinese market. In addition, the competition intensity is high, the customer demands are low to medium and the technological dynamism is low.  The Chinese market for Gloneer products is very large (P10, P22). A slight difference in the market volume exists between China L and China P since China P offers products which are incorporated in China L’s projects (P11). Therefore, the market volume for China P is seen as high to very high, while the market volume for China L is even larger and seen at a very high level (P10, P22).  Gloneer and its Chinese subsidiaries have a comparably strong market position in China (P21). This is due to reference projects which can be presented in tendering procedures and experience in building exceptionally large plant components (P21). International competitors of Gloneer also entered the Chinese market and offer their services (P21). In addition, local competitors foster a strong price competition (P11, P21, P22, P23). In summary, the competition intensity reaches a high level (P10, P11).  The customers of the Chinese subsidiaries are less demanding than other Gloneer customers. Despite requiring Western quality, they are not willing to pay an acceptable price for it (P23). As they often cannot pay for the special equipment which they desire, they finally concentrate on functionality (P11, P21). Overall, the customer demand intensity is seen at a low to medium level (P11, P23).  Technological innovation in China is mainly driven by competitors copying existing technology (P10, P27). The overall technological dynamism in the business of Gloneer is low (P21). If there are small innovative steps they are initiated outside the Chinese market (P23). Therefore, the technological dynamism is only at a low level. When it comes to assessing the level of competence of “China”, the relevant activities are purchasing, logistics and distribution, marketing and sales, human resource management and general management. China P and China L have no research and development activities, and China L has no production either (P10, P21, P22). The level of competence in the functional areas is described below and summarized in Figure 36.

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Purchasing: While the Chinese subsidiaries do most of their purchasing by themselves, it is concentrated on the Chinese market (P11, P23). No international purchasing is conducted so that the level of competence in purchasing is conceived to be lower than in the case of other Gloneer subsidiaries (P11). However, global sourcing is planned to be implemented and the Chinese subsidiaries are participating. Thus, for purchasing, the level of competence is conceived to be low to medium (P10). Logistics and distribution: Like purchasing, logistics and distribution also concentrate on the Chinese market (P11). No special competence is seen in this area (P11, P23). Thus, the level of competence in logistics and distribution is low to medium for the Chinese subsidiaries (P10, P11, P23). Production: The level of competence in production is attributed to China P due to its production facilities and China L due to its engineering. As China P is still in a development phase, the competence level is lower than at the other Gloneer subsidiaries with production (P10, P11). The same applies to the engineering at China L where support from headquarters is needed (P21). Therefore, the competence is seen at a medium level (P10, P11). Marketing and sales: In marketing and sales, the Chinese subsidiaries receive large support from headquarters (P11). The actual competence level for both Chinese subsidiaries is on average seen at a medium level (P11, P22, P23). Human resource management: The level of competence in human resource management is stated to be low (P23). Despite succeeding in their extensive local recruitment, further development potential is noted (P10, P11). Therefore, the competence in human resource management is seen at a low to medium level (P10). General management: The level of competence in general management is conceived to be medium to high when taking an average of both Chinese subsidiaries (P11, P23).

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Competence Level of the Gloneer Subsidiary “China“ to a very high extent

to a high extent

Competent

medium

to a little extent

not at all Purchasing

Logistics & distribution

Production

Marketing & sales

Human resource management

General management

Relevant Value-Chain Activities

Figure 36: The Competence Level of the Gloneer Subsidiary “China”

The Chinese subsidiaries are not only Black Holes in Bartlett and Ghoshal’s role typology, but also Implementors in Gupta and Govindarajan’s role typology. The level of knowledge outflow is conceived to be low from the headquarters’ point of view and supported by subsidiary managers (P11, P22, P23). In contrast, a slight disagreement appears on the level of the knowledge inflows in the case of China P: On average, it is rated at a low level from the subsidiary perspective (P23), while headquarters representatives conceive it to be high (P12, P11). Additional support for this positioning is found when considering the perspective of Germany P who provides knowledge to a high extent to China P (P11, P27). Therefore, for both subsidiaries a high level of knowledge inflow can be stated (P11, P22). The different knowledge inflows and outflows are detailed below and summarized in Figure 37.  Market data on customers and market data on competitors: China P and China L mainly operate in China, they know their local market environment including competitors and customers better than headquarters (P22). They provide market data to headquarters (P11, P22). The outflow is seen at a medium to high level (P22, P23). However, this is no one-way flow. Since the Chinese subsidiaries coordinate their sales activities with headquarters (P22), an inflow of market data on customers and competitors which are often international also takes place. On average, it is seen at a medium to high level (P22, P23).

253









319

320

321

Product designs and process designs: The Gloneer headquarters strongly collaborates with the Chinese subsidiaries since they are still in a start-up phase (P11, P21, P22). In the case of China P, Germany P is the main knowledge provider (P10, P11, P27). For both Chinese subsidiaries, an inflow of knowledge on product designs, and process designs is found (P11, P22, P23). In the case of China L, it is even seen at a very high level (P21, P22). As a little lower inflow is perceived from the perspective of China P (P23), the overall inflow of product designs and process designs is seen at a high level. At the same time, there is no outflow of these types of knowledge (P11, P22, P23). Marketing know-how and distribution know-how: When considering China L, all marketing and sales activities are joint activities between headquarters and China L (P22). Thereby, China L provides the market knowledge for China to headquarters (P11, P22). In the case of China P, less marketing and selling activities take place since China P receives orders from China L (P18) and sells less than half of its plant components to external customers (P23). The Gloneer headquarters provides support in marketing and distribution to the Chinese subsidiaries (P11, P22). On average, the inflow and outflow of these types of knowledge are seen at a medium level.319 Purchasing know-how: In purchasing, a certain exchange of knowledge is established (P22). On the one hand, the Chinese subsidiaries are interested in participating in orders placed by headquarters for achieving concessions (P22). On the other hand, the Gloneer headquarters is interested in purchasing products and components at low prices in China (P22). Thus, China P and China L are starting to provide their purchasing know-how on China to headquarters (P11, P22). However, global sourcing is not yet implemented (P11, P22) so that the outflow of knowledge from the Chinese subsidiaries to headquarters is still limited and thus seen at a low to medium level.320 The level of inflow of purchasing knowhow is on average also found to be at a low to medium level (P22, P23). Management systems and practices: The Chinese subsidiaries receive management systems and practices to a medium extent from headquarters (P22, P23). At the same time, they do not provide this type of knowledge to headquarters or other Gloneer units (P11).321

The subsidiary perspective differs from this assessment. From their point of view, the Chinese subsidiaries receive less marketing know-how and distribution know-how (P22, P23). In addition, the outflow of these types of knowledge is rated higher and even at a very high level in the case of China L (P22). In contrast, almost no outflow is stated for China P (P23). In combination with additional statements from the interviews and the opinion from headquarters, a medium level of inflow and outflow of marketing know-how and distribution know-how is assumed. At subsidiary level, the outflow of purchasing know-how is already seen at “medium” level (P22, P23). Despite being rated at a medium level from the subsidiary interviewees (P22, P23), the existing outflow is not conceived as know-how from the headquarters’ point of view (P11). However, this might change in the future.

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Gloneer: “China“

Inflow of knowledge

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs

Marketing know-how

Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 37: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “China”

6.2.9.2

The Evaluation of “China’s” Performance

The performance evaluation of both Chinese subsidiaries – China P and China L – is addressed in the following. Thereby, all three dimensions of performance evaluation – the role of performance evaluation (1), the content of performance evaluation (2) and the process of performance evaluation (3) are described in detail. (1) The role of performance evaluation in the control mix is derived by comparing the use of three control objects – input, behaviour and output – jointly for both Chinese subsidiaries. Input control: A medium to high level of input control is imposed by headquarters on the Chinese subsidiaries due to a high use of expatriates, a medium influence on hiring and training provided by headquarters to a medium extent in the case of China L and to a high extent in the case of China P.  In the mid-nineties, China P was primarily managed by expatriates. Five to seven managers were delegated to China at this time (P21). Since the beginning of 2001, the number of expatriates has been reduced to two (P21). They form the management team together with one Chinese manager delegated from the joint venture partner (P21). In the near future, the number of expatriates might rise 255





again (P21). “So, one is trying to establish certain interrelatedness and, of course, to bring in the experience collected in Munich before.”322 (P23). The Gloneer headquarters also uses expatriates to a high degree in the case of China L (P21). As two-thirds of the management team are expatriates and additionally expatriates are found at lower levels (P21), the use of expatriates is high for the Chinese subsidiaries. Additional input control on behalf of headquarters is conducted by influencing the hiring of new managers (P22, P23). The top management positions are decided by the board of the Chinese subsidiaries (P22, P23). In addition, headquarters can have an impact on the hiring of managers at lower levels. There is no rule, but rather a case-by-case alignment (P22, P23). “Yes, we discuss it with Munich in the case of important staffing, in the case of important employees we do not go for it alone“323 (P23). Thus, the influence on hiring new managers is considered to be at a medium level for China P and China L. Trainings are provided by headquarters to personnel of the Chinese subsidiaries, too. Chinese employees and managers are sent to Germany not only for technical trainings, but selectively also for commercial functions, such as management accounting (P21, P23). Sales specialists from headquarters are also sent to China to hold trainings there (P23). Special trainings and support for China P is not directly provided but initiated by headquarters. Germany P conducts these trainings on technical issues and production (P23). Thus, a slight difference can be revealed for China L and China P. While training by headquarters is provided at a medium level for China L, it is at a high level for China P.

Behaviour control: At “China”, the level of behaviour control is medium to high. This is due to a medium level of behaviour surveillance, a low to medium predefinition of procedures and a high to very high interaction.  In the early years after the establishment of “China”, behaviour surveillance on behalf of headquarters was very strong (P21). Nowadays, this surveillance and interference is reduced (P21, P22, P23). “Maybe this is also caused by the Chinese market being different from all other markets.”324 (P23). Although the level of behaviour surveillance has been reduced, the Gloneer headquarters still has an eye on the Chinese subsidiaries (P22). Thereby, “the interest is already strong because of the high investment, and then, of course, there is surveillance now“325 (P10). Thus, the level of behaviour surveillance is considered to be medium.  In contrast to the behaviour surveillance, less behaviour control is indicated in terms of the predefinition of procedures (P23). “We attach a high value to leaving 322

323

324

325

Translation of “Also, man versucht da eine gewisse Verflechtung herzustellen und natürlich auch die Erfahrung, die man vorher in München gesammelt hat, hier einzubringen.“ (P23). Translation of “Ja, wir sprechen uns schon ab mit München, bei wichtigen Stellenbesetzungen, bei wichtigen Mitarbeitern machen wir das nicht im Alleingang.“ (P23). Translation of “Das hat vielleicht auch damit zu tun, dass der chinesische Markt ein anderer ist als andere Märkte.“ (P23). Translation of “aber schon allein durch diese Investition ist das Interesse sehr stark, und da wird jetzt natürlich beobachtet.“ (P10).

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the company Chinese and that is especially important in China. So, we do not need a German company here, and nobody interferes on this.“326 (P22). However, in the case of China P, certain procedures from headquarters or from Germany P are adapted to meet the local needs (P23): “One does not need to invent everything anew, we adapt everything which seems to make sense.”327 (P23). Besides this voluntary transfer, certain regulations are imposed by headquarters which are difficult to follow for China P: “That means, we cannot change the Chinese market and come in with our headquarters regulations.”328 (P23). A pressure for localization becomes evident, and China P tries to walk the line between the demands imposed by headquarters and the demands raised by the Chinese market (P23). Altogether, the predefinition of procedures is seen at a medium level for China P. This predefinition is lower in the case of the young subsidiary China L where own initiatives can be taken (P22). A high level of interaction between the Chinese subsidiaries and headquarters is apparent. At headquarters level, the relevant interaction partners are the Gloneer board of directors as well as the head of the product line China P and China L are active in and the controlling department (P10, P21, P23). Apart from regular phone calls (P21, P23), meetings are held several times a year (P21, P23). “The strategy and corporate policies are then preferably aligned and agreed on in the discussions.”329 (P21). For China L, additionally high interaction with headquarters takes place in sales, marketing and project execution: “So, it is very tightly connected, we do not compete against each other; the opposite is the case, we decide jointly how we set up the proposal, which strategy we follow and how the marketing and everything is run.”330 (P22). Thus, a very high level of interaction is found for China L, while interaction is seen at a high level in the case of China P.

Output control: A medium use of output control becomes apparent for both Chinese subsidiaries through a medium use of pre-established targets, a low use of performance-related pay and a high link of headquarters performance judgement to results.  Targets are set for both Chinese subsidiaries at subsidiary level: At the end of each year, forecasts on the financials for the next year are elaborated (P22, P23). These forecasts are communicated to headquarters and approved by the boards

326

327

328

329

330

Translation of “Wir haben eher die Devise und das ist gerade hier in China sehr wichtig, die Firma chinesisch zu lassen. Also, wir brauchen hier keine deutsche Firma, und da mischt sich auch keiner rein.“ (P22). Translation of “Man muss halt nicht alles neu erfinden, es wird alles übernommen, das, was sinnvoll erscheint.“ (P23). Translation of “D.h. wir können den chinesischen Markt nicht umkrempeln und hier mit unseren Vorschriften aus dem Headquarter kommen.“ (P23). Translation of “Die Strategie und Politik wird dann eher in den Gesprächen abgesteckt und vereinbart.” (P21). Translation of “Also, sehr eng verwachsen, wir sind nicht in Konkurrenz; ganz im Gegenteil, wir entscheiden im Konsens, wie wir anbieten, wie die Strategie ist und wie Marketing und alles da läuft.“ (P22).

257

of the Chinese subsidiaries (P22, P23).331 The forecasts are the targets for the subsidiary for the following year (P21, P22, P23). In addition to the goals at subsidiary level, individual target agreements are reached, but they only apply for the president of China P and China L (P21). Therefore, the use of pre-established targets is seen at a medium level. In accordance with the individual target agreements, the variable portion of pay is related to the performance (P21). This is only implemented for the president of China P and China L (P21, P23). Thus, performance-related pay is used to a low extent. Within the pre-established targets at subsidiary and at individual level, (financial) output measures are dominating (P21, P22, P23). “Our job here is to reach the optimal return on the employed resources or to reach the maximum return and that is a wise criterion for performance.”332 (P23). Thus, output measures are highly important at the Chinese subsidiaries. In addition, a high concern with cost and revenues becomes apparent for China L (P22). Summing up, this leads to conceiving the judgement of performance as highly linked to the results.





An overview of the control mix of China P and China L is summarized in Table 67. As input and behaviour control are used to a medium to high extent, while the use of output control is lower, performance evaluation plays a less relevant role in the headquarters’ control mix for the Chinese subsidiaries. The relative weight of performance evaluation in the control mix is low.

Control Objects at “China” Input Control

Behaviour Control

 high use of expatriates

 medium behaviour

 medium influence of

surveillance  medium (China P)/low (China L) predefinition of procedures  high (China P)/very high (China L) interaction

headquarters on hiring new managers  training provided by

headquarters to a high (China P)/medium (China L) extent  medium to high use of input control Table 67:

331

332

 medium to high use of behaviour control

Output Control  medium use of pre-

established targets  low use of performance-

related pay  high link of performance

judgement to results

 medium use of output control

The Control Mix Used for the Gloneer Subsidiary “China”

The board of China L and the board of China P each consist of one member of the Gloneer board of directors, the head of one of the product lines of Gloneer, two representatives of the Chinese joint venture partner and the president of the Chinese subsidiaries. Translation of “Wir haben die Aufgabe hier mit den eingesetzten Mitteln eine optimale Rendite zu erzielen oder eine größtmögliche Rendite zu erzielen und das ist auch ein sinnvolles Erfolgskriterium.“ (P23).

258

(2) For China L and China P, the content of performance evaluation concentrates on financial measures. While only one non-financial measure accompanies the financial factors in the case of China P, some qualitative measures are considered for evaluating the performance of China L. Financial measures: The content of performance evaluation of China P and China L is dominated by financial measures (P2, P22, P23). “Evidentially, we have the indicators order intake, sales, net profit and EBITA.”333 (P23). In addition, return on sales as ratio of EBITA to sales is considered to be very important for headquarters (P21, P23). Non-financial measures: No non-financial measures are detected to be relevant for evaluating the performance of China L. In contrast, one internal non-financial measure is considered to be relevant for China P (P23): the number of employees.334 As China P is running almost at full capacity, limits to its sales and order intake are set by the number of skilled personnel (P23). Thus, the Gloneer headquarters also looks at the growth of China P in terms of its number of employees (P23). The relevant financial and non-financial measures are primarily compared with the budget (P21, P22, P23). The past development is considered as well, while no results from internal benchmarking are communicated to the subsidiaries (P21, P22). Qualitative indicators: Qualitative performance measures play a subordinate role in the case of the Chinese subsidiaries (P21, P23). Qualitative targets in terms of certain projects are integrated into the individual target agreements and thus form the content of the president’s individual performance evaluation (P21). Further qualitative indicators become relevant at subsidiary level: At the production unit China P, qualitative targets concerning safety and environmental protection as well as safeguarding against risk are considered (P23). For China L, training activities are taken into account (P22). “And we do a lot of training, so to say pioneer work, a lot of training with very young employees in a growing company. Great attention is paid on this; what we are doing in this respect and what the company accomplishes.“335 (P22). In addition, the cooperation and coordination with headquarters is evaluated by headquarters in the case of China L (P22). Table 68 summarizes the use of financial, non-financial and qualitative indicators to assess the performance of the Chinese subsidiaries. Besides the financial measures, 333

334

335

Translation of “Aber klar, wir haben die Faktoren Auftragseingang, Umsatz, der Net-Profit und EBITA.“ (P23). Additional non-financial measures, such as the total number of working hours per month and the time off per person, are assessed by China P and reported to headquarters but are not used to evaluate the performance of China P (P23). Translation of “Und wir machen viel Training, also Pionierarbeit, viel Training mit sehr jungen Mitarbeitern in einer wachsenden Gesellschaft. Darauf wird schon sehr geachtet; was wir dort machen und was die Gesellschaft eben erreicht.“ (P22).

259

internal non-financial and internal qualitative indicators play a role, while external qualitative indicators are emphasized only for China P.

Content of Performance Evaluation of “China” Financial High emphasis on:  order intake  sales  net profit  EBITA  return on sales

Non-financial Low emphasis on:  number of employees (China P)

Qualitative Medium emphasis on:  safety and environmental

protection (China P)  development of employees

(China L)  collaboration with other units

(China L)  additional indicators related

to specific projects Table 68:

The Content of Performance Evaluation of the Gloneer Subsidiary “China”

(3) The process of performance evaluation consists of formal, personal and cultural elements (see Table 69 for an overview). For the Chinese subsidiaries, the relevance of these components differs slightly because formal performance evaluation has a higher weight compared to personal and cultural performance evaluation. Formal: The Chinese subsidiaries are formally evaluated on the basis of monthly financial reports, monthly project reports and monthly management reports.  The standard reporting systems also applies to both Chinese subsidiaries (P11, P22, P23). Until the previous year, both subsidiaries were consolidated for reporting, but now they supply their financials separately (P21). “That is a mere reporting of figures, they are only results one receives, and based on which one can say that it was good or bad or based on which we can set new goals.”336 (P21). As part of the standard reporting China P also has to supply a health, safety and environment (HSE) report once a month (P23) and a risk management report (P9e, P23).  Project reports are written every month at China P (P23). “Our monthly cost reports include information on the calculated budget, the percentage of the realized costs, the planned costs and information on the progress of the project.”337 (P23). Every quarter, this is accompanied by a risk report addressing significant issues which could negatively affect the project result (P9e, P23). 336

337

Translation of “Das ist ja reines Zahlenberichten, das sind nur Ergebnisse, die man bekommt und an denen man dann sagen kann, war es gut, war es schlecht oder was für neue Ziele setzen wir uns.” (P21). Translation of “Unsere monatlichen Cost reports enthalten Angaben ueber die vorkalkulierten Budgets, die % bis zum Berichtszeitpunkt angefallen Kosten, die geplanten Kosten und Angaben ueber den Projektfortschritt.” (P23).

260



In addition, a management report is written and sent to headquarters every month (P22, P23). Unfortunately, no real feedback is provided on the management report, but “the persons interested in the directors’ report, know it anyway, okay, they additionally have a systematic summary.”338 (P22). Thus, additional channels are used to communicate performance-related information to headquarters and evaluate the subsidiary. These channels are assessed in the following:

Personal: An equal use of personal performance evaluation is also found for China L and China P. Management meetings and personal appraisals are held in a similar frequency.  China L has the same board as China P. An official meeting between the management of the Chinese subsidiaries and its board is only held once a year (P21, P22). “Then we go through everything, also the weaknesses. Through all achievements we have, but also through all possibilities of improvement.”339 (P22). In addition, frequent meetings are held between the top management of the Chinese subsidiaries and one member of the Gloneer board of directors as well as the head of the relevant product line (P21, P22, P23).  The reports sent to headquarters are closely looked at by headquarters (P23). This may from time to time lead to personal appraisals in terms of clarifying questions, especially when deviations appear in comparison to the budget (P22, P23). “This means that we have to be able to explain these figures and we also need to be able to substantiate them for possible audits.”340 (P23). However, these personal appraisals have so far been used less frequently for China L than for China P (P22, P23). Cultural: For both Chinese subsidiaries, a frequent informal communication is detected, while performance goals are only partly shared.  The informal communication is frequent between the president of China L and China P and headquarters (P21). Due to the collaboration between the Chinese subsidiaries and headquarters on joint proposals and projects, information is informally exchanged (P22, P23). “There is a limited number of managers regularly coming over, but all others do not know the location here, they know the production only on second-hand account, and there is a need to adjust and to understand our capabilities, our employees, our employees’ qualifications, the potentials of the company. These things need to be transferred in informal

338

339

340

Translation of “diejenigen, die das eh interessiert, der Directors’ Report, die wissen’s eh, ok, da haben sie es auch noch mal systematisch zusammen.“ (P22). Translation of “Da geht man durch alles durch, auch durch alle Schwachpunkte. Durch alle Achievements, die wir eben so haben, aber auch durch alle Verbesserungsmöglichkeiten.“ (P22). Translation of “D.h. diese Zahlen müssen wir natürlich auch begründen können und die müssen wir auch bei eventuellen Prüfungen belegen können.“ (P23).

261

conversations.”341 (P23). A high need for informal communication exists, but is mainly restricted to the top management level. Thus, informal communication is seen at a medium level. In general, the same overall goals of headquarters are followed also at the Chinese subsidiaries (P21, P22). However, some differences become apparent. First of all, the Chinese joint venture partner is officially involved in setting the performance goals for China P and China L. While the representatives of this Chinese company mostly remain silent, they articulate their interest in earning a large profit (P21). At the same time, the Gloneer headquarters tries to maximize its profits as well (P21) so that the Chinese subsidiaries might sometimes be caught between two stools. Furthermore, for China P, the Gloneer headquarters imposes certain goals concerning safety and environmental protection as well as safeguards against risks which are difficult to follow strictly in the Chinese market. “There is still a lot of work to do. The goals are clear in qualitative terms concerning health, safety and environment, concerning safeguards against risks, but the demands of the market sometimes render it very difficult.”342 (P23). In addition, the start-up face demands special performance goals (P22). “Of course, we have different requirements in the start-up phase and concerning the culture etc. and therefore also different goals.”343 (P22). Consequently, the performance goals are only partly shared between headquarters and the Chinese subsidiaries.



Performance Evaluation Process of “China” Formal

Personal

Cultural

 monthly financial report;

 official management

 frequent informal

monthly health, safety and environm. report (China P)  monthly management reports  monthly project reports; quarterly additional risk reports (China P)

meeting once year and frequent additional meetings  personal appraisals very seldom (China L)/from time to time (China P)

communication by top managers  partly shared performance goals

 medium to large formal element Table 69: 341

342

343

 small to medium personal element

 small to medium cultural element

The Performance Evaluation Process of Gloneer’s Subsidiary “China”

Translation of “Es ist eine begrenzte Anzahl vom Management, die regelmäßig hier rüber kommen, aber alle anderen kennen den Ort hier, kennen die Fertigung nur aus zweiter Hand, und da ist der Abstimmungsbedarf und das Verstehen unserer Leistungsfähigkeit, unserer Mitarbeiter, die Qualifikation der Mitarbeiter, die Potentiale, die im Unternehmen stecken. Diese Sachen muss man alles in informellen Gesprächen rüberbringen.“ (P23). Translation of “Da ist noch sehr viel Arbeit zu tun. Die Ziele sind klar, in qualitativer Hinsicht, auch was HSE betrifft, was Risikoabsicherungen betrifft, aber die Anforderungen des Marktes machen das manchmal sehr schwierig.“ (P23). Translation of “Wir haben natürlich in der Aufbauarbeit und kulturell etc. andere Erfordernisse und insofern auch andere Ziele.“ (P22).

262

6.2.10 The Gloneer Subsidiary “India” The Indian subsidiary was founded in 1987. It was established as an “extended workbench” and took over work packages from the Gloneer headquarters (P10). By now, the Indian subsidiary has more than 200 employees and is not only involved in large international projects conducted by the Gloneer headquarters or one of the subsidiaries, but offers planning and construction services for plant components itself (P10, P29). Its main customers are the chemical industry in India, but also neighbouring countries are supplied by the Indian subsidiary (P29). Like “China”, the Indian subsidiary is in a Black Hole and Implementor position. Details on the determination of these roles are presented in subsection 6.2.10.1. This is followed by an analysis of the performance evaluation of “India” on behalf of the Gloneer headquarters (subsection 6.2.10.2).

6.2.10.1

The Roles of “India” – Black Hole and Implementor

The Indian subsidiary is conceived as a “Black Hole” (P12). This is due to a higher than medium strategic importance of the market and a low to medium level of competence of “India”. The level of competence is seen at a higher level from the subsidiary perspective (P29). Still, the headquarters perspective is decisive and finds support in the statements provided by the interviewees. Table 70 summarizes the determinants of the Black Hole position of the Indian subsidiary.

Dimension Strategic importance of the market

Indicator

Value

Sources

market volume

high to very high

P10, P11

Competition intensity

medium to high

P10, P29, P30

low to medium

P10, P29

technological dynamism

low

P29

level of competence in purchasing345

low

P10, P11

level of competence in logistics and distribution

very low

P10, P11

level of competence in “production”

medium

P10

customer demand intensity

Level of competence344

344

345

The level of competence differs between the headquarters and the subsidiary perspective. Both opinions are incorporated, but headquarters’ point of view is considered to carry more weight since headquarters representatives can compare the Gloneer subsidiaries. The level of competence in purchasing is believed to be overstated from the subsidiary perspective so that the headquarters perspective is adopted.

263

Table 70:

level of competence in marketing and/or sales

low to medium

P11, P29

level of competence in human resource management

medium

P10, P11, P29

level of competence in general management

medium to high

P10, P11, P29

The Strategic Importance of the Market and the Level of Competence of the Gloneer Subsidiary India

In Bartlett and Ghoshal’s role typology, “India” is positioned as Black Hole. In Gupta and Govindarajan’s role typology, the Indian subsidiary is conceived as Implementor (P12). This is caused by higher than medium knowledge inflows and lower than medium knowledge outflows. From the subsidiary perspective, the knowledge inflows are ranked at a slightly lower level (P29). Nevertheless, statements on the high level of integration and exchange of information between the Gloneer headquarters and the Indian subsidiary support its role (P11, P29). The inflows and outflows of knowledge are summarized in Figure 38.

Gloneer: “India“

Inflow of knowledge

Outflow of knowledge

Market data on customers Market data on competitors Product designs Process designs

Marketing know-how

Distribution know-how Purchasing know-how Management systems and practices to a very high extent

medium

not at all

not at all

medium

to a very high extent

Figure 38: Knowledge Inflows and Knowledge Outflows at the Gloneer Subsidiary “India”346

346

The inflow and outflow of knowledge is derived from combining the statements made by headquarters and subsidiary representatives (P11, P29).

264

6.2.10.2

The Evaluation of “India’s” Performance

Following the same structure as in the preceding subsections, the performance evaluation of “India” is now described. First, the role of performance evaluation in the control mix is determined (1). Then the content of performance evaluation is described (2). Finally, the process of performance evaluation is analyzed in detail for the Indian subsidiary (3). (1) The role of performance evaluation in the control mix is determined for “India” by comparing the use of input control, behaviour control and output control. Input control: Input control is found to be high for the Indian subsidiary because expatriates are used to a medium extent, the Gloneer headquarters executes a high influence on hiring and provides a lot of training to Indian personnel and management.  The managing director of the Indian subsidiary is an expatriate and another manager will be delegated in the near future (P29). Already in the late 1990s, two expatriates had been running the subsidiary, but there was also a period of time when no expatriate was delegated to “India” (P29). Thus, the use of expatriates is at a medium level compared to other Gloneer subsidiaries.  At the same time, headquarters can execute a high influence on hiring at the Indian subsidiary. Despite not being legally obliged, the managing director of the Indian subsidiary regularly informs headquarters when he intends to hire new managers and/or employees (P29). At headquarters, “they say: `Ultimately, the quality has to be high and if we want to ensure this quality, we need to see which people will finally be involved.´”347 (P29). Thus, a high influence on hiring new managers is observed at “India”.  Furthermore, a far bit of training is provided for personnel of the Indian subsidiary. First, this is training on the job when Indian employees or managers are sent to headquarters to work with their colleagues for a defined period of time (P29). Second, the Gloneer headquarters provides trainings for the Indian personnel on special topics, such as purchasing, either in India or in Germany (P29). Behaviour control: The Gloneer headquarters executes a medium to high level of behaviour control towards the Indian subsidiary. This is explained through high behaviour surveillance, medium to high predefinition of procedures and high interaction.  Behaviour surveillance is conducted on behalf of headquarters to a high extent. Headquarters personnel is sent to the Indian subsidiary “for means of control, to

347

Translation of “Die sagen: `Letztendlich muss die Qualität stimmen und wenn wir sicherstellen wollen, dass die stimmt, müssen wir sehen, was da für Leute letztendlich mitwirken werden.´ Also, die Abstimmung ist hier sehr, sehr eng.“ (P29).

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see how the development is in India (…) and how we act as engineering discipline, also quality checks and similar things.”348 (P29). In addition, procedures are largely predefined by headquarters. The Indian subsidiary uses the same software, the same workflows and the same tools as headquarters (P29). Nevertheless, some adaptations to the local situation in India are necessary (P29). “This is not welcome for everybody in Munich, no, then this doesn’t work, then you cannot do this or that, but we have to consider the conditions in India.”349 (P29). Therefore, the predefinition of procedures is not conceived to be high but medium to high. The level of interaction between headquarters and the Indian subsidiary is high (P10, P29). “You will hardly find a subsidiary within Gloneer which interacts and cooperates so tightly and intensely (….) with the parent company as we do.”350 (P29). Every week visitors from headquarters come to the Indian subsidiary to discuss projects, work together on proposals or to set up joint sales activities (P29). While the interaction concerning projects is very high, far less interaction takes place concerning the support functions (P30). Therefore, the interaction is seen at a high level and not at a very high level.

Output control: Compared to input and behaviour control, output control is less often used for the Indian subsidiary. Still, output control is used in terms of pre-established targets, selectively implemented performance-related pay and a high link of performance judgement to results.  Targets for the Indian subsidiary are discussed and agreed on between the managing director and the Gloneer board of directors (P29). In addition, an individual target agreement is established for the managing director (P29). As preestablished targets are not used at lower levels, their overall use is considered to be medium.  It is assumed that pay of the managing director is related to performance in line with the individual target agreements since this is common throughout Gloneer. Thus, the use of performance-related pay is conceived to be low.  In the case of the Indian subsidiary, the performance judgement on behalf of headquarters is highly linked to results. This is indicated by a very high concern with costs (P11). Furthermore, financial output measures make up a large part of the subsidiary targets as well as of the individual target agreement with the managing director (P29). Still, the importance of output measures is a little lower compared to other subsidiaries because the Indian subsidiary often receives 348

349

350

Translation of “für Kontrollmaßnahmen, um zu sehen, wie ist der Fortschritt dort in Indien, das von München abgewickelt wird und wie wir hier agieren als Engineering-Disziplin, auch das Prüfen der Qualität und solche Sachen.“ (P29) Translation of “Das schmeckt nicht jedem in München, nein, dann geht das nicht, da kann man dies und jenes nicht machen, aber man muss indische Gegebenheiten, die muss man berücksichtigen.“ (P29). Translation of “Sie werden im Gloneer Verbund kaum eine Tochter finden, die so eng und intensiv mit der Mutter (…) sich so intensiv und eng abstimmt als wir.“ (P29).

266

orders from headquarters or other subsidiaries and acts as a subcontractor (P29). In these cases, not the Indian subsidiary but the assigning unit is responsible for the final result (P10). The control mix used by headquarters towards the Indian subsidiary is presented in Table 71. A medium to high use of input control, a medium to high use of behaviour control and a medium use of output control is found. This indicates that performance evaluation has a relatively low weight in the control mix of headquarters towards the Indian subsidiary. Control Objects at “India” Input Control

Behaviour Control

 medium use of expatriates

 high behaviour surveillance

 high influence of

 medium to high predefinition

headquarters on hiring new managers  training provided by headquarters to a high extent

of procedures  high interaction

 medium to high use of input control Table 71:

Output Control  medium use of pre-

established targets  low use of performance-

related pay  high link of performance

judgement to results  medium to high use of behaviour control

 medium use of output control

The Control Mix Used for the Gloneer Subsidiary “India”

(2) The content of performance evaluation is dominated by financial measures. In addition, qualitative indicators play an important role while non-financial measures are almost completely neglected (P29). Financial measures: Financial measures are important for evaluating the performance of the Indian subsidiary. Order intake, sales, profit and profit margin are the relevant financial measures (P29, P30). They also form part of the individual target agreements of the managing director (P29). In addition, the order backlog indicating the volume of unfilled orders is considered to be a relevant performance indicator (P30). Considering the standards of comparison, the “comparisons are generally based on the budget.” (P30). No findings from an internal benchmarking are communicated to the Indian subsidiary (P30). Non-financial measures: In contrast to the financial measures, non-financial measures are almost neglected. Only the number of employees is assessed (P29, P30). Thereby, not only the pure number is considered, but employees “should all be qualified and occupied with work.”351 (P29).

351

Translation of “die alle qualifiziert und ausgelastet sind.“ (P29).

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Qualitative indicators: A more qualitative-oriented factor is the judgement of the product situation and the quality the Indian subsidiary delivers: The project situation is frequently looked at by headquarters to see if everything is running well (P29, P30). In addition, the quality of the delivered services is taken into account: “But I would say, primarily, my bosses will look at the quality the company offers; are there many complaints about us delivering bad engineering”352 (P29). To establish quality standards according to ISO 9001 is also one of the managing director’s goals (P29). In addition, indicators related to further projects are incorporated (P29). In summary (see Table 72 for an overview), financial measures dominate the performance evaluation of the Indian subsidiary. In addition, some emphasis is placed on internal non-financial and medium emphasis is placed on internal qualitative measures.

Content of Performance Evaluation of “India” Financial High emphasis on:  order intake  sales  EBITA  return on sales

Non-financial Low emphasis on:  number of qualified employees

Qualitative Medium emphasis on:  project quality  extension of infrastructure  additional indicators related

to specific projects

 order backlog

Table 72:

The Content of Performance Evaluation of Gloneer’s Subsidiary “India”

(3) In the case of the Indian subsidiary, the process of performance evaluation is almost dominated by formal components, while additional personal and cultural elements are equally used (see Table 73 for an overview). Formal: The formal components of evaluating the performance of the Indian subsidiary are the quarterly financial reports, monthly project cost reports and monthly management reports. So far no Balanced Scorecard is used at the Indian subsidiary, but the managing director plans to elaborate one which might form part of the performance evaluation in the future (P29).  The Indian subsidiary is also using the standard reporting system (P11), but it only has to supply its financials on a quarterly basis (P29, P30). “In order to

352

Translation of “Aber ich würde sagen, in erster Linie werden sich meine Chefs anschauen, wie gut ist die Qualität der Firma, gibt es da viele Beschwerden, dass wir schlechtes Engineering abliefern“ (P29).

268





evaluate the company and to know what the situation is, we report, of course, on a quarterly basis.”353 (P29). More performance-related information is required from “India” concerning the projects. “And we provide cost reports on our local projects every month.”354 Very detailed information on each project is required by headquarters to see how the Indian subsidiary performs on each project (P9e, P11). On a monthly basis, the managing director of the Indian subsidiary also supplies a management report to headquarters (P29, P30). He “presents a separate report, which is mainly concentrating on the sales or orders taken of any new proposals that we get … status of the projects execution on that project while they are being executed.” (P30).

Personal: The formal reports are only one part of evaluating the performance of the Indian subsidiary. “We send reports; that is the official part. And then there are, of course, many opportunities to exchange information with the management there.”355 (P29). This is conducted through management meetings and personal appraisals:  An official meeting between the Indian subsidiary and its board is held once a year (P29). The board consists of two managers from the Gloneer board of directors, two Indian managers and the managing director of the Indian subsidiary. In addition, quarterly board meetings are established, where usually at least one member of the Gloneer board of directors participates (P29, P30). The managing director of the Indian subsidiary also travels to Germany. “And myself, I am definitely in Germany four to five times a year, too, and then, of course, I report on the general business situation.”356 (P28).  Personal appraisals only cover the individual target agreements. They are held once a year (P54). Besides this, a high reliance on the formal element of performance evaluation is stated which is not accompanied by personal appraisals (P30). Cultural: A small to medium cultural component of the performance evaluation becomes apparent in a low level of informal communication and partly shared performance goals.  At top management-level, frequent communication is found with headquarters (P29). At lower hierarchical levels, this informal communication is not usual (P30). Thus, the informal communication is conceived to be low.  The performance goals are partly shared between headquarters and the Indian subsidiary (P29). The differences are partly caused by the specific competitive situation in India and by the corporate culture (P29). “A medium-sized company 353

354 355

356

Translation of “Für die Beurteilung der Firma und um irgendwo zu wissen, wie schaut es denn aus, berichten wir das natürlich vierteljährlich.“ (P29). Translation of “Und Kostenberichte über unsere lokalen Projekte, die machen wir monatlich.“ (P29). Translation of “Wir schicken Berichte, das ist der offizielle Teil. Und dann gibt es natürlich Gelegenheiten genug, sich mit dem Management da auszutauschen.“ (P29). Translation of “Und meine Wenigkeit, ich bin bestimmt auch vier-fünf Mal im Jahr in Deutschland und da berichte ich natürlich über die allgemeine Geschäftssituation.” (P29).

269

… On the one hand, we cultivate the personal contact to our employees, on the other hand, we expect more from them and that is a different philosophy compared to what Munich can do.”357 (P29).

Performance Evaluation Process at Gloneer’s “India” Formal

Personal

Cultural

 quarterly financial reports

 official management

 frequent informal

 monthly project cost reports

meetings once a year and three additional and occasionally more meetings  personal appraisals of individual targets once a year

communication only at topmanagement level  partly shared performance goals

 monthly management

reports

 medium to large formal element Table 73:

 small to medium personal element

 small to medium cultural element

The Performance Evaluation Process of Gloneer’s Indian Subsidiary

6.2.11 Discussion of the Performance Evaluation at Gloneer The preceding subsections showed that the performance evaluation of the Gloneer subsidiaries differs partly to a little and partly to a large extent. Nevertheless, it is not yet clear if these differences can be explained by the strategic roles the subsidiaries fulfil. In the case the subsidiary roles have an impact on performance evaluation, it is necessary to analyze whether this influence corresponds to the outlined propositions. Consequently, the performance evaluation of the subsidiaries fulfilling the same roles is compared in this subsection. In addition, it is compared to the predictions formulated in subsection 4.2. First, Bartlett and Ghoshal’s role typology is considered in subsection 6.2.11.1. This is followed by comparing the performance evaluation of the subsidiaries according to Gupta and Govindarajan’s role typology in subsection 6.2.11.2. Finally, conclusions are drawn on the role-specific performance evaluation within Gloneer (subsection 6.2.11.3).

357

Translation of “Eine mittelgroße Firma... wir pflegen einerseits mehr den persönlichen Umgang mit den Mitarbeitern, andererseits verlangen wir den Mitarbeitern auch mehr ab und das ist schon ein bisschen eine andere Philosophie als Gloneer München das durchführen kann.“ (P29).

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6.2.11.1

Performance Evaluation of the Gloneer Subsidiaries in Bartlett and Ghoshal’s Role Typology

All nine Gloneer subsidiaries fulfil certain roles within Gloneer. Now it is analyzed if these roles also trigger specific evaluations of the subsidiaries’ performance. In this subsection, the performance evaluation of the subsidiaries is compared to the propositions for each subsidiary role of Bartlett and Ghoshal’s role typology elaborated earlier in subsection 4.2.1. First, the Strategic Leaders (subsection 6.2.11.1.1) are addressed. This is followed by the Contributors (subsection 6.2.11.1.2) and the Implementers (subsection 6.2.11.1.3). Finally, the performance evaluation of the Black Holes within Gloneer is compared to the propositions (subsection 6.2.11.1.4).

6.2.11.1.1

Performance Evaluation of the Strategic Leaders

Germany L and USA L are Strategic Leaders within Gloneer. The evaluation of their performance is summarized and compared to the propositions for Strategic Leaders in Table 74. A high consistency is found when comparing the role, the content and the process of performance evaluation of Germany L and USA L. Although differences exist between the two subsidiaries in terms of their physical distance to the Gloneer headquarters, their history and their activities, the performance evaluation is very similar. The only apparent difference concerns the content of performance evaluation. Here, more emphasis is placed on qualitative indicators in the case of USA L compared to Germany L. This can be explained by the fact that at USA L the management has been working with the Balanced Scorecard for three years. For USA L, more reliance on indicators apart from the financials becomes apparent than it is the case at Germany L where the Balanced Scorecard has just been introduced. However, a fairly similar treatment of Strategic Leaders is found within Gloneer. This consistent performance evaluation does not completely match the propositions for Strategic Leaders. While the medium relative weight of performance evaluation is in line with the expectations, the content of the performance evaluation differs from the predictions, and the process only partly supports the propositions. The deviations can be explained through the high emphasis on the standard financial reporting (1), the strong market positioning of Gloneer (2), limited measurability of qualitative indicators (3) and an incomplete coping with the Strategic Leader role (4).

271

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Strategic Leader

medium relative weight

more quantitative nonfinancial external and qualitative internal indicators

more personal and cultural

Germany L

medium relative weight

mainly financial and also emphasis on nonfinancial internal and external measures

more formal and cultural

USA L

medium relative weight

mainly financial and also emphasis on nonfinancial internal and external as well as qualitative internal and external indicators

more formal and cultural

Result

consistency and support of the proposition

partial consistency and partial support of the proposition

consistency and partial support of the proposition

 “standard” emphasis

 “standard” reporting

on financials (1)  lack of external focus at subsidiary level due to strong market position of Gloneer (2)  limited use of qualitative indicators at Germany L since they are not measurable (3)  no complete coping with the Strategic Leader role (4)

system as strong formal element (1)  no complete coping with the Strategic Leader role (4)

Explanations

Table 74:

Appropriateness of the Propositions on the Performance Evaluation of Strategic Leaders at Gloneer

(1) The demanding standard reporting system established within Gloneer requires monthly written reports from the subsidiaries (P9e). These reports mainly address financials and are essential for the external reporting (P11, P18). It becomes evident that no other instrument used for performance evaluation has such a high weight as the reporting system. This corresponds to a high emphasis on financial performance measures and a large formal element in the performance evaluation process also for the Strategic Leaders Germany L and USA L. The high emphasis on sales and order intake as performance measures partly opposes the global product management (P19). It is important to win contracts against competitors, but it does not matter if headquarters, USA L or Germany L succeed. The Gloneer headquarters promotes global product management in order 272

to foster collaboration between the Gloneer units and win contracts with a joint effort (P9c, P9d). However, it basically fosters competition between subsidiaries, such as USA L and Germany L which have a similar product portfolio, by linking their performance judgement to the sales and order intake of the individual subsidiary. (2) Concerning the content of performance evaluation, a frequent use of non-financial external measures, such as market share, was expected for Strategic Leaders. This external focus is largely missing in the performance evaluation of Germany L and USA L. Gloneer wants to be number one, two or three in each market, but does not evaluate the subsidiaries separately with regard to this aspect (P15). A possible reason could be the strong market position of Gloneer (P27). It is enough for the Gloneer headquarters to evaluate the order intake which indicates that USA L or Germany L have won a contract against one or several competitors and which secures the future market position (P18). (3) Furthermore, the rare use of qualitative indicators for evaluating the performance of Germany L can be explained by certain scepticism towards qualitative indicators (P15, P19). The saying “What cannot be measured, cannot be managed” seems to be true. Even if this initial lack of measurability is overcome by making internal indicators measurable and integrating them into the Balanced Scorecard, low emphasis is placed on them (P17, P18). Financial measures are often believed to be the more reliable indicators of performance at Germany L. (4) The incomplete coping with the role of Strategic Leaders might also explain the deviation in the performance evaluation of Germany L and USA L. The positioning of both subsidiaries is not at the far end of the matrix but more or less centred. In addition, in spite of a medium to high level of competence and medium to high importance of the market, Germany L and USA L do not fulfil all functions which are attributed to the position of a Strategic Leader. Both subsidiaries are Local Innovators. Despite having knowledge of the Eastern European and former Soviet Union countries in the case of Germany L and on the US-market in the case of USA L, they only provide this knowledge to a low extent to headquarters and to other Gloneer units at the moment. The development of strategies for the whole group attributed to the Strategic Leader role (Bartlett/Ghoshal 1989: 105-106, Schmid et al. 1998: 36) is limited, too. Thus, the underlying assumptions favouring the use of qualitative internal measures and a more personal process of performance evaluation are not completely given for Germany L and USA L. All in all, an almost completely consistent performance evaluation of Strategic Leaders within Gloneer is found. The propositions on the performance evaluation are partly met and give rise to additional considerations and explanations immanent in the Gloneer case.

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6.2.11.1.2

Performance Evaluation of the Contributors

“Switzerland”, Germany S, “Sweden” and Germany P are Contributors within Gloneer. When comparing the performance evaluation of the four Contributors, consistency is only partly found across all of them. However, “Switzerland” and “Sweden” are similarly evaluated. The same is true of “Germany S” and “Germany P”. The differences between these two groups can be explained by the differing degree of collaboration in their business (1) and the differing geographic distance (2). (1) The differences between the two Contributor pairs might be explained by the fact that Germany P and Germany S strongly collaborate with headquarters, while “Switzerland” and “Sweden” are highly autonomous Contributors within Gloneer. The latter have own product lines which are not directly related to the headquarters business. In contrast, Germany P is an internal supplier to headquarters and other Gloneer subsidiaries, while Germany S collaborates with headquarters in its largest product line to a high extent. (2) Furthermore, Germany S and Germany P are located within the home country of Gloneer. In addition, they are situated at a comparably short geographic distance to the Gloneer headquarters. In contrast, “Switzerland” and “Sweden” are located at larger distances in foreign countries. Following this distinction, the two pairs of Contributors are separately compared to the propositions. Table 75 summarizes how the performance of “Switzerland” and “Sweden” is evaluated and compares it to the propositions. The same comparison is presented for Germany S and Germany P in Table 76. For “Switzerland” and “Sweden”, a partial support of the proposition can be observed. The high relative weight of performance evaluation is fully met. As opposed to the predictions, the content of performance evaluation concentrates entirely on financial measures in the case of “Switzerland”. This might be due to no complete coping with the Contributor role for both subsidiaries in combination with an intended development of “Sweden” (1). In addition, the dominant role of the standard reporting explains why personal elements and cultural elements in the performance evaluation process are neglected (2). (1) Both subsidiaries have a medium to high level of competence and operate in a market of low strategic importance for Gloneer. This indicates the Contributor role. Nevertheless, additional characteristics are not fully met by the Swiss and the Swedish subsidiary. Headquarters and other Gloneer units are not dependent on the contributions of these two subsidiaries. Despite being, for instance, very competent in research and development, this competence is not used within Gloneer. Both subsidiaries are Local Innovators with limited provision of know-how to headquarters

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and other Gloneer units. “Switzerland” tried once to “contribute” its know-how on management systems and practices to the other Gloneer subsidiaries (P26), but the impact was limited. However, there seems to be potential for headquarters to channel the competences of the Swiss subsidiary towards the MNC.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Contributors

high relative weight

financial and qualitative internal indicators

Formal, personal and cultural

“Switzerland”

high relative weight

mainly financial measures

more formal

“Sweden”

high relative weight

mainly financial and additionally qualitative internal indicators

more formal

consistency and support of the proposition

partial consistency and partial support of the proposition

consistency and partial support

 no complete coping

 “standard” reporting as

Result

Explanations

with the Contributor role, but intended development of “Sweden” (1) Table 75:

strong formal element (2)

Appropriateness of the Propositions on the Performance Evaluation of Contributors at Gloneer (I/II)

In contrast to “Switzerland”, the Swedish subsidiary is partly evaluated on internal qualitative measures. Nevertheless, no better fulfilment of the additional implications of a Contributor role can be stated for “Sweden”. Indeed, this assessment rather seems to indicate that the Gloneer headquarters has an eye on the Swedish subsidiary (P13) and wants to increase its level of competence. To this aim, the Gloneer headquarters is also looking at internal performance indicators at “Sweden”. (2) The dominant role of the standard reporting system becomes evident when looking at the performance evaluation process of the two subsidiaries. The expected cultural and personal elements are neglected in favour of this large formal element. Overall, the performance evaluation of “Switzerland” and “Sweden” partly corresponds to the propositions. This result is also reached for the other two Contributors – Germany S and Germany P (see Table 76). However, the explanations differ.

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Performance evaluation has a medium weight in the control mix for Germany S and Germany P in contrary to the expected high relative weight. A possible reason might be the small physical distance to the headquarters site (1). The difference in the process of performance evaluation can be explained by the fact that Germany S does not completely cope with the Contributor role (2). In contrast, Germany P is a full Contributor; its performance evaluation process corresponds to the predictions. (1) The short geographic distance between headquarters and these two Contributors seems to foster input control in terms of the provision of trainings. Managers of both subsidiaries can take part in the general training program offered by the Gloneer headquarters (P25, P27). Furthermore, interaction as part of behaviour control is easy due to the geographic closeness. This might explain why output control does not take up the prominent position in the control mix expected for Contributors. (2) In the case of Germany S, the personal performance evaluation element is neglected. This might be due to a limited coping with the Contributor role. In contrast to Germany P, Germany S is a Local Innovator and has not provided its knowledge to other units so far. An exchange of know-how takes place between Germany S and its counterpart in the USA (P24). Nevertheless, the knowledge transfer is still limited. In contrast, Germany P fulfils its Contributor role. Germany P is the competence centre within Gloneer for technology and production (P11, P27). All other Gloneer production units benefit from the competence of Germany P since the latter is a Global Innovator and provides its know-how to them.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

high relative weight

financial and qualitative internal indicators

Formal, personal and cultural

Germany S

medium relative weight

mainly financial and additionally qualitative internal indicators

more formal and cultural

Germany P

medium relative weight

financial and add. nonfinancial and qualitative internal indicators

Formal, personal and cultural

consistency, but no support of the proposition

consistency and support of the proposition

partial consistency and partial support of the proposition

Propositions for Contributors

Result

Explanations

 geographic distance

(1)

Table 76:

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 limited coping with the

Contributor role in the case of Germany S (2)

Appropriateness of the Propositions on the Performance Evaluation of Contributors at Gloneer (II/II)

Overall, no consistent treatment of Contributors on behalf of headquarters is derived. This is due to inherent differences between “Switzerland”, “Sweden”, Germany P and Germany S. However, Germany P is a typical Contributor in contrast to the other three subsidiaries. The performance evaluation of Germany P consists of a medium relative weight of performance evaluation, financial and in addition non-financial as well as qualitative internal measures as a content of the performance evaluation and a mixture of formal, personal and cultural elements in the performance evaluation process.

6.2.11.1.3

Performance Evaluation of the Implementer

Only one Implementer is detected within Gloneer: the British subsidiary. Table 77 summarizes the propositions for Implementers and the evaluation of “Great Britain’s” performance. Large support is derived with only one deviation concerning the relative weight of performance evaluation in the control mix. While a high relative weight is expected, a lower relative weight in the control mix of “Great Britain” is observed. This might be due to the past performance of the British subsidiary. Consequently, the Gloneer headquarters does not only rely on output control, but intervenes in terms of behaviour control to impact activities upfront. This interesting notion of “EBIT makes you free” is frequently found at Gloneer (P15, P23, P24).

Propositions for Implementers “Great Britain” Result Explanation Table 77:

6.2.11.1.4

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

high relative weight

financial measures only

more formal

medium relative weight

almost only financial measures

more formal

no support of the proposition

support of the proposition

support of the proposition

 past performance

Appropriateness of the Propositions on the Performance Evaluation of Implementers at Gloneer

Performance Evaluation of the Black Holes

“China” and “India” are Black Holes within Gloneer. The propositions for Black Holes and the performance evaluation of the two subsidiaries are presented in Table 78. A high consistency is found when comparing the role, the content and the process of

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performance evaluation of the Chinese and the Indian subsidiary. Consequently, Black Holes are equally treated within Gloneer. However, the predictions differ partly from this consistent performance evaluation of the two subsidiaries. Although the low relative weight of performance evaluation corresponds to the prediction, the content of performance evaluation differs from the expectations and the proposed process is only partly supported. The deviations can be explained through the high emphasis on the standard financial reporting (1), the strong collaboration between the two subsidiaries and headquarters (2), the demanded localization in China and India (3) and the large geographic distance to headquarters (4).

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Black Holes

low relative weight

quantitative non-financial external and qualitative external indicators

more formal and cultural

“China”

low relative weight

mainly financial and additionally qualitative internal indicators

more formal

“India”

low relative weight

mainly financial and additionally qualitative internal indicators

more formal

Result

consistency and support of the proposition

consistency, but no support of the proposition

consistency and partial support of the proposition

Explanations

Table 78:

 “standard” emphasis

 required localization (3)

on financial measures (1)  strong collaboration between headquarters and the subsidiaries so that external market position is only relevant at Gloneer level (2)

 geographic distance

(4)

Appropriateness of the Propositions on the Performance Evaluation of Black Holes at Gloneer

(1) Again, the high emphasis on the demanding standard reporting system partly explains the strong emphasis on financial measures and as well as on the dominating formal element in performance evaluation. Financials are required every month as part of the standard reporting in the case of “China” and as part of the project reporting in the case of “India”. They form the basis for the performance evaluation of the two subsidiaries. 278

(2) The expected external focus is largely missing in the content of performance evaluation of “China” and “India”. This might be explained by the strong collaboration with headquarters. Marketing and sales activities are strongly aligned between headquarters and the Indian as well as the Chinese subsidiary. In general, they are even jointly conducted (P22, P23, P29). This might explain why external market data, such as market share, is not used to evaluate the Chinese or the Indian subsidiary, but is more relevant at the level of Gloneer. (3) Concerning the process of performance evaluation, a cultural component was proposed for Black Holes. This cultural element might not be detected in the case of “China” and “India” due to the required localization in these host countries. Performance goals are only partly shared in both cases since the subsidiaries need to operate autonomously and adapt their processes to local needs (P23, P29). (4) Furthermore, the large geographic distance might oppose the cultural component in performance evaluation. Informal communication with headquarters is only found at the top management level and not at lower levels within “China” and “India”. Travels and visits are expensive and thus only undertaken by the top management of the two subsidiaries and members of the Gloneer board of directors. Consequently, managers and employees at lower hierarchical levels do not know their colleagues at headquarters and vice versa (P23). This restricts informal communication which indicates that performance goals are only partly shared. Overall, a consistent performance evaluation of Black Holes within Gloneer is deduced. The specific propositions on the performance evaluation are partly met and additional considerations and explanations immanent in the Gloneer case can be found.

6.2.11.2

Performance Evaluation of Gloneer Subsidiaries in Gupta and Govindarajan’s Role Typology

Apart from the subsidiary roles in Bartlett and Ghoshal’s role typology, the nine Gloneer subsidiaries fulfil certain roles according to Gupta and Govindarajan. Here, it is analyzed whether these roles are related to the performance evaluation of the subsidiaries. For each subsidiary role of Gupta and Govindarajan’s role typology, except for the Integrated Player which could no be found at Gloneer, the performance evaluation of the subsidiaries is compared to the propositions elaborated earlier in subsection 4.2.2. The next subsection starts out with the Global Innovator (subsection 6.2.11.2.1). Then the performance evaluation of the various Local Innovators within Gloneer is compared to the propositions (subsection 6.2.11.2.2). The same comparisons are drawn for the Implementors in subsection 6.2.11.2.3.

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6.2.11.2.1

Performance Evaluation of the Global Innovator

Only one subsidiary within Gloneer fulfils the role of a Global Innovator. This is Germany P. In Table 79, the performance evaluation of Germany P is compared with the propositions on Global Innovators.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Propositions for Global Innovator

medium relative weight

financial and quantitative non-financial internal as well as qualitative internal indicators

more formal and personal

Germany P

medium relative weight

financial and additionally non-financial and qualitative internal indicators

formal, personal and cultural

support of the proposition

support of the proposition

partial support of the proposition

Result Explanation

 no “standard” reporting

for Germany P (1)  supplier to

headquarters (2) Table 79:

Appropriateness of the Propositions on the Performance Evaluation of Global Innovators at Gloneer

While the role and the content of the performance evaluation correspond to the expectations, slight disagreement can be found regarding the process of the performance evaluation. Again, the exclusion of Germany P from the standard reporting system reduces the dominance of the formal component in performance evaluation (1), while at the same time the situation as a supplier to headquarters enhances the cultural element in the performance evaluation process (2). (1) As already mentioned above, Germany P is no legally separate unit which leads to its exclusion from the standard reporting system. Despite supplying other written reports, Germany P is therefore not as formally evaluated as expected for a Global Innovator. (2) Furthermore, Germany P realizes a large amount of its sales with headquarters and other Gloneer units. This causes a high alignment of performance goals because the profit is basically shared between the internal supplier and its internal customer (P27). Consequently, this can explain the cultural element next to the formal and personal performance evaluation of the Global Innovator Germany P. 280

6.2.11.2.2

Performance Evaluation of the Local Innovators

Most Gloneer subsidiaries are characterized as Local Innovators. Table 80 summarizes the performance evaluation of these six subsidiaries and the propositions for Local Innovators.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

high relative weight

financial measures only

more formal

Germany L

medium relative weight

mainly financial and some emphasis on nonfinancial internal and external measures

more formal and cultural

USA L

medium relative weight

mainly financial and also emphasis on nonfinancial internal and external as well as qualitative internal and external indicators

more formal and cultural

“Switzerland”

high relative weight

mainly financial measures

more formal

“Sweden”

high relative weight

mainly financial and additionally qualitative internal indicators

more formal

Germany S

medium relative weight

mainly financial and additionally qualitative internal indicators

more formal and cultural

“Great Britain”

medium relative weight

almost only financial measures

more formal

partial consistency and partial support of the proposition

partial consistency and partial support of the proposition

partial consistency and partial support of the proposition

Propositions for Local Innovator

Result

Explanations Table 80:

mostly no pure, but diverse Local Innovators

Appropriateness of the Propositions on the Performance Evaluation of Local Innovators at Gloneer

When taking a closer look at the positions of the Local Innovators, it becomes evident that “Switzerland” is characterized by the lowest inflow and outflow of knowledge. In contrast, the other subsidiaries are found in positions with tendencies towards Global Innovator and Implementor roles. The performance evaluation of “Switzerland” completely complies with the expectations, while deviations are revealed for the other subsidiaries.

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For the other subsidiaries, the performance evaluation within Gloneer is only partly consistent and only meets the expectations to some extent. The average medium relative weight of performance evaluation is lower than expected for Local Innovators. The common high emphasis on financial measures in all subsidiaries corresponds to the proposition of “financial measures only”. However, additional performance indicators are used in the case of Germany L, USA L, “Sweden” and Germany S. Furthermore, a relevant formal element is revealed in the performance evaluation process of all the Local Innovators within Gloneer, though an additional cultural element in the process of performance evaluation is found for some of the subsidiaries. These deviations can partly be explained when taking into account that the subsidiaries are not as clearly in a Local Innovator position as “Switzerland” and can thus not be considered pure Local Innovators. In addition, the subsidiaries are very diverse. No matter whether the subsidiaries are Strategic Leaders (Germany L and USA L), Contributors (“Sweden” and Germany S) or Implementers (“Great Britain”) according to Bartlett and Ghoshal, they are all found in Local Innovator positions in Gupta and Govindarajan’s role typology. This again supports a restricted coping with the roles as already mentioned above. Germany L and USA L, for instance, are in a Strategic Leader position, but do not provide much of their knowledge to other Gloneer units. A Global Innovator or an Integrated Player position seems to be a better match for the Strategic Leader. This example illustrates the diversity of the Local Innovators which can explain the limited consistency in their performance evaluation and the limited matching to the expectations. Overall, no consistent treatment of Local Innovators on behalf of headquarters can be found. However, “Switzerland” is in a clear Local Innovator position in contrast to the other five subsidiaries. The performance evaluation of “Switzerland” corresponds to the predictions for Local Innovators.

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6.2.11.2.3

Performance Evaluation of the Implementors

Two Gloneer subsidiaries are Implementors: “China” and “India”. Their performance evaluation is summarized in Table 81 and compared to the propositions for Implementors.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

medium relative weight

financial, quantitative non-financial internal and qualitative internal indicators

more formal and cultural

“China”

low relative weight

mainly financial and additionally qualitative internal indicators

more formal

“India”

low relative weight

mainly financial and additionally qualitative internal indicators

more formal

Result

consistency, but no support of the proposition

consistency and support of the proposition

consistency and partial support of the proposition

Propositions for Implementor

Explanations

 subsidiaries in a

development phase (1)

 required localization of

the subsidiaries (2)  geographic distance

(3) Table 81:

Appropriateness of the Propositions on the Performance Evaluation of Implementors at Gloneer

The role, the content and the process of performance evaluation of the Chinese and the Indian subsidiary are very consistent. Like above in their common role as Black Holes, the two subsidiaries are equally treated as Implementors. However, this consistent performance evaluation of the two subsidiaries differs to some extent from the expectations for Implementors. Even though the content of the performance evaluation corresponds to the propositions, the expected role of the performance evaluation is not supported, and the predicted process of performance evaluation is only partly met. The deviations can be explained with the situation of “China” and “India” being in a development phase (1), the demanded localization in China and India (2) and the large geographic distance to headquarters (3). (1) Both Implementors are in a development phase (P22, P29) and might not keep their position for a long period of time. The Gloneer headquarters relies on input and

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behaviour control to promote them instead of waiting for the output. This may explain the low relative weight of performance evaluation in the control mix. (2) Concerning the process of performance evaluation, a cultural component was proposed for Implementors (as for Black Holes). However, performance goals are only partly shared in the case of the Chinese and the Indian subsidiary. This might be due to the required localization in these host countries. Both subsidiaries adapt to the local needs and try to secure certain autonomy from headquarters (P22, P23, P29). (3) In addition, the large geographic distance between headquarters and India or China limits informal contacts. The geographic distance makes it difficult for colleagues to get to know each other. While the top managers of both subsidiaries communicate informally with headquarters, this is does not apply for lower hierarchical levels. This restricted informal communication indicates that performance goals are only partly shared. Consequently, the cultural element in the performance evaluation is negligible compared to the formal component. Overall, a consistent performance evaluation of Implementors within Gloneer is derived. The expectations for their performance evaluation partly correspond to the empirical findings. However, the deviations give rise to additional considerations relevant for the Gloneer case.

6.2.11.3

Standardization versus Role-Differentiation in Performance Evaluation at Gloneer

When summarizing the preceding subsections, the propositions elaborated in subsection 4.2 find support in several cases, yet contradictions are also found. In spite of no full correspondence to the expectations, the performance of Strategic Leaders, Black Holes and Implementors is consistently evaluated within Gloneer. As there is only one Global Innovator and one Implementor within Gloneer, no statement on the consistency can made for these two subsidiary roles. In the case of the Contributors and Local Innovators, more diversity in the dimensions of performance evaluation is derived. However, one pure Contributor (Germany P) and one pure Local Innovator (“Switzerland”) and their specific performance evaluation are identified. Figure 39 summarizes how the Gloneer headquarters evaluates the performance of the subsidiaries in Bartlett and Ghoshal’s role typology. Figure 40 presents the same for Gupta and Govindarajan’s role typology.

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high

Contributor

Competence of local organization

1) medium relative weight of performance evaluation 2) financial and additionally nonfinancial and qualitative internal indicators 3) formal, personal and cultural process

Implementer

Strategic Leader 1) medium relative weight of performance evaluation 2) mainly financial and also emphasis on non-financial internal and external measures 3) more formal and cultural process

Black Hole

1) medium relative weight of 1) low relative weight of performance evaluation performance evaluation 2) almost only financial measures 2) mainly financial and 3) more formal process additionally qualitative internal indicators 3) more formal process

low

low

Strategic importance of the market

high

Figure 39: Role-Specific Performance Evaluation at Gloneer According to Bartlett and Ghoshal’s Role Typology

Thereby, the research questions formulated in the introduction are answered. It is shown how the role of performance evaluation, the content of performance evaluation and the process of performance evaluation differ to some extent according to the subsidiary roles within Gloneer. The Strategic Leaders (USA L and Germany L), the Contributor (Germany P), the Implementer (“Great Britain”) and the Black Holes (“China” and “India”) are evaluated differently within Gloneer. This is also the case for the Global Innovator (Germany P) in comparison with the Local Innovator (“Switzerland”) and with the Implementors (“China” and “India”). Thus, in the case of Gloneer, it is illustrated how the subsidiary role influences the performance evaluation of the subsidiaries.

285

high

Global Innovator

Integrated Player

Outflow of knowledge

1) medium relative weight of performance evaluation 2) financial and additionally nonfinancial and qualitative internal indicators 3) formal, personal and cultural process

Local Innovator 1) high relative weight of performance evaluation 2) mainly financial measures 3) more formal process

Implementor 1) low relative weight of performance evaluation 2) mainly financial and additionally qualitative internal indicators 3) more formal process

low

low

Inflow of knowledge

high

Figure 40: Role-Specific Performance Evaluation at Gloneer According to Gupta and Govindarajan’s Role Typology

However, the impact is not strong enough to lead to completely different roles, contents and processes of performance evaluation for each subsidiary role. When trying to explain the existing inconsistency in the performance evaluation of the subsidiaries fulfilling the same role and clarifying the deviations from the propositions, additional intervening factors have been identified. These factors which next to the subsidiary roles might also have an impact on performance evaluation can be found at corporate level (1) and at subsidiary level (2). (1) At headquarters level, the high emphasis on the standard reporting system, the strong market position of Gloneer, personal preferences for quantitative performance measures and the central position of headquarters might have an influence on performance evaluation:  Financial reports are required by headquarters at least every quarter and form a comparable basis for evaluating the performance of all subsidiaries. Most interviewees considered this financial report as most relevant for evaluating the subsidiary’s performance.  The strong market position of Gloneer might restrict the external focus considering the content of the performance evaluation. 286





Personal preferences for measurable performance indicators are found at Gloneer. This leads to limited trust in qualitative indicators since they are not measurable. Furthermore, it is discovered that some subsidiaries do not completely cope with their role according to Bartlett and Ghoshal in spite of their positioning in the role typology. This can partly be explained when taking a closer look at the largest unit within Gloneer: headquarters. The global product responsibility for the large product lines lies at the Gloneer headquarters (P9c: 3), central functions are taken care of at headquarters, technical innovations are developed at headquarters, most Gloneer employees are working at headquarters and, in addition, subsidiaries are sometimes treated as satellites of lower relevance (P27). This indicates that headquarters is the centre of Gloneer and makes it difficult for the subsidiaries to live up to the expectations imposed by their roles.

(2) Furthermore, additional intervening factors can also be found at subsidiary level: These can be past performance, development stage, level of collaboration with headquarters, geographic distance and required localization in the host country:  Past performance might impact the role of performance evaluation in the control mix. While good past performance enhances the reliance on output control, bad past performance triggers the use of input control and behaviour control.  The development stage of the subsidiaries might influence the control mix. While input and behaviour control are more likely to be used for subsidiaries in development phases, output control might be more relevant for subsidiaries in a “static” stage.  The collaboration between headquarters and subsidiaries can also impact the performance evaluation. When headquarters and a subsidiary collaborate strongly in marketing and sales, this might restrict the relevance of external non-financial measures since activities are jointly undertaken and contracts are jointly gained. Thus, the usefulness of measures, such as market share, to evaluate the subsidiary is limited. Furthermore, when a subsidiary is mainly a supplier to headquarters and other units, a stronger alignment of performance goals is likely. This enhances the cultural component in the performance evaluation.  The geographic distance between headquarters and the subsidiary might have an impact on the performance evaluation process. The cultural element in performance evaluation can be larger in geographically close subsidiaries since informal communication is easier.  The required localization in some host countries might also restrict the cultural components in the performance evaluation process. When subsidiaries need to adapt to a high degree to local needs, it is difficult to reach a complete alignment of the performance goals. One additional influence of the strategic importance of the market can be detected when comparing the overall control executed by headquarters and the content of performance evaluation. A larger control mix and more distinct performance 287

measures are found for subsidiaries operating in markets of high strategic relevance (Germany L, USA L, “China”, “India”). The same is true of Germany P which also has higher market relevance than Germany S, “Switzerland”, “Sweden” and “Great Britain”. However, a larger size of the subsidiaries corresponds to the high strategic relevance of the market in the case of Gloneer. Therefore, the subsidiary size might also have an influence on the control mix and the selection as well as relevance of performance measures.358 Apart from detecting the differences and similarities in the performance evaluation at Gloneer, it remains questionable whether differentiating performance evaluation is intended or not. The interview partners at headquarters level argue in favour of a differentiation of performance evaluation (P10, P11). They explicitely refer to the past performance (P10), the development stage (P10), the subsidiary activities and functions (P10), the host country (P10) and the strategic importance as well as the weight of the subsidiary (P10) as influencing factors. Consequently, in contrast to Eucom, Gloneer supports differences in the performance evaluation. In summary, this whole section on the business unit Gloneer can be described as follows: Gloneer and its selected nine subsidiaries were briefly introduced. This was followed by characterizing each subsidiary in greater detail and identifying the subsidiary roles before analyzing the performance evaluation separately for each subsidiary. It became evident that the subsidiaries are diverse and fulfil different roles. At the same time, differences in the performance evaluation of the subsidiaries could be observed. Then, the performance evaluation of the subsidiaries was compared to propositions for each subsidiary role in order to analyze the relationship between the subsidiary role and the performance evaluation (see Scapens 1990: 275-276, Ahrens/Dent 1998: 27-30, Lee 1999: 76, Ghauri/Grønhaug 2002: 176 for details on this pattern matching). The predictions on the role, content and process of performance evaluation were partly met. Furthermore, consistency in the evaluation of subsidiaries with the same role was shown for Strategic Leaders, Black Holes and Implementors. The remaining deviations between the performance evaluation found at Gloneer and the propositions for role-specific performance evaluation led to additional insights, further explanations and interesting new ideas. All in all, a pattern was discovered which illustrates the influence of subsidiary roles on performance evaluation within the boundaries of the Gloneer case. Having presented both cases separately, the following section aims at comparing the rolespecific performance evaluation of the Eucom subsidiaries and the Gloneer subsidiaries. Thereby, it is analyzed if the findings from the two cases replicate each other or not (Scapens 1990: 270, Yin 1993: 50, Hartley 1994: 226). 358

An impact of the subsidiary size in terms of sales volume is illustrated by the risk management policies at Gloneer. While small subsidiaries do not need to supply a risk management report, the large subsidiaries are regularly required to provide headquarters with such a report (P11).

288

6.3 Comparison of the Role-Specific Performance Evaluation at Eucom and Gloneer In the discussion of the Eucom case and the Gloneer case, a certain differentiation of performance evaluation according to the subsidiary roles was revealed. It might now be interesting to see, if this differentiation is common across both cases. Therefore, the Eucom and Gloneer subsidiaries with the same roles are presented again in this section. As not all the subsidiary roles are found within Gloneer and Eucom a comparison is only possible for Strategic Leaders (1), Contributors and Global Innovators (2), Implementers (3) and Local Innovators (4). (1) Strategic Leader: The Finnish subsidiary is a Strategic Leader at Eucom while Germany L and USA L fulfil this role at Gloneer. The performance evaluation of these Strategic Leaders can be characterized as follows (see Table 82 for an overview): Similary, a medium relative weight of performance evaluation within the control mix is found for the Finnish subsidiary of Eucom, as well as for Germany L and USA L since in both MNCs headquarters do not only control the output of their Strategic Leaders, but place emphasis on additional control objects. Concerning the content of performance evaluation, financial measures are used to evaluate the performance of the Strategic Leaders. In addition, common emphasis is placed on non-financial internal and external measures. Furthermore, the process of performance evaluation of Strategic Leaders does not consist of formal elements only, but one additionally relevant component – either personal or cultural – is used.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Eucom’s Strategic Leader (the Finnish subsidiary)

medium relative weight

financial as well as nonfinancial external and internal measures

more formal and personal

Gloneer’s Strategic Leaders (Germany L and USA L)

medium relative weight

mainly financial and also emphasis on nonfinancial external and internal measures

more formal and cultural

medium relative weight

financial and nonfinancial external and internal measures

not only formal, but one additional element

Common Characteristics

Table 82:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Strategic Leaders

(2) Contributor and Global Innovator: Contributor roles are played by the German subsidiary at Eucom and Germany P at Gloneer. At the same time, both subsidiaries 289

are Global Innovators within their MNC. The performance of the German subsidiary of Eucom and Germany P is evaluated by the respective headquarters as follows (see Table 83 for an overview): The Eucom and the Gloneer headquarters use a mix of control objects towards their Contributors in which performance evaluation has a medium relative weight. In addition, the relevant performance indicators for the German subsidiary of Eucom and Germany P are financial and non-financial measures. In the case of the German subsidiary of Eucom, the focus of the nonfinancial measures is external while Germany P is additionally evaluated on the basis of non-financial internal measures. This difference can be explained by the activities with which both subsidiaries make a contribution within their MNCs: Germany P is more of an “Internal Contributor” and an “Internal Global Innovator” by conducting research and development, supplying state-of-the-art products to the other units and providing its production know-how to other manufacturing units. By contrast, the German subsidiary is more of an “External Contributor” and an “External Global Innovator” within Eucom when providing know-how on industries to other units and gaining large contracts for the group which also bring in new business for the other Eucom units. Despite these differences, both headquarters evaluate the performance of their Contributors similarly based on a mixed process by combining formal, personal and cultural elements.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Eucom’s Contributor and Global Innovator (the German subsidiary)

medium relative weight

mainly financial and additionally non-financial external measure

mainly formal and personal, but also cultural

Gloneer’s Contributor and Global Innovator (Germany P)

medium relative weight

financial and additionally non-financial and qualitative internal indicators

formal, personal and cultural

Common Characteristics

medium relative weight

financial and nonfinancial measures

formal, personal and cultural

Table 83:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Contributors and Global Innovators

(3) Implementer: Eucom’s Implementer is the Spanish subsidiary and “Great Britian” fulfils the same role within Gloneer. How the respective headquarters evaluates the performance of these two subsidiaries is presented in Table 84 and can be characterized as follows: While performance evaluation plays a high role in the case of the Spanish subsidiary of Eucom, it is found to be only of medium relative weight in the case of Gloneer’s “Great Britain”. This can be due to the fact that the Spanish

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subsidiary is believed to be in a good position. By contrast, the Gloneer headquarters tries to influence “Great Britain” in order to benefit more from their Implementer role. However, Eucom and Gloneer primarily rely on a formal process when evaluating the Implementers and mainly use financial measures.

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

high relative weight

mainly financial measures

more formal

Gloneer’s Implementer (“Great Britain”)

medium relative weight

almost only financial measures

more formal

Common Characteristics

medium to high relative weight

mainly financial measures

more formal

Eucom’s Implementer (the Spanish subsidiary)

Table 84:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Implementers

(4) Local Innovator: The Spanish subsidiary of Eucom is also a Local Innovator. Within Gloneer, this role is primarily attributed to “Switzerland”. The performance of these two subsidiaries is evaluated as follows (see Table 85 for an overview): Headquarters primarily rely on output control in the case of Local Innovator subsidiaries. Consequently, a high relative weight of performance evaluation is found for Eucom’s Spanish subsidiary as well as for Gloneer’s “Switzerland”. Thereby, headquarters mainly use financial measures to evaluate the performance of the Local Innovators. Apart from this, the performance evaluation process in place can be characterized as highly formal for both subsidiaries.

291

Role of Performance Evaluation

Content of Performance Evaluation

Process of Performance Evaluation

Eucom’s Local Innovator (the Spanish subsidiary)

high relative weight

mainly financial measures

more formal

Gloneer’s Local Innovator (“Switzerland”)

high relative weight

mainly financial measures

more formal

Common Characteristics

high relative weight

mainly financial measures

more formal

Table 85:

Comparison of the Performance Evaluation of Eucom’s and Gloneer’s Local Innovators

In summary, formal performance evaluation on the basis of financial measures is conducted for all subsidiaries no matter which role they play within the MNC. However, Eucom and Gloneer cannot be viewed as investment banks which only try to find the best short-term returns for their financial resources. When evaluating subsidiaries which are highly competent and/or which operate in strategically important markets, additional performance measures and performance evaluation processes come into play. At the same time, headquarters do not attribute such a high relative weight to performance evaluation as it is the case for subsidiaries of lower strategic relevance. The same applies to the outflow of knowledge: When subsidiaries provide knowledge to other units, the relative weight of performance evaluation in the control mix decreases, non-financial measures are observed to a higher degree and personal as well as cultural components form increasingly part of the performance evaluation process.

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7 Contributions, Limitations and Implications for Future Research The central research question of this dissertation was: (How) does performance evaluation differ according to the subsidiary role within an MNC? To answer this research question, the topic was conceptually analyzed and discussed. Proceeding from this background, an empirical investigation based on qualitative case studies was conducted. This led to identifying different subsidiary roles within two selected business units. In addition, differences in the performance evaluation of the subsidiaries were discovered which could be partly explained by the subsidiary roles. Thus, role-specific performance evaluation of subsidiaries within MNCs was discovered for the first time. This dissertation makes a contribution to the role typology research stream in international business literature by examining the role-specification of the management of subsidiaries. In addition, the study bridges the existing gap between international business literature and literature on management control (Otley et al. 1995: 41). Furthermore, a qualitative research approach which is frequently demanded for research problems in International Business (see, for instance, Schmid et al. 1998: 100, Macharzina/Oesterle 2002a: 14, Schmid/Schurig 2003: 775, Marschan-Piekkari/Welch 2004: 7-8, Peterson 2004: 25, Wright 2004: 51) was adopted and proved to be very valuable. More specifically three major contributions of this study to IB research can be identified: the elaboration of an integrative concept of performance evaluation (1), the identification of different subsidiary roles within one MNC (2) and the conceptualization, illustration and explanation of the relationship between subsidiary roles and performance evaluation (3). (1) A three-dimensional concept of performance evaluation, composed of the role of performance evaluation, the content of performance evaluation and the process of performance evaluation, was elaborated. This concept is more complete than existing conceptualizations of performance evaluation where only the pure performance measures are looked at. The concept proved its applicability on the one hand when existing literature was reviewed according to its elements. On the other hand, the suitability of the concept to management practice was shown in the empirical study. (2) The empirical study did not only serve to test the suitability of the performance evaluation concept, but was used to study subsidiary roles within one MNC. In literature so far, subsidiary roles have often been determined by comparing subsidiaries from different MNCs (Schmid 2004: 247). However, in this study the MNC was “held constant” to gain insights into role-differentiation within one MNC. K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1_7, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

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Based on Bartlett and Ghoshal’s as well as Gupta and Govindarajan’s role typologies, subsidiaries with diverse roles within two business units were identified in the empirical study. Thereby, both headquarters’ perspectives and subsidiaries’ perspectives were taken into account.359 (3) The subsidiary roles and the performance evaluation concept were integrated into a contingency framework of role-specific performance evaluation. Detailed propositions on the relationship between subsidiary roles and performance evaluation were specified. These predictions are far more specific than existing guidance on how to manage subsidiaries according to their roles which is presented by the authors of the role typologies. In addition, the predictions were illustrated by the findings from the case studies. Apart from these contributions to the IB field, the dissertation has also managerial implications in terms of providing insights into the influencing factors on performance evaluation (1), making subsidiary roles transparent (2) and rendering rolespecification accessible for management practice (3). (1) This study provides management practice with insights into performance evaluation. Although no recommendations could be extracted on how subsidiaries are evaluated best, important issues in performance evaluation became apparent. The literature review showed potential influencing factors at corporate and subsidiary level which can be taken into account. Furthermore, the case studies revealed insights into how subsidiary roles could be considered. Additional influencing factors became apparent in the case discussion. (2) Determining subsidiary roles might help to make the “value” of subsidiaries explicit within MNCs. There is often valuable competence, information, knowledge and expertise at subsidiary level which is not considered from the headquarters’ point of view, maybe only because headquarters are not aware of their potential (Schmid 2003a: 274). Making subsidiary roles explicit might enhance the visibility of the subsidiaries because then the level of competence of subsidiaries and/or their potential knowledge outflows to the rest of the MNC become apparent. (3) By combining the subsidiary roles with performance evaluation, the accessibility of the subsidiary roles for management practice is enhanced. In place of only determining the position of subsidiaries, implications for managing the subsidiaries accordingly become reachable. The illustrated predictions on role-specific performance evaluation can provide guidance on how to evaluate the subsidiaries according to their role.

359

This procedure is recommended in literature and necessary for deriving a common understanding of the subsidiary role (Young/Tavares 2004).

294

In spite of these valuable contributions, this dissertation also has limitations which are limitations for this study, but also chances for future research. Thus, limitations and avenues for future research are simultaneously presented in the following. They can be found along with the elements of the contingency framework: the performance evaluation concept (1), the role typologies (2) and the relationship between the two variables (3). (1) How headquarters evaluate the performance of subsidiaries was addressed in terms of three dimensions: the role, the content and the process of performance evaluation.  The set-up of performance evaluation is premised on the fact that headquarters are the evaluating unit and subsidiaries the units to be evaluated. The more we move towards network-type MNCs, such as the Transnational Organization (Bartlett 1986, Bartlett/Ghoshal 1987a, 1987b, 1989), the Heterarchy (Hedlund 1986, Hedlund/Rolander 1990, Hedlund 1996), the DMNC (Doz/Prahalad 1991, Doz/Prahalad 1993) or the Horizontal Organization (White/Poynter 1989a, 1989b, 1990), the more performance evaluation departs from this hierarchical top-down process with headquarters as the centre. The perspective adopted here could be modified by focussing more on subsidiaries (Barner-Rasmussen 2003). By changing the direction of the relationship between headquarters and subsidiaries, the conceptual framework of performance evaluation developed in this dissertation could be adapted. This would be a promising avenue for future research.  In spite of being far more extensive than existing concepts, the performance evaluation concept used in this study is still not complete. Considering, for example, the content of performance evaluation, the main focus was put on the types of performance indicators, but not on their level. One of the cases illustrated that a differentiation of performance evaluation was not based on the selection of performance measures, but rather on the imposed level: One subsidiary, for instance, had to achieve a higher EBIT and return on sales than another. This effect was not systematically addressed in this study. However, it might be interesting to examine also the relationship between subsidiary roles and the required level of common performance indicators. Further promising extensions of the performance evaluation concept could be the inclusion of aspects like the currency choice, inflation, transfer pricing and accounting standards. (2) Bartlett and Ghoshal’s as well as Gupta and Govindarajan’s role typologies were integrated into the contingency framework as independent variables.  Several indicators were used to classify the subsidiaries according to the relevant dimensions. In doing so, “average” positions were determined for each subsidiary. However, the descriptions of the subsidiary roles frequently revealed that one subsidiary, for instance, is a Contributor in one function and an Implementer in another function. Consequently, the subsidiaries were often not found in extreme but rather central and similar positions within the role typologies. A more 295



differentiated look at the subsidiary roles can be a promising avenue for future research. The concentration on two role typologies is oversimplifying and only partly maps the reality of MNCs with subsidiaries fulfilling multiple roles (Schmid 2004: 247). As many authors concentrate on only one role typology when doing research on subsidiary roles, the chosen approach is more complete. In addition, the incorporation of Bartlett and Ghoshal’s as well as Gupta and Govindarajan’s role typologies in this study proved to be valuable since the position in one role typology could be used to reach a deeper understanding of the subsidiary role according to the other role typology. Consequently, future research should proceed from here and incorporate more than one role typology to reach a fuller understanding of the subsidiaries and their functions within the MNC.

(3) The analysis of how subsidiary roles as independent variable influence performance evaluation as dependent variable was at the centre of this dissertation.  The one-way influence of the subsidiary roles on performance evaluation was of interest. Thereby, a potential interplay between the variables was neglected. Frequently, the consideration of interdependent relations is claimed as necessary extension of contingency approaches (see for instance Schreyögg 1994: 164, Littkemann 1997: 701-702). It could be an interesting field for future research to examine also the link between performance evaluation as independent variable and the subsidiary role as dependent variable. In addition, the interdependence between both of them could be the subject of longitudinal studies.  By concentrating on subsidiary roles as independent variable, other potential influencing factors were excluded. However, in the case discussion additional intervening factors were addressed which provide points of departure for future research. As an example, one promising factor is selected: the individual manager. Sometimes, interviewees explained procedures of control and performance evaluation by referring to the responsible managers (P3: 87-89, P7: 172). In addition, the relationship between the subsidiary manager and their line manager at headquarters seems to have an impact on how performance evaluation is conducted (P24: 184, P26: 152). Thus, it might be interesting to study the effect of the leadership style, the experiences, the personal relationships, the values and the character of the involved managers on performance evaluation.  The elaborated contingency framework excluded the link to the “performance” of performance evaluation. Therefore, despite having found initial support of rolespecific performance evaluation, it remains unclear if the active role-differentiation and the role-specific evaluation have a positive impact on MNC performance. Future research could try to incorporate this aspect. Following Aharoni’s suggestion, case studies could concentrate on corporations with a comparably high performance (Aharoni 1993: 43-44). First, however, it is necessary to clearly define MNC performance, operationalize it and consider additional potential influencing factors on MNC performance. 296



The limited generalizability of the results from the qualitative case studies has already been addressed in section 5.5. Statistical generalizability is neither aimed at nor is it achieved. However, the propositions were partly supported by the findings from the cases. At the same time, the rejection of the propositions was possible so that initial support in the context of the cases is achieved. It would be very interesting to see if the findings can be further transferred. Thus, conducting more case studies on this topic is recommended as avenue for future research. Furthermore, proceeding from this qualitative study, a large-scale empirical test of the supported propositions could be promising.

This study not only serves as a point of departure for future research but also illustrates a common phenomenon: The researcher’s frame of reference differs from the practitioner’s frame of reference (Shrivastava/Mitroff 1984). The four elements of a frame of reference are considered in the following (Shrivastava/Mitroff 1984: 2022)360: cognitive elements (1), cognitive operators (2), reality tests (3) and the domain of inquiry (4). (1) Cognitive elements refer to categories and units of information which add up to a person’s belief system and preferences (Shrivastava/Mitroff 1984: 20-21). The researcher commonly aims at adding objective findings to existing literature (Shrivastava/Mitroff 1984: 20-21, Macharzina/Oesterle 2002a: 17). Here, the researcher’s perspective departed from existing literature on role typologies. A gap in the literature was identified and built upon when analyzing the influence of subsidiary roles on performance evaluation. In contrast, as expected from decision-makers, interviewees at headquarters were mainly interested in problem solving (Shrivastava/Mitroff 1984: 20-21). They wanted to know how to evaluate their subsidiaries effectively and efficiently. In addition, the interview partners liked to see how other companies execute the performance evaluation of subsidiaries in order to learn from each other. Consequently, the specific relationship between subsidiary roles and performance evaluation is not of primary interest to practicioners361 whereas it is relevant for researchers.362

360

361

362

Shrivastava and Mitroff mention two additional aspects of a frame of reference (Shrivastava/Mitroff 1984: 22-23): the degree of articulation and metaphors. As these two aspects are no components of a frame of reference but ways to describe and communicate the four elements, they are not addressed here. This might also be caused by the fact that managers are (still) not familiar with subsidiary role typologies (Schmid 2004: 248). While it was surprisingly easy for the interview partners to classify subsidiaries according to Bartlett and Ghoshal’s as well as Gupta and Govindarajan’s role typology, they did not know them before and do not label their subsidiaries Strategic Leaders, Contributors, Implementors, Black Holes, Integrated Players, Global Innovators, Local Innovators or Implementers. One reason for this low awareness of the role typologies in management practice might be an existing communication barrier between IB research and management practice (see Macharzina/Oesterle 2002a: 18 for further details). Researchers and practitioners often consider different topics as interesting but some overlap exists (Baldridge et al. 2004: 1067).

297

(2) Cognitive operators are used by individuals to rearrange and sort information (Shrivastava/Mitroff 1984: 21). They can vary from complex models to common sense. While researchers’ cognitive operators are structured and often abstract concepts, practitioners tend to rely on intuitive and narrow problem definitions (Shrivastava/Mitroff 1984: 20-21). The conceptual framework of performance evaluation used in this study (see section 2.2) illustrates this gap between the frames of reference. While performance evaluation is interpreted in a broader context of control and coordination within the MNC from the researcher’s perspective, interview partners seemed to intuitively restrict the topic to financial performance measures. Furthermore, the process of coding and categorizing the empirical data shows the researcher’s tendency to abstracting and theoretizing. Sometimes it can be questioned if this incorporates a certain over-interpretation of the interview statements and data material. (3) Reality tests refer to a person’s checking of cognitive elements and operators (Shrivastava/Mitroff 1984: 21): Present experiences are compared to past experiences in order to establish their realness. Researchers conduct validity and reliability tests where practitioners check for pragmatic value (Shrivastava/Mitroff 1984: 21-22, Baldridge et al. 2004: 1067). Here, the review of the research design (see section 5.5) corresponds to a researcher’s type of reality test. In contrast, decision-makers would look at the workability of role-specific performance evaluation. (4) The domain of inquiry establishes the boundaries of the frame of reference (Shrivastava/Mitroff 1984: 22). A person can either be captured within its frame of reference or be able to accept other frames of references. The research discipline constitutes the researcher’s domain of inquiry while practitioners are linked to their function or division (Shrivastava/Mitroff 1984: 22). Here, the interviewees had a general management and/or finance or controlling background (see section 5.3) which might constrain their perspective to these areas. This domain of inquiry certainly differs from the researcher’s domain of inquiry. The study is rooted in IB research but contributions from other disciplines such as management control and accounting are taken into account, too. In addition, the broad selection of contributions for the literature review (see section 3.1) and the qualitative research design (see section 5.1) reflect the liberal and open research approach of this dissertation. Overall, the gap between the researcher’s and a practitioner’s frame of reference becomes apparent. The research questions, the conceptual framework, the research steps and the multidisciplinary approach reflect the characteristics of a researcher’s frame of reference. However, a more subjective – and as such more decision-makeroriented – perspective was adopted in the qualitative research approach. It shows that there is a possible bridge between the researchers and practitioners frame of reference. In general, it has often been critized that IB and management research is

298

of limited relevance for management practice (see, for instance, Shrivastava 1987, Mowday 1997: 337, Tranfield/Starkey 1998: 351-353, Rynes et al. 2001, Macharzina/Oesterle 2002a: 16-18, Aram/Salipante 2003: 189-190, Van Aken 2004, Kogut 2005: 66, Vermeulen 2005). In order to meet the requirement of an applied science, the researchers’ and practitioners’ frames of references need to become more similar. This can be achieved through a closer cooperation and interrelatedness of academia and management practice. Certainly, all participants would benefit from exchanging their thoughts, communicating their challenges and increasing their interaction.

299

Aim of Research  description and discussion of the design and primary functions of financial reporting systems  financial reporting systems consisting of formal and standardized reports containing quantitative and qualitative information

 description of the reporting and evaluation methods at Hewlett-Packard

 description of the reporting and evaluation methods at General Electric

 description of the reporting and evaluation methods at ITT

Empirical Design  case studies covering six Swedish MNCs  three to five subsidiaries within each MNC  data collection via interviews at headquarters level and at subsidiary level; company documents used in addition

 case study of a US MNC in the computer industry: Hewlett- Packard

 case study of a US MNC in the electronic industry: General Electric

 case study of a US MNC in the electronic industry: ITT

Content:  financial measures: net income, ROI, ROS  non-financial measures: market share, receivable turnover, inventory turnover, currency exposure  qualitative measures: government relations, employee relations  standard of comparison: budget Process:  formal: ~ reporting system Content:  financial measures: ROCE, ROE, compensation related to sales, receivables as percentage of sales, debt-equity-ratio

Content:  financial measures: profit, assets, receivables, capital purchases, CF, sales, cost of sales, selling expenses, expense levels, inventory  non-financial measure: manufacturing capacity  standard of comparison: budget Process:  formal: ~ reporting system

Described Variable(s) Content:  financial measures: balance sheet items, income statement items, specification of cash and credit, inventory, sales per product,  non-financial measures: production output, market share  qualitative measures: political and economic conditions in the host country  standards of comparison: budget, past, internal ä Process:  formal: ~ financial reporting system, manuals for the reporting system  personal: ~ personal visits and informal communication

Appendix I: Descriptive Contributions on Performance Evaluation Author Leksell 1981a, 1981b

Czechowicz et al. 1982: 93-103

Czechowicz et al. 1982: 104108

Czechowicz et al. 1982: 109111







 

     

 

Main Findings The reporting system is found to be the major formal channel of communication within the MNCs. The reporting frequency differs between the MNCs; on average specification of cash and credit and inventory are most often supplied. Most MNCs have standardized their financial reporting system; still, differences exist between wholly owned subsidiaries and joint venture subsidiaries. The MNCs use elaborated manuals describing the reporting system, time schedules etc. to guide the subsidiaries in this area. The reliance of headquarters executives on formal reports is found to be limited; rather informal communication and personal visits are used to satisfy their information needs. Different headquarters representatives (i.e. from finance or a product line) ask for different performance information from the subsidiaries. Reporting units do not necessarily coincide with the legal units because foreign units are grouped by division and product line. Foreign units supply product line reports and regional management reports which put emphasis on differing financial and non-financial measures. Manufacturing subsidiaries are considered profit centres, while marketing subsidiaries are considered cost centres. The same evaluation system is used for domestic and foreign operations. Diversified subsidiaries are reporting to the international division, while non-diversified subsidiaries report to their product group. Some subsidiaries incorporate both characteristics and therefore report to the international division and to one or more product group(s). Countries are ranked according to their relative risk and a higher ROI is required from subsidiaries in riskier countries. Reporting units do not necessarily coincide with the legal units; rather units are grouped by product line. The German subsidiary is for example subdivided by product line into five units which are evaluated.

301

K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

Author

Czechowicz et al. 1982: 112113

Czechowicz et al. 1982: 114115

Czechowicz et al. 1982: 116121



 





 

Aim of Research

 description of the reporting and evaluation methods of ICI  details on inflation accounting at ICI

Czechowicz et al. 1982: 122123

Czechowicz et al. 1982: 124156

 description of the management reporting and review process of

description of the reporting and evaluation methods at BOC details on inflation adjustment at BOC description of the reporting and evaluation methods at Company X details on the local capital charge approach of Company X description of the reporting and evaluation methods at ESAB details on the calculation of capital cost at ESAB description of the reporting and evaluation methods at the international division of a major health company

Miller 1982: 199-205

Empirical Design

Content:  financial measures: RI, return on capital charge

Described Variable(s)  non-financial measures: inventory turnover, market share  standards of comparison: budget, past Process:  formal: ~ reporting system Content:  financial measures: after tax ROE, pre-tax ROA  standard of comparison: budget

 case study of a US MNC in the electronic industry: Company X

 case study of a UK MNC in the electronic industry: BOC

 case study of a Swedish MNC in the manufacturing industry: ESAB

 case study of a division of a US MNC in the health care industry: Health Care Company

 case study of a UK MNC in the chemical industry: ICI

Content:  financial measures: sales, profits, cash, debt and fixed asset, dividend payouts, inventories, current

Content:  financial measures: EBT, sales, ROI, gross margin, stocks, trade debt, overhead  non-financial measure: market share  standard of comparison: budget Process:  formal: ~ reporting system Content:  financial measures: EBT, income statements in total and by product line, balance sheet, sales per product, working capital  non-financial measure: market share  qualitative measures: governmental relations, employee relations, management development  standards of comparison: budget, past Process:  formal: ~ reporting system Content:  financial measures: CF per product, ROI, net income  standards of comparison: budget, past, internal benchmarking Process:  formal: ~ reporting system  case study of a US technology company: 3M  description based on information

Main Findings  Countries are ranked according to their relative risk and a higher ROCE is required from subsidiaries in riskier countries.

 BOC believes in granting autonomy to the subsidiaries so that headquarters representatives do not interfere in subsidiaries’ operations.  Standards for performance evaluation of foreign subsidiaries are being developed.

 Based on a local capital charge system, specific capital charges are calculated for each subsidiary and subtracted from the operating profit after tax.

 Performance is primarily evaluated by subsidiary and secondarily by product line.

 International markets are geographically grouped as management centres (e.g. management centre Germany with five corporate entities).

 In Western Europe performance is primarily evaluated by product line and secondarily by subsidiary. In other countries such as Brazil or Australia, performance is primarily evaluated by subsidiary.  In Western Europe, profit is measured before interest and taxes (EBIT), while for other subsidiaries profit after interest and taxes (operating income) is decisive.  The subsidiaries worldwide are organized by country and divided into regions.  The performance measures are supplied in

302

Author

Abdallah 1984, Abdallah/Keller 1985

Donaldson/Pai 1984

Rubino 1986

Aim of Research 3M

 description of the performance evaluation of foreign subsidiaries  examination of differences in performance evaluation between domestic and foreign subsidiaries as well as between subsidiary managers and subsidiary  description of performance evaluation at Burroughs

 description of accounting techniques used for performance evaluation of foreign subsidiaries at IBM  details on the organizational structure

Empirical Design provided by the controller of the international operations of 3M

Content:  financial measures: profit, CF, ROA  non-financial measures: order growth, receivable days, months of inventory, manpower

 survey answered by international division managers of 64 US MNCs with at least one foreign subsidiary

 case study of an US MNC in the computer industry: Burroughs Corporation

Described Variable(s) ratio, debt/equity ratio, ROA, additional income statement and balance sheet items, sales by product, costs by product, capital expenditures, sales costs  non-financial measures: growth, tax-rates, accounts receivable ratios, asset turnover ratio, gross national product, consumer prices, industrial production, wages, market size, market share  qualitative measures: general economic situation, labour, success of sales programs, new product introductions, product quality, service quality, pricing  standards of comparison: budget, past, external benchmarking Process:  formal: ~ reporting and review system, overview books, economic profiles on host countries, monthly sales flashes  personal: ~ on-site meetings with review teams, international support team travelling to the host countries Content:  financial measures: ROI, profits, CF, ROA, return on operating assets, return on net assets, cash remittance, sales  non-financial measures: market share  standard of comparison: budget

 case study of an US MNC in the computer industry: IBM

Content:  financial measures: gross profit margin, ratio of expense to revenue, operating margin, net profit margin, ROA, quick ratio as measure of liquidity and ability to meet obligations  non-financial measures: inventory turnover, asset turnover

Main Findings overview books by all regions containing information on the each country operations.  On-site corporate reviews take place once a year: Review teams from headquarters are sent to the countries. Prior to these meetings a verbal briefing on the review issues is conducted with the person responsible for the region.  Local managers present details on the overall position of the subsidiary.  Division managers add details on the positioning within their business with a special focus on sales and profits. They also compare product quality, service and pricing to competitors.

 The most common financial measures are profit and ROI.  Within the MNCs the same performance evaluation and budgetary procedures are used for domestic and foreign subsidiaries.  Within the MNCs the same performance evaluation is used for subsidiary managers as for the subsidiary.  63% of the respondents indicated that environmental differences were considered in performance evaluation at least to a little extent.  It is stated that profit can be measured in several ways.  Recommendations on how to design performance evaluation systems are put forward: “Performance” needs to be clearly defined. The system should be objective, reflect accountability with responsibility, facilitate active communication and identify problems early. Additionally, it should be fair, provide quality information and be cost effective.  Foreign units are grouped by country and region for evaluation purposes.  Detailed manuals (Accounting Manual and Manufacturing Accounting manual) are provided to the countries for guidance on accounting rules, procedures, classifications and requirements.  Communication between the accounting

303

Kang/Park 1986

Author

Aim of Research of IBM and the region Europe, Middle East and Africa as well as its accounting department

 description of performance evaluation at Monsanto  details on the organizational structure of Monsanto, its reorganization and planning system

 description of performance evaluation at GoldStar  details on the organizational structure of GoldStar, its management philosophy and its planning system

Miller 1982: 206-214, 1986







Evans 1986

Schoenfeld 1986a



description of performance evaluation at FMC details on inflation accounting and the current cost reporting system at FMC description of performance evaluation at Alldelphi (a subsidiary of N.V. Phillips) details on strategic planning and the overall reporting system

Empirical Design

 case study of a Korean MNC in the chemical industry: GoldStar

 case study of an US MNC in the chemical industry: Monsanto

Content:  financial measures: sales, net income, ROC, asset management, CF, operating income, gross margin, product costs, operating costs  non-financial measures: local economic and market data  standards of comparison: budget, external benchmarking

Described Variable(s)  standards of comparison: budget, past, internal benchmarking Process:  formal: ~ accounting system for evaluation, accounting manuals  personal: ~ personal communication via telexes and personal visits Content:  financial measures: sales, profitability, net income, product cost, investment, per capita sales ratio, export sales price ratio, ratio of sales to private label sales, new non-discount store sales  non-financial measures: product mix ratio, market diversification ratio, production quantity  qualitative measures: new market development, product development, product quality  standards of comparison: budget, past, internal benchmarking Process:  formal: ~ formal evaluation system

 case study of an US MNC in the engineering and chemical industry: FMC

 case study of a German-subsidiary of a Dutch MNC in the electronics industry: Alldelphi

Content:  financial measures: net contribution, sales, EBIT, net income, funds flow, working capital  non-financial measure: orders  standards of comparison: budget, past Process:  formal: ~ formal performance reports Content:  financial measures: sales, gross margin, operating results, results before taxes, inventory, receivables  non-financial measures: production output, number of employees  standards of comparison: budget, past Process:  formal: ~ formal reports

Main Findings department and the businesses in each country is important for ensuring that the financial data appropriately reflects the business.

 Performance evaluation differs for the three US subsidiaries.  For the newly established subsidiary no formal evaluation procedures were developed yet.  The manufacturing subsidiary is evaluated based on a mixture of financial, non-financial and qualitative measures: net income, production quantity, product development, product quality, product cost, investment.  The marketing subsidiary is evaluated based on a mixture of financial, non-financial and qualitative measures: sales, net income, new market development, per capita sales ratio, export sales price ratio, product mix ratio, market diversification ratio, profitability.  Domestic and foreign units are primarily grouped by product line.  The same performance evaluation procedures are applied for domestic and foreign units.  For free-standing operations emphasis is placed on earnings and efficiency measures, for more dependent units operating incomes or gross margins are used and support units are evaluated based on operating costs.  The same performance evaluation procedures are used for domestic and foreign units.  Net contribution (operating profit after tax less an earnings target on the capital employed) is used as the main financial measure.

 Subsidiaries responsible for one country are managed jointly by the management of the subsidiary and the major industrial groups.  The subsidiaries have to monthly supply inventories reports, personnel reports and sales reports.  In addition, a new performance indicator system is being developed.

304

Appleyard et al. 1990, 1991

Author Schoenfeld 1986b

 description of the budgeting techniques and performance evaluation practices of foreign subsidiaries of UK MNCs

Aim of Research  description of performance evaluation at Nixdorf  details on the planning system, the “Best Performing Subsidiary” contest at Nixdorf

Duangploy/ Gray 1991

 description of performance evaluation practices in US MNCs in the 1970s and 1980s

Empirical Design  case study of a German MNC in the computer industry: Nixdorf

 sample of 11 UK MNCs  data collection via structured interviews with senior accountants and senior treasurer

 survey answered by 111 US MNCs  12 follow-up interviews

Described Variable(s) Content:  financial measures: revenues by segment, consolidated expenses, personnel expenses, interest expenses, consolidated total assets, accounts receivable, consolidated indebtedness, CF, profit after elimination of transactions which are not the result of a specific subsidiary’s activity  non-financial measures: incoming orders, number of employees per function, backlog of hardware orders, productivity (incoming orders per salesman or sales employee, consolidated revenues per employee, consolidated gross profit per employee, total expenses per employee), ratio of booking to billing  standards of comparison: budget, past Process:  formal: ~ formal reports  cultural: ~ contest for the best performing subsidiary Content:  financial measures: profit, ROI, ROCE, CF to subsidiary, ROS, sales  non-financial measures: productivity, market share, growth, employee turnover  qualitative measures: cooperation with the rest of the group, cooperation with the host government, safety  standards of comparison: budget, past, internal benchmarking, external benchmarking Content:  financial measures: profit, ROI, EPS, CF potential to US, ROA, ROS, ratio of current assets to current liabilities, ratio of cash to total liabilities  non-financial measures: inventory turnover, accounts receivable turnover  standards of comparison: past, external benchmarking

Main Findings  Subsidiaries have to supply a monthly report with financial and non-financial data.  Every year a contest is conducted and the best performing subsidiary wins a prize.





   





The most common financial measure are profit an ROI or ROCE. The most common non-financial measures are productivity, market share and growth. Cooperation with the rest of the group and with the host government as well as safety are used as qualitative measures. Most firms transfer their domestic performance evaluation system to foreign subsidiaries without adaptations. The most common financial measures are profit and ROI. Most common non-financial measures is inventory turnover. The most common comparison standard is comparison to the past. When comparing performance evaluation in the 1970s and 1980s, only slight changes were discovered: emphasis on profits increased, while emphasis on ROI decreased.

305

Aim of Research  description of management control systems of MNCs  the management control system is conceptualized as steering controls, controls coupled with headquarters approval and post-action controls

Independent Variable(s) MNC characteristic:  nationality Subsidiary characteristic:  objectives: profitability, market position, cash flows, host country relations

Content:  financial measures: ROI, ROE, RI, profit, CF potential from subsidiary to parent, comparison to budgeted ROI, profits, sales, ratios, others  standards of comparison: past, internal benchmarking in the home, host or other foreign countries  currency choice: local currency, parent currency

Relevant Dependent Variable(s) Content:  financial measures: profitability, sales growth, sales volume  non-financial measures: market share, productivity, control of expenses  qualitative measure: personnel development Process  formal: ~ bureaucratization = use of formal standardized planning procedures

 survey answered by 70 top executives in international divisions of US MNCs in the chemical industry  personal and telephone interviews with 33 selected executives from the survey sample  statistical analysis: frequency distribution, student’s t-test, correlation analysis, analysis of variance, ²-test

Empirical Design  125 interviews with operating executives and marketing managers of 36 Brazilian subsidiaries  MNCs: 24 from the US, 36 from Europe and 11 from Japan  statistical analysis: frequency distribution

Appendix II: Explanatory Contributions on Performance Evaluation Author Hulbert/Brandt 1980

Morsicato 1980

 description of evaluation practices of foreign subsidiaries and their managers of US MNCs  detailed examination of the currency choice

MNC characteristics:  degree of internationalization: ~ size in terms of foreign commitment determined via total sales of foreign subsidiaries  organizational structure: segregated structure with an international division, integrated structure organized by function, division or geographic area, global matrix Subsidiary characteristic:  geographic location by region: Europe, Middle East, Africa, Asia and Far East, Australia, Latin America, Canada

























Main Findings The most common financial measures are profitability, sales growth and sales volume. The most common non-financial measure is market share. MNC nationality plays a minor role in the selection of performance measures, but European managers use a higher number of measures than Japanese or US managers and place more emphasis on sales-oriented measures. Less bureaucratization was discovered for European and Japanese MNCs than for US MNCs. An inconsistency is discovered between subsidiary objectives and the measures of their performance. The most common financial measures are profit and comparison of budgeted profit/sales. A positive relationship between MNC internationalization and the use of budget comparison of profit and sales is discovered. 66% of the respondents state a preference for local currency. The currency choice is not significantly related to the MNC size. Organizational structure by product division and by geographic areas relates significantly to a preference for the parent currency. Only for subsidiaries operating in the Middle East a significant adaptation of the performance evaluation system is found. 58,6% of the interviewees state that the environment of the subsidiary is considered in their performance evaluation and even more (64,3%) see this as necessary. During the interviews again more executives opted in favour of an adaptation.

K. Kretschmer, Performance Evaluation of Foreign Subsidiaries, DOI 10.1007/978-3-8349-9922-1, © Gabler | GWV Fachverlage GmbH, Wiesbaden 2008

306

Hedlund 1981

Author Welge 1980, 1981

Aim of Research Independent Variable(s)  analysis and Subsidiary characteristics: explanation of  geographic location by differences in the country internal structure of the  size management systems  age and efficiency of  ownership: equity stake foreign subsidiaries  form of market entrance:  the management own subsidiary, acquisition, system is joint venture conceptualized as:  technology: manufacturing delegation, technology, information concentration, technology coordination (structural, personal and technocratic mechanisms), conflictresolution, authority and motivation

Subsidiary characteristics:  size  dependence: ~ internal

MNC characteristics:  nationality  size  technology: degree of automation

Environmental factor:  uncertainty

Subsidiary characteristics:  geographic location by country  autonomy  frequency of conflicts with HQ  product flow integration  performance  market share

MNC characteristics:  examination of the autonomy and formality  nationality  size of headquarterssubsidiary relationships

Horvath et al. 1981

 examination of the impact of culture on organizational control  organization control is conceptualized as formalization, specialization and centralization

Process:  formal: ~ formalization

Process:  formal: ~ formality = degree to which decisions are made and activities carried out according to explicit routines and lines of authority

Relevant Dependent Variable(s) Process:  personal: ~ personnel oriented coordination = frequency and motivation for personal visits, transfer of headquarters personnel

 structured interviews with chief executives or senior managers of 36 manufacturing MNCs  MNCs: 12 from Great Britain, 12 from Japan and 12 from Sweden  statistical analysis: descriptive statistics,

 interviews in 24 subsidiaries of 6 large Swedish MNCs  survey answered by HQ officials of 39 MNCs from Sweden, the US and Japan with 77 subsidiaries  in-depth case studies  statistical analysis: correlation analysis

Empirical Design  interviews with 25 top level managers at headquarters and 21 top level managers at subsidiaries of 6 MNCs within the chemical industry  MNCs: 6 from Germany and 15 of their subsidiaries in India, France and the US  statistical analysis: descriptive statistics, correlation analysis

Main Findings  The use of personnel oriented coordination mechanisms differs between the subsidiaries in different countries: In French subsidiaries personal oriented coordination is more widely used than in Indian or US subsidiaries.  Personnel oriented coordination and subsidiary size as well as subsidiary age seem to be positively related.  A weak positive correlation is stated for the equity stake and personal oriented coordination.  The form of market entrance is correlated with personal oriented coordination implying a lower level of personal coordination for entrance forms which rely heavily on external partners.  Only weak correlations are discovered between manufacturing technology and personnel oriented coordination mechanisms. Information technology is found to be negatively correlated with personnel oriented coordination.  More informal management was discovered in Swedish and Japanese compared to US companies.  Subsidiaries located in developing countries tended to be managed in less formal ways than those located in developed.  A negative correlation is revealed for subsidiary autonomy and formality for the sample of Swedish, Japanese and US MNCs.  For Swedish MNCs subsidiary size, and subsidiary performance are negatively related to formality. The frequency of conflicts and the degree of product flow integration are positively related to formality. The market share of the subsidiary is not related to formality.  Uncertainty is negatively related to formality.  Differences in the degree of formalization are discovered with Swedish MNCs scoring lowest and Japanese MNCs scoring highest.  The size of the MNC and the size of the subsidiary are positively correlated with the degree of formalization.  Only a weak positive correlation is discovered for the degree of automation and formalization.

307

Author

Negandhi/ Baliga 1981

Czechowicz et al. 1982, Choi/ Czechowicz 1983









Aim of Research

Independent Variable(s) dependence (on the parent organization) and external dependence (on other organizations)

analysis and MNC characteristic: explanation of  nationality differences in management orientations, strategies, policies and practices of US subsidiaries with headquarters in different countries (Germany and Japan) analysis of bureaucratic versus personal control strategies MNC characteristic: comparison of  nationality evaluation practices of foreign subsidiaries and their managers of US and non-US manufacturing companies additional analysis of the consideration of currency choice, inflation, inter-company pricing, taxes and fund allocation

 structured interviews with 91 CEOs and top executives of 33 US subsidiaries of MNCs  MNCs: 17 from Germany and 16 from Japan  statistical analysis: frequency distribution

Empirical Design correlation analysis

Process:  formal: ~ bureaucratic = reliance on formal reports, rules, regulations and procedures  personal: ~ personal = control by placing trustworthy personnel (from headquarters) in key positions in the subsidiary

 survey answered by 88 MNCs  MNCs: 64 from the US and 24 from the UK, Sweden, Switzerland and other European countries  interviews with 20 financial executives from US and non-US MNCs  10 telephone interviews with US MNCs  3 roundtable discussions with a total of 50 US MNCs  8 case studies  statistical analysis: frequency distribution

Relevant Dependent Variable(s)

Content:  financial measures: ROI, ROE, ROA, ROS, EPS, CF to subsidiary, CF to parent, RI, comparison to budgeted sales/profit/ ROI/ROA/ROE, others  non-financial measures: market share, quality control, labour turnover, R&D, productivity, others  qualitative measures: environmental compliance, employee development, intra-company cooperation, relationship with host government, employee safety, community service  standards of comparison: comparison with budget, past, other unit or competitor  currency choice: local currency, parent currency





















Main Findings The correlation between internal dependence and formalization differs between the countries: Japan and Sweden show a positive relationship between internal dependence and formalization, while Britain shows a weak negative relationship. External dependence was expected to show a negative correlation with formalization, but a positive correlation is discovered. Japanese and German MNCs require written performance with almost the same frequency from their subsidiaries. Subsidiaries of German MNCs tend to be controlled more bureaucratically than subsidiaries of Japanese MNCs where personal control is more frequent.

Performance evaluation practices are similar within US and non-US MNCs. The most common financial measures are profit/sales, ROS and ROI. The most common non-financial measures are market share, productivity improvement and quality control. The most common qualitative measure is the relationship with host country government. The most common performance standards are comparison to the budget and comparison to the past. US MNCs rely more on parent-currency while non-US MNCs prefer a local currency perspective.

308

Author Dobry 1983

Aim of Research  analysis and explanation of differences in subsidiary control and coordination of US and German MNCs  personal and bureaucratic mechanisms are addressed as control mechanisms

Independent Variable(s) MNC characteristic:  nationality

Yunker 1983

Environmental factor:  perceived environmental variability

MNC characteristics:  survey of the  size: sales volume, number relationship between of subsidiaries several exogenous  degree of variables and three internationalization: ~ policy areas for US internationalization MNCs determined via number of  the policy areas are host countries, foreign subsidiary autonomy, subsidiary ratio, foreign performance evaluation sales ratio and transfer pricing  short-run profit orientation

Egelhoff 1984

MNC characteristic:  examination of the  nationality control intensity and control type exercised by MNCs from different Control variables: MNC characteristics: countries  length of experience abroad  control within three  degree of functional areas internationalization: ~ (marketing, number of foreign manufacturing, finance) subsidiaries  industry Subsidiary characteristics:  host country

Relevant Dependent Variable(s) Process:  formal: ~ bureaucratic control determined via analysis of the internal reporting system, budgeting, planning system  personal: ~ personal control determined via analysis of communication patterns, visits, transfers of managers to foreign subsidiaries, development of managers, incentive system for managers Content:  financial measures: profit-oriented: ROE, ROA, ROS, CF to parent, RI, net income; growth-oriented: sales growth; cost-oriented: cost reduction  non-financial measures: growth-oriented: market share; innovation-oriented: new product innovation, production technology innovation  standards of comparison: budgetgoal-oriented (adherence to budgets, meeting plan goals), subjective measures (specifically tailored standards) and objective measures (company-/ industry-/ economy-wide standards)  currency choice: local currency, parent currency

Control mix:  output control: ~ output control = performance reporting systems: use and frequency of performance measures in three functional areas (marketing: total sales, sales by product line, sales to specific accounts, total selling expense, components of selling expense, selling expense by product line; manufacturing: total manufacturing expense, components of manufacturing expense, cost of specific raw materials, units of

Empirical Design  survey answered by 39 subsidiaries (12 US subsidiaries of German MNCs and 17 German subsidiaries of US MNCs)  statistical analysis: frequency distribution



Main Findings  A higher degree of formalization is discovered in US MNCs compared to German MNCs.  Personal communication is more frequent in US MNCs compared to German MNCs.  Management transfers are equally used for control purposes in MNCs from both countries.

















The most common measures are market share, cost reduction and net income. For the standards of comparison a high budget-orientation is stated. Furthermore, company-wide standards are preferred to industry- or economy-wide standards. MNC size has a significant positive impact on the use of objective criteria and a negative impact on the use of growth-oriented and budget-goal-oriented measures. The foreign subsidiary ratio has a positive impact on the use of growth-oriented measures on which the foreign sales ratio has a negative impact. Short-term profit orientation and perceived environmental variability have a significant positive impact on budget-goal-orientation in terms of the standards of comparison. Perceived environmental variability positively affects the performance evaluation within most dimensions. MNC nationality has a strong influence on the choice of the control type: US MNCs use more output control while European MNCs rely more on behavioural control. The control variables can be interpreted as follows: The size of the subsidiary is positively associated with the use of output control in manufacturing. The age of the subsidiary, the number of subsidiaries and the years of the company abroad are negatively associated with the use of output control in finance. Differences in the types of control are discovered when comparing MNCs by industry. The control variables do not

 survey answered by 52 US MNCs  statistical analysis: frequency distribution, correlation analysis

 structured interviews with executives responsible for foreign subsidiaries within 50 MNCs  MNCs: 24 from the US, 6 from the UK and 20 from Continental Europe  94 headquarterssubsidiary relationships covered  statistical analysis: correlation analysis,

309

Author

Mascarenhas 1984

Kenter 1985









 interviews with top executives of 25 US subsidiaries with headquarters in different countries (European countries and Japan)  statistical analysis: correlation analysis

Empirical Design variance analysis

 Manufacturing interdependence has a significant positive correlation with systemsensitivity and personal communication between subsidiaries and central staff as well as among subsidiaries.  Additionally, a positive (but non-significant) trend is discovered between manufacturing interdependence and the use of impersonal methods.

Main Findings significantly affect output control in marketing.

Aim of Research

Relevant Dependent Variable(s) output by product, manufacturing variances, quality control data; finance: subsidiary profit, inventory level, accounts receivable turnover)  behaviour control: ~ assignment of parent company managers to foreign subsidiaries as subsidiary CEO and within three areas (marketing, manufacturing, finance)

 interviews with managers responsible for the international activities of 22 German MNCs  explorative study for generating hypotheses  statistical analysis: cross-classified tables, correlation analysis, ²test

Independent Variable(s)  size  age

Process: Subsidiary characteristic: examination of the  formal: ~ impersonal methods (e.g.  interdependence: ~ relationship between regular reports, work plans, manufacturing interdependence of budgets) interdependence: pooled, subsidiaries within the  personal: ~ personal communication sequential, reciprocal MNC and their (e.g. group meetings, telephone coordination patterns conversation, face-to-face coordination patterns communication) consist of: impersonal  cultural: ~ system sensitivity methods, personal acquired through socialization (e.g. communication, system recruitment, training programs, sensitivity and transfers) compensation system MNC characteristics: Process: analysis and  size  personal: ~ direct instructions in explanation of the use three functional areas (marketing,  degree of of control and human resources, finance) coordination internationalization mechanisms for foreign  strategy: corporate strategy,  cultural: ~ socialization subsidiaries within international strategy, German MNCs investment strategy  interdependence: flows top coordination down, flows bottom up mechanisms are conceptualized as  industry  R&D intensity person-oriented and  technology: ~ manufacturing technocratic mechanisms technology  market share  competition intensity

 With an increasing MNC size, the use of direct instructions decreases in human resources.  No impact on direct instructions and socialization is found for the degree of internationalization.  A global integrated strategy leads to more direct instructions in human resources and finance.  Flows from bottom to the top lead to a lower socialization and more direct instructions within human resources.  Within the chemical industry direct instructions are significantly used to a higher extent than in other industries.  An increase in the R&D intensity leads to a lower use of direct instructions in human resources.  No impact on direct instructions and internationalization is found for manufacturing technology.  An increase in the relative market share leads to a decreasing level of socialization.  An increase in the intensity of competition leads to a decreasing level of socialization.  The lower the intensity of competition, the higher the use of direct instructions, especially

310

Aim of Research

Independent Variable(s)

Brownell 1987

Environmental factor:  examination of the  environmental uncertainty in relationship between two dimensions: environmental environmental complexity, uncertainty and the use environmental dynamism of accounting based control as well as their impact on managerial performance  control: output versus behaviour control

Author

Demirag 1988, 1990

Relevant Dependent Variable(s) Control mix:  output control: ~ output control via budgeting systems  behaviour control: ~ behaviour control: assignment of home country managers to foreign subsidiaries

Content: MNC characteristics:  financial measures: ROI, ROE, RI,  degree of profit, value added, CF potential to internationalization: ~ the parent, comparison of budgeted foreign commitment ROI/profit/sales, ratios, others determined via total sales of  standards of comparison: past, foreign subsidiaries internal benchmarking in the home,  organizational structure: host or other foreign countries segregated structure with an  currency choice: local currency, international division, parent currency integrated structure organized by function, division or geographic area, global matrix  locus of decision-making: centralization versus decentralization  industry: more or less technologically intensive

 description of evaluation practices of foreign subsidiaries and their managers of UK MNCs  detailed examination of the relationship between contextual variables and the currency choice

Egelhoff 1988

 examination of the influencing factors on formal control of foreign subsidiaries

Subsidiary characteristic:  geographic location by region: Europe, Middle East, Africa, Asia, Australia , Latin America, North America Control mix: MNC characteristics:  output control: ~ performance  nationality control = use and frequency of  size performance measures in three  length of experience abroad functional areas (marketing: total  degree of sales, sales revenue by product line, internationalization: ~ size of sales to specific accounts, total foreign operations selling expense, components of  strategic and environmental selling expense, selling expense by complexity product or product line;  industry manufacturing: total manufacturing

Empirical Design  survey answered by 56 sales and customer service managers in Australian offices of one MNC  interviews with key personnel at headquarters and subsidiary level  statistical analysis: regression analysis  survey answered by 105 financial directors of UK MNCs  interviews with 23 of these directors  statistical analysis: frequency distribution, Z-tests, ²-test

 structured interviews at 50 MNCs with 3 representatives (head of international division, persons executives of foreign subsidiaries report to) of each MNC  MNCs: 24 from the US, 6 from the UK and 20 from Continental

Main Findings in marketing.  Within the sample, output control is the dominant type of control while behaviour control is almost not used at all.  Differences in environmental complexity are found between sales and customer service, while environmental dynamism is constant. Thus, further analysis is only conducted for environmental complexity: Heavy reliance on accounting information (and output control) in performance evaluation is inappropriate where environmental complexity is high.

 The most common measures are ROI, comparison of budgeted profit and comparison of budgeted sales.  The most common comparison standards are comparison to the past and internal benchmarking either with units in the home or host country.  The majority of MNCs use both currencies in performance evaluation.  Internationalization, the locus of decisionmaking, industry groups and the subsidiary environment have no significant impact on the currency choice.  The organizational structure can have an impact on currency choice: MNCs structured by geographic areas have a greater tendency to prefer the parent currency than other MNCs.  No relationship between the currency choice and the degree of internationalization was discovered.  Firms operating in all geographic areas were found to use more local currency than parent currency.  US MNCs tend to exercise the highest level of performance control, while European MNCs exercise the lowest.  The length of experience abroad negatively affects the level of performance control in finance.  The degree of performance control decreases with an increase in the size of the foreign operations.  The level of performance control is reduced with an increase in strategic and

311

Author

Ghoshal/Nohria 1989

Rolander et al. 1989

Aim of Research

 examination of the fit between subsidiaries’ situations and their governance structure  governance structure as: centralization of authority, formalization of rules and systems and normative integration

Independent Variable(s) Subsidiary characteristics:  size  age  strategic and environmental change  interdependence

Subsidiary characteristics:  local resources  environmental complexity of the host country

Relevant Dependent Variable(s) expense, components of manufacturing expense, cost of specific raw materials, units of output by product, manufacturing variances, quality control data; finance: subsidiary total profit, subsidiary profit by product line, inventory levels, accounts receivable turnover)  behaviour control: ~ assignment of parent company managers to foreign subsidiaries as subsidiary CEO and within three areas (marketing, manufacturing, finance) Process:  formal: ~ formalization = routinization of decision-making and resource allocation  cultural: ~ normative integration

Content: MNC characteristics:  examination of the  financial measures: sales, performance evaluation  size contribution, operating profit, net  ownership practices and their profit, ROCE, return on total capital,  organizational structure changes during the ROE, ROS, CF, RI  growth: ~ historical and 1980s in Swedish  non-financial measures: market potential growth MNCs share, productivity, quality,  product type  analysis of the impact production volume, R&D, personnel  industry and competitive of different context turnover, order bookings, capital situation factors turnover, inventory turnover  task-related demands (e.g. Process: need for flexibility, need for creativity or innovativeness,  formal: ~ formalization = formal feed-back and financial measures requirements that other than for assessing subsidiary managers’ trained financial controllers performance can understand the reports) Subsidiary characteristics:  host market risk: ~ political risk, inflation risk and foreign exchange risk

Empirical Design Europe  statistical analysis: correlation analysis



 







survey answered by executives responsible for the international operations of 66 MNCs and their national wholly-owned subsidiaries MNCs: 36 from the US, 30 from Europe reporting on 618 HQsubsidiaryrelationships statistical analysis: correlation analysis first survey answered by 55 finance directors and chief controllers at corporate HQ of Swedish MNCs in 1983 second survey answered by 69 finance directors and chief controllers at corporate HQ of Swedish MNCs in 1989





















Main Findings environmental complexity. Industry has only a significant influence in the case of manufacturing where automotive MNCs are exercising most and pharmaceutical MNCs least performance control. Larger subsidiaries tend to have more manufacturing control. Older subsidiaries are financially less controlled. The level of performance control tends to be high, when subsidiaries experience high interdependencies or a high degree of strategic or environmental change. Formalization is positively correlated with the environmental complexity and the local resource level. Normative integration is positively correlated with environmental complexity and the local resource level.

The most common measures are sales, operating profit, market share and inventory turnover. An increase in formalization was discovered when comparing the results from the 1983 survey to the 1989 survey. The external influencing factors (like size of the MNC, political risk in the host country or environmental turbulence) were not found to impact the design of the performance evaluation system. The controllers in the 1989 survey reported that the design of the performance evaluation system was influenced by task related factors such as the need for rapid indication of performance development, the requirement that people with limited training in accounting understand the reports, the need for short but information dense reports, the need to make use of the system for communication.

312

Author

Hosseini/ Rezaee 1990

Martínez/Jarillo 1991

Coates et al. 1991, 1992



 







Aim of Research

Independent Variable(s)

Environmental factor:  turbulence or uncertainty analysis of changes in Environmental factor:  accounting standards evaluation practices of change foreign subsidiaries after the introduction of SFAS No. 52 additional analysis of the consideration of currency fluctuations Subsidiary characteristic: examination of the  subsidiary roles based on relationship between level of integration and level subsidiary strategy of differentiation expressed by their level of integration and differentiation across subsidiaries and their coordination mechanisms coordination mechanisms: formal and subtle mechanisms MNC characteristics: examination of the performance evaluation  nationality  mission statement practices of German, UK and US MNCs analysis of their relation to the MNCs’ mission statements

Empirical Design

 survey answered by 109 controllers of international operations of US MNCs  statistical analysis: frequency distribution

Relevant Dependent Variable(s)

Content:  financial measures: ROI, ROE, RI, segmented profit margin, CF potential, comparison of budgeted sales/profit  currency choice: local currency, parent currency

 structured interviews with one of the top five executives of 50 Spanish subsidiaries of foreign MNCs  statistical analysis: cluster analysis

 interviews with members of the MNC top management team and representatives from subsidiary management within 15 MNCs  MNCs: 5 from Germany, 5 from the UK and 5 from the US  statistical analysis: yes/no distribution

Process:  formal: ~ formal mechanisms = centralization, formalization, standard routines, planning, output control  cultural: ~ subtle mechanisms = informal communication, organizational culture, lateral relations

Content:  financial measures: profitability (EPS, ROE, ROCE, ROA, ROS, sales/fixed assets, gross contribution, EBIT, EBT, EBITDA, net income, EVA, operating expenses, NPV), CF liquidity (operating CF, positive CF, cover financing costs, working capital ratios), financial stability (gearing, dividend cover), sales  non-financial measures: market share, productivity (added value ratios, payroll cost ratios, yield, JIT ratios, output), new products, new business orders, deliveries, orders in hand  qualitative measures: quality, customer service, safety, employee statistics, environment, others





















Main Findings

The most common financial measures are segmented profit, comparison of budgeted profit and ROI. 65% of the respondents use the local currency for performance evaluation. Changes in SFAS 52 had no impact on the choice of performance measures and on the currency choice. For receptive subsidiaries (low localization, high integration) a higher use of subtle mechanism is found compared to other subsidiaries. A higher integration goes in line with a higher use of coordination mechanisms both formal and subtle. A higher localization seems to go in line with a lower use of coordination mechanisms, both formal and subtle. Subtle mechanisms seem to be used additionally, when formal mechanisms are already in place. German MNCs favour ROS and market share as performance criteria, while UK and US MNCs put less emphasis on sales and concentrate on profitability-oriented measures. UK and US MNCs place more emphasis on financial stability than German MNCs. Performance measures at corporate level are generally consistent with the mission statements; but subsidiary performance measures sometimes diverge from corporate performance measures. At subsidiary level a wider range of measures is used compared to corporate level.

313

Author Gupta/ Govindarajan 1994

Gencturk/ Aulakh 1995

Hamilton III et al. 1996, Hamilton III/Kashlak 1999

Muralidharan 1998, Muralidharan/ Hamilton III 1999









Aim of Research examination of the relationship between knowledge flows and corporate control control as structural, personal and cultural control as well as managerial selection, performance assessment, performance compensation and process variables examination of the impact of different uncertainty sources on the choice of control types and its performance implications control is conceptualized as process and output control; both types are considered to be “formal controls”

 elaboration of a model for selecting the right control system for subsidiaries in differing country environments  control is conceptualized as input, behaviour and output control  identification of strategic development stages of foreign subsidiaries and recommendation of appropriate control systems  control is conceptualized as input, behaviour and

Independent Variable(s) Subsidiary characteristic:  subsidiary roles based on magnitude and directionality of knowledge inflow and magnitude and directionality of knowledge outflow

MNC characteristics as source of uncertainty:  business unit size  degree of internationalization: ~ business unit internationalization  interdependence: ~ horizontal interdependence Environmental factors:  perceived host market attractiveness  perceived host market risk Environmental factors:  cultural distance  host market risk: ~ political risk (host country policies, host government restrictions) and economic risk (instability of foreign exchange rate, host country restrictions) Subsidiary characteristic:  development stage: early, intermediary, mature

Relevant Dependent Variable(s) Process:  personal: ~ intensity of communication = frequency, informality, openness and density of communication  cultural: ~ socialization of subsidiary managers = process through which values and norms become closely aligned with the company culture

Control mix:  output control: ~ output control = measurement of outcomes  behaviour control: ~ process control = direct surveillance

Control mix:  output control: ~ output control  behaviour control: ~ behaviour control  input control: ~ input control

Control mix:  output control: ~ output control  behaviour control: ~ behaviour control  input control: ~ input control

Empirical Design  survey answered by 359 heads of subsidiaries from US, Japanese and European MNCs  MNCs: 19 from the US, 45 from Japan, 15 from Great Britain and from Scandinavia



Main Findings  The use of formal lateral integrative mechanisms and the intensity of communication between a subsidiary and headquarters is highest in the case of integrated players, medium for global innovators and implementors and low for local innovators.  The socialization of subsidiary managers is (in contrast to the prediction) highest in the case of implementors, medium for integrated players and local innovators and lowest for global innovators.



















 survey answered by top level informants of 78 business units across 42 US firms  statistical analysis: regression analysis

 n.a.; conceptual work

 n.a.; conceptual work integrating a review of six case-based studies



Business unit size has a positive impact on the use of output control and no impact on the use of process control. Business unit internationalization has a positive impact on the use of output control and a negative impact on the use of process control. Horizontal interdependence has no impact on the use of output control and a positive impact on the use of process control. The perceived host market attractiveness has a negative impact on the use of output control and a positive impact on the use of process control. The perceived host market risk has no impact on output control and process control. Output and behaviour control are proposed for countries with low political risk, low economic risk and low cultural distance. Behaviour control is proposed for countries with high political risk, low economic risk and high cultural distance. Input control is proposed for countries with high political risk, high economic risk and low cultural distance. Mainly output control and partly input control is recommended for the early stage. Behaviour control and still partly output control and some input control are proposed for the intermediary stage. Mainly input control, still partly output control and some behaviour control are recommended for the mature stage.

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Aim of Research output control

Chang/Taylor 1999

 examination of factors determining the degree and type of control used by US and Japanese MNCs  control as output control and staffing control

Author

Harzing 1999

 examination of MNC and subsidiary characteristics which cause differences in the use of control mechanisms  control along two dimensions: personal versus impersonal, direct versus indirect

Independent Variable(s)

MNC characteristics:  nationality Subsidiary characteristics:  ownership Control variables: MNC characteristic:  degree of centralization of decision-making Subsidiary characteristics:  relative importance: intrafirm sales, relative size, functions  tenure of the subsidiary president  age of the subsidiary MNC characteristics:  nationality  size  degree of internationalization: ~ level of multinationality  organizational model: multidomestic, transnational, global  level of diversification: ~ complexity/ heterogeneity  industry Subsidiary characteristics:  size  age  local responsiveness  subsidiary roles determined by the level of interdependence and local responsiveness  value chain activity: ~ subsidiary function: R&D, sales  interdependence Environmental factors:  cultural distance

 MNC nationality has no impact on output control, but on staffing control; Japanese MNCs rely more heavily on staffing control than US MNCs.  The degree of ownership is positively related to the level of output control and staffing control.  Subsidiary size has a moderating effect.

Main Findings

 survey answered by 107 top executives of Korean subsidiaries of US and Japanese MNCs  statistical analysis: regression analysis

Empirical Design

Control mix:  output control: ~ output control = measuring the desired quality and/or quantity of output  input control: ~ staffing control = employment of parent nationals to fill top subsidiary positions

 survey answered by managing directors of 287 subsidiaries of 104 different headquarters (1 to 11 responses per headquarters)  MNCs from European countries, Japan and the US with subsidiaries distributed all over the world  statistical analysis: correlation analysis, regression analysis

Relevant Dependent Variable(s)

Control mix:  output control: ~ output control = indirect impersonal control  behaviour control: ~ personal centralised control = direct personal control Process:  formal: ~ bureaucratic formalised control = direct impersonal control  cultural: ~ control by socialization and networks = indirect personal control

 With an increase in headquarters size an increase of output control and control by socialization and networks is revealed.  The level of multinationality does not significantly affect the type of control mechanisms which are used.  Direct control mechanisms are mostly used by British MNCs and far less in Swiss MNCs. Indirect control mechanisms are most frequently used by Swedish MNCs and least used in German and Japanese MNCs.  Output control and control by socialization and networks are dominantly used in multidomestic companies; there is a tendency for global firms to use more direct control than transnational firms to which control by socialization suits better.  No significant influence of complexity/heterogeneity is found on the type of control mechanisms in use.  A strong industry effect is discovered: While subsidiaries in the chemical and electronics industry are strongly controlled, subsidiaries in the paper industry are far less controlled.  A positive relationship between subsidiary size and the use of control by socialization and networks is found.  The age of the subsidiary does not seem to

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Author

Welge/ Holtbrügge 1999

Aim of Research

Independent Variable(s)  environmental uncertainty

Subsidiary characteristic:  elaboration of  value chain activity: R&D, individualized production, sales performance measures for subsidiaries according to their value chain activity

Relevant Dependent Variable(s)

Content:  financial measures: development costs, sourcing costs, production costs, labour costs, sales, profit, ROI  non-financial measures: development time, number of registered products, number of new products, number of customer complaints, reject rate, lead time, employee suggestions for improvement, number of implemented product and process innovations, time for order processing and delivery, number of regular customers  qualitative measures: employee qualification, name recognition

Empirical Design

 n.a.; conceptual work





















Main Findings have a significant influence on the type of control mechanism exercised by headquarters. A negative relationship is discovered between local responsiveness and personal centralised control as well as bureaucratic formalised control. Subsidiary roles have the following effects on control: Autonomous subsidiaries experience a lower level of control than receptive and active subsidiaries, but no significant differences can be stated for the level of output control. Sales subsidiaries experience a significantly higher level of output control and lower level of other control types compared to other subsidiaries. R&D subsidiaries on the other hand experience a higher level of control by socialization and networks. Highly interdependent subsidiaries experience a higher level of personal centralised control as well as bureaucratic formalised control compared to other subsidiaries. Cultural distance has a negative effect on the level of output control. Environmental uncertainty is not found to significantly affect the type of control. Size, subsidiary role, function and cultural distance were found to have the highest explanatory power with regard to the level and type of control. For R&D Centres development costs, development time, number of registered products, number of new products, employee qualification and number of customer complaints are recommended. For Production Centres sourcing costs, production costs, labour costs, reject rate, lead time, employee suggestions for improvement, number of implemented product and process innovations and number of customer complaints are recommended. For Sales Centres sales, profit, ROI, time for order processing and delivery, number of regular customers and name recognition are recommended.

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Author Chung et al. 2000

O'Donnell 2000

Chung et al. 2002

Aim of Research  examination of the relationship between intra-company flows and headquarters management style and control  control as output, behavioural and cultural control

 examination of an efficient way to control subsidiaries within MNCs  control object of interest: behaviour of subsidiary management

Independent Variable(s) MNC characteristic:  parenting style: ~ strategic management style: strategic planning, financial control, strategic control Subsidiary characteristics:  knowledge flows: knowledge inflows and knowledge outflows  product flows: product inflows and product outflows  capital flows: capital inflows and capital outflows

Subsidiary characteristics:  lateral centralization = specialized knowledge at subsidiary level  subsidiary autonomy  interdependence

MNC characteristics:  examination of the performance evaluation  nationality  parenting style: strategic practices in US, planning, financial control, Japanese and Western strategic control European MNCs  analysis of the impact of parenting style and MNC nationality on the selection of performance metrics (based on the Balanced Scorecard approach), the transfer of parent company nationals and corporate acculturation

Relevant Dependent Variable(s) Control mix:  output control: ~ performance reporting systems  behaviour control: ~ behaviour control = assignment of parent company managers to key management positions of the foreign subsidiary Process:  cultural: ~ socialization control

Process:  formal: ~ bureaucratic mechanisms = rules, programs, procedures  personal: ~ headquarters supervision = presence of headquarters personnel in the top management of the foreign subsidiaries  cultural: ~ clan control = various types of contact and communication to facilitate interaction between headquarters management and subsidiary management (vertical) as well as among subsidiaries (lateral) Content:  financial measures  non-financial measures: internal business, customer and innovation & learning Process:  cultural: ~ socialization practices in terms of the transfer of parent nationals and corporate acculturation

Empirical Design  survey answered by 56 top executives of Australian subsidiaries of MNCs from different countries around the world  statistical analysis: correlation analysis

 survey answered by 89 key informants at headquarters-level responsible for subsidiary management of US MNCs  reporting on 20 headquarterssubsidiary relationships  statistical analysis: correlation analysis, regression analysis  survey answered by 308 subsidiary managers in Australia, Ireland, Malaysia and Singapore  MNCs: 122 from the US, 76 from Japan and 110 from Western Europe  statistical analysis: analysis of variance (ANOVA and MANOVA)























Main Findings Headquarters with a strategic control style require output information less frequently than those with a strategic planning style and a financial control style. The use of behaviour control and socialization control is not found to be significantly related to the strategic management style. An increase of knowledge inflow leads to more reliance on socialization control. But no significant relationships are found between the output control and behaviour control and knowledge flows. Product flows are not significantly related to one of the control types. Capital flows do neither impact output control nor socialization control, but an increase in capital flows leads to more reliance on behaviour control. Lateral centralization has no impact on headquarters supervision and the use of bureaucratic mechanisms. Subsidiary autonomy is negatively related to headquarters supervision and the use of bureaucratic mechanisms. With an increase in headquarters-subsidiaryinterdependence, the use of vertical integration mechanisms (clan control) increases.

Most MNCs place highest emphasis on financial measures, followed by customer, internal business and innovation and learning. Japanese MNCs place a little less emphasis on financial measures and put more emphasis on internal business and customer performance than US and Western European MNCs. Japanese MNCs rely less on corporate acculturation for control and transfer more parent company nationals to their subsidiaries compared to US and Western European MNCs. When analyzing the effect of the parenting style, it is also found to significantly affect the focus of the performance metrics.

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Author

Tseng et al. 2002

Harzing/Sorge 2003

O'Clock/Devine 2003

Aim of Research

Independent Variable(s)

Subsidiary characteristics:  size  age

MNC characteristics:  nationality  size  age  industry

 examination of the use Subsidiary characteristics: of control mechanisms  knowledge flows: ~ knowledge transactions for various types of within the local network and subsidiaries knowledge transactions  control as bureaucratic, within the MNC network personnel, performance and cultural control

 analysis of country of origin effects and other contingencies and their impact on organizational policies  corporate control on two dimensions: personal versus impersonal and direct versus indirect

Subsidiary characteristics:  elaboration of a performance evaluation  strategy at business unit level: build, hold, harvest system for foreign strategic business units  strategy at product line level: low cost, differentiate, which integrates role of focus, defender, prospector strategy and culture  additional development  culture characteristics

Relevant Dependent Variable(s)

 survey answered by top executives of 50 Taiwanese subsidiaries of foreign MNCs  statistical analysis: cluster analysis, Ftests

Empirical Design

 n.a.; conceptual work

 survey answered by managing directors of 287 subsidiaries of 104 different headquarters (1 to 11 responses per headquarters)  MNCs: from European countries, Japan and the US with subsidiaries distributed all over the world  statistical analysis: GLM factor analysis

Control mix:  input control: ~ personnel management mechanisms = training and selection of subsidiary management  output control: ~ performance management mechanisms = mechanisms which rely on a clearly defined output Process:  formal: ~ bureaucratic management mechanisms = structural and formal administrative mechanisms  cultural: ~ cultural management mechanisms = management development and socialization

Control mix:  output control: ~ output control, planning = indirect impersonal control  behaviour control: ~ centralization, direct supervision, expatriate control = direct personal control Process:  formal: ~ standardization and formalization = direct impersonal control  cultural: ~ socialization, informal communication, management training = indirect personal control Content:  financial measures: sales, returnbased (ROI, EVA), costs  non-financial measures: market share, new products, efficiency  qualitative measures: quality, customer service















Main Findings MNCs with the strategic planning style transfer more of their parent company nationals to their subsidiaries than MNCs with the strategic control style or the financial control style. MNCs with the financial control style rely more on corporate acculturation than MNCs with a different parenting style. For operation-centred subsidiaries (high knowledge transaction density within the MNC and low knowledge transaction density within the local network) bureaucratic mechanisms and personnel mechanisms are more frequently used than in other subsidiaries. Self-sufficient subsidiaries (low knowledge transaction density within the MNC and high knowledge transaction density within the local network) performance management mechanisms and cultural mechanisms are more frequently used than in other subsidiaries. For production-based subsidiaries (high knowledge transaction density within the MNC and low knowledge transaction density within the local network) bureaucratic mechanisms are used more frequently and cultural mechanisms are used less frequently than for self-sufficient subsidiaries. The country of origin highly explains the use of impersonal control and indirect personal control. The level of direct control is not explained by any of the factors, but one of its elements – expatriation – is strongly influenced by the country of origin. Age, industry and size also affect the use of expatriates. Subsidiary size has a significant influence on the level of indirect personal control with large subsidiaries experiencing more indirect control from headquarters.

 Suggestion for the content and process of performance evaluation for each combination of Hofstede’s cultural dimensions and the strategic alternatives.  Examples include: Focus on market share and sales in the case of a builder strategy, focus on cost and efficiency measures when

318

Author

Madureira 2004

Aim of Research of an incentive system

Independent Variable(s)

Subsidiary characteristic:  exploration of specific  perceived dependence: lack coordination of authority mechanisms for local implementers Environmental factor:  coordination  perceived uncertainty mechanisms as formalization, centralization, socialization and lateral communication

Relevant Dependent Variable(s)  standards of comparison: budget

R&D RI ROA ROC ROCE ROE ROI ROS

Empirical Design

 n.a.; conceptual

research and development residual income return on assets return on capital return on capital employed return on equity return on investment return on sales

Process:  formal: ~ formalization = coordination via written rules, policies and procedures  cultural: ~ socialization = organization’s norms, values and beliefs are communicated to its members

cash flow earnings before interest and tax earnings before interest, tax, depreciation and amortization earnings after interest before tax earnings per share economic value added just in time net present value

Abbreviations: CF EBIT EBITDA EBT EPS EVA JIT NPV

Main Findings harvesting and in the case of a low cost product strategy, quality and customer service measures for a defender strategy and tight budget control in the case of low individualism, high power distance and high uncertainty avoidance.  It is proposed that formalization in local implementers is negatively associated with the perceived degree of uncertainty and informational dependence.  It is proposed that socialization in local implementers is negatively associated with the perceived degree of uncertainty and decisional dependence.

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Appendix III: Interviews and Additional Material

P1

Interview with the CFO of Eucom

P2

Interview with the CEO and the CFO of Eucom Germany

P3

Interview with the CEO of Eucom Spain

P4

Interview with the CFO of Eucom Spain

P5

Interview with the CEO of Eucom Sweden

P6

Additional interview the CFO of Eucom Germany

P7

Interview the CFO of Eucom Finland

P8

Blue book Eucom

P9

Gloneer internal documents  

P9a: Presentation of Gloneer P9b: Main Organization Chart Gloneer



P9c: Overview of Product Management at Gloneer P9d: Presentation of Product Management at Gloneer



P9e: Document on Controlling of Subsidiaries of Gloneer



P10

Interview/Workshop with the Director of Controlling, the Assistant Controller for Subsidiary Controlling and the Assistant Controller for Strategic Controlling of Gloneer

P11

Additional Interviews with one Assistant Controller of Gloneer

P12

Summary of Discussion on the Roles of Gloneer's Subsidiaries

P13

Interview with the CEO and Financial Manager of Gloneer Sweden

P14

Interview with the President of Gloneer USA L

P15

Interview with the Vice President of Gloneer USA L

P16

Balanced Scorecard of Gloneer USA L

P17

Interview with the CEO of Gloneer Germany L

P18

Interview with the Commercial Manager of Gloneer Germany L

P19

Interview with the Head of Controlling Gloneer Germany L

P20

Balanced Scorecard of Gloneer Germany L

P21

Interview with the President of Gloneer China L and P

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P22

Interview with the Commercial Manager of China L

P23

Interview with the Commercial Manager of China P

P24

Interview with the CEO of Gloneer Germany S

P25

Interview with the Commercial Manager of Gloneer Germany S

P26

Interview with the CEO of Gloneer Switzerland

P27

Interview with the CEO of Gloneer Germany P

P28

Draft of a Balanced Scorecard of one of Gloneer's subsidiaries

P29

Interview with the CEO of Gloneer India

P30

Interview with the Commercial Manager of Gloneer India

P31

Interview with the CEO of Gloneer Great Britain

P32

Interview with the Commerical Manager of Gloneer Great Britain

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Appendix IV: Interview Guide Introduction   

Information on the interviewer Information on the project Time-frame of the interview

Subsidiary Situation  

Which are the main lines of business/product lines of the subsidiary? Who are your main internal and/or external customers?

Subsidiary Roles Subsidiary Role – Strategic importance of the market  Please describe the market area you are serving. Can you estimate the total revenue volume of the market you are serving?  Please describe how intense competition is within the market you operate in. How many competitors are you competing against within your market?  Please describe how demanding your customers are. How would you estimate the intensity of customer demands for your industry?  Please describe how innovative the market is you operate in. How many product and process innovations have been generated during the last year? Subsidiary Role – Competence of the Local Organization Which functions are you active in and how do you characterize your competence level within this function compared to other subsidiaries of the company?



Active? (yes/no)

0 not at all

Competence level 1 2 3 to a little medium to a high extent extent

4 to a very high extent

research & development purchasing logistics and distribution production marketing & sales human resource management general management

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Subsidiary Role – Knowledge Inflow  To which degree are you receiving knowledge (market data on customers, market data on competitors, product designs, process designs, marketing know-how, distribution know-how, purchasing know-how, management systems and practices) from other units of the company? knowledge type

0 not at all

Knowledge inflow 1 2 3 to a little medium to a high extent extent

4 to a very high extent

market data on customers market data on competitors product designs process designs marketing know-how distribution know-how purchasing know-how management systems and practices

Subsidiary Role – Knowledge Outflow  To which degree are you providing knowledge (market data on customers, market data on competitors, product designs, process designs, marketing know-how, distribution know-how, purchasing know-how, management systems and practices) to other units of the company?

knowledge type

market data on customers market data on competitors product designs process designs marketing know-how distribution know-how purchasing know-how management systems and practices

324

0 not at all

Knowledge outflow 1 2 3 to a little medium to a high extent extent

4 to a very high extent

Control Mix 

Which control mechanisms are used by headquarters for the subsidiary? Examples of control mechanisms are written company manuals, trainings of subsidiary managers at headquarters, performance reports or transfer of expatriates to the subsidiary.

Input Control In some companies, parent-country nationals are assigned to subsidiaries to ensure that headquarters policies are carried out. Please indicate the degree to which headquarters use expatriates to directly control the subsidiary’s operations and activities?  Which impact do headquarters have on the hiring of managers for the subsidiary?  To which degree do headquarters provide training for managers (for instance before they assume their jobs at the subsidiary)? 

Behaviour Control  In some companies, headquarters managers strive for a close surveillance on the behaviour of their subsidiary managers. Please describe the degree of behaviour surveillance that headquarters manager execute towards the subsidiary.  To which degree are procedures predefined by headquarters or do subsidiary executives have the choice on how to reach certain outcomes?  To which degree are subsidiary managers held accountable for their behaviour and activities by headquarters no matter which output is reached? Output Control In some companies, the performance of subsidiaries is highly linked to concrete results (for instance financial results or the number of new customers). Please describe the degree to which headquarters link their performance judgement to concrete results of your subsidiary?  To which degree are pre-established targets used for evaluating subsidiary managers?  To which degree is pay of subsidiary managers based on the performance of the subsidiary? 

325

Performance Evaluation – Content 

Which measures are used by headquarters to evaluate the performance of the subsidiary?

Financial Measures  Which financial measures (such as EBIT, ROI, cost per unit or EVA) are used by headquarters to evaluate the performance of the subsidiary? How important are they? Non-financial Measures Which non-financial quantitative measures (such as market share, production volume or labour turnover) are used by headquarters to evaluate the performance of the subsidiary? How important are they?



Qualitative Measures  Which qualitative measures (such as product quality, customer service or employee safety) are used by headquarters to evaluate the performance of the subsidiary? How important are they? Additional How frequently are these performance measures supplied?  How important are different standards for performance evaluation of the subsidiary, such as comparison to budget, comparison to the past, internal benchmarking and external benchmarking? 

Performance Evaluation – Process 

Can you describe how headquarters execute the performance evaluation of the subsidiary? Which evaluation procedures (such as performance reports, personal communication or management meetings) are used?

Formal Process Some companies mainly use written reports for performance evaluation. Other firms rely more on informal performance evaluation. Please describe the degree of formalization that headquarters exert towards the subsidiary in performance evaluation.  How often are formal reports used for performance evaluation purposes? 

Personal Process  Do management meetings or similar gatherings take place at headquarters and/or at the subsidiary site for evaluation purposes? If so, how often are they scheduled? And how long are they? 326



Do people talk face-to-face or on the phone or write e-mails for evaluation purposes? If so, how many people are involved and how often to they communicate?

Cultural Process Within some firms informal communication among headquarters and subsidiary executives is common while others refrain from this. How important is informal communication on subsidiary performance?  To which degree do the executives of the subsidiary share the corporate values and common performance goals? 

Summing up What is most important for this subsidiary: formal or informal feedback from headquarters?



Additional Comments  

Are there, for instance, plans for changes in performance evaluation of the subsidiary in the near future? Is there anything else that we have not discussed that you think is important?

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Appendix V: Case-Specific Scales for the Performance Evaluation Process363 (1) The formal process of performance evaluation:

Gloneer “India” • quarterly financial reports • monthly project cost reports • monthly management reports

Gloneer “China” Gloneer “Great Britain” • monthly financial reports, • monthly financial reports, quarterly additional information • monthly management reports • scarce project reports

monthly health and safety report (China P) • monthly management reports • monthly project reports (China P); quarterly additional risk report (China P)

Gloneer “Sweden” • monthly financial reports, quarterly additional financial data • monthly management reports • occasionally technical reports

Eucom Finland

Gloneer Germany L Gloneer Germany S • monthly financial reports, quarterly additional financial data • monthly management reports

Gloneer “Switzerland” • monthly financial reports • monthly management reports

• monthly financial reports, quarterly additional financial data • monthly management reports • monthly project reports/quarterly global project reports • implementation of a Balanced Scorecard

Gloneer USA L Gloneer Germany P • quarterly financial reports • monthly risk report • yearly review of the Balanced Scorecard

not at all

small

• monthly financial reports, quarterly additional financial data • monthly management reports • quarterly project reports • yearly review of the Balanced Scorecard

medium

large

• weekly management reports • monthly project reports • monthly flash reports before and after closing • detailed monthly financial reports

Eucom Spain • weekly management reports • monthly project reports • monthly flash reports before and after closing • detailed monthly financial reports

Eucom Germany • weekly management reports • monthly project reports • monthly flash reports before and after closing • detailed monthly financial reports

very large

Formal process of performance evaluation

363

The process descriptions are presented along the scale from “not at all” to “very large”. No second dimension is incorporated in the figures.

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(2) The personal process of performance evaluation:

Gloneer “India” • official management meeting once a year and three additional meetings and occasionally more meetings • personal appraisals of individual targets once a year

Gloneer “China” • official management meeting once a year but frequent additional meetings • personal appraisals very seldom (China L)/from time to time (China P)

Gloneer “Sweden” • management meetings three times a year and from time to time additional meetings • personal appraisals from time to time

Gloneer USA L • management meetings twice a year • personal discussions concerning reported data and personal appraisals of individual targets at least once a year

Gloneer Germany P • quarterly management meetings • quarterly discussion of financial results • personal appraisals of individual targets at least twice a year

Gloneer Germany L • official management meeting once or twice a year; quite frequently additional meetings • personal discussion of ad-hoc reports and personal appraisal of individual targets twice a year

Gloneer “Great Britain” • official management meetings twice a year • scarce personal appraisals

Gloneer Germany S • management meetings once a year • sometimes personal appraisals and appraisals concerning the individual targets twice a year

Gloneer “Switzerland” • management meetings once a year • almost no personal appraisals

not at all

small

Eucom Finland • personal discussion of the monthly financial reports • monthly project review conference calls • business review meetings from time to time • personal appraisals of target agreements once a year

Eucom Germany Eucom Spain • monthly project review conference calls • local management meetings every quarter • personal appraisals of target agreements once a year

medium

• monthly project review conference calls • personal discussions of the monthly financial reports • regular business review meetings once per month to every two months • personal appraisal of target agreements once a year

large

very large

Personal process of performance evaluation

329

(3) The cultural process of performance evaluation:

Gloneer “India” • frequent informal communication only at topmanagement level • partly shared performance goals

Gloneer “China” • frequent informal communication by top managers • partly shared performance goals

Gloneer “Great Britain” • very limited informal communication • largely shared performance goals

Gloneer “Sweden” • very limited informal communication • partly shared performance goals

Gloneer “Switzerland” • limited informal communication • partly shared performance goals

Gloneer Germany P • frequent informal communication • largely shared performance goals

Gloneer Germany S • frequent informal communication • largely shared performance goals

Gloneer USA L • frequent informal communication • largely shared performance goals

Gloneer Germany L

Eucom Finland • limited informal communication • limited shared performance goals

• frequent informal communication • shared performance goals

Eucom Germany

Eucom Spain

• frequent informal communication • largely shared performance goals

• informal communication at personal meetings • partly shared performance goals

not at all

small

medium

large

Cultural process of performance evaluation

330

very large

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