15.3 A case study on centres of competence in Central and Eastern Europe


15.3 A case study on centres of competence in Central and Eastern Europe

Some earlier studies already provided some evidence that, within MNCs, foreign centres of competence do exist. [5] The present study extends this research. In contrast to previous studies, this research is an intensive case study of one single MNC. I will first describe the study (15.3.1) as well as the company and its industry (15.3.2). Then I will focus on the company s activities in Central and Eastern Europe (15.3.3), before investigating how the company established a centre of competence in Central and Eastern Europe (15.3.4). Finally, the findings from the case study will be discussed (15.3.5).

15.3.1 The empirical study

About 40 foreign subsidiaries of a German MNC were investigated to ascertain whether and in what way the MNC had set up foreign subsidiaries as centres of competence. [6] Hence the aim was to determine not only which subsidiaries could be interpreted as centres of competence, but also how foreign subsidiaries have become or are becoming centres of competence.

For the purposes of the study all the subsidiaries were initially defined as centres of competence, and the three elements of the definition “ specific competences or capabilities, responsibility for the markets in several countries , and a high degree of integration “ were assumed to be in place. Managers of the subsidiaries were then asked to describe their competences and capabilities, responsibilities and degree of integration. They were also requested to provide information on the dynamics of becoming a centre of competence. The research method included a semistructured questionnaire for subsidiary managers, personal interviews with some subsidiary managers, interviews with management at headquarters and intensive investigation of archival data at headquarters. The study was carried out during the years 2000 and 2001. There is insufficient space to present the whole case here, so we shall concentrate on the company s activities in Central and Eastern Europe.

15.3.2 The company and the industry

The company, which for reasons of confidentiality will be called Alpha, is a German MNC that ranks among the top three companies in the world in terms of market share. It manufactures products that are used by end-consumers as well as industrial clients , car manufacturers. Currently Alpha owns production facilities in 18 countries and sells its products in more than 140 countries. Its annual turnover amounts to more than C=4 billion and it employs more than 30 000 people worldwide. Fifty per cent of its turnover is generated in North America, about 30 per cent in Europe and the remaining 20 per cent in Latin America, North Africa and the Asia-Pacific region.

Alpha operates in an industry that can be characterized as mature and traditional but offers the possibility of continuous innovation and the chance to integrate high-tech activities. The industry is rather oligopolistic. As far as Central and Eastern Europe is concerned , in Alph s industry some of the former communist countries had their own state-owned production facilities. These concentrated more on products for end-consumers than on products for industrial clients. When the transition process started in Central and Eastern Europe the industry changed as well. For instance Alph s biggest European competitor bought a company in Poland that had considerable manufacturing facilities, and its main US-based competitor took over a very well known Hungarian company whose manufactures enjoyed a reputation for good quality in the West. Alpha, however, hesitated to buy a company in Central and Eastern Europe and instead chose to set up sales representatives, sales affiliates and sales subsidiaries. A closer look at Alph s activities in the region will give additional insights.

15.3.3 Alph s activities in Central and Eastern Europe

At the beginning of the 1990s (former) Czechoslovakia was one of the first markets in Central and Eastern Europe to be entered by Alpha. Its principal aim was to sell products, but quite early in the 1990s it also considered acquiring a Czechoslovakian manufacturing firm that exported its products to other countries in the former communist bloc. For reasons of confidentiality this firm will be called Beta. However Alpha eventually decided not to acquire Beta as the restructuring its operations was judged to be too difficult due to Alph s lack of experience with restructuring and the unavailability of suitable human resources.

In Czechoslovakia Alpha restricted its operations to the sale of products via sales representatives, affiliates and subsidiaries. The same was true of its operations in Poland, Hungary, Romania, Bulgaria, Russia and Croatia. In some cases the main reason for establishing a sales facility was to follow customers who had ˜gone East , for instance to follow a German wholesale and retail chain that carried Alph s products. While it was decided to serve most countries via sales facilities or representatives located in the host country, sales in Slovenia would be organized by the Austrian subsidiary and sales in Macedonia by the Greek subsidiary.

A few years later Alpha realized that in the long run it would be difficult to remain competitive without setting up manufacturing operations in the region. While it could outperform its competitors in innovative products and the upper market segments, it had problems in the mass-market segment. The reason was that Alpha, unlike its national and international competitors with local production facilities in the CEFTA (Central European Free Trade Agreement) countries, did not manufacture at low cost. Furthermore in most countries in the region there were still high tariffs on imported products. Thus Alpha seized its chance when Czechoslovakia was divided into the Czech Republic and Slovakia and Beta, the company Alpha had decided not to acquire a few years ago, was split up. One of Bet s two factories in Slovakia (Gamma) was bought by its local managers. Shortly after this management buy-out Gamma was offered for sale by its new owners , and after careful consideration Alpha decided to take it over.

The most important reason for acquiring Gamma was not to serve the Slovakian market, which “ compared with other Central and Eastern European markets was rather small, but to gain access to a low-cost manufacturing site in the region. Alpha then decided that Gamma should be integrated into the corporate network, and as we shall see, this was the start of Gamm s evolution into a centre of competence.

15.3.4 The development of the Slovakian subsidiary into a centre of competence

After the acquisition of Gamma the first objective was to raise its quality standards to the level required by headquarters. Therefore Alpha transferred production lines from its units in other countries and purchased other equipment from third parties for installation in Slovakia. In addition personnel from headquarters and Western subsidiaries were transferred to Gamma, and specialists in different fields (for example, operations and human resources) were sent on short- term assignments. Nonetheless, the restructuring of Gamma took longer than expected.

During the first years after Gamm s acquisition (that is, during the second half of the 1990s), its purpose was to manufacture low-cost, low-price, mass-produced products for the CEFTA countries and Alpha subsidiaries located there. Only a relatively small percentage of the output was designated for the local Slovakian market. Over time Gamma developed and improved its manufacturing competences and ability to meet the requirements of the mass market. While the inflow of knowledge from other Alpha units was very important to this process, most of the knowledge was tacit and could not be codified, and therefore the expatriate workers and specialists played a crucial role.

Gamma was soon given another very important mission. Before becoming part of Alpha, Gamma had gained experience in the mechanical engineering of production lines. At present Alpha had only one unit in Germany and one in the United States to carry out this activity. Gamma was chosen as the third unit and it was given the task of overhauling existing product lines, building new machines (investment below C=100 000) and carrying out simple but labour-intensive construction tasks . As well as extensive knowledge transfers from Germany to Slovakia, the development of Gamm s mechanical engineering capabilities was considerably aided by an expatriate from one of Alph s sites in Germany, who took over the management of the mechanical engineering division in Slovakia. [7]

In 2000 it was decided to increase Gamm s production lines to 40, and for some products Gamma would become the sole producer. This would involve some product lines being transferred to Slovakia, and as a consequence a number of Alpha units in Germany, Italy and the United States would lose some of their responsibilities. It is important to note that not only simple products but also very complicated and innovative ones are designated to be manufactured by Gamma in the future. Some of these will be targeted at the consumer market and others at industrial markets.

15.3.5 The findings of the study on Gamma

The findings of the case study show that Gamma can be considered a centre of competence. Its responsibilities include both functional and process-oriented activities, and it has regional responsibility for the manufacture of some products. In the future it will have worldwide responsibility for other products, and for certain activities in mechanical engineering it already has such responsibility.

Some of Gamm s competences and capabilities are unique within the Alpha group , and while others also exist at headquarters or in other subsidiaries they cannot be delivered at the same price. It is important to note that manufacturing a certain product or carrying out a certain service at a high level of quality can be viewed as a distinct competence or capability.

Gamma is also highly integrated into the Alpha network. It has high outflows of products to units in other CEFTA countries, and in the future there will be increasing outflows of products to corporate units worldwide. Furthermore it provides mechanical engineering services for Alpha units all over the world, resulting in the transfer of products, people and knowledge. The reverse is also true, that is, Gamma is dependent on inflows from headquarters and other subsidiaries. Hence it constantly receives parts , staff and knowledge from abroad.

[5] One study was on German MNCs (Schmid et al. , 1999), the other on Japanese MNCs (Schmid, 2000). For a comparison of these studies see Schmid (1999). There is also evidence on the existence of centres of excellence, which are similar to centres of competence. See for instance Kutschker et al. (2001).

[6] I gratefully acknowledge the important work done by Christian Fischer, who collected the data for the case study.

[7] Mechanical engineering is considered to be a process-oriented activity.




Change Management in Transition Economies. Integrating Corporate Strategy, Structure and Culture
Change Management in Transition Economies: Integrating Corporate Strategy, Structure and Culture
ISBN: 1403901635
EAN: 2147483647
Year: 2003
Pages: 121

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