In line with earlier publications (Schmid et al. 1999; Schmid, 1999, 2000), in this chapter the term centre of competence is used to describe an MNC subsidiary that:
Has specific competences or capabilities in one or several areas (functions, products or processes).
Is responsible for the markets in several countries with regard to these areas.
Is highly integrated into the MNC.
To be a centre of competence all three conditions must be fulfilled, as discussed in the following subsections.
The most important decision an MNC must take is which type of centre of competence it wants to establish, that is, the types of responsibility the centre should have due to its specific resources, competences and capabilities. This comes close to what White and Poynter (1984) call ˜value-added scope . A centre of competence can be one of three types: functional, product-oriented or process-oriented .
Functional centres of competence are foreign subsidiaries in which one or several value-adding activities are developed into an area of competence. Examples are research, development, purchasing, production, sales, marketing, logistics and distribution. Superior competences or capabilities can relate to any function. Even subsidiaries that are involved in supporting or coordinating activities rather than primary value-adding activities can be centres of competence. [3]
Product-oriented centres of competence are subsidiaries responsible for all value-adding activities for a specific product or service, although in some cases the responsibility can extend to several products, a specific group or line of products or a certain area of business.
Process-oriented centres of competence are responsible for processes such as product development. Although cross-border business processes are difficult to handle, MNCs can establish centres of competence for processes.
As stated in the definition above, for a subsidiary to be a centre of competence it must be able to apply its specific competences or capabilities in several countries markets. Thus MNCs have to define the geographical responsibility of their centres of competence, or what White and Poynter (1984) call their ˜market scope . There are three basic options: worldwide responsibility, regional responsibility and country-portfolio responsibility. MNC subsidiaries with global responsibility can be described as having world mandates or global mandates . Likewise a subsidiary that is responsible for a specific region can be said to have a regional mandate . Some centres of competence have individually defined portfolios of country markets, and therefore have country-portfolio mandates.
Geographical responsibility | Functional centre of competence | Product-oriented centre of competence | Process-oriented centre of competence |
---|---|---|---|
World-wide | World functional | World product | World process |
responsibility | mandate | mandate | mandate |
Regional | Regional functional | Regional product | Regional process |
responsibility | mandate | mandate | mandate |
Country- | Functional mandate | Product mandate | Process mandate |
portfolio | for specific | for specific | for specific |
responsibility | countries | countries | countries |
Table 15.1 summarizes the basic types of centres of competence and the options for their geographical responsibility. It demonstrates the wide range of possibilities open to MNCs that wish to establish such centres.
While centres of competence have a certain degree of independence they are also an integral part of the MNC. Thus a basic feature of such centres is that they function fairly autonomously while at the same time being a decisive part of the corporation as a whole. As we shall see, a centre of competence is given as much independence as possible in particular areas (certain functions, products or processes), but other parts of the corporation are entitled to make use of its competences and capabilities. The MNC can therefore be seen as an intraorganizational network, with complex flows between headquarters and its foreign subsidiaries.
To gain an idea of the degree of integration of the network an MNC might consider the consequences that would arise if the focal centre of competence no longer had access to the competences, capabilities and resources of the parent company and the rest of the network, and vice versa . The greater the consequences in both cases, the greater the integration of the centre of competence into the MNC. At the same time integration is a question of influence. A highly integrated subsidiary is influenced in various ways by the decisions, actions and behaviour of headquarters and other subsidiaries, and it also influences other parts of the corporation. For example a centre of competence might have a positive impact on the development of the competences, capabilities and resources of other units (Schmid et al. 2002; Kutschker et al. 2002).
The importance of competences, capabilities and resources for firms has frequently been stressed by scholars and practitioners alike. The resource-based view argues that competitive advantage is not only a question of intelligent positioning in the market, it is also about intelligent use of a firm s internal strengths, including competences, capabilities and resources (Wernerfelt, 1984; Prahalad and Hamel, 1990). These can give competitive advantage to firms if they fulfil the following criteria: they should be valuable , rare, imperfectly imitable and difficult to substitute (Barney, 1991). In addition many authors stress that they are not static; they have to be constantly adapted , changed and developed.
In MNCs competitive advantage is not necessarily the preserve of the parent company as different parts of the corporation, especially foreign subsidiaries, often have different resources. It is surprising that, for a long time, neither the literature on strategic management nor the literature on international management fully addressed the possibilities offered by these diverse resources. Admittedly authors such as Hymer and Kindleberger did stress that firms should spread their monopolistic advantages across borders (Hymer, 1976; Kindleberger, 1969), but most authors assumed that monopolistic advantages were primarily created by headquarters in the home country and subsequently transferred abroad.
Only later did Hedlund and Kogut (1993) argue that it might be helpful to view the MNC as a bundle of competences, capabilities and resources. According to these authors, important competitive advantages can be created by subsidiaries abroad. One source of competitive advantage is ˜metacapability “ the ability to integrate widely dispersed activities and to exploit the various competences, capabilities and resources available.
From this perspective it can be argued that MNCs should strive to make the most of their foreign subsidiaries. Clearly this view differs from that which prevailed in the international management discipline for decades: that MNCs have monopolistic advantages that are primarily developed at home and then used to enter other markets. The major differences between the traditional view and the view that emerged at the end of the 1980s are shown in Table 15.2. Obviously some MNCs are still adhering to the traditional view, but those which change from the traditional model to the modern model require changes in strategy, structure and culture.
Traditional view of MNCs | Modern view of MNCs | |
---|---|---|
The basic assumption | Missionary model | Network model |
Dominant perspective of the MNC | Centre-periphery perspective | Multicentre perspective |
The organizational character of the MNC | The MNC as a hierarchy ( dominance of vertical relationships | The MNC as a heterarchy (vertical, horizontal and lateral relationships) |
The influence of subsidiaries within the MCN | Mostly limited influence | Steadily growing influence |
The roles of subsidiaries within the MNC | UNO-syndrome (assumption that all subsidiaries are equal or similar) | Differentiated set of subsidiary roles, one being the centre of competence role |
Approach to coordination within the MNC | Primarily the task of headquarters, top-down | The task of both head- quarters and subsidiaries, top-down and bottom-up |
Geographical origin of MNC competitive advantage | Only headquarters in home country | Headquarters in home country and subsidiaries in host countries |
Basis of MNC competitive advantage | Intelligent positioning in all markets | Intelligent positioning in all markets and building upon diverse competences |
Responsibility of the subsidiary within the MNC | Primarily own (country) market | Responsibility can go beyond the scope of its own (country) market |
Leveraging of competences, capabilities, and resources within the MNC | Primarily by headquarters | Both by headquarters and by subsidiaries |
Corporate culture of the MNC | Dominated by headquarters rather ethnocentric | Primarily geocentric, but with polycentric and regiocentric elements |
While many MNCs are aware that subsidiaries are of crucial importance to their overall development, [4] not all have found a way to upgrade and empower their foreign subsidiaries. A good way of using the foreign subsidiaries competences is to establish a portfolio of centres of competence within the MNC. There are clear benefits of having centers of competence. These centres of competence enable an MNC to use specialization advantages, to leverage different country-specific or organization-specific resources and to motivate subsidiary employees , for instance via extensive transfer of decision-making competences. It is helpful if subsidiaries which have superior competences and capabilities and which are responsible for other markets are officially labeled ˜centres of competence . The official label serves as an indicator for recognition. Recognition is not only motivating for the subsidiary in question; it also provides other MNC units with the necessary information about the subsidiary status. The label stresses the subsidiary s distinctive role within the MNC network.
[3] The distinction between primary and secondary activities is made by Porter (1986, pp. 15 “60), but not all authors share Porter s view on how to differentiate between primary and secondary value-adding activities.
[4] It is surprising that subsidiaries have long been neglected in the literature. Research on subsidiaries has only become of interest in the last 15 years , and has only gained particular importance during the last few years. See Birkinshaw and Hood (1998).