15.3.5.1 The general process of becoming a centre of competence

The case study demonstrates that becoming a centre of competence can take several years and is linked to the building up of competences and capabilities. For any MNC, a crucial question is whether a subsidiary should have the requisite competences or capabilities before being designated a centre of competence or whether it should develop them after being chosen to become one. ^[8] Both alternatives can be found in practice and different centres of competence have different histories. A subsidiary might have developed superior competences and capabilities of which headquarters and other subsidiaries are not fully aware. Only after significant changes in the environment and diverse subsidiary initiatives are these competences and capabilities recognized as being very important for the whole MNC. At this point the parent company might decide that the subsidiary should become a centre of competence. In other cases, as with Gamma, an MNC might realize that it has to develop specific competences or capabilities in order to be competitive. However it should be noted that in Gamm s case, Alph s original intention was to make it a low-cost production site. Only later was it made a regional centre of competence for the manufacture of some products and given worldwide responsibility for others. The influence of single individuals on this process must be highlighted. For instance an expatriate from Italy shaped Gamm s development into a centre of competence for manufacturing, and another from Germany was instrumental in building up its mechanical engineering capability. According to Gamm s top management, employees transferred from other subsidiaries were more important to Gamm s development than were those from the headquarters.

15.3.5.2 Deliberate planning or evolution?

Linked to the above findings is the question of whether centres of competence are generally the result of detailed planning or the consequence of accidental evolution. It is realistic to assume that they are usually the result of both forces. ^[9] If we look at the roles of headquarters and subsidiaries, it seems desirable for top management to orchestrate the upgrading of subsidiaries and designating centres of competence, as was done in the case of Gamma. But at the same time top management can never have complete control over organizational processes. The more important the subsidiary, the more competences and capabilities it will have and the more it will try to become autonomous, or at least in some areas. This means that very mature and powerful subsidiaries can do much to turn themselves into centres of competence, for example by developing particular competences and capabilities and then drawing the headquarters attention to them. Sometimes, however, these remain hidden until headquarters or other subsidiaries recognize that they might be of use to themselves . Finally, becoming a centre of competence can often be the result of conflicts, struggles and collisions of interest within MNCs (see Dlugos et al. , 1993, on political perspectives on the firm).

The process of acquiring a mandate (world mandate, regional mandate or country-portfolio mandate ) does not necessarily mean that headquarters makes an inventory of all subsidiaries, compares their competences and capabilities, picks out what it considers to be the best one and then grants it a mandate. Becoming a centre of competence is not an engineering process, but to some extent can better be seen as a political process driven by various actors within and/or outside the firm. ^[10] For instance in the case of Gamma it was competitive pressure that led to its acquisition and subsequent development into a centre of competence. However a number of other units in the Alpha group opposed the idea of Gamma becoming a centre of competence as the planned extension of its product lines meant that units in Germany, Italy and the United States would lose some of their responsibilities. To sum up, there are limits to the deliberate planning of centres of competence by top management.

15.3.5.3 Acquisition or greenfield investment?

Takeovers are often a very quick way for an MNC to acquire new competences or capabilities, including technologies (Zander, 1999; Inkpen et al. , 2000) and skilled work forces. However competences and capabilities not only have to be acquired , they also have to be integrated into the MNC since a basic feature of any centre of competence is full integration into the MNC network. Centres of competence do not operate autonomously, but make their competences and capabilities available to other parts of the organization.

It is known that the failure rate for acquisitions is high, and some observers have put the figure at 50 per cent or more. Failure is often due to problems with integrating the acquired company, and integrating a company located abroad and assigning it the role of a centre of competence can be an even more challenging task. On the one hand, centre of competence status can aid integration since a newly acquired company may be proud of its prominent position in the international network. On the other hand other subsidiaries in the network might fight against the newcomer being awarded centre of competence status. In Gamm s case the integration problem was aggravated by the fact that its competences and capabilities first had to be developed or modified. Thus, it is definitely more difficult to make acquired subsidiaries centres of competence. However, sometimes there are no possibilities for greenfield-investments, for instance because of legal restrictions or timing problems.

15.3.5.4 Geographical location of centres of competence

Generally speaking the reasons for being or becoming a centre of competence vary a lot. Reasons include superior production capabilities, access to certain types of customers and embeddedness in favourable external networks, as well as possession of particular management or functional skills. ^[11] Hence it would be wrong to suggest that there is an overarching theory about where best to locate centres of competence. This is an important message since some MNCs believe that centres of competence should always be located in advanced countries or large markets such as the United States, Japan or Germany. As our case study has demonstrated, centres of competence can also function well in small countries .

At the moment Gamma is Alph s only centre of competence in Central and Eastern Europe. However the situation may change in the future. For example its unit in Poland, which is basically a sales subsidiary, has developed particular competences in information technology and marketing, and some of these competences are already being utilized by other subsidiaries in the region.

^[8] This question was also put forward by Moore (2000).

^[9] This is in line with the general development of firms, which could be described as ˜guided evolution . See Lovas and Ghoshal (2000). On the international development of firms see Kutschker and Schmid (2002, pp. 1045 “179).

^[10] Birkinshaw (1998) differentiates between subsidiary-driven development and parent-driven development.

^[11] Some of these reasons are also mentioned by Ferdows (1997). However, unlike Ferdows, we do not consider that the possession of skills and knowledge is the only reason for the centre-of-competence role.