Subsidiary performance has been a matter of in-depth research for many years. Subsidiaries, as extent literature puts in, are branches or parts of multinationals which are established to achieve the bigger objectives of the MNC. However, subsidiaries may have their own localized goals which may not be in the bigger agenda of the MNC. As such, managers face difficulty in evaluating and comparing performance across subsidiaries.
MNC goes for the establishment of a subsidiary with an aim to exploit firm-specific advantages in an untapped market. In such a case, the subsidiary assumes a strategic role. However, what measures or yardsticks should be applied to measure the subsidiary performance poses challenging questions to the managers.
For instance, as an organizational unit, managers use financial measures to evaluate the business performance of a subsidiary in terms of budgetary contribution. But, when evaluated as a strategic business unit, managers face the dilemma of taking into consideration controllable/non-controllable factors in the operating environment of the subsidiary (Anthony & Govindarajan 888).
In the external environment of the subsidiary, factors like exchange and currency rates, rate of local taxes, cost of materials, labor and other local resources differ from one subsidiary to another. As such, inclusion of these dimensions in the performance evaluation criteria makes the task harder. Likewise, the internal environment of the subsidiary (policies of the parent company) also poses such challenges. These factors include policy relating to transfer pricing and payment of interests and royalties in subsidiaries located in politically unstable territories.
Evaluation of short-term/long-term goals is another area that presents controversy in the domain of subsidiary performance management. In the short run, a subsidiary may register good profits, but in the long run, it may be demonstrating plummeting rates of employee satisfaction and returns on revenues. As such, two or more subsidiaries exhibiting such contrary results become less favorable for comparative performance evaluation.
Coming to resources, subsidiaries are governed to a great extent by the ‘people’ resources. Recruitment and selection of human resources, their training and development, compensation and performance management can be a serious issue when evaluating performance across diverse subsidiaries (Rao 2004).
Looking at international recruitment and selection, managers often encounter expatriate failure due to common criteria used. Due to diverse contexts, cultures and traditions, managers’ ability to evaluate subsidiary performance is constrained.
It is an established fact that selection of the right people is based upon the fulfillment of the goals of the corporation – the same holds true for a subsidiary which is always involved in the processes of globalization and localization. Thus, the kind of staff recruited in international context is of a crucial importance in evaluating performance of subsidiaries.
On similar lines, imparting cross-cultural training also matters a lot. A standard training curriculum signifies that the policies of the parent company are being followed by every subsidiary, irrespective of the culture/region or local environment it is operating in. Failure to impart international assignment training leads to asymmetry in the fulfillment of bigger MNC objectives by individual subsidiaries and subsequently, it becomes difficult for managers to evaluate their performance.
In order to overcome these difficulties, managers can adopt several measures. One of them is the use of integrative mechanism to handle subsidiaries which are highly interdependent on each other. For high interdependence of subsidiaries, matrix structure of control could be used where upper echelon managers come together as a committee and perform integrative roles (“What is a Matrix Structure”). For low level complexity, liaisoning can be applied to cut-short the communication channel across subsidiaries.
Another means of overcoming the evaluation hurdles in subsidiary performance is the selection of control approach. Traditionally, the market approach has been a preferred choice of managers as headquarters hold the command and subsidiaries have to follow the rules/procedures as specified. However, this system favors the situation only when the environment is stable enough to allow response and feedback time to the management to make alterations in decisions.
In contemporary scenario, the cultural approach to managing and evaluating subsidiaries is suggested. In this approach, the individuals are entrusted to exercise self-control which is congruent to the local practices, culture and norms. This way, less response time is needed, control is facilitated and flexibility is incorporated ("Global versus Cultural Approaches”).
Unlike the market approach that deals mainly with clearly defined requirements, or the rules approach which attaches greater significance to power and control, the cultural approach lets subsidiaries perform as autonomous units.
This, in turn, removes the ambiguity in organizational and subsidiary-specific goals since the subsidiary is not controlled by a narrow vision or objectives. Flexibility in decision making allows the subsidiaries to take apt decisions according to the type of situation at hand, thereby eliminating the elements of complexity, uncertainty and diversity in performance evaluation criteria of subsidiaries.
Works cited
Anthony, R.N., & Govindarajan, V. Management Control Systems. Chicago: Irwin, 1995.
"Global versus Cultural Approaches in Public Relationship Management: The case of the European Union." Academia.edu. N.p., n.d. Web. 14 Oct. 2014. <http://www.academia.edu/216627/Global_versus_Cultural_Approaches_in_Public_Relationship_Management_The_case_of_the_European_Union>
Rao, P.L. Comprehensive Human Resource Management. New Delhi: Excel Books, 2004.
"What is a matrix organization structure? A definition." Global Integration RSS 20. N.p., n.d. Web. 14 Oct. 2014. <http://www.global-integration.com/matrix-management/matrix-structure/matrix-organization-structure/>.
