Both Pharma and Volkswagen exhibit signs of tension and/or relationship mismanagement between their headquarters and its subsidiaries; namely Pharma UK and Volkswagen North America. This paper aims to compare and contrast these problems using the appropriate theories, examples and information given in the case studies. Further, the current state of the companies will be described and recommendations to improvements will be given.
Pharma S.A. was founded in Zurich in the late 1800s and has 110 subsidiaries worldwide. The biggest division within Pharma S.A. is pharmaceuticals but the company is diversifying its operations with acquisitions of various speciality chemicals businesses. Pharmaceuticals currently account for 57% of revenues. The major pharmaceutical product lines are oncology, dermatological, gastro-intestinal, and fertility control and hormone replacement. The drug approval process is complex and very costly (Approximately 8-20years and approximately $200million). The Hormone Replacement Therapy (HRT) sector has been growing rapidly, especially in Britain.
Pharma’s subsidiaries are responsible for managing the registration process for new drugs and for local sales and marketing efforts. Before 1990, the core activities, namely R;D (although some R;D was also carried out on a subsidiary level), production and business management, were all centred at headquarters in Zurich. It was organized into divisions and then by functions within the division (figure 1).
Figure 1: Former structure of Pharma S.A.
In 1990 a new structure was announced in order to increase the level of coordination between countries and to focus product development efforts on the core products in Pharma’s portfolio. Four SBUs (Oncology, dermatology, gastro-intestinal drugs and HRT drugs) were created in Zurich to be responsible for providing “strategic direction”. A separate European Marketing Board was created to coordinate the registration and launch of products that would still be carried out in the national subsidiaries across Europe. [A2]
The case study outlines a conflict between Pharma UK and the headquarters. The subsidiary developed a transdermal formulation of Vexa (a drug developed by the UK subsidiary in the 1980s) simultaneously with similar technology being developed for Zanta (a similar drug to Vexa marketed in the rest of Europe) at headquarters. In spite of negative signals from the SBU responsible, the subsidiary development went ahead and was later brought under deliberation to the European Marketing Board.[w3]
Volkswagen in North America
Volkswagen, headquartered in Germany, is the fourth largest automobile manufacturer in the world. In its early entrance into the American market, the company did well with the VW Beetle and VW Micro Bus. However, when these models went out of production and Japanese automobiles entered the American market, Volkswagen’s market share decreased.
VW’s operations are organised in three national divisions in Canada, USA and Mexico. Although the company has manufacturing sites (Canada and Mexico), marketing and sales division as well as a design centre (USA) in North America, the decision making is to a large extent controlled by the German headquarters. The North American subsidiaries negotiate sales and profit targets with headquarters but exercise much discretion in achieving these targets. Further, the North American operations can choose what model type to sell, but have little influence on the product development process. In 1991 a regional management for North America was announced to co-ordinate activities as NAFTA came into being.
Figure 2: Organisational Structure of Volkswagen[w4]
Corporations have four main structures it can adopt focusing either on product (leads to the establishment of SBUs), functions (such as marketing, finance, production, etc.), geography or customers (divisions focusing of business relations with government, specific industries, etc.) (figure 3). (Young, 2003)[w5]
Figure 3: The four structures: Product, Functions, Geography and Customers
Before 1990, the subsidiaries were managed with limited autonomy. For example, any expenditure over ï¿½10,000 had to be cleared by the headquarters. While the day-to-day management of Pharma UK was the managing director’s (Paul Willis) responsibility, all strategic issues required considerable input from headquarters in Zurich.
After 1990 Pharma changed its structure from a focus on function to a focus on product. The subsidiaries used to report to different sections such as R;D, product and business management in Zurich before the four SBUs were established. As subsidiaries were focusing their activities on sales, marketing and product registration, they report to the European Marketing Board. However, Pharma UK kept its R;D centre.
Volkswagen did have a functional structure where the three operations in North America were organised under the sales and marketing function centrally. Production of components in Canada and cars in Mexico are likely to have been organised under the production department centrally. R;D and product development was centralised at the headquarters with 56% of all manufacturing is done in Germany.
With the prospects of NAFTA being signed, a North American regional management was announced in 1991 to integrate the businesses in Canada, the United States and Mexico. This can be seen as a move away from a functional structure to a geographic structure where the North American activities are closely coordinated. As indicated, a reason for this was that a greater number of cars for Canada and the US could be sourced out of Mexico, something which might in the future allow for more adaptation of the product. [w6]
Cultural Typology was first investigated by Perlmutter in 1969 (Young, 2003) and later by Welch in 1994 (Mead, 1998). This concept outlines how a multinational corporation structures its relationships with its subsidiaries. Four main types of typology exist: ethnocentric, polycentric, regiocentric and geocentric (Mead, 1998). The first typology, ethnocentric, defines an organisation whose most powerful and influential positions are filled by headquarter country nationals with the company’s home culture dominating.
Polycentric cultures are also structured with country nationals filling headquarter positions, but employ subsidiary managers from the host country. Regiocentric companies go even further to manage regions by regional employees. Finally, geocentric culture originates from the concepts that regardless of nationality, the best person for the job will fill the position (Mead, 1998). However, this structure is difficult to implement. Mead (1998) suggests that American and European firms typically adopt a polycentric typology.
Both Volkswagen and Pharma have polycentric cultural typology. While the host country (Germany and Switzerland) nationals compose the headquarter management (dominating company culture and strategic direction), the subsidiaries are managed by host country nationals.
While Parma’s Swiss headquarters is managed by Swiss nationals, the UK subsidiary is managed by the British. Unlike Volkswagen, Pharma UK provides what may be seen as too much participation in the national company. Pharma UK seems to further their own agenda based on what is best for the British market while the headquarters furthers Pharma corporation’s objectives with Swiss management and focus. This discrepancy, arising from a polycentric structure, has caused friction within the corporation between the British management and the headquarters’ Swiss management.
Unlike Volkswagen[w7], Pharma has created a European Marketing Board in order to promote subsidiary representation in headquarters. However, the power of the board is limited with few responsibilities. Pharma’s polycentric culture has resulted in friction between the home company and the UK subsidiary and both sides seem to be loosing out by wasting efforts on clashing rather then reaching a common goal.
Volkswagen has three North American Divisions which are run with national management. While it seems that this topography would afford the countries great power and freedom of decision, this is not the case. The individual subsidiaries are little more then sales and marketing facilities to fill the needs of that particular market and have little real influence in decision making. While the topography of the company is set up in a way that would seem to promote national input of subsidiaries with North American management, it is failing to do so.
This structure may further prevent the transfer of corporate culture to the subsidiary and the transferring of ideas from the bottom up. An example of this is the lengthy process before the designers in Germany understood the importance for the North American market of having cup holders in the cars. The movement to create a regional board between the North American countries will increase the communication between subsidiaries, but neglect the looming problem of poor subsidiary involvement in HQ decision making in the presence of low market share and falling sales.
Centralised vs. Decentralisation
In international operations one of the primary areas of consideration is where the ultimate decision making authority will rest on important matters. If the home office holds this control, decision making is centralised; if the subsidiary can make many of these important decisions without having to consult the home office, decision making is decentralised[w8]. Centralisation is generally found in large enterprises operating in a highly competitive environment requiring large capital investments. Other factors influencing the choice of whether power is centralised are the relative importance of the unit to the MNE, the volume to unit cost relationship, the level of product diversification, whether the product line is homogeneous, the independence between the units, the competency of managers in the home country, the experience in doing international business and the geographic distance between the headquarters and the subsidiary.[w9]
How much subsidiaries influence the decision making depends on their mandate. The mandate given to subsidiaries is highly dependent on the structure of the company, as subsidiaries where a geographical structure has been adopted generally have a broader mandate. Delany (2000) claims corporations will benefit from strengthening the subsidiaries’ role in corporate strategy formation process, as this will allow full exploitation of the company’s capabilities. However, this requires a change of mandate, or in some cases that subsidiaries go beyond their mandate, something which might challenge the management hierarchy.
In the case of both VW and Pharma, there is high level of control from the head office and subsidiaries have little influence. It is known that German MNEs tend to be fairly centralised in their decision making approaches. German managers are generally hierarchical in their approach and the most important decisions are made at the top. (Rugman and Hodgetts, 2003) [w10]
The mandate of Pharma UK
In the case of Pharma, subsidiaries were given the responsibility of product registration, as well as sales and marketing. However, Pharma UK was in the 1980s allowed to market Vexa, a drug developed in the UK while headquarters was developing Zanta, a similar drug. The UK subsidiary did in effect create a mandate to develop drugs and this was accepted by headquarters. However, after the creating of 4 SBUs on a corporate level, it was no longer accepted that the UK subsidiary went beyond its mandate to develop new drugs. This was demonstrated by the refusal by HQ to invest in the further development of Vexa TD. This case also exhibited internal conflict with regards to who should decide the mandate for Pharma UK (PUK) (either the SBUs or the European Marketing Board).
Since Vexa TD represented technology the SBU in question had not been able to develop, an option would have been to give PUK a world product mandate, whereby PUK would have taken responsibility for development, manufacturing and marketing of Vexa TD on a global basis (Birkinshaw and Hood 1997).
The mandate of Volkswagen’s North American subsidiaries
The VW subsidiaries in North America are given the mandate to run the sales and marketing operations, as long as sales targets agreed with headquarters in Germany are met. Through these targets and control of production and product development, control is retained at a corporate level. In response to the creation of NAFTA, a North American regional management was established to co-ordinate activities in Mexico, USA and Canada. However, no new mandate was given, as the North American subsidiary did only have limited influence on production.
Volkswagen and Pharma are both organisations with a polycentric culture with subsidiary managers are locally recruited. Further, they both operate in industries where R;D costs are high and need to be kept low. This is also reflected in the structure the companies have chosen. Previously both companies applied structure according to function, but the structures have been and are being changed in different ways. Pharma, with the establishment of 4 SBUs, moved towards a product structure; however communication between the subsidiaries and the headquarters went through the European Marketing Board which is not involved in product development or product decision making.
Volkswagen on the other hand, is in the process of moving towards a geographic structure where North American is managed as one area instead of three separate countries. This development was partly brought about by the establishment of NAFTA. As mentioned, companies adopting this structure do often give the subsidiaries a broader mandate, but this is (at least for the time being) not the case for Volkswagen North America. There is trace of centralisation with power being transferred from the three national divisions in North America to the new regional management board.
The move by Pharma towards a product structure might also be seen as centralisation of power as headquarters who claimed the responsibility for R;D as well as strategy for the market seen as one. As the pharmaceutical products are standardised, it is suggested centralisation is encouraged.[w11]
In both cases, there is a problem with the flow of information between the subsidiary and headquarters. In the case of Volkswagen this is mainly concerning information about what the American market demands, information that should be fed back to the product developers in Germany as they have no local knowledge of the North American market. The problem for the UK subsidiary of Pharma is more that initiatives and competencies are not being utilised to the best of the company. This is partly due to the structure not allowing proper communication between the SBU and the UK subsidiary because information passes through the European Marketing Board that have no specific product knowledge of mandate.
After the development of Vexa TD was not accepted by the headquarters, the UK managers are unhappy with the relationship between the subsidiary and HQ. Promoting these managers to headquarters might help keep them, their competencies, and their input within the company; as well as improve the relationship to Pharma UK.
Currently the communication between Pharma UK and HQ goes through the European Marketing Board, something that does not make communication with regards to product development possible. The UK subsidiary should still be allowed to do some development work, but then needs to be able to communicate directly with the relevant SBU. This can be achieved by implementing a matrix structure to replace the current product structure.[w12] For example, the Pharma UK R;D division would have two areas to report to: the relevant SBU and the European Marketing Board.
Finally, due to the importance of co-ordination in the industry, the European Marketing Board should be given some real power and influence to ensure the feedback from all subsidiaries flows to the product developers.
Volkswagen North America
Firstly, the move towards regional management should continue. Due to NAFTA there are more incentives to manage the three North American subsidiaries as one. A common North American market might also make it more interesting for Volkswagen due to their share size.
The product developers at headquarters seem to have very little knowledge of the North American market, partly due to the way the subsidiary is organised. A feedback loop should be put in place to ensure information reach the correct people in headquarters and that the appropriate emphasis is placed on it.
The North American operation should be given more freedom to adapt the products to the local market, although the development and production of separate models is likely to be too expensive with the volumes VW is achieving now. Limited adaptation, such as more cup holders, different seats and head lights might increase the appeal in Canada and the USA.