Japanese corporations have managed their home offices successfully for years, but what about their foreign operations? Some startling research on Japanese overseas subsidiaries sheds light on just what it takes to operate a profitable business away from home--and teaches lessons for all multinationals.
       Most research on international business scrutinizes the corporation as a whole, but little is known about the individual dynamics and performance of subsidiaries. However, Business School marketing professor David Montgomery recently completed a study of 1,148 Japanese overseas subsidiaries. Collaborating with Associate Professor Takehiko Isobe of the University of Marketing and Distribution Sciences in Kobe, Japan, Montgomery examined the relationship between subsidiaries' profits and their strategic roles in different geographic locations.
       The study found that the more Japanese nationals there were working in an overseas subsidiary, the less profitable it was. It seems self-evident that the most nimble players in any market would be local managers who have the connections and know-how to capitalize on the quirks of their own market. After all, American firms have long tried to entice good Japanese nationals to run their Tokyo subsidiaries. The obvious question: Why have Japanese companies populated their overseas outposts with so many people from the home office?
       The short answer: corporate culture. But the full story is more complicated. Along with everyone else, the Japanese embraced the popular notion of globalization in the mid-1980s. The objective of global strategy is to reduce costs through product standardization around the world. Global strategy entails gaining competitive advantage by increasing economies of scale, improving transportation, and capitalizing on the growing similarities in consumer tastes across national borders. It calls for multinationals to integrate their overseas subsidiaries with the parent strategy. For the Japanese, that means tight central control.
       In Japan, a hierarchical, clan-like corporate culture, strikingly different from Western management style, is used to build commitment to the organization and has proven to be an asset in Japan's domestic businesses. As a result, many Japanese companies send a cadre of nationals from headquarters to ensure clear communication and strategy execution between parent and subsidiary. Although most business professionals and journalists seem to believe that Japanese subsidiaries are well managed, there has been little evidence to support that conjecture. "Our results show that the increase in Japanese employees will diminish the likelihood of subsidiary profit," write Isobe and Montgomery.
       They also found that a subsidiary has different characteristics and strategic roles in each location. Japanese multinationals tend to divide activities and allocate them primarily to one location. For example, subsidiaries in Asia were relatively more responsible for low-cost manufacturing, operations in Europe concentrated on marketing, and North American subsidiaries focused on technology and innovation.
       Interestingly, Montgomery and Isobe discovered that Japanese subsidiary profit depends more on marketing activities than on the manufacturing for which the Japanese are so well known. Location was also key to profitability. After considering five factors--geographic area, characteristics of the parent, type of globalization strategy, strategic roles of the subsidiary, and subsidiary characteristics--the researchers showed that profits were boosted most by scale, experience, and marketing objectives such as developing a worldwide distribution network.
       By contrast, subsidiaries that focused exclusively on manufacturing goals, such as building a global production network, were not as profitable. The researchers point to global sourcing strategy as an example. Successful competition requires strong marketing research skills and worldwide distribution channels that garner low-cost parts and develop world-class factories. The advantages of a Matsushita or a Toyota come from channel and distribution management, both elements of marketing strategy. Just-in-time manufacturing would not function if the company didn't have these marketing capabilities.
       Montgomery and Isobe's study represents one of the first efforts to develop a model that objectively analyzes the performance of subsidiaries as entities distinct from their parents. It has relevance to the operations of multinationals, no matter what country they call home.

--Barbara Buell

"Strategic Roles and Performance of Japanese Subsidiaries,"
Takehiko Isobe and David B. Montgomery,
GSB Research Paper #1507,
July 1998