Cnsider the following dilemma, based on a real occurrence:
As part of its European operations, a major U.S. corporation, Firm A, operates wholly owned subsidiaries in, among other countries, both Germany and France. All country managers are expected to meet or exceed aggressive P&L targets. Recently, the German subsidiary has been successful in selling several expensive machines to an important customer, Firm B, for its production operations. These machines have been delivered and successfully installed, and Firm A’s German subsidiary has booked the revenues. As part of the contract, Firm A’s German subsidiary management has agreed to provide Firm B with ongoing service for the next five years.
One year after machine installation, following a production rationalisation exercise, Firm B decides to transfer the machines to its French factory, just a few miles across the border from its German location. Firm B requests reinstallation assistance and ongoing service, as previously agreed with Firm A’s German subsidiary. For a variety of reasons, not the least of which is lack of language skills, Firm A’s French subsidiary would have to provide needed services. The French country manager refuses to provide the needed services. When asked to explain his decision, he states:
"I have the solemn responsibility to maximise profits in France, for the benefit of the company and its shareholders. If I take on reinstallation and ongoing service for Firm B’s machines, my expenses will increase significantly, and profits will fall. Furthermore, service is a core strength in France, but I run a very tight ship on service personnel; I would have to hire more people and get them up to speed. My German colleagues have suggested they would transfer funds to France, but we have very different ideas on these amounts. They have also raised the possibility that their service personnel would continue to service Firm B in France, but that would violate territorial boundaries, not to speak of language difficulties and a host of other problems.
“Frankly, I do not approve of the service arrangement with Firm B. In order to make the original sale, my German colleagues gave away the farm on servicing the machines. The contract is very open-ended, including significant liability for parts. My French organisation is being asked to assume a major cost drain. It would be one thing if we had sold the machines and received the revenues in France, but all revenues went to Germany. I’m not going to do it. I can’t risk the viability of the French subsidiary, and our ability to serve the corporation.”
It is axiomatic in management circles that structure follows strategy. The firm contemplates its environment, formulates objectives, then develops strategy by securing and allocating resources in pursuit of those objectives.
In such a situation, the European vice president would have to intervene, so that service to an important European customer, Firm B, did not atrophy, with serious consequences for long-run revenues.
This illustration is just a single incident, but as firms increasingly operate outside their home countries; inter-country incidents like this
