Emerging markets are shifting the balance of
economic power, and for multinationals, a “business as usual” approach will no
longer suffice.
The
last decade has seen a disruption in the nature of consumer markets on an
unprecedented scale. The shifts on the demand side are well known: Emerging
nations have displaced mature economies as the engines of growth, attracting
Western multinationals in search of millions of new consumers. What has been
less appreciated is a quieter (but equally significant) shift on the supply
side. The iconic American and European companies that have dominated the
economic world order for the past several decades are ceding ground to an
increasingly influential set of emerging market “champions.” Adding to the
complexity, these high-growth markets are often distinct from one another in
terms of the speed of the market, the drivers of demand and consumer preferences,
and the regulatory and investment climate.
These
developments have created a multipolar world that moves at different speeds and
presents a more diverse range of requirements to succeed than the global
marketplace of years past; one with multiple centers of power and influence
that are changing the way business is done. Yet many companies are reluctant to
move away from their legacy hub-and-spoke model — which evolved to support the
old, more homogeneous business environment — to a global enterprise management
model that allows for greater nimbleness and adaptability.
How can
companies balance local autonomy with the need to achieve global scale and
standardization? Does it even make sense to have a headquarters anymore? And
where should the talent that runs the company come from? Such questions are
critical, because they ultimately determine a company’s long-term viability.
The answers, of course, are not universal, but in our work with multinationals,
three key themes consistently emerge as enablers of success: a rebalanced
organizational structure and operating model, more dispersed decision rights
mechanisms, and an approach to leadership and people management that emphasizes
diversity and local talent.
A New Balance of Power
Global
companies understand that in a multipolar world, half or more of their revenues
and profits are likely to be generated beyond their legacy markets; this is
true for seasoned multinationals as well as emerging market companies. Yet they
still think about growth markets in terms of their past or current business
contribution, rather than their longer-term potential. Top management remains
concentrated at headquarters, where they lack a direct line of sight into and
intuitive understanding of these new markets. In addition, many companies go
too far in centralizing global functions in the interest of efficiency,
resulting in excessive rigidity and standardization.
To
overcome these hurdles, companies need to carefully consider where their areas
of potential growth lie and recalibrate their organizational balance of power
accordingly. For example, Banco Santander SA, a leading global bank
headquartered in Madrid, revised its structure to reflect Brazil’s growing
importance; the company brought its Brazil operations on par with its European
operations. Such structural adjustments, coupled with the changes to decision
rights and governance mechanisms discussed below, increase a company’s capacity
to be nimble and channel the right levels of management attention to (and investment
in) critical growth markets. Frequently, it is companies that have their roots
in emerging economies that get it right, because they have less inertia and
baggage from the past.
Another
construct gaining ground, the regional cluster model, is helping companies
answer the age-old question of how to reap the benefits of customer proximity
as well as economies of scale. The last decade and a half saw a focus on
excessive centralization — an attempt to increase efficiencies that failed to
address differences in local demand, languages, and cultures. In the regional
cluster model, essential, customer-facing activities are maintained locally,
supported by a critical mass of expertise housed at the cluster level to
prevent duplication and redundancy while also avoiding the drawbacks of
overcentralization. This model also recognizes that needs and opportunities
vary by function. Finance, human resources, and IT are good prospects for
substantial centralization. At the other extreme, sales, legal, and communication
activities are generally best handled locally. Functions such as marketing,
manufacturing, procurement, and R&D fall somewhere in the middle. (See
“Twenty Hubs and No HQ,” by C.K. Prahalad and Hrishi Bhattacharyya, s+b, Spring
2008.)
Decentralized Decision Making
As
important as the “hardware” of organizational structure is the “software” that
runs on it — the set of decision rights, management processes, and control
mechanisms that brings the structure to life and determines its overall
effectiveness. For most multinationals, the matrix is a necessary way of life;
the benefits of horizontal coordination across business units and functions
compared with those of the vertical silos that they had in decades past are
simply too significant to ignore. But as companies grow larger and more global,
problems inevitably arise with the matrix structure. The decision-making
process drags on, the right judgment calls aren’t always made, and overhead
costs sprout at every node in the organization to support cumbersome management
processes.
The
root cause is often the way information flows through the organization, and the
determination of who is empowered to decide what. With every dimension that is
added to a matrix (product groups, customer business units, functions, regions,
and so on), the potential for decision making to grind to a halt increases
exponentially. Because a more concentrated approach to decision making would be
antithetical to a multipolar world, companies need to promote greater
decentralization and autonomy, and differentiated levels of authority.
Decision
rights should be pushed down into the organization, and the center should
involve itself only in critical enterprise-level decisions such as portfolio
strategy, capital allocation, and global brand management. Company leaders
should establish a comprehensive decision-rights architecture that reflects the
levels of importance of various stakeholders in complex decisions. Over time,
this approach unshackles the organization, and a new management paradigm and
set of behaviors take hold.
But
increased decentralization also requires greater transparency and new
mechanisms to ensure accountability and manage risk. Companies need to adopt
disciplined and coordinated decision-making and performance management
processes. First, they should identify key performance indicators (KPIs) that
link strategy to operations. They then need to link these KPIs to the company’s
primary management processes (strategic planning, budgeting, compensation,
ongoing performance management). Finally, they must build information systems
and controls to support this approach by extracting and monitoring the right
kinds of information.
A Global Talent Pool
The
talent issue for global enterprises starts at the top. The composition of
boards and executive committees remains largely influenced by companies’
historic center of gravity and does not represent an ideal diversity of
experiences. Senior management often finds it hard to shed old modes of
operating and open up opportunities to new talent based on merit and breadth of
perspective rather than tenure or internal political affiliation.
Agribusiness
giant Bunge Ltd. illustrates how this facet of the talent management challenge
can be managed successfully. Bunge has focused on selecting board members from
around the world who have the international experience to steer the strategy of
a truly global company. Not only does the current board have knowledge of
investing and running large businesses in all the key markets where Bunge
operates, but it also boasts expertise in many areas related to agriculture,
such as logistics, advertising, and food processing and packaging.
Starting
with the board and senior executives, global companies need to forge more
diverse management teams able to understand the opportunities and the
challenges the business faces in its current and future markets. Successful
global companies develop comprehensive human capital strategies to acquire and
retain talent in key markets around the world. Typically these plans are
anchored in the company’s business strategy and focus on differentiating the
company’s approach to markets by segmenting its talent pools; improving
managers’ capabilities, behavior, effectiveness, and accountability; taking a
holistic approach to human capital programs; and building employee engagement.
At
German electronics and electrical engineering giant Siemens AG, only 30 percent
of the more than 400,000 employees are located in Germany; the others are
spread across 190 countries. This dispersed workforce means that securing and
retaining the global talent pool is a major challenge. “With countries like
Germany, we had a pretty good view,” notes a Siemens IT governance executive,
“but when we talk about emerging markets and fast-growing economies, we weren’t
always able to attract the best talent.” In response, Siemens embarked a few
years ago on a successful transformation of its global people strategy,
adopting processes for consistent individual performance management, robust
succession planning, and high-potential talent identification and development;
a global database that made job postings and experience profiles on individuals
available to all; and a CEO-driven global diversity and inclusion program.
In
high-growth emerging economies, first-mover advantage is crucial, and having a
coherent and flexible global enterprise management model that can adapt to (and
get ahead of) rapid evolutions in the market can make all the difference. A
pragmatic first step is to determine where your company stands on all three
enablers — organization structure and footprint, decision rights and controls,
and leadership and talent. You will see where change is most urgently needed,
and, ultimately, can begin an evolution to a new model that better equips your
company to navigate the dynamics of today’s multipolar world.
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