It takes more than localizing your customer facing business to win in emerging market, say keynote speaker Nirmalya Kumar and Phanish Puranam in the Harvard Business review.
Two summers ago, Frits van Paasschen, the CEO of Starwood Hotels, was talking to his wife, Laura, about China. With 70 properties in operation there and 80 more being built, the People’s Republic had just become Starwood’s second-largest market, after the United States. Van Paasschen jokingly said, “It’s almost like we should move our headquarters there.” Laura’s response, in a nutshell: Perhaps you should.
A year later, van Paasschen did just that—for a month. From June 8 to July 11, 2011, Starwood’s eight-member top management team worked out of Shanghai, doing business 12 hours ahead of, rather than behind, the company’s official White Plains, New York, headquarters. Starwood now plans to shift its base for a month every year to fast-growing markets such as Brazil, Dubai, and India. The end result of these relocations remains unclear: They may prove to be symbolic, they could be learning moments, or they might portend a permanent move of Starwood’s headquarters. Today they epitomize the mounting pressures on multinational companies’ organizational structures.
As emerging markets grew explosively in the first decade of the 21st century, multinationals raced to develop new strategies. However, changes in their organizational structures have been slow to follow, and people and processes are coping—but badly. Corporations are trying to shoehorn global operations into existing structures, which is in part why so many are unable to realize the full potential of emerging markets. In fact, 95% of senior executives say that they doubt their companies have the right operating model (of which structure is a key component) for today’s world, according to a 2011 Accenture study. Organizational redesigns are complicated and politically messy, however, so responses have ranged from outright denial to grudging acceptance; only a few companies are actually trying to fix the problem.
The pressures on multinational structures seem likely to intensify. Businesses are increasingly seeking not just suppliers and raw materials in emerging markets such as China and India, but also customers. The recent recession has served as a catalyst: Many Western companies believe they have focused too much and for too long on the developed world. Moreover, multinational corporations are scouting for new products and services in developing countries—not just to break into them, but also to kick-start growth at home by offering more value for less money. GE’s recent “reverse innovation” success with its MAC 400 and 400i portable electrocardiography machines in India, for example, may seem simple, but most companies struggle to develop such innovations in developing countries or to transplant locally developed innovations worldwide. Such efforts sorely challenge established structures and processes.
At the same time, the nature of innovation is becoming more global because of technological advances. Organizations are figuring out how to break up and distribute, across nations and locations, tightly integrated tasks once performed at only a single site. This global division of R&D facilitates intrafunctional specialization among countries. The advantages include conducting work where the best expertise exists, at the lowest possible cost; exploiting time zone variation to operate 24/7; and mitigating risks by building redundancies across locations. The management dilemmas are, of course, substantial: How do you choose which processes to distribute and where to relocate them? How do you reintegrate them across borders? How do you get people to work effectively across organizational, national, cultural, and time zone barriers?
What’s emerging is a new structure, which we call the T-shaped country organization. It helps to localize customer-facing operations even as it distributes back-end activities across countries. Showing the way are companies, such as GE, Intel, and AstraZeneca, that are adapting ideas from the Indian IT-offshoring industry and, in the process, rewriting the way corporations should think about structures.
Why Existing Structures Are Deficient
Figuring out how to manage product lines, regions, and functions has been a perennial problem for multinational companies. Most started out by forming international sales divisions with country-specific subunits at home and by locating only customer-facing (or front-end) processes in each country.
Several companies later adopted transnational structures in order to exploit location-specific advantages in countries far from their home base. Each country’s operations specialized in part of the value chain (for instance, Germany focused on product engineering and Mexico on manufacturing) or, sometimes, product lines (Japan developed CT scanners, for example, and Europe X-ray machines).
Copyright Speakers Corner 2016