When Germany’s Cash & Carry built its first Metro store in tropical Bangalore in 2003, it installed roofs that could withstand five to ten metres of snow – exactly like it had done in its home country. To Harvard Business School’s Prof. Tarun Khanna, erecting a winter structure in a city that has never seen a snowflake is emblematic of a lack of local responsiveness.
It is a failing that he and other commentators blame for Cash & Carry having only 15 outlets in India after a decade there. In contrast, America’s Walmart already has 20 outlets, even though it entered India four years after its German rival.
Globalisation pressures, rapidly developing emerging markets, and technological advances require multinational corporations (MNCs) to be as agile and flexible as a start-up firm to cater to local demand while maintaining global growth. The dangers of failing to be locally responsive are well known by C-suite executives. Yet there are many examples in Asia of MNCs falling into this trap.
This is due in large part to the centralisation strategy, a conventional business approach that enables MNCs to expand across their borders while maintaining control. Centralisation in today’s fast-paced business environment mutes the ability of Asia-based subsidiaries to respond to local markets in a timely manner.
At the same time, however, too much decentralisation of authority threatens the parent company’s control, which can result in tarnished reputations as the international retailers that sourced from the Bangladeshi garments factory whose building recently collapsed can attest.
Corporate centres with a tendency to over-indulge in control and compliance issues destroy more value by introducing excessive red tape and procedures than they create by harnessing synergies, according to research findings from Hay Group’s Global R&D Centre. There needs to be a shift in focus. As our research states: “The tipping point begins by questioning the conventional ways corporate centres create value.”
Is your corporate centre a ‘value creator’ or a ‘value destroyer’? This question is particularly relevant in Hong Kong and Singapore, which between them host more than 5,000 regional headquarters. And there are, of course, corporate centres in India, Japan, Korea and Taiwan, which boast a number of global companies such as Toyota and Samsung, even as ambitious globalising companies are emerging from China, India and Southeast Asia.
The Samsung saga
The story of Samsung Electronics is instructive in answering this question. Samsung is the largest electronics manufacturing company in the world with revenue of 201 trillion won (US$179.4 billion) in 2012. It is currently headquartered in Seoul, South Korea, with assembly plants and sales networks spread out in 65 countries all over the globe.
Samsung’s journey has not exactly been smooth sailing. In its pursuit to become a leading MNC in the 1980s to 2000, it went through several rounds of organisational and cultural restructuring. It was only in the 2000s when the corporate centre finally established an optimal level of centralised control and decentralised control that paved the way for the organisation’s success in later years.
Founded in 1969, Samsung initially hewed to a highly centralised and autocratic structure, with many layers of hierarchy and operations controlled tightly and directly by management. All major decisions had to be approved by the Office of Secretaries (now known as the Group Strategic Planning Office).
This structure worked well in the 1980s and 1990s. Samsung was then exporting OEM products made in Korea, enabling the organisation to leverage on the centre’s resources and reap economies of scale and scope.
In 1993, Samsung accelerated its overseas expansion with the construction of five complexes designed to create synergies, such as sharing local knowledge and cutting labour costs. The centralised structure was seen as no longer applicable; Samsung instead implemented a regional headquarters system.
The new system failed. Actual synergies were limited because the characteristics of the business units supposedly under the control of the regional HQ were very different. More seriously, the regional headquarters were not really empowered to make decisions regarding local activities. Even when local managers were hired, these locals were often not given the authority to make decisions pertaining to their division.
Samsung headquarters in Korea resisted changes and disregarded foreign input. The old practice of selecting key personnel was little changed – recruitment and promotion remained geared towards concentrating power in top management, especially towards those of Korean origin. As a result, the complexes were not truly localised; they did not hire local managers, secure local resources or capitalised on opportunities to learn indigenous management know-how.
Third time’s the charm
The Korean giant tried again in 1998, but this time, the pendulum swung back towards centralisation. A Global Product Manager (GPM) structure was established, comprised of 17 business divisions that each took charge of the global production and sales organisations for its products. The Korea-based GPM head made all important decisions regarding strategy, technical support and pricing and production scheduling, and had bottom-line responsibility.
The corporate centre placed heavy focus on compulsory training programmes designed to inculcate the desired attitudes and behaviour to be displayed by employees. Auditing teams and HR were empowered to fire those who exhibited inappropriate behaviour or actions. The company founder devised saboon (company motto) that characterised the ‘Samsung Man’ as one who has internalised nine shared values: creativity, challenge, strategic focus, simplicity, self-control, customer focus, crisis awareness and continuous innovation.
This initiative also failed. The corporate centre increased both direct intervention (via the GPM structure) and indirect intervention (training and saboon) to gain greater control over the organisation. But the result was less than ideal. The excessive control over employees caused structural rigidity and stifled the innovation and creativity expected from everyone in Samsung.
Samsung tried yet again in the 2000s with the formation of the Global Business Manager (GBM) structure. The emphasis was placed on the business rather than on product lines to reduce the rigidity of the previous GPM structure. Based in Korea, the GBMs managed foreign subsidiaries, decided strategy, technical support, pricing, transfer prices and output levels, and were responsible for profitability.
The adjustments in structure were complemented by the tweaking of indirect intervention by the centre. The heavy hand was lightened, with the focus shifted to making senior management role models and influencers for those lower down the hierarchy, rather than enforcers of ‘Samsung Man’ behaviour.
Samsung reduced the previous nine shared values to ‘7 DNA’ – dream, vision and goal; insight and good sense; trust and credibility; creativity and challenge; technology and information; speed and velocity; and change and innovation. They are designed to serve as uniting principles to link all global employees, regardless of nationality or location, and as a tool to manage global diversity, rather than to impose ‘Samsung Man’ conformity.
Above all, more foreigners were hired for key Korea-based positions while operations were globalised to attract the best talent. The integration of non-Koreans in Samsung’s headquarters appears to be reducing bureaucracy within the company and diluting the authoritarian streak that characterised top management in previous years.
The experience of Unilever, the British-Dutch consumer goods MNC with over 400 brands sold in 180 countries, is instructive as well. Like Samsung, Unilever’s corporate centre was also caught in the centralisation-decentralisation dilemma. Unlike the Korean giant, however, its problem stemmed from too much decentralisation rather than centralisation.
Unilever was established in 1930 through the merger of British soap maker Lever Brothers and Dutch margarine producer Margarine Unie. From the outset, the organisation resembled a holding company rather than an MNC, with two different chairmen and head offices in London and Rotterdam. The decentralised structure allowed subsidiaries to form their own strategic approach, giving Unilever the opportunity to learn about local markets and how to market to them with rapid decision-making.
But decentralisation had disadvantages. While competitors used pan-European product launches, Unilever had to approach each of its 17 European operations individually, endure duplicative promotional efforts and forego economies of scale. Other problems included limited central strategic direction and lack of solidarity across the organisation, with loyalties resting on individual affiliates and personal ties, rather than tied to Unilever as a whole.
As revenue and profits flat-lined, senior managers met in 1984 to address Unilever’s weaknesses. They recognised the need to centralise certain activities (finance, packaging and research), but still believed in providing products that met local needs. The strategy was to retain a decentralised structure, but adopt a certain degree of direct centralisation.
Unilever created regional business groups that put together a number of divisions, each one focusing on a specific category of products. Lever Europe, for example, belonged to the European Business Group and focused on detergent products. The consolidation cut the number of soap plants in Europe from ten to just two, standardised packaging, and unified pan-European advertisements.
By 1990, Unilever was no longer underperforming. But it still faced the problem of slow innovation and a huge number of brands – there were some 1,600 of them, many from acquisitions. The corresponding large number of strategic business units (SBUs) made control by the centre difficult, as the required reporting and monitoring were too time consuming and administratively tedious.
With so many brands and SBUs, it was also difficult to foster a sense of shared and common objectives. Information was bound to be lost somewhere with the very long communication chain. Soon, Unilever was again underperforming, with revenue steadily decreasing from US$49.7 billion in 1995 to US$43.7 billion in 1999.
Path to ‘One Unilever’
Unilever embarked on a five-year “Path to Growth” strategy in 2000. The number of brands was reduced to 400, with the majority of divestment in the slower growing detergent and food categories. Of these, 13 were designated as a Masterbrand (they included Dove and Lipton), an umbrella entity under which the remaining brands were grouped. Each Masterbrand was overseen by a global brand unit tasked with creating a global vision and inspiring cooperation from all geographical markets.
A regional approach was adopted, with country operations grouped under three geographical areas; supply chain functions were streamlined and consolidated; the IT department integrated all information sources and needs in a global Unilever Information Program; and an entrepreneurial culture was encouraged with, among others, a variable remuneration structure.
Path to Growth delivered some results, but it became clear that Unilever had not yet struck the right balance when growth stagnated again in 2004. Today, the MNC believes it is closer to achieving that balance with the ‘One Unilever’ strategy, which has done away with the company’s dual chairmanship and focused on the mega-trend of the health-conscious consumer, rather than the specific needs of each SBU. This broad ‘Vitality’ concept acts as a guide to SBUs in managing their brand, controlling the type of changes they make by limiting it to those relevant to issues around health.
In our analysis of Samsung and Unilever, we use the framework shown below, which looks at the corporate centre – consisting of boardroom members and senior managers of the next hierarchy level – as the body that formulates corporate strategy and executes on it by wielding the tools of direct and indirect intervention.
Framework on Corporate Centres as Value Creators
Drawing lessons from the history of Samsung and Unilever, we can conclude that managing the reins of a multinational corporation is an uphill task that involves pendulum swings between centralisation (direct intervention by the corporate centre, such as Samsung’s Office of Secretaries approving all major decisions) and decentralisation (indirect intervention, such as Unilever’s ‘Vitality’ guide).
Our analysis suggests that centralisation is useful in optimising resources. The corporate centre identifies similar resources across its business units and centralises them to obtain economies of scale, as both Samsung and Unilever have done. But centralisation of learning can be counterproductive, as again both companies have discovered. Employees must be free to react according to the specific context of the local markets where they operate (such as not erecting a winter-proof roof in a tropical climate).
Their learning should lead to new improvement solutions that should be easily executed without the need for the corporate centre’s approval. The centre’s role should be as indirect facilitator, setting broad guidance (such as Unilever’s ‘Vitality’ concept) and efficiently transferring knowledge across the different SBUs. It should not act as a direct dictator.
Both resources and learning are needed to create synergy, which arises from the sharing and recombination of resources between different business units. Their working together results in the generation of value which is worth more than the sum of the business units when they work apart. For example, the corporate centre can create synergy by merging the Thailand unit’s expertise in production with the Singapore unit’s expertise in supply chain.
Our analysis of Samsung and Unilever suggests both direct and indirect intervention and a moderate level of centralisation are required to achieve synergy. Without a certain degree of centralisation, there might be inconsistency in the quality of the organisation’s output. It is imperative for the corporate centre to intervene indirectly when the level of direct intervention is low to retain control over employees while at the same time providing enough autonomy to stimulate creativity.
MNC corporate centres should learn to master the subtle form of control to expand and enhance a decentralised structure. Naturally, changing values and corporate culture are not overnight realities, but as business cycles become shorter and recessions become more frequent, the time that corporate centres have to create value and complement local needs is shorter than before.
About the Author
Dr. Andreas Raharso is the Global Director of Hay Group R&D Centre for Strategy Execution. Based in Singapore, he directs Hay Group’s work in transformation leading to innovation and productivity for best-in-breed MNCs.
Photo credit: Shutterstock.com