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THE GLOBE

Have You
Restructured for
Global Success?
It takes more than localizing your customer-facing business to win in emerging markets. by Nirmalya Kumar and Phanish Puranam

OCTOBER 2011 reprint R1110J

The Globe

Microsoft CEO Steve Ballmer speaks, in May 2011, as the company opens the headquarters of its AsiaPacific R&D Group in Beijing.

Have You Restructured
For Global Success?
T
Photography: Getty Images

It takes more than localizing your customer-facing business to win in emerging markets. by Nirmalya Kumar and Phanish Puranam

2 Harvard Business Review October 2011

wo 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, multi­ ationals raced to develop new stratn egies. However, changes in their organizational structures have been slow to follow, and people and processes are coping—but

A
B

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Diagnostic

What Kind of
Multinational
Structure Fits
Your Company?

This two-part diagnostic tool can help you calibrate, on scales ranging from 1 to 5, how geographically clustered or dispersed the key capabilities of your businesses are—and gauge whether your organization can collaborate seamlessly across geographies. Plot the two scores on the graph (right) to identify an appropriate global structure for your company. How geographically clustered or dispersed are the skills, capabilities, and resources needed for your businesses to operate?
Highly clustered
Most are found in one region, often the home region.
SCORE 1
Example Sharp historically has done most of its R&D and manufacturing in Japan. It set up sales units abroad only during the early stages of its international expansion.

Moderately clustered
Most are found in one region, although different regions may possess advantages for different functions. SCORE 3
Example Many consumer goods companies today locate manufacturing in Asia, but R&D and product design remain in the U.S.

Highly distributed
Most are spread across multiple regions. SCORE 5
Example When GE develops new jet engines, it relies on its China unit to design for manufacture, its India unit for analytics and materials science, and its German labs for windtunnel testing.
SCORE FOR A

How competent are people in your organization at working closely across geographies?

Not very competent
Effectiveness is confined within specific geographies, functions, and product divisions. SCORE 1

Moderately competent
People are somewhat effective at working across geographies, functions, and product divisions. SCORE 3

Highly competent
People are adept at working across geographies, functions, and product divisions.
SCORE 5

Symptoms Large technical and cultural differences exist within functions. IT systems don’t permit effective collaboration.
Resistance to rotating people across countries is strong.

Symptoms Some but not all of the key ingredients—common language and organizational culture, IT systems that allow remote collaboration, and rotation of employees—are in place.

Symptoms Most or all of the key ingredients of collaboration are in place.

badly. Corporations are trying to shoehorn “reverse innovation” success with its MAC global operations into existing structures, 400 and 400i portable electrocardiography which is in part why so many are unable to machines in India, for example, may seem realize the full potential of emerging mar- simple, but most companies struggle to kets. In fact, 95% of senior executives say develop such innovations in developing that they doubt their companies have the countries or to transplant locally develright operating model (of which structure oped innovations worldwide. Such efforts is a key component) for today’s world, ac- sorely challenge established structures and cording to a 2011 Accenture study. Organi- processes. zational redesigns are complicated and poAt the same time, the nature of innovalitically messy, however, so responses have tion is becoming more global because of ranged from outright denial to grudging ac- technological advances. Organizations are ceptance; only a few companies are actually figuring out how to break up and distribtrying to fix the problem. ute, across nations and locations, tightly
The pressures on multinational struc- integrated tasks once performed at only tures seem likely to intensify. Businesses a single site. This global division of R&D are increasingly seeking not just suppliers facilitates intrafunctional specialization and raw materials in emerging markets among countries. The advantages include such as China and India, but also custom- conducting work where the best expertise ers. The recent recession has served as a exists, at the lowest possible cost; exploitcatalyst: Many Western companies believe ing time zone variation to operate 24/7; and they have focused too much and for too mitigating risks by building redundancies long on the developed world. Moreover, across locations. The management dilemmultinational corporations are scouting for mas are, of course, substantial: How do new products and services in developing you choose which processes to distribute countries—not just to break into them, but and where to relocate them? How do you also to kick-start growth at home by offer- reintegrate them across borders? How do ing more value for less money. GE’s recent you get people to work effectively across

SCORE FOR B

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
October 2011 Harvard Business Review 3

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B

SCORE B

Competence in working across countries 5
T-Shaped
Structures

3

Transnational
Structures
Matrix
Structures
Front-End/
Back-End
Structures

1

3

A
5

SCORE A

Geographic dispersion of skills, capabilities, and resources

product engineering and Mexico on manufacturing) or, sometimes, product lines (Japan developed CT scanners, for example, and Europe X-ray machines).
Other corporations have adopted matrix structures; the axes of the matrix may be products, businesses, functions, or regions.
At companies such as ABB and Unilever, managers in an emerging market may have one reporting relationship for product lines and another for functions or regions. One or the other of those relationships tends to dominate in practice, despite their equal importance in theory.
A variant involves organizing front-end and back-end operations differently. For instance, in 2001 Cisco created a structure that grouped marketing and sales by customer segment but R&D activities by product line. Between the two, the company set up a solutions group that integrated products into a bundle tailored for each customer. A combination of matrix and back-end integration entails centralizing back-end operations in the home country while managing customer-facing processes via a matrix of product lines and countries.
That’s how pharmaceutical giants such as
4 Harvard Business Review October 2011

Pfizer and tobacco companies such as B.A.T.
Industries are organized.
For companies that are keen to tap into the full potential of emerging markets, none of these structures is performing as well as they once did, our research indicates. Three reasons explain the change:
One, the emergence of China and India as leading markets, combined with minimal growth in the developed world, has made the former “stars” and turned the latter into mere “cash cows.” Traditionally perceived as add-ons, whose modified products yielded supplementary revenue,
China and India are now major sources of demand, with distinct consumer needs that companies must address. Existing structures don’t facilitate that effort because the balance they strike among products, businesses, functions, and regions is no longer adequate in these two markets.
Two, China and India are becoming sources of talent for developing new products and processes. This trend has resulted in the global segmentation of R&D and in intrafunctional specialization among countries, as mentioned earlier. Corporations can segment R&D vertically into distinct

processes that capture customer requirements; generate product specifications; search for technological solutions to meet those specifications; prototype results; and then engineer for manufacture. For instance, Microsoft’s product development team in Hyderabad, India, develops software according to specifications from its U.S. counterparts in Redmond, Washington. That kind of vertical segmentation requires temporal sequencing of each step in the process.
Segmenting R&D horizontally is an alternative technique used to develop multi­ omponent technologies such as enc gines, hardware, and advanced software.
Organizations design components in parallel in different countries and create interfaces that enable assembly and interoperability. With horizontal segmentation, a unit in China can contribute its design-formanufacture expertise; one in India can provide analytics and materials science expertise; and another in Germany can chip in with wind-tunnel testing—as happens in GE’s jet engines business.
The shift of innovation activities will likely be self-perpetuating. To perform cutting-edge work, a person must have engaged in less-sophisticated tasks earlier.
New entrants work their way up a ladder.
You can’t become a partner in a consulting firm without having been an associate, an investment banker without having served as an analyst, or the head of a clinical research team without having worked as a research assistant. In each case, the senior people know exactly what their juniors do because of experience. Without such knowledge, senior managers, arguably, cannot do their jobs effectively or make use of input from juniors.
Geography is fracturing these skill ladders; the lowest rungs for many jobs are now located in developing countries. With those rungs having moved out of the West or having become less remunerative, Western students are less likely to invest in climbing them. The limited availability of talent will, in turn, reinforce the trend of moving the lower rungs of the skill ladder offshore,

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and so on. To be clear, we are not arguing that Silicon Valley will collapse or that R&D centers in the West are likely to shut down anytime soon. But companies deciding whether to open a new R&D lab in New Jersey or Basel, Switzerland, will increasingly need to justify why they shouldn’t do so in
Beijing or Hyderabad, where talent is relatively plentiful and cheaper. The locations multinationals choose for developing their innovation capabilities are likely to change dramatically in the future.
Three, the assumption that multinational corporations’ intellectual leadership should come only from developed markets persists. After all, they used to be the largest and the most profitable markets. Despite the lip service paid to globalization nowadays, estimates suggest that fewer than 15% of Fortune Global 500 companies have a CEO from outside their bases. Organizational cultures, too, reflect developed nations’ dominance in intellectual leadership: Think of American creativity at Apple,
German reliability at Daimler, Norwegian egalitarianism at Telenor, and so on.
But change is becoming necessary. If
China and India turn out to be both a company’s largest markets and its major sources of innovation, something has to give. Few multinationals can escape the Asianization of their top management teams. As leadership composition changes, the political center of gravity also will shift eastward. Unless corporations adapt to the new loci of innovation and growth, which will change the organizational fabric, they are unlikely to grow as fast as rivals will.

Falling Into the Gaps

These tectonic forces are together opening a set of gaps between multinational companies’ ambitions and achievements in emerging markets.
The passion gap. Multinational companies’ subsidiaries in China and India frequently complain about top management’s lack of commitment to their markets. Senior executives may pay lip service to growth in China and India, and may visit them frequently, but Asian countries are high-

context cultures where executives and investors seek signs that are more tangible than public appearances and pronouncements. Cultural barriers often make local managers suspect that the global leadership isn’t excited by foreign markets. They may be right: According to upper echelon theory, the composition of top management teams

Few multinationals can escape the
Asianization of their top management teams. affects companies’ strategic choices. For example, if several senior executives have backgrounds in finance, the company is more likely to rely on M&A. Conversely, the lack of emerging-market experience at the top tends to limit the commitment to developing countries.
The ambition gap. Most multinational corporations are headquartered in nations whose economies grow today, at most, between 1% and 3% a year. Their CEOs are delighted when overseas subsidiaries deliver double-digit sales growth, but Chinese and Indian entrepreneurs would deem it unacceptable just to reach that threshold.
They demand—and invest aggressively to achieve—at least 25% growth year after year. By contrast, Western companies prefer to report revenues and earnings to Wall
Street as per their forecasts, which are usually conservative. In addition, many companies refuse to make significant overseas investments simply because short-term profits and management bonuses may suffer. The value-proposition gap. Most Chinese and Indian customers are constrained by low incomes and budgets, forcing Western companies to revise their business models and, sometimes, reinvent them completely. Local entrepreneurs, trying to ramp up businesses quickly, are short of capital, too: They often have to pay annual interest rates on borrowings of about

15% (China is an exception), compared with
5% in the developed world. The high cost of capital has led some Indian companies to develop unique business models. For instance, Bharti Airtel outsources IT infrastructure and customer services; buys network capacity instead of equipment; and has merged its infrastructure with that of rivals, thereby limiting the investment required to scale up. Many Western companies find it tough to make inroads against local competitors that have adapted well to these conditions.
The product line gap. Many transnational giants have not pushed their R&D operations to innovate for the great mass of middle-market consumers in developing countries, or tried to tailor products to local preferences, or even localized their marketing activities. For example, how does
BMW’s tag line, “The ultimate driving machine,” translate in China, where BMWs are usually driven by chauffeurs? How do luxury companies change their product lines from the understated markers of status that are popular in the West to the “bling” that many emerging-market consumers covet?
A few Western companies do develop products exclusively for China and India, but most are content to skim the surface of these markets’ potential.

The Two Strokes of the
T-Shaped Structure

Multinational subsidiaries in emerging markets must reorganize themselves so that they can cope better with two sets of pressures. On the customer side, they need to move faster, make more decisions locally, and alter the incentives and career opportunities offered to employees. In other words, their front-end operations must become highly localized. Given the size of emerging markets like China and India, a high level of localization doesn’t preclude economies of scale.
On the back end of the value chain, transnational companies should use emerging markets as platforms for globally segmented innovation, manufacturing, and offshore services. They must break up opOctober 2011 Harvard Business Review 5

The Globe

erations such as product development and tries. Partitioning work in this way allows
R&D, relocate them, possibly across sev- companies to divide tasks across the globe eral countries, and integrate them across and exploit local skills. For example, GE’s the world. The issue is no longer simply John F Welch Technology Centre, in Bangawhether to integrate a subsidiary or give it lore, embodies GE’s worldwide capability more autonomy; the answer will depend for computational modeling, and AstraZenon whether you’re talking about front-end eca’s unit in Bangalore specializes in tropior back-end processes. cal medicine. Setting up such centers of exThese imperatives demand new re- pertise means that work can proceed largely sponses. Companies must let front-end, or independently across locations. customer-facing, processes in emerging
When these spatially distributed pieces markets enjoy greater autonomy. Back- of specialist work can’t be completely blackend processes, particularly product devel- boxed, they must be integrated. One apopment and R&D, need not be collocated; proach involves building formal channels they could be broken up and integrated for coordination. These include assigning across countries to foster global develop- integration roles (such as that of program ment and manufacturing, not just sharing manager), locating some employees physiof ideas. That dual approach yields a T- cally close to others, and opening direct shaped form: The horizontal stroke repre- channels of communication to help bridge sents linkages across countries; the vertical distances. Ensuring that people speak the stroke illustrates the need for depth within same “language” (and that doesn’t mean each country. A T-shaped structure is thus
English) augments the efficacy of these a response to the fact that emerging mar- channels. At GE, design engineers from kets are increasingly becoming lead mar- R&D centers around the world collaborate kets as well as talent pools. effectively because, as a senior GE BangaThe T-shaped country structure can be lore manager puts it, “We all speak the lanseen as an extension of the transnational guage of Six Sigma.” structure, with one difference: It distribCompanies can also use tacit coordinautes parts of functions—not entire func- tion—in other words, without extensive tions—geographically, which requires un- communication—for the same purpose. precedented integration across countries. This relies on shared decision-making proThis differs from the avoidance of duplica- cedures, a common vocabulary, and the tion across geographies or “nice to have” ability to observe work as it happens across horizontal exchanges of best practices. locations. Research has shown that some
Each country unit will have its own area companies have figured out how to let softof expertise, and all areas will be necessary ware engineers in different locations coorfor developing new products and services. dinate their iterative programming and bugIn each country, the horizontal and verti- fixing activities without communicating in cal strokes of the “T” will be connected detail. The engineers draw instead on the loosely. For instance, in India the global knowledge they share—which comes from
R&D centers of companies such as Intel, common training and the use of workflow
GE, and Microsoft have a few projects to software—to anticipate colleagues’ redevelop products for local customers, but sponses to problems. Even when the engimost of the work supports global product neers had poor substitutes for face-to-face development. interactions (such as webcams, telephone,
Past research has shown that companies and e-mail), they successfully managed can use two complementary approaches to cognitive collocation. A senior scientist coordinate processes across geographies: at AstraZeneca’s Bangalore unit told us, separation and integration. Separation en- “When people share the same understandtails isolating the activities in each country ing about work procedures, data, methand minimizing interactions among coun- ods, and the underlying science, the need

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to pick up the phone and ask a question doesn’t arise too often.”
The soft factors underlying the mutual understanding shared by geographically dispersed teams have hard consequences, in that they limit the need for travel and prevent coordination failures. Here’s how
Guillermo Wille, who used to head GE’s
Bangalore R&D campus, summarized the challenge: “People usually don’t trust their counterparts who are sitting 11,000 miles away. If you think about it, though, few companies have the luxury of having all their technologists sitting in one building.…The behavioral reality is that if people

migrated quickly to China and India, have been among the first to do so. As a bridging mechanism, companies like P&G rotate non-U.S. executives in and out of headquarters. Many corporations, including P&G and
Unilever, have asked the China and India heads to report directly to the worldwide
CEO or have accorded them the status of regional heads. Samsung’s China CEO, for instance, is regarded as one of the company’s top three executives worldwide.
Redrawing HQ geography. Before
Asian managers enter the C-suite, Western companies may move closer to China and India. In 2006 McDonald’s located

Before Western executives start packing their bags for emerging markets, they must realize that expat managers may not always be welcomed. are sitting in different buildings, they already pick up the phone or communicate through computers. If you understand that, and have created a culture of treating your teams in the next building or those 11,000 miles away the same, you have it. The only caveat is the time difference, which generates issues in work/life balance. That’s the problem you face.”

Challenges for Top Teams

Amid the focus on structure, it’s easy to forget that leaders are the people who make organizations tick globally. The rise of emerging markets has major implications for how top management teams are configured, where they sit physically, and how they operate culturally.

“Repeopling” the leadership tier.

Multinational companies will increasingly have to move people from emerging markets, especially Chinese and Indian managers, into leadership positions. Companies in financial services, consulting, and technology, where opportunities have

its Asia head to China—its first regional head outside Oak Brook, Illinois. IBM created a growth-markets headquarters in
2008, based in Shanghai and responsible for Asia (non-Japan), Latin America, Russia, Eastern Europe, the Middle East, and
Africa. In 2009 HSBC’s then-CEO, Michael
Geoghegan, moved from London to Hong
Kong to focus on emerging markets, and
GM moved the responsibility for global purchasing from Detroit to Shanghai. In 2011
Bayer shifted the base of its general medicines division to Beijing. And GE’s health care unit, the world’s biggest manufacturer of medical-imaging machines, is moving the headquarters of the 115-year-old business from Waukesha, Wisconsin, to Beijing.
When Irdeto set up dual headquarters in
Hoofddorp, the Netherlands, and in Beijing, the CEO moved to China with his family. In the not-too-distant future, some multinational companies may toy with the idea of splitting headquarters functions, with compliance staying in the West but intellectual leadership moving to Asia—permanently.

Recognizing cultural shifts. Not surprisingly, the rise of China and India is leading to discontent among some multinational companies’ senior executives who work in developed countries, which still account for most of their profits. However, these markets are growing slowly, competition is intensifying, and profit margins are falling. Besides, as a senior executive at the energy and water company Nalco recently noted, companies often have to dismantle something in mature markets to build elsewhere. Before Western executives start packing their bags for emerging markets, they must realize that expat managers may not always be welcomed: They’re expensive, often unable to speak the local language, and lack local networks. On the other hand, expats are likely to be more valued in back-end functions such as R&D and product development, where global segmentation requires intracompany networks and deep technical knowledge.
No organizational design is perfect or permanent. Smart executives recognize that they must make trade-offs that are appropriate to the economic climate, competitive context, and corporate history. The challenge for CEOs is to let the energy, ambition, and optimism they sense in China and India coexist with their developedmarket units. Local subsidiaries, frustrated by the shackles that HQ places on them, are increasingly demanding that the worldwide leadership move to emerging markets, defer to them, or get out of the way. Deploying the T-shaped country organization can help companies to walk the tightrope between their operations in developed and rapidly developing countries, to knit people across countries, and to thereby create global competitive advantage.
HBR Reprint R1110J
Nirmalya Kumar is a professor of marketing, and Phanish Puranam is a professor of strategy and entrepreneurship, at
London Business School. They are the codirectors of the school’s Aditya Birla India Centre and the coauthors of India Inside: The Emerging
Innovation Challenge to the West (Harvard
Business Review Press, forthcoming in 2011).
October 2011 Harvard Business Review 7