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Designing the head office of a multinational corporation

Pieter Klaas Jagersma


Introduction

Most industries are facing increasing challenges. Tougher competition, narrowing margins and tightening competitive standards are applying pressure to all businesses. At the same time, new opportunities for growth are evident. The corporate challenge is to anticipate in response to a changing environment and to seize growth opportunities - new markets are opening up, niches are appearing and discontinuities are occuring. These pressures and opportunities are evident in almost all industries. Emerging pressures and opportunities lead to additional challenges. New business challenges often lead to a changing corporate focus.

While companies are anticipating and reorganizing in many different ways, clear features are emerging. In particular flatter, more flexible organizational structures are supported by leaner corporate centers. Other emerging organizational features are:

1. Continuous reorganization in response to changing business challenges.
Many multinationals have recently carried out restructuring of various forms, but the trend is for continuous restructuring, driven by changing business needs and increasing pace of change. According to Jack Welch (CEO of General Electric), "organizations have to realize that they cannot simply maintain the status quo. People must understand that change is never-ending". IBM drives continual reorganization of domestic and foreign subsidiaries to provide development opportunities and match capabilities of high potential managers. KPN Telecom started its improvement process in 1990 and has adjusted its structure several times since.

2. Accountability pushed closer to the front line through smaller, more focused units.
There has been a clear move towards pushing accountabilities closer to the front line through smaller, more focused units. ABB has about 1,300 local companies with bottom line responsibility; reliable information and data flows support the decentralized lines of authority. Unilever has 500 operating companies in over 80 countries each accountable for their own financial performance.

3. Increasingly non-uniform grouping of units driven by business needs.
There are growing differences in the way multinationals group their domestic and foreign subsidiaries, driven by business needs. Unilever groups its products differently in different regions, focusing on the markets - e.g., detergents is run more globally than foods which are, by nature, more local. The business groups of Bertelsmann are a combination of regions, sectors and functions, and are determined by business needs. LOreal has divisions with non-uniform make-up, defined by business needs.

4. Smaller, more focused corporate organization with fewer layers.
Most of the multinationals have delayered their organization recently, while at the same time reducing the number of corporate staff significantly. For example, Hewlett-Packard removed the layer between the corporate head office and subsidiaries, and reduced corporate staff to 400 people. Shell has eliminated many of the corporate center committees through which its small corporate center works with the organization, and AT&T reduced its number of layers from 12 to 8 between the top and the front line. Multinationals like KPN Telecom and Unilever have reduced corporate staff and pushed traditionally central functions into the operating domestic and foreign subsidiaries.

5. Increasing willingness to enter into strategic partnerships and to outsource.
Multinationals are increasingly focusing on core strengths and own competitive advantages by entering into partnerships, strategic alliances or joint ventures, and by outsourcing. A lot of multinationals have formed strategic partnerships and alliances with other majors. Others have radically outsourced accounting and their IT/IS function. For example, "best-of-class" ABB relies heavily on cross-border partnering and outsourcing to get a stake in emerging markets as the pace of change (e.g., China) is much too fast for the multinational to rely on building up own capabilities fast enough.

6. Increasing use of high-level teams (cross-functional/cross-sectoral) to address business challenges.
Many multinationals supplement the flatter and more focused structure with flexible, high-level teams to address corporate and cross-business unit challenges. In particular, multinationals use these teams to capture growth opportunities. For example, Procter&Gamble has set up innovation centers which bring together people from advertising, marketing and R&D to develop global products in a more integrated way. Lots of other multinationals use small multifunctional teams to set up businesses in new growth areas.

Changing role of head office

In supporting new corporate structures and strategies, the role of the corporate head office/headquarter (HQ) is changing - especially the head office of corporations with domestic and foreign subsidiaries. Top management is getting closer to the local business, coaching and challenging domestic and foreign subsidiaries and actively developing high performing people.

Top managers are getting closer to the business, focusing on the long term by setting challenging strategic aspirations, helping define strategic direction and targets for the domestic and foreign subsidiaries, and on the short term by engaging in immediate key decisions:

  • Unilevers corporate head office sets (different) strategic priorities for each product group.
  • ABB corporate head office sets ambitious targets for each local company, says Percy Barnevik (CEO), "Decentralization doesnt mean abdication - you still have to know what is going on".
  • AOL corporate head office refines strategic direction quarterly, sets aggressive multiyear targets for each subsidiary and actively engages in strategic decision making.
  • The successful turnaround in General Electric is due to the direct involvement from the CEO in setting strategic direction for the domestic and foreign subsidiaries and giving them stretch targets and also due to quarterly meetings between CEO and top 250 managers.

Multinationals are increasingly focusing on key performance indicators which are directly linked to levers for performance improvement. The key performance indicators can be financial or non-financial (e.g., cost, time, quality, customer satisfaction). Also subsidiary management is increasingly reviewed and rewarded on their performance against key performance indicators.

In pursuit of growth opportunities in rapidly changing markets, multinationals increasingly recognize, reward and promote entrepreneurial behavior. At KPN Telecom, entrepreneurial behavior is a determining factor in selecting people to join the high-level, high-exposure international teams. ABB keeps its local companies relatively small, to stimulate entrepreneurial spirit. Heads of the local companies are the primary initiators of entrepreneurial action and they are actively coached by the senior area managers in that respect. General Electric evaluates its managers on a number of entrepreneurial attributes - e.g., the ability to identify business opportunities and take responsibility for mistakes.

People development systems of multinational corporations get increasingly performance-based. High-potential people are spotted early, and top management take an active role in developing them. Apple evaluates high performers with a ranking system and the head office plays an active role in their training and development. Microsoft has an active mentor system within its business segments; the area managers in the segments are charged with developing the operating company managers.

General Electric has set up a special Executive Management Group at the head office responsible for staffing and the development of the top 5.000 managers (1,5 per cent of all staff). The group reports directly to the CEO and is managed separately from the main human resources function. The head office of Unilever identifies high potential people through a star list. This highlights people with potential for promotion, warranting closer career attention from higher levels, and at Royal Dutch Shell, head office monitors the development plans of the top 500 potential staff. Often, CEOs sit through the evaluations of the top 100 staff, and are personally involved in their selection.



Designing corporate HQ

Designing the corporate HQ is of vital importance to the top management of multinationals. Few issues generate so much heat within multinationals as the relationship between corporate HQ and the rest of the multinational.

  • "In part, this is a natural result of all those mega-mergers. Where should the combined head office be? Whom should it contain? Should it be like the old HQ of company A, or company B, or neither? But there is also underlying uncertainty about what the head office is for. Throughout corporate history, there has been natural tension between the desire to centralise and to decentralise. And with the rise of networked technology, the number of functions that can be handled either way has risen sharply.
  • Not only is the purpose of head office unclear; so is its effectiveness. According to a report on head office design by The Conference Board, not a single company among those surveyed claimed to be able to measure systematically the value and effectiveness of what head office did. According to the study, some executives argued that the issue was too complex and political to be worthwhile. Commonsense might also suggest that if the company is doing well overall, head office is doing its job". (Financial Times March 2 1999)

Effective design of the corporate HQ will enable top management to execute more effectively the key tasks that the multinational corporation as a whole is faced with, and add value more effectively to its individual foreign and domestic subsidiaries.

  • "What conclusions can be drawn on how best to design an HQ? The Conference Boards report surveyed a total of 89 large companies in the US, Europe and Asia. It also reviewed the management literature on the topic. Some of the findings are unremarkable: others are a surprise.
  • First, 85 per cent of the companies surveyed had reorganized their head offices at least once in the 1990s. The main reason given was the need for greater speed, presumably as a result of increased competition. One result seemed to be a degree of complacency. Companies were asked how good their head office was at adding value, compared to the competition. For instance, how good was it at providing leadership? Above average, according to 87 per cent of the sample. And this was from a group of companies that had no objective means of assessing head office performance. Well-managed companies, it appears, displayed certain common characteristics. First, the head office was small: 2 per cent or less of total group headcount. Perhaps surprisingly, North American companies were more likely to have big head offices, compared with European ones.
  • Second, all well-managed companies had reorganized their HQs significantly in the 1990s. Certain functions had been strengthened: business development, procurement, and the exchange of knowledge and best practice. And the less well-managed companies? Again, they tended to have reorganized their head offices. But they were more likely to have done so only on the arrival of a new chief executive. Their main motive was negative: to make the corporate culture less bureaucratic and inflexible. The report does not present an ideal model to which all head offices should conform. As the report puts it, headquarters design is entering a new period; and one of its main characteristics will need to be the capacity to change as fast as the outside world does".(Financial Times March 2 1999 )

Many structural models for the corporate HQ can be effective. Important differences in design exist among high-performing multinationals along many key organization elements, e.g.:

  • The degree to which performance management responsibilities are centralized to the corporate headquarter or shared with geographic or sector/group CEOs.
  • The role of the group/sector executive level and need for group/sector staff.
  • Organizational approaches for overseeing and adding value to foreign and domestic subsidiary or business unit strategy development (e.g., a few use internal boards, some rely on groups/sectors, and many have a CEO-led process).
  • The degree to which key staff functions (e.g., legal, HR, planning) should be provided centrally.
  • Whether other services (e.g., IT/IS) should be shared and, if so, where they should be managed (i.e., at the corporate headquarter or group/sector level).

Corporate top managers of multinationals are frequently faced with deciding which tasks they have to perform at the corporate level, and how they should work with and relate to the subsidiaries. The chief executives of multinationals are frequently concerned with how their corporate HQ should operate. They are concerned with what roles and tasks should be performed by the corporate HQ.

Furthermore, CEOs are frequently concerned with how the corporate HQ should operate to effectively carry out these tasks, how top managers at the HQ should relate to foreign subsidiaries, how their personal styles should be adapted to the specific situation in each subsidiary, and how they can effectively and consistently add value to the operating domestic and foreign subsidiaries. And finally, many CEOs are raising questions about how the corporate HQ is staffed and structured.

It is useful to separate two important aspects of corporate HQ design.

  • First, the key tasks for the corporate HQ have to be clarified or developed in light of specific challenges facing the corporation. It is helpful to separate the corporate HQ tasks into tasks that are permanent and stable, i.e., supporting domestic and foreign subsidiaries to capitalize fully the economic potential in the subsidiaries, and the dynamic or ad-hoc tasks to change the overall corporate business portfolio.
  • Second, based on the prioritized corporate tasks, the organizational mechanisms have to be developed and structured to help the corporate HQ effectively execute these tasks.

A multinational corporation can approach these issues from different angles. Some multinational corporations are primarily concerned with what the key tasks for the corporate HQ ought to be; some with how the corporate HQ performs one or several of the corporate HQ functions.

Regardless of the corporations entry point however, one need to think of the resolution in an integrated way, where tasks and mechanisms are consistently determined. Three basic structural models exist:

  • Tight, integrated management of foreign and domestic businesses where most skills can be shared across similar or identical business systems.
  • Management of separate businesses, sharing skills, and exploiting synergies where possible. A company combines tight control of key risk factors, strategy, and investments with relative operating flexibility for domestic and foreign subsidiaries.
  • Portfolio-oriented management of independent domestic and foreign subsidiaries with few or no shared skills or services.

Choosing the appropriate design for a corporate head office - and the definition of its role - should flow from a review of at least four broad variables:

  • The value potential and performance management challenges of the core businesses, e.g., the subsidiary value creation profile and degree to which the corporate portfolio has to be rejuvenated (through acquisitions, alliances or divestments).
  • The relationship and interdependency of foreign and domestic business units, e.g., the similarity of core skills/competencies - and an assessment of whether they are superior or merely adequate - across domestic and foreign subsidiaries and whether key services/functions should be shared for competitive advantage.
  • The capacity of the top management to provide performance management oversight.
  • The capabilities and experience level of key subsidiary management teams.

As important as selecting the appropriate structural model is developing internally consistent line and staff management roles. In addition, key management systems and forums must also be designed to be consistent with structure and roles. Indeed, how key management systems and forums are managed seems ultimately to determine the actual role and effectiveness of the corporate head office. Critical factors include:

  • Constructive and supportive sets of attitudes about the interaction between the domestic and foreign subsidiaries and the corporate head office.
  • The level of leader group knowledge about and experience with each of the corporations foreign and domestic businesses.
  • Subsidiary manager knowledge about the strategic direction and priorities of the multinational (i.e. there has to be a clear corporate strategy and vision).
  • The ability of the corporate HQ to differentiate the way it interacts with individual foreign and domestic subsidiaries, e.g., in terms of time spent reviewing strategies and operations (i.e., situational leadership).

Last but sure not least: the HQ of multinationals always has to strike a balance on a business-by-business basis between maximizing the benefits of synergy, scale and skill and minimizing complexity costs. The problem is that most head offices minimize the benefits of synergy, scale and skills and maximize complexity costs. Again, preparation is the name of the game. In other words: designing an effective and efficient corporate HQ is (adapted from Rosabeth Moss Kanter) like "teaching an elephant to dance".

Prof. dr. P.K. Jagersma is an entrepreneur, author and Professor of International Business at Nyenrode University. He is also director of the Center for International Business at Nyenrode University.


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