Last month, I was invited by the Economist Intelligence Unit to present in Hong Kong on business hub strategies. Waltraut Ritter a managing partner at Knowledge Enterprises also presented at this conference. One of the statements she made "hubs remind me of delays at airports....hubs are great for the airline but terrible for the customer" was extremely impactful, especially living in Singapore where "hub" is an overly used word. Singapore is positioning itself to be the bio-tech hub, education hub, logistics hub, Asian aerospace hub, etc..
I spoke more from an organizational point of view. The talk generated quite a bit of dialog. In this article I will summarize some of my talk and the feedback that it generated.
One of the most important aspects is to understand what is driving the Hub or decentralization strategy? I referred to some ideas I had talked about in an earlier blog entry “Agenda coloured glasses”.
Each functional unit such as finance, R&D, sales, marketing, etc has their own agenda for wanting to drive a decision to centralize or decentralize. The agenda could be based on anything from tax rebates for the organization, to a leader wanting complete control over all aspects of an organization. However, from an organizational point of view it is imperative to align the drivers of the different agenda, with the overall organizational goal.
A key take away from this view of understanding the agenda was that the “players should not be the score keeper”. This idea resonated with almost all the business leaders in the room. It was agreed that often decisions are made or forced through, promising great returns for the business. But as time passes, the metrics, expectations or goals are changed, thereby rendering the changes either unecessary in the best case or destructive in the worst case.
The discussion then moved to a centralized company structure. The concept of centralization could broadly be categorized in terms of hubs and decision or control centers.
From a centralized hub point of view there was broad agreement that having a hub made sense for
▪ Low margin , often high volume products
▪ Undifferentiated products
▪ Low value add to customer interfacing roles
▪ Franchise model requiring consistency
From a centralized control perspective there was agreement that it often lead to
▪ Policed innovation
▪ Limited growth of leadership except at the centre
▪ Organizational distance from the customer and finally
▪ Increased risk of “critical exposure” because the controls for a organization in very few hands can lead to bad decisions that impact the whole organization (like at Enron)
From a decentralized point of view there was broad agreement that it made sense for
▪ Higher margin products
▪ Value added customer interfacing roles,
▪ Differentiated products/systems/business models
From a decentralized control perspective it leads to
▪ Increased customer centric innovation
▪ Closer understanding of customer needs
▪ Decreased risk of “critical exposure” since the organization is “atomized” into a multitude of P&Ls hence a bad decision could capsize a atom but have small impact on the whole organization.
I also presented a couple of case studies where it was clear that with a decentralized business approach, companies had tremendous improvement in performance like at Sony TV division (Sony's Newest Display Is a Culture Shift ) where the America business Unit started showing tremendous results when the product definition for TVs in America was delegated to Sony’s America team instead of the earlier centralized approach of all decisions being made in Japan.
Finally a highly simplified conclusion on the impact of these complex issues was as follows:
Impact of Centralization
- Increase control of operations (at least a perception of increased control)
-Increase efficiency of certain functions in an organization
-Less investments on sharing best practices
-Open loop decision making
**Impact of decision may not be seen immediately
**Build bureaucracy – often forgetting their job is to service the business
**Skill of negotiating the company labyrinth gets rewarded
Impact of Atomizing
- High customer contact and market understanding
-The cell/atom can be replaced with minimum pain!
-Higher investment in sharing best practices
-Closed loop decision making and control
**Immediate effect, high accountability
**Cannot hide behind the bureaucracy
**Skills of understanding the market and customer expectation gets rewarded
One of the things that this session highlighted to me is that each person has a different understanding of centralization or decentralization. The biggest misconception is that centralization equals location when in fact the essence of centralization or decentralization should be defined based on where the final decision is made, and not necessarily where resources are located.
3 comments:
Excellent food for thought Chandran. As you know I have been in the throws of this discussion and in the thick of it for the last 3 years in Eastern Europe as we went after an agenda-driven centrlization model for regional operations, then pulled back to a hybrid structure and offcourse all these decisions have had their implications. My honest opinion is that there is no perfect model or 'pure' model. Every case is different. I also believe that centralization around the true leadership (not seniority) is not necessarily a bad thing (in terms of leveraging leadership) but its a tough argument to make because it can lead to getting lazy on leadership development and then centralizing because you have only limited leadership developed. I will also try to summarize my opinion in an overly simplistic way:- Organizational structure should best match the business goals of the business unit and overall business and leverage the current leadership in the best way. The more complex an organizational structure (and complexities can be legal, operational or logistical) the harder it is to manage and the more 'surprises' you get on things you didn't expect.
yiannis
I agree that there is no perfect model , or even go as far as to say that many sensible models can be effective. I work for Citibank and with the recent debacle in the financial sector, we at Citi are going back to a model with empowered general managers, while keeping our market strategy largely unchanged. BTW I have heard chandran speak and he is very persuasive even when he takes the extreme view of atomizing business units.
Interesting current topic. I would agree with Yiannis when he says “…that there is no perfect model or 'pure' model. Every case is different. I also believe that centralization around the true leadership (not seniority) is not necessarily a bad thing …”.
Yes, Chandran is a very intelligent and persuasive speaker – though one doesn’t necessarily have to agree with him every time!
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