Rethinking the Rules of Organization Design in Emerging Markets
By: Reed Deshler
The typical organizational design process is like drawing a blueprint, building a house, and moving in. This is the familiar strategy-structure-staffing sequence that has come to dominate the practice. Ongoing organization effectiveness work in emerging markets is revealing that this tried and true pattern for effective organization design still applies, but there are some unique considerations that need to be grappled during the push forward into a new frontier. We will highlight four key issues—speed, entry and evolution, leadership development, and unique design needs—that can change the rules when doing organization design in high-potential markets.
For our purposes, an emerging market is any country, region, business adjacency, or product/service area where an established company can expand its current offering. When thinking of emerging markets, it is common to think of certain countries or regions (e.g., BRIC countries or the Middle East). But emerging markets can also be new product categories or business adjacencies such as the nascent tablet computer market where Apple’s iPad leads the way. In short, an emerging market is any frontier for growing your business.
One of the characteristics of emerging markets is a sense that time is of the essence because of explosive growth and the accompanying media hype. It’s a land grab for those who arrive first and who thrust their stakes in the ground. But many businesses entering an emerging market can expect to lose money for a period of time. Quick profits are unlikely, so perseverance is the watchword. Organizations should understand the risks of investing in emerging markets instead of just focusing on potential returns.
Despite the need to move quickly to stake your claim, the race often goes to the tortoise, not the hare. This is true for a couple of reasons. First, those at the forefront of the push into the hinterland also face front line exposure to the setbacks, impediments, and reversals experienced by all pioneers. Holding back a bit provides an opportunity to learn from the mistakes of others.
Another reason to reign in your speed of entry is that strategy is key in emerging markets. Finding the right strategy may take some time.
Some of the questions that an emerging market strategy should answer are:
- What production/service delivery capabilities do you intend to build in market (e.g., production sites, distribution systems, service, etc.)?
- Do you intend to operate in that market or just distribute/sell product in that market?
- How do the customer demographics vary from other markets?
- What unique capabilities will you need to effectively compete?
- What adaptations will you make to current products/services to fit specific market preferences/needs?
- How will unique regulatory or compliance requirements affect your systems and processes?
The mandate for those working to design the organization to win in an emerging market is to take the time needed clarify strategy and architect a sound design and only then move quickly to implement. If you expect growth rates and returns on investment to exceed the country, region, or market’s regular growth rate—as enterprises such as GE and 3M do—a sound strategy and design are essential to moving fast.
Entry and Evolution
Being thoughtful about the strategy and design for pushing forward into emerging markets does not exempt an organization from continued innovation and evolution as it explores and develops those markets. If things go well, you will likely be changing your organization design more often than you would in an established market. Your organization will evolve, and the good news is that you can anticipate that evolution by following a road map chartered by other organizations that have moved through this territory before.
Here is where an important principle of organization design comes into play: not all work is equal strategically. Work that directly drives an organization’s strategy—work that makes the organizational strategy happen–is called strategic work. Work that is necessary, but not strategic, is referred to as essential work. Both types of work are important to the success of any organization, but strategic work done well creates differentiation in the marketplace, thereby winning in the marketplace. Work that is strategic in one organization may be essential in another. For example, at ADP or Ceridian, payroll processing is the strategic work of their businesses, but for most other companies, payroll is only an essential activity because it doesn’t help the organization differentiate itself in the marketplace.
The typical road map for entering and then evolving in an emerging market is:
- Build or leverage a regional organization to deliver all work activities (strategic and essential). For example, if you want to enter Malaysia, rather than building a dedicated Malaysian organization or set of capabilities, use a Southeast Asian regional structure to support Malaysia and other surrounding countries. Similarly, a company like RIM might leverage its existing structure to support the launch of its tablet computer offering, the Playbook.
- As the market grows, shift regional resources to the country to establish more focused and robust operations. You may move both strategic and essential work activities. As the Malaysian business takes off, give the country head more and more authority and resources to build the capabilities needed in country to grow the business. Likewise, if RIM’s tablet business gains traction, eventually, unique and dedicated resources and structures will be created to support that business segment separately and distinctly from its other business structures and systems.
- As the market begins to peak and move toward maturity, move back toward regionalization or even globalization for essential work activities. This will help control costs, minimize redundancy and duplication, and aid in the establishment of standards for back office work.
That said, some organizations might skip part of step two above — retaining essential work at the regional level by designing global or regional shared service organizations and moving only strategic work into the country. This move enables cost-effective growth in all markets and allows emerging market resources to focus on strategic work activities without having to worry about building the organizations and processes to perform essential work.
This road map describes a typical scenario, but the reality of course is that each situation and market is unique. What is important is that the broader enterprise as well as the country or new market leader recognizes and anticipates the unique organization design and other human capital support needs of growing, emerging markets. Sometimes an emerging market, though still only a fraction of a company’s revenue or profits, can require as much organization design and HR support as larger, more established countries or markets.
Another consideration in how an organization approaches emerging market growth is the availability, positioning, and capability of management resources. According to Jim Slavik, former COO of GE Money in the Czech Republic, “You have got to put in leaders who are both strong in local markets and corporate relationships.” He adds, “If Corporate tries to micro-manage from a distance, it will kill the creativity needed to quickly build the business. Give the emerging market leaders autonomy to make decisions.” Jim’s advice sounds simple enough, but if an organization doesn’t have leaders it can confidently entrust to lead in emerging markets, the best strategy or design for an emerging market risks falling flat.
It is common and perhaps appropriate to use expatriates at first to provide the leadership experience and depth needed to lead in emerging markets. But these expatriates should be supplemented with local resources. Local resources can help with the nuances of the country or market and may be able to leverage key relationships to help grow the business. They need to be developed so that the in-market bench is ready when the market needs to expand and stabilize. Expatriate leaders should be held accountable not only to launch and grow the business but also to select and develop the next generation of local talent.
Many companies hire both local and expatriate leadership, only to find conflicts in the decision making process. Organizations need to structure their operations so that customer-facing employees (e.g., sales, marketing, etc.) are staffed with local talent, but balanced by back-office staffs that have relationships and experience in working with corporate leaders, processes, and systems.
In the long term, companies can use emerging markets as a rotational space to develop talent within the organization. Provide clear on and off ramps for leaders to enter emerging business roles and then rotate back into the main business. If high potential leaders feel like they are taking a career risk to support an emerging business market opportunity, there will be a higher likelihood of turnover or worry about career derailment.
Corporate or established business units and emerging markets often experience friction due to the uniqueness of each business’ situation. Corporate organizations struggle to appreciate the need for flexibility in emerging markets to make decisions fast and to adjust corporate policies and rules to local needs. In turn, emerging market leaders can operate like entrepreneurs—potentially ignoring corporate standards or policies. They don’t always do a good job keeping corporate informed of the business or in leveraging systems and processes from headquarters. Therefore, the most effective emerging market leaders are those who have both corporate and emerging market experience. These leaders appreciate both the corporate need for structure, consistency, and information, while recognizing the business need in emerging markets for flexibility and speed.
Unique Design Needs
The final consideration for emerging markets is their unique organization design needs. At a corporate level, how an organization structures to handle expanding market growth or emerging markets varies. Some companies embed emerging market responsibilities into existing business units or regions. Others create separate, standalone organizations to oversee emerging markets. At GE, emerging markets are part of the businesses; each business is responsible for determining the strategy and organization design for emerging markets and then overseeing implementation and execution. Recently, GE is in the process of trying a new approach in India by setting up dedicated country leadership for all business done in that country. The key point here is that each model for organizing and leading emerging markets comes with benefits and risks, and those should be carefully considered for your unique business and markets – not just copied from how others are structuring.
In some markets, like Russia, it is common for nearly all companies to have Security departments with former KGB/FSB agents working in them. These departments handle security-related issues for the company—issues that may not stand out in other countries (e.g., crime, employee and facility safety, investigations, etc.). Security departments perform essential work activities in some emerging markets that are not needed elsewhere. Cyber security is likewise becoming a critical need for companies who aren’t necessarily expanding their geographic footprint but who are creating businesses and business models that rely on information and access on-line.
Job title can be critical. In many Asian countries like China, for instance, it is imperative that companies designate a country president or general manager. This person is essentially the company’s representative in country; this role is typically filled by a leader native to the country and is given a title that will help those outside the organization understand the significant role the person plays. Even if title isn’t considered important in your company or country, it may well be crucial in other places. The design of the organization may need to take into account this consideration. When determining job design, positions, and compensation.
Prepare to be financially flexible in emerging markets. Some markets won’t produce positive returns for several years. Recognize how internal accounting rules and performance expectations need to be adjusted for emerging business opportunities. Cost allocations that work in Minnesota may not work in Melbourne. Short-term, quarter-to-quarter thinking and tactics can be detrimental to a start-up business that requires more investment than established operations. Just as ill-conceived financial expectations can be detrimental, corporate policies and systems required by HR, IT, Supply Chain, and others can put constraints on emerging markets that limit the local ability to build the business at the speed needed. Leaders should openly discuss these tension points and establish a set of criteria for determining when an emerging market should play by the rules of everyone else and when the rules don’t apply.
We believe that the potential for winning in emerging markets is determined by more than a good strategy or product or channel—it is about speed, rapid evolution, talent and resources, and organization design linked to strategy. The foundation of strategy, structure, and staffing for effective organization design hasn’t changed, but some additional challenges need to be anticipated in light of emerging market conditions.
I would like to thank the following individuals for their work and contributions on aspects of this article – Bridie Fanning, Jim Slavik, Ivan Svitek, and Alyson Von Feldt.