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What the New Asia Means for Multinationals

 
6/28/2004
Asia is remaking itself, and that means important strategic rethinking for Western multinationals doing business there. An excerpt from the new Harvard Business School Press book, Winning in Asia.

Many of the Western multinationals operating in Asia have a head start when it comes to achieving the potential benefits of cross-border integration. They already have an international reach that spans the region through established subsidiaries and experience of how to adapt to local conditions. But arguably the presence many multinationals have established in Asia is more suited to prospering in yesterday's competitive environment rather than being well attuned to winning in the next round—especially against the new breed of Asian multinationals that seems likely to evolve as Asian companies rise to the challenge of inter-nationalization.

When compared with the demands of Asia's changing competitive environment, the limitations of Western multinationals' existing bases in Asia typically lie in three areas: the "long, thin arm" problem, lack of cross-border integration within Asia, and the belief that it is sufficient to "think global and act local." If Western multinationals are to avoid losing ground to locals in the next round of Asian competition, these limitations will need to be addressed.

Overcoming the "long, thin arm" problem
Because many Western multinationals originally came to Asia in search of lower-cost locations for their manufacturing or service operations, their units in Asia are primarily manufacturing plants or operations centers. Others came in search of growth markets, so that sales and service units formed the core of their Asian operations. In both cases, the Asian subsidiary began as an extension of a global function—such as manufacturing or sales—within the multinational.

Such a subsidiary necessarily had strong links with the multinational's global headquarters. However, the links were essentially one-way: from the parent to the subsidiary in Asia. The role of the Asian units was to execute functions directed from headquarters or to apply a business formula already perfected back at home base. Just as the fingers on a hand execute commands from the brain, Asian subsidiaries acted like the end of a long arm of the corporate center. The arm was also "thin" in the sense that the breadth and complexity of knowledge that flowed along it was constrained.

Winning in Asia
Winning in Asia

This evolution has resulted in Asian units that have only limited influence on the strategies, design, or development of their own functions and activities and, equally important, only limited interactions with sister subsidiaries, outside the headquarters, within the multinational organization. Clearly there are exceptions: Hewlett-Packard (HP), for example, has given one of its Singapore units the global responsibility for its ink-jet printer line, including design, management of the global supply chain, and international marketing. This unit's links into the HP global network have had to become extensive and capable of facilitating constant, two-way flows of complex knowledge. But this situation is rare; the Asians units of Western multinationals seldom have a charter that allows them to develop a breadth and depth of activities and capabilities equivalent to major subsidiaries elsewhere in the world (the number of multinationals with centers of excellence in Asia for major product lines, for example, is still few).

Just as the fingers on a hand execute commands from the brain, Asian subsidiaries acted like the end of a long arm of the corporate center.

Unless this situation changes dramatically, the local subsidiaries of multinationals are likely to see today's competitive advantage eroded as more and more Asian companies broaden the range of capabilities in which they are world-class to include innovation, brand building, and supply chain management.

More cross-border integration
The second deficiency of many Western multinationals in Asia compared with the demands of the next round of competition is that they have designed their operations around national subsidiaries that have only limited integration with their Asian sister units. This was a sensible strategy in an Asia divided into national fiefdoms, separated by barriers to the flow of trade, investment, and communication. But as the walls around these national fiefdoms steadily collapse, Western multinationals will need to reassess the competitiveness of their existing structures in the context of a much more economically integrated Asia. The achievement of cross-border synergies will move from being the icing on the cake to becoming core to survival.

Paradoxically, therefore, Western multinationals also face their own form of the internationalization imperative in Asia's next round of competition. Unlike many of their Asian cousins, they generally don't need to extend their reach across Asia by building new subsidiaries. But they do need to much better integrate the subsidiaries they have. Arguably, reforming an existing organizational structure is sometimes even more of a challenge than building one from scratch; old dogs, after all, don't always easily learn new tricks.

Take the case of the Anglo-Dutch multinational, Unilever. Seeing the relentless growth of cross-border competition and Asian competitors starting to leap over national boundaries by opening units in new countries, Unilever decided to reexamine the scope for improving its cost base and leveraging best practices by better integrating its many subsidiaries across Asia. Despite its long history and significant market shares in Asia, Unilever identified a long list of unexploited synergies to be gained from better integrating and coordinating its subsidiaries operating in the same business "across the water" within Asia. These included opportunities for joint purchasing, dedicating plants in some countries as the regional supply base for particular product lines, shared product development, common branding, and shared marketing campaigns. To achieve these synergies without undermining its continued ability to respond to local market conditions, however, Unilever had to move incrementally toward integration over a period of years. This involved setting up a set of regional coordination groups in which power was carefully balanced among the chairpersons, the units responsible for supplying services (such as product development) to their sister units, and representatives of the units acting as internal customers. These groups were gradually given more responsibilities and resources as they gained experience and the country managers became more comfortable operating with more cross-border integration and dependence on the pan-Asian network for the performance of key activities within their business.21

What Unilever found, therefore, was that while the benefits of greater cross-border integration in terms of lower costs and improved margins were both significant and relatively easy to identify, actually achieving them in practice required a complex multistage process through which existing structures and mind-sets could be reshaped. This is despite the fact that Unilever, like many Western multinationals, already had decades of experience in adapting its global business formula to local Asian markets, and its managers were expert at "thinking global and acting local." The harsh reality is that in the next round of competition, this set of skills, alone, is unlikely to be sufficient to succeed.

Beyond thinking global, acting local
In the Asian competitive environment of tomorrow, it won't be enough for the managers of Western multinationals to be able to think global, act local. The reason is that being expert at taking a global business formula and adapting it to a local market largely ignores the opportunity to take learning from a local Asian market and apply it to reshaping the company's strategy across Asia (or for that matter, the world).

Asia will need to learn to go beyond adapting a global business formula locally and begin to think local and act global as well.

Thinking global, acting local often means that best practices and innovations generated in the course of adapting a global business formula to a local market remain imprisoned locally: They don't get propagated across Asia and the world. While this remains the case, Western multinationals in Asia won't be able to fully exploit the learning they are accumulating inside their Asian operations. The long-term consequence of this failure will be an inability to keep pace with their Asian cousins as they become increasingly capable of taking what they learn in one Asian country and deploying that learning elsewhere. In short, while Asia remains a recipient and implementer of best practice within Western multinationals rather than a strong contributor to global improvement and innovation, their competitive advantage will erode relative to Asian rivals capable of milking what they learn in Asia for all it is worth.

To prevent this erosion in their competitive advantage, managers of Western multinationals in Asia will need to learn to go beyond adapting a global business formula locally and begin to think local and act global as well.22 In other words, they will have to become much better at identifying how the uniquely Asian aspects of their local operations can contribute to their company's global strength. Asia will have to move from being an implementer to become a contributor and, in some cases, a strategic leader within Western multinationals if they are to win in the next round.23

Excerpted with the permission of Harvard Business School Press from Winning in Asia: Strategies for Competing in the New Millennium by Peter J. Williamson. Harvard Business School Press, 2004. All right reserved.

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Peter J. Williamson is the Professor of Asian Business and International Management at INSEAD, and coauthor of From Global to Metanational (HBS Press, 2001).

Footnotes

21. P. J. Williamson, "Lever Brothers Thailand (C)," Case no. 9-396-088 (Boston: Harvard Business School, 1995).

22. This change in thinking is more fully explored in Doz, Santos, and Williamson, From Global to Metanational.

23. These terms describing the role of different subsidiaries were introduced by Bartlett and Ghoshal, Managing Across Borders.