Redefining Future Operations Strategies in China

Leadership StrategiesDigital TransformationOperations and Supply Chain OfficersTeam Effectiveness
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July 10, 2023
6 min read
Leadership StrategiesDigital TransformationOperations and Supply Chain OfficersTeam Effectiveness
Executive Summary
For multinational corporations reviewing their China approach, understanding the different operating models and talent strategies is key.
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In a world reshaped by the Covid-19 pandemic, inflationary pressures, and continuing geopolitical tensions, multinational companies (MNCs) are reexamining how they build their businesses and talent pipelines.

These challenges are especially pronounced in China, as global geopolitical tensions increase, local competition remains fierce, and increasing concerns over data privacy all loom large.

Despite these challenges, the payoff for reevaluating organizational operations in China remains high. China accounts for 25-40% of the global market in sectors including cars, luxury consumer goods, and industrial equipment—it’s difficult for companies in these industries to miss out on the China market, not to mention those that depend on China supply chains and R&D facilities.1  As MNCs reevaluate and reconfigure their strategies, the operating approach they choose has massive implications for their talent strategy and overall success.

To help organizations determine the model best suited to their business, Russell Reynolds Associates’ analyzed 10 companies and conducted in-depth interviews with over 40 senior MNC executives who have already begun successfully redefining their operations in China across six dimensions.

Operating Model Dimensions

We found that the MNCs successfully bringing their products and solutions to China are employing one of the following models:

  • Commercial-led operating model: balancing global products and scalability with local China strategies, with most decision rights sitting within a global function.
  • Full-function operating model: adapting global products for local use, empowering local leaders to make decisions that best fit the local population.

 

Figure 1: Operational approach determines the global and local balance across dimensions

Operating Model Dimensions

Source: Russell Reynolds Associates’ 2023 China Operations Benchmarking Study, n = 40  

 

Commercial-led operating model: Balancing global scale with local China strategy

MNCs that employ a commercial-led model in China remain committed to global products and solutions. That said, it’s still imperative for leaders to customize their go-to-market approaches to the local operating environment. Companies that choose this approach are likely to have a competitive advantage in product and solutions innovation, with supply chain and manufacturing efforts still laddering up to a global function that can be adapted to local requirements, maximizing cost efficiencies. However, this does increase the disruption potential due to geopolitical turmoil.

Commercial-led models also present a technological advantage from a digitalization perspective, as a company-wide digital platform maximizes cost and efficiency. However, digital products may be constrained by local data protection laws and may rely on local partners to ensure market access.

From a talent strategy perspective, commercial operating models have strong alignment to global talent management frameworks, with minor adaptations to the local market. This approach typically involves a business unit-centric management team with independent go-to-market strategies. This also requires knowledgeable and supportive leadership at the global business unit level. Within China, leaders’ decision rights will be likely limited to commercial operations, so identifying a strong executor is crucial.

 

Case Study

A global technology company strengthens its foothold in China through new business segments and local technology partners via a commercial-led operating model.

After maintaining a presence in China for over a century, this organization successfully transitioned to a commercial-led operating model. China became its second largest single country market, accounting for 16% of the company’s global revenue. There is no consolidated China P&L, and China’s business unit leaders report directly to the global business unit lead. The organization maintains a strong R&D and sustainability focus, with a goal of staying neutral during geopolitical conflict.

“Our core technologies are developed in global R&D center. China R&D is globally integrated and mostly focused on application; however, it also takes the lead on certain products that are dominant in China’s market.” –Executive from an organization with a commercial-led operating model

Achievements:

  • The organization’s vertical structure allows for consolidated digital expertise and cloud-based solutions, increasing efficiency and sustainability.
  • Global orientation allows for partnerships with both global and local technology leaders.

“We have a consolidated technology approach to combine digital solutions and data analytics offering across all business units. We also partner with China’s leading local technology companies to localize offerings so that we are compliant with China’s legal requirements on data security.” –Executive from an organization with a commercial-led operating model

Risks:

  • China’s slowing construction market has negatively impacted the organization’s growth targets.
  • Due to security concerns, local applications (e.g., WeChat) are not viable for business purposes, proposing challenges regarding connecting with local customers.

 

Full-function operating model: local leaders are empowered to make decisions at the regional and global levels

With full-function operating models, China is not only an important marketplace, but also a source of advantage in global manufacturing, innovation, and talent. China’s innovation strategy adapts global products for local use, generating both China-specific IP and global IP. Companies that choose this approach will leverage scale and connectivity across business units in China, while also coordinating with global functions to ensure continuous support and investment. However, this can erode the business unit’s ability to react to market changes with agility. Digitalization capabilities are more localized, but require substantial upfront investment with uncertain returns. Overall, organizations employing full-function operating model are likely to have strong local competition in China or operate in a highly regulated environment that constrains their market access.

Full-function operating models require an empowered and strategic regional leadership team. With this approach, the China leadership team has full P&L oversight with local decision rights across commercial and non-commercial functions including business development, R&D, and manufacturing. This allows local leaders to source and execute on M&A deals that benefit local operations. Talent in China has clear alignment to global talent management frameworks, particularly at the senior leadership level, with the autonomy to adapt locally.

 

Case Study

A multinational life sciences conglomerate implements a full-function operating model, balancing a growth-oriented culture with strategic investments.

In 2022, the organization designated an official China P&L owner. All operating revenues and operating expenses in China now roll up to the regional president, instead of vertically via the global business units. Life sciences is a highly-regulated marketplace; as such, clout and influence over polices is important. It was also important to the organization to raising competency levels and technology standards across the board in order to compete effectively in the local marketplace.

Achievements:

  • Implementing the full-function model itself was an achievement, as it was the result of successful internal advocacy and sustained commitment to organizational redesign.
  • The initial proof of concept has been successful, with functioning R&D and manufacturing sites and China-led innovation partnerships exposing the company to new technology and fast revenue growth.

“There is a trusted relationship between the global and China leadership team. In China, we have the autonomy to make key decisions that will impact our business both in the short and long-term. As such, we need business leaders that can think strategically and take an enterprise-wide approach beyond meeting immediate short-term targets.” –Executive from an organization with a full-function operating model

Risks:

  • Leaders must continually demonstrate the advantages of localized offerings both in manufacturing and R&D, while balancing a complex group of global stakeholders.

“Now that we have full support from the global leadership team, we have to continuously demonstrate progress and success in the operating model we have chosen for China. The journey will not be easy, but we have a clearly defined end in mind.” –Executive from an organization with a full-function operating model

 

Identifying and developing multinational corporate talent in China

China has the second largest economy in the world, making it an impossible region to ignore. As multinational corporations consider the right approach to tackle the ever-changing business landscape, implementing the right operating model and associated talent strategy has never been more important.

Evaluate the market dynamics

Before choosing an operational approach, thoughtfully evaluate the segments where your company is considering expansion. Remember, an operating model is not a cookie-cutter solution; be prepared to adapt as you chart this new course.

Identify the right talent for your operational approach

First, assess your internal talent and organizational structure. Review the strengths and potential gaps of said structure, governance, and existing talent pool. Then, design an operating model that aligns with the organizational structures that already exist before looking for the appropriate top external talent.

Be realistic about your current leaders and the model they’re best equipped to execute

While your current talent should not define your strategy, it’s also important to take into account the leaders that are already in-house and assess their capabilities—and potential—against your business goals for the future. Don’t shy away from investing in talent development programs for high potential leaders that can help implement and execute the best operating model for your organization.

Increase global collaboration

Regardless of the chosen approach, ensure that there are numerous touchpoints and opportunities for leaders in China with those across the globe. Empower leaders in China to make decisions, particularly ones that relate to the regions in which they live. Regardless of their core competencies, leaders grappling with uncertain circumstances must be collaborative and bring an enterprise mindset to the table.

Build and maintain trust with local leaders

Once you’ve chosen your strategic approach, don’t waver. The chosen pathways will inevitably have ups and down, but by maintaining commitment to leaders in China, MNCs redefining their presence in the region increase their chances for longterm success.

 

Authors

  • Chen Chen is a member of Russell Reynolds Associates’ Consumer industry. He is based in Shanghai.
  • Grace Lu leads Russell Reynolds Associates’ Healthcare industry in Greater China. She is based in Beijing.
  • Jeremy Shi is a member of Russell Reynolds Associates’ Industry & Natural Resources industry. He is based in Shanghai.