> Rethinking profitable growth: the productivity imperative for foreign multinationals in China
Rethinking profitable growth: the productivity imperative for foreign multinationals in China
Driving productivity to maximize efficiency
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Case study: LF Asia, a division of Li & Fung – Moving the productivity focus to the front office
Established in Guangzhou in 1906, Li & Fung is recognized as a world leader in consumer goods design, development, sourcing and distribution.
The company has built a reputation for process efficiency in the high-volume, low margin trading business. In this more mature market, raising productivity is not a one-off event. Li & Fung has had to raise its productivity ceiling year after year.
The company has made full use of the shared service center model, centralizing finance, human resources, and IT functions to reduce back office costs per unit of output.
For instance, LF Asia has many financial support services concentrated in Nanjing, where labor costs are relatively cheaper and the workforce is more stable than first tier cities like Beijing or Shanghai. LF Asia has also outsourced certain functions, such as logistics.
“For the next few years, technology is what we will focus on,” says Herman So, Executive Vice President of Finance at LF Asia, “because outsourcing and shared services has been a model which we’ve been using for many years.”
In terms of raising productivity, the center of gravity will move from back office to sales and marketing. The company has, for example, introduced tablet computers to the company’s sales force to increase their effectiveness and efficiency when away from the office.
Mr. So expects to do more business over the internet, both for its obvious cost advantages, and to access the vast online population in China.
In addition, LF Asia has started experimenting with selling account services to its existing customers – services such as importation support, billing, and invoicing.
By leveraging its existing organizational infrastructure, the company drives economies of scale through greater volume.
Case study: Cisco – Time to capitalize on IT
Cisco Systems is the world’s largest maker of networking equipment.
The industry is highly globalized, with significant research and development, software coding, and manufacturing in China.
Despite pressure in recent years from both low cost manufacturers and innovative startups, the company has sustained its position as the leading provider of enterprise network solutions.
Michael Foy, Finance Director of Cisco China says “Cisco is in the business of selling productivity tools, but we’re also a primary user of the same technology – often before it goes to market.”
As a global organization, Cisco has created ‘communities of practice’ across geographical and functional units to share resources more effectively. The company employs common productivity metrics globally, and tries to limit administrative complexity – for example by simplifying its legal entity structure.
TelePresence is a collaboration platform developed by Cisco to help geographically dispersed organizations overcome physical barriers and cut down on travelling costs.
When it was rolled out internally, Cisco reported savings in excess of USD100 million, including a saving of two hours per week per employee.
Mr. Foy also sees great potential in cloud computing to raise utilization rates while slashing IT costs by 20 percent or more.
These technologies have applications for all organizations which share sophisticated information and have been implemented successfully by a number of Chinese universities and hospitals.
Case study: Ford – Raising productivity on many fronts
The Ford Motor Company has clearly signaled its intentions with recent announcements of nine new plants in Asia Pacific and Africa.
Six of the plants will be in China, where current production volume is estimated to double by 2015.
John Lawler, CFO of Ford Asia Pacific Africa stresses the importance of managing cost structures relative to growth plans: “You have to look at every cost element, pay attention to every line on the income statement.”
Ford’s plants in China aim for global best practice. The company continues to invest in training and development to accelerate labor productivity in its relatively young workforce.
Within each business unit and region, Ford assesses performance against its peers around the world.
Globally consolidated functions work across geographies in a matrix structure. Mr. Lawler says, “You need to balance the global capacity to share assets, ideas, and technologies, with an in-depth knowledge of local business and employee practices.”
Within the Chinese market, Ford is growing market share to fully leverage economies of scale. The company intends to become a full-line automotive manufacturer in China, with a full portfolio of products to satisfy all customers. Its ‘15 by 15’ plan aims to have 15 automotive models in China by 2015.
Our survey results point to the importance of human resources and governance issues when it comes to achieving long-term improvements in organizational productivity.
We found broad-based concerns among foreign multinationals about their operating models (Figure 8). Almost two-thirds of respondents agreed that their company's operating modelimpaired their competitiveness.
The majority of respondents also said that their operating model did not allow them to keep pace with rapid growth, and that their companies needed to overhaul their organizational structure in China to tap new opportunities.
In the current environment, productivity is about more than reducing costs. It should be understood in its widest sense: improving processes and organization within a business, targeting customers and delivering products and services more effectively, and deploying resources to the most profitable opportunities.
All of this requires a competitive operating model tailored to the unique features of the domestic environment in China.
More productivity gains will come from the front office
When respondents were invited to cite the two functional areas that offered the most scope for productivity improvements in their organizations (Figure 9), the two top choices were operations (45 percent) and marketing and sales (37 percent).
These two areas are also typically the biggest in terms of cost, where productivity initiatives usually have the biggest impact.
The importance of marketing and sales is telling, showing that companies are increasingly focused on improving sales effectiveness in China to become more productive. We expect that had we asked this same question a few years ago, the result would have been much lower.
Functions that figured less prominently included research and development (23 percent), finance (21 percent), and IT (16 percent).
Many foreign multinationals have already achieved gains from back office initiatives.
It seems that they are now moving the focus of their performance improvement programs to the front office.
Given the potential, a surprisingly low number of foreign multinationals have adopted IT initiatives to drive productivity (Figure 10).
More needs to be done to capitalize on IT investments already made in core business systems such as enterprise resource planning (ERP). Our experience has been that companies often make one-off investments in IT without making other changes in their business to capitalize on those investments.
For instance, some companies have spent millions of dollars on global implementation of ERP tools that simply doesn’t match the unique operating practices and local requirements of the Chinese market, or are not fully utilized.
The time appears right for companies to take advantage of new technology enablers to improve productivity in a much more strategic way.
Mobile internet and e-commerce are already changing the retail industry. With local government support and serious industry investment, cloud computing in China is also moving to the adoption stage.
Data analytics offers the promise of harnessing data to reduce costs, improve performance, and manage risk.
Every organization faces barriers to improving productivity, but not every manager takes the time to systematically assess what may inhibit the success of productivity programs in their organization.
Our survey results point to the importance of human resources and governance issues when it comes to achieving long-term improvements in organizational productivity.
When asked what barriers they faced to improving productivity, almost a third of our respondents highlighted a shortage of labor or management talent (Figure 11).
Other noted obstacles were an inappropriate business model (29 percent), unclear accountability (25 percent), lack of communication between management and the workforce (25 percent), and overly centralized control by home country headquarters (23 percent).
How high-performing companies are boosting productivity
We analyzed what high performing companies were doing to raise productivity.
We define this group as companies that, according to respondents, achieved EBITDA margin of over 10 percent in the past financial year.
We asked our respondents to choose from a menu of 50 potential productivity improvement tools and approaches which ones their organizations had taken.
Out of that 50, the survey found that the five top productivity initiatives were (1) business unit strategy reviews, (2) improved people development and management, (3) cost reduction programs, (4) enterprise resource planning, and (5) greater autonomy for country management (Figure 12).
Interestingly, high performers were significantly more likely to pursue these initiatives than the others. On average, high performing companies were 14.2 percent more likely to pursue the top five productivity initiatives than the others in our survey.
China’s productivity imperative
Driving sustainable growth for China operations
