of CP execs feel the biggest barrier to business transformation is an inflexible operating model, according to our 2016 global survey of more than 200 leaders in the sector.
Getting the right balance
The combined impact of these changes represents a tipping point for many companies. Is your operating model enabling growth? If you need to make changes, are you looking at an evolution or a revolution?
Scale may still be the most important driver for some areas of your business. An above-market, centralized model will likely still make the most commercial sense for value chain elements that are not consumer facing, like shared services for back office operations and some highly technical centers of expertise.
For other areas, by getting closer to the consumer, companies are achieving benefits that far outweigh any costs they might incur by sacrificing scale benefits forgone. When it comes to developing market-specific products, pricing, marketing and promotions, for example, a more decentralized management model could better fit your business requirements.
Companies should look at every area of their value chain and ask, “What drives competitive advantage?” and “What model will enable us to win in the market?”
of CP execs recognize they need to make significant changes to business operations, according to our 2016 global survey of more than 200 leaders in the sector.
The price of local power
It’s also important to get the right balance between flexibility, efficiency and control. Would you trade a few percentage points in operating cost or an effective tax rate to improve corporate agility and ultimately gain market share?
You can empower local management to pursue market-specific strategies that drive growth if you decentralize aspects of the business. But empowerment can increase costs and reduce control if it’s not supported in the right way.
Likewise, a more flexible management model can increase the entrepreneurial spirit and drive growth in new and innovative ways. But such models typically create costly duplication and reduce corporate control in ways that increase risk.
Which model works for you?
We see global CP companies responding to these competing pressures by adopting a new range of operating models. By moving away from the homogenous models of the past, you can find a more customized, balanced approach — one that offers different spans of control across different areas of the business.
In other words, the level of centralization will vary by function, product category, brand and geography, reflecting the specific drivers of competitive advantage in each area.
of CP companies are struggling to keep pace with changing consumer needs and behaviors, according to our 2016 global survey of more than 200 leaders in the sector.
What it means for tax
Tax must follow the business reality, and the reality is that value is being created at multiple levels and locations across the value chain — not in one neat and tidy place in a regional head office. As you think through the implications for your tax model, it might help to reflect on these questions:
1. Do the “traditional models” have any place in this new world?
- Is a limited risk distributor model applicable for markets where you are trying to drive growth?
- Can regional manufacturing hubs support an agile supply chain?
- Does centralized pricing help you respond quickly to market conditions?
2. If your operating model is unique to your business (and therefore difficult to benchmark), what’s the right transfer pricing approach?
3. Do the new business practices increase direct tax risk — how will private equity and withholding tax risk be managed?
4. What’s the best way to align how intellectual property is developed, maintained and exploited in your new model?
5. How do you create and structure the legal entities needed to house your business functions, assets and profits?
6. How will your new transfer pricing model and transaction flows affect your direct and indirect tax liabilities?
7. What role should financing play in your new tax model — and can your finance and treasury centers support a more decentralized operating model?
8. How should you reflect the business contribution of non-people functions? (For example how do you value and reward data and intelligent automation?)
9. What’s the best way to build flexibility into your new model, so you can grow or adapt quickly as operational needs change?
10. As your tax and operating models change, how much can you rely on existing incentives, advanced pricing agreements and rulings?
Given the significant changes to the business and tax environment, devising and implementing an operating and tax model with the right balance of global consistency and regional freedom is becoming a more complex and nuanced task.
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By moving away from the homogenous models of the past, consumer products companies can find a more customized, balanced approach — one that offers different spans of control across different areas of the business.