Centralization has always carried scale advantages, notably reduced costs, improved efficiency, and the ability to share knowledge. Although those advantages may be clear at headquarters, middle management and local or regional work forces have been less enamored of centralization. They often see in centralization a loss of autonomy, the creation of an ivory tower for the elite, and the disempowerment of local managers, leaving them with less interesting jobs. Centralization distances local managers from their customers, hindering knowledge transfer, innovation, and a host of other practices that contribute to sustainable growth. Paradoxically, centralization often goads managers into operating distinct vertical processes that remain separate from one another — the “silo syndrome” so antithetical to good management.
Fortunately, this view of centralization is not only old-fashioned, but out of date. There are new ways to centralize that give firms scale advantages, while granting to local management the authority it needs to use its experience to get the best results. Dynamic management in the New Europe and its adjacent regions today mandates regional or cross-regional centralization.
Under a regional management structure, certain functions — certainly those requiring the highest level of knowledge — should be pulled together. Treasury, accounting, and legal functions, for example, should be centralized to ensure that action is consistent with complex regulatory requirements and implemented with consistency from country to country.
A company’s knowledge base about products, processes, and such intangible assets as intellectual property and brand also must be centralized. Core assets need to be tightly managed in a consistent manner, both to protect them and to identify and develop synergies across countries.
Regional control of the knowledge base enables companies to leverage trends more effectively. When companies launch new initiatives, task forces, or ad hoc teams, regional centralization allows cross-functional and cross-market experience to be shared, understood, applied, and eventually rolled out efficiently. In Europe, the skills necessary to do this are never located in one country; they have to be culled from a highly knowledgeable (and by definition diverse) team.
At the other end of the functional spectrum, repetitive tasks (for example, sales support, logistics, logistics planning, and order entry) that are performed in multiple countries also should be centralized, reducing the learning-curve costs that otherwise would be borne by individual country units.
Systems, too, can be implemented more efficiently and effectively when they are appropriately centralized. By introducing an SAP system to cover all of EMEA, Apple reduced the cost, complexity, and duplication of effort that would have fallen on us had we implemented a separate system in each country.
Despite centralization’s obvious benefits, Europe’s heterogeneity remains too extreme to permit all management decisions to be regionalized. The spectrum of European consumers is wide — no one would ever think to market to or manage a Corsican in the same way one would a Bavarian or a Scot.
The challenge is to find the best way to manage the New Europe based on product, process, and people. Although it is a well-accepted business principle that, for a firm to succeed, at least one of those three components must be the company’s core competence, multinational executives must recognize that the other two components need to be as good as possible. The success of regionalized management in the New Europe depends on executives’ evaluating all three components and deciding whether to centralize at the regional level or to localize at the country level.
The richness of the opportunities and the complexity of the challenge are evident when you consider the range of localization choices that can be — that must be — made in these areas.