Risky Business: The 2 Key Layers of your Operating Model you MUST Align with Your Growth Strategy
This article is part 7 of a 17-part series on global expansion. You can find the full list below this article.
Imagine expanding your business into a country where your local team or partner makes strategic decisions that don’t align with your organization’s goals (we call it your “north star”). With your money!
As disgraceful as it is…it’s not uncommon. So how are you going to ensure something like that won’t happen to your business?
It all comes down to your operating model. Your operating model guides your teams, provides the context of your strategy and enables behaviors that will realize your vision. We find that even companies with a solid growth strategy in place can fail in reaching their goals due to poorly designed or implemented operating models. And the first two layers of your operating model that you’ll need in order to mitigate risk are governance and organizational design.
The first layer of your operating model: create control with a governance structure
Governance is basically your company’s formal policies and procedures or rules and regulations that ensure that risks are managed. An effective governance and risk management structure allows companies to identify, analyze (qualify and quantify), take action, monitor and control risks. Most global companies have a globally consistent framework in place, though there are often additional country-specific controls that must be considered as you expand.
For example, in Japan, hankos (an official company stamp) are used in place of signatures on contracts and documents, including bank records. Any person who has access to the hanko could just waltz up to the bank and withdraw as much money as they can, which means there would need to be policies in place that include how the hanko is secured and who has access to it. Maybe there also needs to be a peer approval process in place in order for a person to access the hanko. And this just isn’t Japan; seals are common in other countries like China and Korea. Creating a policy means you’re creating a control that will diminish risk.
Or in another scenario, let’s say a company has a financial goal or more formal policy to reinvest or redeploy cash to other members of the group (potentially via a cash pool) but they discover that they have a lot of cash sitting in a bank in a local subsidiary. The local managing director may not have the incentive to utilize the cash if he’s being wined and dined by the bank, which gives him special treatment for having so much cash in the accounts. In order to utilize the cash optimally to fit the company’s goals, they could create policies, procedures or controls to regulate how much cash can sit in the account.
In a broader sense, governance is also about ensuring that everybody within the organization and within each function is working based on an agreed-upon framework that has a number of controls in place. Each function will likely have a different set of rules depending on how that function needs to operate. For example, a finance function may have a different process in place to fulfill their duties compared to an HR function. Governance helps companies align people under a common framework consistently and efficiently to the north star goals.
Your governance framework can start with a procedure manual; when you’re thinking about how to build your governance framework, you can think about your sales procedure, the process for signing contracts, how cash is handled, any approval processes, etc. A great governance framework is one that helps the company perform better while efficiently identifying, mitigating, and managing risk; not one that has so many policies that it prevents business from moving forward. Finding the right balance for your company is key.
The 2nd layer of your operating model: reporting Lines that put power back in your hands
How are you going to manage your business in a new jurisdiction without letting local employees cause issues?
You can start by looking at your organizational structure, which is a culmination of a few things: reporting lines, KPIs, and governance. When you structure your organization with formal reporting lines and regulations, you can improve efficiency and profitability. Essentially, each function of your business needs to ensure its people on the ground report to the right management personnel and have the right KPIs that will in turn drive the desired behavior.
Let’s start with a story about a southeast Asian electronic component company. The company had expanded to multiple locations over the years and recently found that processes were being duplicated, causing inefficiency. But what’s worse is they discovered that their Australian subsidiary had taken matters into their own hands, including giving customers unapproved levels of discounts and had been buying products from third parties (instead of from headquarters!!) that they would resell without approval.
Not only could the headquarters not vet the third-party products that were being sold, but this also resulted in the costly underutilization of the company’s manufacturing facilities which were set up as the sole producer of these company’s products.
It might sound like the Australian subsidiary was intentionally creating problems, but usually, when problems like these happen it’s because the branch is only thinking about their local operations’ profit margins and not about the whole supply or value chain and how their small piece fits into the global structure.
There were a few things that needed to happen from an organizational design perspective. First, they changed the reporting lines so that the local head of sales and operations would need to report to their local finance manager, who would then report to the CFO at headquarters. They also had to redesign KPIs to change the behavior of the sales team to be more aligned with headquarters’ ambition and the cross-functional reporting helped regulate these actions and targets. Then, they had to create a clear governance structure to make sure products were only sourced from their manufacturing plant.
Organizational structure and governance aren’t necessarily only about reporting lines. It could also be about the segregation of duties. The more you expand, the more you may want to consider spreading decision-making power across roles so that not all power is in one person. Startups that begin with one main person may start to segregate duties to ensure an independent governance framework. Again, finding the right balance is key to ensure that any framework applied still allows the company to grow and operate in an agile and efficient way while ensuring quick risk identification and mitigation.
Changes in your organizational structure do require management to facilitate the transition and controls should be put in place to ensure that new procedures are being followed and operational efficiency attained which, in the long run, will lead to higher profitability!
How can you align your governance and organizational structures to your north star goal?
At the forefront of strategizing your governance framework and organizational structure when expanding abroad, the first thing you can do is have a company-wide meeting with the heads of each function to share your north star goals and to align understanding across the functions. What does the company’s north star goal mean to them? How does that translate or cascade down into your function? How does your function’s translation of the north star goals fit in with the other functions? Are they aligned?
Let’s say being the #1 company in Denmark for interior goods is your north star, with a target amount of sales and target profit margin goals. How would those goals translate to the operations within each function? Maybe your sales team needs to shift their KPIs. Maybe your finance team needs to think of a more effective governance structure. And perhaps your marketing team needs to develop brand awareness to improve recognition within that jurisdiction. How do these functions’ goals link together toward the company’s north star goals?
Essentially, each function within the organization needs to understand its goal, and every person needs to know what it means for them. After your company-wide meeting, departments can have more detailed meetings to strategize a plan where they’ll think of governance, roles, and reporting to ensure all are aligned and driving the desired behavior.
Need help facilitating this next phase of your global expansion? We’re happy to help, feel free to contact us here!
Special thanks to Sam Barrett from EY’s APAC Operating Model Effectiveness team for his inputs and insights in putting together this series of articles.
International Business Expansion Series
This article is part 7 of a 17-part series about International Business Expansion. Here’s a list of the full series to give you a well-rounded understanding of what to consider when expanding your business abroad, from strategy to execution to management:
- The #1 Thing that Companies Need for a Successful Expansion Abroad
- The 3 Components of a Market Analysis to Know if Your Product is Viable Abroad
- How to James Bond Your Profit Margin with Location Analysis
- How to WIN in a New Market with These 6 Models of Execution
- Lost in Translation: How Culture Can Impact Your Business Expansion
- Show me the money: How to Fund Your Business Expansion Abroad
- Risky Business: The 2 Key Layers of your Operating Model to Align with Your Growth Strategy
- Avoid Being Taxed: How Tweaking the Structure of Your Organization Can Protect Your Bottom Line
- Trash Talk: Why You Need to Analyze Your Processes Before Expanding Globally
- 5 Reasons Why You Should Customize Your Technology for Your International Expansion
- Setting Up a Business Abroad: The 4 Kinds of Structures & Legal Implications
- Landlocked: How your Transaction Flows can Impact Your Access to Funds
- 5 Industry-Specific Legal and Regulatory Obligations that can Impact Your Business Expansion Abroad
- “Health Checks”: Your Ticket to Building a Sustainable International Business
- How Much Is Your Business Worth? 4 Drivers that Increase the Value of Your International Business
- Plug and Play: How to Efficiently Scale Your Business When Expanding Abroad
- Beach, or Boardroom? Plan Your Exit Strategy Before You Expand Globally