Roland Berger: Global Companies Face Dual Challenges

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Funds Blog / October 23, 2024

On January 9th, during the Roland Berger 2025 Industry Trends Conference, Mengxian Zhou, a global partner, emphasized the dual challenges faced by Chinese companies venturing abroad, including localization capabilities and inadequate modern governance.

As globalization progresses, an increasing number of Chinese enterprises are looking beyond national bordersRecent statistics from China's Ministry of Commerce and the General Administration of Customs reveal a 9% growth in outward direct investment across all sectors in the first three quarters of 2024, amounting to an impressive $124.4 billionExport growth in critical sectors was also noteworthy, with high-end equipment, integrated circuits, and automobiles increasing by 43.4%, 22%, and 22.5% respectively.

However, embarking on international operations is far from straightforward

Zhou pointed out several shortcomings faced by companies in terms of localizationMany continue to rely on general agency models which result in a lack of precise management and weak control over end sales, despite having established local sales offices that often lack standardized processesFurthermore, production and supply chains have yet to establish robust manufacturing bases, leading to slow product launches internationallyIn terms of research and development, insufficient local insights mean that product decision-making processes often remain dominated by domestic agendas, resulting in inadequate participation from international stakeholders.

To address these challenges, Zhou proposes that companies develop a standardized sales management system to create a clear framework for sales activitiesThis involves strengthening control over end distribution channels and granting local sales subsidiaries greater autonomy

On the production front, establishing local manufacturing facilities and fostering stable relationships with local suppliers becomes pivotalAdditionally, resources should be redirected towards global R&D teams, facilitating collaboration and resource sharing with domestic teams, thereby ensuring products are tailored effectively to meet the diverse needs of various markets.

In addition to localization capabilities, modern governance reforms are a crucial area that Chinese enterprises must tackle as they expand globallyZhou stressed that many firms cling to domestic management models that are insufficiently agile to meet international requirements.

The crux of the issue lies in the mismatch between domestic and international management systemsFor instance, many enterprises exhibit sluggish decision-making processes and ambiguous boundaries when it comes to international business oversight, often due to unclear delineation of responsibilities and inadequate resource allocation

Furthermore, the discrepancy in performance assessment mechanisms between domestic and international departments exacerbates the management of overseas operations, often leaving local branches without the necessary support from domestic units.

Zhou argues that these challenges necessitate the modernization of governance structures within enterprisesShe suggests exploring improvements through the following four dimensions:

First, at the strategic decision-making level, which is akin to the command center of the entire management structure, effective solutions for interdepartmental decisions must be identifiedWhen a decision involves multiple departments, the delineation of authority and responsibility can easily become murky, resulting in pushback when it comes to execution

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To avoid such a situation, it is essential to clearly specify the responsibilities and rights of each department concerning specific decision-making processes, allowing every unit to know precisely what it is responsible for, thus averting the negative consequences of inter-departmental blame game, ensuring strategic decisions flow smoothly downwards for effective implementation.

Second, at the collaborative integration level, which plays a critical role in linking strategic decisions with specific operational efforts, the focus must be on enabling effective communication and teamwork across departmentsAlthough departments have their respective roles, many business processes require tight collaboration between themHowever, differing interests, priorities, and institutional cultures can create invisible “department walls,” hindering smooth communication and collaborative work

Thus, the key to success here is to break down these barriers through streamlined business processes, clarifying each department's tasks and interconnections while establishing effective communication mechanisms that ensure timely and accurate information exchange, thereby enabling all segments to operate as a cohesive and efficient whole.

Next, in the context of international organization and regional management, the growing importance of this aspect becomes increasingly evident as companies expand their global footprintThe crux lies in balancing domestic and overseas business development while considering the unique market conditions, regulations, and cultural nuances in different countriesA vital aspect of this is thoughtfully designing the headquarters’ control model over the regions, ensuring a clear understanding of the headquarters’ role in the overarching business framework while delineating the regional units' implementation responsibilities

This involves establishing a rational distribution of authority, with the headquarters overseeing macro-strategic planning and resource allocation while allowing the regions to operate within that framework based on local realities, thus facilitating robust cooperation between domestic and international operations.

Finally, at the operational execution level, effective delivery of the preceding layers is essentialAt this stage, designing the performance appraisal mechanism becomes paramount, as it serves as a guide for employee behavior and operational focusGiven the distinct characteristics of domestic and overseas businesses, performance metrics must reflect these differences while simultaneously maintaining a connection between the twoFor example, setting common KPIs for overall performance alongside tailored indicators for varying business environments, while acknowledging cross-regional collaboration and resource sharing, can incentivize employees to engage actively in both domestic and international operations

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