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VLE case studies referred to in MN1178 Business and management in a global context Chapter 7 Case 1: Strategy at Proctor & Gamble Founded in 1837, Cincinnati-based Proctor & Gamble has long been one of the world’s most international companies. Today it is a global colossus in the consumer products business, with annual sales in excess of $50 billion, about 54 per cent of which are generated outside the United States. P&G sells more than 300 brands – including Ivory soap, Tide, Pampers, Iams pet food, Crisco and Folgers – to consumers in 160 countries. Historically, the strategy at P&G was well established. The company developed new products in Cincinnati and then relied on semi-autonomous foreign subsidiaries to manufacture, market and distribute those products in different nations. In many cases, foreign subsidiaries had their own production facilities and tailored the packing, brand name, and marketing message to local tastes and preferences. For years this strategy delivered a steady stream of new products and reliable growth in sales and profits. By the 1990s, however, profit growth of P&G was slowing. The essence of the problem was simple: P&G’s costs were too high because of extensive duplication of manufacturing, marketing and administrative facilities in different national subsidiaries. The duplication of assets made sense in the world of the 1960s, when national market were segmented from each other by barriers to cross-border trade. Products produced in Great Britain, for example, could not be sold economically in Germany due to high tariff duties levied on imports into Germany. By the 1980s, however, barriers to cross-border trade were falling rapidly worldwide and fragmented national markets were emerging into larger regional or global markets. Also, the retailers through which P&G distributed its products were growing larger and more global, such as Wal-Mart in the United States, Tesco in the United Kingdom and Carre-four in France. These emerging global retailers were demanding price discounts from P&G. In the 1990s, P&G embarked on a major reorganisation in an attempt to control its cost structure and recognise the new realism of emerging global markets. The company shut down some 30 manufacturing plants around the globe, made 13,000 employees redundant and concentrated production in fewer plants that could better realise economies of scale and serve regional markets. It wasn’t enough. Profit growth remained sluggish, so in 1999 P&G launched its second reorganisation of the decade. Named ‘Organisation 2005’, the goal was to transform P&G into a truly global company. P&G tore up its old organisation, which was based on countries and regions, and replaced it with one based on seven self-contained global business units, ranging from baby care to food products. Each business unit was given complete responsibility for generating profits from its products and for manufacturing, marketing and product development. Each business unit was told to rationalise production, concentrating it in few large facilities; to try to build global brands wherever possible, thereby eliminating marketing difference between countries; and to accelerate the development and launch of new products. P&G announced that, as a result of this initiative, it would close another 10 factories and lay off 15,000 employees, mostly in Europe where there was still extensive duplication of assets. The annual cost savings were estimated to be about $US 800 million. P&G planned to use the

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savings to cut prices and increase marketing spending in an effort to gain market share and thus further lower costs through the attainment of scale economies. This time the strategy seemed to be working. Between 2003 and 2007 P&G reported strong growth in both sales and profits. Significantly, P&G’s global competitors, such as Unilever, Kimberly-Clark and Colgate-Palmolive, were struggling between 2003 and 2008. (Source: L.P. Willcocks, using multiple published sources, including annual reports.)

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Chapter 7 Case 2: Cemex and its global expansion From relatively modest beginnings as a Mexican family-owned conglomerate, since 1996 CEMEX has been the third largest cement company in the world (measured by cement production capacity). Having completed the acquisitions of Southdown in the United States and RMC in the UK, the group was a well-established ‘three-legged’ player in America, Europe and Asia. However, global competition was tough and, by 2008, CEMEX was still not positioned in the two emerging giant markets of China and India. CEMEX’s strategy to become one of the leading players in the world of cement took place over many years in three major steps: (1) consolidating its presence the Mexican market, (2) internationalisation, and (3) global management. We will look at each of these in turn. Mexico In 1985, when Lorenzo Zambrano was appointed head of CEMEX, the company was fairly similar to any other developing country conglomerate. Founded in Mexico in 1906, CEMEX had grown from a regional cement producer to a diversified group of companies with interests in tourism, petroleum and mining projects, and was listed on the Mexican stock exchange. The signing of the GATT agreement in 1985 turned Mexico, the world’s thirteenth-largest cement consumer, into an open marketplace and, at the same time, an interesting expansion opportunity for cement multinational companies (MNCs). The demographics, the attractive market characteristics and the expected infrastructure development all gave Mexico a huge growth potential. With increased competition from more efficient international players, a consolidation movement was inevitable. Zambrano implemented a deliberate strategy to make cement its core business. CEMEX divested the company of nearly all its non-core and non-cement related businesses, reinvesting the proceedings into cement assets. It acquired the two major cement manufacturers in Mexico, thus becoming the main national player and the tenth largest cement company in the world. CEMEX was creative in its efforts to expand its Mexican market. It developed exceptional customer care service support. In 1998 it changed the image of cement by launching a programme whereby people who had little money or savings could invest in home building. This linked with more traditional community savings schemes. In 2001 it targeted Mexican migrants to the USA. It enabled migrants to send back money to family members for construction projects, and it also helped Mexican migrants to spend money on Mexican-based homes. While its competitors were selling bags of cement, CEMEX was selling the dream of a home, with a business model supported by innovative financing and construction expertise. Its Mexican cement sales tripled, while still allowing CEMEX to charge 15 per cent more than its competitors. CEMEX also improved its efficiency by using information technology (IT). In 1987 CEMEX hired a cyber-visionary, Gelacio Iiguez, who created a network information system by installing satellite dishes for voice and data transmisson in all its plants. He also developed an integrated dispatching system, centralising dispersed operation by a satellite. In the past delivery trucks had often failed to reach customers on time, resulting in cancellations or reorders and consequent losses. To avoid this, CEMEX equipped its ready-mix delivery trucks with global positioning systems, enabling customers to track them. A central monitoring system also helped in redirecting a truck where an order had been cancelled. This drastically reduced delivery times and enabled 70 trucks to make deliveries that had previously required 100 trucks. The technology enabled big savings in fuel, payroll and maintenance, while increasing customers’ goodwill. In 1995 CEMEX launched one of the

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first corporate websites. It featured catalogues of products for clients as well as financial and company information for analysts. Zambrano also launched a logistics system that enabled customers to track shipments online. In 2000 CEMEX formed a subsidiary to manage its e-business efforts. One of these was Contrumex, a construction industry online marketplace aimed at small and medium-sized businesses in Latin America. Another was Latinexus, an online exchange for indirect goods and services created in partnership with other leading companies in Mexico and Brazil. CEMEX renamed its subsidiary ‘Neoris’ and relaunched it as an independent company offering website services, e-consulting and web architecture to companies other than CEMEX. The basis of CEMEX’s e-business strategy was fivefold: 1. The boundaries between companies and industries was becoming increasingly blurred. 2. The relationships between companies and their markets was changing. 3. Time has sped up. Information is everywhere, readily available and virtually free.

CEMEX needed to seize the opportunity to differentiate itself by speed of decision- making and new business strategies

4. The internet is changing the nature of work. Computers and networks can replace human hands and minds in many routine activities. This frees up people to take on the more information-intensive activities that create value for the firm and customers.

5. There has been a shift in value creation from owning assets to leveraging assets through networks.

Internationalisation Cement is a very cyclical industry and its presence in several countries with counter-cyclical economies would ensure a more predictable stream of cash flows. The company’s performance was intimately pegged to the evolution of the Mexican economy. This meant high cash-flow volatility and high costs of capital. In the mid-1980s, international opportunities were substantial, but CEMEX would have to make focused decisions, first because of the reduced amount of available resources and, second, because only a focused player would be able to compete with the larger MNCs operating in various international markets. The man with this vision was Lorenzo Zambrano. Ricardo Castro, CEMEX’s senior vice-president of Strategic Business Development for Asia and Africa, describes his chairman’s vision:

He saw opportunities in both the Mexican cement market and markets beyond its national borders. So his strategy was to transform the Mexican conglomerate into a focused cement player with global coverage. Initially, the company divested its non-core assets, becoming first a regional Mexican cement producer. Subsequently, the company expanded nationally, and finally became global.1

One of the early steps to internationalisation was to export cement from Mexico to the United States and Latin America. However, given its structural economic characteristics and particularly the high transport costs, international trading had limited potential. In 1992, CEMEX’s first direct investment was in Europe with the acquisition of Valenciana and Sanson in Spain. At the time, Spain was one of Europe’s most attractive markets and through this acquisition CEMEX instantly became the market leader in Spain and the world’s fifth largest cement producer, with 36 million tons of capacity. It was also the company’s first major encounter with its global competitors, the French company, Lafarge, and the Swiss company, Holcim (at the time Holderbank). The success in Spain spurred further international expansion, this time in South and North America. In 1994 CEMEX acquired Vencemos, Venezuela’s largest cement company; Cemento Bayano in Panama; and a plant in Texas.

1 Quoted in Lassserre, P. Cemex: Cementing a global strategy. Case 3072331. (France: Insead, 2007).

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Further acquisitions in the Dominican Republic in 1995 and Colombia in 1996 were completed. By this time the expansion strategy was already paying off. When Mexico entered its 1994 crisis, leading to its currency’s – the Peso’s – massive devaluation, CEMEX was able to offset severe losses with profits from its international operations. In the mid-1990’s CEMEX began its expansion into Asia, a region that clearly matched its strategy for high growth potential markets. Government infrastructure spending was on the rise, and per capita cement consumption was still very low but growing fast. Asia represented more than 20 per cent of the world’s capacity of 1.4bn tons. By 1994 CEMEX set up trading operations in Southeast Asia and in 1999 established CEMEX Asia Holdings (CAH), with a mission to develop new partnerships and cement-related businesses in that region. In 1997, it made its first acquisition, a 30 per cent stake in Rizal Cement in the Philippines. However, immediately after acquiring Rizal Cement, the Asian crisis set in and caught CEMEX, and everyone else, by surprise. The industry saw a huge reduction in demand throughout the region – in the Philippines by 17 per cent, Indonesia by 30 per cent, Malaysia by 37 per cent and Thailand by 35 per cent. But the crisis, which made many regret the high acquisition prices paid prior to 1997, also presented the cement MNC with an opportunity. Heavily indebted local producers now wanted to sell and prices were going down. By late 1998, CEMEX had guaranteed a 70 per cent stake in Rizal Cement, and also bought Apo Cement, the lowest cost producer in the Philippines. In Indonesia, CEMEX was named preferred bidder for Sement Gresik, a state-owned company that had consolidated three out of the five state-owned cement producers and controlled about 40 per cent of domestic production. The government wanted to privatise the company and by May 1998 CEMEX was planning on taking a majority stake. But after strikes and protests, the government backed off and CEMEX only took a 25 per cent share of the company. Since it was unable to take control of the company CEMEX divested itself of its stake in August 2006. With Asia on hold, CEMEX expanded its operations in America and Europe. In November 2000 CEMEX acquired Southdown, No. 2 in the United States, with 12 plants serving 27 states. Southdown operates at full capacity and serves only the American market, providing a stable stream of cash flows. In 2005 it acquired the RMC group, based in the UK, which increased its capacity by around 20 per cent, strengthened its position across the cement value chain, reinforced its presence in Europe and made CEMEX the world’s largest producer of ready-mix. Going global From 1996 to 2008, CEMEX had consolidated its position as the third largest cement producer in the world, behind Lafarge/Blue Circle and Holcim. By 2005 it had achieved an estimated production capacity of 94 million tons per year. It was the number one producer of ready-mix, with 76 million tons; one of the largest aggregate producers, with 175 million tons; and one of the top cement traders in the world, selling more than 17 million tons in 2005. What truly makes CEMEX a global company and not simply a multinational? According to the company’s executives, there are several factors that make CEMEX a truly global company. First, the international expansion strategy was a planned and organised move, rolled out in several phases. As a consequence, today CEMEX’s international network is not a sum of different operations in different locations, but can be seen as a network of systems. Initially, CEMEX represented a Mexican cement production system. Later it became a system of cement production and trading in the Caribbean region, with ramifications in Europe, Latin America and North America. It later advanced into the Mediterranean region, and went as far as Asia in 1995 (although the first acquisition in Asia only occurred in 1997).

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Secondly, CEMEX full integrates its international operations into the CEMEX network. This is mainly achieved via a common technological platform, organisational structure and corporate culture. In addition, its trading activity is important in achieving a true interconnection between CEMEX and independent production systems. This activity allows CEMEX to maintain a strong relationship between cement producers and customers worldwide. Finally, the company has developed a knowledge community through a series of practices known as ‘the CEMEX Way’. This can be summarised as follows: The CEMEX way: identifies and disseminates best practice and standardises business processes across the globe

• has common management principles and systems for the entire organisation • encourages all managers to ‘speak the same language’ when discussing business

issues • implements knowledge and experiences gathered over many years of doing business in

various countries. The CEMEX way specifies everything about the running of the company, down to the make of computers employees must use. It also insists on mutual learning across subsidiaries. It also uses a post-merger integration (PMI) process that is put in place after each acquisition, to ensure that the acquisition is quickly and well assimilated. CEMEX specified three conditions for an acquisition to go ahead. The acquisition should provide a return on investment much bigger than the cost of capital. Second, it should enable CEMEX to maintain its financial strength and credit quality. Third, CEMEX’s management expertise should be able to increase the acquired company’s value. In the integration process, CEMEX decides on which operations should be decentralised and those that need centralised decision-making and standardisation. It uses the CEMEX brand, and sources people and assets internationally. It standardises management practices, but if local practices are particularly effective, it standardises those for CEMEX as well. A key issue for CEMEX has been its management of people. There is a clear career path to ensure the best of new employees find their way quickly up the company. There is an intensive induction programme educating people into the CEMEX way. Multiple training and education programmes are made available to staff, including over 260 e-learning courses on operations, business and managerial skills. CEMEX is also notable globally for its extensive leverage on technology. For example, while it was still mainly a domestic company based in Mexico, ready-mix concrete trucks were equipped with computers on board. This allowed for central tracking by global-positioning satellite systems and precise planning of cement delivery schedules. Technology has allowed CEMEX to become one of the lowest cost producers anywhere in the world. Its technological backbone also allowed CEMEX to specialise in markets that lack highly developed road systems or solid telephone networks and where competing becomes a matter of showing customers that you can save them from uncertainty. What CEMEX did was adapt global technology to the developing world’s almost limitless range of local problems. CEMEX is also strong on global branding and its concern for customer satisfaction. While the CEMEX brand is strongly used, it also has product sub-brands, designed to suit the needs of the customer in whichever part of the world they are in. Historically, by managing all the critical activities – IT, staff, innovative marketing methods, acquisition strategy and effective customer support – CEMEX had delivered superior value to all its stakeholders.

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Information technology and acquisitions CEMEX’s approach to IT is interesting, not least for illustrating Chapter 13 of this subject guide. Its decision to enter global markets in the 1990s coincided with the IT revolution, but also a consolidation spree in the global cement industry. CEMEX’s main competitors had started acquisitions earlier and had used a decentralized approach. They ran into problems unifying diverse cultures and systems. CEMEX was able to assimilate acquisitions in months due to its IT expertise, process standardisation philosophy and capabilities. Eight ‘e-groups’ were made responsible for process effectiveness. Each e-group has business, IT and HR experts. These groups worked closely with the staff from the acquired company to decide what could be standardized and what practices and systems could remain localised. About 20 per cent of the acquired company’s practices are retained, with the rest typically recorded in a database, in case they subsequently proved useful. The future – 2008 and beyond1

CEMEX is absent from the two leading emerging countries, China and India, which together represent more than 50 per cent of world markets. Could it ignore those giant source of demand and if not, the challenge was how to develop a presence? The Chinese market in particular is very fragmented, with about 1,000 local producers.

The financial crisis that hit the world in 2008 had dire effects on CEMEX. By 2009 CEMEX had accumulated a debt burden of $US 19.4 billion. At this point, Mexico accounted for only one-third of its revenues, but contributed substantially to this debt burden. CEMEX’s strategy of acquisitions to expand was a fundamental part of its success but this backfired with the acquisition of Rinker in 2007 and the subsequent global financial crunch. Having acquired companies during the boom times, CEMEX became more optimistic after every acquisition. Optimism, proven track record on acquisitions and debt-clearing ability in the past guided the acquisition of Rinker, an Australian company. As the US market slowed down from 2008, where Rinker had most of its operations, CEMEX’s hopes for the acquisition were shattered. Moreover, Rinker was probably overpriced when CEMEX bought it in 2007 for $US 15.3 billion. Certainly by 2008 some estimated its value to be a low as half that figure. By 2008–09 the major markets of the USA, the UK, Spain and Mexico had all experienced major slowdowns as they moved towards recession. Another blow CEMEX had to absorb was nationalisation of its company in Venezuela. It asked for $1.3 billion in compensation, but was offered only $650 million. When CEMEX rejected the offer, the state seized its assets. From 2009 to 2013, Cemex constantly had to scout for debt restructuring or sell assets in order to pay impending debts. The signs are that it has managed this troublesome period with great difficulties, but that it may well come out of this challenging period with a good future ahead of it. (Source: L.P. Willcocks, using multiple published sources.)

1 This section is based on annual reports from 2008–2013 and Vivek, M. et al. Cemex’s cost of globalised growth – The cash crunch? IBSCDC case 3101061. (Cranfield: Case Clearing House, 2010).

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Chapter 8 Case 1: The changing steel industry For a long time, the steel industry was seen as a static and unprofitable one. Producers were nationally based, often state-owned and frequently unprofitable – the early 2000s saw 50 independent steel producers becoming bankrupt in the United States alone. But recent years have seen a turnaround. During 2006, Mittal Steel paid $36bn (€24.5bn) to buy European steel giant, Arcelor, creating the world’s largest steel company. The following year, Indian conglomerate Tata bought the Anglo-Dutch steel company, Corus, for $13bn. These high prices indicated considerable confidence in the prospects of a better industry structure. New entrants In the last two decades, two powerful groups have entered world steel markets. First, after a period of privatisation and reorganisation, in 2009 Russia had become the world’s second largest steel exporting country (behind Japan), led by giants such as Severstal and Evraz. China, too, had become a major force. Between the early 1990s and 2009, Chinese producers increased their capacity six times. Although the Chinese share of world capacity reached over 40 per cent in 2009, most of this was directed at the domestic market. Nevertheless, China was the world’s fourth largest steel exporter in 2009. Substitutes Steel is a nineteenth-century technology, increasingly substituted by other materials such as aluminium in cars, plastics and aluminium in packaging, and ceramics and composites in many high-tech applications. Steel’s own technological advances sometimes work to reduce need: thus steel cans have become about one-third thinner over the last few decades. Buyer power The major buyers of steel are the global car manufacturers. They are sophisticated users and are often leaders in the technological development of their materials. In North America at least, the decline of the once dominant ‘Big Three’ – General Motors, Ford and Chrysler – has meant many new domestic buyers, with companies such as Toyota, Nissan, Honda and BMW establishing local production plants. Another important user of steel is the metal packaging industry. Leading can producers such a Crown Holdings, which makes one-third of all food cans products in North America and Europe, buy in large volumes, coordinating purchases around the world. Supplier power The key raw material for steel producers is iron ore. The main producers – Vale, Rio Tinto and BHP Billiton – control about 70 per cent of the market for internationally traded ore. Iron ore prices had multiplied four times between 2005 and 2008, and, despite the recession, by 2010 were still twice the 2005 level. Competitive rivalry The industry has traditionally been very fragmented: in 2000, the world’s top five producers accounted for only 14 per cent of production. Companies such as Nucor in the USA, Thyssen-Krupp in Germany as well as Mittal and Tate responded by buying up weaker international players. By 2009, the top five producers accounted for 20 per cent of world production. The new steel giant, Arcelor-Mittal, alone accounted for about 10 per cent of world production, and for one-fifth of the European Union market. Nonetheless, despite a cyclical peak in 2008 and a slump in 2009, the world steel price was basically the same in 2010 as it was in 2005. (Source: L.P. Willcocks, using multiple published sources on steel industry growth.)

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Chapter 8 Case 2: Portman-Ritz-Carlton, Shanghai How does a five-star hotel differ from its lower-tier competitors? How does the best five-star hotel stand out from its five-star peers? The answer is ‘people’, according to Mark DeCocinis, general manager of the five-star Portman-Ritz-Carlton Hotel in Shanghai, China, which has been named the ‘Best Employer in Asia’ by Hewitt Associates three times.

‘Our priority is taking care of our people,’ said DeCocinis in an interview. ‘We’re in the service business, and service comes only from people. It’s about keeping our promise to our employees and making that an everyday priority. Our promise is to take care of them, trust them, develop them, and provide a happy place for them to work. The key is everyday execution.’1

One of the ‘secrets’ behind the Portman-Ritz-Carlton’s success is that the general manager interviews every prospective employee. Of course this is a time-consuming process for a busy general manager. Yet, by doing that, the general manager is able to get a ‘feel’ for the intangible nature of the potential employee’s attitudes. In terms of the questions that the general manager asks, DeCocinis shared that he usually asks them about themselves and tries to make a connection. But the most important question he asks is: ‘Why do you want to join our hotel?’ and ‘Whatever they say, the most important notion needs to be ‘I enjoy working with people’, not just using the phrase ‘I like people’… I really want to find out what motivates them’

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The Portman-Ritz-Carlton’s employee satisfaction rate is 98 per cent, and its guest satisfaction is between 92 per cent and 95 per cent. To translate excellent HR management to better firm performance, the hotel’s performance goals are aligned with the Ritz-Carlton’s corporate goal – from the company to the hotel, and from the hotel to each division. This means that everyone is part of the whole. Every employee comes up with a plan to reach the goal for the next year, measured by guest satisfaction, financial performance and employee satisfaction. Bonuses at the end of the year are based on improvements made.

If the person smiles naturally, that’s very important to the Ritz-Carlton, it turns out, because this is something that they feel the candidate can’t force. In a culture where people tend to have more reserved expressions, service personnel who smile naturally are valuable and rare resources appreciated by hotel guests.

In China, many multinationals face a constant shortage of talent and high employee turnover. Yet, the Portman-Ritz-Carlton has not only been able to attract, but also to retain, high-quality staff to deliver excellent customer service and ensure profitable growth. What are the ‘secrets’ behind its ability to retain these individuals? To illustrate this ability, a senior executive pointed to one incident. During the 2003 SARS crisis, business started to deteriorate. By April, the Ritz Carlton occupancy rate, which should have been at 95 per cent, had dropped to 35 per cent. The first step was for the executive team to take a 30 per cent pay cut. But then it got worse. By May, the occupancy rate was 17 per cent to 18 per cent. The hotel reduced the working week to four days, and staff were asked to take their outstanding paid leave days. And then, when these reserves were used up, everyone really pulled together. Employees who were single gave their shifts to colleagues who had families to support. Some employees were worried that their contracts would not be renewed given the low occupancy rates, so the hotel chain renewed them without a second thought. Employee satisfaction rate that year was 99.9 per cent. This was a negative situation that turned out to have extremely positive consequences.

1 Quoted in Peng, M. Global strategic management. (London: Cengage, 2009) [ISBN 9780324590982] Chapter 3. 2 Ibid.

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Such a willingness to go the extra mile to ensure employee satisfaction is reciprocated by a loyal, dedicated and hard-working workforce. Within the Ritz-Carlton family of 59 hotels worldwide, the Portman-Ritz-Carlton has been rated the highest in employee satisfaction for five consecutive years. It has also won the prestigious Platinum Five-Star Award by the China National Tourism Administration. It is one of only three hotels in China, and the only Shanghai hotel, to receive this inaugural award, which is the highest hospitality award in China. (Source: L.P. Willcocks, using multiple published sources.)

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Chapter 10 Case 1: Levis Strauss goes local The early 2000s saw a tough few years for Levi Strauss, the iconic manufacturer of blue jeans. The company whose 501 jeans became the global symbol of the Baby Boom generation and were sold in more than 100 countries, saw its sales drop from a peak of $71 billion in 1996 to just $4 billion in 2004. Fashion trends had moved on, its critics charged, and Levi Strauss, hamstrung by high costs and a stagnant product line, was looking more faded than a well-worn pair of 501s! Perhaps so, but 2005–2006 brought signs that a turnaround was in progress. Sales increased for the first time in eight years, and after a string of losses, the company started to register profits again. There were three parts to this turnaround. First, the company made cost reductions at home. Levi’s closed its last remaining US factories and moved production offshore where jeans could be produced more cheaply. Second, the company broadened its product line, introducing the Levi’s Signature brand that could be sold through lower-priced outlets in markets that were more competitive, including the core US market where Wal-Mart had driven down prices. Third, the company decided in the late 1990s to give more responsibility to national managers, allowing them to better tailor the product, offering and marketing mix to local conditions. Prior to this, Levi’s had basically sold the same product worldwide, often using the same advertising message. The old strategy was designed to enable Levi’s to realise the economies of scale in production and advertising, but it wasn’t working. Under the new strategy, variations between national markets have become more pronounced. Jeans have been tailored to different body types. In Asia, shorter leg lengths are common, whereas in South Africa, women’s jeans must have a larger backside, so Levi’s had customised the product offering to account for these physical differences. Then there are the socio-cultural differences (see Chapter 3 of this subject guide). In Japan, tight-fitting black jeans are popular; in Islamic countries, women are discouraged from wearing tight-fitting jeans, so Levi’s offerings in countries like Turkey are roomier. Climate also has an effect on product design. In northern Europe, standard weight jeans are sold, whereas in hotter countries lighter denim is used, along with brighter colours that are not washed out by the tropical sun. Levi’s advertisements, which used to be global, have also been tailored to regional differences. In Europe, the ads now talk about the cool fit. In Asia, they talk about the rebirth of an original. In the United States, the advertisements show real people who are themselves originals: ranchers, surfers, great musicians, for example. There are also differences in distribution channels and pricing strategy. In the fiercely competitive US market, prices are as low as $25 and Levi’s are sold through mass-market discount retailers, such as Wal-Mart. In India, strong sales growth is being driven by Levi’s low-priced Signature brand. In Spain, jeans are seen as higher fashion items and are being sold for $50 in higher-quality outlets. In the UK, prices for 501s are much higher than in the United States, reflecting a more benign competitive environment. This variation in marketing mix seems to be reaping dividends. Although demand in the United States and Europe remains sluggish, growth in many other countries is strong. Turkey, South Korea and South Africa all recorded growth rates in excess of 20 per cent per annum following the introduction of this strategy in 2005. Looking forward, Levi’s has been expecting for some time that 60 per cent of its growth would come from emerging markets. (Source: L.P. Willcocks, using multiple published sources.)

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Chapter 11 Case 1: Unilever Unilever is one of the world’s oldest multinational corporations, with extensive product offerings in the food, detergent and personal care businesses. It generates annual revenues in excess of $50 billion and a wide range of branded products in virtually every country. Detergents, which account for about 25 per cent of corporate revenues, include well-known names such as Omo, which is sold in more than 50 countries. Personal care products, which account for about 15 per cent of sales, include Calvin Klein cosmetics, Pepsodent toothpaste brands, Faberge hair care products and Vaseline skin lotions. Food products account for the remaining 60 per cent of sales and include strong offerings in margarine (where Unilever’s market share in most countries exceeds 70 per cent), tea, ice cream, frozen foods and bakery products. Historically, Unilever was organised on a decentralised basis. Subsidiary companies in each major national market were responsible for the production, marketing, sales and distribution of products in that market. In Western Europe, for example, the company had 17 subsidiaries in the early 1990s, each focused on a different national market. Each was a profit centre and each was held accountable for its own performance. This decentralisation was viewed as a source of strength. The structure allowed local managers to match product offerings and marketing strategy to local tastes and preferences and to alter sales and distribution strategies to fit the prevailing retail systems. To drive the localisation, Unilever recruited local managers to run local organisations; the US subsidiary (Lever Brothers) was run by Americans, the Indian subsidiary by Indians, and so on. By the mid-1970s, this decentralised structure was increasingly out of step with a rapidly changing competitive environment. Unilever’s global competitors, which include the Swiss firm Nestlé and Proctor & Gamble from the United States, had been more successful than Unilever on several fronts – building global brands, reducing cost structure by consolidating manufacturing operations at a few choice locations, and executing simultaneous product launches in several national markets. Unilever’s decentralised structure worked against efforts to build global or regional brands. It also meant lots of duplication, particularly in manufacturing, a lack of scale economies and a high-cost structure. Unilever also found that it was falling behind rivals in the race to bring new products to consumers. In Europe, for example, while Nestlé and Proctor & Gamble moved toward pan-European product launches, it could take Unilever four to five years to ‘persuade’ 17 European operations to adopt a new product. In an effort to address this situation, Lever Europe was established to consolidate the company’s detergent operations. The 17 European companies report directly to Lever Europe. Using its newfound organisational clout, Lever Europe consolidated the production of detergents in Europe in a few key locations to reduce costs and speed up the introduction of new products. Implicit in this new approach was a bargain: the 17 companies would relinquish autonomy in their traditional markets in exchange for opportunities to help develop and execute a unified pan-European strategy. The number of European plants manufacturing soap was cut from 10 to two and some new products were manufactured at only one site. Product sizing and packaging were harmonised to cut purchasing costs and to accommodate unified pan-European advertising. By taking these steps, Unilever estimated that it saved as much as $400 million a year in its European detergent operations. By 2000, however, Unilever found that it was still lagging behind its competitors, so the company embarked upon another reorganisation. This time the goal was to cut the number of

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brands that Unilever sold from 1,600 to just 400 and to market these on a regional or global scale. To support this new focus, the company planned to reduce the number of manufacturing plants from 380 to 280 by 2004. The company also established a new organisation based on just two global product divisions – a food divisions and a home personal care division. Within each division are a number of regional business groups that focus on developing, manufacturing and marketing either food or personal care products within a given region. For example, Unilever Bestfoods Europe, with its headquarters in Rotterdam, focuses on selling food brands across Western and Eastern Europe, while Unilever Home and Personal Care Europe do the same for home and personal care products. A similar structure can be found in North America, Latin America and Asia. Thus, Bestfoods North America, with its headquarters in New Jersey, has a similar charter to Bestfoods Europe, but, in keeping with differences in local history, many of the food brands marketed by Unilever in North America are different to those marketed in Europe. (Source: L.P. Willcocks, using annual reports, and Hill, C. International business. (New York: McGraw Hill, (2010) [ISBN 9780071220835].) Further questions to consider:

1. What was Unilever trying to do when it introduced a new structure based on business groups in the mid-1990s? Why do you think that this structure failed to cure Unilever’s ills?

2. In the 2000s, Unilever switched to a structure based on global product divisions. What do you think is the underlying logic for this shift? Does the structure make sense, given the nature of competition in the detergents and food business?

3. Using a search engine, look up the latest developments in Unilever’s structure. (Its annual report might help you here; also have a look at its entry on Wikipedia.)

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Chapter 11 Case 2: Dow chemical’s matrix structure A handful of major players compete head-to-head around the world in the chemical industry. These companies are Dow Chemical and DuPont of the United States, ICI in the UK and the German trio of BASF, Hoechst AG and Bayer. The barriers to the free flow of chemical products between nations largely disappeared in the 1970s. The ability to sell freely worldwide, along with the commodity nature of most bulk chemicals, has ushered in a prolonged period of intense price competition. In such an environment, the company that wins the competitive racer is the one with the lowest costs. Dow Chemical was long among the cost leaders. For years, Dow’s managers insisted that part of the reason for this was its matrix organisational structure. Dow’s organisational matrix had three interacting elements: functions (e.g. R&D, manufacturing, marketing), businesses (e.g. ethylene, plastics, pharmaceuticals) and geography (e.g. Spain, Germany, Brazil). Managers’ job titles incorporated all three elements – for example, plastics marketing manager for Spain – and most managers reported to at least two bosses. The plastics marketing manager in Spain might report to both the head of the worldwide plastics business and the head of Spanish operations. The intent was to make Dow operations responsive to both local market needs and corporate objectives. Thus, the plastics business might be changed with minimising Dow’s global plastics production costs, while the Spanish operation might be changed with determining how best to sell plastics in the Spanish market. When Dow introduced this structure, the results were less than promising: multiple reporting channels led to confusion and conflict. The large number of bosses made for an unwieldy bureaucracy. The overlapping responsibilities resulted in turf battles and a lack of accountability. Area managers disagreed with managers who oversaw business sectors about which plants should be built and where. In short, the structure didn’t work. Instead of abandoning the structure, however, Dow decided to see if it could be made more flexible. Dow’s decision to keep its matrix structure was prompted by its move into the pharmaceuticals industry. The company realised that the pharmaceutical business is very different from the bulk chemicals business. In bulk chemicals, the big returns come from achieving economies of scale in production. This dictates establishing large plants in key locations from which regional or global markets can be served. But in pharmaceuticals, regulatory and marketing requirements for drugs vary so much from country to country that local needs are far more important than reducing manufacturing costs through scale economies. A high degree of local responsiveness is essential. Dow realised its pharmaceutical business would never thrive if it were managed using the same priorities as its mainstream chemical operations. Accordingly, instead of abandoning its matrix, Dow decided to make it more flexible in order to better accommodate the different businesses, each with its own priorities, within a single management system. A small team of senior executives at headquarters helped set the priorities, within a single management system. After priorities were identified for each business sector, one of the three elements of the matrix – function, business or geographic area – was given primary authority in decision making. Which element took the lead varied according to the type of decision and the market or location in which the company was competing. Such flexibility required that all employees understand what was occurring in the rest of the matrix. Although this may seem confusing, for years Dow claimed this flexible

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system worked well and credited much of its success to the quality of the decisions it facilitated. By the mid-1990s, however, Dow had refocused its business on the chemicals industry and had divested itself of its pharmaceutical activities where the company’s performance had been unsatisfactory. Reflecting the change in corporate strategy, in 1995 Dow decided to abandon its matrix structure in favour of a more streamlined structure based on global business divisions. The change was also driven by realisation that the matrix structure was just too complex and costly to manage in the intense competitive environment of the 1990s, particularly given the company’s renewed focus on its commodity chemicals where competitive advantage often went to the low-cost producer. As Dow’s then CEO put it in a 1999 interview: ‘We were an organisation that was matrixed and depended on teamwork, but there was no one in charge. When things went well, we didn’t know whom to reward, and then things when poorly, we didn’t know whom to blame. So we created a global divisional structure and cut out layers of management. There used to be 11 layers of management between me and the lowest level employees; now there are five.’ In short, Dow ultimately found that a matrix structure was unsuited to a company that was competing in very cost-competitive global industries, and it had to abandon its matrix to drive down operating costs. (Source: L.P. Willcocks, using multiple published sources, including annual reports.)

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Chapter 12 Case 1: Philips NV in China The Dutch consumer electronics, lighting, semiconductor and medical equipment conglomerate, Philips NV, has been operating factories in China since 1985 when the country first opened its markets to foreign investors. Then China was seen as the land of unlimited demand, and Philips, like many other Western companies, dreamed of Chinese consumers snapping up its products by the millions. But the company soon found out that one of the big reasons the company liked China – the low wage rates – also meant that few Chinese workers could afford to buy the products they were producing. Chinese wage rates are currently one-third of those in Mexico and Hungary, and five per cent of those in the United States or Japan. So Philips hit on a new strategy: keep the factories in China but export most of the goods to the United States and elsewhere. By the mid-2000s, Philips had invested over $2.5 billion in China, operated 25 wholly owned subsidiaries and joint ventures in China which together employed approximately 30,000 people. At this point Philips was exporting nearly two-thirds of the $7 billion in products that the factories produced every year. Philips accelerated its Chinese investment in anticipation of China’s entry into the World Trade Organization (WTO). The company planned to move even more production to China in the future. In 2003, Philips announced it would phase out production of electronic razors in the Netherlands, lay off 2,000 Dutch employees and move production to China by 2005. A week earlier, Philips had stated that it would expand capacity at its semiconductor factories in China, while phasing out production in higher-cost locations elsewhere. At this time, more than 25 per cent of everything Philips made worldwide came from China, and executives said the figure was rising rapidly. Several products, such as CD and DVD players, are now made only in China. Philips also started to give its Chinese factories a greater role in product development. In the TV business, for example, basic development used to occur in Holland but was moved to Singapore in the early 1990s. Now Philips has transferred TV development work to a new R&D centre in Suzhou near Shanghai. Similarly, basic product development work on LCD screens for cell phones was shifted to Shanghai in the mid-2000s. The attractions of China to Philips included continuing low wage rates, an educated workforce, a robust Chinese economy, a stable exchange rate that is pegged to the US dollar, a rapidly expanding industrial base, which included many other Western and Chinese companies that Philips uses as suppliers, and easier access to world markets after China’s entry to the WTO. Philips stated that ultimately its goal was to turn China into a global supply base from which the company’s products would be exported around the world. Some observers worried that Philips and companies pursuing a similar strategy might be overdoing it. Too much dependence on China could be dangerous if political, economic or other problems disrupted production and the companies’ ability to supply global markets. Some observers believed that it might be better if the manufacturing facilities of companies were more geographically diverse as a hedge against problems in China. These critics’ fears were given some substance in early 2003 when an outbreak of the pneumonia-like SARS (severe acute respiratory syndrome) virus in China resulted in the temporary shutdown of several plants operated by foreign companies and disrupted their global supply chains. Although Philips was not directly affected, it did restrict travel by its managers and engineers to its Chinese plants. (Source: L.P. Willcocks, using multiple published sources.)

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Chapter 12 Case 2: Hewlett Packard in Singapore In the late 1960s, Hewlett Packard was looking around Asia for a low-cost location to produce electronic components that were to be manufactured using labour-intensive processes. The company looked at several Asian locations and eventually settled on Singapore, opening its first factory there in 1970. Although Singapore did not have the lowest labour costs in the region, costs were low relative to North America. In addition, the Singapore location had several important benefits that could not be found at many other locations in Asia. The education level of the local workforce was high. English was widely spoken. The government of Singapore seemed stable and committed to economic development, and the city-state had one of the better infrastructures in the region, including good communications and transportation networks and a rapidly developing industrial and commercial base. Hewlett Packard also extracted favourable terms from the Singapore government with regard to taxes, tariffs and subsidies. At its start, the plant manufactured only basic components. The combination of low labour costs and a favourable tax regime helped to make this plant profitable earlier than expected. In 1973 Hewlett Packard transferred the manufacture of one of its basic handheld calculators from the United States to Singapore. The objective was to reduce manufacturing costs, which the Singapore factory was quickly able to do. Increasingly confident in the capability of the Singapore factory to handle entire products, as opposed to just components, Hewlett Packard’s management transferred other products to Singapore over the next few years including keyboards, solid-state displays and integrated circuits. However, all these products were still designed, developed and initially produced in the United States. The plant’s status shifted in the early 1980s when Hewlett Packard embarked on a worldwide campaign to boost product quality and reduce costs. It transferred the production of its HP41C handheld calculator to Singapore. The managers at the Singapore plant were given the goal of substantially reducing manufacturing costs. They argued that cost reduction could be achieved only if they were allowed to redesign the product so it could be manufactured at a lower overall cost. Hewlett Packard’s central management agreed, and 20 engineers from the Singapore facility were transferred to the United States for one year to learn how to design application-specific, integrated circuits. They then brought this expertise back to Singapore and set about redesigning the HP41C. The results were a huge success. By redesigning the product, the Singapore engineers reduced manufacturing costs for the HP41C by 50 per cent. Using this newly acquired capability for product design, the Singapore facility then set about redesigning other products it produced. Hewlett Packard’s corporate managers were so impressed with the progress made at the factory that they transferred production of the entire calculator line to Singapore in 1983. They followed this transfer with the partial transfer of ink-jet production to Singapore in 1984 and keyboard production in 1986. In all cases, the facility redesigned the products and often reduced unit manufacturing costs by more than 30 per cent. The initial development and design of al these products, however, still occurred in the United States. In the 1980s and early 1990s, the Singapore plant assumed added responsibilities, particularly in the ink-jet printer business. In 1990, the factory was given the job of redesigning an HP ink-jet printer for the Japanese market. Although the initial produce redesign was a market failure, the managers at Singapore pushed to be allowed to try again, and in 1991 they were given the job of redesigning HP’s DeskJet 505 printer for the Japanese market. This time the redesigned product was a success, garnering significant sales in Japan. Emboldened by this success, the plant has continued to take on additional design responsibilities. Today, it is

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viewed as a ‘lead plant’ within Hewlett Packard’s global network, with primary responsibility not just for manufacturing but also for the development and design of a family of small ink-jet printers targeted at the US market. (Source: L.P. Willcocks, using multiple published sources, including annual reports.) Further questions to consider: 1. Is HP still based in Singapore? Look at its location strategy in 2013. Use a search engine

to discover the role of Singapore in its overall strategy. 2. In recent years HP has run into a lot of strategic and financial problems. Do you think the

Singapore location has mitigated these problems or made them worse?

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Chapter 12 Case 3: Lenovo and in-house production In a modest factory on the outskirts of China’s capital, electronics maker, the Lenovo Group, displays its unusual approach toward capturing the top spot in the global computer market. The factory, which in 2013 assembles desktop computers and servers, resembles thousands of others across China. Robotic arms are in constant motion, moving parts and pieces around. Rows of workers, clad in blue, pop parts into place as computers make their way down the line. The factory can churn out about 25,000 machines in a day. The difference: the facility, its equipment and its employees are all part of Lenovo. It is one of eight company-owned factories around the world, with three more to be built in China and Brazil. That is a departure from the common industry practice, in which companies from Apple to Hewlett Packard increasingly outsource the assembly, and even design, of laptops and other gadgets to contract manufacturers. Lenovo sees retaining all these functions as a key advantage. ‘Selling PCs is like selling fresh fruit,’ says Lenovo chief executive Yang Yuanqing. ‘The speed of innovation is very fast, so you must know how to keep up with the pace, control inventory, to match supply with demand and handle very fast turnover.’1

This came into play late 2011 when flooding in Thailand caused a shortage of some types of hard drives for the computer industry. The company first had to battle with other companies to procure more hard drives. But because Lenovo assembles many of its own computers, it was able to quickly shift the mix of products in its pipeline to focus on products for which the hard drives were available, and prioritise products that had higher profit margins, according to Lenovo’s supply chain senior vice president.

The rapid rise of Lenovo According to the supply chain vice president, Lenovo gained a tremendous amount of market share during that industry crisis because of the speed of its supply chain. Lenovo saw its market share climb above 14 per cent in the fourth quarter as it shipped 13 million computers, up from 13.7 per cent in the previous quarter, according to research firm International Data Corporation (IDC). Hewlett Packard, the top computer vendor by unit sales for the past five years, saw its market share that quarter drop to 16 per cent from 18 per cent in the previous quarter. Hewlett Packard has never commented publicly on this. The in-house approach – combined with aggressively moving into fast-growing emerging markets – has helped Lenovo turn a declining business around. Its profit for the fiscal year ended March 31 grew by 73 per cent to $473 million, outpacing most of its rivals. As recently as 2009, Lenovo was still posting losses. Lenovo didn’t sell outside China until 2005, when it shocked the high-tech world by buying a major business unit of International Business Machines (IBM). Lenovo hired a US high-tech executive to run the company, but sales sagged during the recession. So, in 2009, Lenovo co-founder Liu Chuanzhi and Yang took control again and got the company back on track, largely by boosting sales in developing countries like China, India, Russia and other markets where PC sales have surged. Whereas Chinese manufacturers make huge numbers of computers and other devices sold by other companies, Lenovo is different because it sells under its own name. That makes it the first Chinese global consumer brand. By mid-2012, Lenovo faced a bigger challenge than its recent turnaround. Demand for traditional PCs was slumping as hand-held gadgets like Apple’s iPad gained popularity. Yang was hoping that his approach to the PC business would 1 Chao, L. ‘As rivals outsource Lenovo keeps production in-house, Wall Street Journal, 9 July 2012; http://online.wsj.com/article/SB10001424052702303302504577325522699291362.html (accessed 22 May 2013).

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aid a new push into new types of smartphones, tablets and internet-connected televisions. Early in 2012 Lenovo unveiled its first internet-connected television, the K91 Smart TV, then made it available for sale in China. Lenovo said it needed to line up deals with content providers before it could sell the TV in the USA and elsewhere, and did not know how quickly that would happen. Later in 2012, Lenovo planned to start selling its first smartphones powered by a chip designed by Intel Corp. It also was getting ready to start selling the IdeaPad Yoga, an ultrathin laptop with a keyboard that can swing behind the monitor to transform the gadget into an iPad-like tablet. David Wolf, chief executive of Wolf Group Asia, a Beijing-based marketing strategy firm, said the challenge for Lenovo was to develop products that are not just good products, but that people can’t wait to have. But, according to him, Lenovo recognise that there’s a pathway and they need to be on it. Sales of Lenovo’s newest products are small but growing. According to the IDC, the company was the fourth-largest vendor of tablets in the first quarter of 2012 with a 2.8 per cent share of unit shipments, up from number eight in the fourth quarter of last year. Apple, meanwhile, garnered a 63 per cent share of tablet shipments with its iPad. Apple chief executive Tim Cook has not been impressed with Lenovo’s tinkering with tablets. In an earnings call in April, when analysts asked if he would consider making a device to provide optional keyboards to iPads, he commented that you can converge a toaster and a refrigerator, but those things are probably not going to be pleasing to the user… you wind up compromising both and not pleasing either user. Yang spent a lot of time at the Consumer Electronics Show in Las Vegas in January looking at products from competitors. He said later that compared to Samsung, LG and those companies in terms of design, Lenovo still have room to improve. For him, those companies’ products are both fashionable and stylish. That represents a real challenge for Lenovo. Yang started out at the predecessor company of Lenovo in 1988, delivering computers by bicycle in the early days. In the USA, there is an infrastructure to fulfil a company’s every need. In China, by contrast, Lenovo had no infrastructure, so had to do it themselves. Its first advertisement was taped to the window of its office which Lenovo displayed by turning the lights on at night. Yang moved up the ranks after catching the eye of the company’s co-founder, Liu. He became chief executive in 2001 at the age of 36. That year, he led a team of 10 executives on a world tour of companies like Cisco Systems, Intel and Hewlett Packard, which at the time were more than three times Lenovo’s size by revenue. After Lenovo bought IBM’s PC unit in 2005, Yang moved to the USA; he stepped back from the CEO position and became chairman of the company, bringing US executives in to take his place. The integration of the two companies was rocky, but Lenovo’s profits were climbing sharply by mid-2008. However, the global economic downturn exposed huge vulnerabilities within the company. The IBM ThinkPad business was heavily reliant on commercial sales at a time when companies were reducing spending on technology, and Lenovo’s consumer business was strong only in China. The company struggled to get its products on the shelves of major retailers in the USA, and its global market share dropped to less than 7 per cent worldwide by unit shipments, lagging behind Hewlett Packard, Dell and Taiwan’s Acer. Lenovo co-founder Liu decided to return as chairman in 2009 while Yang shifted from the chairman’s seat back to being CEO. Liu has since stepped down, and in 2012 Yang was both chairman and CEO. He had a four-year plan. He refocused the company on China as well as other emerging markets. He expanded its vast network of resellers around China so that even in rural areas customers would be close to a Lenovo store with customer service, and he made an aggressive push into India and Russia, where IBM’s ThinkPads were well known but

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Lenovo’s brand wasn’t. Others in the industry have been sceptical of this approach. Steve Felice, Dell’s president, was asked in an earnings call in May 2012 why the company didn’t go after the market for competitively priced PCs, particularly in Asia. He replied that Dell had ‘backed off’ of that market. He added that Dell would watch the situation carefully, but he didn’t think that type of competition was sustainable at an industry-wide level. As part of the plan, Yang sat down in 2009 with Lenovo’s supply chain senior vice president, pouring over charts and analyses of the costs and benefits of in-house manufacturing. They decided to increase the company's in-house manufacturing to 50 per cent (from less than 30 per cent). Although three years before, the whole industry believed that the future was about outsourcing, Lenovo came to the conclusion that the company could move faster if it was more vertically integrated. Lenovo chief technology officer said in 2012 that the company’s strategy was playing a key role in the development of new products. Looking at the industry trends, most innovations for PCs, smartphones, tablets and smart TVs were related to innovation of key components such as display, battery and storage. Differentiation of key parts, for him, was very important. So Lenovo started investing more, and working very closely with key parts suppliers for products like bigger and thinner touch screens. He said consumers could expect to see some of these efforts embodied in new products from Lenovo by the end of 2012. Lenovo already has had some misses in its recent efforts to branch out into new products. One of its earliest efforts to show the world its innovative abilities was its U1 Hybrid, a combination notebook and tablet with a detachable keyboard unveiled in 2010, which proved too costly to make and which missed its release date. Eagerness drove Lenovo to show off the U1 Hybrid before it was ready. Still, the device, which was a novel idea at the time, did attract a lot of attention for the company, including from David Roman, formerly an executive at HP and Apple, who signed up that year to become Lenovo’s chief marketing officer. He says he joined the company because he was impressed by Lenovo’s innovative efforts and Yang’s determination, and saw its lack of brand identity as an opportunity. Roman said he wanted to find ways to make Lenovo into a brand considered to be cool and innovative rather than cheap by consumers around the world. But, as it turned out, his task started from inside the company. There were ‘very emotional discussions’ in the beginning about actually having ‘Lenovo’ on the front of the ThinkPad. The logic was the Lenovo name could actually be damaging to ThinkPad, but Roman could not see the logic of putting Lenovo’s best product on the market without its logo. Since then, Roman has launched an overhaul of the company’s image, purchasing advertising slots during hit prime-time TV shows such as ‘Glee’ and National Football League broadcasts. One advertisement shows a Lenovo laptop activating a parachute after being tossed out of a plane to show how quickly it boots. In Lenovo’s US offices, slogans from the campaign –Lenovo ‘for those who do’ – are plastered everywhere. Senior executives at Lenovo consider building a brand to be a crucial part of Lenovo’s next phase of growth now that the PC business is on an upswing. The message from the senior executives is: to have higher market share, you need to have a brand. (Source: L.P. Wilcocks, using multiple published sources, including Chao, L. ‘As rivals outsource Lenovo keeps production in-house, Wall Street Journal, 9 July 2012; http://online.wsj.com/article/SB10001424052702303302504577325522699291362.html (accessed 22 May 2013).

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Chapter 12 Case 4: PanGenesis and offshore outsourcing ‘We have an innovative workforce solution for offshore outsourcing,’ asserted Carlos Apéstegui, head of PanGenesis’s Costa Rican operations. ‘We have a unique apprentice programme to tap young Costa Rican students and a special approach to importing highly qualified labour into Costa Rica. We have created a formula that allows us to lower charge rates, perform faster development – and all this in this attractive small nation.’ He finished his sentence by waving at the many tropical plants around him in the garden of the hotel hosting a large technology conference.

His guest was Paul Matzurski, a deputy CIO at a large US corporation who was visiting Costa Rica for the first time in search of new destinations for offshore outsourcing. Matzurski sipped his drink and said, ‘I didn’t know the extent of the tight labour market here and even the rest of Latin America.’ He continued: ‘You know, labour scarcity, the search for talent, and a tight labour market are all issues we deal with a lot in the USA. We hear about the tight labour markets in India and elsewhere. I was surprised to learn this is the case here in Costa Rica. Even [Costa Rican] President Arias spoke of spending more on education during his keynote address to this conference yesterday.’

PanGenesis’s CEO, Richard W. Knudson, spoke up: ‘Let me tell you the details of PanGenesis’s workforce and pricing plans,’ he said to Matzurski. ‘Do you have a sheet of paper? I will explain.’ Fifteen minutes later, Matzurski had a much clearer appreciation of PanGenesis’s ambitious plans.

Matzurski leaned back and pondered the PanGenesis value proposition for offshore outsourcing. This is certainly creative, intriguing, and ambitious, he thought, but will it work? Will the programme provide the apparent substantial improvement in productivity and quality at a lower cost with quicker delivery? Will the plan generate enough skilled employees? How many more years will it take to get the kinks out of this new workforce method? In 1997, Costa Rica’s president, José María Figueres, flew to California to visit Intel’s headquarters in Santa Clara, California. This was an unusual visit: the president of a tiny Central American country was coming to press his case that Intel, one of the world’s most important tech companies, should choose Costa Rica as the next location of its semiconductor plant.

The Intel gamble clearly paid off. Costa Rica is now a high-tech star. Intel alone employs 5,500 in country. The other major multinational corporation player in the country is Hewlett Packard, which employs a similar number. Dozens of other foreign tech companies, including those in the life sciences, have set up operations in Costa Rica, and hundreds of indigenous Costa Rican firms have sprouted up selling their products and services to clients in the region, as well as to North America and to Europe. Until its rise as a tech centre, Costa Rica was best known for its coffee, bananas, rain forest and, most interesting, abolishing its standing army in 1948.

Costa Rica has only 4 million people and so the boom in high tech has led to an usual high-tech labour crunch with escalating salaries. Of the labour force, there are about 7,500 software professionals (or as many as 25,000 if broader assumptions are used) and another 20,000 employees in a related boom sector: call centres. Costa Rica has nurtured good schools and universities, both public and private, yielding one of the highest literacy rates in the world. In addition to the major public universities, one of its leading a private universities, Universidad

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Latina, has established a number of computer-related programs that help train software professionals.

And its timing has been right. By 2007 the global tech boom was in its second decade, with an accelerating global demand for software professionals in both wealthy and emerging nations and an ensuing labour crunch and a related problem of turnover as people jumped from job to job in the hot market seeking higher salaries. At the same time, baby boomers in Europe and the United States were racing toward retirement, with US Labor Department estimates that by 2020, there will be a 28 million person shortage in the labour force. And so, after looking at the overheated markets in India and China, and the upcoming crunch in the USA, many have turned to labour markets in Latin America to fill the void. PanGenesis is one of the companies that was in the right place.

PanGenesis is an IT services firm targeting and servicing multinational clients. Thus, its foreign clients outsource IT support offshore (nearshore) to PanGenesis. PanGenesis was founded in 2002 and is headed by three experienced leaders. American CEO and founder Richard W. Knudson is an old hand in offshoring, having lived in India for seven years consulting to the Indian IT industry. Among his many accomplishments, Knudson was involved in early capability maturity model (CMM) evaluations in India and China. The firm’s president is Jim Kamenelis, the former CIO of Xerox Palo Alto Research Centre, one of the most venerated R&D centres in modern US history. Carlos Apéstegui heads operations in Costa Rica. He is a native of Costa Rica and has 20 years of successful IT business operations in Costa Rica.

PanGenesis is building several programmes for tapping inexpensive but well-trained IT labour.

Apprentice programme

CEO Knudson and President Kamenelis began working with the newly elected Able Pacheco government in 2002 to create apprentice programmes. Working with influential people in Costa Rica and making his case directly to the president and the science and technology minister, Pardo-Evens, many of the elements of the programme were in place in 2007. At its core, the programme targets young, poor students just out of secondary school. There are many excellent students who are not funnelled through career tracks for various reasons. Typically they are busy working to contribute to the family income. Only about 20 per cent of 2,500 applicants who apply at the state-funded public university computer science (CS) program are accepted, with the remaining 80 per cent ripe for an apprentice programme. Of those who are accepted into the CS programs, 60 per cent are unable to finish. A related source of apprentices are the 450 students who finish the strong high school IT track, comprising 2,500 hours of work. In spite of their computer prowess, many seek structure in their computer career plans. All of these students can be turned into productive software engineering professionals through the apprentice programme. The students undergo a rigorous six-month training programme that includes English immersion; intensive programming concepts; configuration management using well-known software; quality assurance audits; nightly code reviews; training in documentation; and teamwork, scheduling and statistical analysis. Once the training is successfully completed, the graduates become engineering apprentices and are assigned to support a seasoned software engineer for four hours a day. This pair acts as a development team. The qualification for an apprentice is modelled in Figure 1 below.

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Figure 1. The apprentice relieves the software engineer from having to perform important but non-engineering housekeeping tasks that take up a substantial amount of time. This frees the engineer to focus on high-impact software engineering tasks. While fully educated and experienced software engineers are ‘charged out’ at up to $30 an hour, an apprentice is charged to the client at a much lower rate. PanGenesis’s income for the apprentice is used to fund the apprentice’s living expenses, pay the university for the apprentice’s four-year university education to receive a software engineering degree, and sponsor grants for underprivileged students and support university classrooms and laboratories. To remain an apprentice the student must pursue a university degree as a software engineer, maintain high grades, properly and diligently perform his or her apprenticeship assignments, and commit themselves to working for PanGenesis after graduating from the university. The apprentice works four hours each day and attends the university the remainder of the time. This programme is modelled in Figure 2 below.

Figure 2. As shown in Table 1 that follows, the apprentice model allows PanGenesis to significantly underbid competitors while substantially reducing project and development costs and delivery times. In addition to schedule and cost benefits, the services and products receive a substantial improvement in quality due to 100 per cent code reviews and frequent quality audits conducted by the well-trained apprentices. This value-added to quality and project cost is not factored into the savings already achieved by the apprenticeship model.

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Costs and charges for apprentice-supported teams Typical engineering tasks Hours Core engineering work 4.0 Productive housekeeping tasks: configuration management, code review, quality audits, scheduling, statistical analysis, etc.

2.5

Social time: Phone calls, long lunch, breaks, non-business conversation

1.5

In the traditional model, assume a typical project with the following parameters: Traditional model Metrics Total project hours 10,000 Rate charged in offshore outsourcing $30 per hour Skills needed: Engineers experienced in J2EE, Web applications 5 or more years

experience

Number of engineers assigned 5

Effort per week 200 hours per week Duration 50 weeks Total charge to customer $300,000 In the PanGenesis apprentice model, the apprentice takes over some of the software engineer’s productive housekeeping tasks: Apprentice model Metrics Number of total productive hours (1,000 hours added for apprentice management)

11,000

Apprentice daily work hours 4

Engineering rate $30 per hour Apprentice rate $9 Total weekly charge to customer of a team of engineers and apprentices $1,380

Charge rate by PanGenesis (engineers with five or more years of experience)

$23 per hour

Effort per week (engineers and apprentices) 300 hours

Duration (total hours/weekly burn rate) 37 weeks Total cost to PanGenesis of team of engineer and apprentice (hours × average rate)

$253,000

Table 1: Software engineer productivity: the workday breakdown.

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Underemployed university graduates

According to the government’s estimate, Costa Rica has 47,000 underemployed or unemployed university graduates. The Arias government’s minister of science and technology, E. Flores, would like to retrain them for IT. Therefore, PanGenesis has included a fast-track programme for these professionals using the apprenticeship programme model. These professionals have experience in business that would add value to their role as a software engineer. The PanGenesis programme is an accelerated two-year programme during which students work while attending the core software engineering courses to qualify for a degree in software engineering. The accelerated pace is based on having met prior university general education and elective requirements from the employee’s previous degree. Income from the client for the degreed professional/apprentice is used in the same way as the income from secondary school graduates who cannot afford the university.

Labour importation

The last element of the PanGenesis model is to build a large, scalable, highly qualified engineering workforce. To accomplish this, it is augmenting Costa Rican labour with guest workers from other nations. PanGenesis has established an international IT sourcing capability, hiring skilled software engineers from Eastern Europe, the Philippines and Latin America. This initial workforce will serve clients and will be the first mentors to the apprenticeship workforce being developed. Of particular interest to the firm is the Philippines, which has a relatively large and mobile IT professional labour pool. Its engineers are well trained, speak excellent English and are also familiar with Spanish. Filipino employees will enjoy income tax exemption because they are working outside the Philippines. They will be working for an affiliate company of PanGenesis. PanGenesis pays their social security tax due on salary received in Costa Rica, and provides them with room and board expenses. (Source: © Oshri, I., J. Kotlarksy and L. Willcocks The handbook of global outsourcing and offshoring. (Basingstoke: Palgrave Macmillan, 2011) second edition [ISBN 9780230293526] pp.70‒76. Reprinted with kind permission from Palgrave McMillan and the author, Erran Carmel.)

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Chapter 13 Case 1: WR Grace and information systems WR Grace is a chemical manufacturer with its headquarters in Columbia, Maryland. Founded in 1854, the company develops and sells specialty chemicals and construction products and has been a worldwide leader in those fields. Grace has over 6,300 employees and earned $2.8 billion in revenues in 2009. The company has two operating segments: Grace Davison, which focuses on specialty chemicals and formulation technologies, and Grace Construction Products, which focuses on specialty construction materials, systems and services. Between these two divisions, there are over 200 separate subsidiaries and several different legal entities that comprise the full company. Grace has operations in 45 countries around the world. Though Grace is a strong and successful company, global companies with separate divisions often struggle to unify their information systems. Grace is not a single, cohesive business unit – it’s an amalgam of many operating divisions, subsidiaries and business units, all of which use different financial data, reports and reconciliation methods. Though this ‘fractured’ structure is common to most global companies, it created problems for the company’s general ledger. The general ledger of a business is its main accounting record. General ledgers use double-entry bookkeeping, which means that all of the transactions made by a company are entered into two different accounts: debits and credits. General ledgers include accounts for current assets, fixed assets, liabilities, revenues and expense items, gains, and losses. It’s no surprise that a global company that earns several billion dollars in revenues would have a complicated ledger system, but Grace’s general ledger set-up was more than just complicated. It was a disorganised tangle of multiple ledgers, redundant data, and inefficiency processes. The company had three separate ledger systems from SAP: one for its legal reporting requirements team and two more for each of its two major operating segments, Grace Davison and Grace Construction Products. But each of the three implementations for these systems occurred several years apart, so the differences between the ledgers were substantial. All three ledgers had different configurations and different levels of granularity within the reporting functionality, and all three of the ledgers were driven by separate data sources. The ‘classic’ general ledger is used for reporting revenues and expenditures for all subsidiaries, accounts and business areas. The Grace Davison ledger stored information on company codes (subsidiary ID numbers), accounts, profit centres, plants and trading partners. The Grace Construction Products management ledger stored information on company codes, accounts, business areas, profit centres, trading partners and destination countries. Grace Davison used profit-centre accounting for its management reporting, and Grace Construction Products used special-purpose ledgers to gather the same financial information. If this sounds like a confusing arrangement, that’s because it was. Consolidating this data across the two divisions and across its many sub-divisions proved difficult, and compiling company financial reports was a painstaking and time-consuming task. Reconciling the financial data from each of the three reporting sources resulted in lengthy financial close cycles and consumed excessive amounts of employee time and resources. Michael Brown, director of finance productivity at Grace, said that ‘from a financial point of view, we were basically three different companies’. Grace management decided that the company needed to eliminate the financial reporting ‘silos’ and create a system that served all parts of Grace’s business. The company hoped to create a global financial standard for its financial reporting system, using the slogan ‘one Grace’ to rally the company to work towards that standard. SAP General Ledger was the most important factor in Grace’s ability to accomplish its goal. Attractive to Grace because of its

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many unique and useful features, SAP General Ledger has the ability to automatically and simultaneously post all sub-ledger items in the appropriate general accounts, simultaneously update general ledger and cost accounting areas, and evaluate and report on current accounting data in real time. Grace also liked SAP’s centralised approach to general ledger, including up-to-date references for the rendering of accounts across all of its divisions. Consolidating multiple ledgers is a difficult task. SAP General Ledger helped Grace to simplify the process. SAP Consulting and an SAP General Ledger migration team assisted the company along the way. SAP implementations feature an SAP team leader and project manager as well as a migration cockpit. The migration cockpit is a feature of SAP implementations that offers a graphical representation and overview of the general ledger migration process. The cockpit displays steps of the migration in sequence and manages logs, attachments, and other materials important to the general ledger. The migration cockpit helps to ensure that sufficient planning goes into the general ledger consolidation process, and that the necessary business process changes accompany the technical changes of implementing a unified general ledger. SAP and Grace split the project into two main components: General Ledger Data Migration and Business Process Testing. General Ledger Data Migration involved acquiring all of the relevant data from Grace’s three separate ledgers, combining it and eliminating redundancies, and supplying it to the SAP General Ledger. A small team executed this half of the project. Grace decided to standardise its reporting processes around profit-centre accounting and built its general ledger design with that standard in mind. Business process testing was completed by a global SAP team performing multiple full-cycle tests. In other words, SAP testers accessed the system remotely and tested all of the functions of SAP General Ledger to ensure that the system would work as planned. The SAP General Ledger project manager oversaw both components of the project. During the testing process, SAP testers used a technique called ‘unit testing’, common to many system upgrades of this type. The testers set up a ‘dummy’ system with a prototype version of the general ledger and used it to test different types of accounting documents. Grace wanted to modify the configuration of the general ledger to conform to the company’s unique needs and circumstances, and made sure that the people who knew what was needed were building the system and designing its specifications. Because of these adjustments, unit testing was critical to ensure that configuration changes had not affected the overall integrity of the system. SAP testers also performed basic scenario tests, complex scenario tests and tests on special accounting document types in an effort to ensure that the general ledger was equipped to handle all of the tasks Grace expected it to perform. They also tested in-bound finance interfaces, such as the HR interface, bank statements and upload programmes, as well as special document types used by those interfaces. SAP and Grace both knew that a significant effort would be required to properly test the general ledger, and SAP’s experience with similar upgrades in the past was helpful in ensuring that SAP performed the proper number of tests. After the data migration was completed, Grace had to decommission its old ledgers, which were still pivotal sources for many of the custom reports that the company was generating on a regular basis. For example, reports are automatically generated from the special-purpose ledger, or reports that group all the transactions that took place within a particular country in the past year, and so on. To decommission its old ledgers, Grace had to eliminate as many of those custom reports as it could, and move the essential ones over to the new general ledger. Grace recruited employees from all areas of their financial division to identify the most critical reports. With the general ledger migration completed, all of WR Grace shares a common accounting infrastructure. Now management can quickly develop an overall picture of the company’s financial status, and most of the ledger can be accessed or updated in real time. The financial

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reconciliation processes at the end of each reporting period were totally eliminated, allowing Grace to devote less energy to managing its ledgers and more on actually running its business. The eventual savings in all areas of the business should pay for the installation in a short time. Grace’s accountants and financial planners will be much more efficient. Managers will spend less time getting the information they need. The total IT costs for maintaining a single ledger will be far less than the costs for maintaining three, and fewer errors will make their way into the general ledger system. Best of all for Grace, the implementation was completed on time and under budget. Grace hopes to use the General Ledger platform to continue making other improvements with SAP. Grace plans to upgrade its consolidation systems, financial planning and analytics functions to SAP systems. Grace already had a strong relationship with SAP. In 1997, Grace installed SAP software for the first time, and prior to the general ledger migration, Grace was already using SAP Business Information Warehouse and NetWeaver Portal globally. This pre-existing relationship made the process of implementing SAP General Ledger much easier. It’s also the reason why Grace is so optimistic that by switching to SAP solutions it will achieve similar gains in other areas of its business. (Source: L.P. Willcocks, using multiple published sources.)

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Chapter 13 Case 2: 3M develops a global IT architecture 3M is a diversified technology company with a global presence. Its products are available in 200 countries, it has operations in 62 countries and it produces over 55,000 products. In 2009, the company generated $23.1 billion in revenue, down from $25.6 billion (8 per cent) in 2008 as the global recession slowed business activity. The company employs 76,000 people. 3M, with headquarters in Minnesota in the USA, is the poster-child for global US firms: 63 per cent of its revenue comes from offshore sales (14.6 billion) and 58 per cent of its employees are international. Historically 3M’s core competencies have been sticky films and scratchy papers (sandpaper) and, since its founding in 1902, the company has continuously demonstrated through new products just how much the world depends on these competencies. 3M is organized into six largely independent divisions: industrial and transportation (tapes, abrasives and adhesives); healthcare (surgical tapes to dental inserts); consumer and office (furnace filters to Post-it notes and Scotchbrite pads); safety, security and protection services (respirators to Thinsulite insulation and RFD equipment); display and graphics (LCD monitors to highway reflective tape); and electro and communications (insulating materials to disk drive lubricants). 3M is among the leading manufacturers of products for many of the markets it serves. With such a large global presence and with many of its foreign operations the result of purchases, the company was until recently a collection of legacy applications spread across the globe. 3M inherited the hardware and software of acquired companies, from the shop floor to supply chain, sales, office and reporting systems. Even where 3M expanded organically by moving into new countries, each of the six divisions, and thousands of their smaller operations, developed their own information and reporting systems with very little corporate, global oversight. As one manager noted, if 3M continued to operate its business with an accumulation of disaggregated solutions, the company would not be able to efficiently operate in the current recession, or support future growth. In 2008, 3M began a series of restructurings of its operations, including a review of its global systems. In 2010, 3M adopted SAP’s Business Suite Applications to replace all of its legacy software around the world. The intent was to transform its business processes on a global scale, and force independent divisions to adopt common software tools and, more importantly, common business processes. The price tag was also global: licensing fees paid to SAP are reported to be somewhere in the region of $35 million to $75 million. Business Suite 7 is SAP’s brand of enterprise systems. It consists of five integrated modules that can be run on a wide variety of hardware platforms, and which work well with software from other vendors. The core business process and software modules are customer relationship management (CRM), enterprise resource planning (ERP), product lifecycle management, supply chain management (SCM) and supplier relationship management. Each module has pre-defined business processes and the software needed to support these processes. Firms adapt their own business processes to these ‘industry best practice modules,’ or make changes in the SAP software to fit their business models. Business Suite is built on a service-oriented architecture (SOA), which means it can work well with data from legacy database systems and offers lower implementation costs. In implementing SAP’s Business Suite, 3M is not following in the footsteps of some ill-fated global system initiatives by other Fortune 500 companies. Rather than do a ‘rip, burn, replace’ of all its old software, 3M is rolling out the SAP enterprise software in phased and modular stages. Following a piecemeal approach, it is rolling out a demand forecasting and supply

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planning module in Europe first, and then once the concept is validated, additional rollouts will follow around the world. In Asia-Pacific, 3M is implementing its ERP system over the next few years. In the past, executive managers in the USA did not have timely, accurate or consistent information on how all the firm’s business units, regions and products were performing. To a large extent, 3M was not manageable or governable prior to the current effort to rationalise its systems. One solution will be SAP’s business intelligence (BI) software which will enable 3M’s management to access accurate and timely data on business performance across its divisions to support informed decision-making. The SAP software agreement enables 3M to integrate the best practices it has gained with its existing BI deployments from the SAP BusinessObject portfolio in the USA and in other regions into the global rollout template. One advantage of having integrated global systems is the ability to transfer what you learn in one region to another region. In a further sign that 3M management has a keen understanding of corporate structure and strategy, the firm plans to maintain a large measure of independence among the six divisions because their histories and products are so different. It will not force the divisions to adopt a single instance of the SAP products but instead will allow substantial variation among divisions – what one wag called ‘virtual instances’ of the software that reflect the needs of customers served by the various divisions. 3M’s efforts to create a global IT infrastructure identify some of the issues that truly global organisations need to consider if they want to operate across the globe. Like many large, multinational firms, 3M grew rapidly by purchasing other businesses in foreign countries, as well as through expanding domestic operations to foreign countries. In the process, 3M inherited hundreds of legacy software systems and developed new systems, few of which could share information with one another, or report consistent information to corporate headquarters. 3M’s legacy information systems simply could not support timely management decision-making on a global scale. To solve its global management and business challenges, 3M adopted an integrated suite of software applications from SAP, one of the world’s largest software firms. 3M had to devise a flexible, modular implementation strategy that integrated both the existing legacy systems and preserved some measure of autonomy for the six divisions that are the basis of the company. 3M is now able to respond to changes in business conditions around the globe and around the clock. (Source: © L.P. Willcocks, using multiple published sources.)

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Chapter 12 Case 3: ABB and a ‘multinational’ approach When ABB was created in 1988 through a merger between Swedish ASEA AB and Swiss BBC Brown Boveri, the new CEO, Percy Barnevik, believed that local presence was key and soon became famous for his ‘multi-domestic’ approach. Under the company slogan ‘Think Global, Act Local’, Barnevik created a federation of thousands of companies that were distinct businesses and separate legal entities. In Barnevik’s own words, ABB wanted to be ‘global and local, big and small, radically decentralised with centralised reporting and control’. For many years, ABB’s local operations were organised within the framework of a two-dimensional matrix aimed at maximising performance in every country while coordinating across business product areas globally. Every local manager reported to one or several product area managers responsible for developing worldwide product and technology strategies, as well as a regional manager in charge of executing these strategies based on the unique needs of local markets. However, the driving thrust of ABB was local profits; if a local manager could show good financial performance, he or she enjoyed great operational independence from regional or global influence. ABB relied on the principle that a decentralised organisation works effectively when there is financial accountability to higher-level managers. To this end, the company designed a global financial reporting system called ABACUS, which collected uniform financial performance data at a high level for the company’s 4,500 profit centres. ABB’s ‘multi-local’ model was held up as a best practice example of successful decentralisation during the 1990s. The local nature of the ABB business, the ABACUS financial performance measures, the effort to foster culturally sensitive managers and the small but effective top management team were considered the key strengths of ABB’s multinational approach. (Source: Kettinger, W., D. Marchand and J. Davis ‘Designing enterprise IT architectures to optimise flexibility and standardisation in global business’, MISQ Executive 9(2) June 2010, pp.95–113..Reprinted with kind permission from MISQE.)

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Chapter 13 Case 4: Escalation in global outsourcing projects: the XperTrans-C&C BPO Case 1

Introduction It is March 2011. Francesca Harding, an independent consultant with many years of experience in IT and business process outsourcing, has been hired to analyse the recent history of outsourcing of the human resource (HR) function at Clean&Cure (C&C), a global multinational company. John Delaney C&C’s CIO, appointed in February 2011, invited Harding into his office, then shook his head ruefully. ‘You know, Francesca, the more they tell me, the more I just do not understand why they went on with it. I mean, I like the original idea, the principle, but there were so many things they could and perhaps should have done.... well, that’s my thinking anyway. And of course things have moved on from last year when the contract was taken over by another supplier. I can’t say we are happy. We have just brought HR in Germany back in-house. What I want from you is a sober, objective report on what happened and what we can learn from it, but more importantly what we should do now. Something I can discuss with HR Director, and the CEO as a matter of urgency. Are you up for it?’ Francesca Harding nodded. ‘I am going to need to talk to quite a few people, John, and I am going to need a lot of documents. Then give me two weeks, and I will come back with something that hopefully makes sense. These things are like detective stories, except there rarely is one person or one factor, or one explanation, but I guess the really important thing is that the organisation gets to learn from it, and gets to put its sourcing, project management and IT function on the right footing.’ ‘Yeah, that’s right,’ said Delaney. ‘Well good luck with it.’ And with that Francesca Harding went off to do her analysis of the XperTrans- C&C case that had caused the participant organisations so much grief over the previous four years. Here is what she found. Beginnings XperTrans is a US-based outsourcing provider, which entered into human resources outsourcing (HRO) services in the early 2000s. However, working assiduously in the early 2000s, XperTrans established a HRO client base of renowned multinational companies within a matter of a few years. The HRO business line was not XperTrans’s core business – in fact in 2007 it only accounted for 10 per cent of the company’s revenues. The firm’s main areas of focus have always been, and into 2007 remained, Customer Management and Information Technology operations. In 2007 XperTrans was successful in winning the biggest global HRO deal of the time, with the client company Clean&Cure (C&C), beating big competing suppliers such as Accenture and IBM. The XperTrans-Clean&Cure contract was signed in May 2007, though the bidding process stretched back into 2006. A ten-year contract was signed worth more than $1 billion. XperTrans agreed to support 120,000 C&C employees working for 250 different C&C subsidiaries all around the world. Within the Europe, Middle East and Africa region XperTrans’s aim was to cover 44 C&C countries in 13 languages from their Hungarian service centre with a planned total headcount of 150‒200 employees.

1 This case is based on real client and supplier companies but the two organizations have been renamed to preserve the anonymity requested. Participants from the two companies have also had their names changed in the text. All detail is otherwise accurate except where confidentiality or competitiveness issues arise, in which case the data has been suppressed or generalised. The case has been designed for class discussion only rather than to indicate good or bad practice in the particular circumstances prevailing. The authors are Dorottya Kovasznai and Leslie Willcocks of the LSE.

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The aim of the contract was to provide a HRO solution that covered the full employee lifecycle from recruitment to termination, supporting all HR domains (recruitment, HR administration, payroll, compensation, benefits, training,etc.). The designed business processes were based on XperTrans’ self-developed HR Information Technology Services. The HR IT Services included the management and administration of a centralised and consolidated global HR system that was deployed to manage and administer employee data and reporting.

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2006 2007 2008 2009 2010 2011

Recruitment of EMEA regional implementation team begins

EMEA Service Centre management and Wave A employees recruited and trained. Planned total EMEA Service Centre headcount 150-200 to support 44 C&C countries in 13 languages

Global design workshops finish and EMEA design workshops begin: 88 EMEA local workshops to be held by early 2008

XperTrans-C&C deal signed in May 2007:- Biggest ever HRO contract at the time- Project value (for 10 years) exceeded $1 billion- XperTrans agreed to support 120.000 C&C employees globally

Sales pursuit and contract crafting process begins

Massive recruitment campaign and XperTrans Service Centre site ramp-up in preparation for planned July 1, 2009 Wave B go live. Wave B training and Wave C implementation continue, but a growing number of countries are delayed to later implementation Waves

Implementation team starts developing Service Centre operational workflows and processes

June 2010: -ANG takeover comes into effect

Aug 2009:-Project put on hold for an unspecified period and XperTrans asked to stabilise Wave A operations-Announcement of Wave B resources' layoff

Aug 2009 - Febr 2010:-Wave A stabilisation

Early 2009: -Series of Wave A country delays

Wave A go live with 2 countries (South Africa-1 March, Germany-1 April): -Serious operational issues after go live (e.g. payroll)

June 2009:-Temporary freeze of global Wave B preparation activities announced-No new go live date specified

Oct 2009:-Majority of Wave B resources released

Febr 2010:-XperTrans CEO & president replaced

March 2010: -XperTrans sells HR Management line of business to competitor ANG

July 2010: -C&C takes payroll back in-house globally

Figure 1: XperTrans-C&C Timeline (Europe Middle East and Africa focus).

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In addition, HR IT also covered the management of enterprise application interfaces, security, business continuity and disaster recovery services, as well as the administration and management of integrated Employee and Manager Self Service applications. Automation and integration of HR processes were crucial for C&C, as by 2007 the company’s HR activities were performed using 665 different software applications across its subsidiaries. In contrast, XperTrans set out on a large-scale rationalisation, aiming to deliver HRO services to C&C based on 30 software packages and tools. As originally planned, most C&C subsidiaries used SAP to manage their HR operations, so the supplier XperTrans decided to stick to this and host SAP as part of its service. This meant that all payroll functions and the full employee lifecycle management (compensation, benefits, HR administration, etc.) would be handled through a standard SAP HR module, though these were to be harmonised across the various C&C subsidiaries. In addition, XperTrans planned to develop custom applications to (1) handle Contact/Case tracking between C&C and the XperTrans service centre, (2) integrate payroll across subsidiaries, and (3) to conduct employee satisfaction surveys. The remaining 27 software/tools to be applied by XperTrans were to be purchased from other third party vendors and covered many different purposes. Three examples were: Recruiting/Applicant Tracking (Taleo), Performance Management / Succession Planning (SuccessFactors), and Knowledge Management (Authoria). The original intention of XperTrans was to implement their HR outsourcing model developed in the USA with minimal changes, despite the implementation going into C&C’s European, Middle East and Africa (EMEA) region. The project plan and its implementation The project was broken down into numerous Waves and Phases and a country-by-country go-live plan in order to realise a step-by-step implementation approach and to avoid the pitfalls of a ‘big-bang’ strategy. The initially planned project timelines are shown in Figure 1 and Figure 2.

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Figure 2: XperTrans-C&C project waves and countries.

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Figure 3:XperTrans-C&C project go-live milestones (EMEA-specific).

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The project had an extremely ambitious timeline: global design workshops were to be finished in late 2007, regional design and implementation were supposed to be completed within the following two years, and all countries were expected to go live by mid-2010 (see Figures 2 and 3). However, the EMEA implementation team encountered a series of difficulties when they commenced the development of regional HR business processes because the adjustment of the US-developed service model to the local circumstances emerged as a far from straightforward process. In particular, the US model could not easily accommodate the immense complexity of the country-specific labour legislation requirements and the diverse HR practices present in the EMEA region. After the go-live with the first wave of countries (‘Wave A’: South Africa and Germany) in early 2009 (see Figure 2), XperTrans experienced a series of serious operational issues which made it clear that the implemented HRO solution was far from ideal. The main problem was XperTrans’s inability to meet the payroll accuracy service level agreement, which obviously raised concerns on C&C’s side. To make things worse, the implementation team was struggling to meet the development deadlines set for the upcoming project waves and consequentially numerous country-go lives had to be postponed. Still, in spite of the growing problems surrounding the project, it came as a surprise for XperTrans that in June 2009 C&C requested to delay the Wave B go-live scheduled for the following month (see Figure 2). Finally, in August 2009 the client requested XperTrans to put the entire project ‘on hold’ for an unspecified period of time and asked them to concentrate on the stabilisation of the live Wave A countries. Although in the EMEA region Wave A only involved a relatively small employee population in South Africa and Germany, on a global level XperTrans were already servicing more than 50 per cent of C&C’s total headcount. This was due to the fact that in North America the USA and Canada ‒ with a significant employee population ‒ had already gone live. At this stage, Clean&Cure were worried that the outsourcing project might jeopardise their entire HR operations, but in their view, it was already too late for them to back out of the contract. From August 2009 to February 2010 XperTrans worked diligently on stabilising the project, but the majority of their resources hired to support the Wave B countries were laid off. In early 2010 XperTrans announced that their CEO and president were to be replaced, and in March 2010 they agreed to sell their HR management line of business to ANG (a competitor in the HRO arena) with an effective date of 1 June 2010. ANG took over all client accounts from XperTrans and XperTrans’s own in-house HR operations. ANG also brought its own clients to the Budapest-based service centre XperTrans and C&C had established. The future of the project became insecure. In practice, Clean&Cure decided to take payroll back in-house globally in July 2010, but there was no decision on the future of the remaining outsourced HR operations. Throughout the winter of 2010‒11 ANG worked initially on the idea of expanding the number of clients serviced from Hungary, but after reviewing the XperTrans contracts they had taken over, they changed plans. In March 2011 C&C decided to backsource their entire German account with immediate effect. The outsourcing arrangement there

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was not working well, and C&C found themselves facing a series of further decisions to sort out their HR sourcing strategy and future. Outsourcing management Francesca Harding contemplated this history with little pleasure. She could see that the timelines were ambitious and that there was a lot more complexity than both companies originally saw in what they were undertaking. She also drew on her long experience and did an analysis of other issues against the better practice she had seen in many other outsourcing arrangements. In particular she focused on strategy, contracting, relational governance and project management. On strategy, C&C had turned to outsourcing to harmonise their disparate HR systems into a more cost effective global HR system. The aim was to outsource all their HR activities except that which was considered ‘strategic’. For XperTrans, HRO had always been a small part of its operation, and this major deal offered a great opportunity to strengthen this line of business by creating a prestige client and site. At the time the deal was signed there were hardly any global HRO contracts of this size and scope, so there were no robust benchmarks available. XperTrans were selected because they seemed to provide the best combination of cost, scope, timeline and transformation. Harding knew some of the senior managers involved on the XperTrans side and managed to get to talk to several of them on the telephone. One gave her some insight into the selection process: ‘The people we had on-board during the sales pursuit were incredibly convincing. They were saying our capabilities were fantastic – if we get this deal we are able to build the plane while flying it.’ (XperTrans regional operations implementation manager). As far as Harding could work out, contract crafting had been a long and meticulous process, but it involved mainly sales people from XperTrans’s side and no experts with global service centre operation experience. In an attempt to please the client, XperTrans had also committed to provide a level of service that they were not providing to any other client. They also set an ambitious timeline. XperTrans had also promised to implement their US HR outsourcing solution with minimal changes to the EMEA region, without verifying the viability of this model. It was a fee-for service contract (employee/month) which turned out to be not at all profitable for XperTrans. A senior manager from XperTrans gave Harding some further insight that sounded useful: ‘American companies signing global deals have a very narrow minded vision, they don’t quite still understand that you can’t do it the same way in 44 countries as you do it in one. It would be important to have people from operations involved when crafting the contract to avoid setting unrealistic service levels.’ (XperTrans senior operations manager). Harding contemplated governance, relationships and project management. The relationship between the two companies seemed to have been generally positive and cooperative. C&C agreed to make payments towards the initial investment that XperTrans had to make upfront. The joint governance procedures were specified in detail by the contract including escalation, dispute resolution and change request procedures. The appointed contract managers on both sides were responsible for overseeing the development of the project on an ongoing basis. C&C was a very hands-on client and they were following the project closely at every stage. On the face of it there was not much wrong in these areas, as far as Harding could see.

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She decided to dig deeper still, but in another way. Harding re-looked at the case details and the interviews she had carried out, firstly at the macro level, then at middle and micro levels. She asked herself – how could this outsourcing arrangement secure continuous commitment from both organizations over several years, despite the obvious question marks that kept coming up in that period amongst everyone she talked to who had been involved in the project? Escalation at the macro-level The picture that emerged made it clear that the roots of XperTrans’s commitment to the C&C project went back to the history of the HRO business line within the supplier organisation. According to a senior XperTrans manager: ‘In the early 2000s XperTrans wanted to go into HRO, because it was fashionable and it seemed to be a big market. They thought it was similar to the other call centre businesses the company had already been in, but this was a mistake they made. In the US HRO is still relatively simple, but here in EMEA it is so massively complicated.’ In 2007 XperTrans’s HRO business line was still not profitable and winning a huge global contract with C&C was perceived as a great opportunity to turn things around. C&C fitted XperTrans’s desired client profile and there was a determination to learn from past mistakes and to do outsourcing with this client well. Furthermore, the project meant great opportunities for XperTrans locally as well, because the scope for Europe was massive. As a consequence, it soon became received wisdom that the C&C project was vital for both XperTrans as a company and for the Hungarian service centre. However, as the events unfolded, it turned out that the project was vital for XperTrans’s HRO business line only. XperTrans’s original aim was to implement their US HR outsourcing solution based on an integrated technology platform with minimal local customisations in all C&C countries worldwide. Although it soon turned out that for some HR domains (e.g. payroll, benefits) the US solution could not be easily applied to Europe, the EMEA resources had no choice but try and make the solution stipulated in the contract work by every means possible. To make things worse, XperTrans had committed to provide a level of service that they were not providing to any other client at the time. They also decided to start the EMEA implementations with a particularly complicated country, namely, in this case, Germany. Harding could see that there had been a strong disconnect between what was promised, the level of in-house knowledge XperTrans had, the timeline that was given and the actual requirements of the individual countries. The people who had a high level view and who made the high level judgements simply did not have the detailed information about what exactly would be required. This resulted in a serious resource planning issue and a series of middle-level and micro-level problems. A senior operations manager from XperTrans gave Harding the following summary: ‘They did not take into consideration the language differences and the fact that each of the 44 EMEA countries has its own unique legal regulatory system. I believe that the staff headcount calculations were fundamentally flawed as well. The complexity of the whole project was not mapped adequately and thus the IT support base of the whole operation

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could not be calibrated adequately. XperTrans’s HRO model works in the US, but not in Europe due to the local complexities and due to cultural differences.’ Escalation at the middle-level The XperTrans EMEA team assigned to the C&C project started to experience difficulties during the local design workshops. Though they were following the process development instructions provided by the US team diligently, it was not clear to them how the documents created at the workshops could be turned to usable work processes at the end of the day. According to one XperTrans manager: ‘The atmosphere at the local design workshops was generally very cooperative, but I think initially people did not really understand what their input was supposed to be… At that point I thought. ‘How on earth will this all come together?’’ In addition, as more and more countries were postponed to later project waves, it became a problem in itself that the development team was still working from the information collected on the local design workshops a long time previously. As one XperTrans manager told Harding: ‘Some of the information we used as an input to our work processes were based on three-year-old C&C decisions which had not been revised as time went by. This of course led to missed targets and serious escalations and disputes. It was simply unrealistic to expect that XperTrans was going to provide a service of six sigma accuracy under these circumstances.’ The sheer size of the venture and the high number of different teams working on the project often created situations when the stakeholders’ interests clashed. There were no people from operations involved in the contract crafting process, and as a result, XperTrans committed to providing unrealistically high service levels in an attempt to please the client. As the regional operations implementation manager from XperTrans put it: ‘Operations should have been involved in the design and in setting the service level agreements (SLAs), not just sales. What sales people tend to forget is that they should regard operations as the end user, because it is operations who actually need to run the service centre when it is fully implemented.’ All interviewees commented on the communication problems between the different working groups. Apparently, the XperTrans team had worked in silos: the solutions experts designed the processes, the IT specialists tried to translate them into IT functionality, and finally it was the operations team who had to work along the lines of those processes. To complicate things further, the IT specialists were all highly paid contractors who did not understand operations. Being outsiders, IT people did not have any incentive to spend time on trying to understand operations’ needs and this of course impacted the developed solution in a negative way. Finally, XperTrans’s practice of evaluating progress and making decisions had been heavily based on routines. The high-level contact managers never stopped to reassess the overall viability of the venture as a whole – they solely monitored project milestones and deadlines. According to a XperTrans training manager:

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‘We got to a stage where instead of creating processes adequately, people were rushing to finalise processes towards particular deadlines. We have been replacing many of the processes created before go-live, because they were created by people who were told to create processes, but who did not have a stake in creating those processes accurately. Some of the processes were very, very high level and vague, others were patchy and incomplete.’ Escalation at the micro-level The macro-level decision to try and implement XperTrans’s US HR outsourcing model in all C&C countries worldwide seemed to have had plenty of micro-level consequences. As a result of the complexity of the project, the ambitious timeline, the extremely strict SLAs, the flawed resource planning and the inadequate level of in-house expertise, the Wave A countries experienced serious difficulties after go-live. According to one project coodinator: ‘There were a series of seemingly insignificant practical issues which caused huge problems after we went live. There were numerous translation and data conversion problems, which caused serious SAP errors in the live system. The translation of fulfilment items to local languages had not been performed adequately and there were certain hard copy retention requirements the service centre had no information about. In some cases, processes were developed without taking into consideration the realities of the countries in question (e.g. you cannot build a process which relies on the postal services in South Africa.)’ According to one senior C&C manager, XperTrans started to lose credibility with C&C when they decided to hire external consultants to help them manage the implementation in the EMEA region: ‘A company employing consultancy in anything is doing so because it does not have enough knowledge in-house. And that is fine. But if you are supposed to be a HRO provider, it’s a bad sign if you have to hire consultants to tell you about employment law in certain countries.’ Organisational characteristics seemed to have further compounded the situation by preventing decision-makers from getting a clear picture of the real state of the project. On the client’s side, C&C had not requested early feedback from their own team internally – they waited for almost a year before they looked into the evaluation of the project. On XperTrans’s side, the delay in the client’s feedback had helped to maintain the impression that the project was more or less on track. Interestingly enough, there had been no employee transfers between C&C and XperTrans, which contributed to the low level of transparency between the two organisations. As XperTrans had not had prior experience in HRO projects of this scale, they did not have adequate planning, monitoring and self-assessment procedures in place: ‘At the beginning a lot of time was spent on having fun at workshops (and a lot of money was spent on travelling and staying in luxury hotels). But by the time got to 2009, travel restrictions had to be imposed because we were exceeding budgets; deadlines needed to be extended and panic started. I just think that there have not been realistic estimates made of the time and resources needed.’ (XperTrans training manager).

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Harding recalled that the contract had failed to take into consideration the circumstances of the regions outside the USA, and global leadership had not paid attention when European managers were raising concerns about the viability of the model in EMEA. Furthermore, XperTrans were not only working in silos, but in many cases the roles and responsibilities within the teams had not been clarified either. Harding could see that this made it hard to oversee the real status of the project and to assess the progress made. According to one senior manager: ‘The gaps were frustrating: the initial processes did not specify responsibility areas, decision-making points and exact escalation routes. At go-live no-one had the authority to initiate a comprehensive clean-up to evaluate what went well and what was missing. From April 2009 onwards we had been experiencing serious operational issues, but there was no-one there to put the project back on track. We had to wait until October 2009 for the stabilisation team to arrive.’ (XperTrans project coordinator). In addition to the broken communication lines and the lack of clarity over roles, timing was another issue. Many functionalities were not finalised until a couple of weeks before go-live, so operations people had not been able to be properly trained: ‘We had to wait until go live to see what actually happens in the systems and how. The IT specialists of course had known it, but they would not share, not even with the implementations team. We were talking about fictional theoretical systems up until the very last day before go-live.’ (Implementation team coordinator) From the point of view of technology, SAP HR was supposed to be configured in a standard way globally, but eventually the EMEA context had made country-specific customisations unavoidable. Due to cost and time constraints, there were a lot of SAP items not finished in time, while others were configured incorrectly. There was also an extraordinary lack of resources available for testing the systems. In addition, the testing did not go well, which made the client very concerned. At the end of the day, inadequate IT planning had cost XperTrans a lot of money, because it negatively impacted on the service centre’s readiness for go-live and it resulted in missing service levels on a regular basis. Finally, Harding noted that, although the driver of HR outsourcing was supposed to have been automation, XperTrans operation managers estimated that only around 50 per cent of the C&C project’s service centre processes were automated as of July 2010. Conclusion In rereading her notes the same questions kept coming back to Francesca Harding. She had seen it all too frequently in her career and not just in outsourcing. It seemed to be all too common in all sorts of organisational ventures. Was she seeing it again here? The phenomenon of escalation. Why do organisations embark upon questionable outsourcing ventures and why do they persist with them well beyond an economically defensible point? How and why does such escalation of commitment occur? And how do you de-escalate and turn such projects around? She also was intrigued to see the extent to which the XperTrans-C&C case followed the better practices she regularly recommended to clients and which also appeared in recent reviews of outsourcing practices. Harding turned her mind to writing a report. She had two days of work ahead. She drafted out the questions she needed to answer:

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1. How do the client and supplier outsourcing practices exhibited in the XperTrans-C&C case compare against what is recommended as ‘best’ or effective practices by outsourcing advisers and researchers?

2. Why did the escalation of commitment to this IT-enabled HR business project occur? What de-escalation should have been carried out, and when?

3. How can de-escalation of the project be managed, going forward, and how should C&C set up its project practices to ensure they do not repeat such an experience?

4. What implications does this experience have for C&C for redesigning its back office IT function to help business functions like HR get their IT delivered using both internal expertise and external services?

5. What should C&C do now? Clearly a sourcing strategy had to be developed, and within it there are immediate challenges to be dealt with and decisions to be made. While the new supplier had taken over the contract in July 2010, there seemed little interest on all sides to continue with the project, at least on existing terms. Should C&C terminate the contract, renegotiate with ANG, bring all HR back in-house as done with payroll or terminate the contract then relet it through a new competitive bid process? Each of these options had their own challenges. Harding knew her hard-won experience was going to be vital if she was going to make headway on making a recommendation for the way forward.

(Source: © Kovasznai, D. and L.P. Willcocks ‘Escalation in global outsourcing projects – the Expertrans C&C BPO case’, Journal of Information Technology Teaching Cases 2, 10-16 (March 2012), pp. 1‒7. Reprinted with kind permission of the authors and Palgrave MacMillan.)

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Chapter 14 Case 1: Royal Dutch-Shell and expatriate policies Royal Dutch-Shell is a global petroleum company with joint headquarters in both London and The Hague in the Netherlands. The company employs more than 100,000 people; at any one time approximately 5,500 of whom are living and working as expatriates. The expatriates at Shell are a diverse group, made up of over 70 nationalities and located in more than 100 countries. Shell, as a global corporation, has long recognised that the international mobility of its workforce is essential to its success. By the 1990s, however, Shell was finding it harder to recruit key personnel for foreign postings. To discover why, the company interviewed more than 200 employees and their spouses to determine their biggest concerns. The data were then used to construct a survey that was sent to 17,000 current and former expatriate employees, expatriates’ spouses and employees who had declined international assignments. The survey registered a phenomenal 70 per cent response rate, clearly indicating that many employees thought this was an important issue. According to the survey, five issues had the greatest impact on the willingness of an employee to accept an international assignment. In order of importance, these were: 1. separation from children during their secondary education (the children of British and

Dutch expatriates were often sent to boarding schools in their home countries while their parents worked abroad)

2. harm done to a spouse’s career and employment 3. failure to recognise and involve a spouse in the relocation decision 4. failure to provide adequate information and assistance regarding relocation 5. health issues. The underlying message was that the family is the basic unit of expatriation, not the individual, and Shell needed to do more to recognise this. To deal with these issues, Shell implemented a number of programmes designed to address some of these problems. To help with the education of children, Shell built elementary schools for Shell employees where there was a heavy concentration of expatriates. As for secondary school education, it worked with local schools, often providing grants, to help them upgrade their educational offerings. It also offered an education supplement to help expatriates send their children to private schools in the host country. Helping spouses with their careers is a more vexing problem. According to this survey data, half of the spouses accompanying Shell staff on assignment were employed until the transfer. When expatriated, only 12 per cent were able to secure employment, while a further 33 per cent wished to be employed. Shell set up a spouse employment centre to address the problem. The centre provides career counselling and assistance in locating employment opportunities both during and immediately after an international assignment. The company also agreed to reimburse up to 80 per cent of the costs of vocational training, further education or reaccreditation, up to a maximum of $4,400 per assignment.

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Shell also set up a global information and advice network known as ‘The Outpost’ to provide support for families contemplating a foreign posting. The Outpost has its headquarters in The Hague and now runs 40 information centres in more than 30 countries. The centre recommends schools and medical facilities and provides housing advice and up-to-date information on employment, study, self-employment and volunteer work. (Source: L.P. Willcocks, using multiple published sources and annual reports.)

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Chapter 14 Case 2: Lenovo and human resources

In late 2004 IBM announced that it was getting out of the personal computer business and would sell its entire PC operations to Lenovo, the fast-growing Chinese manufacturer of personal computers, for $1.75 billion. The acquisition turned Lenovo into the world’s third-largest PC firm. It also raised many questions about how a Chinese enterprise with little global exposure would manage the assets of a US firm that had 2,400 employees in the USA, 4,000 in foreign manufacturing facilities, and 3,600 sales and distribution centres in over 50 countries around the world. Lenovo moved quickly to reassure employees that it was committed to building a truly global enterprise with a global workforce. Less than 24 hours after the two companies announced the acquisition, the human resources department at IBM’s PC division released a 59-point question-and-answer memo to all employees informing them that they would become employees of Lenovo, that their compensation and benefits would remain identical or fully comparable to their IBM package, and that they would not be asked to relocate. The memo also made it clear that employees could accept employment at Lenovo or leave, with no separation pay. IBM would not consider them for a transfer within IBM or recruit or hire the new Lenovo employees for two years. What really surprised many observers, however, was the composition of the top management team at the new Lenovo and the location of its global headquarters. Top executives at Lenovo were clever enough to realise that the acquisition would have little value if IBM’s managers, engineers and salespeople left the company, so they moved Lenovo’s global headquarters to New York! Moreover, the former head of IBM’s PC division, Stephen Ward, was appointed CEO of Lenovo, while Yang Yuanqing, the former CEO of Lenovo, became chairman, and Lenovo’s Mary Ma became CFO. The 30-member top management team was split down the middle – half Chinese, half American – and boasted more women than men. English was declared the company’s new business language. The goal, according to Yang, was to transform Lenovo into a truly global corporation with a global workforce that would be capable of going head-to-head with Dell in the battle for dominance in the global PC business. The choice of Ward for CEO, for example, was based on the assumption that none of the Chinese executives had the experience and capabilities required to manage a truly global enterprise. A candidate’s nationality was not an issue for Lenovo when deciding who should hold management positions. Rather, the decision focused on whether the person had the skills and capabilities required for working in a global enterprise. Lenovo was committed to hiring the very best people wherever they might come from. Commenting on the acquisition, Bill Matson, a former IBM executive who became senior vice president of human resources at Lenovo, noted that the company would use the same set of principles to guide workforce management in all locations. He noted that you have to establish the broad principles of how you want to manage your business, but then you

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have to be very astute about making sure that those principles are applied in every local market so that you remain responsive to the needs of people in different environments.1

(Source: L.P. Willcocks, using multiple published sources, including Hill, C. International Business. (New York, McGraw Hill, 2010) [ISBN 9780071220835] Chapter 18.)

1 Quoted in Hill, C. International business. (New York: McGraw Hill, 2010) [ISBN 9780071220835] Chapter 18.