Chapter 1
The Global Operating Model

A Failure of Strategy or Execution?

Companies that compete globally must have sophisticated playbooks for sustaining competitive advantage in the face of myriad new challengers, continued waves of technological change, and uncertain economic and regulatory environments. As a result, leaders of these companies must design organizations capable of immense creativity and agility to manage the tension that is inherent in complex, global strategies.

The economic recovery of 2010-2015 has triggered a number of high-profile mergers, but even more breakups and spinoffs among large global companies, particularly those based in the United States. Between 2012 and 2014 alone, Kraft, Royal Philips, Hewlett Packard, Ingersoll Rand, ConocoPhillips, Darden, and eBay agreed to split off substantial portions of their businesses in response to a groundswell of hostility toward underperforming diversified companies. The chief executives of iconic companies including DuPont, Amgen, and GE were under pressure from activist investors such as Bill Ackman, Nelson Peltz, Daniel Loeb, and Carl Icahn to do the same. Even Procter & Gamble announced its intention to shed more than 50 percent of its brands "in order to simplify the way we organize and manage the company" (Byron 2014).

As organization designers, this trend intrigues us. Have conglomerates and diversified companies underperformed because of failures in enterprise strategy? Or are these companies failing the acid test for organization effectiveness, stumbling on execution brought about by lumbering, layered, and siloed organizational models unsuited to delivering on diverse, global strategies? Hewlett Packard's CEO, Meg Whitman, defended plans to break up the company into two parts. "Our markets are moving at lightning speed, both the enterprise market as well as the printing and PC market, and we need to be faster, we need to be more nimble, we need to have a cost structure that is appropriate for the competitors that we face in both those businesses," she told the business press in May 2015 (CNBC 2015). Cost increases of about $400 million are expected to be offset by other synergies in the two separate companies at the end of 2017.

The Global Operating Model

The global operating model is the means to manage this complexity, this tension, this need for both leverage and agility. It is the artful combination of organizational structure, process, governance forums, metrics, and reward systems that tie together global business units and functions with far-flung geographic market units. The global operating model is intended to structure interactions at the strategic nodes that will build and execute needed capabilities. Global operating models are typically composed of three dimensions:

1. Geographic market units (regions, countries, or country clusters)
2. Global business units (products, brands, categories, or customer segments)
3. Global operating and support functions (R&D, supply chain, marketing, IT, HR, finance, etc.)

Figure 1.1 illustrates how Deere & Co. defines the relationship among its region-market units, global product platforms, and worldwide functions.

Figure 1.1 Deere's global operating model.

Source: Deere & Co.

In addition to Deere, companies such as Nike, P&G, Medtronic, PepsiCo, Unilever, IBM, Levi Strauss, and Philips have created elegant organization models and consider their worldwide, matrix organizations to be sources of competitive advantage. Some leadership teams inhabit these models as though they are second nature. Others struggle mightily.

No companies have completely solved the challenges of bringing these complex organizational models to life, but many have made great progress. Studying these companies up close is productive. There are reasons some deliver superior results with these organizational arrangements while others seem to have real problems. This book will explore what factors yield success and provide a road map to effectiveness that any leadership team can follow.

Global Operating Model

An interdependent set of organization structures, processes, governance, metrics, and reward systems that tie together center-based business and functional teams and diverse geographic teams in order to execute complex strategies around the world.

Why Organization Is as Important as Strategy

Profitable growth comes not from the articulated strategy, but a company's actual strategy, which is reflected in how the organization's resources are allocated. Outdated capabilities, structures, and decision-making processes get in the way of implementing good intentions and block attention for new sources of growth. In effect, the backward pull of structure, if left unattended, inhibits the very best laid strategic plans.

CEOs of large multinational companies can overcome the central challenge of designing for growth by building critical organizational capabilities that build the bridge from strategy to structure to performance. Such enterprisewide capabilities are difficult to build. They are cultivated by the intentional arrangement of structure, process, metrics, and talent. Organizational capabilities are a distinct source of competitive advantage that enable both the rapid execution of strategy and the envisioning of new strategic options.

Most of the truly critical capabilities that drive growth-innovation, brand building, digital marketing, and ecommerce-are formed at the intersections of business units, functions, and geographic markets as shown in Figure 1.2 below.

Figure 1.2 Growth comes at the intersection of global and local.

For example, after years of failed attempts to penetrate Asian and Latin American markets with its best-in-class agricultural equipment, Deere & Co. embraced the reality that retrofitting its American product lines (tractors, planters, harvesters, etc.) for emerging markets was not the solution for competing against tough local players that could bring low-cost equipment to farmers with good-enough levels of reliability. "Shifting the center of gravity" from Moline, Illinois to Pune, India helped bring a very different mindset to product development in emerging markets (Govindarajan and Trimble 2012). However, it would be years before Deere could overcome the immense regulatory barriers in China in order to provide cheap capital to small farmers who, instead, chose to buy low-cost Chinese tractors and planters. Meanwhile, Deere's investment in state-of-the-art paint systems in China and its global rollout of sophisticated production process and engineering standards appeared to its critics as grossly overengineered for markets with price points that simply could not support those levels of process innovation. Deere's new global operating model, implemented in 2009, is intended to more nimbly manage the tensions among developed and developing markets across its five product platforms.

Or consider Nike, marketing a core brand across a number of consumer categories with hundreds of footwear and apparel products all over the world. The voice of the global soccer consumer has made its way into Nike's day-to-day decision making, and with record-setting results. But the seasonal marketing story line for the swoosh has to work for basketball, running, fitness, and other consumer categories too, so the global soccer team has to line up behind a bigger marketing idea. That's only the beginning of the creative conflict. South Africa might want to go one way on footwear design profiles and color palettes while the Netherlands, South Korea, and Brazil have other ideas. And apparel, footwear, and accessories have to fit together as an integrated collection for the footballer in all of those markets.

To ignore any of these competing voices diminishes the potential of Nike's powerful blend of brand, design, and market reach. It must be agile, but it must leverage its design prowess and its considerable cost structure. Nike executives cannot afford to keep things simple and make the wrong compromises. Nike's top team is very deliberate about how to work the complexity and the tension across the matrix in their organization to competitive advantage.

Both of these examples illustrate how sophisticated management of the connections and conversations across product lines, markets, and functions are needed to drive growth strategies.

Agility versus Leverage

The global operating model, with its multiple dimensions, embodies the promise of the matrix organization-that a company can have it all: robust global products and brands, local market responsiveness, and cost-effective functional processes and systems. The reality is that many senior executives in companies trying to execute global strategy are frustrated by the challenges of meeting any of these objectives.

Mike Canning, CEO of Duke Corporate Education, observes: "In the past, many organizations moved to a matrix to better position themselves for opportunities and customer solutions; decades later, they are still trying to figure out why it isn't working. CEOs discuss how their companies have 'perfected the art of working in silos.' Leaders point out that collaboration across business units remains challenging because people are not properly incentivized and no single...