THE MANAGEMENT OF LARGE GROUPS: ASIA AND EUROPE COMPARED

The Management of Large Groups: Asia and Europe Compared PHILIPPE LASSERRE, Professor of Business Policy, INSEAD, Euro-Asia Centre, Fontainebleau

The management of large groups within a corpora- tion is critical - it provides synergetic added value. Philippe Lasserre provides a typology of Asian and European corporations in this respect, with actual examples. He then compares them in terms of their organisational setting and corporate control.

Asian and European corporations show up as very different. The author ascribes this to the ‘engin- eering’ way of organising business life in the West compared with the ‘biological’ or ‘codified relation- ships’ approach in the East. On the basis of these organisational differences, he then offers advice to European managers in their dealings with Asian corporations, as competitors or partners.

Introduction The economic and social role of a multi-business corporation is to enhance the value creation capabilities of its business units. Value creation capabilities are er,hanced when additional or reinforced sources of competitive advantage accrue to business units through their citizenship within a group. This group effect, known as ‘synergy’, provides business units with a reduced cost position or an improved differentiation and market power thanks to the sharing of assets, the transfer of skills and competences, or a better or cheaper access to human and financial resources. Groups can also contribute directly to value creation by leveraging financial or political power, imposing management discipline and providing the necessary impetus for corporate renewal through acquisitions and the manage- ment of innovation. The value creation capabilities of groups are achieved by the design and the implementa- tion of organisational mechanisms and processes. There is no one single best method for managing groups, and the globalisation of markets and competition has revealed the emergence of organisational forms, parti- cularly in the Asia Pacific region, which differ signifi- cantly from the one adopted in Europe and North America. The purpose of this article is to underline some of the salient differences between corporations in Asia and in Europe, to analyse the basis of those differences and finally to draw some recommendations which may

be useful for European managers planning to operate in Asia or simply willing to understand the logic of their Asian partners or competitors.

In the first and second parts one will identify some prominent types of corporations in Europe and in Asia Pacific. In a third part, their organisational forms and their corporate control styles will be compared. Finally, some recommendations for European managers will be proposed.

European Corporate Archetypes European groups can be broadly classified into three major types: industrial groups, industrial holdings and financial conglomerates.

A first type of corporation is characterised by a port- folio of business activities which share a common set of competences and in which a high degree of synergy is achieved by managing key interdependencies at corporate level. Andrew Campbell and Michael Goold at the Ashridge Strategic Management Cent-re in the UK, in their study of British corporations, have named this type ‘Strategic Planning’ groups,’ because of the strong input from corporate headquarters in those groups into the strategy formulation of business units. Here, those groups are identified as industrial groups. Examples of industrial groups in Europe are British Petroleum or Glaxo in the UK, Daimler Benz or Henkel in Germany, Philips in the Netherlands or l/Air Liquide and Michelin in France.

industrial holdings are corporations in which the business units are clustered into subgroups or sectors. In this type of corporate grouping, synergies are strong within subgroups and weak between subgroups. In industrial holdings, the task of value creation through synergies are delegated to the subgroup level of management, while the corporate role is to impose management disci- pline through the implementation of planning and control systems, to manage acquisitions and leverage and allocate human and financial resources. Campbell and Goold call these groups ‘Strategic Control’ groups, because of their intensive use of planning and control

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systems to regulate the relationships between business units and corporate headquarters. Examples of indus- trial holdings are: ICI or Courtaulds in the UK, BSN or Alsthom-Alcatel in France, Siemens or BASF in Germany.

Financinl conglornerntes are characterised by a constella- tion of business units which do not necessarily share any common source of synergies and whose corporate value is essentially created by the imposition of manage- ment discipline, financial leverage and the management of acquisitions and restructuring. Heavy reliance on financial control systems as the major mechanisms of corporate governance have led Campbell and Goold to call these ‘Financial Control’ groups. Hanson Trust or BTR in the UK are examples of financial conglomerates. A more recent and extreme version of financial con- glomerates has appeared in the USA under the form of what Professor Michael Jensen at the Harvard Business School has identified as ‘LB0 Partnerships’, in which value is extracted through corporate restructuring and financial discipline imposed on business units under the form of heav and Roberts. Y

debts, as in the case of Kolberg Kravis

In Europe one can find examples of the three types of groups in a variety of corporate ownership arrange- ments, whether private or government-owned. In France one can find in the public sector industrial groups such as Renault, SNECMA or Aerospatiale or, in the private sector, Peugeot, Dassault or Michelin. Simi- larly Rh6ne Poulenc, a Government-owned group, is managed as an industrial holding like BSN, which is a privately-owned group. Figure 1 gives a profile of one typical European group in each category.

Asian Corporate Archetypes [n the Asia Pacific region, where in the past three decades local corporations have emerged as strong competitors, one can possibly identify three major :ypes: the entrepreneurial conglomerates, the Japanese Keiretsus and the national holdings.

The entrepreneurial conglomerate is a prevailing form of :orporate organisation in South East Asia, Korea, Taiwan and Hong Kong. Entrepreneurial conglomerates are widely diversified into a large number of unrelated activities ranging from banking, trading, real estate, nanufacturing and services. These groups are usually u-rder the leadership of a father figure who exercises :ontrol over the strategic decisions of business units and s the driving force behind any strategic move. Very little ittempt is made in Asian entrepreneurial conglomerates o manage synergies. The major source of value in those Groups emanates from the ability of the entrepreneur o leverage financial and human resources, to establish ,olitical connections, to conclude deals with govern- nents and business partners, and to impose loyalty and discipline upon business units. One can distinguish hree major types of entrepreneurial conglomerates in 4sia: the large Korean groups or Chaebols such as

Industrial Group: Volkswagen (Germany) The Volkswagen group with 42bn US$ turnover is the fourth largest producer of motor cars in the world. It controls the VW, Audi, SEAT and Skoda brands. its production centres are located in Western and Eastern Europe, Latin America and China. It engaged recently in a collaboration with Toyota.

Industrial Holdings: BSN Group (France) With IObn US$ sales, the BSN group is the largest food- based diversified group in France and the fourth in Europe after Unilever, Nestle and BAT. The BSN group is present in dairy products, beer, mineral water, grocery products and packaging. Each product division develops its own strategy, the corporate office discusses and approves strategic plans, manages acquisitions, central financial management and human resources.

Financial Conglomerate: Hanson Trust (UK) One of the stars on the London Stock Exchange, Hanson Trust, with 13bn US$ sales, is engaged in a variety of businesses ranging from tobacco (Imperial Group), battery (Eveready), Coca Cola bottling, hydraulic cranes, building materials, titanium dioxide, Jacuzzis, vitamins. Hanson Trust is the delight of financial analysts for its bold approach to acquisition, restructuring and turnaround.

L Figure 1 Illustrative examples of European groups

Samsung, Daewoo or Hyundai; the Overseas Chinese groups such as Liem Sioe Liong or Astra International in Indonesia, Formosa Plastics in Taiwan, Charoen Pokphand in Thailand or Li Ka Shing in Hong Kong; and the colonial ‘Hongs’ such as Swire or Jardine Matheson in Hong Kong.

The Keiretsus are a unique feature of Japanese corporate organisation. They constitute super groups, or clusters of groups in which businesses are either vertically integrated as in the case of Honda, NEC, Toyota or Matsushita, or horizontally connected as in the case of Mitsubishi, Mitsui or Sumitomo. Although some com- panies in the groups exercise greater ‘power’ than others, Keiretsus are not hierarchically organised. They are like a club of organisations which share common interests. Linkages across companies are made through cross shareholdings, the regular meeting of a ‘Presiden- tial council’ in which chairmen of leading companies exchange views. Transfer of staff and, in some cases, long-term supplier-client relationships are also mechan- isms used among the vertical Keiretsus. Value is added in Keiretsus through their ability to coordinate informally a certain number of key activities (R&D, export con- tracts), to transfer expertise through personnel rotation, and to build strong supplier-distributor chains.

The Asian national holdings groups have been formed more recently as an expression of industrial indepen- dence in order to capitalise on domestic markets and

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National Group: Singapore Airlines (Singapore) With revenues of 2.4bn US$ and net profits of 620mn US$ in 1990, Singapore Airlines is the most profitable airline in the world and systematically ranks number one in customer satisfaction. The group concentrates on air transport and related areas such as airport terminal services, catering, training of pilots, aircraft engineering and maintenance, insurance, travel agency and property cevelopment.

Horizontal Keiretsu: Dai-lchi Kangyo Bank Group - DKB The largest industrial group in Japan in turnover (300bn US$), DKB comprises 123 companies of which 47 are represented at the presidential council. Activities range from banking, trading (C. Itoh), cosmetics (Shiseido), rubber(Yokohama), steel(Kawasaki),electronics(Fujitsu), transportation (Isuzu), oil, cement, chemicals, fibres, construction, services, shipping, etc.

Vertical Keiretsu: The Toshiba Group With sales of 30bn US$, the Toshiba Group is the second largest electrical and electronics manufacturer after Hitachi. The group produces appliances, consumer and professional electronics, computers, chemicals, machinery, ceramics, metal products. It is also involved in construction, trading. finance and insurance and services activities. The group comprises 473 subsidiaries and 165 affiliated companies.

Entrepreneurial Conglomerate: Salim Group (Indonesia) The most powerful Indonesian conglomerate (turnover of 8bn US$), this group was founded by Liem Sioe Liong, an immigrant from Fujian, in the late 1950s. The group comprises 330 companies spread over cement, textile, banking, automotive, construction, real estate, insurance, agrobusiness, pharmaceuticals, chemical products, pulp, shipping, etc. The group’s close links with the govern- ment constitutes one of the bases for the monopolistic situation enjoyed in many businesses.

Entrepreneurial Conglomerate: Daewoo (Korea) Daewoo is the third largest Chaebol with consolidated sales of 1 Sbn US$. Created in 1967 by Kim Woo Choong, the group is engaged in heavy equipment (Caterpillar), diesel engines, automobiles (joint ventures with GM), construction, electronics, computers, appliances, telecommunication (with Northern Telecoms), financial services. --

Figure 2 Illustrative examples of Asian groups

public endowment. Some of these are government- owned like Petronas in Malaysia, Singapore Airlines, Singapore Technology, Gresik in Indonesia, or private like Siam Cement in Thailand or San Miguel in the Philippines. Their business portfolios tend to be less diversified than the ones of the entrepreneurial con- glomerates, and their value creation capabilities stem from their ‘nationality’. The typical Asian groups are presented in Figure 2.

Group Management: A Comparison In order to proceed to a comparison of the ways groups organise themselves to control and coordinate their activities, one needs to define the key dimensions which capture the most significant differences. In the manage- ment literature, various parameters have been proposed to study organisational differences, and the objective of this article is not to review previous research, but to propose what seems to be the most salient measures of differences. Two dimensions are considered as the most important ones:

(a) First, the way corporations organise the respective roles of headquarters, the ‘centre’, and business units, whether those are divisions or subsidiaries. This dimension is referred to as Organisationnl

Setting.

(b) Second, the way headquarters ensure that business units’ performances and behaviour are in line with corporate expectations. This is referred to as Co~~omte Control.

Organisational Setting Corporations around the world appear to cluster them- selves around four types of corporate organisational settings.

In the first type of organisation, the centre plays an important role in managing synergies. Strategic and operational integration and coordination of business units are considered to be the major sources of competi- tive advantage. Interdependencies are achieved through a variety of mechanisms, including centralised func- tions, top-down strategic plans, strong corporate identity and socialisation of personnel. Given this high role assigned to the centre of this form of organisation, it can be qualified as a federation. This form prevails in the first type of European groups identified above: the industrial groups and in certain of national holdings in the Asia Pacific region.

In a second type, the centre functions as both resource allocator, guardian of the corporate identity and source of strategic renewal. Business units enjoy a large degree of strategic autonomy provided that their strategies are ‘negotiated’ and fit with the overall ‘corporate strategic framework’ inspired by the centre. Bottom-up planning, negotiated strategies, operational autonomy and central mechanisms of financial and human resources allocation are key characteristics of this type of organisational setting. It differs from the federate organisation by the more balanced power sharing between the centre and the operating units; for that reason it is referred to, here, as a confederation. This form is most often characteristic of the European industrial holdings as well as Asian national holdings.

In a third category, one can find groups organised as a multitude of uncoordinated business units, each of them linked directly or indirectly to the centre. The role

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of the centre in those groups can be either ‘hands on’, as in the case of Asian entrepreneurial conglomerates, or ‘hands off’, as in the case of European financial conglomerates. What characterises these groups is the fact that the relationships between business units and corporate headquarters are composed of a series of one to one ‘contractual’ agreements. This form resembles a cunsfe~laf~~rz and, as said earlier, is predominantly adopted by Asian and European conglomerates.

between the group chairman and business units’ key managers. Subjective, holistic forms of assessment are in use. Although some form of measurement and use of systems can be found in these groups, the main concern for unit managers is to behave according to the norms and beliefs of the chairman. Asian entrepreneurial conglomerates are practising, nearly exclusively, this form of control.

Finally, in a fourth type of organisational setting, one can find groups in which there is no centre or, on the contrary, there are several centres. Some coordination mechanisms are loose, as in the case of informal meet- ings, while some are more tightly controlled, as in the case of long-term suppliers contracts. Japanese Keiretsus are representative of this organisational type. Because it is structured as a network, it is called here the cunne~ion type of organisation.

Corporate Control

Finally, with ideological control the focus is to make sure that managers have internalised the values of the group and are behaving accordingly. Systems, financial measurements, special relationships with the chairman, if used at all, do not play a dominant role here. What does matter is the development of strong beliefs, norms, values across the organisation. Recruitments, socialisa- tion, training, rotation of staff are all kinds of process which build and maintain an ideology, This type of control prevails in the Asian national holdings in which strong national and corporate identities constitute the essential glue of group performance. Vertical Keiretsus

Corporate control describes how groups ensure that business units’ performances and behaviours are in line with corporate expectations. One can distinguish five major methods of exercising control: control by financial performances only, control by systems, control by strategy, direct subjective control of the persons and control by ideology.

are also well-known to use extensively control.

this form of

The Mapping of European Asian Groups

Versus

In groups which rely primarily on financial controls,

headquarters assign financial goals based on financial standards (return on assets, shareholder value). Perfor- mances are monitored and evaluated according to achievement of these financial goals. Rewards and punishments of managers are based on those achieve- ments and, for the group, the strategic value of businesses is assessed on their capacities to produce the ‘figures’. This method of control prevails in European financial conglomerates.

Those two dimensions combined give the opportunity to contrast the Asian groups with their European counterparts in the chart represented in Figure 3. As it appears in this figure, Asian and European large cor- porations live in a different organisational world. While they share some similarities in the way they control their operations, they differ in the way they design their organisational settings, and vice versa. What is interest- ing to observe from Figure 3 is that Asian corporations introduce, in any case, an interpersonal feature in their management system.

The exercise of control by systems is based on the implementation of planning and control mechanisms such as interactive strategic planning sessions, invest- ments decisions using capital budgeting techniques, control reviews, etc. Systems use financial as well as non-financial information (strategic, marketing). This mode of control predominates in theEuropean industrial holdings and the European industrial groups.

The Keiretsus are built around the ability of group members to connect to each other in one way or another through personal contacts. In the entrepreneurial conglomerate, the entrepreneur is in direct contact with business units and all relationships are personalised. In the case of national holdings, the personification of rapport is established through ideological means, sense of belonging and nationalistic stand.

In the control by strategy mode, the emphasis is neither on the financial measurement of performance nor on ‘systems’, but on the appreciation of the strategic trajec- tory of business units and on their degree of fit with the whole corporation. This is done through task forces, corporate conferences, informal meetings, temporary assignments of key executives to business units, etc. European industrial groups and, to some extent, Japanese Keiretsus are practising this form of control, whose purpose is not to measure or to enforce, but to make sure that there is a coherent corporate strategic fit.

The European groups, by contrast, tend to prefer systematic or administrative features in their corporate management. Financial conglomerates are driven by ‘numbers’, industrial holdings favour complex planning and control mechanisms, while industrial groups adopt structural and regulatory means of coordination. When confronted by a problem of change the typical reaction of a Western corporation will be to find a new ‘structure’ or a new ‘system’.

From Organisational Engineering to Organisational Biology

“eronafised control is exercised through a direct interface Western corporate designers adopt an ‘engineering‘

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approach to building and regulating organisational life. Although over the past 50 years behavioural sciences have brought an immense contribution to the art of management, this has been, most of the time, translated into practice with an instrumental perspective. Motiva- tion theories have given birth to ‘management by objec- ti\,es’, experimental psychology using conditioning techniques has been used for the design of rewards and bc>nus systems, information theory is applied in the setting up of computer systems, etc. The rationale underlying this effort is probablv the belief that human behaviour can be influenced ‘& the vranipzdafior7 of organisational mechanisms. The main concern of M estern managers confronted ivith a situation of stra- te;$c change is to install a new ‘organisation’ or a new ‘nianagement system’ lvhich is supposed to align behaviour with the new realities.

This instrumental engineering approach is challenged by Asian corporate architects who conceive enterprises

as living entities where various individuals and groups obtain mutual benefit through cooperation. Organisa- tions are not seen as independent of the people who compose them and, most of the time, enterprises are compared to ‘families’. In 1983, Chairman Kim Woo Choong, founder of Daewoo, was participating in a session at the Harvard Business School with a group of US senior executives. He was asked by one partici-

pant how he could coordinate some 40 subsidiaries without controlling them. Chairman Kim anslvered that coordination was achieved through ‘s~~irifual Iithgcs’!3 That does not mean that Asian firms do not use svstems for their management, but that personification 02 inter- relationships are given priorities over formal svstems. One major underlyin g assumption of Asian managers is that organisational mechanisms are not set up to ‘manipulate’ people but rather to give a structure to social interactions. In fact, most of the time, people are not rewarded for their performance, as measured in terms of results, but in terms of conformity to behaviour. Organisations are not seen as machines (an engineering viect-) but as a set of ‘codified’ relationships (a biological vierv).

Decoding Asian Firms: an Imperative for European Managers European managers are confronted more and more with Asian firms either as partners or as competitors. \t’hen the competitive pressure from Asian firms becomes too intense, Western managers try to emulate them. One good example is provided by an article published in 1990 in the Htzfiflzrrf Busit~css Retjtt3iLl by Charles Ferguson’ in which the author proposes the creation of Western Keiretsus between US and European companies in the

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computer industrv! This proposition reflects an engin- eering view of the organisational l%.orld: the machine ‘works’ in Japan. zvhy don’t \ve import the machine? It is as if lve asked US societv to renounce individualism. lVhat an ambition! Instead of trying to ‘import the machine’, Western managers should be inspired to gain an understanding of the way the relationships function or don’t function in these groups, ivhat social roles do they play, in other terms to ‘decode’ and not to ‘imitate’ Asian organisations. This decoding ability requires three attitudes: (a) getting ridof a @on’ judgements, (b) making the necessary effort to study the social and cultural background of Asian societies, and (c) resisting the temptation of easy translations.

(a) Get Rid of a priori Judgements More often than not, when presented with Asian cases, particularly successful ones, Western managers give readv-made explanations: Japan Inc. exploited man- power, ‘work-oholism’, nationaIism, sacrificed genera- tion, etc. Those views are meaningless because they are based on a simplistic engineering causality leading to defeatism or stubborn protectionism. Understanding the functionality of a social structure is the first necessary step in the analysis of organisation, while the decipher- ing of causal links comes second. A rushed application of ready-made causal schemes based on superficial facts does not help to understand Asian partners and competitors.

(b) Invest in the Study of Cultures and Societies One of the dangers of ‘instrumental’ thinking is that it by-passes what is not considered of immediate relevance. Cultural and social knowledge are all too frequently considered to be a waste of time or, at best, as subjects of ‘executive summaries’. Organisations and business behaviour are part of an historical and cultural heritage bvhich, in the case of Asian societies, is very rich, complex and heterogeneous. The manager who does not make the necessary efforts to enlighten himself with such knowledge is condemned to go from surprise to surprise if not from disillusion to disillusion.

(c) Resist the Temptation of ‘Easy Translations’ Some managers fall into the trap of adopting, naively, a so-called ‘Asian’ way of doing things. In the early

19S@s, a European bank set up a regional office in Singapore, its first commitment in the region. The newly appointed general manager, a very enthusiastic person, decided that he ivould work ‘the Chinese way’: hand- shakes, networking, personal trust, etc. He found himself trapped txvo )-ears later with a portfolio of bad debts amounting to several million US$! Such horror stories can only fuel the resistance of European corporate boards to commit resources for developing strategies in the Asia Pacific region.

Notes

Jensen, ?vf, ‘Thr Eclipse of the Public Corporation’, Hutxrti Busirless R&w, September/October 1989. Aguilar, F. lnter\%ew with Kim LL’oo Chong, Video, Harvard Business School, 19B4. Ferguson, Charles, ‘Computers and the Coming of US Kriretsus’, Hnnwd Bttsirless R&w, JulyiAugust 1990.

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