The need to grapple with the organisational challenge of doing business in several countries is hardly new. People who write about the management of multinational companies have long debated organisational choices such as a geographic focus versus product focus, the role of country managers and the pros and cons of the trans­national model. These businesses characteristically need to protect their local value while simultaneously exploiting crossborder synergies and increasing scale.

This perennial topic is now a top priority for senior managers at a growing number of companies that are expanding abroad or seeking to deepen their crossborder integration. These executives are trying to take advantage of increases in scale and crossborder synergies while simultaneously protecting the value of steadfastly local activities – for example, separate product lines, production facilities or supply chains; strong company cultures; or perhaps some combination of allthese.

In Europe, among other places, local elements in sectors such as power utilities, retail banking, insurance and telecommunications represent sizable profit sources that the blanket application of multinational best practices and global processes could easily undermine.

We call such companies ‘multi­locals’ to reflect their international and domestic character. Such organisations have strong roots in national or regional companies but often expand abroad because they have the resources to pursue mergers and acquisitions but find only limited growth potential at home. They hope to take advantage of the opportunities provided by changing regulation and converging consumer tastes. Today, they are especially active in Europe, although they can also be encountered in South America and parts of Asia.

The challenge facing executives at multilocals is to manage their dual local-international focus. Companies must first identify their sources of local and crossborder value and then grasp and address the barriers that may hinder the level of integration they desire.

At the same time, they must learn to mange the complexity of the multilocal approach by grouping businesses in geographic clusters where appropriate, fine-tuning management’s accountability and introducing a common culture – but only where it would have a positive impact.

Bringing multilocal organisations to life

Centralising accountability for a function at headquarters may be an obvious solution to the problems of operating in more than one country, but it is not always the right one. Excessively tight central control risks tearing apart processes that have been optimised locally and stifling the entrepreneurship, initiative and local adaptations that create local value.

For example, while a company that generates electric power might seem to have strong economic reasons for centralising its fuel purchases, individual plants may require locally determined supplies to operate in the most efficient way.

Designing a balanced organisation

To get the balance right in a multi­local organisation, companies should identify their specific sources of local and international value and then understand and address organisational barriers that may obstruct the capture of crossborder value or risk destroying local value.

To start with, managers must understand, subfunction by subfunction, the size and nature of the crossborder and local value at stake. The greater the crossborder value, the more appropriate a relatively centralised model is likely to be. Some managers of multilocals, seeing only a choice between outright centralisation and complete local independence, take an unrealistically narrow view of the way companies can organise functions. In reality, the choices and designs should be more nuanced.

When the value of a crossborder effort is greater but harder to capture, organisations might use centralised decision making tempered with local execution. This approach stops short of full centralisation, since country organisations continue to play an important role in implementing decisions or policies and may have discretion to vary them within centrally defined limits. Nonetheless, the centre lays out clearly what it expects from the country organisations.

For example, when steel companies set base prices, they provide a certain level of central direction and co-ordination. In one known example, these are achieved through a group-level pricing office. But the company attaches equal importance to retaining flexibility at the country and regional levels so that it can take specific local market circumstances intoaccount.

Countering complexity and ambiguity

These design steps are intended to create the best organisation for extracting crossborder synergies and, at the same time, protecting local value:

-- Geographic clustering.

Regional clustering, an approach falling between full centralisation and full localisation, can help multilocals manage complexity. The benefits of geographic clustering are fourfold: stronger integration of the relevant functions across countries; the avoidance of duplication and excess costs; a greater ability to lead and manage the performance of units in a large number of countries; and opportunities to provide attractive senior management roles to experienced, well-performing country heads.

Companies should also consider geographic clustering, ensure clear accountability where it really matters – in linchpin roles – and build common ways of working in critical crossborder processes while allowing the local entities to maintain their own cultures.

-- Accountability and pivotal positions.

Recent empirical work published in The McKinsey Quarterly has highlighted the motivational benefits of telling employees who is performing complex roles and what is expected of them, and making sure they are clearly accountable for results.

-- A selective common culture.

Many multinationals that think of themselves as a single family tolerate little deviation away from corporate cultural norms. By contrast, multilocals invariably have to deal with a number of local or corporate cultures.

Such cultures are often made stronger by local regulations and co-ownership by national or municipal governments. Common practices and norms can be a powerful way of making international groups work in concert.

Striking an appropriate balance between the protection of local value and the integration of selected cross-country processes and functions is challenging. The organisational response to create the right linkages must be subtle and avoid blunt centralisation.

Giancarlo Ghislanzoni is a director in McKinsey and Company’s Milan office, Risto Penttinen is a principal in the Helsinki office and David Turnbull is a consultant in the London office.

PRACTICAL TIPS

UNDERSTANDING ORGANISATIONAL BARRIERS

McKinsey’s research on Europe’s power, banking and telecom sectors has identified the following three barriers to achieving potential sources of crossborder value:

-- Lack of awareness – without an awareness of crossborder opportunities managers overlook the chance to collaborate with colleagues in other parts of the organisation.

-- Poor motivation – at many companies, management sees little value in organisational integration. Typical issues include worries that a unit might lose its autonomy and the ability to manage its own profitability if procurement specifications changed to promote group-wide sourcing. Another common concern is that a single centre of excellence for developing products may come in and set the specifications managers work to.

-- Inability to execute – differences in language and culture are common reasons for this problem, but executives should not underestimate the sheer level of difficulty in getting dozens of people to co-operate for a common goal.