World-class performance—with a Chinese twist

In Operation China: From strategy to execution Jimmy Hexter and Jonathan Woetzel—partners at McKinsey & Company—explain how and why the business landscape and consumer behaviors have changed in China and supply their perspective on what it takes for companies to win here today. Drawing on many years of experience working in China with multinationals, Chinese companies, and the Chinese government, the two authors show why the focus of competition has shifted to execution and explain how companies can raise it to world-class levels across all critical functions in China today.

When winning was about gaining privileged access, multinationals had no need to ensure that their organizations in China performed as well as their assets elsewhere. Manufacturing labor costs here are a fifth of the levels prevailing in Europe and the United States, for instance, so many multinationals can run factories less efficiently than they do at home and still come out way ahead. Yet a recent McKinsey study of 30 multinational-owned factories in China found that waste reduced profits by 20 to 40 percent. Another study revealed that despite all the benefits of sourcing in China, many multinationals believe that they are getting far less than half of the value they—and their customers—could get from sourcing goods here.

Managers aren’t underperforming in China intentionally. Superb execution—at the level that global companies expect of their managers in competitive developed markets—has been tough to achieve. For many years, managers in China had to play by business rules different from those in the developed world. They inherited many operational challenges through partnerships or acquisitions that brought legacy processes and employee mind-sets, as well as inefficient approaches to manufacturing, procurement, sales, and marketing. A lack of good data hampered market research; laws and outdated distribution networks fettered channel strategies. Over the years, managers developed processes and systems that were only “good enough” to get the job done. They focused on growth, not on improving execution.

But good-enough execution will no longer suffice as businesses expand and competition stiffens in China. Companies such as Danfoss, GE, Johnson & Johnson, KFC, and Nokia are showing that great execution counts here. With a far greater emphasis on high performance standards and operating rigor, they are beating domestic and global competitors in the smaller cities. And the secret is this: these companies took best practices from operations elsewhere and adapted them—sometimes a little, sometimes a lot—to Chinese realities.

A global consumer products company, for example, has created a premier market research unit in China, where the data that marketers depend on elsewhere have been incomplete or nonexistent. How? By setting high performance standards and implementing the same processes and tools the company uses in the United States, tailoring them as needed, but with an eye toward getting the same results it gets there. Some global (and even domestic Chinese) industrial companies are implementing lean-manufacturing techniques by tweaking team-based practices to work in a culture that reveres hierarchy. Other companies are adapting procurement practices, such as standard supplier audits, to account for differences in a landscape where suppliers may be less reliable than they are elsewhere. These companies tailor practices to meet high global standards. They don’t lower their standards because “China is different.”

Global best practice with a Chinese twist—that’s the lesson other multinational companies must learn. To succeed they must understand how to select, from their global arsenals of standards, tools, and frameworks, the right ones to implement in China, adapted in the right way for the local context. That is how multinationals will raise the bar on execution in China over the next decade.

Knowing how to win

Hexter and Woetzel provide detailed stories of companies that have succeeded or failed to meet the execution agenda. They show how businesses adapt, experiment, learn, tweak, and experiment again—all while remaining focused on meeting very high aspirations. The authors also provide a framework for improving execution in China, as well as practical advice, based on considerable experience, about the kinds of adaptations managers should pursue in a number of different functions.

What’s more, this book embodies not only the authors’ direct experience with business transformation in China but also the many investments that McKinsey has made to understand how to serve clients here. The authors and their colleagues in the Greater China Office have conducted a number of research initiatives and developed several proprietary databases they have drawn on for this book. These initiatives include:

	In-depth interviews with 6,000 people in over 30 localities throughout China, from the largest cities to semirural communities. McKinsey’s China Consumer Center is compiling and analyzing market data to understand what drives Chinese consumers and how they compare with shoppers in other countries. Surveys now cover about 90 percent of China’s gross domestic product, 80 percent of its disposable income, and 60 percent of its population.
	A 2006 McKinsey Global Institute study of urban consumers in China. The study includes analyses of data from an extensive MGI database of consumption variables from 1985 to 2005, as well as econometric forecasts of the country’s future consumption patterns.
	A growing body of knowledge on the sourcing and supply-management practices of multinational companies in China. This collection includes in-depth case studies of supply operations at more than 20 companies (as of this writing) in a number of industries, as well as surveys (conducted at more than 50 companies) on specific issues.
	In-depth interviews and surveys, conducted by the authors while writing this book, with executives responsible for the Chinese operations of more than 40 multinational companies in a variety of sectors, including consumer products, energy, industrial products, retailing, and high tech.
	A study of the talent- and performance-management practices of 300 global companies and a study (using a standard set of “performance ethics” benchmarks) comparing 24 multinational and Chinese companies.
	Operation China: From strategy to execution is the fruit of these and other research initiatives, of work on the ground helping companies to succeed in China, and of discussions with hundreds of executives at multinationals in China and at Chinese companies of all sizes.

For every company today, the stakes in China are high. As the country solidifies its roles as a market, a global manufacturer, and a talent pool, executives will find that their companies must lead here to lead in the rest of the world. Because by adopting—and adapting—world-class standards to win in China today, companies will create tomorrow’s new global standards for performance.