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Article|McKinsey Quarterly

Capability building in China

Skill building must be rewards-based, rooted in real work, and tailored to local conditions.

July 2013 | byKarel Eloot, Gernot Strube, and Arthur Wang

Capability building—leadership, managerial, and team-based skills rather than technical ones—has become an urgent imperative for many companies in China. As the country loses its extreme low-cost-labor advantage, businesses must look for ways to increase productivity and internal collaboration, to better understand consumers, and to develop a more sophisticated appetite for risk.

Companies in China face many of the same challenges—a lack of up-front planning and inadequate resources—that bedevil capability-building exercises everywhere. But certain “China factors” stand out. For starters, the demand for managers with strong leadership skills and international experience is growing significantly faster than the supply of qualified candidates. That imbalance makes it more difficult to pull off successful skill-building efforts, even for multinationals that typically invest more in training than Chinese companies do. (Indeed, one implication of China’s white-hot war for talent is that outside trainers brought in by multinational companies to set up and run new programs often move on before relevant tools and internal processes are in place.) Another perennial challenge for multinationals: the Chinese context and culture, which may require local tailoring of global approaches.

Then, of course, there are China’s state-owned enterprises. Many of them only recently converted from government departments into commercial entities and are still working to adapt to a competitive environment and adopt a true business mind-set. These companies generally lack a systematic approach to nurturing employees moving up the organizational ladder. They misconstrue capability building as a classroom activity, missing the impact of linking it to actual business. And they are too inflexible either to fire underperformers or to reward and promote employees, including managers, who change their behavior and adopt the necessary mind-sets.

While the challenges facing multinationals and state-owned enterprises differ, our experience with leaders at both kinds of organizations (as well as with private-sector Chinese companies) has highlighted the importance of some common, broadly applicable principles. In this article, we describe three that should help companies overcome many of the obstacles that have frustrated capability-building efforts in the past.

1. Relate capability building to real activities

In many Chinese companies today, capability building remains synonymous with classroom training, partially thanks to the tradition of rote learning in schools. The case for building new skills is easier to understand, however, if the exercise is rooted in visible operational outcomes, as well as improvements in the welfare of participating employees.

A large state-owned enterprise we know consciously built the capability-building program at one of its refineries around tangible targets. About 30 change agents were held accountable for 12 productivity improvements, such as higher energy efficiency and more reliable equipment. In the process, these employees had an immediate opportunity to apply the technical and managerial skills they had learned and to observe the benefits, including a 10 percent fall in energy consumption.

Or consider the experience of a Chinese automotive joint venture that recently began to develop new car models in China after years of manufacturing only cars transferred from mature markets. The venture has now set up a “corporate university” to encourage cross-functional collaboration among a range of functions—notably, engineering, finance, manufacturing, purchasing, quality, and sales—as well as better communication with global headquarters to ensure a successful launch. This is capability building with a purpose that everyone can understand and rally around.

As this example emphasizes, capability building rooted in real work and aimed at overcoming real challenges often benefits from a broader support system. Historically, many human-resource departments emphasized quantity over quality, placing priorities such as cross-functional collaboration and leadership skills on the back burner. Even today, many HR functions do no more than oversee salaries and benefits, relying largely on one-to-one training in local plants. As industry processes and value chains grow in complexity and innovation becomes more important, a comprehensive approach is required.

2. Instill incentives and create opportunities for promotion

In China, a hierarchical culture remains a formidable barrier to better performance. Individuals do not always gain promotion or receive sufficient reward for their efforts; the plaudits tend to go automatically to people with the longest tenures in the highest ranks. In many corporate environments, the most important thing is not to make mistakes and, hence, not to take risks.

All of those problems proliferated at one big Chinese state-owned heavy-industry company we know. Most of its leaders had transferred from technical positions into general-management ones, without sufficient training or coaching on how to manage that transition. Seniority and technical skills rather than broader leadership and managerial talent or potential determined promotions and rewards, and no centralized knowledge or learning resources were available to help fill in capability gaps. As a result, some talented young managers chose to leave the company.

By contrast, another state-owned enterprise recently discovered the power of incentives. To sustain its improvement program, it established an accreditation process that officially certifies change agents who outperform their peers, rather like General Electric’s Black Belt program. The rule now is that every senior manager has to pass this certification test before being considered for further promotion. Ten percent of the profit improvement the change program generates is used to motivate the people involved. As employees have come to see how the initiative is improving performance and winning them recognition from the company’s leadership, participation has climbed.

3. Don’t forget China’s unique culture

Chinese employees will be much more receptive to capability-building materials that reflect the local culture rather than, say, American or European examples and case studies. Local trainers invariably add know-how and credibility to the wider organizational rollout, notably in winning over skeptics.

One worldwide industrial-packaging leader, facing significant competition in a highly commoditized and fragmented market, sought to use its global commercial-excellence program to accelerate growth. But its salespeople could not apply what they learned to the China market, and the costs, in the form of employee fatigue, were considerable.

The solutions may sound obvious: developing Chinese teaching materials to help solve problems, building day-to-day business problems around products that participants would find in the Chinese market, and localizing global training materials through culturally appropriate metaphors and examples. But we know from experience how easy it is to overlook these issues. In our own work, we routinely use a case involving a coffee machine to teach managers about the seven types of waste and how a “lean” perspective can address them. When we recently used this case at a Chinese state-owned enterprise, however, the managers couldn’t make sense of the story, because they had never used a coffee machine. We have now adapted the context to tea making.

About the authors

Karel Eloot is a director in McKinsey’s Shanghai office; Gernot Strube is a director in the Hong Kong office, where Arthur Wang is a principal.

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