The centralised governance model is at odds with a fragmented world

Global businesses are learning a harsh lesson. Their centralised governance model where headquarters make key decisions like investments, new products, and new capabilities is increasingly at odds with a fragmented world and digitisation. A model perfected for efficient execution of central decisions across markets in a more integrated world where markets evolved slowly (in relative terms), where data/information access was unsymmetrical (i.e. customers had limited access), and communication between customers and markets was minimum.

This world has dramatically changed. We all know the divisiveness of today’s geopolitics fragmenting global markets. The longer-term inexorable transformation of the integrated ‘one’ marketplace is being driven by the growth of digitisation in two ways. First, the growth of internet and mobile has democratised data/information access (further fed by fakes and deepfakes). Second, it offers digital ‘tools’ to organise around common interests quickly and cost-effectively. Together they have given ‘voice’ to customers with unmet needs and shared aspirations, creating demand for ‘micro-markets’. There has been a power shift from manufacturers to customers. The global marketplace is becoming a fragmented ‘local’ one.

Many global firms with their centralised decision-making are unable to compete in this fast-changing local marketplace. Unable or unwilling to change, they are losing share to local, nimble competitors, and many have even withdrawn.

The winners are the likes of US consumer goods company P&G, Chinese appliances major Haier, streaming giant Spotify, and, closer home, Bajaj Finance, all of whom have pioneered a new governance model that reduces the ‘control’ role of the centre and gives power to customer-facing teams. Haier calls its model ‘rendanheyi’ or ‘zero distance from the customer’ by breaking up the business into customer-focused micro-enterprises. Bajaj has followed a ‘break to grow’ strategy where they systematically set up empowered teams who ‘own’ customer value pools. Conceptually, they are building ‘bottom-up’ into a more decentralised network like team-based structure, as opposed to a top-down hierarchical organisation. Local speed and innovation of such a network drives its competitiveness, rather than the global scale and execution efficiency of a centralised hierarchy.

The well-known British historian Niall Ferguson backs this corporate thesis on governance based on his research on how societies have evolved. In The Square and the Tower, he remarks that through history centralised hierarchy (and control by the ruling elite) has been the most prevalent governance model. The only time this was challenged was in the early 1400s when a new innovation disrupted one of the central pillars of governance by a ruling hierarchy — controlling access to information. Johannes Gutenberg had invented the printing press and suddenly all kinds of data, information, knowledge, all earlier controlled by the elites (and the church in medieval Europe), became easily accessible to common people via articles, books, pamphlets and posters. For the first time a new ‘technology’ had empowered the masses. They were able to organise themselves into loose networks of interest groups, ‘voice’ their dissatisfaction with the status quo, and share aspirations. There was a clear power shift from the elite hierarchies to people networks in society.

Translating this into management speak, a new technology had transformed the demand structure of the marketplace and altered the balance of power between the company (hierarchy) and the customer (demand networks). According to Ferguson, for only the second time in history after the Gutenberg press, a similar phenomenon is underway with the development of another new technology — the internet, now enhanced by digital tools and generative AI. As he points out, these informal networks were able to put pressure on the ruling elite in Europe to bring about deep social and political reforms at the onset of the industrial age.

This raises an important question. Can political governance in today’s societal marketplace, facing a similar fragmentation around the world into ‘micro-markets’ of local/regional, ethnic, and cultural groups (and aspirations), learn from these companies? But unlike decentralisation in companies, many countries are seeing the opposite with increased centralisation under nationalist leaders, which can deepen the fault lines. There are two major challenges in adopting the corporate lessons for political governance. First are sceptics who raise the spectre of structural anarchy with greater decentralisation. To them, only the discipline of central hierarchy can maintain alignment with the overall goals of the country and ensure efficient execution. Second and perhaps more difficult to overcome is the controlling power of the centralised hierarchy. Decentralising means giving away power, and only a visionary leader will do it after building some degree of consensus in the leadership team. Unless forced by ‘market’ pressure as some of these companies faced.

On the first challenge, paradoxically, digitisation, which has been a force for a more localised marketplace, also provides the answer to how to balance local autonomy with central (or global) alignment and overall objectives. The leading companies have built (or are building) a digital stack/platform as the spine that connects all the local teams. Such a platform supports a highly metricised operating model by enabling real-time sharing of data/analysis with all stakeholders and transparent performance management. It operationalises the ‘rules of the game’ within a value framework (or aligned purpose) for all internal transactions, and also can be leveraged for external two-way engagement with customers. By doing this, as a leader of one of these companies says, market complexity can be an opportunity to create advantage!