While the combined ASEAN region is larger than Brazil, Russia, and India, its relatively small individual submarkets complicate matters because of their diversity. Companies need an organizational structure that leverages economies of scale, while allowing deep penetration of each market to ensure sustainable growth. Many companies are forced to adopt localized tactics tailored for each individual market, but this has not prevented them from creating a scalable regional strategy using efficient organizational designs. In FSG’s latest report, we highlight more than 20 cases of organizations that have mastered the four virtues necessary to be effective in ASEAN (clients can access the full report on the FSG portal by the 20^th October).

AN UNDENIABLE RISE IN ASEAN’S IMPORTANCE

For a number of years, Western MNCs have indicated that the ASEAN markets continue to grow in importance in terms of their worldwide revenues. Not only do companies expect this top-line growth trend to sustain itself over the next couple of years, there are also expectations for improved bottom-line performance across the region. Given the region’s increasing importance, leading MNCs are now assessing the role that ASEAN will strategically play in comparison to China and India in their APAC portfolio over the long run—not just from a consumption angle but also from a production and sourcing point of view (see my previous blog and podcast on this here).

SHOULD YOU CENTRALIZE OR DECENTRALIZE? Opposing Forces at Play in ASEAN

ASEAN is one of the fastest-growing regions in the world; its GDP is expected to expand at an average of 4–6% for the next five years, it is likely to become the emerging markets’ second largest consumption base, and it will play a significant role in most MNCs’ manufacturing footprint. Given such an exciting future, many firms want to decentralize their organization in order to capture as much of the market as possible.

However, because the region is made up of 10 different countries that are individually much smaller than some of the larger emerging markets, are home to many different languages and business cultures, and are still relatively less mature, MNCs are forced to try and control the growth of such a complex environment through centralization of accountability.

• Decentralize: A steady revival of investments after the subprime crisis has lead the ASEAN countries to surpass mighty China in terms of FDI, and investors continue to find this region’s high rate of economic growth and rising consumer spending to be very attractive. The combined GDP of the ten-member Association of Southeast Asian Nations (ASEAN) is already significantly larger than those of India, Brazil, and Russia. According to base- and best-case scenarios created by the Asian Development Bank (ADB), the bloc’s GDP will exceed Japan’s GDP by 2028 and the EU’s by 2030 MNCs need explore how to optimize their organizational structure to make the most of this growth. Executives should be reminded that while ASEAN is beginning to function like one large economic unit, it is still made up of several smaller markets, and thus the organizational design strategies used in China or India aren’t directly applicable.

• Centralize: While the combined region is larger than Brazil, Russia, and India, ASEAN’s relatively small individual markets complicate matters because of their diversity. Companies need an organizational structure that leverages economies of scale, while allowing deep penetration of each market to ensure sustainable growth. Moreover, corruption is rampant in Southeast Asia, with most of the ASEAN countries ranked in the bottom half of the global Corruption Perceptions Index for 2013. With such high rates of corruption, MNCs can find it difficult to hand over accountability to country teams without having proper compliance tools already in place. Much like in most emerging markets, the processes of conducting business in ASEAN are not necessarily formal; a 10-year World Bank study showed that for some of the key ASEAN countries, the size of their shadow economies was roughly between 34–50% of the real GDP. In such an environment, it becomes important to have critical functions either centralized or have regional oversight to avoid compliance issues.

WHAT SHOULD YOUR COMPANY AIM TO ACHIEVE? Four Virtues of an Efficient ASEAN Organization

Based on primary interviews, secondary research on large corporations, and discussions with its experts, FSG believes there are four critical virtues that leading companies have mastered to achieve organizational success in ASEAN

1. These organizations keep costs as low possible and make investments in the people who will generate the highest return for the firm

2. These organizations empower their local teams and move decision making closer to customers in order to outmaneuver competitors and more rapidly capture growth opportunities

3. These organizations use their global scale as a competitive advantage by streamlining functions and preventing the duplication of efforts across organizational units

4. These organizations control translation of regional strategies to ensure that local and regional teams are operating within the boundaries of broader corporate strategies

This is part 1 of a 2 part series. Check back soon for part 2. FSG Clients can look for a full report on optimal organization structure in ASEAN on October 20th, 2014 on the client portal. Not a client? Contact us to learn more.