Many companies like to be centralized, even when center-led models tend to be much better. However, as a recent article in Knowledge @ Wharton, that contained a transcript of an interview with Johnson & Johnson CEO William Weldon pointed out, there can be many advantages to decentralization too, if done right.
Johnson & Johnson is a lot bigger than the band-aids and baby shampoo they are known for – much bigger. They are, in fact, a company with a market capitalization of $180 Billion to $200 Billion, with over $60 Billion in annual revenue, and over 200 operating companies which collectively have over 120,000 employees across the CPG, Pharmaceutical, and Medical Device Manufacturing sectors. Furthermore, unlike some multinationals, they are very decentralized with many of the operating companies operating more-or-less independently from the others. So, more than most, they’re in a position to understand what the advantages of decentralization can be.
The first benefit, which is often unspoken, is that you’re forced to seek out and hire people who are true leaders and capable of managing their businesses on their own. This makes sure that you have talent spread out across the organization, and not centered in one tiny division, which makes for a much more productive and robust company.
The second benefit, as pointed out by Weldon, is that you have local management running the company. This is very important in the CPG sector. Local management will know what sells, what consumers want, and how to grab the biggest share of the local market. In comparison, a remote manager, who doesn’t speak the language or understand the culture, might pick a name for a mp3 player that means “crappy sound” in the local language and then, like Chevy, wonder why the Spanish aren’t buying the Nova.
In addition, having a wide variety of local managers in different cultures gives you a large amount of diversity in your organization – and the more people who think different, the better off you are when it comes time to innovate.
The third benefit is that, because control is decentralized, the chance of one person’s mistake crippling the organization is extremely low. In centralized control, if the CEO, CFO, or COO makes a big snafu, like focussing the whole company on a single, poorly thought out, marketing campaign, it can topple the whole company. In a decentralized company, if the local manager makes a big snafu, that’s just one little unit with one little mess in the grand scheme of things, and its likely to be easily recoverable if a few senior managers from other units step in to help.
The fourth benefit is that it forces you to be innovative when it comes to innovating. With people all over the world, you have to be innovative to get them together. That means adopting, implementing, and developing innovation networks that allow people to come together across companies, geographies, and fields of expertise to work on new product development.
And once you have these innovation networks in place, you begin to see the value of open innovation, and realize, as Johnson and Johnson has, that you can extend the innovation network outside your four walls and instead of having 120,000 minds to draw on, you can include your partners, customers, suppliers, and third party innovators and have a network of over 2 Million minds to draw on – which is 20 times the number of minds you’d have at your disposal if you insisted on trying to keep innovation within your four walls.
It’s a great model, when done right, and lends further validation to my belief that center-led, or more appropriately, center-guided models are often the best models for operations across the board. Experts in a Center of Excellence (COE) support and guide the organization on common strategic issues while leaving the local issues to the local experts. I highly recommend the article.