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Series: “Offshore Expansion by Small and Medium Enterprises” Part 5 Critical Points in Local Operation Management | Tatsuya Hoshino, Research Director Vietnam Economic Research Institute (VERI) [Date of Issue: 31/August/2011 No.0198-0807]

Date of Issue:31/August/2011

Series: “Offshore Expansion by Small and Medium Enterprises” Part 5
Critical Points in Local Operation Management

Tatsuya Hoshino
Research Director
Vietnam Economic Research Institute (VERI)

Key issues in managing a local operation are the choice of a local director, the relationship between the parent firm and the local operation, and labor policies in relation to local staff. While the selection of a director is obviously critical, the relationship between the parent firm and the local firm is also important. The parent company should not micromanage the local operation, but nor should it stand back and leave everything to the local firm, as both approaches lead to problems. If care isn’t taken in hiring local staff, production will not rise, and the local operation can also suffer from job-hopping and strikes. Steps need to be taken to motivate local employees.

1. Selection of Local Managers
(a) When a local operation is established, the most important question is obviously how to manage that operation. The first issue is the selection of a general director. In many successful cases, seconds-in-command or other critical personnel have been sent out from headquarters. Operations that have failed have often suffered from the appointment of personnel fluent in the local language and familiar with the local environment but with no management experience, or vigorous young employees whose strong marketing abilities were prioritized over their management abilities.

(b) Case 1
For one computer solutions and maintenance firm set up in Country A in the ASEAN region, the parent company sent over a young employee with a good track record in sales to head the local operation, hoping to capture local orders. A year later, there had been almost no improvement in performance. The local director had gone to local Japanese affiliates in search of business, but perhaps because of his youth, he had been given appointments with liaison officers rather than the leaders of these firms, and had consequently made no headway. The local operation also had two talented local employees, but the young director didn’t know how to use their skills and instead ended up competing with them. When the head of the parent company visited the local operation, he discovered this situation and sent the young director home, replacing him with a top gun from headquarters who had management experience. At the request of the new director, the head of the parent company also began coming out every two months to visit the heads of other local Japanese affiliates to promote sales. Promising local employees were also actively assigned to accompany him on these visits. These moves brought about a major improvement in business performance.

2. Relationship between Parent Company and Local Operation
(a) In some cases, the parent company leaves things entirely to the local director and just checks key items, business performance and balance sheets. In other cases, the parent company micromanages the operation. Both approaches have their pros and cons, but if a talented employee has been appointed as the local director, the former will work better. Even then, however, senior managers from sales and administration should be sent out from the parent company once every six months to ascertain the current situation at the local operation and its future prospects.

(b) Case 2
Local Japanese affiliate X, set up in East Asian country Y, imported machinery and equipment from Japan and sold it locally. In addition to Country Y, Company X also sold to other neighboring countries. The parent company left management entirely to Company X, looking only at contracts, sales and balance sheets. Personnel out on business trips from the parent company did no more than go around local clients. Two years down the track, contracts and sales suddenly shot up, and the parent company applauded this as the result of marketing efforts. Three years further on, a young employee sent out from the parent company noticed that the local operation’s sales did not tally with the value of goods imported from Japan. Going through the books did not explain the disparity, so when he went home he reported the issue to the head of administration. The administration division at the parent company conducted an intensive investigation and discovered that staff at the local operation had been arbitrarily short-selling to third countries and were operating entirely on credit. Moreover, because this had continued for quite some time, the company had incurred a massive loss. The situation arose from the local director leaving everything up to local staff, and from the parent company leaving everything up to the local director without putting a checking function in place. A serious situation which could have been forestalled if anyone was paying attention was consequently allowed to occur.

3. Key Points in Relation to Local Staff and Labor Policies
(a) Local employees are a critical element in managing a local operation, and it is important to exploit their abilities to the full. Local employees across ASEAN share the following characteristics:
(i) Unlike Japanese employees in Japan, they are not used to working within corporate structures. They operate on a one-on-one basis.
(ii) They are not accustomed to systems for reporting to and consulting with immediate superiors or for liaising or consulting with colleagues. If a problem occurs, they try to deal with it themselves, which loses time. They don’t have the concept that a problem belongs to all the relevant staff and should be resolved as a team.
(iii) While they say that wage rises are up to their superiors to decide, they are in fact extremely sensitive about these and will quit immediately if they don’t consider the rise to be adequate. They exchange information about the wages of other employees and wages paid at other companies, so they are well-acquainted with comparative wage levels.

(b) Labor Policies
(i) In relation to (a)(i) and (ii), many local Japanese affiliates use in-house training to ensure that staff fully understand the company’s organization and operation.
(ii) To boost company solidarity, arrange annual staff trips and barbeques in which everyone participates, and let local staff do all the planning. Pay out bonuses (around one month’s salary) before the Chinese New Year and hold a company dinner to celebrate the New Year together.
(iii) Make sure there are differences in salaries. Talented staff should receive higher salaries, with a 40-50 percent disparity between their pay packets and those of less able staff. If there isn’t much disparity, the talented staff will quit. Find out what other companies are paying and gear wage levels accordingly. Move proactively in boosting the wages of talented staff, even where they claim it is unnecessary.
(iv) In many countries, labor protection makes it difficult to fire staff. In Vietnam, staff cannot be fired unless they have caused serious damage to the company (although there are no specific regulations on what constitutes serious damage). Consequently, local operations need to be very cautious about who they hire, relying on the results of personal interviews with the local director rather than on curriculum vitae (which are not necessarily entirely true). As noted in (iii), major wage gaps need to be instituted to create an environment that will attract and retain talented staff.

(c) Case 3
Software company A, a Japanese affiliate set up in Vietnam, paid its top software engineers around $700-1,000 a month, but took on talented engineer B, who could also speak Japanese, at a monthly salary of $2,000. He proved to be very competent at his job, and the local director of Company A was satisfied. A year later when it was time to revise salaries, the local director proposed to B that they discuss a wage rise, but B said that he was already receiving enough and didn’t want a wage rise, so he would leave the matter to the director. The director took him at his word and didn’t give him a pay rise. The next year the same conversation took place, and again there was no pay rise. The third year, the director felt that a rise really was necessary and talked to B about it, but B just gave the same response. The director was unhappy at the situation but because the starting salary of $2,000 had been high and because he believed that B was expressing his honest opinion, again he left B’s salary unchanged. One month later, B brought in his resignation letter. The director was astonished, and said that he had only left the salary at that level because B had said he didn’t want a rise, but that he would raise it immediately if B liked. B explained that because he had received a high starting salary, he hadn’t felt that he could ask for a raise, but when the director chose not to raise his salary three times in a row, he felt undervalued and had therefore decided to quit. B was quite determined, and left the company. Later it was found that B had taken a job at another foreign affiliate six months later with a starting salary of $3,000.

(original article : Japanese)
(For the Japanese version of this article)

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