Businesses operating in China learning by trial and error

Looking back over more than three decades, businesses operating on the mainland have learned by trial and error, just as Beijing has been learning to adapt to its open door policy. The two learning processes have gone on simultaneously, with both sides having to heed Chinese strategist Sun Tzu's words to adapt their intents "to the infinite variety of circumstances". It follows that what matters on mainland markets is execution. Strategy is little more than a general orientation which takes form as decisions are made in response to an evolving context. Time and history is therefore crucial, as government, companies, consumers and workers are not what they were only a short while ago, except for the paradox that speed of change in China proceeds lethargically. The Communist Party, for instance, is no less a Communist Party in 2012 than it was in 1978, except for the fact that its policy tools have altered beyond recognition. Similarly, more than 400 million people have joined the middle classes, while retaining a characteristic acquired under conditions of scarcity. Consumers shop around, compare prices, product quality and after-sales service, then decide to buy or not. For companies, the only way to keep ahead in fast-moving markets is to strive for innovation, seize opportunities, decide quickly and mobilise the necessary resources to back the commitment. However, managing speed is a capability that has to be built up over time through the firm's collective learning process as projects are completed and new horizons and opportunities open up in the light of the knowledge acquired. Managing to respond speedily requires a patient process of learning by the company's top team. If the top team doesn't learn, then those lower down the ladder who are sent to get operations up and running will be fighting a losing battle. They won't have the decision-making power, the support or the understanding to succeed. This applies to both non-Chinese and Chinese companies, which have found themselves entering geographies in their vast homeland where they lack almost as much savvy as non-Chinese firms. Where they differ is that non-Chinese companies are advised to integrate operations globally, but at the same time, must give their China operations enough autonomy to make decisions quickly and independently in response to whatever is thrown at them. They have to become an integrated network of financially interdependent operations that share knowledge, innovation and success. If the mainland operation is to be fully integrated, then how it reports upwards will be an important reflection of how China fits into the organisation as a whole. Some companies view China as part of Asia-Pacific and the China chief executive reports to Asia-Pacific rather than directly to headquarters. Other companies take the view that China is virtually a region in itself, with all its different markets and massive geography, so it reports directly to the central organisation. Equally important for the non-Chinese company is to ensure that it shows one consistent face to the party-state. Easier said than done, when there are five different levels of government, and two parallel but complementary channels of authority through party and state. The fact of the matter is that the party-state tends to view corporations as one entity, so that it pays for corporations to show one face to government, and speak with one voice. Autonomy, yes, but not at the expense of clear procedures and channels of corporate authority. Integrating will also involve managing perceptions and expectations on all sides, not only between the headquarters and China, but also between other subsidiaries around the world. Managers in these subsidiaries will be involved in their own complex business, and not aware of the specific conditions facing their colleagues in China. These take the shape of costs, the structure of which will vary around the world according to conditions. Common to all territories is the rule of thumb that when you invest, you may be targeting one or two particular features to exploit. Regardless of what those features are, the key measure will always be total operating costs over a given period of time. These numbers will give you an ex-post evaluation of how long it took your organisation to operate in the territory. There can be no doubt that over the past 30-plus years, conditions for operating on the mainland have been completely transformed, as indicated by China's move up the World Bank's "ease of doing business in" rankings, until recent changes in the composition of the index. However, there can also be no doubt that maintaining the momentum to create a business friendly environment, while reconciling that with the multiple other demands on public policy, is a major challenge for the party-state. We will be able to say that the mainland has completed its business system transformation when there is a convergence of cost structures on those of the rest of the world. For the moment, China's business metrics remain special. China remains a high-volume, low-margin business context by world standards. Business people confide that in the longer term, they expect margins to improve. But remember: China is a huge country, with a vast population eager to live better and to work hard. Competition is tough and will remain so - for a long time yet. Jonathan Story is emeritus professor at Insead business school, which has campuses in France, Singapore and Abu Dhabi

Businesses operating in China learning by trial and error

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Adapting to the situation is what foreign and domestic firms have been doing for the past 30 years as they seek to stay ahead