The proximity effect - distance is everything

Michael Hedges February 1, 2009

Students of management and almost anyone who has worked for a large organization know about the proximity effect. Results decrease proportionate to geographical distance from headquarters. Tantalizing evidence piles up showing far-flung divisions outperform those nearest the boss.

NRJ Group’s core activity is radio broadcasting and selling the advertising that goes with it. Results for 2008, released January 27, showed a 7.3% decrease in revenue over 2007. Q4 revenues dropped 14.6% year on year. However, NRJ International – exploiter of the NRJ brand throughout Europe – increased revenue 5.2% compared to 2007. (See NRJ International press release here) Contributing most to NRJ International’s revenue increase were stations in Germany (Hamburg, Berlin, Munich) and Austria (Vienna).

Granted, NRJ International contributed but one-tenth (€33.8 million v. €337.5 million) to NRJ Group’s total revenue. And the business model inside France is quite different from that outside France, where it is more brand manager than broadcast operator. And, too, the French broadcast operations have suffered  “…lower advertising investments in the distribution, transport and telecommunications sectors,” according the NRJ Group statement to investors.

NRJ Group entered markets outside of France during the fat days, with a different business model as an operator. Few of these acquisitions became raging successes. Several talented executives were given, in quick succession, the chore of managing the international division. All, on departure, cited “interference from Paris.” Everything, is seems, was micromanaged from headquarters. The NRJ station in Stockholm sounded exactly like NRJ in Paris, Swedish voices notwithstanding. This management concept is the proximity paradox. Headquarters executives, typically elevated from positions at local operations, keep playing from the playbooks they wrote during their glory days. Senior executives and board members with time on their hands will, indeed, edit music playlists, sometimes consulting family members. Who’s to argue?

NRJ CEO and founder Jean-Paul Baudecroux has, to his credit, changed this. And he has his hands full with line extensions in television and mobile phones, not to forget unpleasant trends for his main national radio brands in France. (See article on recent French radio audience) Delegation is always the CEO’s toughest job.

Another example of the proximity effect comes from Switzerland. Travel by train from Bern, headquarters of public broadcaster SSR-SRG, to Zürich or Lausanne – homes, respectively, of regional broadcast centers DRS and RSR – takes about an hour. Travel by train from Bern to Lugano, home to regional broadcaster RSI, takes about four hours. RSI’s aggregate market share is nearly 80%, far higher that the other Swiss regional broadcasters.

Obviously, these are imperfect examples. Other factors intrude. Such it is with management concepts. 

Do you have a better example of the proximity effect? Send it on. Confidentiality is always respected.