The Transformation of Multinationals

Stephen DeAngelis

June 15, 2007

A year ago I wrote a post about a letter to the editor of the Financial Times written by IBM CEO Sam Palmisano [Globalization and Resilient Enterprises]. Palmisano argued that multinationals, in order to survive, will have to transform from industrial age corporations into the globally integrated enterprises, which he defined this way:

“The globally integrated enterprise … fashions its strategy, management and operations to integrate production – and deliver value to clients – worldwide. That has been made possible by shared technologies and shared business standards, built on top of a global information technology and communications infrastructure. Because new technology and business models are allowing companies to treat their functions and operations as component pieces, companies can pull those pieces apart and put them back together in new combinations, based on judgments about which operations the company wants to excel at and which are best suited to its partners.”

As I noted in that post, “The key to this paradigm is the ability to ‘pull apart’ business processes and ‘put them back together’ as needs dictate. Of course, this kind of talk excites me because Enterra Solutions is in the business of enabling globally integrated corporations and turning them into Resilient Enterprises. Tom Barnett and I spend a great deal of our time addressing multinational corporations about this subject. We talk about the need for the next generation Enterprise Architecture, which pulls apart business processes and turns them into automated rules sets that can be recombined as required in the corporate DNA.” The Economist has weighed in on multinational transformation and claims that much of the impetus for change is coming from multinationals emerging from the developing world rather than from multinationals that originated in the developed world [“Globalisation’s Offspring,” 7 April 2007].

“For as long as multinational companies have existed—and some historians trace them back to banking under the Knights Templar in 1135—they have been derided by their critics as rapacious rich-world beasts. If there was ever any truth to that accusation, it is fast disappearing. While globalisation has opened new markets to rich-world companies, it has also given birth to a pack of fast-moving, sharp-toothed new multinationals that is emerging from the poor world.”

The article notes that “old” multinationals are concerned because they believe the newcomers won’t be burdened by the same regulations, cultural limitations, and ethical practices that add to their operational costs. The Economist agrees that newcomers do have some advantages.

“The newcomers have some big advantages over the old firms. They are unencumbered by the accumulated legacies of their rivals. Infosys rightly sees itself as more agile than IBM, because when it makes a decision it does not have to weigh the opinions of thousands of highly paid careerists in Armonk, New York. That, in turn, can make a difference in the scramble for talent. Western multinationals often find that the best local people leave for a local rival as soon as they have been trained, because the prospects of rising to the top can seem better at the local firm.”

That is one of the reasons that Palmisano’s globally integrated enterprise will strategize globally but operate locally — finding better ways to take benefit from globalization while also responding to local concerns. The article notes, however, that not all the advantages accrue to the newcomers.

“The newcomers’ advantages are not overwhelming. Take the difference in company ethics, for instance, which worries plenty of rich-world managers. They fear that they will engage in a race to the bottom with rivals unencumbered by the fine feelings of shareholders and domestic customers, and so are bound to lose. Yet the evidence is that companies harmonise up, not down. In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores. So as those companies globalise, the differences are likely to narrow. Nor is cost as big an advantage to emerging-country multinationals as it might seem. They compete against the old guard on value for money, which depends on both price and quality. A firm like Tata Steel, from low-cost India, would never have bought expensive, Anglo-Dutch Corus were it not for its expertise in making fancy steel. This points to an enduring source of advantage for the wealthy companies under attack. A world that is not governed by cost alone suits them, because they already possess a formidable array of skills, such as managing relations with customers, polishing brands, building up know-how and fostering innovation.”

The Economist then rhetorically asks how old multinationals can exploit the advantages they do have. Interestingly enough they turn to Sam Palmisano and his globally integrated enterprise.

“Sam Palmisano, IBM‘s boss, foresees nothing less than the redesign of the multinational company. In his scheme, multinationals began when 19th-century firms set up sales offices abroad for goods shipped from factories at home. Firms later created smaller ‘Mini Me’ versions of the parent company across the world. Now Mr Palmisano wants to piece together worldwide operations, putting different activities wherever they are done best, paying no heed to arbitrary geographical boundaries. That is why, for example, IBM now has over 50,000 employees in India and ambitious plans for further expansion there. Even as India has become the company’s second-biggest operation outside America, it has moved the head of procurement from New York to Shenzen in China. As Mr Palmisano readily concedes, this will be the work of at least a generation. Furthermore, rich-country multinationals may struggle to shed nationalistic cultures. IBM is even now trying to wash the starch out of its white-shirted management style. But today, General Electric alone seems able to train enough of its recruits to think as GE people first and Indians, Chinese or Americans second. Lenovo’s decision to appoint an American, William Amelio, as its Singapore-based chief executive, under a Chinese chairman, is a hint that some newcomers already understand the way things are going. IBM‘s approach is possible only because globalisation is flourishing. Many of the barriers that stopped cross-border commerce have fallen. And yet, Mr Palmisano’s idea also depends on the fact that the terrain remains decidedly bumpy. Increasingly, success for a multinational will depend on correctly spotting which places best suit which of the firm’s activities. Make the wrong bets and the world’s bumps will work against you. And now that judgment, rather than tariff barriers, determines location, picking the right place to invest becomes both harder and more important.”

The article concludes that the transformation of multinationals will follow Darwin’s survival of the fittest principle. New globally integrated enterprises will emerge and some old multinationals will evolve. Those that do will flourish. Those that don’t will fail. In The Economist’s words:

“Nobody said that coping with a new brood of competitors was going to be easy. Some of today’s established multinational companies will not be up to the task. But others will emerge from the encounter stronger than ever. And consumers, wherever they are, will gain from the contest.”

To be truly transformative, companies, consumers, and the work force all need to benefit from change. When that happens, the results will be globalization’s true offspring.