The Coming Evolution of Global Business

Stephen DeAngelis

June 18, 2014

“Whether you trace them back to Assyrian trading networks in 2000BC, or only as far as the mid-19th century when the modern cross-border joint-stock company was born,” writes Andrew Hill, “multinationals have had a good run.” [“Business is going native again,” Financial Times, 9 April 2014] That remark sounds a lot like a toast that someone might make at a friend’s wake. In a way, it is. Hill seems to accept former IBM CEO Sam Palmisano’s prediction that multinational corporations, which Hill characterizes as a “hub-and-spoke model,” will give way to “‘globally integrated enterprises’ (GIEs).” According to Hill and Palmisano, GIEs “will shed national identity and serve customers from wherever in the world makes most sense, backed by a global supply chain and global support functions. Such companies will be more productive, innovative and agile.” Hill notes that Palmisano first put forth his ideas half a dozen years ago and is still pushing them. I first wrote about his concept in a June 2006 post entitled “Globalization and Resilient Enterprises.” James M. Pethokoukis, a reporter from U.S. News & World Report, read that post and contacted me. He was writing an article about Palmisano’s concept and wanted my take on the subject. Pethokoukis’ article, for which Palmisano declined to be interviewed, was entitled “Multinationals 2.0.” I discussed Pethokoukis’ article in a follow-on post also entitled “Multinationals 2.0.” In that latter post I concluded, “Pethokoukis offers a balanced look at Palmisano’s proposition that multinational corporations must change into globally integrated enterprises or perish as corporate dinosaurs.” The following is how Pethokoukis characterized what I had to say to him back in 2006:

“Here’s the even bigger vision: As more and more countries – particularly the developing ones in Africa, Latin America, and the Middle East – become more interconnected and dependent, it will result in a safer, more orderly world. ‘The business world has this enlightened self-interest in integration,’ says Steve DeAngelis, CEO of Enterra Solutions, a software solutions company that helps global companies integrate far-flung operations. ‘Look at China and the United States. Look at all the economic bridges we are building. Each one we build is a step away from military conflict.’ So while multinationals have traditionally been stereotyped as corporate villains – for polluting the environment or attempting to overthrow unfriendly Third World governments – the new organization would supposedly make the planet a better place.”

Pethokoukis’ use of the word “supposedly” denotes a bit of skepticism. Frankly, he has good reasons to be skeptical about whether or not globally integrated enterprises will actually make the world a safer place. Such theories have been raised before. In an article entitled “Economic Interdependence and War: A Theory of Trade Expectations,” Dale Copeland gives a brief history of others who have made this claim – most famously Norman Angell. [International Security, Vol. 20, no.4, Spring 1996] Copeland writes:

“The argument was first made popular in the 1850s by Richard Cobden, who asserted that free trade ‘unites’ states, ‘making each equally anxious for the prosperity and happiness of both.’ This view was restated in The Great Illusion by Norman Angell just prior to World War I and again in 1933. Angell saw states having to choose between new ways of thinking, namely peaceful trade, and the ‘old method’ of power politics. Even if war was once profitable, modernization now makes it impossible to ‘enrich’ oneself through force; indeed, by destroying trading bonds, war is ‘commercially suicidal’.”

I’m well aware that politicians and extremists don’t always act rationally (look at what’s happening in Iraq); but, I still believe that economic integration creates a better environment for negotiations during tense times than a world in which there is little integration. This post, however, isn’t about international relations. It’s about how organizations are evolving. Hill writes that, if multinational corporations are going to evolve into globally integrated enterprises, they “will have to adopt unfamiliar ways of working and managing and adapt deep-seated national cultures, while younger, more flexible enterprises, built from scratch along global lines, snap at their heels.” He continues:

“The GIE idea is also haunted by the sometimes sorry history of companies such as Philips and ABB, which switched from command-and-control to ‘matrix’ management in the 1990s. Since Mr. Palmisano first floated the idea of the globally integrated enterprise in 2006, developed economies have stalled, reviving calls for protectionism. Emerging markets growth has slowed. But he says ‘the current environment actually accelerates the need for this structure’, as companies and countries seek new sources of growth and productivity. He has just published Re-Think – an ebook that is part memoir, part manifesto – and launched the Center for Global Enterprise, to propagate the idea.”

In his article, Hill discusses three companies that are transforming into globally integrated enterprises: IBM, Cemex, the Mexican cement company, and Bharti Airtel, the Indian telecommunications group. Each of these companies is exploring different organizational models that foster integration and each is moving away from the hub-and-spoke model. Pankaj Ghemawat of Iese Business School told Hill, “The basic impulse is a sensible one: let’s find non-hub-and-spoke ways of tying things together.” The reason companies want to dump the hub-and-spoke model, Ghemawat told Hill, is because “the process of greater integration will make international companies more efficient.” But, Hill reports that the transformation is neither easy nor quick. He writes, “Mr. Palmisano says even IBM will take years to perfect the idea: ‘We don’t have to create the next material for a semiconductor but in a way you have to invent the new model for business.'” Given the fact that Palmisano first introduced this idea eight years ago, and that he indicates that IBM will still take more years to transform, helps you to understand how difficult changing organizational models can be.

Hill identifies four of the most difficult challenges that executives have to face as they transform from hub-and-spoke multinational corporations to globally integrated enterprises. The first challenge involves striking “the right balance between global and local functions, and between outsourcing operations and handling them in-house.” Obviously, some matters are better handled by decision makers who understand local conditions and can respond with greater speed and effectiveness as conditions change. The late Lorenzo Zambrano, the Cemex chief executive who passed away shortly after Hill’s article was published, told him that you have to “avoid the risk of tilting towards one extreme or the other”. He told Hill that the transition is “an open-ended process [that has] to adapt to constantly changing market conditions”. Hill reports that “Cemex tapped into the collective knowledge of its 4,000 staff in 50 countries using, among other tools, its ‘Shift’ internal social network to share best practice and increase collaboration, while centralising support activities such as IT.”

The outsourcing challenge is different. If your goal is better integration, that goal becomes much more difficult when certain functions are handled outside of the integrated enterprise. One way around this challenge is to establish “trusted partner” relationships with vendors so that they can be appropriately integrated. Hill reports how Bharti Airtel handles outsourcing:

“Bharti Airtel … pursued a radical outsourcing policy. It held on to the core functions of customer, financial and brand management, and regulatory liaison, but got other companies to design, build and operate its network and handle its IT needs. Sunil Bharti Mittal, founder and chairman, says those agreements were vital when the group ‘woke up as a multinational’ in 2010, after its purchase from Zain of networks in 15 African countries. As Bharti Airtel matures, though, it is bringing more services back in-house, having received complaints about poor customer service in some areas. ‘We’ve decided to revisit these contracts because the alacrity with which we needed to attend to some of these issues’ was not shared by all its outsourcing partners, Mr. Mittal says.”

A second challenge faced by companies trying to transition into globally integrated enterprises that Hill identifies “is how to maintain trust, both internally and externally.” He specifically points to challenges involved with maintaining global supply chains. “When a global supply chain fails,” he writes, “it damages the whole group. Similarly, privacy breaches or cyber attacks that undermine the internet’s resilience weaken the backbone for GIEs’ international networks.” A number of analysts have pointed out that, as supply chains stretch across the globe, they significantly increase in complexity. That’s why many of them recommend segmenting supply chains regionally. Regional supply chains make sense for a number of reasons including the fact they help reduce complexity. MIT Sloan School of Management Visiting Professor Suzanne de Treville believes that more and more companies will opt for regionalization by bringing manufacturing closer to where goods are consumed. “De Treville finds that it’s often more costly than companies think to offshore. Using a new finance tool, she shows how the ‘mismatch costs’ that result from extending the supply chain may well be higher than the lower cost offered by the offshore supplier, leading to reduced profits.” [“MIT Prof.: More Costly To Offshore Than Many Companies Think,” by MIT Sloan School of Management, Manufacturing.net, 23 May 2014]

The third challenge noted by Hill for companies trying to become globally integrated enterprises involves “a lack of diversity in the senior management of multinationals.” He writes:

“Mr. Palmisano says, ‘if you are going to truly be a globally integrated enterprise … your top talent should be whatever the top talent of the world is’. But according to research by Prof Ghemawat, of the 500 largest listed companies in the world, only 14 per cent have a chief executive from outside the employer’s country of origin. In those companies, only 10 per cent of the senior management team are non-native.”

The final challenge identified by Hill is one that has plagued change managers from the beginning of time: “disruption from the bottom up.” In his famous book The Prince, Niccolo Machiavelli discussed how difficult it is to change an existing organization and why one must expect to put his career on the line to effect change. He wrote:

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things, because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.”

Like Palmisano, I believe that organizations will become more globally integrated. All the trends, from cloud services to mobile devices to the Internet of Things, indicate that the world is becoming more connected. The tools are finally in place that can help make this transition smoother. My guess is that the cultural barriers will be much harder to overcome than the technical barriers as corporations evolve into globally integrated enterprises.