Multinationals 2.0

Stephen DeAngelis

July 25, 2006

Following the publication of my post on IBM CEO Sam Palmisano’s letter to editor of the Financial Times [Globalization and Resilient Enterprises], I was contacted by James M. Pethokoukis of U.S. News & World Report about an article he was writing. The article, entitled “Multinationals 2.0,” is now on newsstands in the 31 July issue of the magazine. Tom Barnett today also posted a comment on the article [“Steve in US News & World Report“]. Pethokoukis offers a balanced look at Palmisano’s proposition that multinational corporations must change into globally integrated enterprises or perish as corporate dinosaurs. Pethokoukis summarized Palmisano’s thoughts this way:

Here is the essence of what Palmisano, who declined to be interviewed, seems to be talking about: Unlike multinationals, whose business in developing markets involves selling goods and services and using the local population for low-skill production and call centers, the globally integrated entity would set up more-sophisticated operations — such as research and development and product design — using local talent whenever possible. Last month, speaking before some 10,000 employees in Bangalore, India, Palmisano said IBM was tripling its investment in the country to the tune of $6 billion and opening a telecommunications research and innovation center there. IBM also recently announced it would spend $40 million over the next three years and hire 200 staffers for new development lab in Russia. “We are in a global economy, and that doesn’t mean just low-cost labor arbitrage,” says Gartner Group analyst David Cearley. “What it also means is that you look for the best talent no where it exists around the world.”

Pethokoukis interviewed both proponents and skeptics of globally integrated enterprises. On the supporting side, Pethokoukis notes, is General Electric, which “opened R&D centers in Bangalore in 2000 and Shanghai in 2002.” Michael Idelchick, GE’s vice president of advanced technology, insists, “You need to speak the language and understand the culture. You can’t just be moving technical experts back and forth from the United States.”

The article notes that the old business model for multinationals was the “hub and spoke” model, where corporate headquarters was the hub and subsidiaries were the spokes. Business moved in direct relationship with the hub (which is a problem in a 24/7 world). Mohanbir Sawhney, a technology professor at Northwestern University’s Kellogg School of Management, agrees that this approach is no longer viable. In order to be resilient in today’s business climate, a business must “end up with centers of excellence distributed around the world.” In other words, instead of one hub with multiple spokes, you have multiple hubs (or nodes) of excellence which are connected and supportive.

IBM may specialize its Indian units in R&D and software engineering, its Philippine and Irish units in customer-care operations, its Chinese units in manufacturing, and so on. “Decoupling” different capabilities and then “recoupling” them through the network is a fundamental shift in global organization design. “Hub and spoke is very good for physical things but perhaps not so stimulating of creativity in human and knowledge organizations,” writes Carlota Perez, a Venezuelan researcher specializing in technology and economics, in an E-mail. (Palmisano is a big fan.) “Information technology does not work like hub and spoke. The freer the linkages, the richer the exchanges, the greater the feedback loops, and the better the atmosphere for sharing experience and attempting innovation.”

Perez really captures the essence of a Resilient Enterprise — freer linkages, richer exchanges, greater feedback loops, and improved environment for sharing and innovating. Kalle Lasn, founder of Vancouver-based Adbusters magazine and anti-globalization activist, doesn’t believe that multinationals like IBM have seen the light on their own but are responding to movements that insist large corporations become better global citizens. Whatever the reason, change does seem to be in the air:

In response, many companies are trying to spiff up their public images by adopting “green” approaches to marketing. British Petroleum spins itself as Beyond Petroleum, for instance. Even Wal-Mart has begun talking about climate change and its commitment to sustainable growth. Good corporate citizenship in action? Perhaps. But Julie Gorte, chief social investment strategist at Calvert Group mutual funds, says it’s also savvy business. “You don’t want consumers mad at you, obviously, and [being seen as socially aware] is especially important to European consumers,” she says.

Whether you call it “savvy business” or resilience, corporations that understand the world as it is emerging will those that thrive under changing conditions. One point that I made during my interview with Pethokoukis was that greater connectivity, sensibly applied, and culturally sensitive not only improves the business climate but the security climate as well:

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.

The article ends by raising the specter of domestic job losses in the United States and the backlash that such losses would inevitably create. I agree that corporations need to become resilient in a smart way. Eliminating consumers (i.e., laid off workers) in Core states while trying to create a new consumer middle class in Gap states does not make good business sense. Corporations must work with the government, unions, consumer groups, economists, and academics to generate new jobs that will sustain a domestic middle class while working abroad to help generate new middle classes. This need not be a zero-sum game where one country loses at the expense of another. The win-win scenario, however, will only be achieved when America embraces the fact that a better education system is required and developing new jobs in emerging fields becomes a priority. That is a vision that politicians of both parties ought to be able to get behind.