This is the sort of image that most ordinary people have of “managing in a global age”: It is just an easy affair of extending well-known brands around p. 120 the world and doing deals with your friends. In fact, globalization is incredibly difficult to manage, and for most managers it is usually more a source of fear than of excitement. For every McDonald’s, Coke, or Disney, there are countless smaller firms fighting to avoid getting run over by these global juggernauts. And even the three giants have hardly had easy times recently. Disney’s magic dust has lost its sparkle, as profits have stalled and the company has failed to make any sense out of its acquisition of Capital Cities/ABC. Coke’s growth also stalled at the same time that it ran into an embarrassing series of health-related and legal disasters in Europe. And after complaints that Burger King does indeed “just taste better,” McDonald’s has had to revamp its menu and even retreat from some countries.
Any manager will tell you that his or her job has become much more difficult. In some cases, these challenges are self-inflicted. (Disney’s Michael Eisner seems to be unusually good at falling out with his senior managers.) But there is also a universal feeling that every manager now faces a world in which the old certainties have been replaced by a string of unpleasant surprises and in which strategy has devolved from long-term planning to simple panicking. Globalization is not the only reason for this uncertainty, but, with the possible exception of technological innovation, it is the main destabilizer of the management psyche.
One way to understand the full horror of global management is to look at the process in slow motion and with the benefit of hindsight. At the beginning of the nineteenth century, Britain was the world leader in textiles, thanks to its water-driven looms. The machines, blueprints, and so on were carefully guarded secrets. An aristocratic American, Francis Cabot Lowell, managed to finagle his way into the factories and talked to the workers about the machines they used. By the time he left Britain in 1813, the textile barons were on to him. Customs officials searched his baggage twice and discovered no drawings. But Lowell had memorized the designs. Built on the back of the Cartwright power loom, the town of Lowell (named after him posthumously) became not just one of America’s first industrial centers but also a thorn in the side of Britain’s textiles industry. But before you get too distraught about the poor old British, it is worth remembering Manaus. By the 1870s, the Brazilian jungle city had become one of the world’s most advanced. (It had an electric tramway and an opera house.) Then another resourceful entrepreneur, a Briton named Henry Wickham, managed to smuggle out some rubber-tree seeds, cultivated them in Kew Gardens, and then shipped them out to British colonies in Asia, such as Sri Lanka and Malaysia. Rubber prices collapsed, and so did the fortunes of Manaus.
p. 121 The sort of things that happened to Lancashire and Manaus over decades happen to businesses today in months and sometimes even just days. Suddenly, competitors leap out of nowhere; prices start falling; seemingly impervious products are suddenly upstaged; if you don’t get your idea around the world quickly enough, somebody else will.
In a growing number of industries (cars and computers are the most obvious examples), there is simply too much capacity around the world, so globalization keeps pushing down prices. To keep track, some companies then squeeze their workers. Firms such as BMW have pointed to the labor practices its American workers are prepared to accept in order to bully its German and British workers into doing the same.
New products have to be thrown around the world rapidly to make profits. Gillette used to unveil its razors around the world gradually. The Mach 3 razor it launched in 1998, by contrast, was available in one hundred countries within eighteen months of its release. Developing the technology to justify this sort of launch gets ever more expensive, even for something as cheap as a razor. You can buy a Mach 3 razor for $1.35; the razor cost 550 million times that to bring to market (and even if you factor in the exorbitant cost of replacing the blades, the multiple still runs into the millions). Worst of all, there is no guarantee even then that you can control the market: Despite Gillette’s patents, a British supermarket had produced a similar three-bladed razor by the summer of 1999.
This sort of dog-eat-dog world might at least be tolerable if we could rely on the world behaving as a single market. But another complication for managers is that the world is not quite as global as it seems in places like Orlando. As we have seen, the triumph of global products is a myth. Razors are one of the very few global products, and even with them there are plenty of questions about pricing ($1.35 is a lot of money in many parts of the world) and advertising. Consultants at McKinsey estimate that only about 20 percent of world output—or $6 trillion out of the world’s GDP of $28 trillion—is produced and consumed in global markets; the rest is still in places where products are delivered “primarily through local or national industry structures.” If you make aircraft or semiconductors, you are fighting in a global market; if you make beer or sell life insurance, you are, for the most part, fighting local battles.[1]
Companies forget their local markets at their peril, yet they have no choice but to think about globalization. As we have already seen (chapter 5), even the most stubbornly local industries are being caught up in the maelstrom. Beer and life insurance might still be local, but international brands, p. 122 companies, and standards are emerging. In even the most hole-in-the-corner service (office cleaning, for instance) there is at least one multinational (such as International Service Systems of Denmark) sniffing around. Within thirty years, McKinsey reckons that a market worth seventy-three trillion dollars—or 80 percent of its forecast for world GDP—will be globally accessible. The trend toward global integration is accelerating relentlessly. A decade ago, there were only about two thousand cross-border deals a year; now the total is more than six thousand. More than twenty thousand alliances were formed worldwide between 1996 and 1998, the vast majority of them involving the entering of new markets.
This means that the only chance even the most obscure company has to survive in the global age is to concentrate on producing the best product or service in its class—and, as soon as it has achieved that, to go on producing another and then another. This does not necessarily mean “going global,” but even in national markets global standards are increasingly taking hold, albeit with products tailored to local quirks. Business has become a series of short-term sprints: Once you have won one race, another one begins immediately, but this time with different rules and tougher terrain. That is one reason why the premium that the stock market is prepared to pay for firms that can consistently outinnovate their peers has risen: The rewards have become much greater.
This raises the daunting question of how to build an organization that can keep on producing world-class products and services. Here, we will study the ways that three very different companies have taken to globalization. The first is a tiny family-owned perfumery that has never left the bazaar in Tangiers. The second is Nokia, a Finnish telephone company, which has been one of the great success stories of globalization. And the last is General Electric, until recently, the world’s most admired company—and one that is just beginning to realize how much globalization is going to change it.[2]
The Six Principles of Global Management
Management writers usually resort to case studies when they do not really know the answer to a question. We plead half guilty to that charge. Put simply, there is no model for how to design a global company. For much of this century, there was a fairly clear model of what a good company should look like: the hierarchical, multidivisional firm invented by Alfred Sloan of General Motors. But this basically American model broke down in the 1970s and 1980s, as it was in short order humiliated by lean Japanese firms such as p. 123 Toyota, outinnovated by the T-shirted people in Silicon Valley, and in general found to be far too inflexible to deal with the sort of uncertainty that is the signature of globalization. Since then, management theory has fragmented.
Globalization defie
s hard and fast rules. For every general principle there are so many glaring exceptions that it is tempting to forget about management theory and just go by the seat of the pants. For example, marketing appears to be exactly the sort of task that should be left to local managers of global brands. But when Nabisco ran a jovial advertisement on Peruvian television that showed a group of African cannibals preparing to tuck into some tasty white tourists—but then having second thoughts when offered Nabisco’s Royal Pudding—it immediately ran into a storm of protests in its home market. Racism helps sell in some parts of South America (a Peruvian ad by Goodyear compared the thickness of their tires to a black man’s lips), but it is the sort of thing that turns a company’s reputation to mud in the United States: An embarrassed Nabisco had to centralize control.[3] Prophets of globalization invariably urge companies to recruit their senior figures from as wide a range of countries and backgrounds as possible. But one of the reasons why Iridium, the satellite consortium, came crashing to the ground was that its famously multicultural board (which included the son of an American presidential candidate and the brother of Osama bin Laden) was impossible to manage. The board’s twenty-eight members spoke multiple languages, turning meetings into mini-UN conferences, complete with headsets translating the proceedings into five languages. Cultural squabbles and misunderstandings were commonplace.
Though hard rules are impossible to find, we will nonetheless dare to put forward six general principles. The first is that management matters, particularly when it comes to corporate culture. Take, for instance, General Motors. Today, the big car companies have pretty similar arrays of factories and access to talent; their cars are also distressingly similar. Yet in 1998 General Motors spent twice as much money on labor per car as Toyota did. GM was also about a third less efficient than Ford. The simple fact was that GM had not been as well managed. Take the bullet train to Toyota City, and you are immersed immediately in one of the world’s great management machines—a company town where even the humblest workers seem to spend their days conjuring up new ways to make manufacturing slightly more efficient.
This ties into the second point: Size complicates. According to John Stopford of the London Business School, half of the firms that operate internationally employ fewer than 250 employees.[4] For most small companies, globalization is essentially a matter of looking for as many opportunities to p. 124 sell their wares as possible. With multinationals—ironically the very firms that were set up to exploit global opportunities—there is a much more difficult challenge of persuading people to think together. A small firm can manage to replicate many of the advantages of a big firm by forming alliances and so on; it is often much harder for big companies to replicate the advantages of small ones by remaining lean and entrepreneurial.
A big global company is nearly always caught between two admirable goals: its need to make the most out of all its ideas, bring forward local talent, and become more multicultural; and its need to remain true to the (often strongly nationalist) culture that often is central to why it became a big company in the first place. Many companies do not want particularly to shed their national identities. As Michael Porter has argued, if everybody can make the same product everywhere, then a firm’s distinguishing mark is often its geography—the “Californianness” of a software firm or the “Germanness” of a machine-tools firm.
The third principle is that, in general, the very things that define good national management also define good international management, only more so. It is possible to write treatises on the virtues of things such as transparency, clear lines of command (Peter Drucker likes to point to the Roman proverb that “a slave who has three masters is a free man”), and “flat” management structures (another Druckerism; “Every relay doubles the noise and cuts the message in half”), but these lessons have long applied to management of all sorts.[5] One of the problems about globalization is that even the best companies can leave their brains behind when they go abroad. When it went to Hollywood, Sony forgot even the first principle of accountability. The result was a series of huge losses culminating in a $2.7 billion write-off in 1994. A new boss, Nobuyuki Idei, introduced a new management team with specific responsibilities. He also made a point of visiting America once a month. By 1997, a unit that lost $1.7 billion in 1995 made $3.4 billion. Had the film studio been based in Osaka, the problem would likely never have occurred.
The fourth principle is perhaps just an extension of the third: It pays to behave ethically. Many companies pay lip service to corporate ethics—most American business schools now teach courses on the subject, some of them compulsory. Most of the obvious abuses have stopped: It has been some time since a multinational got caught running a sweatshop itself, for instance—but they still sometimes subcontract work to firms that do. And there is still a tendency for firms to behave like vacationers abroad and assume that the usual rules of good behavior do not need to be observed so strictly. A 1998 p. 125 study of local newspaper employment ads in Thailand, Malaysia, and Singapore by two researchers from the University of Illinois found that 13 percent of American firms placed ads specifying males only, and another 11.5 percent specified females only; the companies included Cargill, Bank of America, and, perhaps inevitably, Nike.[6]
Ethical capitalism makes sense for several reasons. It forces companies to remember their constituents back home. It also forces them to play to their own strengths rather than to exploit their host society’s weaknesses. Multinational companies are seldom successful purely because they cut corners or bribe officials. Above all, in a world where a growing number of assets are intangible, a company’s reputation can be its most prized asset. Reputation helps companies to recruit the most ambitious and motivated people. (Drucker argues that one of a company’s most important jobs is selling itself to potential employees.) Reputation also helps companies earn the goodwill of the wider community. Companies that have lost that goodwill, such as Nike, find that their every mistake is pounced on; those that have reserves of goodwill, such as The Body Shop, find that even their shareholders will forgive them a few lapses.
The fifth point might sound like one of those vague generalizations that trips off management gurus’ tongues without really meaning anything. But in fact it gets us as close to the heart of the matter as anything: Global management is really about how you husband human capital, knowledge in particular. In a world that is characterized increasingly by uncertainty, it is important to have the right people to cope with it. “Intangible” assets (which usually means what those outside accountancy refer to as “people”) make up at least half of the market value of most American firms; they become ever more important as tangible assets such as capital and resources become available to all. Countless surveys show that managers think that talent is their most important resource.[7] Yet anecdotal evidence suggests that multinationals still think that their best talent is Californian or, at a stretch, Catalan, rather than Colombian, or Congolese. There is no shortage of big companies prepared to say that by 2010 as much as a third of their profits will come from India, Brazil, and China; but how many of them are prepared to recruit the same proportion of their top managers from China, India, and Brazil?[8]
The sixth principle is that, far from dissipating the effect of personality, globalization has made leadership even more important. No company has put more effort into trying to develop a broad management team than General Electric. Yet its immediate future is dominated by the fact that its boss, p. 126 Jack Welch, retired in 2001. One part of Welch’s cult was purely skillful public relations, and there have been questions raised about General Electric’s auditing methods. But all the speeches, phrasemaking, and appearances at GE’s training center had an effect precisely because Welch had a personality big enough to somehow reach across borders. Despite being worth several hundred million dollars, Welch was still seen as one of the grunts.
From Cortés to Rue Sabou
If any single group of companies looks particularly exposed t
o globalization, it is big, established ones from emerging markets, which account for only two of the top one hundred transnationals. While Western multinationals have years of experience in moving into new markets, these flabby organizations, particularly the ones that have grown up behind high tariff barriers, tend to be about as well prepared for contact with foreigners as the Aztecs were for the arrival of Cortés.[9] By the time that they adapt to the new, foreign standards, their empire has been “colonized.” It is certainly difficult to feel sorry for local champions such as Indonesia’s timber barons, who have thrived purely on account of their skills at winning connections. But even when globalization sweeps away such corrupt empires, its victory is often pyrrhic. Foreign takeovers are not depicted as victories for local consumers or as injections of capital but as assaults on the patriotic heartland. (It is worth remembering the storm in America just a decade ago when, as Newsweek’s cover put it, Sony “invaded” Hollywood.)
The oligarchs sometimes do not disappear outright, but they often modify their methods and can become invaluable contacts for foreign businesses trying to push into the country. In this changing of their guises they resemble other small companies that fight back against globalizing forces.
Sit around a table in Shanghai with a group of local businesspeople, and they all begin by moaning about how difficult life is. Then a quietly determined young woman from Shanghai Jahwa, China’s oldest cosmetics firm, explains how her firm has met the challenge of invading Western firms by upgrading its manufacturing, training its saleswomen, and, in particular, refining its marketing. Jahwa concentrates on Chinese potions, which it now exports to Chinese communities around the world. Many Chinese people believe that human organs such as the heart and liver are internal spirits that determine the health of the body. Jahwa has launched several highly successful products that are meant to cure ailments such as prickly heat by appeasing these “six spirits.” After the woman finishes, the other businesspeople tell similar stories. Connections are involved, of course, and there are p. 127 plenty of rules in China that tilt markets toward local firms, but many of these local companies have found legitimate ways to compete with foreign multinationals.
A Future Perfect: The Challenge and Promise of Globalization Page 19