Karl Marx was right in a way. A spectre is haunting capitalism – just not the one he imagined. Instead of a proletarian uprising, managers of the world’s largest corporations are wrestling with a different kind of revolution: the fact that the vast majority of their employees, sales and facilities are outside their home country. In a global economy that has recently given violent, conclusive proof of its volatility, their ability to manage their sprawling organizations is under threat.
Call it the next fundamental evolution of the multinational. Once the quintessential U.S. corporate, IBM now employs about two thirds of its 400,000 staff outside the U.S. and generates about two thirds of its sales overseas. IBM headquarters in Armonk, New York, cannot make every decision in a company that operates 24/7 around the globe. In a rethink of its management structure, IBM lumped all its business in emerging markets (Latin America, Eastern Europe and Asia) into one organization headquartered in Shanghai in 2008.
“We’re trying to lower our center of gravity,” says Michael Markovits, IBM vice president of business and technical leadership. That is IBM-speak for devolving decision-making from head office. “We’re saying, ‘Let’s try to get decisions made as close to the customer as we possibly can.’ We’re trying to shift our culture from command and control from New York to empowering local leaders to make decisions.”
Wrenching shift
Multinationals have operated in many countries for decades, with varying degrees of decentralization. But surging sales in geographically distant (from headquarters) and culturally distinct countries such as China and India pose a far more complex challenge. When overseas markets account for 80% of sales, as is the case for Coca-Cola, a company’s center of gravity can undergo a wrenching shift.
Established multinationals also face a tough new breed of competitor: companies based in India, Brazil and China that aim to dominate their home markets and expand globally. China’s Haier is now the world’s fourth largest manufacturer of white goods, while Brazil’s Embraer – once a regional manufacturing powerhouse – derives 93% of its US$3.8 billion annual aerospace sales from outside Brazil.
“In some markets – like fast moving consumer goods – the worry isn’t that companies from China and India will make inroads into Europe and North America,” says Martin Scott, Partner, Transaction Services, KPMG in the UK. “I can’t see, for example, an Indian food company suddenly taking over the U.S. soup market.”
“What multinationals do need to worry about is that if their markets are saturated and static in Europe and North America, and their five- or 10-year growth plan sees them growing strongly in India, Brazil or China, they need to make sure they structure themselves to be successful in those countries. They will be competing head-to-head for sales and growth against very strong local players in those enormous markets. If your thinking is driven by Europe and North America, will that work in emerging economies?”
Geoff Colvin, Fortune writer and author of The Upside of the Downturn, says the challenge is especially acute for businesses with powerful brands: “Brand owners typically collect most of the profit in an industry. Until now, developing economies have been happy to cash in on their labor cost advantage. Now companies like Haier and Lenovo are going after the enormously larger sums that are flowing to the brand owners.”
Back to the core
Remaking organizational charts, as IBM did, is only part of the response to this new era. The way organizations are structured will need to be reconsidered, corporate cultures and HR policies need to be revolutionized and CEOs need to reflect on how the emerging economies will affect their core business.
In good times, Colvin suggests, businesses often forget what their core is. It can take a downturn or a market-redefining competitive threat to focus leaders. Japanese audio and electronics group
Pioneer has already redefined its core. It has left the flat-screen TV market, where low-cost competition from China is fierce, allowing it to run its DVD business with Sharp and focus on audio.
2012, Feb 09 
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