The Future of the Globally Integrated Enterprise
“In Retreat: Global companies in the era of protectionism,” reads the cover of the January 28 issue of The Economist. In The retreat of the global company, The Economist defines global firms as those where over 30% of their sales come from outside their home region. For the past three decades, global firms have been the “apex predators of the global economy,” directing the global flow of goods, services and capital, shaping ecosystems, orchestrating supply chains and owning most of the world’s intellectual capital. But now, “The biggest business idea of the past three decades is in deep trouble.”
Global firms boomed as China was opening up, Europe was integrating, the Soviet bloc was collapsing, and barriers to global trade and investment were coming down. IT advances made it much easier to do business around the world. Global competition forced companies to become more agile and efficient by unbundling functions and re-engineering processes.
The world was waking up to the growing economic power of emerging markets. “Governments in the rich world dreamed of their national champions becoming world-beaters. Governments in the emerging world welcomed the jobs, exports and technology that global firms brought. It was a golden age.”
The Economist referenced The Globally Integrated Enterprise, a 2006 Foreign Affairs article by IBM’s then CEO Sam Palmisano. Palmisano’s article started out by looking at the evolution in the way companies have conducted business around the world.
First came the international corporation around the middle of the19th century. Based in a home country, its overseas functioning consisted primarily of importing raw materials and exporting and selling finished goods.
In the first half of the 20th century, the multinational corporation started spreading beyond its home country by building national subsidiaries around the world. Those local subsidiaries tended to have control over sales, manufacturing and other business functions, while the parent company continued to perform such tasks as R&D, finance and product management.
Then around the late 1980s, technological and market forces started reshaping multinationals into something new, the globally integrated enterprise. These companies operated in an increasingly seamless way across national boundaries, locating their operations wherever it made the most sense in terms of talent, resources and cost. Competitive pressures forced every enterprise to examine its operations, asking simple questions like why processes and practices were different from country to country, and why it was necessary to have different departments performing the same set of tasks in each country.
The intensely competitive global marketplace required that companies pay more attention to costs, quality and opportunities for innovation and differentiation than ever before. At the same time, the explosive growth of the Internet accelerated the ability to integrate business processes, information and workforce around the world, leading companies to outsource production and services operations to global supply chain partners.
But, notes The Economist, “In 2016 multinationals’ cross-border investment probably fell by 10-15%. Impressive as the share of trade accounted for by cross-border supply chains is, it has stagnated since 2007. The proportion of sales that Western firms make outside their home region has shrunk. Multinationals’ profits are falling and the flow of new multinational investment has been declining relative to GDP. The global firm is in retreat… Their financial performance has slipped so that they are no longer outstripping local firms. Many seem to have exhausted their ability to cut costs and taxes and to out-think their local competitors.”
Moreover, “The changing political landscape is making things even harder for the giants.”
Last October, Palmisano published a follow-up to his 2006 Foreign Affairs article, - The Global Enterprise: Where to Now? The article started with a warning he’d presciently written ten years earlier: “The alternative to global integration is not appealing. Left unaddressed, discontent with globalization will only grow. People might ultimately choose to elect governments that impose strict regulations on trade or labor, perhaps of a highly protectionist sort. Worse, they might gravitate toward more extreme forms of nationalism, xenophobia, and antimodernism. The shift from [multinational corporations] to globally integrated enterprises provides an opportunity to advance both business growth and societal progress. But it raises issues that are too big and too interconnected for business alone or government alone to solve.”
“Today, the world stands at the crossroads described in that article,…” he added. “A rising chorus of nationalism echoes across developed countries; it calls for tighter borders and restrictions on immigration. Global trade negotiations have essentially ceased, and regional trade deals face strong headwinds of opposition.”
In the decade between the two Foreign Affair articles, we’ve transitioned from the connected world of PCs, browsers and web servers, to the hyperconnected world of smartphones, IoT devices, cloud-based apps, oceans of data, and broadband wireless networks. Increasingly smart AI applications are emerging all around us.
In addition, the 2008 financial crisis led to an economic downturn around the world, from which many have not fully recovered. Labor markets remain weak. “Among 25 advanced economies, about 550 million people - two-thirds of the population - have seen their incomes stagnate or fall over the past decade.” For a while now, the world has been stuck in a period of low productivity and economic growth. No one really knows what to do or how long it will last. Looking into the future, few topics are as challenging as the future of work, given our justifiable fears of rising technological unemployment.
Powerful forces are pulling in opposite directions. “[G]overnments are retreating from economic and political openness, while the digital world is increasingly pulling people toward greater integration. In such a dynamic environment, clashes are inevitable. Although political forces seem to be trying to separate people, technology is digitally connecting and integrating them in everything from business to entertainment to commerce to social sharing and commentary to scientific endeavors. Leaders in the private and public sectors will need to develop business and governing models that reflect the realities of this dual world while maximizing opportunities and minimizing obstacles.”
According to Palmisano, global firms have generally responded to these challenging economic environment by focusing primarily on reducing their overall operational costs. Despite dramatic advances in technology, companies have mostly ignored the opportunities to pursue growth through innovative new products and markets. Companies must embrace a new business model, “pre-empting or overcoming the obstacles erected by politics or the public while leveraging the opportunities presented by connectivity and integration.” Global firms must address a few fundamental issues, including:
The shift from a supply-side to a demand-side world. “After decades of operation in an industrial age, enterprises understood how to create and address supply. But their ability to quickly and directly engage demand, or to satisfy diverse multicultural demand, was limited… People, regardless of where they live, will be much more likely to support globalization if they can see how they as individuals will benefit.”
Expansion of the middle class and consumer technologies. “The twin forces of increasing wealth (reflected in the rise of the global middle class) and expanded enterprise and consumer-scale technology will shape the business and political climate over the next decade. The rise in global living standards has been a remarkable achievement. From 1990 to 2010, for example, 1.2 billion people moved into the middle class throughout the world, and 1.8 billion more are projected to do so by 2025… The potent mix of higher incomes and greater access to technology will lead citizens, customers, and investors to become more engaged and more demanding.”
Integration of different generations and perspectives. “It will be especially important to place individuals from digitally raised generations in management roles so that their skills and global orientation are embedded in a company’s procedures. This will be necessary as a company seeks to closely align itself with both its own employees and its customers.”
Opportunities based on the proliferation of new technologies. “Progress on these fronts depends on developing a contemporary business model, corporate structure and management system that capture these opportunities. A guiding principle should be showing constituencies a path to the future while providing simple, low-cost solutions that draw on modern technologies to drive speed and responsiveness.”
“What’s clear is that the opportunities for companies are going to be massive over the next ten years. But the competitive pressures are going to be greater, and the price of failure will be higher. Amid volatility and uncertainty, companies and governments should not lose sight of one of the important lessons from the past two decades: the individuals and communities that have prospered have done so because they developed the skills needed for the future, embraced a more connected and diverse world, and became hubs for innovative behavior and investment.”