Multinationals 2.0
IBM chief sets off a debate about the global role of corporations
In his satirical new book Rome, Inc.: The Rise and Fall of the First Multinational Corporation, Stanley Bing humorously makes the case that the proto-capitalistic Imperium Romanum--with its bold takeovers, power-mad CEOs, and compelling brand--was the beta version of the globe-spanning Microsofts, General Electrics, and IBMs of today. Or perhaps more accurately, the Enrons and WorldComs of yesterday. While Rome Inc. had a great multicentury run, eventually it went out of business. One wonders if the feckless Emperor Honorius, watching the Visigoths coming over the seventh hill in A.D. 410, truly realized that the Roman Empire was about to fall.
Granted, IBM CEO Samuel Palmisano doesn't have to contend with Visigoths, Vandals, and other pesky barbarians. But like any modern CEO, he does have to deal with flash mob protests by antiglobalization advocates, company-bashing websites, protectionist legislation, and a high-velocity, Internet-connected world where the burgeoning Chinese and Indian economies spawn both profitable market opportunities and lethal competitors.
To succeed in this challenging global environment, Palmisano contends, IBM should be the last multinational corporation. Don't panic, Big Blue shareholders: He's talking evolution here, not extinction. In recent essays for the Financial Times newspaper and Foreign Affairs magazine, Palmisano went public with his big-think idea: The era of the multinational corporation is coming to a close. The very word "multinational," writes Palmisano, "suggests how antiquated our thinking about it is. The emerging business model of the 21st century is not, in fact, 'multinational.' This new kind of organization--at IBM we call it 'the globally integrated enterprise'--is very different in its structure and operations." Its many components, from back office to manufacturing to product development, will be dispersed around the planet in a vast network. Failure to adopt this model, he concludes, is not only bad for the immediate bottom line but in the long term will also exacerbate the many conflicts surrounding globalization. "People may ultimately elect governments that impose strict regulations on trade or labor," he warns, "perhaps of a highly protectionist sort. Worse, they might gravitate toward more extreme forms of nationalism, xenophobia, and antimodernism."
Local talent. 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 a new development lab in Russia. "We are in a global economy, and that doesn't just mean low-cost labor arbitrage," says Gartner Group analyst David Cearley. "What it also means is that you look for the best talent no matter where it exists around the world."
And that is what IBM and some other global companies, such as General Electric, are doing. In the past five years, GE has opened R&D centers in Bangalore in 2000 and Shanghai in 2002. "We see developing countries as a huge growth opportunity for us," says Michael Idelchick, GE's vice president of advanced technology. "And to be a global player there, 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 ... and there is a big enough talent pool out there." This global distribution of key assets represents a big change from the classic multinational structure, with the company headquarters as the hub and subsidiaries as the spokes. In that model, a company often tries to replicate all its business processes, such as marketing and sales, in each subsidiary. "In the 1980s, Procter & Gamble was famous for saying that its approach to globalization was to create little replicas of Cincinnati all over the world," says Mohanbir Sawhney, a technology professor at Northwestern University's Kellogg School of Management. That's not the case with networked companies. Instead of subsidiaries looking like so many Mini Me units, Sawhney says, "you end up with centers of excellence distributed around the world."
And not just in the Group of Eight nations. For instance, 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 PÃÂérez, 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."
Good for society? "The shift from MNCs to globally integrated enterprises provides an opportunity to advance both business growth and societal progress," Palmisano writes.
Antiglobalization activist Kalle Lasn doesn't believe for a moment, though, that the head of Big Blue is somehow turning into a big red. Lasn, founder of Vancouver-based Adbusters magazine, just thinks that his movement is finally making some headway. "I've been doing some consulting with some large companies, and I can tell you that they are worried," he says. "They feel that global sentiment is inexorably turning against them."
Earlier this month, for instance, some 70,000 South Korean activists staged anti-U.S. rallies to denounce their government's free-trade agreement negotiations with Washington as "U.S. economic colonialism." Also worrisome has been the nationalization of energy assets in Russia, Venezuela, and, more recently, Bolivia. 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.
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.
Yet given all this Bono-friendly talk about corporate responsibility and global economic development, it's easy to forget that the primary functions of global corporations are to make a profit and please shareholders. "These public statements help IBM's business because basically it removes some taboos," says Uri Dadush, a trade economist at the World Bank. "[Palmisano] is saying that if we find a relatively low-cost place to do R&D, we will do that."
In an era of integrated global networks, could the "good jobs" that are supposed to stay in the United States get moved offshore and disappear as well? "The ground is being softened for a whole new group that will have to compete to keep their jobs in the global economy," says L. Josh Bivens, an economist at the liberal Economic Policy Institute.
The traditional response from economists has been that global development enlarges the overall economic pie and will lessen the advantage of moving work to low-wage locales. But in the case of globally networked companies, cost is only one factor. Having engineers and designers overseas is considered a benefit in and of itself. The real backlash global CEOs might need to worry about could take place right in their own backyard if the pie doesn't grow fast enough to create oodles of good jobs at home. And despite the best efforts of media-savvy CEOs, globally integrated enterprises might end up being seen as merely version 2.0 of traditional multinationals.
This story appears in the July 31, 2006 print edition of U.S. News & World Report.