January 25 2006 by Jeffrey Rothfeder
It’s one of those “can’t live with it, can’t live without it” propositions: Globalization has created unparalleled opportunities for low-cost manufacturing and opened up new markets, but managing the global corporation worries even the most gutsy chief executive. “How we manage talent, how we communicate, and how we organize the business to take advantage of the possibilities of scale on a global basis, these issues are challenging in terms of getting the global organization to work,” said Murray Dalziel, group managing director of global ractices at the Hay Group, a human resource consultancy.
Dalziel’s comments, made at a roundtable discussion on global business that his firm sponsored, hit a nerve with the CEOs of multinationals in attendance. All of them agreed that grappling with these issues takes up an increasing amount of their time. Yet resolving them is probably the most important thing that they can do to ensure the longterm survival and success of their companies. “If we don’t get this straight, the company will fail,” said Paul Zeven, chief executive of Royal Philips Electronics’ North American operations.
Of all the challenges, human development appears to be the most time-consuming and frustrating. “We’ve been in China for 20-plus years now, but we’re just getting to the point where we have pretty strong Chinese managers,” said James Owens, CEO of Caterpillar. “We’re kind of a unique company in that we’re very much into promoting from within. We tend to hire low- or mid-level junior executives and groom them within our company, which usually involves international assignments for them. So we hired locally in China, then moved them internationally, got to know them, became confident that they have the right kind of loyalties to our company, and now we’ve moved them back there into senior positions.”
The training period, when prospective executives are rotated through different worldwide regions, is a critical chance for the company to instill the corporate culture, including, most importantly, its global vision. With a broad bucket of experiences and knowledge to rely on when they become “country managers” in their native nations, these executives would be less likely to bring a provincial approach to what the corporation envisions as an international job.
But achieving this goal is frequently impeded by communications difficulties, which often have to be ironed out before even attempting to prepare people to work together as an interconnected company from any number of far-flung locations, said John Faraci, CEO of International Paper.
The way International Paper operated not long ago, explained Faraci, “we could pick up the phone and talk to any of our offices and assume that everybody will all be on the same page. But now you acquire a business, for instance, in Russia-the relationship, the processes, the communications are so different. Before you start developing people, you really have to work hard to have a company culture that has figured out how to knit something together that isn’t just a bunch of international operations, but that is something truly global.”
That model, in turn, gives rise to another, much more intriguingly radical organizational possibility: the virtual corporation. If the company is global in the important sense that it speaks with one voice and has one set of values and beliefs, no matter where the employee or office is located, then why should management be centralized in any single region? “We’ve taken the deliberate action of saying yes, the company happens to be founded and headquartered in Germany, but that’s just the place where we pay taxes,” said Andy Mattes, chief executive of Siemens Communications (U.S.).
The company has dispersed its top management geographically. “If you have executives around the globe, say, in the Americas, in Europe and in Asia, you have to deal with different values and vantage points all the time,” Mattes explained. “All your [support] staff are located in different places. And they bring new ideas into the organization that are constantly being refreshed. In our case, probably two-thirds of the product innovation is happening in places around the globe, other than at corporate headquarters.”
Executives on the panel felt that the notion of a virtual corporation is more welcome at European than American companies. A possible explanation for this, according to some attendees, is that because European companies are based in small country markets, early on they had to become global players in order to grow. Nonetheless, nationalistic barriers that many U.S. companies have put up may be breaking down, as increasingly a requirement for top management, not just country managers, is spending some time overseas. Of the 36 officers at Caterpillar, “30 have lived part of their career outside of the United States,” said Owens. Moreover, the executive suites at some U.S. companies are taking on a decidedly non-American flavor.
“The Wall Street Journal cited three internal candidates for my job (when I retire),” said George David, CEO of United Technologies, who is 63. “Two are French and one is French-Canadian. So it’s an important test: Can a non-home country national aspire to run the corporation? And if the answer is no, then you don’t have the right management group.”
Despite the overwhelming sentiment that globalization is absolutely critical for companies, executives said that it is equally important to not overlook the risks of global expansion. Regulatory compliance, particularly with Sarbanes-Oxley auditingrules, is one concern. Caterpillar recently purchased a 40 percent stake in a Chinese company and will create accounting systems that meet U.S. standards before acquiring the rest of the operation.
Added Steve Barton, executive vice president and director of Benchmark Electronics, a technology components company: “We’re scared to death of global operations. The business practices in Asia are totally different, with regards to how vendors treat buyers and procurement agents, and just business practices in general that aren’t allowed in the U.S.” So yes, go global. But do it carefully.