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Three Pillars of Globalization

CEOs may be divided over the critical measure for success in becoming global. But they are united in reckoning that culture and people are the greatest hurdles to success.

Once upon a time, American companies did most of their business in America. No longer. Coca-Cola, DEC, Colgate-Palmolive, Gillette, Unisys, Avon Products, and Applied Materials are among the growing list of companies that derive two-thirds or more of their revenue from outside the U.S. And this list does not include big oil companies such as Exxon, whose non-U.S. revenues add up to more than three fourths of its total. H-P, Citicorp, P&G, AIG, Intel, Xerox, Dow Chemical, Johnson & Johnson, NCR, Eastman Kodak, 3M, McDonald’s, TI, and Ralston Purina derive more than half their sales outside the U.S. And American-based companies represent half of the Forbes list of the “World Super 50″ largest international firms.

And that goes for international firms as well. Royal-Dutch Shell, Itochu and Mitsui have been doing business worldwide in one form or another for the better part of a century. The Dutch-British Unilever has been a true multinational since its founding in 1930. In his introduction to Global Strategies, ABB chairman Percy Barnevik saw globalization as a focus on execution to a balanced position between local presence and global product management. The idea is “to combine a decentralized structure and a deep understanding of local markets with global optimization of resources and a degree of centralized control of finances and product lines. This is what Unilever calls ‘unity in diversity’ and what we at ABB call being ‘global and local, big and small.’”

Globalization is transforming business in powerful ways. It is no longer a question of whether one wishes to compete in a global arena, but how one does so effectively. A recent Conference Board survey of Fortune 1000 companies found that leaders who consider their companies to be very successful globally spend 40 percent of their time on global issues, compared with 25 percent for all CEOs. Most companies in the early stages of “going global” focus on strategic alliances to reach new markets. In companies that see themselves as most successful and most global, many more members of top management are foreign born: 20 to 25 percent vs. an average of 10 percent for all companies.

Some of these findings are reflected in the following roundtable co-sponsored with Deloitte Touche Tohmatsu International. Discussion centered on three “pillars” in establishing a foundation for global leadership:

  • Organizational consistency-how to employ the same thinking and procedures on a worldwide basis in order to capture economies of scope and scale.
  • Human resource capability-having the right people in the right place when one chooses to compete.
  • Customer-focused organizational flexibility having the ability to service customers according to their global requirements using empowered teams to cut across traditional corporate hierarchies.

Normally, it is the customer, as DTTI’s Ed Kangas points out, that drives one to consistent organization. Most roundtable participants agreed that the best long-term approach is to foster an adaptive transnational culture, in which managers-wherever they are-understand the strategic intent of the organization and its products. Most agreed that more U.S. based firms would have more non-U.S.-born citizens at the highest managerial levels. This trend was evident in our roundtable group. Gonzalo Dal Borgo is a Chilean with Brazilian citizenship working for St. Louis-based ston Purina. Alcoa’s Alain Belda was born in French Morocco but raised in Brazil and educated in Canada. BMW’s Hen-rich Heitmann, also born in Germany, spent much of his career with BMW in East Asia and Eastern Europe before coming to the U.S.

Larry Gloyd and John Meier said their biggest challenge is to “get our people to understand where the real growth will come from.” When asked by employees, “why change? why go global?” Meier explained it in terms of the Wayne Gretzky school of management: “Skate to where the puck is going.”

RECIPE FOR GLOBALIZATION

Edward Kangas (Deloitte Touche Tohmatsu International): We see our clients and ourselves striving toward not only economy of scale in a global marketplace, but power of scale, meaning the ability to become dominant enough to control or at least manipulate a market.

To that end, we’re all working toward global consistency. There is great money to be saved if you build manufacturing plants exactly the same size. Or, if you have several different sizes, having them look the same in every country, using the same manufacturing systems, computer systems, and the like.

To get real consistency, you have to become seamless. This often means you have to appoint people who have global or at least regional responsibilities for certain areas and really let them operate them globally. Technology allows you to implement consistent methodology and begin gaining the advantages of consistency in your operations around the world.

Clearly, if you’re going to be successful in a multinational environment, you must get to a place where you govern and manage in a way that is truly multinational. For American businesses, that typically means doing something almost artificial to give more power to the non-American leaders in the world, compared to what their relative size or importance may be today.

I would say all businesses, large and small, find that they’re doing some of that in certain areas of their business. It may be only procurement, it may be only in manufacturing or sales. But that’s globalization. To me international business means you can set up or buy companies and operate them relatively autonomously. But operating an international business with relatively free-standing subsidiaries is a far cry from trying to globalize a business and operate at least some aspects of it as one business.

There are a number of companies that have made great progress. Hewlett-Packard is in the process of installing common methodologies on a worldwide basis for doing virtually all manufacturing, sales, and procurement activities. Bayer has a major project going on in Europe and the U.S. General Motors as well. They are all wrestling with fundamentally the same issue of how to gain global efficiency and global power of sale through consistency in their operations.

We are in the process of realigning our fundamental businesses to operate on a relatively and, in some cases, totally integrated basis. And we’re doing it differently with different parts of our business. In the case of our management consulting business, the most globalized of our service offerings-which is about a $2 billion business with about 6,000 to 7,000 people around the world-we took all of it, traded subsidiaries in each of the countries, and then merged those subsidiaries. We run that business as one profit center on a global basis as a way to give the management of that business the ability to focus investments and manage resources quickly.

Byron O. Pond (Arvin Industries): We are really struggling with the issue of how to deal with the customer globally. We’re faced with a global situation with Ford, for example, where the purchasing decisions are made in maybe six places around the world. We’re struggling to develop a globally oriented marketing approach toward this customer, but we can’t seem to get it done. There are so many conflicts in the customer’s organization that make the conflicts in our organization that much more difficult to overcome.

Elizabeth Coleman (Maidenform International): It seems that what you have to do is think and act strategically, globally with a kind of local result. We are executing a strategy that, from an external point of view, is very department-store focused and mail-order focused, rather than small specialty stores where we can’t get the profitability and can’t get the consistency. So it’s actually a global strategy. We’re most successful when we appear local.

Alain Belde (Aluminum Co. of America): We’re right in the midst of being more local than global. Global in the process and communication, global in the transfer of technology, but we’re focusing more on a local market than a global market and moving too much stuff around. As a supplier to the automobile industry, we wrestle with the issue of having a partnership so that we can defend ourselves from being a global supplier, versus having a wholly owned company, because of the exchanges you make around the world.

Wallace Barnes (Rohr): A category of challenge that is predominant in the aerospace industry is where a company’s involvement internationally is driven not by internal dynamics such as market access, efficiency, or lower cost, but by the customer. In the aerospace industry, if you’re a primary supplier of the original equipment, there are basically two customers: Boeing and Airbus.

And it’s not a joint venture. In effect, you are encouraging someone to come in and make a part of a component that goes into this total package. So you do not have the financial or management control, and yet your customer, Boeing for example, is driving very strong technical requirements. And the challenge is how to get the consistency, how to get the product out of that co-producer without the direct control.

And I can tell you it’s an enormous job. The short answer is that you send massive teams of people, descend on these producers, and have your own people camped out there. It may not be economic, but it’s the only way to solve the problem.

J.P. Donlon (CE): Does consistency suffer?

Barnes: Consistency is the biggest problem. Because the quality requirements speak for themselves in the aerospace industry, and you simply cannot afford to let that slip.

THE PEOPLE PROBLEM

Lawrence Gloyd (CLARCOR): Our biggest challenge has been people. We started our first operation with a foreign national, and found out that he was taking us to the cleaners. [Laughter] So we learned we were not doing what we should be from a control standpoint.

We’ve put on very strict controls from financial and operational standpoints, but we still feel our best opportunity is to have people managing the business who have grown up and been in business in those areas-with oversight from our own people. But we have not assigned our own people from this country to run any of the individual operations because they don’t know the customs or the marketplace.

Gonzalo Dal Borgo (Ralston Purina International): A lot of problems have resulted from having people in charge of international operations who don’t understand the international environment. So they make the wrong decisions. And by making the wrong decisions, the people at the local level lose respect for the bosses, and they start doing whatever they want.

William J. White (Bell & Howell): People with the same value system, given the same facts, should come to the same conclusion. But people with different value systems who are making decisions based on some other priorities or some other hierarchy of needs of their own, are going to come to a different conclusion. So we find local nationals are the way to go, but we need people with the same value system. With that, you get consistency.

David Cornstein (Finlay Enterprises): Our problem has been more of a regional problem than a global one. Especially as an American looking geographically, it seems that if we go from the Midwest to the East or whatever, it’s so simple. But as you cross borders, especially in Europe, it’s a completely different culture and you have the potential for a lot of problems.

White: When you’re putting different people together and you’re putting in a new culture, either combining cultures or building a new culture from one that you’ve had before, our experience has been that it takes a very long time for people to get accustomed to doing things the new way, because they fall back to the old way; they fall back on their memories.

Gerald Mahoney (Mail-Well): I think it’s less of an issue when you establish your own culture there. It’s when you go in and buy a company that’s been doing things for years and years-that’s where I get concerned. It’s tough to break old habits.

Heinrich Heitmann (BMW): It took us three years before we really formed one team within the group. And there was a lot of hesitation and missing openness in the beginning.

Mahoney: It’s important, when you go in and you take over a company, to be careful not to go in as the conquering hero, take over, make a lot of changes. Let it go a little slower; get to know the people. If a manager is successful, I believe strongly you leave him the hell alone, especially with a regional business where you have to service local markets, and you’ve got to know your local customers well.

We’ve acquired several companies in Canada, and the gentleman running Canada for us is a most talented guy. I’d probably slap him a little bit if he were down here and doing some of these things, but he’s incredibly successful. He’s great with people; he’s got what I call a nose for making profit; he just knows how to make money. We’re not going to bring a lot more to him by bringing U.S. customs there.

Thomas Sullivan (RPM): In the last two and a half years, we have either purchased or built facilities in South Africa, South America, Poland, Malaysia, and Singapore. In all cases, we’ve left 25 to 30 percent of the ownership with those who are running it for a period of anywhere from three to seven years. That’s where you get culture in a hurry.

FOREIGN SOIL, COMMON CULTURE

Arnie Pollard (CE): What do you do to develop and accelerate the evolution of shared values and a common culture proactively?

Heitmann: The official answer would certainly be that you have the traditional measures like regular meetings of the executives, regular meetings of the next layer, common training, all kinds of management events. And then even some kind of modern training where you get out of the office and have some kind of survival training, put people in an extreme situation, and create a certain team spirit.

Pond: Sixty-five percent of our company has changed over the past decade, and it has forced us to make some pretty serious decisions about how to create a new company culture. When we started into the process, we decided to create a whole new company culture, rather than take our culture and superimpose it on these new countries in which we were doing business. We focused our operations on a total quality production system, and we’ve spent about $10 million a year implementing these programs. It’s paid off tremendously, because we now have 14,000 people beginning to think alike. When you go to a plant in the Netherlands and a plant in Indiana, they work very similarly.

Richard Huber (Aetna): With respect to the local management, in our own particular case, we have some 12,000 employees outside of the U.S., of whom less than 20 are expats, so we are largely locally staffed. But I’ll tell you about a recent case: We made a major acquisition in Brazil, a $385 million investment, and we had prepared for that by recruiting some talented Brazilians, bringing them to Hartford, and training them. When the deal closed, we sent them in as our people in the company in Brazil.

Our partners were crestfallen. “Where are the Americans? You’re supposed to be an American company-where are the Foreign Legionnaires?” And we were virtually obliged to send down a few.

Heitmann: Sometimes I feel that the headquarters tend to send people out to other countries, and that is a one-way street, so to speak. Very few companies are really prepared to get many foreign executives into headquarters as they send the expats out. And that’s very shortsighted. So you should really develop a scheme where you invite foreign executives into your headquarters, have them work there three years, and get them back into their countries. That has been rather successful. So you can go either for what I call the job swap, which means for six months you take field personnel in England and exchange them with the field personnel in Germany. Or you take a dealer developer from America and send him over to England, and then just swap the jobs for six months.

And besides that, I think one has to develop local nationals, or market people as I would prefer to call them-I’m not talking about the nationality-and bring them into headquarters for three or four years. Then let them go back into their normal environment, in their normal culture. But obviously, corporations do not spend money for that. There is a great hesitation to do that. You all have these missionary ideas that you have to send your people into other places.

Belda: When we started in Brazil, about 30 years ago, we brought in an American. I was the financial person in that company. And I think the success of the company was based on the fact that we brought in an old gentleman who wasn’t going to be promoted anywhere but had a strong sense of values and connections with the company and set the local standards. He wasn’t going to be promoted; he wasn’t a super star. He just set the right standards in the company, and we’ve lived that.

Heitmann: If you want to have different cultures represented in your management boards or in management, you do not necessarily go for different nationalities. You really have to ask yourself what type of personalities you need in your different positions and choose them accordingly. And not to say simply, “I go for a Frenchman in France or an Englishman in England.” That is much too simple.

What is really important for a company like ours is that we have and share values. You have to create a certain esprit de corps. You have a value system that is understood by all the people in your management team. We do that.

And then for some areas, you really just go for the expats, and that is typically in manufacturing and purchasing, all those activities in our company that are not that customer-related. And for that business you really need local people from that culture. So we have the global people for those non-customer related businesses, and we have to go for local people for the more sales and customer-oriented activities. It is a combination.

SPEAKING THE SAME LANGUAGE

John Meier (Libbey): What about joint ventures, when it’s not a 100 percent owned situation in a foreign global opportunity. What things work best to get the whole team to buy in, not just a bunch of white-collar people?

William Adams (Agile Web): Agile Web is made up of 18 different small-and medium-sized companies. For the first three years, we faced exactly those issues: how are we going to adopt common practices, common policies; how will we get a common value system. And we spent $4 million of the taxpayers’ dollars figuring out we couldn’t change any of that.

So instead what we do is we go up to a customer and try to find a common language. We ask the customer to tell us what they want, and we just write down a little flow diagram at the activity level. “I heard what you said, but here’s the activity that you really defined.” We then go back to the 18 companies and line up their capabilities with those activities. And we say, “If you perform these activities the way you do in your own culture and your own company in your own marketplace, they fit into this overall grand plan.” The customers get exactly what they want, because they defined the activities. The 18 companies get what they want, because they were allowed to do what they do well in their own way. And if the customer changes, we just change the activity diagram and realign our companies underneath.

So we don’t try to drive a common system; it doesn’t work. We don’t try to getcommon values. We instead articulate common expectations. I’m confident I can’t really understand what someone’s value system is. But I can observe and manage behaviors. And as long as those behaviors are consistent with the requirement for this contract at this point in time, then I have something that can work. And our companies are very interested in that, because they don’t have to change.

John Guffey, Jr. (Coltec): We look at it sort of simplistically. That is, what has made us successful in the markets we’re in today already? Why are we successful in our domestic markets? We have products that the customer needs and wants; we have local representation. So we try to put the violin player in the violin section and the timpani drum player in the timpani section to make the symphony come out a little better.

I always remind my guys, when they’re talking global, to remember that the pioneers in this country were found face down in the mud with arrows sticking out of their rears, and it was the settlers that came in and made all the money. So we try to be a bit more of a settler than a pioneer.

It’s important, for those of us starting down this path, not to get too optimistic or arrogant about the rate or speed of success, or to build your shareholders up that this new program is going to pay off in spades in a very short time. Sometimes we get arrogant about our own products and our own markets. We’ve got huge market share, so we think all we have to do is put a place in Singapore and we’ll get another huge market share. But we have to be patient, let the seeds come to fruition.

White: Those of us who are heads of public companies recognize this very well, because when you’re making an acquisition, the public market expects you to get economies immediately. The dilution thing is unacceptable to the public market. So when you say it takes you three years to change the culture, you really need to do a lot of talking to get people to understand that.

Dal Borgo: It all depends on the cultures of the different companies. Generally it takes some time, but we impose our culture. Ralston Purina has got a very, very strong culture. We have the checkerboard we just run by it and what it represents. So when we go in, we try to set our culture. And this is good for when we buy companies with a weak culture themselves. When we buy companies with a strong culture, though, we have a crunch and then we have to manage.

John K. Binswanger (Chesterton Binswanger): We’re seeing more and more companies centralizing control and having decisions coming from the CEOs rather than from all the different regional areas.

White: A big problem facing us now is that, with the increased capability of communicating across countries, I see a lot of people micro-managing operations. And this is a big danger. The key to success in international business is decentralization. But the good part of the decentralization is having intense or a very strong global or regional coordination. We need capable people, who understand international business, coordinating the portfolio of local companies running around the world.

Barry Naft (Environment International): Globalization of communications is here, and you can call anywhere, do anything, send anything in just a few minutes, if you have a mind to. But the institutional barriers of doing business are not dropping nearly as quickly. And I think it hits manufacturing harder than any other discipline.

For example, I find some of the cheapest money in the world right now is in Portugal, and it’s easy to come by for manufacturing. But try to run a three-shift operation in Portugal and get the efficiency you can in, say, Germany. It’s very frustrating.

Those institutional barriers will have to fall along with the political and the communications advances, but they’ll follow more slowly. And the key is to be selective and pick the kind of things that you want to standardize and those you want to localize, and be willing to change that mix as the world changes over the next couple of decades.


A Who’s Who Of Roundtable Participants

William M. Adams is president and CEO of Huntingdon Valley, PA-based Agile Web, Inc., a $310 million integrated multiphase source of manufactured assemblies involving electronics or electro-mechanical products.

Wallace Barnes is the chairman of Chula Vista, CA-based Rohr, Inc., an $800 million international aerospace supplier.

Alain J.P. Belda is president and COO of Pittsburgh, PA-based Aluminum Company of America, a $13.1 billion producer of aluminum and alumina.

John K. Binswanger

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.