An interesting article - "The Globally Integrated Enterprise", authored by IBM chairman and CEO Sam Palmisano was just published in the latest issue of Foreign Affairs. The key theme of the article is the emergence of a relatively new institution in society - the globally integrated enterprise. The piece discusses its characteristics, opportunities and challenges.
Foreign Affairs is published by the Council on Foreign Relations, which describes it as “the international forum of choice for the most important new ideas, analysis, and debate on the most significant issues in the world.” The fact that this article appears in such a publication instead of one devoted to business, e.g., the Harvard Business Review, is testament to the importance of globalization beyond the world of business – especially to public policy issues like economic development and trade relationships.
Sam's argument is that the modern industrial corporation has gone through three stages of evolution in the way it does business around the world. The first of these he calls "the international corporation," starting around the middle of the19th century. This kind of business was based in a home country, and its overseas functioning consisted primarily of importing raw materials and exporting and selling finished goods. Sometime after World War I, driven by a number of factors including economic depression and the rise of protectionism, the "multinational corporation" made its appearance, spreading beyond its home country by building national subsidiaries in countries 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 and product management.
This is the model most of us still hold in our heads, but Sam argues that it's not the corporate model of the future. Over the last twenty years, a combination of factors started reshaping multinationals into something new. The emerging "globally integrated enterprise" operates in an increasingly seamless way across national boundaries, locating its operations wherever it makes the most sense in terms of talent, resources and cost.
What has made this possible? Major improvements in communications and information technologies as well as the rise of standards in IT and operations have made it much more feasible to share business services, regardless of where they are being performed. During this same period, we have seen a significant reduction in the barriers to trade and investments among countries. Given these technological and economic forces, every enterprise has started to examine its operations, asking simple questions like why processes and practices are different from country to country, and why it is necessary to have different departments performing the same set of tasks in each country where it does business.
The trend toward globally integrated and optimized enterprises has shifted into higher gear in the last ten years, especially the last five. First, the success of the commercial Internet in the mid-1990s accelerated the ability of a company to integrate its business processes, information and workforce around the world. Next, we have seen the rise of outsourced operations, first with manufacturing and more recently with services, both to companies that can perform those operations better because of their economies of scale and expertise, as well as to countries that can perform them more inexpensively because of their lower labor costs. Finally, the intensely competitive marketplace in which just about every business now operates makes it mandatory for a company to pay more attention to costs, quality and opportunities for innovation and differentiation than ever before.
Along with the opportunities come many challenges, and in the Foreign Affairs article Sam identifies four in particular:
- Talent - that is, securing a supply of high-value skills;
- Intellectual property - striking the right balance between the rights of the inventors to benefit from their work while enabling collaboration between companies and their partners, suppliers, and customers;
- Organizational culture - in particular, looking for new forms of partnership and collaboration among multiple enterprises, societal institutions and communities; and
- Trust – which is more important than ever, given increasingly distributed business models.
I find this fourth challenge particularly intriguing, because trust keeps coming up as one of the most important attributes for individual, community and business success in the networked, virtualized and global world of the 21st century.
For example, in the 2006 IBM Global Innovation Outlook, one of the major general findings was the rising importance of trust in individual business relationships: "In many GIO discussions, people kept coming back to the idea of 'reputation capital.' Think of it as a kind of accumulated trust, a standard of accountability that enables diverse, and often virtual, networks of people to confidently strike partnerships with one another. A perfect example is eBay and its community-run rating system."
Similarly, when deciding whether to work with an open source community like those formed around Linux, Apache and Grid computing, nothing is more important than the quality of the community -- not just the quality of the technology it produces, but the brand and reputation that the community and its individual members and leaders establish through their actions and behaviors.
For a business to be successful in a globally integrated world dealing with many different kinds of people and governments, trust and integrity are more important than ever. As Sam wrote in the article: "A company's standards of governance, transparency, privacy, security, and quality need to be maintained even when its products and operations are handled by a dozen organizations in as many countries." In other words, regardless of how distributed a company's processes and operations are, it must bear responsibility for its products, services and actions, which requires greater transparency and vigilance than in the more vertically integrated world of the past. Sam further adds, "A reliance on hierarchies contained within one function, enterprise, or nation must be supplemented by new ways of establishing trust, based on shared values that cross borders and formal organizations."
Speaking of shared values, "Trust and personal responsibility in all relationships" is one of IBM's three core values. This is much easier said than done. A global company and its leaders are constantly faced with the need to decide among the conflicting priorities of its various stakeholders, e.g., employees, clients, governments, business partners, shareholders, universities and others. These constituencies are now literally spread all over the globe and often live under different conditions and value systems, all of which must be paid attention to when making decisions.
Indeed, one relationship in particular -- that between business and government -- will require innovative thinking and new levels of trust and responsibility. This goes beyond the need for smooth everyday business transactions. Business and government must jointly address some of the toughest problems we all face, from healthcare to education to securing the world's trade lanes and protecting the environment, problems that are far too complex for business or government alone to solve.
At the end of the day, we have to recognize that we are all in this together -- which means we have to co-evolve, and co-innovate. Not only is the corporation changing and becoming globally integrated, but so is government, and so are markets, and so is culture. Sam regards this as offering much hope for progressive thinking and new solutions. I could not agree more with him as he says, "The shift . . . to globally integrated enterprises provides an opportunity to advance both business growth and societal progress."