The most admired companies are more focused on managing from the center than on local initiatives.
(FORTUNE Magazine) - For hundreds of years, since the rise of the world's first multinational corporations, there was no such thing as a global market. At the British East India Co. or United Fruit, it was all about the home market. Managers were expatriates, sent to keep watch over foreign subsidiaries. The subsidiaries existed to extract resources, grow things, or make products with cheap labor to send back to the mother country.
Those days are long gone. Viable markets for consumer products now exist in nearly every country. And manufacturing, marketing, sales, and R&D are increasingly performed far from headquarters. But the age of management from the center has hardly disappeared. Indeed, according to a study conducted by Hay Group in conjunction with FORTUNE's annual Most Admired Companies survey, some of the world's old-school techniques of centralization have proven useful in the age of globalization.
In order to better understand how corporations operate globally--one of the nine attributes on which the rankings are based--Hay Group surveyed executives at 74 companies. The follow-up research, conducted in the fourth quarter of 2005, divided the companies into two groups: those that ranked among the top three in their industry on effectiveness in conducting business globally ("global leaders") and all the rest ("peer group").
The results were clear and perhaps surprising: Companies that are most admired for their globalness are more focused on enterprise-wide objectives than on local initiatives and do a better job managing from the center. Ninety percent of the global leaders say they have succeeded in aligning their subsidiaries around a common strategic vision, compared with 78% of the peer group. And 87% of the global leaders say their performance-management systems are adequately focused on enterprise-wide objectives, compared with only 63% of the peer group. "This basic simplicity does not come easily," says Hay Group vice president Mel Stark. "Companies commit significant resources to developing clarity around complex roles and decision-making processes."
Operations at Swiss food giant Nestle, the company ranked highest this year for effectiveness in conducting business globally, mirror the survey results. "There is no such thing as a global consumer, and the autonomy given to our individual operations makes a lot of sense," says Peter Brabeck-Letmathe, the chairman and CEO of Nestle. "Whatever element the consumer can taste, see, feel, or hear must be decided locally. But at the same time, international competitive pressure forces us to rationalize the upstream part of the business." That means, he explains, that Nestle's headquarters decides if a foreign operation should contract or expand, based on its profitability for the overall enterprise. Indeed, more global leaders (68%) say that managers will sacrifice local priorities for the sake of the parent company than do members of the peer group (51%).
At drugmaker Novartis, another Swiss company in the global-leader group, centralization is also important, especially when it comes to development. "R&D is done in one way globally," says CEO Daniel Vasella. That was not the case when the company was created by a merger in 1996, he adds: "There was very little global coordination, and that was a massive waste."
Global leaders are more likely to develop new practices centrally and diffuse them to subsidiaries than the peer group (64% vs. 53%); they tend to centralize compensation policies, keeping pay and incentives consistent from country to country (83% vs. 55%); and they make more frequent use of expatriates to manage overseas business (79% vs. 51%).
Mike Salamon, executive president of Australian mining company BHP Billiton, which was also in the global-leader group, says that having headquarters control the movement of top managers is good for all divisions. "The subsidiaries will say it's too bureaucratic," Salamon says. "But we give each of our businesses access to a 100,000-person talent pool." At both BHP Billiton and NestlÃ©, as at many of the global leaders, foreign experience is a prerequisite for top management candidates. "The people on the executive committee, in the process of getting there," Salamon says, "would have to have functioned in more than one business in more than one country."
Having a common corporate culture is another distinguishing characteristic of the most admired companies. Ninety percent of global leaders say they have succeeded in building one across all their divisions, compared with only 71% of the peer group. "Caterpillar culture is consistent around the globe," says Stuart Levenick, president of the U.S. company that makes industrial vehicles. "We evaluate and measure performance the same way around the world."
So does all this mean we are returning to the days of corporate mercantilism? Not exactly. "Things that look centralized actually allow for local empowerment," says Eamonn Kelly, CEO of Global Business Network, a consulting firm in Berkeley. Kelly argues that enterprise-level objectives give overseas managers clear performance targets, which provide space for creativity and flexibility at the local level. Indeed, 69% of global leaders report success sharing local innovations globally, while only 55% of peers do. "If you have organizational discipline, then the structure and processes and standards are not there to bother leaders but rather to give freedom," says Novartis's Vasella. "Freedom is only meaningful within boundaries."
HOW TO RECOGNIZE A GLOBAL LEADER
Companies were divided into two groups: global leaders
(top three companies in each industry with the highest global-orientation
scores) and peer group (the rest). Bars show the percentage of each group that
Our businesses are aligned around a common corporate
Global leaders 90%
Peer group 71%
Performance management is adequately focused on
[Global leaders] 87%
[Peer group] 63%
We are effective in integrating operations globally to
exploit economies of scale.
[Global leaders] 85%
[Peer group] 68%
Our businesses have a centralized compensation
[Global leaders] 83%
[Peer group] 55%
Our company makes frequent use of expatriate
[Global leaders] 79%
[Peer group] 51%
We are effective at sharing local innovations around
[Global leaders] 69%
[Peer group] 55%
Our managers are willing to sacrifice local priorities
to benefit the global enterprise.
[Global leaders] 68%
[Peer group] 51%
We do a good job developing new approaches centrally
and diffusing them worldwide.
[Global leaders] 64%
[Peer group] 53%