Do Multinationals Really Understand Globalization?

The ability of global companies to leverage global opportunities is surprisingly shallow

By Navi Radjou and Prasad Kaipa

IBM (IBM) recently released two important reports on the rapidly changing global business environment: the 2010 CEO Study, which is based on interviews conducted with more than 1,500 chief executive officers worldwide; and the Global Student Study 2010, which is based on a survey of more than 3,600 graduate and undergraduate students worldwide.

Taken together, the studies compare side by side the value system, mindset, and management style of current-generation CEOs with those of the Millennials (aka Generation Y) who are poised to become future leaders. As we studied them carefully, we found a big discrepancy between the Millennials' view of globalization and its impact on organizations and that of present CEOs.

Most CEOs surveyed by IBM expect their business environment to get increasingly complex in coming years, driven by tectonic shifts in the macroeconomic environment: 76 percent of CEOs foresee a swift shift of economic power from the West to developing markets. We can't agree more: The Organization for Economic Cooperation & Development (OECD) forecasts that the global share of gross domestic product (GDP) for developed economies will drop from 60 percent in 2000 to 43 percent in 2030. As a result, businesses will soon be operating in what we call a polycentric world—where Western centers of economic and geopolitical power will be interconnected with new centers of growth and influence in Asia, Africa, and South America.

The Task at Hand

A polycentric world is inherently complex due to its extreme diversity. Consider this: The already 250 million-strong Chinese middle class is expected to double in size in the coming decade and one global worker in four will be an Indian by 2020. The result? A massive increase in the diversity of the customer base and workforce of multinationals on a scale they have never experienced before. To effectively serve such a highly heterogeneous customer base and manage a highly multicultural employee base, CEOs of many multinationals will need to fundamentally redesign their monocultural (read: Western) and ethnocentric organizations. They will need to learn to juggle multiple business models, organizational practices, management structures, and even leadership styles in order to harness the growing diversity in the unpredictable global business environment.

Unfortunately, CEOs seem to underestimate the task at hand. Only 23 percent of CEOs surveyed believe that globalization will have a big impact on their organization in the next five years. Worse: While many Western CEOs claim that 50 percent to 60 percent of their future growth will come from emerging economies like India and China, another study shows that only 2 percent of their senior leadership currently hails from those fast-growing regions. This means that 98 out of 100 senior execs in Fortune 500 firms are defending obsolete business models in the old monocentric world (read: the U.S.), whereas only two of them are trying to restructure their organization for growth and success in the new polycentric world!

On the other hand, 55 percent of the Millennials that IBM surveyed expect globalization to massively change organizations in the future—and seem eager to contribute to those changes. After all, Millennials already live in a polycentric world and are fully aware of its extreme diversity—with their friends on Facebook and online gaming sites spanning multiple continents. As such, these culturally malleable Millennials welcome and celebrate the growing diversity in the globally interconnected business environment and are confident they can navigate through its complexity by leveraging their social networking skills and by focusing on continual learning.

Polycentric Organizations

The onus is on existing CEOs to redesign their organizations to leverage global diversity and the creative potential of Millennials (who will soon swell their employee base) in order to find innovative solutions for dealing with complexity in the postrecession global economy. To effectively compete and win in the emerging polycentric world, we believe, monolithic and ethnocentric multinationals must evolve into what we call polycentric organizations that reflect internally the growing external diversity and are able to learn and adapt continuously. Polycentric organizations not only tame but even capitalize on global complexity because of three noteworthy attributes:

1. They operate as a network. Polycentric organizations eschew hierarchical structures and silos —the death knell for developing empathy and harnessing diversity. Rather, they operate in a networked configuration, integrating creative talent and ideas from employees, suppliers, and customers across regions to meet the global demand for innovative products and services.

2. They are highly adaptive. Flexibility is key to learning dynamically and succeeding in extreme diversity. Polycentric organizations aren't wedded to a single European or U.S.-centric business model or organizational practice, but employ a diverse portfolio of strategies and approaches that allow them to quickly learn and adapt to new opportunities and threats in different regional markets.

3. They boast a global mindset. Polycentric organizations don't believe in a single "corporate culture," and allow multiple perspectives and value systems to co-exist within the same enterprise. They are also open to external ideas and actively collaborate with a rich network of partners. This diversity in thinking and action is reflected in the heterogeneity of their leadership team and how they make and execute their decisions.

Our research shows that a few visionary multinationals—some Western, some Eastern—have begun to embody and manifest the three key attributes of polycentric organizations.

For instance, both General Electric (GE) and Cisco Systems (CSCO) are de-Westernizing their firms and creating networked organizations by giving leaders in emerging markets global R&D remit and global profit-and-loss (P&L) responsibilities. John Chambers, Cisco's CEO, dispatched his top lieutenant, Wim Elfrink, to Bangalore to launch and run Cisco's Globalization Center East, which now works closely with the U.S.-based research and development teams to co-create affordable and sustainable solutions for both emerging and developed markets. Likewise, GE's CEO Jeffrey Immelt has made John Flannery, till recently the president and CEO for GE Capital in Asia, the head of GE's India operations, reporting directly to GE Vice-Chairman John Krenicki. For the first time in its history, GE now has a senior vice-president heading India, which from now on will be treated as one single, integrated business with its own P&L on par with any other global business unit of GE.

Globalization Strategies

Best Buy (BBY) has made adaptability the cornerstone of its globalization strategy. For example, Best Buy's astounding growth in China is due to the fact that it designed its local stores to be less transactional (as in the U.S.) and more experiential, giving Chinese customers plenty of space to browse and try out products before actually buying them.

Not to be undone by their Western rivals, next-gen multinationals from emerging markets like Tata Motors (TTM) and Lenovo (LNVGY) are diligently cultivating a global mindset by increasing the diversity of their leadership teams. For instance, Lenovo's chief marketing officer, chief operating officer, and many senior vice-presidents are all non-Chinese. Similarly, Ravi Kant, vice-chairman of Tata Motors, told us that the leadership team of recently acquired Jaguar Land Rover continues to make decisions and operate pretty much as before, and together with other Tata Motors units they are learning to operate with a global mindset. Finally, Suzlon Energy (SUEL:IN), India's wind energy pioneer, is tapping into globally distributed creativity thanks to its global innovation network with R&D hubs in Denmark, Germany, and the Netherlands.

The monocentric global economic order is rapidly being eclipsed by a polycentric world. Rather than keeping their enterprise locked into 20th century organizational structures and processes, CEOs of multinationals must leverage the Millennials to accelerate their firms' evolution into polycentric organizations that harness the diversity and capitalize on the complexity of the 21st century.

Navi Radjou is executive director of the Center for India & Global Business at Judge Business School at the University of Cambridge. Dr. Prasad Kaipa is a CEO coach and adviser; he has worked with more than 100 top executives and 30 Fortune 500 companies in the areas of leadership development and innovation.