National recipes

The myth of the global company

Everyone accepts that different cultures produce distinct cuisines, but the smartest executives recognise that this applies to business, too.

by Professor Gordon Redding, director, Euro-Asia and ComparativeResearch Centre, INSEAD
Last Updated: 23 Jul 2013

Recipes for food dishes are usually traceable to a culture of origin.

You do not go to a banquet anywhere in the world and expect to be given 'world food'. Even the foods that are sold worldwide, such as McDonald's or the Chinese takeaway, remain essentially American and Chinese. Although there are some fusion cuisines, they are consciously hybridised to reflect their separate origins. But in most cases you would expect a dish to reflect the society from which it came. A boeuf bourguignon is French, a vindaloo is Indian, a steak and kidney pudding British and pho very Vietnamese.

And if you enquire as to the origins of these products of national craftsmanship, they reveal a pattern in which the same basic ingredients - beef, spices, starch, vegetables - end up in a remarkably varied final form. The difference lies in the way core ingredients are combined.

Not only do the recipes 'work' to please people. They have other features: they become stable, can be found described in books, become respected for their ability to give people satisfaction, they endure through generations; and yet they remain difficult to replicate without the surrounding supports that make them genuine. Systems of business are also national recipes.

They put together ingredients into patterns, which - if they work - then stabilise and replicate themselves. And they are equally products of their cultures. They use the same basic ingredients all over the world - capital, human talent, ways of achieving enough trust to do business - and they play with the combinations until a mixture works to grow wealth.

Sometimes societies do this by debate about how it should be done, as happened when Adam Smith defined how the early industrial revolution might be designed. Sometimes they do it by state planning, as in the days of Japan Inc in the 1960s. Sometimes a society allows creative experimentation - which is now, arguably, happening in China. No matter what the process, there is a historical trajectory in each society that takes it in a direction largely pre-determined by the society's more fundamental nature.

If you were to track the economic evolutions of countries that are at roughly the same stage of emergence (Korea and Poland, Brazil and Indonesia, India and China, Singapore and Hong Kong), you would find major contrasts in both what they do and how they do it. In many such contrasts, you would also find contrasts in how well they do it - how many peoples' lives are made easier and richer. That is why 'capitalism' is not one thing. That is why the six business systems currently dominating the world economy are all different in their natures (see p36). That is why globalisation is not at all easy - and across some combinations almost impossible.

If there were no cultural differences, business could spread easily throughout the world. But this does not happen. Despite all the hype about globalisation, despite centuries of world trade and investment, and the communication miracles of the past 20 years, invisible barriers still exist to prevent transnational companies from going transnational wherever they please.

And the barriers are not legal; they are expressed in such phrases as 'We could never get the hang of how business is done there', 'We don't understand the environment', 'They play by different rules'.

What this says is that the business system in the country under discussion is foreign in ways that seem unfathomable. A recent study by Alan Rugman and Alain Verbeke of the world's 500 largest companies (380 of which gave data about where they operated geographically) assessed how many of these companies were truly global in the sense that no more than 50% of their volume came from their home region (Americas, Europe, Asia) and at least 20% came from each of the other two - in other words, they would be fairly spread around. They discovered that decades of globalisation have produced just nine companies with a global reach (see p38).

Research by Subramanian Rangan at INSEAD shows similar patterns, this time of 'no go' areas for huge corporations. Some find Asia difficult, others might find Latin America comfortable but North America not. It is as if there were hidden obstacles that are easy for some to surmount and impossible for others. Their hidden nature is why research on business systems, and 'the societal effect', is crucial. Not only might it unlock the understanding necessary to do business in, say, China or Russia, it might also explain why the leading companies in any major industry come from just one or two cultures: why are consultancy and accounting essentially American games? Why is it that to make money in quality cars a company has to be German or Japanese? Why do the French and Italians dominate clothing and perfume branding? Why is China now the workshop of the world?

Understanding a business system starts with four assumptions. First, it is most useful to define it as belonging to one society, because it is a product of a society's history. It normally overlaps with a nation-state, so that, for instance, one can distinguish the French system from the German, that of the US from that of Mexico. Occasionally, a society might overlap several states - that of the overseas Chinese is a case in point - but normally a state has its own distinct culture, and also the legal and educational, and language traditions of a state are normally distinct.

Second, no business system is static. Societies evolve continually, so we are considering here a moving object, and moving sometimes quite fast in historical terms, as did South Korea after 1960 and China after 1980.

Third, this object is not isolated from the rest of the world and will receive constant influences from outside. Even North Korea gets penetrated by clandestine DVDs (from China) about life in South Korea. Fourth, a business system in a society is a complex object, and that complexity has to be accepted as an aspect of understanding it. To take bits out of context for comparison or special analysis makes it much harder to understand fully.

A societal business system is like a cake with three layers, each of which contributes to the final effect. That effect comes from the combination of the recipe's layers. At the top is the business system - the way business is done in a society; in other words, how organisations take on distinct forms, how they relate to each other across the economy, what happens inside them. These are all aspects of the general challenge of stitching together stable combinations of people, capital, technology and markets.

Then we start looking at why. This starts with the middle layer, which is the systems used in the society to make things orderly, stable, predictable and fair. So for finance to work, there needs to be a banking system, a stock-market, commercial law, professions. For people to exercise talent in the economy, there needs to be an education system, the encouragement of science, a labour market, perhaps unions, and so on.

For people to exchange with each other widely, and in large volume, there needs to be a basis for trust to be extended beyond a small circle of people into the much wider realm of strangers. Information here is crucial. If you can believe what you read or hear, and if you can read or hear it easily, you can make business decisions more quickly, with greater certainty.

This middle layer is the realm of order and the things inside it are called institutions by theorists.

If the business system rests on the institutions, what do the institutions rest on? The answer is that they rest on the culture, and its job is to provide meaning for the system of order. In other words, the society has certain ideals, values, principles, beliefs. These are expressed as a set of axioms, buried in peoples' minds and guiding action. Do you trust authority? Is religion a priority? Can you influence your own fate? Are you on your own or connected? Put all together, they answer the question: why?

Why do Western societies have democratic institutions? Because they believe in individualism and self-responsibility. Why do they have elaborate legal systems? Because they believe in rights, fairness, evidence-based judgement and predictable sanctions for the control of behaviour. Why do Chinese people rely so much on guanxi in business dealings? Because it is an old principle that mutual obligation is a moral issue, that survival depends on its exercise and that status comes from its mastery. Why do the Japanese depend so heavily on group identity in work situations? Because for hundreds of years, they were bound into social units called ie, whose capacity to survive depended on co-operation and shared hard work.

What we have then is a complex system of interwoven influences, in a permanent state of evolution and adjustment, in which culture provides meaning, and underpins institutions that provide order, which in turn underpins the business system that provides coordination of economic behaviour.

The vast majority of countries are open to the entry of outside practices and ideas - even if sometimes reluctantly. But some simply assume the right to impose their practices and ideas on others; in many cases, the argument is appealing, such as the movement for standard international accounting practices, or technical compatibility, or shared environmental laws. Much in the way of managerial behaviour is influenced by attempts at standardisation, but this universalism can be naive.

In many of these transfers, there is a hidden agenda, and its interpretation is not always consistent. The arrival of heavy organisations and their attached institutions might be seen in the originating country as bringing best practice to a place in need of them. But it is equally possible to interpret the behaviour as 'exporting our rules for you to follow, so that we can expand the area in which our game is played'. The EU pours new standardising regulations into the boardrooms of companies already drowning in last year's flood. The Foreign Corrupt Practices Act, in all its Presbyterian austerity, is treated as a world constraint for US companies.

And in technology the production line for the Lexus in Nagoya looks remarkably similar, at first glance, to that for the S-class Mercedes in Stuttgart.

The hot-rolling mill in Shanghai's Baosteel plant looks much the same as other sheds elsewhere.

In many ways, the systems of business interpenetrate and people have always been inclined to be deceived by this appearance into thinking that one day there will be a single world system. In its first definition in the 1960s, this idea was termed the 'convergence hypothesis', and it originated from a study by four distinguished scholars. As time went on, however, it became apparent that the converging slowed down as societal systems came closer.

The leader of that team of scholars, Clark Kerr, wrote another book 23 years later, observing that although there was convergence in technology and superficialities, such as systems of administration and control, the 'realms of the mind' remained distinct. Thus the 'meaning' of what was happening remained distinct. Cultures themselves do not converge. EuroDisney could not replicate the American Dream; it had to Europeanise it, as it found when its French staff refused to follow its American rules.

Because culture provides meaning it is very deep, and because it defines reality it is very significant to a people. Because it represents an accumulation of messages received over the whole of a person's upbringing, it is often invisible. But it is always there and always strong. An outsider trying to come to terms with its effects may often suffer from the challenges it brings. Its depth may not be seen. Its shaping of local meaning may not be accessible through the unacknowledged thought patterns of outside meaning. And, in the absence of understanding, its strength may be misjudged.

This is what makes business combinations across cultures matters of such delicacy, and often failure. Looked at from another perspective, this is also why some countries can assemble competitive modern economies and others cannot - so far. It is also why the economies so far assembled are not of one type, but of six distinct systems (see left). Each of these systems has inbuilt strengths and weaknesses, and their strengths in competition come from their societal legacy. The laws of economics are heavily conditioned by culture (in ways that many economists struggle with reluctantly). So too are there compatibilities and non-compatibilities between systems.

A way of probing for such understanding is to take one of the systems and consider what it is especially good at, and then ask where that advantage comes from inside the society and its history. And is it transportable?

Let us look at the liberal market capitalism of the US and UK, and try to understand its distinct nature. The Anglo-Saxon version of the multinational, currently so dominant in many markets, performs well on the basis of three features.

It is driven by a powerful discipline stemming from the voracious and impatient appetite of highly critical investors wanting a high return on their capital, and paying senior professional executives very well for living under the pressure of delivering that performance. This dominance of shareholder value dates only from the 1970s, when investment theorists began to behave as if they were scientists and grew hugely as a body with claims to professionalism. It is not a universal phenomenon, despite its pretensions, as few societies have the same structure of financial institutions giving power to these intermediators.

The system is capable of very fast change and adaptation to shifts in technology and demand. This stems from a reliance on professionalised managerial skills in depth, on organisations designed for flexibility and speed of response, and on labour markets able to cope with radical restructuring.

It is noteworthy that change in such organisations is handled primarily by the managerial ranks, and that the workforce carries out a strategy but does not normally initiate it - for instance, product evolution. It is capable of using bureaucracy to integrate activities across complex differences of geography and sector. It knows about performance control, and keeps it at its core.

Such a system could not have been built without certain societal conditions.

The calculated rationality visible in the organisational order and structures rests on beliefs in the value of such impersonal 'scientific' ways of proceeding.

The professionalising of the managerial role via the MBA and other formal qualifications is a distinct feature of this system. The individual nature of the performance and reward built into so many control systems needs people who think of themselves as separate equals. Hands-off government is an outcome of centuries of political debate and industrial experience, as is also the philosophy of market discipline as the driver. In the US, the experience of huge organisational scale came from society's massive expansion across an almost empty continent packed with resources: the British equivalent was its period of empire. The Protestant ethic lay below the attitudes to self-responsibility, freedom, hard work and social co-operation, which fed into the creation of particular forms of law, of access to capital, and the use of labour in a certain way.

But the system's distinguishing features are not guarantees of success in every form of industry, and as competition intensifies, the weaker industries die away, flourishing instead in other systems of capitalism. It is no accident that the US can no longer make money in the car industry, that it no longer makes radios or TVs, and that its clothing industry relies on manufacturing elsewhere. It never learned to use labour skills strategically in the way that the Japanese and Germans do. It is no accident that manufacturing in the US accounts for only 16% of GDP compared with 77% for services.

So, what is the US/UK system of capitalism good at, and why? Three forms of industry are handled particularly well in terms of success in global competition, and are best understood in terms of the way certain features combine. The first combination occurs in consultancy, investment banking, financial services, architecture and project engineering services. Here the firm employs specialists in, for example, restructuring in the airline industry, new financial instruments, lending to the oil industry, risk assessment in shipping insurance, and sends them where they are needed, for varying periods. The firm's success depends mainly on its ability to obtain, keep and market these potentially valuable skills.

This second group has scale as its principal feature, but also operating efficiency. The form can dominate in a number of fields: in resources, as with oil giants such as Exxon Mobil; in services of a machine-like nature - for example, fast food, hotel chains, retail banking; applied technology - and applied creativity, as in media and entertainment.

The key to the last group is technology at the cutting edge - information, engineering, biochemistry, medicine - and the search for its fruitful application. The individual firms here are unlikely to be widely known, but together they make up a crucial catalyst in the wider societal system of capitalism, in that they supply the innovation needed to keep it competitive.

In comparison, Germany was once described as 'the graveyard of venture capitalism'. It cannot sustain a Silicon Valley and its major pharmaceutical companies depend heavily for innovation on their satellite laboratories in the US system. The reason is that its system has much more rigid markets in both capital and labour, and far more parties to deal with when making decisions.

Large German organisations are strong in a different kind of innovation - more incremental and less radical. They can produce cars with great market appeal due to constant technical innovation, but in their case the new ideas are generated inside their factories by the workers themselves.

The German worker, unlike the American, is trained to a very high level of technical skill. They expect to be with a firm for many years and are strongly represented in its board discussions. Innovation to meet market demand is part of the job, and authority to do so is encouraged. The US car firm is not structured to meet this challenge, and for goods of this nature - mechanical, responsive to consumer taste, heavily branded, within a family budget - it is failing.

Japan, in so many ways like Germany, is good at constant incremental improvement of mechanical products, sensitive to consumer demand, and that is why it has come to dominate the higher end of consumer markets.

In Japan the assigning of patent rights to firms rather than individuals has an effect on the structure of innovation, and inhibits the growth of the Silicon Valley formula. China's rise as the workshop of the world is due to its unique combination of newly legitimised entrepreneurship, capacity to network, access to market and technical know-how through intermediaries, and capital sourced largely from friends. There is much more to the China formula than the low labour cost, although that is clearly a crucial ingredient.

But China also has weaknesses. Its history has left it with a dependence on personal trust and a suspicion of more formal institutions, such as legal contracts, formal qualifications and bureaucracy. As a result, most large Chinese organisations, as they grow, will remain dependent on a key individual lao ban, or big boss. He will take up so much of the decision power that he will find it hard to keep ambitious talent; as a result, there is a size beyond which Chinese firms become less efficient. This is why there are so few globally recognised brands of Chinese origin. Their field of strength is OEM and they do it better than anyone else, and that is no accident. Like all societal economic systems, it is a product of historical evolution and it reflects the culture. And like all such systems, it is likely to go on doing so.

THE SIX FORMS OF CAPITALISM

At the beginning of the 21st century, six distinct forms of capitalism have emerged to dominate global markets. They do not have the field entirely to themselves, as there are new pretenders trying to enter the premier division of world business. But in terms of track record, these are ahead of the pack. They are identified here in terms of the main kind of organisation they support to represent them, but there is more to it than that. The organisational type is the product of the forms of order in which it is embedded, and the culture they in turn rest on. These are the present-day outcomes of long and complex processes of history.

1. US/UK LARGE MULTI-DIVISIONAL MULTINATIONAL FIRM. This is the flagship firm of the liberal market economy with its beliefs in competition, in individual accountability, in bureaucratic and rational organisations run by professional managers with formal qualifications or proven track records. It rests on a capital market that is both highly responsive and demands high performance, and which also works best in conditions of easy access by all. Ownership of firms is widespread throughout the society, and goes with a mobile labour market in which people can and do move around. Collaboration between firms, to affect the market, is usually illegal. The role of government is to make sure the rules work to maintain the intensity of the competition, but otherwise to stand back from the action. The key to the system is the drive provided by the search for shareholder value.

Examples: Wal-Mart, Citigroup, P&G.

2. EUROPEAN LARGE-SCALE FIRM. This formula occurs in much of mainland Europe, particularly in Germany, and is an expression of what is called the coordinated market economy. The market is not free; it is shaped and moulded by a coalition of significant stakeholders - government, banks, managers, employees, unions, local communities. Industry is owned much less by the public and more by banks and other industrial firms, often networked in alliances. This is a much 'slower' system than the liberal one, relying on 'patient' capital for long-term investment, on stable labour forces with high skills accumulated within the firm, and on a great deal of collaboration in industrial and political networks. There is a strong sense of duty to community and of social ideals.

Examples: Siemens, Volkswagen, Nestle

3. EUROPEAN INDUSTRIAL DISTRICTS. The typical firm here is small or medium, and may well be a family business or a closely held partnership. It is likely to be in a geographical district surrounded by other similar firms, which cooperate by linking their specialisms into networks, such as the textile firms of Emilia Romagna or the design-based consumer goods firms of West Jutland. Their secret lies in the reduction of costs and the flexibility of market response possible when high levels of trust are achieved. This form preserves the virtues of craftsmanship and design by cooperating in access to market channels.

Examples: Grundfos A/S, Denmark (pumps), Filatura di Pollone SPA, Italy (textiles)

4. JAPANESE KEIRETSU. The large industrial groups of Japan may no longer command the headlines, but Japan's economy is still four times larger than that of China, and the second largest in the world; its leading organisations are formidable industrial machines. The keiretsu are combinations of firms linked horizontally and vertically across sectors and into supply chains, and bonded together by elaborate cooperation, especially with technology, capital, and information. They live by the distinct belief that they exist primarily to keep their people employed, and through the agonies of their long recession, it is a belief they have largely kept to. They have a formidable capacity for organising complex and large-scale operations in global markets, and have deep reserves of managerial talent.

Examples: Toyota, Hitachi, Mitsubishi

5. KOREAN CHAEBOL. This is a child of the Korean formula for economic development, in which an alliance of government and key entrepreneurial families drove the Korean economy from nothing to one of the world's best in the 30 years from 1960. These grew as enormous family businesses, but in doing so also built strength in professional management. Their recent reshaping has seen many of the families move to one side and the professionals take over. The clarity of vision and the size of risk, possible with strong leadership, makes them capable of world leadership in some industries. They are, however, more 'vertical' and less 'horizontal' than Japanese firms in their structuring. They are described as having disciplined and militaristic corporate cultures.

Examples: Samsung, LG, Posco

6. CHINESE PRIVATE COMPANY. In 1980, private business was illegal in China: 25 years later it accounts for about two-thirds of the economy. This sector is the organisational base for the 'workshop of the world'. Inevitably, various types of firm are in this category: local entrepreneurial firms; overseas Chinese investments and alliances; and components of state-owned enterprises forced into the competitive marketplace. In most cases, there is a single dominant individual setting strategy and controlling operations. The normal organisational scale is small or medium, but the disadvantages of small scale are balanced by the advantages of networking. This 'clan' or 'network' capitalism puts together small firms into chains of component supply and assembly, and encourages the specialisation that yields their efficiency and price competitiveness.

Examples: D'Long Strategic Investments (financing), Shanghai Xingaochao Group (woodboard)

THE NINE GLOBAL COMPANIES IBM Sony Royal Philips Electronics Nokia Intel Canon Coca-Cola Flextronics Intl LVMH

Most people would regard Wal-Mart and Nike as global companies, but according to research by Alan Rugman and Alain Verbeke (see below), they are not. In fact, only nine companies out of 500 proved to be truly global when measured against the extent to which they had penetrated all three of the major markets in the world: North America, the EU and Asia. A company needs to have at least 20% of its sales in each of the three markets: Coca-Cola, for instance, qualified eminently with 38.4% in North America, 22.4% in Europe and 24.9% in Asia.

Of the 380 multinational enterprises (MNEs) for which geographic sales data was available, Rugman and Verbeke discovered that in 320 an average of 80.3% of their total sales was in their home region of the triad. They concluded from this that the great majority of the world's MNEs are regionally based in terms of breadth and depth of market coverage.

They also made an interesting observation with regard to 'back-end' globalisation: "Where globalisation does occur, it is only at the back-end of the value chain. Some of the world's largest MNEs master the art of connecting globally dispersed inputs. These can be in the form of financial capital, human capital, R&D knowledge or components, and can be integrated to better serve home region clients. Hence, it appears possible to be global at the back-end of the value chain, and much can undoubtedly be learned from observing and imitating the routines of global leaders in this portion of the value chain."

The nine truly global companies are in different sectors, but a strong common theme runs through the strategies of seven of them: that is, the application of scientific technical knowledge in the marketplace. The other two (Coca-Cola and LVMH) are masters of the use of branding in consumer markets. In addition, they have all been successful at offering products whose appeal reaches across cultural and national boundaries, either by products people do not want to be without, or by sheer availability, or by status-based allure.

But what has made them truly world players as organisations? There are four demands made on any organisation facing severe competition:

1. It needs to be managed and controlled in such a way as to carry no slack, and to extract the absolute maximum out of its resources. One measure of this is profit per employee, but there are many others. This is a test of managerial quality to control and inspire.

2. It needs to be at the cutting edge of innovation in its field; for instance, Nokia or Flextronics.

3. It needs to be able to reshape itself as an organisation - and sometimes quite radically - to keep up with its environment. The arrival of a British CEO at Sony is an example of this ability.

4. It needs to have a solid relationship with its customer base and nothing represents that more clearly than the strength of the brand.

THE ONES THAT DIDN'T MAKE IT McDonald's Nike Wal-Mart Carrefour Volkswagen Toyota Honda

Perhaps the companies that did not make it are the most interesting cases, as many would generally be regarded as global. Nike, for instance, regarded by Krugman and Verbeke as one of the 'special cases', has more than half its sales in the US (52.1%). The bi-regional MNEs include giants such as Unilever and McDonald's (in both cases they have less than 20% of their sales in Asia). There are 11 host region MNEs (which have a majority of their sales in a host market), including DaimlerChrysler, Honda and Manpower. The first two have their biggest markets in the US, and the third's biggest market is in Europe.

Sources: Regional and Global Strategies of Multinational Enterprises, by Alan M Rugman and Alain Verbeke, Journal of International Business Studies 35:1, 2004: 3-18

The Regional Multinationals: MNEs and Global Strategic Management by Alan M Rugman, Cambridge University Press, 2005

For information on Alan Rugman's research, go to: www.kelley.indiana.edu/rugman/

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Upcoming Events

Subscribe

Get your essential reading delivered. Subscribe to Management Today