The Frontiers of Management. Peter F. Drucker

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      The Changing Multinational

      MOST MULTINATIONALS ARE STILL structured and run pretty much the way the American and German inventors of the species designed them, all of 125 years ago. But this design is becoming obsolete.

      In the typical multinational there is a parent company with “daughters” in foreign countries. Major decisions—what products (or services) to sell worldwide, capital appropriations, key personnel—are centralized in the parent. Research and development are done exclusively in and by the parent and in its home country. But in manufacturing, marketing, finance, and people management, the daughters have wide autonomy. They are run by nationals of their own country with, at most, one or two home-office “expatriates” in the top group. And their avowed goal is to be “a good citizen of our country.” The ultimate accolade for a multinational has been that a daughter is being seen in its country as “one of us.” “In Stuttgart,” goes the standard boast, “no one even knows that we are an American company. Our CEO there is head of the local Chamber of Commerce this year. Of course he is a German.”

      But every one of these design features is becoming inappropriate and, indeed, counterproductive. In the four areas where local autonomy has been the traditional goal, the multinational increasingly has to make systems decisions rather than let each daughter make decisions for itself. Even to be a “good citizen” threatens to become an impediment.

      Manufacturing economics is running into head-on conflict with the traditional design. In the typical multinational, the local daughter tries to manufacture as much as possible of the end product it sells. “Ninety percent of whatever goes into the tractor we sell in France is made in France” is a typical statement. But, increasingly, even a market as big as France (even one as big as the United States) is becoming too small for efficient production of everything. Automation in particular calls for centralization across an ever-widening spectrum of products and processes.

      The world's most efficient automobile-engine plant, Fiat's fully automated factory in southern Italy, needs, to be fully economical, more than twice the volume Fiat can absorb—a major reason that Fiat has been flirting with Ford-Europe as a potential marriage partner. But many services also increasingly demand specialization and centralization to be truly competitive. “That we are number one in equipment leasing in Europe,” says a U.S. banker, “we owe largely to our having one centralized operation for the entire Continent, whereas each major European bank operates in one country only.”

      But the decision to centralize all European manufacturing of one part—compressors, for instance—in one plant in France, however justified by economics, will immediately run afoul of the “good citizen” commitment. It means “taking away jobs” from West Germany, Italy, and Britain and will thus be fought tooth and nail by the German, Italian, and British governments and by the labor unions. It is going to be opposed even more strongly by the managements of the daughters in all these countries. They will see it, with justification, as demoting them from masters in their own house to plant managers.

      Similar pressures to go transnational and thus to take decisions away from the local subsidiary are also building up in marketing. Even such large countries as West Germany and France are no longer big enough or distinct enough to be discrete markets for everything. In some products and services the market has indeed become global, with customers' values, preferences, and buying habits the same, regardless of nation or culture. In other products, markets are becoming more segmented—but by life-styles, for instance, rather than by geography. In still others, the successful way to market is to emphasize the foreignness of a product (and sometimes even of a service, as witness the success of the American-style hospital in Britain). Increasingly a marketing decision becomes a systems decision. This is particularly true in respect to service to distributors and customers, which everywhere is becoming crucial.

      And when it comes to finance, the “autonomous” subsidiary becomes a menace. The splintering of financial-management decisions is responsible in large measure for the poor performance of the American multinationals in the years of the overvalued dollar, when most of them lost both market standing and profitability. We do know how to minimize the impacts of exchange-rate fluctuations on both sales and profits (see Chapter 5: “Managing Currency Exposure”). Now that fluctuating exchange rates, subject to sudden wide swings and geared primarily to capital movements and to governmental decisions, have come to be the norm, localized financial management has become a prescription for disaster for anyone operating in the international economy. Financial management now requires taking financial operations away from all operating units, including the parent, and running them as systems operations, the way old hands at the game, such as Exxon and IBM, have for many years.

      But in today's world economy, capital appropriations also have to be managed as systems decisions. This is the one area of multinational management, by the way, in which the Japanese are well, and dangerously, ahead of the Western-based multinational, precisely because they treat foreign units as branches, not daughters.

      In the Japanese multinational, the earnings and the cash flow of the overseas units are no more “theirs” than the earnings and cash flow of the Nagoya branch are Nagoya property. This enables the Japanese to take earnings out of one unit, for example, the United States or the German one—but also out of the Japanese parent—and to invest them in developing tomorrow's growth markets, such as Brazil or India. The Western-based multinational, conversely, expects the subsidiary in Brazil or India to finance its future market development out of its own near-term earnings, with the funds earned in more mature countries earmarked for investment there, or for dividend payments. Thus the Japanese treat the world market the way American companies treat the United States, where funds earned in New England are freely used for investment in the Northwest. As a result, the Japanese are rapidly gaining control of tomorrow's markets—which in the long run may be a greater threat to U.S. (and Western) industry than Japanese competition in its home markets.

      Precisely because the subsidiary of the multinational will increasingly have to become part of a system in manufacturing, marketing, and financial management, management people will increasingly have to become transnational. Traditionally the foreign unit could offer its management people careers roughly commensurate with what domestic companies of comparable size could offer: opportunities to become top management in “their” company. This top management could then expect to have authority quite similar to that of top management in a truly domestic company.

      “In all my twenty years as CEO,” the former head of the Swiss subsidiary of National Cash Register once said, “there were only six decisions where I had to go to the parent company in Dayton for approval.” Increasingly, however, almost every major decision will have to be made as a joint decision. This means, on the one hand, that the local management of the subsidiary will have far less autonomy and will see itself as middle management. On the other hand, it will have to know the entire system rather than only its own company and its own country.

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