How Did the Corporation Become Global?

How old is globalization? In a 2007 presentation on the subject, Nayan Chanda, cofounder of the Yale Center for the Study of Globalization, said that globalization has been a near constant for 1,000 years, but that its pace was greatly restrained by the slowness by which people and ideas were able to move about the world. He cites four "principal actors of globalization" to describe its spread: traders, preachers, adventurers, and warriors. For the past couple decades, traders—in the modern form of the corporation—have been preeminent. "The whole world is a factory," he said. "You produce one thing here and another somewhere else, and another 5, 20, 30 companies put it together in yet another place… The result is a worldwide supply chain that aims to achieve the most efficient use of resources all over the world."

The corporation has been one of the most important engines of globalization, and one of its chief beneficiaries. In an essay in Foreign Policy, Samuel Palmisano, the former CEO and chair of the board of IBM, traces the evolution of the multinational corporation and how the liberalization of trade has helped create what he calls the "globally integrated enterprise." From its rise in the mid-19th century until the 1920s, the "international corporation" spread across the globe, often with the aid of its home country's armed forces. The Great Depression brought a rise of protectionism, forcing corporations to adapt into what became the modern multinational, working around tariffs by building local production, their organizational structures often determined by which nations they were able to get into.

Over the last 30 years, economic nationalism has receded, allowing corporations a freer hand in determining how and where they sell and produce goods. The boom in informational technology has also reduced the need for a company organized around a central hub, allowing far-flung arms to communicate with each other in real time. "Simply put," Palmisano writes, "the emerging globally integrated enterprise is a company that fashions its strategy, its management, and its operations in pursuit of a new goal: the integration of production and value delivery worldwide. State borders define less and less the boundaries of corporate thinking or practice."

Henry Schacht's career spanned much of the era of the multinational and globally integrated enterprise. He joined Cummins Diesel in 1962 at the height of the reign of the multinational corporation, and led the company from 1973 to 1995. He later became CEO of Lucent, leaving that post for the second time in 2003. At both organizations, he stressed the importance of global expansion. To attain senior leadership at Cummins, managers needed to work abroad, gaining a crucial understanding of how the company's many markets-and cultures-functioned. During his two decades as CEO, Schacht turned Cummins from a global seller of American-manufactured goods to one where production, as well as markets, had spread worldwide. "Today it doesn't matter where the headquarters are," he told Yale Insights. "And it's populated with people from all different backgrounds and all different primary languages, all different passports." He added that increasing competition has demanded this evolution: "If you're not thinking globally, you're likely to get whacked across the back of the head when you're not looking."

TRANSCRIPT

Q: How has business changed over the course of your long career?

Henry Schacht: When I first got involved in the commercial world after graduate school, it was essentially a domestic business with some outreach into both obvious and not so obvious places. I went to work for Cummins Engine in 1962, and they had a small operation in India at that time, and they had a small operation in the UK, but they basically were driven by the domestic market, and the rest of it was things they were interested in, but it was at the periphery.

And over the many, many years I was there, from ’62 to ’95, it changed totally. And we went from a domestic company, with heavy made-in works, and by that I mean 80% of what we sold we made ourselves. And 80% of that stayed in the United States. And when I finished up in 1995, 20% of what we made was made-in works, but it was made-in works all over the world. And from, say, 10% when I first started, outside the United States, to when I left in ’95 or retired in ’95, it was closer to 50%. And now, if you look carefully, it’s well beyond that.

So, companies have had to transform themselves over this period of time, these 33 years that I was at Cummins. They had to transform themselves to a domestic company, essentially, with extensions of what they were doing overseas. So, they went through—we went through several different iterations, but essentially from a domestic company, with a few sales outlets and a few small manufacturing facilities in other places in the world that needed our product, we went to what I would call a multinational company, where we were basically a United States company, but we had other full-fledged operations in other parts of the world, to where it is today. I’d call it a transnational company; it doesn’t matter where the headquarters are. And it’s populated by people with all different backgrounds, all different primary languages, all different passports.

Q: What skills do senior managers need to flourish in the global economy?

Schacht: My cohort, my age, who were maturing in the late ’60s and the early ’70s, most of us have lived overseas. And the reason for that is compulsory military service in those times. I spent two years in Vietnam, well before the war. The COO was on a ship for three years, docked everyplace. The chief financial officer spent two years in Germany at the front lines of what was then the Cold War. So, we’d all lived in different parts of the world. So, it didn’t seem unnatural to try to think in their terms rather than to project American terms. I mean you didn’t have to be in Vietnam very long to understand projecting American terms wasn’t going to work and clearly didn’t.

So, we all came out of that set of experiences, and we had to then think about 15, 20 years later, when most of our human talent, which again was the only key resource we had—differentiating resource—didn’t have those experiences. So, how did you provide them? What did you do structurally to make sure people who didn’t have the same experiences as we had had in our 20s and early 30s? And so we developed programs to do that and said, “If you want to be on the track to be a senior management person in this company, you need to have lived overseas. You need to take an assignment overseas and to go live there and think about how you then adjust your own approach to what is a global world,” and eventually became a transnational world. So, it’s possible, but it has to be explicit rather than implicit.

Q. How has the competitive landscape changed?

Schacht: Who would have thought, when you were AT&T with Bell Labs and Western Electric, and you created Lucent out of Western Electric and Bell Labs, who would have thought—that was, you know, 1996—that by 2013 your major competitor would be Chinese? And the second major competitor would be Chinese. And the two of them would be larger than you are by magnitudes. I mean, it just wasn’t part of the equation at that time, but that’s the world now, and it’s not just electronics.

Who would have thought that Samsung outsells Apple? And this is a whole different world. And if—you know, everybody assumes Apple is the king of the hill. Well, they may well be in terms of marketing and style and even in technology. But Android— Samsung outsells them by quite a bit, even in smartphones. And so, if you’re not thinking globally, you’re likely to get whacked across the back of the head when you aren’t looking.

Q: What are the opportunities and difficulties for leaders in the global economy?

Schacht: Almost every senior manager would like to benefit his country of origin. I don’t know any senior manager that doesn’t have to fight it all the time. By “fight it,” I mean that doesn’t work if you don’t say, “In my country of origin, what’s their distinctive competence?” For instance, in the diesel engine business, we used to—there’s no foundry left in the United States that makes what we make.

We can, in our operations in Brazil, we can cast a block, take a first cut, bring it back to the United States and lay it down at half the price of the foundry that is ten yards away. Okay? Now, to keep that foundry alive for very long—not going to happen. So, you’ve got to figure out how to moderate the employment off-put in your local communities, etc., etc., etc. I mean, this is complicated stuff.

When I was at Lucent, one of the things that, as an American, troubled me greatly, is there are no Americans, virtually no Americans in the PhD track that we hire from. Virtually none. Now, I know what to do as a CEO of a transnational company. As a citizen, it bothers the heck out of me. But I don’t have any choice. If I’m gonna stay ahead of the—particularly the Chinese, who are getting very good in this particular world—I’ve got to be there. So, we move our laboratories there. Half of Bell Labs is in China. And, you know, that’s the way the world is. I don’t have any choice, but it causes angst that you have to learn to live with if you’re going to be a transnational manager.