The emerging competitive landscape poses a challenge to the internal-governance capacity of large, established firms. Internal governance refers to the wealth-creation processes inside diversified multinational corporations (DMNCs). Three main processes constitute internal governance: cultivating strong corporate–business-unit relationships, fostering inter-unit linkages, and pursuing growth and innovation. First, it is easier to create wealth when frictions in the relationships between the corporate center and the business units (and the geographical units) are reduced. Eased frictions allow business units to be market oriented rather than embroiled in internal debates.
Second, enhancing the quality of inter-unit linkages (for example, global account management) creates value. Internal corporate leverage of resources requires business units to collaborate to address new, emerging opportunities. Finally, growth and innovation are an integral part of a corporation’s vitality.
The rate of change in the competitive environment exceeds the speed with which established DMNCs have been able to transform their internal-governance processes.1 Consider Kodak, Matsushita, Toshiba, and other firms with great traditions, global scope, and established technological capabilities. As the dominant paradigms in their businesses shift, their ability to lead is severely compromised. Although leaders recognize the need for rapid transformation of their firms’ internal governance, the problem lies in determining how to accomplish that transformation.
DMNCs are not constrained by a lack of knowledge about new technology; they often create new technologies. Philips is a technological leader in the optical media that gave the world CD and now DVD. Long before smaller start-ups, Xerox and IBM had all the technology needed to develop the personal computer. Kodak had the knowledge base to lead the development of the digital-imaging market. Nor are these organizations financially constrained. Their R&D budgets and capital spending run into billions of dollars per year. The malaise cannot be attributed to resource constraints.
Old Remedies and New Problems
At the first signs of competitive difficulty, managers assumed that the time-tested remedy of cost cutting would save them. All large, established firms bought time through the rituals of portfolio adjustment, reengineering, and head-count reduction. From 1991 to 1996, many leading firms attempted to restructure their way out of problems (see Table 1).
As late as 1998, Kodak and Xerox were undertaking restructuring efforts: in January, Kodak announced a reduction of 16,800 employees; in April, Xerox announced a reduction of 9,000 employees. Through restructuring activities, managers reduced inefficiencies accrued over decades.