Transforming Internal Governance: The Challenge for Multinationals

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.


1. For examples that demonstrate some of the problems established firms face, see:

C. Christensen, The Innovator’s Dilemma: When Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997); and

D. Leonard-Barton, “Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development,” Strategic Management Journal, volume 13, Summer 1992, pp. 111–125.

2. S. Morita, “Global Localization,” in Genryn (Tokyo: Sony, 1996), chapter 8.

3. B. Tuchman, The March of Folly: From Troy to Vietnam (London: Michael Joseph Ltd., 1984).

4. I. Nonaka and H. Takeuchi, The Knowledge-Creating Company (New York: Oxford University Press, 1995).

5. G. Hamel, “Strategy as Revolution,” Harvard Business Review, volume 74, July–August 1996, pp. 69–82.

6. C.K. Prahalad and R. Bettis, “Dominant Logic: A New Linkage between Diversity and Performance,” Strategic Management Journal, volume 7, November–December, 1986 pp. 485–501.

7. G. Hamel and C.K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994).