put in a
quandary which has compounded
the exchange rate risks and
companies across the globe seemed
out of place and clueless.What do all
these events signify? Should they be
looked at isolation or are there any
powerful lessons for future
managers and CEOs when they
connect the dots? Do you think the
world was integrated for an
inimitable disintegration?
The present and the immediate past
always look more turbulent than the
distant past. This is because we
overlook what it must have been like
to live through past crises. You
mention an impressive and worrying
list of crises since 2000, but let us put
them in perspective. Economically
speaking, for instance, all of the crises
in the US economy youmention have
still left it growing at 2-3% per year, with unemployment at only 5-6% In
contrast, during the Great
Depression, the US economy shrank
by more than 30% between 1929 and
1932, and unemployment went as
high as 25%. People lost their entire
life savings when banks collapsed
and the stock market tumbled.
(Today, a one-day decline in the Dow
Jones Industrial Average of 5% seems
catastrophic!)
Yes, many well-known American
firms have gone under since 2000,
but that has always been the case
historically. For instance, only a
handful of firms that were on
Fortune's list of the top-100 US firms
in 1900 were still on the list in 2008
(General Electric was one of those
few, but in 2008 its future prospects
as an integrated, diversified firm
looks shakier than ever). "Creative
destruction," to use Joseph
Schumpeter's term, has always been
with us.
As I said earlier, we keep learning
how to manage the domestic
economy more effectively. That is
why the US financial crisis of
September 2008, it was hoped,
would not lead to "Great Depression
II." By backstopping the banks and
financial institutions, the US
government hoped to avert the
vicious cycle of shrinking wealth and
incomes.
That said, managers and public
policymakers would be wise to
recognize two important realities,
going forward. First, national
economies are tied to the global
economy more closely than at any
time in the past. Never before in the
world's history have the volumes of
capital and trade flows, as a share of
world GDP, been as high as they are
at present. Therefore, a crisis in one
part of the world is more easily
transmitted to other parts, and
managers everywhere must pay
attention to economic and political
developments in the rest of the world, at least with the corner of
their eye.
Second, global economic
interdependence has increased a lot
faster than our capacity to manage it.
Countries have created sophisticated
mechanisms to manage their
domestic economies, but they
jealously guard their national
sovereignty when it comes to creating
mechanisms to manage global
interdependence. The US is
particularly prone to act in this way.
Global institutions, such as the WTO,
the IMF, the United Nations, or G8
meetings, are helpful devices but
inadequate for dealing with serious
global crises, such as a worldwide
financial collapse or terrorism.
Imagine what it would be like to
manage the US or Indian economy
with all the interdependence across
states but with only a committee of
state governors or chief ministers to
manage the country and no federal/
central governmentwith the authority
and tools to do so. That is what we
have at themoment at the global level.
I find that scary, but realize that
stronger global institutions will
probably not be created until
countries suffer through the
equivalent of another Great
Depression.
-
As you compare the Fortune 500
companies list, let's say in 1958 and
2008, what distinguishes these two
lists? What can be surmised and
learnt from those two lists? As you
look at companies in USA, Europe,
and Asia, what stands out? Is there
any particular development that
seems to sum up the impact of global
competition?
I have already referred to this
evolution earlier. If a list of that kind
had been made in 1900 it would have
been dominated by European firms
particularly British, Dutch, and
German firms. By 1958 the list was
dominated by American and
European firms. By the 1980s, the list included many Japanese firms and a
few Korean firms. In 2007, that list
included as many as 59 firms from
emerging markets, including 14 from
South Korea, 24 from China, and six
from India. Twenty years from now,
the list will likely include at least 50
Chinese firms and possibly a
comparable number from India. This
is merely a result of the big shifts in
the global economy that I discussed
earlier.
-
According to a recent McKinsey
Global Survey, almost 70% of
executives around the world say that
global social, environmental, and
business trends are increasingly
important to corporate strategy. Yet
relatively few companies act on the
global trends they think will affect
them most; among those that do act,
only 17% report significant benefits.
Why is there such a disparity
between need and action?
One of the responsibilities of any
CEO is to create an organization that
will be in sync with the company's
future environment, but the problem
is that organizations prefer to be in
sync with the current or past
environment. The stronger the
company's fit with its current
environment, the better its current
performance; the harder it will be to
prepare the organization to deal with
a different, future environment. Also,
the bigger the organization, the greater
the difficulty in changing the 'inside'
to match the needs of the 'outside.'
Because most of McKinsey's clients
tend to be big, successful
organizations, it is not surprising that
therewould be a significantmismatch
between their current organizations
and perceived future needs.
