Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
Executives' Club of Chicago
April 12, 2007
"Leadership, Trust and the Globally Integrated Enterprise"
What I'd like to talk to you about today is how we respond to what I believe to be the seminal economic and societal development of our lifetime—the reality of globalization.
In the countries of the so-called "developed" world, some people today worry about the economic impact of globalization. They see it as a "rush to the bottom," and fear its impact on their own job security, wages and standard of living.
In the developing world, some people also fear globalization—but for a different reason. They are concerned about its supposedly "homogenizing" effect—as a threat to their culture and traditions.
As I'll argue here today, I believe that while both of these fears are understandable, they are largely unfounded.
First, global integration is about much more than lower costs. The forces driving it are much deeper and subtler than that, and they offer opportunities to everyone, not just low-cost providers.
Second, far from moving us toward some homogenized global culture, I believe that global integration is driving greater differentiation. Increased economic value is flowing to those who focus with laser-like attention on how they uniquely are, on what makes them special.
Each of us will need to decide what our unique strengths are, and how we should adapt to a new, challenging and ultimately promising reality. The most productive way to think about this—both for business growth and for societal health—is not "What will globalization do to me?" but rather, "How can I get work to flow to me?"
The world finds itself at a historical inflection point, when the very nature of business and business institutions is changing. I think we all know that. But how is it transforming the forms and processes we live with day in and day out?
Take the modern business corporation. This is an institution that's been around for a couple of hundred years. It's changed a lot over that period, and now its fundamental model is being transformed again. I discussed this last year in an essay in the public policy journal Foreign Affairs, where I looked at the evolution of the modern corporation through three distinct models.
The first was the 'international' model of the 19th century, where most operations were centered in the home country, with overseas sales and distribution.
Next was the 'multinational' model of the 20th century, which created smaller versions of the parent company in countries around the world. IBM was a classic multinational. There were "mini-IBMs" in dozens of countries: IBM Japan, IBM Brazil, IBM UK, IBM Germany, IBM Spain and so on. Every country operation had not only its own sales force, but also its own supply chain, procurement, finance, HR and other so-called 'back-office' functions. In many cases, the countries had their own manufacturing, development, even research capabilities.
But what once looked like efficiency is now coming to look like redundancy. So a globally integrated company looks very different. It locates operations and functions anywhere in the world based on the right cost, the right skills and the right business environment. And it integrates those operations horizontally and globally.
For example, at IBM, we used to have separate supply chains in different markets; now we have one supply chain, a global one, for the entire company. In our professional services businesses, where we used to think about our human capital—our people—in terms of countries and regions and business units, we now manage and deploy them as one global asset.
If you apply the same logic to all the operations of a company—from R&D and finance, to manufacturing and logistics—you begin to see how different this globally integrated model is. IBM and many companies have started down this path.
Why is this new organizational form emerging?
I think what's at work here is simple. I call this "the Principles of Global Integration": When everything is connected, work flows… the work that people do, even the work of computers. Work flows to the places where it will be done best—that is, most efficiently and with the highest quality. It's like water finding its own level.
And today, for the first time in human history, everything is connected. There are a billion people, millions of businesses and perhaps a trillion devices connected to the World Wide Web. By 2011, it is estimated that the Internet will reach 2 billion people—nearly one-third of the world's population.
At the same time that this global networked infrastructure was being built out, we've seen the advent of free trade agreements, a shift to a services-based economy and the emergence of highly skilled labor forces in places like India and China. And we're now beginning to see the real consequence of that for business and for society. Consider:
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The Indian services firms and Google are, in different ways, building business models based on the notion that work, activity and collaboration can and will flow from anywhere to anywhere in a flat world. In the case of Google, the computing model is totally different from a traditional technology company—say, a Microsoft.
Ask yourself: When you "google" some word or some person, where is the data you search through? Where is the software? Where does the processing take place? A tiny fraction of this work is done by your PC. The software is delivered as a service, over the Net. And the processing happens in massive "google-plexes" located in various parts of the world.
Technologies embedded in the network, and in business processes themselves, are now enabling the free flow of data and intelligence that sustain the globally integrated economy.
We are on track to produce 1 billion transistors for every human being on Earth by the year 2010. About half of those are built into consumer electronics. But a growing number are RFID tags, which are helping to monitor everything from auto parts moving around on the production floor to cartons of tomatoes en route to market.
So we have this dynamic flow of work across the global platform. But what determines how and where work flows?
As I see it, it's driven by three forces: economics, expertise and openness.
First, economics.
You can't fight economics. A key determiner of where and how work will move is cost and profit potential. There's no question that low cost has been the initial reason why so much work has moved to places like India, China and Latin America, where labor costs are a fraction of those in America and much of Western Europe.
But costs aren't the only factor. If they were, we'd see everything commoditizing and all work flowing in one direction. And that's not happening.
Why are European biotech and pharmaceutical companies like Roche and Eppendorf building manufacturing and R&D centers in the U.S.?
Why is Sony investing in upstate NY—not a traditional low-cost neighborhood?
Why is Takeda Pharmaceutical (of Japan) setting up their global R&D in Chicago?
Why did Tata Consultancy Services open an RFID Technology Center here?
Or why has Chicago-based Motorola increased its hiring of engineers at its six next-gen wireless and infrastructure R&D centers in Hydrabad and Bangalore, India, by 15% in the past year?
And why are the Chicago Board Options Exchange and the Chicago Mercantile Exchange in a flurry of plans to merge?
Could it be because this will double down on unique, Chicago-based expertise to make this city the world's center for risk-management in futures and derivatives?
In all these cases, the decisions are not based solely or primarily on cost. This is a race for differentiation. What they're doing is responding to the second principle of global integration—expertise.
In a world where the means of production and distribution are increasingly available to anyone, the only way to distinguish yourself is to have a differentiated value proposition and skills. You've got to have a better idea. You've got to do something that makes you special.
In a word, it's all about innovation.
Finally, the theme of innovation reminds us of the third principle of global integration—openness. To cause work to flow to you—to your nation, to your region, to your city—you must have an attractive business environment. This involves everything from modern education systems and physical infrastructure to progressive trade, taxation and intellectual property policies and —an increasingly vital element is—openness.
Systems that are open nurture collaboration—the co-creation of value. That's why I'm concerned when I hear about new technologies that might close off portions of the Net, restricting the access to commerce and ideas that is its hallmark. In our rush to add features to the Net, to increase its speed and strengthen its capabilities as a business platform, we must also ensure that it simply stays open.
By the way, when I talk about openness here, I don't just mean open technology standards, as important as those are. I mean open trade. I mean balanced approaches to intellectual property regulation. I mean governmental policies that encourage and protect the broadest participation in the economy and society. I mean the rule of law. Put them together, and you get open, stable business environments that provide a level playing field, which stimulates competition, innovation and the free flow of goods and ideas.
So these three forces—economics, expertise and openness—are my candidates for the key Principles of Global Integration. And if you accept the basc idea—that when everything is connected, work moves—then the burning question for companies, for nations, and for individuals becomes:
What will cause work to move to me?
On what basis will I differentiate and compete? Economics? Traditional scale? Expertise? A creative open model? What will it be?
Similarly, as a society, what will it be? Free trade? Protectionism?
To bring it closer to home: How will we differentiate the U.S.?
We have many, many inherent advantages, but we can't rest on our laurels… not today, not anymore. Consider that in just one day's edition of the NY Times last week, you could read:
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So, how will we as business leaders get work to flow to the Midwest? To Chicago?
Do we want to try to be the low-cost producer?
I don't think so. But does the Midwest, with its incredible array of universities and research institutions—many of which are among the best in the world in key fields of technology and business—have the assets and people to compete on the basis of expertise? Now …. that starts to sound a lot more interesting.
Looking farther down the road, will the much-noted improvement that Mayor Daley is achieving in Chicago's public schools not only build hope among the city's future citizens, but also spawn the next generation of leaders with the skills needed by global enterprises and communities?
Governments clearly have a role to play, working in partnership with business.
One promising form of partnership are regional initiatives, such as Milwaukee 7, which aims to make that city the global anchor for the counties of southeastern Wisconsin. As the Metropolitan Milwaukee Association of Commerce president Tim Sheehy put it:
"There are two paths the city can take. One puts Milwaukee in a place where it can compete on a worldwide basis to attract talent, investment and jobs and the other puts us in a place where we're struggling to keep the community above water…"
After a good deal of soul-searching at my own company, we've chosen our own path. At IBM, we've decided to compete on the basis of expertise and openness. And we are moving from a multinational to a globally integrated model just as fast as we can.
Now, with any change of this magnitude, there are myriad challenges for leaders. We have to think seriously about issues in a global, not just a multinational context—such as the rules governing the ownership and use of intellectual property, the new skills we'll need to develop, and the new kinds of organizational culture that will be required.
I want to close my remarks by highlighting one challenge of overriding importance: the issue of trust.
Of all the challenges raised by globalization, this is perhaps the most fundamental. It isn't just about issues like ethics and legal compliance—though obviously those are essential for any business. What I'm talking about goes far beyond that.
How do you sustain trust in enterprises that are based on increasingly distributed models? How do you ensure trust when your company's operations, customer and employee relationships and brand may be shaped—or even managed—by companies that are part of your ‘virtual' enterprise?
You may choose to leverage the expertise and scale of partners; there are compelling reasons to do so. But I would submit that you cannot outsource trust and responsibility.
Finally, how do you build trust on a global societal level?
When it comes to the fears about globalization that I cited at the beginning, how do we persuade people in both the developed and the developing worlds that global integration isn't just the latest euphemism for old-fashioned economic and cultural imperialism?
I believe this requires nothing less than a new employer/employee ‘compact'—a model that recognizes the profound shift in power that's taking place: away from companies and institutions, and toward individuals and communities.
This will require a whole new kind of humility for enterprises and their leaders. And it will also require a new level of ownership and personal responsibility among individuals. Both of those shifts will involve major culture change.
Here's what I mean: The social and economic compact that evolved during the end of the Industrial Age in the U.S. was for large businesses to take on many social tasks. They were, on balance, happy to do so, rather than wind up with more government control. IBM was, again, a leader in this shift to what were seen, quite accurately, as progressive workplace policies—in benefits, compensation, equal opportunity, training and education, etc.
Now, however, companies are having a harder and harder time affording those burdens (pensions and healthcare being the most notable examples). The initial reaction has often been to shift the burden to employees. But it's become clear over the past decade that beyond a certain point, that is not politically sustainable, nor is it a serious solution for a great nation, or region, or city. Or, for that matter, company.
The danger is that if businesses simply withdraw from their part of this compact, we won't move to empowerment of individuals, but simply return to lots of regulation—which has often also meant the strengthening of nationalistic barriers to trade, to ideas and to collaborative work.
So if we don't want to backslide into nationalistic protectionism, I think, we need to come up with progressive alternatives to corporate paternalism. It's very much in our interest to push for empowerment of our workforces—but we'll have to be active and imaginative to get there.
At IBM, we've set off down the path of empowering and enabling our people to make decisions and to act. We have been working to ‘lower the center of gravity' of the company, as I put it—that is, to trust IBMers and push decision-making authority out and down.
A globally integrated enterprise, in other words, can only be successful if it works for the company, its employees and society. Again, the most productive way to think about this is not "What will globalization do to me?" but rather, "How can I get the work of an integrated planet to flow to me?"
These are complicated times, they're wonderful times, they're exciting times. And I think they present a unique chance to lead in shaping a profoundly new environment.
Thank you for your attention.
