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The landscape of global business has undergone a seismic shift in the past few decades, reshaping the balance of corporate power across continents. Two regions have risen to prominence, eclipsing their European counterparts: the US and China.
This blog post charts the implications of this worldwide transformation, examining the managerial factors that have led to the current state of play in the corporate world.
The Rise of US and Chinese Corporates
Historically, Europe was a stronghold of global business, boasting several of the world’s largest multinationals. However, recent trends paint a different picture. European firms are now a rarity in the top 20 global companies – a shift that was unimaginable when a young Steve Jobs on a 1985 visit to Europe was asked his opinion of European attitudes to entrepreneurship. His insights foreshadowed the challenges Europe would face in nurturing new corporate giants.
Take the MSCI index shown in Figure 1, which evaluates regional financial and economic performance in terms of stock-market and investment opportunities.
Figure 1. Cumulative MSCI Index Performance-Gross Returns (USD)
The rise in the MSCI All Country World Index (ACWI) reflects particularly the rapid ascent of China, alongside other Asian-Pacific emerging markets such as South Korea and Taiwan. These countries now rival the economic might of the traditionally dominant US and Europe. However, the expected diversification of the largest firms towards Asia has not proportionately diminished the status of the US corporate giants.
Exploring the Reasons Behind the Shift
In 2000, European companies constituted about 20% of the top 100 global firms by market capitalization. Today, Europe barely holds 8%.
In contrast, over the same period US firms have not only maintained their dominance but have grown. The reasons behind Europe’s lagging performance are multifaceted. While Europe faces stronger demographic headwinds than the US, it has enjoyed certain economic advantages, such as the adoption of a single currency and the expansion of the EU common market. Nevertheless, these factors have not yet translated into significant growth in corporate market capitalization relative to GDP growth. A critical factor in the US maintaining, and China increasing, their lead, is the latter countries’ predominance in the digital tech domain.
Many European CEOs acknowledge the reality of this situation, hoping that it was a one-off blip from which the continent will in time recover. But that may be a cop out. The Economist argues that Europe’s failure to develop competitors in this vast new sector is not a mere accident of timing. Its roots lie deeper, in the European managerial style. A more risk-averse culture, reliance on traditional industries, and challenges in creating new industries could explain European firms’ struggle to maintain a presence at the global corporate top table, leaving firms such as Apple, Microsoft, Amazon, Google, Facebook, Alibaba, and Tencent to share the lead.
The evidence points to a need for a fundamental reassessment of Europe’s approach to fostering corporate giants. The continent must embrace more risk, encourage innovation, and adapt to the rapidly changing global economic landscape. The key lies in learning from the past and boldly stepping into the future1.
The Reinvention of Management
The need for a fundamental reassessment of the traditional approach to fostering corporate giants has been known among leading management researchers and practitioners for the last two decades. Yet there are few international, regional or even national forums dedicated to discussing the need to reinvent firm management, or sharing operational practice on how to do it. Only a small fraction of the world’s total research funding is allocated to research on business management and its evolution and importance for global competitiveness.
Despite this lack of political and leadership focus, the good news is that researchers have been able to identify several pioneering, mainly US and Chinese corporations that have recast themselves to better compete in the global, digital, and now AI world, and have analyzed and codified the practices that enable them to outshine their international counterparts.
Managerial implications
Based on their findings there are five key lessons for managers in less performing companies.
Embrace Dynamic, Agile Management Practices: The success of the US and Chinese pioneers can be attributed to their dynamic capabilities, which involve integrating, developing, and reconfiguring competencies to meet rapidly changing environments. Other firms should adopt similar agile management practices, focusing on continuous adaptation and proactive change management
Foster and retain a Culture of Entrepreneurship and Innovation: The entrepreneurial spirit of the pioneers should be contrasted with the more risk-averse culture of European and other more traditional firms. Other companies need to cultivate a culture that encourages entrepreneurship, innovation, and calculated risk-taking. This involves transforming traditional management styles to maximize the firm’s human potential and support creativity, flexibility, and experimentation.
Adopt Customer-Centric and Networked Organizational Structures: The success of the pioneers demonstrates the effectiveness of a customer-centric approach and a networked organizational structure. Firms should aim for ‘zero distance’ to customers and users, ensuring seamless, direct connections to understand and meet their needs effectively. This could involve restructuring organizations into more decentralized, networked models that promote closer customer and user engagement and responsiveness
Empower Employees and Decentralize Decision-Making: The model of the pioneers emphasizes employee empowerment and decentralization. Other firms should consider adopting models that transform employees into intrapreneurs and even entrepreneurs, granting them more autonomy, responsibility, and stake in the success of their projects or microenterprises.
Leverage Digital Transformation and Global Leadership: With the digital revolution being a key factor in the rise of pioneering US and Chinese firms, other firms must intensify their digital transformation efforts. This involves not only adopting new technologies but also developing leadership that is adept at navigating digital landscapes, fostering global cultural integration, and building collaborative, innovative ecosystems. Leaders in other firms need to be adaptive, non-hierarchical, and skilled in managing diverse, global teams.
In summary, non-pioneering firms must fundamentally reassess and revamp their management styles, corporate cultures, and organizational structures, taking cues from the successful practices of US and Chinese pioneering megafirms to remain competitive and relevant in the global market.
About the author:
Dr. Annika Steiber, the author of the 2nd Edition of the Silicon Valley Model-Management for Entrepreneurship, available on Amazon.