Consulting
References Practices Case
September 9, 1994
Imagine the reaction if the Internal Revenue Service turned over its computers, and access to the financial secrets of all its companies and citizens, to a foreign concern. But in Britain, there was little choice. Only U.S. outfits had the know-how to get the job done on the best terms. Last November, the award went to Electronic Data Systems Corp., the computer-services unit of General Motors Corp. EDS, based in Plano, Texas, promised to install a system that will eventually allow Inland Revenue's work to be done in half the time at half the cost, with a fraction of the department's current 2,000 data-center employees.
American companies, at least for the time being, have little foreign competition either in the construction of sophisticated computer networks for others or, more important, in the myriad ways they use networks themselves to slash costs and beat competitors. Such networks have become information factories that speed innovation and compress product cycles, and American companies are their undisputed masters, in much the same way they were the first masters of mass-assembly factory systems early in the century.
And as in the earlier years, the phenomenon is creating a crucial competitive advantage, particularly for U.S. service companies, whose main product often is information itself. According to a 1992 McKinsey & Co. study, American telecommunications, banking, retailing and airline industries are up to twice as productive as their competitors in Japan and Germany, and one of the main reasons is technology. McKesson Corp., Boeing Co., Citicorp and Wal-Mart Stores Inc. have all reshaped their industries by deploying state-of-the-art networks as offensive weapons.
For years, the U.S. has run huge surpluses in the export of services and advanced technology, trends that have been little noted amid the gloomy monthly reports of trade deficits caused mainly by oil and auto imports. On Tuesday, two international organizations issued a report saying the U.S. has become the world's most competitive economy for the first time since 1985, citing, among other things, American strength in science and technology.
"There is no question Americans are leaders in constructing and managing networks," says Thomas Hughes, a professor of history, science and technology at the University of Pennsylvania in Philadelphia. "And there is no question that extensive use of networks, like factory systems in the 1920s, will be a key to establishing leadership in many industries."
Foreigners say the idea that American companies have reasserted their dominance through technology isn't mere chauvinism. British Aerospace PLC, whose U.S. rivals have relied on managed networks for years, recently found only two concerns qualified to run its information systems, both American. "The big companies with big backing, with maturity and experience in handling far flung projects, are in the U.S.," says Peter Harris, an information-technology director at British Aerospace. "We haven't been able to get that comprehensive approach in Europe."
Technology isn't the only reason. Management changes, to unleash the American bent toward innovation and creativity while copying the best Japanese practices, have allowed American manufacturers such as Hewlett-Packard Co. and Motorola Inc. to regain or take control of high-tech markets. Those tactics often include a more ruthless pruning of work forces than in Japan and Europe. Macroeconomic factors, such as the weak dollar and recessions abroad, have also temporarily aided U.S. companies.
But the U.S. edge in software, computers and networks is apt to be durable, because the dominance in these fields arises from some uniquely American traditions: entrepreneurism, inventiveness, abundant risk capital, superior graduate school education and an inflow of foreign brainpower. There is also the fact that the U.S. military poured hundreds of millions of dollars into network technology, including the world's first large-scale network, Arpanet, which began operating in 1970 as the forerunner to the Internet
The effect of high-powered computer networks on the internal operations of companies and external competition is poorly understood, partly because computers have been linked in a meaningful way for only a few years. Stand-alone computers that acted as glorified typewriters or adding machines had little effect on productivity Only by chaining together computers with instant access to vast databases, new market information and the work of colleagues have companies begun to reap the benefits of information factories.
These benefits include great increases in the metabolism of companies - the speed with which they can launch new products and businesses; the power to glean and react to information before competitors; the ability to cut costs. partly by replacing entire layers of managers and workers with databases, and the ability to eliminate the barriers of time and space with continual global communications.
EDS has erected more information factories than anyone, including an estimated 50,000 networks. Sometimes EDS builds the factories from scratch, sometimes it just upgrades them with customized software or better linkages and sometimes it merely absorbs a customer's factory into its own global network. Last year, EDS's overseas sales surged to 23% of its $8 6 billion in revenue, from 15% in 1989. It does so well as a seller of networks partly because it brandishes its own network as a weapon in hard-fought contests with U.S. rivals Andersen Consulting, a Chicago-based unit of Arthur Andersen & Co., International Business Machines Corp., Computer Sciences Corp. of El Segundo, Calif., and others.
EDSnet, as its information factory is called, is the world's largest corporate data network and a $1 billion feat of engineering. It links 400,000 desktop computers and terminals, 95 data centers housing 142 mainframes, and 15,000 satellite dishes in 30 countries. It handles 51.2 million transactions and data transfers per day and has the capacity to store 49.7 trillion pieces of data, 45 times the contents of the Library of Congress. The shuttling of information is monitored 24 hours a day in the latest series of fads and trends in the multinational management over the years.
European multinationals, says Harvard Business School Prof. Christopher Bartlett; pioneered the idea of far-flung, autonomous foreign subsidiaries - a business analogue of their countries' old colonial empires, where distance and slow communications gave local governors much clout. After World War II, U. S. multinationals such as IBM cast a new corporate mold: Foreign subsidiaries had some autonomy when deciding how to handle their local markets, but they drew on the technological or marketing expertise of corporate headquarters. More recently, Japan's rising multinationals organized themselves with an all-powerful Tokyo headquarters dictating to foreign representative offices. For the past decade or more, the three types of multinationals have been bumping into-and influencing-one another across the globe.
One result, Prof. Bartlett and other management specialists say, is "the transnational," with an often-complex mixture of local and international power centers. The aim of such organizations, says Roger Camrass, a senior official at Arthur D. Little Inc.'s European management-consulting practice, is to combine the economies of scale of a global behemoth with the flexibility and market savvy of a local company.
Some companies say changes in the corporate power balance needn't always prompt costly resignations. Two years ago, Minnesota Mining & Manufacturing Co. moved some key functions from its individual country subsidiaries in Europe to Europe-wide business centers and units. The country subsidiaries weren't abolished because they "house the bricks, the mortar and the people," says John Muilenburg, a human-resources vice president responsible for international affairs at the big St. Paul, Minn.-based manufacturer. And "we have a need to maintain a local presence."
But Mr. Muilenburg says that so far there hasn't been an increase in turnover among foreign-subsidiary managers affected by the organizational shift. One possible explanation: 3M is putting more local nationals into top positions of the country subsidiaries in Europe.
"It's not all a bed of roses,' concedes the personnel executive. 'But with the changing environment and intensified competition, we have to find ways to do business differently."