A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  Producing more managers will count for little if the businesses that they join still rely purely on their connections and give key jobs to family memp. 73bers. Fortunately, a revolution also seems to be at least beginning in the upper reaches of Asia’s family-run companies, led by people such as Patrick Wang Shui-chung.

  Wang’s World

  You do not have to be a very astute student of Chinese culture to finger Patrick Wang as the eldest son of a self-made tycoon. His suit is exquisitely tailored, his thick black hair is neatly combed, and he speaks impeccable Harvard Business School English. His company, Johnson Electric, the world’s second-largest maker of electric motors, feels like a business-school case study dumped into the sulphur-scented hell of Hong Kong’s grimy Tai Po Industrial Estate. By the time you arrive at the building, you feel as if you have smoked a pack and a half of Gitanes, and one of the first things you see is that staple of Chinese business, a bust of the family patriarch, in this case Wang’s father. But the quiet office is on a thoroughly open plan, and everywhere you look there are signs of management ideas in action—from the cabinets stuffed full of boring-looking awards for manufacturing efficiency, awarded by partners such as Kodak, Texas Instruments, and Black & Decker, to the ubiquitous posters inviting workers to spend exciting evenings learning about transformational leadership, e-commerce, and conflict resolution.

  For Wang, management theory is not some arcane subject. “We are now in a new world,” he says. In the past, national barriers could keep second-rate operations in business. Now, everybody “is just a click away.” Like so many Hong Kong companies, Johnson had its roots in the toy business. Wang senior started his career making tiny motors for toy cars in the 1950s. Nowadays, micromotors are used to drive all sorts of things that have come to seem like necessities in our pampered times, including car seats, overhead projectors, blenders, electric knives, and can openers. Johnson employs more than fifteen thousand people and does business with more than twenty countries.

  Johnson long ago outsourced most of its manufacturing to China and Thailand (hence the quiet). It has also established research, development, and marketing facilities in Germany, Switzerland, and the United States. Johnson’s biggest customers—global car companies—want global suppliers, not to mention ever lower prices and ever higher quality. Wang recalls Michael Porter’s argument that companies can beat the competition in one of two ways—by being cheaper or being better—with a wistful sigh. Here, p. 74 “the great man is wrong.” Johnson has to do both at once if it is to have any chance of staying alive.

  Porter’s name is frequently on Patrick Wang’s lips. The air outside may be foul with every kind of chemical, and the world’s most fearsome gerontocracy may be only a couple of hours away in Beijing, but Wang’s heart is clearly on the banks of the River Charles. Wang has been a regular at Harvard’s executive-education program since the early 1990s. He reads the Harvard Business Review “religiously.” Management theory is the “brains trust for the business world,” he argues, and the best way to learn the secrets of the world’s most successful companies. “Even if I lived for three hundred years,” he says, “I would not be able to study all these companies.”

  Wang took some time to reach that conclusion. As a young man, he had studied electrical engineering at Purdue University, a “dry and serious place” whose non-Ivy League status clearly embarrasses him. For a while, he thought he would be able to learn all the management he needed from business magazines—a belief that was reinforced by the fact that his “maths genius” father did not even finish high school. But by the early 1990s, Wang was fed up with being pestered by twenty-something stock-market analysts about things like EVA (economic value added) and worried by their presumption that family firms merely wanted to hive that EVA for themselves. He enrolled himself at Harvard Business School and on his return brought in consultants from McKinsey and the Thomas Group.

  Consultants have plenty of defects, but one clear advantage of hiring outsiders for hierarchical family businesses is that they are more willing to tell people like Wang the harsh facts. McKinsey revealed that Wang’s customers were unhappy with the firm’s slowness. (Wang had been under the impression that their love knew no bounds.) Thomas told him to modernize his production processes and to reduce clutter so as to keep inventory to a minimum. (“We use the sea as our warehouse,” he boasts today.) Since then, Wang has led his company on a trail of permanent revolutions of reengineering, cutting costs, and pushing quality. Credit Suisse First Boston now praises Johnson as “one of the few companies globally that can deliver defect-free motors.” In 1999, it took over Lear’s electric-motor division for $310 million.

  As Wang breathlessly explains how McKinsey’s work on “the war for talent” has set him on reconsidering his recruitment policy and then mentions the interesting paper he saw on “disruptive technologies,” he seems to have drunk perhaps a little too deeply from the management-theory spring. But it is also clear that embracing all these ideas has given him a psychological p. 75 edge. In Chinese business, size has usually been a token of esteem. But management theory has taught Wang to fire as well as to hire, and labor now accounts for only 3 percent of the company’s costs. An even more important lesson has been humility. Most Chinese princelings make Tom Wolfe’s masters of the universe look as if they have inferiority complexes. Not Wang. “I’m just the CEO,” he says, in what might strike many of his peers as an oxymoron, “I’m not omnipotent.”

  He thinks that Dilbert has it right: The higher you go in an organization, the less you understand what is really happening. Although there are other members of the Wang family in the company, Wang boasts that Johnson is “flat” and “unhierarchical,” organizing its people in “cross-functional” teams and getting them to communicate regardless of national boundaries. He himself is merely a middleman who takes the wisdom of the Charles and translates it so it can be understood on the Yangtze. He holds “drumbeat” meetings in his Chinese factories as often as possible in order to communicate his latest ideas to his employees. Instructions should be simple. Examples should be concrete. Feedback should be frequent. And measurement should be relentless. “Management is not rocket science,” he says. “Most of it is just common sense.”

  The Sun Also Rises

  If Asia provides one example of the globalizing effect of management, then America provides another. Although most of the ideas that the new schools in India and China will drum into the heads of their pupils will be well-established Western ones, it is wrong to associate business excellence solely with the United States. Management science is in a constant process of evolution, and that evolution works best when it is open to ideas from all over the world.

  One of the most feted management thinkers in the United States at the moment is a mild-mannered Japanese professor with thick glasses and a taste for talking about epistemology: Ikujiro Nonaka. Nonaka has been given a chair at the University of California, Berkeley, and he is regarded as the doyen of a fashionable new area of management science: how companies create and use knowledge. One consultant—himself a “chief knowledge officer”—calculates that about three quarters of large American companies either have “knowledge initiatives” in place or are about to launch them. There are many books with the phrase intellectual capital in the title, proving, if nothing else, that the gurus’ emphasis on creativity and p. 76 communication does not extend to their own book titles. And the market for “knowledge-management services” is already in the billions.

  Nonaka’s acolytes (who include some of Silicon Valley’s finest) like to ascribe his preeminence in this burgeoning field to his taste for rigorous philosophizing. His book The Knowledge-Creating Company is profound stuff compared with most management tomes. Yet people no more buy management books for their insights into epistemology than they read Playboy for the short stories by John Updike. The real value of Nonaka’s approach to knowledge management is that it is very different from the one that prevails in the United S
tates.

  The first difference is Nonaka’s relative lack of interest in information technology. Many American companies equate “knowledge creation” with setting up computer databases. Nonaka argues that much of a company’s knowledge bank has nothing to do with data but is based on informal on-the-job knowledge—everything from the name of a customer’s secretary to the best way to deal with truculent suppliers. Many of these tidbits are stored in the brains of middle managers, exactly the people whom big reengineering projects in America replaced with computers. Nonaka argues that Japanese companies are past masters of tapping into the tacit insights and hunches of employees; he also argues that companies that cut their workforces too radically or too cavalierly risk getting rid of a store of tacit knowledge that might never be replaced.

  The second thing that makes Nonaka stand out is his insistence that companies need plenty of slack to remain creative. Allow employees time to pursue harebrained schemes or just sit around chatting, and you may come up with a market-changing idea, he argues; force them to account for every minute of their day, and you will be stuck with routine products.

  Looking to Japan for insights on management might seem odd at a time when that recession-bound country has become known for its bloated companies and bankrupt banks. Moreover, Silicon Valley works by decidedly different rules from those laid down by Nonaka: Institutional memory is weak and middle managers rare, knowledge generation appears to be split between individual entrepreneurs and the Valley’s collective intellectual infrastructure. But America’s interest in Nonaka demonstrates just how ecumenical the search for good management ideas has become. Some of the best companies in the Valley clearly take his thinking very seriously.

  In other words, America can still learn from Japan. In fact, Nonaka fits into an elaborate game of “pass the parcel” that has been taking place across the Pacific pretty much since the war. The first time the parcel was passed p. 77 was when the Japanese seized on the ideas of W. Edwards Deming. The next was when Toyota sent back its system of lean production. Since then, the process has become something of a blur, with each side picking up the other’s ideas, changing them, and sending them back. In time, somebody—perhaps Nonaka himself—will give his ideas an American spin and fling the parcel back across the Pacific. The game will stop only when somebody invents a perfect parcel—and that, despite all the outrageous promises of ultimate and immediate satisfaction found on the shelves of business-book shops, is unlikely to happen soon.

  5 – Sex, Death, and the Welfare State

  p. 78 HOW MUCH HAVE political liberalization, technology, capital, and management already turned the world economy into a single, integrated system? There have been so many extravagant claims about the depth and breadth of globalization that it is hard not to dismiss all the rhetorical froth as pure globaloney. But globalization is a continuing process, and a complex and convoluted one at that. Globalization moves at different speeds in different parts of the planet and in different sections of the population.

  We should thus be on our guard against taking our skepticism too far. The world economy is becoming more integrated. Activities that were once fairly isolated are being woven into a worldwide web. We want to illustrate this point by looking at how three businesses associated with activities that have hitherto seemed quintessentially local or at most national—sex, death, and the public sector—are being globalized. This is not, we hope, just an exercise in commercial prurience. All three activities show the power of the engines of globalization, and all three show how globalization is affecting the deepest feelings and anxieties of a growing number of people on the planet. If globalization can reach these areas, it can reach anywhere.

  The Van Nuys Experience

  Van Nuys is an area of the San Fernando Valley that has clearly seen better days. “The town that started right” (as its motto has it) is beginning to run to seed. Many of the small bungalows that dominate the area look worn. Groups of Latinos hang around on street corners, waiting for people to give p. 79 them jobs. Giant car lots give the main streets sepulchral airs. The California sun struggles in vain to confer a touch of glamour on the shopping malls.

  The San Fernando Valley is rapidly becoming the capital of one of the world’s saddest and, until recently, least global industries: sex. The business, which Forbes reckons is worth fifty-six billion dollars a year, stretches from the oldest profession on earth to the most complicated forms of interactive video.[1] It also has many faces, from the harmless to the unspeakably evil. Porn is no longer a ghetto. Adult movies account for more than a quarter of all videotape sales and rentals. Wholesome hotel chains, like Hilton and Sheraton, present their visitors adult entertainment, beamed into their rooms by NASDAQ-listed companies such as On Command Corporation and LodgeNet Entertainment. Virtually every Western investment bank in Moscow takes clients to prostitute-packed nightclubs. AT&T happily connects people to expensive phone-sex numbers. Cosmopolitan needs sex as much as Playboy does. Howard Stern, Jerry Springer, and the E! channel feature porn stars, who have themselves become industries: Ron Jeremy (known in the industry as “the hedgehog”) has managed to get his fat, hairy face on cigars, beer, T-shirts, and, of course, a sex toy modeled on a certain part of his anatomy.

  “Silicone Valley,” home to fifty out of the top eighty-five porn companies, grinds out more sex films than any other area on the planet, and it follows a business model much like that of other industrial clusters. Alongside the filmmakers there are talent agencies such as Pretty Girls International; strip clubs such as Bob’s Classy Lady; sex-toy emporiums; some sixteen hundred leading stars; and film-production sets such as Trac Tech, a gigantic affair with permanent sets made up to look like a hospital, a bar, and a restaurant, as well as the inevitable bedrooms. In all, it employs some twenty thousand people; at one point in 1999, one out of every five films in production in Los Angeles was a porn film.[2]

  The most eloquent guide to the globalization of this business is Steven Hirsch, the president of Vivid Video, the largest porn studio. From a collection of low buildings in a residential bit of Van Nuys, Vivid produces about ninety sex films a year. In one building, a team of ten postproduction specialists, using state-of-the-art dubbing machines and digital editing suites, churn out films twenty-four hours a day seven days a week; in another, teams of technicians perfect Vivid’s Internet site. Vivid distributes its films on five continents, via video stores, mail-order houses, the Internet, and cable and satellite television. Vivid produces 80 percent of the content of the Playboy Channel. It is also the world’s largest provider of adult films for hotels p. 80 and motels. The company employs some 150 people and had sales of about sixty million dollars in 1999.

  The tanned and aerobicized Hirsch looks like a foot soldier in that vast army of Californians who divide their time between the gym and the beach. But, oddly, he sounds as if he has just graduated from a high-powered business school. He talks fluently about diversifying the company, segmenting the market, integrating vertically, and rethinking distribution channels. Indeed, if one ignored his somewhat conspicuous display of Adult Video News Awards (in 1997, Vivid won no fewer than fifteen of these adult Oscars, an all-time high), one could be forgiven for thinking he was one of the more technologically astute studio moguls.

  Like a lot of people in Hollywood, Hirsch grew up around the business. His father made his name producing eight-millimeter films back in the days when they were called stag movies. He worked in the warehouse of his father’s company while attending the University of California, Los Angeles; later, he signed on as the national sales manager at Cal Vista, one of the largest distributors in the business. (His sister, Marci, another graduate of the warehouse, also works for Vivid, overseeing production.) In 1985, he co-founded Vivid with David James, a barrel-chested Welshman who sports tattoos and a walrus mustache. James, whose previous careers include spells as a coal miner and as a member of the antiterrorist unit of the British army, now runs Vivid’s new-technology divisi
on, focusing on digital video discs. DVD, he claims, is the reason why “I’ve gone from the coal mines to the gold mines.”

  Hirsch never consciously planned to turn Vivid into a global powerhouse. The business that he entered was an amateurish affair, not much given to thinking about the next month, let alone the long term. In his early years, he was more interested in getting his products across state lines than across national frontiers: some states have much tougher laws on obscenity than others do. The company set up a small foreign division to handle its overseas rights ten years ago. Now that division accounts for a fifth of Vivid’s revenues, with the Internet becoming an important distribution service. Certainly, the era of state troopers searching trucks for smut is over.

  Porn is a nasty industry, run by ugly characters. All the same, if you hold your nose tightly, it is possible to see how Vivid has been driven by the three engines of globalization: management, technology, and, to a lesser extent, capital. The management bit has been simple enough. Hirsch has simply imported the best practices (or, at least, not-bad practices) into an industry where such things were nonexistent. In the past, the standard way to get p. 81 rich in porn was either to rip off your customers or to sell them the sleaziest product imaginable. Now that anyone with a handheld video camera and a few willing bodies can make a porn film, the market is being saturated. By the end of the 1990s, there were thirty new hard-core titles, around a quarter of them homemade, hitting the market every day.