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Leadership & Organisations - BLOG

The Euro Crisis – Failing to Learn from Corporate Contexts

Charles Galunic |

Reading the news these past several months on the Euro crisis may have you believe that the difficulties are the result of leaders navigating in completely unchartered territory. The EU experiment is a great challenge because it is so remarkably unique. This isn’t really true, or at least the part about not having examples to help charter the territory. In fact there are many relevant analogies from business organizations.

The EU challenge is, roughly, a challenge of coordinated action. The collective believes it will be stronger if the decentralized members work in coordination, which basically means obeying common rules, sharing resources, and looking for synergies. But I could have easily replaced the words “EU” with “Multinational Corporation” without any loss of meaning or priority. That is, business and organization students will quickly see important parallels between what the EU has been trying to achieve and the challenges facing many large, diversified companies. These are not new problems. For example, the problem of coordinated action and rabid decentralization is what Lou Gerstner faced when he rescued IBM from near-bankruptcy in the 90’s. IBM’s main resources were held by product and geographic “chieftains,” and so as clients became more global and required global solutions, providing integrated services became difficult (costly and slow). Gerstner’s summary of a lesson learned from the experience is prescient in light of the EU problem (pg 249 of his book “Who says Elephants Can’t Dance?”):

“One of the most surprising (and depressing) things I have learned about large organizations is the extent to which individual parts of an enterprise behave in an unsupportive and competitive way towards other parts of the organization. It is not isolated or aberrant behavior. It exists everywhere—in companies, universities, and certainly in governments. Individuals and departments…jealously protect their prerogatives, their autonomy, and their turf.”

Gerstner’s solution was a decisive, integrated, and consistent plan to pull the pieces together, and his thoughts on the trade-offs of decentralization (which he claims has been oversold by the management media) and centralization are worth reading (see chapter 26). Many companies face the same fundamental challenges. Booz-Allen faced similar issues in the past and instituted their “Vision 2000” plan, along with a new knowledge management system and performance management approach, in order to create more coordination and leverage from their various partners/offices. Coordinated action and leverage is also behind the unifying changes (and rebranding in some cases) in companies like UBS and, more recently, AVIVA and Allianz Global Assistance. I think it’s safe to say that this is quite a common challenge for multinationals.

It’s important to note here that these challenges do not have perfect solutions. They are tough problems, even for large corporations, which are of course not democracies. That is, even top-down, unified command structures like modern corporations face much back-and-forth on these challenges. Nonetheless, there is considerable “institutional” credibility that is brought to bear on these problems in the corporate context, and progress can be made, although this is mostly about finding the right balance between local autonomy and centralization.

The relevance of these experiences to the EU crisis is first in the appreciation of the challenge. The remarkable, if not amazing, thing is that the challenges faced by business organizations in dealing with similar problems have, apparently, been grossly underestimated in the EU context. Roughly put, there has been, by design, overwhelming local autonomy but limited central clout to orchestrate substantial coordinated action in the EU single currency zone. How could policy makers not recognize the problems this would create? Can you imagine Gerstner being asked to integrate IBM but without appropriate authority or legitimacy? EU institutions exist, but they have a sizeable deficit, and not a financial one but one of legitimacy (see the May 26th Briefing by The Economist). Dr. Larry Sidentop, (my former Politics tutor at Oxford), is cited in The Economist briefing as having warned some time ago of the crisis of democracy Europe would face with a single currency, the need for coordinated action, but institutions without proper legitimacy and power. To sum, the EU crisis is turning out to be less about financial deficits and more about institutional ones, at least if we seek longer term solutions and prevention of future problems. And the lessons from corporate experiences are worth examining—there are plenty of them. To be sure, we need to be careful drawing parallels between business organizations and government as they are different in important ways, yet it’s a shame when we fail to appreciate relevant analogies and create realistic structures and solutions.

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