Academic journal article The McKinsey Quarterly

Balancing Corporate Power: A New Federalist Paper

Academic journal article The McKinsey Quarterly

Balancing Corporate Power: A New Federalist Paper

Article excerpt

How complex modern organizations can achieve unity without uniformity

THE PROSPECT OF applying political principles to management issues makes a great deal of sense, given that organizations today are more and more seen as minisocieties rather than as impersonal systems. But the concept of federalism is particularly appropriate since it offers a well-recognized way to deal with paradoxes of power and control: the need to make things big by keeping them small; to encourage autonomy but within bounds; to combine variety and shared purpose, individuality and partnership, local and global, tribal region and nation state, or nation state and regional bloc. Change a few of the terms and these political issues can be found on the agendas of senior managers in most of the world's large companies.

It is therefore no accident that Percy Barnevik, the CEO of Asea Brown Boveri, has described his sprawling "multidomestic" enterprise of 1,100 separate companies and 210,000 employees as a federation. Nor is it accidental that former CEO John Akers has called IBM's restructuring a move to federalism. Basel-based Ciba-Geigy recently moved from a management pyramid with a matrix designed around businesses, functions, and regions to an organization with 14 separate businesses controlling 94 percent of the company's spending -- a federal organization.

Although they do not always call it federalism, businesses in every country are moving in the same direction: General Electric, Johnson & Johnson, and Coca-Cola in the United States; Grand Metropolitan and British Petroleum in Great Britain; Accor in France; and Honda in Japan. Older global companies, such as Royal Dutch Shell and Unilever, went federal decades ago, pulled that way by the demand for autonomy from their overseas subsidiaries. But they, too, are always flexing their structures and fine-tuning the balance of power because federalism is not a static system.

Neither, however, is federalism just a classy word for restructuring. The thinking behind it, the belief, for instance, that autonomy releases energy; that people have the right to do things in their own way as long as it is in the common interest; that people need to be well-informed, well-intentioned, and well-educated to interpret that common interest; that individuals prefer being led to being managed: these principles reach into the guts of the organization or, more correctly, into its soul -- the way it goes about its business day by day. Federalism properly understood is not so much a political structure or system as it is a way of life.

Coping with paradox

It is, however, the structure that changes first, as organizations twist and turn in their attempts to cope with the paradoxes of modern business. To understand federalism at work, we first need to examine these paradoxes and the ways in which organizations are evolving to deal with them. Then a look at the five key principles of federalism will show how this particular political theory can illuminate these paradoxes and point the way to some practical action.

Every organization is different, so there will be no common or even constant solution to each dilemma. And a federal organization can be particularly exhausting to govern since it relies as much on influence, trust, and empathy as on formal power and explicit controls. But in today's complex world of interrelationships and constant change, the move to federalism is inevitable. And that which is inevitable it is best to understand so that we may profit from it.

Size

The first paradox is that organizations need to be both big and small at the same time, be they corporations or nations. On the one hand, the economies of scale still apply. The discovery and development of new sources of oil and gas require resources that no small niche player could contemplate. Big is essential as well for pharmaceutical companies if they are to finance the massive research programs on which their future depends. …

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