The Frontiers of Management. Peter F. Drucker
Saudi Arabia, has had to cut its output by more than 40 percent to prevent a collapse of the cartel price. The other, weaker members, as predicted by the theory, have begun to bootleg petroleum at substantial discounts of as much as 15 percent below the posted price.
In the meantime, as the fourth of the cartel rules predicts, OPEC has lost its dominance of the oil market. “Any cartel undermines the market shares of its members within ten years or so,” Mr. Liefmann concluded in 1905. In 1973, the OPEC countries accounted for almost 60 percent of the oil supply of the industrialized countries. Their share nine years later had fallen to about 45 percent (and by 1985 to a third). As predicted by cartel theory, OPEC is losing market position to newcomers outside it, such as Mexico, the North Sea, and Gabon.
The fifth and final rule is that in the end a cartel permanently impairs the position of its product, unless it cuts prices steadily and systematically, as did the only long-lived monopolists on record, the explosives cartel before World War I and the Bell Telephone System from 1910 through 1970. However, the experience of most past cartels, for example, the European steel cartel between the wars, suggests that for a long time to come, petroleum will lose markets fast when it becomes more expensive but will not regain markets by becoming cheaper.
It would be foolish to dismiss the features that distinguish OPEC from other cartels. The most important is surely geopolitics: Much of the world's petroleum, and particularly so much of the oil with low exploration and production costs, comes from areas of political instability. The developed countries might well decide to maintain costlier but politically safer sources of hydrocarbons; for example, Soviet natural gas for Western Europe or Mexican oil for the U.S. strategic petroleum reserve. But a decision to pay a premium price as political insurance could only speed the decline in consumption and in dependence on petroleum.
One cannot yet rule out what all the energy specialists predict: that the oil market is different, and OPEC will behave differently from other cartels. The test will come with the first sustained economic upturn in the developed countries. We will then know whether petroleum consumption will go up as fast as the economy, or whether, as cartel theory predicts, it will rise much more slowly or perhaps not at all.
(1982)
1986 Note: The test did indeed come with the 1983 upturn in the American economy. And as cartel theory predicted, consumption did not go up as fast as the economy, indeed hardly went up at all. What then delayed the cartel's collapse for two years, until the fall of 1985, was Saudi Arabia's willingness—possible only for a country that has very few mouths to feed—to cut production another 15 percent to below one-quarter of capacity output. But even this did not reverse the downward slide of both oil consumption and oil prices. And when the collapse came—in the fall of 1985—it went faster and further than any earlier major cartel had collapsed.
CHAPTER FOUR
The Changing Multinational
MOST MULTINATIONALS ARE STILL structured and run pretty much the way the American and German inventors of the species designed them, all of 125 years ago. But this design is becoming obsolete.
In the typical multinational there is a parent company with “daughters” in foreign countries. Major decisions—what products (or services) to sell worldwide, capital appropriations, key personnel—are centralized in the parent. Research and development are done exclusively in and by the parent and in its home country. But in manufacturing, marketing, finance, and people management, the daughters have wide autonomy. They are run by nationals of their own country with, at most, one or two home-office “expatriates” in the top group. And their avowed goal is to be “a good citizen of our country.” The ultimate accolade for a multinational has been that a daughter is being seen in its country as “one of us.” “In Stuttgart,” goes the standard boast, “no one even knows that we are an American company. Our CEO there is head of the local Chamber of Commerce this year. Of course he is a German.”
But every one of these design features is becoming inappropriate and, indeed, counterproductive. In the four areas where local autonomy has been the traditional goal, the multinational increasingly has to make systems decisions rather than let each daughter make decisions for itself. Even to be a “good citizen” threatens to become an impediment.
Manufacturing economics is running into head-on conflict with the traditional design. In the typical multinational, the local daughter tries to manufacture as much as possible of the end product it sells. “Ninety percent of whatever goes into the tractor we sell in France is made in France” is a typical statement. But, increasingly, even a market as big as France (even one as big as the United States) is becoming too small for efficient production of everything. Automation in particular calls for centralization across an ever-widening spectrum of products and processes.
The world's most efficient automobile-engine plant, Fiat's fully automated factory in southern Italy, needs, to be fully economical, more than twice the volume Fiat can absorb—a major reason that Fiat has been flirting with Ford-Europe as a potential marriage partner. But many services also increasingly demand specialization and centralization to be truly competitive. “That we are number one in equipment leasing in Europe,” says a U.S. banker, “we owe largely to our having one centralized operation for the entire Continent, whereas each major European bank operates in one country only.”
But the decision to centralize all European manufacturing of one part—compressors, for instance—in one plant in France, however justified by economics, will immediately run afoul of the “good citizen” commitment. It means “taking away jobs” from West Germany, Italy, and Britain and will thus be fought tooth and nail by the German, Italian, and British governments and by the labor unions. It is going to be opposed even more strongly by the managements of the daughters in all these countries. They will see it, with justification, as demoting them from masters in their own house to plant managers.
Similar pressures to go transnational and thus to take decisions away from the local subsidiary are also building up in marketing. Even such large countries as West Germany and France are no longer big enough or distinct enough to be discrete markets for everything. In some products and services the market has indeed become global, with customers' values, preferences, and buying habits the same, regardless of nation or culture. In other products, markets are becoming more segmented—but by life-styles, for instance, rather than by geography. In still others, the successful way to market is to emphasize the foreignness of a product (and sometimes even of a service, as witness the success of the American-style hospital in Britain). Increasingly a marketing decision becomes a systems decision. This is particularly true in respect to service to distributors and customers, which everywhere is becoming crucial.
And when it comes to finance, the “autonomous” subsidiary becomes a menace. The splintering of financial-management decisions is responsible in large measure for the poor performance of the American multinationals in the years of the overvalued dollar, when most of them lost both market standing and profitability. We do know how to minimize the impacts of exchange-rate fluctuations on both sales and profits (see Chapter 5: “Managing Currency Exposure”). Now that fluctuating exchange rates, subject to sudden wide swings and geared primarily to capital movements and to governmental decisions, have come to be the norm, localized financial management has become a prescription for disaster for anyone operating in the international economy. Financial management now requires taking financial operations away from all operating units, including the parent, and running them as systems operations, the way old hands at the game, such as Exxon and IBM, have for many years.
But in today's world economy, capital appropriations also have to be managed as systems decisions. This is the one area of multinational management, by the way, in which the Japanese are well, and dangerously, ahead of the Western-based multinational, precisely because they treat foreign units as branches, not daughters.
In the Japanese multinational, the earnings