Brace For Change

It was July 1997 when the first seismic shift occurred. At the epicenter Thailand devalued its currency, creating surface ruptures throughout the economies of Southeast Asia. The ground began to quake all around—Indonesia, Malaysia, Hong Kong. Next, teetering financial towers in Japan began to topple, generating a tsunami that would eventually drench the United States. Suddenly, Americans who didn’t know a rupiah from a rupee were awakening to international financial news as the lead story of the day.

Even before the dust cleared in August 1998, Russia responded to mounting pressures by defaulting on its debts, sending shock waves through global capital markets and fissures up Wall Street. More psychologically damaging than fiscally harmful to most U.S. industries, the event nonetheless terrified all who watched. What would happen next? How far would it spread?

As the Asian turmoil spread to Eastern Europe and ricocheted to Latin America, it was bound to jostle the United States as well. Reeling from multiple jolts, the U.S. stock market plummeted. And although it recovered, aftershocks of the crisis were apparent. At press time, corporate earnings are volatile, exports are down, job creation has slowed and organizations are searching for the best ways to respond. Moreover, the financial tremors have created a credit crunch in the United States, so companies are facing greater difficulty obtaining money to finance expansion and new purchases. Economists see this as the greatest threat. It might create a more widespread slowdown and eventual recession.

Every industry is affected differently. You have the task of assessing multiple scenarios and evaluating each one’s impact on your organization. You must create workforce strategies that are flexible enough to handle contingencies brewing in vastly different countries that will affect all aspects of the business: corporate culture, staffing, retention and compensation.

Trace the rumbles to the United States.
According to Merrill Lynch senior economist Gerald D. Cohen, U.S. job growth slowed from an average of 282,000 new jobs per month in 1997 to 218,000 in 1998. October 1998 had 116,000. “We expect the U.S. economy to slow to about 1.5 percent and the unemployment rate to rise to a little over 5 percent,” he says. “The unemployment rise will come from less hiring, not necessarily more firing.” Furthermore, as corporate earnings slow, companies are less apt to raise wages. (This depends on the industry because a labor shortage still exists in many fields.)

“When you look at what’s happening around the U.S. economy, you find very different responses from companies and even different responses from divisions within the same large company. It depends on what they do, where they sell and what they use in their production,” says Martin Regalia, chief economist for the U.S. Chamber of Commerce. “The impact is very… uneven.”

For example, when foreign currencies fall, U.S. goods become more expensive and consumers overseas purchase fewer of them. The manufacturing sector slows, producing shift cancellations, overtime reduction and actual job layoffs at some workplaces. With approximately 30 percent of U.S. manufacturing happening overseas, when Asian and Latin American purchasers don’t have money to buy U.S. goods, the effect is noticeable. Companies such as Goodyear Tire & Rubber Co., RJR (in Russia) and Royal Dutch Shell Oil announced falling demand. The Gillette Co. and Coca Cola Co. continued to gain market share, but because of currency weakness around the world, their actual dollar revenues have dropped over the short-term.

Likewise, many of the financial-services organizations with heavy investments in Asia and Russia experienced huge losses. However, U.S. domestic banks without overseas operations are strong. The same goes for companies that import raw materials from Southeast Asia to sell in the United States, Western Europe, Canada or Mexico—where there’s no recession. In fact, they’re actually prospering from the Asian downturn.

“The global economy cannot be viewed as monolithic,” says David de Wetter, a consultant with New York City-based Towers Perrin. Not only are industries and regions affected differently, but companies also approach their global investments from different perspectives. For example, some organizations view globalization as a way to implement cost-effective methods of producing goods and services. Others seize opportunities for long-term growth, recognizing the local market as a growing consumer base. Still, others see the need for geographic diversification. Each perspective dictates a different HR strategy.

Understand structural flexibility.
Just as new earthquake construction allows buildings to sway with the force so they don’t crumble, the global marketplace dictates the need for new flexible HR approaches. Knee-jerk reactions won’t work. You can’t simply respond by pulling expatriates home or firing local workers to cut down salary rolls. And what happens when the turnaround comes? Can you simply hunker down and wait for the whole thing to pass? Some companies are.

Others are seizing opportunities. Think what it would be like to create an organization with systems that respond to the uncertainty globalization brings—a structure that can shift from sales and marketing efforts to production when a region’s currency falls, avoiding some of the casualties of falling revenue. “The whole notion of structural flexibility is crucial,” says de Wetter.

Structural flexibility gives an organization the strength to absorb shocks and to ride out crises, while behaving in a nimble, responsive way to new possibilities. It requires a paradigm shift. For example, in many firms, it makes sense to change from a country-by-country management structure to a more integrated, product-focused or customer-focused organization. This eliminates duplication in management and administration, and it allows the company to respond with a big-picture perspective.

The Gillette Co., based in Boston, recognizes the need to transcend national borders. Gillette was hit by devaluing currencies, but its structural changes were already in development before the crisis. International since 1905, the company has been working to reorganize its global business into four entities. Originally arranged by country with separate units for all its product lines—Gillette razors and toiletries, Duracell batteries, Oral-B dental care, and Braun appliances—Gillette is consolidating the products into geographic regions, creating a single sales force for each market that will sell all the products in that region.

Gillette planned the reorganization as a step toward becoming truly global. Each geographic region will organize activities so it can be most responsive to local needs, says Michael C. Hawley, president and chief operating officer. For example, while the Asian markets suffered because revenues fell due to currency difficulties, the Russian market also faltered because the distributors couldn’t get the product to market. While these two problems differ considerably, an overall structure that eliminates redundant efforts when possible and consolidates its workforce can respond in a more sure-footed way to events like these.

Looking at Gillette as an example, you can begin to examine your own organization with an eye on flexibility, strength and responsiveness. Understanding your organization’s competitive issues as well as your industry and the regions in which it’s operating is the first giant step. “If you look at it from a globalization perspective, organizations that are structured on a global or product group basis have a better chance of reacting to a crisis,” says Tom Tilghman, senior consultant at Towers Perrin. “Instead of simply focusing on Asia, for example, you can consider [the situation] within the context of the world at large. Recognize that there are certain commonalities among markets that transcend geographic borders. When you do this, you can simply identify a problem in one area and find an opportunity in another.”

For example, one pharmaceutical company was producung and selling products in Mexico before the devaluation of the peso. When Mexico devalued its currency, the first thought was the division would be bankrupt. Because the managers viewed the situation from an opportunistic vantage point, however, they realized the cost of producing goods in Mexico would now be significantly lower. They turned their operations from producing and distributing strictly to the local economy into producing and distributing to the global economy. Rather than be decimated by the shifting activity underfoot, they were able to forge a success.

Similarly, some global companies are looking at opportunities everywhere—even in markets that have been stable and mature for some time. For example, one company had been doing business in Spain for a dozen years. To overcome some of the competitive challenges in other regions, they introduced new products and services in Spain and are now sending some of their people out of the troubled areas into España.

“As part of this new structural flexibility, organizations are trying to become more nimble and are looking to resource people and locate people wherever there is opportunity,” says de Wetter. Develop systems that enable you to examine the situation globally. Consider the skills you need in different regions. Evaluate where can you use cross-border teams, and think about whether technology can aid your structural flexibility.

Build a global corporate culture.
Corporate culture is the bedrock that absorbs some of the impact of quakes that may devastate neighboring structures. Companies that focus on long-term stability and growth are working to fortify global awareness in the organization’s culture.

Lisle, Illinois-based Molex, an electronic manufacturing company, is a good example. The company makes a hefty 10 percent after-tax profit. Located in the Americas (40 percent of its profit comes from this region), Japan, Korea, South Asia and Europe, the company is well situated to withstand economic shock waves. This year, the Americas and European regions did extremely well and the Asian countries had to struggle. In the recent past, Asia was responsible for a monumental portion of the income. What did the company do?

As part of its annual worldwide communications meeting for all employees, the chairman spoke with workers in Southeast Asia to celebrate the advantages of being global. He explained that even though their region was down, the company still made enough money to give salary increases, avoid layoffs and make improvements all over the world.

“We made the point that for many years, [Asia] contributed the lion’s share, and that now it’s Europe and America’s turn,” says Malou Roth, vice president of human resources training and development. “We refurbished the cafeteria in Malaysia and air conditioned the warehouses. We continued to expand and invest in factories and equipment in Asia for new products.”

These speeches delivered a double dose of global wisdom. They acknowledged previous efforts by employees in the region, tying their work to the overall success of the company. They also pointed out in concrete detail the tangible results of a company that’s globally diversified. These results were intentional.

“We really wanted people to understand that we are all connected. The idea that the French are making more money than they had expected directly helps you keep your job.”

The message was especially meaningful this year because the problems have been so terrible in the Asian region. Sometimes a country will have a bad year because a big customer moves, for example. But everyone knows that these current problems are widespread and major. “They all knew about it. They all read about it. They all were feeling it,” she says. “The fact that they were able to still feel that the company is growing as a result of profit made by other parts of Molex is an extremely powerful message.”

Like stocking canned goods for an unpredictable earthquake, organizations should make contingency plans for surviving and growing through a financial crisis such as the current one. Depending on the areas of the world in which your company does business, look at outcomes down the road and determine which scenarios yield the best results. Build a structure that can withstand future shocks without crumbling.