Greg Lindsay's Blog

September 25, 2010  |  permalink

Companies Without Propinquity

The New York Times examines the rising number of multinational executives relocating to Asia, taking special care to mention Cisco’s “Globalization Center East,” its four-year-old de facto second headquarters in Bangalore. The story makes two points especially worth noting: senior executives feel it’s necessary to spend time in the Pacific Rim (lots of time—the CEO of the German chemical company Henkel recently spent six weeks jetting across nine countries and logging more than 100 meetings); and an increasing number of executive functions are beginning to follow manufacturing and services overseas. They’re not necessarily being outsourced, but the term “outsourcing” itself—which implies there is a core to the company in just one country—is becoming obsolete.

The best testimony for both trends is given by Cisco’s chief globalization officer, Wim Elfrink. I met Wim in New Songdo last year for my Fast Company story about instant cities, and he was just as quotable then as he is in the NYT piece. Here are a pair of his quote from the story, contrasted with a quote and a relevant passage from Aerotropolis. From the NYT

“It’s not about costs and cheap labor. It’s about how can we get access to talent, how can we get access to growth and innovations, and how can we get access to new partners,” Wim Elfrink, chief globalization officer at Cisco, said in a telephone interview from Bangalore. “The demographic shifts and the massive process of urbanization here mean the region is going through a tremendous transition – and to be part of that, and to really understand it, you have to be here.”

In other words, there is no substitute for being there, either on a full-time or even part-time business. Even Cisco, which is trying to reinvent its management culture around its TelePresence, still relies of moving batteries of executives around the world by air. In Songdo, I asked Elfrink if he thought TelePresence would really kill the business trip, as some have suggested:

“The volume of travel won’t decrease,” he conceded cheerfully, “but it will become more efficient. My weekly meetings to go over numbers and projects are conducted via telepresence—why should I fly my folks in for that? But if we’re having a strategy meeting, we have to have dinner, go for walks, take breaks and be creative. People say that telepresence is killing travel, but it’s not killing it. It adds and it replaces.”

He makes another observation at the end of the NYT story which is quickly glossed over:

He added, “I think what we’re seeing is the start of a whole new phase of globalization.” After changes in trade, manufacturing, and research and development, “the next phase of globalization will be the decentralization of headquarters functions,” he said.

I make exactly the same point in Aerotropolis, describing it as “companies without propinquity” (a nod to the sociologist Melvin Webber’s 1960s concept of “community without propinquity,” i.e. communities defined by mutual interests rather than geography. Too bad he didn’t live to see Facebook). Here’s how I describe it in the book:

Don’t be fooled by the recession’s pause—if anything, we’re still picking up speed, propelled by the hubs’ centrifugal force and our tireless pursuit of a competitive edge. First, road warriors embodied connectivity, joining companies to customers and the home office to the field office. Then, more and more of us became junior road warriors too, as electronic correspondence goaded us to move. Sensing this shift, companies settled around hubs seeking economies of connectivity to match their economies of scale. The trend is to keep going, flinging ourselves ever further into space, until we scatter completely, forming what Melvin Webber might have called companies without propinquity – maybe the next step in corporate evolution.

Corporations have struggled with how and where to best arrange themselves since Henry Ford built the world’s biggest factory outside Detroit, then changed his mind and started taking it apart again. In 1937, the economist Ronald Coase wrote an essay titled “The Nature of the Firm,” exploring just how big a vertically-integrated one like Ford’s might get. Not much bigger, he argued, because beyond a certain point, the drag of managing huge organizations over long distances would offset any advantages of scale. Size mattered, however, if advances in transportation, communication, and management techniques could shrink these distances and diminish the drag. This is exactly what happened. 

Emboldened by the Jet Age, companies broke themselves into pieces and spread them around searching for comparative advantage. Given enough telephones, flights and mainframe access, they could put their headquarters in one place, their factories in another, their R&D labs in a third, their back-office file cabinets in a fourth, and their call centers in a fifth. Once they added FedEx to the equation and swapped out their mainframes for PCs, factories left for Mexico (then China), call centers for India, and R&D for Beijing. The puzzle keeps rearranging itself, and the pieces keep moving further away. The next thing to go is the notion of having a “headquarters,” and the idea that a global enterprise can and should be run by one person from one place.

It would seem it’s already going.

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Greg Lindsay is a generalist, urbanist, futurist, and speaker. He is a non-resident senior fellow of the Arizona State University Threatcasting Lab, a non-resident senior fellow of MIT’s Future Urban Collectives Lab, and a non-resident senior fellow of the Atlantic Council’s Scowcroft Strategy Initiative. He was the founding chief communications officer of Climate Alpha and remains a senior advisor. Previously, he was an urban tech fellow at Cornell Tech’s Jacobs Institute, where he explored the implications of AI and augmented reality at urban scale.

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