American and Chinese Megafirms Outshine European Counterparts: A Snapshot on Global Corporate Dynamics
by Dr. Annika Steiber
The landscape of global business has undergone a seismic shift in the past few decades, reshaping the balance of corporate power across continents. Two regions have risen to prominence, eclipsing their European counterparts: America and China.
My focus for the last 15 years has been to better understand the unique management model and culture in Silicon Valley and China and compare these with the most common one in Europe. This blog post will delve into the intricacies of a worldwide transformation, examining the factors that have led to the current situation in the corporate world.
The Rise of American and Chinese Corporates
Historically, Europe was a stronghold of global business, boasting several of the world’s largest multinationals. However, recent trends paint a different picture. European firms are now a rare sight in the top 20 global companies (1), with their presence in the top 10 becoming increasingly scarce, see Figure 1.
Figure 1. Top Global Firms by Market Cap (2)
This shift was unimaginable in 1985 when a young Steve Jobs during his visit to Europe, opined on the European approach to entrepreneurship (3). His insights foreshadowed the challenges Europe would face in nurturing new corporate giants.
Figure 2. Cumulative MSCI Index Performance-Gross Returns (USD) (4)
The MSCI index showed in Figure 2, primarily focuses on evaluating a country’s financial and economic performance, particularly in terms of its stock market and investment opportunities. The increase in MSCI ACWI (5), highlights primarily the rapid ascent of China, alongside other Asian-Pacific emerging markets such as South Korea and Taiwan. These countries now rival the economic might of the traditionally dominant North America and Europe. However, the expected diversification of the largest firms towards Asia did not proportionately diminish American corporate giants.
Exploring the Reasons Behind the Shift
In 2000, European companies constituted about 20% of the top 100 global firms by market capitalization. Today, Europe barely hold 8%. (6) In contrast, American firms have not only maintained their dominance but have grown in the same period.
The reasons behind Europe’s lagging performance are multifaceted. While, Europe faces stronger demographic headwinds than the US, it has enjoyed certain economic advantages, such as the adoption of a single currency and the expansion of the EU common market. Nevertheless, these factors have not yet translated into significant growth in top corporate market capitalization relative to GDP growth. (7) A critical factor in America maintaining, and China increasing, its lead, is the countries’ dominance in the digital tech revolution.
A more risk adverse culture, reliance on traditional industries, and challenges in creating new industries could explain European firms struggle to mark their presence in the list of top global companies in market capitalization. As a result, companies, such as Apple, Microsoft, Amazon, Google, Facebook, Alibaba, Tencent, and more are today at the forefront of this shift.
Many European CEOs accept this judgment, hoping that it may have been a single instance of bad luck from which Europe will in time recover. But that's probably a cop out. The Economist argues that Europe's failure to develop competitors in this vast new sector is not a mere accident of timing. Its roots lie a lot deeper, in the European managerial style, as was touched on above. (8)
The evidence points to a need for a fundamental reassessment of Europe’s approach to fostering corporate giants. The continents must embrace more risk, encourage innovation, and adapt to the rapidly changing global economic landscape. The key lies in learning from the past and boldly stepping into the future.
The fact that many European countries (9) made it into the top 10 list of the most innovative countries according to the Global Innovation Index 2023, (10) might not change the fact that the European corporate culture needs to change, as a higher rank in the GII index could mirror things like a higher public investment in R&D, less wide gaps in education and workforce skills, or other factors that are important part of any national innovation system, but not under the direct control of the large corporations.
The Evolution of Global Corporate Dynamics
In 2014, after years of research and studies on the innovative and high growth company, Google, I presented the components of the new management model, originated in Silicon Valley and practiced by Google, a company that has grown almost 5X in market capitalization since then. The result was presented in the book The Google Model: Managing for Continuous Innovation in a Rapidly Changing World. Later, I found that the same model was also practiced by five other top innovators in Silicon Valley, and the result was published in the book The Silicon Valley Model: Management for Entrepreneurship. A notable quality of all Silicon Valley cases was their ability to remain entrepreneurial—i.e., fast-moving, innovative, and adaptable—even while growing to sizes far beyond the startup stage.
In the same year, I was made aware of the fast development in China and decided to investigate the management model of some of the most innovative companies there. Interestingly, the companies appeared to be using their own, enhanced versions of the Silicon Valley Model and in 2018, the result was presented in a follow-up volume Management for the Digital Age: Will China Surpass Silicon Valley?
Key Components of the NEW Management Paradigm
Based on decades of research, six principles could be viewed as key to drive exponential growth and still allow a highly efficient operation. These are:
1. Dynamic Capabilities: Adapting competencies to changing environments
2. Continuous Change: Proactively evolving before issues arise
3. People-Centric Approach: Focusing on individual innovation
4. Ambidextrous organization: Balancing production and improvement with innovation and new high growth businesses
5. Open Organization: Co-creating with external entities
6. Systems Approach: Moving beyond linear methods
These principles commonly necessitate management practice changes. Below a new set of management practices will be exemplified by referring to the Chinese firm, Haier, and its ‘RenDanHeYi’ model. RenDanHeYi is characterized by six key practices:
• Zero Distance to Users: Direct, seamless business-customer connections.
• Networked Organization: Transforming into decentralized, collaborative, and value creating networks of internal businesses.
• Ecosystem Strategy: Collaborating with internal and external parties in dynamic, value driven ecosystems.
• Employees as Entrepreneurs: Encouraging entrepreneurship among all employees.
• Pay-by-User Compensation: Revenue-based employee rewards.
• Non-Linear Management: Focusing on businesses and employees’ self-evolvement for exponential growth. In a non-linear management system, decision-making, communication, and organizational structure are more flexible, dynamic, and adaptable.
The six practices collectively enable a corporation to embody key attributes for exponential growth:
Practice | Principles |
Zero Distance to Users | Establishing direct connections with customers fosters a people-centric and dynamic environment. It ensures immediate feedback and agile response to market needs, driving continuous innovation and growth. |
Networked Organization | This decentralized structure promotes an ambidextrous organization, balancing efficiency in core operations with flexibility in exploring new ventures. It enhances collaboration and idea exchange, vital for systemic growth and adaptability. |
Ecosystem Strategy | By engaging with various internal and external stakeholders, companies become open and adaptive. This strategy leverages diverse perspectives and skills, essential for systemic innovation and addressing complex market demands. |
Employees as Entrepreneurs | Empowering employees to act as entrepreneurs cultivates a people-centric culture that value initiative and creativity. This approach accelerates innovation and personal investment in the company’s success, contributing to dynamic growth. |
Pay-by-User Compensation | Aligning compensation with user revenue incentivizes employees to focus on customer satisfaction and value creation, driving a people-centric and growth-oriented culture. |
Non-Linear Management | Encouraging self-evolvement and flexibility in management breaks conventional hierarchies, fostering a dynamic and systemic environment. This approach allows rapid adaptation to changing markets and innovative problem-solving, essential for exponential growth. |
Conclusions
The analysis of American and Chinese Megafirms outshining European counterparts, as detailed in the text, leads to the following five key managerial implications:
Embrace Dynamic, Agile Management Practices: The success of American and Chinese companies can be attributed to their dynamic capabilities, which involve integrating, developing, and reconfiguring competencies to meet rapidly changing environments. European firms should adopt similar agile management practices, focusing on continuous adaptation and proactive change management.
Foster a Culture of Innovation and Entrepreneurship: The text highlights the entrepreneurial spirit in both Silicon Valley and Chinese companies, which contrasts with the more risk-averse culture in European firms. European companies must cultivate a culture that encourages innovation, entrepreneurship, and calculated risk-taking. This involves transforming traditional management styles to support creativity, flexibility, and experimentation.
Adopt Customer-Centric and Networked Organizational Structures: The success of companies like Haier demonstrates the effectiveness of a customer-centric approach and a networked organizational structure. European firms should aim for zero distance to users, ensuring seamless, direct connections with customers to understand and meet their needs effectively. This could involve restructuring organizations into more decentralized, networked models that promote closer customer engagement and responsiveness.
Empower Employees and Decentralize Decision-Making: The RenDanHeYi model and similar approaches used by successful American and Chinese firms emphasize employee empowerment and decentralization. European firms should consider adopting models that transform employees into intrapreneurs or entrepreneurs, granting them more autonomy, responsibility, and stake in the success of their projects or microenterprises.
Leverage Digital Transformation and Global Leadership: With the digital revolution being a key factor in the rise of American and Chinese corporates, European firms must intensify their digital transformation efforts. This involves not only adopting new technologies but also developing leadership that is adept at navigating digital landscapes, fostering global cultural integration, and building collaborative, innovative ecosystems. Leaders in European firms need to be adaptive, non-hierarchical, and skilled in managing diverse, global teams.
In summary, European firms must fundamentally reassess and revamp their management styles, corporate cultures, and organizational structures, taking cues from the successful practices of American and Chinese Megafirms to remain competitive in the global market.
References:
(4) The index is based on the MSCI Global Investable Market Indexes (GIMI) Methodology —a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations.
(5) MSCI Europe includes 15 developed countries in Europe. MSCI World index includes 23 developed countries worldwide.
(6) https://app.hedgeye.com/insights/101965-trendspotting-whatever-happened-to-all-the-european companies?type=%2C
(7) https://www.economist.com/briefing/2021/06/05/once-a-corporate-heavyweight-europe-is-now-an-also-ran-can-it recover-its-footing
(8) https://app.hedgeye.com/insights/101965-trendspotting-whatever-happened-to-all-the-european companies?type=%2C
(9) Switzerland, Sweden, UK, Finland, Netherlands, Germany, and Denmark. The Global Innovation Index focuses on a country’s ability to foster and sustain innovation. It considers factors such as research and development investments, innovation infrastructure, human capital, business sophistication, and innovation outputs.
(10) https://www.wipo.int/global_innovation_index/en/