Junk Your Headquarters
You don't need a headquarters -- you need a federation of autonomous hub offices in different regions.
So argue C.K. Prahalad and Hrishikesh Bhattacharyya in their article Twenty Hubs and No HQ in the latest issue of strategy+business (registration required).
Prahalad, a respected business scholar based at the University of Michigan, and Bhattacharyya, a former Unilever executive, argue that even Western multinationals with the right ideas about globalization still get it wrong.
To wit:
one large, well-established MNC has an annual growth rate of 9 percent in developing countries, and only 2 percent in mature, developed-country markets. Already, almost one-third of its revenues and nearly two-fifths of its profits come from emerging markets, and those percentages are increasing every quarter. Relative to other companies' leaders, the top executives of this company are advanced in their thinking; they say they aspire to sell their products around the world. But their actions tell another story. Their center of gravity remains in North America and Europe: That is where three-fourths of the company's assets are located and where 88 of the top 100 senior executives grew up. These executives have lived their lives primarily in developed markets; they socialize largely with people from similar backgrounds; at work, they put individuals who resemble them on the fast track for promotion; and they all share a dominant logic in the way they make decisions. It is no surprise that they think of developed and emerging markets as distinct from one another, and that they have neither a structure nor a strategy to integrate them.
The two argue that the old models of international business are based either on centralized management, which they think is outmoded, or decentralized management that is really just geographic centralization. They ask
What if a company's executives truly took seriously the new middle class emerging in so many countries? How would they organize their companies to provide products and services for those new consumers? They could start with the 20 countries in the world that best serve as gateways to nearby regions. Drawing on capital, talent, and resources from those gateway countries, companies would establish their own corporate hubs in each of them: offices with enough capabilities in marketing, manufacturing, and logistics to maintain a powerful presence in all the markets of that region. Companies would then integrate these hubs into a global network that distinguished their company from its competitors around the world.
The authors call their approach the hub-and-gateway approach, built around the 20 countries that represent 80 percent of economic activity on earth and 70 percent of its population. They say that using a hub strategy for all aspects of regional business will make companies more responsive to the markets, and better able to tailor products for consumers especially.
The argument seems to have potential holes -- will companies really find that a gateway-and-hub model reduces sourcing costs by 20 percent and overhead by two-thirds? What about lack of Western -quality management talent in emerging economies? Can Brazil really make an effective hub for the Spanish-speaking countries around it?
The authors do raise arguments in their favor. They also raise a couple of new ways to make economic decisions that are worth thought. They argue that "purchasing power parity" measures should replace gross domestic product as a measure of economic power, particularly because of the fluctuations in the dollar, which skews GDP estimates. Under such a measure, India, Mexico and Brazil become much richer countries than GDP would make out.
They remind readers of the 'investment multiplier' effect in investing in emerging markets.
To understand the significance, consider an MNC that invests US$1 million in fabrication technology in the U.S., versus the same US$1 million in India. One dollar converts to about 40 rupees (Rs. 40) in India at the exchange rate in December 2007. But it takes only Rs. 9 to buy goods in India that would be worth $1 in the United States. A $1 investment in India is thus the purchasing-power equivalent of (or buys the same amount of production as) about $4.40 in the United States. This index, 4.4 to 1, is the investment multiplier for India. Every developing nation has its own investment multiplier. Even when it isn't noticed, the investment multiplier is operating. That is why it makes far more sense to manufacture products in India for sale in the United States, rather than the other way around.
Both of these points should interest corporate strategists.
The gateway-and-hub model deserves thought -- it might bring clear business benefits. But Western cultural blindness may not be the reason why "no company that we know of has yet taken the concept to its most powerful end, operating most or all functions under a hub structure, and creating a seamless global network to integrate it all together."