The last decade has seen a disruption in the nature of consumer markets on an unprecedented scale. The shifts on the demand side are well known: Emerging nations have displaced mature economies as the engines of growth, attracting Western multinationals in search of millions of new consumers. What has been less appreciated is a quieter (but equally significant) shift on the supply side. The iconic American and European companies that have dominated the economic world order for the past several decades are ceding ground to an increasingly influential set of emerging market “champions.” Adding to the complexity, these high-growth markets are often distinct from one another in terms of the speed of the market, the drivers of demand and consumer preferences, and the regulatory and investment climate.
These developments have created a multipolar world that moves at different speeds and presents a more diverse range of requirements for success than the global marketplace of years past; one with multiple centers of power and influence that are changing the way business is done. Yet many companies are reluctant to move away from their legacy hub-and-spoke model — which evolved to support the old, more homogeneous business environment — to a global enterprise management model that allows for greater nimbleness and adaptability.
How can companies balance local autonomy with the need to achieve global scale and standardization? Does it even make sense to have a headquarters anymore? And where should the talent that runs the company come from? Such questions are critical, because they ultimately determine a company’s long-term viability. The answers, of course, are not universal, but in our work with multinationals, three key themes consistently emerge as enablers of success: a rebalanced organizational structure and operating model, more dispersed decision-rights mechanisms, and an approach to leadership and people management that emphasizes diversity and local talent.
A New Balance of Power
Global companies understand that in a multipolar world, half or more of their revenues and profits are likely to be generated beyond their legacy markets; this is true for seasoned multinationals as well as emerging market companies. Yet they still think about growth markets in terms of their past or current business contribution, rather than their longer-term potential. Top management remains concentrated at headquarters, where executives lack a direct line of sight into and intuitive understanding of these new markets. In addition, many companies go too far in centralizing global functions in the interest of efficiency, resulting in excessive rigidity and standardization.
To overcome these hurdles, companies need to carefully consider where their areas of potential growth lie and recalibrate their organizational balance of power accordingly. For example, Banco Santander SA, a leading global bank headquartered in Madrid, revised its structure to reflect Brazil’s growing importance; the company brought its Brazil operations on par with its European operations. Such structural adjustments, coupled with the changes to decision rights and governance mechanisms discussed below, increase a company’s capacity to be agile and channel the right levels of management attention to (and investment in) critical growth markets. Frequently, it is companies that have their roots in emerging economies that get it right, because they have less inertia and baggage from the past.
Another construct gaining ground, the regional cluster model, is helping companies answer the age-old question of how to reap the benefits of customer proximity as well as economies of scale. The last decade and a half saw a focus on excessive centralization — an attempt to increase efficiencies that failed to address differences in local demand, languages, and cultures. In the regional cluster model, essential, customer-facing activities are maintained locally, supported by a critical mass of expertise housed at the cluster level to prevent duplication and redundancy while avoiding the drawbacks of overcentralization. This model also recognizes that needs and opportunities vary by function. Finance, human resources, and IT are good prospects for substantial centralization. At the other extreme, sales, legal, and communication activities are generally best handled locally. Functions such as marketing, manufacturing, procurement, and research and development fall somewhere in the middle. (See “Twenty Hubs and No HQ,” by C.K. Prahalad and Hrishi Bhattacharyya, s+b, Spring 2008.)