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Published: February 26, 2008

 
 

Twenty Hubs and No HQ

A new form of global organization grounded in “gateway” countries can allow a company to operate profitably around the world.

Illustration by Lars Leetaru

Growth prospects for multinational corporations (MNCs) are expanding enormously. In Asia, Latin America, Africa, and Eastern Europe, there are more than 4 billion new potential customers whose rising incomes and aspirations have created an unprecedented market for all manner of goods and services. They want to own homes, to eat nutritious food, and to have varied entertainment options. They want toothpaste, cell phones, and motorcycles. To cater to these needs, business-to-business enterprises will be called upon to provide chemicals, cement, machine tools, electricity, and much more.

Many corporate leaders recognize this opportunity, but few are developing the capabilities or the management focus that they will need to realize its full potential. They persist in thinking of these new markets as “emerging markets,” separate from their existing customers in the industrialized world. Many companies have not reorganized their operations to serve a fully global economy.

For example, 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.

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.

Through this type of organization, all the countries of the world could be served with only about 20 basic offices, with networks that linked the manufacturing, research and development, and logistics functions. And these companies, rather than acting as if their central management were rooted in their home countries, would also build a global senior management pipeline from their 20 or so hubs, treating all hub executives as equally important to the company’s future. Although no company is yet fully organized this way, there is reason to believe that most successful companies in the future will craft such a gateway–hub structure.

Out from Complexity
Leaders of multinational corporations have heard ad nauseam that entering emerging markets will require them to leave their comfort zone. But the biggest challenge is not unfamiliarity. It’s complexity. For example, there are more than 190 countries around the world. Each has its own history, culture, and regulatory regime. People speak different languages, eat different foods, and observe different religions. There is considerable diversity of occupation, income, social mores, and attitudes among them. And the more clearly this complexity is recognized — the more clearly businesspeople see the need for local understanding as the key to global reach — the more daunting the challenge of entering emerging markets becomes.

 
 
 
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