Corporate leaders expect to have to make stark choices as they expand. But the time has come to embrace a new business model that encompasses both the established advantages of industrial markets and the opportunities of emerging economies. (Also see “Competing for the Global Middle Class,” by Edward Tse, Bill Russo, and Ronald Haddock, s+b, Autumn 2011.) Instead of struggling to apply a Western business model everywhere, you can adopt a business model that treats decentralization, centralization, current practices, and potential disruptions not as trade-offs, but as complements.
In a previous article, “Twenty Hubs and No HQ” (s+b, Spring 2008), we proposed an essential part of this business model: a global corporate structure with no headquarters. Instead of a single center, companies would establish core office “hubs” in many or most of the 20 gateway countries in the world that house 70 percent of the world’s population and account for 80 percent of its income. These 20 countries include 10 from the industrialized world: Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, the United Kingdom, and the United States. The other 10 are emerging markets: Brazil, China, India, Indonesia, Mexico, Russia, South Africa, South Korea, Thailand, and Turkey.
A hub strategy enables a company to provide products and services everywhere. But it will not in itself resolve the trade-offs of globalization. Companies can accomplish this only with a more comprehensive business model that (1) customizes their products and services in hubs around the world, (2) unites business units around a platform of proprietary knowledge and the building of competencies, and (3) arbitrages their operating models to gain cost-effectiveness, productivity, and efficiency.
An Operating Model without Trade-offs
Some companies are already following these three imperatives, pursuing all of them simultaneously. Among those that we have studied in detail are Toyota, Marriott, McDonald’s, GE Healthcare, and several global cellular telephone companies. Leaders in these enterprises have trained themselves and their teams to be very deliberate about where to customize, how to build competencies, and what to arbitrage. With this type of operating model, there is no longer a need to choose between a centralized and a decentralized structure, between current and future customers, or between a strategy grounded in industrialized economies and one grounded in emerging economies.
To illustrate these three imperatives, we draw on the experience of GE Healthcare (customization), McDonald’s (competencies), and the Chinese and Indian mobile telephone industries (arbitrage). It’s important to remember, however, that all these stories involve integrating all three elements — a rare feat. Only with the full operating model can a company gain the benefits of decentralization, centralization, and outsourcing without making compromises.
• Customization. The key to this imperative is to deliver products and services in a locally competitive way. That means they must satisfy the needs and wants of diverse customers, in terms of features, affordability, and cultural affinities. Because needs and wants vary greatly among people at different income levels, this objective is complex and expensive to reach in any centralized way. That is why companies must leverage the diversity of a decentralized structure.
Is there a simple and coherent way to deliver customization to customers in 200 countries spread over five continents? The answer is yes, through the hub system: Companies customize only in a maximum of 20 gateway countries. With this limited investment, they can serve customers everywhere, on every level of the income pyramid, from the wealthiest to the poorest. These 20 countries have enough scale in themselves to offer the necessary economies and growth potential. They are also well equipped with skills: Manufacturers of goods will find the suppliers and employees they need to meet reliable quality standards in operations, and they will also find innovation and R&D facilities already existing there. The logistical and institutional infrastructure is well developed in most of these gateway countries, integrated into international regulation and trade. Each gateway country can independently perform most necessary business activities; when linked together, they make up a formidable network.