Reinventing the Global Wheel with a Hub Approach


Most multinational companies today spend a lot of time talking about globalization and its impact on their business. But there is a huge gap between talking the talk and walking the walk, and thus far few companies have managed to breach it.


That's the premise of a strategy+business article titled Twenty Hubs and No HQ. In it, authors C.K. Pralahad, a business professor and co-author of "The New Age of Innovation," and Hrishi Bhattacharyya, a consultant and part-time business instructor, suggest companies could essentially serve all of the consumer markets in the world by establishing about 20 global hubs, then creating networks to link their marketing, manufacturing, logistics and research & development functions.


The hub approach is a hybrid of the two most common current approaches: centralization and decentralization. The decentralized model features a single headquarters and a handful of regional offices, with individual country managers running the business in a somewhat autonomous fashion. The usual result: big bureaucracies and too many specialized products. In a centralized model, central HQ uses a standardized approach to manage all of its offices. With this approach, companies tend to miss opportunities to create products geared to a region's needs.


These missed opportunities are becoming costlier all the time, with the rapidly growing appetite for consumer goods and rising incomes in markets like India. The more global a company's business, the better positioned it will be to withstand economic slumps like the one currently being experienced in the U.S.


The hub approach "reduces the tension between global integration and local responsiveness," write the authors. Though it seems as if it would be tricky to determine where to locate hubs, the authors offer a simple formula based on economic and population data. The 20 countries they mention -- 10 from the industrialized world and 10 from emerging markets -- represent about 80 percent of the world's economic activity and 70 percent of its population.


The hub structure can help companies cut sourcing costs by 20 percent and overhead costs by two-thirds, claim the authors. More importantly, it allows them to serve customers at all income levels in every country where they currently operate and to more easily expand into new geographies.


Ultimately, the biggest benefit is a diversified management team, say the authors. More diverse management would go a long way toward minimizing the still-formidable cultural challenges of entering new markets.


I blogged earlier this month about Lenovo, a company that appears to be adopting several key elements of the hub approach. Says the president of its EMEA (Europe Middle East Africa) division:

Headquarters drive the kind of behavior where people wait for a decision before they move, and we do not want that. We call it world-sourcing. It lets us accumulate the right skills at the right cost and makes us more responsive.