By C.K. PRAHALAD and HRISHI BHATTACHARYYA
From Strategy+Business (www.strategy-business.com)
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.
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.
Currently, most companies attempt to "go global" in one of two ways: centralization or decentralization. Those that decentralize configure themselves with a single headquarters, four or five regional offices and separate managers for each country. They let the country managers make most decisions, becoming the locus for all marketing and government relations and for some of the manufacturing in that nation. Often, the country managers tailor products and services to meet their population's needs. This structure tends to produce huge bureaucracies and unnecessarily complex portfolios. Even as these companies overextend themselves in some markets, they restrict themselves in others, marketing only to some customer segments (often just the wealthiest) and writing off the lowest 50 percent of income earners.
Other MNCs centralize. They seek a unified approach to all markets around the world. But centralization is equally problematic. If a large, remote corporation tries to manage all these countries with one approach from headquarters, rather than responding to the specific needs of local markets, the lost opportunities could be immense.
The gateway-hub structure represents a third alternative: a hybrid that reduces the tension between global integration and local responsiveness. Corporate leaders who are based in business unit-style organizations in selected gateway countries have a natural base from which to extend their footprint into nearby markets.
It is relatively clear which countries are the most promising gateways. The International Monetary Fund classifies 31 countries as developed (or industrialized) nations, but just 10 of these countries account for 90 percent of the economic activity and 70 percent of the population of the industrialized world. These countries are the United States, Japan, Germany, the United Kingdom, France, Italy, Spain, Canada, Australia and the Netherlands. With those 10 countries serving as gateways, it is possible to provide products and services to customers in all the other countries of the industrialized world.
Similarly, in the developing world, 10 countries -- China, India, Brazil, Russia, Mexico, South Korea, Indonesia, Turkey, South Africa and Thailand -- represent 3.1 billion people (70 percent of the population and 80 percent of the economic strength of the developing world). These 10 countries have several qualities that make them valuable as gateways to the regions around them.
They have a large current market for goods and services, and a much larger potential market. They are also well equipped as producers of goods, with quality and innovation that can compete with, or surpass, those of Western nations. They have workers available, both at low cost and with a high-level skill base. They can provide global firms with a reasonably well-developed logistical and educational infrastructure: roads, ports, power and schools. They also have an emerging institutional infrastructure (laws and regulations), and a societal willingness to be part of international regulation and trade. Many of these countries are equipped to serve as a base for R&D, manufacturing, and back-office activities. Finally, each gateway country is naturally aligned to its surrounding nations.
Together, the 20 gateway countries -- 10 from the industrialized world and 10 from emerging markets -- account for about 80 percent of the world's economic activity, and 70 percent of its 6.6 billion inhabitants. An MNC could most effectively expand its operations around the world by making it a priority to set up hubs in these gateway nations. The hubs would have authority over most of the managerial elements of business: supply chain management, product development practices, product launches, marketing, branding, acquisitions and recruitment of talent. The leaders of the hubs would then report directly to the office of the CEO, meeting regularly as part of the most senior executive team.
Each hub would take primary responsibility for serving the gateway market, plus other markets in the regional footprint (often five to 10 other countries), all with local logistics expertise and cultural awareness that a faraway corporate staff could not provide. In the non-hub countries, there would be only a front-end organization for customer contact and service. Everything else would be handled through the hubs.
In the aggregate, this gateway approach would allow an MNC to serve customers on every level of the income pyramid, from wealthiest to poorest, in every country where it operates. In addition, in most MNCs, a gateway-hub structure would reduce sourcing costs by 20 percent and corporate overhead costs by two-thirds.
Perhaps the greatest advantage of this structure has to do with the changed role of the center. In a fully realized gateway-hub MNC, the topmost executive committee contains leaders from all the hubs; management is diversified across the key countries of the developed and developing world. For the first time, the people at the top of the global hierarchy are close to where the action is -- they are physically near their customers and markets. It is now far more possible to promote talented individuals all the way up to the CEO's position, no matter which hub they come from. Core corporate platforms for manufacturing, marketing, and R&D now exist around the world, extending the business day to 24 hours without a reliance on outsourced services. This is the modern version of an empire on which the sun never sets.
Some executives considering the gateway-hub structure ask: Can marketing hubs really reach consumers in other nearby nations? Won't they face the same cultural barriers that block global firms? Experience suggests, however, that hub-based marketers are more likely to find the commonalities that transcend those differences.
The second question that skeptical executives raise about the gateway-hub configuration has to do with the risk of changing to this structure. And, to be sure, there are always risks in managing far-flung enterprises, such as the risk of losing access to critical supplies. Indeed, most firms, in making ad hoc decisions to outsource parts of their business processes and manufacturing operations, have already put themselves at risk.
Underlying the gateway-hub structure is a basic management principle for worldwide enterprise: Neither local responsiveness nor global integration should be based on ideology. This represents a new model for global corporations based not on the priorities of home, but on the needs of the marketplace and on locating work wherever it can be conducted most efficiently and managed most profitably.
C.K. Prahalad is the Paul and Ruth McCracken Distinguished University Professor of Corporate Strategy at the University of Michigan's Ross School of Business. He is the co-author, with M.S. Krishnan, of "The New Age of Innovation" (McGraw-Hill, 2008). Hrishikesh (Hrishi) Bhattacharyya is a management consultant and also teaches part-time at the Ross School of Business at the University of Michigan and at the London Business School.