Monday, October 1, 2012

How to be a Truly Global Organization

By Virgil R. Carter

Before the 2008 downturn in the world’s economies, globalization of commerce developed at a faster pace than in any time in history.  With the slowing of our economy, one may wonder whether going global has any positive potential.  However, the experience of global organizations suggests that the global marketplace is still the place to be.  While growth may have slowed in the “developed” countries, growth and expansion is still taking place in China, India, Russia, Brazil and other emerging market countries, according to a recent article in Strategy + Business. 

According to authors C. K. Prahalad and Hrishi Bhattacharyya, the “problem is not globalization, but the way our current institutions are set up to respond to this new demand.  The prevailing corporate operating model does not work well with the structural changes that have taken place in the global economy”.

According to the authors, “most companies are still organized as they were when the market was largely concentrated in the triad of the old industrialized world:  the U.S., Europe and Japan”.  One of the “most prevalent and pernicious of these models” is the one where companies follow a centrally driven operating model, striving to integrate all products and services for economies of scale.  To achieve this, decision-making, intellectual power and innovation are concentrated in the home location.

Alternatively, similar companies who wish to achieve locally relevant distribution systems, strive to decentralize the company and run as loose federations.  This requires responsibilities for branding and product lineups to be shifted and for acceptance of trade-offs in cost structures, reduced economy of scale, more diverse product lines and varying standards of quality and pricing.

Are these the only models for going global?  The authors suggest “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.  The authors propose a “hub 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.

The authors explain their model, saying “A hub strategy enables a company to provide products and services everywhere.  But it will not in itself resolve the trade-offs of globalization…(this requires) 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”.
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