Prahalad, c. k. and h. bhattacharya (2011) how to be a trully global company.unlocked
strategy+businessISSUE 64 AUTUMN 2011How to Be a TrulyGlobal CompanyMany multinational business models are no longer relevant.Skillful companies can integrate three strategies — customization,competencies, and arbitrage —into a better form of organization.BY C.K. PRAHALAD ANDHRISHI BHATTACHARY YAREPRINT 11308
How to Be a Truly Global Company by C.K. P r a ha lad a nd H r ish i Bhat t acha r y ya Many multinational business models are no longer relevant. Skillful companies can integrate features global perspective three strategies — customization, competencies, and arbitrage — into a better form of organization. During the high-growth years between and other emerging markets. The 1 bil- 1992 and 2007, the globalization of com- lion customers of yesterday’s global busi- merce galloped at a faster pace than in any nesses have been joined by 4 billion more. 2 other period in history. Now, These customers reside in aPhoto illustration by Holly Lindem, portrait by Martin Mörck amid the chronic unemploy- much larger geographic area; ment and anti-trade rhetoric of three-quarters of them are new the post-financial-crisis world, to the consumer economy, and some observers wonder whether they need the infrastructure, globalization needs a time-out. products, and services that only However, the experience of global companies provide. multinational companies in the The problem is not globaliza- field suggests the opposite. For tion, but the way our current in- them, globalization isn’t hap- C.K. Prahalad, 1941–2010 stitutions are set up to respond pening rapidly enough. Whereas to this new demand. The pre- GDP growth has stalled in the industrial- vailing corporate operating model does not ized world, consumption demand is still work well with the structural changes that expanding in China, India, Russia, Brazil, have taken place in the global economy.
C.K. Prahalad Hrishikesh (Hrishi) passed away on April 16, 2010. Bhattacharyya He was the Paul and Ruth firstname.lastname@example.org McCracken Distinguished is a management consultant University Professor of and was formerly a senior Corporate Strategy at the vice president at Unilever with University of Michigan’s Ross global responsibility for the School of Business and the health and wellness category. author of The Fortune at the He has also taught at the Bottom of the Pyramid (Wharton University of Michigan’s Ross School Publishing, 2005). This School of Business and at the article, which was in progress London Business School. at the time of his death, is published with the permission of his family. Most companies are still organized as they were egy. This approach leads to suboptimal results in to- when the market was largely concentrated in the triad day’s complex world. of the old industrialized world: the U.S., Europe, and Other false trade-offs are visible in the tensionfeatures managementfeatures global perspective Japan. These structures lead companies to continue many companies experience between their current busi- building their global strategies around the trade-offs ness model and the needs of the emerging markets they and limits of the past — trade-offs and limits that are are entering. They wonder: no longer accurate or relevant. • Whether to serve existing customers in their home One of the most prevalent and pernicious of these countries or new customers in emerging countries. perceived trade-offs is the one between centrally driv- • Whether to meet competitive quality standards en operating models and local responsiveness. In most demanded by consumers in wealthy countries or offer companies, an implicit assumption is at play: If you just the “good enough” features that poorer customers want to gain the full benefits of economies of scale — can afford. and to integrate common values, quality standards, and • Whether to pursue a strategy of premium or dis- brand identity in your company around the world — count pricing. then you must centralize your intellectual power and • How to attract and retain resources and talent, innovation capability at home. You must bring all your which are perceived as draining away from emerging products and services into line everywhere, and accept markets to the industrial world whenever employees are 56 3 that you can’t fully adapt to the diverse needs and de- permitted to migrate. mands of customers in every emerging market. • Whether, in using resources strategically, to fol- Alternatively (according to this assumption), if you low the typical Western orientation (toward reducing want locally relevant distribution systems, with rapidly labor and accumulating capital) or the view from emerg- responding supply chains and the lower costs of emerg- ing markets (where labor is inexpensive, capital is diffi- ing-market management, then you must decentralize cult to accumulate, and therefore it is worth investing in your company and run it as a loose federation. You must building large workforces for growth). move responsibilities for branding and product lineups Corporate leaders expect to have to make stark to the periphery, and accept different trade-offs: more choices as they expand. But the time has come to variable cost structures, fewer economies of scale, more embrace a new business model that encompasses both diverse and incoherent product lines, and more incon- the established advantages of industrial markets and sistent standards of quality. the opportunities of emerging economies. (Also see strategy+business issue 64 Some companies try to use strict cost controls to “Competing for the Global Middle Class,” by Edward manage these trade-offs. They put in place a decentral- Tse, Bill Russo, and Ronald Haddock, s+b, Autumn ized operating model with some central oversight, usu- 2011.) Instead of struggling to apply a Western business ally augmented by outsourcing. But this is a tactical model everywhere, you can adopt a business model move based on expediency, rather than a global strat- that treats decentralization, centralization, current prac-
Instead of struggling to apply a Western business model everywhere, you can adopt a business model that treats decentralization and centralization not as trade-offs, but as complements.tices, and potential disruptions not as trade-offs, but about where to customize, how to build competencies,as complements. and what to arbitrage. With this type of operating mod- In a previous article, “Twenty Hubs and No HQ” el, there is no longer a need to choose between a cen- features title of the article features global perspective(s+b, Spring 2008), we proposed an essential part of tralized and a decentralized structure, between currentthis business model: a global corporate structure with and future customers, or between a strategy groundedno headquarters. Instead of a single center, companies in industrialized economies and one grounded in emerg-would establish core office “hubs” in many or most ing economies.of the 20 gateway countries in the world that house To illustrate these three imperatives, we draw on70 percent of the world’s population and account for the experience of GE Healthcare (customization), Mc-80 percent of its income. These 20 countries include Donald’s (competencies), and the Chinese and Indian10 from the industrialized world: Australia, Canada, mobile telephone industries (arbitrage). It’s important toFrance, Germany, Italy, Japan, the Netherlands, Spain, remember, however, that all these stories involve inte-the United Kingdom, and the United States. The other grating all three elements — a rare feat. Only with the10 are emerging markets: Brazil, China, India, Indone- full operating model can a company gain the benefits ofsia, Mexico, Russia, South Africa, South Korea, Thai- decentralization, centralization, and outsourcing with-land, and Turkey. out making compromises. A hub strategy enables a company to provide prod- • Customization. The key to this imperative is to de- 57 4ucts and services everywhere. But it will not in itself liver products and services in a locally competitive way.resolve the trade-offs of globalization. Companies can That means they must satisfy the needs and wants ofaccomplish this only with a more comprehensive busi- diverse customers, in terms of features, affordability, andness model that (1) customizes their products and ser- cultural affinities. Because needs and wants vary greatlyvices in hubs around the world, (2) unites business units among people at different income levels, this objective isaround a platform of proprietary knowledge and the complex and expensive to reach in any centralized way.building of competencies, and (3) arbitrages their op- That is why companies must leverage the diversity of aerating models to gain cost-effectiveness, productivity, decentralized structure.and efficiency. Is there a simple and coherent way to deliver cus- tomization to customers in 200 countries spread overAn Operating Model without Trade-offs five continents? The answer is yes, through the hub sys-Some companies are already following these three im- tem: Companies customize only in a maximum of 20peratives, pursuing all of them simultaneously. Among gateway countries. With this limited investment, theythose that we have studied in detail are Toyota, Marriott, can serve customers everywhere, on every level of theMcDonald’s, GE Healthcare, and several global cellular income pyramid, from the wealthiest to the poorest.telephone companies. Leaders in these enterprises have These 20 countries have enough scale in themselves totrained themselves and their teams to be very deliberate offer the necessary economies and growth potential.
The menus at McDonald’s restaurants vary widely around the world, while unity remains firmly entrenched where it should be — in branding, technology, and business processes. They are also well equipped with skills: Manufactur- funded, low-tech hospitals and clinics in small towns ers of goods will find the suppliers and employees they and villages. None of these organizations could afford need to meet reliable quality standards in operations, sophisticated, expensive imaging machines. There was afeatures managementfeatures global perspective and they will also find innovation and R&D facilities significant need for customization: Someone needed to already existing there. The logistical and institutional create low-priced machines with basic features that were infrastructure is well developed in most of these gate- easy to use. The devices also needed to be portable, so way countries, integrated into international regulation that medical workers could bring the machine to the and trade. Each gateway country can independently patient, rather than the patient to the machine. perform most necessary business activities; when linked GE Healthcare started a major effort in 2002 in together, they make up a formidable network. China to tackle this problem. The initiative was favored Many companies will settle on fewer than 20 hubs; by a corporate policy put in place a few years earlier: each industry requires a different selection of gateway reorganizing some emerging-market enterprises into countries to meet differing tastes and needs. Reduc- semi-autonomous “local growth teams” with their own ing complexity in this way also dramatically reduces a P&Ls. This meant that GE Healthcare could now cre- wide range of overhead costs for large global companies, ate a local business oriented to China’s particular needs while enabling them to travel the last mile to custom- and advantages, drawing on local talent and combin- ers. For example, by trimming back supervisory layers ing product development, sourcing, manufacturing, 58 5 to only those needed by the gateways, companies can and marketing in one business unit. The price of a cut overhead costs significantly. conventional Western ultrasound machine is between GE Healthcare’s story illustrates how expanding US$100,000 and $350,000. GE’s first portable machine through a few gateway countries enabled it to thrive in for China was launched at a price of only $30,000, many locations. Its primary business is high-end medi- and by 2007 a newer machine was on the market for cal imaging products. In the late 1980s, GE Healthcare $15,000. Sales took off in China and then in a few other started investing in ultrasound machines, designing emerging-market gateway countries. separate devices for use in obstetrics and cardiology. Soon, customization worked in the other direction. Over time, the business became a market leader, with Applications were found for these devices in several rich a portfolio of premium products employing cutting- countries as well, at accident sites and in clinics and edge technologies, sold primarily to big hospitals in rich emergency rooms. Sales rose from zero to more than Western countries. $300 million in five years. In 2009 — as recounted strategy+business issue 64 Very few devices made by GE Healthcare were sold by GE chief executive officer Jeffrey Immelt and inno- in China and India in the 1990s, although the medical vation experts Vijay Govindarajan and Chris Trimble need was enormous and the region represented a huge in the Harvard Business Review in October 2009 — potential market. In these large but poor countries, GE announced that “over the next six years it would the general population relied (and still relies) on poorly spend $3 billion to create at least 100 healthcare innova-
tions that would substantially lower costs, increase ac- of the world, McDonald’s was identified with Americancess, and improve quality.” tastes, and seen as being out of sync with the needs of • Uniting around a platform of competencies. This non-U.S. consumers.initiative means aligning your entire global company The McDonald’s leadership responded by creatingwith a common core purpose, a body of proprietary a new platform on which the company could unite: notworld-class knowledge, and the competencies that dis- standardization, but a common thrust to provide freshtinguish your company from all others. food, healthier menu options, and customized offerings The core purpose must be understood equally in for different cultures. Product offerings were no longerall functions and geographies of the corporation. Every centralized, and the menus at McDonald’s restaurantsindividual should know the strategic principles of the vary widely, while unity remains firmly entrenchedbusiness — which are the same around the world, but where it should be — in branding, technology, and theadapted differently in each locale. For example, providing business processes that gave the company its differen-“everyday low pricing” is the core purpose of Wal-Mart tiation, cost bases, and productivity. The brand logo,Stores Inc. Although that principle remains constant, color schemes, and store layouts are the same aroundthe implementation varies considerably; Walmart in the world. Procurement and distribution systems areIndia is a joint venture wholesale operation, and centrally managed to ensure that deliveries take placeWalmart in Mexico operates restaurants and banks as on time to more than 32,000 individual restaurants.well as superstores. Structured training from a common playbook is given features title of the article features global perspective The core competencies at the heart of this plat- every day to store associates in all locations. The com-form include proprietary technology and intellectual pany’s proprietary knowledge remains centrally and rig-property. These are the unique pieces of knowledge idly controlled.and know-how that distinguish any company — not • Arbitrage. The final imperative involves gainingthe applications or technologies, but the standards and effectiveness and reducing cost by finding less expensiveplatforms of knowledge that the company creates and materials, manufacturing processes, logistics systems,makes its own. They may include manufacturing pro- funds sourcing, or infrastructure. Most companies havecesses, supply chain and logistics systems, customer addressed this tactically, by offshoring back-office workinsight–gathering processes, or distribution and access or moving manufacturing to locations with lower-costsystems. They are made available to all operations, ev- labor. This is generally a defensive or reactive move,erywhere in the world, and are used to customize offer- rather than a well-considered strategy.ings and arbitrage procurement and costs. An arbitrage initiative is much more systemic. The At the McDonald’s Corporation in the mid-2000s, business looks at its production flow and disaggregatedthis type of unity represented a dramatic shift away cost chain as a whole, seeking optimized sourcing, sales 59 6from the rigid hierarchies, brands, financial perfor- conversion, and go-to-market options. The initiative ap-mance metrics, and reporting relationships of its old proaches materials, factory locations, and people as partcentralized model. The restaurant chain had embodied of a single system, taking into account the processes andthe centralization model for many years. Every aspect procedures within the most important hubs, and amongof the system had been standardized around the world: hubs as well.brand identity, product offerings, packaging systems, The history of mobile telephony in China and In-franchise arrangements, and the design of the stores. dia provides a good example of the power of arbitrage.All this had come out of a single manual, and the com- These two countries together have more than 1 billionpany’s rigidity had helped it prosper, because it was seen cell phone users, and the number of new connections inas exporting an image of the American lifestyle. India alone exceeds a staggering 10 million a month. In But standardization began to reach its limits the early 2000s, the groundwork for new networks inaround 2001. There was a distinct shift in consumer China and India was laid by a few farsighted telephonetaste toward healthier, more nutritious foods. In the companies. At that time, landline networks were sparse,U.S., fast-food restaurants in general and McDonald’s and the number of homes with phone lines was a mi-in particular were blamed by many for the emerging nuscule fraction of the total households. The only wayobesity epidemic, especially among American children. to build a profitable phone system was to create “net-Customers started switching to other chains. In the rest work value”: access to enough other people and institu-
tions to make the system feel indispensable. This meant Bringing the Elements Together providing telephone access to millions of prospective Some companies recognize the benefits of customiza- customers who had never used a phone, who lived on $2 tion; they are moving into new geographies through a day, who had no money to buy the phones outright, gateway countries. A growing number of companies and who lacked the bank accounts and credit cards that are uniting around platforms of competencies. And, of would allow them to sign service contracts. course, many companies practice arbitrage. But until The pricing structures reflected these realities. In they join the few pioneers that combine these three ele- India, for example, Reliance Industries Ltd. (a large na- ments, most companies will not get the full payoff of tionwide conglomerate) sold Nokia and Motorola hand- the new operating model. Indeed, the three cases de- sets for as little as $10, lowered call rates to two cents scribed in the previous section are successful precisely per minute for these phones, and sold prepaid cards that because they integrated all three elements. customers could use both to pay for and to ration their For example, GE Healthcare had to drop the pricefeatures managementfeatures global perspective telephone use. It took skillful collaboration among cell of its ultrasound machines by more than 90 percent in phone manufacturers and carriers to accomplish the ar- order to have its products accepted in emerging mar- bitrage needed for them to offer such prices. Manufac- kets. Its solution involved not just customization, but turers such as Nokia, Motorola, and Samsung offered arbitrage: It used an ordinary laptop computer instead their products, product knowledge, and R&D capabil- of proprietary hardware. These machines did not have ity at a reduced cost; carrier companies such as Voda- many of the features of their expensive counterparts, fone, China Mobile, and Airtel invested in cell phone but they could perform such simple tasks as spotting towers and switching equipment with minimal return stomach irregularities or enlarged livers or gallbladders. at first. Then Airtel in India took a hugely innovative This made them critical tools for doctors at rural clin- step. Realizing that its own capital for network expan- ics. The laptop-based design, in turn, drew heavily on sion was constrained, it brought in Ericsson, Siemens, GE’s platform of competencies: specifically, experience Nokia, and IBM as network equipment and IT vendors, with other projects that had shifted from using custom convincing them to forgo their ordinary fee structures. hardware to using standard computers. The new devic- Instead, Airtel paid these companies on the basis of us- es also incorporated breakthrough ideas from scientists 60 7 age and revenue. Airtel thus converted fixed infrastruc- in the GE system with deep knowledge of ultrasound ture costs to variable costs and improved its ability to technology and biomedical engineering. offer low prices to customers. Similarly, the McDonald’s story did not only in- Another form of arbitrage, deploying the most in- volve unity around a platform. The company also saw expensive marketing and distribution channel avail- the power of customization. Today, McDonald’s offers able, was an essential factor in creating a mass mobile rice burgers in Taiwan, vegetarian entrees in India, tor- phone market. Reaching people in remote Chinese or tillas in Mexico, rice cakes in the Philippines, and wine Indian villages was a huge challenge. Little grocery with meals in many European cities. McDonald’s also shops, often housed in temporary structures, were of- extended its already impressive arbitrage capabilities ten the only commercial channels available to consum- through sophisticated sourcing and distribution prac- ers there. These stores sold everyday-use products such tices, tailored to each location’s opportunities. as soap, cigarettes, and matchboxes. Instead of creating The arbitrage in the Chinese and Indian mobile strategy+business issue 64 a new channel of dedicated telephone stores, the phone phone story also depended on the other two elements. companies established partnerships with these outlets; Although the prices were low, the equipment was stan- they stocked and sold the prepaid cell phone cards. This dard quality; networks had to seamlessly integrate with would never have happened if the telcos had followed the world’s telecommunications systems. The compa- their old pricing and distribution models. nies involved, including the vendors such as Siemens,
Motorola, and Ericsson, drew upon their platforms of The company’s collegial culture allows it to pareproprietary knowledge to make it work. Everyone cus- back the expenses of oversight and supervision; every-tomized relentlessly, varying the payment plans, the one naturally pays attention to cost and efficiency. Mar-amounts coded into phone cards, and the services of- riott also demonstrated its facility for arbitrage throughfered to support the different needs and interests of tele- its early adoption of the Internet as a vehicle for makingcom users in each country. and confirming reservations. For another example of the way these three ele- Many CEOs and top managers are still askingments can be deliberately combined, consider the case themselves when the bad times will end. No one has theof Marriott International Inc. Throughout most of its answer, and even in a robust recovery, competition willhistory, the company followed a centrally driven strat- not slacken. A better question is, What can we do nowegy with tight controls over the look and feel of its prop- to establish ourselves in the new global economy? Con-erties. But the company was also willing to experiment. sumer-oriented companies will need to deliver world-For example, in 1984, it was the first hotel chain to offer class quality in their products and services, customizedtimeshare vacation ownership. for purchasers in multiple locales and circumstances, Like McDonald’s, Marriott learned the problems with significant price reductions (affordable to people atof rigorous centralization firsthand. In 2001, when it the lowest income levels). They must also provide theiropened a timeshare in Phuket Beach, Thailand, the ven- customers varying forms of access (owning, renting, orture failed. Gradually, Marriott realized that the reason leasing equipment). This cannot be done when a com- features title of the article features global perspectivehad to do with cultural differences: Asian tourists, espe- pany is striving to balance decentralization and central-cially the Japanese, want to visit multiple places during ization. It can be accomplished only by companies thata single vacation. They typically stay two or three days transcend the old trade-offs and seek operating modelsin one location and then move on. This made them that allow them to serve the largest numbers of peoplevery different from Marriott’s U.S. and European holi- while meeting the highest possible standards. +day travelers, who prefer to stay in one place for a week Reprint No. 11308or more. In 2006, the hotel chain launched a timesharenetwork called the Marriott Vacation Club, Asia Pa-cific. Customers could hop among locations, spendingtheir annual club dues anywhere in the network. Thiscustomization initiative turned a failed project into one Resourcesof the company’s fastest-growing businesses. Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, “How GE Is In initiatives like this, Marriott draws on its central Disrupting Itself,” Harvard Business Review, October 2009: Inside storystrengths, including a devotion to knowledge at starts of the GE Healthcare initiative to overcome “glocalization” and innovate within emerging economies. 61 8with the CEO (and son of the founder) J.W. (“Bill”)Marriott Jr. In his 1997 book, The Spirit to Serve: Mar- Jon R. Katzenbach and Jason A. Santamaria, “Firing up the Front Line,” Harvard Business Review, May–June 1999: On Marriott’s strategy.riott’s Way (with Kathi Ann Brown; HarperBusiness), Paul Leinwand and Cesare Mainardi, The Essential Advantage: How toMarriott wrote, “Our principal product is probably not Win with a Capabilities-Driven Strategy (Harvard Business Review Press,what you think it is. Yes, we’re in the food-and-lodg- 2011): The capabilities system resembles this article’s unity of platform.ing business (among other things). Yes, we ‘sell’ room C.K. Prahalad, “The Innovation Sandbox,” s+b, Autumn 2006, wwwnights, food and beverage, and time-shares. But what .strategy-business.com/article/06306: Why arbitrage does not mean thoughtless substitution, but rather creative low-cost alternatives thatwe’re really selling is our expertise in managing the pro- transform conventional business practice.cesses that make those sales possible.” This approach is C.K. Prahalad and Hrishi Bhattacharyya, “Twenty Hubs and No HQ,”reflected in Marriott’s strong “spirit to serve” philoso- s+b, Spring 2008, www.strategy-business.com/article/08102: Firstphy and its highly centralized recruiting approach for publication of the customization concept, with an operating model forseeking out dependable, ethical, and trustworthy asso- transforming the headquarters–local office relationship.ciates. The company is known in the U.S., for example, Ellen Pruyne and Rosabeth Moss Kanter, “Pathways to Independence: Welfare-to-Work at Marriott International,” Harvard Business Schoolfor its robust efforts to train welfare recipients to make Case Study 9-399-067: More detail about Marriott.a permanent transition into the workforce, and world- For more thought leadership on this topic, see the s+b website at:wide for its extensive profit-sharing practices and hu- www.strategy-business.com/global_perspective.man resources support.