As multinationals increasingly expand into new geographies across EMEA, they are under pressure to get closer to customers and distributors while minimizing the costs associated with a direct local presence in a large number of markets. This is particularly important given the profitability pressures many companies are under in the context of slow global growth and currency volatility.
One way to get around this issue is by setting up sub-regional hubs that manage multiple markets and shorten distances, both physical and organizational, between the business on the ground and the company’s leadership.
How do companies typically pick sub-regional hubs for their business? Approaches differ, but decisions are often made ad hoc, driven by accidental business, the personal skill sets and preferences of expat executives, the lobbying of local partners, and incremental geographic expansion. The resulting structures are often inefficient and lag behind the company’s strategy, instead being a reflection of its past. Companies that follow such approaches could end up building sub-regional clusters comprising Israel, the Nordics, and Spain, or hubbing for Sub-Saharan Africa out of Paris.
This approach is neither efficient nor effective. Profitability pressures in emerging markets will force companies to delay localizing their business in smaller emerging markets, requiring instead stronger distributor relationships that can only be effectively managed from much closer to the ground. As a result, companies should re-assess whether their current hubbing structure supports their medium-term strategic priorities.
Typically, when multinationals look to select a new hub, they consider its geographic location, local labor market, tax and legal environment, etc. and they use these criteria to select one hub over another. However, they are skipping an important step – the assessment of how different hubs align with their long-term strategy. At FSG, we recommend a different approach that takes into account the strategic fit of potential hub options, the nature of a company’s customer relationships and product localization needs, and, finally, the comparative attractiveness of different hub options.
Using FSG’s alternate approach to selecting hubs, multinationals will be able to get a better picture of the benefits that less obvious, more local hubs could bring to their business. As companies are increasingly localizing their hubs, particularly in Sub-Saharan Africa, they should also evaluate options that may have seemed far-removed until not too long ago. As a result, a number of tier-2 and tier-3 hubs are emerging in EMEA. These locations typically offer much more localized coverage than places like Dubai or Istanbul, but they provide critical access for companies that prioritize a particular cluster of markets.