"Hub and Spoke" Business Formation

Organizational Hierarchy [a.k.a. Hub & Spoke Network]

Free idea generation, flexibility, experimentation and speed to test and implement new solutions demand less formalization and low standard of organization levels which is only possible in an open cultural environment. Traditionally big corporation tend to be driven through efficiency and control over the operations and decision flows in a top-down scheme with no crack open for new ideas.

However, in recent years with the emergence of information technology, businesses are now driven to a wide cultural shift and new forms of organization are arising. Lead by the technology giants with worldwide operations through the web, where competition is strongly related to innovation and creativity, the big companies must found new ways to run decentralize operations.

Inspired in the IT architecture, "Hub and Spoke" Business model permit companies maintains the strategic control in the center and at same time give some flexibility to the units. The central Business (hub) spread the operations through a network of business units (spoke) which have own resources to innovate locally.

Some authors present a few drawbacks of this model considering that it steel centralized and dependent from the center. Although, this approach is highly flexible and depending from the organization culture it could be more malleable if the spokes could communicate with each other directly and not through the central hub.

With the emergence of the social business some strategist are predicting that companies will be driven to new holistic form of organization which is refereed as Multiple Hub & Spoke or "Dandelion" where each business unit have great flexibility and autonomy to focus operations on the needs of the community.

How to put the strategy in action?

Defining an overall strategy for a company is usually a conceptual activity developed by business owners. Meanwhile, after clearly defining what the strategy is, the big question arises:

How to successfully implement, measure and communicate strategy through the company?

More than just having a strategy, companies must be able to implement and measure performance. Kaplan and Norton developed a holistic management system called BALANCED SCORECARD which is based on four major perspectives:

• Finance
• Clients
• Internal process
• Learning and growth

Since traditionally strategy is measured through past results and intangible assets are not reflected directly in the financial reports, balanced scorecard is a powerful tool to help managers translate strategy in to performance indicators that reflect operations activities in to a dashboard of results. However, it is not an easy process to translate strategy and design the balanced scorecard. The video shows the fundamentals, but in practice business must be well planned and organized so that the potential of the tools can be exploited.

First Mover

first move

In the ages of discovery, 15th century, Portugal builds a vast commercial empire. Reaching the Indian coast by sea and discovering Brazil, Portuguese establish a strong platform of commerce supplying Europe with every kind of expensive and rare goods. Two centuries later, Spanish, Dutch, English and French were dominating the world commerce and the Portuguese empire diminished to a few colonies in Africa, Asia and Brazil.

In the modern business world we have the same strategic issues. Pioneers of the market have open road to occupy the spaces, the resources and establish strong advantages over following competitors. But if the first mover is not able to capitalize on its advantages it leaves space to the early and later followers.

First mover can capitalize advantages over:

• Brand Loyalty and Technological Leadership
• Preemption of Scarce Assets
• Exploiting Buyer Switching Cost
• Reaping Increasing Returns Advantages

Although depending on the market forces none of these mechanisms could be sufficient to sustain strong leadership over second and late movers. However if the first-mover advantage is based on R&D and the firm is innovative enough to assimilate market changes and customer requirements, the leadership can be maintain through sustainable cost, higher margins and brand loyalty. Example: INTEL Microprocessor over AMD and CYRIX.

In the other hand, being first in the market could be fallacious. The first mover assumes the risk of "breaking new ground", uncertainty, higher costs and usually must develop new suppliers and distribution channels. Later mover's are in a best position to understand customer's needs, learn and assimilate first mover's investment avoiding mistakes and exploiting incumbent inertia, adopt technology, introduce new production system and become more efficient.

Yet an optimal timing of entry is a strategic movement that depends of many complex factors related to market i.e. customers preferences, technology performance and cycle, enabling technologies, complementarity goods, industry characteristics, firm capacities and resources etc.

One good example about a late entrant that took strategic advantage from first and second mover was the introduction of the iPhone by Apple. With fast cycles of development and after launching successful products such as iPod and iTunes, which intensify a remarkable consumer experience, Apple enters in the smartphone industry with a refined product that changes the competition forces. Selling more than 1 million units in the first 74 days evidences the success of the strategy.

sources:
Wikipedia
Strategic Management of Technological Innovation, third edition. 2001