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Managing Differences
The Central Challenge of Global Strategy
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Global Strategy Assumptions
1. Balancing economies of scale and responsiveness to local conditions
2. The more emphasis companies place on scale economies in their worldwide operations, the more global their strategies will be.
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The main goal of any global strategy must be to manage the large differences that arise at borders, whether those borders are defined geographically or otherwise.
Assuming that the principal tension in global strategy is between scale economies and local responsiveness encourages companies to ignore another functional response to the challenge of cross-border integration: arbitrage.
Companies are exploiting differences rather then overcoming them. 2000-2003: 60,000 manufacturing plants built in China. 2005 onward: India accounts for more than half of IT and business process
offshoring.
Global Strategy Assumptions
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The AAA Triangle
Framework for global integration
AdaptationAggregationArbitrage
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Adaptation
Boost revenues and market share by maximizing a firm’s local relevance
Creating local units in each national market that do a pretty good job of carrying out all the steps in the supply chain
The AAA Triangle
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Aggregation
Attempts to deliver economies of scale by creating regional or sometimes global operations
standardizing the product or service offering grouping together the development and production
processes
The AAA Triangle
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Arbitrage
Exploitation of differences between national or regional markets
Locating separate parts of the supply chain in different places, Ex: China, India
The AAA Triangle
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Strategic map for managers aiming for globalization.
1 A or combine 2 A’s
Unlikely to use all 3 A’s at the same time.
Which will create most leverage?
Understanding the AAA Triangle
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Setting up mini branches of the company in target countries.
Advertising intensityLocal culture & presenceStrategic levers include:
Decentralization Flexibility Partnership
Adaptation
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Create regional or global operations R&D driven large economies of scaleHorizontal relationships Be cautious of homogenizationStrategic levers include:
Regions or country groupings Large platform
Aggregation
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Separating supply chain in diverse countries Labor intensive organizationsOutsourcing to reduce labor costsVertical relationshipsStrategic levers include:
Taxes, regulations Prices, knowledge, resources
Arbitrage
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IBM Mini-IBMs in target countries Grouped countries into regions Increased # of employees in India
P&G Started out like IBM Aggregation to beat competitors Consumer goods industry NOT outsourced
IBM vs. Proctor & Gamble
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Two forms of AA strategies Beats competitors in both dimensions at once Manages tension between two A’s better than
competitors
Must do more than allocate and monitorHard and soft integrative devicesStructural and algorithmic strategies
From A to AA
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P&G’s disaster GBU & MDO
Success with Lafley Balance between adaptation and aggregation Decision grid Structures and systems supplemented each other
Adaptation & Aggregation
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TCS’s emphasis on global network delivery model Global centers Regional centers Nearshore centers
Potential for significant international revenue gain ABN AMBRO
Aggregation & Arbitrage
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Cognizant’s investment in its key market Two-in-a-box structure
Arbitrage & Adaptation
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Organization’s Constraints Limited managerial bandwidth “One culture organization” belief Competitors can choose which strategy to beat them
on Effects on external relationships
Tensions between the three A’s must be weak
The Elusive Trifecta
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Aggregation Economies of scale Acquisition capabilities Economies of scope
Arbitrage Migrating rapidly to low-cost production bases “Pitcher-catcher” concept
GE Healthcare
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Adaptation Country-focused marketing organizations Emphasis on services as well as equipment Eliminate limited managerial bandwidth issue
Success also depends on competitor’s weaknesses
GE Healthcare, Cont’d
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Adaptation = Competitive Advantage 1970s tried to move to more Aggregate focus Blocked until 1996
Comprised of six companies through acquisitions over a three year period
Trailing in Arbitrage First manufacturing joint venture in China in
September 2004 First output in 2005 First supplies for output in 2006 Sourcing level of PMS in 2005 compared to GEH in 2001
PMS – Developing a AAA Strategy
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Two Alternatives:
• Adaptation – Aggregation• Adaptation – Arbitrage
Action Agenda for PMS
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Closest to the strategy in place
Local Responsiveness
Give up idea of creating competitive advantage
Imitation from larger rivals’ large scale moves
Adaptation-Aggregation Strategy
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Focus on low-cost locations AND reengineering the product
Cost reductions of 20% for first line of Chinese offerings
Adaptation-Arbitrage Strategy
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Lateral shift to a new area of business Medical devices for home usage First product = a home-use defibrillator
Adaptation into new market
Best Alternative
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Speed up attempts at arbitrage (pitcher-catcher concept)
Geographic variation
Enable at-home device business to use consumer electronics division for resources and capabilities
Future Needs for PMS
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Focus on only 1 or 2 of the “A’s” Easier to gain a competitive advantage. Don’t spread yourself too thin by going after all 3 at
first.
Make sure the new elements of a strategy are a good fit organizationally. IBM: grown their staff in India much faster than other
competitors. They have begun to introduce India-based arbitrage.
Broader Lessons
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Employ multiple integration mechanisms. Pursuit of more than 1 “A” at a time leaves too much
to chance.
Broader Lessons, Cont’d
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Think about externalizing integration. Not all integration has to happen within a single
organization. Joint ventures in advanced semi-conductor research,
development, manufacturing, etc.
Broader Lessons, Cont’d
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Know when NOT to integrate. Tightly coupled systems. Domain selection. Keep activities that share a roof apart.
Broader Lessons, Cont’d
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Globalization rhetoric has been concentrated in markets. Only recently is it turning to production. Offshoring
AAA framework provides a basis for considering global strategies.
Clear thinking enhances performance.
Wrap it up.