3.1 Ghemawat’s “AAA”
Global Strategy Framework
Ghemawat so-called AAA framework offers three generic approaches
to global value creation. Adaptation strategies seek to increase
revenues and market share by tailoring one or more components of a company’s
business model to suit local requirements or preferences. Aggregation strategies
focus on achieving economies of scale or scope by creating regional or global
efficiencies; they typically involve standardizing a significant portion of the
value proposition and grouping together development and production
processes. Arbitrage is about exploiting economic or other
differences between national or regional markets, usually by locating separate
parts of the supply chain in different places.
Adaptation
Adaptation—creating global value by changing one or more
elements of a company’s offer to meet local requirements or preferences—is
probably the most widely used global strategy. The reason for this will be
readily apparent: some degree of adaptation is essential or unavoidable for
virtually all products in all parts of the world. The taste of Coca-Cola in
Europe is different from that in the United States, reflecting differences in
water quality and the kind and amount of sugar added. The packaging of construction
adhesive in the United States informs customers how many square feet it will
cover; the same package in Europe must do so in square meters. Even commodities
such as cement are not immune: its pricing in different geographies reflects
local energy and transportation costs and what percentage is bought in bulk.
Ghemawat subdivides adaptation strategies into five
categories: variation, focus, externalization, design,
and innovation (Figure 3.1 "AAA
Strategies and Their Variants").
Variation strategies not only involve making changes
in products and services but also making adjustments to policies,
business positioning, and even expectations for success.
The product dimension will be obvious: Whirlpool, for example,
offers smaller washers and dryers in Europe than in the United States,
reflecting the space constraints prevalent in many European homes. The need to
consider adapting policies is less obvious. An example is
Google’s dilemma in China to conform to local censorship rules. Changing a
company’s overall positioning in a country goes well beyond
changing products or even policies. Initially, Coke did little more than “skim
the cream” off big emerging markets such as India and China. To boost volume
and market share, it had to reposition itself to a “lower margin–higher volume”
strategy that involved lowering price points, reducing costs, and expanding
distribution. Changing expectations for, say, the rate of
return on investment in a country, while a company is trying to create a
presence is also a prevalent form of variation.
Figure 3.1 AAA Strategies and Their
Variants
A second type of adaptation strategies uses a focus on
particular products, geographies, vertical stages of
the value chain, or market segments as a way of reducing the
impact of differences across regions. A product focus takes
advantage of the fact that wide differences can exist within broad
product categories in the degree of variation required to compete effectively
in local markets. Ghemawat cites the example of television programs: action
films need far less adaptation than local newscasts. Restriction of geographic scope
can permit a focus on countries where relatively little adaptation of the
domestic value proposition is required. A vertical focus
strategy involves limiting a company’s direct involvement to specific steps in
the supply chain while outsourcing others. Finally, a segment focus
involves targeting a more limited customer base. Rather than adapting a product
or service, a company using this strategy chooses to accept the reality that
without modification, their products will appeal to a smaller market segment or
different distributor network from those in the domestic market. Many luxury
good manufacturers use this approach.
Whereas focus strategies overcome regional differences by
narrowing scope, externalization strategies transfer—through strategic
alliances, franchising, user adaptation, or networking—responsibility
for specific parts of a company’s business model to partner companies to
accommodate local requirements, lower cost, or reduce risk. For example, Eli
Lilly extensively uses strategic alliances abroad for drug
development and testing. McDonald’s growth strategy abroad uses franchising as
well as company-owned stores. And software companies heavily depend on
both user adaptation and networking for the development of
applications for their basic software platforms.
A fourth type of adaptation focuses on design to
reduce the cost of, rather than the need for, variation. Manufacturing costs
can often be achieved by introducing design flexibility so as
to overcome supply differences. Introducing standard production platforms and modularity in
components also helps to reduce cost. A good example of a company focused on
design is Tata Motors, which has successfully introduced a car in India that is
affordable to a significant number of citizens.
A fifth approach to adaptation is innovation, which, given
its crosscutting effects, can be characterized as improving the effectiveness
of adaptation efforts. For instance, IKEA’s flat-pack design, which has reduced
the impact of geographic distance by cutting transportation costs, has helped
that retailer expand into 3 dozen countries.
Minicase: McDonald’s
McAloo Tikki [1]
When Ray Kroc opened his first McDonald’s in Des Plaines,
Illinois, he could hardly have envisioned the golden arches rising 5 decades
later in one of the oldest commercial streets in the world. But McDonald’s
began dreaming of India in 1991, a year after opening its first restaurant in
China. The attraction was obvious: 1.1 billion people, with 300 million
destined for middle-class status.
But how do you sell hamburgers in a land where cows are sacred
and 1 in 5 people are vegetarian? And how do you serve a largely poor consumer
market that stretches from the Himalayas to the shores of the Indian Ocean?
McDonald’s executives in Oak Brook struggled for years with these questions
before finding the road to success.
McDonald’s has made big gains since the debut of its first two
restaurants in India, in Delhi and Mumbai, in October 1996. Since then, the
fast-food chain has grown to more than 160 outlets. The Indian market
represents a small fraction of McDonald’s $24 billion in annual revenues. But
it is not insignificant because the company is increasingly focused on
high-growth markets. “The decision to go in wasn’t complicated,” James Skinner,
McDonald’s chief executive officer, once said. “The complicated part was
deciding what to sell.”
At first, McDonald’s path into India was fraught with missteps.
First, there was the nonbeef burger made with mutton. But the science was off:
mutton is 5% fat (beef is 25% fat), making it rubbery and dry. Then there was
the french fry debacle. McDonald’s started off using potatoes grown in India,
but the local variety had too much water content, making the fries soggy.
Chicken kabob burgers? Sounds like a winner except that they were skewered by
consumers. Salad sandwiches were another flop: Indians prefer cooked foods.
If that was not enough, in May 2001, the company was picketed by
protesters after reports surfaced in the United States that the chain’s fries
were injected with beef extracts to boost flavor—a serious infraction for
vegetarians. McDonald’s executives in India denied the charges, claiming their
fries were different from those sold in America.
But the company persevered, learned, and succeeded. It figured
out what Indians wanted to eat and what they would pay for it. It built, from
scratch, a mammoth supply chain—from farms to factories—in a country where
elephants, goats, and trucks share the same roads. To deal with India’s massive
geography, the company divided the country into two regions: the north and
east, and the south and west. Then it formed 50-50 joint ventures with two
well-connected Indian entrepreneurs: Vikram Bakshi, who made his fortune in
real estate, runs the northern region; and Amit Jatia, an entrepreneur who
comes from a family of successful industrialists, manages the south.
Even though neither had any restaurant experience, this
joint-venture management structure gave the company what it needed: local faces
at the top. The two entrepreneurs also brought money: before the first restaurant
opened, the partners invested $10 million into building a workable supply
chain, establishing distribution centers, procuring refrigerated trucks, and
finding production facilities with adequate hygiene. They also invested $15
million in Vista Processed Foods, a food processing plant outside Mumbai. In
addition, Mr. Jatia, Mr. Bakshi, and 38 staff members spent an entire year in
the Indonesian capital of Jakarta studying how McDonald’s operated in another
Asian country.
Next, the Indian executives embarked on basic-menu research and
development (R&D). After awhile, they hit on a veggie burger with a name
Indians could understand: the McAloo Tikki (an “aloo tikki” is a cheap potato
cake locals buy from roadside vendors).
The lesson in the McDonald’s India case: local input matters.
Today, 70% of the menu is designed to suit Indians: the Paneer Salsa Wrap, the
Chicken Maharaja Mac, the Veg McCurry Pan. The McAloo, by far the best-selling
product, also is being shipped to McDonald’s in the Middle East, where potato
dishes are popular. And in India, it does double duty: it not only appeals to
the masses; it is also a hit with the country’s 200 million vegetarians.
Another lesson learned from the McDonald’s case: vegetarian
items should not come into contact with nonvegetarian products or ingredients.
Walk into any Indian McDonald’s and you will find half of the employees wearing
green aprons and the other half in red. Those in green handle vegetarian
orders. The red-clad ones serve nonvegetarians. It is a separation that extends
throughout the restaurant and its supply chain. Each restaurant’s grills,
refrigerators, and storage areas are designated as “veg” or “non-veg.” At the
Vista Processed Foods plant, at every turn, managers stressed the “non-veg” side
was in one part of the facility, and the “vegetarian only” section was in
another.
Today, after many missteps, one can truly imagine the ghost of
Ray Kroc asking Indians one of the greatest questions of all time—the one that
translates into so many cultures: “You want fries with that?” Yes, Ray, they
do.
Aggregation
Aggregation is about creating economies of
scale or scope as a way of dealing with differences
(see Figure 3.1 "AAA Strategies and Their Variants"). The
objective is to exploit similarities among geographies rather than adapting to
differences but stopping short of complete standardization, which would destroy
concurrent adaptation approaches. The key is to identify ways of introducing
economies of scale and scope into the global business model without
compromising local responsiveness.
Adopting a regional approach to globalizing the
business model—as Toyota has so effectively done—is probably the most widely
used aggregation strategy. As discussed in the previous chapter, regionalization or semiglobalization applies
to many aspects of globalization, from investment and communication patterns to
trade. And even when companies do have a significant presence in more than one
region, competitive interactions are often regionally focused.
Examples of different geographic aggregation
approaches are not hard to find. Xerox centralized its purchasing, first
regionally, later globally, to create a substantial cost advantage. Dutch
electronics giant Philips created a global competitive advantage for its
Norelco shaver product line by centralizing global production in a few
strategically located plants. And the increased use of global (corporate)
branding over product branding is a powerful example of creating economies of
scale and scope. As these examples show, geographic aggregation strategies have
potential application to every major business model component.
Geographic aggregation is not the only avenue for generating
economies of scale or scope. The other, nongeographic dimensions of the CAGE
framework introduced in Chapter 1 "Competing in a Global
World"—cultural, administrative, geographic,
and economic—also lend themselves to aggregation strategies. Major
book publishers, for example, publish their best sellers in but a few
languages, counting on the fact that readers are willing to accept a book in
their second language (cultural aggregation). Pharmaceutical
companies seeking to market new drugs in Europe must satisfy the regulatory
requirements of a few selected countries to qualify for a license to distribute
throughout the EU (administrative aggregation). As for economic aggregation,
the most obvious examples are provided by companies that distinguish between
developed and emerging markets and, at the extreme, focus on just one or the
other.
Minicase: Globalization
at Whirlpool Corporation
The history of globalization at the Whirlpool Corporation—a
leading company in the $100-billion global home-appliance industry—illustrates
the multitude of challenges associated with globalizing a business model.
Whirlpool manufactures appliances across all major categories—including fabric
care, cooking, refrigeration, dishwashing, countertop appliances, garage
organization, and water filtration—and has a market presence in every major
country in the world. It markets some of the world’s most recognized appliance
brands, including Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Bauknecht,
Brastemp, and Consul. Of these, the Whirlpool brand is the world’s top-rated
global appliance brand and ranks among the world’s most valuable brands. In
2008, Whirlpool realized annual sales of approximately $19 billion, had 70,000
employees, and maintained 67 manufacturing and technology research centers
around the world. [2]
In the late 1980s, Whirlpool Corporation set out on a course of
growth that would eventually transform the company into the leading global
manufacturer of major home appliances, with operations based in every region of
the world. At the time, Dave Whitwam, Whirlpool’s chairman and CEO, had
recognized the need to look for growth beyond the mature and highly competitive
U.S. market. Under Mr. Whitwam’s leadership, Whirlpool began a series of
acquisitions that would give the company the scale and resources to participate
in global markets. In the process, Whirlpool would establish new relationships
with millions of customers in countries and cultures far removed from the U.S.
market and the company’s roots in rural Benton Harbor, Michigan.
Whirlpool’s global initiative focused on establishing or
expanding its presence in North America, Latin America, Europe, and Asia. In
1989, Whirlpool acquired the appliance business of Philips Electronics N.V.,
which immediately gave the company a solid European operations base. In the western
hemisphere, Whirlpool expanded its longtime involvement in the Latin America
market and established a presence in Mexico as an appliance joint-venture
partner. By the mid-1990s, Whirlpool had strengthened its position in Latin
America and Europe and was building a solid manufacturing and marketing base in
Asia.
In 2006, Whirlpool acquired Maytag Corporation, resulting in an
aligned organization able to offer more to consumers in the increasingly
competitive global marketplace. The transaction created additional economies of
scale. At the same time, it expanded Whirlpool’s portfolio of innovative,
high-quality branded products and services to consumers.
Executives knew that the company’s new scale, or global
platform, that emerged from the acquisitions offered a significant competitive
advantage, but only if the individual operations and resources were working in
concert with each other. In other words, the challenge is not in buying the
individual businesses—the real challenge is to effectively integrate all the
businesses together in a meaningful way that creates the leverage and
competitive advantage.
Some of the advantages were easily identified. By linking the
regional organizations through Whirlpool’s common systems and global processes,
the company could speed product development, make purchasing increasingly more
efficient and cost-effective, and improve manufacturing utilization through the
use of common platforms and cross-regional exports.
Whirlpool successfully refocused a number of its key functions
to its global approach. Procurement was the first function to go global,
followed by technology and product development. The two functions shared much
in common and have already led to significant savings from efficiencies. More
important, the global focus has helped reduce the number of regional
manufacturing platforms worldwide. The work of these two functions, combined
with the company’s manufacturing footprints in each region, has led to the
development of truly global platforms—products that share common parts and
technologies but offer unique and innovative features and designs that appeal
to regional consumer preferences.
Global branding was next. Today, Whirlpool’s portfolio ranges
from global brands to regional and country-specific brands of appliances. In
North America, key brands include Whirlpool, KitchenAid, Roper by Whirlpool
Corporation, and Estate. Acquired with the company’s 2002 purchase of
Vitromatic S.A., brands Acros and Supermatic are leading names in Mexico’s
domestic market. In addition, Whirlpool is a major supplier for the Sears,
Roebuck and Co. Kenmore brand. In Europe, the company’s key brands are
Whirlpool and Bauknecht. Polar, the latest addition to Europe’s portfolio, is
the leading brand in Poland. In Latin America, the brands include Brastemp and
Consul. Whirlpool’s Latin American operations include Embraco, the world’s
leading compressor manufacturer. In Asia, Whirlpool is the company’s primary
brand and the top-rated refrigerator and washer manufacturer in India.
Arbitrage
A third generic strategy for creating a global advantage
is arbitrage (see Figure 3.1 "AAA
Strategies and Their Variants"). Arbitrage is a way of
exploiting differences, rather than adapting to them or bridging them, and
defines the original global strategy: buy low in one market and sell high in
another. Outsourcing and offshoring are modern day equivalents. Wal-Mart saves billions
of dollars a year by buying goods from China. Less visible but equally
important absolute economies are created by greater differentiation with
customers and partners, improved corporate bargaining power with suppliers or
local authorities, reduced supply chain and other market and nonmarket risks,
and through the local creation and sharing of knowledge.
Since arbitrage focuses on exploiting differences between
regions, the CAGE framework described in Chapter 1 "Competing
in a Global World" is of particular relevance and helps define a
set of substrategies for this generic approach to global value creation.
Favorable effects related to country or place of origin have
long supplied a basis for cultural arbitrage. For example, an
association with French culture has long been an international success factor
for fashion items, perfumes, wines, and foods. Similarly, fast-food products
and drive-through restaurants are mainly associated with U.S. culture. Another
example of cultural arbitrage—real or perceived—is provided by Benihana of
Tokyo, the “Japanese steakhouse.” Although heavily American—the company has
only one outlet in Japan out of more than 100 worldwide—it serves up a
theatrical version of teppanyaki cooking that the company describes as “Japanese”
and “eatertainment.”
Legal, institutional, and political differences between
countries or regions create opportunities
for administrative arbitrage. Ghemawat cites the actions taken by
Rupert Murdoch’s News Corporation in the 1990s. By placing its U.S.
acquisitions into holding companies in the Cayman Islands, the company could
deduct interest payments on the debt used to finance the deals against the
profits generated by its newspaper operations in Britain. Through this and
other similar actions, it successfully lowered its tax liabilities to an
average rate of less than 10%, rather than the statutory 30% to 36% of the
three main countries in which it operated: Britain, the United States, and
Australia. By comparison, major competitors such as Disney were paying close to
the official rates. [3]
With steep drops in transportation and communication costs in
the last 25 years, the scope for geographic arbitrage—the leveraging
of geographic differences—has been diminished but not fully eliminated.
Consider what is happening in medicine, for example. It is quite common today
for doctors in the United States to take X-rays during the day, send them
electronically to radiologists in India for interpretation overnight, and for
the report to be available the next morning in the United States. In fact,
reduced transportation costs sometimes create new opportunities for geographic
arbitrage. Every day, for instance, at the international flower market in
Aalsmeer, the Netherlands, more than 20 million flowers and 2 million plants
are auctioned off and flown to customers in the United States.
As Ghemawat notes, in a sense, all arbitrage strategies that add
value are “economic.” Here, the term economic arbitrage is used
to describe strategies that do not directly exploit cultural, administrative,
or geographic differences. Rather, they are focused on leveraging
differences in the costs of labor and capital, as well as variations in more
industry-specific inputs (such as knowledge) or in the availability of
complementary products. [4]
Exploiting differences in labor costs—through outsourcing and
offshoring—is probably the most common form of economic arbitrage. This
strategy is widely used in labor-intensive (garments) as well as
high-technology (flat-screen TV) industries. Economic arbitrage is not limited
to leveraging differences in labor costs alone, however. Capital cost
differentials can be an equally rich source of opportunity.
Minicase: Indian
Companies Investing in Latin America? To Serve U.S. Customers? [5]
Indian investment in Latin America is relatively small but
growing quickly. Indian firms have invested about $7 billion in the region over
the last decade, according to figures released by the Latin American division
of India’s Ministry of External Affairs in New Delhi. The report projects that
this amount will easily double in the next few years.
As India has become a magnet for foreign investment, Indian
companies themselves are looking abroad for opportunities, motivated by
declining global trade barriers and fierce competition at home. Their current
focus is on Latin America, where hyperinflation and currency devaluation no
longer dominate headlines.
Like China, India is trying to lock up supplies of energy and
minerals to feed its rapidly growing economy. Indian firms have stakes in oil
and natural gas ventures in Colombia, Venezuela, and Cuba. In 2006, Bolivia
signed a deal with New Delhi-based Jindal Steel and Power, Ltd., which plans to
invest $2.3 billion to extract iron ore and to build a steel mill in that South
American nation.
At the same time, Indian information technology companies are
setting up outsourcing facilities to be closer to their customers in the West.
Tata Consultancy Services is the leader, employing 5,000 tech workers in more
than a dozen Latin American countries.
Indian manufacturing firms, accustomed to catering to low-income
consumers at home, are finding Latin America a natural market. Mumbai-based
Tata Motors, Ltd., has formed a joint venture with Italy’s Fiat to produce
small pickup trucks in Argentina. Generic drug makers, such as Dr. Reddy’s, are
offering low-cost alternatives in a region where U.S. and European
multinationals have long dominated.
The Indian government has carefully positioned India as a
partner, rather than a rival out to steal the region’s resources and jobs, a
common worry about China. Mexico has been particularly hard-hit by China’s
rise. The Asian nation’s export of textiles, shoes, electronics, and other
consumer goods has cost Mexico tens of thousands of manufacturing jobs,
displaced it as the second-largest trading partner with the United States, and
flooded its domestic market with imported merchandise. In 2006, Mexico’s trade
deficit with China was a record $22.7 billion, but China has invested less than
$100 million in the country since 1994, according to the Bank of Mexico.
Mexico’s trading relationship with India, albeit small, is much
more balanced. Mexico’s trade deficit with India was just under half a billion
dollars in 2006, and Indian companies have invested $1.6 billion here since
1994—or about 17 times more than China—according to Mexico’s central bank.
Some of that investment is in basic industries and
traditional maquiladora factories making goods for export. For
example, Mexico’s biggest steel plant is owned by ArcelorMittal. Indian
pharmaceutical companies, too, are finding Latin America to be attractive for
expansion. Firms including Ranbaxy Laboratories, Ltd., Aurobindo Pharma, Ltd.,
and Cadila Pharmaceuticals, Ltd., have sales or manufacturing operations in the
region.
[1] Mucha and Scheffler (2007, April 30).
[3] Ghemawat (2007a), chap. 6.
[4] Ghemawat (2007a), chap. 6.
[5] Dickerson (2007, June 9).
3.2 Which “A” Strategy Should a Company Use?
A company’s financial statements can be a useful guide for
signaling which of the “A” strategies will have the greatest potential to
create global value. Firms that heavily rely on branding and that do a lot of
advertising, such as food companies, often need to engage in considerable
adaptation to local markets. Those that do a lot of R&D—think
pharmaceutical firms—may want to aggregate to improve economies of scale, since
many R&D outlays are fixed costs. For firms whose operations are labor
intensive, such as apparel manufacturers, arbitrage will be of particular
concern because labor costs vary greatly from country to country.
Which “A” strategy a company emphasizes also depends on its
globalization history. Companies that start on the path of globalization on the
supply side of their business model, that is, that seek to lower cost or to
access new knowledge, first typically focus on aggregation and arbitrage
approaches to creating global value, whereas companies that start their
globalization history by taking their value propositions to foreign markets are
immediately faced with adaptation challenges. Regardless of their starting
point, most companies will need to consider all “A” strategies at different
points in their global evolution, sequentially or, sometimes, simultaneously.
Nestlé’s globalization path, for example, started with the
company making small, related acquisitions outside its domestic market, and the
company therefore had early exposure to adaptation challenges. For most of
their history, IBM also pursued an adaptation strategy, serving overseas
markets by setting up a mini-IBM in each target country. Every one of these
companies operated a largely local business model that allowed it to adapt to
local differences as necessary. Inevitably, in the 1980s and 1990s,
dissatisfaction with the extent to which country-by-country adaptation
curtailed opportunities to gain international scale economies led to the
overlay of a regional structure on the mini-IBMs. IBM aggregated the countries
into regions in order to improve coordination and thus generate more scale
economies at the regional and global levels. More recently, however, IBM has
also begun to exploit differences across countries (arbitrage). For example, it
has increased its work force in India while reducing its headcount in the
United States.
Procter & Gamble’s (P&G) early history parallels that of
IBM, with the establishment of mini-P&Gs in local markets, but it has
evolved differently. Today, the company’s global business units now sell
through market development organizations that are aggregated up to the regional
level. P&G has successfully evolved into a company that uses all three “A”
strategies in a coordinated manner. It adapts its value proposition to
important markets but ultimately competes—through global branding, R&D, and
sourcing—on the basis of aggregation. Arbitrage, while important—mostly through
outsourcing activities that are invisible to the final consumer—is less
important to P&G’s global competitive advantage because of its relentless
customer focus.
3.3 From A to AA to AAA
Although most companies will focus on just one “A” at any given
time, leading-edge companies—such as General Electric (GE), P&G, IBM, and
Nestlé, to name a few—have embarked on implementing two, or even all three of
the “A”s. Doing so presents special challenges because there are inherent
tensions between all three foci. As a result, the pursuit of “AA” strategies,
or even an “AAA” approach, requires considerable organizational and managerial
flexibility. [1]
Pursuing Adaptation and Aggregation
P&G started out with a focus on adaptation. Attempts to
superimpose aggregation across Europe first proved difficult and, in
particular, led to the installation of a matrix structure throughout the 1980s,
but the matrix proved unwieldy. So, in 1999, the then CEO, Durk Jager,
announced another reorganization whereby global business units (GBUs) retained
ultimate profit responsibility but were complemented by geographic market
development organizations (MDOs) that actually managed the sales force as a
shared resource across GBUs. The result was disastrous. Conflicts arose
everywhere, especially at the key GBU-MDO interfaces. The upshot: Jager
departed after less than a year in office.
Under his successor, A. G. Lafley, P&G has enjoyed much more
success, with an approach that strikes a better balance between adaptation and
aggregation and that makes allowances for differences across general business
units and markets. For example, the pharmaceuticals division, with distinct
distribution channels, has been left out of the MDO structure. Another example:
in emerging markets, where market development challenges are huge, profit
responsibility continues to rest with country managers.
Aggregation and Arbitrage
VIZIO, founded in 2002 with only $600,000 in capital by
entrepreneur William Wang to create high quality, flat panel televisions at
affordable prices, has surpassed established industry giants Sony Corporation
and Samsung Electronics Company to become the top flat-panel high definition
television (HDTV) brand sold in North America. To get there, VIZIO developed a
business model that effectively combines elements of aggregation and arbitrage
strategies. VIZIO’s contract manufacturing model is based on aggressive
procurement sourcing, supply-chain management, economies of scale in
distribution.
While a typical flat-screen television includes thousands of
parts, the bulk of the costs and ultimate performance are a function of two key
components: the panel and the chipset. Together, these two main parts account
for about 94% of the costs. VIZIO’s business model therefore focuses on
optimizing the cost structure for these component parts. The vast majority of
VIZIO’s panels and chipsets are supplied by a handful of partners. Amtran
provides about 80% of VIZIO’s procurement and assembly work, with the remaining
20% performed by other ODMs, including Foxconn and TPV Technology.
One of the cornerstones of VIZIO’s strategy is the decision to
sell through wholesale clubs and discount retailers. Initially, William Wang
was able to leverage his relationships at Costco from his years of selling
computer monitors. VIZIO’s early focus on wholesale stores also fit with the
company’s value position and pricing strategy. By selling through wholesale
clubs and discount stores, VIZIO was able to keeps its prices low. For VIZIO,
there is a two-way benefit: the prices of its TVs are comparatively lower than
those from major manufacturers at electronics stores, and major manufacturers
cannot participate as fully as they would like to at places like Costco.
VIZIO has strong relationships with its retail partners and is
honored to offer them only the most compelling and competitively priced
consumer electronics products. VIZIO products are available at valued partners
including Wal-Mart, Costco, Sam’s Club, BJ’s Wholesale Club, Sears, Dell, and
Target stores nationwide along with authorized online partners. VIZIO has won
numerous awards including a number-one ranking in the Inc. 500
for “Top Companies in Computers and Electronics,” Good Housekeeping’s
“Best Big-Screens,” CNET’s “Top 10 Holiday Gifts,” and PC
World’s “Best Buy,” among others. [2]
Arbitrage and Adaptation
An example of a strategy that simultaneously emphasizes
arbitrage and adaptation is investing heavily in a local presence in a key market
to the point where a company can pass itself off as a “local” firm or
“insider.” A good example is provided by Citibank in China. The company, part
of Citigroup, has had an intermittent presence in China since the beginning of
the 20th century. A little more than 100 years later, in 2007, it was one of
the first foreign banks to incorporate locally in China. The decision to
incorporate locally was motivated by the desire to increase Citibank’s status
as an “insider”; with local incorporation, the Chinese government allowed it to
extend its reach, expand its product offerings, and become more closely engaged
with its local customers in the country.
China’s decision in 2001 to become a member of the World Trade
Organization (WTO) was a major factor in Citibank’s decision to make a greater
commitment to the Chinese market. Prior to China’ joining the WTO, the banking
environment in China was fairly restrictive. Banks such as Citibank could only
give loans to foreign multinationals and their joint-venture partners in local
currency, and money for domestic Chinese companies could only be raised in
offshore markets. These restrictions made it difficult for foreign banks to
gain a foothold in the Chinese business community.
Once China agreed to abide by WTO trading rules, however, banks
such as Citibank had significantly greater opportunities: they would be able to
provide local currency loans to blue-chip Chinese companies and would be free
to raise funds for them in debt and equity markets within China. Other segments
targeted by Citibank included retail credit cards and home mortgages. These
were Citibank’s traditional areas of expertise globally, and a huge potential
demand for these products was apparent.
Significant challenges remained, however. Competing through
organic growth with China’s vast network of low-cost domestic banks would be
slow and difficult. Instead, in the next few years, it forged a number of
strategic alliances designed to give it critical mass in key segments. The
first consisted of taking a 5% stake in China’s ninth-largest bank, SPDB, a
move that allowed Citibank to launch a dual-currency credit card that could be
used to pay in renminbi in China and in foreign currencies
abroad. In the following years, Citibank steadily increased its stake to the
maximum 20% allowed under Chinese law and significantly expanded its product
portfolio.
In June 2007, Citibank joined forces with Sino-U.S. MetLife
Insurance Company, Ltd., to launch an investment unit-linked insurance product.
In July of 2008, the company announced the launch of its first debit card.
Simultaneously, it signed a deal with China’s only national bankcard
association, which allowed Citibank’s debit cardholders to enjoy access to the
association’s vast network in China. The card would provide Chinese customers
with access to over 140,000 ATMs within China and 380,000 ATMs in 45 countries
overseas. Customers could also use their debit cards with over 1 million
merchants within China and in 27 other countries. Today, Citibank is one of the
top foreign banks operating in China, with a diverse range of products, eight
corporate and investment bank branches, and 25 consumer bank outlets. [3]
Developing an AAA Strategy
There are serious constraints on the ability of any one company
to use all three “A”s simultaneously with great effectiveness. Such attempts
stretch a firm’s managerial bandwidth, force a company to operate with multiple
corporate cultures, and can present competitors with opportunities to undercut
a company’s overall competitiveness. Thus, to even contemplate an “AAA”
strategy, a company must be operating in an environment in which the tensions
among adaptation, aggregation, and arbitrage are weak or can be overridden by
large-scale economies or structural advantages, or in which competitors are
otherwise constrained. Ghemawat cites the case of GE Healthcare (GEH). The
diagnostic imaging industry has been growing rapidly and has concentrated
globally in the hands of three large firms, which together command an estimated
75% of revenues in the business worldwide: GEH, with 30%; Siemens Medical
Solutions (SMS), with 25%; and Philips Medical Systems (PMS), with 20%. This
high degree of concentration is probably related to the fact that the industry
ranks in the 90th percentile in terms of R&D intensity.
These statistics suggest that the aggregation-related challenge
of building global scale has proven particularly important in the industry in
recent years. GEH, the largest of the three firms, has consistently been the
most profitable, reflecting its success at aggregation through (a) economies of
scale (e.g., GEH has higher total R&D spending than its competitors, but
its R&D-to-sales ratio is lower), (b) acquisition prowess (GEH has made
nearly 100 acquisitions under Jeffrey Immelt before he became GE’s CEO), and
(c) economies of scope the company strives to integrate its
biochemistry skills with its traditional base of physics and engineering
skills; it finances equipment purchases through GE Capital).
GEH has even more clearly outpaced its competitors through
arbitrage. It has recently become a global product company by rapidly migrating
to low-cost production bases. By 2005, GEH was reportedly more than halfway to
its goals of purchasing 50% of its materials directly from low-cost countries
and locating 60% of its manufacturing in such countries.
In terms of adaptation, GEH has invested heavily in
country-focused marketing organizations. It also has increased customer appeal
with its emphasis on providing services as well as equipment—for example, by
training radiologists and providing consulting advice on postimage processing.
Such customer intimacy obviously has to be tailored by country. And, recently,
GEH has cautiously engaged in some “in China, for China” manufacture of stripped-down,
cheaper equipment, aimed at increasing penetration there.
[1] This discussion draws on Ghemawat (2007b), Chapter 7.
[3] Citibank’s Co-Operative Strategy in China (2009).
3.4 Pitfalls and Lessons in Applying the AAA Framework
There are several factors that companies should consider in
applying the AAA framework. Most companies would be wise to focus on
one or two of the “A”s—while it is possible to make progress on all three
“A”s, especially for a firm that is coming from behind, companies (or, more
often to the point, businesses or divisions) usually have to focus on one or,
at most, two “A”s in trying to build competitive advantage. Companies should
also make sure the new elements of a strategy are a good fit
organizationally. If a strategy does embody substantially new elements,
companies should pay particular attention to how well they work with other
things the organization is doing. IBM has grown its staff in India much faster
than other international competitors (such as Accenture) that have begun to
emphasize India-based arbitrage. But quickly molding this work force into an
efficient organization with high delivery standards and a sense of connection
to the parent company is a critical challenge: failure in this regard might
even be fatal to the arbitrage initiative. Companies should also employ
multiple integration mechanisms. Pursuit of more than one of the “A”s
requires creativity and breadth in thinking about integration mechanisms.
Companies should also think about externalizing integration. Not
all the integration that is required to add value across borders needs to occur
within a single organization. IBM and other firms have shown that some
externalization can be achieved in a number of ways: joint ventures in advanced
semiconductor research, development, and manufacturing; links to, and support
of, Linux and other efforts at open innovation; (some) outsourcing of hardware
to contract manufacturers and services to business partners; IBM’s relationship
with Lenovo in personal computers; and customer relationships governed by
memoranda of understanding rather than detailed contracts. Finally, companies
should know when not to integrate. Some integration is always a
good idea, but that is not to say that more integration is always better.
3.5 Points to Remember
1.
There are three generic strategies for creating value in a
global context: adaptation, aggregation, and arbitrage.
2.
Adaptation strategies
seek to increase revenues and market share by tailoring one or more components
of a company’s business model to suit local requirements or preferences. Aggregation strategies
focus on achieving economies of scale or scope by creating regional or global
efficiencies. These strategies typically involve standardizing a significant
portion of the value proposition and grouping together development and
production processes. Arbitrage is about exploiting economic
or other differences between national or regional markets, usually by locating
separate parts of the supply chain in different places.
3.
Adaptation strategies can be subdivided into five
categories: variation, focus, externalization, design,
and innovation.
4.
Aggregation strategies revolve around generating economies
of scale or scope. The other nongeographic dimensions of the CAGE framework
introduced in Chapter 1 "Competing in a Global World"—cultural, administrative, geographic, and economic—also
lend themselves to aggregation strategies.
5.
Since arbitrage focuses on exploiting differences between
regions, the CAGE framework also defines a set of substrategies for this
generic approach to global value creation.
6.
A company’s financial statements can be a useful guide for
signaling which of the “A” strategies will have the greatest potential to
create global value.
7.
Although most companies will focus on just one “A” at any given
time, leading-edge companies such as GE, P&G, IBM, and Nestlé, to name a
few, have embarked on implementing two, or even all three, of the “A”s.
8.
There are serious constraints on the ability of any one company
to simultaneously use all three “A”s with great effectiveness. Such attempts
stretch a firm’s managerial bandwidth, force a company to operate with multiple
corporate cultures, and can present competitors with opportunities to undercut
a company’s overall competitiveness.
9.
Most companies would be wise to (a) focus on one or two of the
“A”s, (b) make sure the new elements of a strategy are a good fit
organizationally, (c) employ multiple integration mechanisms, (d) think about
externalizing integration, and (e) know when not to integrate.
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