Managing Differences

The Central Challenge of Global Strategy

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.

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

The AAA Triangle

Framework for global integration

AdaptationAggregationArbitrage

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

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

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

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

Setting up mini branches of the company in target countries.

Advertising intensityLocal culture & presenceStrategic levers include:

Decentralization Flexibility Partnership

Adaptation

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

Separating supply chain in diverse countries Labor intensive organizationsOutsourcing to reduce labor costsVertical relationshipsStrategic levers include:

Taxes, regulations Prices, knowledge, resources

Arbitrage

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

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

P&G’s disaster GBU & MDO

Success with Lafley Balance between adaptation and aggregation Decision grid Structures and systems supplemented each other

Adaptation & Aggregation

TCS’s emphasis on global network delivery model Global centers Regional centers Nearshore centers

Potential for significant international revenue gain ABN AMBRO

Aggregation & Arbitrage

Cognizant’s investment in its key market Two-in-a-box structure

Arbitrage & Adaptation

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

Aggregation Economies of scale Acquisition capabilities Economies of scope

Arbitrage Migrating rapidly to low-cost production bases “Pitcher-catcher” concept

GE Healthcare

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

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

Two Alternatives:

• Adaptation – Aggregation• Adaptation – Arbitrage

Action Agenda for PMS

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

Focus on low-cost locations AND reengineering the product

Cost reductions of 20% for first line of Chinese offerings

Adaptation-Arbitrage Strategy

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

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

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

Employ multiple integration mechanisms. Pursuit of more than 1 “A” at a time leaves too much

to chance.

Broader Lessons, Cont’d

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

Know when NOT to integrate. Tightly coupled systems. Domain selection. Keep activities that share a roof apart.

Broader Lessons, Cont’d

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.