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Mahvesh-Mahmud Sultan

(Judge Business School, University of Cambridge, UK. 2008)

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25 years of rhetoric focused on

globalization of markets.

Recently interest has been shown inglobalization of production, resources

and intellect.

Why have a global strategy?

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

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What are a firms globalization options?

Firms attempting to venture outside home

turf may have three basic strategic options:x Aggregation

x Adaptation

x Arbitrage

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Latest Research not found in book chaps Links well with External Environment

(Chap 3) Societal Environment

x General Environment affecting all firms

Task Environment

x Immediate industrial environment

Firms attempting to reduce costs andincrease profits often scan the TASKenvironment for leveraging their internalstrengths against external opportunities.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Economies of Scale:

Reduction in the average cost as a firm expands

its plant size or output.x McDonalds can reduce costs of producing fries as

it buys potatoes at a volume discount AND SELLTHEM AMASS.

Economies of Scope:

Reduction in the average cost as the firm

produces larger number of different products.

x P&G uses same marketing experts for differentproducts-using same skill across product lines.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Business Leaders &Academics make themistake of assuming that in order to goglobal, firms:

1. Need to strike the right balance b/w economiesof scale (e.g. standardized product soldeverywhere) and responsiveness to localconditions (e.g. niche marketing).

2.Think that the more the emphasis on scaleeconomies in their worldwide operations, the

more global their strategies will be.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Firms forget to manage differences

across borders; geographic or otherwise.

Firms forget to exploit differences acrossborders (arbitrage).

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Three distinctive types of global strategy:

Adaptation:

x Boost revenues and market share by maximizing firms localrelevance.

x Establish all the steps in the supply chain in the local market

Aggregation:x Deliver economies of scale by creating regional or global

operations; standardizing a product/service and groupingtogether development and production.

Arbitrage:

x Exploitation of differences b/w national or regional

markets by locating separate parts of the supplychain in different places.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Its not possible for a firm to adopt allthree strategic choices though it maymove from one approach to the next oradopt at the most two types at a time.

Also different industries (IT vs. FMCGs)offer different headroom for each of thethree As.

Within industries different firms may followdifferent strategies depending on their ownstrengths.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Firm-type defines what strategy is to be adopted. (Note the affect of strategy on structure and vice-versa)

ADAPTATION Country-centered organization

x Tailored to each countrys requirements

x Telenor (Norwegian/TalkShawk)/Mobilink (Orascom Egyptian)

x Suzuki/Toyota

AGGREGATION GBUs Regional Divisions/Product Divisions

x McDonalds/MENA/ASIA-Pacific

ARBITRAGE Functional/Vertical Organization

Emphasis on supply & demand within and across organizational

boundaries.x Most Call Centers

x Software Industry

x Netsol/Techlogix

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Mini IBMs in each

countryRan all functions

except R&D

ADAPTATION

Aggregated countriesinto regions in order toimprove coordinationreaching scaleeconomies at regionaland global levels

A R GATIONExploited wage

differences byincreasing number ofemployees in Indias

ARBITRAGE

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

Curtailed opportunities to

gain international scale

economies

Curtailed opportunities to

gain international scale

economies

Precludedopportunities to

exploit differences incountries

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P&G (All three/Outsourced)

Tata Consultancy (Software

Export/Arbitrage) Cognizant (Moving from arbitrage to

adaptation).

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

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Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

ADAP=

ADVERTISING/SALES

AGG=

R&D/SALES

ARB=

LABOUR/SALES

Strategic Map

Source: Managing Differences, Ghemawat, P. HBR, March 2007, P. 62

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Ideally a company should follow a

strategy that involves just one A. But mostly successful firms can follow 2

strategies at a time.

So managing the 2 strategies can allowa company to gain strategic advantage

over rivals if:

1. It beats rivals on both dimensions at once

2. Or because it manages the trade-offsbetween the two strategies better

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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1980s-ADAPTATION

P&G started with adaptation- had a matrix structure but it didntsupport the global strategy it wanted to pursue.

1990s-AGGREGATION

P&G decided to reorganize into GBUs (Global Business Units e.g.homecare, pharmaceuticals) who were responsible for making

profits for the firm and were supported by GMDOs (GeographicMarket Development Organizations such as local or regionalsales forces).

2000s-BALANCE B/W ADAPTATION&AGGREGATION

GBUs regional HQs co-located with regional HQs of MDOs.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Tata Consultancy Services (Similar to whatNETSOL is doing)

Focuses on Arbitrage but is balancing out

Aggregation through its Global Network Delivery

Modelx India and China (Arbitrage but where bulk of skill lies)

x Uruguay and Brazil (Medium level scale and selectcapabilities)

x USA for customer comfort

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Cognizant

(Similar to Avaz Networks Pakistan also knownas Enabling Technologies and Techlogix)

Two global leads one in USA and one in Indiafor each project(2 in a box)

On-site presence in the USA.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

DIAGNOSTIC IMAGINGFIRMS

GE, SIEMENS AND PHILIPS

Source: Managing Differences, Ghemawat, P. HBR, March 2007, P. 62

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Corporate strategy- initially very decentralized and

adaptive. Japanese price under-cutting began in the 1970s-

through aggregation.

PMS was in need of a redefined strategy different

from the parent firms. Adaptation was beneficial for parent Philips but

due to the presence of SMS, and GEH, theadaptation advantage was lost.

Though it had adaptation advantages, but thesewere lost on the aggregation disadvantages.

PMS represented a larger part of Philips than SMS

and GEH did in each of their parent pies. Thereforea larger loss at PMS would hurt Philips overall.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

20/23

PMS was an amalgamation of six acquisitions.

Acquisitions were to improve an aging X-ray

technology and it took over 3 years to do this. Due to its disparate parts, it had been slow on the

arbitrage front in failing to move manufacturing tolow-cost areas such as China where ironicallyPhilips claimed to be the largest Western MNC.

GEH and SMS had moved into China at least four

years earlier, nicely securing an arbitrageadvantage overPMS.

What are the obvious strategic alternatives?

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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It shouldnt drop adaptation because italready has a strong-hold on it.

It is somewhat into aggregation andtherefore can follow and Adaptation-Aggregation strategy.

It can also follow an adaptation-

arbitrage strategy. Given that both rival firms may have

gained a great competitive advantagein each of the strategic options; Philipsmight want to diversify.

It is now focusing on at-home devices-other rivals havent tapped into.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Focus on one or two As. New elements of a strategy (external

environment) should be a fit with theorganizations overall stance (internalenvironment).

If 2-As are being pursued structural andother mechanisms may change and

multiple integration may require creativity. Integration may not always be helpful e.g.P&G has clearly delineated GBUs andMDOs.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)

8/7/2019 PaNkaj Ghemawat Strategy Management AAA

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Examples are limited to technology firms(e.g. for arbitrage).

The AAA triangle may be useful but thedefining ratios for each of the strategies

may-be overly simplistic and deceiving. Too much focus on products. What about

service industry?

Too much emphasis on economies of

scale and scopewhat about strategiesbeing pursued on the internet? Scopemay remain relevant scale may not.

Mahvesh-Mahmud Sultan(Judge Business School, University of Cambridge, UK. 2008)