Solved by verified expert:Objectives:Critique a variety of generic strategies that can be used to achieve organizational goals and objectives Assess a company’s corporate culture and how it might affect a proposed strategy Examine the basic types of strategic alliances.Questions: Using the concepts presented in the required readings, identify circumstances that may affect the decision to downsize and withdraw from the country. Why do some companies choose to stay open abroad in spite of diminishing returns? Post should be a minium of 250 words
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Generic Strategies for Global Value Creation
In this chapter, we introduce three generic strategies for creating value in a global context—
adaptation, aggregation, and arbitrage—and a number of variants for each. This chapter draws
substantially on Ghemawat (2007b). This conceptualization was first introduced by Pankaj
Ghemawat in his important book Redefining Global Strategy and, as such, is not new. In the next
chapter, we extend this framework, however, by integrating these generic strategies with the
proposition that global strategy formulation is about changing a company’s business model to create
a global competitive advantage.
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 TikkiMucha and Scheffler (2007, April 30).
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.http://www.whirlpoolcorp.com/about/history.aspx
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 regio …
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