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MANAGING DIFFER ENCES
Professor of Global Strategy at IESE Business School
Harvard Business Review, March 2007
• Professor of Global Strategy at IESE Business School, Barcelona, Spain. • B.A. degree in Applied Mathematics from Harvard College • Ph.D. in Business Economics from Harvard University. • Then worked as a consultant at McKinsey & Company London • Join the Harvard Business School (HBS) faculty in 1983. • He spent 25 years on the fulltime faculty at Harvard Business School. • In 1991, he was appointed the youngest full professor in HBS’s history. He joined the IESE faculty in 2006.
In the article Prof. Ghemawat describe that there are two wrong assumption about the Global Strategy’s challenges. In his opinion the biggest challenge is “Managing differences that arises at borders. To solve that he presented his famous concept “AAA-Triangle”. In his AAA model “Adaptation, Aggregation & Arbitrage” , he discussed Adaptation & Aggregation, Aggregation & Arbitrage, Adaptation & Arbitrage & at the last all the AAA at the same time. According to him, managing any AA or AAA strategy is very difficult. So the MNC’s should have a Comprehensive strategy to deal with it. AAA triangle has a framework that provides a basis for considering global strategies which encompasses all three effective responses to the large differences that arise at national borders. Clear thinking about the full range of strategy options should broaden the perceived opportunities, sharpen strategic choices & enhance global performance.
Adjust to local conditions/ relevance
Find commonalities among countries Standardization of product Product divisions/ regional structuresglobal accounts
Remodel firm DNA Become local Country- centric structure / strategies Expensive when covering many countries
gr Ag ati eg
Ad ap ta t
Horizontal relationship for cross border economies of Exploit economics differences between markets scale (prices, resources, knowledge etc), geographic differences (distance, climate etc) Even large Needs willingness and ability to change MNC’s fail here
Needs creative, fearless executives Vertical relationships
Adaptation seeks to
boost revenues & market share by maximizing a firms local relevance.
Aggregation attempts to deliver economies of scale by creating regional or sometime global operations; it involves standardization of product/ Arbitrage service and grouping together the development & production Arbitrage is the exploitation of differences processes. between national/inter-national markets; often by locating separate parts of the supply chain in different places. e.g. Call Centres in India, Factories in China & Retail Shops in Western
Ad ap tat i
on ati eg
From A to AA Combinations
To Manage AA strategies requires considerable organizational & material Innovation. Companies must do more than just allocate resource & monitor national operations from headquarters. They need to deploy a board array of integrative devices ranging from the Hard (i.e. Structure & system) to the Soft (i.e. Style & Socialization). There can be Three Combinations as AAStrategies
Adaptation & Aggregation Aggregation & Arbitrage Arbitrage & Adaptation
Adaptation & Aggregation Proctor & Gamble
Started with a Adaptation strategy Hesitating attempts at Aggregation across Europe Which led to function-by-function installation of Matrix structure throughout 80s but proved unmanageable. In Sept 1999, new CEO D.I. Jager, introduced REORGANIZATION plan (which consist 6 Reconstruction programs, cut workforce by 15,000, which is 13% of the whole workforce) In Which GBUs retained Profit Responsibility but these were accompanied by MDOs that were concerned with Sales. Results were..failure...D.I.Jager left in less than a
Adaptation & Aggregation (Cont)
His Successor CEO, Lafley, has enjoyed success because his approach was a right fit of Adaptation & Aggregation & allows room for differences across general business units & markets. Profit responsibility continue to be vested with Country Managers. Decision Grids are structured… Decisions… how & by whom. GBUs regional Headquarters are collocated with MDOs.
Aggregation & Arbitrage
TCS has targeted a balance between Aggregation & Arbitrage,, to gain the benefits of Aggregation TCS Today without losing its traditional Chairman Arbitrage -based Competitive Ratan Tata Advantage. CEO
S. Randari The Global Network Delivery It built Global Centres…. Serve Large Revenue (FY 08-09) Customers, breadth & depth of Model, which consist $ 6 Billion skills, very high scales & Quality NOPAT Control process $ 1.12 Billion Employees The Regional Centres… Medium 141,162 scales, select Capabilities, and emphasis on addressing language & Website www.tcs.com Cultural Challenges The Nearshore Centres… Small
Aggregation & Arbitrage (2)
This right fit improves TCS’s economics in so many ways It seems to hold potential for International Revenue gains. As TCS signed a five year, Multinational Contract with Dutch Bank ABNAMRO, that generated $ 200 millions. This was the largest contract ever for an Indian Software firm. According to CEO, S.Ramadori, TCS beaten out Indian Competitors including the Intra ABN-AMRO, Because it was the only Indian firm which can arrange several hundreds professional to meet the
Chairman Ratan Tata CEO S. Randari Revenue (FY 08-09) $ 6 Billion NOPAT $ 1.12 Billion Employees 141,162 Website
Arbitrage & Adaptation
Cognizant begun its operations as captive firm of Dun & Bradstreet (US Cognizant Today firm) in 1994.
Chairman In 1996, it become independent Kumar Mahadeva firm. CEO Francisco D’soza Its CEO then & Founder Kumar Revenue (FY 08-09) Mahadeva dealt customer in US, $ 2.817 Billions
while COO then, Lakshami Narayanan mange delivery out of India. Employees
A two-in-a-box structure was Website developed; there were two global www.cognizant.com heads for each project- one in India & one in US- jointly accountable and
Development Centres in India Developing Software Engineer in India
Local presence in US Headquarter in US
Main Challenge For Cognizant
To over come on Poor Coordination between Delivery & Marketing that leads to “Tossing Stuff over the wall”.
The Elusive Tri-fecta
(The Mysterious Ranking of AAA Strategies)
The question is “Is it possible to Implement AAA simultaneously & in which order”. There are hurdles i.e. • The Complexity collides with Bandwidth. of doing so Managerial
• People think that an organization should have only one Culture. • Capable Competitors can force a company to choose which dimension it is going to try to beat them.
Medical Diagnostic Industry of US A Case Study of Elusive Tri-fecta
The Global Medical Diagnosticimaging Industry are in the hands of three firms which hold 75% global share as GE Healthcare (GEH) ………30% Siemens Medical Solutions (SMS)….. 25%
Among these, GEH is Successful because it uses a right fit of AAA.
Philips Medical Systems (PMS) ……..20%
GEH …..& AAA
Economies of Scale Higher R & D spending more than PMS/SMS, Greater Total Sales, Larger Service force (50% of GEH total workforce), low expenses ratios. Acquisition Capabilities GEH is very much efficient in acquiring . It made 100 acquisitions under Jeffery Immelt (CEO GEH then, later on GE CEO) including $ 9.5 Billions Amersham (2004) deal. Economies of Scope GEH integrated its Biochemistry skills, through Amersham, its traditional base of Physics & Engineering skills ; it finances equipment purchases through its sister organization GE- Capital.
Arbitrage 50% raw material & 60% manufacturing in low cost countries. Adaptation Country focused MDO Bundle Offerings Goods + Services Aggregation Pitcher – Catcher concept.
PMS - AAA stretegy development
• Originally adaptation emphasized • Transfer to aggregation
–Less R&D investment –Aquisition
–Outsourcing in low cost country
AAA competitive map
Focus on one A or two of A’s
It is possible to progress on all three A’s, companies usually have to focus on one or two in trying to build Competitive Advantage.
Make sure the new elements of a strategy are a good fit organizationally.
The new elements should be brought in accordance with already present elements of the strategic grid. Otherwise the result will be a big failure.
Progress on more than one of A’s
Broader Lessons (2)
Think about Externalizing Integration
Not all the Integration needs to occur in single organization. IBM see some Externalization is a key part of Global strategy. e.g. i) Joint Ventures in advance Semi-Conductor research. ii) IBM’s relationship with Lenovo in PC’s.
Know what not to Integrate
All the times integration is not good idea. Because 1) Very tightly coupled systems are not flexible enough. 2) Domain selection; Knowing what not to do as
Globalization is not concerned only with just availing of Production Opportunities across the borders. Only 1% of managers think about globalization strategically. The AAA framework provides a basis for considering global strategies that cover all the three effective responses to the large differences that arises at national borders. Clear thinking should broader the perceived opportunities, sharpen strategic choices & enhance global performance.
Q & A…. Its your Turn
We Welcome Questions; but as You know this is Business World, where every Question has Thousand & one Answers. We will try to give The Best.. In Sha Allah.
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