The development of economic cooperation among various countries requires reassessment of international corporations’ strategic approaches. In 2007, Ghemawat offered his view on the global strategic management in the article “Managing Differences: The Central Challenge of the Global Strategy” that was published in Harvard Business Review. Ghemawat suggests a new framework for distinguishing the right global strategy and explains the difficulties that companies may face on the way of combining two or more options. This paper summarizes the article, uses Ghemawat’s framework for formulating international strategies for the certain firms (Jollibee, Philips and Matsushita) and gives a critical assessment of his Adaptation-Aggregation-Arbitrage framework, pointing to the limited practical potential of the Ghemawat’s theory.
The theory of Ghemawat offers an innovative approach to formulating the company’s global strategy. The researcher mentions that the standard approach to global management becomes problematic in the modern conditions. The classical financial theory gives two options – either local or global strategic planning. However, Ghemawat notices that a number of companies were unsuccessful in their global attempts due to the misunderstanding of international markets. Alternatively, the researcher offers an innovative approach that allows working out an effective global competitive edge. His framework concentrates on three main types of strategies – aggregation, arbitrage, and adaptation, which create an AAA triangle of the company.
The aggregation strategy implies that a competitive advantage on a global level may be achieved through international standardization. Aggregation allows reaching substantial economy of scale through excessive standardization with an emphasis on horizontal relationships and cross-border displays (global business units, huge regional structures). A key characteristic of aggregation is high research and development expenses. One of the best examples of aggregation is Proctor and Gamble Company. At the very beginning of their penetration into global market, P&G tried to create many small local P&G companies. However, such strategy was unsuccessful. To solve this problem, P&G established a few global business units that coordinated the sales of regional-level market development organizations.
The second possible global strategy offered by Ghemawat is adaptation. The main idea behind adaptation is to maximize revenues through the adjustment to the requirements and trends of the local markets. In particular, adaptation could be managed through opening a number of local units and local offices. The simplest example of adaptation is the creation of a local unit that has a complete cycle of operations within the national market (from a development of product/service to its sales to target customers). Adaptation is characterized by excessive and complex control as every unit has a separate structure and coordination. While national units are all-sufficient divisions, adaptation in a global sense means decentralization, variation in production processes and management approaches, and high local relevance. The technical side of adaptation is marked with high advertisement costs. One of the brightest examples of adaptation is the history of IBM’s international operations till the 1990s. The company opened mini-IBMs in target countries, which operated as complete business units. However, the practice shows that one or another strategy is effective only throughout a certain period. In the 1990s, IBM found adaptation ineffective and utilized aggregation.
The third Ghemawat’s option is an arbitrage. This type of international strategy implies the utilization of distinctions between regional and national markets. A structural feature of such approach is locating different parts of business chain in different places. One of the best examples of arbitrage is outsourcing. Many huge IT-corporations practice outsourcing, placing the development and sales offices in different parts of the globe. Labor costs in India or China are lower than in the US. Thus, a company may reach a substantial economy through placing labor-intensive divisions outside the US. The same practice is used by large technics manufacturers that try to locate labor-intensive production plants in the countries with cheap labor cost (Asian, African countries and the region of Eastern Europe). Arbitrage implies a vertical organizational structure and pure functional divisions. For instance, a company may have production plants in China, customer-service centers in India and retail stores in Western Europe or the US. Every division has a head that is responsible for a certain function (production, customer support, sales). Ghemawat suggests a hint for managers who seek for an effective international strategy. High percentage of labor costs in firm’s expenses points to the importance of arbitrage in a company’s strategy. A bright example of arbitrage could be seen in IBM’s initiative in hiring more workers in India and taking advantage of wage differences in various countries. To illustrate the changes, we may look at a number of Indian employees at IBM: in 2004, IBM employed only 9000 Indian workers whereas in 2006 the number of Indian employees raised in almost five times to 43000.
The core idea of an AAA-framework is that global market changes require a vast view on a firm’s international strategy. It is not enough to concentrate on global attempts. Company’s management should effectively maneuver among the three A’s – adaptation, aggregation and arbitrage, choosing the right option for a particular moment. Ghemawat suggests that a company can benefit from using two options; however, it is a task of wise managers to consolidate the advantages of two or more global strategies.
Ghemawat’s framework allows assessing international attempts of some global players. The further analysis will include the Philippine-based fast-food chain Jollibee and two electronic manufacturing companies that compete with each other on a global level – Philips and Matsushita. The assessment includes the analysis of three companies covered in the course cases. According to the memo Jollibee Foods Corporation, Jollibee managed to beat its key-competitor McDonalds at Philippine market with a total share of 32 percent compared to McDonalds’ 27 percent. The success of the company is largely attributed to its philosophy, effective marketing through the recognition of the brand under its “Five F’s” strategy, and a distinct taste. At the same time, the company was able to offer competitive prices and cover a niche of low-to-average income families. However, Jollibee’s success at the Philippines market was not a case for Hon Cong. The company faced a number of difficulties in penetrating the Chinese market. Initial positioning as a Philippine-based company with native staff created substantial problems in interacting with Chinese customers. Jollibee lacked additional resources – Chinese native staff, who could serve local customers. The company’s idea was to stay Philippine; however, they did not foresee the requirements of the local customers. Using Ghemawat’s framework, one may assume that Jollibee should switch to the adaptation strategy. Thus, they should adapt their menu, style and staff to the local environment.
The second case that studied in the course analyzes Philips and Matsushita (Philips versus Matsushita). Phillips is a global company with the headquarters in the Netherlands. After the Second World War, Philips dominated in the electronic industry. This domination was mainly achieved through intense research and development direction and a highly centralized organizational structure. However, the rapid changes in the industry proved inefficiency of the highly centralized organizational structure. Such structure did not give possibility to respond quickly to market needs and was a burden for the development. The answer of Philips’ management was the entire restructuring. The company switched from a consumer electronics brand to a company with three key divisions -lightning, healthcare, and consumer lifestyle. Particular “lifestyle company” orientation in combination with high R&D created excellent possibilities for effective global competition. The analysis of Philips global attempts from the Ghemawat’s point of view suggests that the company relied on aggregation. However, when market conditions changed, the company understood the importance of adaptation. In the recent years, extreme competition requires new solutions, though. The company needs to use the benefits of arbitrage and improve profits by cutting labor costs.
The second company of the case is Matsushita. It was a leader in the Japanese electronics market. The company had high R&D expenses, which according to Ghemawat’s framework points to strict adherence to aggregation. However, after the consumer electronics market in Japan collapsed, the company needed to reevaluate its options on a global scope. Matsushita underwent serious structural changes, giving more functions (especially in product development) and freedom to its international divisions. Thus, the company combined aggregation with adaptation. The final spot of Matsushita activity was rebranding and changing its name to Panasonic (the former trade mark for the US and Canadian markets).
In my view, Ghemawat’s framework truly reflects market realities. There are economists who have another point of view on the problem of international business strategies. For instance, Thomas L. Friedman in his book The World Is Flat: A Brief History of the Twenty-First Century offers contradictory views on international strategic thinking. Friedman suggests that globalization erases the cross-border boundaries, and all companies have equal possibilities for the international development. My position is that the framework of Ghemawat is more realistic as international business may have many boundaries, local features as well as many advantages. Even though the development of technology improves communication, every country tries to preserve its traditions, language, style of doing business, and national identity. Therefore, prior to the international development, a company should evaluate the distinguishing market features, possibilities and local trends of the target region. Thus, Ghemawat is correct in his idea that a firm should exploit the benefits of each of three A’s at a certain period, or combine two or more strategies. His idea of the AAA-triangle with percentiles of various types of business expenses (R&D, advertisement or labor costs) is also interesting. However, I suppose that this theory needs additional research and explanations. The AAA-triangle can show a particular momentum of the company’s activity, however, it cannot offer any predictions. At the same time, the problem of most companies is to decide upon the correct global strategy that could lead to positive results. Unfortunately, Ghemawat does not give a recipe for choosing the best strategy in particular circumstances. Thus, I suppose that Ghemawat’s framework is a fresh and promising theoretical framework that needs further research and alteration in order to build an effective practical management model for strategic planning.
To conclude, it is essential to mention that this paper analyzed interesting research of the professor Pankaj Ghemawat on the global strategic management. The researcher offers the concept of three A’s (adaptation, aggregation and arbitrage) that could be used to exploit the benefits of international penetration. Ghemawat’s theory finds solid evidence in practice. The cases of Jollibee, Philips and Matsushita confirm Ghemawat’s point of view. However, my position is that Ghemawat’s framework needs further development in order to become an effective practical tool for managers.