Managing Differences

1. Managing Differences The Central Challenge of Global Strategy

2. Global Strategy Assumptions Balancing economies of scale and responsiveness to local conditions The more emphasis companies place on scale economies in their worldwide operations, the more global their strategies will be.

3. Global Strategy Assumptions • 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.

4. The AAA Triangle • Framework for global integration • Adaptation • Aggregation • Arbitrage

5. The AAA Triangle • 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

6. 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

7. 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

8. Understanding 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?

9. Adaptation • Setting up mini branches of the company in target countries. • Advertising intensity • Local culture & presence • Strategic levers include: • Decentralization • Flexibility • Partnership

10. Aggregation • Create regional or global operations • R&D driven  large economies of scale • Horizontal relationships • Be cautious of homogenization • Strategic levers include: • Regions or country groupings • Large platform

11. Arbitrage • Separating supply chain in diverse countries • Labor intensive organizations • Outsourcing to reduce labor costs • Vertical relationships • Strategic levers include: • Taxes, regulations • Prices, knowledge, resources

12. IBM vs. Proctor & Gamble • 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

13. From A to AA • 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 monitor • Hard and soft integrative devices • Structural and algorithmic strategies

14. Adaptation & Aggregation • P&G’s disaster • GBU & MDO • Success with Lafley • Balance between adaptation and aggregation • Decision grid • Structures and systems supplemented each other

15. Aggregation & Arbitrage • TCS’s emphasis on global network delivery model • Global centers • Regional centers • Nearshore centers • Potential for significant international revenue gain • ABN AMBRO

16. Arbitrage & Adaptation • Cognizant’s investment in its key market • Two-in-a-box structure

17. The Elusive Trifecta • 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

18. GE Healthcare • Aggregation • Economies of scale • Acquisition capabilities • Economies of scope • Arbitrage • Migrating rapidly to low-cost production bases • “Pitcher-catcher” concept

19. GE Healthcare, Cont’d • Adaptation • Country-focused marketing organizations • Emphasis on services as well as equipment • Eliminate limited managerial bandwidth issue • Success also depends on competitor’s weaknesses

20. PMS – Developing a AAA Strategy • 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

21. Action Agenda for PMS • Two Alternatives: • Adaptation – Aggregation • Adaptation – Arbitrage

22. Adaptation-Aggregation Strategy Closest to the strategy in place Local Responsiveness Give up idea of creating competitive advantage Imitation from larger rivals’ large scale moves

23. Adaptation-Arbitrage Strategy Focus on low-cost locations AND reengineering the product Cost reductions of 20% for first line of Chinese offerings

24. Best Alternative • Lateral shift to a new area of business • Medical devices for home usage • First product = a home-use defibrillator • Adaptation into new market

25. Future Needs for PMS Speed up attempts at arbitrage (pitcher-catcher concept) Geographic variation Enable at-home device business to use consumer electronics division for resources and capabilities

26. Broader Lessons • 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.

27. Broader Lessons, Cont’d • Employ multiple integration mechanisms. • Pursuit of more than 1 “A” at a time leaves too much to chance.

28. 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.

29. Broader Lessons, Cont’d • Know when NOT to integrate. • Tightly coupled systems. • Domain selection. • Keep activities that share a roof apart.

30. Wrap it up. • 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.