This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface

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3.4 Pitfalls and Lessons in Applying the AAA Framework

There are several factors that companies should consider in applying the AAA framework. Most companies would be wise to focus on one or two of the “A”s—while it is possible to make progress on all three “A”s, especially for a firm that is coming from behind, companies (or, more often to the point, businesses or divisions) usually have to focus on one or, at most, two “A”s in trying to build competitive advantage. Companies should also make sure the new elements of a strategy are a good fit organizationally. If a strategy does embody substantially new elements, companies should pay particular attention to how well they work with other things the organization is doing. IBM has grown its staff in India much faster than other international competitors (such as Accenture) that have begun to emphasize India-based arbitrage. But quickly molding this work force into an efficient organization with high delivery standards and a sense of connection to the parent company is a critical challenge: failure in this regard might even be fatal to the arbitrage initiative. Companies should also employ multiple integration mechanisms. Pursuit of more than one of the “A”s requires creativity and breadth in thinking about integration mechanisms. Companies should also think about externalizing integration. Not all the integration that is required to add value across borders needs to occur within a single organization. IBM and other firms have shown that some externalization can be achieved in a number of ways: joint ventures in advanced semiconductor research, development, and manufacturing; links to, and support of, Linux and other efforts at open innovation; (some) outsourcing of hardware to contract manufacturers and services to business partners; IBM’s relationship with Lenovo in personal computers; and customer relationships governed by memoranda of understanding rather than detailed contracts. Finally, companies should know when not to integrate. Some integration is always a good idea, but that is not to say that more integration is always better.

3.5 Points to Remember

  1. There are three generic strategies for creating value in a global context: adaptationaggregation, and arbitrage.

  2. 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. These strategies 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.

  3. Adaptation strategies can be subdivided into five categories: variation, focusexternalizationdesign, and innovation.

  4. Aggregation strategies revolve around generating economies of scale or scope. The other nongeographic dimensions of the CAGE framework introduced in Chapter 1 "Competing in a Global World"—cultural, administrativegeographic, and economic—also lend themselves to aggregation strategies.

  5. Since arbitrage focuses on exploiting differences between regions, the CAGE framework also defines a set of substrategies for this generic approach to global value creation.

  6. A company’s financial statements can be a useful guide for signaling which of the “A” strategies will have the greatest potential to create global value.

  7. Although most companies will focus on just one “A” at any given time, leading-edge companies such as GE, P&G, IBM, and Nestlé, to name a few, have embarked on implementing two, or even all three, of the “A”s.

  8. There are serious constraints on the ability of any one company to simultaneously use all three “A”s with great effectiveness. Such attempts stretch a firm’s managerial bandwidth, force a company to operate with multiple corporate cultures, and can present competitors with opportunities to undercut a company’s overall competitiveness.

  9. Most companies would be wise to (a) focus on one or two of the “A”s, (b) make sure the new elements of a strategy are a good fit organizationally, (c) employ multiple integration mechanisms, (d) think about externalizing integration, and (e) know when not to integrate.

Chapter 4

Global Strategy as Business Model Change

Every company has a core domestic strategy, although it may not always be explicitly articulated. This strategy most likely evolved over time as the company rose to prominence in its domestic market and reflects key choices about what value it provides to whom and how, and at what price and cost. At any point in time, these choices are reflected in the company’s primary business model, a conceptual framework that summarizes how a company creates, delivers, and extracts value. A business model is therefore simply a description of how a company does business. As shown in Figure 4.1 "Components of a Business Model", it describes who its customers are, how it reaches them and relates to them (market participation); what a company offers its customers (the value proposition); with what resources, activities, and partners it creates its offerings (value chain infrastructure); and, finally, how it organizes and manages its operations (global management model.

Figure 4.1 Components of a Business Model
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