Monday, May 07, 2007

The Central Challenge of Global Strategy: Managing Differences With the globalization of production as well as markets, you need to evaluate your international strategy. Here’s a framework to help you think through your options. (HBR March, 2007)
Pankaj Ghemawat

Reprint: R0703C

This is a facinating article on global strategies. I highly recommend reading it or ordering the reprint from HBR.....

The main goal of any international strategy should be to manage the large differences that arise at the borders of markets. Yet executives often fail to exploit market and production discrepancies, focusing instead on the tensions between standardization and localization.
In this article, Pankaj Ghemawat presents a new framework that encompasses all three effective responses to the challenges of globalization.

He calls it the AAA Triangle. The A’s stand for the three distinct types of international strategy. Through adaptation (often characterized by companies that heavily advertise to create the local demand), companies seek to boost revenues and market share by maximizing their local relevance. Through aggregation (often characterized by companies with large fixed costs like R&D to leverage them as broadly as possible), they attempt to deliver economies of scale by creating regional, or sometimes global, operations. And through arbitrage, they exploit disparities between national or regional markets, often by locating different parts of the supply chain in different places—for instance, call centers in India, factories in China, and retail shops in Western Europe (often characterized by companies with relatively high labor costs).

Ghemawat draws on several examples that illustrate how organizations use and balance these strategies and describes the trade-offs they make as they do so.Because most enterprises should draw from all three A’s to some extent, the framework can be used to develop a summary scorecard indicating how well the company is globalizing. However, given the tensions among the strategies, it’s not enough simply to tick off the corresponding boxes. Strategic choice requires some degree of prioritization—and the framework can help with that as well. While it is possible to make progress on all three strategies, companies usually must focus on one or two when trying to build competitive advantage.

To spark your interest, here is a very interesting chart from the article:

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