1.
Balancing economies of scale and responsiveness to
local conditions
2. The more emphasis companies place on scale
economies in their worldwide operations, the more
global their strategies will be.
 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.
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2000-2003: 60,000 manufacturing plants built in China.
2005 onward: India accounts for more than half of IT and business process offshoring.
 Framework for global integration
 Adaptation
 Aggregation
 Arbitrage
 Adaptation
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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
 Aggregation
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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
 Arbitrage
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Exploitation of differences between national or regional
markets
Locating separate parts of the supply chain in different
places, Ex: China, India
 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?
 Setting up mini branches of the company in target
countries.
 Advertising intensity
 Local culture & presence
 Strategic levers include:
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Decentralization
Flexibility
Partnership
 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
 Separating supply chain in diverse countries
 Labor intensive organizations
 Outsourcing to reduce labor costs
 Vertical relationships
 Strategic levers include:
 Taxes, regulations
 Prices, knowledge, resources
 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
 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
 P&G’s disaster
 GBU & MDO
 Success with Lafley
 Balance between adaptation and aggregation
 Decision grid
 Structures and systems supplemented each other
 TCS’s emphasis on global network delivery model
 Global centers
 Regional centers
 Nearshore centers
 Potential for significant international revenue gain
 ABN AMBRO
 Cognizant’s investment in its key market
 Two-in-a-box structure
 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
 Aggregation
 Economies of scale
 Acquisition capabilities
 Economies of scope
 Arbitrage
 Migrating rapidly to low-cost production bases
 “Pitcher-catcher” concept
 Adaptation
 Country-focused marketing organizations
 Emphasis on services as well as equipment
 Eliminate limited managerial bandwidth issue
 Success also depends on competitor’s weaknesses
 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
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First output in 2005
First supplies for output in 2006
Sourcing level of PMS in 2005 compared to GEH in 2001
 Two Alternatives:
•
•
Adaptation – Aggregation
Adaptation – Arbitrage
 Closest to the strategy in place
 Local Responsiveness
 Give up idea of creating competitive advantage
 Imitation from larger rivals’ large scale moves
 Focus on low-cost locations AND reengineering the
product
 Cost reductions of 20% for first line of Chinese
offerings
 Lateral shift to a new area of business
 Medical devices for home usage
 First product = a home-use defibrillator
 Adaptation into new market
 Speed up attempts at arbitrage (pitcher-catcher
concept)
 Geographic variation
 Enable at-home device business to use consumer
electronics division for resources and capabilities
 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.
 Employ multiple integration mechanisms.
 Pursuit of more than 1 “A” at a time leaves too much to chance.
 Think about externalizing integration.
 Not all integration has to happen within a single organization.
 Joint ventures in advanced semi-conductor research,
development, manufacturing, etc.
 Know when NOT to integrate.
 Tightly coupled systems.
 Domain selection.
 Keep activities that share a roof apart.
 Globalization rhetoric has been concentrated in
markets. Only recently is it turning to production.
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Offshoring
 AAA framework provides a basis for considering
global strategies.
 Clear thinking enhances performance.