Here comes the second part of my review of "Redefining Global Strategy", by Pankaj Ghemawat. (Part one is here.) As much as part one was an enjoyable read, at least for a business book, part two was harder to plow through, and I stand by my previous comment that books written by academics are only successful when they are co-authored by journalists - or maybe when I am doing the writing. Ghemawat is actually far better than the average academic author, but I still felt frustrated with his book at times and wished for more examples. Let's just say the temptation to skip to the summary at the end of Chapters 5 and 6 was great.
The second part of the book focuses on three strategies for global value creation, dubbed AAA for Adaptation, Aggregation and Arbitrage. (And yes, the author indulges in AA and Aa abbreviations that would make Standard & Poor's and Moody's proud.) Adaptation strategies "adjust to differences in each country". Without some degree of adaptation, multinational companies attempting to enter new markets face an uphill battle. Even Wal-Mart made blunders such as "stocking US-style footballs in soccer-mad Brazil" (p.107) Ghemawat presents an excellent analysis of the home appliance industry starting p.108. For instance, he describes the unexpected diversity in clothes washers (which created problems for Whirlpool trying to produce fewer models and create economies of scale) as follows: "In France, top-loading machines accounted for about 70 percent of the market [...] WestGerman consumers preferred front-loaders with high spin-speeds of 800 rpm or more. Italian consumers preferred 600-800rpm, front-loading machines. The British prefer 800rpm front-loaders, but with a hot and cold water fill rather than cold-water-only supply." (p.111) And you thought selling clothes washers was boring. You can read more along those lines for fridges and ovens on p.111. Ghemawat provides a list of levers and sublevers for adaptation on p.116, for instance segment focus, as demonstrated by Zara (p.121), or partitioning, practiced by McDonald's (and its McSpaghetti offered in the Phillipines but not in Italy, p.125). The author gives also strategies to foster openness, knowledge and integration across countries on pp.134-135, and states in summary that the optimal degree of adaptation depends on industry characteristics.
Aggregation strategies are "all about using various grouping devices to create greater economies of scale than country-by-country adaptation can provide." (p.139) Ghemawat makes the surprising discovery that (semi-)globalization has increased the importance of geographic regions; specifically, "intraregional trade has had more influence than interregional trade on the large increases in international trade." (p.140 - and for those of you out there who always get confused between inter and intra, 'intraregional' means inside one region and 'interregional' means across regions.) "Of the 366 companies in the Fortune Global 500 for which such data were available, 88 percent derived at least 50 percent of their sales in 2001 from their home regions - with the share of sales in the home region averaging 80 percent for this subgroup." (p.141) This chapter gives regional strategy archetypes (regional focus, regional portfolios, regional hubs, regional platforms, regional mandates, and regional networks) based on the evolution of the manufacturing company Toyota. Zara is back on p.147 with the comment that "the decline of the dollar against the euro has inflated Zara's costs of production in Europe, relative to competitors that rely more on dollar-denominated imports from Asia."
Arbitrage is a way of exploiting differences. For instance, labor arbitrage has "played a key role" in Embraer's success (p.179); "Embraer's employment costs came to $26,000 per employee in 2002, versus an estimated $63,000 for the regional jet business of its archrival, Montreal-based Bombardier." This explains why Embraer "has focused its operations on final assembly, the most labor-intensive part of the production process, and has outsourced other operating activities." Ghemawat uses the example of Indian pharmaceuticals, starting on p.180, to illustrate the varieties of arbitrage. Arbitrage is also the reason why the Northern hemisphere can have fresh cut flowers in winter. Chapter 7, on "Playing the Differences", "examines the trade-offs among the AAA strategies and the extent to which it is possible and advisable to pursue more than one of the As at the same time." The author distinguishes between AAA awareness, one A strategy, compound (AA) strategies and trifecta (AAA) strategies. He also introduces the AAA triangle and illustrates the concept on companies such as IBM, Procter & Gamble and Tata Consultancy Services (p.205-8). Chapter 8, "Toward a Better Future", "concludes the book with a look at the future of globalization."