The author of this week’s journal entry is Pankaj Ghemawat, a prominent author and professor at both IESE Business School in Barcelona, Spain, and Harvard Business School. His areas of expertise are Business Administration and Global Strategy.
The main thrust of the article revolves around three types of global strategy: adaptation, aggregation, and arbitrage. “Adaptation seeks to boost revenues and market share by maximizing a firm’s local relevance…Aggregation attempts to deliver economies of scale by creating regional or sometimes global operations…Arbitrage is the exploitation of differences between national or regional markets…” (Ghemawat, 2007, p. 2). Ghemawat explains that, though executives might assume that the ideal company would maximize all three A’s, in practice a company should apply them individually according to the particular needs of the company (Ghemawat, 2007, p. 4).
Ghemawat’s system for addressing the globalization needs of growing businesses is relevant to international business in every way. For example, if your business goals are an adaptation to overseas markets (like Warner Bros overseas expansion), Ghemawat recommends configuring your branches in countries that are similar to the home base. This minimizes excessive variety or complexity of your product and/or process.
Ghemawat’s approach is very relevant to the topic of organizational structure. He goes into detail as to how a business can strategically manage, say, two of the three A’s according to their needs. This realistic approach is important for business owners who are serious about optimizing the organizational structure of their institution. Here, Ghemawat finds common ground with writers like Diana Farrell, whose article Smarter Offshoring takes a strategic approach to arbitrage by emphasizing the overall utility of foreign markets over simply chasing the lowest wage environments.
The implications of this approach for businesses and organizations operating in an international environment are also widespread and positive. For example, a U.S. company pursuing aggregation experiences backlash in a foreign locale. Ghemawat’s system recommends avoiding the appearance of homogeneity in such a case, and being sensitive to the local attitude (Ghemawat, 2007, p. 4).
Current events in business news reflect Ghemawat’s principles in action. In 2013, online media source BusinessToday released a piece on IKEA’s international business strategy in China. When the popular Swedish furniture retailer first entered the U.S. market, it had to change its products to fit American demands for bigger beds and closets. But these modifications were small compared to the changes IKEA had to make to succeed in China (Chu, Girdhar, & Sood, 2013, p. 1). First, IKEA had to shrink its furniture to better fit the average Chinese apartment and include local features like balconies in their displays (Chu et al., 2013, p. 1). Instead of locating its stores in the suburbs as IKEA does in the U.S., the company chose busy metro areas connected by public transportation- the main mode of Chinese transit. These are perfect examples of what Ghemawat would call adaptation. Soon it became apparent that the company would have to change its marketing strategy as well. While known in Europe and America for low prices most people could afford, in China the western brand is considered something of a luxury. The company changed its marketing image from ‘low-price’ to ‘affordable’, but prices were still too high compared with local Chinese companies.
IKEA has addressed this problem through arbitrage and has been able to cut its prices in China by 60% since 2000 (Chu et al., 2013, p. 2). By building factories in China and increasing local sourcing of raw materials, IKEA has exploited the unique advantages of the local Chinese economy. This strategy also allowed IKEA to avoid high Chinese import taxes. In the terms of Ghemawat’s system, IKEA has wisely pursued a two-prong strategy of adaptation and arbitrage to meet its business needs and goals.
Chu, V., Girdhar, A., & Sood, R. (2013). Crouching Tiger Tames the Dragon. Retrieved from www.businesstoday.intoday.in
Ghemawat, P. (2007). Managing Differences: The Central Challenge of Global Strategy. Harvard Business Review. Retrieved from www.gwu.edu