Ghemawat’s ‘AAA’ (adaptation, aggregation and arbitrage) framework has been used to analyse the demands placed on companies as they
Comparative and International Business
- 1. The three global strategies that make up the “AAA” strategy provide a global framework for integration and solution of globalization needs. Adaptation strategy seeks to increase revenues and market growth by maximizing the relevance of the MNEs while aggregation seeks to increase economies of scales in production and sales by creating regional operations and standardization of products. Arbitrage involves exploitation of certain differences that exists in the market for example taking the advantage of the wage differences between China or other Asian countries and the US mostly by leading MNE globally.
The underlying principles behind Ghemawat’s strategic options; Adaptation, Aggregation and Arbitrage (AAA) is that organizations have to choose between one of the different options when consolidating efforts to globalize. Most organizations emphasize on one kind of strategy however some companies adopt several strategies at the same time.
Ghemawat’s (2007) states that “…the AAA Triangle serves as a kind of strategy map for managers. The percentage of sales spent on advertising indicates how important adaptation is likely to be for the company; the percentage spent on R&D is a proxy for the importance of aggregation; and the percentage spent on labor helps gauge the importance of arbitrage… (pg. 62)”
IBM adopted an adaptation strategy when it was expanding its operations abroad. IBM later aggregated foreign countries and divided its manufacturing departments in different regions globally. IBM is gradually exploiting the differences that exist in these countries hence IBM begun to display new emphasis on the arbitrage strategies. IBM increased its employees in India from 9000 in 2004 to 43000 in 2006 specifically to exploit the low wage differences between the US and India (Ghemawat’s, 2007).
The successes in the strategies may take two or more forms. Some companies win because they are better than their competitors in all dimensions while in other companies success comes as a result of effective management of the AAA strategies than their rival companies. Efficient organizational abilities and strategies require higher innovative abilities plus other hard and soft integrative devices.
Procter and Gamble initially started with the adaptation strategy but later ended up with a matrix organization structure in the early and late 1980’s but it proved unwieldy.
- 2. Financial systems play a crucial role in facilitating innovation by allocating funds and financing critical processes that require research and development (Schumpeter, 1996).
The basis of an innovative firm is the company’s effort to integrate skill base systems that engage collective and also learning processes (Lazonick, 2004).
For technological advancement, firms must play a key role in financing innovations
Most companies have also invested largely in foreign countries where pioneer R & D research facilities have been located (Roberts, 2001). The United States of America and the United Kingdom have been very popular destinations for most Multi-national corporations largely because of the high standards of education and the availability of academic institutions and experienced scientists.
In the US, universities have played a significant role in research and development activities. The funding of projects by the US government and public companies created incentives for collaboration between industrial scientists and universities. These efforts have created innovations that have changed the world mostly in digital technology and communication systems.
The US for many years has encouraged its MNE’s to create global scientific centers through integrated global networks for scientific and academic links. The key strategy was to widen knowledge networks, innovations and the search for talent, unique abilities and capabilities in human capital.
The Japanese on the other hand developed overseas academic links and institutions for different reasons. Japanese utilized globalization as one of its strategies to compensate its home-based weaknesses in their institutions of learning. However, Nakayama and Low (1997) views that the Japanese globalization efforts are as a result of lack of confidence in their education system and universities. The academic standards in Japanese scientific research stations are weak and national research efforts are not effectively managed and the funding is inadequate (Clark, 1995).
The US-Pharma is one of US leading pharmaceutical companies and it has one of largest pharmaceutical laboratories in R & D facilities globally. Its funding in R & D department amounted to $5 billion in 2001. The company leads in discovery, development and production of new drugs (Santoro and Chakrabarti, 2001).
J-Pharma is a giant Japanese pharmaceutical company and is among the top ten globally never the less its relative budget in R & D Is very small compared with its counterparts in other parts of the globe. J-Pharma overall R & D budget for the financial period 1999 was £265 million while US-Pharma had a budget of over £1.7 billion for the same period (Lam, 2003).
- International Business Machines Corporation is a multinational technological & consulting company that is based in Armonk in New York, USA. It was founded in 1911 and trades in NYSE as IBM. It operates in over 170 countries under the chairmanship of Ginni Rometty who is also the CEO and President of the company. In 2014, its turnover totaled to $92,793 billion in 2014 which accumulated from a total assets of $17.53 billion for the same period. The company has a Board of Directors made up of 14 directors. The current share price for IBM is 169.65 while its market capitalization is 167.06B with a P/E, EPS, Div & Yield of 14.14, 12 and 5.2 respectively as at the end of the financial year 2014 (International Business machines (IBM) Annual Report, 2014).
Proctor & Gamble is a multinational company that is based in downtown Cincinnati, Ohio in USA. It was founded by William Procter and James Gamble while its current chairman, President and also the CEO is A.G. Lafley. It operates in NYSE as PG and its one of the components that make the Dow Jones and S & P index averages. In 2014 its turnover was $ 83.06 Billion while its total assets amounted to 68.06 Billion in 2013 (Proctor and Gamble Annual report, 2014). IBM has grown its Indian subsidiary faster than its competitors and its exploiting the wage differentials and other market benefits associated with outsourcing operations. IBM’s ability to match people to opportunities has demonstrated the company’s ability to tap into foreign markets and emerging markets (Morgan, 2001).
Procter & Gamble followed IBM footsteps with its mini P & Gs that also tried to fit in the American market but it evolved differently in the process. The company’s foreign business units currently sell through market development at regional levels (Ghemawat’s, 2007).
- 4. The radical growth in US based multinational companies and the rise of digital and other technological innovations was facilitated by the US governments’ effort to fund R & D research to foster development and growth in the country’s economy (Lazonick and O’Sullivan, 1996).
Various capitalism frameworks have resulted in differential economic and development growth rates. For example, macro-institutional analysis on national economies globally related the liberal market capitalism to the USA model while the coordinated market economy is closely related to the Germany model. The Chinese economy is definitely not entirely socialist or capitalist but it can be described as a variety of capitalism (Fligstein and Zhang, 2011). It’s noteworthy that China experienced rapid growth after adopting capitalist structures that were comparable to the US model (Fligstein and Zhang, 2011).
However, the proponents of the variety capitalism also state that the system is weighed down by weak and inadequate legal structures, weak laws and property rights, inefficient capital marker structures, institutional uncertainties and a civil service that’s unreliable have contributed to an imbalance society where majority of its citizens are very poor and who survive on very low wages that are payable by MNE that the government has allowed to operate in the country. These companies contribute limited funds to R & D in China but repatriate their profits to their home countries.
- 5. Education and labor affect organizations directly. Labor organizations prime objectives are basically to champion the rights of workers. The basis of welfare is improvement for the terms and working conditions of workers. These needs translate to monetary terms when they are being applied by the concerned companies. Most companies have thousands of workers and a small increment on the workers compensation can affect the productivity of the firm in terms of costs and prices of products that must also be increased to break even. Increased prices may mean a decrease in profitability for the company and reduced capabilities for future growth and expansion. Also it means that the company would in a precarious situation when opportunities arises that require funding when it actually has none or inadequate financial resources.
Education on the other hand determines the level of compensation for employees. Highly trained employees and with adequate experience are compensated much better than employees who are less skilled and untrained.
The labor movement in Sweden has been very strong since the early 1950’s and it resulted in cost increases in companies which later forced the government to intervene and subsidize the costs as they were unaffordable to companies.
Delsen and Van Veen (1992) states that, “In the early 1970s …the unions asked the government and Parliament to pass legislation to bring about improvements in areas such as job security and employee participation in decision-making. These trade union demands resulted in a number of new laws. The most important was the Act on Employee Participation in Decision-making (MBL), which came into force in 1977. This law required employers to negotiate not only in the area of social affairs but in all major changes in working conditions, including questions of what to produce and how production should be organized. Employers have to give the union access to almost all of the company’s economic information (pg. 97).”
The powerful unions have impacted positively on employee rights, compensation rights and general employment rights. However, companies have been affected negatively as the cost of labor takes a huge percentage of the total costs besides the country’s economy was not spared either.
Delsen and Van Veen (1992) continue that “High inflation, current account deficits and high capital exports seem to be the most important problems… (pg. 97)”
However, research shows that some countries like Germany and France have tried the Swedish model but it resulted in a different scenario than what is happening in Sweden.
Delsen and Van Veen (1992) states that “…research in the Federal Republic of Germany and France shows that the reduction in employment protection by means of increasing the opportunities for temporary contracts does not result in more employment. Further, the net employment effect of the special government temporary employment programmes in Europe is also limited. They merely result in redistribution of unemployment and a shift in the recruitment pattern in the direction of subsidized temporary jobs. Moreover, the countries that have gone the furthest with short-term flexibility may run greater risk those employers will not pay sufficient attention to the source of their long-term flexibility and efficiency, i.e. to manpower training (pg. 96).”
- 6. The reasons as to why and how inter-firm relations vary can only be understood by investigating the various interplay of interorganizational processes and purposes at different levels while also taking into account the economic rationale that stems from the collaboration together with other institutional norms, cultures and traditions that describe the boundaries of the two companies. According to Sako (1992) the inter-organizational relations depend on the existing nature of relationship that is existing between organizations together with their individual dependence to each other. The relationship exists in three levels; institutional, organizational and interpersonal. These interorganizational relations are based on efforts and forces that may be beyond the organizations level hence makes it unlikely for agents to effectively develop and sustain permanent high trust relations.
Institutionally, inter-firm relations vary with the level of trading involved between the two companies. Trade associations, professions, national training health and safety procedures and affiliation to quality bodies are some of the ways in which inter-firm relations relate with other firms in the same industries. For example, companies share norms and standards that exist in the same industry concerning prices, regular payment dates for supplies and other payments for licences on health and safety matters, quality standards besides maintaining regular contacts with other representatives from other companies.
Marchington & Vincent (2004) states that “…although inter-organizational relations may be shaped or influenced at an industry or regional level, these are produced and reproduced within organizations…Much depends on the nature of the two organizations and previous relations between them. In large firms with interests in a range of products (and maybe industries) it is highly likely there will have been commercial contacts in the past. The nature of these relationships is likely to influence decisions about whether or not to work closely with each other in the future. For example, reputation for reliability, product quality and willingness to adapt at short notice can have a strong effect on the likelihood of entering into future liaisons”. (pg. 1036).
Organizationally, companies maintain regular contacts at national or even local levels through previous trade relations or similarity in competitive strategies or organizational cultures. Product dependence between regular customers and also existing suppliers makes it possible for companies to consult during product shortages or when weighing the ratio of sales between the companies on products that are critical to customers.
These inter-firm relations may be on a variety of different circumstances or conditions. For example, some relations tend to be obligational contractual (OCR) while others are arms-length contractual (OCR) (Sako, 1992).
Interpersonally, organizations share depth of contacts between suppliers and customers especially when socializing during parties or while attending closed meetings in joint working meetings on issues affecting local stakeholders in particular regions.
These relations assist in development of trading opportunities and joint-ventures initiatives on projects that would benefit the companies substantially.
- Foreign countries have different policies and laws that address and govern business activities for foreign and local business enterprises. Several kinds of risks face MNEs while trading in these countries. Most notable ones are political and economical risks (Jones, 2010).
Political risks are exhibited in different forms
Some foreign countries are not stable politically and the risks of turmoil, infighting, religious tensions and fanatical attacks and civil war looms as each day passes. These countries have weak economies and the market reliability is not certain.
Competition in foreign countries can be tilted intentionally to favor local companies at the expense of multinational companies that are mostly viewed as well established and more experienced than the local companies. Different countries tilt the trading environment at the pretext of protecting local industries or local jobs and employment of its citizens. Some countries tax foreign companies differently or higher than the local firms and the risks of unfavorable policies and laws being introduced run’s high in these countries.
Risk of Counterfeits
Some countries like China have ineffective patent and copyright laws that don’t prevent the production of counterfeits (Jones, 2010). These products reduce the profitability and liquidity position of affected companies as products are manufactured and their market is effectively eroded by the counterfeits.
To counter these risks multinational corporations have mastered survival strategies through integration of international concessions and agreements that seek to reduce levies and fees that inhibit international trade. Historically, imperial governments introduced legislation that protected foreign companies and ensured that they succeeded (Jones, 2010).
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