strategy lecture 4 mahvesh-mahmud sultan (judge business school, university of cambridge, uk. 2008)

STRATEGYLECTURE 4

Mahvesh-Mahmud Sultan (Judge Business School, University of Cambridge, UK.

2008)

What is Netsol? What is Techlogix? Questions for the Toyota Case Study

(Question 8 changed from RBV to AAA Triangle)


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QUESTIONS FOR TOYOTA CASE PRESENTATION

1. Give an outline of the case facts.2. What were the immediate issues?3. What were the basic issues?4. What was the corporate/business/functional

strategy?5. Who was responsible for each of the above-

mentioned strategies?6. What were the Strengths and Weaknesses?7. What were the Opportunities and Threats?8. Does the AAA Triangle apply to this case? If

‘yes’ how and if ‘no’ then why?


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25 years of rhetoric focused on globalization of markets.

Recently interest has been shown in globalization of production, resources and intellect.

Why have a global strategy?


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What are a firm’s globalization options?› Firms attempting to venture outside home

turf may have three basic strategic options: Aggregation Adaptation Arbitrage


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Latest Research not found in book chaps Links well with External Environment

(Chap 3)› Societal Environment

General Environment affecting all firms › Task Environment

Immediate industrial environment Firms attempting to reduce costs and

increase profits often scan the TASK environment for leveraging their internal strengths against external opportunities.


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Economies of Scale:› Reduction in the average cost as a firm

expands its plant size or output. McDonald’s can reduce costs of producing fries

as it buys potatoes at a volume discount AND SELL THEM AMASS.

Economies of Scope:› Reduction in the average cost as the firm

produces larger number of different products. P&G uses same marketing experts for different

products-using same skill across product lines.Mahvesh-Mahmud Sultan

(Judge Business School, University of Cambridge, UK. 2008)

Business Leaders & Academics make the mistake of assuming that in order to go global, firms: 1. Need to strike the right balance b/w

economies of scale (e.g. standardized product sold everywhere) and responsiveness to local conditions (e.g. niche marketing).

2. Think that the more the emphasis on scale economies in their worldwide operations, the more global their strategies will be.


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Firms forget to manage differences across borders; geographic or otherwise.

Firms forget to exploit differences across borders (arbitrage).


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Three distinctive types of global strategy:› Adaptation:

Boost revenues and market share by maximizing firm’s local relevance.

Establish all the steps in the supply chain in the local market

› Aggregation: Deliver economies of scale by creating regional or global

operations; standardizing a product/service and grouping together development and production.

› Arbitrage: Exploitation of differences b/w national or regional

markets by locating separate parts of the supply chain in different places.


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It’s not possible for a firm to adopt all three strategic choices though it may move from one approach to the next or adopt at the most two types at a time.

Also different industries (IT vs. FMCGs) offer different headroom for each of the three A’s.

Within industries different firms may follow different strategies depending on their own strengths.


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Firm-type defines what strategy is to be adopted. › (Note the affect of strategy on structure and vice-versa)

ADAPTATION› Country-centered organization

Tailored to each country’s requirements Telenor (Norwegian/TalkShawk)/Mobilink (Orascom Egyptian) Suzuki/Toyota

AGGREGATION› GBU’s› Regional Divisions/Product Divisions

McDonald’s/MENA/ASIA-Pacific ARBITRAGE

› Functional/Vertical Organization› Emphasis on supply & demand within and across

organizational boundaries. Most Call Centers Software Industry Netsol/Techlogix


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Curtailed opportunities to gain international scale

economies

Precluded opportunities to

exploit differences in countries

P&G (All three/Outsourced) Tata Consultancy (Software

Export/Arbitrage) Cognizant (Moving from arbitrage to

adaptation).


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Mahvesh-Mahmud Sultan (Judge Business School, University of Cambridge, UK. 2008)

•ADAP= ADVERTISING/SALES

•AGG=•R&D/SALES

•ARB=•LABOUR/SALES

Strategic Map

Source: Managing Differences, Ghemawat, P. HBR, March 2007, P. 62

Ideally a company should follow a strategy that involves just one A.

But mostly successful firms can follow 2 strategies at a time.

So managing the 2 strategies can allow a company to gain strategic advantage over rivals if:1. It beats rivals on both dimensions at once2. Or because it manages the trade-offs

between the two strategies better


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1980s-ADAPTATION P&G started with adaptation- had a matrix structure but it

didn’t support the global strategy it wanted to pursue.1990s-AGGREGATION P&G decided to reorganize into GBUs (Global Business Units

e.g. homecare, pharmaceuticals) who were responsible for making profits for the firm and were supported by GMDOs (Geographic Market Development Organizations such as local or regional sales forces).

2000s-BALANCE B/W ADAPTATION & AGGREGATION GBU’s regional HQs co-located with regional HQs of MDOs.


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Tata Consultancy Services (Similar to what NETSOL is doing)› Focuses on Arbitrage but is balancing out

Aggregation through its Global Network Delivery Model India and China (Arbitrage but where bulk of skill lies) Uruguay and Brazil (Medium level scale and select

capabilities) USA for customer comfort


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Cognizant › (Similar to Avaz Networks Pakistan also

known as Enabling Technologies and Techlogix)

› Two global leads one in USA and one in India for each project(2 in a box)

On-site presence in the USA.


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DIAGNOSTIC IMAGING FIRMSGE, SIEMENS AND PHILIPS

Source: Managing Differences, Ghemawat, P. HBR, March 2007, P. 62

Corporate strategy- initially very decentralized and adaptive.

Japanese price under-cutting began in the 1970s-through aggregation.

PMS was in need of a redefined strategy different from the parent firms’.

Adaptation was beneficial for parent Philips but due to the presence of SMS, and GEH, the adaptation advantage was lost.

Though it had adaptation advantages, but these were lost on the aggregation disadvantages.

PMS represented a larger part of Philips than SMS and GEH did in each of their parent pies. Therefore a larger loss at PMS would hurt Philips overall.


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PMS was an amalgamation of six acquisitions. Acquisitions were to improve an aging X-ray

technology and it took over 3 years to do this. Due to its disparate parts, it had been slow on

the arbitrage front in failing to move manufacturing to low-cost areas such as China where ironically Philips claimed to be the largest Western MNC.

GEH and SMS had moved into China at least four years earlier, nicely securing an arbitrage advantage over PMS.

What are the obvious strategic alternatives?


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It shouldn’t drop adaptation because it already has a strong-hold on it.

It is somewhat into aggregation and therefore can follow and Adaptation-Aggregation strategy.

It can also follow an adaptation-arbitrage strategy.

Given that both rival firms may have gained a great competitive advantage in each of the strategic options; Philips might want to diversify.

It is now focusing on at-home devices-other rivals haven’t tapped into.


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Focus on one or two A’s. New elements of a strategy (external

environment) should be a fit with the organization’s overall stance (internal environment).

If 2-A’s are being pursued structural and other mechanisms may change and multiple integration may require creativity.

Integration may not always be helpful e.g. P&G has clearly delineated GBUs and MDOs.


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Examples are limited to technology firms (e.g. for arbitrage).

The AAA triangle may be useful but the defining ratios for each of the strategies may-be overly simplistic and deceiving.

Too much focus on products. What about service industry?

Too much emphasis on economies of scale and scope…what about strategies being pursued on the internet? Scope may remain relevant scale may not.


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What’s happening with Ford, GM and Chrysler? (Also known as the Big-3)

Toyota case Please follow guidelines given in the

Lecture 3 Slides.


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strategy lecture 4 mahvesh-mahmud sultan (judge business school, university of cambridge, uk. 2008)

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