Since then, the fast-food chain has grown to more than outlets. But it is not insignificant because the company is increasingly focused on high-growth markets. First, there was the nonbeef burger made with mutton. Then there was the french fry debacle. Chicken kabob burgers? Sounds like a winner except that they were skewered by consumers. Salad sandwiches were another flop: Indians prefer cooked foods. But the company persevered, learned, and succeeded.
It figured out what Indians wanted to eat and what they would pay for it. It built, from scratch, a mammoth supply chain—from farms to factories—in a country where elephants, goats, and trucks share the same roads. Then it formed joint ventures with two well-connected Indian entrepreneurs: Vikram Bakshi, who made his fortune in real estate, runs the northern region; and Amit Jatia, an entrepreneur who comes from a family of successful industrialists, manages the south.
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Even though neither had any restaurant experience, this joint-venture management structure gave the company what it needed: local faces at the top. In addition, Mr. Jatia, Mr. Those in green handle vegetarian orders. The red-clad ones serve nonvegetarians. It is a separation that extends throughout the restaurant and its supply chain. Aggregation Strategies that focus on achieving globalized economies of scale or scope by creating efficiencies based on exploiting similarities among geographies or markets. The objective is to exploit similarities among geographies rather than adapting to differences but stopping short of complete standardization, which would destroy concurrent adaptation approaches.
The key is to identify ways of introducing economies of scale and scope into the global business model without compromising local responsiveness. Adopting a regional approach to globalizing the business model—as Toyota has so effectively done—is probably the most widely used aggregation strategy.
As discussed in the previous chapter, regionalization or semiglobalization applies to many aspects of globalization, from investment and communication patterns to trade. And even when companies do have a significant presence in more than one region, competitive interactions are often regionally focused. Examples of different geographic aggregation approaches are not hard to find.
Xerox centralized its purchasing, first regionally, later globally, to create a substantial cost advantage. Dutch electronics giant Philips created a global competitive advantage for its Norelco shaver product line by centralizing global production in a few strategically located plants. And the increased use of global corporate branding over product branding is a powerful example of creating economies of scale and scope.
As these examples show, geographic aggregation strategies have potential application to every major business model component. Geographic aggregation is not the only avenue for generating economies of scale or scope. The other, nongeographic dimensions of the CAGE framework introduced in Chapter 1 "Competing in a Global World" — cultural , administrative , geographic , and economic —also lend themselves to aggregation strategies.
Major book publishers, for example, publish their best sellers in but a few languages, counting on the fact that readers are willing to accept a book in their second language cultural aggregation. Pharmaceutical companies seeking to market new drugs in Europe must satisfy the regulatory requirements of a few selected countries to qualify for a license to distribute throughout the EU administrative aggregation.
As for economic aggregation, the most obvious examples are provided by companies that distinguish between developed and emerging markets and, at the extreme, focus on just one or the other. Whirlpool manufactures appliances across all major categories—including fabric care, cooking, refrigeration, dishwashing, countertop appliances, garage organization, and water filtration—and has a market presence in every major country in the world. In the late s, Whirlpool Corporation set out on a course of growth that would eventually transform the company into the leading global manufacturer of major home appliances, with operations based in every region of the world.
Under Mr. In the process, Whirlpool would establish new relationships with millions of customers in countries and cultures far removed from the U. In , Whirlpool acquired the appliance business of Philips Electronics N. In the western hemisphere, Whirlpool expanded its longtime involvement in the Latin America market and established a presence in Mexico as an appliance joint-venture partner.
By the mids, Whirlpool had strengthened its position in Latin America and Europe and was building a solid manufacturing and marketing base in Asia. In , Whirlpool acquired Maytag Corporation, resulting in an aligned organization able to offer more to consumers in the increasingly competitive global marketplace.
The transaction created additional economies of scale. In other words, the challenge is not in buying the individual businesses—the real challenge is to effectively integrate all the businesses together in a meaningful way that creates the leverage and competitive advantage. Some of the advantages were easily identified. Whirlpool successfully refocused a number of its key functions to its global approach.
Procurement was the first function to go global, followed by technology and product development. The two functions shared much in common and have already led to significant savings from efficiencies.
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More important, the global focus has helped reduce the number of regional manufacturing platforms worldwide. Global branding was next. In addition, Whirlpool is a major supplier for the Sears, Roebuck and Co. Kenmore brand. In Latin America, the brands include Brastemp and Consul. A third generic strategy for creating a global advantage is arbitrage Strategies that exploit economic or other differences between national or regional markets, usually by locating separate parts of the supply chain in different places.
Arbitrage is a way of exploiting differences, rather than adapting to them or bridging them, and defines the original global strategy: buy low in one market and sell high in another. Outsourcing and offshoring are modern day equivalents. Wal-Mart saves billions of dollars a year by buying goods from China. Less visible but equally important absolute economies are created by greater differentiation with customers and partners, improved corporate bargaining power with suppliers or local authorities, reduced supply chain and other market and nonmarket risks, and through the local creation and sharing of knowledge.
Since arbitrage focuses on exploiting differences between regions, the CAGE framework described in Chapter 1 "Competing in a Global World" is of particular relevance and helps define a set of substrategies for this generic approach to global value creation. Favorable effects related to country or place of origin have long supplied a basis for cultural arbitrage Strategies that are based on exploiting the favorable effects related to country or place of origin on consumer preferences. For example, an association with French culture has long been an international success factor for fashion items, perfumes, wines, and foods.
Similarly, fast-food products and drive-through restaurants are mainly associated with U. Legal, institutional, and political differences between countries or regions create opportunities for administrative arbitrage Strategies that attempt to derive competitive advantage from legal, institutional, and political differences between countries or regions.
By placing its U. By comparison, major competitors such as Disney were paying close to the official rates. Ghemawat a , chap. With steep drops in transportation and communication costs in the last 25 years, the scope for geographic arbitrage Strategies that focus on gaining competitive advantage through the leveraging differences in transportation and communication costs due to geographic differences.
Consider what is happening in medicine, for example. It is quite common today for doctors in the United States to take X-rays during the day, send them electronically to radiologists in India for interpretation overnight, and for the report to be available the next morning in the United States. In fact, reduced transportation costs sometimes create new opportunities for geographic arbitrage.
Every day, for instance, at the international flower market in Aalsmeer, the Netherlands, more than 20 million flowers and 2 million plants are auctioned off and flown to customers in the United States. Rather, they are focused on leveraging differences in the costs of labor and capital, as well as variations in more industry-specific inputs such as knowledge or in the availability of complementary products. Exploiting differences in labor costs—through outsourcing and offshoring—is probably the most common form of economic arbitrage.
This strategy is widely used in labor-intensive garments as well as high-technology flat-screen TV industries. Economic arbitrage is not limited to leveraging differences in labor costs alone, however. Capital cost differentials can be an equally rich source of opportunity. Indian investment in Latin America is relatively small but growing quickly. The report projects that this amount will easily double in the next few years. As India has become a magnet for foreign investment, Indian companies themselves are looking abroad for opportunities, motivated by declining global trade barriers and fierce competition at home.
Their current focus is on Latin America, where hyperinflation and currency devaluation no longer dominate headlines. Like China, India is trying to lock up supplies of energy and minerals to feed its rapidly growing economy. Indian firms have stakes in oil and natural gas ventures in Colombia, Venezuela, and Cuba. At the same time, Indian information technology companies are setting up outsourcing facilities to be closer to their customers in the West. Tata Consultancy Services is the leader, employing 5, tech workers in more than a dozen Latin American countries.
Indian manufacturing firms, accustomed to catering to low-income consumers at home, are finding Latin America a natural market. Mumbai-based Tata Motors, Ltd. Generic drug makers, such as Dr. Some of that investment is in basic industries and traditional maquiladora factories making goods for export.
Indian pharmaceutical companies, too, are finding Latin America to be attractive for expansion. Firms including Ranbaxy Laboratories, Ltd. Firms that heavily rely on branding and that do a lot of advertising, such as food companies, often need to engage in considerable adaptation to local markets. For firms whose operations are labor intensive, such as apparel manufacturers, arbitrage will be of particular concern because labor costs vary greatly from country to country.
Companies that start on the path of globalization on the supply side of their business model, that is, that seek to lower cost or to access new knowledge, first typically focus on aggregation and arbitrage approaches to creating global value, whereas companies that start their globalization history by taking their value propositions to foreign markets are immediately faced with adaptation challenges. For most of their history, IBM also pursued an adaptation strategy, serving overseas markets by setting up a mini-IBM in each target country.
Every one of these companies operated a largely local business model that allowed it to adapt to local differences as necessary. Achieving attractive financial performance is the reward for having aimed at and hit the real target; i. Paradoxically, it is when an organization thinks of itself as a financial engine whose purpose is to generate attractive financial returns that the company is least likely to maximize those returns in the long run.
Or, as with the automotive service chain, attempts to profit with-out delivering superior value end in lost business, long-term customer alienation, and corporate disgrace. Why do managers so often choose not to focus on value creation and instead make decisions that systematically decrease the long-term value of their businesses? This narrow view is powerfully reinforced by financial accounting systems that were well adapted to the industrial economy, but are inadequate in the information economy. In the information age, those intangible assets are far more important than the bricks and mortar that traditional accounting systems were designed to measure.
Given that perspective, in the short term every dollar spent on employee training is a dollar of lost profit. Instead, they will become increasingly alienated and defect as soon as a technology shift, regulatory change, or competitive offering allows it. Satisfied, loyal customers and new customers responding to word-of-mouth referrals drive revenue growth and profit ability for investors. Time horizons and perceived self-interest. The time horizon within which you evaluate a business decision dramatically influences your notion of self-interest. At the moment you spend a dollar on employee training, that dollar is in fact lost to the shareholder.
One way to build an understanding of these dynamics is to identify the key capabilities, resources, and relationships that are the basic ingredients of value creation for a particular firm, and to think of those ingredients as assets that either grow or diminish over time, depending upon how they are managed. For example, employee learning and job satisfaction are two assets that could be tracked on the Employee Balance Sheet. As managers identify the strategic assets that belong on the various balance sheets, they also must articulate the relationships among those assets.
By tracing the dynamics through which customer, employee, and process assets accumulate, interact, and ultimately drive profitable growth, a company will be well on its way to managing the fundamentals of value creation and avoiding the pitfalls of managing by a set of narrow financial measures.
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Expanding the pie between a company and its employees. One way in which companies and employees can expand the pie is flexible work schedules. If an employee has the freedom to see to personal business while completing all required work , the employee is better off, and the employer is likely to benefit from higher morale and the ability to attract and hold onto the best people. Outback Steakhouse has become a very successful, rapidly growing business by resisting the temptation to view a dollar of additional compensation to employees as a dollar of lost income to the shareholder.
Outback has made its restaurant managers partners, attracting the best, most experienced people in the industry with a compensation system that more traditionally managed chains would view as ludicrously extravagant. In addition, managers receive 4, shares of stock, which vest over the five-year contract period. All hourly employees participate in a stock ownership plan as well. Another Outback innovation — not opening for lunch — generates benefits for investors, employees, and customers. The benefit to managers and employees is that they work only one shift per day.
Outback also insists that managers work only five days per week to avoid burnout and high turnover. Finally, focusing on dinner allows the restaurants to maintain high levels of food quality. From its founding, Outback grew to restaurants by the end of in a very crowded, competitive industry. Over the last five years, revenues have grown at a 55 percent annual rate, while earnings have increased Motivated, well-trained employees using state-of-the-art processes create outstanding customer value.
Growth and profitability result, increasing investor wealth. Part of that wealth is reinvested in employees and processes, perpetuating a virtuous cycle. For example, if the restaurants were in higher rent locations, they might be more tempted to open at lunch to cover that cost.
If managers worked longer hours, turnover would be higher and the partnership model that motivates those managers would be unworkable. If the quality of the food dropped, the number of meals from repeat customers would decrease, putting pressure on margins and tempting the owners to cut compensation to restore profits, etc.
Expanding the pie between a company and its customers. As markets become increasingly competitive and one industry after another is forced to deliver greater value in the form of lower prices, higher quality, or both, companies in those industries respond to the mounting pressure with one of two broad approaches.
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This approach can yield some short-term profit increases, but it is not sustainable. You can only squeeze so hard for so long. A smaller number of forward thinking firms innovate their way out of this zero-sum dilemma. One example of this kind of value-chain innovation is the Custom Sterile program of Allegiance, Inc.
Under the Custom Sterile program, all of the supplies needed for a particular surgical procedure are collected, packaged together, and sterilized in advance at an Allegiance facility. This helps hospitals to standardize and optimize their use of surgical supplies, and creates dramatic savings compared to the traditional process, in which expensive nursing labor locates the supplies from storage facilities within the hospital, collects them, and sterilizes them for each operation. The innovation is also good for Allegiance.
Instead of having their margins relentlessly squeezed in a series of transaction-focused, commodity sales, the company has created a relationship-focused, high-value-added offering that justifies higher margins. Competition and Customer Value Another fallacy that has cropped up in much of the literature on strategy is that the purpose of business is to beat the competition. There is no question that competition, like profit, is an important dimension that companies must be aware of and manage to successfully create value in the long run.
So competition is a key variable in determining whether a product or service provides a differentiated benefit to the customer, and one that she is willing to pay a premium for. Thus, we need to think of competition not as a goal, but as part of the business environment — a key element of the context in which a firm seeks to create value. What then become critical are the alternative responses to competition undertaken by different firms, some of which are more likely to succeed than others, given the nature of the business environment.
In the emerging information economy, the most successful responses to competition focus on two areas: 1 innovation that drives down the cost of products and services while increasing their quality and variety, and 2 building a deeper understanding of changing customer needs within increasingly specific market segments. Many of them pit the interest of the company against the interest of the customer — a prescription for customer alienation and long-term disaster.
At the same time, they are by far the resources that yield the highest returns. Real value creation and long-term growth and profitability occurs when companies develop a continuous stream of products and services that offer unique and compelling benefits to a chosen set of customers.