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The AAA Framework propagated by Ghemawat explains the three generic constituent for company to create value in the process of venturing into international business and they are adaptation strategies, aggregation strategies and arbitrage strategies. Adaptation strategies promote the concept of changing one or more element of the marketing process to cater to the needs and preferences locally and improve the revenue and market share prospect of the company (Morschett, Schramm and Zentes, 2015). Aggregation strategies promote the concept of standardizing the value proportion significantly by combine development and production process together. Arbitrage strategies promote the concept of exploring the economic and other variance identified in the regional and national market and identifying separate attribute of the supply chain process in various locations. In this assignment two industry and two companies in each industry is used to explain the AAA Framework.
Adaptation is the process of creating value proposition globally whereby the company change one or more element related with the marketing mix to cater to the needs and preference of consumers locally. This is based on the premises that certain degree of change (adaptation) is imperative or inevitable for all goods in every corner of the globe practically. There are five divisions of adaptation strategies available for the company with respect to the global market and they are variation strategies, focus strategies related with products, market segmentation, geographies or vertical stages as element of minimizing the implication of variance across locations (Morschett, Schramm and Zentes, 2015). The third is externalization strategies and it explore strategic alliances, user adaptation, franchising or networking responsibility in context to particular components of a company and its strategies with partners to adjust to local needs, cost or risk reduction. The fourth is design strategies and it promotes cost reduction rather than variation with the help of flexibility in design and overcoming supply variation. The last one is innovation strategy and it is related with enhancing the efficiency of adaptation process.
Aggregation is the process of creating value proposition globally whereby the company focus in developing economies of scale as means of handling the differences. The goal of this strategy is exploring the geographic similarities compared to adaptation to disparity without going total standardization that could damage the coexisting adaptation strategies. The essence of the concept is to manage means of introduction of the aggregation strategies without impacting local sensitivity negatively. The various aggregation strategies include geographic and non-geographic aspect (Rugman, and Verbeke, 2004). The non -geographic aggregation strategies again can be classified into cultural aggregation, administrative aggregation, and economic aggregation. The cultural aggregation is related with the language and traditional aspect. The administrative aggregation is related with regulatory and legal aspect. The economic aggregation is related with the difference in developed and emerging market across the globe. It is identified from the research that even if the company has business in different location the competitive interaction tends to be focussed regionally in most cases.
Arbitrage is the process of creating value proposition globally whereby the company aims to explore differences rather than aiming to bridge them or adapt to them. It explains the unique global strategy that state buying in one market at low cost and selling them in other market at high price (Rugman, and Verbeke, 2004). In the modern corporate environment it can be associated with the concept of off-shoring and outsourcing. The absolute economies that has low visibility while being of great significance are developed by higher differentiation with partners and customers, increased bargaining power with suppliers for the company, minimization of logistics and supply chain and other risks both market and otherwise and by promoting local development and knowledge sharing process. As the arbitrage strategies promote the concept of exploring the regional differences, the CAGE framework (Cultural, Administrative, Geographic and Economic) plays a significant role and assist in the setting of sub strategies for generic method related with the value creation globally. The favourable impact in terms of place or country of origin has been part of cultural arbitrage for long (Ghemawat, 2003). On the other hand the differences between regions and countries in terms of legal, political or institutional differences served as the basis for administrative arbitrage. With the development in the communication and transportation leading cost efficiency the need for geographical arbitrage has reduced but it has not completely ceased. The economic arbitrage is related with strategies that are not directly related to cultural aspect, administrative aspect or geographic aspect.
The three strategies namely adaptation, aggregation and arbitrage and their different variants are explained in the below table.
The first sector chosen is computer industry (hardware and software) as the most of the companies in this sector expand to international market to improve the business and sustain the growth of the company. In the pursuit of making an impact in the global market the company uses the AAA Framework namely adaptation strategies, aggregation strategies and arbitrage strategies (Ghemawat, 2003). To understand the global value creation strategy using the AAA Framework two different companies representing the same industry is taken and they are IBM (International business machines) corporation and TCS (Tata consultancy services) and both are examined to understand the strategy used by them to establish their business in the international market.
IBM is a multinational company founded in 1911 by the name Computing –Tabulating-Recording Company (CTR) with the head office in New York, US. The name of the company was changed to its present name International business machines) in the year 1924. The company makes and markets all computer products including hardware, software and middleware and provides consulting and hosting services in a wide range of areas like personal computer, mainframe computers and nanotechnology (Ibm.com. 2002). The company also has a strong research and development wing (R&D) and has registered the most number of patents since the last 23 years consecutively. The company is nicknamed Big Blue and is one of thirty companies representing the Dow Jones industrial average. The company operates in 170 countries across the globe with strong team of 3, 80,000 employees globally known as IBMers and is considered the largest employer in the world.
The company uses different A’s of the AAA Framework to create value globally at various points in the process of establishing business in the international market. The company used the adaptation strategy to enter the various international market it operates standing at 170 countries across the globe (Ricart et al., 2004). IBM caters to international markets by launching a mini IBM in the foreign country where the company performs a range of business operation and activity by applying the adaptation strategy and matching the local needs and preferences of the consumers. But in the course of operation when the company observed adaptation country by country resulted in limiting the scope it shifted to aggregation strategy to improve scope in the global market by taking advantage of economies of scale.
TCS is a multinational company founded in 1968 with the head office in Mumbai, India and it is part of the Tata Group of companies. The company provides consulting and business services and it is considered the Big four valuable brands in the IT services globally (Tcs.com. 2008). TCS has operation in 46 countries across the globe and it is also considered as the 10th biggest service provider in the IT sector. The company has 3, 62,079 employees supporting the global operation of the company.
The company excelled in using two A’s of the AAA Framework. The company used the arbitrage strategy whereby it indulges in software service export to those international markets where the labour cost is high. Later TCS supplemented this strategy with the aggregation strategy by developing a new delivery structure globally that has three types of development centres for software. Global centres based in India cater to large account and include codding and quality control facility (Ricart et al., 2004). The regional centres based in Hungary and Brazil cater to language and cultural aspect with limited capabilities. The near shore centres of the company based in Phoenix and Boston cater to developing customer satisfaction by closeness of location.
The second sector chosen is Pharmaceutical industry as the industry has many multinational companies. The sector has technology oriented innovative drugs to the generic drugs over the counter (OTC). The Pharmaceutical industry also use the AAA Framework namely adaptation strategies, aggregation strategies and arbitrage strategies to establish the business (Ghemawat and Ghadar, 2006). The two companies selected to understand the global value creation are Eli Lily and company and Novartis International AG.
Eli Lily and company is multinational Pharmaceutical company established in 1876 with the head office in Indiana, US. The company was known to produce penicillin in mass quantity and it was also the pioneer of human insulin and its production with the help of recombinant DNA (Lilly.com. 2010). Eli Lily and company is the biggest producer of psychiatric medications and distribute it across the globe. The company operates in 17 countries with the products catering to 125 countries globally. The company employs 37,925 staff across the globe.
The company use the adaptation strategy to create global value creation. Eli Lily and company use the externalization strategy one of the five adaptation strategy to promote the business in the international market. The company explore the strategic alliances in the international market to promote the process of drug development and testing of drugs (Rugman, and Verbeke, 2008). It is also using the administrative aggregation to market new drugs in the international market with the objective of fulfilling the regulatory formalities to seek the licence so that the company can distribute the drugs in the new market.
Novartis International AG is a multinational company established in 1996 with the head office in Basel, Switzerland. The company has wide product line including pharmaceuticals, over the counter drugs, generic drugs, vaccines, contact lenses, diagnostics and animal health. Novartis International AG is the biggest pharmaceutical company in terms of market capitalization at $280 billion (Novartis.com.au. 2011). The company’s products are distributed in 140 counties across the globe. There are 118,700 employees working globally.
The company use the combination of Adaptation strategy and aggregation strategy to establish the business in the international market and create value globally. The company use the externalization strategy as the adaptation strategy. Ciba –Geigy and Sandoz merged to form a new entity known as Novartis. It also formed strategic alliance with Astra Zeneca to strengthen the international business (Ramsey et al., 2010). Again the company use the aggregation strategy to enter new market in the international business with administrative aggregation to seek the licence and regularity in the foreign market to sell the product. Thus it use the two A’s of the AAA Framework to create value creation globally.
Thus it can be concluded that every company planning to expand to international market needs to explore the AAA Framework namely adaptation strategies, aggregation strategies and arbitrage strategies. Adaption strategy use the five variants namely variation strategy, focus strategy, externalization strategy, design strategy and innovation to create value creation. The aggregation strategy focuses on economies of scale and economies of scope to promote value creation globally. The arbitrage strategy includes the performance enhancement, cost reduction and risk reduction to promote value creation in the international market. To explain the strategy two industry namely Computer industry (hardware and software) and Pharmaceutical industry was chosen to illustrate the concept of AAA Framework (Ramsey et al., 2010). Again two companies from each namely IBM (International business machines) corporation and TCS (Tata consultancy services) representing the Computer industry (hardware and software) and Eli Lily and company and Novartis International AG representing the Pharmaceutical industry was taken and the AAA Framework use by each company was evaluated. In context to the IBM it was observed that the company use the strategy of adaptation strategies and aggregation strategy to establish the business in the international market by developing a mini IBM in every foreign country and combined with aggregation strategy using economies of scale. TCS used the arbitrage strategy to sell in the market with high labour cost and used aggregation. Eli Lily and company and Novartis International AG used externalization strategy and aggregation strategy to create value globally.
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