Describe about the AAA Global Strategy Framework.
The AAA global strategy framework is three generic approaches to create global value. This framework was developed by Pankaj Ghemawat. The three As stand for Adaptation, Aggregation and Arbitrage (Ghemawat, 2007). This framework allows the business operating at global level to adapt these strategies and attain better results. A business might be able to incorporate one or two strategies at the most, but if a business is able to incorporate all the three strategies then it gets the optimum output out of its operations (Ghemawat, 2001).
Adaptation strategy - To adapt one or more strategies in the business to increase the value generated by meeting the requirements of the local market is one of the most recognized business strategy. Every business involves some changes in their products or services to cater to different markets. Adaptation strategies focus on reducing the need for adaptation of new strategies and improving on existing adaptation because it incurs extra costs (Ghemawat, 2011).
Aggregation strategy – In this strategy the company focuses on Achieving economies of scale. The company tries to group together development or production process and exploit similar opportunities in a geographical area in order to reduce costs. The company identifies certain similar key components in the business model that could be standardized and the economies of scale could be introduced. The business also keeps in mind to not to compromise on local needs of the customers (Ghemawat, and Siegel, 2011).
Arbitrage strategy- It is a strategy to exploit market opportunities because of difference in the culture, geographical location, economics or administrative policies. Arbitrage focuses on performance enhancement, cost reduction and risk reduction (Ghemawat, 2011).
Industry 1- Food and Beverage Industry.
First Company- McDonald’s, the world’s largest company that serves fast food. The company operates in 119 countries and has 35,538 outlets. The company was founded in the United States and headquarters in Chicago. The company’s primary products were hamburgers, cheeseburgers, chicken products and breakfast items along with soft drinks and milkshakes (McDonald's History, 2016). The company adapted to the demands of the various domestic markets and changed its menu accordingly. Today McDonald’s is a renowned brand in the fast food industry. The company incorporates adaptation strategy aggressively but is slow on aggregation and arbitrage.
Second Company- Kentucky Fried Chicken, is a fast food chain that is especially renowned for its fried chicken. The company is headquartered in Kentucky, United States. It is the second largest fast food chain after McDonald’s. The company serves in 123 countries and has almost 20000 outlets globally (What made us great is still what makes us great, 2016). The company continues to grow globally and has changed its menu overtime to adapt to the changing demands of the market as well as to enter and cater to potential market of different countries. The company is slow on aggregation and arbitrage strategy.
Industry 2- Computer Industry
First company – Apple Inc.- An American Multinational Company headquartered in Chicago that designs, develops and sells consumer electronics, computer software and online services. The company also sells hardware product that includes the most running and highly successful Iphone Smartphone, Mac personal computer as well as Ipad tablet computer (Apple Info., 2016). The Company sells its products at a higher price than its competitors because of its high quality and user friendly experience. It is the world’s largest information technology company by revenue. To company is rigid in its pricing policy because it serves a higher quality product but to capture a potential market the company has changed its policies and adapted new strategies. The company also incorporates the strategies of aggregation and arbitrage.
Second company – International Business Machines Corporation (IBM), is an American Multinational Technology company which is headquartered in New York, United States. The company operates in over 170 countries and manufactures computer hardware, middleware and software (About IBM, 2016). The company has adapted new strategies to cater to the potential market and expand its global presence. It also incorporated aggregation and arbitrage strategies.
First Company - Adaptation at Mc Donald’s
When Mc Donald’s an internationally renowned fast food brand decided to enter Indian market, they had to undergo a lot of changes. To serve hamburgers to the middle class people where every 1 out of 5 is a vegetarian and worship cows was a difficult challenge. But since the market was large, the company was willing to adapt strategies to cater to Indian markets. The first adaptation made by the company was to make non beef burger with mutton, and most importantly to cater to vegetarian customers the company figured out the choice of a typical veggie client and adapted its most fast running product McAloo Tikki which is a sophisticated version of a cheap potato cake that locals eat from roadside vendors. Second adaptation was that since Indians prefer cooked food, the company had to revoke its less selling products such as salad sandwiches and focus more on cooked food. The adaptation strategy also included designing the menu to suit Indian customers. Mc Donald’s in India had to adapt to a lot of changes to fit and survive in the Indian market (Mourdoukoutas , 2011).
Second Company- Adaptation at Kentucky Fried Chicken
Kentucky Fried Chicken or KFC is synonymous for chicken. This brand of fast food is most famous for its variety of chicken, but to cater the Indian market the company had to undergo a lot of changes. The company is making rebranding attempts to accommodate vegetarian food items on their menu in India. The company stepped up to operate two full-scale vegetarian outlets to capture the larger market share by catering to the tailored local needs. This strategy to adapt to the changes as per the market has helped KFC in establishing a brand name in India as well. The brand was relaunched in India in the year 2004; the strategy adopted was to offer vegetarian food and to tap the potential vegetarian share of customers in the market (Prabhakar, 2012).
First Company -Adaptation at Apple Inc.
To enter the market as potential as India, apple had to adapt a few strategies which is an exception to the norms of the company. The company has been known to position itself in the high segment of the market in the western economies and command prices. To cater to the Indian market where there is huge competition and potential users for the Smartphone, the company had to roll out a pricing plan for the phones that will permit the customers to purchase it and pay on the longer term payment plan. The company also reduced its prices when converted from rupees. This was done because India is an attractive market and in order to capture it Apple had to adapt too few changes in the pricing strategy (Langeland and Li, 2013).
Second Company - Adaptation at IBM
The company based in the U.S. had set up mini IBMs to target the local needs of the potential market of different countries. This adaptation strategy was undertaken by the company to adapt to the local needs of the market. The company operated large business but this strategy made it possible for them to adapt to local differences and to capture a large share of the overseas market (Ghemawat, 2007).
First Company - Aggregation at Mc Donald’s
Mc Donald’s has adapted the strategies well as per the Indian market, but the strategy of aggregation is not yet fully incorporated in the company’s domain. The main reason for not pursuing the aggregation strategy on a wholesome level is that Mc Donald’s have to cater to different types of customers in different regions. The only leverage that the company has is in aggregating only a few factors that are common in all the outlets of the country (Yamada and Keiichi, 2010).
Second Company - Aggregation at Kentucky Fried Chicken
KFC tries to maintain balance at adaptation with aggregation. The company has adapted various strategies to cater to Indian market but along with that it also maintains standardization of the parts of value that could travel without any hassle (Prabhakar, 2012).
First Company - Aggregation at Apple Inc
Apple has aggregated its production process to achieve the economies of scale. This also signifies that apple focuses on standardization. The company has its manufacturing process and assembly process in china, this means that the company is producing its products at one place and selling them worldwide. This would help the company in reducing the costs incurred at setting up different manufacturing units (Langeland and Li, 2013).
Second Company - Aggregation at IBM
The adaption strategy made it difficult for the company to achieve economies of scale because adaptation as per different countries meant no standardization and higher input cost. To achieve international scale of economies the company decided a regional structure for the mini IBMs. This concept aggregated one country into one region and one region had one structure. This helped in improving the coordination and in generating more scale of economies at the regional as well as global level for the company (Ghemawat, 2007).
First Company - Arbitrage at Mc Donald’s
McRib, a sandwich which is made up of pork was quite a hit in America, but this product was never in continuous supply by the company. Mc Donald’s took advantage of the price arbitrage strategy and bought pork only when its prices used to be low, they used to buy the pork in wholesome quantity and would run the sandwich for good price when the prices used to be high again (Mourdoukoutas , 2011). .
Second Company - Arbitrage at Kentucky Fried Chicken
Kentucky fried chicken as accompany focuses on only two strategies of this framework- adaptation and aggregation. The company as of now has not focused on arbitrage strategy (Prabhakar, 2012).
First Company - Arbitrage at Apple Inc.
Apple outsources manufacturing and assembly process to China. In 2013, it was estimated by Forbes that if Apple brings back manufacturing to the US, it would incur $4.2billion extra cost. This strategy adopted by apple is due to low costs in the Chinese market as compared to costs that would incur in the American market. The company exploits this economic difference across borders. It sells the products manufactured in china worldwide and enjoy the high price difference (Langeland and Li, 2013).
Second Company - Arbitrage at IBM
The company had recently also undertaken the arbitrage strategy. This strategy enabled the company to exploit the economic difference across borders. The company reduced its head count in the United States and increased its work force count in India. This was done to exploit the wage difference across geographical boundaries. The labor in the United Stated is expensive as compared to the labor wage in India. The quality of the labor is however same, this gave the company a way to the incorporate arbitrage strategy in their structure (Ghemawat, 2007).
The analysis showed that if a company undertakes these strategies it results in increasing its competitive position in the global market. In the food and beverage industry it was essential for McDonald’s and KFC to undertake these strategies, especially Adaptation strategy if it wanted to cater to a different type of market. Both the companies had to change their menus and adapt to a menu that suited the Indian market. McDonalds established its base a little more deeply than the KFC. KFC had to rebrand itself in Indian market. Both the companies could not aggressively take up aggregation and arbitrage strategies , reason being that aggregation was only possible in the factors that were common in the region, and there were very few common factors across the globe in the outlets of the companies, arbitrage were adopted but not as aggressively as adaptation. The second was Computer Industry, where Apple Inc. and IBM were analyzed for their strategies. The former adopted adaptation and aggregation very aggressively. Apple inc. has a rigid pricing policy due to its high quality but to cater to Indian market the company had to adapt a new pricing strategy. Aggregation has allowed Apple to enjoy economies of scale and manufacture its products in the Chinese market and sell them worldwide. Arbitrage strategy is that they enjoy the economic difference of low labor wages and high technology in china and sells their product worldwide. IBM also incorporated adaptation, aggregation and arbitrage by opening up mini IBMs to cater to domestic needs of the market, aggregating and standardizing their product at the later stage and by enjoying the difference in labor wages in India and reducing the head count in the US. The companies should adopt these strategies to achieve full potential and exploit the market opportunities globally.
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