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2.2.5 Value Chains and Global Strategy

The AAA framework suggests ways to manage distances that have been recognized in the CAGE framework within international business expansion. This is effective when considering global business strategy, though this discussion remains highly abstract. The application of this framework to a more detailed corporate strategy requires further examination of corporate activities. We separate what we call “international business expansions” into components of corporate activities, and then consider how each activity contributes to an improvement in corporate value through globalization. The concept of value chains as proposed by Michael Porter breaks down a company's internal functions and combines the value added by each function, leading to overall corporate value.

Figure 2.4 indicates manufacturers such as automakers. The automobile manufacturing process begins with the procurement of parts. These parts are assembled into completed vehicles at factories, exported, and then sold to consumers via dealer networks, who provide post-sales services such as maintenance services. The entire process from vehicle production to post-sales service, through activities such as production and sales, are called primary value chain activities. However, the valueadded activities for the company as a whole are not limited to such activities, and corporate functions exist to support divisions that provide these primary activities, such as divisions responsible for personnel management (human resources), R&D, and procurement.

Companies are organized along these functional divisions, with leaders of each function comprising the management team. These leaders are often directors and corporate officers. A clearer image of global strategy appears when each business unit considers increasing the value chain of activities in global expansion. The AAA framework becomes more crystallized when deliberated at the business unit level.

Figure 2.5 indicates in basic terms, the three R&D areas, procurement and manufacturing, and sales and service as they apply to overseas expansions. First, for R&D, particularly research, it is vital to aggressively incorporate advanced technology from overseas markets. A typical example of this is the establishment of research centers in Silicon Valley or near Boston, and the conducting of joint research with local universities and research institutions. Developing products in response to local needs is also critical. As earlier stated, “adaptation” is critical for white-goods products, but it is executed only when differences in lifestyles are of significant distance in term of the CAGE framework, the local market is of sufficient size, and economic rationale for developing products with localized specifications is high. In addition, offshore development in regions such as China is a form of R&D “arbitrage.” Typically, outsourcing often refers to the offshore development performed by software companies; however, it may also imply internationalization of activities such as product development and design.

Next we look at procurement and manufacturing activities, which essentially utilize “aggregation,” or the expansion of production facilities from the domestic country (mother factories) to the overseas market. In this case, cost margins are possible by arbitrage of wage differences and in the use of local suppliers. A key

Fig. 2.5 Activities of overseas entities by corporate function

limitation to creating overseas production facilities is the risk associated with such high investments. In addition, there are significant transaction costs associated with managing local labor and with decentralization of production facilities. Balancing both determines the financial feasibility of localization. Generally, developing nations have higher tariff rates than developed nations, so that local production makes more economic sense as compared to exporting products to these countries. However, the recent entry of many developing nations into the WTO has resulted in a declining average tariff rate. In addition, regionally flat economic zones, such as those created by the ASEAN Free Trade Agreement, an economic partnership agreement for ASEAN countries, are beginning to take shape. This is in turn causing the production centers of Japanese corporations, which were formally spread throughout Asia, to be concentrated in single countries. Recently, ASEAN entered into economic partnership agreements with Japan, India, and China, and integration of production centers within Asia is expected to continue further.

Finally, we look at sales and service as critical toward understanding the needs of local customers, and as the function most essential for successful localization. Expanding product sales and services in each region requires activities rooted in that region, as well as the cooperation of local companies in networks such as distribution and retail. Thus, there is a strong tendency toward “adaptation” within the AAA framework, with a high level of “arbitrage” from the perspective of highly utilized local sales staff. On the other hand, in cases where brand management is important, as is the case with cosmetics, companies must take care to balance aggregation and adaptation. For example, when Shiseido entered the Chinese market, it used both the SHISEIDO global brand and the “Aupres” brand that was created specifically for the Chinese market. Separating the brands circumvented the possible damage that could be caused to its global brand while maintaining its ability to go after a large local customer segment (the volume zone) (refer to Chap. 9 for details).

 
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