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Comparative and international business – Ghemawat’s (adaptation, aggregation and arbitrage) framework

Questions 1-
Ghemawat’s (adaptation, aggregation and arbitrage) framework has been used to analyze the demands placed on companies as they internationalize. Apply this framework to two companies and assess the usefulness of the framework in understanding the behavior of those firms.

Key points
1. Major theoretical assumptions of the aaa framework
2. Business environment in which real and potential tensions between AAA’s are weak or can be overridden
3. Different organizational requirement for the effective implementation of AAA’s
4. Divergent strategic goals associated with AAA’S
5. Specific examples to illustrate the usefulness of the framework

Key reference
Ghemawat 2007

Question 2
How do education and labor systems affect organizational capabilities?
Compare two institutionally contrasting countries and cite examples in your

Key points :
1. Labor market institution and skill formation systems
2. Impact of different labor market skill formation systems on employment strategies and work organization
3. Organizational capabilities causally associated with divergent work management systems and skill formation institutions
4. Two examples :US vs Germany (specific industries )

Key reference
Harcourt 2007
Wood 2012

Question 3
How and why do inter-firm relations vary across institutional contexts and
how do inter-firm relations influence firms development of organizational
capabilities? Support your answer with evidence.

Key points
1-Different dimensions of inter-firm relations
2-Different types of inter-firm relations in different business systems and associated socio-economic institutions
3-Different organizational capabilities
4-Causal pathways through which different types of inter-firm relations lead to divergent organizational capabilities and competitive strategies
5-Two example : Germany vs US (specific industries )


Question One

The AAA framework is critical in determining the requirements for a successful globalization strategy. During internationalization, firms are faced with quite some significant demands related to the need to exploit fully potential while capitalizing on market orientation. The AAA framework is an abbreviation for Adaptation, Aggregation, and Arbitrage (Ghemawat, 2007). Each ‘A’ is a manifestation of a significant global strategy. Adaptation can be defined as the process of maximization of a firm’s local relevance through an integration of both increased market share and enhanced returns to investment. On the other hand, aggregation refers to the process of delivering significant economies of scale through the creation of global and local operations. Aggregation majorly concerns with the standardization of the product offering or combining the production process and the product development process. Arbitrage is the exploitation of the distinct disparities between local markets (Ghemawat, 2007). It is done through the location of separate portions of the supply chain in various places.

The AAA framework allows companies to choose at least one strategy among the three to be the basis of successful investment across national borders. Each A is associated with a different organizational type. Furthermore, it is assumed that all the three strategies cannot be applied in the same organization at the same time. Two good examples of firms that can be used to understand the application of this model are McDonalds and Starbucks, which are leaders in their respective industries. Although both McDonalds and Starbucks have both had successfully international expansion programs, the beginning proved to be difficult in both cases. McDonalds chose an arbitrage strategy while Starbucks chose an adaptation strategy.

In other words, to achieve competitive advantage, which is a key feature of the AAA framework, Starbucks chose to achieve regional relevance across different markets via a focus on the national stance while ensuring the exploitation economies of scales. For instance, when Starbucks first launched in China, the response and product receipt by the Chinese consumers was not as expected. The Chinese culture commanded quite a different direction of consumer needs and consumption behaviors forcing Starbucks to achieve local relevance by adapting to the needs of consumers and the Chinese culture in general. In other words, the firm, through an adaptation strategy had to ensure that its local presence remained relevant to the local people while integrating increased returns to investment and the increasing market share (potential customers).

On the other hand, McDonalds has been forced to employ an international standardization program as means of achieving absolute economies. Shifts in consumer needs and corresponding market trends have forced the firm to increase investment in more diversified markets across the globe. Regional cultures and consumption behaviors and patterns have forced the firm to come up with a dynamic and flexible business model that allows people to change, adapt to change and also deal with changing operating environments effectively. This is in accordance to Ghemawat’s (2007) model. Previously, the firm employed a more centralized system where there was little specialization.

Subsidiaries and local distributors in different countries had to work within the standards and limits set by the parent firm. However, to gain competitive advantage, McDonalds had to employ a standardization approach based on aggregation where products will be specially produced to suit customer needs and market requirements. Ghemawat, (2007) agrees that this form of standardization allows the firm to complement the product development process and the production process to suit customer needs and demands. Furthermore, it can be seen as the major driver of profits for the company.

When considering the AAA framework, in this case, it can be noted that both firms; Starbucks and McDonalds, strive to succeed in a very competitive industry using different approaches and strategies. However, the framework bases much of its approach on a significant market orientation program that allows for successful product launch and corresponding receipt by the consumer. While the framework denies the possibility of a firm employing all the three strategies, it is analytically practical to associate arbitrage with the goals that both McDonalds and Starbucks have in their global expansion programs. To effectively implement the AAA’s in both case scenarios, both firms have identified the need to recognize market disparities as a key factor. These disparities are the basis upon which product launch and effective investment are conducted.

Thus, although the idea of arbitrage refers to the practical exploitation of these disparities, the goal of an internationalization program as the case of McDonalds and Starbucks, is defined the nature of different markets. Notably, the goals of globalization based on the AAA framework, still basing on how both firms utilize it, is characterized by different coordination of operations basing on firms connect their subsidiaries with the parent firm and how business partners work within the stipulated production conditions (Ghemawat, 2007). Furthermore, each A has a number of extremes that are crucial to watch for. For instance, the level of complexity in the whole process is to be watched while individual corporate strategies are designed to fit into the firm’s business model.

Question Two

Organizational capabilities are subject to many constraints both within and outside the organizational context. The macro-environment has a significant impact on the capabilities of a firm (Harcourt & Wood, 2007). Two major factors in the external environment include education and labor systems. Education refers to the nature of instruction and or training that people receive before they join an organization as workers. Labor systems, on the other hand, refer to the structures and institutions set up to control, manage and administer workers while actively fighting for their rights as well as setting employment laws. Notably, the work of a labor institution is likely to impact highly the capacity of a firm to hire or retain workers. Similarly, the education sector is also likely to influence the capabilities of a firm. To comprehensively understand more on this, it is significant that one identifies how the two factors influence organizational capabilities.

Differences in the manner in which law systems and training affect organizational capabilities are visible through an understanding of coordinated market economies (CMEs) and liberal market economies (LMEs) (Harcourt & Wood, 2007). Unlike the USA, which follows liberal market economies, Germany has a strong protection for employment through its coordinated market economies. In Germany, employers have been forced to seek for flexibility in their recruitment procedures to enhance capabilities by ensuring that cooperation among employees is upheld while teamwork is embraced. Harcourt & Wood, (2007) contend that restrictive labor laws like the case of the USA such as compelling firms to retain even the ‘worst’ of employees have made organizations reluctant in hiring people. The profound impact can be seen as a negative productivity line while the economy gets hurt the most. If an employee is unproductive or redundant at work, the best solution is a layoff. However, if the law protects the employees against job loss, then firms have to pay people for ‘nothing’. Significantly, and most apparently, this negatively affects profit margins. The cost of production becomes too high as the input surpasses the returns on investment.

In the USA, firm strategies towards force tenure are less compared to Germany. Legislation has a key role in determining how firms hire, retain and fire employees. Industries in CMEs and LMEs base on different worker characteristics. While training may seem to be the center of these characteristics, firms have a daunting task in ensuring that job requirements match well with a job-seekers’ qualifications. There is little or no variance at all in the manner in which training occurs in USA and Germany. Participation in training rates is almost similar in both cases as firms strive to maintain a highly skilled workforce (Harcourt & Wood, 2007). Investment in the human capital of workers in both USA and Germany is also almost similar. However, the impact of education, in this case, is more significant to consider than a mere comparison between the two countries. Employee turnover is lower in Germany than the USA because of training measurement. Informal job experience is much better to be used as a training measurement as the case of CMEs compared to normal classroom learning as the case of LMEs.

According to Harcourt & Wood, (2007) with experience, a worker is likely to value their work more and hence, fully engage their efforts as well as commit themselves to their responsibilities. This implies that such workers may be highly skilled compared to normal-class-learning employees. Hence, firms will strive to retain this kind of workers while enhancing firm capabilities.  However, low turnover and especially in the wake of strict protective labor laws, firms find it hard to balance between increasing performance and recruiting new skilled workers. Furthermore, induction programs and vocational apprenticeships have a significant impact on organizational capabilities. Induction oriented training is one of the major strategies used to counter high staff-turnover rates harmful to an organization’s performance levels. In Germany for instance, this has been more successful as firms recruit employees who are familiar with firm’s specific rules and procedures. Unlike Germany whose employment of apprenticeships characterizes the training of workers, USA’s apprenticeship training has evidently dropped. For instance, in USA workers in the automobile manufacturing industry receive four times less training compared to their equivalents in Germany.

Evidently, the recruitment of workers who are familiar with a firm’s specific rules and regulations is a first step in guaranteeing effective performance (Harcourt & Wood, 2007). This is because, such employee have an easier time coordinating between activities and not require further training. However, employees who have not gone through induction training find it hard to coordinate between firm activities hence, requiring further training. The cost of such instances is harmful to firm capabilities. Skill updating and re-training workers are a heavy investment of both time and resources which would have otherwise been helpful elsewhere. In other words, the effect on organizational capabilities is negative. Notably, the USA society is relatively unbalanced compared to Germany’s. This minority-majority basis has led to unbalanced training between low-waged workers and high-waged workers. The implication is still the same. Little training is the basis of poor performance hence, strained capabilities.

Question Three

When one talks about inter-firm relations, two things quickly come to their minds; strategic partnerships or simple in-sourcing or outsourcing temporary contracts. Multiple inter-organizational relationships are always multifaceted and complex basing on various contextual factors. Institutions have a great impact on the nature and manner in which inter-firm relationships work. In this particular case, institutions refer to the industry/sector societies and establishments that define rules within which inter-firm relations are to be founded. In other words, organizations are always expected to work within these institutions demands. Different countries have different institutions (Marchington& Vincent, 2004). Thus, there is a great possibility that inter-firm relations may vary across institutional contexts. These variations, on the other hand, have different implications for the individual development of firm capabilities. It is, therefore, significant to investigate how and why inter-fir relations vary and how these relations influence the development of organizational capabilities.

It has been argued that inter-firm relations are shaped by forces that exist beyond a firm’s internal operations and processes. However, it is also argued that institutional forces cannot influence the nature of these relations alone. Inter-firm relations have been classified under ACR and OCR types of relations. ACR relations characterize countries such as Britain while OCR characterizes countries such as Japan. In Britain, it has been identified that ACR relations are not feasible owing to the historical development of industries. Other institutional aspects affecting inter-firm relations include culture, employment and the fiscal system of the country (Marchington& Vincent, 2004). In other words, weak institutional structures have a less profound effect on inter-firm relations. Two idiosyncratic dimensions that can be used to distinguish between the ACR and OCR are the duration for reciprocity and the extent/level of interdependence between firms.  The extent of firm interdependence refers to how firms depend on each other through the relationship while the duration of reciprocity refers to the length of commitments between the two firms through the relationship.

As noted, trade institutions and local laws make up the contextual institutions that guide the conduct of relations between firms. The presence of trade institutions allows creates a conducive environment through which different firms develop trust with other organizations. One significant factor to note is how mining machinery and kitchen furniture industries in Germany are guided by institutional forces. These institutions come up with a stock of laws that have always, to some extent, achieved a high degree of harmonization of the expectations of member firms. Transparency and predictability are two factors that define these kinds of relationships. In other words, they formulate the basis upon which trust between firms can be developed regardless of whether the relationship is short term or long term.

In case the institutional order is unreliable, individual firms especially trustee firms are likely to use their power inappropriately hence, making the trustor firm bear the risk of conflict. Notably, industry structures and institutions should not be seen as rigid to the demands of firms. Rather, their actions are guided by the corresponding actions of individual firms in the sector. Hence, as Marchington& Vincent, (2004) connote; industry structures may vary across regions and boundaries, but the nature and actions of individual firms are more significant to consider. In other words, institutional forces across different industries only define the expectations that firms should live with as they strive to form relationships with other firms.

By establishing strong codes of conduct and industry standards, institutional forces lay a framework within which firms operate. This is enabled through laying down the expectations from each firm and the establishment of trust between these firms as well as a guiding paradigm for a beneficial relationship between the firms. Notably, OCR relations such as the case of Germany are more likely in the case of strong and powerful institutional forces (Marchington& Vincent, 2004). In simpler terms, strict government regulations and the presence of active trade associations is likely to impact heavily the creation of relations between firms. The positivity of these relationships is largely dependent on the establishment of rules and regulations by these intuitional forces. ACR relations, on the other hand, characterize less powerful institutional forces whose ability to control and determine the nature of interactions between firms is limited due to weak institutional structures.

Concerning this, it is quite significant to note that the creation, maintenance, and nature of inter-personal relations between firms are determined by the local institutional forces that exist. Furthermore, like the case of USA, institutional forces allow firms to participate in an interactive process through which they learn to act and operate within a set of agreed rules, standards and regulations. A powerful incentive for cooperation between firms is thus, provided through institutional forces (Marchington& Vincent, 2004). In the case of little institutional support or weak institutional control, it is relatively rare to see positive inter-firm relations. However, worth noting is the influence that these interactions have on the capabilities of a firm.

The more positive a relationship is; it the more positive the capabilities will be.  For instance, taking the case of mining machinery industries in Germany, if institutional forces heavily determine how relationships between, say, a mining firm and a machinery firm happen, it is likely that a high level of trust will emerge between these firms. As noted, there are various expectations from both firms by the industry structures. The trust will yield a sustainable relation through which both firms benefit. The benefits are more likely to emanate in the form of fiscal capabilities of individual firms. Nevertheless, if weak institutional forces guide the relations, they are likely to be negative owing to lack of trust and increased risk of conflict. The outcome is a reduced organizational capability.


Ghemawat, J., (2007). Managing Differences: The Central Challenge of Global Strategy. Harvard Business Review, March 20007, p 59-68.

Harcourt, M., & Wood, G., (2007).The Importance of Employment Protection for Skill Development in Coordinated Market Economies.European Journal of Industrial Relations, Vol. 13(2), p 141-159

Marchington, M., & Vincent, S., (2004).Analyzing the Influence of Institutional, Organizational and Interpersonal Forces in Shaping Inter Organizational.Journal of Management Studies Vol. 41(6), p 1030-1056

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