Discuss about the Competitive Strategy.
Pankaj Ghemawat, from the Harvard Business School, very recently proposed the AAA Framework, a three-dimensional framework that can be used to describe international strategy (2007). It expands on the integration-responsiveness tension further and Ghemawat argues that if it is assumed that the main tension in the case of global strategy lies between economies of scale and local responsiveness pushes organizations in giving a cold shoulder to the other functional response in opposition of cross border integration: arbitrage. Several companies have found big opportunities in the form of value creation in exploitation instead of just bending to or surmounting the variations they come to face at the borders of their different markets. The three dimensions encompassed in the AAA triangle are:
Figure 1. AAA Framework
Source: (Ghemawat 2007)
In the Australian airlines industry, both Qantas and Virgin Australia are big names. In the international airspace, Qantas enjoyed substantial presence before the growth of the Middle Eastern and Asian carriers. The new low-cost modern capacities that came up in Europe routes captured Qantas’ market share and kept on eroding it. Qantas moved towards irrelevance and oblivion and decided they need to take dramatic steps to diminish their cost base and remodel their global strategy (Bartholomeusz 2013). Qantas had been suffering huge losses in their international business while their European services stopover point was Singapore. To adapt to the needs of their business, they struck a deal with Emirates airlines and decided to replace Singapore with Dubai to overhaul their loss making overseas business. The two airlines co-ordinate pricing, sales and flight schedules and even have a profit sharing agreement concerning the flights operating between Australia and UK. Qantas chief executive Alan Joyce described the event to be a huge step ahead in an effort to bring back profitability for their international business. In Middle East and Asia Qantas faced huge competition from other carriers, along with the rising fuel prices. Qantas’ traditional model was put aside to get into a new arrangement, the first of its kind for the organization. Further, they decided to remove existing code sharing agreements in Europe and close down services in Frankfurt (Hume 2012). It can be seen that Ghemawat’s arbitrage dimension is in play here.
Virgin Australia of the Virgin Group, resides as one of Australia’s top three best airline carrier with Qantas and Air New Zealand. Very recently last year the carrier faced an issue when their chief executive, John Borgetti, came face-to-face with a crisis in the form of a major shareholder who attempted ousting him over his refusal in reining Virgin’ expensive growth strategy. He retaliated by joining hands with two new Chinese shareholders, HNA Group and Nanshan Group (Smyth 2016). Like Qantas, using the arbitrage strategy, Virgin Australia put a step ahead to maintain its position as a viable competitor to Qantas, and at the same time use the boom in travel and tourism to its advantage. Virgin has been looking for growth and China, being the future for inbound travel, has been a strategic choice to unite with. Reports showed that in 2015 100m Chinese travelled overseas, and there has been significant rise in the investments into overseas lifestyle and services business over the last few years from the Chinese people (Thomson 2016). The two new shareholders would now equally share the burden of Virgin Australia along with the carrier’s other shareholders. Borghetti wanted to put to good use the fastest growing source of tourists from China and thus struck a deal with HNA Group, who bought 13% stake of the Australian carrier. According to forecasts, the Chines tourist numbers in Australia is calculated to go up to 4m a year by the year 2030 and the projected growth potential is remarkable (Janda 2016).
Coming to a very different industry, retail, an Australian retail company that has incorporated elements of Ghemawat’s AAA framework is Wesfarmers. Wesfarmers had been faring well in the Australian market, unlike its rival Coles. Even though Coles had a huge market base, they lost out significant number of customers and submerged in debts . Wesfarmers was looking for market expansion and they saw a lucrative opportunity in Coles. Their main motive was, as Richard Goyder, said was to give back Coles its rightful position in the retail business in Australia, and the fact that it would be a substantial and attractive addition in the Wesfarmers business added more viability to it. With Coles was added the vast expanse of the retailer’s business. The shareholders had an added interest – they wanted to end their uncertainty and keep Coles as the Australian-owned business that it was and its staff benefitted from a revitalized retail force. Along with Coles came a significant growth in the operational base of Wesfarmers and a large number of new employees (King 2015). After the acquisition in 2007, Coles Group officially suspended their shares from close of trading on the ASX in the same year (Coles acquisition 2017). In this act by Wesfarmers, Ghemawat’s adaptation strategy can be seen in play, as Wesfarmers attempted to remodel their firm by including Coles in the operations and at the same time they wanted to focus on the local strategies and local conditions and adjust their strategies accordingly for maximum profitability.
Harvey Norman is considered Australia’s finest retail electronics and furniture chain, with a vast history of retailing behind them. They experienced the worst retail turndowns of the decade and decided not to open any more stores in their domestic market (Carruthers and Cleary 2012). The retail market has shifted largely in the last decade, from the internet to overseas competition from online retailers. Their business model of direct property ownership and franchising has worked for long, serving customers, vendors and shareholders properly (Bell 2014). However, they needed a new model and they moved outside Australia into Ireland, Croatia and Malaysia. Malaysia was chosen as the country boasted of an increasingly wealthy population which is growing at 4 per cent annually. They did not close their domestic stores though. Harvey’s simple solution was to invest outside Australia and increase the number of overseas stores. That is exactly what they did (Korporaal 2016). Halting the store openings in Australia the firm focused on overseas expansion to chart new waters and exploit the diverse economics, exactly like the arbitrage strategy of Ghemawat’s AAA framework. One very important reason the renowned firm concentrated on overseas business instead of the domestic one was the poor articulation of the government regarding where the economy is going for the retail industry. They knew repositioning their business would be tough and that it’s too late, but they set their eyes on remodeling and that they did (Korporaal 2016).
Coming to the success and failure story of the four firms discussed above, AAA framework has played a big role – a positive role. Ghemawat’s strategic dimensions bought in profitability for all the four firms, in different measurements. For Qantas, who followed the arbitrage strategy, the success with the Dubai port was historic. The partnership between Qantas and Emirates brought in a tectonic shift in the global aviation industry and it reformed the entire landscape for Australian travelers. Dubai became the Flying Kangaroo’s center spot for international network, reducing time and expense for the travelers. It brought scores of European destinations within the one-stop away purview from the Emirates Dubai hub. Together the carriers are taking more travelers to more different places, sharing customers and destinations in Europe, the Middle East and North Africa. In addition, the joining of the two opened up the Emirates flights for the Qantas loyalists out of Australia, who received the benefit of booking flights under their QF numbers only and earn the Qantas frequent flyers points’ full serve along with status credits. The frequent flyer card can also allow access into almost all Emirates lounges, making its special and different for loyal customers of Qantas (Flynn 2015).
Using arbitrage strategy of Ghemawat, even Virgin Australia gained success. Their partnership with Chines giant HNA opened huge doors for them. It put virgin in the second position after Qantas, even after repeated financial losses for a couple of years. Putting Virgin in the competition again, the adoption of the strategy turned it into a viable competitor to Qantas, even though Qantas has hold of 63% of the domestic airline market. The Chinese airlines had for long held international ambitions for their carriers and were seeking partners for exploiting the rising tourism boom in the country. With the venture, a significant growth opportunity for both the country’s airline business came in with the opening of international routes. The tourist numbers are expected to rise exponentially in the near future (Palmer 2016). The strategy has reformed Virgin into a full service airline, making it leave behind its budget carrier tag and compete directly with the Flying Kangaroo. The Australian customers have benefitted significantly, who have reaped benefits of lower domestic airfares in the duopoly market. The implementation of the strategy was a success in the financial aspect also, with Chines shareholders contributing huge support to the cash-strapped Virgin. The cooperation has extended to sharing of codes, frequent flyer programs and mutual lounge access. It has also made interesting dynamics within the management team, even after being challenging for both the parties (Hatch, Freed and Smith 2016).
The objective Wesfarmers had in acquiring Coles for themselves was fulfilled after the full remodeling of the Coles side of operations. The iconic brand of Coles underperformed for full ten years. With a bloated head office and a poorly managed business, all the aspects of the firm was in a downfall. The adoption of the adaptation strategy was a bold move from Wesfarmers side – a risky acquisition. But the business today is unrecognizable. Under the leadership of Ian McLeod the profits doubled and the business went on to outperform its direct competitor Woolworths for consecutively four years. More than $2 billion of free income has been come back to Wesfarmers and for the shareholders huge value has been created. Costs have been decreased for Australian purchasers and the nature of fresh food expanded with enormous changes in the benchmarks of produce-developing and animal farming. It is most likely the best performing global top 30 food retailer in the course of recent years (Norman 2013).
A similar success story can be seen in the case of Harvey Norman. The company expanded into new countries and explored new economies, which has brought a long awaited success and revenue spike. The 13 Irish stores recently experienced growth by more than 10% and the online sales by 38%, backed up by the recent acceleration of the Irish retail economy. They also reaped benefits of their investment program in its Irish estate at the time of recession. The success has boosted their confidence, encouraging them to open more stores in the region. The adaptation they have adopted and the expansion they have done has brought in the much needed success for the well-known retail firm. They got the experience of the benefits of model change and how adaptation to modern procedures can actually improve their competitive advantage in the market (Paul 2016).
Conclusion
In conclusion, it can be said the Ghemawat’s AAA framework has proven to be extremely profitable and successful for the four organizations discussed – Qantas, Virgin Australia, Wesfarmers and Harvey Norman. The organizations might not have incorporated all the dimensions of the framework, but seven the adoption of single dimensions has proven be largely beneficial for them. Organizations can invoke inspiration from such cases and implement these strategic dimensions in their operations, singularly or all three, to reap benefits and gain competitive advantage in the global market.
References
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