When it comes to global strategy, most business leaders and academics make two assumptions: first, that the central challenge is to strike the right balance between economies of scale and responsiveness to local conditions; and second, that the more emphasis companies place on scale economies in their worldwide operations, the more global their strategies will be.

These assumptions are problematic. The main goal of any global strategy must be to manage the large differences that arise at borders, however they are defined. Moreover, assuming that the principal tension in global strategy is between scale economies and local responsiveness encourages companies to ignore another viable strategy: arbitrage.

In this article, I present a new framework for approaching global integration that gets around the problems outlined above. I call it the AAA Triangle. The three A’s stand for the three distinct types of global strategy. Adaptation seeks to boost revenues and market share by adapting the firm's products or services to the local context. Aggregation attempts to deliver economies of scale by creating regional or sometimes global operations; it involves standardizing the product or service offering, grouping together activities such as development, production and marketing at a regional level or by languages, etc. Arbitrage is the exploitation of differences between national or regional markets, often by locating separate parts of the supply chain in different places - for instance, call centres in India, factories in China and retail stores in Western Europe. Different ways of operationalizing these three broad strategies are discussed in detail in my book, Redefining Global Strategy (Harvard Business School Press, 2007).

Because most border-crossing enterprises will draw from all three As to some extent, the framework can be used to develop a summary scorecard indicating how well the company is globalizing. However, because of the significant tensions within and among the approaches, it's not enough to tick off the boxes corresponding to all three. Strategic choice requires some degree of prioritization-and the framework can help with that as well.

Understanding the AAA Triangle

The three As are associated with different organizational types. If a company is emphasizing adaptation, it probably has a country-centered organization. If aggregation is the primary objective, cross-border groupings of various sorts - global business units or product divisions, regional structures, global accounts, and so on - make sense. An emphasis on arbitrage is often best pursued by a vertical, or functional, organization that pays explicit attention to the balancing of supply and demand within and across organizational boundaries. Clearly, not all three modes of organizing can take precedence in one organization at the same time. And although some approaches to corporate organization (such as the matrix) can combine elements of more than one pure mode, they carry costs in terms of managerial complexity. A few leading-edge companies are pursuing AA strategies, such as Tata Consultancy Services (aggregation and arbitrage) and P&G (adaptation and aggregation). Some companies have emphasized different A’s at different points in their evolution. For example, IBM traditionally focused on adaptation and was organized into small, fairly complete branches of IBM in different countries. Subsequently, when its activities increased at a much larger international scale, IBM chose to aggregate the different countries into regions. It is only more recently that IBM has been involved in arbitrage, specifically, in exploiting wage differences.

Strategic Choices

Philips Medical Systems (PMS) offers a good opportunity to see how the AAA triangle can help companies devise good global strategies in lieu of its competitors. PMS is much smaller than its other two major competitors in the diagnostic- imaging industry. PMS has been focusing largely on connecting its disparate parts and it has also lagged behind its competitors in arbitrage activities. For example, PMS began its manufacturing joint-venture in China in 2004, with the export operations scheduled for 2006 at levels that were achieved by its competitor GE in 2001.

Given its historical emphasis on adaptation and its competitive position, it would be very difficult for PMS to beat its competitors, GE and Siemens, in terms of aggregation or arbitrage front. Two AA strategy choices - adaptationaggregation or adaptation-arbitrage - are probably more promising. In addition, of course, there is always room for creativity in changing the game: thus, PMS has also tried a lateral shift to a new business area, personal medical devices, which combines its strengths in medical systems and in consumer electronics. The broader point of this example is that the appropriate emphasis across the AAA strategies depends on industry conditions and competitive position.