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strategy and business
 / Spring 2008 / Issue 50(originally published by Booz & Company)


Pankaj Ghemawat: The Thought Leader Interview

The broader point is that there is a long list of strategies for adaptation, rather than just one or two blunt instruments such as product reformulation or decentralization.

S+B: What about aggregation?
That is the recognition that, although there are big differences at the borders, the degree of difference varies a great deal, and therefore you can often group operations so as to minimize differences within a set of countries or some other group. You end up with a more reasonable situation for an individual manager, with geographic regional strategies being the most obvious manifestation.

Of course, there is nothing sacrosanct about using regions (or the minimization of geographic distance) as the basis for aggregation. Different aggregation strategies work for different companies at different points in their evolution. At IBM, I get the sense that [CEO] Sam Palmisano is effectively removing the regional heads from day-­to-day line decision responsibility. Instead, he’s putting the product divisions together as the primary corporate structure.

By contrast, I recently talked to Toyota’s chairman, Fujio Cho. He emphasized that Toyota is focused on building up its competitive position at the regional level. One major driver is its sense of administrative distance, a sense that free trade across regions in auto parts and components is not going to happen. But Toyota does anticipate some free trade agreements within regions, which therefore become the fundamental building blocks for conquering new markets. And the other driver, of course, is economic distance: the large difference in gas­oline prices between the U.S. — Toyota’s single most important market — and most of the rest of the world. This leads to distinct de­mands in terms of cars’ size and power.

A regional strategy is sometimes mistaken for a halfhearted approach to globalization: “They couldn’t quite cut it as a global company.” That’s why I like the Toyota example. Few people would regard Toyota as a weak global competitor.

S+B: Didn’t it take Toyota about 50 years to reach its current inter­national position?
Toyota went through successive stages of a regional strat­egy. They began selling cars outside Japan in the 1950s, but with a center-and-satellite configuration. All the production was concentrated in Toyota City in Japan, and they shipped the cars overseas.

Then they created freestanding regional hubs — for instance, with manufacturing plants located around the world, and some product development capabilities in East Asia and North America.

Next, they shifted toward regional platforms. They still had engineering and other commonalities directed from Toyota City, but they embraced the notion that, ultimately, people in different regions want sufficiently different auto­mobiles that the cars should be designed locally. This is now evolving into networks among the regions, to tap economies of scale. For instance, Southeast Asian plants basically supply the transmission for Toyota’s pickup trucks worldwide.

S+B: What is the limiting factor in an expansion strategy like that? Is it Toyota’s own capabilities?
That is certainly one limiting factor. With the rapid buildup of manufacturing capabilities outside Japan and Southeast Asia, quality is a real issue. In parts of the world, you will see a lot of Toyotas in the repair shop, and they’re concerned about that. They are still trying to figure out how to implant the Toyota Way more deeply in their new regional manufacturing facilities. And they have an impressively deep way of thinking about it. They know there are problems with their Southeast Asia components; they know those problems come up when those components are plugged into downstream manufacturing processes around the world. “But this is exactly how we expose problems,” they say, “with our manufacturing operations.” As they ship stuff back and forth, it becomes clear which regions have conformance problems.

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