The core competencies at the heart of this platform include proprietary technology and intellectual property. These are the unique pieces of knowledge and know-how that distinguish any company — not the applications or technologies, but the standards and platforms of knowledge that the company creates and makes its own. They may include manufacturing processes, supply chain and logistics systems, customer insight–gathering processes, or distribution and access systems. They are made available to all operations, everywhere in the world, and are used to customize offerings and arbitrage procurement and costs.
At the McDonald’s Corporation in the mid-2000s, this type of unity represented a dramatic shift away from the rigid hierarchies, brands, financial performance metrics, and reporting relationships of its old centralized model. The restaurant chain had embodied the centralization model for many years. Every aspect of the system had been standardized around the world: brand identity, product offerings, packaging systems, franchise arrangements, and the design of the stores. All this had come out of a single manual, and the company’s rigidity had helped it prosper, because it was seen as exporting an image of the American lifestyle.
But standardization began to reach its limits around 2001. There was a distinct shift in consumer taste toward healthier, more nutritious foods. In the U.S., fast-food restaurants in general and McDonald’s in particular were blamed by many for the emerging obesity epidemic, especially among American children. Customers started switching to other chains. In the rest of the world, McDonald’s was identified with American tastes, and seen as being out of sync with the needs of non-U.S. consumers.
The McDonald’s leadership responded by creating a new platform on which the company could unite: not standardization, but a common thrust to provide fresh food, healthier menu options, and customized offerings for different cultures. Product offerings were no longer centralized, and the menus at McDonald’s restaurants vary widely, while unity remains firmly entrenched where it should be — in branding, technology, and the business processes that gave the company its differentiation, cost bases, and productivity. The brand logo, color schemes, and store layouts are the same around the world. Procurement and distribution systems are centrally managed to ensure that deliveries take place on time to more than 32,000 individual restaurants. Structured training from a common playbook is given every day to store associates in all locations. The company’s proprietary knowledge remains centrally and rigidly controlled.
• Arbitrage. The final imperative involves gaining effectiveness and reducing cost by finding less expensive materials, manufacturing processes, logistics systems, funds sourcing, or infrastructure. Most companies have addressed this tactically, by offshoring back-office work or moving manufacturing to locations with lower-cost labor. This is generally a defensive or reactive move, rather than a well-considered strategy.
An arbitrage initiative is much more systemic. The business looks at its production flow and disaggregated cost chain as a whole, seeking optimized sourcing, sales conversion, and go-to-market options. The initiative approaches materials, factory locations, and people as part of a single system, taking into account the processes and procedures within the most important hubs, and among hubs as well.
The history of mobile telephony in China and India provides a good example of the power of arbitrage. These two countries together have more than 1 billion cell phone users, and the number of new connections in India alone exceeds a staggering 10 million a month. In the early 2000s, the groundwork for new networks in China and India was laid by a few farsighted telephone companies. At that time, landline networks were sparse, and the number of homes with phone lines was a minuscule fraction of the total households. The only way to build a profitable phone system was to create “network value”: access to enough other people and institutions to make the system feel indispensable. This meant providing telephone access to millions of prospective customers who had never used a phone, who lived on $2 a day, who had no money to buy the phones outright, and who lacked the bank accounts and credit cards that would allow them to sign service contracts.