IBUS90003 Chap.8 AAA Logics, the Uppsala Model and Operating Strategies
AAA Logics, the Uppsala Model and Operating Strategies
The second half of Week 4 gathers three frameworks about how MNEs organise and grow. Ghemawat's AAA framework, from his 2007 article on managing differences, offers three logics for dealing with cross-border variation. Adaptation tailors products to local tastes to win revenue and share, at the cost of complexity and lost distinctiveness. Aggregation pursues scale by grouping countries into regions or a global whole.
Arbitrage exploits differences in labour costs, taxes and other factors, though those gaps are narrowing and some raise ethical concerns. IBM and Procter and Gamble show how firms move between the logics over time, and the practical rule is to localise the customer-facing front end while integrating the back end.
The Uppsala model, developed by Johanson, Wiedersheim-Paul and Vahlne, describes internationalisation as incremental learning: firms build knowledge through experience, enter markets of growing psychic distance and raise their commitment step by step along an establishment chain. Its weaknesses, from born globals to acquisitive Asian firms and cheaper information, are as examinable as its claims.
Finally, the chapter places operating strategy on a grid of two pressures, global integration and local responsiveness, explained through political, technological, social and competitive forces on one side and cultural, technical, commercial and legal forces on the other.
The international, multi-domestic, global and transnational strategies each answer a different mix of those pressures, and each has a characteristic downside.
What this chapter covers
- 01
Adaptation, aggregation and arbitrage
- 02
IBM and Procter and Gamble across the three logics
- 03
Assumptions of the Uppsala model
- 04
Establishment chain and psychic distance
- 05
Weaknesses of incremental internationalisation
- 06
Pressures for global integration and local responsiveness
- 07
International, multi-domestic, global and transnational strategies
Worked example · free
Place a consumer electronics firm on the strategy grid
- 2Assess integration pressure: low-cost rivals, short cycles and scale economies in manufacturing and R&D make the pressure for global integration high.
- 2Assess responsiveness pressure: customer needs are converging and local variants are minor, so the pressure for local responsiveness is low.
- 3Choose the global strategy and name its risk: exposure to host policy intervention and exchange rates, and missing innovations that arise in local markets.
Key terms
- AAA Framework
- Ghemawat's set of three logics for managing cross-border differences: adaptation, aggregation and arbitrage.
- Establishment Chain
- The Uppsala model's sequence of stages through which a firm increases its commitment to a foreign market as it gains experience.
- Multi-Domestic Strategy
- An operating strategy that treats foreign markets as a portfolio of local opportunities, with decentralised, self-sufficient national units.
- Global Strategy
- An operating strategy that treats the world as one unit, centralising scale-intensive activities and selling standardised products.
- Born Global
- A firm that operates internationally from or near its founding rather than internationalising step by step.
AAA Logics, the Uppsala Model and Operating Strategies FAQ
Can a firm use adaptation, aggregation and arbitrage together?
Rarely all three at full strength at the same time. Firms tend to emphasise different logics at different points in their history, as IBM moved from adaptation to aggregation and then arbitrage.
What is psychic distance in the Uppsala model?
It covers the factors that make a foreign environment hard to understand, such as language, education, business practice, politics, culture and industrial development, which shape the order of market entry.
Why do critics say the Uppsala model is outdated?
Many firms skip stages, born globals start international, knowledge can be bought or learned from others, falling information costs reduce the need for experience, and services do not fit the model well.
What is the main downside of a transnational strategy?
It is very complex to run, needs strong leadership that is hard to find, and makes it difficult to keep dispersed operations working as one, so integration and monitoring become more demanding.
Exam move
This chapter carries three frameworks, so give each its own revision card. On the AAA card, write each logic with its benefit, its cost and one company example, and add the front-end and back-end rule. On the Uppsala card, list the assumptions, the three contributions and at least five weaknesses, because questions often ask you to evaluate the model rather than describe it.
On the strategy card, draw the integration and responsiveness grid, place the four strategies in it with one seminar example each, and write the downside beneath every quadrant. Then practise moving between the cards: a firm running an adaptation logic usually sits on the responsive side of the grid, while one pursuing aggregation and arbitrage leans towards integration.
For the case part of the exam, rehearse rating the two pressures from case facts, choosing a strategy and naming its risk in a single tight paragraph, and test your answer against the Tesco example for the Uppsala model.
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