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ADDING Value1
Pankaj Ghemawat
This note introduces the ADDING value scorecard and uses it to identify and calibrate
the levers through which global strategy can create (or destroy) value, and to assess
alternative strategy options. Some of the levers are likely to be familiar from singlecountry strategy but others are new or applied in rather different ways.
The ADDING Value Scorecard
The late C. Northcote Parkinson noted in one of his less famous laws that businesspeople
tend to do detailed cost-benefit analyses of relatively small decisions but simply throw up
their hands and surrender to animal spirits when making large ones.2 There is a sense in
some quarters that global strategic moves are so complex and so subject to uncertainty
that they essentially become matters of faith. The ADDING value scorecard presented
here is intended as an antidote to this kind of thinking.3 ADDING is an acronym that
parses the assessment of international business strategy into the individual levers via
which value is created, each of which is amenable to careful (and in many cases
quantitative) analysis: Adding volume, Decreasing costs, Differentiating or increasing
willingness to pay, Improving industry attractiveness, Normalizing risks, and Generating
knowledge and other resources.
The components of the ADDING value scorecard are meant to be commensurable, and to
add up to determine overall value addition or subtraction. The first four components
should be familiar from single-country strategy: adding volume (or, with a more dynamic
frame, growth), decreasing costs, differentiating or increasing willingness to pay, and
increasing industry attractiveness. They reflect what might be called the fundamental
equation of business strategy:
Your margin = industry margin + your competitive advantage
Michael Porters famous five-forces framework for the structural analysis of industries
has explored the strategic determinants of industry profitability (the first term on the right
side of the equation).4 Porter and other strategists, notably Adam Brandenburger and Gus
Stuart, have probed the determinants of competitive advantage (the second term on the
right side of the equation), and emphasized characterizing it in terms of willingness to
pay and (opportunity) costs:5
Your competitive advantage = [willingness to pay cost] for your company
[willingness to pay cost] for your competitor = your relative willingness to pay
your relative cost.
Volume
Economic
Value
Competitive
Advantage
Costs
Differentiation
Margin
+
Uncertainty/
Risk
Industry
Attractiveness/
Leverage
Knowledge/
Resources
Look broadly at other changes in industry structure. Consider how the factors in
Michael Porters five-forces framework are changing. For example, are shifts in sales or
production to emerging markets changing the bargaining power of buyers or suppliers?
Think through how you can de-escalate or escalate the degree of rivalry. Conduct
detailed structural and competitor analysis to figure out competitors likely responses to
strategic moves.
Recognize the implications of your actions for rivals costs or willingness to pay
for their products. Raising rivals costs or reducing their willingness to pay can do as
much for a companys profits as improving its own position in absolute terms.
Attend to regulatory, or nonmarket, restraintsand ethics. Behavior aimed at
building up bargaining power is always a sensitive matter, and the legal status of the
strategies listed under the preceding two headings, in particular, varies across countries.
Be careful of the legal and ethical considerations that may arise around these types of
strategies.
Normalizing Risk
Characterize the extent of key sources of risk in a business (capital intensity, demand
volatility, etc.). A useful way of summarizing risks is in terms of the learn-to-burn rate: a
ratio that looks at how quickly information resolving key uncertainties comes in versus
the rate at which money is (irreversibly) being spent.
Assess how much cross-border operations reduce riskor increase it.
International operations can provide geographic risk pooling, but can also create new
sources of risk. For example, a company reliant on cross-border supply chains faces very
different risks from one with more localized production.
Recognize any benefits that might accrue from increasing risk. Risk can, given
optionality, be valuable for the same reason that financial options are more valuable in
the presence of greater (price) volatility. Thus, some multinationals think of emerging
markets as strategic options rather than just as risk traps.
Consider multiple modes of managing exposure to risk or exploitation of
optionality. For example, a company may enter a foreign market with a fully owned
greenfield operation, make an acquisition, work with a joint venture partner, or simply
export there. Or, given widely diversified shareholders, it may make more sense to rely
on shareholders to eliminate industry-specific risks and, given that possibility, to discount
them in formulating company strategy.
Generating Knowledgeand Other Resources or Capabilities
Assess to what extent knowledge is location-specific versus mobile and the implications
for knowledge transfer. Cross-country differences may require explicit attention to
knowledge decontextualization and recontextualization. Otherwise, knowledge transfer
can make matters worse rather than better.
Consider multiple modes of managing the generation and diffusion of knowledge.
In addition to formal mechanisms, dont forget about informal ways that knowledge
diffuses across borders: through personal interactions; working with buyers, suppliers, or
consultants; open innovation; imitation; contracting for use of knowledge; and so forth.
Guidelines
Decreasing
Costs
Differentiating /
Increasing
Willingness-toPay
Improving
Industry
Attractiveness /
Bargaining
Power
Normalizing (or
Optimizing)
Risk
Generating
Knowledge (and
other Resources
or Capabilities)
Working through the ADDING value scorecard also helps surface some of the
opportunities and challenges that result from semiglobalization and the reality of
persistent cross-country differences. The CAGE distance framework is introduced in
section 2 to sharpen the analysis of such differences.
1 Pankaj Ghemawat And Jordan I. Siegel, Cases on Redefining Global Strategy , (Harvard
Business Review Press, 2011):1-10
2
Michael E. Porter, Competitive Advantage (New York: Free Press, 1985); and Adam M.
Brandenburger and Harborne W. Stuart Jr., Value-Based Business Strategy, Journal of Economics &
Management Strategy 5, no. 1 (1996): 524.
6
Pankaj Ghemawat and Fariborz Ghadar, Global Integration Global Concentration, Industrial
and Corporate Change, August 2006, especially 597603.