1. Emphasizing Institutions, Cultures, and Ethics
Chapter 4
Emphasizing Institutions, Cultures, and Ethics
Global Strategy Mike W. Peng
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2. Outline Understanding institutions
An institution-based view of strategy
The strategic role of cultures
The strategic role of ethics
A strategic response framework
Debates and extensions
Implications for strategists
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3. Dimensions of Institutions
DEGREE OF FORMALITY
EXAMPLES
SUPPORTIVE PILLARS
Formal Institutions
Laws
Regulatory (coercive)
Regulations
Rules
Informal institutions
Norms
Normative
Cultures
Cognitive
Ethics
Institutions: Definitions
“Humanly devised constraints that structure human interaction” (North)
“Regulatory, normative, and cognitive structures and activities that provide stability and meaning to social behavior” (Scott)
Table 4.1
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4. Understanding Institutions (cont’d)
Institutional framework - formal and informal institutions governing individual and firm behavior - supported by three pillars
Formal institutions - laws, regulations, rules - supported by the regulatory pillar (the coercive power of governments)
Informal institutions - norms, cultures and ethics - supported by the normative and cognitive pillars
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5. Understanding Institutions (cont’d)
What Do Institutions Do?
Key function - Reduce uncertainty
How Do Institutions Reduce Uncertainty?
Relational contracting - informal, relationship-based, personalized exchanges
Arm‘s length transaction - formal, rule-based, impersonal exchange with third part enforcement
Institutional transitions - fundamental and comprehensive changes to the rules that affect all organizations
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6. The Costs and Benefits of Informal, Relationship-Based, Personalized Exchange
Figure 4.1
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7. The Costs and Benefits of Formal, Rule-Based, Impersonal Exchange
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Figure 4.2

8. An Institution-Based View of Strategy
There is a need to discuss the relationship between strategic choices and institutional frameworks
Influence of task environment has been explored in strategy literature
Porter’s “diamond” model explains competitive advantage of globally leading industries in different countries, criticized for ignoring history and institutions
Strategic choices are selected within and constrained by institutional frameworks in developed economies
Striking differences between institutions in developed and emerging economies has pushed the institution-based view to the forefront
Strategic choices are direct outcomes of the dynamic interaction between institutions and firms
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9. The Porter Diamond: Determinants of National Competitive Advantage
Source: Reprinted by permission of Harvard Business Review from “The competitive advantage of nations” (p. 77) by Michael Porter, March/April Copyright © 1990 by the Harvard Business School Publishing Corporation; all rights reserved.
Figure 4.3
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10. Institutions, Firms, and Strategic Choices
Sources: Adapted from (1) M. W. Peng, 2000, Business Strategies in Transition Economies (p. 45), Thousand Oaks, CA: Sage Publishing.; (2) M. W. Peng, 2002, Towards an institution-based view of business strategy (p. 253), Asia Pacific Journal of Management, 19 (2): 251–267.
Figure 4.4
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11. Two Core Propositions
Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework.
While formal and informal constraints combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty to managers and firms.
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12. The Five Dimensions of Culture
Power Distance
Refers to the extent that the members of a society expect and accept that power is distributed unequally
In Brazil, the richest 10% of the population receives about 50% of the national income (high power distance)
In Sweden, the richest 10% gets 22% of the national income (low power distance)
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13. The Five Dimensions of Culture
Individualism vs. Collectivism
Individualism
Ties between individuals are loose
Individual achievement and freedom highly valued
Collectivism
Ties between individuals are strong
Collective accomplishments highly valued
In difficult times, the United States oftentimes practices layoffs (individualism) while Japan oftentimes institutes across-the-board pay cuts (collectivism)
Masculinity versus femininity
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14. The Five Dimensions of Culture
Uncertainty avoidance
Low uncertainty avoidance countries: place a premium on job security, career patters, and retirement benefits; resist change (Greece)
High uncertainty avoidance countries: willing to take risk with less resistance to change (Singapore)
Long-term orientation
Cultures with long-term orientation: emphasize perseverance and savings for future betterment (China)
Cultures with short-term orientation: want quick results and instant gratification.
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15. The Strategic Role of Ethics
Ethics: Norms, principles, and standards of conduct that govern individual and firm behavior
All agree - ethics can make or break a firm
Value of an ethical reputation is magnified during crisis
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16. Views on Business Ethics
Managing Ethics Overseas
What is ethical in one country may be unethical or illegal in other countries
Two perspectives on dealing with ethical dilemmas overseas (Donaldson)
Ethical relativism - “when in Rome, do as the Romans do”
Ethical imperialism - absolute belief that “there is only one set of Ethics, and we have it!”
Donaldson’s three guiding principles:
Respect for human dignity and basic rights
Respect for local traditions
Respect for institutional context
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17. Views on Business Ethics (cont’d)
Ethics and Corruption
Corruption distorts the basis for competition
Corruption: tendency for inverse relationship with economic development. There are exceptions
U.S. firms are subject to the Foreign Corrupt Practices Act (FCPA)
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18. Strategic Responses to Ethical Challenges
BEHAVIORS
EXAMPLES IN
THE TEXT
Reactive
Deny responsibility, do less
than required
Ford Pinto fire
(the 1970s)
Defensive
Admit responsibility, but fight
it, do the least that is required
Nike (the early 1990s),
Facebook (2011)
Accommodative
Accept responsibility, do all
that is required
Ford Explorer roll-overs
(the 2000s)
Proactive
Anticipate responsibility, do
more than is required
BMW (the 1990s)
Table 4.5
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19. Debates and Extensions
Opportunism versus Individualism/Collectivism
Cultural Distance versus Institutional Distance
“Bad Apples” versus “Bad Barrels”
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20. The Savvy Strategist
Underlying context of institutional structures, resources and capabilities impact strategic choices
Institutions, culture, and ethics implications: homework, cross cultural intelligence, and ethics are part of strategy
Institution-based view answers to the four fundamental questions
Why do firms differ? Institutional frameworks shape firm differences
How do firms behave? Institutional differences
What determines the scope of the firm? Development of formal institutional frameworks
What determines the international success and failure of firms? Institutional frameworks govern strategic choices
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