1. Emphasizing Institutions, Cultures, and Ethics4
Emphasizing Institutions, Cultures, and Ethics
chapter
Part I: Foundations of Global Strategy
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. Understanding 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 4.2
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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
Source: M. W. Peng (2003), Institutional transitions and strategic choices (p. 279), Academy of Management Review, 28 (2): 275–296.
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Figure 4.1

7. The Costs and Benefits of Formal, Rule-Based, Impersonal Exchange
Source: M. W. Peng, 2003, Institutional transitions and strategic choices (p. 280), Academy of Management Review, 28 (2): 275–296. Copyright © Reprinted by permission of Academy of Management Review via Copyright Clearance Center.
Copyright © 2009 Cengage. All rights reserved.

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.
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Figure 4.3

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.
Copyright © 2009 Cengage. All rights reserved.
Figure 4.4

11. Two Core Propositions
Managers and firms rationally pursue their interests and make strategic choices within institutional constraints
Opening Case: Japanese pharmaceutical firms do not as relentlessly pursue new innovations as US firms do
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12. Two Core Propositions (cont’d)
While formal and informal constraints combine to govern firm behavior, when formal constraints fail, informal constraints play a larger role
Collapse of the formal institutional regime in the former Soviet Union facilitated growth of entrepreneurial firms
Even in developed economies, the best connected firms can reap significant benefits
Politically sophisticated firms usually win some form of government protection
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13. Hofstede’s Dimensions of Cultural Values
Power Distance
Distinguishes the levels of hierarchy accepted by the society
Individualism versus Collectivism
Focuses on the importance of the individual versus the group in social and business situations
Masculinity versus femininity
Measures the degree of sex role differentiation
Uncertainty Avoidance
Identifies the tolerance for ambiguity
Long-term Orientation
Emphasizes perseverance and savings for future betterment
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14. Cultures and Strategic Choices
Power Distance
French and Italian managers have a penchant for centralized authority; French and Italian subsidiaries abroad are more likely to have majority ownership control
Solicitation of subordinate feedback and participation (“empowerment”), widely used in Western European and North American countries, is seen as a sign of weak leadership and low integrity in higher power distance countries (Egypt, India, Mexico, and Russia)
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15. Cultures and Strategic Choices (cont’d)
High power distance countries: penchant for centralized authority
Solicitation of subordinate feedback and participation: sign of leadership and low integrity in high power distance countries
Individualistic cultures: greater differentiation, entrepreneurship, and more formal contractual safeguard
Masculinity versus femininity
Masculine cultures: assertive, decisive, and aggressive managers
Masculine countries: advantage in mass manufacturing
Feminine cultures: managers less visible, more intuitive
Feminine countries: advantage in small-scale customized manufacturing
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16. Cultures and Strategic Choices (cont’d)
Uncertainty avoidance
Low uncertainty avoidance countries: rely more on experience and training
High uncertainty avoidance countries: rely more on rules and procedures
Long-term orientation
Cultures with long-term orientation: long time horizons in strategic planning
Western firms: short-term profits and shorter planning horizons
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17. 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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18. 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 around the world
Respect for local traditions and institutional context
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19. 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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20. A Strategic Response Framework
INSTITUTIONAL
CONSTRAINTS
PRIMARY UNDERLYING
PRESSURES
STRATEGIC
RESPONSES
STRATEGIC
BEHAVIORS
EXAMPLES IN
THE TEXT
Formal
Regulatory
Reactive
Deny responsibility, do less
than required
Ford Pinto fire
(the 1970s)
Formal
Regulatory
Defensive
Admit responsibility, but fight
it, do the least that is required
Nike
(the early 1990s)
Informal
Normative
Accommodative
Accept responsibility, do all
that is required
Ford Explorer roll-overs
(the 2000s)
Informal
Cognitive
Proactive
Anticipate responsibility, do
more than is required
BMV (the 1990s)
Sources: Based on (1) A. Carroll, 1979, A three-dimensional conceptual model of corporate social performance, Academy of Management Review, 4: 497–505; (2) M. Clarkson, 1995, A stakeholder framework for analyzing and evaluating corporate social performance, Academy of Management Review, 20: 92–117; (3) S. Wartick & P. Cochran, 1985, The evolution of the corporate social performance model, Academy of Management Review, 10: 758–769.
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Table 4.5

21. Debates and Extensions
Cultures versus Institutions
Opportunism versus Individualism/Collectivism
Cultural Distance versus Institutional Distance
“Bad Apples” versus “Bad Barrels”
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22. 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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