Adapted from Mike Peng, Global Strategy, 2006Adapted from Mike Peng, Global Strategy, 2006 11

Emphasizing Institutions and CulturesEmphasizing Institutions and CulturesDr. Ellen A. DrostDr. Ellen A. Drost

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OutlineOutline Understanding institutionsUnderstanding institutions

An institution-based view of strategyAn institution-based view of strategy

The strategic role of culturesThe strategic role of cultures

The strategic role of ethicsThe strategic role of ethics

A strategic response frameworkA strategic response framework

Implications for strategistsImplications for strategists

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Opening Case: Cut Salaries or Cut Jobs?Opening Case: Cut Salaries or Cut Jobs?

Questions:Questions:

– What to do in economic downturn?What to do in economic downturn?

– The case of JapanThe case of Japan

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Opening Case: Opening Case: Cut Salaries or Cut Jobs?Cut Salaries or Cut Jobs?

Institutions and CulturesInstitutions and Cultures

– Institution-based answer: What about the formal Institution-based answer: What about the formal role of different governments? What about the role of different governments? What about the informal norms of acceptable prices and informal norms of acceptable prices and practices around the world? What about the practices around the world? What about the values and influences of various stakeholders?values and influences of various stakeholders?

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Understanding InstitutionsUnderstanding Institutions Informal definition: “Rules of the game”Informal definition: “Rules of the game” Formal definition: “Humanly devised Formal definition: “Humanly devised

constraints that structure human interaction” constraints that structure human interaction” (North)(North)

Institutions affect individual and firm behaviorsInstitutions affect individual and firm behaviors An institution-based view of strategy:An institution-based view of strategy:

– Covering institutions, cultures, and ethicsCovering institutions, cultures, and ethics– Strategists need to appreciate the “big picture” in Strategists need to appreciate the “big picture” in

which competition around the globe takes place.which competition around the globe takes place.

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Understanding Institutions (cont’d)Understanding Institutions (cont’d) An Institutional FrameworkAn Institutional Framework

– Formal and informal institutions that govern Formal and informal institutions that govern individual and firm behavior individual and firm behavior

– These formal and informal institutions are supported These formal and informal institutions are supported by three “pillars” (Scott)by three “pillars” (Scott)

Table 4.2Table 4.2

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What Do Institutions Do?What Do Institutions Do? Institutions Reducing uncertaintyInstitutions Reducing uncertainty

– Signaling conduct as acceptable or not, which Signaling conduct as acceptable or not, which constrains the range of acceptable actions.constrains the range of acceptable actions.

Uncertainty can lead to transactions costsUncertainty can lead to transactions costs– Transaction costs: Costs associated with economic Transaction costs: Costs associated with economic

transactions—costs of doing businesstransactions—costs of doing business– A major source of transaction costs: OpportunismA major source of transaction costs: Opportunism

Self-interest seeking by misleading, cheating Self-interest seeking by misleading, cheating and/or confusing other partiesand/or confusing other parties

– The possibility of opportunism introduces uncertaintyThe possibility of opportunism introduces uncertainty

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Why Is It Important to Reduce Uncertainty?

Without stable institutional frameworks—Without stable institutional frameworks—– Transaction costs may be so high (e.g., extensive Transaction costs may be so high (e.g., extensive

opportunism) that certain transactions would not take opportunism) that certain transactions would not take place.place. Example: If credible institutional frameworks are Example: If credible institutional frameworks are

absent, investors may choose to put money abroad absent, investors may choose to put money abroad (e.g., capital flight from Russia).(e.g., capital flight from Russia).

– What happened in Kenya’s Flower Industry? Page 95.What happened in Kenya’s Flower Industry? Page 95. Violence versus stability.Violence versus stability.

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How to Reduce Uncertainty?How to Reduce Uncertainty? Two kinds of institutions—informal and formalTwo kinds of institutions—informal and formal

Relational contracting: based onRelational contracting: based on informal institutionsinformal institutions

– Informal, relationship-based, personalized exchange Informal, relationship-based, personalized exchange (Figure 4.1)(Figure 4.1)

– Benefits outweigh costs, up to a certain point.Benefits outweigh costs, up to a certain point.

Arm’s-length transaction: based onArm’s-length transaction: based on formal institutionsformal institutions

– Formal, rule-based, impersonal exchange with third-Formal, rule-based, impersonal exchange with third-party enforcement (Figure 4.2)party enforcement (Figure 4.2)

– Benefits outweigh costs, when the scale and scope of Benefits outweigh costs, when the scale and scope of the economy become very largethe economy become very large

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Informal InstitutionsInformal Institutions

Informal institutions suggest expected behaviors Informal institutions suggest expected behaviors – Everyone knows these unwritten “rules” (drinking with Everyone knows these unwritten “rules” (drinking with

colleagues)colleagues)

If formal constraints fail, informal constraints play a If formal constraints fail, informal constraints play a larger role in reducing uncertaintylarger role in reducing uncertainty

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Formal InstitutionsFormal Institutions

Formal InstitutionsFormal Institutions– An expensive legal and regulatory framework of courts, An expensive legal and regulatory framework of courts,

police, lawyers, regulators, and other mechanisms that police, lawyers, regulators, and other mechanisms that enforce laws and regulations to facilitate the widening enforce laws and regulations to facilitate the widening of marketsof markets

Benefits of Formal InstitutionsBenefits of Formal Institutions– Support arm’s-length transactions by bringing distant Support arm’s-length transactions by bringing distant

parties (strangers) together. parties (strangers) together. – Foster rule-based transactions that attract new players Foster rule-based transactions that attract new players

into a global economy that cannot operate on informal into a global economy that cannot operate on informal institutions alone.institutions alone.

– Facilitate economic expansion and growthFacilitate economic expansion and growth

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An Institution-Based View of StrategyAn Institution-Based View of Strategy Institutions are more than background Institutions are more than background

conditionsconditions– Institutions provide guidelines to firms as to how Institutions provide guidelines to firms as to how

they can act, and what can be done with legal or they can act, and what can be done with legal or other guarantees.other guarantees.

Institutions Institutions directly directly impact a firm’s formulation impact a firm’s formulation and implementation of strategy (Figure 4.4). and implementation of strategy (Figure 4.4). – In two words: Institutions matter.In two words: Institutions matter.– The key question: The key question: HowHow do they matter? do they matter?

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Institutions, Firms, and Strategic Choices

Figure 4.4

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.

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Two Core PropositionsTwo Core Propositions Informal constraints play an important in Informal constraints play an important in

transition economies (e.g. during transition economies (e.g. during institutional transitions) institutional transitions) – Fundamental and comprehensive changes Fundamental and comprehensive changes

introduced to the formal and informal rules of introduced to the formal and informal rules of the game that affect organizations as playersthe game that affect organizations as players

– ““Transition economies such as China, Russia, Transition economies such as China, Russia, countries in Eastern Europecountries in Eastern Europe

– The importance of quanxi and blat during The importance of quanxi and blat during China’s and Russia’s recent institutional China’s and Russia’s recent institutional transitions, respectively.transitions, respectively.

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The Strategic Role of Culture The Strategic Role of Culture CultureCulture

– ““The collective programming of the mind which The collective programming of the mind which distinguishes the members of one group or distinguishes the members of one group or category of people from another” (Hofstede)category of people from another” (Hofstede)

– Is the Is the most informalmost informal and and least codifiedleast codified part of a part of a country’s institutional framework.country’s institutional framework.

– Impacts the strategy of firms.Impacts the strategy of firms. Firms must understand cultural rule setsFirms must understand cultural rule sets

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HofstedeHofstede’’s Five Dimensions of Cultural Valuess Five Dimensions of Cultural Values Power DistancePower Distance

– Distinguishes the levels of hierarchy accepted by the society.Distinguishes the levels of hierarchy accepted by the society. Individualism versus CollectivismIndividualism versus Collectivism

– Focuses on the importance of the individual versus the group Focuses on the importance of the individual versus the group in social and business situations.in social and business situations.

Masculinity versus femininityMasculinity versus femininity– Measures the degree of gender role differentiation and Measures the degree of gender role differentiation and

quality of life issuesquality of life issues Uncertainty AvoidanceUncertainty Avoidance

– Identifies the tolerance for ambiguity.Identifies the tolerance for ambiguity. Long-term OrientationLong-term Orientation

– Emphasizes perseverance and savings for future betterment.Emphasizes perseverance and savings for future betterment.

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Hofstede Dimensions of Culturea

Table 4.3

a. When the scores are the same, countries are listed according to their alphabetical order. Arab countries, East Africa, and West Africa are clusters of multiple countries. Germany and Yugoslavia refer to the former West Germany and the former Yugoslavia, respectively. Sources: Adapted from G. Hosftede, 1997, Cultures and Organizations: Software of the Mind (pp. 26, 53, 84, 113, 166), New York: McGraw-Hill. Data on the first four dimensions are based on surveys of IBM employees during 1968–72, first published in G. Hosftede, 1980, Culture’s Consequences, Beverly Hills, CA: Sage Publishing. Data on the fifth dimension are based on surveys of students during the 1980s, first published in The Chinese Culture Connections, 1987, Chinese values and the search for culture-free dimensions of culture, Journal of Cross-Cultural Psychology, 18: 143–164.

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Culture and StrategyCulture and Strategy Power DistancePower Distance

– French and Italian managers have a penchant French and Italian managers have a penchant for centralized authority; French and Italian for centralized authority; French and Italian subsidiaries abroad are more likely to have subsidiaries abroad are more likely to have majority ownership control.majority ownership control.

– Solicitation of subordinate feedback and Solicitation of subordinate feedback and participation (“empowerment”), widely used in participation (“empowerment”), widely used in Western European and North American Western European and North American countries, is seen as a sign of weak leadership countries, is seen as a sign of weak leadership and low integrity in higher power distance and low integrity in higher power distance countries (Egypt, India, Mexico, and Russia).countries (Egypt, India, Mexico, and Russia).

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Culture and Strategy (cont’d)Culture and Strategy (cont’d) Individualism versus CollectivismIndividualism versus Collectivism

– Individualist U.S. firms often desire to find ways to Individualist U.S. firms often desire to find ways to differentiate, whereas collectivist Japanese firms differentiate, whereas collectivist Japanese firms have a tendency to converge on a defensible have a tendency to converge on a defensible position.position.

– Because entrepreneurs are usually willing to take Because entrepreneurs are usually willing to take more risk, individualistic societies tend to foster more risk, individualistic societies tend to foster relatively more entrepreneurship.relatively more entrepreneurship.

– Collectivism may result in relatively lower levels of Collectivism may result in relatively lower levels of entrepreneurship. entrepreneurship. Singapore and Japan currently score very low on Singapore and Japan currently score very low on

entrepreneurship.entrepreneurship.

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Culture and Strategy (cont’d)Culture and Strategy (cont’d) Masculinity versus FemininityMasculinity versus Femininity

– High masculinity countriesHigh masculinity countries ““Good” managers are typically assertive, decisive, and Good” managers are typically assertive, decisive, and

“aggressive” (only in masculine countries does this word “aggressive” (only in masculine countries does this word carry a positive connotation)carry a positive connotation)

Firms may have a relative advantage in mass Firms may have a relative advantage in mass manufacturing (e.g., Japan). manufacturing (e.g., Japan).

– High femininity countries High femininity countries Managers are less visible, more intuitiveManagers are less visible, more intuitive

Firms may have a relative advantage in small-scale, Firms may have a relative advantage in small-scale, customized manufacturing, agricultural and forestry exports, customized manufacturing, agricultural and forestry exports, and service industries (e.g., Sweden, Norway, Netherlands, and service industries (e.g., Sweden, Norway, Netherlands, and Denmark).and Denmark).

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Culture and Strategy (cont’d)Culture and Strategy (cont’d) Uncertainty avoidanceUncertainty avoidance

– Managers in low uncertainty avoidance countries Managers in low uncertainty avoidance countries (e.g., Great Britain) rely on experience and (e.g., Great Britain) rely on experience and training.training.

– Managers in high uncertainty avoidance countries Managers in high uncertainty avoidance countries (e.g., China) rely more on rules and procedures.(e.g., China) rely more on rules and procedures.

– Example: The Swissair crash (1998)Example: The Swissair crash (1998) U.S. commentators: Rules are there to be broken U.S. commentators: Rules are there to be broken

during emergencies!during emergencies!

Swissair officials: Rules exist exactly for such Swissair officials: Rules exist exactly for such emergencies! emergencies!

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Culture and Strategy (cont’d)Culture and Strategy (cont’d) Long-term orientation: Cultures with long-term Long-term orientation: Cultures with long-term

orientation nurture firms with longer horizons orientation nurture firms with longer horizons in strategic planning. in strategic planning.

– Japanese and Korean firms are willing to forego Japanese and Korean firms are willing to forego short-term profits to focus more on market share short-term profits to focus more on market share SIA 1.1: Matsushita’s 250-year planSIA 1.1: Matsushita’s 250-year plan

– Western firms focus on short-term quarterly profitsWestern firms focus on short-term quarterly profits Chapter 10 Closing Case: In the oil industry, there is a Chapter 10 Closing Case: In the oil industry, there is a

recent tendency to shorten the planning horizon from recent tendency to shorten the planning horizon from 10-15 years to 5 years or less. 10-15 years to 5 years or less.

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The Strategic Importance of CultureThe Strategic Importance of Culture Culturally naïve and ignorant firms may Culturally naïve and ignorant firms may

commit strategic blunders.commit strategic blunders.– Chevy Nova car Chevy Nova car –– ““No goNo go”” in Spanish in Spanish– Mitsubishi Motors in America: $34 million fine to Mitsubishi Motors in America: $34 million fine to

settle sexual harassment charges in a low settle sexual harassment charges in a low masculinity country (relative to Japan)masculinity country (relative to Japan)

– See page 106 of text.See page 106 of text.

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The Strategic Role of EthicsThe Strategic Role of Ethics Ethics: Norms, principles, and standards of conduct governing Ethics: Norms, principles, and standards of conduct governing

individual and firm behaviorindividual and firm behavior Ethics: Not only an important part of informal institutions, but also Ethics: Not only an important part of informal institutions, but also

deeply reflected in formal laws and regulationsdeeply reflected in formal laws and regulations– What is illegal is typically unethicalWhat is illegal is typically unethical– What is legal may be unethical (e.g., mass lay-off downsizing)What is legal may be unethical (e.g., mass lay-off downsizing)– What is unethical is not always necessarily illegalWhat is unethical is not always necessarily illegal

Recent interest in business ethics:Recent interest in business ethics:– Fueled by unethical scandals at Enron, WorldCom, Parmalat, etcFueled by unethical scandals at Enron, WorldCom, Parmalat, etc– Ethics Officer Association: 12 member firms (1992) Ethics Officer Association: 12 member firms (1992) 1,000 1,000

firms (2004)firms (2004)

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Views on Business EthicsViews on Business Ethics A negative viewA negative view

– Firms are forced to jump on the ethics Firms are forced to jump on the ethics ““bandwagonbandwagon”” under under social pressures while not necessarily becoming more ethical.social pressures while not necessarily becoming more ethical.

A positive viewA positive view– Firms want to do it right regardless of social pressures.Firms want to do it right regardless of social pressures.

An instrumental viewAn instrumental view– Ethics: A useful instrument for good profitsEthics: A useful instrument for good profits

– The value of ethical reputation is magnified during a crisisThe value of ethical reputation is magnified during a crisis

Institution-based explanationInstitution-based explanation– All of the above may be accurate, for some firmsAll of the above may be accurate, for some firms

– See the Strategic Response Framework (Table 4.7)See the Strategic Response Framework (Table 4.7)

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Managing Ethics OverseasManaging Ethics Overseas Ethical standardsEthical standards are different around the world are different around the world

– Whistle blowers: ethical in America; unethical in JapanWhistle blowers: ethical in America; unethical in Japan– MicrosoftMicrosoft’’s competitive actions, after surviving U.S. legal s competitive actions, after surviving U.S. legal

scrutiny, are found to be unethical and illegal by the EUscrutiny, are found to be unethical and illegal by the EU Ethical relativismEthical relativism

– When in Rome, do as the Romans doWhen in Rome, do as the Romans do Ethical imperialismEthical imperialism

– There is only one set of good Ethics, and we have it!There is only one set of good Ethics, and we have it! Three “middle-of-the-road” guiding principlesThree “middle-of-the-road” guiding principles

– Respect for human dignity and basic rights.Respect for human dignity and basic rights.– Respect for local traditions (e.g., gift-giving)Respect for local traditions (e.g., gift-giving)– Respect for institutional contextsRespect for institutional contexts

Peng, M. Global Strategy, 2006Peng, M. Global Strategy, 20062727

A Strategic Response Framework

Table 4.5

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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Implications for Strategists (cont’d)Implications for Strategists (cont’d)

What determines the international What determines the international success and failure of firms? success and failure of firms?

–Firm performance is, in part, Firm performance is, in part, determined by the institutional determined by the institutional frameworks governing strategic frameworks governing strategic choices.choices.