4 Chapter 4 chapter Emphasizing Institutions Cultures and

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4 Chapter 4 chapter Emphasizing Institutions, Cultures, and Ethics Global Strategy Global Mike W.

4 Chapter 4 chapter Emphasizing Institutions, Cultures, and Ethics Global Strategy Global Mike W. Peng Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Outline • Understanding institutions • An institution-based view of strategy • The strategic role

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 Copyright © 2014 Cengage Learning. fornotstrategists All Implications Rights Reserved. May be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. •

Dimensions of Institutions DEGREE OF FORMALITY EXAMPLES SUPPORTIVE PILLARS Formal Institutions § Laws §

Dimensions of Institutions DEGREE OF FORMALITY EXAMPLES SUPPORTIVE PILLARS Formal Institutions § Laws § Regulatory (coercive) § Regulations § Rules Informal institutions § Normative § Cultures § Cognitive § Ethics • Institutions: Definitions Table 4. 1 “Humanly devised constraints that structure human interaction” (North) “Regulatory, normative, and cognitive structures and Copyright © 2014 Cengage Learning. activities that provide stability and meaning to social All Rights Reserved. May not be (Scott) or scanned, behavior” copied or duplicated, posted to a publicly accessible website, in whole or in part.

Understanding Institutions (cont’d) Institutional framework - formal and informal institutions governing individual and firm

Understanding Institutions (cont’d) Institutional framework - formal and informal institutions governing individual and firm behavior - supported by three pillars v. Formal institutions - laws, regulations, rules - supported by the regulatory pillar (the coercive power of governments) v. Informal institutions - norms, cultures and ethics - supported by the normative and cognitive pillars Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Understanding Institutions (cont’d) • What Do Institutions Do? Key function - Reduce uncertainty •

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 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Costs and Benefits of Informal, Relationship-Based, Personalized Exchange Copyright © 2014 Cengage Learning.

The Costs and Benefits of Informal, Relationship-Based, Personalized Exchange Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 4. 1

The Costs and Benefits of Formal, Rule-Based, Impersonal Exchange Copyright © 2014 Cengage Learning.

The Costs and Benefits of Formal, Rule-Based, Impersonal Exchange Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 4. 2

An Institution-Based View of Strategy • There is a need to discuss the relationship

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 institutionbased©view to the forefront Copyright 2014 Cengage Learning. All Rights Reserved. May not • Strategic choices arebedirect outcomes of the dynamic scanned, copied or duplicated, institutions or interaction between and firms posted to a publicly accessible website, in whole or in part.

The Porter Diamond: Determinants of National Competitive Advantage Source: Reprinted by permission of Harvard

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 1990. Copyright © 1990 by the Harvard Business School Publishing Corporation; all rights reserved. Copyright © 2014 Cengage Learning. All Rights Reserved. May not Figure be scanned, copied 4. 3 or duplicated, or posted to a publicly accessible website, in whole or in part.

Institutions, Firms, and Strategic Choices Sources: Adapted from (1) M. W. Peng, 2000, Business

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 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Two Core Propositions • Managers and firms rationally pursue their interests and make choices

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. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Five Dimensions of Culture • Power Distance Refers to the extent that the

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) Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Five Dimensions of Culture • Individualism vs. Collectivism Individualism v Ties between individuals

The Five Dimensions of Culture • Individualism vs. Collectivism Individualism v Ties between individuals are loose v Individual achievement and freedom highly valued Collectivism v Ties between individuals are strong v Collective accomplishments highly valued In difficult times, the United States oftentimes practices layoffs (individualism) while Japan oftentimes institutes across-theboard pay cuts (collectivism) • Masculinity versus femininity Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Five Dimensions of Culture • Uncertainty avoidance Low uncertainty avoidance countries: place a

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. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Strategic Role of Ethics • Ethics: Norms, principles, and standards of conduct that

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 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Views on Business Ethics • Managing Ethics Overseas What is ethical in one country

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” v Ethical imperialism - absolute belief that “there is only one set of Ethics, and we have it!” v • Donaldson’s three guiding principles: Respect for human dignity and basic rights Respect for. Cengage local traditions Copyright © 2014 Learning. All Rights Reserved. May not be context Respect for institutional scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Views on Business Ethics (cont’d) • Ethics and Corruption distorts the basis for competition

Views on Business Ethics (cont’d) • Ethics and 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) Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Responses to Ethical Challenges STRATEGIC RESPONSES STRATEGIC BEHAVIORS EXAMPLES IN THE TEXT Reactive

Strategic Responses to Ethical Challenges STRATEGIC RESPONSES STRATEGIC BEHAVIORS EXAMPLES IN THE TEXT Reactive Deny responsibility, do less than required Ford Pinto fire (the 1970 s) Defensive Admit responsibility, but fight it, do the least that is required Nike (the early 1990 s), Facebook (2011) Accommodative Accept responsibility, do all that is required Ford Explorer roll-overs (the 2000 s) Proactive Anticipate responsibility, do more than is required BMW (the 1990 s) Table 4. 5 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Debates and Extensions • Opportunism versus Individualism/Collectivism • Cultural Distance versus Institutional Distance •

Debates and Extensions • Opportunism versus Individualism/Collectivism • Cultural Distance versus Institutional Distance • “Bad Apples” versus “Bad Barrels” Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Savvy Strategist • Underlying context of institutional structures, resources and capabilities impact strategic

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 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.