Emphasizing Institutions, Cultures, and Ethics Chapter 4 Emphasizing Institutions, Cultures, and Ethics Global Strategy 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 of cultures The strategic role of ethics A strategic response framework Debates and extensions Implications for strategists 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.

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 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. 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 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? Reducing uncertainty Signaling conduct as acceptable or not, which constrains the range of acceptable actions. Uncertainty can lead to transaction costs Transaction costs: Costs associated with economic transactions – or more broadly, costs of doing business A major source of transaction costs: Opportunism— defined as “self-interest seeking with guile” (Williamson) The possibility of opportunism introduces uncertainty 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. 4

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. Figure 4.1

The costs and benefits of formal, rule-based, impersonal exchange Time Source: M. W. Peng (2003), Institutional transitions and strategic choices (p. 280), Academy of Management Review, 28 (2): 275–296.

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 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. 4

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. 4

Culture “the collective programming of the mind which distinguishes the members of one group or category of people from another.” Geert Hofstede

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. 4

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 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. 4

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. 4

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 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 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 (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) 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 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 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 “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 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. 4