Cultures, Institutions & International

Strategy

GROUP 4

Overview

The Context of Strategy: Two Traditional Perspectives

– Industry Based View (Porter 1980)• Based on Industry Structure/ Competitive Analysis• Strategy formulation on the premise of potential gaps in

industry

The Context of Strategy: Two Traditional Perspectives

– Resource Based View (Barney 1991) • Focuses upon “the impact of idiosyncratic firm attributes on a

firms competitive” (Barney 1991 p100)

• Institutions and culture drive International Strategy

“regulative, normative and cognitive structures” should not be considered “background” to the formulation of International Strategy

• Strategic choices a function of the dynamic interaction of institutions and organizations

“What drives firm strategy in International Business?”(Peng et al. 2008)

Institutional Based View: Implications of Distance

The extent of dissimilarity between host and home institutions. Affects the MNE legitimacy in the host country, the transfer of

routines & therefore: THE FDI DECISION

Host Country Selection

A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from several sources:

Host country selection: Source of Competitive Advantage

Host country selection: Source of IKEA’s Competitive Advantage

o First furniture store to look for a globalised strategy

o Competitive cost advantage to rivals due to low production, transportation and assembly costs

o Successfully expanded across Europe due to wide acceptance of standardized designs

BUT: US Market Strategy Failure:o Different tastes in US meant cost

advantage was negated o Difficult to transfer IKEA's frugal

culture to the U.S.

Solution: Adaptation• New product lines to

reflect local tastes • Service adaptations were

made - American customers hate standing in lines, love next-day delivery, etc.

• Outsourced manufacturing to US

Result:• North America is fastest

growing market for IKEA• Adapted business model

being used throughout Asia and Australasia

IKEA’s Competitive AdvantageHost country selection: IKEA’s Competitive Advantage

Host country selection: Organizational Diversity

– UAE is a country where the level of employment of nationals is an indicator of conformity to the local institutional environment and an important source of external legitimacy

– General Electric is a MNE acknowledged for implementing employee diversification practices in hiring, developing and retaining Emirati talent

– Successful employee diversification helped achieving leading business positions in power, water , health and aviation in the UAE

Host country selection: Organizational diversity: GE in the UAE Case Study

• Being highly heterogeneous the market presents cultural and institutional issues

• Kraft responded by diversifying its business platforms and initiatives

• Successful product diversification led to re-configuring the flavor of Oreo biscuits in accordance with local tastes. Kraft Foods is currently the biggest biscuit producer in China.

• Adjustments to shopping behavior in Indonesia led to a huge increase in sales

Host country selection: Organizational Diversity: Kraft Foods in the Asia-Pacific market

Host country selection: Global Strategy

• Global strategy is the guiding principle for MNEs' global operations• To analyse if a MNE adopts a global strategy, the level of strategy integration

can be ranked from high integration to low integration

Low Integration High Integration

Multi domestic Strategy Global Strategy

High influence of host country cultures and institutions on the strategy

Low influence of host country cultures and institutions on the strategy

High Autonomy Low autonomy

Dependency on local resources Dependency on other MNE units

Investment available in institutionally distant markets

Invest in host countries only when the institutional distance is small

Products and services adapted in countries

Standardised products and services

Local marketing Uniform worldwide marketingThe extent cultures and institutions influence the strategy will be dependent upon how integrated the MNE’s strategy is.

Host country selection: A Global Strategy Mars Inc. and M&Ms

Global or Multi-domestic?

GLOBAL

Level of Integration Fairly High

Location of Production and Management

Production and Coordination hubs located across the world.

Interdependency of MNE units

High amount of interdependency across the business functions

The markets they invest in

Whilst Mars Inc. is present in over 70 countries, the country must adhere to a detailed list of specifications before entry.

Level of product standardisation

High

Level of marketing standardisation

High M&Ms Taiwan

ENTRY STRATEGY

ENTRY MODES: Acquisition

Kraft – Cadbury

Feb 2010: was one of its top competitors in order to increase market share and global presence and gain access to emerging markets.

Cultural and Institutional Concerns

• Cadbury’s ethos needed taken into account • Possibility of disregarding British heritage• Difficulty to legitimise within the institutional environment of the MNE

Reasons for entry

• Culturally close• Perceived brand quality and strong

heritage• Size and scope of operations• Strong distribution channels

Hyundai2008: Entered Noŝovice in Czech Republic. Invested in the opening of a manufacturing plant providing 13,000 jobs (3,000 directly). The economic benefits in the region exceed the costs of the foreign investment.

Cultural and Institutional Concerns

• Less awareness of culture on entry• Profits go straight back to MNE and not to the host country - may be resistance

from local economies

Reasons for entry

• Czech Republic’s long industrial tradition• Good existing technology base• Highly qualified Czech workforce

ENTRY MODES: Greenfield

Ownership mode(joint venture versus wholly owned subsidiary)

CONTROL MECHANISMS: Equity share in a joint venture

• Firms will refrain from investing in markets that are institutionally distant

• Firms may choose lower levels of control and resource commitment commonly associated with a Joint Venture

–Lowers risk of institutional conflicts

• Greater control enhanced resource commitment and higher risk (Delios & Beamish, 1999)

Entry Strategy: Ownership strategy

“Starbucks, a Tata Alliance”• India potentially the largest market

outside of the US for Starbucks

• US Starbucks + Tata Global Beverages in January 2012 created a 50:50 joint venture, TATA Starbucks Limited

• India recently created a more open economy allowing 100% equity ownership of foreign firms

• However the environment does not support this– Weak Institutions: Lack of regulative

framework

– Cultural Values: Individualist

Entry strategy: Ownership strategy - Joint Venture

OWNERSHIP STRATEGY

Tesco and Ting Hsin•2004 Tesco gained foothold in China•50:50 JV with Ting Hsin (Hymall)•2006 Tesco spent £180m acquiring 90% stake

Entry strategy: Ownership strategy - Joint Venture

Yahoo and Alipay: Failed

• Yahoo’s stake in Chinese firm Alibaba marked largest investment by foreign firm in China’s technology market

• Yahoo 40%: Alibaba 60% merged search engine operations

• JV included business-to-business auction site Alipay recognised as a key asset for Yahoo’s access to China (key strategic industries)

• Alibaba owner Mr Ma transferred ownership of Alipay to Alibaba

• Yahoo’s 43% stake no longer has value

OWNERSHIP STRATEGYOWNERSHIP STRATEGY- Joint Venture

ConclusionsConclusion

•Institutional leg of strategy tripod becoming increasingly accepted within theory

•Porter – influence of cultures and institutions dependent upon structural characteristics of industry

•Personal opinion – globalization will result in decreasing influence over time

Questions?

Reflections: