International Business Strategy

Lecture 3: Institution views on

strategy
Prof Mo Yamin
Mo.Yamin@manchester.ac.uk
www.manchester.ac.uk/research/mo.yamin

Agenda for todays lecture

Introducing the institutional perspective on
strategy
What are institutions
Dimensions of strategy

What do institutions do ?....( reduce uncertainty)

How do informal and formal institutions reduce uncertainty?

Two core prepositions of the institution-based view

on strategy

Revisiting the strategy Tripod : applying it to

explain Walmart's failure in Germany
Industry based factors
Resource based factors
Institution-based factors

What are Institutions : definitions

Humanly devised constraints that structure
human interaction (North)
Informally known as the rules of the game

Regulatory, normative, and cognitive structures

and activities that provide stability and meaning
to social behavior (Scott)
Formal institutions : Institutions represented by laws and
regulations
Informal Institutions : institutions represented by norms
,cultures and ethics
3

Norms, cultures and ethics : definitions

Norms : the prevailing practices of relevant

players that affect the focal individual and
firms
Cultures : the collective programming of the
mind that distinguishes members of one
group or category of people from another
Ethics: norms , principle and standards of
conduct governing
Individual and firm behaviour
4

Dimensions of INSTITUTIONS

2013 Cengage Learning. All rights reserved.

LO1: TWO TYPES OF INSTITUTIONS

Regulatory pillar:
coercive power
of governments
2013 Cengage Learning. All rights reserved.

iStockphoto.com/xyno

Formal institutions:
laws, regulations, and rules.

LO1: TWO TYPES OF INSTITUTIONS

Informal institutions:
norms, culture, and ethics.

2013 Cengage Learning. All rights reserved.

Cognitive pillar
internalized
values and beliefs
that guide individual
and firm behavior.
iStockphoto.com/xyno

Normative pillar - how

the values, beliefs, and
actions of other
relevant players
influence the behavior
of focal individuals
and firms.

Understanding Institutions (contd)

What Do Institutions Do?
Key function - Reduce uncertainty

How Do Institutions Reduce Uncertainty?

by constraining the range of acceptable actions.
Political or economic uncertainty can be potentially
devastating to firms because uncertainty surrounding
economic transactions can lead to the costs of doing
business (transaction costs).
Transaction costs also rise from opportunism, the act of
seeking self-interest with guile.
Institutions spell out the rules of the game, mitigating
violations and keeping transaction costs minimal.

how do informal and formal institutions

reduce uncertainty ?
Informal institutions reduce uncertainty through
relational contracting
informal, relationship-based, personalized exchanges
No formal third party enforcement.
Informal sanction: Loss of reputation constrains opportunism.
Main cost: need to build and maintain strong social network
(slide 10)

Formal institutions reduce uncertainty through armslength transactions

Formal , rule-based impersonal exchange with third
party enforcement
Opportunism constrained through the imposition of legal
sanctions
Main cost: The creation of the enforcement infra-structure :
courts , lawyers , police, prisons , credit agencies (slide 11)
9

The Costs and Benefits of Informal, Relationship-Based,

Personalized Exchange

Figure 4.1

The Costs and Benefits of Formal, Rule-Based, Impersonal

Exchange

Figure 4.2

An Institution-Based View of Strategy

A perspective on strategy that argues that in
addition to industry and firm level conditions
firms also need to take into account wider
influences from sources such as the state and
society when crafting strategy
Strategic choices are direct outcomes of the
dynamic interaction between institutions and
firms

Institutions , Firms and strategic choices

13

Two Core Propositions : Proposition 1

Managers and firms rationally pursue their

interests and make choices within the formal
and informal constraints in a given
institutional framework.
firms success is correlated to
monitoring, decoding, and adapting
to changing rules of the game
Managers are boundedly rational they make
decisions in the absence of complete
information

Two core propositions: Proposition 2

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.
This is particularly relevant in emerging
markets .
Striking differences between institutions in
developed and emerging economies has pushed the
institution-based view to the forefront.
monitoring, decoding, and adapting to
changing rules of the game in emerging markets 15

Agenda for todays lecture

Introducing the institutional perspective on
strategy
What are institutions
Dimensions of strategy

What do institutions do ?....( reduce uncertainty)

How do informal and formal institutions reduce uncertainty?

Two core prepositions of the institution based view

on strategy

Revisiting the Strategy Tripod : applying it to

explain Walmart's failure in Germany
Industry based factors
Resource based factors
Institution-based factors

16

Strategy tripod
Three theoretical perspectives on strategy provide
their own distinctive answers to the four
fundamental questions*
Industry-based view - focusses on the degree of
competitiveness in the industry as the critical influence on
a firms strategic positioning in the industry
Resource-based view -emphasizes firm specific differences
in capabilities as the main driver of strategic behavior and
performance
Institution-based view - highlights the importance of
context- shaped by institutional forces- particularly when
companies operate outside their home market

The idea of the strategy tripod is simply that

combining these three perspectives provides a more
robust understanding of strategy
17

18

Remember that a firms strategy is defined

as
Its theory of how to compete successfully
A good theory is one that corresponds to external and internal realities
affecting a particular firm
External realities refer to the industry context and the institutional setting within
which firms compete . The internal reality refers to the resources and capabilities the
firm uses to achieve its strategic aim.
A good theory receives support from the three pillars . A bad theory receives no or weak
support.

Walmarts theory of its business was based on the belief that everyday
low price Is a powerful weapon with which to compete : it is an
unbeatable proposition
This worked in the US and Mexico and to a lesser degree in the UK and
Canada
It did not work in Germany, Europes largest retail market. Why not ?

19

Industry based factors relevant to Walmart in Germany

rivalry amongst competitors in German

retailing
hard discounters led by Aldi and Lidl have strong
market shares
Walmart could not implement or defend its cost
leadership against main competitors

Large market share gave the incumbents retailers

strong bargaining position with suppliers*
Its low market share significantly weakened
Walmarts bargaining power with suppliers

Exist Barriers
German retailers are mostly family-owned or
organized as co-operatives. The dont have to
satisfy shareholders and can better withstand cost
competition.
20

Resources and capabilities

"everyday low prices" not achieved
Despite its enormous financial and managerial
resources and its legendary reputation ,Germanys
biggest market-research institute, demystified WalMarts fundamental value proposition

everyday low prices as a (largely) empty

promise
Wal-Mart had not been able to systematically undercut Aldi
and the other hard discounters
its assortment was not even substantially cheaper then the
traditional ( i.e non-discounters)retailers offerings
even some of its store managers complained about 'low
American quality standards of most merchandise
21

Neither "everyday low prices" nor "excellent service

Wal-Mart Germany has not succeeded in

delivering on the second part of
its value proposition excellent customer
service either. By contrast the company has
repeatedly been rated as only just or even slightly
below average in terms of overall consumer
satisfaction
Walmart strategy in Germany failed the VIRO test :
mostly because it failed to offer value that was
rare and could not be matched by its main rivals
in Germany
22

Institutional factors relevant to Walmarts poor

performances in Germany : Formal Aspects

Retail-Specific Legislation
At a maximum of 80 hours a week store opening hours
in Germany are among the shortest in Europe ( see
table in next slide). Sunday and holiday openings are
not permitted at all.
Germanys fair trading laws forbid merchants to sell
goods below cost on a permanent basis.

A pricing strategy focussed on loss-leaders was very likely to

be illegal under German law (but more often than not
perfectly legal in the
US and UK)

Employment regulations
strict worker protection regulations, making surplus
workers redundant can be a complicated, and costly in
Germany

23
Overall formal institutions significantly

Store opening hours in selected EU countries

24

Informal institutions :Norms and practices

Wal-Mart is a strictly non-union employer
In Germany unions, wield enormous influence
both in the political sphere and on the shop floor
Centralized wage-bargaining process is the standard
procedure for determining wages in Germany
in retailing the relevant union, and the retailers employers
association agree upon.

Walmart refused to accept the centralised

agreements leading to many labour disputes and
disruptions
25

Norms and cultures affecting Walmarts instore operations

Ten-Feet Rule of Walmart ( see next slide) was
seen in Germany as fake and not genuine
because the employees are strangers, and thus,
shoppers did not appreciate it.
it is not the norm to express emotions in business
relations. Shoppers think it weird that a stranger
smiles and talks to them during their shopping
activity.
The same applies to the idea of greeters in the
stores
26

shoppers unaware of key role of greeters in Wal-Marts

Ten-Feet Rule of Walmart

27

Overview

What are institutions , what are their key

dimensions?
What do they do and how?
Core proposition of the institution-based
view on strategy
Applying the strategy tripod to Walmart in
Germany

28