International Strategic Management: Chapter 1 - Chapter 4

FEP – Master in International Business 1
International Strategic Management

Chapter 1 – Chapter 4
Table of Contents
1. Introduction ............................................................................................................................ 2
1.1. Strategy: Concepts and Questions ............................................................................. 2
1.2. Fundamental Perspectives: Industry, Resources and Institutions ............................ 2
1.3. Global Strategy: Concept and Relevance ................................................................... 3
1.4. Globalization: A Situation Point ................................................................................. 4
2. Industry Competition ............................................................................................................. 4
2.1. The Five Forces Framework ....................................................................................... 5
2.2. Three Generic Strategies ........................................................................................... 7
2.3. Debates and Extentions ............................................................................................. 8
2.4. The Savy Strategist ..................................................................................................... 8
3. Resources and Capabilities ..................................................................................................... 8
3.1. The VRIO Framework ............................................................................................... 11
3.2. Debates and Extentions ........................................................................................... 12
3.3. The Savvy Strategist ................................................................................................. 13
4. Intitutions, Cultures and Ethics ............................................................................................ 14
4.1. Understanding Institutions: ..................................................................................... 14
4.2. An Institution-Based View of Business Strategy ...................................................... 17
4.3. The Strategic Role of Cultures ................................................................................. 19
4.4. The Strategic Role of Ethics ..................................................................................... 21
4.5. A Strategic Response Framework for Ethical Challenges ........................................ 23
4.6. Debates and Extensions ........................................................................................... 24
---------- International Strategic Management ----------

1. Introduction
1.1. Strategy: Concepts and Questions
We start this chapter by defining what strategy is. Since strategy is a recent concept
applied to management, there are still 3 different definitions: strategy as a Plan, wich means
it’s related to planning and folowing a rigorous plan, to make sure the company can achieve
its goals. Later, the strategy was seen as a flexible, goal-oriented actions. Strategy was
associeted with Action, a view that is based on patterns of behaviour of a firm. The key
diference between this two approaches is that Plan-strategy is a top-down view, while the
Action-strategy is bottom-up, based on the actions of the everyday life. On the Plan-strategy,
we can say we have an intended strategy, witch means have defined a set of actions we
believe will make the company grow. On Action-Strategy, we have a emergent strategy: the
best practices from the employees will make the company grow. A new way of thinking
emerges: the Strategy as Integration, witch mixes the 2 strategies referred (Plan and Action).
In this view, we determine the long-term goals, and then we have a set of small, unplanned
actions, so we can achieve those goals.
The authors of the book defend that strategy must be seen as a theory, a way of
making a firm compete successfully. Defining this way (as a theory) has several advantages,
like:
● It includes planning and actions (just like integration), we work on a strategy

formulation (a plan) but then we make decisions on the actions we have to make (strategy
implementation);
● It serves two porpuses: to explain and to predict;
● it requires replications and experimentations, because one strategy may not
work all the time;
● It helps to understand that sometimes it’s not easy to change a strategy.
1.2. Fundamental Perspectives: Industry, Resources and Institutions
In the study of global strategy, it’s important that we answer some questions:

Why do firms differ?
There are several reasons that can be the answer to this questions. First, we saw that
the theory (strategy) might not work on all firms, at all times. Second, there are cultural
differences in the way companies work, which means this will lead to differences on the firms.
How do firms behave?
There are three main forces that determine the way firms behave, making the
“strategic Tripod” on behave analysis. These forces are the industry-based view, that involves
the analysis of the five industry forces (interfirm rivalry, threat of potencial entry, bargaining
power of the suppliers and the costumers and the threat of substitutes); the resource-based
view, based in the specific resources and capabilities of the company; and finaly the
institution-based view, that focus on the specific aspects of the country, such as economic
reforms, cultural diferences, government policy.
What determines the scope of the firm?
There’s no easy answer here. Although its widely accepted that firms should focus their
efforts on their industry (avoiding conglomerates, witch cuts the firm’s value), on emergent
markets, the conglomerate strategies are paying-off.
Geografical scope is also important. Not all enterprises should go global. It’s important
to measure the capacity of a company to enter diferent markets.
What determines the success and failure of firms?
The Strategic-tripod, offers the main forces that lead to success or failure of the
companies. The competition within an industry might determine firm’s performance. The
weaknesses that a firm has (the resources-based view) compromise the ability of a firm to
survive. And finally, even the institutions may influence the success or failure of a company.
1.3. Global Strategy: Concept and Relevance
What is global strategy?
Global strategy may be, in a traditional view, a way to serve standardized goods or
services around the globe. But it also may be any strategy outside one’s home country.
Essencially, for this course, we will assume that Global Strategy means the strategy of the firms

around the globe. This definition includes Big MNE, that work on lots of different markets;
SME, from developed countries or developing countries. This definition includes also firms
that haven’t adventure in foreign markets, because they maybe be suffering from foreing
entrants.
1.4. Globalization: A Situation Point
We can define globalization as the close integration and dependance of the countries,
companies and people aroud the globe.
Essencially, we have 3 different perspectives on Globalization: we can see it as a recent

phenomenon, that started on the 20th century; we can see it as a snowball effect that started
with the portuguese discoveries; or we can see it as a pendulum swing effect: the countries
start opening their barriers, the world becames flatter, and then there is a event (like a world
war, or plain crashes) that make the contries close again, in a never ending pendulum.
Some people say we are in a Semiglobalization era. The countries have barriers to the
trade of goods, services, capital and people, but that barries are not big enough to turn a
country in an isolation island.
On the start of the 21st century, 3 main events changed the globalization as we knew
it. First, some global antiglobalization protests, then the 9-eleven event, and then corporate
governement crisis.
2. Industry Competition
We start this chapter by defining what is an Industry. An industry is considered a group
of companies that provide the same good or service to the market, like the car-, the cellphone,
or the tourism-industry. To better understand the competition that a industry might have, we
start by seeing the perfect competition scenario, where there are a lot of small sellers and
buyers, and a firm is a price-taker (she accepts that price that is used in this market). On the
perfect competition, is very easy to get in or out of the market (there are no barriers).
Althought the perfect competition market is disered, is very rare to find. Instead, we see the

imperfect competition scenario, that goes from monopoly, olygopoly, monopolistic

competition and so on.
In order to help us understand the market and how to rule it, industrial organization
(a branch of economics specificaly worried about this issues) as contructed the SCP model
(Structure, conduct and performance). From the book:
“Structure reffers to the structural attributes of an industry (such as cost of entry/exit).

Conduct is firm actions (such as product differentiation). Performance is the result of firms
conduct in response of the industry structure, which can be average, above- or below-average.
The model suggest that industry structure determines firm conduct (or strategy), which in
turn, determines firm performance”
Industirial organization and policymakers work on a way to make imperfect markets

into perfect markets, trying to make every company have average profits. However, firms use
the SCP model the other way around: they want to have above-average profits (with legal and
ethical boundaries).
2.1. The Five Forces Framework
The five-forces framework was first presented by Michael Porter, and is the Back-Bone
of industry-based analysis. It includes:
(1) The intensity of rivalry among competitors;
(2) The Threat of potential entry;
(3) Bargaining power of suppliers;
(4) Bargaining power of buyers;
(5) The threat of substitutes.
If these forces are very strong, the probability of having above-average profits is very
small.
Considering (1), an industry with lots of discounts or when the market has lots of
similar and small firms, we can say the market is Highly competitive. This is usual for mass-
market produtcs, with a very regular consume. On markets with not-so-frequent consume
(such as motorcycles) is difficult for a company to establish dominance (big market share),
because people try to make the best decitions, and not just buying the same product because

they are used to. Some other issues need to be analysed, and are sumarized in the folowing
table, as the other forces.
5 Forces Threats of the industry profits
Lots of competeting firms
Rivals are similar in size, influence and product

offerings
Rivalry Among High-price Low-frequent purchases

Competitors
Capacity is added in large increments
Industry slow growth or decline
High exit costs
Little scale-based advantages (economies of scale)
Little non-scale based advantages
Inadequate product proliferation

Threat of Potential Entry
Inadequate product differentiation
Little fear of retaliation
Government policies
A small number of suppliers
Suppliers provide unique differentiated products

Bargaining Power of
Suppliers
Weight of the supplier is big
Suppliers may practice foward integration
Small number of buyers
Products provide little cost-savings

Bargaining Power of
Buyers
Buyers purchase standard undifferentiated products
Buyers may practice backward integration
Substitutes are superior to existing products

Threat of Substitutes
Switching costs are low

The important lessons to retain are: not all market are equally profit, since the five
forces can be very different; the firm should focus on existing and potential threats/
oportunities that will garantee the above-average profits.
2.2. Three Generic Strategies
The generic strategies are “intended to stregthen the focal’s firm position relative to
the five competing forces”. Those 3 strategies are:
(1) Cost leadership;

(2) Differentiation;
(3) Focus.
On cost leadership, firm’s focus in on getting the best prices possivle. Usually, the
product isn’t diferent from others (little diferenttiation), and are produced in large scales.
The (2) approach tries to deliver diferent products for smaller markets, but those
markets are willing to pay more for those products (are more costumized to the need of those
people). Products usually have distinctive features . Firms with the (2) approach can deal with
more bargaining power of the suppliers.
The focus strategy is “focused” on a niche of the market. Usually only companies with
a lot of market Knowledge can be in this niche.
Strategies Product Differentiation Market Segmentation Key Functional Areas
Cost Manufacturing, materials

Low (mainly by price) Low (mass market)
Leadership and logistics
High (many market R&D, marketing and

Differentiation High (mainly by uniqueness)
segments) sales
Low (mainly by price) or High Low (one or few

Focus Any kind
(by uniqueness) segments)
The lessons we can take from this strategies is that a company should choose their
strategy, and stick to it. Companies that can’t decide one, or are tring to get all the strategies
at once, we call them “stuck in the middle” and don’t to seem to have a clear strategy.

2.3. Debates and Extentions
The study of the industry doesn’t end here. There’s easy to understand that the world
is always changing, and new extensions arise. Just to have an idea, some markets are have
blurried lines: for exemple the TV-industry is changing its shape. Now, there are youtube
channels, some soapoperas have Facebook acounts, we see tv in a computer, etc.
Second, sometimes companies work together to develop something new, or there are
companies that are adventurous enough to get into very competitive markets.
Some years later, Porter as included a new force: complementors; COmplementors are
complementary industries that are related. For instance, whenever the car-industry sells more
cars, its expected that the petrol stations will increase their sales.
Other questions are related to the “stuck in the middle” vs “all rounder” (if a firm can
make it all or it’s not doing anything great).
2.4. The Savy Strategist
We can conclude some actions we need to take when we are analysing the industry
competition. First, we need to understand the industry from the inside out. Second, there
might be some other forces that are not contempled in the 5 forces Framework. And finaly,
the industry analysis doesn’t dictate the firm’s fate - there are companies making above-
average profits in severe industries.
3. Resources and Capabilities

For this chapter we will analyse the second base foundation of the strategic tripod.
We define resources and capabilities as “the tangible and intangible assets of a firm uses to
choose and implement its strategies”.
The aim of the Resources-based view is to understand how firms differentiate among
themselves using their resources and capabilities.
The tangible R&C are the ones easily quantified or observable. On the other hand, the
intagible R&C are those who are almost impossible to quantify or to be observable.

Tangible Resources
Examples
and Capabilities
Ability to generate internal funds

Financial
Ability to raise external capital
Location of plants, offices and equipments

Physical
Access to raw materials and distribuition channels
Technological Possetion of patents, trademarks, copyrights and trade secrets

Formal planing, comand, and control systems
Organizational
Integrated management information systems
Intangible Resources
Examples
and Capabilities
Managerial talents
Human
Organizational culture
Research and development capabilities

Inovation
Capacities for organizational inovation and change
Perceptions on product quality, durability and reliability among

costumers
Reputation Reputation as good employer
Reputation as a socially responsible corporate citizen
One of the functions of a company is to put all the resources and capabilities in order
to produce a good or a service that brings value to the costumers - this is the value chain. This
value chain has two main areas: the primary activities and the support activities. Since every
activity of the value chain needs a set of resources and capabilities, it’s the manager’s job to
find out how to properly distribute the R&C to get the most add-value product. Of course is
unlikely a company as all the resouces it needs to bring the most add-value product, so it need
to choose which activities should be done by the company, and which should be outsourced.
So, the firms have a desition-model to help them. They need to know if they really need to
make that activity, and if they need, if they have the R&C that are required for the activity.

So here are the basic model that helps the company understand if it should do that
function, or if it should outsource it. In order to decide if they really need to do the activity
(the first question of the model), companies must think if product or service they need has a
high level of commoditization, which means the product is very similar between the
producers, and the company can easily acquired it.
Take the exemple of the automobile industry. The companies don’t produce steel or
glass, because this products have a high level of commoditization, so is easily obtained.
Notice that, as the next graphic shows, when there’s a high level of commoditization,
companies should consider the process of outsourcing, that is, turning on or several parts of
the value chain to out-side suppliers, in order to focus on the core business.
High Commoditization Outsource Outsource

Nature of the Activity
Proprietary (Firm-specific) In house ?
Common Accross
Industry Specific
Industries
Industry Specificity

By analysing the previous table, companies can understand which activities they
should produce in-House, or which ones shoud be outsourced.
To give a more depth to the analysis, the next table explains the main diferences
between in- and out-sourcing and in- and off-shoring.
Mode of Activity
Location of Captive Soucing (FDI) Offshoring Foreign Location

Activity
Domestic In-house Onshoring Domestic Location
In-house Outsourcing
3.1. The VRIO Framework
The VRIO framework is a Resources-based framework that analysis the value (v), rarity
(r), imitability (i) and organizational (o) features of the Resources and Capabilities a company
has.
The first question when analysing the importance of R&C a company possess, is
whether or not the R&C add value for the product or service made. If the R&C aren’t value, a
company must get rid of them as soon as possible, because they may come as a disadvantage,
and create below-average profits.
When we have valued R&C but they are not rare, we consider they lead to competitive
parity. It’s not advantage, but the costumers and clients expect we have them. When a
company has this type of resources, it’s expected to have average profits. Only when a firm
has R&C that are at the same time, value and rare, it will achieve above-average profits,
although only temporarily.
In order to achieve more consistent results, the value and rare R&C should also be hard
to imitate. As we know, tangible resources are more easily imitated, so the advantage they
bring is more scarce. Here, there are two ways of imitation: direct duplication (which is usually
more dificult) or substitution (which is not an easy task). Although some companies try it,
imitation is hard to get. This is because companies can’t acquire new resouces in short periods
of time; the past events may influenciate the present; and the casual ambiguity it envolves

the R&C. For exemple, for other companies, is dificult to know, or at leat understand, why a
different cultural organitazion may lead to a faster response to the needs of a client. So it’s
not a direct link that rivals identify easily.
Besides the value, the rarity and the imitability, companies (and managers) must figure
out what is the best way to apply the R&C the company owns, the organization of the R&C. A
company must have a set of complementary assets (non-core assets that support the main
assets) in order to leverage the R&C which possess.
Another aspect of the organization of the firm is the social complexity, the difficulties
arising from organizing groups, projects, people, resources, and so on.
Costly to Exploited by Competitive

Valuable? Rare? Firm Performance
Imitate? Organization? Implications
Competitive
No - - No Below Average
Disadvantage
Yes No - Yes Competitive Parity Average
Yes Yes No Yes Competitive Advantage Above Average
Sustained Competitive Consistently Above

Yes Yes Yes Yes
Advantage Average
“Overall, only valuable, rare and hard to imitate capabilities that are organizationally
embedded and exploited can possibly lead to sustained competitive advantage and
persistently above-average performance”.
3.2. Debates and Extentions
This chaptes will make some points that are worth to consider. The first one is the
approaches that determine the above-average profits of a firm. Several studies point the
industry-based view as being the main responsable for such profts (comparing the
pharmaceutical markets vs groceries markets). However, lots of other sutdies indicate that
the resouces-based is the one that explains such profits within an industry (such as Zara vs

other brands). All we can say is that both perspectives are important to “make a picture” of
what the business world is. In conclusion, these visions are complementary to each other.
The second debate is based on comparing static vs dynamic resources. Some people
talk about a Knowledge-based view of the firm, since the knowledge that the workers have,
the relations they establish with suppliers and clients, are the real R&C. So, in this view, we
have tacit knowledge doing “all the work”, we see the people “learning by doing”, instead of
“learning before doing” and are simple rules that establish the relations existing.
There are other questions that need further analysis, such as if the offshoring is
positive for both countries (since the workers are seen as beeing part of a comoditization),
and to understand if the R&C we have in one country may be reproduce in other countries in
order to garantee success.
3.3. The Savvy Strategist
The savvy strategist focus on three major points. (1) a company must figure out, with
the help of the VRIO Framework, which are their best R&C, usually the ones that are
intangible. (2) Imitation will not lead to a successful strategy, although it my be important
sometimes to have a benchmark. (3) No company must expect their advantages will last
forever. It has happen before, and will certantly happen now: companies explore the
advantages they have, for the period of time they can. So, in order to keep ahead of the
competition, companies must have a strategic foresight: a future vision, to keep them always
on top.
Finnaly, the resourced-based view of the firm answers the 4 fundamental questions:
Why do firms differ? Because of the differences there are in the R&C the companies have.
How do firms behave? they try to used theirs R&C to explore their advantages and hide their
weaknesses. What determines the scope of the firm? The way the firm organises the value-
chain of the ativities it develops. What determines the success or the failure of the firm? Once
agains, its R&C will explain the evolution of the firm.

4. Intitutions, Cultures and Ethics

4.1. Understanding Institutions:
Definitions
Douglas North (Nobel in Economics), defines institutions as “the humanly devised

constraints that structure human interaction”, this definition empathizes the “rules of the
game” metaphor (the institutions as the creators and moderators of the rules to which the
individuals and the firms have to obey). An institutional framework is made up of formal and
informal institutions governing the individual and the firm behavior. These institutions are
supported by three “pillars” identified by Richard Scott (leading Sociologist): (1) Regulatory
(2) Normative and (3) Cognitive.
Formal institutions include laws, regulations and rules. Their primary supportive pillar
is the Regulatory Pillar, which is the coercive power of governments.
Informal institutions, on the other hand, include norms, cultures and ethics. Their two
main supportive pillars are the Normative and the Cognitive. The normative pillar refers to
how values, beliefs, and actions (collectively known as norms) of other relevant players
influence the behavior of focal individuals and firms. (For instance the recent norms centered
on rushing to invest in China and India have lead many Western firms to invest in China not
knowing exactly how to make this moves work but motivated by the fact that most firms were
already there so “Why weren’t they?”). The cognitive pillar refers to the internalized, taken-
for-granted values and beliefs that guide individuals and firm behavior. This pillar refers to the
conscience of right and wrong that each individual has that can many times overcome certain
norms (many times although the majority keeps silent and that may be perused as the norm
to follow the sense of right and wrong of an individual can lead an individual to ignore the
norm and report certain wrong doings).

Degree of Formality Examples Supportive Pillars

Laws
Formal Institutions Regulations Regulatory (coercive)
Rules
Norms Normative
Informal Institutions Culture

Cognitive
Ethics
What do institutions do?
Although institutions do many things, they key role is to reduce uncertainty. By

signaling which conduct is legitimate and which is not, institutions constraint the range of
acceptable actions. In other words, institution should be able to reduce uncertainty that can
be devastating when not taking into consideration. Uncertainty in economic transactions can
lead to transition costs, which are more broadly known as the costs of doing business.
An important source of transaction costs is opportunism, defined as self-interest

seeking with guile. Examples include misleading, cheating and confusing other parties in
transaction costs. In attempt to reduce these transaction costs, institutional framework
increase certainty by spelling out the rules of the game so that all players can understand them
and consequently violations (such as failure to fulfill a contract) can be mitigated with relative
ease (trough formal arbitration and courts).
Without a stable institution framework that protects all players, the transaction costs
can become too high, to the extent that certain transactions simply would not take place. In
the absence of a good, credible institutional framework, investors can choose to put their
money abroad.
How do institutions reduce uncertainty?
The first kind of economic transaction is often called relational contracting and it is
known as an informal, relationship-based, personalized exchange, this kind of contracting is
the one to which you need no written document, for instance when you loan money to your
friends, there is no need to sign a contract because there’s trust between the two parts, thus

your transaction is governed by informal norms and cognitive beliefs based on what friendship
is about.
However in addition to the benefits of friendship, there are costs: all the time you invested in
the relationship and all the gifts you’ve given over the years, for example.
Costs and benefits of inFormal, trust-

based, personal exchange
In the beginning of the relationship (T1) the

costs to engage in relational contracting are very
high (A) and the benefits low (B) because there’s a
need to build strong social networks trough time
and resource consuming process. If the relationship
stands, the rest of the time, then benefits outweigh
the costs. Over time, when the scale and scope of informal transactions expand the costs per
transaction move down (from A to C and then E) and benefits move up (from B to C and then D).
The second institutional transaction

it is often called arm’s-length transaction.
This mode of governing relationships is a
formal, rule-based and impersonal
exchange with third-party enforcement. As
the economy grows so does the number and
quantity of transactions, therefore there’s
the need for the enforcement of a third-
party trough formal market-supporting
institutions.
Costs and benefits of formal, rule-based, impersonal exchange
In the graphic it can be seen that in the beginning cots per transaction are high,
because of the high costs of formal institutions (credit bureaus, courts, lawyers, and police).
Over time, however, the third-party enforcement is likely to facilitate the widening of markets,

because unfamiliar parties, people who are not your friends and who would have been
deterred to transact with you before, are now confident enough to trade with you and other
people. They are confident enough because there’s a strong formal institutional framework.
In other words, if there’s an adequate formal institutional framework, firms can borrow
money from local banks, out-of-state banks, or even foreign banks, which means that formal
market-supporting institutions facilitate more new entries by lowering transaction costs and
consequently firms are able to grow and so are economies.
Lastly, there’s the Institutional transactions. Institutions are not static, meaning they
do not stay the same way for a very long period of time. Thus, institutional transactions are
all of the fundamental and comprehensive changes introduced to the formal and informal
rules of the game that effect organizations as players.
4.2. An Institution-Based View of Business Strategy
Overview
For years the relationship between strategic choices and institutional frameworks has
been ignored by most of the strategy literature. There is, therefore, a strong need to discuss
this relationship. On the other hand, the so called “task environment”, that focuses on
economic variables such as market demand and technological change, has received significant
attention over the years.
It is now important to point out Porter’s Diamond of National Competitive Advantage.

Porter’s Diamond explains that the competitive advantage of different industries in different
nations depends essentially on four factors: Firm strategy, structure and rivalry, Country
Factor endowments (natural and human resources); Related and Supporting Industries and
Domestic Demand. Porter basically argues that the combination of the four guarantees the
competitive advantage of globally leading industries in different countries. Despite the
complexity of Porter’s diamond, it has been harshly criticized for ignoring histories and
institutions. Porter focuses on market economies and so do most researchers. But this
omission is unfortunate because it is known by marketers that, in developed economies,
institutional frameworks play a crucial role on strategic decisions. The striking institutional
differences between developed and emerging economies have propelled the institution based

view to the forefront of strategy discussions. In fact, the institution-based view considers that
strategic choices are direct outcomes of the dynamic iteration between institutions and firms.
Here upon the question is no longer whether institutions matter, as that seems to be
acknowledged, what is important to understand from now on is how they matter.
Two core propositions
The institution-based view suggests two core propositions on how institutions matter.
First, managers and firms rationally make strategic choices within institutional constraints. For
instance, the pharmaceutical industry: in the US the institutional framework fosters
innovation that command premiums, the Japanese institutional framework, on the other
hand, discourages innovations because they can make the old drugs obsolete- needless to say:
old drugs are the most profitable in Japan. Both strategies are perfectly rational within their
own institutional frameworks.
Another example is Counterfeiting: Close to 10% of all world trade is reportedly

counterfeiting, which means hundreds of firms and thousands of individuals are involved in
this practice. No one while growing up wishes to become a counterfeiter, so what happens to
people, why do people end up getting involved in this unethical and illegal procedure? The
key to understand this strategy is the realization that the people involved in counterfeiting are
not monster but just ordinary people who made a rational and strategic choice (from their
point of view) given an institutional environment of weak intellectual protection and the
availability of moderately capable manufacturing and distribution skills. Not taking the weight

out of the illegality of counterfeiting, it is important to understand this in order to devise

effective countermeasures.
The second proposition is that while formal and informal institutions combine to
govern firm behavior, in situations where formal constraints fail, informal constraints will play
a larger role in reducing uncertainty and providing constancy to managers and firms. For
example, when the formal institutional regime collapsed with the disappearance of the former
Soviet Union, it was the informal constraints, based on personal relationships and connections
(blat in Russian) among managers and officials, that have facilitated the growth of many
entrepreneurial firms.
Relying on informal connections is perceived as a strategy relevant only to firms in

emerging economies. Many of the observers assume that in developed economies firms
pursue only ‘market-based’ strategies. This is far from the truth. Even in developed
economies, formal rules are only a small part of the institutional constraints, informal
constraints are pervasive.
Firms compete both in product markets and in political markets characterized by

informal relationships. To use the resource-based language, political assets may be very
valuable, rare and hard-to-imitate. The firms that are able to masters both formal and informal
relationships, economic and political, benefit many times from political protection. Lobbying
is not necessary indicative of ‘corruption’-just a demonstration of certain firms’ mastery of the
rules of the game.
4.3. The Strategic Role of Cultures
The definition of culture
There are far too many definitions of culture. We will use the one from the cross-
cultural expert Geert Hofstede: “the collective programming of the mind which distinguishes
the members of one group or category of people from another.” It is important to mention
that culture is often neglected in strategic books because it is considered too soft. That is
obviously not the case and so in the following paragraphs it will be analyzed the strategic role
of culture.

The five dimensions of culture
Hofstede and his team proposed five dimensions of culture:
Power distance: measures the extent to which less powerful members within a
country expect and accept that power is distributed unequally. In other words, distinguishes
the levels of hierarchy accepted by the society.
Individualism vs. Collectivism: Focuses on the importance of the individual versus the
group in social and business situations.
Masculinity vs. Femininity: Measures the degree of sex role differentiation.
Uncertainty Avoidance: Identifies the tolerance of ambiguity.
Long-term orientation: Emphasizes perseverance and savings for future betterment.
Cultures and Strategic choices
A great deal of strategic choices is consistent with Hofstede’s cultural dimensions. For
example:
Power Distance: solicitation of subordinate feedback and participation, widely

practiced in low power distance Western countries, is regarded as a sign of weak leadership
and low integrity in high power distance countries such as Egypt, India, Mexico and Russia.
Individualism vs. Collectivism: In individualistic societies, such as the USA

entrepreneurs are usually more willing to take more risk because these societies foster
entrepreneurship, whereas collectivism may result in relatively lower levels of
entrepreneurship. Besides entrepreneurship, individualistic societies are characterized by
greater differentiation (US firms tend to try to differentiate themselves whereas Japanese
firms tend to converge) and more formal contractual safeguard.
Masculinity vs. Femininity: The managers from masculine societies are perceived as
assertive, decisive and “aggressive” (in masculine societies the word ‘aggressive’ carries a
positive connotation) whereas in feminine society the stereotypical manager is “less visible,
intuitive rather than decisive, and accustomed to seeking consensus”. Economically speaking,
masculine societies (such as Japan) may have an advantage in mass manufacturing while
feminine societies (such as Denmark) may have relative advantage in small-scale customized
manufacturing.

Uncertainty avoidance: Managers in low uncertainty avoidance countries (such as

Great Britain) rely more on experience and training, whereas managers in high uncertainty
avoidance countries (such as China) rely more on rules and procedures.
Long-term orientation: Cultures with long-term orientation are likely to nurture firms
with long horizons in strategic planning. While cultures which are short-termed oriented ten
to focus on relatively short-term profits and shorter planning horizons.
Overall, there is strong evidence pointing out the strategic importance of culture.
Sensitivity to cultural differences can not only help strategists better understand what is going
on in other parts of the world, but can also avoid strategic mistakes.
4.4. The Strategic Role of Ethics
The definition and impact of ethics
Ethics refers to norms, principles and standards of conduct governing individual and
firm behaviour. Ethics is not only an important part of informal institutions, but is also deeply
reflected in formal laws and regulations.
There is also a substantial overlap between what is ethical and what is legal. An action
can be legal but unethical (e.g. laying off thousands of employees in the name of downsizing).
It is hard to drawn the line sometimes, some say that firms should only limit themselves to do
what’s legal, on the other hand some believe that as social players, firms have to act
responsible and ethical.
There is a debate on what motivates firms to become ethical:
● A negative view suggests that some firms may simply jump into the ethics
“movement” under social pressures to appear more legitimate without necessarily becoming
more ethical;
● A positive view maintains that some (not all) firms may be self-motivated to
“do it right” regardless of social pressures;
● An instrumental view believes that good ethics may simply represent a useful
instrument to help make good profits.

All sides of debate, however, agree that it is increasingly clear that ethics can make or
break a firm. And during an economic crisis the value of an ethical firm is magnified.
Managing ethic overseas
Managing Ethic overseas is greatly challenging. What is ethical in one country may be
unethical or even illegal in other countries: under-performing employees, whistle blowers,
cross-border trading.
So facing such differences, how can managers prepare themselves? There are two
perspectives on dealing with ethical dilemmas overseas:
1. Ethical relativism: refers to an extension of the cliché “When in Rome, do as the

Romans do”;
2. Ethical imperialism: refers to the absolute belief that “There is only one set of
Ethics, and we have it.”
At the extreme, ethic relativism would have to accept any local practice, whereas
ethical imperialism may cause resentment and backlash among locals.
Three “middle-of-the-road” guiding principles have been proposed by Thomas

Donaldson, a business ethicist. First, respect for human dignity and basic rights (such as those
concerning health, safety, and the needs for education instead of working at a young age)
should determine the absolute minimal ethical threshold for all operations around the world.
Second, respect for local traditions suggests cultural sensitivity. Finally, respect for
institutional context calls for a careful understanding of local institutions.
Ethics and corruption
Ethics helps to combat corruption, often defined as the abuse of public power for
private benefits usually in the form of bribery (in cash or in kind). Corruption distorts the basis
for competition that should be based on products and services, thus causing misallocation of
resources and slowing economic development. Some evidence reveals that corruption
discourages foreign direct investment (FDI). But there are exceptions, such as China and
Indonesia, where corruption is known to exist but FDI doesn’t seem to cease. Why is that? For
two main reasons: first, the vast potential of these two economies may outweigh the
drawbacks of corruption. Second, overseas Chinese and Japanese firms are leading investors
in mainland China and Indonesia, respectively. It is possible that “acquiring skills in managing

corruption (at home) helps develop a certain competitive advantage (in managing corruption
overseas).”
If that is indeed the case, it is not surprising that many US firms complained that they
were unfairly restricted by the Foreign Corrupt Practices Act (FCPA), a law enacted in 1977
that bans bribery to foreign officials.
4.5. A Strategic Response Framework for Ethical Challenges
Ai its core, the institution-based view focuses on how certain strategic choices, under
institutional influences, are diffused from a few firms to many. In other words, the attention
is how certain practices become institutionalized. Such forces of institutionalization are driven
by a combination of regulatory, normative and cognitive pillars. How firms strategically
respond to ethical challenges, thus, leads to a strategic response framework. It features four
strategic choices: (1) reactive; (2) defensive; (3) accommodative and (4) proactive strategies.
1. Reactive: reactive strategies are passive. Even when problems arise, firms do
not feel compelled to act. That leaves only formal regulatory pressures to compel firms to act;
2. Defensive: A defensive strategy focuses on regulatory compliance. In the
absence of regulatory pressures, firms often fight informal pressures coming from the media
and activists;
3. Accommodative: An accommodative strategy features emerging organizational
norms to accept responsibility and a set of increasingly internalized cognitive beliefs and
values toward making certain changes. These normative and cognitive values may be shared
by a number of firms, thus leading to new industry norms;
4. Proactive: proactive firms anticipate institutional changes and do more than is
required.

Institutional Underlying Strategic Strategic

Constrains Pressures Responses Behaviours
Deny responsability,
Formal Regulatory Reactive
do less than required
Admit responsability,
Formal Regulatory Defensive but fight it, do the
least it is required
Accept
Informal Normative Accommodative responsability, do
everything is required
Anticipate
Informal Cognitive Proactive responsability, do
more than is required
4.6. Debates and Extensions
Relative to the industry- and resource-based views, the institution-based view is the
newest leading perspective on strategy. Not surprisingly, some significant debates emerge:
Cultures versus Institutions, Opportunism versus individualism; Cultural Distance versus
Institutional Distance; “Bad Apples” versus “Bad Barrels”.
4.7. The Savvy Strategist
Strategy is about choices. When seeking to understand how these choices are made,
practitioners and scholars usually “round up the usual suspects” namely, industry structures
and firm-specific resources and capabilities but it is also very important to pay attention to
the underlying context. The institution-based view emphasizes the importance of institutions,
cultures, and ethics as bedrocks propelling or constraining strategic choices. Overall, if
strategy is about “the big picture”, then the institution-based view reminds all strategists not
to forget the “big picture”.
By focusing on institutions, cultures and ethics, the savvy strategy draws at least three
important implications for action:
1. When entering a new country, do you homework: understand the formal and
informal institutions governing firm behaviour. When don’t have to “do as the Romans do”,
but it is important to understand why Romans do things a certain way;
2. Strengthen cross-cultural intelligence by building awareness, expanding
knowledge, and levering skills;

3. Integrate ethical decision making as part of the core strategy processes of the
firm.
The institution-based view answers to four fundamental questions:
Why do firms differ? The institution-based view points out the institutional
frameworks that shape firm differences.
How do firms behave? The answer also boils down to institutional differences.
What determines the scope of the firm? Chater 9 will have more details on how
institutions have shaped the evolution of the scope of the firm.
What determines the success and failure of firms around the globe? The institution-
based view argues that firm performance is, at least in part, determined by the institutional
frameworks governing strategic choices.

International Strategic Management: Chapter 1 - Chapter 4

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FEP – Master in International Business 1

International Strategic Management

1.1. Strategy: Concepts and Questions ............................................................................. 2

1.2. Fundamental Perspectives: Industry, Resources and Institutions ............................ 2

1.3. Global Strategy: Concept and Relevance ................................................................... 3

1.4. Globalization: A Situation Point ................................................................................. 4

2. Industry Competition ............................................................................................................. 4

2.1. The Five Forces Framework ....................................................................................... 5

2.2. Three Generic Strategies ........................................................................................... 7

2.3. Debates and Extentions ............................................................................................. 8

2.4. The Savy Strategist ..................................................................................................... 8

3. Resources and Capabilities ..................................................................................................... 8

3.1. The VRIO Framework ............................................................................................... 11

3.2. Debates and Extentions ........................................................................................... 12

3.3. The Savvy Strategist ................................................................................................. 13

4. Intitutions, Cultures and Ethics ............................................................................................ 14

4.1. Understanding Institutions: ..................................................................................... 14

4.2. An Institution-Based View of Business Strategy ...................................................... 17

4.3. The Strategic Role of Cultures ................................................................................. 19

4.4. The Strategic Role of Ethics ..................................................................................... 21

4.5. A Strategic Response Framework for Ethical Challenges ........................................ 23

4.6. Debates and Extensions ........................................................................................... 24

---------- International Strategic Management ----------

● It includes planning and actions (just like integration), we work on a strategy

1.2. Fundamental Perspectives: Industry, Resources and Institutions

---------- International Strategic Management ----------

Why do firms differ?

How do firms behave?

What determines the scope of the firm?

What determines the success and failure of firms?

1.3. Global Strategy: Concept and Relevance

What is global strategy?

---------- International Strategic Management ----------

1.4. Globalization: A Situation Point

Essencially, we have 3 different perspectives on Globalization: we can see it as a recent

---------- International Strategic Management ----------

imperfect competition scenario, that goes from monopoly, olygopoly, monopolistic

“Structure reffers to the structural attributes of an industry (such as cost of entry/exit).

Industirial organization and policymakers work on a way to make imperfect markets

2.1. The Five Forces Framework

---------- International Strategic Management ----------

5 Forces Threats of the industry profits

Lots of competeting firms

Rivals are similar in size, influence and product

Rivalry Among High-price Low-frequent purchases

Industry slow growth or decline

High exit costs

Little scale-based advantages (economies of scale)

Little non-scale based advantages

Inadequate product proliferation

Little fear of retaliation

A small number of suppliers

Suppliers provide unique differentiated products

Suppliers may practice foward integration

Small number of buyers

Products provide little cost-savings

Buyers may practice backward integration

Substitutes are superior to existing products

---------- International Strategic Management ----------

2.2. Three Generic Strategies

(1) Cost leadership;

Strategies Product Differentiation Market Segmentation Key Functional Areas

Cost Manufacturing, materials