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Global Strategy
FIFTH EDITION
Mike W. Peng, Ph.D.
Jindal Chair of Global Strategy
University of Texas at Dallas
Chair, Global Strategy Interest Group, Strategic Management Society (2008)
Decade Award Winner, Journal of International Business Studies (2015)
Fellow, Academy of International Business (since 2012)
and Asia Academy of Management (since 2019)
The Only Global-Strategy Textbook Author Listed among Highly Cited
Researchers (among the top 0.1% most cited researchers worldwide)
(every year since 2014)
Australia
• Brazil • Canada• Mexico • Singapore • United Kingdom • United States
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Global Strategy, Fifth Edition
Mike W. Peng
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Print Number: 01 Print Year: 2020
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To Agnes, Grace, and James
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Brief Contents
List of In-Chapter Features and Integrative Cases
Preface xv
About the Author xx
PA R T
PA R T
xi
1 Foundations of Global Strategy
1
Strategizing Around the Globe 2
2
Managing Industry Competition
3
Leveraging Resources and Capabilities
4
Emphasizing Institutions, Cultures, and Ethics
1
32
58
2 Business-Level Strategies
84
113
5Growing and Internationalizing the Entrepreneurial Firm
PA R T
6
Entering Foreign Markets
7
Making Strategic Alliances and Networks Work
8
Managing Competitive Dynamics
140
168
194
3 Corporate-Level Strategies
9
114
223
Diversifying and Managing Acquisitions Globally
224
10Strategizing, Structuring, and Innovating Around the World
PA R T
11
Governing the Corporation Globally
12
Strategizing on Corporate Social Responsibility
4 Integrative Cases
254
282
314
341
Glossary 426
Index of Names 438
Index of Organizations 451
Index of Subjects 454
iv
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Brief Contents
Contents
List of In-Chapter Features and Integrative Cases xi
Preface xv
About the Author xx
PA R T
1 Foundations of
Global Strategy
chapter 1 Strategizing Around
the Globe 2
opening case: Zoom 3
Why Study Global Strategy? 5
What is Strategy? 6
Origin 6
Plan versus Action 6
Strategy as Theory 7
Strategy in Action 1.1: German and
French Military Strategies in 1914 7
Strategy in Action 1.2: Selling Star Wars
to LEGO Top Management 10
Strategy, Strategist, and Strategic
Leadership 11
Fundamental Questions in Strategy 12
Why Do Firms Differ? 12
How Do Firms Behave? 14
What Determines the Scope of the
Firm? 15
What Determines the Success and Failure
of Firms Around the Globe? 15
Strategy in Action 1.3: Confessions of
Your Textbook Author 16
What is Global Strategy? 17
Globalization and Semiglobalization 17
What Is Globalization? 17
The Swing of a Pendulum 18
Black Swan and Risk Management 19
Semiglobalization 20
Debates and Extensions 20
Debate 1: Globalization versus
Deglobalization 20
Debate 2: Strategic versus Nonstrategic
Industries 22
Debate 3: Just-in-Time versus Just-in-Case
Management 22
Fostering Critical Strategic Thinking
Through Debates 23
Organization of the Book 23
Chapter Summary 24
Key Terms 24
Critical Discussion Questions 24
Topics for Expanded Projects 25
Closing Case: Two Scenarios of the Global
Economy in 2050 25
Notes 27
chapter 2Managing Industry
Competition 32
Opening Case: Global Competition in the
Cruise Industry 33
Defining Industry Competition 35
The Five Forces Framework 35
From Economics to Strategy 35
Rivalry among Competitors 37
Threat of Entrants 37
Strategy in Action 2.1: High Fashion
Fights Recession 38
Bargaining Power of Suppliers 40
Bargaining Power of Buyers 40
Threat of Substitutes 41
Lessons from the Five Forces
Framework 41
Strategy in Action 2.2: Digital Strategy
and Five Forces 42
Three Generic Strategies 43
Cost Leadership 43
Differentiation 44
Focus 45
Lessons from the Three Generic
Strategies 45
Debates and Extensions 45
Debate 1: Clear versus Blurred Definitions
of Industry 46
Debate 2: Industry Rivalry versus
Strategic Groups 46
Debate 3: Integration versus
Outsourcing 47
Debate 4: Stuck in the Middle versus
All-Rounder 48
Debate 5: Economies of Scale versus 3D
Printing 48
Strategy in Action 2.3: Singapore Airlines
Is Both a Differentiator and a Cost
Leader 49
Debate 6: Industry-Specific versus FirmSpecific and Institution-Specific
Determinants of Performance 50
Making Sense of the Debates 50
The Savvy Strategist 50
Chapter Summary 51
Key Terms 51
Critical Discussion Questions 52
Topics For Expanded Projects 52
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
v
vi
Contents
The Strategic Role of Culture 94
The Definition of Culture 94
The Five Dimensions of Culture 95
Cultures and Strategic Choices 96
The Strategic Role of Ethics 97
The Definition and Impact of Ethics 97
Managing Ethics Overseas 98
Strategy in Action 4.2: Onsen and Tattoos
in Japan 98
Ethics and Corruption 99
A Strategic Response Framework
for Ethical Challenges 100
Strategy in Action 4.3: Monetizing the
Maasai Tribal Name 101
Debates and Extensions 102
Debate 1: Opportunism versus
Individualism/Collectivism 102
Debate 2: Cultural Distance versus
Institutional Distance 103
Debate 3: Freedom of Speech versus
Censorship on the Internet 104
The Savvy Strategist 105
Chapter Summary 106
Key Terms 106
Critical Discussion Questions 107
Topics For Expanded Projects 107
Closing Case: IKEA’s Challenge in Saudi
Arabia 107
Notes 108
Closing Case: The Future of the
Automobile Industry 52
Notes 54
chapter 3Leveraging Resources
and Capabilities 58
opening case: Canada Goose Flies High 59
Understanding Resources and
Capabilities 60
Resources, Capabilities, and the Value
Chain 62
From Swot to Vrio 65
The Question of Value 66
The Question of Rarity 66
The Question of Imitability 66
Strategy in Action 3.1: ASML 67
The Question of Organization 68
Strategy in Action 3.2: CIMC 69
Debates and Extensions 70
Debate 1: Firm-Specific versus
Industry-Specific Determinants of
Performance 71
Debate 2: Static Resources versus
Dynamic Capabilities 71
Debate 3: Offshoring versus
Nonoffshoring 72
Debate 4: Domestic Resources versus
International (Cross-Border)
Capabilities 74
Strategy in Action 3.3: Natura 75
The Savvy Stategist 76
Chapter Summary 77
Key Terms 77
Critical Discussion Questions 78
Topics For Expanded Projects 78
Closing Case: H-E-B Fights
Coronavirus 78
Notes 80
chapter 4Emphasizing Institutions,
Cultures, and Ethics 84
Opening Case: Brexit and Strategic
Choices 85
Understanding Institutions 87
Definitions 87
What Do Institutions Do? 88
How Do Institutions Reduce
Uncertainty? 88
An Institution-Based View of Business
Strategy 90
Overview 90
Two Core Propositions 92
Strategy in Action 4.1: The American
Guanxi Industry 93
Institutional Logics and Hybrid
Organizations 94
PA R T
2Business-Level
Strategies
chapter 5Growing and Internationa­
lizing the Entrepreneurial
Firm 114
Opening Case: The New East India
Company 115
Entrepreneurship and Entrepreneurial
Firms 116
A Comprehensive Model of
Entrepreneurship 117
Industry-Based Considerations 118
Resource-Based Considerations 119
Institution-Based Considerations 120
Strategy in Action 5.1: Europe’s
Entrepreneurship Deficit 120
Five Entrepreneurial Strategies 121
Growth 122
Strategy in Action 5.2: Tory Burch’s Rise
in the Fashion Industry 122
Innovation 123
Network 123
Financing and Governance 124
Harvest and Exit 125
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents
Internationalizing the Entrepreneurial
Firm 126
International Strategies for Entering
Foreign Markets 126
International Strategies for Staying in
Domestic Markets 127
Debates and Extensions 128
Debate 1: Traits versus Institutions 128
Debate 2: Slow Internationalizers versus
Born Global Start-ups 128
Strategy in Action 5.3: Immigrant
Entrepreneurs 129
Debate 3: High-Growth Entrepreneurship
versus Ethically Questionable
Behavior 130
The Savvy Entrepreneur 131
Chapter Summary 132
Key Terms 132
Critical Discussion Questions 132
Topics For Expanded Projects 133
Closing Case: Boom in Busts: Good
or Bad? 133
Notes 134
chapter 6Entering Foreign
Markets 140
Opening Case: Amazon Enters India 141
Overcoming Liability of Foreignness 143
Understanding the Propensity to
Internationalize 143
Strategy in Action 6.1 Nordic
Multinationals 144
A Comprehensive Model of Foreign
Market Entries 145
Industry-Based Considerations 145
Resource-Based Considerations 146
Institution-Based Considerations 147
Where to Enter? 148
Location-Specific Advantages and
Strategic Goals 148
Cultural and Institutional Distances
and Foreign Entry Locations 150
When to Enter? 150
How to Enter? 152
Scale of Entry: Commitment and
Experience 152
Modes of Entry: The First Step on Equity
versus Nonequity Modes 152
Modes of Entry: The Second Step
in Making Actual Selections 155
Strategy in Action 6.1: Thai Union’s
Foreign Market Entries 157
Debates and Extensions 157
Debate 1: Liability versus Asset of
Foreignness 157
Debate 2: Old-Line versus Emerging
Multinationals: OLI versus LLL 158
vii
Debate 3: Global versus Regional
Geographic Diversification 159
Debate 4: Contractual versus
Noncontractual
Approaches of Entry 159
Strategy in Action 6.3: Goldman Sachs
Enters Libya 160
The Savvy Strategist 161
Chapter Summary 162
Key Terms 162
Critical Discussion Questions 162
Topics For Expanded Projects 163
Closing Case: How Firms from Emerging
Economies Fight Back 163
Notes 164
chapter 7Making strategic alliances
and networks work 168
Opening Case: Even Toyota Needs
Friends 169
Defining Strategic Alliances and
Networks 170
A Comprehensive Model of Strategic
Alliances and Networks 171
Industry-Based Considerations 171
Resource-Based Considerations 172
Rarity 173
Imitability 174
Organization 174
Institution-Based Considerations 175
Formation 176
Stage One: To Cooperate or Not to
Cooperate? 176
Stage Two: Contractual or Equity
Modes? 176
Stage Three: How to Position the
Relationship? 177
Strategy in Action 7.1: Delta Spreads Its
Wings Globally 178
Evolution 178
Combating Opportunism 178
Evolving from Strong Ties to Weak
Ties 179
From Corporate Marriage to
Divorce 180
Strategy in Action 7.2: Yum Brands,
McDonald’s, and Sinopec 181
Performance 182
The Performance of Strategic Alliances
and Networks 182
The Performance of Parent Firms 183
Debates and Extensions 184
Debate 1: Majority JVs as Control
Mechanisms versus Minority
JVs as Real Options 184
Debate 2: Alliances versus
Acquisitions 184
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
viii
Contents
Debate 3: Acquiring versus Not Acquiring
Alliance Partners 185
Strategy in Action 7.3: Renaussanbishi: No
Way! 186
The Savvy Strategist 187
Chapter Summary 188
Key Terms 188
Critical Discussion Questions 189
Topics For Expanded Projects 189
Closing Case: Fiat Chrysler: From Alliance
to Acquisition 189
Notes 190
chapter 8Managing Competitive
Dynamics 194
Opening Case: Jetstar’s Rise in the Asia
Pacific 195
Strategy as Action 196
Industry-Based Considerations 198
Collusion and Prisoner’s Dilemma 198
Industry Characteristics and Collusion
vis-à-vis Competition 198
Strategy in Action 8.1: The Global
Vitamin Cartel 200
Resource-Based Considerations 201
Value 201
Rarity 202
Imitability 202
Organization 202
Resource Similarity 202
Competitor Analysis 202
Strategy in Action 8.2: Alibaba versus
Amazon 204
Institution-Based Considerations 205
Formal Institutions Governing Domestic
Competition: A Focus on
Antitrust 205
Formal Institutions Governing
International Competition: A Focus
on Antidumping 207
Attack and Counterattack 208
Three Main Types of Attack 208
Awareness, Motivation, and Capability 210
Cooperation and Signaling 211
Debates and Extensions 211
Debate 1: Strategy versus Antitrust
Policy 211
Debate 2: Competition versus
Antidumping 213
Strategy in Action 8.3: Brussels versus
Google 214
The Savvy Strategist 215
Chapter Summary 216
Key Terms 216
Critical Discussion Questions 217
Topics for Extended Projects 217
Closing Case: Is There an Antitrust Case
Against Big Tech? 217
Notes 219
PA R T
3Corporate-Level
Strategies
chapter 9Diversifying and Managing
Acquisitions Globally 224
Opening Case: The Growth of Marriott
International 225
Product Diversification 227
Product-Related Diversification 227
Product-Unrelated Diversification 227
Strategy in Action 9.1: Starbucks
Diversifies into Tea 227
Product Diversification and Firm
Performance 228
Geographic Diversification 229
Limited versus Extensive International
Diversification 229
Geographic Diversification and Firm
Performance 229
Combining Product and Geographic
Diversification 230
A Comprehensive Model of
Diversification 231
Industry-Based Considerations 231
Resource-Based Considerations 232
Institution-Based Considerations 234
The Evolution of the Scope of the Firm 235
Acquisitions 238
Setting the Terms Straight 238
Motives for Mergers and
Acquisitions 239
Performance of Mergers and
Acquisitions 240
Strategy in Action 9.2: GE–Alstom: A
Deal Too Far? 241
Strategy in Action 9.3: Can Mergers of
Equals Work? 242
Debates and Extensions 243
Debate 1: Product Relatedness versus
Other Forms of Relatedness 243
Debate 2: Old-Line versus New-Age
Conglomerates 244
Debate 3: High Road versus Low Road
in Integration 245
Debate 4: Acquisitions versus
Alliances 246
The Savvy Strategist 246
Chapter Summary 248
Key Terms 248
Critical Discussion Questions 248
Topics for Expanded Projects 249
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents
Closing Case: Puzzles Behind Emerging
Multinationals’ Acquisitions 249
Notes 250
chapter 10Strategizing, Structuring,
and Innovating Around the
World 254
Opening Case: Launching the McWrap 255
Multinational Strategies and Structures 256
Pressures for Cost Reduction and Local
Responsiveness 256
Four Strategic Choices 257
Strategy in Action 10.1: KFC Leverages
Artificial Intelligence in China 259
Four Organizational Structures 260
The Reciprocal Relationship between
Multinational Strategy and
Structure 262
A Comprehensive Model of Multinational
Strategy, Structure, and Innovation 262
Industry-Based Considerations 263
Resource-Based Considerations 264
Institution-Based Considerations 265
Strategy in Action 10.2: Canadian Apotex,
Indian Production, and EU, UK, and
US Regulations 265
Strategy in Action 10.3: Moving
Headquarters 267
Worldwide Learning, Innovation,
and Knowledge Management 269
Knowledge Management 269
Knowledge Management in Four Types
of Multinational Enterprises 269
Globalizing Research and
Development 271
Problems and Solutions in Knowledge
Management 272
Debates and Extensions 273
Debate 1: Headquarters Control versus
Subsidiary Initiative 273
Debate 2: Customer-Focused Dimensions
versus Integration, Responsiveness,
and Learning 273
The Savvy Strategist 274
Chapter Summary 275
Key Terms 276
Critical Discussion Questions 276
Topics for Expanded Projects 276
Closing Case: Subsidiary Initiative at
Schenck Shanghai Machinery 277
Notes 278
chapter 11Governing the Corporation
Globally 282
Opening Case: The Murdochs versus
Minority Shareholders 283
ix
Owners 284
Concentrated versus Diffused
Ownership 284
Family Ownership 285
State Ownership 285
Managers 286
Principal-Agent Conflicts 286
Principal-Principal Conflicts 287
Board of Directors 288
Board Composition 288
Strategy in Action 11.1: The Debate about
Independent Directors in China 289
Leadership Structure 290
Board Interlocks 290
The Role of Boards of Directors 290
Strategy in Action 11.2: Professor Michael
Jensen as an Outside Director 291
Directing Strategically 291
Governance Mechanisms as a Package 292
Internal (Voice-Based) Governance
Mechanisms 292
External (Exit-Based) Governance
Mechanisms 293
Internal Mechanisms + External
Mechanisms 5 Governance
Package 294
A Global Perspective 294
Strategy in Action 11.3: Global
Competition in How to Best Govern
Large Firms 296
A Comprehensive Model of Corporate
Governance 297
Industry-Based Considerations 297
Resource-Based Considerations 298
Institution-Based Considerations 298
Debates and Extensions 300
Debate 1: Opportunistic Agents versus
Managerial Stewards 300
Debate 2: Global Convergence versus
Divergence 301
Debate 3: Value versus Stigma of Multiple
Directorships 301
Debate 4: State Ownership versus Private
Ownership 302
The Savvy Strategist 304
Chapter Summary 305
Key Terms 305
Critical Discussion Questions 306
Topics for Expanded Projects 306
Closing Case: The Private Equity
Challenge 306
Notes 308
chapter 12S trategizing on Corporate
Social Responsibility 314
Opening Case: Starbucks’s Corporate Social
Responsibility Journey 315
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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x
Contents
A Stakeholder View of the Firm 317
A Big Picture Perspective 317
Strategy in Action 12.1: Global Warming
and Arctic Boom 318
Stakeholder Groups, Triple Bottom Line,
and ESG 319
A Fundamental Debate 320
A Comprehensive Model of Corporate
Social Responsibility 322
Strategy in Action 12.2: Giants of the
Sea 323
Industry-Based Considerations 323
Resource-Based Considerations 325
Strategy in Action 12.3: Can McDonald’s
Set the Chickens Cage-Free? 326
The CSR-Economic Performance
Puzzle 326
Institution-Based Considerations 327
Debates and Extensions 330
Debate 1: Reducing versus Contributing
toward Income Inequality 330
Debate 2: Domestic versus Overseas Social
Responsibility 331
Debate 3: Active versus Inactive CSR
Engagement Overseas 332
Debate 4: Race to the Bottom (“Pollution
Haven”) versus Race to the Top 332
The Savvy Strategist 333
Chapter Summary 334
Key Terms 335
Critical Discussion Questions 335
Topics For Expanded Projects 335
Closing Case: The Ebola Challenge 336
Notes 337
PA R T
4 Integrative Cases
IC 8
The Final Frontier of Outsourcing to India
(by A. P. Krishnan) 367
IC 9
Volkswagen’s Emissions Scandal
(by B. E. Coates) 372
IC 10 Private Military Companies
(by M. W. Peng)
375
IC 11 Snowsports Interactive: A Global Start-Up’s
Challenges
(by M. L. Taylor, X. Yang, and D.
Mardiasmo) 379
IC 12 Business Jet Makers Eye China
(by M. W. Peng)
384
IC 13 Carlsberg in Russia
(by M. W. Peng)
386
IC 14 Enter North America by Bus
(by M. W. Peng)
388
IC 15 Etihad Airways’ Alliance Network
(by M. W. Peng)
390
IC 16 Jobek do Brasil’s Joint Venture Challenges
(by D. M. Boehe and L. B. Cruz)
392
IC 17 Saudi Arabia in OPEC: Price Leader in a Cartel
(by M. W. Peng)
398
IC 18
AGRANA: From a Local Supplier to a Global Player
(by M. Hasenhüttl and E. PleggenkuhleMiles) 402
IC 19 Nomura’s Integration of Lehman Brothers
(by M. W. Peng)
407
IC 20
Cyberattack on TNT Express and Impact on
Parent Company FedEx
(by W. E. Hefley) 409
IC 1
The Consulting Industry
(by M. W. Peng) 342
IC 21 Shanghai Disneyland
IC 2
The Asia Pacific Airline Industry
(by M. W. Peng) 346
IC 22 Samsung’s Global Strategy Group
IC 3
LEGO’s Secrets
(by M. W. Peng) 349
IC 23 Corporate Governance the HP Way
IC 4
BMW at 100
(by K. Meyer)
IC 24
When CSR Is Mandated by the Government in
351
IC 5
Occidental Petroleum (Oxy): From Also-Ran to
(by M. W. Peng)
(by M. W. Peng)
(by M. W. Peng)
414
417
419
India
(by N. Kathuria) 422
Segment Leader
(by C. F. Hazzard) 355
IC 25 Wolf Wars
IC 6
Tesla’s CEO Quits Presidential Councils
(by Y. H. Jung) 360
IC 7
Legalization of Ride-Hailing in China
(by Y. Li) 362
Glossary 426
Index of Names 438
Index of Organizations 451
Index of Subjects 454
(by M. W. Peng)
424
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
List of In-Chapter Features
and Integrative Cases
Action
location
Headquarters
location
Industry
CH 1
Strategizing around the globe
Opening Case
Zoom
Worldwide
USA
Videoconference
SIA 1.1
German and French military strategies
Belgium/France
Germany/France
Military
SIA 1.2
Selling Star Wars to LEGO top
management
North America/
worldwide
Denmark
Toy
SIA 1.3
Confessions of your textbook author
Worldwide
USA
Publishing
Closing Case
Two scenarios of the global economy
in 2050
Worldwide
Worldwide
Unspecified
CH 2
Managing industry competition
Opening case
Global competition in the cruise industry
Worldwide
USA
Cruise
SIA 2.1
High fashion fights recession
Worldwide
USA/Europe
Fashion
SIA 2.2
Digital strategy and five forces
Worldwide
Worldwide
Digital/AI
SIA 2.3
Singapore Airlines
Worldwide
Singapore
Airline
Closing Case
The future of the automobile industry
Worldwide
USA/Europe/
Japan/Korea
Automobile
CH 3
Leveraging Resources and Capabilities
Opening Case
Canada Goose flies high
Worldwide
Canada
Apparel
SIA 3.1
ASML
Worldwide
The Netherlands
Chipmaking
equipment
SIA 3.2
CIMC
Worldwide
China
Containers
SIA 3.3
Natura
Brazil/worldwide Brazil
Cosmetics
Closing Case
H-E-B fights coronavirus
USA
USA
Supermarkets
CH 4
Emphasizing institutions, cultures, and ethics
Opening Case
Brexit and strategic choices
UK/EU/
rest of the world
Automobile,
financial
services, and
agriculture
UK/EU
SIA 5.1
The American guanxi industry
USA
USA
Lobbying
SIA 5.2
Onsen and tattoos in Japan
Japan
Japan
Bathhouse
SIA 5.3
Monetizing the Maasai tribal name
Kenya
The West
Unspecified
Closing Case
IKEA’s challenge in Saudi Arabia
Saudi Arabia
Sweden
Furniture retail
xi
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xii
List of In-Chapter Features and Integrative Cases
Action
location
Headquarters
location
Industry
CH 5
Growing and internationalizing the entrepreneurial Firm
Opening Case
The new East India Company
UK
UK
High-end retail
SIA 5.1
Europe’s entrepreneurship deficit
Europe
Europe
Unspecified
SIA 5.2
Tory Burch’s rise in the fashion industry
Worldwide
USA
Fashion
SIA 5.3
Immigrant entrepreneurs
Worldwide
Worldwide
Unspecified
Closing Case
Boom in busts: Good or bad
Worldwide
Worldwide
Unspecified
CH 6
Entering foreign markets
Opening Case
Amazon in India
India
USA
E-commerce
SIA 6.1
Nordic multinationals
Worldwide
Nordic countries
Unspecified
SIA 6.2
Thai Union’s foreign market entries
Worldwide
Thailand
Seafood
SIA 6.3
Goldman Sachs enters Libya
Libya
USA
Financial services
Closing Case
How firms from emerging economies
fight back
Worldwide
Emerging
economies
Unspecified
CH 7
Making strategic alliances and networks work
Opening Case
Even Toyota needs friends
Worldwide
Japan
Automobile
SIA 7.1
Delta spreads its wings globally
Worldwide
USA
Airline
SIA 7.2
Yum Brands, McDonald’s, and Sinopec
China
USA/China
Fast food and
energy
SIA 7.3
Renaussanbishi: No way!
France/Japan
France/Japan
Automobile
Closing Case
Fiat Chrysler: From alliance to acquisition Italy/USA
Italy/USA
Automobile
CH 8
Managing competitive dynamics
Opening Case
Jetstar’s rise in the Asia Pacific
Asia Pacific
Australia
Airline
SIA 8.1
The global vitamin cartel
Worldwide
Switzerland/
Germany/France/
Japan
Vitamin
SIA 8.2
Alibaba versus Amazon
China/
worldwide
China/USA
E-commerce
SIA 8.3
Brussels versus Google
Europe
USA
Tech
Closing Case
Is there an antitrust case against
Big Tech?
USA
USA
Tech
CH 9
Diversifying and managing acquisitions globally
Opening Case
The growth of Marriott International
Worldwide
USA
Hotel
SIA 9.1
Starbucks diversifies into tea
Worldwide
USA
Beverage service
SIA 9.2
GE-Alstom: A deal too far?
France
USA
Conglomerates
SIA 9.3
Can mergers of equals work?
Unspecified
Unspecified
Unspecified
Closing Case
Puzzles behind emerging multinationals’
acquisitions
Worldwide
Emerging
economies
Unspecified
CH 10
Strategizing, structuring, and innovating around the World
Opening Case
Launch the McWrap
USA/Europe
USA
Fast food
SIA 10.1
KFC leverages artificial intelligence in
China
China
USA
Fast food
SIA 10.2
Canadian Apotex, Indian production,
and EU, UK, and US regulations
India
Canada
Pharmaceuticals
SIA 10.3
Moving headquarters
Worldwide
Worldwide
Unspecified
Closing Case
Subsidiary initiative at Schenck Shanghai
China
Germany
Machinery
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List of In-Chapter Features and Integrative Cases
Action
location
Headquarters
location
Industry
xiii
CH 11
Governing the corporation globally
Opening Case
The Murdochs versus minority
shareholders
USA/UK
USA
Media
SIA 11.1
The debate about independent directors
in China
China
China
Unspecified
SIA 11.2
Professor Michael Jensen as an outside
director
USA
USA
Unspecified
SIA 11.3
Global competition in how to best
govern large firms
Worldwide
Worldwide
Unspecified
Closing Case
The private equity challenge
Worldwide
Worldwide
Unspecified
CH 12
Strategizing on corporate social responsibility
Opening Case
Starbucks’ CSR journey
USA/UK
USA
Beverage service
SIA 12.1
Global warming and Arctic boom
The Arctic
region
Australia/Canada/ Shipping and
Denmark/Russia
mining
SIA 12.2
Giants of the sea
Worldwide
Denmark
Shipping
SIA 12.3
Can McDonald’s set the chickens
cage-free?
Worldwide
USA
Fast food
Closing Case
The Ebola challenge
Africa/USA
USA/Canada/
Europe
Pharmaceutical
Worldwide
USA/Europe
Consulting
Integrative cases
IC 1
The consulting industry
IC 2
The Asia Pacific airline industry
Asia Pacific
Asia Pacific
Airline
IC 3
LEGO’s secrets
Worldwide
Denmark
Toys
IC 4
BMW at 100
Worldwide
Germany
Automobile
IC 5
Occidental Petroleum (Oxy):
From also-ran to segment leader
Worldwide
USA
Energy
IC 6
Tesla’s CEO quits presidential councils
USA
USA
Automobile
IC 7
Legalizing ride-hailing in China
China
China/USA
Ride hailing
IC 8
The final frontier of outsourcing to India
India/USA
India
Commercial
surrogacy
IC 9
Volkswagen’s emissions scandal
USA/worldwide
Germany
Automobile
IC 10
Private military companies
Worldwide
USA/UK
Private military
IC 11
SnowSports Interactive: A global start-up’s
challenges
Australia
Australia
Skiing
IC 12
Business jet makers eye China
China
Brazil/Canada/
France/USA
Business aviation
IC 13
Carlsberg in Russia
Russia
Denmark
Beer
IC 14
Enter North America by bus
USA
UK
Motor coach
travel
IC 15
Etihad Airways’s alliance network
Worldwide
UAE
Airline
IC 16
Jobek do Brasil’s joint venture challenge
Brazil
Brazil/USA
Furniture
IC 17
Saudi Arabia in OPEC: Price leader in
a cartel
Worldwide
Saudi Arabia/
Austria
Energy
IC 18
AGRANA: From a local supplier to
a global player
Worldwide
Austria
Food processing
IC 19
Nomura’s integration of Lehman Brothers USA/UK
Japan
Investment
banking
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xiv
List of In-Chapter Features and Integrative Cases
IC 20
Cyberattack on TNT Express and impact
on parent company FedEx
Action
location
Headquarters
location
Industry
Europe/The
Netherland
USA
Express delivery
IC 21
Shanghai Disneyland
China
USA
Theme park
IC 22
Samsung’s global strategy group
Worldwide
Korea
Conglomerate
IC 23
Corporate governance the HP way
USA
USA
IT
IC 24
When CSR is mandated by the
government of India
India
India
Unspecified
IC 25
Wolf wars
USA
USA
Ranching and
hunting
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface
T
he first four editions of Global Strategy have made this
book the world’s number-one global-strategy textbook.
The fifth edition aspires to do even better. Global Strategy
has set a new standard for (1) global or international stra­
tegy courses, (2) strategic management courses, and (3) international business courses at the undergraduate and MBA
levels. It has been widely used in Angola, Australia, Austria,
Brazil, Britain, Canada, Chile, China, Denmark, Egypt, Finland, France, Germany, Hong Kong, India, Indonesia, Ireland,
Israel, Lithuania, Macau, Malaysia, Mexico, the Netherlands,
Netherlands Antilles, New Zealand, Norway, Peru, the Philip­
pines, Portugal, Puerto Rico, Romania, Russia, Singapore,
Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, and the United States. Now available
in Chinese, Portuguese, and Spanish, Global Strategy is global.
Written during the tumultuous time of the coronavirus
that shut down most of the global economy, the fifth edition
continues the market-winning framework centered on the
strategy tripod pioneered in the first edition. Its most strategic features include (1) a broadened definition of global
strategy; (2) an evidence-based, in-depth, and consistent
explanation of cutting-edge research; and (3) an interesting
and accessible way to engage students.
A Broadened Definition of
“Global Strategy”
In this text, “global strategy” is defined not as a particular
multinational enterprise (MNE) strategy but as strategy
around the globe. In other words, we do not exclusively
focus on international strategy. Global strategy is most
fundamentally about strategy before being global. Most
global-strategy textbooks take the perspective of the foreign
entrant, typically the MNE, and ignore the other side. The
other side—namely, the domestic side—does not sit around
waiting for its market to be invaded. Instead, domestic firms
actively strategize, too. Failing to understand the other side
captures only one side of the coin at best.
Offering a more balanced and more inclusive perspective,
Global Strategy covers the strategies of both large MNEs and
small entrepreneurial start-ups, both foreign entrants and domestic firms, and enterprises from both developed and emerging economies. In short, this is a truly global global-strategy text.
An Evidence-Based, In-Depth,
and Consistent Explanation
The breadth of the field poses a challenge to textbook authors. My respect for the diversity of the field has increased
tremendously over the past two decades. To provide an evidence-based, in-depth explanation, I have leveraged the latest research. Personally, I have accelerated my own research,
publishing more than 40 articles after I finished the fourth
edition. Drawing on such cutting-edge research has greatly
enriched Global Strategy.
In addition to my own work, I have also drawn on the
latest research of numerous colleagues—please check the
Index of Names. Beyond academic sources, I have often
relied on my two favorite magazines—Bloomberg Busi­
nessweek and Economist. Recently, I have also subscribed
to Foreign Affairs, Fortune, Harvard Business Review, and
Wall Street Journal. The end result is an unparalleled, most
comprehensive set of evidence-based and timely insights
on the market.
Given the breadth of the field, it is easy to lose focus. To
combat this tendency, I have endeavored to provide a consistent set of frameworks in all chapters. This is done in three
ways. First, I have focused on the four most fundamental
questions in strategy. These are: (1) Why do firms differ? (2)
How do firms behave? (3) What determines the scope of the
firm? (4) What determines the success and failure of firms
around the globe?
Another way to combat the tendency to lose the sight
of the “forest” while scrutinizing various “trees” (or even
“branches”) is to consistently draw on the strategy tripod—
the three leading perspectives on strategy—namely, industry-based, resource-based, and institution-based views. This
provides a great deal of continuity in the learning process.
Finally, I have written a beefy “Debates and Extensions”
section for every chapter. Virtually all textbooks uncritically
present knowledge “as is” and ignore the fact that the field is
alive with numerous debates. Because debates drive practice
and research ahead, it is imperative that students be exposed
to important debates and that their critical thinking skills be
fostered. The new debates that have become more promi­
nent since the fourth edition—such as globalization versus
deglobalization and firms’ role in reducing versus contributing toward income inequality—are more spicy, making the
book more relevant.
An Interesting and Accessible
Way to Engage Students
If you fear this text must be boring because it draws so hea­
vily on latest research, you are wrong. I have used a clear and
engaging conversational style to tell the “story.” Relative to
rival texts, my chapters are shorter and livelier. The length
of all our Integrative Cases is shorter than that of many long
“monster cases” found elsewhere.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xv
xvi
Preface
Some earlier users commented that reading Global Stra­
tegy is like enjoying a “good magazine.” A large number of
interesting anecdotes have been woven into the text. Nontraditional (“outside-the-box”) examples range from ancient
Chinese military writings to modern “four-star company
commanders” armed with UAVs (Chapter 1), from Shakespeare’s The Merchant of Venice (Chapter 5) to Tolstoy’s
Anna Karenina (Chapter 7). Some of the discussions are
truly cutting-edge. For example, the closing case for Chapter
8, “Is There an Antitrust Case Against Big Tech?” (written
in March 2020), will force students to discuss it in a future
tense. This is because the US government—in an effort to
make the discussion about this case more interesting—sued
Google in October 2020 after this case was written, and the
future outcome of this case is unknown as the fifth edition
goes to press. A consistent theme is to engage ethics. This is
not only highlighted in Chapters 4 and 12, but also throughout all chapters in the form of Ethical Dilemma features and
Critical Discussion Questions marked “On Ethics.”
So what? Many textbooks leave students to struggle with
this question at the end of every chapter. In Global Strategy,
every chapter ends with a section titled “The Savvy Strategist” with one teachable table or slide on “Strategic Implica­
tions for Action” from a practical standpoint. No other
competing textbook is so savvy and so relevant.
What’s New in the Fifth Edition?
Most strategically, the fifth edition has (1) significantly upgraded the global-strategy knowledge base, (2) enhanced
the executive voice by drawing more heavily from CEOs and
other strategic leaders, (3) drawn directly on the author’s
consulting experience, (4) introduced a new and diverse set
of cases, and (5) returned to the traditional format of having
one hardcopy book including everything.
The scale and scope of the changes in the global-strategy
landscape between the publication of the fourth edition
(2017) and the fifth edition is likely to be some of the most
profound since the launch of the first edition (2006). Sources
of such changes not only come from disruptive tech­
nological start-ups known as unicorns—a term coined as
recently as in 2013—but also from worsening geopolitical
relationships between the top two economies of the world.
Instead of globalization, the new buzzword is deglobaliza­
tion. On top of all of the above, the coronavirus of 2020—a
black swan event—shut down the global economy. Tho­
roughly updated, the fifth edition helps students make better
sense of this rapidly changing and tumultuous era.
If Global Strategy aspires to train a new generation of
global strategists, we need to coach them to think, act,
and talk like CEOs. Although I have taught a few executive education classes with Global Strategy, most students
using the text have not assumed that kind of executive
responsibility. To facilitate strategic thinking, the fifth
edition has enhanced the executive voice by featuring
extensive block quotes from the following CEOs and
other strategic leaders:
Armstrong Industries’ outside director Michael Jensen
(Chapter 11)
Business Roundtable (183 members who are CEOs of
prominent US firms signed a statement on the purpose
of a corporation in 2019—Chapter 12)
Canada Goose’s CEO Dani Reiss (Chapter 5)
Dow Chemical’s CEO William Stavropoulos (Chapter 10)
The (new) East India Company’s founder Sanjiv Mehta
(Chapter 5)
Facebook’s founder and CEO Mark Zuckerberg (Chapter 1)
GE’s chairman and CEO Jeff Immelt (Chapters 8)
GE’s chairman and CEO Jack Welch (Chapter 12)
Google’s CEO Eric Schmidt (Chapter 7)
IBM’s CEO Ginni Rometty (Chapter 3)
L’Oreal’s CEO Jean Paul Agon (Chapter 10)
P&G’s chairman and CEO A. G. Lafley (Chapter 1)
US Assistant Attorney General (commenting on the global
vitamin cartel case—Chapter 8)
US Assistant Attorney General (representing the
Department of Justice to challenge AT&T’s proposed
merger with T-Mobile—Chapter 8)
Walmart’s CEO Doug McMillon (Chapter 1)
Whole Foods’s cofounder and CEO John Mackey
(Chapter 12)
World Health Organization’s Director-General Margaret
Chan (Chapter 12)
Zoom’s founder and CEO Eric Yuan (Chapter 1)
I have directly drawn on my consulting experience to
inject new insights. Chapter 1 describes my consulting
engagement with MTR Corporation in Hong Kong (see
Table 1.3). Chapter 3 illustrates a strategic sweet spot for
UK manufacturing, which I developed for a major consulting engagement I completed for the UK government as
part of its two-year Future of Manufacturing project (see
Figure 3.6). Table 4.5 (“Texas Instruments Guidelines on
Gifts in China,” which is in the public domain) is shared
with me by a consulting client at TI. In addition, I have
written the new Integrative Case 1 “The Consulting Industry” to more comprehensively introduce this strategically
important industry.
The fifth edition has expanded case offerings by (1) presenting 21 new Integrative Cases and (2) making available four
popular and still timely Integrative Cases from earlier editions.
Students and instructors especially enjoyed the wide-ranging
and globally relevant cases in previous editions. Fourteen of
the 25 Integrative Cases were authored by me, and the other
11 were contributed by 17 colleagues from Australia, Canada,
China, New Zealand, and the United States. The fifth edition is
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface xvii
blessed with that many new Integrative Cases. The end result is
an unparalleled, diverse collection of cases that will significantly
enhance the teaching and learning of global strategy.
Finally, what’s new in the fifth edition is what is old—
returning to a hardcopy format that includes everything
(including all Integrative Cases). The fourth edition experi­
mented with a format that (1) was completely digital or (2)
was a hybrid—printing the 12 chapters in a hardcopy looseleaf book but keeping all Integrative Cases online. Customer
feedback indicated that the all-inclusive hardcopy is still the
most preferred format. Of course, for those digitally savvy,
the product will also be online.
MindTap
Online resources are transforming many aspects of everyday
life, and learning is not immune to the impact of technology.
Rather than simply taking the pages of Global Strategy and
placing them online, we have restructured the content to
fully utilize the engagement and interactivity that the
medium allows.
MindTap is a digital learning solution that helps instructors engage and transform today’s students into critical
thinkers. Through (1) paths of dynamic assignments and
applications that you can personalize, (2) real-time course
analytics, and (3) an accessible reader, MindTap helps you
turn apathy into engagement:
●●
●●
●●
●●
●●
Support Materials
A full set of support materials is available for adopting instructors, ensuring that instructors have the tools they need
to plan, teach, and assess their course. These resources include:
●●
●●
Personalization—Customize the Learning Path by
integrating outside content like videos, articles, and
more.
Analytics—Easily monitor student progress, time on
task, and outcomes with real-time reporting.
YouSeeU facilitates group projects and a variety
of other assignments through digital video and
collaboration tools.
Business Insights provides a rich online database and
research tool.
We have provided a pre- and postcourse assessment
that measures Global Literacy, which provides
both students and instructors with feedback on the
general awareness of global social, cultural, political,
and economic awareness. In addition, having these
data can also provide valuable data to support
assurance of learning reporting for accreditation
purposes. We thank the efforts of Anne Mägi of the
University of Illinois–Chicago for her work on these
assessments.
Additional media and text cases that are not found in
the chapters, assessment, and much more!
For more information on using MindTap in your course,
consult the instructor resources or visit www.cengage.com
/mindtap.
Critical Thinking—Engaging, chapter-specific
content is arranged in a singular Learning Path
designed to elevate thinking.
In addition, MindTap integrates other powerful tools to
help enhance your course:
●●
●●
●●
Instructor’s Manual—This comprehensive manual
provides chapter outlines, lecture notes, and sample
responses to end-of-chapter questions, providing
a complete set of teaching tools to save instructors
time in preparing for class and to maximize student
success within the class. The Instructor’s Manual also
includes notes to accompany the Integrative Cases
from the text.
Test bank—The robust Global Strategy test bank
contains a wide range of questions with varying
degrees of difficulty in true/false, multiple-choice,
and short answer/essay formats. All questions have
been tagged to the text’s learning objectives and
according to AASCB standards to ensure students
are meeting necessary criteria for course success.
Instructors can use the included Cognero software
package to view, choose, and edit their test questions
according to their specific course requirements. The
test bank is also available in a format compatible with
most Learning Management Systems.
PowerPoint Slides—Each chapter includes a complete
set of PowerPoint slides designed to present relevant
chapter material in a way that will allow more visual
learners to firmly grasp key concepts.
Acknowledgments
As Global Strategy celebrates the launch of its fifth edition,
I first want to thank all the customers—instructors and students around the world who have made the book’s success
possible. A big thanks goes to 11 very special colleagues:
Xinmei Liu and Sun Wei (Xi’an Jiaotong University), Bin Xu
(Peking University), and Haifeng Yan (East China University of Science and Technology) in China; Joaquim Carlos
Racy (Pontifícia Universidade Católica de São Paulo) and
George Bedinelli Rossi (Universidade de São Paulo) in Brazil; Enrique Benjamín and Franklin Fincowski (Universidad Nacional Autónoma del de México), Mercedes Muñoz
(Tecnológico de Monterrey Campus Santa Fe y Estado de
México), Octavio Nava (Universidad del Valle de México),
and Claudia Gutiérrez Rojas (Tecnológico de Monterrey
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xviii
Preface
Campus Estado de México) in México. They loved the book
so much that they were willing to endure the pain of translating it into Chinese, Portuguese, and Spanish. Their hard
work has made Global Strategy more global.
At the Jindal School at UT Dallas, I appreciate Naveen
Jindal’s generous support to fund the Jindal Chair. I thank
my colleagues Shawn Carraher, Larry Chasteen, Emily
Choi, Greg Dess, Maria Hasenhuttl, Charlie Hazzard, Tom
Henderson, Jeff Hicks, Shalonda Hill, Sora Jun, Seung
Lee, Sheen Levin, John Lin, Livia Markóczy, Toyah Miller,
Dennis Park, Cuili Qian, Orlando Richard, Rajiv Shah,
Riki Takeuchi, Eric Tsang, McClain Watson, Habte Woldu,
Junfeng Wu, and Jun Xia—as well as Hasan Pirkul (dean)
and Varghese Jacob (vice dean). At the Center for Global
Business that I founded and have served as executive
director, I appreciate the contributions made by Hubert
Zydorek (director) and the Advisory Board (especially Mike
Skelton, chair; Kerry Tassopoulos, co-chair; Laura Gatins,
Hajo Siemers, and Brewster Waddell, executive committee
members). I have directly sought their advice on how to
make the fifth edition better.
At Cengage Learning, I thank Joe Sabatino (product director), Jennifer Ziegler (senior project manager), and John
Rich (content creation manager) for their guidance. At MPS
Limited, I appreciate the contributions of Anubhav Kaushal
(senior project manager) and his team, who made the editing and production process a joy.
In addition, I thank many customers who provided informal feedback to me. Space constraints force me to only
acknowledge those who wrote me since the fourth edition,
because those who wrote me earlier were thanked in earlier
editions. (If you wrote me but I failed to mention your
name here, my apologies—blame this on the volume of such
e-mails.)
Siah Hwee Ang (Victoria University of Wellington,
New Zealand)
Hari Bapuji (University of Melbourne, Australia)
Balbir Bhasin (University of Arkansas at Fort Smith, USA)
Dane Blevins (University of North Carolina at
Greensboro, USA)
Charles Byles (Virginia Commonwealth University, USA)
Anil Chandrakumara (University of Wollongong,
Australia)
Murali Chari (Rensselaer Polytechnic Institute, USA)
Tee Yin Chaw (Management and Science University,
Malaysia)
Futian Chen (Xiamen University, China)
Limin Chen (Wuhan University, China)
Glen Damro (RMIT University, Australia)
Ngo Vi Dzung (Vietnam National University, Vietnam)
Todd Fitzgerald (Sanit Joseph’s University, USA)
Dennis Garvis (Washington and Lee University, USA)
John Gerace (Chestnut Hill College, USA)
Mike Geringer (Ohio University, USA)
Katalin Haynes (Texas A&M University, USA)
Jorge Heredia (Universidad del Pacifíco, Peru)
Stephanie Hurt (Meredith College, USA)
Ana Iglesias (Tulane University, USA)
Basil Janavaras (Minnesota State University, USA)
Ferry Jie (RMIT University, Australia)
Jungkwon Kim (Hanyang University, South Korea)
Aldas Kriauciunas (Purdue University, USA)
Yong Li (University of Nevada at Las Vegas, USA)
David Liu (George Fox University, USA)
Rajiv Mehta (New Jersey Institute of Technology, USA)
Kiran Momaya (Indian Institute of Technology Bombay,
India)
Phillip Nell (Vienna University of Economics and
Business, Austria)
Pradeep Kanta Ray (University of New South Wales,
Australia)
David Reid (Seattle University, USA)
Pamela Resurreccion (De La Salle University, Philippines)
Trond Randøy (University of Agder, Norway)
Al Rosenbloom (Dominican University, USA)
Daniel Rottig (Florida Gulf Coast University, USA)
Paula Tomsett (I-Shou University, Taiwan)
Jose Vargas-Hernandez (Universidad de Guadalajara, Mexico)
Krishna Venkitachalam (Stockholm University, Sweden)
George White (University of Michigan at Flint, USA)
Josef Windsperger (University of Vienna, Austria)
Richard Young (Minnesota State University, USA)
Man Zhang (Bowling Green State University, USA)
Alan Zimmerman (City University of New York, USA)
For the fifth edition, the following 18 colleagues kindly
read one chapter of manuscript and provided crucial feedback, for which I am grateful:
Larry Chasteen (University of Texas at Dallas, USA)
Miranda Eleazar (University of Texas at Dallas, USA)
Nishant Kathuria (University of Texas at Dallas, USA)
Som Lahiri (Illinois State University, USA)
Sheen Levine (University of Texas at Dallas, USA)
John Lin (University of Texas at Dallas, USA)
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface
Kaveh Moghaddam (University of Houston at
Victoria, USA)
Deb Mukherjee (University of Akron, USA)
Canan Mutlu (Kennesaw State University, USA)
Dennis Park (University of Texas at Dallas, USA)
Cuili Qian (University of Texas at Dallas, USA)
Prashant Salwan (Indian Institute of Management Indore,
India)
Sunny Li Sun (University of Massachusetts at Lowell, USA)
Cristina Vlas (University of Massachusetts at Amherst,
USA)
Joyce Wang (St. Cloud State University, USA)
Jun Xia (University of Texas at Dallas, USA)
Michael Young (Appalachian State University, USA)
Wu Zhan (University of Sydney, Australia)
In this edition, the following 17 colleagues graciously
contributed fascinating new cases that grace the pages of
the fifth edition:
Dirk Michael Boehe (Massey University, New Zealand)
Breena Coates (California State University, San
Bernardino, USA)
Luciano Barin Cruz (HEC Montreal, Canada)
Maria Hasenhuttl (University of Texas at Dallas, USA)
Charles F. Hazzard (University of Texas at Dallas, USA)
William E. Hefley (University of Texas at Dallas, USA)
Young H. Jung (Montclair State University, USA)
Nishant Kathuria (University of Texas at Dallas, USA)
Arun Perumb Krishnan (University of Texas at Dallas,
USA)
xix
Yugang Li (East China University of Science and
Technology, China)
Diaswati (Asti) Mardiasmo (PRD Real Estate, Australia)
Klaus Meyer (Ivey Business School, Canada)
Canan Mutlu (Kennesaw State University, USA)
Grace Peng (Highland Park High School, USA)
Erin Pleggenkuhle-Miles (University of Nebraska at
Omaha, USA)
Marilyn L. Taylor (University of Missouri at Kansas
City, USA)
Xiaohua Yang (University of San Francisco, USA)
Last, but no means least, I thank my wife Agnes, my
daughter Grace, and my son James—to whom this textbook
is dedicated. When the first edition was conceived, Grace
was one month old and James was waiting for his turn to
show up in the world. Now Grace is a published author of
young-adult novels and a case contributor to Global Stra­
tegy, and James can build robots from nuts and bolts and
edit videos for professional presentations. Both are world
travelers, having been to more than 40 countries. Now both
of them are on the verge of leaving our house to join the
wider world—a scary (but exciting) prospect to any parent.
As a third-generation professor in my family, I can’t help
but wonder whether one (or both) of them will become a
fourth-generation professor. To all of you, my thanks and
my love.
MWP
January 1, 2021
Dallas, Texas
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Mike Peng
About the Author
Mike W. Peng is the Jindal Chair of Global Strategy at the
University of Texas at Dallas. He is a National Science
Foundation (NSF) Career Award winner and a Fellow of
the Academy of International Business (AIB) and the Asia
Academy of Management (AAOM).
Professor Peng holds a bachelor’s degree from Winona State
University, Minnesota; and a Ph.D. degree from the University
of Washington, Seattle. He had previously served on the faculty
at the Ohio State University, University of Hawaii, and Chinese
University of Hong Kong. He has also held visiting or courtesy
appointments in Australia, Brazil, Britain, Canada, China,
Denmark, Hong Kong, the United States, and Vietnam.
Truly global in scope, Professor Peng’s research has
investigated firm strategies in Africa, Asia Pacific, Europe, and
North and South America. With more than 160 articles and
five books, he is one of the most prolific and most influential
scholars in global strategy. Used in more than 40 countries,
his textbooks, Global Strategy, Global Business, and GLOBAL,
are world market leaders that have been translated into
Chinese, Portuguese, and Spanish. He has more than
50,000 Google citations, and both the United Nations and
the World Bank have cited his work. Among the top 0.1%
most cited researchers worldwide, he is one of the only 101
top scholars in business and economics listed among Highly
Cited Researchers (compiled by Clarivate Analytics/Web of
Science based on citation impact) in 2020. He has been on
this distinguished list every year since 2014 and is the only
global-strategy textbook author to have attained this honor.
Professor Peng is active in leadership positions. He has
served on the editorial boards of AMJ, AMP, AMR, GSJ,
JIBS, JMS, JWB, and SMJ; and guest-edited a special issue for JMS. At the Strategic Management Society (SMS),
he was elected to be the Global Strategy Interest Group
Chair (2008). He also co-chaired the SMS Special Conference in Shanghai (2007) and Sydney (2014). At AIB,
he co-chaired the AIB/JIBS Frontiers Conference in San
Diego (2006), guest-edited a JIBS special issue (2010),
and chaired the Richard Farmer Best Dissertation Award
Committee (2012). At AAOM, he served one term as
Editor-in-Chief of the Asia Pacific Journal of Manage­
ment (2007–2009). In recognition of his contributions,
APJM named its best paper award the Mike Peng Best
Paper Award. He served as program chair for the biennial
conference in Bali, Indonesia (2019); and is currently
Vice President of AAOM.
Professor Peng’s consulting clients include AstraZeneca,
Berlitz, Canada Research Chair, MTR Hong Kong,
Nationwide, Routledge, SAFRAN, Texas Instruments,
UK Government Office for Science, and World Bank.
His numerous honors include a US Small Business
Administration Best Paper Award, a (lifetime) Distinguished
Scholar Award from the Southwestern Academy of
Management, and a (lifetime) Scholarly Contribution Award
from the International Association for Chinese Management
Research (IACMR). He has been included in Who’s Who in
America, and quoted by The Economist, Newsweek, US News
and World Report, Dallas Morning News, Texas CEO, Atlanta
Journal-Constitution, Exporter Magazine, World Journal,
Business Times (Singapore), CEO-CIO (Beijing), Sing Tao
Daily (Vancouver), and Brasil Econômico (São Paulo).
xx
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Part 1
Foundations
of Global
Strategy
1
Strategizing Around
the Globe
2
Managing Industry
Competition
3
Leveraging Resources
and Capabilities
4
iStock.com/busracavus
Emphasizing Institutions,
Cultures, and Ethics
1
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CHAPTER
1
iStock.com/golero
Strategizing Around the Globe
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Offer a basic critique of the traditional, narrowly defined “global strategy”
2. Articulate the rationale behind studying global strategy
3. Define what is strategy and what is global strategy
4. Outline the four fundamental questions in strategy
5. Understand the nature of globalization and semiglobalization
6. Participate in three debates concerning globalization and global strategy
2
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OPENING CASE
Emerging Markets
Ethical Dilemma
Zoom
The year 2020 is destined to go down in history as
one of the most unforgettable years. Thanks to the
coronavirus (COVID-19), economies shut down one
after another. Millions of people were sick, many
died, and suffering was immense. All nonessential
businesses closed, stock markets crashed, oil prices
dived into the negative, unemployment soared, and
firms were bankrupt left and right. In such a bleak
environment, can any firm grow? It turns out
that videoconferencing software firm Zoom has
experienced skyrocketing growth during the crisis.
Zoom was founded in 2011 by a Chinese immi­
grant Eric Yuan. In 1997, Yuan went to work for
WebEx, a videoconferencing start-up. In 2007, Cisco
acquired Webex for $3.2 billion. Yuan—as Cisco’s
corporate vice president of engineering—proposed
that Cisco develop a product that would work on
mobile phones, not merely on personal computers
(PCs). Cisco rejected his proposal. Frustrated but
determined, Yuan left in 2011 to start Zoom. By
2017, San Jose, California-based Zoom became a
“unicorn”—a private firm worth more than $1 billion.
It went through an initial public offering (IPO) at
NASDAQ in April 2019. By the end of its first day
of trading, its share price increased more than 72%
to reach $62 per share, resulting in a $16 billion
market capitalization. By the end of December 2019,
Zoom was trading at $68. On April 22, 2020, its share
reached $169 and it was worth $46 billion.
Convenient live-video chat was a science-fiction
dream for a long time. Helping to turn that dream
into reality, Zoom’s mission, according to its IPO
prospectus, was “to make video communications
frictionless.” Its original strategy was to be a leading corporate videoconferencing firm—specifically
for businesses with information technology (IT)
departments that can set up accounts and help end
users. It competed with two giants—Cisco Webex
and Microsoft Teams—as well as smaller rivals such
as Skype, Google Meets, and Hangouts. Zoom
excelled in its easy-to-use software: one click on an
email or the smartphone. If the conference had fewer
than 100 participants and was less than 40 minutes,
Zoom was free. Clients that paid a monthly fee of
$19.99 could host as many 1,000 participants on
a single video call. Another attractive feature was
that it was a neutral platform. Its solution offered
video, audio, and screen-sharing experience across
Windows, Mac, Linux, Android, BlackBerry, and Zoom
Rooms. Its IPO prospectus identified six leading
sources of competitive advantage: (1) video-first
platform, (2) cloud-native architecture, (3) functionality and scalability, (4) ease of use and reliability,
(5) ability to utilize existing legacy infrastructure, and
(6) low total cost of ownership.
The onslaught of COVID-19 made Zoom a household name. According to a letter from Zoom’s management team to customers posted on its website
on April 23, 2020:
We are humbled to have the opportunity to support
such a wide range of clients from schools (100,000
in 25 countries), to universities (many of the major
US institutions), to governments (e.g., major functions of the US Government, the British Parliament,
and many other governments around the world), to
enterprises of all sizes, industries, and geographies
(226 of the 241 countries and territories), including
full deployments in many Fortune 500 companies.
We have grown from 10 million daily meeting participants as of December 2019, to over 300 million a
day in April 2020.
Throughout March and April 2020, Zoom’s number of users broke a new record every day. Its original
strategy obviously had to rapidly adapt and improvise. It was no longer its plan to be a leading corporate videoconferencing provider that mattered. What
mattered was how its actions satisfied the ballooning
demand for its services as a mass market service provider. In late February and early March, after schools
in Italy and Japan were shut down, Zoom removed
the time limits on its free product for educational
institutions in these countries—a practice now extended to other countries where schools shut down.
3
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4
PART 1
Foundations of Global Strategy
OPENING CASE
(Continued)
By design, a Zoom meeting was anchored by one
of its 17 data centers worldwide. If one data center
experienced problems, the meeting would be handed
over to the next closest. In the middle of the crisis,
Zoom added two more data centers and bought
more cloud storage capacity for surge protection
from Oracle and Amazon Web Services.
Although meteoric, Zoom’s rise to become a
household name was not without bumps. Its connections in China made it aware of the potential devastation of COVID-19. To protect its employees, Zoom
shut down its San Jose headquarters two weeks before Santa Clara County ordered citizens to shelter in
place. As a result, Yuan and his executive team—like
millions of other people who work at home—had to
go through a long series of Zoom meetings every
day. “I hate that,” Yuan admitted to a reporter—a
sentiment more recently known as “Zoom fatigue”
worldwide.
In addition to worrying about whether servers
were overwhelmed by the surging traffic, another
major headache was security. Simplicity versus
security (read: complexity) has always been a source
of tension in IT. The very reason behind Zoom’s
success—simplicity—also contained a seed for
security problems. How to enhance Zoom’s security
while maintaining its user-friendliness, thus, became
a dilemma. “Zoombombings” arguably became one
of the newest English words, indicating the severity
and frequency of security incidents. In response,
Zoom quickly addressed some issues (such as
requiring passwords for all Zoom meetings as of
April 4) and endeavored to solve some of the more
challenging security weaknesses going forward.
Rapidly becoming part of critical infrastructure,
Zoom “is now owned by the world,” noted Yuan
in an interview. He went on to claim that Zoom
“can’t go back. . . . For now we have to embrace
this new paradigm and figure out how to make
it work.”
Sources: (1) Bloomberg Businessweek, 2020, The accidental social
network, April 13: 45–49; (2) CNBC, 2020, Zoom Video Communications Inc., April 27: www.cnbc.com; (3) Economist, 2020,
Zoom diplomacy, April 11: 44; (4) Guardian, 2020, Worried
about Zoom’s privacy problems? April 9: theguardian.com;
(5) National Geographic, 2020, “Zoom fatigue” is taxing the brain,
April: www.nationalgeographic.com; (6) Zoom, 2019, Amendment No. 2 to Form S-1 Registration Statement, April 16,
Washington: SEC; (7) Zoom, 2020, A letter from Zoom’s management team to our customers, April 23: zoom.us.
H
multinational enterprise
(MNE)
A firm that engages in
foreign direct investment
(FDI) by directly controlling
and managing value-adding
activities in other countries.
foreign direct investment
(FDI)
A firm’s direct investment in
production and/or service
activities abroad.
ow do firms such as Zoom compete around the globe? What determines
their success and failure? Since strategy is about competing and winning,
this book will help current and would-be strategists answer these and other
important questions. In brief, “global strategy” in this book is about strategy around
the globe—practiced by firms big and small. In other words, this book does not focus
on a particular form of international (cross-border) strategy, which is characterized
by the production and distribution of standardized products and services on a worldwide basis. For more than three decades, this strategy, often referred to as global strategy for lack of a better term, has often been advocated by traditional global-strategy
books.1 However, such a relatively narrow “global strategy” had always been difficult
to practice, going forward it is likely to be less useful in a possibly deglobalizing world.
The relatively narrow “global strategy” has been practiced by some
multinational enterprises (MNEs), defined as firms that engage in foreign direct
investment (FDI) by directly controlling and managing value-adding activities
in other countries.2 Although Zoom is a young firm, it has become an MNE with
FDI in a number of countries. In reality, MNEs often have to adapt their strategies, products, and services for local markets. In the automobile industry, there
is no “world car.” Cars popular in one region are often rejected by customers
elsewhere. The Volkswagen Golf and the Ford Mondeo (marketed as the Contour in
the United States) are popular in Europe, but have little visibility in the streets of Asia
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Chapter 1 Strategizing Around the Globe
and North America. The so-called world drink, Coke Classic, actually tastes different
around the world (with varying sugar content). Coca-Cola’s effort in pushing for a
set of “world commercials” centered on the polar bear cartoon character presumably
appealing to some worldwide values and interests has not been appreciated by many
viewers around the world. Viewers in warmer weather countries had a hard time
relating to the furry bear. In response, Coca-Cola switched to more costly but more
effective country-specific advertisements. For instance, the Indian subsidiary
launched an advertising campaign that equated Coke with thanda, the Hindi word
for “cold.” The German subsidiary developed a series of commercials that showed a
“hidden” kind of eroticism (!).3 In summary, one size does not fit all.
It is evident that the narrow notion of “global strategy” (the “one-size-fitsall strategy”), while useful for a small number of MNEs, is often incomplete and
unbalanced. Even for most MNEs, a sensible approach seems to be “think global, act
local.” In the case of Zoom, it operates data centers in Australia, Brazil, Canada, China,
Germany, India, Japan, the Netherlands, and the United States. Its “global” business
model—a firm’s way of doing business and creating and capturing value—is to route
videoconferencing traffic to the data center anywhere in the world that can provide the
most seamless and best performance. At any given time, data centers in some regions
may be busier than those elsewhere. Given the sensitive nature of the content of Zoom
meetings, some users expressed concerns about their meetings being routed to data
centers in regions that have potential cybersecurity issues.4 In response, Zoom has
offered a “local” solution, by letting users opt out of specific data center regions and opt
in to specific data center regions. This gives customers more control over their data.5 In
summary, simple-mindedly pushing for a “global” solution is likely to backfire, and a
sensible combination of what is “global” and what is “local” is a must.
business model
A firm’s way of doing
business and creating and
capturing value.
Why Study Global Strategy?
Strategy courses in general—and global-strategy courses in particular—are typically the most
valued courses in a business school.6 Why study global strategy? Some of the most soughtafter and highest-paid business school graduates (both MBAs and undergraduates) are
typically strategy consultants with global-strategy expertise.7 You can be one of them.
Outside the consulting industry, if you aspire to join the top ranks of large firms, expertise
in global strategy is often a prerequisite. So, don’t forget to add a line on your résumé that
you have studied this strategically important course.
Even for graduates at large firms with no interest in working for the consulting industry
and no aspiration to compete for top jobs, as well as individuals who work at small firms
or are self-employed, you may find yourself using foreign products and services (such
as Zoom meetings), competing with foreign entrants in your home market, and perhaps
even selling and investing overseas. Alternatively, you may find yourself working for a
foreign-owned firm, your previously domestic employer acquired by a foreign player, or
your unit ordered to shut down for global consolidation. Approximately 80 million people
worldwide, including seven million Americans, one million British, and 18 million Chinese,
are directly employed by foreign-owned firms. For example, in Africa, the largest privatesector employer is Coca-Cola with 65,000 employees. In Britain, the largest private-sector
employer is Tata Group with 50,000 employees. Understanding how strategic decisions are
made may facilitate your own career in such organizations. If there is a strategic rationale
to downsize your unit, you want to be able to figure this out as soon as possible and be the
first to post your résumé online, instead of being the first to receive a pink slip. In other
words, you want to be more strategic. After all, it is your career that is at stake. Don’t be the
last to know!
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5
6
PART 1
Foundations of Global Strategy
What is Strategy?
Origin
strategic management
A way of managing the
firm from a strategic, “big
picture” perspective.
strategy
An organization’s theory
about how to compete
successfully.
strategy as plan
A perspective that suggests
that strategy is most
fundamentally embodied
in explicit, rigorous formal
planning as in the military.
strategy as action
A perspective that suggests
that strategy is most
fundamentally reflected by
firms’ pattern of actions.
intended strategy
A strategy that is
deliberately planned for.
Derived from the ancient Greek word strategos, the word strategy originally referred to “the
art of the general” or “generalship.” Strategy has strong military roots.8 The oldest book on
strategy, The Art of War, dates back to approximately 500 b.c. It was authored by Sun Tzu, a
Chinese military strategist.9 Sun Tzu’s most famous teaching is, “Know yourself, know your
opponents; encounter a hundred battles, win a hundred victories.” The application of the
principles of military strategy to business competition, known as strategic management
(or strategy in short), is a more recent phenomenon developed since the 1960s.10
Plan versus Action
Because business strategy is a relatively young field (despite its long roots in military
strategy), what defines strategy has been a subject of intense debate.11 Three schools of
thought have emerged (see Table 1.1). The first “strategy as plan” school is the oldest.
Drawing on the work of Carl von Clausewitz, a Prussian (German) military strategist of the
19th century,12 this school suggests that strategy is embodied in the same explicit rigorous
formal planning as in the military.
However, the planning school has been challenged by the likes of Liddell Hart, a British
military strategist of the 20th century, who argued that the key to strategy is a set of
flexible goal-oriented actions.13 Hart favored an indirect approach, which seeks rapid flexible
actions to avoid clashing with opponents head-on. Within the field of business strategy, this
“strategy as action” school has been advocated by Henry Mintzberg, a Canadian scholar.
Mintzberg posited that in addition to the intended strategy that the planning school
TABLE 1.1
What Is Strategy?
Strategy as Plan
●●
●●
“Concerned with drafting the plan of war and shaping the individual campaigns and, within these, deciding on the individual engagements” (von Clausewitz, 1976)1
“A set of concrete plans to help the organization accomplish its goal” (Oster, 1994)2
Strategy as Action
●●
●●
●●
“The art of distributing and applying military means to fulfill the ends of policy” (Liddell
Hart, 1967)3
“A pattern in a stream of actions or decisions” (Mintzberg, 1978)4
“The creation of a unique and valuable position, involving a different set of activities . . .
making trade-offs in competing … creating fit among a company’s activities” (Porter,
1996)5
Strategy as Integration
●●
●●
●●
“The determination of the basic long-term goals and objectives of an enterprise, and the
adoption of courses of action and the allocation of resources necessary for carrying out
these goals” (Chandler, 1962)6
“The major intended and emergent initiatives undertaken by general managers on
behalf of owners, involving utilization of resources to enhance the performance of
firms in their external environments” (Nag, Hambrick, and Chen, 2007)7
“The ideas, decisions, and actions that enable a firm to succeed” (Dess, McNamara,
Eisner, and Lee, 2019)8
Sources: Based on (1) C. von Clausewitz, 1976, On War, vol. 1 (p. 177), London: Kegan Paul; (2) S. Oster,
1994, Modern Competitive Analysis, 2nd ed. (p. 4), New York: Oxford University Press; (3) B. Liddell
Hart, 1967, Strategy, 2nd rev. ed. (p. 321), New York: Meridian; (4) H. Mintzberg, 1978, Patterns in
strategy formulation (p. 934), Management Science 24: 934–948; (5) M. Porter, 1996, What is strategy? (pp. 68, 70, 75), Harvard Business Review 74: 61–78; (6) A. Chandler, 1962, Strategy and Structure
(p. 13), Cambridge, MA: MIT Press; (7) R. Nag, D. Hambrick, & M. Chen, 2007, What is strategic management, really? Strategic Management Journal 28: 935–955; (8) G. Dess, G. McNamara, A. Eisner, & S.
Lee, 2019, Strategic Management, 9th ed. (p. 6), Chicago: McGraw-Hill.
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Chapter 1 Strategizing Around the Globe
emphasizes, there can be an emergent strategy that is not the result of “top-down” planning
but rather the outcome of a stream of smaller decisions from the “bottom up.”14 Facebook is a
good example. Its founder Mark Zuckerberg shared in an interview:
We build things quickly and ship them. We get feedback. We iterate, we iterate, we iterate.
We have these great signs around: “Done is better than perfect.”15
7
emergent strategy
A strategy based on the
outcome of a stream of
smaller decisions from the
“bottom up.”
It is not just fast-moving high-tech firms such as Facebook that are practitioners of the
strategy as action school. For a firm as traditional as Walmart, its CEO Doug McMillon told
a journalist:
Once, a company like ours made big decisions annually or quarterly. Today strategy
is daily.16
Both of these two schools of thought have merits and drawbacks. Strategy in Action 1.1
compares and contrasts them by drawing on real strategies used by the German and French
militaries in 1914. The Germans embraced the strategy as plan school, and the French practiced the strategy as action school. In the end, both militaries failed miserably. A crucial lesson is that a winning strategy must have a combination of both schools of thought, leveraging
their advantages while minimizing their weaknesses.
Strategy as Theory
Shown in the Opening Case, Zoom had a plan to be a leading corporate videoconferencing provider. However, in the middle of the coronavirus outbreak, it ended up becoming a mass-market provider on a much larger scale. Its actions had to adjust to these new
demands, ranging from making sure there was sufficient cloud capacity to meet the surging
demand to improving its security measures in the middle of dramatically scaling up its
operations. Like managers at Zoom, many managers and scholars have realized that, in
reality, the essence of strategy is likely to be a combination of both planned deliberate
actions and unplanned emergent activities, thus leading to a “strategy as integration”
school (see Table 1.1).
First advocated by Alfred Chandler,17 an American business historian, this more balanced
strategy as integration school of thought has been adopted in many textbooks.18 It is the
strategy as integration
A perspective that suggests
that strategy is neither
solely about plan nor action
and that strategy integrates
elements of both schools of
thought.
STRATEGY IN ACTION 1.1
German and French Military Strategies in 1914
Although Germany and France are now the best of friends within the European Union (EU), they had fought for hundreds of
years (the last war in which they butted heads was World War II).
Prior to the commencement of hostilities that led to World War I
in August 1914, both sides had planned for a major clash.
The Germans embraced the strategy as plan school with a
meticulous Schlieffen Plan. Focusing on the right wing, German
forces would smash through Belgium. Every day’s schedule of
march was fixed: Brussels would be taken by the 19th day, the
French–Belgium border crossed on the 22nd, and Paris conquered
and victory achieved by the 39th. Heeding Carl von Clausewitz’s
warning that military plans that left room for the unexpected
could result in disaster, the Germans with infinite care had endeavored to plan for everything—except flexibility. In short, there
was no Plan B.
The French were practitioners of the strategy as action
school. Known as Plan 17, the French plan was a radical contrast
to the German one. Humiliated in the 1870 Franco–Prussian War,
during which France lost two provinces (Alsace and Lorraine),
the French were determined to regain them. But the French had
a smaller population and, thus, a smaller army. Since the French
army could not match the German army man for man, the French
military emphasized action—the individual initiatives and bravery
(known as élan vital, the all-conquering will). In Plan 17, a total
of five sentences were all that was shared with the generals who
would lead a million soldiers into battle. Sentence one was “Target
Berlin.” Sentence two was “Recover Alsace and Larraine.” The last
sentence was “Vive la France!”
In the end, both plans failed miserably, with appalling casualties but no victory to show.
Source: Condensed from B. Tuchman, 1962, The Guns of August,
New York: Macmillan.
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8
PART 1
Foundations of Global Strategy
TABLE 1.2Four Advantages of the Strategy as Theory Definition
●●
●●
●●
●●
strategy formulation
The crafting of a firm’s
strategy.
strategy implementation
The actions undertaken to
carry out a firm’s strategy.
SWOT analysis
A strategic analysis of a
firm’s internal strengths (S)
and weaknesses (W) and
the external opportunities
(O) and threats (T) in the
environment.
Integrating both planning and action schools
Leveraging the concept of “theory,” which serves two purposes (explanation and
prediction)
Requiring replications and experimentations
Understanding the difficulty of strategic change
perspective we embrace here. Following Peter Drucker, an Austrian–American management
guru, we extend the strategy as integration school by defining strategy as an organization’s
theory about how to compete successfully. In other words, if we have to define strategy with one
word, it is neither plan nor action—it is theory.
According to Drucker, “a valid theory that is clear, consistent, and focused is extraordinarily powerful.”19 A theory in a business context can be viewed as a way of doing business.20
For example, Zoom’s theory “to make video communications frictionless” is clear, consistent,
and focused, helping to channel its energies to make it happen (see the Opening Case).
Table 1.2 outlines the four advantages associated with our definition. First, it capitalizes
on the insights of both planning and action schools. This is because a firm’s theory of how
to compete will simply remain an idea until it has been translated into action. Thus, formulating a theory (advocated by the planning school as strategy formulation) is merely a first
step.21 Implementing it through a series of actions (noted by the action school as strategy
implementation) is a necessary second part.22 Although the cartoon in Figure 1.1 humorously
portrays these two activities as separate endeavors, in reality good strategists do both.
Shown in Figure 1.2, a strategy entails a firm’s assessment at point A of its own strengths (S)
and weaknesses (W), its desired performance levels at point B, and the opportunities (O)
and threats (T) in the environment.23 Such a SWOT analysis resonates very well with Sun
Tzu’s teaching on the importance of knowing “yourself ” and “your opponents.” After such an
assessment, the firm formulates its theory on how to best connect points A and B. In other
words, the broad arrow becomes its intended strategy. However, given so many uncertainties,
FIGURE 1.1
Strategy Formulation and Strategy Implementation
Source: Harvard Business Review, October 2011 (p. 40).
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Chapter 1 Strategizing Around the Globe
Performance
FIGURE 1.2 The Essence of Strategy
Where must
we be?
trategy
nded s
Inte
Where are we?
Point A
Point B
Emergent
strategy
Unrealized
strategy
Time
not all intended strategies may prove successful, and some may become unrealized strategies.
On the other hand, other unintended actions may become emergent strategies with a thrust
toward point B. Overall, the strategy as theory definition enables us (1) to retain the elegance
of the planning school with its more orthodox logical approach, and (2) to entertain the flexibility of the action school with its more dynamic experimental character.
Second, this new definition rests on a simple but powerful idea, the concept of “theory.” The
word theory often frightens students and managers because it implies an image of “abstract”
and “impractical.” But it shouldn’t.24 A theory is merely a statement on relationships between
two phenomena. At its core, a theory serves two purposes: to explain the past and to predict
the future. For example, the theory of gravity explains why many people committing suicide
were “successful” by jumping from high-rise buildings or tall cliffs. It also predicts that should
individuals (hypothetically) harbor such a dangerous tendency, they will be equally “successful” by doing the same. Each firm has a unique theory (way) of doing business.25 Walmart’s
theory, “everyday low prices,” explains why it has been successful in the past. After all, who
doesn’t like everyday low prices? The theory also predicts that Walmart will continue to do
well by focusing on low prices.
Third, a theory proven successful in one context during one period does not necessarily
mean it will be successful elsewhere or in other periods. A hallmark of theory building and
development is replication—repeated testing under a variety of conditions to establish a
theory’s boundaries.26 In natural sciences, this is known as continuous experimentation. For
instance, after several decades of experiments in outer space, we now know that objects
dropped by astronauts inside a spacecraft would not fall. Instead, they float. In other words,
replication helps us understand that the theory of gravity is Earth bound and does not
apply in outer space. Such replication seems to be the essence of business strategy. Firms
successful in one product or geographic market—that is, having proven the merit of their
theory once—constantly seek to expand into newer markets and replicate their success.27
Each new entry can be viewed as a new experiment. In new markets, firms sometimes
succeed and other times fail. As a result, firms are able to gradually establish the limits of
their particular theory about how to compete successfully. For instance, Walmart’s theory
failed in Germany and South Korea, and the firm had to pull out from those markets. Just
as knowing the limits of the theory of gravity helps the scientific community, knowing the
limits of a business theory, although painful to managers involved, is beneficial to the firm.
Walmart’s corporate performance actually improved after exiting money-losing operations
in Germany and South Korea.
Finally, the strategy as theory definition helps us understand why it is often difficult to
change strategy. Imagine how hard it is to change an established theory. The reason that a certain theory is widely accepted is because of its past success. But past success does not guarantee
replication
Repeated testing of
theory under a variety of
conditions to establish its
applicable boundaries.
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9
10
PART 1
Foundations of Global Strategy
future success. Although scientists are supposed to be objective, they are also human. Many
scientists may be unwilling to concede the failure of their favorite theories even in the face
of repeatedly failed tests. Think about how much resistance from the scientific establishment
that Galileo, Copernicus, and Einstein had to face initially. The same holds true for strategists.
Bosses have been promoted to current positions because of their past success in developing
and implementing old theories. National heritage, organizational politics, and personal career
considerations may prevent many bosses from admitting the failure of an existing strategy.28
Yet, the history of scientific progress suggests that it is possible to change established theories,
although it may be difficult initially. If enough failures in testing are reported and enough
researchers raise doubts about certain theories, then their views, which may be peripheral
initially, gradually drive out failed theories and introduce better ones. The painful process
of strategic change in many firms is similar. Usually a group of younger managers challenge
the current strategy. They propose a new theory on how to compete more effectively, which
initially is often marginalized by top management. But eventually, the momentum of the new
theory may outweigh the resistance of the old strategy, leading to some strategic change (see
Strategy in Action 1.2). Walmart recently changed its strategy from “everyday low prices”
to “save money, live better,” in order to soften its undesirable image as a ruthless cost cutter
associated with “everyday low prices.”
Overall, strategy is not a rulebook, a blueprint, or a set of programmed instructions.
Rather, it is a firm’s theory about how to compete successfully, a unifying theme that gives
coherence to its various actions.29 Strategy is about making choices and balancing trade-offs.
Strategy is also about articulating and communicating.30 If a theory is to be understood, it
STRATEGY IN ACTION 1.2
Selling Star Wars to LEGO Top Management
Founded in 1932, LEGO was derived from the Danish phase leg
godt (“play well”). Its theory of doing business has always been
building excellent toy bricks to foster creativity. In 1997, Peter
Eio, chief of LEGO North America, proposed to LEGO Group
senior management at the Danish headquarters the idea of
licensing Star Wars characters for LEGO toys. This would
enable LEGO to capitalize on the anticipated release of the new
Star Wars trilogy starting with The Phantom Menace. From his
North America headquarters in Enfield, Connecticut, Eio was
convinced that the US toy market had become license-driven.
Licensed toys such as fairy-tale characters from Disney movies
and Buzz Lightyear from Toy Story accounted for half of all toys
sold in the United States. Despite its success, LEGO’s go-it-alone
culture had prevented it from messing with any licensed products
up to this point.
Encouraged by Lucasfilm executives who were LEGO fans
and wanted to partner with LEGO, Eio thought he had proposed a
winning strategy that would enable LEGO to get into the lucrative
world of licensing. Unfortunately, LEGO senior executives’ initial
reaction, according to Eio himself, “was one of shock and horror.
It wasn’t the LEGO way.” Specifically, headquarters executives felt
LEGO did not need to license intellectual property from another
player. Further, the specific characters centered on war and vio­­­lence would violate one of LEGO founder Ole Kirk Christiansen’s
core values: Never let war seem like child’s play. According to
critics, the very name, Star Wars, would violate the essence of
LEGO’s peaceful identity. Heated debate took place. One executive
at corporate headquarters even claimed that “Over my dead body
will LEGO ever introduce Star Wars.”
During the next round, Eio and his team surveyed parents
in the United States. He also convinced his colleague in charge of
Germany, which was LEGO’s largest and by far its most conservative market, to conduct a similar survey. While American parents strongly supported the Star Wars idea, German parents were
also enthusiastic. Armed with such supportive consumer data, Eio
pushed this subsidiary-driven initiative further and continued
to meet resistance and pushback from corporate headquarters.
Eventually, the founder’s grandson and the president and CEO of
LEGO Group at that time, Kjeld Kirk Kristiansen, who was a Star
Wars fan himself, overruled his conservative executives and gave
the licensing deal his blessing.
In 1999, LEGO Star Wars products were released on the
wings of the blockbuster The Phantom Menace, becoming one of
the most successful product launches not only for LEGO, but also
for the global toy industry. More than one-sixth of LEGO Groups’
earnings in the 2000s came from the Star Wars line.
Sources: (1) The author’s interviews of LEGO customers and
LEGO store personnel in Copenhagen and Dallas; (2) M. W. Peng,
2022, LEGO’s secrets, in Global Strategy, 5th ed., Boston: Cengage;
(3) D. Robertson, 2013, Brick by Brick: How LEGO Rewrote the
Rules of Innovation and Conquered the Global Toy Industry, New
York: Crown Business.
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Chapter 1 Strategizing Around the Globe
must be communicated in a powerful yet effective way. If it has too many words, managers
and employees will not remember it. Then there is no way they can relate what they do day
in and day out to strategy. For this reason, this book’s definition of strategy goes above and
beyond the dozens of words stemming from each of the previous definitions (see Table 1.1).
We leverage the power of just one word—theory.
One of the first questions I often raise when engaging executives in training and consulting is: “What is your company’s strategy?” One of the most typical answers I get is: “What do
you mean? Vision? Mission?” While they have some vague sense about vision (articulation
of a firm’s envisioned future) and mission (statement of a firm’s purpose), most of them are
clueless about “strategy.” Then after overcoming the initial confusion and after going to
their corporate website, they usually give me dozens (and sometimes hundreds!) of words.
“Can you recite these words and tell your subordinates what these words are, without using
Google?” I would ask. They, of course, cannot. Regardless of the labels used such as “vision” or
“mission,” any strategy statement that is hard to remember is by definition hard to communicate and, thus, hard to understand. A successful strategy needs to be short but to the point,
communicating the uniqueness of a particular theory of doing business. Examples include
Walmart’s “everyday low prices” and “save money, live better” and Zoom’s “to make video
communications frictionless.” Table 1.3 illustrates my efforts to push executives at MTR
Corporation to condense their (relatively) well-crafted mission from 23 words to only eight
words—a two-thirds (!) reduction.
11
vision
Articulation of a firm’s
envisioned future.
mission
Statement of a firm’s
purpose.
Strategy, Strategist, and Strategic Leadership
Just as military strategies and generals must be studied simultaneously, an understanding
of business strategies around the globe would be incomplete without an appreciation of the
role top managers play as strategists.31 Although mid-level and lower-level managers must
understand strategy, they typically lack the perspective and confidence to craft and execute
a firm-level strategy. A top management team (TMT) led by the chief executive officer
(CEO) must exercise strategic leadership by making strategic choices. Since leadership is
about transforming organizations from what they are to what the leaders would have them
become, strategic leadership can be defined as how to most effectively manage organizations’
strategy formulation and implementation processes to create competitive advantage.32
Since the directions and operations of a firm typically are a reflection of its top managers,
their personal preferences based on their own culture, background, and experience may
TABLE 1.3 Articulating Strategy for MTR Corporation
top management team
(TMT)
The team consisting of the
highest level of executives
of a firm led by the CEO.
chief executive officer
(CEO)
The top executive in
charge of the strategy and
operations of a firm.
Official Mission
Articulation
leadership
We will:
We will:
Transforming organizations
from what they are to what
the leaders would have
them become.
●●
●●
●●
Strengthen our Hong Kong corporate
citizen reputation
Grow and enhance our Hong Kong core
businesses
Accelerate our success in the Mainland
and internationally
[TOTAL: 23 words]
●●
Strengthen reputation
●●
Grow in Hong Kong
●●
Go global
[TOTAL: 8 words]
Source: MTR Corporation is a publicly listed company headquartered in Hong Kong, where it builds
and operates transit railways that carry five million passengers every weekday. It also develops
residential and commercial real estate property. In addition to Hong Kong, it operates in six cities worldwide: Beijing, Hangzhou, and Shenzhen, China; London, United Kingdom; Melbourne,
Australia; and Stockholm, Sweden. Globally, it carries 1.36 billion passengers every year. “Official
Mission” is adapted from MTR Corporation, 2015, Vision, mission, values, www.mtr.com.hk
(accessed February 1, 2015). “Articulation” is from the author’s consulting engagements with MTR
executives, July 2013 and July 2014.
strategic leadership
How to most effectively
manage organizations’
strategy formulation and
implementation processes
to create competitive
advantage.
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12
PART 1
Foundations of Global Strategy
TABLE 1.4Strategic Work Only the CEO Can Do
●●
●●
●●
●●
Identify the meaningful outside and link it with the internal organization
Define what business the firm is in (and not in).
Balance present and future.
Shape values and standards.
Source: Adapted from A. G. Lafley, 2009, What only the CEO can do, Harvard Business Review May:
54–62. Lafley was chairman and CEO of P&G, 2000–2009.
microfoundation
Proximate causes of a given
strategy phenomenon at a
level of analysis lower than
that of the phenomenon
itself.
affect firm strategy.33 In other words, underpinning strategy and strategic leadership are
microfoundations, which are the proximate causes of a given strategic phenomenon at a
level of analysis lower than that of the phenomenon itself.34 For example, a strategy to embark
on overseas expansion is often championed by managers with significant international
experience and global mindset.35 While this book focuses on firm strategies, it is also about
strategists who exercise strategic leadership to propel their firms to new heights.
By definition, strategic work is different from nonstrategic (tactical) work. Drawing
on the wisdom of A. G. Lafley, former chairman and CEO of Procter & Gamble (P&G),
Table 1.4 outlines the nature of the highest level of strategic work that only the CEO can
do.36 In a nutshell, the CEO needs to shape strategy, refine it, communicate it, and help
people get it.
No hard line exists separating strategic and nonstrategic work. While CEOs can
delegate significant work to members of TMT (such as chief financial officer and chief
operations officer), some CEOs enjoy hands-on management. But too much interference
in lower-level work—often known as micromanaging—is going to render strategic
leadership ineffective. The military has recently struggled with this challenge. On
traditional battlefields, the “fog of war” gave senior commanders insufficient information,
and they had to rely on tactical commanders to accomplish missions. However, on
modern battlefields, satellites, sensors, and unmanned aerial vehicles (UAVs) present
“fog of information”—too much information. Armed with such abundant (but still
distorted) information, some senior commanders feel emboldened to issue direct orders
to lower-level units, becoming in essence “four-star company commanders.”37 Tactical
commanders, when facing risky decisions, would not mind letting senior commanders
to call the shots. The upshot? Lower-level flexibility and initiatives as well as overall
organizational effectiveness can be undermined.
Fundamental Questions in Strategy
Although strategy around the globe is a vast area, we will focus our attention only on the most
fundamental issues, which define a field and orient the attention of students, practitioners,
and scholars in a certain direction. Specifically, we will address the following four fundamental questions:38
●●
●●
●●
●●
Why do firms differ?
How do firms behave?
What determines the scope of the firm?
What determines the success and failure of firms around the globe?
Why Do Firms Differ?
Within every modern economy, firms, just like individuals, differ. Across economies, the
diversity among firms is striking. Figure 1.3 illustrates how management quality varies
round the world. Firms in developed economies led by the United States, Japan, and Germany
generally have higher-quality management than firms in emerging economies such as
Brazil, China, and India. Within every economy, there is a distribution of well-managed
and poorly-managed firms, resulting in a bell curve. The distribution of firms in Figure 1.4
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Chapter 1 Strategizing Around the Globe
FIGURE 1.3
Management Quality Varies Around the World
USA
Japan
Germany
Sweden
Canada
Australia
UK
Italy
France
New Zealand
Mexico
Poland
Ireland
Portugal
Chile
Argentina
Greece
Brazil
China
India
2.6
2.8
3
3.2
Average management quality scores,
from 1 (worst practice) to 5 (best practice)
3.4
Source: Adapted from N. Bloom, C. Genakos, R. Sadun, & J. Van Reenen, 2012, Management practices
across firms and countries (p. 18), Academy of Management Perspectives February: 12–33. Averages
taken across all firms within each country. A total of 9,079 observations. Firms were randomly sampled from the population of all manufacturing firms with 100 to 5,000 employees. The median firm is
privately owned, has approximately 350 employees, and operates two production plants.
FIGURE 1.4 The Distribution of Firms
USA
Brazil
China
Bars are the histogram
of firms in each country
.8
.6
Line is the smoothed
US density, shown
for comparison to
the US
Fraction of Firms
.4
.2
0
UK
India
Greece and Portugal
.8
.6
.4
.2
0
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
Management quality scores, from 1 (worst practice) to 5 (best practice)
Source: Adapted from N. Bloom, C. Genakos, R. Sadun, & J. Van Reenen, 2012, Management practices
across firms and countries (p. 20). Academy of Management Perspectives February: 12–33. A total of 4,930
observations. See footnote to Figure 1.3 for details of the survey.
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13
14
PART 1
Foundations of Global Strategy
presents much richer information than a single score for each country’s firms in
Figure 1.3. It turns out that outstanding firms exist in Brazil, China, and India.39 Examples
of such exceptional firms include Embraer and 3G Capital from Brazil, Alibaba and Huawei
from China, and Tata and Infosys from India. But in comparison with the distribution of US
and UK firms, Brazil, China, and India, as well as Greece and Portugal, suffer from a large tail
of poorly-managed firms.
Why firms in emerging economies on average suffer from lower-quality management
and—if this is the case—how they can catch up have been a puzzle. Some point to institutional differences: The lack of market-supporting institutions that can facilitate firm growth
in emerging economies may play a role.40 However, this view needs to reconcile with the fact
that firms in emerging economies have generally been growing at a much faster rate than
firms in developed economies in the last three decades. As a result, why firms differ remains
to be an intriguing question in strategy.
How Do Firms Behave?
strategy tripod
A framework that suggests
that strategy as a discipline
has three “legs” or key
perspectives: industrybased, resource-based, and
institution-based views.
This question focuses on what determines firms’ theories on how to compete. Shown
in Figure 1.5, one way to help us understand how firms behave is a strategy tripod,
which is a comprehensive view of strategy consisting of three leading perspectives.41
The industry-based view suggests that the strategic task is mainly to examine the
competitive forces affecting an industry and to stake out a position that is less vulnerable
relative to these forces. While the industry-based view primarily focuses on the external
opportunities and threats (the O and T in a SWOT analysis), the resource-based view
largely concentrates on the internal strengths and weaknesses (S and W) of the firm. This
view posits that it is firm-specific capabilities that differentiate successful firms from
failing ones.
Recently, an institution-based view has emerged to account for differences in firm
strategy.42 This view argues that in addition to industry-level and firm-level conditions,
firms also must take into account the influences of formal and informal rules of the game.43
A better understanding of the formal and informal rules of the game explains a great deal
behind the success and failure of numerous firms around the world.
Collectively viewed as a strategy tripod, these three views form the backbone of the first
part of this book, Foundations of Global Strategy (Chapters 1, 2, 3, and 4). They shed considerable light on the question “How do firms behave?” For the second and third parts of
the book, we will repeatedly draw on the strategy tripod with these three views to tackle a
variety of strategy problems.
FIGURE 1.5 The Strategy Tripod: Three Leading Perspectives on Strategy
Industry-based
competition
Firm-specific resources
and capabilities
Strategy
Performance
Institutional conditions
and transitions
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Chapter 1 Strategizing Around the Globe
15
What Determines the Scope of the Firm?
This question first focuses on the growth of the firm. Most firms seem to have a lingering love
affair with growth. The motivation to grow is fueled by the excitement associated with such
growth. However, there is a limit beyond which further growth may backfire. Then, downsizing, downscoping, and withdrawals are often necessary.
In developed economies, a conglomeration strategy featuring product-unrelated
diversification, in vogue in the 1960s and the 1970s, was found to destroy value and was
largely discredited by the 1980s and the 1990s. Witness how many firms are still trying to
divest and downsize in the West. However, this strategy seems to be alive and well in many
emerging economies. Although puzzled Western media and consultants often suggest that
conglomerates destroy value and should be dismantled in emerging economies, empirical
evidence suggests otherwise. Recent research in emerging economies reports that some (but
not all) units affiliated with conglomerates may enjoy higher profitability than independent
firms, pointing out some discernible performance benefits associated with conglomeration.44
One reason behind such a contrast lies in the institutional differences between developed and
emerging economies. Viewed through an institutional lens, conglomeration may make sense
(at least to some extent) in emerging economies, because this strategy and its relatively positive
link with performance may be a function of the level of institutional (under)development in
these countries.45
In addition to product scope, careful deliberation of the geographic scope is important.46
For firms aspiring to become global leaders, a strong position in the three major developed
regions—North America, Europe, and Japan—is often necessary. Expanding market position
in key emerging economies is also desirable. However, it is not realistic that all firms can, or
should, “go global.” Many firms may have entered too many countries too quickly and may be
subsequently forced to withdraw. Further, many firms that have done a reasonably good job
competing abroad have now been seriously thinking about reducing their geographic scope
in a “less global” world (see the Closing Case).
What Determines the Success and Failure
of Firms Around the Globe?
The focus on firm performance, more than anything else, defines the field of strategic management and international business.47 All three major perspectives that form the strategy tripod ultimately seek to answer this crucial performance question.48 We are interested not only
in acquiring and leveraging competitive advantage (defined as performance superiority over
rivals), but also in sustaining such advantage over time and across regions. Sustaining competitive advantage does not mean maintaining excellent performance forever—not possible
(see Strategy in Action 1.3). It merely means efforts to maintain high levels of performance
to the extent possible.
What is firm performance? There is no consensus. If you survey ten managers from ten
countries on what performance exactly is, you may get ten different answers.49 Long-term or
short-term performance? Financial returns or market shares? Profits maximized for shareholders or benefits maximized for stakeholders (groups and individuals who can affect or
are affected by the achievement of the organization’s objectives)? Without consensus on the
performance measures, it is difficult to find an easy answer to the question on what drives
firm performance. Instead of focusing on a single financial or economic bottom line, some
firms adopt a triple bottom line that consists of economic, social, and environmental
dimensions—also known as profit-people-planet (PPP) dimensions.
One solution is a balanced scorecard, which is a performance evaluation method from
the customer, internal, innovation and learning, and financial perspectives. Outlined in
Table 1.5, the balanced scorecard can be thought of as the dials in a flight cockpit. To fly
an aircraft, pilots simultaneously require a lot of information, such as air speed, altitude,
and bearing. To manage a firm, strategists have similar needs. But pilots and strategists
cannot afford information overload—too much information. The balanced scorecard
competitive advantage
Performance superiority
over rivals.
stakeholder
Any group or individual
who can affect or is affected
by the achievement of the
organization’s objectives.
triple bottom line
A performance yardstick
consisting of economic,
social, and environmental
dimensions.
balanced scorecard
A performance evaluation
method from the customer,
internal, innovation and
learning, and financial
perspectives.
information overload
Too much information to
process.
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16
PART 1
Foundations of Global Strategy
STRATEGY IN ACTION 1.3
Confessions of Your Textbook Author
The first edition of Global Strategy was written during 2003–2004,
first marked in 2005, and copyrighted in 2006. An enduring interest
of the book is sustainable competitive advantage. One secret
I can confess to the readers is that while I always endeavor to find
a diverse set of high-performance firms from around the world as
examples, I have maintained a small list of fallback examples. When
other examples are ineffective, I would fall back on these excellent
firms. Now looking back while working on the fifth edition, I am
disappointed to find that a number of these “excellent” firms have
got themselves into trouble. But then I am (secretly) happy that
such corporate mess-ups can vividly illustrate a key point: Even for
excellent firms, competitive advantage does not last forever.
In the first edition, Nokia was one of those hot firms. In fact,
it was written up as one of the only nine “most-global” multinationals, and had numerous appearances. However, the global leader
of mobile phones was completely elbowed out of this business by
Apple and Samsung, which first unleashed their smartphones in
2007—around the time the second edition was written. In 2012,
Nokia sold its mobile phone business to Microsoft for $7 billion
and concentrated on selling servers and routers to telecom operators. “Remember Nokia?” is the title of a nostalgic media article
I find when working on the fifth edition. Today, Nokia is still in
business, but it is no longer a household name.
Another favorite in the first edition was Siemens. But in the
second edition (copyrighted in 2009), it was written up as the closing case for Chapter 4: “Siemens in a Sea of Scandals.” Between
2000 and 2006, Siemens not only paid $1.9 billion bribery to “win”
hundreds of contracts worldwide, but also recorded such expenses
as tax-deductible expenses. It went from being one of the mostrespected firms in Germany to one of the least-respected. Its number of appearances dropped from 11 times in the first edition to a
mere two in the fourth edition.
An all-time favorite in the first four editions was General
Electric (GE). It was positively mentioned numerous times:
12 times in the first edition, 31 times in the second, 19 times in the
third, and eight times in the fourth. However, between the fourth
edition (copyrighted in 2017) and the fifth edition (copyrighted in
2022—written in 2020), GE suffered one of the most spectacular
and swiftest corporate meltdowns. It went from being one of the
most-prestigious firms to being kicked out of the Dow Jones
Industrial Average in 2018 (it was a founding member in 1896
and had been on it continuously between 1907 and 2018). When
revising for the fifth edition, I find that Bloomberg Businessweek
used the following highly unusual title: “What the Hell Is Wrong
with GE?” Fortune evidently imitated this title, with its own: “What
the Hell Happened?” As a result, in the fifth edition, GE, my all-time
darling, has turned into an unenviable example. See Strategy in
Action 9.2: “GE–Alstom: A Deal Too Far?”
Making its first appearance in Global Strategy, Zoom is my
new darling, commanding readers’ attention as the all-important
opening case for Chapter 1. While Zoom is undoubtedly an
excellent firm, it must be secretly thanking the coronavirus. It is
the deadly virus that propelled this relatively obscure corporate
videoconferencing firm to become a household name, coining new terms such as “Zoombombing” (one word), “Zoom
diplomacy,” and “Zoom fatigue.” Will it remain its relevance in the
tenth edition of Global Strategy?
Sources: (1) Bloomberg Businessweek, 2017, Remember Nokia?
July 3: 66–69; (2) Bloomberg Businessweek, 2018, What the hell is
wrong with GE? February 5: 42–49; (3) Fortune, 2018, What the
hell happened? June 1: 149–156; (4) M. W. Peng, 2006, 2009, 2014,
2017, Global Strategy, 1st–4th ed., Boston: Cengage.
summarizes and channels a large volume of information to a relatively small number of
crucial dimensions.
In summary, these four questions represent some of the most fundamental puzzles in
strategy. While other questions can be raised, they all relate in one way or another to these
four.50 Thus, answering these four questions will be the primary focus of this book and will
be addressed in every chapter.
TABLE 1.5Performance Goals and Measures from the Balanced Scorecard
●●
●●
●●
●●
From a customer perspective: How do customers see us?
From an internal business perspectives: What must we excel at?
From an innovation and learning perspective: Can we continue to improve and
create value?
From a financial perspective: How do we look to shareholders?
Source: Adapted from R. Kaplan & D. Norton, 2005, The balanced scorecard: Measures that drive
performance, Harvard Business Review July: 172–180.
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Chapter 1 Strategizing Around the Globe
17
What is Global Strategy?
“Global strategy” has at least two meanings. First, as noted earlier, the traditional and narrowly
defined notion of global strategy refers to a particular theory on how to compete and is
centered on offering standardized products and services on a worldwide basis. This strategy
is only relevant for a relatively small number of large MNEs active in many countries. A
majority of the firms in the world—including many MNEs that do not embrace such a global
strategy—may find little use for this definition.
Second, global strategy can also refer to international strategy.51 Americans seem especially
fond of using the word global this way. For example, Walmart’s first foray outside the United
States in 1991 was widely hailed as evidence that Walmart had “gone global.” In fact, Walmart
had only expanded into Mexico. While this was an admirable first step for Walmart, the
action was similar to Singapore firms doing business in Malaysia or German firms entering
Austria. To many internationally active Asian and European firms, there is nothing global
about these activities in neighboring countries. So why is there the hype about the word
global? Historically, the vast US domestic market made it unnecessary for many firms to seek
overseas markets. As a result, when many US firms do venture abroad, even in countries as
close as Mexico, they are likely to be fascinated about “discovery of global markets.” Since
everyone seems to want a more exciting global strategy rather than a plain-vanilla international
one, calling non-US (or nondomestic) markets “global” markets becomes a cliché.
So what do we mean by global strategy in this book? We use neither of the preceding definitions. Global strategy is simply defined as strategy of firms around the globe—essentially
firms’ theories about how to compete successfully. We deal with both the strategy of MNEs
(some of which may fit into the traditional narrow definition of global strategy) and the
strategy of smaller firms (some of which may have an international presence, whereas others
may be purely domestic). We do not exclusively concentrate on firms doing business abroad,
which is the traditional domain of global-strategy books. To the extent that international
business involves two sides—domestic firms and foreign entrants—an exclusive focus on
foreign entrants only covers one side and, thus, paints a partial picture. Domestic firms do
not sit around, waiting for their markets to be invaded by foreign entrants. Domestic firms
actively strategize too. A truly global global-strategy book that endeavors to be relevant to
firms around the globe needs to provide a balanced coverage. This is the challenge we will
take on throughout this book.
global strategy
(1) Strategy of firms around
the globe. (2) A particular
form of international
strategy, characterized
by the production and
distribution of standardized
products and services on a
worldwide basis.
Globalization and Semiglobalization
Globalization, broadly speaking, is the close integration of countries and peoples of the
world. This abstract five-syllable word is now frequently heard and debated. This section
(1) outlines three views on globalization, (2) reviews the swing of the pendulum, (3) highlights the importance of risk management, and (4) discusses the strategic implications of
semiglobalization.
globalization
The close integration of
countries and peoples of the
world.
What Is Globalization?
Globalization is a shorthand version for economic globalization—no one is ever serious about
political globalization. Depending on what sources you read, globalization can be:
●●
●●
●●
a new force sweeping through the world in recent times,
a long-run historical evolution since the dawn of human history, or
a pendulum that swings from one extreme to another from time to time.
An understanding of these views helps put the debate about globalization in perspective. First, opponents of globalization suggest that it is a new phenomenon beginning in the
late 20th century. The arguments against globalization focus on environmental stress and
sweatshop labor in low-income countries, and manufacturing decline, job loss, and income
inequality in high-income countries.
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18
PART 1
Foundations of Global Strategy
A second view contends that globalization has always been part and parcel of human
history. Historians debate whether it started 2,000 or 8,000 years ago. The earliest traces of
MNEs have been discovered in Assyrian, Phoenician, and Roman times.52 International competition from low-cost countries is nothing new. In the first century a.d., the Roman emperor
Tiberius was so concerned about the massive quantity of low-cost Chinese silk imports that
he imposed the world’s first-known import quota of textiles.53 In a nutshell, globalization is
nothing new and will always exist.
A third view suggests that globalization is the “closer integration of the countries and
peoples of the world which has been brought about by the enormous reduction of the costs
of transportation and communication, and the breaking down of artificial barriers to the
flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders.”54
Globalization is neither recent nor one-directional. It is, more accurately, a process similar to
the swing of a pendulum.
The Swing of a Pendulum
emerging economy
(emerging market)
A label that describes
fast-growing developing
economies since the 1990s.
base of the pyramid (BoP)
The vast majority of humanity, about five billion
people, who make less than
US$2,000 a year.
BRIC
Brazil, Russia, India, and
China.
BRICS
Brazil, Russia, India, China,
and South Africa.
reverse innovation
(frugal innovation)
Low-cost innovation from
emerging economies that
has potential in developed
economies.
The pendulum view is more realistic and more balanced, and therefore makes the most sense
by helping us understand the ups and downs of globalization.55 Globalization has never been
going one direction, and will always be subject to the forces of tension and contradiction.
The current era of globalization originated in the aftermath of World War II, when major
Western countries committed themselves to global trade and investment. However, between
the 1950s and the 1970s, this view was not widely shared. Communist countries, such as China
and the Soviet Union, sought to develop self-sufficiency. Many noncommunist developing
countries, such as Brazil, India, and Mexico, focused on protecting domestic industries. But
refusing to participate in global trade and investment ended up breeding uncompetitive
industries. In contrast, four developing economies in Asia—Hong Kong, Singapore, South
Korea, and Taiwan—earned their stripes as the “Four Tigers” by participating in the global
economy. They became the only economies once recognized as less developed (low-income)
by the World Bank to have subsequently achieved developed (high-income) status.
Inspired by the Four Tigers, more countries and regions—such as China in the 1970s, Latin
America and Central and Eastern Europe in the 1980s, and India and Russia in the 1990s—
realized that joining the global economy was a must. As these countries started to emerge as
new players in the global economy, they became collectively known as emerging economies
(or emerging markets)—fast-growing developing economies.56 Because of their traditionally low income, they had been at the base of the pyramid (BoP) of the global economy that
had been largely ignored by MNEs in the West.57 Now such BoP markets had emerged, first
as vast low-cost labor markets and gradually as emerging middle-class consumer markets.
Extending its reach to cover more emerging economies, globalization rapidly accelerated.
However, globalization, like a pendulum, is unable to keep going in one direction. Rapid
globalization in the 1990s and the 2000s saw some significant backlash. First, the rapid growth
of globalization led to the historically inaccurate view that globalization is new. Second, it
created fear among many people in developed economies that they would lose jobs. Finally,
some factions in emerging economies complained against the onslaught of MNEs, alleging
that they destroy local firms as well as local cultures, values, and environments. The September
2001 terrorist attacks in New York and Washington undoubtedly were some of the most visible and most extreme acts of antiglobalization forces at work. As a result, international travel
was curtailed, and global trade and investment flows slowed down in the early 2000s.
However, by the mid 2000s, worldwide gross domestic product (GDP), cross-border
trade, and per capita GDP all soared to historically high levels. It was during that period
that BRIC—an acronym for four major emerging economies: Brazil, Russia, India, and
China—became a buzzword.58 A few years later, adding South Africa, BRIC became a more
inclusive label of BRICS. One interesting development is reverse innovation (or frugal
innovation)—an innovation that is adopted first in emerging economies and then diffused
around the world.59 The traditional flow of innovation is from developed to developing
economies. In contrast, General Electric (GE) developed a basic ultrasound scanner from
scratch in China. John Deere developed a 35-horsepower tractor from scratch in India. In
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Chapter 1 Strategizing Around the Globe
19
both cases, the origin of new innovations is from the BoP, and the cost is about 10% of the
cost if they had been developed in developed economies. The two multinational giants not
only marketed these products in China and India, but also brought them back home. In
other words, the flow of innovation is now reversed. While MNEs are actively competing
in emerging economies, emerging economies have also become a breeding ground of a new
class of global competitors.60
Unfortunately, the party suddenly ended in 2008. The Great Recession of 2008–2009
was unlike anything the world had seen since the Great Depression (1929–1933). The crisis
showed how interconnected the global economy had become. Deteriorating housing markets
in the United States, fueled by unsustainable subprime lending practices, led to massive government bailouts of failed firms. The crisis quickly spread around the world. Global output,
trade, and investment plummeted, whereas unemployment skyrocketed.
After unprecedented government intervention in developed economies, the global
economy had turned the corner.61 However, starting in 2010, the Greek debt crisis and then
the broader PIGS debt crisis (“PIGS” refers to Portugal, Ireland or Italy, Greece, and Spain)
erupted. The already slow recovery in Europe, thus, became slower, and unemployment
hovered at very high levels. In 2016, a majority of citizens in Britain, frustrated by slow
growth, high unemployment, endless needs to bail out troubled countries, and the influx of
immigrants, voted to exit the European Union (EU)—Brexit.
Also in 2016, Americans voted Donald Trump into power. He departed from earlier presidents’ interest in globalization and free trade. President Trump withdrew US participation in
the Trans-Pacific Partnership (TPP), threatened to dismantle the North America Free Trade
Agreement (NAFTA) (which was eventually renegotiated to become the US-Mexico-Canada
Agreement [USMCA]), launched a trade war not only with China but also with the EU, Canada, Japan, and Mexico, and tightened immigration and border control. In contrast, Chinese
leaders became defenders of globalization, arguing that “economic openness serves everyone
better.”62 It is a great irony that the world’s communist leaders presented themselves as champions of globalization and open markets. In the 1980s, it was the Chinese leaders who were
lectured by American politicians about the merits of abandoning isolationism and joining
the global economy. However, this is exactly why the pendulum view on globalization is so
powerful and insightful.
Black Swan and Risk Management
Shortly after the United States and China reached phase-one agreement for a truce in their
trade war in January 2020, the coronavirus (COVID-19) hit China first. Then it hit the rest
of the world by March 2020. On an unprecedented worldwide scale, borders were closed and
economies shut down one after another. All nonessential businesses closed, stock markets
crashed to a new low, oil prices dived into the negative, unemployment numbers soared, and
firms went bankrupt left and right. The recovery is slow and painful.63
The coronavirus reminds all firms and managers of the importance of risk management—
the identification and assessment of risks and the preparation to minimize the impact of
high-risk, unfortunate events.64 What is especially scary is a black swan event. According to
engineering professor Nassim Taleb, a black swan event is an unpredictable one that is beyond
what is normally expected and that has severe consequences.65 World War I (see Strategy in
Action 1.1), the 1991 dissolution of the Soviet Union, the September 2001 attacks, and the
2020 coronavirus outbreak are examples of black swan events. As a technique to prepare and
plan for multiple scenarios and especially to cope with black swan events, scenario planning
is now extensively used (see the Closing Case).66
Like the proverbial elephant, globalization is seen by everyone yet rarely comprehended.
The sudden ferocity of the coronavirus surprised everybody. Many people blamed
globalization for its global spread, and solutions include calls for deglobalization (see the
Debates and Extensions section). Remember all of us felt sorry when we read the story of a
bunch of blind men trying to figure out the shape and form of an elephant. We really should
not. Although we are not blind, our task is more challenging than the blind men who study
a standing animal. Our beast—globalization—does not stand still and often rapidly moves
risk management
The identification and
assessment of risks and the
preparation to minimize
the impact of high-risk,
unfortunate events.
black swan event
An unpredictable event that
is beyond what is normally
expected and that has severe
consequences.
scenario planning
A technique to prepare and
plan for multiple scenarios
(either high or low risk).
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Foundations of Global Strategy
back and forth (!). Yet, we try to live with it, avoid being crushed by it, and even attempt to
profit from its movement.
Semiglobalization
semiglobalization
A perspective that suggests
that barriers to market
integration at borders are
high but not high enough to
completely insulate countries from each other.
Despite the hype, globalization—even at its peak—is not complete. Even before the recent
movement to “deglobalize,” did we really live in a globalized world? Are selling, investing, and
living abroad just as easy as at home? Obviously not. Most measures of market integration,
such as trade and FDI, have recently scaled new heights but still fall far short of pointing to
a single, globally integrated market. In other words, what we have may be labeled semiglobalization, which is more complex than extremes of total isolation and total globalization.
Semiglobalization suggests that barriers to market integration at borders are high but not
high enough to insulate countries from each other completely.67
Semiglobalization calls for more than one way of strategizing around the globe. Total isolation (or total deglobalization) on a nation-state basis would suggest localization—a strategy
of treating each country as a unique market. An MNE marketing products to 100 countries
will need to come up with 100 versions. This strategy is clearly too costly and too impractical.
Even the strongest critics of globalization are not advocating such a retreat—each country
becoming a self-sufficient hermit.
Total globalization, on the other hand, would suggest that the “world is flat,” which is the
title of an influential 2005 book by journalist Thomas Friedman.68 If this is indeed the case,
such a flat world would lead to standardization—the traditional “global strategy” of treating
the entire world as one market (as previously discussed). An MNE can just market one version of “world car” or “world drink.” But the world obviously is not that simple.
In summary, (semi)globalization can be viewed as a continuum between total isolation and
total globalization. Given the heightened trade barriers recently, the world clearly is not flat.
It is spiky.69 However, the world is not going toward total isolation either. While McDonald’s
sells beer in Germany, curry chicken in India, McRice in Indonesia, and meat pies in New
Zealand, underneath such local variety are a number of global elements not only in terms of
items such as hamburgers and fries, but also in terms of globally consistent management systems. Overall, in a world of semiglobalization, there is no single right strategy, forcing firms
such as McDonald’s to engage in a variety of experimentations.
Debates and Extensions
One thing that distinguishes the field of global strategy from other fields is the frequency
and magnitude of debates.70 In this book, every chapter features a beefy Debates and Extensions section. To combat the widespread tendency to have one-scenario, rosy views and to be
shocked by black swans, it is imperative that strategists devote significant attention to debates.
This section outlines three crucial ones.
Debate 1: Globalization versus Deglobalization
Economic globalization—hereafter “globalization” in short—is always controversial. Advocates of globalization count its contributions to include greater economic growth, higher
standards of living, increased technology sharing, and more extensive cultural integration.
Critics argue that globalization destroys jobs in rich countries, exploits workers in poor countries, grants MNEs too much power, degrades the environment, and promotes inequality.
Critics of globalization argue that globalization has reached its peak, is in trouble, and is
in retreat; and that deglobalization is the wave of the future. Globalism is out. Nationalism
is in—personified by President Trump’s “America First” policy. Trade wars. Investment
scrutinies. Immigration controls. Coronavirus-induced economic shutdowns. Evidence
seems everywhere.
Some suggest that the backlash against globalization was triggered by the single-minded,
one-directional push for hyperglobalization by “hyperglobalists” between 1991 and 2008—a
historical period bracketed by the end of the Cold War and the Great Recession. Globalization,
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Chapter 1 Strategizing Around the Globe
according to President Bill Clinton (in power 1993–2001), “is the economic equivalent of
a force of nature, like wind or water.” Debating globalization? British Prime Minister Tony
Blair (in power 1997–2007) laughed it off, suggesting that “you might as well debate whether
autumn should follow summer.”71
However, denying the existence of the globalization debate does not make it go away. Such
denial (or arrogance) has made many policy makers and corporate strategists to only focus
on the benefits of globalization, and fail to appreciate its drawbacks. For communities and
individuals deeply impacted by the forces of globalization, the losses in terms of jobs, firms,
and opportunities can be substantial.72 Ignoring such drawbacks, many policy makers and
corporate strategists have been repeatedly surprised—ranging from the antiglobalization
protests that derailed a major World Trade Organization meeting in Seattle in 1999 to the rise
of nationalist politicians in countries such as Brazil, Britain, Hungary, Poland, Turkey, and the
United States in the late 2010s.73
Some argue that globalization is not in retreat. While global trade has not grown
significantly since reaching the peak in the mid-2010s, globalization is now “being driven
by digital technology.”74 The reason that global trade growth had slowed down recently
(before COVID-19) is twofold. First, most efficiency gains from trade (such as China’s low
labor cost) have been realized. As emerging economies led by China can now produce more
intermediate goods such as components by themselves, there is reduced demand for such
trade in intermediate goods. The second reason, of course, is the heightened protectionist
barriers in trade wars. However, trade in services—especially digital services—is growing by
leaps and bounds. The growth of cross-border bandwidth used increased 90-fold from 2005
to 2016, and will likely grow an additional 13-fold by 2023. Half of all trade in global services
now relies on digital technology. A pair of 3D-printed Adidas sneakers can be made (printed)
in the United States, and thus does not need to be made in Vietnam and shipped across the
Pacific. The 3D printer in the United States will need to pay royalties to Adidas in Germany—
an example of digital service trade, which has substituted for some traditional goods trade.
Such technology-enabled automation is great news to intellectual property owners (Adidas
in this case) and 3D printer producers and operators, but is terrible news to thousands of
employees working in shoe factories and hundreds of employees involved in the supply chain
worldwide. Thanks to some politicians’ calls (and coercion), some factories may move back to
developed economies. But they are unlikely to generate that many jobs—blame this on digital
technology.
At the end of the day, the debate boils down to whether countries are better off one way
or the other. To some critics of globalization, a major manifestation of deglobalization is to
“decouple” from China.75 But would such “decoupling” of the world’s top-two economies
make the United States better off? General Motors (GM), which sells more cars in China
than in the United States, is unlikely to be enthusiastic about abandoning its largest market.
Likewise, Apple is unlikely to be happy about delinking from a country that assembles all its
smartphones and is its largest foreign market. Doug McMillon, CEO of Walmart, the world’s
largest firm (by revenue) and the largest importer of made-in-China goods, commented:
The world is a global marketplace. You could choose to participate less, but other countries
are still going to trade with each other. And the math says that over time trade is good for
the United States—in terms of total GDP growth, in terms of saving people money, in terms
of people living the life they want to live.76
Since the first edition of Global Strategy (2006), current and would-be strategists have been
advised to be serious about the globalization debate. Firms, especially large MNEs, have often
been singled out as carriers of globalization, resulting in backlash.77 Therefore, it is imperative
that strategists realize that “globalization is at a crossroads” and it “may have passed its highwater mark.”78 For individual firms, the quest is for “a saner globalization” as opposed to
hyperglobalization.79 In other words, holding the view that “the more global, the better” can
be counterproductive. Walmart improved its corporate performance by withdrawing from
Germany and South Korea, Google and Uber by withdrawing from China, and Deutsche
Bank and DHL by withdrawing from the United States. Overall, in the face of uncertainty
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associated with globalization vis-à-vis deglobalization (see the Closing Case), it may be
advisable to minimize exposure to political and operational risks, withdraw from certain
money-losing operations, and reduce the product and geographic scope of the firm.80
Debate 2: Strategic versus Nonstrategic Industries
The demarcation line separating what is strategic and what is nonstrategic has always
been subject to debate. Thanks to the coronavirus, this debate has taken on additional
importance recently.81 An industry being designated “strategic” can count on government
subsidies in good times and bailouts in bad times. The government can also help by erecting
tariff barriers and blocking foreign takeovers. An industry that fails to grab the “strategic”
status will be left to fend for itself.
It is no surprise that defense-related industries have often been able to invoke nationalsecurity arguments to win the “strategic” designation. Surprisingly in 2006, Danone, a yogurt
producer, was able to twist the arms of the French government to designate the yogurt industry
to be a strategic one that would be protected from foreign takeovers. In the Great Recession
of 2008–2009, banks and financial services firms—known as Wall Street firms—were able to
grab massive bailout funds, whereas thousands of Main Street firms were left to sink or swim.
In the debate on the $2.2 trillion stimulus package to bail out industries during the 2020
coronavirus outbreak, the US Postal Service failed to win the “strategic” status, was given no
free money, and was only allowed to borrow $10 billion.82 From an institution-based view, it
seems that the ability to win the “strategic” status largely boils down to how capable an industry is in lobbying for its case—in addition to its intrinsic strategic importance.
One of the most recent rounds of this debate is whether the face mask industry should be
designated “strategic.” Face masks are a low-value, easily shipped item ideal for offshoring. In
2019, China made half of the world’s face masks. The coronavirus outbreak in China in January and February 2020 created a spike of demand for face masks. The Chinese government
ordered all in-country producers, including foreign firms such as 3M, to stop exports. When
the virus reached other countries in March, there was a severe shortage of face masks worldwide. Although 3M and Honeywell cranked up their limited remaining US-based production
to “surge capacity,” they could hardly keep up with the surging demand at home.83 The little,
seemingly “nonstrategic” face mask has become more “strategic.” Calls for the United States
to produce and stockpile face masks and other medical supplies have been frequently heard.
But if the face mask industry becomes “strategic,” what about industries that produce gloves,
disinfectant, and toilet paper, all of which turned out to be objects of panic buying during
the pandemic?
Debate 3: Just-in-Time versus Just-in-Case
Management
global value chain
Chain of geographically
dispersed and coordinated
activities involved in the
production of a good or
service and its supply and
distribution activities.
Because production of many products ranging from smartphones to jetliners and their components is often dispersed globally, global supply chains are a hallmark of 21st-century globalization. A global value chain is a chain of geographically dispersed and coordinated
activities involved in the production of a good or service and its supply and distribution
activities.84 Global value chains are underpinned by global supply chains. Supply chain management, once an obscure logistics function, has now gained strategic importance. Supply
chain management firms such as Amazon, DHL, FedEx, and UPS have become household
names. On any given day, 2% of the world’s GDP can be found in UPS trucks and planes.
“FedEx” has become a verb and even live whales have reportedly been “FedExed.” Modern
supply chains aim to “get the right product to the right place at the right time—all the time.”85
In a quest for higher efficiency, just-in-time management is often practiced. Maintaining
a large inventory of products and components would tie up significant storage, assets,
and capital. Relying on super-reliable supply chain management to deliver just-in-time—
sometimes directly to store shelves and to-be-assembled cars and planes—can provide a
lot of savings. As a result, asset light and lean manufacturing have become buzzwords, and
inventory levels at many factories are now days’ and even hours’ worth.
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Chapter 1 Strategizing Around the Globe
However, a supply chain is only as strong as its weakest link.86 When one link breaks down,
the whole chain may grind to a halt. On March 11, 2011, Japan suffered from a major earthquake, which disrupted production at a number of automobile-components factories. On
March 17, GM had to close two US-based factories, due to a lack of components arriving from
Japan. In January 2020, the coronavirus shut down most factories in China, and quickly automobile, electronics, and other plants in many other countries had to shut down—initially not
because the virus reached them, but because the supplies from China could not come. Beyond
manufacturing, the coronavirus outbreak has taught us that in healthcare, retail, banking, and
many other service industries, keeping storage of supplies ranging from face masks to power
generators is a must. Overall, one lesson from the 2011 Japanese earthquake and the 2020
coronavirus is that there is value in just-in-case management.
The broader debate is about the value of organizational slack, which is defined as a cushion of resources that allow an organization to adapt successfully to pressures.87 A slack-laden
organization may become bloated and inefficient, and the just-in-time management movement
can be conceptualized as efforts to reduce slack and enhance efficiency. However, a low-slack
organization can become vulnerable to external shocks—especially black swan events. While
slack is clearly of strategic importance, specifying the optimal level and distribution of various
slack resources remains a source of contention. Many governments stockpile fuel, foodstuffs,
and weapons “just in case.” The coronavirus has taught them to stockpile medical supplies and
personal protection equipment. For individual firms, supply chain breakdown and panic buying
during the pandemic have taught them that relying on just-in-time delivery of supplies can be
dangerous. As the swing of the pendulum moves from just-in-time management to just-in-case
management, debate rages on regarding how much slack is too much and how little is too little.
23
organizational slack
A cushion of resources
that allow an organization
to adapt successfully to
pressures.
Fostering Critical Strategic Thinking Through Debates
To the extent that a university education fosters critical thinking, a global-strategy course
must foster critical strategic thinking.88 As resetting globalization is in order, none of the three
debates has an easy solution. If you as an inexperienced would-be strategist feel uncomfortable dealing with these debates, more experienced strategists also struggle to cope with them.
However, it is through debates that strategic thinking skills are fostered, options clarified,
and decisions made. In short, debates drive practice and research forward. Therefore, every
chapter in Global Strategy has a Debates and Extensions section. From a career standpoint,
ability to handle paradoxes and ambiguity—such as expertise in tariffs, supply chains, and
risk management—is especially valuable during crises.89
Organization of the Book
Global Strategy has three parts. The first part concerns foundations. Following this chapter,
Chapters 2, 3, and 4 introduce the strategy tripod, consisting of the three leading perspectives: industry-based, resource-based, and institution-based views. The second part covers
business-level strategies (How should we compete in a given line of business?). In contrast to
most global-strategy books that focus on large MNEs, we start with small entrepreneurial
firms (Chapter 5), followed by ways to enter foreign markets (Chapter 6), to leverage alliances
and networks (Chapter 7), and to manage competitive dynamics (Chapter 8). Finally, the
third part deals with corporate-level strategies (What business should we be in?). Chapter 9
on diversification and acquisitions starts this part, followed by strategies to structure and
innovate (Chapter 10), to govern the corporation around the world (Chapter 11), and to deal
with social responsibility (Chapter 12).
A unique organizing principle is a consistent focus on the strategy tripod and on the four
fundamental questions in all chapters. Opportunities and challenges in emerging markets
are highlighted. Ethics is emphasized throughout the book, in features marked “Ethical
Dilemma” and in discussion questions marked “On Ethics.” Starting with Chapter 2, “The
Savvy Strategist” section concludes every chapter, culminating in a one-slide “Strategic
Implications for Action” to drive home the important takeaways.
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24
PART 1
Foundations of Global Strategy
CHAPTER SUMMARY
1. Offer a basic critique of the traditional, narrowly defined
“global strategy.”
●●
The traditional and narrowly defined notion of
“global strategy” is characterized by the production
and distribution of standardized products and ser­
vices on a worldwide basis—in short, one size fits all.
This strategy has often backfired in practice.
●●
5. Understand the nature of globalization and semiglobalization.
2. Articulate the rationale behind studying global strategy.
●●
●●
To better compete in the corporate world that will
appreciate expertise in global strategy.
●●
3. Define what is strategy and what is global strategy.
●●
●●
There is a debate between two schools of thought:
strategy as plan and strategy as action. This book,
together with other leading textbooks, instead,
follows the strategy as integration school.
In this book, strategy is defined as a firm’s theory about
how to compete successfully, while global strategy is
defined as strategy of firms around the globe.
●●
Some view globalization as a recent phenomenon,
whereas others believe that it has been evolving
since the dawn of human history.
We suggest that globalization is best viewed as a
process similar to the swing of a pendulum.
Semiglobalization is a perspective that suggests that
barriers to market integration at borders are high
but not high enough to completely insulate coun­
tries from each other.
6. Participate in three debates concerning globalization and
4. Outline the four fundamental questions in strategy.
●●
the scope of the firm? (4) What determines the suc­
cess and failure of firms around the globe?
The three leading perspectives guiding our explo­
ration are industry-based, resource-based, and
institution-based views, which collectively form a
strategy tripod.
The four fundamental questions are: (1) Why do firms
differ? (2) How do firms behave? (3) What determines
global strategy.
●●
(1) Globalization versus deglobalization, (2) strategic
versus nonstrategic industries, and (3) just-in-time
versus just-in-case management.
KEY TERMS
Balanced scorecard 15
Global value chain 22
Stakeholder 15
Base of the pyramid (BoP) 18
Globalization 17
Strategic leadership 11
Black swan event 19
Information overload 15
Strategic management 6
BRIC 18
Intended strategy 6
Strategy 6
BRICS 18
Leadership 11
Strategy as action 6
Business model 5
Microfoundation 12
Strategy as integration 7
Chief executive officer (CEO) 11
Mission 11
Strategy as plan 6
Competitive advantage 15
Multinational enterprise (MNE) 4
Strategy formulation 8
Emergent strategy 7
Organizational slack 23
Strategy implementation 8
Emerging economy 18
Replication 9
Strategy tripod 14
Emerging market 18
Reverse innovation 18
SWOT analysis 8
Foreign direct investment (FDI) 4
Risk management 19
Top management team (TMT) 11
Frugal innovation 18
Scenario planning 19
Triple bottom line 15
Global strategy 17
Semiglobalization 20
Vision 11
CRITICAL DISCUSSION QUESTIONS
1. A skeptical classmate says: “Global strategy is relevant
for top executives such as CEOs in large companies. I am
just a lowly student who will struggle to gain an entry-
level job, probably in a small company. Why should I care
about it?” How do you convince her that she should care
about global strategy?
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Chapter 1 Strategizing Around the Globe
2. ON ETHICS: Some argue that globalization has gone too
far. Others argue that globalization, despite its imperfections, makes the world better. What are the ethical dilemmas in each position? What do you think?
25
3. ON ETHICS: Critics argue that MNEs, through FDI, both
exploit the poor in poor countries and take jobs away from
rich countries. If you were the CEO of an MNE from a
developed economy or from an emerging economy, how
would you defend your firm’s FDI?
TOPICS FOR EXPANDED PROJECTS
1. The 2020 coronavirus crisis has been devastating. However,
not all industries and not all firms have suffered. Some may
have profited from these events. Why have some industries
and some firms profited from the crisis?
3. ON ETHICS: What are some of the darker sides asso-
ciated with globalization? Why are negative attitudes
toward globalization growing in some parts of the world?
Since the swing of the pendulum is likely to move toward
the “deglobalization” direction, how can strategists make
sure that the benefits of their various actions outweigh
their drawbacks?
2. As the CEO of a fast-moving firm (such as Zoom), use the
strategy tripod to analyze what the leading challenges for
your firm’s internationalization will be.
CLOSING CASE
Emerging Markets
Ethical Dilemma
Two Scenarios of the Global Economy in 2050
Two scenarios about the future of the global economy in
2050 have emerged. Known as “continued globalization,”
the first scenario is a (relatively) rosy one. Spearheaded
by Goldman Sachs, whose chairman of its Asset Management Division, Jim O’Neil, coined the term “BRIC” more
than two decades ago, this scenario suggests that—in
descending order—China, the United States, India, Brazil,
FIGURE 1.6
and Russia will become the largest economies by 2050
(Figure 1.6). BRIC countries together may overtake the
United States by 2025 and the Group of Seven (G-7—
Britain, Canada, France, Germany, Italy, Japan, and the
United States) by 2032, and China may individually
dethrone the United States by 2026. In purchasing power
parity (PPP) terms, BRIC’s share of global GDP, which rose
BRIC and the United States will Become the Largest Economies by 2050
60,000
2010 US$ billion
50,000
2050 GDP
40,000
30,000
20,000
10,000
China
N–11
US
India
Euro area
Africa
Brazil
Russia
Japan
Mexico
Indonesia
UK
France
Germany
Nigeria
Turkey
Egypt
Canada
Italy
Iran
Philippines
Spain
Korea
Saudi Arabia
Australia
Argentina
Malaysia
Colombia
Thailand
Vietnam
Poland
South Africa
Bangladesh
0
Source: Goldman Sachs, 2012, An update on the long-term outlook for the BRICs and beyond, Monthly Insights from the Office
of the Chairman, Goldman Sachs Asset Management, January: 3. “N-11” refers to the Next Eleven identified by Goldman Sachs:
Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, and Vietnam.
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26
PART 1
Foundations of Global Strategy
from 18% in 2001 to 25% currently, may reach 40% by 2050.
In addition, by 2050, the Next Eleven (N-11) as a group may
become significantly larger than the United States and almost twice the size of the Euro area.
Goldman Sachs’s predictions have been largely supported by other influential forecasting studies. For example, the
Organization for Economic Cooperation and Development
(OECD) predicted that by 2060, China, India, and the United
States will become the top three economies. The combined
GDP of China and India will be larger than that of the entire
OECD area. In 2011, China and India accounted for less than
one-half of GDP of the G-7. By 2060, the combined GDP
of China and India may be 1.5 times larger than the G-7.
India’s GDP will be a bit larger than the United States’, and
China’s a lot larger.
Despite such dramatic changes, one interesting constant
is the relative rankings of per capita income. Goldman
Sachs predicted that by 2050, the G-7 countries will still
be the richest, led by the United States, Canada, and the
United Kingdom (Figure 1.7). Ranked eighth globally
($63,486—all dollar figures in this case refer to 2010 US
dollars), Russia may top the BRIC group, with per capita
income approaching that of Korea. By 2050, per capita
income in China ($40,614) and India ($14,766) will continue
to lag behind that in developed economies—at, respectively,
47% and 17% of the US level ($85,791). These predictions
were supported by OECD, which noted that by 2060, Chinese
and Indian per capita income would only reach 59% and 27%
of the US level, respectively.
Underpinning this scenario of “continued globalization”
are three assumptions: (1) emerging economies as a group
will maintain strong (albeit gradually reduced) growth;
(2) geopolitical events and natural disasters (such as climate changes) will not create significant disruption; and
(3) regional, international, and supranational institutions
will continue to function reasonably. Globalization amplifies inequality and disruption, and this scenario envisions
a path of growth that is perhaps more volatile than that of
the first two decades of the 21st century. But ultimately this
scenario leads to considerably higher levels of economic
integration and much higher levels of incomes in countries
nowadays known as emerging economies.
The second scenario can be labeled “deglobalization.”
It is characterized by (1) prolonged pandemics, recessions,
high unemployment, droughts, climate shocks, disrupted
food supply, and conflicts over energy (such as water
wars) on the one hand; and (2) public unrest, protectionist policies, and the unraveling of certain institutions that
we take for granted (such as the EU and NAFTA/USMCA)
on the other hand. As protectionism rises, global economic
integration suffers. Value chains become more regional and
less global. Withdrawing from operations abroad and coming home become a leading corporate movement. “Delinking” of the US and Chinese economies would switch to
high gear after the 2020 coronavirus. Numerous foreigninvested factories in China would move to Southeast Asia,
Africa, Mexico, and elsewhere. The United States would
endeavor to make not only jetliners but also face masks.
FIGURE 1.7 The Rankings of Per Capita Income Remain Relatively Unchanged
90,000
80,000
2050 GDP per capita
2010 US$/capita
70,000
60,000
50,000
40,000
30,000
20,000
10,000
US
Canada
UK
France
Germany
Euro area
Japan
Korea
Russia
Italy
Turkey
Mexico
Brazil
China
Iran
BRIC
South Africa
N–11
Egypt
Morocco
Vietnam
Indonesia
Philippines
India
Africa
Nigeria
Pakistan
Bangladesh
Tanzania
Uganda
Ethiopia
Congo
0
Source: Goldman Sachs, 2012, An update on the long-term outlook for the BRICs and beyond (p. 4), Monthly Insights from the Office
of the Chairman, Goldman Sachs Asset Management January: 4. See footnote to Figure 1.6 for N-11.
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Chapter 1 Strategizing Around the Globe
An Apple smartphone, completely made in the United
States, would cost more than $2,000.
The upshot? Weak economic growth around the world.
During the lockdowns in 2020, people did not travel, did
not eat at restaurants, and did not buy cars. A 40%–50%
drop in discretionary spending could result in at least 10%
reduction in GDP. The impact of the coronavirus-induced
recession is worse than that of the Great Recession of
2008–2009, and the recovery has been slow. While global
deintegration would harm economies worldwide, regional
deintegration would harm countries of Europe. Brexit will
make Britain a weaker economy. Unable to keep growing sustainably, BRICS may become “broken bricks” and
fail to reach their much-hyped potential. In the 1950s and
1960s, Russian economic growth was also very impressive, fueling Soviet geopolitical ambitions that eventually
turned out to be unsupportable. In the 1960s, Burma (now
Myanmar), the Philippines, and Sri Lanka were widely anticipated to become the next Asian Tigers, only to falter
badly. Over the long course of history, it is rare to sustain
strong growth in a large number of countries over more
than a decade. It is true that the first decade of the 21st
century—prior to the Great Depression of 2008–2009—
witnessed some spectacular growth in BRIC and many
other emerging economies. However, “failure to sustain
growth has been the general rule historically,” according
to a pessimistic expert.
In both scenarios, one common prediction is that
global competition will heat up. Competition under the
“deglobalization” scenario would be especially brutal since
the total size of the “pie” will not be growing sufficiently
(if not negatively). At the same time, firms would operate
in partially protected markets, which result in additional
costs for market penetration. Competition under the “continued globalization” scenario would also be intense, but in
27
different ways. The hope is that a rising “tide” may be able
to lift “all boats.”
Sources: (1) A. Cuervo-Cazurra, J. Ganitsky, Y. Luo, & J. Mezias,
2016, Global strategy and emerging markets, AIB Insights 16: 1–6;
(2) Economist, 2017, The retreat of the global company, January
28: 18–22; (3) Economist, 2019, A new kind of cold war, May 18:
special report; (4) Economist, 2020, Goodbye globalization, May
16: 7; (5) Foresight Horizon Scanning Centre, 2009, World Trade:
Possible Futures, London: UK Government Office for Science;
(6) C. Layne, 2012, This time it’s real: The end of unipolarity
and the Pax Americana, International Studies Quarterly 56:
203–213; (7) McKinsey Global Institute, 2019, Globalization in
Transition, January; (8) OECD, 2012, Looking to 2060, November;
(9) M. W. Peng & K. Meyer, 2013, Winning the Future Markets
for UK Manufacturing Output, consulting report, London: UK
Government Office for Science; (10) R. Sharma, 2012, Broken
BRICS, Foreign Affairs November: 2–7; (11) S. Smit, M. Hirt, &
K. Buchler, 2020, Safeguarding our lives and our livelihoods,
McKinsey Quarterly March; (12) F. Zakaria, 2020, The new China
scare, Foreign Affairs January: 52–69.
CASE DISCUSSION QUESTIONS
1. Which of the two scenarios is more plausible for the
global economy in 2050? Why?
2. From a resource-based view, what should firms do to
better prepare for the two scenarios?
3. ON ETHICS: From an institution-based view, what should
firms do to better prepare for the two scenarios? (HINT:
For example, if they believe in “continued globalization,”
they may be more interested in lobbying for reduced trade
barriers. But if they believe in “deglobalization,” they may
lobby for higher trade barriers.)
NOTES
[Journal Acronyms] AER—American Economic Review;
AMJ—Academy of Management Journal; AMLE—Academy
of Management Learning and Education; AMP—Academy of
Management Perspectives; AMR—Academy of Management
Review; APJM—Asia Pacific Journal of Management; BJM—
British Journal of Management; BW—Bloomberg Businessweek;
B&S—Business & Society; ETP—Entrepreneurship Theory and
Practice; FA—Foreign Affairs; GSJ—Global Strategy Journal;
HBR—Harvard Business Review; IBR—International Business Review; ICC—Industrial and Corporate Change; IJMR—
International Journal of Management Reviews; JEL—Journal
of Economic Literature; JIBP—Journal of International Business Policy; JIBS—Journal of International Business Studies;
JIM—Journal of International Management; JIMktg—Journal
of International Marketing; JM—Journal of Management;
JMS—Journal of Management Studies; JWB—Journal of
World Business; MBR—Multinational Business Review;
MIR—Management International Review; OSc—Organization
Science; S+B—Strategy + Business; SEJ—Strategic Entrepreneurship Journal; SMJ—Strategic Management Journal;
SO—Strategic Organization; SS—Strategy Science; WSJ—Wall
Street Journal
1. V. Govindarajan & A. Gupta, 2001, The Quest for Global
Dominance, San Francisco: Jossey-Bass; S. Tallman, 2009,
Global Strategy, West Sussex, UK: Wiley; G. Yip, 2003,
Total Global Strategy II, Upper Saddle River, NJ: Pearson
Prentice Hall.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
28
PART 1
Foundations of Global Strategy
2. J. Dunning, 1993, Multinational Enterprises and the
Global Economy (p. 30), Reading, MA: Addison-Wesley.
Other terms are multinational corporation (MNC) and
transnational corporation (TNC), which are often used
interchangeably with MNE. To avoid confusion, we will
use MNE throughout this book.
3. K. Macharzina, 2001, The end of pure global strategies?
(p. 106), MIR 41: 105–108.
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7. McKinsey Global Institute, 2019, Globalization in
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9: 3–18. See also M. Baer, K. Dirks, & J. Nickerson, 2013,
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 1 Strategizing Around the Globe
35.
36.
37.
38.
39.
40.
41.
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42–51; P. Rosenzweig, 2013, What makes strategic decisions different, HBR November: 89–93.
M. Augier, T. Knudsen, & R. McNab, 2014, Advancing the
field of organizations through the study of military organizations (p. 1433), ICC 23: 1417–1444.
R. Rumelt, D. Schendel, & D. Teece (eds), 1994, Fundamental Issues in Strategy (p. 564), Boston: Harvard
Business School Press.
McKinsey Global Institute, 2018, Outperformers, report.
M. W. Peng & P. Heath, 1996, The growth of the firm in
planned economies in transition, AMR 21: 492–528. See
also K. Meyer & M. W. Peng, 2016, Theoretical foundations of emerging economy business research, JIBS 47:
3–22; M. W. Peng, S. Lebedev, C. Vlas, J. Wang, & J. Shay,
2018, The growth of the firm in (and out of) emerging
economies, APJM 35: 829–851.
M. W. Peng, S. Sun, B. Pinkham, & H. Chen, 2009, The
institution-based view as the third leg for a strategy tripod,
AMP 23: 63–81. See also G. Gao, J. Murray, M. Kotabe,
& J. Lu, 2010, A “strategy tripod” perspective on export
behaviors, JIBS 41: 377–396; A. Gaur, X. Ma, & Z. Ding,
2018, Home country supportiveness/unfavorableness and
outward foreign direct investment from China, JIBS 49:
324–345; M. Ju, H. Zhao, & T. Wang, 2014, The boundary
conditions of export relational governance: A “strategy
tripod” perspective, JIMktg 22: 89–106; S. Lahiri,
D. Mukherjee, & M. W. Peng, 2020, Behind the internationalization of SMEs: A strategy tripod synthesis, GSJ
(in press); Z. Su, M. W. Peng, & E. Xie, 2016, A strategy tri-
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
29
pod perspective on knowledge creation capability, BJM 27:
58–76; Y. Xie, H. Zhao, Q. Xie, & M. Arnold, 2011, On the
determinants of post-entry strategic positioning of foreign
firms in a host market: A “strategy tripod” perspective,
IBR 20: 477–490; Y. Yamakawa, M. W. Peng, & D. Deeds,
2008, What drives new ventures to internationalize from
emerging to developed economies? ETP 32: 59–82.
M. W. Peng, D. Wang, & Y. Jiang, 2008, An institutionbased view of international business strategy, JIBS 39:
920–936. See also G. Ahuja & S. Yayavaram, 2011,
Explaining influence rents, OSc 22: 1631–1652; K. Meyer,
S. Estrin, S. Bhaumik, & M. W. Peng, 2009, Institutions,
resources, and entry strategies in emerging economies,
SMJ 30: 61–80; W. Ritchie & S. Melnyk, 2011, The impact
of emerging institutional norms on adoption timing
decisions, SMJ 32: 860–870; G. Shinkle & A. Kriauciunas,
2012, The impact of current and founding institutions on
strength of competitive aspirations in transition economies, SMJ 33: 448–458.
M. W. Peng, H. Nguyen, J. Wang, M. Hasenhuttl, & J. Shay,
2018, Bringing institutions into strategy teaching, AMLE
17: 259–273; C. Stevens, E. Xie, & M. W. Peng, 2016,
Toward a legitimacy-based view of political risk, SMJ
37: 945–963; D. Zoogah, M. W. Peng, & H. Woldu, 2015,
Institutions, resources, and organizational effectiveness in
Africa, AMP 29: 7–31.
T. Khanna & Y. Yafeh, 2007, Business groups in emerging
markets, JEL 45: 331–372; M. W. Peng, S. Lee, & D. Wang,
2005, What determines the scope of the firm over time?
AMR 30: 622–633.
Y. Li, M. W. Peng, & C. Macaulay, 2013, Market-political
ambidexterity during institutional transitions, SO 11:
205–213; M. W. Peng, W. Sun, C. Vlas, A. Minichilli, & G.
Corbetta, 2018, An institution-based view of large family
firms, ETP 42: 187–205.
G. Qian, T. Khoury, M. W. Peng, & Z. Qian, 2010, The
performance implications of intra- and inter-regional
geographic diversification, SMJ 31: 1018–1030.
M. W. Peng, 2004, Identifying the big question in international business research, JIBS 25: 99–108.
K. Brouthers, L. Brouthers, & S. Werner, 2008, Resourcebased advantage in an international context, JM 34:
189–217; C. Chan, T. Isobe, & S. Makino, 2008, Which
country matters? SMJ 29: 1179–1205; G. Markman,
T. Waldron, & A. Panagopoulos, 2016, Organizational
hostility, AMP 30: 74–92.
C. Chen, M. Delmas, & M. Lieberman, 2015, Production
frontier methodologies and efficiency as a performance
measure in strategic management research, SMJ 36: 19–36.
Y. Luo, J. Sun, & S. Wang, 2011, Comparative strategic
management, JIM 17: 190–200; G. White, O. Gudiken,
T. Hemphill, W. He, & M. Khoobdeh, 2016, Trends in
international strategic management research from 2000 to
2013, MIR 56: 35–65.
S. Tallman & T. Pedersen, 2015, What is international
strategy research and what is not? GSJ 5: 273–277.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
30
PART 1
Foundations of Global Strategy
52. K. Moore & D. Lewis, 2009, The Origins of Globalization,
New York: Routledge.
53. D. Yergin & J. Stanislaw, 2002, The Commanding Heights
(p. 385), New York: Simon & Schuster.
54. J. Stiglitz, 2002, Globalization and Its Discontents (p. 9),
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55. R. Hoskisson, M. Hitt, W. Pan, & D. Yiu, 1999, Theory and
research in strategic management: Swings of a pendulum,
JM 25: 417–456.
56. M. Wright, I. Filatotchev, R. Hoskisson, & M. W. Peng,
2005, Strategy research in emerging economies, JMS 42:
1–33. See also C. Christensen, E. Ojomo, & K. Dillon,
2019, Cracking frontier markets, HBR January: 90–101; A.
Musacchio & E. Werker, 2016, Mapping frontier economies, HBR December: 40–48.
57. C. K. Prahalad & S. Hart, 2002, The fortune at the bottom
of the pyramid, S+B 26: 54–67; L. Christensen, E. Siemsen,
& S. Balasubramanian, 2015, Consumer behavior change
at the base of the pyramid, SMJ 36: 307–317.
58. R. Hoskisson, M. Wright, I. Filtotchev, & M. W. Peng, 2013,
Emerging multinationals from mid-range economies, JMS
50: 1295–1321; M. W. Peng, 2012, The global strategy of
emerging multinationals from China, GSJ 2: 97–107.
59. V. Govindarajan & C. Trimble, 2012, Reverse Innovation
(p. 4), Boston: Harvard Business Review Press. See also
S. Bradley, J. McMullen, K. Artz, & E. Smimiyu, 2012,
Capital is not enough, JMS 49: 684–717; C. Christensen,
E. Ojomo, & D. van Bever, 2017, Africa’s new generation of innovators, HBR January: 119–136; A. Winter &
V. Govindarajan, 2015, Engineering reverse innovations,
HBR July: 81–89.
60. L. Casanova & A. Miroux, 2020, The Era of Chinese
Multinationals, San Diego: Academic Press; A. CuervoCazurra, A. Inkpen, A. Musacchio, & K. Ramaswamy,
2014, Governments as owners, JIBS 45: 919–942; P. Deng,
A. Delios, & M. W. Peng, 2020, A geographic relational
perspective on the internationalization of emerging market firms, JIBS 51: 50–71; J. Duanmu, 2014, State-owned
MNCs and host country expropriation risk, JIBS 45:
1044–1060; M. McCormick & D. Somaya, 2020, Born
globals from emerging economies, GSJ 10: 251–281; S.
Lebedev, M. W. Peng, E. Xie, & C. Stevens, 2015, Mergers
and acquisitions in and out of emerging economies, JWB
50: 651–662.
61. M. W. Peng, R. Bhagat, & S. Chang, 2010, Asia and global
business, JIBS 41: 373–376.
62. K. Li, 2017, Economic openness serves everyone better,
BW February 2: 8. Li Keqiang is the premier in President
Xi Jinping’s administration, and this is the first time that a
sitting Chinese politician contributed an article to
Bloomberg Businessweek, the most widely circulated weekly
business and economic magazine in the United States.
63. Economist, 2020, After the disease, the debt, April 25: 7.
64. T. Andersen & R. Bettis, 2015, Exploring longitudinal risk-return relationships, SMJ 36: 1135–1145; A.
65.
66.
67.
68.
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72.
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74.
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76.
77.
Chakrabarti, 2015, Organizational adaptation in an economic shock, SMJ 36: 1717–1738; D. De Carolis, Y. Yang,
D. Deeds, & E. Nelling, 2009, Weathering the storm, SEJ
3: 147–160; S. Li & S. Tallman, 2011, MNC strategies,
exogenous shocks, and performance outcomes, SMJ
32: 1119–1127; C. Oh & J. Oetzel, 2011, Multinationals’
response to major disasters, SMJ 32: 658–681; V. Pereira,
Y. Tamouri, S. Patnaik, & K. Mellahi, 2020, Managing
and preparing for emerging infectious diseases, AMP (in
press); C. Rice & A. Zegart, 2018, Managing 21st-century
political risk, HBR May: 130–138.
The origin of the term “black swan” dates to ancient
Rome, which meant a “rare bird” that was presumed not
to exist. This term used to mean impossibility. However, it
played an important role in the development of scientific
thought, because a scientific theory such as “all swans are
white” could be refuted by the discovery of a single black
swan. In the 1700s, black swans were indeed discovered in
Western Australia, falsifying the previous theory that all
swans were white. See N. Taleb, 2007, Black Swan, London:
Penguin.
H. Courtney, D. Lovallo, & C. Clarke, 2013, Deciding how
to decide, HBR November: 63–70; S. Phadnis, C. Caplice,
Y. Sheffi, & M. Singh, 2015, Effect of scenario planning
on field experts’ judgment of long-range investment
decisions, SMJ 36: 1401–1411; P. Schoemaker & P. Tetlock,
2016, Superforecasting, HBR May: 73–78; G. Stalk & A.
Iyer, 2016, How to hedge your strategic bets, HBR May:
81–86.
P. Ghemawat, 2003, Semiglobalization and international
business strategy, JIBS 34: 138–152.
T. Friedman, 2005, The World is Flat, New York: Farrar,
Straus, & Giroux.
J. Kim & R. Aguilera, 2015, The world is spiky, GSJ 5:
113–132.
M. W. Peng & E. Pleggenkuhle-Miles, 2009, Current
debates in global strategy, IJMR 11: 51–68.
Clinton and Blair’s words are quoted in D. Rodrik, 2019,
Globalization’s wrong turn (p. 27), FA July: 26–33.
D. Autor, D. Dorn, & G. Hanson, 2003, The China
syndrome, AER 103: 2121–2168.
T. Devinney & C. Hartwell, 2020, Varieties of populism,
GSJ 10: 32–66; D. Rodrik, 2018, Populism and the economics of globalization, JIBP 1: 12–33; M. Witt, 2019,
De-globalization, JIBS 50: 1053–1077.
S. Lund & L. Tyson, 2018, Globalization is not in retreat,
FA May: 130–140.
Economist, 2020, Globalization under quarantine, February
29: 35.
McMillon, 2017, We need people to lean into the future
(p. 99), op. cit.
O. Butzbach, D. Fuller, & G. Schnyder, 2020, Manufacturing discontent, GSJ 10: 67–93; V. Marano, S. Tallman,
& H. Teegen, 2020, The liability of disruption, GSJ 10:
174–209.
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Chapter 1 Strategizing Around the Globe
78. M. W. Peng, 2006, Global Strategy (p. 29), Boston:
Cengage.
79. Rodrik, 2019, Globalization’s wrong turn (p. 30), op. cit.
80. T. Ambos, B. Cesinger, F. Eggers, & S. Kraus, 2020, How
does de-globalization affect location decisions? GSJ 10:
210–236; A. Cuervo-Cazurra, Y. Doz, & A. Gaur, 2020,
Skepticism of globalization and global strategy, GSJ
10: 3–31; L. Dai, L. Eden, & P. Beamish, 2017, Caught
in the crossfire, SMJ 38: 1478–1498; R. de Figueiredo,
E. Feldman, & E. Rawley, 2019, The costs of refocusing,
SMJ 40: 1268–1290; K. Meyer, 2017, International business
in an era of anti-globalization, MBR 25: 78–90;
O. Petricevic & D. Teece, 2019, The structural reshaping of globalization, JIBS 50: 1487–1512; A. Verbeke, R.
Coeurderoy, & T. Matt, 2018, The future of international
business research on corporate globalization that never
was . . . JIBS 49: 1101–1112.
81. Economist, 2020, Strategic pile-up, April 11: 52.
82. BW, 2020, The US Postal Service has never been more
important—or more endangered, April 20: 46–51.
83. BW, 2020, 3M meets the crisis it’s been preparing for,
March 30: 39–41; BW, 2020, Swabs, stat! March 30: 42–47.
84. Benito, G., Petersen, B., & Welch, L. 2019, The global value
chain and internalization theory, JIBS 50: 1414–1423;
F. Fortanier, G. Miao, A. Kolk, & N. Pisani, 2020, Accounting for firm heterogeneity in global value chains,
JIBS 51: 432–453; G. Gereffi, 2019, Global value chains
and international development policy, JIBP 2: 195–210;
85.
86.
87.
88.
89.
31
L. Kano, E. Tsang, & H. Yeung, 2020, Global value chains,
JIBS (in press).
R. Stone, 2004, Leading a supply chain turnaround
(p. 116), HBR October: 114–121.
T. Choi, D. Rogers, & B. Vakil, 2020, Coronavirus is a
wake-up call for supply chain management, HBR (in
press); Y. Kim & G. Davis, 2016, Challenges for global
supply chain sustainability, AMJ 59: 1896–1916.
C. Stan, M. W. Peng, & G. Bruton, 2014, Slack and the
performance of state-owned enterprises, APJM 31:
473–495; J. Tan & M. W. Peng, 2003, Organizational slack
and firm performance during economic transitions, SMJ
24: 1249–1263; W. Wan & D. Yiu, 2009, From crisis to
opportunity, SMJ 30: 791–801.
H. Bapuji, F. de Bakker, J. Brown, C. Higgins, K. Rehbein, &
A. Spicer, 2020, Business and society research in times of
the corona crisis, B&S (in press); G. George, J. HowardGrenville, A. Joshi, & L. Tihanyi, 2016, Understanding and
tackling societal grand challenges through management
research, AMJ 59: 1880–1895; K. Miller & S. Lin, 2015,
Analogical reasoning for diagnosing strategic issues in
dynamic and complex environments, SMJ 36: 2000–2020;
R. Priem, 2018, Toward becoming a complete teacher of
strategic management, AMLE 17: 374–388.
BW, 2020, Wanted: More risk managers, April 20: 36–37;
W. Frick, 2019, How to survive a recession and thrive
afterward, HBR May: 98–105; WSJ, 2019, Trade skills are
hot commodity, October 3: B6.
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER
2
iStock.com/golero
Managing Industry Competition
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Define industry competition
2. Analyze an industry using the five forces framework
3. Articulate the three generic strategies
4. Understand the six leading debates concerning the industry-based view
5. Draw strategic implications for action
32
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OPENING CASE
Emerging Markets
Global Competition in the Cruise Industry
The cruise industry is the second life of the ocean
liner industry. Eclipsed by jets, the last ocean liners
stopped service in the 1980s. The modern cruise
industry began in the 1960s when the Big Three—
Norwegian, Carnival, and Royal Caribbean cruise
lines, all headquartered in Miami—were launched
and dedicated to vacation cruises, not transportation. In 1977, ABC started its weekly Love Boat television series, which became a decade-long unpaid
commercial for the fledgling industry. Portrayed as
a blend of fun and romance, the cruise industry gra­
dually gained popularity beginning in the 1980s.
Geographically, competition is literally global. The
key markets are the Caribbean, Alaska, Mexico, and
Europe. The hottest new market is Asia, primarily
China, which may become the second-largest market for cruise passengers behind the United States
when you read the case. A vast majority of cruises
are international, stopping at ports in multiple countries. Only a few cruises, such as those around the
Hawaiian islands, are domestic. A large, modern
cruise ship is essentially a hotel, multiple restaurants
and bars, swimming pools, a shopping center, a casino, a theater, a sports center, an art gallery, a kids
center, and a travel agency all combined into one.
The complexities of the operations—dealing with
port authorities, tour operators, and employees
from around the world (typically dozens of nationalities are employed)—are mind-boggling. The three
earliest entrants are the Big Three incumbents—led
by Carnival—that still dominate the competition,
attracting 80% of the passengers. Nicknamed “Carnivore,” Carnival has acquired many smaller lines
such as Costa, Cunard, Holland America, P&O, and
Princess, which have been called brands. Combined,
Carnival’s brands have 47% of the passenger market
share. Royal Caribbean is the second largest cruise
operator (23%), followed by Norwegian (10%).
Initially, the industry was serviced by redundant
ocean liners. By the 1990s, purpose-built megaships increasingly entered service. Every year since 2001, nine
or more new cruise ships hit the waves. Costing more
than $1 billion each, most of these megaships were
100,000 tons or greater—larger than the Nimitz-class
aircraft carrier. The new ones keep getting bigger.
The world’s largest are Royal Caribbean’s Oasis of the
Seas and Allure of the Seas, each at 225,000 tons with
2,700 cabins and room for 5,400 passengers. Megaships
are more profitable because they enable cruise lines to
spread fixed costs across more customers.
The glamor of the industry has attracted many entrants. Yet entry barriers are high, and successes rare.
Between 1966 and 2008, 88 firms entered the US
market, but 77 either dropped out or dropped dead.
A new entrant since 1989, Switzerland-based MSC
Cruises took ten years to establish itself, ultimately
becoming the world’s fourth-largest cruise operator.
MSC Cruises was able to do this only because its
parent company, Mediterranean Shipping Company
(MSC), was willing to subsidize such money-losing indulgences in the beginning.
Suppliers to the cruise industry are shipbuilders
and their suppliers. Although China, South Korea, and
Japan—in this order—are the world’s top three shipbuilding nations (of all kinds of ships), European shipbuilders have maintained their excellence in constructing and servicing the floating vacationlands. Of the
32 cruise ships on order, 30 are being built in
Europe—specifically, Finland, France, Germany, and
Italy. Shipbuilders are eager to bid for cruise ship
contracts, because of the reduced demand for other
oceangoing cargo ships, first thanks to the Global
Financial Crisis of 2008–2009 and more recently to
the trade wars of 2018–2019.
Buyers of cruises number approximately 22 million
every year, led by 12 million from America and six
million from Europe. The typical passengers—in the
colorful language of the Economist magazine—are
“newly-weds, nearly-deads, and over-feds.” Cruise
lines attract them not only with world-class destinations, food choices, and family friendliness, but also
with a variety of on-board activities such as entertainment, gambling, shopping, and sports. Every year,
approximately 3.5% of the US and Australian populations take cruises. While only 1/60th of the Chinese
population cruise (fewer than one million every year),
the number of cruises from Chinese ports has been
growing by double digits recently.
33
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34
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
OPENING CASE
(Continued)
As vacation service providers, cruise ships compete with
a variety of transportation substitutes such as jets, trains,
and motor coaches (buses), as well as establishment substitutes such as hotels, restaurants, and tourist attractions. Yet,
cruise ships offer an impossible-to-imitate advantage: The
hotel (the ship) conveniently goes with the passengers, who
are delivered to the next city while sleeping at night. Certain coastal areas of the world are most ideal for such seaborne tourism. For example, consider a week-long cruise
throughout the Baltic Sea (stopping in Copenhagen, Rostock
[Germany], Tallinn, St. Petersburg, Helsinki, and Stockholm)
or the Strait of Malacca (stopping in Singapore, Penang,
Langkawi, and Phuket). Imagine the hassle of flying or taking
train rides to that many locations, finding local transportation,
checking into multiple hotels (with all that packing and unpacking!), and then at the end of touring one city struggling in
the middle of local traffic to get to the airport or train station
several hours before departure time. In comparison, cruise
passengers, after a good night’s sleep while sailing, arrive at
each location bright and early, leisurely stroll off the ship, enjoy the sites stress-free, and come back to the ship before
dinner, which is usually served while the ship commences its
run to the next port. It is not surprising that more vacationers
are attracted by this mode.
Despite the glamour, captains of this industry know
that they need steel stomachs to navigate the waters infested by love boats—indeed, too many of them. Two issues loom large on the horizon. First, competition among
the survivors now focuses on who can fill an armada of
bigger, fancier vessels. However, mass tourism has its limits. Given the crowding in hunting for a table at cafeteria
or fighting for a “beach chair” near the on-board swimming pool, Royal Caribbean is actually “Commoners’
Caribbean,” according to one passenger. Many would-be
passengers may be scarred away by the ordeal of the
passengers on Diamond Princess and Grand Princess
during the 2020 coronavirus outbreak. Thanks to their
proximity on a ship, a single case of coronavirus ended
up spreading to hundreds of passengers, forcing the authorities to quarantine all passengers inside their cabin
rooms on board the ship for two weeks. As a result, many
cruise lines had to suspend their cruises in 2020. Second,
the Big Three essentially offer English language-based
cruises throughout the world, with some local adaptation (for example, with more Chinese-speaking staff
for cruises in the Asia Pacific). Such a lack of differentiation is making room for Hapag-Lloyd’s single-language
(German) ships to gain market share in Germany.
Single-language ships in Chinese and Japanese are also
emerging in Asia, aiming to eat Big Three’s lunch. While
the industry is indeed global, each cruise, by definition,
is local. How the Big Three and other aspiring cruise
lines can effectively “think global” and “act local” at the
same time is likely to be a key determinant on who will
rule the waves in the future.
Sources: (1) The author’s interviews on board Carnival, Norwegian, Princess, and Royal Caribbean ships, 2008–2019;
(2) Bloomberg Businessweek, 2014, Asia is getting its own love
boats, June 2: 20–21; (3) Bloomberg Businessweek, 2015, The
People’s Republic of Cruiseland, April 27: 50–57; (4) J. Daniels,
L. Radebaugh, & J. Sullivan, 2013, International Business,
14th ed., Upper Saddle River, NJ: Prentice Hall; (5) Economist,
2014, Sailing into headwinds, January 11: 56–57; (6) Princess
Cruise Lines, 2020, Updates on Diamond Princess, www.
princess.com; (7) Wall Street Journal, 2019, Making 180,000
tons feel cozy at sea, December 19: A11.
H
ow can the cruise industry grow out of the ocean liner industry, which has now
disappeared? How do cruise lines in this industry compete? Why are new entrants
interested in joining the waves? How do cruise lines deal with suppliers and customers? Finally, are there any substitutes for cruising? This chapter addresses these and
other strategic questions. We accomplish this by introducing the industry-based view,
which is one of the three leading perspectives on strategy. (The other two, resource-based
and institution-based views, will be covered in Chapters 3 and 4, respectively.)
As noted in Chapter 1, a basic strategy tool is SWOT analysis, which deals with
internal strengths (S) and weaknesses (W) as well as environmental opportunities (O)
and threats (T). The focus of this chapter is O and T from the industry environment,
S and W will be discussed in Chapter 3. We start by defining industry competition.
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 2
Managing Industry Competition
35
Then the five forces framework will be introduced, followed by a discussion of three
generic strategies. Finally, we outline six leading debates.
Defining Industry Competition
An industry is a group of firms producing products (goods and/or services) that are similar to
each other. The traditional understanding is based on a 1776 book published by Adam Smith,
the founding father of the economics discipline, The Wealth of Nations. The book portrayed
a model of perfect competition, in which price is set by the invisible hand known as the
“market,” where all firms are small price takers, no firm is large enough to dictate pricing,
and market entry is relatively easy. However, such perfect competition is rarely observed in
the real world. In the real world, some firms can be large, and some even dominant. They
have the ability to throw their weight around, making new entry difficult. Consequently,
since the 1930s, a more realistic branch of economics, called industrial organization (IO)
economics (or industrial economics), has emerged to focus on larger firms. Its primary
contribution is a structure-conduct-performance (SCP) model. Structure refers to the
structural attributes of an industry (such as the cost of entry). Conduct is firm actions (such
as product differentiation). Performance is the result of firm conduct in response to industry
structure, which can be classified as (1) average (normal), (2) below-average, and (3) aboveaverage. The model suggests that industry structure determines firm conduct (or strategy),
which, in turn, determines firm performance.1
However, the goal of IO economics is not to help firms compete. Instead, as a branch
of economics, it is to help policy makers better understand how firms compete so policy
makers can properly regulate them. In terms of the number of firms in one industry, there is
a continuum ranging from thousands of small firms in perfect competition to only one firm
in a monopoly. In between, there may be an oligopoly with only a few players or a duopoly
with two competitors. Small firms can only hope to earn average returns at best, whereas
monopolists, oligopolists, and duopolists may earn above-average returns. Economists and
policy makers are usually alarmed by above-average returns, which they label excess profits.
Monopoly is usually outlawed and oligopoly scrutinized.
An intense focus on above-average firm performance is shared by IO economics and
strategy. However, IO economists and policy makers are concerned with the minimization
rather than the maximization of above-average profits. The name of the game, from the
perspective of strategists in charge of profit-maximizing firms, is exactly the opposite—to
try to earn above-average returns (of course, within legal and ethical boundaries). Therefore,
strategists have turned the SCP model upside down by drawing on its insights to help firms
perform better.2 This transformation comprises the heart of this chapter.
The Five Forces Framework
The industry-based view of strategy is underpinned by the five forces framework, which was
first advocated by Michael Porter (a Harvard strategy professor who is an IO economist by
training) and later extended and strengthened by numerous others. This section introduces
this framework.
From Economics to Strategy
Leveraging decades of IO economics research, Porter in a 1980 book, Competitive Strategy,
“translated” and extended the SCP model for strategy audiences.3 The five forces framework
from this book forms the backbone of the industry-based view. Shown in Figure 2.1, these five
forces are (1) the intensity of rivalry among competitors, (2) the threat of entrants, (3) the bargaining power of suppliers, (4) the bargaining power of buyers, and (5) the threat of substitutes.
A key insight is that firm performance critically depends on the degree of competitiveness of
these five forces within an industry. The stronger and more competitive these forces are, the
less likely the focal firm will be able to earn above-average returns, and vice versa (Table 2.1).
industry
A group of firms producing
products (goods and/or
services) that are similar to
each other.
perfect competition
A competitive situation in
which price is set by the
“market,” all firms are price
takers, and entries and exits
are relatively easy.
industrial organization
(IO) economics (industrial
economics)
A branch of economics that
seeks to better understand
how firms in an industry
compete and then how to
regulate them.
structure-conductperformance (SCP) model
An industrial organization
economics model that suggests that industry structure
determines firm conduct
(strategy), which in turn determines firm performance.
structure
Structural attributes of an
industry such as the cost of
entry.
conduct
Firm actions such as product differentiation.
performance
The result of firm conduct.
monopoly
A situation whereby only one
firm provides the goods and/
or services for an industry.
oligopoly
A situation whereby a few
firms control an industry.
duopoly
A special case of oligopoly
that has only two players.
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36
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
five forces framework
A framework governing
the competitiveness of
an industry proposed by
Michael Porter. The five
forces are (1) the intensity of
rivalry among competitors,
(2) the threat of entrants,
(3) the bargaining power of
suppliers, (4) the bargaining
power of buyers, and (5) the
threat of substitutes.
FIGURE 2.1 The Five Forces Framework
Rivalry among
competitors
Threat of
substitutes
Threat of
entrants
Industry
competitiveness
Bargaining
power of buyers
TABLE 2.1
Bargaining
power of suppliers
Threats of the Five Forces
Five Forces
Rivalry among
competitors
Threats Indicative of Strong Competitive Forces that Can
Depress Industry Profitability
●●
●●
●●
●●
●●
●●
Threat of entrants
●●
●●
●●
●●
●●
●●
Bargaining power of
suppliers
●●
●●
●●
Bargaining power of
buyers
●●
●●
●●
Threat of substitutes
●●
●●
A large number of competing firms
Rivals are similar in size, influence, and product offerings
High-price, low-frequency, “big ticket” purchases
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
Insufficient product differentiation
Little fear of retaliation because of focal firm’s lack of excess
capacity
No government policy banning or discouraging entry
A small number of suppliers
Suppliers provide unique, differentiated products
Suppliers are willing and able to vertically integrate
forward
A small number of buyers
Buyers purchase standard, undifferentiated products from
focal firm
Buyers are willing and able to vertically integrate backward
Substitutes are superior to existing products in quality and
function
Switching costs to use substitutes are low
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Chapter 2
Managing Industry Competition
Rivalry among Competitors
Actions indicative of a high degree of rivalry include (1) frequent price wars, (2) proliferation
of new products, (3) intense advertising campaigns, and (4) high-cost competitive actions
and reactions (such as honoring all competitors’ coupons). Such intense rivalry reduces
profits.4 The key question is: What conditions lead to intense rivalry?
At least six sets of conditions emerge (Table 2.1). First, the number of competitors is crucial. The more concentrated an industry is, the fewer competitors there will be, and the more
likely those competitors will recognize their mutual interdependence and, thus, restrain
their rivalry. In the automobile industry, the few ultraluxury automakers such as Ferrari,
Lamborghini, and Rolls-Royce do not engage in intense competitive actions (such as deep
discounts) typically found among mass-market competitors.
Second, rivals of similar size, market influence, and product offerings often vigorously
compete with each other. This is especially true for firms unable to differentiate their pro­
ducts, such as airlines. In contrast, the presence of a dominant player lessens rivalry because
it can set industry-wide prices and discipline behaviors deviating too much from the price
norm. De Beers in the diamond industry is one such example.
Third, in industries whose products are “big tickets” and purchased infrequently (such as
cars, mattresses, and motorcycles), it may be difficult to establish dominance (the market
leader has a very large market share). Without a dominant market leader, the upshot is more
intense rivalry. In contrast, it may be relatively easier for leading firms to dominate in staple
goods industries with lower-priced, more frequently purchased products (such as beers and
tissues).5 This is because consumers for staple goods do not spend much time doing research
on their purchase decisions and find it convenient to stick with well-known brands. On the
other hand, consumers for big ticket items are more interested in searching for a good deal
every time they buy. How often do you buy a car? Chances are that the next time you buy a
car, you will do some research again. Therefore, the producer that sold you a car several years
ago runs the risk of losing you as a customer.
Fourth, in some industries, new capacity must be added in large increments, thus fueling
intense rivalry. If the route between two seaports is currently served by two cruise lines (each
with one ship of equal size), any existing company’s new addition of merely one equivalent
ship will increase the capacity by 50%. Thus, the two existing cruise lines are often compelled
to cut prices (see the Opening Case). Industries such as hotels, petrochemicals, semiconductors, and steel often periodically experience overcapacity, leading to price-cutting as a
primary coping mechanism.6
Fifth, slow industry growth or decline makes rivals more desperate, often unleashing
actions not used previously. In the life-and-death fight to remain viable after the 2008
economic crisis and the 2020 COVID pandemic, many luxury goods makers had to resort to
discounting, a practice they typically avoided before (see Strategy in Action 2.1).
Finally, industries experiencing high exit costs are likely to see firms continue to operate
at a loss.7 Specialized equipment that is of little alternative use or cannot be sold off poses as
an exit barrier. In addition, emotional, personal, and career costs, especially on the part of
executives admitting failure, may be high. In Japan and Germany, managers may be legally
prosecuted if their firms file for bankruptcy.8 Thus, it is not surprising that these managers
will try everything before taking their firms out of an industry.
Overall, if there are only a small number of rivals led by a few dominant firms, new capacity is added incrementally, industry growth is strong, and exit costs are reasonable, then
the degree of rivalry is likely to be moderate and industry profits more stable. Conditions
opposite to those may unleash intense rivalry.
dominance
A situation whereby the
market leader has a very
large market share.
Threat of Entrants
In addition to keeping an eye on existing rivals, established firms in an industry—
incumbents—also have a vested interest in keeping potential new entrants out.9 New entrants are motivated to enter an industry because of the lucrative above-average returns some
incumbents earn.10 For example, Amazon has entered numerous industries, such as artificial
incumbent
A current member of an
industry that competes
against other members.
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37
38
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
STRATEGY IN ACTION 2.1
Emerging Markets
High Fashion Fights Recession
Pumping out fancy clothing, handbags, jewelry, perfumes, and
watches, the high end of the fashion industry—otherwise known
as the luxury goods industry—had a challenging time in the Great
Recession of 2008–2009. In 2009, total luxury goods industry sales
fell by 20%. How did the industry cope?
Of the five forces, the threat of substitutes was relatively insignificant. Potential new entrants were not dying to enter when incumbents were struggling. Devastated by order cancellations from
automakers and shoemakers, suppliers such as leather tanneries
were eager to work with any order that luxury goods firms could
lavish on them. Managing industry competition, thus, boiled
down to how to manage rivalry and manage customers.
The high fashion world was dominated by the Big Three: LVMH
($36 billion sales in 2013, with more than 50 brands such as Louis
Vuitton handbags, Moët Hennessy liquor, Christian Dior fashion,
TAG Heuer watches, and Bulgari jewelry), Richemont ($13 billion,
with Cartier jewelry and Piaget watches), and Kering ($12 billion, with
Gucci handbags, Yves Saint Laurent clothing, and Sergio Rossi shoes).
Next were several smaller players such as Burberry, Hermès, Prada,
and Swatch. Virtually all firms pursue a differentiation strategy and
a smaller number of them engage in a focus strategy. By definition,
high fashion means high prices. An informal code of conduct (or
norm) permeates the industry: no discount, no coupons, no price
wars please—in theory at least. Discounting, so frequently used in the
low-end fashion industry, is viewed as dangerous and poisonous, not
only to the occasional firm that unleashes it, but also to the image and
margin of the whole world of high fashion.
In desperation, many firms cut prices—but quietly. At Tiffany
jewelry stores, salespeople advised customers about diamond ring
price reductions, but otherwise there was no publicity. Richemont and
Gucci offloaded their excess inventory to discount websites. Coach
launched a lower-priced line branded Poppy as a fighter brand without cheapening the image of the Coach brand. During the month before Christmas in 2008, American department stores such as Macy’s
and Saks Fifth Avenue offered some savage price slashing of up to 80%
of some luxury goods. The only firm that stood rock solid was LVMH,
which claimed that it never puts its products on sale at a discount.
When the going gets tough, it destroys stock instead. In contrast to
many luxury goods firms that rely on department stores, LVMH owns
its retail shops, thus having complete control over pricing.
The bloodbath in the Great Recession forced weaker players
such as Christian Lacroix and Escada to file for bankruptcy. But
it made stronger players such as LVMH even more formidable.
LVMH benefited from an established pattern in high fashion: the
flight to quality. When people have less money, they spend it on
entry barrier
Industry structures that
increase the costs of entry.
the best. Shoppers go for fewer, more classic items such as one
Burberry raincoat (as opposed to two designer dresses) and one
Birkin bag by Hermès (rather than three bags by less-prestigious
brands). For this reason, LVMH, according to its proud president,
“always gains market share in crises.” Its sales grew from $24
billion in 2008 to $29 billion in 2011 to $36 billion in 2013, with
profit margins at a healthy 40% or so—twice as high as some of its
weaker rivals.
In addition to managing interfirm rivalry, how to manage
fickle customers was tricky. Although the seriously rich were not
affected by the Great Recession, their number remained small. Most
firms had been relying on the “aspirational” customers to fund their
growth. As the recession became worse, many middle-class customers in economically depressed, developed economies began to hunt
for value instead of triviality and showing off. Japan had been the
number one market for luxury goods for years, and most Japanese
women reportedly owned at least one LVMH product. But sales
were falling after 2005 and dropped sharply after 2008. Young Japa­
nese women seemed more individualistic than their mothers and
often hauled home lesser-known (and cheaper) brands.
Emerging markets, especially China, offered luxury goods
firms the best hope. Since 2008, while global sales declined,
Chinese consumption (both at home and traveling) had been
growing between 20% and 30%. In 2011, China rocketed ahead of
Japan for the first time as the world’s champion consumer of luxury
goods—splashing $13 billion to command a 28% global market
share. In 2013, the luxury market in China shot up to $19 billion.
Everybody that was somebody in high fashion had been elbowing its way into China. However, a hallmark of emerging markets
is unpredictability. Since President Xi Jinping came to power in
2012, his anticorruption campaign curtailed the growth of conspicuous consumption in China, forcing firms to look elsewhere.
In 2020, the luxury goods industry was hit by a more devastating
recession caused by COVID-19. How would it cope this time?
Sources: (1) Bloomberg Businessweek, 2018, The Arnaults try to refashion LVMH for millennials, July 16: 14–15; (2) BusinessWeek, 2009,
Coach’s new bag, June 29: 41–43; (3) BusinessWeek, 2009, When discounting can be dangerous, August 3: 49; (4) Economist, 2009, LVMH
in the recession, September 19: 79–81; (5) Economist, 2010, Fashionably alive, November 13: 76; (6) Economist, 2011, The glossy posse,
October 1: 67; (7) Economist, 2014, China: Beyond bling, December 13:
8; (8) Economist, 2014, Exclusively for everybody, December 13: special
report; (9) Economist, 2020, Fashion victims, June 20: 52–53.
intelligence, cloud computing, consumer electronics, digital streaming, physical retail, and
publishing. For incumbents such as Walgreens in the drugstore industry, they are learning a
new, terrifying phrase: being “Amazoned.”11
Incumbents’ primary weapons are entry barriers, which are industry structures that increase the costs of entry. For instance, Airbus’s A380 burned $12 billion and Boeing’s 787
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Chapter 2
Managing Industry Competition
consumed $10 billion before their maiden flights—literally sky-high barriers for all potential
entrants. The key question is: What conditions have created such high entry barriers?
As shown in Table 2.1, at least six structural attributes are associated with high entry
barriers. The first is whether incumbents enjoy scale-based advantages. The key concept
is economies of scale, which refer to reductions in per unit costs by increasing the scale of
production and distribution. For example, Walmart thrives on using its enormous economies
of scale in distribution to spread logistics and overhead cost over a large number of stores,
which results in lower prices.
Another set of advantages that incumbents may enjoy is independent of scale: nonscale-based advantages.12 Proprietary technology (such as patents) is one example. Entrants
have to “invent around,” the outcome of which is costly and uncertain. Entrants can also
directly copy proprietary technology, which may trigger lawsuits by incumbents for patent
violations. Another source of such advantages is knowhow, the intricate knowledge of how to
make products and serve customers that takes years, sometimes decades, to accumulate. New
entrants often have trouble mastering such knowhow.
In addition to scale-based and non-scale-based low-cost advantages, another entry barrier
is product proliferation, which refers to efforts to fill product space in a manner that leaves
little “unmet demand” for potential entrants.13 In the textbook publishing industry, Cengage
Learning, our multibillion dollar multinational publisher, has teamed with your author (whose
nickname is “Mr. Global”) to not only publish this market-leading text, Global Strategy, but
also Global Business and GLOBAL around the world. European students can enjoy a European
adaptation (coauthored with Klaus Meyer). Indian students can study an Indian adaptation
(coauthored with Deepak Srivastava). For non-English readers, there are Quanqiu Qiye Zhanlue (Chinese), Estrategia Global (Spanish), and Estratégia Global (Portuguese).
Also important is product differentiation—the uniqueness of incumbents’ products that
customers value. Its two underlying sources are (1) brand identification and (2) customer
loyalty. Incumbents, often through intense advertising, would like customers to identify their
brands with some unique attributes. BMW brags about its cars being the “ultimate driving
machines.” Champagne makers in the French region of Champagne argue that competing
products made elsewhere are not really worthy of the name champagne.
A second source of product differentiation is customer loyalty, especially when switching costs for new products are substantial. Many high-tech industries are characterized by
network externalities, whereby the value a user derives from a product or service increases
with the number (or the network) of other users of the same product.14 Such a product or
service can be called a platform, which is defined as an intermediary that connects two or
more distinct groups of users and enables their direct interaction.15 Think of Airbnb, Alibaba, Amazon, Apple, Craigslist, eBay, Facebook, Rakuten, Uber, and WeChat. Platforms
have a winner-take-all property, whereby winners (incumbents) whose technology standard
is embraced by the market (such as Microsoft Word and Excel) lock out potential entrants. In
other words, these industries have an interesting, increasing returns characteristic as opposed
to diminishing returns taught in basic economics.16
Another entry barrier is possible retaliation by incumbents. Incumbents often maintain
some excess capacity that is designed to punish new entrants. To think slightly outside the
box, perhaps the best example is the armed forces. They cost taxpayers huge sums of money
and clearly represent excess capacity in peace time. But they exist for one reason: to deter
foreign invasion (or punish new entrants). No country has ever unilaterally disbanded its
armed forces, and the worst punishment for defeated countries (such as Germany and Japan
in 1945 and Iraq in 2003) is to have their military dismantled. In general, the more credible
and predictable the retaliation, the more likely new entrants may be deterred. Coca-Cola has
been known to retaliate by slashing prices if any competitor (other than Pepsi) crosses the
threshold of 10% share in any local market. As a result, potential entrants often think twice
before proceeding.
Finally, government policy banning or discouraging entries can serve as another entry
barrier. For example, drug patents are government-imposed entry barriers. Their expiration
often unleashes new entrants marketing generic drugs. In the airline industry, the US and
39
scale-based advantage
Advantage derived from
economies of scale (the
more a firm produces some
products, the lower the unit
costs become).
economies of scale
Reduction in per unit costs
by increasing the scale of
production.
non-scale-based
advantage
Low-cost advantage that is
not derived from the economies of scale.
product proliferation
Efforts to fill product space
in a manner that leaves
little “unmet demand” for
potential entrants.
product differentiation
The uniqueness of products
that customers value.
network externality
The value a user derives
from a product increases
with the number (or the
network) of other users of
the same product.
platform
An intermediary that connects two or more distinct
groups of users and enables
their direct interaction.
excess capacity
Additional production
capacity currently underutilized or not utilized.
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40
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
Indian governments only allow foreign entrants, respectively, a maximum of 25% and 49%
of equity in their countries’ airlines. In the Canadian wireless telephone service industry,
the lowering of government-imposed entry barriers leads to a proliferation of new entrants,
threatening the profit margins of incumbents.17
Overall, if incumbents can leverage scale-based or non-scale-based advantages (or both),
offer numerous products, provide significant differentiation, maintain a credible threat of retaliation, or enjoy regulatory protection, the threat of potential entry becomes weak. Thus, incumbents can enjoy higher profits.18 Otherwise, incumbents may be under siege. Incumbents
may be especially vulnerable when entrants bring in fundamentally new technologies and
business models to disrupt an existing industry (see the Closing Case). For example, Airbnb
entered Texas in 2008. By the mid-2010s, it had grabbed 10% revenue from incumbent hotels,
especially those hotels at the lower end that do not cater to business travelers. Further, Airbnb
has severely curtailed hotels’ ability to increase prices during the peak season.19
Bargaining Power of Suppliers
bargaining power of
supplier
The ability of suppliers
to raise prices or reduce
the quality of goods and
services.
forward integration
Acquiring and owning
downstream assets.
Suppliers are organizations that provide inputs such as materials, services, and manpower to
firms in the focal industry. The bargaining power of suppliers refers to their ability to raise
prices or reduce the quality of goods and services. Three conditions may lead to suppliers’
strong bargaining power (see Table 2.1). First, if the supplier industry is dominated by a few
firms, then they may gain an upper hand. Hundreds of airlines around the world have to rely
on only two suppliers: Boeing and Airbus. It is not surprising that Boeing and Airbus enjoy
a great deal of bargaining power.
Second, the bargaining power of suppliers can become substantial if they provide
unique, differentiated products with few or no substitutes. For instance, as a supplier of
mission-critical software for most personal computers (PCs), Microsoft is able to extract
significant price hikes from PC makers such as Dell, HP, and Lenovo whenever its Windows
unleashes a new version. Likewise, law firms can charge high fees from clients by providing
highly specialized legal services.
Finally, suppliers may enhance their bargaining power if they are willing and able to enter
the focal industry by forward integration. In other words, suppliers may threaten to become both suppliers and rivals. For example, in addition to supplying phones and computers
to traditional telecom and electronics retail stores, Apple has established many Apple Stores
in major cities. In luxury goods, Prada used to supply 50% of its output to distribution channels such as department stores and jewelry shops. Now it only supplies 20% of its products
to outside distribution channels and prefers to sell 80% of its products in Prada-owned stores
and online channels (see Strategy in Action 2.1).20 In other words, via forward integration,
Apple and Prada are both suppliers to and rivals for their distribution channel partners.
In summary, powerful suppliers can squeeze profitability out of firms in the focal industry.
Thus, firms in the focal industry have an incentive to strengthen their own bargaining power
by reducing their dependence on certain suppliers.21 For example, Walmart has implemented
a policy of not having any supplier account for more than 3% of its purchases. Dealing with
powerful suppliers, focal firms can bring new value to suppliers (such as increasing contract
duration), nurture new suppliers, or play hardball (such as canceling orders and suspending
future business—or at least threatening to do so).22
Bargaining Power of Buyers
bargaining power of buyer
The ability of buyers to
reduce prices or demand
quality improvement of
goods and services.
From the perspective of buyers, whether individual or corporate, firms in the focal industry are essentially suppliers. Therefore, our previous discussion on suppliers is relevant
here (Table 2.1). Three conditions lead to the strong bargaining power of buyers. First,
a small number of buyers leads to strong bargaining power. For example, hundreds of
automobile-component suppliers try to sell to a small number of automakers such as BMW,
Ford, and Honda. These buyers frequently extract price concessions and quality improvements by playing off suppliers against each other. When these automakers invest abroad, they
often encourage or coerce suppliers to invest with them and demand that supplier factories
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Chapter 2
Managing Industry Competition
be sited next to the assembly plants—at the suppliers’ own expenses. It is no surprise that
many suppliers comply.23 This is how Toyota cloned Toyota City in Guangzhou, China. Its
main Toyota-owned factory is surrounded by 30 supplier factories.
Second, buyers may have strong bargaining power if they purchase standard, undifferentiated commodity products from suppliers. Although automobile components suppliers as a
group possess less bargaining power relative to automakers, suppliers are not equally powerless. There are usually several tiers. Top-tier suppliers are the most crucial, often supplying
nonstandard, differentiated key components such as electric systems, steering wheels, and
car seats. Bottom-tier suppliers make standard, undifferentiated commodity products such as
seat-belt buckles, cup holders, or simple nuts and bolts. Obviously, automakers possess more
bargaining power when dealing with bottom-tier suppliers.
Finally, like suppliers, buyers may enhance their bargaining power by entering the focal
industry through backward integration. Buyers such as Costco, Marks & Spencer, and
Tesco now directly compete with their own suppliers such as Procter & Gamble (P&G)
and Johnson & Johnson, by procuring store brand (also known as private label) products.24
Store brand products, such as Kirkland (for Costco), Kroger, and Safeway brands, compete
side by side with national brands on the store shelf. Store brand products command approximately 40% of grocery sales in Spain, 30% in Britain, and 20% in the United States.25
Only leading brand producers such as Frito-Lay (potato chips) can resist the demand made
by the powerful stores to make private label goods for the stores. Many mediocre brand
producers, when facing the choice of producing private label goods for the stores or being
kicked out of shelf space (because their products are replaceable), surrender to the strong
bargaining power of stores.
Overall, buyers can capture value by enhancing bargaining power. Buyers’ bargaining power may be minimized if focal firms sell to numerous buyers, provide differentiated products,
and enhance entry barriers.
41
backward integration
Acquiring and owning
upstream assets.
Threat of Substitutes
Substitutes are products and services of different industries that satisfy customer needs currently met by the focal industry. For instance, plant-based “meat-like” products are substituting some real meat-based products.26 Two areas of substitutes are particularly threatening
(Table 2.1). First, if substitutes are superior to existing products in quality and function, then
they may rapidly emerge to attract a large number of customers. Online media has pushed
many print-based newspapers and magazines to the brink of extinction. Smartphones are
now substituting some PCs, cameras, maps, and print books.
Second, substitutes may pose significant threats if switching costs are low. For example,
consumers incur virtually no costs when switching from cow milk to soy milk. Both are
readily available on supermarket shelves. However, no substitutes exist for large passenger
jets, especially for transoceanic transportation. The only other way to go to Hawaii or New
Zealand seems to be swimming (!).
Overall, the threat of substitutes requires firms to vigilantly scan the larger environment
rather than the narrowly defined focal industry. They need to pay attention to developments
in seemingly unrelated industries. Enhancing customer value of existing products (such as
more competitive pricing, higher quality, better utility, and more convenient locations) may
reduce the attractiveness of substitutes.
substitute
Product and service of a different industry that satisfies
customer needs currently
met by the focal industry.
Lessons from the Five Forces Framework
Taken together, the five forces framework offers three significant lessons (Table 2.2):
●●
The framework reinforces the important point that not all industries are equal
in terms of potential profitability. When firms have the luxury to choose (such as
diversified companies contemplating entry to new industries or entrepreneurial startups scanning new opportunities), they will be better off if they choose an industry
whose five forces are weak. Michael Dell confessed that he probably would have
avoided the PC industry had he known how competitive the industry would become.
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42
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
industry positioning
Ways to position a firm
within an industry in order
to minimize the threats presented by the five forces.
artificial intelligence
(AI)
Simulation of human intelligence processes by machines, especially computer
systems.
Big Data (data analytics)
Analyzing extremely large
data sets that may reveal
previously unknown patterns, trends, and associations.
Internet of things (IoT)
A system of interconnected devices and machines
linked by the Internet.
TABLE 2.2 Lessons from the Five Forces Framework.
●●
●●
●●
Not all industries are equal in terms of potential profitability.
The task for strategists is to assess the opportunities (O) and threats (T) underlying each
of the five competitive forces affecting an industry.
The challenge is to stake out a position that is strong and defensible relative to the
five forces.
●●
●●
The task is to assess the opportunities (O) and threats (T) underlying each
competitive force affecting an industry and then to estimate the likely profit
potential of the industry.27
The challenge, according to Porter, is “to stake out a position that is less vulnerable to
attack from head-to-head opponents, whether established or new, and less vulnerable
to erosion from the direction of buyers, suppliers, and substitutes.”28 In other words,
the key is to position your firm well within an industry and defend its position.
Consequently, the five forces framework also becomes known as the industry
positioning school.
Although the thrust of this framework was put forward more than 40 years ago, it has continued to assert strong influence on practice and research today. While it has been debated
and modified (introduced later), its core features remain remarkably insightful—even during
the digital age (see Strategy in Action 2.2).
STRATEGY IN ACTION 2.2
Digital Strategy and Five Forces
“What is your digital strategy?” This is a question recently raised
by many gurus, consultants, and board directors as if it were a
brand new strategy. Digital strategy encompasses a bewildering
array of new jargons and technologies such as artificial intelligence (AI), Big Data (data analytics), cloud computing,
cybersecurity, Industry 4.0, Internet of things (IoT), online
interface design, robotics, and social media. In truth, a digital
strategy—sometimes called a digital business model—is really the application of digital technologies to existing business activities or to develop new ways of competition. As a result, the five
forces framework continues to be insightful. Unfortunately, from a
SWOT standpoint, instead of presenting great opportunities (O),
digital technologies unleash tremendous threats (T).
●●
ivalry among competitors is likely to be more intense.
R
Digital technologies tend to reduce differentiation among
competitors and drive the basis of competition to price.
The Internet enables more competitors from distant
locations to join the competition, thus intensifying
rivalry. For example, a college student selling her used
textbooks used to compete only with fellow students from
her campus, who a generation ago would post a limited
number of hard-copy advertisements on the wall of the
student union building. Today, she has to compete against
students from around the country (maybe around the
world), who can use Amazon’s digital platform to ship
●●
●●
●●
●●
their used books to potential customers on the focal
campus.
Threat of potential entry is also heightened because digital
technologies lower entry barriers. Numerous online
shopping websites can directly reach customers, severely
handicapping brick-and-mortar stores and malls that
have to shoulder rents, sales forces, and inventories. In the
travel industry, TripAdvisor has significantly disrupted
the livelihood of travel agents, guidebook publishers, and
travel reviewers.
Bargaining power of suppliers is often enhanced. Because
suppliers are able to reach more buyers (including many
overseas), the focal firms’ “special relationship” with
suppliers becomes less valuable.
Bargaining power of buyers is often enhanced too. Digital
technologies provide buyers with more information and
facilitate more comparison shopping. Focal firms’ room
for profits can be squeezed.
Threat of substitutes has also become more acute. Digital
technologies have lower switching costs for many end
users to adopt new products and services. For example,
Wikipedia and numerous other online knowledge sources
substitute the need to purchase encyclopedias and
dictionaries. They forced the Encyclopedia Britannica (in
print since 1768) to go completely online after 2010.
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Chapter 2
Managing Industry Competition
Three Generic Strategies
Having identified the five forces underlying industry competition, the next challenge is how
to make strategic choices. In a 1985 book, Competitive Advantage, Porter suggested three
generic strategies: (1) cost leadership, (2) differentiation, and (3) focus. All three generic
strategies are intended to strengthen the focal firm’s position relative to the five competitive
forces (see Table 2.3).29
Cost Leadership
digital strategy (digital
business model)
An application of digital
technologies to existing
business activities and/
or to develop new ways of
competition.
generic strategy
Recall that our definition of strategy is a firm’s theory about how to compete successfully (see
Chapter 1). A cost leadership strategy suggests that a firm’s theory about how to compete
successfully centers on low costs and prices. Offering the same value of a product at a
lower price—in other words, better value—tends to attract many customers. A cost leader
often positions its products to target “average” customers for the mass market with little
differentiation. The key functional areas center on efficiency in manufacturing, services, and
logistics. The hallmark of this strategy is a high-volume, low-margin approach.
A cost leader such as Walmart can minimize the threats from the five forces.30 First, it is
able to charge lower prices and make better profits compared with higher-cost rivals. Second,
its low-cost advantage is a significant entry barrier. Third, the cost leader typically buys a large
volume from suppliers, which reduces their bargaining power. Even Walmart’s largest supplier,
P&G, is afraid of Walmart’s size. Fourth, the cost leader would be less negatively affected if
strong suppliers increase prices or powerful buyers force prices down. Finally, the cost leader
For most incumbents, a digital strategy is defensive in nature. In
the conservative luxury goods industry (see Strategy in Action 2.1),
brands such as Prada that are late to the digital game are falling behind. The future of Chanel and Céline, which still shun e-commerce
altogether, can be questionable. Well thought out and executed, a
digital strategy can also become an offensive strategy. Burberry has
led the luxury goods industry in being the first to livestream its displays and being the first to use Twitter’s “buy” function. Most fundamentally, a digital strategy can be conceptualized along two dimensions: (1) from value chains to digital ecosystems and (2) from a
fuzzy understanding of the needs of end costumers to a sharper one.
Key to a successful ecosystem driver is to become the first choice
destination for a specific domain, such as Amazon for books, Cruise.
com for cruises, and Wikipedia for basic research.
Big Data analytics can enable firms—both incumbents and
new entrants—to gain a superior understanding of the needs of
end customers. A hot recent topic is IoT, which is a system of interconnected devices and machines. To compete for a share in your
(future) smart home, Sony and Vizio are duking it out in IoT television, Honeywell and Nest are fighting to install IoT-connected
environmental-management systems, Motorola and Belkin are
elbowing each other to provide security cameras, and Philips and
Flux are eager to provide IoT-enabled light bulbs. Note that in
each of these examples, an incumbent and a new entrant are vying
for dominance. Which firm will you trust to coordinate all these
IoT assets and access all relevant data? Technology giants, such
as Apple, Google, Huawei, Intel, and Samsung, are determined to
43
Strategy intended to
strengthen the focal firm’s
position relative to the five
competitive forces, which
can be (1) cost leadership,
(2) differentiation, and
(3) focus.
cost leadership
A competitive strategy that
centers on competing on
low costs and prices.
position themselves at the center of such a vast IoT network. A
five forces analysis in the future will help us understand why their
digital strategy—or someone else’s, such as Amazon Alexa’s or
AT&T’s—succeeds or fails.
Sources: (1) E. Banalieva & C. Dhanaraj, 2019, Internalization theory for the digital economy, Journal of International Business Studies 50: 1372–1387; (2) Bloomberg Businessweek, 2018, AI painted
this, May 21: The sooner than you think issue; (3) Economist, 2015,
Strutting their stuff, February 14: 58; (4) Economist, 2018, GrAIt
expectations, March 31: special report; (5) Economist, 2019, The
digital assembly line, September 7: 57–58; (6) A. Hagiu & E. Altman, 2017, Finding the platform in your product, Harvard Business Review July: 95–100; (7) M. Jacobides, 2019, In the ecosystem
economy, what’s your strategy? Harvard Business Review September: 129–137; (8) L. Moeller, N. Hodson, & M. Sangin, 2018, The
coming wave of digital disruption, PwC Strategy + Business Spring:
41–47; (9) M. Porter, 2001, Strategy and the Internet, Harvard
Business Review March: 63–78; (10) P. Weill & S. Woerner, 2018,
What’s Your Digital Business Model? Boston: Harvard Business
School Press; (11) The World in 2018, 2018, Luxury’s triumph of
experience over hope, London: Economist; (12) M. Van Alstyne,
G. Parker, & S. Choudary, 2016, Pipelines, platforms, and the
new rules of strategy, Harvard Business Review April: 54–62; (13)
F. Zhu & N. Furr, 2016, Products to platforms, Harvard Business
Review April: 73–78.
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44
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
TABLE 2.3
Three Generic Competitive Strategies.
Product
Differentiation
Market
Segmentation
Key Functional
Areas
Cost leadership Low (mainly by
price)
Low (mass market)
Manufacturing, services,
and logistics
Differentiation
High (mainly by
uniqueness)
High (many market
segments)
Research and development (R&D), marketing,
and sales
Focus
Extremely high
Low (one or a few
segments)
R&D, marketing, and sales
challenges substitutes to outcompete not only the utility of its products, but also its prices—a
very difficult proposition. Thus, a true cost leader is relatively safe from these threats.
However, a cost leadership strategy has at least two drawbacks. First, there is always the danger of being outcompeted on costs. This forces the leader to continuously search for lower costs.
Otherwise, it may no longer be a cost leader. A case in point is Southwest Airlines, the legendary,
Dallas-based discount carrier that has been the role model for numerous budget airlines around
the world, such as AirAsia in Malaysia, IndiGo in India, and Ryanair in Ireland. While Southwest
has become the fourth-largest airline in the United States, it is no longer the cost leader.31 At 8.25
cents, Southwest’s per-mile cost to fly one passenger (technically known as available seat mile) is
still below that of its three larger rivals (Delta: 8.98 cents, United: 8.81, and American: 8.55). But
the true cost leaders are now the ultrabudget Spirit Airlines (5.95) and Allegiant Travel (5.66),
which pack more seats onto planes by not allowing seats to recline.
Second, in the relentless drive to cut costs, a cost leader may cut corners that upset customers. Boeing cut short test procedures when developing its 737 MAX sensors. The result
was two crashes in Indonesia and Ethiopia that killed 338 people. With the worldwide fleet
of Boeing 737 MAX grounded, the damage to the firm’s reputation and financial bottom line
has been enormous.
Overall, a cost leadership strategy is pursued by most firms. However, many other firms
have decided to be different by embracing the second generic strategy, which is discussed next.
Differentiation
differentiation
A competitive strategy that
focuses on how to deliver
products that customers
perceive as valuable and
different.
A differentiation strategy focuses on how to deliver products that customers perceive
to be valuable and different (Table 2.3). While cost leaders serve “typical” customers,
differentiators target customers in smaller, well-defined segments who are willing to pay
premium prices. The key is a low-volume, high-margin approach. The ability to charge higher
prices enables differentiators to outperform competitors that are unable to do so. A Lexus
car is not significantly more expensive to produce than a Chrysler car, yet customers always
pay more for a Lexus. Nestlé finds out that its Nespresso pods can charge ten times more
per cup of coffee than Nescafé Gold Blend.32 To attract customers willing to pay premiums,
differentiated products must have some truly (or perceived) unique attributes, such as quality,
sophistication, prestige, and luxury.33 The challenge is to identify these attributes and deliver
value centered on them for each market segment.34 Therefore, in addition to maintaining a
strong lineup for its 3, 5, and 7 series, BMW is now filling in the “gaps” by adding the new 1
and 6 series as well as sport utility vehicles (SUVs).
According to the five forces framework, the less a differentiator resembles its rivals, the
more protected its products are. For instance, Disney theme parks advertise the unique experience associated with Disney movie characters. Lingerie queen Victoria’s Secret emphasizes
her (which really should be “its”) seductive secret. Menswear king Ermenegildo Zegna hints
at the power and the elegance associated with its style. The bargaining power of suppliers is
relatively less of a problem because differentiators are able to pass on some (but not unlimited) price increases to customers. Similarly, the bargaining power of buyers is less problematic
because differentiators tend to enjoy strong brand loyalty.
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Chapter 2
Managing Industry Competition
45
On the other hand, a differentiation strategy has two drawbacks. First, the differentiator
has to confront relentless efforts of imitation. As the overall quality of the industry goes up,
brand loyalty in favor of the leading differentiators may decline. Since the Great Recession,
the previously high-flying Starbucks has an increasingly hard time differentiating itself. As
McDonald’s raises its coffee quality and enhances its store image (especially through its newer
and hipper McCafé), McDonald’s has been eating some of Starbucks’s lunch (or drinking
Starbucks’s coffee!).
Second, the differentiator may have difficulty sustaining the basis of differentiation in the
long run. There is always the danger that customers may decide that the price differential
between the differentiator’s and cost leader’s products is not worth paying for. In fear of losing
customers, luxury automakers such as Audi, BMW, and Mercedes-Benz have unleashed “lowend” luxury models that end up blurring the line between these models and their high-end
offerings.35
Focus
A focus strategy serves the needs of a particular segment or niche of an industry (Table 2.3).
A segment can be defined by (1) geographical market, (2) type of customer, or (3) product
line. While the breadth of the focus is a matter of degree, focused firms usually serve the
needs of a segment so unique that broad-based competitors choose not to serve. In the coffee
industry, Starbucks is a differentiated player, but single-origin coffee makers such as Discovery, Intelligentsia, and Stumptown deploy a focus strategy by only sourcing premium coffee
from a single high-quality region (such as certain farms or villages in Ethiopia, the birthplace
of coffee).36 Compared with Starbucks, which mixes coffee from different regions of Ethiopia
for its Ethiopia Sidamo Blend, single-origin coffee makers are more discriminating and more
selective. (In comparison, cost leader Kraft Foods simply labels one of its Maxwell House
coffees “South Pacific Blend,” without even mentioning any particular country—conceding
that it mixes a lot of low-cost coffee beans from various places.)
Although it sounds like a tongue twister, a specialized differentiator is basically more differentiated than a large differentiator. The six highly focused ultraluxury automakers—Aston
Martin, Bentley, Ferrari, Lamborghini, McLaren, and Rolls-Royce—all claim to be in the
“luxury goods” business as opposed to the car business.37 This approach may be successful
when a focused firm possesses intimate knowledge about a particular segment. The logic of
how a traditional differentiator can dominate the five forces, previously discussed, applies
here, the only exception being a much smaller and narrower but sharper focus. The two
drawbacks—namely, (1) the challenge of defending against ambitious imitation and (2) the
difficulty to sustain such expensive differentiation—also apply here.
focus
A competitive strategy
that serves the needs of a
particular segment or niche
of an industry.
Lessons from the Three Generic Strategies
Recall from Chapter 1 that strategy is about making choices—what to do and what not
to do. The essence of the three generic strategic choices is whether to perform activities
differently or to perform different activities relative to competitors.38 Two lessons emerge.
First, cost and differentiation are two fundamental strategic dimensions. The key is to
choose one dimension and focus on it consistently. Second, firms that are stuck in the
middle—having neither the lowest cost nor sufficient differentiation (or focus)—may
be indicative of having either no strategy or a drifting strategy. Their performance may
suffer as a consequence. However, the second point is subject to debate, as outlined in
the next section.
Debates and Extensions
Although the industry-based view is a powerful strategic tool, it is not without controversies.
A new generation of strategists must understand some of these debates and, thus, avoid uncritical acceptance of the traditional view. This section introduces six leading debates.
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46
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
Debate 1: Clear versus Blurred Definitions of Industry
ecosystem
A community of organizations interacting as a
system.
complementor
A firm that sells products
that add value to the pro­
ducts of a focal industry.
industry life cycle
The evolution of an industry
that typically goes through
introduction, growth, maturity, and decline phases.
The heart of the industry-based view is a clearly defined industry. A five forces analysis will
be challenging in an industry with blurring boundaries. For example, consider the television
broadcasting industry. The emergence of cable, online, satellite, and telecommunications services has blurred its boundaries. A television in the future may be able to control household
security systems, play interactive games, and place online orders—essentially blending with
the functions of a PC. To jockey for advantageous positions in preparation for such a future,
there have been a large number of mergers and alliances. In other words, the competitors
of ABC not only include CBS, CNN, Fox, and NBC, but also Apple, AT&T, Comcast, Disney, Netflix, Sky UK, Sony, YouTube (owned by Google), and others. So what exactly is this
“industry”?
Such fuzzy industry boundaries are not alone in television broadcasting. A new concept is
to view all the players involved as an ecosystem—a community of organizations interacting
as a system.39 However, it will be challenging to specify the boundaries of an ecosystem (see
Strategy in Action 2.2). Even assuming that industry boundaries can be clearly defined, the
five forces Porter identified in the 1980s are not necessarily exhaustive. In 1990, Porter himself added related and supporting industries as an important force that affects the competitiveness of an industry.40 This is endorsed by Andrew Grove, former chief executive officer
(CEO) of Intel, who coined the term complementors.41 Basically, complementors are firms
that sell products that add value to the products of a focal industry. Complementors to PC
and smartphone industries are firms that produce software applications. When complementors produce exciting products (such as games), the demand for PCs and smartphones grows,
and vice versa.
Even assuming clearly defined industry boundaries and considering the impact of complementors (in addition to the five forces), strategists will also need to take into account the
industry life cycle—the evolution of an industry that typically goes through introduction,
growth, maturity, and decline phases.42 A value-adding strategy during the growth stage may
become inappropriate during a late phase. During the PC industry’s growth phase, IBM successfully pursued a differentiation strategy. However, during the maturity phase, competition
focused on cost leadership, and IBM was not successful in adapting its strategy to become a
cost leader. It eventually exited the industry by selling its PC division to Lenovo. Overall, in
any given industry, it will be foolhardy to claim one generic strategy is the winning formula
or recipe. Paying attention to industry boundaries, complementary forces, and industry life
cycle is a must.
Debate 2: Industry Rivalry versus Strategic Groups
strategic group
A group of firms within a
broad industry.
mobility barrier
Within-industry difference
that inhibits the movement
between strategic groups.
In a broadly defined industry, obviously not every firm is competing against each other.
However, some groups of firms within a broad industry do compete against each other. In
the automobile industry, we can identify three groups: mass market, luxury, and ultraluxury
(Figure 2.2). These different groups of firms are, thus, known as strategic groups.43 Within
the automobile industry, strategy within one group tends to be similar: The mass-market
group pursues a cost leadership strategy, the luxury group a differentiation strategy, and the
ultraluxury group a focus strategy.
While this intuitive idea does not seem controversial, a debate has erupted on the question:
How stable are these strategic groups? In other words, how easy or difficult is it for firms to
change from one strategic group to another? In the automobile industry, strong incentives
exist for firms in the mass-market group that suffer from price wars to charge into the luxury group that enjoys high margins. Can they do it? The 1990s launch of Lexus, Acura, and
Infiniti by Toyota, Honda, and Nissan, respectively, suggests that despite the challenges, it is
possible. However, Mazda entertained the idea of launching its own luxury brand but decided
to quit. The root cause is mobility barriers, which are differences that inhibit the movement
between strategic groups. Mazda was not confident about its ability to overcome mobility
barriers. Recently, Hyundai has fought a similar uphill battle by attempting to go up market.
Will Hyundai succeed or fail?
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Chapter 2
FIGURE 2.2
Managing Industry Competition
Three Strategic Groups in the Global Automobile Industry
Cost/price
Ultraluxury
Bentley, Ferrari,
Lamborghini
Mass Market
Chrysler, Fiat, Ford, GM,
Honda, Hyundai, Mazda,
Nissan, Renault, Toyota,
Volkswagen
Luxury
Acura, BMW, Lexus,
Mercedes, Porsche,
Tesla
Prestige
Mobility barriers not only are hurdles going up market, but also hurdles going down
market. While Tesla has had remarkable success with its high-end electric vehicles
(prices start at $70,000), it has a bumpier ride in mass manufacturing its lower-end
Model 3 ($35,000) (see the Closing Case). This shows how difficult it is for a luxury automaker
good at differentiation to become a mass-market player embarking on cost leadership.
Overall, it seems clear that (1) mobility barriers exist, and (2) it is challenging to overcome
mobility barriers, but it can be done.
Debate 3: Integration versus Outsourcing
Dealing with suppliers and buyers, the industry-based view advises the focal firm to consider
integrating backward (to compete with suppliers) or integrating forward (to compete with
buyers)—or at least threaten to do so. This strategy is often recommended when market uncertainty is high, coordination with suppliers or buyers is tight, and the number of suppliers
or buyers is small.44 (What if they hold us up if we don’t buy them out?) However, this strategy
is expensive because it takes huge sums of capital to acquire independent suppliers or buyers,
and most acquisitions end up in failure (see Chapter 9).45
Critics argue that under conditions of market uncertainty, less integration is advisable. A
focal firm with no internal supplier units can simply reduce output by discontinuing or not
renewing supply contracts, whereas a firm stuck with its own internal supplier units may keep
producing simply to keep these supplier units employed. In other words, integration reduces
strategic flexibility.46 Internal suppliers, which had to work hard for contracts if they were
independent, may lose high-powered market incentives because their business is now taken
care of by the “family.”47 Over time, internal suppliers may become less competitive relative to
outside suppliers. The focal firm thus faces a dilemma: Going with outside suppliers will keep
internal suppliers idle, but choosing internal suppliers will sacrifice cost and quality. Over
time, integration has gradually gone out of fashion and outsourcing (turning over activities
to outside suppliers) is in vogue.
The outsourcing movement has been influenced by the Japanese challenge in the 1980s
and the 1990s. The Japanese way of managing suppliers, through what is called a keiretsu
(interfirm network), seems radically different from the American way. In the 1990s, GM had
700,000 employees, but Toyota only had 65,000. A lot of activities performed by GM, such
as those in internal supplier units, are undertaken by Toyota’s keiretsu member firms using
non-Toyota (and lower-cost) employees.
At the same time, Toyota has far fewer suppliers than GM. Toyota’s suppliers tend to be
“cherry-picked” trusted members of the keiretsu. Instead of treating suppliers as adversaries,
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47
48
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
Toyota treats (first-tier) suppliers as partners by co-developing proprietary technology with
them, relying on them to deliver directly to the assembly line just in time, and helping them
when they are in financial difficulty. However, Toyota does not rely only on trust and goodwill. To minimize the potential loss of high-powered market incentive on the part of keiretsu
members, a dual sourcing strategy—namely, splitting a supply contract between a keiretsu
member and a nonmember (usually a local company when Toyota moves abroad)—is often practiced. This makes sure that both the internal (keiretsu) and external suppliers are
motivated to do their best. Overall, solid value-adding relationships with suppliers are now
widely regarded as a source of competitive advantage. They have been implemented by many
non-Japanese firms around the world.
However, in a curious turn of events, even as many US firms have become more “Japaneselike,” Japanese firms are increasingly under pressure to become more “American-like”! This
is because some outsourced activities that are crucial to the core business should not have
been outsourced. Otherwise, firms risk becoming “hollow.” Supplier relations that are too
close may introduce rigidities, resulting in a loss of much-needed flexibility. In Japan, some
previously rock-solid buyer-supplier links have started to fray. There is now less willingness
to help troubled suppliers. Even keiretsu members previously discouraged (if not outright
forbidden) to seek contracts outside the network are now encouraged to do so because the
benefits of learning from dealing with other customers may eventually accrue to the lead
firm (such as Toyota).48 Overall, the debate suggests that decisions on integration versus
outsourcing requires careful analysis and that single-handed pursuit of one way (as opposed
to another way) is not advisable.49
Debate 4: Stuck in the Middle versus All-Rounder
flexible manufacturing
technology
Modern manufacturing
technology that enables
firms to produce differen­
tiated products at low costs
(usually on a smaller batch
basis than the large batch
typically produced by cost
leaders).
additive manufacturing
(3D printing)
Manufacturing threedimensional products from
a digital model by using
additive processes, where
products are created by
adding successive layers
of material. This contrasts
traditional manufacturing,
which can be labeled “subtractive” processes centered
on removing material by
methods such as cutting
and drilling.
mass customization
Mass produced but customized products.
According to Porter, firms must choose either cost leadership or differentiation. Pursuing both may get them “stuck in the middle” with poor performance.50 For example, South
Korean shipbuilders feel they are being squeezed in a “nutcracker,” losing orders to Japanese
competitors that maintain their excellence at the high end, and to Chinese rivals that become
more capable while maintaining their low-cost edge.51
However, some highly successful firms such as Singapore Airlines stand out as both cost
leaders and differentiators (see Strategy in Action 2.3). Some authors argue that holding
technology constant for firms already operating at the maximum efficiency, further cost savings are not possible and differentiation is a must.52 McDonald’s new slogan “progress over
perfection” is indicative of this trend.53 Recently, McDonald’s ended the use of antibiotics in
its chickens and embarked on a ten-year journey to liberate chickens from cages and offer
cage-free eggs. Likewise, Walmart has sought to become more differentiated by experimenting with upscale offerings in Plano, Texas; with in-store health clinics in Dallas-area stores;
and with a more “Earth-friendly” store in McKinney, Texas. Indeed, a review of 17 studies
finds that instead of being underdogs, some (but not all) firms stuck in the middle may have
the potential to be “all-rounders.”54 In short, it is possible to be both cost competitive and
differentiated simultaneously.
Debate 5: Economies of Scale versus 3D Printing
Until recently, manufacturing technology required economies of scale, emphasizing largebatch production to drive down costs. Ask any factory to make you a single pencil or shovel
to your own specification. The factory would charge you at least thousands of dollars because
it would have to make a mold, buy components, and assemble them into the finished product.
To do all of the above for a single pencil or shovel would be extremely expensive. Pencils and
shovels only become affordable to you because their factories produce thousands of them—
thanks to economies of scale.
However, flexible manufacturing technology has enabled some firms to produce differentiated products at a low cost (usually on a small batch basis). The recent emergence of
additive manufacturing (or 3D printing) has made such mass customization possible.
Three-dimensional printing can be defined as “any kind of production in which materials
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Chapter 2
Managing Industry Competition
49
STRATEGY IN ACTION 2.3
Singapore Airlines Is Both a Differentiator and a Cost Leader
The airline industry is generally viewed to be structurally un­
attractive. Flying people from point A to point B is essentially a commodity business that is difficult to differentiate, and most airlines
endeavor to be cost leaders. Jets are technologically equivalent—
made either by Boeing or Airbus. With deregulation, entry barriers
are no longer sky-high. Choosing from many carriers, travelers
now have transparent pricing from many competing airlines on a
screen in front of them. Worldwide, premium full-service airlines
are being squeezed by no-frills discount airlines.
Among so many airlines worldwide, Singapore Airlines is
widely regarded as the world’s premium carrier. It has won the
World’s Best Airline Award from Condé Nast Traveler 29 out of
the 30 times the award has been issued. In 2019, it was nominated
for the Skytrax World’s Best Airline Cabin Crew award. As a
differentiator, Singapore Airlines always buys newer aircraft. It is
the launch (first) customer for the Airbus A380. It also replaces
aircraft more frequently. On average, its fleet is seven years old, in
comparison with an industry average of 13 years old. Customers
are willing to pay more for seats on newer aircraft. New aircraft
are more fuel-efficient and require less maintenance, resulting in
lower cost. Singapore Airlines is also renowned for its legendary
service. Its cabin crews are trained to interact with American,
Chinese, and Japanese passengers differently. However, Singapore
Airlines does not pay premium salary. Its wage is average by
Singapore standards, which are relatively low by global standards.
As a result, its labor costs are just 16% of total costs, whereas United
Airlines’ are 23%, British Airways’ 28%, and American Airlines’
31%. In short, Singapore Airlines seems to be both a world-class
differentiator and a competitive cost leader.
Sources: (1) Australian Aviation, 2017, Under pressure, July:
52–55; (2) Conde Nast Traveler, 2018, The Best International
Airlines: 2018 Readers’ Choice Awards, www.cntravelor.com;
(3) L. Heracleous & J. Wirtz, 2010, Singapore Airlines’ balancing
act, Harvard Business Review July: 145–149; (4) Skytrax World’s
Best Airline Awards, 2019, World’s Best Airline Cabin Crew,
www.worldairlineawards.com.
are built up to create a product rather than cut, ground, drilled, or otherwise reduced into
shape.”55 This type of printing enables products to be manufactured economically in much
smaller batches, more flexibly, with a much lower amount of wastage. The software can be
endlessly adjusted, and the cost to set up the 3D printer is the same regardless of whether
it produces (or prints) one product or many copies. In other words, economies of scale for
3D printing are almost zero.56 Already 3D printing has been widely used to produce individually tailored dental crowns, hearing aids, and artificial limbs. GE, for example, recently
redesigned its turbo engines for the Cessna Denali business aircraft so that around a third of
the components can be 3D printed.57
Going forward, 3D printing can tweak product design almost instantly and endlessly in
response to market trends. “Farms” of 3D printers can print products close to their point of
purchase or consumption. This technology may undermine location-based advantages of
concentrating mass manufacturing in a few gigantic, world-scale factories—think of Foxconn’s iPhone factory in Shenzhen, China. In the future, 3D printing, according to Dartmouth College professor Richard D’Aveni, may “threaten to eliminate traditional manufacturing method, such as assembly lines, global supply chains, inflexible capital intensive
equipment, and subtractive manufacturing.”58
Critics argue: Not so fast! Not everything can be made by 3D printing. The key is how
to combine the strengths of traditional manufacturing centered on economies of scale with
the strengths of 3D printing. Manufacturing per se is often relatively easy to imitate. Smart
combination of manufacturing and services—sometimes called servitization—will make it
harder for rivals to imitate.59 In a consulting project for the UK government, my colleague
and I advised:
servitization
Smart combination of manu­
facturing and services.
It is possible to envision UK leisure marine firms such as Fairline Boats (a world leader in the 38–80-foot powerboat segment) to both export Made-in-UK boats and provide
3D printers that can “print” out spare parts on-site for export clients around the world—an
interesting example of smart combination of manufacturing and services.60
In this way, manufacturing of the boats can still be done in a central factory by leveraging economies of scale, and servicing and provisioning of the parts can be undertaken by 3D printing.
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50
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
Debate 6: Industry-Specific versus Firm-Specific and
Institution-Specific Determinants of Performance
The industry-based view argues that firm performance is most fundamentally determined
by industry-specific attributes. This view has recently been challenged from two directions.61
The first is the resource-based view. Although the five forces framework suggests that particular industries (such as airlines) may be structurally unattractive, certain firms such as
Ryanair, Singapore, and Southwest Airlines are highly successful (see Strategy in Action 2.3).
What is going on? A short answer is that there must be firm-specific resources and capabilities that contribute to the winning firms’ performance.
A second challenge comes from the critique that the industry-based view “ignores industry history and institutions.”62 Porter’s work, first published in 1980, may have carried some
hidden, taken-for-granted assumptions underpinning the way competition was structured in
the United States in the 1970s (and earlier). As “rules of the game” in a society, institutions
obviously affect firm strategies. For example, cost leadership as a strategy is banned by law
in the Japanese bookselling industry. All bookstores must sell new books at the same price
without discount. Thus, Amazon, whose primary weapon was low price, had a hard time
elbowing its way into Japan. Clearly, strategists must understand how institutions affect competition. This view has become known as the institution-based view. Overall, these two views
complement the industry-based view and will be introduced in Chapters 3 and 4.
Making Sense of the Debates
The six debates suggest that the industry-based view—and in fact the strategy field as a
whole—is alive, exciting, and yet unsettling. All these debates direct their attention to Porter’s work, which has become an incumbent in the field.63 When describing his work, Porter
deliberately chose the word framework rather than the more formal theory or model. In his
own words, “frameworks identify the relevant variables and the questions that the user must
answer in order to develop conclusions tailored to a particular industry and company.”64 In
this sense, Porter’s frameworks have succeeded in identifying variables and raising questions
while not necessarily providing definitive answers. Although the degree of contentiousness
among these debates is not the same, it is evident that the last word has not been written on
any of them.
The Savvy Strategist
The savvy strategist can draw at least three important implications for action (Table 2.4).
(1) You need to understand your industry inside and out by focusing on the five forces.65 The
industry-based view provides a systematic foundation for industry analysis. (2) Be aware that
additional forces may influence the competitive dynamics of your industry. The five forces
framework should be a start of your analysis, not the end. (3) Realize that industry is not destiny. The point of industry analysis “is not to declare the industry attractive or unattractive.”66
While the industry-based view is a powerful framework to understand what is behind the
performance of the “average” firm, you need to be aware that certain firms can do well in
a structurally unattractive industry—think of Singapore Airlines (Strategy in Action 2.3).
Your job is to lead your firm to become a high-flying outlier, despite the pull of gravity of
unattractive attributes of the industry.
TABLE 2.4
●●
●●
●●
Strategic Implications for Action
Establish an intimate understanding of your industry by focusing on the five forces.
Be aware that additional forces may influence the competitive dynamics of your industry.
Realize that industry is not destiny. Certain firms may do well in a structurally unattractive
industry.
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Chapter 2
Managing Industry Competition
51
In conclusion, the industry-based view can directly answer the four fundamental questions
in strategy discussed in Chapter 1. First, why do firms differ? The five forces in different
industries lead to tremendous diversity in firm behavior. The answer to the second question—How do firms behave?—boils down to how they maximize opportunities and minimize threats presented by the five forces. Third, what determines the scope of the firm? A
traditional answer is to examine the bargaining power of the focal firm relative to that of
suppliers and buyers. Integration would result in an expanded scope of the firm. However,
recent research and practice suggest caution. Firms are advised to leverage opportunities of
outsourcing, remain focused on core activities, and be willing to collaborate not only with
suppliers and buyers but also with competitors. Finally, what determines the international
success and failure of firms? The answer, again, is that industry-specific conditions must have
played an important role in determining firm performance around the world.
CHAPTER SUMMARY
1. Define industry competition.
●●
●●
●●
3. Articulate the three generic strategies.
An industry is a group of firms producing similar
goods or services (or both).
The industry-based view of strategy grows out of IO
economics, which helps policy makers better understand how firms compete so policy makers can pro­
perly regulate them.
The five forces framework forms the backbone
of the industry-based view of strategy, which draws
on the insights of IO economics to help firms better
compete.
●●
4. Understand the six leading debates concerning the indus-
try-based view.
●●
2. Analyze an industry using the five forces framework.
●●
●●
The stronger and more competitive the five forces
are, the less likely that firms in an industry are able to
earn above-average returns and vice versa.
The five forces are: (1) rivalry among competitors,
(2) threat of entrants, (3) bargaining power of
suppliers, (4) bargaining power of buyers, and
(5) threat of substitutes.
The three generic strategies are: (1) cost leadership,
(2) differentiation, and (3) focus.
(1) Clear versus blurred definitions of industry,
(2) industry rivalry versus strategic groups, (3) integration versus outsourcing, (4) stuck in the middle
versus all-rounder, (5) economies of scale versus
3D printing, and (6) industry-specific versus firmspecific and institution-specific determinants of firm
performance.
5. Draw strategic implications for action.
●●
●●
●●
Establish an intimate understanding of your industry
by focusing on the five forces.
Be aware that additional forces may influence the
competitive dynamics of your industry.
Realize that industry is not destiny. Certain firms may
do well in an unattractive industry.
KEY TERMS
additive manufacturing (3D printing) 48
dominance 37
incumbent 35
artificial intelligence (AI) 42
duopoly 35
backward integration 41
economies of scale 39
industrial organization (IO) economics
(industrial economics) 35
bargaining power of buyers 40
ecosystem 46
bargaining power of suppliers 40
entry barrier 38
Big Data (data analytics) 42
excess capacity 39
complementor 46
five forces framework 35
conduct 35
flexible manufacturing technology 48
cost leadership 43
focus 45
differentiation 44
forward integration 40
digital strategy (digital business
model) 42
generic strategy 43
industry 35
industry life cycle 46
industry positioning 42
Internet of things (IoT) 42
mass customization 48
mobility barrier 46
monopoly 35
network externality 39
non-scale-based advantage 39
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52
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
oligopoly 35
product differentiation 39
strategic group 46
perfect competition 35
product proliferation 39
structure 35
performance 35
scale-based advantage 39
platform 39
servitization 49
structure-conduct-performance
(SCP) model 35
substitute 41
CRITICAL DISCUSSION QUESTIONS
industry (1) on a worldwide basis and (2) in your country.
Which industry holds more promise for earning higher returns for the average firm? Why?
1. Why do price wars often erupt in certain industries (such
as the automobile industry) but less frequently in other industries (such as the diamond industry)? What can firms
do to discourage price wars or be better prepared for them?
2. Compare and contrast the five forces affecting the cruise
3. ON ETHICS: As a manager, is it ethical to threaten your
suppliers? Your buyers?
industry, fashion industry, airline industry, and automobile
TOPICS FOR EXPANDED PROJECTS
1. Conduct a five forces analysis of the business school indus-
try or the higher education industry. Identify the strategic
group to which your institution belongs. Then use this
analysis to explain why your institution is doing well (or
poorly) in the competition for better students, professors,
donors, and ultimately rankings.
other acting as a firm strategist (such as CEO of Google or
Facebook), write two statements, each advocating one side
of the argument. [HINT: Consult Chapter 8.]
3. ON ETHICS: A powerful new entrant is likely to drive
many smaller incumbent firms out of business and their
employees out of work. As CEO of a multinational visiting a small country that your firm plans to enter, you face
protestors organized by small firms. You are going to be interviewed by a local journalist, who has given you a list of
questions ahead of the interview. One question is: How can
we be sure that the entry of your firm is beneficial to our
economy? How do you answer this question?
2. ON ETHICS: “Excessive profits” coming out of monopoly,
duopoly, or any kind of strong market power are often
targets for government investigation and prosecution (for
example, Google and Facebook are being investigated by
antitrust authorities). Yet, strategists openly pursue aboveaverage profits, which are argued to be “fair profits.” Do you
see an ethical dilemma here? Working in pairs, with one
person performing the role of an antitrust official and the
CLOSING CASE
Emerging Markets
The Future of the Automobile Industry
The automobile industry in the next 20 years will look very
different from how it has looked over the last 100 years.
Since the establishment of the automobile’s dominant
design in the 1920s, the industry has focused on massive
economies of scale centered on vehicles running the internal
combustion engine (ICE), which are mostly purchased for
private consumption. Led by automakers from the United
States, Europe, Japan, and South Korea, the ranks of top
competitors worldwide have been relatively stable. Intense
rivalry has mostly taken place among them. No major
component supplier has undertaken forward integration to
become a viable automaker. No new entrant has successfully
challenged the dominance of incumbents. As income rises
throughout emerging economies, many consumers are
eager to buy their first vehicles. Despite the emergence of
discount airlines, high-speed trains, light-rail trains, and
motor coaches, the substitute for the (ICE-based, privately
owned) car, which is prized for its convenience and
versatility, seems hard to imagine.
Until now. A series of new entrants—ranging from
Tesla to Google to Uber—have recently invaded the industry. Founded in 2003, Tesla aspired to mass-manufacture
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Chapter 2
battery-powered electric vehicles (EVs) to displace ICEbased cars. In 2009, it took advantage of the Great Recession,
which resulted in overcapacity, by spending only $42 million
to grab a manufacturing plant worth $1 billion in Fremont,
California, from Toyota and GM that had previously produced 450,000 cars a year. In 2010, Tesla Motors became
the first new US automaker since the 1950s to go through
an initial public offering. In September 2019, its value of
$34 billion was more than Ford’s. While Tesla has achieved
remarkable success marketing its high-end EVs (prices start
at $70,000), it has had a bumpier ride since launching its
lower-end Model 3 ($35,000) in 2016.
At the same time that EV makers are challenging ICEbased incumbents, how cars are operated has also been
disrupted by ride-sharing operators such as Uber, Lyft,
and Didi. Because most privately owned cars stay parked
23 hours a day, keeping cars running can clearly reduce precious urban land wasted on parking. If a shared car can get
people to where they want to go at any time, private ownership may become less relevant. At approximately 90 million
a year, car sales worldwide may have peaked. The average
American family may cut its car ownership from 2.1 vehicles
in 2020 to 1.2 by 2040. In fact, one of Uber’s core visions is to
“end private car ownership.”
Approximately 60% of the cost for ride sharing is the
driver. If no driver is needed, autonomous vehicles (AVs)
can further bring down the cost of rides. In addition
to cost savings, other benefits are obvious. Worldwide
1.25 million people die in road accidents every year,
and AVs can greatly reduce such tragedies. AVs have
superhuman response time and can slam on the brakes
in less than one millisecond, whereas human drivers need
a second or so. Being superbly alert and never tired, AVs
can also be more tightly spaced on the road, thus reducing
congestion. By liberating people from driving, AVs can
give hundreds of hours every year back to individuals who
normally drive a lot. The benefits are beyond mere time
savings. “You can be drunk,” noted one expert, “you don’t
have to look for parking, and your kids can take the car.” In
2009, Google entered the AV industry by launching the startup Waymo, which is now a stand-alone subsidiary. In 2017,
Waymo started a limited trial of a self-driving taxi service in
Phoenix. In 2018, it launched a commercial self-driving car
service called Waymo One. Users in Phoenix can use an app
to request a ride. Uber has been test-driving its robotaxis in
Pittsburgh. Overall, one of the common “dreams” shared
by Google, Uber, and other AV entrants is to deploy a large
fleet of self-driving cars ready to pick you up wherever and
whenever you need a ride.
At the same time, incumbents are not sitting around.
They hedge their bets in two ways. The first is to unleash
their own EV, AV, and hybrid models. While full EVs are
being introduced, most models initially will be plug-in hybrids, such as Toyota’s Prius. Given the limited number of
charging stations, having an ICE in hybrids can reduce range
anxiety of EV drivers. However, an ICE also adds cost, complexity, and weight compared with a pure EV, which has
Managing Industry Competition
53
simpler mechanisms and fewer required parts. In 2010, Nissan launched the world’s first EV, the Leaf. Now in its second generation, the Leaf is the world’s all-time best-selling
EV, with global sales of more than 400,000 by 2019. GM’s AV
start-up Cruise has been testing its vehicles in San Francisco.
Volkswagen is the most ambitious incumbent, planning to
spend $33 billion in the next five years, promising 70 EV
models with 22 million vehicles delivered by 2028.
For dozens of years, incumbents are involved in highly
capital-intensive, logistically complex, organizationally
large-scale operations. Incumbents feel they possess the
capabilities to mass-produce EVs that can bring the price
down. Tesla, after all, was a niche luxury automaker prior
to its 2017 launch of Model 3. Its lifetime volume was only
320,000 vehicles (through 2017). In fact, Tesla ran into a wall
when trying to beef up Model 3 production. While incumbents may feel threatened by Tesla, entry barriers centered
on economies of scale are still significant. David Teece, a
UC Berkeley professor who is a leading expert on dynamic
capabilities, argued that “until an EV-only entrant achieves
mass-market acceptance and high-volume manufacturing,
it will be hard to argue that lower barriers to entry pose a
threat to incumbents.”
A second response is to transform how incumbents view
themselves. Instead of viewing themselves as manufacturers that sell cars to (and then forget about) private buyers,
incumbents are experimenting with new business models
such as ride-sharing services. For example, Daimler and
BMW merged their ride-sharing businesses in 2018 to form
a new joint venture Reach Now to compete head-to-head
with Uber and Lime. For a monthly fee, GM is allowing customers to switch in and out of different models of Cadillac up to 18 times a year. Overall, incumbents face a classic
dilemma: When can they abandon the very products that
are the foundation of their reputation and switch to the new
EV-based and AV-based capabilities that may transform
them into transportation service providers?
Going forward, the automobile industry is clearly facing
its greatest-ever transformation. Electrification, autonomous
driving, and car sharing represent the biggest disruptions to
the industry since the car displaced the horse-drawn carriage.
The car in the future is very likely to be battery-powered,
driverless, and shared. Stay tuned.
Sources: (1) Bloomberg Businessweek, 2019, Peak car, March 4:
special report; (2) Economist, 2016, Upward mobility, May 28: 61;
(3) Economist, 2016, The driverless, car-sharing road ahead, January 9: 53–54; (4) Economist, 2018, Reinventing wheels, March 3:
special report; (5) Economist, 2018, The last lap of luxury, March
3: 55–57; (6) Economist, 2019, Charging ahead, April 20: 57–59;
(7) Economist, 2019, New wave, March 16: 58; (8) Fortune, 2016,
Some assembly required, July 1: 47–55; (9) Fortune, 2016, The
ultimate driving machine prepares for a driverless world, March
1: 123–135; (10) M. Jacobides, J. MacDuffie, & C. J. Tae, 2016,
Agency, structure, and the dominance of OEMs, Strategic Management Journal 37: 1942–1967; (11) J. MacDuffie, 2018, Response
to Perkins and Murmann, Management and Organization Review
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54
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
14: 481–489; (12) G. Perkins & J. Murmann, 2018, What does the
success of Tesla mean for the future dynamics in the global automobile sector? Management and Organization Review 14: 471–480;
(13) D. Teece, 2018, Tesla and the reshaping of the auto industry,
Management and Organization Review 14: 501–512.
2. Using the five forces framework, how would you charac-
terize the competition in this industry in 2040?
3. ON ETHICS: AVs threaten the livelihood of millions
of people who drive taxis, buses, and trucks, as well as
insurers, healthcare providers, and personal-injury
lawyers. Ride sharing and reduced car ownership are bad
news for car dealerships, repair shops, and parts makers.
From a societal standpoint, do the pros of these new
innovations outweigh the cons?
CASE DISCUSSION QUESTIONS:
1. Using the five forces framework, how would you char-
acterize the competition in the automobile industry before the recent disruptions brought by EVs, AVs, and ride
sharing?
NOTES
[Journal Acronyms] AER—American Economic Review;
AMP—Academy of Management Perspectives; AMJ—Academy of Management Journal; AMR—Academy of Management
Review; APJM—Asia Pacific Journal of Management; BW—
Bloomberg Businessweek; ETP—Entrepreneurship Theory and
Practice; GSJ—Global Strategy Journal; HBR—Harvard Business Review; JBR—Journal of Business Research; JEP—Journal of Economic Perspectives; JIBS—Journal of International
Business Studies; JIM—Journal of International Management;
JMS—Journal of Management Studies; JMR—Journal of Marketing Research; JWB—Journal of World Business; OSc—
Organization Science; SEJ—Strategic Entrepreneurship Journal;
SMJ—Strategic Management Journal; WSJ—Wall Street Journal
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 2
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22. P. Paranikas, G. Whiteford, & B. Tevelson, 2015, How to
negotiate with powerful suppliers, HBR July: 90–96.
23. M. W. Peng, S. Lee, & J. Tan, 2001, The keiretsu in Asia, JIM
7: 253–276.
24. S. Chen, 2010, Transaction cost implication of private
branding and empirical evidence, SMJ 31: 371–389.
25. BW, 2011, Even better than the real thing, November 28:
25–26; Economist, 2010, Basket cases, October 16: 21.
26. Economist, 2017, I can’t believe it’s not meat. December 2: 50.
27. I. McCarthy, T. Lawrence, B. Wixted, & B. Gordon, 2010,
A multidimensional conceptualization of environmental
velocity, AMR 35: 604–626.
28. M. Porter, 1998, On Competition (p. 38), Boston: Harvard
Business School Press.
29. M. Porter, 1985, Competitive Advantage, New York: Free
Press.
30. C. Fishman, 2006, The Wal-Mart Effect and a decent
society, AMP 20: 6-25.
31. BW, 2014, Southwest hangs up its low-cost jersey,
September 11: 27–28.
32. Economist, 2019, How to rev up Unilever, May 4: 59.
33. M. Schilling, 2017, What’s your best innovation bet? HBR
July: 86–93.
34. W. C. Kim & R. Mauborgne, 2005, Blue Ocean Strategy,
Boston: Harvard Business School Press.
Managing Industry Competition
55
35. BW, 2014, The downside of low-end luxury. July 21: 19–20.
36. BW, 2011, A pot of trouble brews in the coffee world,
September 8: 13–14.
37. Economist, 2018, Joining the high revvers, September 26: 65.
38. M. Porter, 1996, What is strategy? HBR November: 61–78.
See also R. Makadok & D. Ross, 2013, Taking industry
structuring seriously, SMJ 34: 509–532.
39. S. Ansari, R. Garud, & A. Kumaraswamy, 2016, The disruptor’s dilemma, SMJ 37: 1829–1853; E. Autio, S. Nambisan,
L. Thomas, & M. Wright, 2017, Digital affordances, spatial
affordances, and the genesis of entrepreneurial ecosystems,
SEJ 12: 72–95; M. Howard, W. Boeker, & J. Andrus, 2019, The
spawning of ecosystems, AMJ 62: 1163–1193; M. Jacobides,
2019, In the ecosystem economy, what’s your strategy? HBR
September: 129–137; R. Kapoor & J. Lee, 2013, Coordinating and competing in ecosystems, SMJ 34: 274–296; J. Li, L.
Chen, J. Yi, J. Mao, & J. Liao, 2019, Ecosystem-specific advantages in international digital commerce, JIBS 50: 1448–1463;
T. Thompson, J. Purdy, & M. Ventrasca, 2018, How entrepreneurial ecosystems take form, SEJ 12: 96–116.
40. M. Porter, 1990, The Competitive Advantage of Nations,
New York: Free Press.
41. A. Grove, 1996, Only the Paranoid Survive, New York:
Doubleday. See also K. Boudreau & L. Jeppesen, 2015,
Unpaid crowd complementors, SMJ 36: 1761–1777;
R. Kapoor & N. Furr, 2015, Complementarities and competition, SMJ 36: 416–436.
42. R. Agarwal, M. Sarkar, & R. Echambadi, 2002, The conditioning effect of time on firm survival, AMJ 45: 971–994;
S. Klepper, 1996, Entry, exit, growth, and innovation over
the product life cycle, AER 86: 562–583.
43. G. Cattani, J. Porac, & H. Thomas, 2017, Categories and
competition, SMJ 38: 64–92; W. De Sarbo, R. Grewal, &
R. Wang, 2009, Dynamic strategic groups, SMJ 30: 1420–
1439; S. Grodal, A. Gotsopoulos, & F. Suarez, 2015, The coevolution of technologies and categories during industry
emergence, AMR 40: 423–445; B. Kabanoff & S. Brown,
2008, Knowledge structures of prospectors, analyzers, and
defenders, SMJ 29: 149–171; F. Mas-Ruiz & F. Ruiz-Moreno, 2011, Rivalry within strategic groups and consequences for performance, SMJ 32: 1286–1308; M. W. Peng, J. Tan,
& T. Tong, 2004, Ownership types and strategic groups in
an emerging economy, JMS 41: 1104–1129.
44. O. Williamson, 1985, The Economic Institutions of Capitalism, New York: Free Press.
45. M. Ceccagnoli & L. Jiang, 2013, The cost of integrating external technologies, SMJ 34: 404–425.
46. S. Nadkarni & V. Narayanan, 2007, Strategic schemas, strategic flexibility, and firm performance, SMJ 28: 243–270;
G. Pacheco-de-Almeida, J. Henderson, & K. Cool, 2008,
Resolving the commitment versus flexibility trade-off,
AMJ 51: 517–538.
47. W. Egelhoff & E. Frese, 2009, Understanding managers’
preferences for internal markets versus business planning,
JIM 15: 77–91.
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FOUNDATIONS OF GLOBAL STRATEGY
48. K. Aoki & T. Lennerfors, 2013, The new, improved keiretsu,
HBR September: 109–113; J. McGuire & S. Dow, 2009, Japanese keiretsu, APJM 26: 333–351.
49. C. de Fontenay & J. Gans, 2008, A bargaining perspective
on strategic outsourcing and supply competition, SMJ 29:
819–839.
50. R. Huckman & D. Zinner, 2008, Does focus improve operational performance? SMJ 29: 178–193; S. Thornhill & R.
White, 2007, Strategic purity, SMJ 28: 553–561.
51. Economist, 2018, Setting a new course, February 3: 32–33.
52. C. Hill, 1988, Differentiation versus low cost or differentiation and low cost, AMR 13: 401–412.
53. Fortune, 2016, Free bird, September 1: 78–88.
54. C. Campbell-Hunt, 2000, What have we learned about
generic competitive strategy? SMJ 21: 127–154.
55. R. D’Aveni, 2018, The Pan-Industrial Revolution, New
York: Houghton Mifflin Harcourt.
56. Economist, 2012, Additive manufacturing: Solid print,
April 21: www.economist.com.
57. WSJ, 2018, Printing the future, October 17: www.wsj.com.
58. R. D’Aveni, 2018, Personal communication to the author,
September 20.
59. M. Cusumano, S. Kahl, & F. Suarez, 2015, Services, industry evolution, and the competitive strategies of product
firms, SMJ 36: 559–575.
60. M. W. Peng & K. Meyer, 2013, Winning the Future Markets
for UK Manufacturing Output (p. 43), consulting report for
the Foresight Future of Manufacturing Project, Evidence
Paper 25, London: UK Government Office for Science.
61. J. Bou & A. Satorra, 2007, The persistence of abnormal
returns at industry and firm levels, SMJ 28: 707–722;
E. Karniouchina, S. Carson, J. Short, & D. Ketchen, 2013,
Extending the firm vs. industry debate, SMJ 34: 1010–1018.
62. S. Oster, 1994, Modern Competitive Analysis, 2nd ed. (p. 46),
New York: Oxford University Press.
63. C. Decker & T. Mellewigt, 2007, Thirty years after Michael
E. Porter, AMP 21: 41–55.
64. M. Porter, 1994, Toward a dynamic theory of strategy, in R.
Rumelt, D. Schendel, & D. Teece (eds), Fundamental Issues
in Strategy (p. 427), Boston: Harvard Business School Press.
65. E. Hirsh & K. Rangan, 2013, The grass isn’t greener, HBR
January: 21–22; M. Jacobides & A. Kudina, 2013, How industry architectures shape firm success when expanding
in emerging economies, GSJ 3: 150–170.
66. M. Porter, 2011, The five competitive forces that shape
strategy (p. 51), in On Strategy, Boston: Harvard Business
School Press.
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CHAPTER
3
iStock.com/golero
Leveraging Resources
and Capabilities
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Explain what firm resources and capabilities are
2. Undertake a basic SWOT analysis along the value chain
3. Decide whether to keep an activity in-house or outsource it
4. Analyze the value, rarity, imitability, and organizational (VRIO) aspects of resources
and capabilities
5. Participate in four leading debates concerning the resource-based view
6. Draw strategic implications for action
58
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OPENING CASE
Emerging Markets
Canada Goose Flies High
“Switzerland had Rolex, Britain had Land Rover—
Canada could have Canada Goose,” proclaimed CEO
Dani Reiss in a Harvard Business Review article on his
ambition to create a homegrown luxury brand. While
Canada Goose has indeed become a high-flying luxury brand recently, it has humble roots. In 1957, it
was founded by Dani’s maternal grandfather, Sam
Tick, as Metro Sportswear in Toronto. It produced
outwear with a handful of employees. In the 1970s,
Dani’s father, David Reiss, became CEO. He invented
a down-filling machine, and the firm focused on private-label orders, making custom down-filled coats
and heavy-duty parkas for police forces and government workers. However, the orders did not come in
regularly. In an effort to create a steady flow of revenue, David in 1985 began to produce apparel under
the firm’s own brand Snow Goose. In the early 1990s,
as Metro began selling in Europe, it found that the
Snow Goose name was already trademarked by another firm. Since Metro came from Canada, Metro
sold its products in Europe under the name Canada
Goose. In 1996, Dani graduated from college and
joined the firm. In 2001, Dani succeeded David as
CEO. By then, Canada Goose had approximately
$3 million in annual revenue.
Dani ignited the growth and pledged to remain
“Made in Canada.” He pursued three related strategic goals: (1) get out of the private-label business,
(2) eliminate the Snow Goose brand, and (3) focus
exclusively on building the Canada Goose brand. His
conversations with retailers and customers found that
people appreciated a well-constructed and exceptionally warm parka made from the best materials.
The country of origin was also important. After all,
who knows cold better than Canadians? This insight
was important, because at the time Dani took over,
outsourcing production to low-cost emerging eco­
nomies in Asia became the norm sweeping through
the apparel industry. Dani believed that “achieving
mass distribution by competing on price is not the
way to succeed . . . to create a sustainable global
business, we would have to grow from a foundation
of undeniable core values that prioritized quality
over quantity.” The upshot was that Canada Goose
committed to “Made in Canada.” Instead of leaving,
Canada Goose expanded into eight factories in
Toronto (three), Winnipeg (three), and Quebec (two).
Competing with Asian labor costs that were 20% of
the Canadian wages, Dani figured that the only way
to win was to enhance the value, rarity, and inimitability of Canada Goose products. To many people,
owning a Canada Goose coat is like owning a little
piece of Canada, and for that they are willing to
pay a premium. Compared with many made-in-Asia
products, a Canada Goose parka made in Canada
became rare on the market and almost impossible
to imitate. Throughout Canada, the firm currently
employs 3,500 individuals, representing 6% of the
cut and sew jobs.
Endeavoring to build a brand that Dani called
the “Swiss watch of apparel” and the “Land Rover
of outerwear,” Canada Goose outfitted researchers
and workers in remote, cold-weather regions such as
participants in the United States Antarctic Program.
It also sponsored a North Pole expedition team
featured in National Geographic. In 2016, Canada
Goose opened stores in Toronto and New York City.
This was a time when brick-and-mortar retailers were
disappearing fast. Swimming upstream, today Canada
Goose operates stores—in addition to its first two—in
Banff, Beijing, Boston, Calgary, Chicago, Edmonton,
Hong Kong, London, Milan, Minneapolis, Montreal,
Paris, Shanghai, Shenyang, Tokyo, and Vancouver.
Canada Goose stores provide a highly unique
experience that customers at neither traditional
retailers such as Niemen Marcus nor e-commerce
platforms could obtain. Specifically, the stores offered
a cold room where shoppers could test Canada Goose
products in temperatures as low as –25 Celsius (–13
Fahrenheit) before making a purchase—a creative
and authentic way to engage customers.
Despite their high costs—ranging from $295 to
$1,695—Canada Goose’s fur-trimmed and down-filled
parkas have developed a cult following. They become
the “must-have” winter uniform for Canadian kids and
youth. In China, despite calls to boycott Canadian
products due to a diplomatic dispute, customers lined
up on the opening day outside a new store in Beijing in
59
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PART 1
FOUNDATIONS OF GLOBAL STRATEGY
OPENING CASE
(Continued)
2018. One high school in England banned Canada Goose
coats in order to “poverty-proof the school” so that
disadvantaged students would feel less peer pressure.
Annual revenue reached $18 million in 2008 and $200
million in 2015. In 2013, Boston-based private equity
firm Bain Capital acquired a 70% equity stake in Canada
Goose at a $250 million valuation. In 2017, Dani took the
firm public on the Toronto and New York Stock Exchanges
(TSE and NYSE: GOOS). Propelled by the initial public
offering (IPO) that valued the firm at $1.1 billion, revenue
surged from $590 million in 2018 to $830 million in
2019—a compound annual growth rate of 42% since
2016. Fielding questions about whether Canada Goose
was a fad during the IPO road show, Dani pointed out:
We’ve been growing every year for at least the past 15
years, but in so many ways we’re just getting started. . . .
Young, old, local, international, outdoor explorers or
fashionistas—they all respond to our commitment to quality, authenticity, and staying true to
our DNA. That’s how we remain relevant as we
grow and build an enduring brand. As we grow,
I’ve made it clear that one aspect of our business
is nonnegotiable. Canada Goose will forever be a
champion for “Made in Canada.” There is simply
no better way for us to remain timeless.
Sources: (1) Canada Goose, 2020, Our history, our stores,
www.canadagoose.com; (2) CBC News, 2017, Canada Goose
sees half of profits in long term from own stores, e-commerce,
November 9: cbc.ca; (3) D. Weiss, 2019, The CEO of Canada
Goose on creating a homegrown luxury brand, Harvard Business Review September: 37–41.
W
resource-based view
A leading perspective
of strategy that suggests
that differences in firm
performance are most
fundamentally driven by
differences in firm resources
and capabilities.
resource
The tangible and intangible
assets a firm uses to
choose and implement its
strategies.
dynamic capability
A firm’s capacity to build
and protect competitive
advantage, including
the ability to sense and
seize opportunities and to
reconfigure existing assets.
hen outsourcing production to low-cost countries became a norm in the
apparel industry, how can Canada Goose deviate from such a powerful
norm and win? What are the sources of the value of its products? How
can it develop a cult following? The answer is that there must be certain resources
and capabilities specific to Canada Goose that are not shared by rivals. This insight
has been developed into a resource-based view, which has emerged as one of the
three leading perspectives on strategy.1
While the industry-based view focuses on how average firms within one industry
compete, the resource-based view sheds considerable light on how individual firms
(such as Canada Goose) differ from each other within one industry. In SWOT analysis,
the industry-based view deals with the external O and T, and the resource-based view
concentrates on the internal S and W.2 A key question is: How can high-flyers such
as Canada Goose defy gravity and sustain competitive advantage? In this chapter,
we first define resources and capabilities, and then discuss the value chain analysis.
Afterward, we focus on value (V), rarity (R), imitability (I), and organization (O)
through a VRIO framework. Debates and extensions follow.
Understanding Resources and Capabilities
A basic proposition of the resource-based view is that a firm consists of a bundle of productive resources and capabilities.3 Resources are defined as “the tangible and intangible assets
a firm uses to choose and implement its strategies.”4 There is some debate regarding the definition of capabilities. Some argue that capabilities are a firm’s capacity to dynamically deploy
resources. They suggest a crucial distinction between resources and capabilities, and advocate
a dynamic capabilities view.5
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Chapter 3
Leveraging Resources and Capabilities
While scholars may debate the fine distinctions between resources and capabilities, these
distinctions are likely to become blurred in practice.6 For example, is Canada Goose’s high
quality a resource or a capability? How about its efforts to leverage its country of origin? How
about its willingness to deviate from the industry norm to outsource production to low-cost
countries and to hire high-cost Canadian workers? For current and would-be strategists, the
key is to understand how these attributes help improve firm performance, as opposed to figuring out whether they should be labeled as resources or capabilities. Therefore, we will use
the terms “resources” and “capabilities” interchangeably and often in parallel. In other words,
capabilities are defined here the same way as resources.
All firms, including the smallest ones, possess a variety of resources and capabilities.
How do we meaningfully classify such diversity? A useful way is to separate them into two
categories: tangible and intangible ones (Table 3.1). Tangible resources and capabilities
are assets that are observable and quantifiable. They can be broadly divided into three
categories:
●●
●●
●●
Financial resources and capabilities. Examples include firms’ abilities to tap into
capital markets. Canada Goose’s abilities to first attract private equity and then to
successfully go through an initial public offering (IPO) have provided much needed
rocket fuel to propel its rise (see the Opening Case).
Physical resources and capabilities. For instance, while many people attribute the
success of Amazon to its online savvy (which makes sense), a crucial reason Amazon
has emerged as a gigantic retailer is because it has built some of the largest physical,
brick-and-mortar fulfillment centers in key locations.
Technological resources and capabilities. For example, in the race to develop additive
manufacturing (3D printing) technologies, Hershey has developed a number of
chocolate printers that do not require a large run and can potentially be used in
restaurants and bakeries.7
Intangible resources and capabilities, by definition, are harder to observe and more
difficult (or sometimes impossible) to quantify (see Table 3.1). Yet it is widely acknowledged
that they must be “there,” because no firm is likely to generate competitive advantage by solely
relying on tangible resources and capabilities alone. Examples of intangible assets include:
●●
●●
●●
Human resources and capabilities. Extraordinary human resources (HR) can be
crucial assets propelling a firm to new heights, whereas mediocre HR can be a drag
(see the Closing Case).8
Innovation resources and capabilities. For example, design thinking—an iterative
process in which firms seek to understand users, challenge assumptions, and solve
problems in a creative way—has become an important innovation tool.9 Apple,
Google, and Samsung have developed resources and capabilities centered on design
thinking.
Reputation resources and capabilities. Reputation can be regarded as an outcome of a
competitive process in which firms signal their attributes to constituents.10 BMW, Ford,
and IBM recently celebrated their 100th birthday. Despite some setbacks, these longlasting firms can leverage their reputation and march from strength to strength, whereas
many of their less reputable rivals struggle.
Table 3.1
capability
The tangible and intangible
assets a firm uses to
choose and implement its
strategies.
tangible resources and
capabilities
Observable and
quantifiable resources and
capabilities.
intangible resources
and capabilities
Hard-to-observe and
difficult-to-codify resources
and capabilities.
design thinking
An iterative process
in which firms seek to
understand users, challenge
assumptions, and solve
problems in a creative way.
Examples of Resources and Capabilities
Tangible Resources
Intangible Resources
Dynamic Capabilities
Financial
Human
Sensing
Physical
Innovation
Seizing
Technological
Reputation
Reconfiguring
61
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62
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
The relatively straightforward typology of tangible and intangible resources is generally
static. From a more dynamic (action-oriented) perspective, three crucial capabilities are (see
Table 3.1):11
sensing
●●
Abilities to discover
opportunities.
Sensing: Abilities to discover opportunities.12
●●
Seizing: Abilities to capture value from opportunities.
●●
Reconfiguration: Abilities to remain flexible by redesigning business models,
realigning assets, and revamping routines.
seizing
Abilities to capture value
from opportunities.
Successful and long-running firms such as BMW, Ford, and IBM have repeatedly gone
through cycles of sensing, seizing, and reconfiguration, moving from one business area to
another. Why do many initially successful firms, such as MySpace, WeWork, and Yahoo, end
up flaming out? One answer is that they have failed to develop dynamic capabilities centered
on sensing, seizing, and reconfiguration.13
Note that all resources and capabilities discussed here are merely examples. They do not
represent an exhaustive list. Firms will forge ahead to discover and leverage new resources
and capabilities.
reconfiguration
Abilities to remain flexible
by redesigning business
models, realigning assets,
and revamping routines.
Resources, Capabilities, and the Value Chain
If a firm is a bundle of resources and capabilities, how do they come together to add value?
A value chain analysis allows us to answer this question. Shown in Panel A of Figure 3.1,
most goods and services are produced through a chain of vertical activities (from upstream
to downstream) that add value—in short, a value chain. The value chain typically consists
of two areas: primary and support activities.14 Each activity requires a number of resources
and capabilities. Value chain analysis forces managers to think about firm resources and capabilities at a very micro, activity-based level.15 Given that no firm is likely to be good at all
activities, the key is to examine whether the firm has resources and capabilities to perform a
particular activity in a manner superior to competitors—a process known as benchmarking
in SWOT analysis.
If managers find that their firm’s particular activity is unsatisfactory, a decision model can
remedy the situation (see Figure 3.2). In the first stage, managers ask: “Do we really need to
perform this activity in-house?” Figure 3.3 introduces a framework to take a hard look at this
question, whose answer boils down to (1) whether an activity is industry-specific or common across industries, and (2) whether this activity is proprietary (firm-specific) or not. The
value chain
Goods and services
produced through a chain
of vertical activities that add
value.
benchmarking
Examination as to whether
a firm has resources and
capabilities to perform a
particular activity in a manner superior to competitors.
Figure 3.1 The Value Chain
Panel A. An Example of a
Value Chain with Firm Boundaries
Primary
activities
Support
activities
Components
Final assembly
Marketing
Primary
activities
Support
activities
INPUT
INPUT
Research and
development
Panel B. An Example of a
Value Chain with Some Outsourcing
Infrastructure
Research and
development
Infrastructure
Components
Logistics
Human resources
OUTPUT
Final assembly
Marketing
Logistics
Human resource
OUTPUT
Note: Dotted lines represent firm boundaries.
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Chapter 3
Leveraging Resources and Capabilities
63
Figure 3.2 A Decision Model in a Value Chain Analysis
No
Outsource, sell the unit,
or lease its services
to other firms
Do we really need to
perform this activity
in-house?
Yes
Keep doing it
and improving it
Yes
Do we have the
resources and
capabilities that add
value in a way better
than rivals do?
Acquire necessary
resources and
capabilities in-house
No
Access resources
and capabilities
through strategic
alliances
answer is “No” when the activity is found in Cell 2 in Figure 3.3, with a great deal of commonality across industries and little need for keeping it proprietary—known in the recent jargon
as a high degree of commoditization. The answer may also be “No” if the activity is in Cell 1
in Figure 3.3, which is industry-specific but also with a high level of commoditization. Then,
the firm may want to outsource this activity, sell the unit involved, or lease the unit’s services
to other firms (see Figure 3.2). This is because operating multiple stages of uncompetitive
activities in the value chain may be inefficient and costly.
High
commoditization
Cell 1
Outsource
Cell 2
Outsource
Proprietary
(firm-specific)
Commoditization versus proprietary
nature of the activity
Figure 3.3 In-House versus Outsource
Cell 3
In-House
Cell 4
???
Industry
specific
Common
across industries
commoditization
A process of market
competition through which
unique products that
command high prices and
high margins generally lose
their ability to do so—these
products thus become
“commodities.”
Industry specificity
Note: At present, no clear guidelines for Cell 4 exist, where firms either choose to perform activities
in-house or outsource.
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64
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
outsourcing
Turning over all or part of
an activity to an outside
supplier to improve the
performance of the focal
firm.
Think about steel, definitely a crucial component for automobiles. But the question for
automakers is: “Do we need to make steel by ourselves?” The requirements for steel are common across end-user industries—that is, the steel for automakers is essentially the same for
construction, defense, and other end users (ignoring minor technical differences for the sake
of our discussion). For automakers, while it is imperative to keep the automaking activity
(especially engine and final assembly) proprietary (Cell 3 in Figure 3.3), there is no need to
keep steelmaking in-house. Therefore, although many automakers such as Ford and GM historically were involved in steelmaking, none of them does it now. In other words, steelmaking
is outsourced and steel is commoditized. In a similar fashion, Ford and GM no longer make
glass, seats, and tires as they did before.
Outsourcing is defined as turning over an organizational activity to an outside supplier
that will perform it on behalf of the focal firm.16 For example, many consumer products
companies (such as Apple and Nike), which possess strong capabilities in upstream
activities (such as design) and downstream activities (such as marketing), have outsourced
manufacturing to suppliers in low-cost countries. Recently, not only is manufacturing often
outsourced, but a number of service activities such as IT, HR, and logistics are also outsourced.
The driving force is that many firms, which used to view certain activities as a very special
part of their industries (such as airline reservations and bank call centers), now believe that
these activities have relatively generic attributes that can be shared across industries. Of course,
this changing mentality is fueled by the rise of service providers, such as IBM and Infosys in IT,
Manpower in HR, Foxconn in contract manufacturing, and DHL in logistics. These specialist
firms argue that such activities can be broken off from the various client firms (just as steelmaking was broken off from automakers decades ago) and leveraged to serve multiple clients
with greater economies of scale.17 Such outsourcing enables client firms to become “leaner and
meaner” organizations, which can better focus on their core activities (see Figure 3.1 Panel B).
If the answer to the question, “Do we really need to perform this activity in-house?” is “Yes”
(Cell 3 in Figure 3.3), but the firm’s current resources and capabilities are not up to the task, then
there are two choices (see Figure 3.2). First, the firm may want to acquire and develop capabilities
in-house so that it can better perform this particular activity.18 Second, if a firm does not have
enough skills to develop these capabilities in-house, it may want to access them through alliances.
Conspicuously lacking in both Figure 3.2 and 3.3 is the geographic dimension—domestic
versus foreign locations.19 Because the two terms outsourcing and offshoring have emerged
rather recently, there is a great deal of confusion, especially among some journalists, who
often casually equate them as the same. So to minimize confusion, we go from two terms to
four terms in Figure 3.4, based on locations and modes (in-house versus outsource):20
Figure 3.4 Location, Location, Location
Location of
activity
Mode of activity
Cell 1
Captive
sourcing/FDI
Cell 2
Offshoring
Foreign location
Cell 3
Domestic
in-house
Cell 4
Onshoring
Domestic location
In-house
Outsourcing
Note: Captive sourcing is a relatively new term, which is conceptually identical to foreign direct investment (FDI), a term widely used in global strategy.
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Chapter 3
Leveraging Resources and Capabilities
●●
Offshoring—international/foreign outsourcing
offshoring
●●
Onshoring—domestic outsourcing
●●
Captive sourcing—setting up subsidiaries to perform in-house work in foreign
International/foreign
outsourcing.
●●
locations
Domestic in-house activity
onshoring
Outsourcing—especially offshoring—has no shortage of controversies and debates
(see the Debates and Extensions section). Despite this set of new labels, we need to
be aware that “captive sourcing” is conceptually identical to foreign direct investment
(FDI), which is nothing new in the world of global strategy (see Chapters 1 and 6). We
also need to be aware that “offshoring” and “onshoring” are simply international and
domestic variants of outsourcing, respectively. Offshoring low-cost IT work to India,
the Philippines, and other emerging economies has been widely practiced. Interestingly,
eastern Germany, northern France, and the Appalachian, Great Plains, and southern
regions of the United States have emerged as new hotbeds for onshoring.21 In job-starved
regions such as Michigan, high-quality IT workers may accept wages 35% lower than at
headquarters in Silicon Valley.
One interesting lesson we can take away from Figure 3.4 is that even for a single firm,
value-adding activities may be geographically dispersed around the world, taking advantage of the best locations and modes to perform certain activities. For instance, a Dell laptop may be designed in the United States (domestic in-house activity), its components may
be produced in Taiwan (offshoring) as well as the United States (onshoring), and its final
assembly may be in China (captive sourcing/FDI). When customers call for help, the call
center may be in India, Ireland, Jamaica, or the Philippines, manned by an outside service
provider (offshoring).
Overall, a value chain analysis engages managers to ascertain a firm’s strengths and
weaknesses on an activity-by-activity basis, relative to rivals, in a SWOT analysis. The recent
proliferation of new labels is intimidating, causing some gurus to claim that “21st-century
offshoring really is different.”22 In reality, it is not. Under the skin of the new vocabulary,
we still see the time-honored SWOT analysis at work. The next section introduces a new
framework.
Outsourcing to a domestic
firm.
captive sourcing
Setting up subsidiaries
to perform in-house
work in foreign location.
Conceptually identical to
foreign direct investment
(FDI).
From Swot to Vrio
Recent progress in the resource-based view has gone beyond the traditional SWOT analysis.
The new work focuses on the value (V), rarity (R), imitability (I), and organizational (O)
aspects of resources and capabilities, leading to a VRIO framework.23 Summarized in
Table 3.2, addressing these four important questions has a number of ramifications for
competitive advantage.
Table 3.2
65
The VRIO Framework: Is a Resource or Capability . . .
Valuable?
Rare?
Costly to
Imitate?
Exploited by
Organization?
Competitive
Implications
Firm
Performance
No
—
—
No
Competitive
disadvantage
Below average
Yes
No
—
Yes
Competitive
parity
Average
Yes
Yes
No
Yes
Temporary competitive Above average
advantage
Yes
Yes
Yes
Yes
Sustained competitive
advantage
VRIO framework
A resource-based
framework that focuses
on the value (V), rarity
(R), imitability (I), and
organizational (O)
aspects of resources and
capabilities.
Consistently
above average
Sources: Adapted from (1) J. Barney, 2002, Gaining and Sustaining Competitive Advantage, 2nd ed.
(p. 173), Upper Saddle River, NJ: Prentice Hall; (2) R. Hoskisson, M. Hitt, & R. D. Ireland, 2004,
Competing for Advantage (p. 118), Cincinnati: South-Western Cengage Learning.
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66
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
The Question of Value
Do firm resources and capabilities add value? The preceding value chain analysis suggests
that this is the most fundamental question to start with.24 Only value-adding resources
and capabilities can lead to competitive advantage, whereas non-value-adding ones may
lead to competitive disadvantage. With changes in the competitive landscape, previous
value-adding resources and capabilities may become obsolete. For example, Butterfinger,
Crunch, FunDip, and Nerds used to be part of Nestlé’s flagship products. However, as
competition for junk food becomes brutal, Nestlé has found it increasingly difficult to
derive value from these products. In 2018, it sold its US confectionary business, which
owned these candy brands, to Ferraro for $2.8 billion. The evolution of IBM is another case
in point. IBM historically excelled in making hardware, including tabulating machines
in the 1930s, mainframes in the 1960s, and PCs in the 1980s. However, as competition
for hardware heated up, IBM’s capabilities in hardware not only added little value but
also increasingly stood in the way for it to move into new areas. Since the 1990s, IBM
has been focusing more on lucrative software and services, where it has developed new
value-adding capabilities, aiming to become an on-demand computing service provider.
As part of this new strategy, IBM purchased PricewaterhouseCoopers and sold its PC
division to Lenovo.
The relationship between valuable resources and capabilities and firm performance
is straightforward.25 Instead of becoming strengths, non-value-adding resources and
capabilities, such as Nestlé’s traditional prowess in confectionary and IBM’s historical
expertise in hardware, may become weaknesses. If firms are unable to get rid of non-valueadding assets, they are likely to suffer below-average performance.26 In the worst case, they
may become extinct, a fate IBM narrowly skirted during the early 1990s. According to IBM’s
former CEO Ginni Rometty:
Whatever business you’re in, it’s going to commoditize over time, so you have to keep
moving it to a higher value and change.27
The Question of Rarity
Simply possessing valuable resources and capabilities is not enough. The next question asks:
How rare are valuable resources and capabilities?28 At best, valuable but common resources
and capabilities will lead to competitive parity but not advantage. Consider the identical aircraft made by Boeing and Airbus used by numerous airlines. They are certainly valuable, yet
it is difficult to derive competitive advantage from these aircraft alone. Airlines have to work
hard on how to use these same aircraft differently.
Only valuable and rare resources and capabilities have the potential to provide some temporary competitive advantage. Overall, the question of rarity is a reminder of the cliché: If
everyone has it, you can’t make money from it.29 For example, as many firms are arming
themselves with artificial intelligence (AI) and data analytics capabilities, they become no
longer rare. However, the ability both to discover insights from big data and to communicate such insights in an accessible way to managers who are not trained in data analytics is
extremely rare. Most data scientists are trained to do research, but not communication and
presentation of the research to lay audiences. Firms that can identify and develop such talents
thus become rare.30
The Question of Imitability
Valuable and rare resources and capabilities can be a source of competitive advantage only
if competitors have a difficult time imitating them. While it is relatively easier to imitate a
firm’s tangible resources (such as plants), it is a lot more challenging and often impossible to
imitate intangible capabilities (such as tacit knowledge, superior innovation, and managerial
talents).31 ASML, a low-key Dutch firm that makes the advanced chipmaking machines used
by high-visibility chipmakers such as Intel and Samsung, excels in such tacit knowledge, superior innovation, and managerial talents. Confronting the difficulty of imitation, ASML’s
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Chapter 3
STRATEGY IN ACTION 3.1
Leveraging Resources and Capabilities
67
ASML
Artificial intelligence, drones, Internet of things (IOT), smart
homes, smartphones, wireless payments . . . every future technology
runs on semiconductor chips. Every reader of Global Strategy already
got it. Quizzed about which companies make these chips, AMD,
Intel, Qualcomm, Samsung, Taiwan Semiconductor Manufacturing
Company (TSMC), and Texas Instruments (TI) might be nominated.
But it is likely that few might have heard about ASML, the world’s
only manufacturer of the most advanced chipmaking equipment
that uses extreme ultraviolet (EUV) light, with wavelengths
of just 13.5 nanometers (one nanometer = one-billionth of
a meter). ASML’s customers include all of the world’s leading
chipmakers, which use its machines to manufacture a wide
range of semiconductor chips that power almost every future
technology. “The world’s supplier to the semiconductor industry”
is how ASML proudly describes itself on its website.
Founded in 1984 in Eindhoven, the Netherlands, ASML
started its life as a joint venture (JV) between Advanced
Semiconductor Materials International (ASMI) and Philips, a
Dutch electronics giant. In 1988, the JV became an independent
firm that took the official name ASML (no need to spell out).
ASML competes with Nikon and Canon of Japan and Ultratech of
the United States in the market for photolithographic machines,
which use light to etch integrated circuits onto silicon wafers. In
this market, ASML enjoys a commanding market share of 62%.
In the most advanced EUV market, ASML is the only game in
town—actually in the world. Each EUV machine weighs about
180 tons and has the size of a big bus. The world’s top three
chipmakers—Intel, Samsung, and TSMC—have become as reliant
on ASML as the rest of the technology industry is on them. In fact,
all these three top chipmakers have chipped in to fund ASML’s
R&D in return for stakes as strategic investors in the firm. ASML’s
website proudly describes its mission: “Changing the world, one
nanometer at a time.”
The rising importance of the semiconductor industry has
helped ASML increase its market capitalization tenfold since 2010,
reaching $100 billion in 2019. This makes ASML, whose 2019
revenue was $13 billion, worth more than Airbus, Siemens, or
Volkswagen, three iconic European firms. Next time, when you
play on your smartphone, please spare a thought on the low-key
firm that makes it possible.
Sources: (1) ASML, 2020, About ASML, www.asml.com: (2) Economist,
2019, Chips with everything, September 14 (Technology Quarterly):
3–4; (3) Economist, 2020, Industrial light and magic, February 29:
49–50.
two rivals Canon and Nikon have not bothered to imitate ASML’s most advanced extreme
ultraviolet (EUV) light technology (see Strategy in Action 3.1).
Imitation is difficult. Why? In two words: causal ambiguity. This refers to the difficulty
of identifying the causal determinants of successful firm performance.32 What exactly has
caused Canada Goose to be such a relevant luxury brand (see the Opening Case)? In the
apparel industry, Canada Goose has no shortage of imitators. A natural question is: How
does Canada Goose do it? Usually a number of resources and capabilities will be nominated, such as a commitment to high-quality materials, a willingness to deviate from the
industry norm to outsource production to low-cost countries, an interest in embracing its
country of origin, and a multinational market presence. While all of these are plausible,
what exactly is it? This truly is a million (or billion) dollar question, because knowing the
answer to this question is not only intriguing to scholars and students, but also can be
hugely profitable for Canada Goose’s rivals. Unfortunately, outsiders usually have a hard
time understanding what a firm does inside its boundaries. We can try, as many rivals have,
to identify Canada Goose’s recipe for success by drawing up a long list of possible reasons,
labeled as “resources and capabilities” in our classroom discussion. But in the end, as outsiders we are not sure.33
What is even more fascinating for scholars and students and more frustrating for rivals is
that managers of a successful firm such as Apple often do not know exactly what contributes
to their firm’s success. When interviewed, they can usually generate a long list of what they
do well, such as a strong organizational culture, a relentless drive, and many other attributes.
To make matters worse, different managers of the same firm may have a different list. When
probed as to which resource or capability is “it,” they usually suggest that it is all of the above
in combination. After Apple made a record-breaking $18 billion profit in the fourth quarter
of 2014 (never before had so much money been made by a single firm in three months),
CEO Tim Cook told the media that it was “hard to comprehend.”34 This is probably one of
the most interesting and paradoxical aspects of the resource-based view: If insiders have a
causal ambiguity
The difficulty of identifying
the causal determinants
of successful firm
performance.
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68
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
hard time figuring out what unambiguously contributes to their firm’s performance, it is not
surprising that outsider efforts in understanding and imitating these capabilities are usually
flawed and often fail.
Overall, valuable and rare but imitable resources and capabilities may give firms some
temporary competitive advantage, leading to above-average performance for some period of
time. However, such advantage is not likely to be sustainable. Shown by the example of Canada
Goose, only valuable, rare, and hard-to-imitate resources and capabilities may potentially lead
to sustained competitive advantage.
The Question of Organization
complementary asset
Noncore asset that complements and supports the
value-adding activities of
core assets.
ambidexterity
Ability to use one’s both
hands equally well. In
management jargon,
this term has been used
to describe capabilities
to simultaneously deal
with paradoxes (such
as exploration versus
exploitation).
social complexity
The socially complex ways
of organizing typical of
many firms.
Even valuable, rare, and hard-to-imitate resources and capabilities may not give a firm a sustained competitive advantage if it is not properly organized.35 Although movie stars represent
some of the most valuable, rare, and hard-to-imitate (as well as highest-paid) resources, most
movies flop. More generally, the question of organization asks: How can a firm (such as a
movie studio) be organized to develop and leverage the full potential of its resources and
capabilities?
Numerous components within a firm are relevant to the question of organization.36 In
a movie studio, these components include talents in “smelling” good ideas, photography
crews, musicians, singers, makeup artists, animation specialists, and managers on the business side. These components are often called complementary assets,37 because by themselves they are difficult to generate box office hits. For the favorite movie you saw most recently, do you still remember the names of its makeup artists? Of course not—you probably
only remember the names of the stars. However, stars alone cannot generate hit movies. It
is the combination of star resources and complementary assets that create hit movies. “It
may be that not just a few resources and capabilities enable a firm to gain a competitive
advantage but that literally thousands of these organizational attributes, bundled together,
generate such advantage.”38
Known as the ability to use one’s two hands equally well, ambidexterity in the strategy
and management literature describes capabilities to simultaneously deal with paradoxes.39
For example, in emerging economies, ambidexterity to manage both market forces and
government forces simultaneously—as a bundle of complementary resources—is key to
navigate the competitive waters.40 To attain competitive advantage, market-based and
nonmarket-based (political) capabilities need to complement each other. This is not only
important for foreign firms, but also crucial for domestic firms. Case in point: The Tata
Nano, the much-hyped, cheapest car that presumably would allow many Indians to become
first-time car owners and create thousands of jobs, could not be made in its originally
planned factory in the Indian state of West Bengal. Thousands of farmers who lost their
land used to build the Nano factory protested. Political pressure forced Tata to abandon
the plan and start another plant in another state, Gujarat, at a great cost. The fact that such
an influential and otherwise respected firm can mess up its political relations domestically
underscores the importance of ambidexterity as capabilities to manage both market-based
and nonmarket-based relationships. Otherwise, strong market performers, such as Tata in
India, may nevertheless hit a wall.
Another idea is social complexity, which refers to the socially complex ways of organizing
typical of many firms. Many multinationals consist of thousands of people scattered in
many different countries. How they overcome cultural differences and are organized as
one corporate entity and achieve corporate goals is profoundly complex. Oftentimes, it is
their invisible relationships that add value.41 Such organizationally embedded capabilities
are, thus, very difficult for rivals to imitate. This emphasis on social complexity refutes what
is half-jokingly called the “Lego” view of the firm, in which a firm can be assembled (and
dissembled) from modules of technology and people (à la Lego toy blocks). By treating
employees as identical and replaceable blocks, the Lego view fails to realize that social capital
associated with complex relationships and knowledge permeating many firms can be a source
of competitive advantage.
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Chapter 3
STRATEGY IN ACTION 3.2
Leveraging Resources and Capabilities
69
Emerging Markets
CIMC
High-profile Chinese firms such as Alibaba, Baidu, Didi, Haier,
Huawei, Tencent, and Xiaomi have increasingly been written up by
the media. However, it is likely that few readers of Global Strategy
had heard about China International Maritime Containers
(Group) (CIMC) before. Founded in 1980 and headquartered
in Shenzhen, CIMC is one of the most globally successful heavy
industry firms from China. With a dominant 55% market share
in the maritime shipping container market worldwide, CIMC
has ranked number one in this industry since 1996. If you ever
bought anything made in China, chances are that it came to you in
a container made by CIMC.
Despite its name, CIMC is much more than containers. With
$12 billion revenue in 2019, CIMC has grown to become a worldleading heavy industry conglomerate covering three main clusters:
(1) logistics equipment and services (containers, vehicles, airport
facilities, and logistics services), (2) energy equipment and services
(energy, chemical, and food equipment; offshore oil platforms;
and turnkey services), and (3) others (finance, real estate, and
modular building). Some of its noncontainer businesses are also
very impressive. For example, it produces more than 1,000 types of
specialized vehicles, such as heavy trucks, semitrailers, van trailers,
and refrigerator trucks. It is the world’s largest producer of airport
passenger boarding bridges (a 40% market share). In ISO liquid
tank containers, CIMC is number one in the word. In LNG storage
equipment, it is number one in China. From land to sea, from
equipment manufacturing to logistics services, CIMC has become
a leading global player in such typically low-key, nonglamorous
industries that form the backbone of global business.
As a business group, CIMC has three listed companies and
more than 300 subsidiaries. Of these, more than 30 subsidiaries
operate in over 20 countries: Australia, Belgium, Brazil, Britain,
Colombia, Denmark, France, Germany, India, Indonesia, the
Netherlands, Poland, Russia, Saudi Arabia, Singapore, South Africa,
Sweden, Suriname, Thailand, Turkmenistan, the United States, and
Vietnam. Its products and services are sold in over 100 countries.
CIMC has more than 50,000 employees—of those, more than 6,000
are outside of China. At present, approximately 40% of CIMC’s
products are manufactured outside of China, so are 60% of its sales.
Two aspects of CIMC’s growth are quite unusual. First,
many leading Chinese firms (including all those named in the
first paragraph) are privately owned, and state-owned enterprises
(SOEs), which may be dominant domestically, are widely known
to have a hard time competing overseas. But CIMC is stateowned. Second, CIMC has embarked on dozens of cross-border
acquisitions. Although such a strategy for global expansion is
usually fraught with challenges, CIMC has generally done a good
job. In short, CIMC has excellent organizational capabilities.
While a majority of SOEs have one major state owner, CIMC
has two: China Merchants Group (a conglomerate active in Hong
Kong) and China Ocean Shipping Company (COSCO—China’s
largest shipping company that is CIMC’s principal customer).
Both of them hold an equal 25% stake (and the rest of the stock
is publicly traded, about half in Shenzhen and half in Hong
Kong). Since both China Merchants and COSCO are competitive
SOEs, they are not like traditional state owners that tend to be
government agencies, which may know little about market
competition but may enjoy excessive intervention. CIMC’s top
management has “encouraged” the two state owners to focus on
competition in their own markets in order to leave CIMC “alone”
to pursue its growth.
Before CIMC embarked on cross-border acquisitions, it was an
experienced acquirer in China. By acquiring a number of container
producers in Shanghai and Dalian, CIMC not only consolidated
the container industry domestically, but also gained significant
experience in managing acquisitions. Expanding overseas, CIMC
has looked at specialist firms that offer complementary assets to
its existing product lines. For example, having entered the airport
passenger boarding bridge market, it endeavored to enter the
airport firefighting equipment market—leveraging the synergy of
selling both equipment to the same airport authorities. Therefore,
in 2013 it acquired Ziegler, the market leader in firefighting
equipment in Germany and one of the world’s top-five players.
In another example, CIMC sought to expand its presence in the
food equipment market, by eyeing the beer brewery equipment
segment. In 2007, it first acquired a specialist firm Holvrieka in
the Netherlands. In 2012, it further acquired another specialist
firm Ziemann in Germany and consolidated them as one firm,
Ziemann Holvrieka, that can provide tailor-made solutions
for the beer, beverage, and liquid food industries from a single
source. Overall, when managing cross-border acquisitions, CIMC
has endeavored to practice a business model that it calls “global
operations, local knowledge.” A case in point is to use Holvrieka as
a platform to integrate Ziemann.
Sources: (1) CIMC, 2018, Introduction of CIMC Group, Shenzhen:
CIMC; (2) CIMC, 2020, About CIMC, www.cimc.com; (3) C. Liu,
2019, CIMC forges world-champion products, presentation, Chinese
Society of Technology Economics Conference, Xi’an, June;
(4) M. Meyer & X. Liu, 2005, Managing indefinite boundaries: The
strategy and structure of a Chinese business firm, Management
and Organization Review 1: 57–86; (5) Ziemann Holvrieka, 2020,
Company, www.ziemann-holvrieka.com.
Overall, only valuable, rare, and hard-to-imitate capabilities that are organizationally
embedded and exploited can lead to sustained competitive advantage and persistently aboveaverage performance.42 Because capabilities cannot be evaluated in isolation, the VRIO
framework presents four interconnected and increasingly difficult hurdles (Table 3.2). In
other words, these four aspects come together as one “package” (see Strategy in Action 3.2).
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70
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
Figure 3.5 Strategic Sweet Spot
Competitors’
offerings
Customers’
needs
SWEET
SPOT
Company’s
capabilities
Source: D. Collis & M. Rukstad, 2008, Can you say what your strategy is? (p. 89), Harvard Business Review April: 82–90.
Figure 3.6 UK Manufacturing: The Search for Strategic Sweet Spot
Export customers’
demand
UK rivals’
capabilities
SWEET
SPOT
UK manufacturers’
offerings
Source: M. W. Peng & K. Meyer, 2013, Winning the future markets for UK manufacturing output (p.
30), consulting report, London: UK Government Office for Science. The full report is in the public
domain at https://www.gov.uk/government/publications/future-manufacturing-winning-markets-foruk-exports. © Crown copyright.
Shown in Figure 3.5, the VRIO framework urges every firm to search for a strategic sweet
spot where it adds value by meeting customer needs in a way that rivals cannot. Figure 3.6
draws on your author’s consulting work for the UK government on how to enhance the export
competitiveness of UK manufacturing. Such VRIO analysis can also help us understand
why Swiss watchmakers (such as Rolex), Danish specialty-toy makers (such as Lego), and
Minnesota medical-needle producers (such as Medtronic) can hit the strategic sweet spot
and carve out a lucrative global niche.
Debates and Extensions
Like the industry-based view outlined in Chapter 2, the resource-based view has its fair share
of controversies and debates. Here, we introduce four previously unaddressed debates.
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Chapter 3
Leveraging Resources and Capabilities
Debate 1: Firm-Specific versus Industry-Specific
Determinants of Performance
At the heart of the resource-based view is the proposition that firm performance is most
fundamentally determined by firm-specific resources and capabilities, whereas the industrybased view argues that firm performance is ultimately a function of industry-specific
attributes. The industry-based view points out persistently different average profit rates of
different industries, such as pharmaceutical versus grocery industries. The resource-based
view, on the other hand, has documented persistently different performance levels among
firms, such as ASML (see Strategy in Action 3.1) and CIMC (see Strategy in Action 3.2)
versus rivals within the same industry. Findings are mixed. Some studies find industryspecific effects to be more significant, and other studies are supportive of the resourcebased view—firm-specific capabilities are stronger determinants of firm performance than
industry-specific effects.43
While the debate goes on, it is important to caution against an interest in declaring one
side to be “winning.”44 There are two reasons for such caution—methodological and practical.
First, while industry-based studies have used more observable proxies, such as entry barriers
and concentration ratios, resource-based studies have to confront the challenge of how to
measure unobservable firm-specific capabilities, such as organizational learning, knowledge
management, and managerial talents. While resource-based scholars have created many innovative measures to “get at” these capabilities, these measures at best are “observable consequences of unobservable resources” and can be subject to methodological criticisms.45 Critics
contend that the resource-based view follows the logic that “show me a success story and I
will show you a core competence [resource] (or show me a failure and I will show you a missing competence).”46 Resource-based theorists readily admit that “the source of sustainable
competitive advantage is likely to be found in different places at different points in time in
different industries.”47 While such reasoning can insightfully explain what happened in the
past, it is difficult to predict what will happen in the future. For instance, are we going to do
better than rivals if we match, say, their equipment?
Second and perhaps more important, there is a good practical reason to believe that it is
the combination of both industry-specific and firm-specific attributes that collectively drive
firm performance. They have in fact been argued to be the two sides of the same “coin” of
strategic analysis from the very beginning of the development of the resource-based view.48 It
seems to make better sense when viewing both perspectives as complementary to each other.49
Debate 2: Static Resources versus Dynamic Capabilities
Another debate stems from the relatively static nature of the resource-based logic, which
essentially suggests, “Let’s identify S and W in a SWOT analysis and go from there.” Such a
snapshot of the competitive situation may be adequate for slow-moving industries (such as
meatpacking), but it may be less satisfactory for dynamically fast-moving industries (such
as IT). Critics, therefore, posit that the resource-based view needs to be strengthened by a
heavier emphasis on dynamic capabilities.
More recently, as we advance into a knowledge economy, many scholars argue for a
knowledge-based view of the firm.50 Tacit knowledge, probably the most valuable, unique,
hard-to-imitate, and organizationally complex resource, may represent the ultimate dynamic
capability a firm can have.51 Such invisible assets range from knowledge about customers
through years (and sometimes decades) of interaction to knowledge about product development processes and political connections.
Focusing on knowledge-based dynamic capabilities, some interesting counterintuitive
findings emerge. Summarized in Table 3.3, while the hallmark for resources in relatively
slow-moving industries (such as hotels and railways) is complexity that is difficult to observe
and results in causal ambiguity, capabilities in very dynamic high-velocity industries (such
as IT) take on a different character. They are “simple (not complicated), experiential (not
analytic), and iterative (not linear).”52 In other words, while traditional resource-based analysis
urges firms to rigorously analyze their strengths and weaknesses and then plot some linear
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Table 3.3 Dynamic Capabilities in Slow-Moving and Fast-Moving Industries
Slow-Moving
Industries
Fast-Moving (High-Velocity)
Industries
Market environment
Stable industry structure, defined
boundaries, clear business models,
identifiable players, linear and predictable change
Ambiguous industry structure,
blurred boundaries, fluid business
models, nonlinear and unpredictable change
Attributes
of dynamic
capabilities
Complex, detailed, analytic routines Simple, experiential routines that
that rely extensively on existing
rely on newly created knowledge
knowledge (“learning before doing”) specific to the situation (“learning
by doing”)
Focus
Leverage existing resources and
capabilities
Develop new resources and capabilities
Execution
Linear
Iterative
Organization
A tightly bundled collection of
resources
A loosely bundled collection of
resources
Outcome
Predictable
Unpredictable
Strategic
goal
Sustainable competitive advantage
Short-term (temporal) competitive
advantage
Sources: Adapted from (1) K. Eisenhardt & J. Martin, 2000, Dynamic capabilities: What are they?
Strategic Management Journal 21: 1105–1121; (2) G. Pisano, 1994, Knowledge, integration, and the locus
of learning, Strategic Management Journal 15: 85–100.
hypercompetition
A way of competition
centered on dynamic
maneuvering intended to
unleash a series of small,
unpredictable, but powerful
actions to erode the rival’s
competitive advantage.
application of their resources (“learning before doing”), firms in high-velocity industries have
to engage in “learning by doing.” The imperative for strategic flexibility calls for simple (as
opposed to complicated) routines, which help managers stay focused on broadly important
issues without locking them into specific details or the use of inappropriate past experience.
Not all fast-moving industries are high-tech ones. As the pace of competition accelerates,
more industries, including many traditional low-tech ones, are becoming fast moving. The
end result is hypercompetition, whose hallmark is a shortened window during which a firm
may command competitive advantage.53 In hypercompetition, firms undertake dynamic maneuvering intended to unleash a series of small, unpredictable, but powerful actions to erode
rivals’ competitive advantage.
Overall, some research suggests that the current resource-based view may have overemphasized the role of leveraging existing resources and capabilities and underemphasized the
role of developing new ones. The assumption that a firm is a tightly bundled collection of
resources may break down in high-velocity environments, whereby resources are added,
recombined, and dropped with regularity.54 In such a world, a series of short-term unpredictable advantage propelled by dynamic capabilities centered on sensing, seizing, and reconfiguration (discussed earlier) seems to be the best a firm can hope for.
Debate 3: Offshoring versus Nonoffshoring
business process
outsourcing (BPO)
Outsourcing of business
processes such as loan
origination, credit card
processing, and call center
operations.
Offshoring—or, more specifically, international (offshore) outsourcing—has emerged as a
leading corporate movement in the 21st century.55 Whether such offshoring proves to be a
long-term benefit or hindrance to Western firms and economies is debatable.
Proponents argue that offshoring creates enormous value for firms and economies.56
Western firms are able to tap into low-cost yet high-quality labor, translating into significant
cost savings. Firms can also focus on their core capabilities, which may add more value than
noncore (and often uncompetitive) activities. In turn, offshoring service providers, such as
Indian IT giants Infosys and Wipro, develop their core competencies in business process
outsourcing (BPO). A McKinsey study reports that for every dollar spent by US firms’ IT/
BPO offshoring in India, $1.46 of new wealth is created. The US economy captures $1.13,
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Chapter 3
Leveraging Resources and Capabilities
through cost savings and increased exports to India, which buys Made-in-USA equipment,
software, and services. India captures the other 33 cents through profits, wages, and taxes.57
While acknowledging that some US employees may regrettably lose their jobs, offshoring
proponents suggest that, on balance, offshoring is a win-win solution for both US and Indian
firms and economies.
Critics of offshoring make three points on strategic, economic, and political grounds. Strategically, according to some outsourcing gurus, if “even core functions like engineering, R&D,
manufacturing, and marketing can—and often should—be moved outside,”58 what is left of
the firm? In manufacturing, US firms have gone down this path before, with disastrous results. In the 1960s, Radio Corporation of America (RCA) invented the color TV and then
outsourced its production to Japan, a low-cost country at that time. Fast-forward to today:
The United States no longer manufactures color TVs. The nationality of RCA itself, after
being bought and sold several times, is now Chinese (France’s Thomson sold RCA to China’s
TCL in 2003). Critics argue that offshoring nurtures rivals. Why have Indian IT/BPO firms
emerged as strong global rivals to Western firms such as IBM? It is in part because they built
up their capabilities doing work for IBM in the 1990s to fix the “millennium bug” (Y2K)
problem.
In manufacturing, many Asian firms, which used to be original equipment manufacturers
(OEMs) executing design blueprints provided by Western firms, now want to have a piece of
the action in design by becoming original design manufacturers (ODMs) (see Figure 3.7).
Having mastered low-cost and high-quality manufacturing, Asian firms such as Asus, BenQ,
Compal, Flextronics, Hon Hai/Foxconn, and Huawei are indeed capable of capturing some
design function from Western firms such as Dell and HP. Therefore, increasing outsourcing of
design work by Western firms may accelerate their own long-run demise. A number of Asian
OEMs (such as Taiwan’s Acer), now quickly becoming ODMs, have openly announced that
their real ambition is to become original brand manufacturers (OBMs). Thus, according
to critics of offshoring, isn’t the writing already on the wall?
Economically, critics contend that they are not sure whether developed economies, on the
whole, actually gain more. While shareholders and corporate high-flyers embrace offshoring
(see Chapter 1), offshoring increasingly results in job losses and ultimately income inequality
in society.
Figure 3.7 From Original Equipment Manufacturer (OEM) to Original Design
Manufacturer (ODM)
Primary
activities
Primary
activities
INPUT
INPUT
Research and
development
Research and
development
Components
Components
Final assembly
Final assembly
Marketing
Marketing
OUTPUT
OUTPUT
An example of OEM
An example of ODM
73
original equipment
manufacturer (OEM)
A firm that executes
design blueprints
provided by other firms
and manufactures such
products.
original design
manufacturer (ODM)
A firm that both designs
and manufactures products.
original brand
manufacturer (OBM)
A firm that designs,
manufactures, and markets
branded products.
Note: Dotted lines represent firm boundaries. A further extension is to become an original brand manufacturer (OBM), which would incorporate brand ownership and management in the marketing area.
For graphic simplicity, it is not shown here.
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PART 1
FOUNDATIONS OF GLOBAL STRATEGY
reshoring
Moving formerly offshored
activities back to the home
country of the focal firm.
Finally, critics make the political argument that firms are only interested in the cheapest
and most exploitable labor. Not only is work commoditized, but also people (such as IT programmers) are degraded as tradable commodities that can be jettisoned. As a result, firms
that outsource work to emerging economies are often accused of being unethical, destroying jobs at home, ignoring corporate social responsibility, violating customer privacy (for
example, by sending medical records, tax returns, and credit card numbers to be processed
overseas), and, in some cases, undermining national security.
One of the most recent rounds of this debate is how the 2020 coronavirus outbreak has
exposed the vulnerability created by decades of outsourcing production of an item as small
(and seemingly “nonstrategic”) as a face mask.59 In 2019, China made half of the world’s face
masks. The outbreak in China in January and February 2020 created a spike of demand for
face masks. The Chinese government ordered all in-country producers, including foreign
firms such as 3M, to stop mask exports.60 When the virus reached other countries such as
the United States in March, there was a severe shortage of face masks. Although 3M still
maintains one factory in the United States (in Aberdeen, South Dakota) and has cranked
up its production to “surge capacity” (3M in 2020 would double its worldwide output to
100 million a month or 1.2 billion a year), 3M and a few other firms such as Honeywell
that still maintain US-based production can hardly keep up with the surging demand at
home.61 The upshot? Thousands of healthcare professionals had to treat patients without
face masks and many unnecessarily died. Face masks are a low-value, easily shipped item
ideal for offshoring. In the United States, approximately 95% of surgical (low-grade)
masks and 70% of N95 (high-grade) masks are made overseas, particularly in China. In
March, when China started exporting some masks, it shipped to countries more friendly to
China such as Iran and Italy, and orders from the United States—thanks to an unfriendly
administration that started a trade war with China in 2018—did not have high priority. As
a result, the little face mask, according to critics of offshoring, embodies everything that is
wrong with offshoring.
In the 2010s (before the coronavirus outbreak), as the cost of producing in China rose
because of rising labor cost, some Western firms started bringing work back to their home
countries—a process known as reshoring.62 Although reshoring has promise and is often encouraged by politicians, it is hard to do. In 2015, the GE Appliance Division tried to “reshore”
manufacturing back to the United States. The combination of rising Chinese labor cost and
superb US worker productivity made the overall labor cost in its Louisville, Kentucky, plant
competitive. However, parts suppliers had disappeared from the United States. GE had to ship
parts from China, which made the final product prohibitively expensive. In 2016, GE gave up
and sold its Appliance Division to China’s Haier.
Note that this debate of offshoring versus nonoffshoring primarily takes place in developed
economies. There is little debate in emerging economies because they stand to gain from
such offshoring. Taking a page from the Indian playbook, the Philippines, with numerous
English-speaking professionals, is trying to eat some of India’s lunch. Northeast China, where
Japanese is widely taught, is positioning itself as an ideal location for call centers for Japan.
Central and Eastern Europe gravitates toward serving Western Europe. Central and South
American firms are eager to grab call center contracts for the large Hispanic market in the
United States.
Debate 4: Domestic Resources versus International
(Cross-Border) Capabilities
Do firms that are successful domestically have what it takes to win internationally? Some
domestically successful firms continue to succeed overseas. IKEA has found that its Scandinavian-style furniture, combined with do-it-yourself flat packaging, is popular around the
globe. Thus, IKEA has become a global cult brand.63 The young generation in Russia is now
known as the “IKEA Generation.”
However, many other firms that are formidable domestically are burned badly overseas.
In supermarkets, Walmart withdrew from Germany and South Korea. Its leading global rival,
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Chapter 3
Leveraging Resources and Capabilities
75
Carrefour, had to exit the Czech Republic, Japan, and Mexico. Target, which had only operated
in the United States before, pulled out of Canada after only two years. In electronics, Best
Buy found it was the “worst buy” in China and quit the country. Similarly, Media Markt of
Germany had to leave China in tears.
Are domestic resources and cross-border capabilities essentially the same? The answer can
be either “Yes” or “No.” This debate is an extension of the larger debate on whether international business is different from domestic business. Each foreign market expansion is essentially a strategic experiment, and firms run different experiments to test the water in different
markets. Strategy in Action 3.3 explores whether Natura, the reigning queen of cosmetics in
Brazil, will be successful abroad.
STRATEGY IN ACTION 3.3
Emerging Markets
Natura
Many people agree that Brazil is beautiful. Likewise, Brazilians
are widely considered to be among the world’s most beautiful
people. However, beauty has to be maintained. Brazilian women’s
spending on beauty products is legendary. Although Brazil has
the world’s fifth-largest population (with 200 million people)
and the seventh-largest economy, it is the second-largest market
for beauty products—second only to the United States. Beauty
products spending per woman in Brazil matches that in Britain,
which has a much higher income. While Brazil is obviously the
attractive “B” in BRICS (Brazil, Russia, India, China, and South
Africa), beauty products are among Brazil’s most attractive
consumer markets, with multinationals such as Avon, Estée
Lauder, L’Oréal, Mary Kay, P&G, Shiseido, and Unilever salivating
over a share of the growing spoils. Emerging as the leading
foreign player, Avon sold more cosmetics in Brazil than in the
United States. Yet, the reigning queen of Brazil’s highly attractive
and competitive market is the homegrown Natura. Natura is
everywhere in Brazil—its cosmetics, perfume, and hygiene
products are in 60% of all households, and it leads the market
with $3 billion in annual revenue and a 14% market share.
Founded in 1969 and listed on the São Paulo Stock Exchange
since 2004, Natura was the world’s 20th most valuable cosmetics
brand by 2013. But because 90% of its sales are in Brazil and
almost 100% of its sales are in Latin America, few people outside
the region have heard about it.
How has Natura been able to dominate such a large and diverse market? Its recipe has at least two ingredients. First, by definition, Natura is green. Approximately 70% of its products are
plant based, and 10% come from the Amazon region, where it purchases from village cooperatives and indigenous tribes. In addition
to soccer and beaches, many people associate Brazil with the rainforest and biodiversity, which seems to be an obvious advantage
for a firm that calls itself Natura and uses a heavy dose of ingredients from the Amazon. Natura is also among the first cosmetics
firms in the world to pay attention to the specific hair-care needs
of black women, which are often ignored by mainstream firms.
Second, Natura relies on a small army of 1.2 million direct
sales agents, who work like the legendary Avon Ladies. Since 2006,
Natura’s agents had been beating the Avon Ladies—Natura’s
number-one foreign rival. Since 1974, its marketing has relied
on direct sales, leveraging hardworking women who go the
extra mile to deliver products (sometimes literally penetrating
the jungles of the Amazon). Direct sales, thus, give Natura a cost
advantage relative to its number-one domestic rival, O Boticário,
which relies on a traditional retail format. An additional beauty
of direct sales is that Natura’s sales force is directly in touch with
end users, whose needs, wants, and aspirations can be conveyed
back to headquarters for new product development.
Facing the onslaught of multinational cosmetics giants, Natura has realized that its best defense is offense. In 2005, Natura
opened its first boutique in Paris, announcing its arrival in the cosmetics capital of the world. While Brazil is famous for commodity
exports such as coffee and soybeans, no Brazilian consumer brand
has made a big splash overseas outside of Latin America. As a result, Natura has embarked on a multibrand, multichannel strategy
globally. In 2013, it acquired Australian luxury skin-care brand
Aesop (a $80 million deal). In 2017, it bought British cosmetics firm
The Body Shop from L’Oreal ($1 billion). In 2020, Natura acquired
the very company that it had long emulated—Avon ($2 billion).
These acquisitions have made Natura the world’s fourth-largest
cosmetics firm. They also give Natura access to 30 new markets,
including in China and Eastern Europe. Competing overseas,
while Natura is leveraging Brazil’s positive country-of-origin effect
of being beautiful, does it have what it takes to be as successful as
it has been at home?
Sources: (1) Bloomberg Businessweek, 2019, Selling the rainforest
door-to-door, August 5: 16–17; (2) J. Chelekis & S. Mudambi, 2014,
Direct selling at the base of the pyramid, in M. W. Peng, Global
Business, 3rd ed. (pp. 28–30), Boston: Cengage; (3) Economist,
2013, Consumer goods: Looks good, September 28 (special report): 14–15; (4) Natura, 2020, Natura &Co to close acquisition of
Avon, creating the world’s fourth-largest pure-play beauty group,
January 3: naturaeco.com
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76
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
The Savvy Stategist
The savvy strategist can draw at least four important implications for action (Table 3.4).
First, there is nothing very novel in the proposition that firms “compete on resources and
capabilities.” The subtlety comes when managers attempt to distinguish resources and capabilities that are valuable, rare, hard-to-imitate, and organizationally embedded from those
that do not share these attributes. In other words, the VRIO framework can greatly aid the
time-honored SWOT analysis, especially the S and W parts. Because managers cannot pay
attention to every capability, they must have some sense of what really matters. A common
mistake that managers often make when evaluating their firms’ capabilities is failing to assess
their capabilities relative to those of their rivals, thus resulting in a mixed bag of both good
and mediocre capabilities. The VRIO framework helps managers make decisions on what
capabilities to focus on in-house and what to outsource.
Second, relentless imitation or benchmarking, while important, is not likely to be a
successful strategy.64 By the time Elvis Presley died in 1977, there were a little more than
100 Elvis impersonators. After his death, the number skyrocketed.65 But obviously none
of these imitators achieved any fame remotely close to the star status attained by the King
of Rock ‘n’ Roll. Imitators have a tendency to mimic the most visible, the most obvious,
and, consequently, the least important practices of winning firms (and rock stars). At best,
follower firms that meticulously replicate every resource possessed by winning firms
can hope to attain competitive parity. Firms so well endowed with resources to imitate
others may be better off by developing their own unique and innovative capabilities. A
case in point is Microsoft’s repeated attempts to become more “sexy” by imitating Apple—
launching Zune to chase iPod, Surface to chase iPad, and Windows phones to chase iOS
devices. All of these efforts failed. Recently, Microsoft decided to be “itself ” and deployed
its considerable resources to transform into a significant player in cloud services, thus
becoming the world’s most valuable firm and achieving a $1 trillion market capitalization
(for several months in 2019).66
Third, a competitive advantage that is sustained does not imply that it will last forever,
which is not realistic in today’s global competition. No competitive advantage lasts forever.
In fact, competitive advantage has become shorter in duration.67 All a firm can hope for is a
competitive advantage that can be sustained for as long as possible. Over time, all advantages
erode.68 For example, each of IBM’s product-related advantages associated with tabulating
machines, mainframes, and PCs was sustained for a period of time. But eventually, these
advantages disappeared. Even IBM’s newer focus on software and servers is challenged by
cloud computing heavyweights such as Amazon.69 The lesson for all firms, including current
market leaders, is to develop strategic foresight—“over-the-horizon radar” is a good metaphor.
Such strategic foresight enables firms to anticipate future needs and move early to develop
resources and capabilities for future competition—of the sort H-E-B has developed in
anticipation of disasters and catastrophes (see the Closing Case).70
Fourth, while the resource-based view has been developed to advise firms, there is no reason you cannot develop that into a resource-based view of the individual. In other words, you
can use the VRIO framework to make yourself into an “untouchable”—a person whose job
cannot be outsourced.71 An untouchable individual’s job cannot be outsourced, because he or
she possesses valuable, rare, and hard-to-imitate capabilities indispensable to an organization.
This won’t be easy. But you really don’t want to be mediocre.
Table 3.4
●●
●●
●●
●●
Strategic Implications for Action
Managers need to build firm strengths based on the VRIO framework.
Relentless imitation or benchmarking, while important, is not likely to be a successful
strategy.
Managers need to build up resources and capabilities for future competition.
Develop your career to make yourself into an “untouchable” whose job cannot be easily
outsourced.
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Chapter 3
Leveraging Resources and Capabilities
77
Finally, how does the resource-based view answer the four fundamental questions in
strategy? The idea that each firm is a unique bundle of resources and capabilities directly
addresses the first question: Why do firms differ? The answer to the second question—How
do firms behave?—boils down to how they take advantage of their resources and capabilities
and overcome their weaknesses. Third, what determines the scope of the firm? The value
chain analysis suggests that the scope of the firm is determined by how a firm performs
different value-adding activities relative to rivals. Lastly, what determines firms’ international
success and failure? Are winning firms lucky or are they smart?72 The answer, again, boils
down to firm-specific resources and capabilities. Although luck certainly helps, it is difficult
to believe that outstanding firms such as ASML, Canada Goose, CIMC, H-E-B, and Natura
that are featured in this chapter are entirely blessed by luck alone.
CHAPTER SUMMARY
1. Explain what firm resources and capabilities are.
●●
●●
“Resources” and “capabilities” are tangible and intangible assets a firm uses to choose and implement
its strategies.
Dynamic capabilities center on sensing, seizing, and
reconfiguration.
(2) onshoring, (3) captive sourcing/FDI, and (4) domestic
in-house activity.
4. Analyze the value, rarity, imitability, and organizational
(VRIO) aspects of resources and capabilities.
●●
2. Undertake a basic SWOT analysis along the value chain.
●●
●●
A value chain consists of a stream of activities from
upstream to downstream that add value.
A SWOT analysis engages managers to ascertain a
firm’s strengths and weaknesses on an activity-by-activity basis relative to rivals.
5. Participate in four leading debates concerning the re-
source-based view.
●●
3. Decide whether to keep an activity in-house or outsource it.
●●
●●
●●
Outsourcing is defined as turning over all or part of
an organizational activity to an outside supplier.
An activity with a high degree of industry commonality and a high degree of commoditization can be
outsourced, and an industry-specific and firm-specific (proprietary) activity is better performed in-house.
On any given activity, the four choices for managers
in terms of modes and locations are (1) offshoring,
A VRIO framework suggests that only resources and
capabilities that are valuable, rare, inimitable, and
organizationally embedded will generate sustainable competitive advantage.
(1) Firm-specific versus industry-specific determinants
of performance, (2) static resources versus dynamic
capabilities, (3) offshoring versus nonoffshoring, and
(4) domestic resources versus international capabilities.
6. Draw strategic implications for action.
●●
●●
●●
Managers need to build firm strengths based on the
VRIO framework.
Relentless imitation or benchmarking, while important,
is not likely to be a successful strategy.
Managers need to build up resources and capabilities
for future competition.
Key Terms
Ambidexterity 68
Hypercompetition 72
Reshoring 74
Benchmarking 62
Intangible resources and capabilities 61
Resource-based view 60
Business process outsourcing (BPO) 72
Offshoring 65
Resource 60
Capability 61
Onshoring 65
Seizing 62
Captive sourcing 65
Original brand manufacturer (OBM) 73
Sensing 62
Causal ambiguity 67
Original design manufacturer (ODM) 73 Social complexity 68
Commoditization 63
Original equipment manufacturer
(OEM) 73
Tangible resources and capabilities 61
Outsourcing 64
VRIO framework 65
Complementary asset 68
Design thinking 61
Dynamic capability 60
Reconfiguration 62
Value chain 62
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78
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
CRITICAL DISCUSSION QUESTIONS
1. Pick any pair of rivals (such as Boeing and Airbus, Apple
and Samsung, Toyota and Volkswagen) and explain why
one outperforms another.
3. ON ETHICS: Since managers read information posted on
competitors’ websites, is it ethical to provide false information on resources and capabilities on corporate websites?
Do the benefits outweigh the costs?
2. ON ETHICS: Ethical dilemmas associated with offshoring
are plenty. Pick one of these dilemmas and make a case to
defend your firm’s offshoring (assuming you are employed
at a firm headquartered in a developed economy).
TOPICS FOR EXPANDED PROJECTS
1. Conduct a VRIO analysis by ranking your school in terms
of the following five dimensions relative to the top three
rival schools. If you were the dean with a limited budget,
Your School
where would you invest precious financial resources to
make your school number one among its rivals?
Competitor 1
Competitor 2
Competitor 3
Perceived Reputation
Faculty Strength
Student Quality
Administrative Efficiency
Building Maintenance
2. The Closing Case introduces H-E-B, which is 115 years old.
Find another firm in any industry and any country that has
also survived more than 100 years. Find the “secrets” behind
the longevity of this firm.
3. ON ETHICS: Highly successful firms ranging from
have been accused by the US government and many
critics for engaging in “unfair” competition to “crush
competitors.” As CEO of a successful firm that is being
investigated by the government for allegedly engaging
in such behavior, how do you defend your firm from a
resource-based view?
Standard Oil in the 1910s to Facebook in the 2020s
CLOSING CASE
Ethical Dilemma
H-E-B Fights Coronavirus
Founded in 1905, H-E-B is a supermarket chain headquartered in San Antonio, Texas. It operates more than 400 stores
throughout Texas and Mexico, with brands such as Central
Market, H-E-B, H-E-B Plus, Joe V’s Smart Shop, and Mi
Tienda. With more than 120,000 employees (who are internally called partners), it is the largest privately held employer in Texas and the 11th-largest privately held company in
the United States. H-E-B’s annual revenue has recently exceeded $28 billion.
When the coronavirus hit the world in 2020, many organizations had to scramble in the middle of the unprecedented crisis. In contrast, H-E-B had an emergency plan since
2005. That year, Hurricane Katrina hit the neighboring state
of Louisiana and caused major damage. Alarmed, H-E-B
developed its response plan after Katrina and appointed a
full-time, year-round director of emergency preparedness.
The plan was continuously refined and sometimes activated—in 2009 in response to the H1N1 swine flu and in
2017 in response to Hurricane Harvey, which caused major
flooding in the Houston area. In the second week of January 2020, before Wuhan, China, was locked down, H-E-B
started paying attention to the development of the virus
and ran a tabletop simulation as an exercise. On February 2,
when most people (and some of H-E-B’s competitors) did
not believe that the virus would hit the United States, H-E-B
activated its response plan and commenced preparation.
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Chapter 3
On March 4, it activated an Emergency Operations Center
in San Antonio (inside its new 1.6 million-square-foot superwarehouse).
H-E-B was in close contact with retailers and suppliers in
China and Italy, which were devastated ahead of the United
States. Information from Chinese retailers was especially
valuable in terms of how quarantine affected the supply
chain, how shopping behavior changed, how firms worked
to serve communities with total lockdowns, and what actions they wished they had done early in the cycle to get
ahead of it. Throughout late February and early March, the
first wave of panic buying for stockpiling household goods
took place in Texas. Household hygiene items such as face
masks, hand sanitizer, paper towel, toilet paper, and wipes;
and basic staples such as bread, eggs, meat, sugar, and water were often cleared out. In toilet paper alone, H-E-B sold
in two weeks what it would normally sell in two months.
Limiting the quantity, such as one dozen eggs per shopper,
became necessary. H-E-B remained steadfast in making sure
warehouses were functional and able to meet the demand.
On March 11, President Trump gave a major speech on
the virus and the National Basketball Association (NBA)
suspended its season, triggering a second wave of furious
buying. To cope with the onslaught, H-E-B implemented
store hour reductions. Starting on March 14, the hours of
all stores, including those that normally would operate
24 hours a day, were reduced to 8 a.m.–8 p.m. Stockers could
not keep up with the tremendous volume, so the headquarters called for “all hands on deck.” Thousands of employees
ranging from cart pushers and baggers to corporate office
workers all helped with stocking—day in and day out.
Even with a plan, improvisation was still a must. H-E-B’s
supply chain excelled in pulling products from the rest
of the country and feeding them to Texas. However, sourcing
and delivering became a huge challenge in a pandemic
where every part of the country was under stress. Suppliers
were receiving significantly expanded orders from all
retailers. Although sizable, H-E-B as a regional player was
only the 15th-largest retailer in the country—much smaller
than national giants such as Amazon, Costco, Target, and
Walmart. Therefore, its orders might not always receive
the highest priority from suppliers. H-E-B, thus, had to
creatively solve the sourcing challenge.
For basic items such as milk and meat, H-E-B operated
some of the largest plants in Texas by itself. It could crank
up such in-house operations from a regular 9-to-5 shift to a
24/7 schedule with less headache. One change was to reduce
the diversity of meat products. Instead of carrying several
hundred meat products, H-E-B focused on the top 50 basic
items. This enhanced efficiency by reducing changeover
delays and shipping more volumes.
Having sourced the tremendously expanded volume
of products, delivering them to stores throughout a state
whose land area is twice the size of Germany in a timely
manner was another challenge. In addition to relying on
its own trucks, H-E-B was also tapping into the resources
of other distributors. For example, Labbatt was a food distributor in Texas that specialized in delivering to schools,
Leveraging Resources and Capabilities
79
institutions, and restaurants. However, most of these places
were shut down, and Labbat’s trucks and drivers became
idle. Therefore, bolting onto H-E-B’s need for the conventional grocery supply with Labbat’s trucks and drivers became a win-win arrangement for both firms. Overall, it was
a team effort with suppliers and distributors to get items to
people throughout Texas.
“It’s not lost on us that we are offering an essential public function,” said one executive. “We’re here to take care of
our partners [employees],” commented another executive,
“take care of our customers, and take care of our community.” “We’re not in a super glamorous job,” noted H-E-B
president Craig Boyan. “We have a lot of hard-working people doing hard jobs. But there’s a strong sense of pride at
H-E-B.”
Despite such a strong sense of pride, the hazard of contracting the virus while working in the store was real. On
March 16, H-E-B gave all employees a $2 per hour raise, as
some began agitating for hazard pay given their interaction
with the public. It also activated a coronavirus hotline—
headed by a chief medical officer—for employees in need
of information or assistance. Given the long extended hours
and the superbusy schedule, H-E-B also set up an essential
store for employees inside its main warehouse, where they
could pick up necessities such as canned foods, toilet paper,
and water for their families. However, in March H-E-B also
made two ethically agonizing decisions: (1) do not offer a
separate hour for senior shoppers (“not the best and safest
option for our customers”), and (2) do not allow employees
to wear face masks or gloves in fear of upsetting customers.
(In early April, H-E-B changed its policy and required employees to wear face masks and gloves.)
Unlike a hurricane whose end could be seen almost from
the beginning, nobody at H-E-B at the time of this writing
(April 30, 2020) could see how and when the coronavirus
would end. One lesson, according to Boyan, is “to try to
adapt as quickly as humanly possible.”
Sources: (1) The author’s interviews; (2) Click2Houston, 2020,
H-E-B reassures customers that despite empty shelves, more
products are on the way, March 29: www.click2houston.com;
(3) Forbes, 2019, America’s largest private companies, December
17: www.forbes.com; (4) H-E-B, 2020, Our history, www.heb.com;
(5) H-E-B, 2020, H-E-B takes additional steps to safeguard Partners by providing masks and gloves, April 3: newsroom.heb.com;
(6) H-E-B, 2020, Store hours and operations, March 13: newsroom.
heb.com; (7) Texas Monthly, 2020, Inside the story of how H-E-B
planned for the pandemic, March 26: texasmonthly.com.
CASE DISCUSSION QUESTIONS
1. How would you characterize H-E-B’s organizational ca-
pabilities? What are the most valuable?
2. What are the pros and cons of in-house operations?
What are the pros and cons of outsourced operations?
3. If you were CEO of an H-E-B competitor, what are the
lessons in terms of do’s and don’ts you can learn from
this case?
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
80
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
NOTES
[Journal Acronyms] AMJ—Academy of Management Journal;
AMP—Academy of Management Perspectives; AMR—Academy
of Management Review; BW—Bloomberg Businessweek; CMR—
California Management Review; GSJ—Global Strategy Journal;
HBR—Harvard Business Review; JEP—Journal of Economic
Perspectives; JIBS—Journal of International Business Studies;
JIM—Journal of International Management; JM—Journal of
Management; JMS—Journal of Management Studies; JWB—
Journal of World Business; MIR—Management International
Review; MS—Management Science; SEJ—Strategic Entrepreneurship Journal; SMJ—Strategic Management Journal; SMR—
MIT Sloan Management Review; SO—Strategic Organization;
VOA—Voice of America
1. J. Barney, 1991, Firm resources and sustained competitive
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M. Porter, 1985, Competitive Advantage, New York: Free Press.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 3
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Leveraging Resources and Capabilities
81
AMR 38: 248–269; F. S. Bentley & R. Kehoe, 2020, Give
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1001–1015.
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Impact of information technology capital on firm scope
and performance, AMJ 56: 1125–1147.
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Reisenkampff, 2016, Revisiting the role of the environment
in the capabilities-financial performance relationship, SMJ
37: 1154–1173; M. Lenox, S. Rockart, & A. Lewin, 2010,
Does interdependency affect firm and industry profitability?
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G. Guo, 2017, Demystifying variance in performance, SMJ
38: 1327–1342; Y. Tang & F. Liou, 2010, Does firm performance reveal its own causes? SMJ 31: 39–57.
P. Godfrey & C. Hill, 1995, The problem of unobservables
in strategic management research (p. 530), SMJ 16: 519–533.
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Chapter 3
46. O. Williamson, 1999, Strategy research (p. 1093), SMJ 20:
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Revisiting the firm, industry, and country effects on profitability under recessionary and expansion periods, SMJ
37: 1448–1471.
50. A. von Nordenflycht, 2010, What is a professional service
firm? AMR 35: 155–174.
51. S. Berman, J. Down, & C. Hill, 2002, Tacit knowledge as a
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What are they? (p. 1113), SMJ 21: 1105–1121.
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Life in the fast lane, SMJ 31: 1527–1547; C. Lee, N.
Venkatraman, H. Tanriverdi, & B. Iyer, 2010, Complementarity-based hypercompetition in the software industry,
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with the new, SMJ 30: 1440–1452.
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Sun, 2013, Knowledge transfer and knowledge building
at offshored technical support centers, JIM 19: 362–376;
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Offshoring bias in US manufacturing, JEP 25: 111–132;
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Chadee, B. Roxas, & S. Michailova, 2013, Effects of partnership quality, talent management, and global mindset on
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19: 333–346; A. Soderberg, S. Krishna, & P. Bjorn, 2013,
Global software development, JIM 19: 347–361.
56. D. Mukherjee, A. Gaur, & A. Dutta, 2013, Creating value
through offshore outsourcing, JIM 19: 377–389.
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58. M. Gottfredson, R. Puryear, & S. Phillips, 2005, Strategic
sourcing (p. 132), HBR February: 132–139.
Leveraging Resources and Capabilities
83
59. Wired, 2020, How decades of offshoring led to a mask
shortage in a pandemic, March 29: www.wired.com.
60. VOA, 2020, World depends on China for face masks but
can country deliver? March 19: www.voanews.com.
61. BW, 2020, 3M meets the crisis it’s been preparing for,
March 30: 39–41; BW, 2020, Swabs, stat! March 30: 42–47.
62. B. Dachs, S. Kinkel, & A. Jager, 2019, Bringing it all back
home? JWB 54: 101017.
63. Fortune, 2015, It’s IKEA’s world, March 15: 166–175.
64. K. Kim & W. Tsai, 2012, Social comparison among competing firms, SMJ 33: 115–136.
65. D. Burrus, 2011, Flash Foresight (p. 11), New York:
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66. BW, 2019, The Nadellaissance, May 6: 36–41.
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D’Aveni, G. Dagnino, & K. Smith, 2010, The age of temporary advantage, SMJ 31: 1371–1385; H. Rahmandad & N.
Repenning, 2016, Capability of erosion dynamics, SMJ 37:
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68. I. Le Breton-Miller & D. Miller, 2015, The paradox of
resource vulnerability, SMJ 36: 397–415; G. Pachecode-Almeida, 2010, Erosion, time compression, and selfdisplacement of leaders in hypercompetitive environments,
SMJ 31: 1498–1526; X. Tian & J. Slocum, 2015, The decline
of global market leaders, JWB 50: 15–25.
69. BW, 2014, It’s not us, it’s you: Why customers are breaking
up with IBM, May 26: 58–63.
70. A. Chakrabarti, 2015, Organizational adaptation in an economic shock, SMJ 36: 1717–1738; D. De Carolis, Y. Yang,
D. Deeds, & E. Nelling, 2009, Weathering the storm, SEJ
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potential of capability development trajectories, SMJ 36:
53–75.
71. T. Friedman, 2005, The World is Flat, New York: Farrar,
Straus, and Giroux.
72. A. Henderson, M. Raynor, & M. Ahmed, 2012, How long
must a firm be great to rule out chance? SMJ 33: 387–406.
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CHAPTER
4
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Emphasizing Institutions,
Cultures, and Ethics
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Explain the concept of institutions
2. Understand the two primary ways of exchange transactions that reduce uncertainty
3. Articulate the two propositions underpinning an institution-based view of strategy
4. Appreciate the strategic role of cultures
5. Identify the strategic role of ethics culminating in a strategic response framework
6. Participate in three leading debates concerning institutions, cultures, and ethics
7. Draw strategic implications for action
84
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OPENING CASE
Ethical Dilemma
Brexit and Strategic Choices
Over three years in the making, Brexit is now
reality. On June 23, 2016, British citizens voted in
a referendum to leave the European Union (EU),
sending shock waves throughout the world. After
three prime ministers and numerous negotiations,
protests, and setbacks in three years, on January 31,
2020, Britain formally withdrew from the EU.
The EU had provided decades of peace, prosperity,
and—from the perspective of firms—certainty.
Especially since 1993, border control was dismantled,
the four freedoms of movement—people, goods,
services, and capital—were accomplished, and certain
elements of United Kingdom (UK) exceptionalism
such as not willing to give up its currency to adopt the
euro were accepted without much trouble. All such
certainty was thrown up in the air when the results
of the Brexit referendum (52% for, 48% against) were
announced. The political impact was immediate.
Within hours, Prime Minister David Cameron
resigned. After three weeks, Theresa May became
the new prime minister. The economic impact was
devastating. In a few days, the pound took a severe
pounding, plummeting to its lowest level against the
dollar in three decades. FTSE 250 Index fell by 14%.
Worldwide, three trillion dollars of share-price value
dissipated because investors were scared.
The EU absorbed 54% of all UK exports, and three
million UK jobs depended on exports to the EU.
Although growing fast, exports to leading emerging
economies known as BRICS (Brazil, Russia, India,
China, and South Africa) only commanded 8% of UK
exports, 3% of which went to China. In foreign direct
investment (FDI), Britain was successful in attracting
multinationals undertaking an “EU platform” strategy
to serve the entire EU. For example, in 2015 Nissan
made 450,000 cars in Britain, 80% of which were
exported to the rest of the EU. Thanks to geography,
the EU would always be Britain’s largest trading
partner—with or without EU membership.
Exactly on what terms would Britain leave the EU?
Nobody knew. The new prime minister received a
well-earned nickname, “Theresa Maybe.” In July
2019, May resigned in frustration, and Boris Johnson
became the third prime minister in three years. In
December 2019, Johnson won a general election,
securing a mandate to make Brexit happen.
For managers at firms based in Britain, the rest of
the EU, and elsewhere, a leading strategic challenge
since June 2016 was: “How can we play the game
when the rules of the game are not known?” Even
after January 31, 2020, the terms of Brexit were
still unclear. During the transition period between
February 1 and December 31, 2020, everything
would remain the same and negotiators would do
their best. However, the outcomes were still unclear.
Politicians and citizens can keep debating whether
Brexit is worth it, but managers cannot wait. They
have to make strategic choices. In the automobile
industry that produced 12% of Britain’s goods
exports and supported 186,000 jobs directly, all
the firms were foreign owned. They all cut back.
Jaguar-Land Rover, a subsidiary of Tata Motors,
confirmed 4,500 job cuts. Honda announced that
it would close a factory that made 150,000 Civics
a year in Swindon, England, in 2021. Operating
the factory since 1989, Honda exported 90% of its
output to the EU. Throughout Europe, Honda built
complex, just-in-time supply chains, which would be
vulnerable to any holdups at the border. Entering
into force on February 1, 2019, the EU-Japan
Economic Partnership Agreement, a free trade
agreement (FTA), would reduce the 10% import
tariffs to zero for made-in-Japan Civics. Brexit
destroyed incentives for Honda to keep producing
cars in Britain and exporting them to the EU, which
might impose import tariffs to a nonmember. As a
result, 3,500 Honda jobs at Swindon and at least
another 3,500 at various suppliers would disappear.
In financial services, London’s fabled banks might
lose their “passporting rights,” which allowed firms
in one EU member country to serve customers in the
other 27 members without setting up local offices.
The passporting privilege was granted not only to
British firms such as Barclays and HSBC, but also to
all foreign firms such as Citigroup, Deutsche Bank,
JPMorgan Chase, and Nomura that set up subsidiaries
85
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86
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
OPENING CASE
(Continued)
in London. Largely concentrated in London—specifically
in the one-square-mile City of London—the financial
services industry contributed 6.5% of British GDP and
11% of tax revenue. The largest financial center in the
world, the city did half of its business domestically, a
quarter with the EU27, and another quarter with the
rest of the world. Taking advantage of such an enviable
location, American banks often had 90% of their
European staff based in London. Well before Brexit,
the EU was concerned about the overconcentration
of financial services in one member at the expense of
other financial centers such as Amsterdam, Frankfurt,
Milan, and Paris. Brexit provided London’s EU rivals a
once-in-a-lifetime opportunity to grab business. The
certain removal of passporting and the uncertainty over
what would replace it was such an existential threat that
approximately 300 financial services firms moved some
activities and people to the EU27 between June 2016
and January 2020. While not a traditional financial hub,
Dublin, Ireland, gained 12,000 once-British jobs. For
example, Barclays and Bank of America Merrill Lynch
moved their EU headquarters from London to Dublin.
In agriculture, Brexit contributed to a labor shortage.
Because native-born Britons had long avoided hard
labor in the fields, farmers brought in thousands of
migrant workers from eastern EU members such as
Bulgaria, Poland, and Romania without visas or hassles.
With immigration a key issue in Brexit, many migrant
workers feared that they would be less welcome. Even
if they came, a weaker pound—another Brexit casualty—
would dent their earnings from hard work in the fields.
The upshot? About half of UK farmers reported some
crops left to rot in the fields.
institution-based view
A leading perspective of
strategy that argues that in
addition to industry-based
and resource-based views,
firms also need to take into
account wider influences
from sources such as the
state and society when
crafting strategy.
Not every industry suffered. Accountants
and lawyers salivated because of the increased
demand for paperwork. UK exporters to the
EU27 as well as importers from the EU27 enjoyed
a temporary jump in orders—thanks to the last
tariff-free days. Logistics, trucking, shipping, and
warehousing industries smiled at a pre-Brexit
boom as firms hoarded everything from French
wines to German auto parts. The last time Britain
stockpiled so much was in June 1944, right before
the Normandy invasion.
“A Shakespearean tragedy of reckless vanity and
hubris, shaped by quasi-comical political chaos,”
according to some Brexit’s critics. A win for democracy,
Brexit represents “an opportunity to transform both
Britain and Europe,” according to some supporters.
One thing on which both sides would agree is the
importance of the rules of the game.
Sources: (1) Bloomberg Businessweek, 2019, Brexit’s late harvest for farmers, May 20: 37; (2) Economist, 2016, The politics
of anger, July 2: 9; (3) Economist, 2017, Theresa Maybe, January 7: 12; (4) Economist, 2017, Lost passports, January 21: 63;
(5) Economist, 2019, Can the City survive Brexit? June 29: 12;
(6) Economist, 2019, City under siege, June 29: 67–70; (7) Economist, 2019, Honda shuts factory, January 23: 57; (8) Fortune,
2019, In Brexit, could Ireland wear the crown? March 1: 85–89;
(9) U. Ott & P. Ghauri, 2019, Brexit negotiations, Journal of International Business Studies 50: 137–149; (10) M. W. Peng & K.
Meyer, 2013, Winning the Future Markets for UK Manufacturing
Output, consulting report, London: UK Government Office for
Science; (11) Wall Street Journal, 2020, Britain’s Independence
Day, January 30.
H
ow are strategic decisions, such as where to locate activities and to hire
workers, made? Why does the uncertainty associated with Brexit trigger the
mass migration of capital, activities, and jobs out of Britain? It is evident that
the industry-based and resource-based views introduced in the previous two chapters,
while certainly insightful, are not enough to answer such high-stakes questions. To
a large degree, firm strategies are enabled and constrained by institutions that are
popularly known as the “rules of the game.” Overall, how firms play the game and win
(or lose), at least in part, depends on how the rules are made, enforced, and changed.
This insight is at the heart of the institution-based view, which covers institutions,
cultures, and ethics. It has emerged as one of the three leading perspectives on
strategy that form the strategy tripod.1 This chapter first introduces the institutionbased view. Then we discuss the strategic role of cultures and ethics, followed by a
strategic response framework. Debates and implications follow.
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Chapter 4
Emphasizing Institutions, Cultures, and Ethics
87
Understanding Institutions
Definitions
Building on the “rules of the game” metaphor, Douglass North, a Nobel laureate in economics,
more formally defines institutions as “the humanly devised constraints that structure human
interaction.”2 An institutional framework is made up of formal and informal institutions
governing individual and firm behavior. These institutions are supported by three “pillars”
identified by Richard Scott, a leading sociologist: (1) regulatory, (2) normative, and (3)
cognitive pillars.3
Shown in Table 4.1, formal institutions include laws, regulations, and rules. Their
primary supportive pillar—the regulatory pillar—is the coercive power of governments.
For example, while many individuals and firms may pay taxes out of their patriotic duty, a
larger number of them pay taxes in fear of the coercive power of the government if they are
caught not paying taxes.
On the other hand, informal institutions include norms, cultures, and ethics. The two
main supportive pillars are normative and cognitive. Normative pillar refers to how the
values, beliefs, and actions of other relevant players—collectively known as norms—influence
the behavior of focal individuals and firms.4 In Britain, the recent norm among firms centers
on rushing out of the country in the wake of Brexit (see the Opening Case). Cautious managers
who resist such “herding” and who are more confident about the post-Brexit Britain are often
confronted by board members and investors: “Why don’t we follow the norm?”
Also supporting informal institutions, cognitive pillar refers to the internalized, takenfor-granted values and beliefs that guide individual and firm behavior.5 For example, what
triggers whistleblowers to report corporate wrongdoing is their belief in what is right and
wrong. While most employees may not feel comfortable with organizational wrongdoing,
the norm is to shut up and avoid “rocking the boat.” Essentially, whistleblowers choose to
follow their internalized personal beliefs on what is right by overcoming the norm that
encourages silence.
How do these three forms of supportive pillars combine to shape individual and firm
behavior? Let us use two examples: one at the individual level and another at the firm level.
First, speed limit formally defines how fast drivers can go—a regulatory pillar. However,
many drivers adjust their speed depending on the speed of other vehicles—a normative
pillar. When some drivers are ticketed by police because they drive above the legal speed
limit, they protest: “We are barely keeping up with traffic!” This statement indicates that
they do not have a clear cognitive pillar regarding what is the right speed (never mind
the posted speed limit signs). They often let other drivers define what is the right speed.
Second, until 2006, Starbucks had marketed Harar, Sidamo, and Yirgacheffe coffee lines
from Ethiopia, each of which was named after a legendary coffee-growing region of that
country. The Ethiopian government objected and demanded compensation. Starbucks
initially resisted, arguing that it did not violate any formal trademark law. After all,
neither the Ethiopian government nor anyone else had bothered to register such names as
trademarks. However, the normative pillar coming from stakeholders such as consumers
and the media started to assert pressure. Starbucks was named and shamed as a mighty
multinational that was exploiting poor coffee farmers in a country whose average annual
income was $1,000. Finally, from a cognitive standpoint, Starbucks from its inception had
Table 4.1
institution
Humanly devised
constraints that structure
human interaction—
informally known as the
“rules of the game.”
institutional framework
A framework of formal
and informal institutions
governing individual and
firm behavior.
formal institution
Institution represented by
laws, regulations, and rules.
regulatory pillar
How formal rules, laws,
and regulations influence
the behavior of individuals
and firms.
informal institution
Institution represented by
norms, cultures, and ethics.
normative pillar
How the values, beliefs,
and norms of other relevant
players influence the
behavior of individuals and
firms.
norms
The prevailing practice of
relevant players that affect
the focal individuals and
firms.
cognitive pillar
The internalized, takenfor-granted values and
beliefs that guide individual
and firm behavior.
Dimensions of Institutions
Degree of Formality
Examples
Formal institutions
●●
●●
●●
Informal institutions
●●
●●
●●
Laws
Regulations
Rules
Norms
Cultures
Ethics
Supportive Pillars
●●
●●
●●
Regulatory (coercive)
Normative
Cognitive
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88
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
always wanted to be a responsible corporate citizen. In the 1990s, it created a corporate
social responsibility (CSR) department and named a vice president for CSR. Therefore,
some factions of its management team argued that helping the growers of some of its
highest-quality coffee was the right thing to do. Starbucks eventually reached a licensing
agreement with the Ethiopian government to compensate the government and ultimately
the coffee growers.6
What Do Institutions Do?
transaction cost
Cost associated with
economic transaction—or
more broadly, cost of doing
business.
opportunism
Self-interest seeking with
guile.
relational contracting
Contracting based on
informal relationships.
informal, relationshipbased, personalized
exchange
A way of economic
exchange based on
informal relationships
among transaction parties.
Also known as relational
contracting.
While institutions do many things, their key role is reducing uncertainty.7 By signaling which
conduct is or is not legitimate, institutions constrain the range of acceptable actions. Uncertainty can be potentially devastating.8 Political uncertainty such as terrorist attacks and ethnic
riots may render long-range planning obsolete.9 Economic uncertainty such as that associated
with Brexit can result in economic losses (see the Opening Case). As larger British firms brace
for Brexit, the 5.6 million small and medium-sized enterprises (SMEs) in the United Kingdom
are likely to incur higher costs and worse delays.10 If every firm has to prepare 50 new forms,
obviously a £1 billion firm is better able to absorb the additional costs than a £1 million firm.
If all exporters and importers experience delays at the UK-EU border, large firms can afford to
hire agents, intermediaries, and lawyers to expedite their shipments, but SMEs may be unable
to do so and their shipments may end up having lower priority to clear customs.
Uncertainty surrounding economic transactions can lead to transaction costs, which are
defined as the costs associated with economic transactions—or more broadly, the costs of doing business. Nobel laureate Oliver Williamson refers to frictions in mechanical systems: “Do
the gears mesh, are the parts lubricated, is there needless slippage or other loss of energy?”
He goes on to suggest that transaction costs can be regarded as “the economic counterpart of
frictions: Do the parties to exchange operate harmoniously, or are there frequent misunderstandings and conflicts?”11
An important source of transaction costs is opportunism, which is defined as self-interest
seeking with guile. Examples include misleading, cheating, and confusing other parties in transactions that will increase transaction costs. To reduce such transaction costs, institutional frameworks increase certainty by spelling out the rules of the game so that violations (such as failure to
fulfill a contract) can be mitigated with relative ease (such as through formal arbitration).
Without stable institutional frameworks, transaction costs may become prohibitively
high—to the extent that certain transactions simply would not take place.12 Given the postBrexit chaos at the UK-EU border, if a UK SME importer does not receive a shipment from
an Italian SME on time, is it because of the “normal” post-Brexit border delays or because of
the Italian SME’s deliberate opportunism in delaying shipping or even in having no intention
to ship the goods after being paid? In the absence of credible institutional frameworks that
can track such delays, this UK SME, after being burned once, may choose not to do business
in the future with that Italian SME supplier—or with any supplier in Italy or even in the
rest of the EU27. Conversely, if the Italian SME ships the goods but the payment does not
come from the UK SME on time, is it because of the “normal” delays in post-Brexit financial
transactions or because of the UK SME’s deliberate opportunism in taking advantage of the
chaos by delaying or even refusing payment?
How Do Institutions Reduce Uncertainty?
Throughout the world, two primary kinds of institutions—informal and formal—reduce
uncertainty.13 Often called relational contracting, the first kind of economic transaction
is known as an informal, relationship-based, personalized exchange. In many parts
of the world, there is no need to write an IOU note when you borrow money from your
friends. Insisting on such a note, either by you or by your friends, may be regarded as an insulting lack of trust. While you are committed to paying your friends back, they also believe
you will—thus, your transaction is governed by informal norms and cognitive beliefs about
what friendship is. In case you opportunistically take the money and run, your reputation
will be ruined. You will not only lose these friends but also, through their word of mouth,
lose other friends who may have been willing to loan you money in the future.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 4
Figure 4.1
Emphasizing Institutions, Cultures, and Ethics
89
Informal, Relationship-Based, Personalized Exchange
Costs/benefits
Costs
D
A
C
Benefits B
T1
Costs
F
Benefits
E
T2
T3
T4
Time
Source: M. W. Peng (2003), Institutional transitions and strategic choices (p. 279), Academy of Management Review 28 (2): 275–296.
However, in addition to the benefits of friendship, there are costs, such as the time you
have spent with friends and the gifts you have given them. Plotted graphically (Figure 4.1),
initially, at time T1, the costs to engage in relational contracting are high (at point A) and
the benefits low (at point B), because parties need to build strong social networks through
a time- and resource-consuming process to check out each other (such as going to school
or wining and dining together). If relationships stand the test of time, then benefits may
outweigh 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), because the threat of opportunism is limited by the extent to
which informal sanctions may be imposed against opportunists if necessary. There is little
demand for costly formal third-party enforcement (such as an IOU note scrutinized by
lawyers and notarized by governments). Thus, between T2 and T3, you and your friends—
and the economy collectively—are likely to benefit from relational contracting.14
Past time T3, however, the costs of such a mode may gradually outweigh its benefits,
because “the greater the variety and numbers of exchange, the more complex the kinds
of agreements that have to be made, and so the more difficult it is to do so” informally.15
Specifically, there is a limit as to the number and strength of network ties an individual or
firm can possess. In other words, how many good friends can each person (or firm) have?
Regardless of how many Facebook friends you have, nobody can claim to have 100 real good
friends. When the informal enforcement regime is weak, trust can be easily exploited and
abused. What are you going to do if your (so-called) friends who borrow money from you
refuse to pay you back or simply disappear? As a result, the limit of relational contracting
is likely to be reached at time T3. Past T4, the costs are likely to gradually outweigh the benefits.
Often termed arm’s-length transaction, the second institutional mode to govern relationships is a formal, rule-based, impersonal exchange with third-party enforcement. As the
economy expands, the scale and scope of transactions rise (you want to borrow more money
to start up a firm and there are many entrepreneurs like you), calling for the emergence of
third-party enforcement through formal market-supporting institutions. Shown in Figure 4.2,
the initial costs per transaction are high, because of the high costs of formal institutions.
Credit bureaus, courts, lawyers, police, and jails are expensive. Small villages usually cannot
afford (and do not need) them. Over time, however, 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 others). In other words, with an adequate formal institutional framework, you
(or your firm) can now borrow from local banks, out-of-state banks, or even foreign banks.
Thus, by lowering transaction costs, formal market-supporting institutions facilitate more new
arm’s-length transaction
Transaction in which parties
keep a distance, develop
little social relationship,
and rely on contracts.
formal, rule-based,
impersonal exchange
A way of economic
exchange based on formal
transactions in which
parties keep a distance.
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90
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
Figure 4.2
Formal, Rule-Based, Impersonal Exchange
Costs/benefits
A
Benefits
C
B
T1
Costs
T2
Time
Source: M. W. Peng (2003), Institutional transitions and strategic choices (p. 280), Academy of Management Review 28 (2): 275–296.
Institutional transition
Fundamental and
comprehensive changes
introduced to the formal
and informal rules of
the game that affect
organizations as players.
entries (such as all the new start-ups you and your fellow entrepreneurs can found and all the
banks that provide financing). Consequently, firms are able to grow and economies to expand.
Overall, interactions between institutions and firms that reduce transaction costs shape economic activity. In addition, institutions are not static.16 Institutional transitions are defined
as “fundamental and comprehensive changes introduced to the formal and informal rules of
the game that affect organizations as players.”17 Brexit clearly represents some of the most
significant institutional transitions in British, European, and world history (see the Opening
Case). In our hypothetical case of a British SME importing goods from an Italian SME, before
Brexit, good personal relationship between owners or managers of the two firms would be
nice, but not necessary—thanks to the smooth EU regulations governing such intra-EU trade
(see Figure 4.2). However, in the post-Brexit world, such formal institutions have collapsed,
and new regulations governing trade between the UK and Italy (and broadly speaking the
EU27) have not taken shape. Therefore, informal, personal relationships between owners or
managers of the two SMEs would have been helpful in combating potential opportunism and
reducing transaction costs (see Figure 4.1). Otherwise, firms without such relationships may
be less interested in trading with each other, because the risk of opportunism may be too
strong and transaction costs too high. Some may quit doing business together. Overall, it is
evident that managers making strategic choices during such transitions must take into account
the nature of institutional frameworks and their transitions—a perspective introduced next.18
An Institution-Based View of Business Strategy
firm strategy, structure,
and rivalry
How industry structure
and firm strategy interact to
affect interfirm rivalry.
factor endowment
The endowment of
production factors such as
land, water, and people in
one country.
Overview
Historically, much of the strategy literature, as exemplified by the industry-based and resource-based views, does not discuss the specific relationship between strategic choices and
institutional frameworks. To be sure, the influence of the “environment” has been noted.
However, much existing work has a “task environment” view that focuses on economic variables such as market demand and technological change.19
A case in point is Michael Porter’s “diamond” model that argues that competitive advantage
of different industries in different nations depends on four factors (Figure 4.3).20 First, firm
strategy, structure, and rivalry within one country are essentially the same industry-based
view covered in Chapter 2. Second, factor endowments refer to the natural and human
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Chapter 4
Emphasizing Institutions, Cultures, and Ethics
91
FIGURE 4.3 The Porter Diamond: Determinants of National Competitive
Advantage
Firm strategy,
structure, and
rivalry
Country
factor
endowments
Domestic
demand
conditions
Related and
supporting
industries
Source: M. Porter, 1990, The competitive advantage of nations (p. 77), Harvard Business Review
March–April. © 1990 by Harvard Business School Publishing; all rights reserved.
resource repertoires. Third, related and supporting industries provide the foundation on
which key industries can excel. Switzerland’s global excellence in pharmaceuticals goes hand
in hand with its dye industry. Finally, tough domestic demand propels firms to scale new
heights to satisfy such demand. Why are made-in-China products in many industries such as
electronics, shoes, toys, and white goods so competitive worldwide? One answer is because
of intense domestic competition.21 Having honed their low-cost skills at home to catch the
tough domestic crowd, winning firms in China may find it relatively easier entering markets
that are not so competitive. Overall, the combination of these four factors explains what is
behind the global competitiveness of certain industries.
Interesting as the diamond model is, it has been criticized for ignoring histories and institutions, such as what is behind firm rivalry. Among strategists, Porter is not alone. Given that
most research focuses on market economies, a stable, market-based institutional framework
has been taken for granted—in fact, no other strategy textbook has devoted a full chapter to
institutions like this one.
Such an omission is unfortunate, because strategic choices are obviously selected within and
constrained by institutional frameworks (see the Opening Case). Today, this insight becomes
more important as more firms do business abroad, especially in emerging economies. The
striking institutional differences between developed and emerging economies have propelled the
institution-based view to the forefront of strategy discussions.22 A hallmark of the institutional
frameworks in emerging economies is institutional voids—lacking market-supporting institutions
that facilitate efficient economic transactions.23 In general, the larger the deficiencies produced
by institutional voids, the more difficult it is to do business in or with those countries. Charging
into countries such as BRICS without a deep understanding of the institutional conditions in
these countries—especially their prevailing institutional voids—is not likely to win markets there.
Shown in Figure 4.4, the institution-based view focuses on the dynamic interaction between
institutions and firms, and considers strategic choices as the outcome of such interaction.
Specifically, strategic choices are not only driven by industry structure and firm-specific
resources and capabilities emphasized by traditional strategic thinking, but also reflect the
formal and informal constraints of a particular institutional framework (see the Opening Case).
related and supporting
industries
Industries that are related
to and/or support the focal
industry.
domestic demand
Demand for products and
services within a domestic
economy.
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92
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
FIGURE 4.4
Institutions, Firms, and Strategic Choices
Institutions
Dynamic
Interaction
Firms
Industry conditions
and firm-specific
resources and capabilities
Formal and
informal
constraints
Strategic
choices
Overall, it is increasingly acknowledged that institutions are more than background conditions. Instead, “institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement strategy and to create competitive advantage.”24 Currently,
the idea that “institutions matter” is no longer novel or controversial. What needs to be better
understood is how they matter.25
Two Core Propositions
intellectual property right
(IPR)
Right associated with the
ownership of intellectual
property.
bounded rationality
The necessity of making
rational decisions in
the absence of complete
information.
The institution-based view suggests two core propositions on how institutions matter
(Table 4.2). First, managers and firms rationally make strategic choices within institutional
constraints.26 For example, hundreds of firms and thousands of individuals around the
world are involved in counterfeiting. Close to 10% of all world trade is reportedly in
counterfeits.27 Remember that this is not slavery and everyone involved has voluntarily
entered this business. However, no high school graduate anywhere in the world, when
filling out a career interest form to indicate what would be a desirable career to pursue
after graduation, has ever declared an interest in joining counterfeiting. So what happened?
Why are so many individuals and firms involved? The key is to realize that managers and
entrepreneurs who make such a strategic choice are not amoral monsters but just ordinary
people. They have made a rational decision (from their standpoint at least), given an
institutional environment of weak intellectual property rights (IPR) protection and the
availability of moderately capable manufacturing and distribution skills.28 Of course, to
suggest that a strategy of counterfeiting may be rational does not deny the fact that it is
unethical and illegal. However, without an understanding of the institutional basis behind
counterfeiting, it is difficult to devise effective countermeasures.
Obviously, nobody has perfect rationality—possessing all the knowledge under all circumstances. Proposition 1 specifically deals with bounded rationality, which refers to the
necessity of making rational decisions in the absence of complete information.29 Without
prior experience, managers from emerging multinationals getting their feet wet overseas and
individuals getting involved in counterfeiting do not know exactly what they are getting into.
So emerging multinationals often burn cash overseas, and counterfeiters sometimes land in
jail, which are examples of their bounded rationality.
Table 4.2 Two Core Propositions of the Institution-Based View
Proposition 1 Managers and firms rationally pursue their interests and make choices within
the formal and informal constraints in a given institutional framework.
Proposition 2 While formal and informal institutions combine to govern firm behavior, in
situations where formal institutions are unclear or fail, informal institutions
will play a larger role in reducing uncertainty and providing constancy to
managers and firms.
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Chapter 4
Emphasizing Institutions, Cultures, and Ethics
The second proposition is that while formal and informal institutions combine to govern
firm behavior, in situations where formal institutions fail, informal institutions will play a
larger role in reducing uncertainty and providing constancy to managers and firms. Many
observers have the impression that relying on informal connections is a strategy only relevant
to firms in emerging economies and that firms in developed economies only pursue “marketbased” strategies. This is far from the truth. Even in developed economies, formal rules
only make up a small (although important) part of institutional constraints, and informal
constraints are pervasive. Just as firms compete in product markets, they also fiercely compete
in the political marketplace characterized by informal ties. Such a strategy, which centers on
leveraging political and social relationships, is called nonmarket (political) strategy.30
The best-connected firms can reap huge benefits.31 For every dollar on lobbying spent by
US defense firms, they reap $28, on average, in earmarks from Uncle Sam, and more than
20 firms grab $100 or more.32 Such an enviable return on investment compares favorably to
capital expenditure (where $1 spent brings in $17 in revenues) or direct marketing (where
$1 spent barely generates $5 in sales). Conceptually, lobbyists’ work with policy makers can
be viewed as institutional work, which is defined as “purposive action aimed at creating,
maintaining, and disrupting institutions.”33 Overall, if a firm cannot be a cost, differentiation,
or focus leader, it may still beat the competition on other grounds—namely, the nonmarket
political environment featuring informal relationships (see Strategy in Action 4.1).34
STRATEGY IN ACTION 4.1
93
nonmarket (political)
strategy
A strategy that centers on
leveraging political and
social relationships.
institutional work
Purposive action aimed at
creating, maintaining, and
disrupting institutions.
Ethical Dilemma
The American Guanxi Industry
Now part of the English-language lexicon, guanxi is the Chinese
word for informal relationships and connections. But guanxi is
certainly not restricted to China. In the United States, a guanxi
industry thrives in Washington, DC. Otherwise known as K Street,
the lobbying industry directly employs approximately 11,000
registered lobbyists and countless unregistered “strategic advisors.”
All of them peddle guanxi.
The arrival of a new president is usually associated with a
gold rush for lobbyists, as companies, interest groups, and foreign
governments scramble to access an unknown administration. In
December 2016, within one month after Donald Trump’s election
but one month before his inauguration in January 2017, two of
Trump’s ex-campaign managers set up Avenue Strategies in a
building with a view of the White House. Its entire marketing
operation, according to the two cofounders, “consisted of
answering the phone,” which was ringing off the hook.
Candidate Trump famously pledged to drain the “swamp” in
Washington. President Trump failed to do so. In 2018, companies
spent more than $3.4 billion advancing their interests, 9% more
than before the self-styled “CEO president” came to power. Amazon grew its formidable force of 11 in-house lobbyists in 2015 to
28 in 2018, in addition to a small army of 13 outside lobbying firms
that assisted it. Of the nine tech companies tracked by Bloomberg
Businessweek, Amazon, which spent $14 million in 2018, was only
outgunned by Google (Alphabet), which splashed $21 million. The
$77 million spent by the nine tech companies (the other seven were
Facebook, Microsoft, Oracle, Apple, Uber, Twitter, and Airbnb—in
descending order of spending), however, was dwarfed by the $280
million spent by pharmaceutical and healthcare companies.
Because the rules of the game for a nonmarket strategy were informal, nontransparent, and elusive, successfully lobbying the Trump
administration was no mean feat. While the administration was
business-friendly, it was also inefficient as a record number of executive posts were not filled two years after Trump moved into the White
House. With so many officials being fired and replaced, the intrigue
of the Trump White House, according to the Economist, “would baffle a Kremlinologist.” Many boutique lobbying shops such as Avenue
Strategists mushroomed. They could only claim to offer access, but
could not offer success. The upshot is that companies and industries
spending most lavishly on lobbying were not necessarily winning in
terms of government favors and better economic performance.
Sometimes, CEOs themselves came to shake hands with the
president and officials at the White House—thanks to meetings
arranged by lobbyists. While the Trump administration did not
release visitor logs, the Obama administration released visitor
logs between 2009 and 2015. These records showed that CEOs’
meetings at the White House were directly beneficial. Specifically,
the shares of firms whose executives enjoyed such meetings outperformed those of industry rivals by nearly 1% two months after the meetings. Such politically connected firms also won more
lucrative government contracts, earning on average an extra
$34 million cool profits in the 12 months after the meetings. Clearly,
guanxi pays in America.
Sources: (1) Bloomberg Businessweek, 2017, How to lobby but not be
a lobbyist, February 13: 25–27; (2) Bloomberg Businessweek, 2017,
Trump’s K Street office, January 23: 22–24; (3) Bloomberg Businessweek, 2019, Amazon flexes its Washington muscles, March 11:
32–235; (4) J. Brown & J. Huang, 2017, All the president’s friends,
NBER Working Paper 23356; (5) Economist, 2017, Doorway to
profit, May 20: 56; (6) Economist, 2019, Lobbying in Trumpland,
April 13: 63–64; (7) J. Kim, 2019, Is your playing field unleveled?
Strategic Management Journal 40: 1911–1937.
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PART 1
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Institutional Logics and Hybrid Organizations
Institutional logic
A socially constructed set of
practices, assumptions, and
values that shape behavior.
institutional pluralism
The existence of multiple
institutional logics.
state-owned enterprise
(SOE)
A firm owned and
controlled by the state
(government).
hybrid organization
An organization that
incorporates elements from
different institutional logics.
Institutional logics refer to socially constructed sets of practices, assumptions, and values
that shape behavior.35 For example, certain institutional logics govern how firms in EU member
countries do business within the EU, such as enjoying the four freedoms of movement—
people, goods, services, and capital. Other institutional logics govern how firms in EU member
countries do business with firms from non-EU member countries (see the Opening Case).
In another example, socialism is supported by a set of institutional logics characterized by
state ownership of firms. Capitalism is supported by a set of institutional logics centered on
private ownership of firms. Within capitalism, there are many shades, leading to varieties of
capitalism—such as the more laissez-faire Anglo-American version and the less laissez-faire
continental European version.36
Within one country, multiple institutional logics may coexist—as evidenced by both private
and state-owned firms. Within one organization, multiple institutional logics may also exist.37
For example, the engineering department is often influenced by an institutional logic in search
of technological excellence with little regard for cost. The finance department is typically driven
by an interest in minimizing cost and maximizing shareholder returns. Such institutional
pluralism—the existence of multiple institutional logics—requires compromise.
Sometimes, compromise can result in hybrid organizations, which are defined as organizations that “incorporate elements from different institutional logics.”38 Many modern stateowned enterprises (SOEs) are hybrid organizations “in which the levels of ownership and
control by the state can vary.”39 Unlike most of their predecessors in the 20th century that
were 100% state owned and controlled, many SOEs in the 21st century are publicly listed
and, therefore, have significant private ownership (represented by private shareholders who
bought shares).40 When managed well, such hybrid organizations can harvest legitimacyenhancing elements of the different institutional logics and thrive. In 2017, ChemChina
(a hybrid Chinese SOE) beat Monsanto (a privately owned US firm) to acquire Syngenta of
Switzerland in a $43 billion deal. One reason behind ChemChina’s success was that it played
its “hybrid” card well. Being state-owned ensured that China’s vast market for seeds and pesticides would be open to Syngenta. Being “hybrid” meant that ChemChina was not eager to
maximize returns right away and was flexible enough to guarantee and respect Syngenta’s
autonomy. This was something that Monsanto, driven by the institutional logic of maximizing shareholder value as soon as possible, could not grant. Therefore, Monsanto failed to win
the nod, and ChemChina won. Overall, hybrid organizations are often able to accommodate
multiple and sometimes competing institutional logics.
The Strategic Role of Culture
The Definition of Culture
culture
The collective programming
of the mind that
distinguishes the members
of one group or category of
people from another.
Although hundreds of definitions of culture have appeared, we will use the one proposed
by the world’s foremost cross-cultural expert, Geert Hofstede, a Dutch professor. He defines
culture as “the collective programming of the mind which distinguishes the members of one
group or category of people from another.”41 Although most international business textbooks
and trade books discuss culture (often presenting numerous details, such as how to present
business cards in Japan and how to drink vodka in Russia), most strategy books ignore culture because culture is regarded as “too soft.” Such a belief is narrow-minded in today’s global
economy. Here we focus on the strategic role of culture.
Before proceeding, it is important to make two points to minimize confusion. First, although
it is common to talk about the American culture or the Brazilian culture, there is no strict
one-to-one correspondence between cultures and nation-states.42 Many subnational cultures
exist within multiethnic countries such as Australia, Belgium, Brazil, Canada, China, India,
Indonesia, Russia, South Africa, Switzerland, and the United States.43 Second, there are many
layers of culture, such as region, ethnicity, and religion. Within a firm, one can find a specific organizational culture (such as the Toyota culture). Having acknowledged the validity
of these two points, we will follow Hofstede by referring to national culture when using the
word culture. While this is a matter of expediency, it is also a reflection of the institutional
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Chapter 4
Emphasizing Institutions, Cultures, and Ethics
95
realities of the world, which consists of approximately 200 nation-states imposing different
institutional frameworks.
The Five Dimensions of Culture
While many ways exist to identify dimensions of culture, Hofstede’s work has become by far
the most influential. He has proposed five dimensions (Figure 4.5). Power distance is the
extent to which less-powerful members within a country expect and accept that power is distributed unequally. In high power distance Brazil, the richest 10% of the population receives
approximately 50% of the national income and everybody accepts this as “the way it is.” In low
power distance Sweden, the richest 10% only gets 22% of the national income. In the United
States, subordinates often address their bosses on a first-name basis, a reflection of low power
distance. While this boss, whom you call Mary or Joe, still has the power to fire you, the distance appears to be shorter than if you have to address this person as Mrs. Y or Dr. Z.
Individualism refers to the perspective that the identity of an individual is fundamentally his
or her own, whereas collectivism refers to the idea that the identity of an individual is primarily
based on the identity of his or her collective group (such as family, village, or company). In
individualistic societies, ties between individuals are generally loose and individual achievement
and freedom are highly valued. In contrast, in collectivist societies, ties between individuals
are often close and collective accomplishments are often sought after. This difference in part
explains when confronting economic downturns, why mass layoffs are widely used in the
United States, whereas across-the-board pay cuts are frequently undertaken in Japan.
The masculinity versus femininity dimension refers to sex-role differentiation. In every
traditional society, men tend to have occupations that reward assertiveness, such as executives, politicians, and soldiers. Women usually work in caring professions, such as teachers
and nurses, in addition to being homemakers. High masculinity societies (led by Japan) continue to maintain such a sharp role differentiation along gender lines. In low masculinity
societies (led by Sweden), women increasingly become executives, politicians, and soldiers,
and men frequently assume the role of nurses, teachers, and househusbands.44
Uncertainty avoidance refers to the extent to which individual members in a culture accept
ambiguous situations and tolerate uncertainty. Members of high uncertainty avoidance cultures
FIGURE 4.5
Examples of Hofstede Dimensions of Culture
To determine the cultural characteristics of a country, compare the
number and vertical distance (higher means more) of that country on a
particular cultural dimension (labeled on the right side of the exhibit)
with those of other countries. For example, with a score of 80, Japan
has the second highest long-term orientation. It is exceeded only by
China, which has a score of 118. By contrast, with a score of 0, Pakistan
has the weakest long-term orientation.
10
118
31
76
60
49
50
38
20
69
65
66
0
95
70
40
50
67
80
China
90
50
35
Brazil
29
92
Germany
54
55
Japan
Pakistan
8
48
20
46
14
46
95
Russia
33
62
Uncertainty Avoidance
8
71
Individualism
Power Distance
29
74
Singapore
Long-term Orientation
Masculinity
48
The degree of social
inequality.
individualism
The perspective that the
identity of an individual is
most fundamentally based
on his or her own individual
attributes (rather than the
attributes of a group).
collectivism
The perspective that the
identity of an individual is
most fundamentally based
on the identity of his or her
collective group (such as
family, village, or company).
masculinity
A relatively strong form
of societal-level sex role
differentiation whereby
men tend to have
occupations that reward
assertiveness and women
tend to work in caring
professions.
femininity
80
65
power distance
91
31
40
Sweden
USA
A relatively weak form
of societal-level sex role
differentiation whereby
more women occupy
positions that reward
assertiveness and more men
work in caring professions.
uncertainty avoidance
The extent to which
members in different
cultures accept ambiguous
situations and tolerate
uncertainty.
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96
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
long-term orientation
A perspective that
emphasizes perseverance
and savings for future
betterment.
(led by Greece) place a premium on job security and retirement benefits. They also tend to resist
change, which, by definition, is uncertain. Low uncertainty avoidance cultures (led by Singapore)
are characterized by a greater willingness to take risk and less resistance to change.
Long-term orientation emphasizes perseverance and savings for future betterment.
China, which has the world’s longest continuous written history of approximately 5,000 years
and the highest contemporary savings rate, leads the pack. On the other hand, members of
short-term orientation societies (led by Pakistan) prefer quick results and instant gratification.
Overall, Hofstede’s dimensions are interesting and informative. They are also largely
supported by subsequent research.45 Note that Hofstede’s dimensions are not perfect and have
attracted some criticism.46 However, it is fair to suggest that these dimensions represent a
starting point for us in trying to figure out the role of culture in global strategy.
Cultures and Strategic Choices
A great deal of strategic choices is consistent with Hofstede’s cultural dimensions. For example,
although widely practiced in low power distance Western countries, asking subordinates for
feedback and participation—known as empowerment—is regarded as a sign of weak leadership
and low integrity in high power distance countries such as Egypt, Russia, and Turkey.
Individualism and collectivism also affect strategic choices.47 Because entrepreneurs must
take more risk, individualistic societies tend to foster higher levels of entrepreneurship,
whereas collectivism may result in lower levels of entrepreneurship. In Japan, only 21% of the
adults view entrepreneurship as a good career choice—the lowest in the world. This compares
with 62% in the United States.48
In high masculinity societies, the stereotypical manager is “assertive, decisive, and
‘aggressive’ (only in masculine societies does this word carry a positive connotation).” In
comparison, in high femininity societies, the stylized manager is “less visible, intuitive rather
than decisive, and accustomed to seeking consensus.”49
Uncertainty avoidance also has a bearing on strategic behavior.50 Managers in low uncertainty
avoidance countries (such as Britain) rely more on experience and training, whereas managers in
high uncertainty avoidance countries (such as China) rely more on rules and procedures.
In addition, cultures with a long-term orientation are likely to nurture firms with long
horizons.51 Japanese and Korean firms are known to be willing to forego short-term profits
and focus more on market share, which, in the long term, may translate into financial gains.
In comparison, Western firms focus on relatively short-term (such as quarterly) profits.
Overall, there is strong evidence pointing out the strategic importance of culture. Sensitivity
to cultural differences cannot guarantee success but can help avoid blunders (see Table 4.3).
Table 4.3
●●
●●
●●
●●
Some Cross-Cultural Blunders
Electrolux, a major European home appliance maker, advertised its powerful vacuum
machines in the United States using the slogan “Nothing sucks like an Electrolux!”
A Japanese subsidiary CEO in New York, at a staff meeting consisting of all American
employees, informed everyone of the firm’s grave financial losses and passed on a
request from headquarters in Japan that everyone redouble efforts. The staff immediately
redoubled their efforts—by sending their résumés out to other employers.
In Malaysia, an American expatriate was introduced to an important potential client he
thought was named “Roger.” He proceeded to call this person “Rog.” Unfortunately,
this person was a “Rajah,” which is an important title of nobility in high power distance
Malaysia. Upset, the Rajah walked away from the deal.
Shortly after arrival at a US subsidiary, a British expatriate angered minority employees
by firing several black middle managers (including the head of the Affirmative Action
program). He was later sued by these employees.
Sources: Based on text in (1) P. Dowling & D. Welch, 2005, International Human Resource Management,
4th ed., Cincinnati: South-Western Cengage Learning; (2) M. Gannon, 2008, Paradoxes of Culture and
Globalization, Thousand Oaks, CA: Sage; (3) D. Ricks, 1999, Blunders in International Business, 3rd ed.,
Oxford, UK: Blackwell.
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Chapter 4
Emphasizing Institutions, Cultures, and Ethics
97
In addition, while “what is different” cross-culturally can be interesting, it can also be unethical and illegal—all depending on the institutional frameworks in which firms are embedded.
Thus, it is imperative that current and would-be strategists be aware of the importance of
ethics, as introduced next.
The Strategic Role of Ethics
The Definition and Impact of Ethics
Ethics refers to the norms, principles, and standards of conduct governing individual and
firm behavior. Ethics is not only an important part of informal institutions, but also deeply
reflected in formal laws and regulations.52 Numerous firms have introduced a code of
conduct (code of ethics)—a set of guidelines for making ethical decisions. There is a debate
on what motivates firms to become ethical.
●●
●●
●●
A negative view suggests that some firms may simply jump onto the ethics
“bandwagon” under social pressures to appear more legitimate without necessarily
becoming more ethical.
A positive view maintains that some (although not all) firms may be self-motivated to
“do it right” regardless of social pressures.
An instrumental view believes that good ethics may represent a useful instrument to
make profits.
ethics
The norms, principles,
and standards of conduct
governing individual and
firm behavior.
code of conduct (code of
ethics)
Written policies and
standards for corporate
conduct and ethics.
Perhaps the best way to appreciate the strategic value of ethics is to examine what
happens after a crisis. As a “reservoir of goodwill,” the value of an ethical reputation can
be magnified during crisis.53 After the 2008 terrorist attacks on the Taj Mahal Palace Hotel
in Mumbai, India, that killed 31 people (including 11 employees), the hotel received only
praise. Why? The surviving guests were overwhelmed by employees’ dedication to duty
and their desire to protect more than 1,200 guests in the face of the terrorist attacks.54
Paradoxically, catastrophes may allow more ethical firms such as the Taj that are renowned
for their integrity and customer service to shine. The upshot seems to be that ethics pays
(see Figure 4.6).
Integrity Can Command a Premium
Nick Hobart
FIGURE 4.6
Source: Harvard Business Review, June 2006 (p. 94).
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Managing Ethics Overseas
ethical relativism
The relative thinking that
ethical standards vary
significantly around the
world and that there are
no universally agreedupon ethical and unethical
behaviors.
ethical imperialism
The imperialistic thinking
that one’s own ethical
standards should be applied
universally around the
world.
Managing ethics overseas is challenging, because what is ethical in one country may be unethical elsewhere (see Strategy in Action 4.2).55 Facing ethical dilemmas, how can managers
cope?
Two schools of thought have emerged.56 First, ethical relativism refers to an extension
of the cliché, “When in Rome, do as the Romans do.” If women in Saudi Arabia are discriminated against, so what? Likewise, if industry rivals in Mexico fix prices, who cares? Isn’t that
what “Romans” do in “Rome”? Second, ethical imperialism refers to the absolute belief that
“There is only one set of Ethics (with the big E), and we have it.” For example, since sexual
discrimination and price fixing are wrong in the United States, some Americans believe that
such practices must be wrong everywhere else. In practice, however, neither of these schools
of thought is realistic. At the extreme, ethical relativism would have to accept any local practice, whereas ethical imperialism may cause resentment and backlash among locals (see the
Closing Case).
Three “middle-of-the-road” guiding principles have been proposed by Thomas Donaldson, a business ethicist (Table 4.4). 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 thresholds for all operations around the
world.
Second, respect for local traditions suggests cultural sensitivity. If gifts are banned, foreign
firms can forget about doing business in China and Japan. While hiring employees’ children
STRATEGY IN ACTION 4.2
Ethical Dilemma
Onsen and Tattoos in Japan
Onsen means hot spring in Japanese. It also refers to a bathhouse or
a traditional inn situated around a hot spring. As a volcanically active country, Japan is both cursed by its frequent earthquakes and
blessed by its thousands of onsen scattered throughout the country.
Taking an onsen bath is such a part of Japanese culture that it has
attracted numerous foreign tourists. But here is a catch: If you have
tattoos on your body, you are not welcome. It turns out that in Japan, tattoos are synonymous with criminals, especially those in the
notorious yakuza (mafia). As a result, onsen operators usually post
a notice at the entrance warning people with tattoos: Please do not
bother. The mere sight of a tattooed gang member is enough to
scare away regular customers. Such a practice has become a part of
the deeply engrained cultural and ethical norms in Japan.
However, onsen is no longer for Japanese customers only. As
a society, Japan is getting older and richer. Getting older means a
smaller number of young people who can be customers. Getting
richer means more homes are equipped with bath facilities, reducing the incentive to frequent a public onsen. As a result, the onsen
industry has been suffering a long-term decline. To combat such
a decline, it increasingly relies on foreign customers. In 2017,
29 million foreign visitors came to Japan, tripling the number in
2013. More than a third of them enjoyed onsen. The government
hoped the total number of foreign visitors to reach 40 million by
2020–2021, during which Tokyo would host the Olympics.
Given the lack of stigma associated with tattoos in many
Western cultures, many foreign visitors eager to experience the
legendary onsen have a rude awakening when being turned away,
thanks to their tattoos. In 2013, a Maori woman from New Zealand
participating in a conference celebrating indigenous culture
was ironically barred from entering a bathhouse because of her
traditional facial tattoo, causing a social media uproar. The government-run Japan Tourism Agency has urged onsen operators to
“give consideration” to tattooed foreigners. Some operators have
offered stickers or patches for such foreigners to cover their tattoos deemed offensive in the eyes of Japanese customers. Other
operators have gone out of their way to reposition themselves as
“tattoo-friendly.”
However, even such “tattoo-friendly” onsen operators face
a nontrivial ethical dilemma. After all, more Japanese customers
than foreigners visit onsen. Making a majority of customers unhappy while appeasing a minority of foreign visitors does not seem
to make sense. If foreigners with tattoos are allowed to enter, then
yakuza members will increasingly complain that they are being
discriminated against. Squeezed between a rock and a hot onsen,
more than half of the operators still ban people with tattoos—
regardless of nationality—from entry. Clearly, changing norms
takes time.
Sources: (1) The author’s interviews; (2) Economist, 2018, Bathing
etiquette in Japan, February 10: 36; (3) Kashiwaya Magazine, 2018,
Are people with tattoos allowed in onsen? January 18: www.kashiwaya.org; (4) Real Japan, 2020, Onsen tips for those with tattoos,
www.therealjapan.com.
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Chapter 4
Table 4.4
●●
●●
●●
Emphasizing Institutions, Cultures, and Ethics
99
Managing Ethics Overseas: Three “Middle-of-the-Road” Approaches
Respect for human dignity and basic rights
Respect for local traditions
Respect for institutional context
Sources: Based on text in (1) T. Donaldson, 1996, Values in tension: Ethics away from home, Harvard
Business Review September–October: 4–11; (2) J. Weiss, 2006, Business Ethics, 4th ed., Cincinnati:
South-Western Cengage Learning.
and relatives instead of more qualified applicants is illegal according to US equal opportunity
laws, Indian companies routinely practice such nepotism, which would strengthen employee
loyalty. What should US companies setting up subsidiaries in India do? Donaldson advises
that such nepotism is not necessarily wrong—at least in India.
Finally, respect for institutional context calls for a careful understanding of local institutions. Codes of conduct banning bribery are not very useful unless accompanied by guidelines for the scale of appropriate gift giving and receiving (see Table 4.5). Citigroup allows
employees to accept noncash gifts with nominal values of less than $100. The Economist lets
its journalists accept any noncash gift that can be consumed in a single day—thus, a bottle of
wine is acceptable but a case of wine is not. Overall, these three principles, although far from
perfect, can help managers improve the quality of their decisions.
Ethics and Corruption
Ethics helps to combat corruption, which is defined as the abuse of public power for private
benefits usually in the form of bribery (in cash or in-kind).57 Corruption distorts the basis
for competition that should be based on products and services, thus causing misallocation of
resources and slowing economic development.58 Therefore, corruption discourages foreign
direct investment (FDI). If the level of corruption in Singapore (very low) increases to the
Table 4.5
●●
●●
●●
●●
●●
corruption
The abuse of public power
for private benefit usually
in the form of bribery.
Texas Instruments (TI) Guidelines on Gifts in China
These China-specific Guidelines are based on TI’s Global Standard Guidelines, taking into
consideration China’s local business climates, legal requirements, customs, and cultures
as appropriate. Employees of TI entities in China (“TIers”) should comply with both these
China-specific Guidelines and Global Standard Guidelines. In any event of conflict, the
stricter standard will apply.
Acceptable gifts include calendars, coffee cups, appointment books, notepads, small
pocket calculators, and ballpoint pens.
Gifts with excessive value refer to those that are worth more than RMB 200 yuan
(approximately $32), and need approval from Asia Finance Director.
If you are not sure when you can accept or offer any gift, the following two Quick Tests
are recommended:
a. “Reciprocity” Test. Ask this question: Based on your knowledge of TI’s policy and
culture, would TI under similar circumstances allow you to provide a TI business partner
a gift of an equivalent nature? If the answer is no, then politely refuse the offer.
b. “Raise Eyebrow” or “Embarrassments” Test. Ask those questions: Would you “raise
eyebrows” or feel uncomfortable in giving or receiving the gift in the presence of
others in a work area? Would you feel comfortable in openly displaying the gift you are
offering or receiving? Would you feel embarrassed if it were seen by other TI business
partners or by your colleagues/supervisor?
No cash or gift cards may be given. Gift cards that are redeemable only for a specific item
(and not cash) with a fixed RMB value, such as a Moon Cake card,* are permitted as long
as they are otherwise consistent with these Guidelines.
*Moon Cake is a special dessert for the Mid-Autumn Festival, which is a major holiday for family
reunion in September.
Source: Adapted from Texas Instruments, 2014, Comprehensive Guidelines on Gifts, Entertainment, and
Travel in China.
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Foreign Corrupt Practices
Act (FCPA)
A US law enacted in 1977
that bans bribery of foreign
officials.
extraterritoriality
The reach of one country’s
laws to other countries.
level in Mexico (in the midrange worldwide), it reportedly would have the same negative
effect on FDI inflows as raising the tax rate by 50%.59
In 1977, the US Congress enacted the Foreign Corrupt Practices Act (FCPA), which
banned bribery to foreign officials. Many US firms complain that the act has unfairly restricted
them. They also point out that overseas bribery expenses were often tax-deductible (!) in
many EU countries, such as Austria, France, Germany, and the Netherlands—at least until
the 1990s. However, even with FCPA, there is no evidence that US firms are inherently more
ethical than others. FCPA itself was triggered by investigations in the 1970s of many corrupt
US firms. Even FCPA makes exceptions for small “grease” payments to get goods through
customs abroad.
Recently, many non-US firms complain that the extraterritorial application of FCPA against
them is unfair. Extraterritoriality is defined as the reach of one country’s laws to other
countries. While FCPA was designed to combat US firms’ corruption, FCPA investigations
in recent years have disproportionately targeted foreign firms. Of the top ten biggest FCPA
fines, only two were on US firms. The top three biggest FCPA fines fell on Petrobras of Brazil
($1 billion), Siemens of Germany ($800 million), and Alstom of France ($700 million)—all
for their alleged corruption behavior outside the United States.60 That the United States enjoys
such an extraordinary privilege of imposing a US law is because any banking transaction in
dollars—which might be a bribery payment from Alstom to an official in Egypt—ultimately
passes through New York. This gives US authorities extraterritorial jurisdiction over such
corruption. Overall, FCPA can be regarded as an institutional weapon in the fight against
corruption. Its implementation has always been controversial.
A Strategic Response Framework
for Ethical Challenges
At its core, the institution-based view focuses on how certain strategic choices, under institutional influences, are diffused from a few firms to many.61 In other words, the attention is on
how certain practices (such as from paying bribes to refusing to pay) 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 (Table 4.6).
A reactive strategy is passive. When problems arise, firms do not feel compelled to act, and denying is usually the first line of defense. The need to take necessary action is neither internalized
through cognitive beliefs nor becomes any norm in practice. That only leaves formal regulatory
pressures to compel firms to act. As early as in 2005, General Motors (GM) had been aware that
the ignition switch of some of its cars could accidentally shut off the engine. Yet, it refused to take
any actions. It produced and sold such cars for a decade. Sure enough, accidents happened and
people were killed and injured due to the faulty switches. Only when victims’ families sued and
congressional pressures increased did GM belatedly recall millions of cars in 2014.
Table 4.6
Strategic Responses to Ethical Challenges
Strategic Responses
Strategic Behaviors
Examples in the Text
Reactive
Deny responsibility; do less
than required
GM (the 2000s–2010s)
Defensive
Admit responsibility but fight
it; do the least that is required
Facebook and Google-YouTube
(the 2010s)
Accommodative
Accept responsibility; do all
that is required
Ford (the 2000s)
Proactive
Anticipate responsibility; do
more than is required
BMW (the 1990s)
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Chapter 4
Emphasizing Institutions, Cultures, and Ethics
101
A defensive strategy focuses on regulatory compliance. In the absence of regulatory
pressures, firms often fight informal pressures coming from the media and activists. For
years, social media firms such as Facebook and Google-YouTube resisted calls for them to
clean up their content, arguing that the Internet should be “free.” The upshot is that numerous
terrorists and extremists posted their content on such social media platforms with impunity.
In March 2019, livestreaming on Facebook by a killer who shot 51 people in Christchurch,
New Zealand, was an extreme case. Before the rampage, the killer tweeted racist messages.
Such a grotesque event led the New Zealand government to declare the sharing of the killing
video a crime, and the Australian government (the gunman was an Australian) to adopt a
harsh new law on social media, with jail times for executives if their firms do not make
adequate efforts to remove offensive content.62
An accommodative strategy features emerging organizational norms to accept responsibility and a set of increasingly internalized cognitive beliefs and values toward making certain changes. In other words, it becomes legitimate to accept a higher level of ethical and
moral responsibility beyond what is minimally required legally. In 2000, when Ford Explorer
vehicles equipped with Firestone tires had a large number of fatal rollover accidents, Ford
evidently took the painful lesson from its Pinto fire fiasco in the 1970s. In the 1970s, Ford
marketed the Pinto car while aware that a design flaw could make the car susceptible to exploding in rear-end collisions. Similar to GM’s recent scandal, Ford had not recalled the Pinto
until congressional, consumer, and media pressures heated up. In 2000, Ford aggressively
initiated a speedy recall, launched a media campaign featuring its CEO, and discontinued its
100-year-old relationship with Firestone.
Finally, proactive firms anticipate institutional changes and do more than is required.
For example, BMW anticipated its emerging responsibility associated with the German
government’s proposed “take-back” policy, requiring automakers to design cars whose
components can be taken back by the same manufacturers for recycling. BMW not only
designed easier-to-disassemble cars, but also signed up the few high-quality dismantler firms
as part of an exclusive recycling infrastructure. Further, BMW actively participated in public
discussions and succeeded in establishing its approach as the German national standard
for automobile disassembly. Other automakers were, thus, required to follow BMW’s lead.
However, they had to fight over smaller, lower-quality dismantlers or develop in-house
dismantling infrastructure from scratch.63 Through such a proactive strategy, BMW has
facilitated the emergence of new environmentally friendly norms.
In summary, the strategic response framework offers a menu from which firms can choose
when confronting ethical challenges. Strategy in Action 4.3 illustrates the ethical challenges
confronting hundreds of firms around the world that profit from using the Maasai name
without paying a dime to the tribe or its people. In your view, how should these firms strategically respond to such challenges?
STRATEGY IN ACTION 4.3
Emerging Markets
Ethical Dilemma
Monetizing the Maasai Tribal Name
Living in Kenya and Tanzania, the Maasai, with their recognizable
red attire, represent one of the most iconic tribes in Africa. As
seminomadic pastoralists, the Maasai have for ages raised cattle
and hunted with some small-scale agriculture near Africa’s finest
game parks such as Serengeti. Known as fierce warriors, the
Maasai have won the respect of rival tribes, colonial authorities,
and modern governments of Kenya and Tanzania. Together with
lions, giraffes, and zebras, a Maasai village is among the “must-see”
places for a typical African safari trip.
Those of you who cannot travel so far to visit Africa can
still get a taste of the colorful Maasai culture. Jaguar Land Rover
marketed a limited-edition version of its Freelander 434 named
Maasai. Louis Vuitton developed a line of fashion wear for men
and women inspired by the Maasai dress. Diane von Furstenberg produced a red pillow and cushion line simply called Maasai. Switzerland-based Maasai Barefoot Technology developed a
line of round-bottom shoes to simulate the challenge of Maasai
walking barefoot on soft earth. Italian pen maker Delta named its
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high-end, red-capped fountain pen Maasai. A single pen retails at
$600, “which is like three or four good cows,” according to a Maasai
tribesman. These are just high-profile examples. Experts estimate
that perhaps 10,000 firms worldwide use the Maasai name, selling
everything from hats to legal services.
All this sounds fascinating, except for one catch. Although
these firms have made millions, not a single Maasai member or
the tribe itself has ever received a penny from the firms. This
has caused a huge ethical and legal debate to erupt. Legally, the
Maasai case is weak. The tribe has never made any formal effort to
enforce intellectual property rights of its culture and identity. With
approximately two million tribal members spread between Kenya
and Tanzania, just who can officially represent the Maasai is up
in the air. An expert laughed at this idea, saying, “Look, if it could
work, the French budget deficit would be gone by demanding
royalties on French fries.” Another expert argued: “Should Amazon
start paying royalties to Brazil? Even if Alibaba wants to pay
royalties to some Arabic country, which one?”
However, from an ethical standpoint, all the firms just cited
claim to be interested in corporate social responsibility (CSR).
If they indeed are interested in the high road to business ethics,
then expropriating—or, if you may, “ripping off ” or “stealing”—
the Maasai name without compensation can become a huge
embarrassment.
The Maasai’s frequent interactions with tourists have made
them aware of how much value there is in the Maasai name. But
they are frustrated by their lack of knowledge about the rules of
the game concerning IPR. Fortunately, they have the help of Ron
Layton, a New Zealander and former diplomat who now runs
nonprofit Light Years IP, which advises groups in the developing
world such as the Maasai. Layton previously helped the Ethiopian
government wage a legal battle with Starbucks, which marketed
Harar, Sidamo, and Yirgacheffe coffee lines from different regions
of Ethiopia without compensation. Although Starbucks projected
an image of being serious about CSR, it initially fought these
efforts before eventually agreeing to recognize Ethiopia’s claims.
Emboldened by the success in fighting Starbucks, Layton
worked with Maasai elders to establish a nonprofit registered in
Tanzania called the Maasai Intellectual Property Initiative (MIPI).
Together, they crafted MIPI bylaws that reflected traditional
Maasai cultural values while satisfying the requirements of
Western courts—in preparation for an eventual legal showdown.
The challenge now is to have more tribal leaders and elders sign
up with MIPI so that it comes to be viewed both externally and
internally as the legitimate representative of the Maasai tribe. How
the tribe can monetize its name and how firms that have profited
from using the Maasai name strategically respond to such ethical
and legal challenges remain to be seen.
Sources: (1) Bloomberg Businessweek, 2013, Maasai™, October 24:
84–88; (2) IP Legal Freebies Blog, 2014, Maasai tribe wants control over commercial uses of its name, March 6: iplegalfreebies.
wordpress.com; (3) IP Legal Freebies Blog, 2013, Mailing yourself
a copy of your creative work does not protect your copyright, January 30: iplegalfreebies.wordpress.com.
Debates and Extensions
Similar to the industry-based and resource-based views, the institution-based view has also
attracted significant debates. This section focuses on three important ones not discussed
earlier.
Debate 1: Opportunism versus Individualism/Collectivism
Opportunism is a major source of uncertainty, and institutions emerge to combat
opportunism. However, critics argue that emphasizing opportunism as “human nature”
may backfire in practice.64 If a firm assumes that employees will steal and thus places
surveillance cameras everywhere, then some employees who otherwise would not steal may
feel alienated enough to do exactly that. If firm A insists on specifying minute details in an
alliance contract in order to prevent firm B from behaving opportunistically in the future, A
is likely to be regarded by B as being not trustworthy and being opportunistic now. This is
especially the case if B is from a collectivist society. Thus, attempts to combat opportunism
may beget opportunism.
Researchers acknowledge that opportunists are a minority in any population. However,
they contend that because of the difficulty in identifying such a minority of opportunists
before they cause any damage, it is imperative to place safeguards that, unfortunately, treat
everybody as a potential opportunist. For example, thanks to the work of only 19 terrorists,
millions of air travelers around the world after September 11, 2001, have had to go through
heightened security. Everybody hates it, but nobody argues that it is unnecessary. This debate,
therefore, seems deadlocked.
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One cultural dimension, individualism/collectivism, may hold a key to an improved understanding of opportunism. A common stereotype is that players from collectivist societies
(such as China) are more collaborative and trustworthy, and that those from individualist
societies (such as the United States) are more competitive and opportunistic.65 However, this
superficial understanding is not necessarily the case. Collectivists are more collaborative only
when dealing with in-group members—individuals and firms regarded as a part of their
own collective. The flip side is that collectivists discriminate more harshly against out-group
members—individuals and firms not regarded as a part of “us.”66 Individualists, who believe
that every person (firm) is on his or her (its) own, make less of a distinction between ingroup and out-group. Therefore, while individualists may indeed be more opportunistic than
collectivists when dealing with in-group members (this fits the stereotype), collectivists may
be more opportunistic when dealing with out-group members. This can be seen when people
enter a building. Almost no Chinese (in China) would hold the door for strangers behind
them, and most Americans have the habit of holding the door for strangers behind them. As
collectivists, the same Chinese who do not bother to hold the door for out-group members
(strangers) often demonstrate impeccable courtesy when dealing with their own in-group
members. As individualists, Americans show little distinction when holding the door for
in-group members (their colleagues, friends, and family members) and out-group members
(strangers).
Thus, on balance, the average Chinese is not inherently more trustworthy than the average
American. The Chinese motto regarding out-group members is: “Watch out for strangers.
They will screw you!” This helps explain why the United States, the leading individualist
country, is among societies with a higher level of spontaneous trust, whereas there is greater
interpersonal and interfirm distrust in the large society in China than in the United States.67
This also explains why it is important to establish guanxi (relationships and connections) for
individuals and firms in China; otherwise, life can be very challenging in a sea of strangers.68
While this insight is not likely to help improve airport security screening, it can help
managers and firms better deal with each other. Only through repeated social interactions
can collectivists assess whether to accept newcomers as in-group members. If foreigners who,
by definition, are from an out-group refuse to show any interest in joining the in-group, then
it is fair to take advantage of them. This explains why many cross-culturally naïve Western
managers often cry out loud for being taken advantage of in collectivist societies—they are
simply being treated as “deserving” out-group members.
103
in-group
Individuals and firms
regarded as part of “us.”
out-group
Individuals and firms not
regarded as part of “us.”
Debate 2: Cultural Distance versus Institutional Distance
Given cross-cultural differences and conflicts, it is not surprising that, for instance, domestic
transactions are less problematic than international transactions. Basically, when disputes
and misunderstandings arise, it is difficult to ascertain whether the other side is deliberately
being opportunistic or is simply being (culturally) different. Firms in general may prefer to
do business with culturally close countries because of the shorter cultural distance—the
difference between two cultures along some dimensions.69
However, critics point out many findings inconsistent with the cultural distance view.70
Given the complexity of foreign entry decisions, cultural distance, while important, is but one
of many factors to consider. For instance, relative to national culture, organizational culture
may be equally important.
Finally, some argue that perhaps cultural distance can be complemented (but not replaced)
by the institutional distance concept, which is “the extent of similarity or dissimilarity
between the regulatory, normative, and cognitive institutions of two countries.”71 For example,
the cultural distance between Canada and China is virtually as huge as the cultural distance
between Canada and Hong Kong (where 98% of the population is ethnic Chinese). However,
the institutional distance between Canada and Hong Kong is much shorter: Both use common
law, speak English as an official language, and share a common heritage of being former British
colonies. Therefore, before entering mainland China, Canadian firms may have a preference to
enter Hong Kong first—thanks to the shorter institutional distance between them.
cultural distance
The difference between
two cultures along some
identifiable dimensions.
institutional distance
The extent of similarity or
dissimilarity between the
regulatory, normative, and
cognitive institutions of two
countries.
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Debate 3: Freedom of Speech versus Censorship
on the Internet
The rapid technological development of the Internet has surpassed the generally slow pace
of institutional development. This has resulted in tremendous uncertainty on what can or
cannot be posted via social media platforms such as Facebook, Google-YouTube, and Twitter.
What should be the rules of the game governing the Internet? From an institution-based
view, this is one of the most recent and most explosive debates.
During the Arab Spring in the early 2010s, social media seemed to promote freedom and
democracy. However, in the late 2010s, social media was not only found to violate user privacy (a persistent problem since its beginning for which repeated fines were imposed),72 but
also fingered to serve as “accomplices of crimes and terrorism” and to “threaten democracy.”73
This was primarily because of (1) inflammatory videos uploaded by many terrorist groups
ranging from recruitment to beheadings, (2) fake news and lies associated with the alleged
Russian interference of the 2016 US presidential election, and (3) hate speech posted by racist, extremist, and other hate groups that incite violence.
At the heart of the debate is whether in the name of “freedom of speech,” social media
firms can allow anyone to publish anything to a global audience. In 2012, someone posted
a YouTube video that offended many Muslims. Protests broke out in dozens of countries,
some turned violent, and 50 people died. The White House asked Google, YouTube’s
owner, to review whether the video violated YouTube’s guidelines against hate speech, and
Google reported the video did not violate such guidelines. There was nothing more the
US government could do. At least 21 other governments demanded that Google block
the video. In countries where YouTube had a legal presence and a local version such as
India, Malaysia, and Saudi Arabia, it complied. But in other countries where it had no
legal presence, it refused. Frustrated, the governments in Bangladesh and Pakistan
simply blocked YouTube completely.74 “Defenders of hate speech” became an unenviable
nickname for social media firms. Normative pressures from various stakeholders were
mounting, cognitive pressures from some social media firm insiders aspiring to do the
right thing were increasing, and regulatory pressures from concerned government officials
and legislators around the world were rising.
In fairness, social media firms endeavored to follow Google’s own motto, “Don’t be
evil,” by learning from such fiascos and improving their responses. In March 2019, within 12 minutes after the Christchurch shooter ended his 17-minute bloody livestreaming,
Facebook took down the video.75 YouTube quickly trained machine-learning programs
to detect different versions of the violent clip and then mobilized hundreds of human
reviewers to remove them. However, since new versions were uploaded more quickly than
they could be taken down, YouTube, after struggling for several hours, made an unprecedented decision to remove all videos identified as suspect by machine-learning software
without waiting for human reviewers to intervene.76 But, were such responses fast enough
or good enough?
The other side of the debate argues: “No!” To prevent similar disasters in the future,
the only solution seems to be to censor Internet content. However, two counterarguments
emerge. The first is the philosophical opposition against censorship. After all, censorship
is associated with dictatorships such as China, Cuba, and North Korea. These governments
ban Facebook, Google-YouTube, and Twitter completely. Do governments and the public
in the West really have such stomach for censorship? Second, from an implementation
standpoint, who should do it—governments or firms? According to whose rules? Strategically, Facebook CEO Mark Zuckerberg agreed in congressional hearings that “it is inevitable that there will need to be some regulation [over social media].”77 Tactically, Facebook
and other social media firms hope that through their own efforts in self-regulation, they
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 4
Emphasizing Institutions, Cultures, and Ethics
can push back more aggressive regulatory controls that will cap their growth. Worldwide,
Facebook currently employs 7,500 content reviewers working in 40 languages.78 The mandarins in Beijing would smile at such “content reviewer” positions, which would be called
“censors” there.
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 capabilities. While these views are insightful, they usually do not pay
adequate attention to the underlying context. The contributions of the institution-based view
emphasize the importance of institutions, cultures, and ethics as the bedrock propelling or
constraining strategic choices (see the Opening Case). Overall, if strategy is about the “big
picture,” the institution-based view reminds current and would-be strategists not to forget
the “bigger picture.”
The savvy strategist draws at least three important implications for action (Table 4.7).
First, when entering a new country, do your homework by having a thorough understanding
of the formal and informal institutions governing firm behavior.79 While you don’t
necessarily have to do “as the Romans do” when in “Rome,” you need to understand why
Romans do things in a certain way. Both Propositions 1 and 2 advise that in countries that
emphasize informal relational exchanges, insisting on formalizing the contract right away
may backfire.
Second, strengthen cross-cultural intelligence by building awareness, expanding
knowledge, and leveraging skills.80 In cross-cultural encounters, while you may not share (or
may disagree) with the values held by others, you will need to at least obtain a roadmap of
the informal institutions governing their behavior (see the Closing Case). Of course, culture
is not everything. It is advisable not to read too much into culture, which is one of many
variables affecting global strategy. But it is imprudent to ignore culture.
Finally, integrate ethical decision making as part of the core strategy processes of the firm.
The best managers expect norms to shift over time by constantly deciphering the changes in
the informal “rules of the game” and by taking advantage of new opportunities (see Strategy
in Action 4.1 and 4.2). How BMW managers proactively shaped the automobile recycling
norms serves as a case in point.
We conclude this chapter by revisiting the four fundamental questions. First, why do
firms differ? The institution-based view points out the institutional frameworks that
shape firm differences. Second, how do firms behave? The answer also boils down to
institutional differences. Third, what determines the scope of the firm? Chapter 9 will
have more details on how institutions shape the scope of the firm. Finally, what determines
the international success and failure of firms? The institution-based view argues that firm
performance is, at least in part, determined by the institutional frameworks governing
strategic choices.81
Table 4.7
●●
●●
●●
Strategic Implications for Action
When entering a new country, do your homework by having a thorough understanding of
the formal and informal institutions governing firm behavior.
Strengthen cross-cultural intelligence by building awareness, expanding knowledge, and
leveraging skills.
Integrate ethical decision making as part of the core strategy processes of the firm—faking it does not last very long.
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105
106
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FOUNDATIONS OF GLOBAL STRATEGY
CHAPTER SUMMARY
1. Explain the concept of institutions.
●●
Commonly known as “the rules of the game,” institutions have formal and informal components, each
with different supportive pillars (regulatory, normative, and cognitive pillars).
and (5) long-term orientation. Each has some significant bearing on strategic choices.
5. Identify the strategic role of ethics culminating in a strate-
gic response framework.
●●
2. Understand the two primary ways of transactions that re-
duce uncertainty.
●●
●●
Institutions reduce uncertainty in two primary ways:
(1) informal, relationship-based, personalized exchanges (known as relational contracting) and (2)
formal, rule-based, impersonal exchanges with
third-party enforcement (known as arm’s-length
transaction).
3. Articulate the two propositions underpinning an institu-
tion-based view of strategy.
●●
●●
Proposition 1: Managers and firms rationally pursue
their interests and make strategic choices within formal and informal institutional constraints.
Proposition 2: In situations where formal institutions
fail, informal institutions will play a larger role.
●●
6. Participate in three leading debates on institutions, cul-
tures, and ethics.
●●
(1) Opportunism versus individualism/collectivism,
(2) cultural distance versus institutional distance, and
(3) freedom of speech versus censorship on the Internet.
7. Draw strategic implications for action.
4. Appreciate the strategic role of cultures.
●●
When managing overseas, two schools of thought
are: (1) ethical relativism and (2) ethical imperialism.
Three “middle-of-the-road” principles focus on res­
pect for (1) human dignity and basic rights, (2) local
traditions, and (3) institutional context.
When confronting ethical challenges, a strategic
framework suggests four strategic choices: (1) reactive, (2) defensive, (3) accommodative, and (4) proactive strategies.
●●
According to Hofstede, culture has five dimensions:
(1) power distance, (2) individualism/collectivism,
(3) masculinity/femininity, (4) uncertainty avoidance,
●●
●●
When entering a new country, do your homework.
Strengthen cross-cultural intelligence.
Integrate ethical decision making as part of the core
strategy processes of the firm.
Key Terms
Arm’s-length transaction 89
Formal institution 87
Intellectual property right (IPR) 92
Bounded rationality 92
Formal, rule-based, impersonal
exchange 89
Long-term orientation 96
Hybrid organization 94
Nonmarket (political) strategy 93
Code of conduct (code of ethics) 97
Cognitive pillar 87
Collectivism 95
Corruption 99
Cultural distance 103
Culture 94
Domestic demand 91
Ethical imperialism 98
Ethical relativism 98
Ethics 97
Extraterritoriality 100
Factor endowment 90
Femininity 95
Firm strategy, structure, and rivalry 90
Foreign Corrupt Practices Act (FCPA) 100
Individualism 95
Informal institution 87
Informal, relationship-based,
personalized exchange 88
In-group 103
Institution 87
Institution-based view 86
Institutional distance 103
Institutional framework 87
Institutional logic 94
Institutional pluralism 94
Institutional transition 90
Masculinity 95
Norm 87
Normative pillar 87
Opportunism 88
Out-group 103
Power distance 95
Regulatory pillar 87
Related and supporting industries 91
Relational contracting 88
State-owned enterprise (SOE) 94
Transaction cost 88
Uncertainty avoidance 95
Institutional work 93
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Chapter 4
Emphasizing Institutions, Cultures, and Ethics
107
CRITICAL DISCUSSION QUESTIONS
1. How does the institution-based view complement and differ
customs official informs you that there is a delay in clearing
your container and it may last a month. However, if you are
willing to pay an “expediting fee” of US$200, he will try to
make it happen in one day. What are you going to do?
from the industry-based and resource-based views? Why has the
institution-based view become a third leg in the strategy tripod?
2. Find one example of institutional transitions from developed
economies and one example from emerging economies.
What are their similarities and differences?
4. ON ETHICS: Social media firms’ strategy has three pillars:
(1) keeping user addicted to the content, (2) collecting data
about user behavior, and (3) selling advertisements targeting specific users. Do you really believe they will protect
your privacy?
3. ON ETHICS: Assuming you work for a New Zealand
company exporting a container of kiwi fruit to Haiti. The
TOPICS FOR EXPANDED PROJECTS
1. Some argue that guanxi (relationships and connections)
is a unique Chinese-only phenomenon embedded in the
Chinese culture. As evidence, they point out that the
word guanxi has now entered the English language and is
often used in mainstream media (such as the Wall Street
Journal) without explanations provided in brackets.
Others disagree, arguing that every culture has a word
or two describing what the Chinese call guanxi, such as
blat in Russia, guan he in Vietnam, and “old boys’ network” in the English-speaking world. They suggest that
the intensive use of guanxi in China (and elsewhere) is a
reflection of the lack of formal institutional frameworks.
Write a short paper to explain which side of the debate
you would join and why. [HINT: Check out Strategy in
Action 4.1.]
2. ON ETHICS: Why has the FCPA not ended corruption in
global business?
3. ON ETHICS: As CEO of Chiquita, you are eager to promote
CSR efforts, such as complying with the Social Accountability 8,000 labor rights standard and Rain Forest environmental
standard. However, you are frustrated that retailors and consumers have not rewarded such behavior. Should Chiquita
scale back some of these CSR activities, which are expensive?
CLOSING CASE Emerging Markets Ethical Dilemma
IKEA’s Challenge in Saudi Arabia
In October 2012, Swedish furniture company IKEA was criti­
cized on the BBC World Service radio for airbrushing wom­
en out of IKEA’s catalogs distributed in Saudi Arabia. Some
women’s rights activists throughout Europe and in other parts
of the West were outraged. They threatened to boycott IKEA
stores in Europe, especially in Sweden. IKEA felt pressured to
issue an apology, stating that the marketing catalog was in­
consistent with its organizational culture and did not reflect
its approach to equality of women in society. In its own words:
We should have reacted and realized that excluding women
from the Saudi Arabian version of the catalogue is in conflict with the IKEA Group values.
What went wrong? From the perspective of a marketing
manager of the IKEA store in Saudi Arabia, the decision
seemed straightforward. To distribute a catalog, it needed
to comply with the law of the land. Any picture of women
who were not totally covered would be illegal by Saudi
Source: Advertisement from IKEA Saudi Arabia
Arabia censorship rules. IKEA had operated in Saudi Arabia
for 30 years. It possessed significant knowledge about the
do’s and don’ts in the local institutional framework.
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108
PART 1
FOUNDATIONS OF GLOBAL STRATEGY
A particularly “offensive” picture that circulated
throughout the world media had a man helping two children in the bathroom. Nothing wrong, you may think. Except in the original version provided by IKEA headquarters, there was a woman standing in the middle, helping
one of the kids. When the two versions were viewed side by
side, it appears that the woman had been erased (or Photo­
shopped out). This act was fingered as condoning what
many Europeans considered the suppression of women in
Saudi society.
One basic point in international business is the need to
adapt products, services, and marketing strategies to local
institutional contexts. Given that Saudi Arabia’s censorship
rules dictated that using the original Swedish pictures would
not be an option, editing the pictures became inevitable.
Around the world, most pictures in advertising are heavily
Photoshopped anyway. One side of the debate argues: What
is wrong?
Another side of the debate claims that what the Saudi
marketing manager overlooked—and what IKEA as a
multinational organization overlooked—was an ethical
challenge for the interconnected world. Local practices must
also be acceptable to stakeholders back home—even though
they may not understand the local institutional context.
Conceptually, this debate boils down to ethical relativism
versus ethical imperialism. How would you participate in
this debate?
Sources: (1) BBC, 2012, World Service, radio broadcast, October 2;
(2) Guardian, 2012, No women please, we’re Saudi Arabian IKEA,
October 2; (3) M. W. Peng & K. Meyer, 2016, International Business,
2nd ed. (pp. 283–284), London: Cengage Learning EMEA.
CASE DISCUSSION QUESTIONS
1. ON ETHICS: The Saudi Arabia IKEA store’s practice can
be viewed as ethical relativism. What are its pros and
cons?
2. ON ETHICS: The attitude of women’s rights activists
throughout Europe and in other parts of the West can be
viewed as ethical imperialism. What are its pros and cons?
3. As a would-be manager who is likely to operate outside
your home country, what are the lessons you can draw
from IKEA’s experience in Saudi Arabia?
NOTES
[Journal Acronyms] AMJ—Academy of Management Journal;
AMLE—Academy of Management Learning & Education;
AMP—Academy of Management Perspectives; AMR—Academy
of Management Review; AP—American Psychologist; APJM—
Asia Pacific Journal of Management; BW—BusinessWeek (before
2010) or Bloomberg Businessweek (since 2010); CCSM—
Cross Cultural and Strategic Management; CMR—California
Management Review; GSJ—Global Strategy Journal; HBR—
Harvard Business Review; JIBP—Journal of International
Business Policy; JIBS—Journal of International Business Studies;
JIM—Journal of International Management; JM—Journal of
Management; JMS—Journal of Management Studies; JWB—
Journal of World Business; MIR—Management International
Review; MOR—Management and Organization Review; MS—
Management Science; OSc—Organization Science; RES—
Review of Economics and Statistics; SMJ—Strategic Management
Journal; SO—Strategic Organization; WSJ—Wall Street Journal.
1. M. W. Peng, S. Sun, B. Pinkham, & H. Chen, 2009, The
institution-based view as a third leg for a strategy tripod,
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institution-based view of international business strategy,
JIBS 39: 920–936.
2. D. North, 1990, Institutions, Institutional Change, and
Economic Performance (p. 3), New York: Norton.
3. W. R. Scott, 1995, Institutions and Organizations, Thousand
Oaks, CA: Sage.
4. D. Philippe & R. Durand, 2011, The impact of normconforming behaviors on firm reputation, SMJ 32: 969–
993; D. Yiu, Y. Xu, & W. Pan, 2014, The deterrence effects of
vicarious punishments on corporate financial fraud, OSc
25: 1549–1571.
5. S. Hannah, B. Avolio, & D. May, 2011, Moral maturation
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Weber, 2016, The heart of institutions, AMR 41: 456–478.
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K. Mayer, 2014, Transaction cost economics and the
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 4
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14. M. W. Peng, 2003, Institutional transitions and strategic
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benefits and costs of relation-based governance, working
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15. North, 1990, Institutions (p. 34), op. cit.
16. M. Clemente & T. Roulet, 2015, Public opinion as a source
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17. Peng, 2003, Institutional transitions and strategic choices
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18. K. Meyer & M. W. Peng, 2005, Probing theoretically into
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20. M. Porter, 1990, Competitive Advantage of Nations, New
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profitability in developing countries, AMJ 52: 1348–1368;
R. Hoskisson, M. Wright, I. Filatotchev, & M. W. Peng, 2013,
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stakeholders through corporate political activity, JIM 24:
369–385; G. McDermott, R. Corredoira, & G. Kruse, 2009,
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24.
25.
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27.
28.
29.
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Emphasizing Institutions, Cultures, and Ethics
109
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P. Ingram & B. Silverman, 2002, The New Institutionalism
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M. Abdi & P. Aulakh, 2012, Do country-level institutional
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& H. Thein, 2014, Business under adverse home country
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G. Gan & B. Qiu, 2019, Escape from the USA, JIBS 50:
1156–1183; P. Jarzabkowski & S. Kaplan, 2015, Strategy
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P. Chaudhry & A. Zimmerman, 2009, The Economics of
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M. W. Peng, D. Ahlstrom, S. Carraher, & W. Shi, 2017, An
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D. Baron, 1995, Integrated strategy, CMR 37: 47–65. See
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by the government, SMJ 36: 97–112; S. Lux, T. Crook, &
D. Woehr, 2011, Mixing business with politics, JM 37:
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
110
31.
32.
33.
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35.
36.
37.
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39.
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41.
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FOUNDATIONS OF GLOBAL STRATEGY
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Y. Li, M. W. Peng, & C. Macaulay, 2013, Market-political
ambidexterity during institutional transitions, SO 11:
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43. M. W. Peng & S. Lebedev, 2017, Intra-national business
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of Hofstede-inspired country-level culture research
in international business since 2006, JIBS 48: 30–47;
B. Kirkman, K. Lowe, & C. Gibson, 2017, A retrospective
on Culture’s Consequences, JIBS 48: 12–29.
46. S. Beugelsdijk, R. Maseland, & A. Hoorn, 2015, Are scores
on Hofstede’s dimensions of national culture stable over
time? GSJ 5: 223–240; D. Caprar, T. Devinney, B. Kirkman,
& P. Caligiuri, 2015, Conceptualizing and measuring
culture in international business and management, JIBS
46: 1011–1027; T. Devinney & J. Hohberger, 2017, The
past is prologue, JIBS 48: 48–62; T. Fang, 2010, Asian
management research needs more self-confidence, APJM
27: 155–170; R. House, P. Hanges, M. Javidan, P. Dorfman,
& V. Gupta, 2004, Culture, Leadership, and Organizations,
Thousand Oaks, CA: Sage; M. Peterson & T. Barreto,
2018, Interpreting societal culture value dimensions, JIBS
49: 1190–1207; R. Tung & G. Stahl, 2018, The tortuous
evolution of the role of culture in IB research, JIBS 49:
1167–1189.
47. N. Boubakri, O. Guedhami, C. Kwok, & W. Saffar, 2016,
National culture and privatization, JIBS 47: 170–190;
E. Ravlin, Y. Liao, D. Morrell, K. Au, & D. Thomas, 2012,
Collectivist orientation and the psychological contract,
JIBS 43: 772–782; X. Zheng, S. Ghoul, O. Guedhami, & C.
Kwok, 2013, Collectivism and corruption in bank lending,
JIBS 44: 363–390.
48. Global Entrepreneurship Monitor, 2018, 2018/2019 Global
Report (p. 48), Babson Park, MA: Babson College.
49. Hofstede, 1997, Cultures and Organizations (p. 94), op. cit.
50. L. Watts, L. Steele, & D. Hartog, 2020, Uncertainty avoidance
moderates the relationship between transformational
leadership and innovation, JIBS 51: 138–145.
51. C. Flammer & P. Bansal, 2017, Does a long-term orientation
create value? SMJ 38: 1827–1847.
52. M. Bazerman, 2014, Becoming a first-class notice, HBR
July: 116–119; D. Welsh & L. Ordonez, 2014, Conscience
without cognition, AMJ 57: 723–742.
53. J. Bundy & M. Pfarrer, 2015, A burden of responsibility,
AMR 40: 345–369; W. T. Coombs & D. Lauder, 2018, Global
crisis management, JIM 24: 199–203; Y. Shiu & S. Yang,
2017, Does engagement in corporate social responsibility
provide strategic insurance-like effects? SMJ 38: 455–470;
A. Zavyalova, M. Pfarrer, R. Reger, & D. Shapiro, 2012,
Managing the message, AMJ 55: 1079–1101.
54. R. Deshpande & A. Raina, 2011, The ordinary heroes of
the Taj, HBR December: 119–123.
55. D. McCarthy & S. Puffer, 2008, Interpreting the ethicality of corporate governance decisions in Russia, AMR 33:
11–31.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 4
56. This section draws heavily from T. Donaldson, 1996,
Values in tension, HBR September: 4–11.
57. R. Galang, 2012, Victim or victimizer, JMS 49: 429–462;
I. Montiel, B. Husted, & P. Christmann, 2012, Using private
management standard certification to reduce information
asymmetries in corrupt environments, SMJ 33: 1103–13;
J. Spencer & C. Gomez, 2011, MNEs and corruption, SMJ
32: 280–300; J. Yi, S. Meng, C. Macaulay, & M. W. Peng,
2019, Corruption and foreign direct investment phases,
JIBP 2: 167–181.
58. S. Lee & S. Hong, 2012, Corruption and subsidiary
profitability, APJM 29: 949–964; S. Lee & D. Weng, 2013,
Does bribery in the home country promote or dampen
firm exports? SMJ 34: 1472–1487; D. Xu, K. Zhou, & F.
Du, 2019, Deviant versus aspirational risk taking, AMJ 62:
1226–1251; J. Zhou & M. W. Peng, 2012, Does bribery help
or hurt firm growth around the world? APJM 29: 907–921.
59. S. Wei, 2000, How taxing is corruption on international
investors? RES 82: 1–11.
60. Economist, 2019, The French resolution, January 19: 63–
65; Economist, 2019, Uncle Sam’s game, January 19: 61–63.
61. J. Clougherty & M. Grajek, 2008, The impact of ISO 9000
diffusion on trade and FDI, JIBS 39: 613–633; H. Greve,
2011, Fast and expensive, SMJ 32: 949–968.
62. Economist, 2019, Laws against lies, April 6: 32–33.
63. S. Hart, 2005, Capitalism at the Crossroads, Philadelphia:
Wharton School Publishing.
64. This section draws heavily from C. Chen, M. W. Peng,
& P. Saparito, 2002, Individualism, collectivism, and
opportunism, JM 28: 567–583.
65. J. Cullen, K. P. Parboteeah, & M. Hoegl, 2004, Crossnational differences in managers’ willingness to justify
ethically suspect behaviors, AMJ 47: 411–421.
66. M. Muethel & M. Bond, 2013, National context and
individual employees’ trust of the out-group, JIBS 2013:
312–333; V. Nee, H. Holm, & S. Opper, 2018, Learning to
trust, OSc 29: 969–986.
67. F. Fukuyama, 1995, Trust, New York: Free Press; G. Redding, 1993, The Spirit of Chinese Capitalism, New York:
Gruyter.
68. R. Burt & B. Batjargal, 2019, Comparative network research
in China, MOR 15: 3–29; S. Opper, V. Nee, & H. Holm, 2017,
Risk aversion and guanxi activities, AMJ 60: 1504–1530.
69. I. Cuypers, G. Ertug, P. Heugens, B. Kogut, & T. Zou, 2018,
The making of a construct, JIBS 49: 1138–1153; B. Kogut &
H. Singh, 1988, The effect of national culture on the choice
of entry mode, JIBS 19: 411–432.
70. S. Beugelsdijk, B. Ambos, & P. Nell, 2018, Conceptualizing
and measuring distance in international business research,
JIBS 49: 1113–1137; L. Brouthers, V. Marshall, & D. Keig,
2016, Solving the single-country sample problem in
cultural distance studies, JIBS 47: 471–479; R. Maseland,
D. Dow, & P. Steel, 2018, The Kogut and Singh national
cultural distance index, JIBS 49: 1154–1166; O. Shenkar,
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
Emphasizing Institutions, Cultures, and Ethics
111
2012, Cultural distance revisited, JIBS 43: 1–11; S. Zaheer,
M. Shomaker, & L. Nachum, 2012, Distance without
direction, JIBS 43: 18–27.
D. Xu & O. Shenkar, 2002, Institutional distance and the
multinational enterprise (p. 608), AMR 27: 608–618. See
also H. Berry, M. Guillen, & N. Zhou, 2010, An institutional
approach to cross-national distance, JIBS 41: 1460–1480;
L. Hakanson & B. Ambos, 2010, The antecedents of psychic
distance, JIM 16: 195–210.
Economist, 2019, Europe takes on the tech giants, March
23: 9; WSJ, 2019, YouTube fined over children’s privacy,
August 31: B3.
BW, 2018, Where is our digital EPA? March 26: 10 –12; BW,
2019, Facebook’s never-ending crisis, March 18: 52–57;
Economist, 2017, Do social media threaten democracy?
November 4: 11; Economist, 2017, Terror and the Internet,
June 10: 13; Economist, 2018, Epic fail, March 24: 9.
Economist, 2016, The muzzle grows tighter, June 4: 55–58.
BW, 2019, When lives are on the line, March 25: 10–12.
Economist, 2019, Now playing, everywhere, May 4: 17–19.
Fortune, 2018, Facebook can’t solve this problem alone,
May 1: 9–10.
BW, 2018, On Facebook, terror is everywhere, May 14: 24–25.
I. Darendeli & T. Hill, 2016, Uncovering the complex
relationships between political risk and MNE firm
legitimacy, JIBS 47: 68–92; C. Stevens, E. Xie, & M. W. Peng,
2016, Toward a legitimacy-based view of political risk, SMJ
37: 945–963.
P. Koch, B. Koch, T. Menon, & O. Shenkar, 2016, Cultural
friction in leadership beliefs and foreign-invested enterprise
survival, JIBS 47: 453–470; S. Fritzsimmons, Y. Liao, & D.
Thomas, 2017, From crossing cultures to straddling them,
JIBS 48: 63–89; G. Lucke, T. Kostova, & K. Roth, 2014,
Multiculturalism from a cognitive perspective, JIBS 45:
169–190; M. Mendenhall, A. Arnardottir, G. Oddou, & L.
Burke, 2013, Developing cross-cultural competencies in
management education via cognitive-behavior therapy,
AMLE 12: 436–451; A. Molinsky, 2013, The psychological
processes of cultural retooling, AMJ 56: 683–710; S. B.
Szkudlarek, J. McNett, L. Romani, & H. Lane, 2013, The past,
present, and future of cross-cultural management education,
AMLE 12: 477–493; D. Thomas & K. Inkson, 2009, Cultural
Intelligence, San Francisco: Barrett-Koehler; N. Yagi &
J. Kleinberg, 2011, Boundary work, JIBS 42: 629–653.
R. Aguilera & B. Grogaard, 2019, The dubious role of
institutions in international business, JIBS 50: 20–35;
E. Banalieva. A. Cuervo-Cazurra, & R. Sarathy, 2018,
Dynamics and pro-market institutions and firm
performance, JIBS 49: 858–880; L. Fuentelsaz, E. Garrido,
& J. Maicas, 2015, Incumbents, technological change, and
institutions, SMJ 36: 1778–1801; M. Taussig & A. Delios,
2015, Unbundling the effects of institutions on firm
resources, SMJ 36: 1845–1865.
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Part 2
BusinessLevel
Strategies
5
Growing and
Internationalizing the
Entrepreneurial Firm
6
Entering Foreign Markets
7
Making Strategic Alliances
and Networks Work
8
iStock.com/busracavus
Managing
Competitive Dynamics
113
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CHAPTER
5
iStock.com/golero
Growing and Internationalizing
the Entrepreneurial Firm
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Define entrepreneurship, entrepreneurs, and entrepreneurial firms
2. Articulate a comprehensive model of entrepreneurship
3. Identify five strategies that characterize a growing entrepreneurial firm
4. Differentiate international strategies that enter foreign markets and those that stay in
domestic markets
5. Participate in three leading debates concerning entrepreneurship
6. Draw strategic implications for action
114
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OPENING CASE
Emerging Markets
Ethical Dilemma
The New East India Company
Before picking up this book, a majority of readers are
likely to have already heard of the East India Company.
Yes, we are talking about the East India Company,
the colonial trading company that created British
India, founded Hong Kong and Singapore, and introduced tea, coffee, and chocolate to Britain and large
parts of the world. Wait a minute—as you scratch your
head over your rusty memory from history books—
wasn’t the company dead? Yes, it was dead—or, technically, dissolved or nationalized in 1874 by the British
government. But, no, it was not dead.
After a hiatus of more than 130 years, the East
India Company was reborn and relaunched in 2005
by a visionary Indian entrepreneur, Sanjiv Mehta.
With permission granted by the UK Treasury for an
undisclosed sum of money, Mumbai-born Mehta
became the sole owner, chairman, and CEO of the
new East India Company, with the rights to use the
name and original trademark. His goals were to unlock
and strengthen the potential value of the world’s
first multinational and the world’s first global brand.
In 2010, with much fanfare, the East India Company
launched its first luxury fine foods store in the
prestigious Mayfair district of London. In 2014, the East
India Company set up a new boutique inside London’s
most prestigious department store, Harrods—a format
called “store in store.” The initial products included
premium coffees and teas, artisan sweets and savory
biscuits, and gourmet chocolates, salts, and sugars.
While the old company obviously never had a website,
the new one proudly announced on its website:
We see our role as bringing together the best the world
has to offer; to create unique goods that help people to
explore and experience what’s out there. Products that
help people see their world in a different and better
light. Products that have the power to amaze and
astonish. . . . The East India Company made a wide
range of elusive, exclusive, and exotic ingredients
familiar, affordable, and available to the world; ingredients which today form part of our daily and national
cuisines. Today we continue to develop and market
unique and innovative products that breathe life into
the history of the Company. We trade foods crafted by
artisans and specialists from around the world, with
carefully sourced ingredients, unique recipes, and
distinguished provenances.
Just like the old East India Company, the new company
is a “born global” enterprise, which immediately
declared its intention to expand globally upon its
launch. By 2014, it had expanded throughout Europe
(Austria, Finland, France, Germany, the Netherlands,
Norway, and Spain), the Asia Pacific (Australia, China,
Hong Kong, Japan, Malaysia, and South Korea), and
the Middle East (Kuwait and Qatar). Its online store
can deliver anywhere worldwide. Overall, in the first
five years since 2005, the East India Company spent
$15 million to develop its new business. In 2011,
Mahindra Group, one of India’s most respected business groups, acquired a minority stake in the East
India Company. After receiving capital injection from
Mahindra, the East India Company announced that
it would invest $100 million in the next five years to
grow the iconic brand.
What had made the (old) East India Company such
a household name? Obviously, the products it traded
had to deliver value to be appreciated by customers
around the world. At its peak, the company employed
a third of the British labor force, controlled half of the
world’s trade, issued its own coins, managed an army of
200,000, and ruled 90 million Indians. Its organizational
capabilities were awesome. Equally important were its
political abilities to leverage and control the rules of
the game around the world, ranging from managing
politicians back home in Britain to manipulating
political intrigues in India. Granted a royal charter
by Queen Elizabeth I in 1600, the old East India
Company certainly benefited from formal backing
of the state. Informally, the brand still resonates with
the 2.5 billion people in the British Commonwealth,
especially Indians. Mehta was tremendously moved
by the more than 14,000 e-mails from Indians all over
the world wishing him well when he announced the
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115
116
PART 2
BUSINESS-LEVEL STRATEGIES
OPENING CASE
(Continued)
acquisition. In his own words: “I have not created the
brand, history has created it. I am just the curator of it.”
Blending continuity and change, the saga of
the East India Company continues. Mehta said he
believed the East India Company was the Google of its
time. But one reporter suggested, “Google is in fact
the East India Company of its modern era. Let’s see if
Google is still around and having the same impact in
400 years’ time.”
Sources: (1) Arabian Business, 2014, The empire strikes back,
October 4: www.arabianbusiness.com; (2) East India Company,
2014, EIC today, www.theeastindiacompany.com; (3) East
India Company, 2014, History, www.theeastindiacompany.com
(4) East India Company, 2014, History of fine foods,
www.eicfinefoods.com; (5) East India Company, 2020, The
Company today, www.theeastindiacompany.com; (6) Economist,
2011, The Company that ruled the waves, December 17.
H
small and medium-sized
enterprises (SMEs)
A firm with fewer than 500
employees in the United
States or with fewer than
250 employees in the
European Union.
entrepreneurship
The identification and
exploitation of previously
unexplored opportunities.
entrepreneur
An individual who
identifies and explores
previously unexplored
opportunities.
international
entrepreneurship
A combination of
innovative, proactive, and
risk-seeking behavior that
crosses national borders and
is intended to create wealth
in organizations.
social entrepreneurship
Innovative, proactive, and
risk-seeking entrepreneurial
behavior that endeavors
to meet social goals that
benefit people and the
society.
ow do entrepreneurial firms such as the (new) East India Company grow?
How do they enter international markets? What are the challenges and constraints they face? This chapter deals with these important questions. This is
different from many strategy textbooks, which only focus on large firms. To the extent
that every large firm started small and some (although not all) of today’s small and
medium-sized enterprises (SMEs) may become tomorrow’s multinational enterprises
(MNEs), current and would-be strategists will not gain a complete picture of the
global landscape if they only focus on large firms. SMEs are firms with fewer than
500 employees in the United States and fewer than 250 employees in the European
Union (other countries may have different definitions). Most students will join SMEs
for employment. Some will also start up their own SMEs, thus further necessitating our
attention on these numerous “Davids” instead of on the smaller number of “Goliaths.”
This chapter will first define entrepreneurship. Next we outline a comprehensive
model of entrepreneurship informed by the three leading perspectives on strategy.
Then we introduce six major entrepreneurial strategies. As before, debates and
extensions follow.
Entrepreneurship and Entrepreneurial Firms
Although entrepreneurship is often associated with smaller and younger firms, there is
no rule banning larger and older firms from being “entrepreneurial.” So what exactly is
entrepreneurship? Research suggests that firm size and age are not defining characteristics
of entrepreneurship.1 Instead, entrepreneurship is defined as “the identification and
exploitation of previously unexplored opportunities.”2 Specifically, it is concerned with
“the sources of opportunities; the processes of discovery, evaluation, and exploitation of
opportunities; and the set of individuals who discover, evaluate, and exploit them.”3 These
individuals, thus, are entrepreneurs. French in origin, the word entrepreneur traditionally
means an intermediary connecting others.4 Today, the word mostly refers to founders and
owners of new businesses or managers of existing firms. Consequently, international
entrepreneurship is defined as “a combination of innovative, proactive, and risk-seeking
behavior that crosses national borders and is intended to create wealth in organizations.”5 Social
entrepreneurship can be defined as innovative, proactive, and risk-seeking entrepreneurial
behavior that endeavors to meet social goals that benefit people and the society.6
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
SMEs are not the exclusive domain of entrepreneurship, because large firms can behave
entrepreneurially. This is known as corporate entrepreneurship—behavioral orientation
exhibited by established firms with an entrepreneurial emphasis that is innovative, proactive,
and risk-taking.7 For example, Google, which has called itself Alphabet since 2015, is one of
the most recognized and largest firms (by capitalization) in the world. Being innovative, proactive, and risk-taking, it has diversified into artificial intelligence, autonomous (self-driving)
vehicles, connected home devices, delivery drones, Internet balloons, robotic arms, smartphones, venture capital, and numerous other businesses.
However, many people associate entrepreneurship with SMEs, because, on average, SMEs
tend to be more entrepreneurial than large firms. To minimize confusion, the remainder of
this chapter will follow this convention, although it is not totally accurate. In other words,
while we acknowledge that some managers at large firms (such as Google) can be highly
entrepreneurial, we will limit the use of the term entrepreneurs to owners, founders, and
managers of SMEs. Further, we will use the term entrepreneurial firms when referring to SMEs.
SMEs are important. Worldwide, they account for more than 95% of the number of
firms, create 50% of total value added, and generate 60%–90% of employment (depending
on the country). Overall, entrepreneurship generates jobs, alleviates poverty, and facilitates
economic growth.8
corporate entrepreneurship
Behavioral orientation exhibited by established firms
with an entrepreneurial
emphasis that is innovative,
proactive, and risk-taking.
A Comprehensive Model of Entrepreneurship
The strategy tripod consisting of the three leading perspectives on strategy—namely, the
industry-based, resource-based, and institution-based views—sheds considerable light
on the entrepreneurship phenomenon.9 This leads to a comprehensive model illustrated
in Figure 5.1.
FIGURE 5.1 A Comprehensive Model of Entrepreneurship
Industry-based
considerations
Resource-based
considerations
Interfirm rivalry
Entry barriers
Bargaining power of suppliers
Bargaining power of buyers
Substitute products/services
117
Value
Rarity
Imitability
Organization
Entrepreneurs
and entrepreneurial
start-up firms
Institution-based
considerations
Formal institutional constraints
(such as laws and regulations)
Informal institutional
constraints (such as cultural
values and norms)
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118
PART 2
BUSINESS-LEVEL STRATEGIES
Industry-Based Considerations
gig econnomy
Finding short-term online
or onsite service jobs (such
as driving, translations, or
baby-sitting).
sharing economy
Making available to others
part of one’s own goods and
services (such as renting out
a room in one’s apartment).
The industry-based view, exemplified by the Porter five forces framework first introduced
in Chapter 2, emphasizes (1) interfirm rivalry, (2) entry barriers, (3) bargaining power of
suppliers, (4) bargaining power of buyers, and (5) threats of substitute products. First, the
intensity of interfirm rivalry has a direct impact on the probability whether a new start-up
will be able to make it.10 In commercial space travel, Elon Musk’s SpaceX, Richard Branson’s
Virgin Galactic, and Jeff Bezos’s Blue Origin have emerged as leading contenders. In addition, dozens of smaller players—such as Landscape from China and Rocket Lab from New
Zealand—are hustling to get a piece of the action.11
Entry barriers impact entrepreneurship.12 It is no surprise that new firm entries cluster
around low-entry-barrier industries such as restaurants. Conversely, capital-intensive industries hinder the chances of entrepreneurial success. For example, at present no entrepreneurs
in their right mind would bet their money on competing against Boeing or Airbus. Even in
the relatively new industry of commercial drones, the leading incumbent—DJI Technology,
founded in China in 2006—is now so dominant that it enjoys a 70% market share worldwide and its customers include the US military (despite the geopolitical tension between the
two countries). Efforts by new entrants to dent its market share have been unsuccessful. The
entry barriers are now so formidable that competitors such as Autel, Flyability, GoPro, Parrot,
Verity Studios, and Yuneec choose to reposition their offerings to focus on software and
services that complement—instead of displace—DJI’s hardware products.13
The recent rise of the technology-enabled gig and sharing economy has lowered entry barriers for many entrepreneurs. Gig economy activities refer to finding online or on-site service
jobs (such as driving, translations, or babysitting). Sharing economy activities refer to making
available to others part of one’s own goods and services (such as renting out a room in one’s
apartment). Global Entrepreneurship Monitor reports that in 2018, one in five adults in South
Korea participated in gig and sharing economy—the highest in the world—followed by those in
Israel, Chile, Ireland, and the United States (see Table 5.1).14 Such individuals may be employed
elsewhere and supplement their income with gigs and sharing. Many gig and sharing participants are planning to launch their own entrepreneurial ventures or are in the process of doing
so. In other words, it is not hard to cross the lines separating gig and sharing economy and
entrepreneurship.
When the bargaining power of suppliers becomes too large, smaller entrepreneurial firms
need to quickly grow in size to deal with such suppliers.15 When dealing with huge hotel
chains such as Hilton and Marriott as suppliers, smaller and younger firms such as Expedia,
Hotels.com, and Priceline have to grow.
Similarly, entrepreneurs who can reduce the bargaining power of buyers may also find a
niche for themselves. Enjoying significant bargaining power as buyers, a small number of
national chain bookstores such as Barnes and Noble used to represent the only major outlets
through which hundreds of publishers must sell their books. Internet bookstores such as
Amazon in the United States and Ozon in Russia have provided more outlets for publishers,
thereby reducing the bargaining power of traditional outlets.
Substitute products and services may offer great opportunities for entrepreneurs.16 If
entrepreneurs can bring in substitute products that can redefine the game, they can effectively
chip away some of the competitive advantages held by incumbents. The disruption to the taxi
Table 5.1 Top Five Countries with the Highest Percentage of Adults
Involved in Gig and Sharing Economy
1
2
3
4
5
South Korea
(21.5%)
Israel
(12.3%)
Chile
(11.2%)
Ireland
(10.9%)
United States
(10.8%)
Source: Data from Global Entrepreneurship Monitor 2018/2019 Global Report (p. 12), 2018, Babson Park,
MA: Babson College.
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
119
and hotel industries brought by Uber and Airbnb, respectively, can be viewed as the rise of
substitutes that eat incumbents’ lunch.
Obviously, entrepreneurs must carefully understand the nature of the industries they
enter. However, even when the industry is conducive to entry, there is no guarantee that
entrepreneurs will succeed. Firm-specific (and often entrepreneur-specific) resources and
capabilities are also crucial.
Resource-Based Considerations
The resource-based view, first introduced in Chapter 3, sheds considerable light on entrepreneurship, with a focus on its value, rarity, imitability, and organizational (VRIO) aspects
(see Figure 5.1). First, entrepreneurial resources must create value.17 A business model is
a firm’s way of doing business and creating and capturing value.18 Although the concept of
“business model” emerged around 2000 with the first wave of Internet ventures, a business
model does not necessarily need to be high-tech.19 In the (mundane) market of intercity
bus service, the US incumbent Greyhound’s business model is to drive passengers from a
bus depot in one city to a bus depot in another city. This business model requires costly
and endless maintenance of bus depots in all destination cities, and many ill-maintained
depots are in unattractive neighborhoods that scare away many potential riders. Megabus,
an entrepreneurial new entrant from Britain, has brought a new business model that has
jettisoned bus depots completely. Megabus simply uses existing city bus (curbside) stops
and does not bother to pick up or drop off passengers from unattractive neighborhoods.
In addition, Megabus offers cheap fares, convenient schedules, Wi-Fi, and a power port on
every seat, thus presenting superb value and changing the way many Americans—especially
the young—travel.20
Second, resources must be rare. As the cliché goes, “If everybody has it, you can’t make
money from it.” The best-performing entrepreneurs tend to have the rarest knowledge and
deeper insights about business opportunities (see the Opening Case).21 When Europe was
hit by a refugee crisis (in 2015 alone, 30,000 asylum seekers showed up in Norway, 160,000
in Sweden, and one million in Germany), governments and nongovernmental organizations
(NGOs) could not cope. Smart entrepreneurs thrived on such chaos. Kristian and Roger
Adolfsen, two Norwegian brothers, turned the crisis into a lucrative opportunity by launching
Hero Norway, which ran dozens of for-profit refugee centers in Norway and Sweden. The
brothers owned Norlandia Hotel Group, which had 30 hotels throughout Scandinavia. By
diversifying into refugee service, Hero Norway charges the Norwegian and Swedish governments $31 to $75 per refugee per night to house and feed thousands of refugees, earning a
fixed but steady profit of 3.5%.22 While numerous people have backgrounds in hotels and
hospitality, the ability to turn such knowledge into profit while helping alleviate the refugee
crisis is truly rare. During COVID-19 when hotels shut down, Hero made money everyday.
Third, resources must be inimitable. While almost everyone has heard about the (old) East
India Company, Sanjiv Mehta’s innovative deal with the UK Treasury—owner of the East
India Company trademark—has made it difficult for imitators to copy his business model.
Counterfeiters and violators of the East India Company trademark will be prosecuted by the
British government (see the Opening Case).
Fourth, entrepreneurial resources must be organizationally embedded.23 An interesting
organizational capability is the ability to pivot—being adaptive and flexible in a creative
revision process to reach entrepreneurial goals.24 As long as wars are fought, there have been
mercenaries for hire. But only recently have private military companies become a global
industry—thanks to the superb organizational capabilities of entrepreneurial firms such as
Blackwater (rebranded first as Xe and now known as Academi) to pivot. They move from
dangerous war zones in Afghanistan to Iraq and more recently to Syria. Entrepreneurs in
the private military industry not only deploy thousands of private soldiers (called “private
contractors”), but also operate their own maritime forces and fixed-wing aircraft and helicopters.25
Overall, in competition with larger firms, entrepreneurial firms may not have advantage in
tangible resources—especially at the beginning. However, they excel in intangible resources
such as vision, drive, and resourcefulness.
pivot
Being adaptive and flexible
in a creative revision process to reach entrepreneurial goals.
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PART 2
BUSINESS-LEVEL STRATEGIES
Institution-Based Considerations
First introduced in Chapter 4, both formal and informal institutional constraints, as rules of
the game, affect entrepreneurship (see Figure 5.1). Although entrepreneurship is thriving
around the globe in general, its development is uneven (see Strategy in Action 5.1). Whether
entrepreneurship is facilitated or retarded significantly depends on formal institutions governing how entrepreneurs start up new firms.26
A World Bank survey, Doing Business, reports striking differences in government regulations concerning how to start up new entrepreneurial firms in terms of registration,
licensing, and incorporation (Figure 5.2). A relatively straightforward (or even “mundane”)
task of connecting electricity to a newly built commercial building illustrates tremendous
differences. In general, governments in developed economies impose fewer procedures (an
average of 4.6 procedures for OECD high-income countries) and a lower total cost (free in
Japan and 5.1% of per capita GDP in Germany). In contrast, governments in low-income
countries do a much worse job. For entrepreneurs to obtain electricity, Burundi imposes
STRATEGY IN ACTION 5.1
Ethical Dilemma
Europe’s Entrepreneurship Deficit
Historically, Europe had neither a shortage of entrepreneurial
talents nor market-friendly institutions. A leading debate in
Europe now focuses on why so few Europeans are interested in
entrepreneurship. Global Entrepreneurship Monitor has reported
that in Europe, an alarmingly small percentage of adults are
involved in “early stage entrepreneurship,” representing only 4%
in Italy, 5% in Germany, 6% in France, and 7% in Britain. These
numbers compare unfavorably with 10% in China, 11% in India,
16% in Brazil, 16% in the United States, and 19% in Canada. The
lack of a risk-taking entrepreneurial culture is one reason. But
another reason is a series of formal, institution-based barriers
that scare away a lot of would-be entrepreneurs.
Europe has many successful large firms and many entrepreneurial SMEs, but the vast majority of Europe’s large firms
were born around the turn of the last century. What Europe
lacks is successful SMEs that grow quickly and join the ranks
of large firms. Of the world’s 500 largest publicly listed firms,
Europe gave birth to only 12 of them between 1950 and 2007,
whereas the United States produced 52 during the same period.
Of the world’s 15 largest digital firms, all are American or
Chinese. Spotify (from Sweden) and Skype (originally from
Estonia—acquired by Microsoft in 2011) are perhaps the only
two European consumer tech brands that Americans recognize.
Smaller home-country markets and a lack of venture capital
(VC) funding may have prevented European SMEs to rapidly
build scale. In 2018, European SMEs received a record-breaking
$18 billion VC. However, this paled in comparison with the
$40 billion and the $67 billion VC that Chinese and American
SMEs received, respectively.
A known fact in entrepreneurship is that risks are high and
bankruptcy is likely. However, Europe’s personal bankruptcy
laws are notoriously unfriendly to bankrupt entrepreneurs. In
France, they are responsible for their debts for nine years after
the bankruptcy. In Germany, six years. In the United States, failed
entrepreneurs can walk away from their debts in less than a year
(see the Closing Case).
Another hurdle is labor laws. To remain viable, failed SMEs
need to reduce staff quickly and cheaply. But in Europe even very
recent hires expect to receive at least six months of severance pay.
“In San Francisco and in China, a communist country, I pay one to
two months,” a frustrated French executive shared with a journalist.
Anil de Mello is a Spanish entrepreneur. After the Great Recession
of 2008–2009 during which his firm went bankrupt, Spanish social
security pursued him for five years to capture funds it had paid to
his employees as severance on his behalf. Although eager to start
up another firm again, de Mello reasoned that he could not afford
another bankruptcy in Spain. Instead, he founded his next new venture in Switzerland, whose labor laws are more entrepreneur-friendly.
De Mello at least stays in Europe, but a large army of European
entrepreneurs simply leave the continent. About 50,000 Germans
work in Silicon Valley, and approximately 500 start-ups in the San
Francisco Bay area have been founded by French entrepreneurs.
Although one of Google’s founders, Sergey Brin, was born in
Europe, a soul-searching question is: Why was Google not founded
in Europe? A forward-looking question is: Will the next Google be
founded in Europe?
Sources: (1) Bloomberg Businessweek, 2015, Shale exploration stalls
in Europe, May 25: 19; (2) Bloomberg Businessweek, 2018, Why
can’t Europe do tech? August 20: 45–49; (3) Economist, 2013, A
slow climb, October 5: 65–66; (4) Economist, 2013, Start me up,
October 5: 60–61; (5) Economist, 2017, Less misérable, February
25: 57; (6) Economist, 2018, Waiting for Goodot, October 13: 54;
(7) Global Entrepreneurship Monitor 2018/2019 Global Report,
2018, Babson Park, MA: Babson College; (8) M. W. Peng, Y.
Yamakawa, & S. Lee, 2010, Bankruptcy laws and entrepreneurfriendliness, Entrepreneurship Theory and Practice 34: 517–530.
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
FIGURE 5.2 Ease of Doing Business: Average Rankings by Region
Sub-Saharan Africa
South Asia
Latin America & Caribbean
Middle East & North Africa
East Asia & Pacific
Eastern Europe & Central Asia
OECD (high income)
0
20
40
60
80
Ranking: 1–183 out of 183
countries surveyed, the
lower the better
100
120
140
160
Source: Data extracted from World Bank, 2020, Doing Business 2020 (p. 4), Washington: World Bank.
Doing Business 2020 scores 190 economies in ten areas: (1) starting a business, (2) dealing with construction permits, (3) getting electricity, (4) registering property, (5) getting credit, (6) protecting
minority investors, (7) paying taxes, (8) trading across borders, (9) enforcing contracts, and (10) resolving insolvency. The overall ranking is based on the aggregate ranking of the ten areas.
a total cost of 430 times of its per capita income and Sierra Leone requires them to wait
441 days.27 Overall, an entrepreneur in a high-income country typically spends only 4% of
its per capita income to launch a company. In contrast, an entrepreneur in a low-income
country needs to cough up 50% of its per capita income to launch a company.28 It is no surprise that the more entrepreneur-friendly these formal institutional requirements are, the
more flourishing entrepreneurship is, and the more developed the economies become—and
vice versa. As a result, more countries are now reforming their formal institutions in order to
become more entrepreneur-friendly. Doing Business 2020 reports that the top ten economies
with the most notable improvement during 2018–2019 were Saudi Arabia, Jordan, Togo,
Bahrain, Tajikistan, Pakistan, Kuwait, China, India, and Nigeria (in descending order of the
magnitude of improvement).
In addition to formal institutions, informal institutions such as cultural values and norms
also affect entrepreneurship.29 For example, because entrepreneurs necessarily take more
risk, individualistic and low uncertainty-avoidance societies tend to foster relatively more
entrepreneurs, whereas collectivistic and high uncertainty-avoidance societies may result in
relatively fewer entrepreneurs. Only 21% of the adults in Japan view entrepreneurship as a
good career choice—the lowest in the world. This compares with 60% in China, 62% in the
United States, and 95% in Guatemala—the highest in the world.30 Among developed economies, Japan has the lowest rate of start-ups, one-third of America’s rate and half of Europe’s.31
Overall, the institution-based view suggests that both formal and informal institutions matter. Later sections will discuss how they matter.
Five Entrepreneurial Strategies
This section discusses five entrepreneurial strategies: (1) growth, (2) innovation, (3) network,
(4) financing and governance, and (5) harvest and exit. A sixth strategy, internationalization,
is covered in the next section.
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121
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BUSINESS-LEVEL STRATEGIES
Growth
unicorn
A privately held technology firm valued at over
$1 billion.
blue ocean
Unexplored new market
areas discovered by
entrepreneurs
For many entrepreneurs (such as Tory Burch), the excitement associated with growing
a new company (such as Tory Burch LLC) is the very thing that attracts them in the first
place (see Strategy in Action 5.2).32 Recall from the resource-based view that a firm can be
conceptualized as a bundle of resources and capabilities. The growth of an entrepreneurial
firm can, thus, be viewed as an attempt to more fully use currently underutilized resources and
capabilities. An entrepreneurial firm can leverage its (intangible) vision and drive in order to
grow, even though it may be short on (tangible) resources such as financial capital.
In the technology world, one of the most enviable forms of growth is to become a rare
unicorn, a privately held technology firm valued at more than $1 billion. The name was
coined by venture capitalist Aileen Lee to describe headline-grabbing hotshots, such as
Airbnb, Didi, DJI, Dropbox, Flipkart, Snapchat, SpaceX, Uber, and Xiaomi.33 Almost all of
their growth is driven by a disruptive business model that topples some incumbents and
enables them to carve out a blue ocean. Blue ocean is a metaphor introduced by an
STRATEGY IN ACTION 5.2
Tory Burch’s Rise in the Fashion Industry
Today, Tory Burch is a name synonymous with class, elegance,
and whimsical elements. Her clothes exude fun and simplicity.
A global phenomenon, Tory Burch stores are found in
31 countries: Australia, Bahrain, Brazil, Britain, Chile, China,
Egypt, France, Germany, Guam, Hong Kong, Indonesia, Italy,
Japan, Kuwait, Lebanon, Macau, Malaysia, Mexico, Panama, the
Philippines, Puerto Rico, Qatar, Saudi Arabia, Singapore, South
Korea, Taiwan, Thailand, Turkey, the United Arab Emirates, and
the United States. Tory Burch started her company Tory Burch
LLC by selling clothes out of her kitchen. According to Business
Insider, “before long, she had an important celebrity endorsement
and soaring sales figures.”
Tory Burch began her fashion career as an ad copywriter,
after graduating with a major in art history from the University
of Pennsylvania in 1988. In 2004, after receiving a $2 million
investment from her husband, she opened a boutique store in New
York City. She sold out in one day. In 2005, she sent Oprah Winfrey
tunics and a pair of Reva flats, which were featured on “Oprah’s
Favorite Things.” On The Oprah Winfrey Show, Tory Burch was
called “the next big thing in fashion,” and afterwards her website
received more than eight million hits in one week.
As Tory Burch’s signature T medallion splashes across shoes,
tunics, and handbags internationally, the brand has become well
known. For example, Tory Burch has been credited by Forbes
for “making the T-shirt fashionable again.” Tory Burch clothes
and accessories are reasonably priced, averaging about $250 for
one purchase. Her bestsellers are the Reva ballet flats that sell
for $195 and tunics that range from $100 to $295. In the years
since the first boutique opened, Tory Burch LLC has grown to
136 company-owned stores in the United States and globally—
from São Paulo to Shanghai. In addition, Tory Burch products
are also distributed in about 3,000 department and specialty
stores. Overall, Tory Burch LLC has an estimated value of
$3.3 billion. Tory Burch herself has become the second recent
female billionaire in the fashion industry—after the founder and
CEO of Spanx, Sara Blakely.
Tory Burch’s clothes are evocative of the 1960s and 1970s, due
to the continued reiteration of geometric patterns, unique prints,
and color blocking. Her collections are alive with color and print.
After being continuously featured on the mid-2000s hit TV show
Gossip Girl and becoming a brand associated with Manhattan high
society, her brand is now a status symbol. In the face of competition
from well-established brands such as Kate Spade, Marc Jacobs, and
Michael Kors, as a brand Tory Burch offers a fresh take on fashion.
The prices for her pieces are much more reasonable than those
of older brands such as Fendi, Gucci, Louis Vuitton, and Prada.
Beyond her ready-to-wear fashion, Tory Burch also offers shoes,
watches, handbags, wallets, and home décor that appeal to many
women.
As an entrepreneur, Tory Burch has her fair share of setbacks.
Personally, she has gone through two divorces and endured copyright lawsuits. “When her company changed operating systems,
they endured a glitchy six-month period where they couldn’t
track shipments,” according to Forbes, “but rather than hiding the
snafu, Burch decided to embrace social media and be transparent
with customers about what was happening and the result was that
her customers became her advocates.” From then on, Tory Burch
rose to the top ranks of female billionaires, eventually becoming a
staple on Forbes’s Most Powerful People annual list.
Sources: This case was written by Grace Peng. Based on (1) Business Insider, 2013, How Tory Burch became a fashion billionaire in
less than a decade, January 3: businessinsider.com; (2) Forbes, 2013,
Billionaire Tory Burch’s seven lessons for entrepreneurs, May 22:
forbes.com; (3) Forbes, 2013, Fashion tycoon Tory Burch becomes
a billionaire (thanks, in part, to $200 ballet flats), January 3:
forbes.com.
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
influential book, Blue Ocean Strategy, by two strategy professors, W. Chan Kim and Renée
Mauborgne.34 Blue ocean refers to unexplored new market areas discovered by entrepreneurs,
whereas red ocean refers to known markets infested by price wars. There is no guarantee
that an entrepreneurial firm will enjoy phenomenal growth to become a unicorn even after
discovering and entering a blue ocean. However, slugging it out with competitors in a red
ocean will certainly make growth a lot harder.
123
red ocean
Known markets infested by
price wars.
Innovation
Innovation is at the heart of an entrepreneurial mindset.35 An innovation strategy is a
specialized form of differentiation strategy (see Chapter 2). It offers three advantages. First, it
allows a potentially more sustainable basis for competitive advantage. Firms first to introduce
new goods or services in a blue ocean are likely to earn (quasi) “monopoly profits” until
competitors emerge. If entrepreneurial firms come up with disruptive technologies, then they
may redefine the rules of competition, thus wiping out the advantages of incumbents.36
Second, innovation should be regarded broadly. Technological breakthroughs are
innovations, but so are less novel but still substantially new ways of doing business. Most
start-ups recombine existing products or services to create novel offerings.37 One example is
Keurig Green Mountain’s pioneering use of single-serve coffee pods in its brewing machines.
Finally, owners, managers, and employees at entrepreneurial firms tend to be more innovative and risk-taking than those at large firms. In fact, many SMEs are founded by former
employees of large firms who were frustrated by their inability to translate innovative ideas
into realities at the large firms.38 A group of programmers at IBM’s German affiliate proposed
to IBM that standard programming solutions could be profitably sold to multiple clients.
After their ideas were turned down, they left and founded SAP, now the number-one player
in the thriving enterprise resource planning (ERP) market. Innovators at large firms also have
limited ability to personally profit from their innovations, because property rights usually
belong to these firms. In contrast, innovators at entrepreneurial firms are better able to reap
the financial gains associated with innovation, thus fueling their motivation to charge ahead.
Network
A network strategy refers to intentionally constructing and tapping into relationships,
connections, and ties that individuals and organizations have.39 There are two kinds of
networks: personal and organizational. Both are important. Prior to and during the founding
phase of the entrepreneurial firm, these two networks overlap significantly. In other words,
entrepreneurs’ personal networks are essentially the same as the firm’s organizational
networks.40 The essence of entrepreneurship can be regarded as a process to “translate”
personal networks into value-adding organizational networks. Three attributes—urgency,
intensity, and impact—distinguish entrepreneurial networking.
First, entrepreneurial firms have a high degree of urgency to develop and leverage networks.
They confront a liability of newness, which is defined as the inherent disadvantage that
entrepreneurial firms experience as new entrants.41 In the absence of a track record, start-ups do
not inspire confidence. They lack legitimacy in the eyes of suppliers, customers, financiers, and
other stakeholders. Thus, start-ups urgently need to draw on entrepreneurs’ social networks to
overcome the liability of newness. Convincing more well-established individuals (as cofounders,
management team members, investors, or board directors) and organizations (as alliance
partners, sponsors, or customers) to lend a helping hand can boost the legitimacy of start-ups.
In other words, legitimacy—an intangible but highly important resource—can be transferred.
A second characteristic that distinguishes entrepreneurial networking is its intensity. Network relationships can be classified as strong ties and weak ties. Strong ties are more durable,
reliable, and trustworthy relationships, whereas weak ties are less durable, reliable, and trustworthy. Efforts to cultivate, develop, and maintain strong ties are usually more intense than
those for weak ties.42 Entrepreneurs often rely on strong ties—typically 5 to 20 individuals—
for advice, assistance, and support. Over time, the preference for strong ties may change, and
the benefits of weak ties may emerge (see the next section).
liability of newness
The inherent disadvantage
that entrepreneurial firms
experience as new entrants.
strong ties
More durable, reliable, and
trustworthy relationships
cultivated over a long
period of time.
weak ties
Relationships that are
characterized by infrequent
interaction and low
intimacy.
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PART 2
BUSINESS-LEVEL STRATEGIES
Finally, because of the small firm size, the contributions of entrepreneurs’ personal networks tend to have a stronger impact on firm performance.43 In comparison, the impact of
similar networks cultivated by managers at large firms may be less pronounced because of the
sheer size of these firms. Moreover, being private owners, entrepreneurs can directly pocket
the profits if their firms perform well, thereby motivating them to make these networks work.
Overall, there is strong evidence that networks, both personal and organizational, represent
significant resources and opportunities and that successful networking may lead to successful
entrepreneurial performance. The most advantageous positions are those well connected to a
number of players who are otherwise not connected—in other words, more centrally located
network positions are helpful. Armed with useful ties and contacts, entrepreneurs, therefore,
can literally become “persons who add value by brokering the connection between others.”44
This indeed is the original meaning of the word entrepreneurs.
Financing and Governance
angel
A wealthy individual
investor.
venture capitalist (VC)
An investor who invests
capital in early-stage, highpotential start-ups.
blitzscaling
Prioritizing speed over efficiency in the development
of a start-up even in the face
of uncertainty.
venture capital (VC)
Capital invested in earlystage, high-potential
start-ups.
All start-ups need capital.45 Here is a joke: Of the “4F” sources of entrepreneurial financing,
the first three Fs are founders, family, and friends—but what is the other F source? The
answer is . . . fools (!).46 While this is a joke, it strikes a chord in the entrepreneurial world:
Given the well-known failure risks of start-ups (a majority of them will fail—see the Closing
Case), why would anybody other than fools be willing to invest in start-ups? In reality,
most outside strategic investors, who can be angels (wealthy individual investors), venture
capitalists (VCs), banks, foreign entrants, and government agencies, are not fools.47
They often examine business plans, require a strong management team, and scrutinize
financial statements. They also demand some assurance (such as collateral) indicating that
entrepreneurs will not simply “take the money and run.” Entrepreneurs need to develop
relationships with these outside investors, some of which are weak ties. Turning weak-tie
contacts into willing investors is always challenging.48
While dealing with strong-tie contacts can be quite informal (based on handshakes or
simple contracts), working with weak-tie contacts is more formal. In the absence of a long
history of interaction, weak-tie investors such as angels and VCs often demand a more formal governance structure to safeguard their investments through a significant percentage of
equity (such as 20%–40%), a corresponding number of seats on the board of directors, and a
set of formal rules and policies.49 In extreme cases, when business is not going well, VCs may
exercise their formal voting power and dismiss the founder CEO.50 Entrepreneurs, therefore,
have to make trade-offs given the need for larger scale financing and the necessity to cede a
significant portion of ownership and control rights of their “dream” firms.
Given the well-known hazards associated with start-up risks, anything that entrepreneurs
can do to improve their odds would be helpful. The odds for survival during the crucial
early years are significantly correlated with firm size—the larger, the better. Therefore, quick
scaling is crucial. Blitzscaling is a concept recently coined by Reid Hoffman, a VC who had
earlier cofounded PayPal and LinkedIn.51 Inspired by the German military’s blitzkrieg (lightning warfare) in the opening moves in World War II, blitzscaling, according to Hoffman,
is “prioritizing speed over efficiency in the development of a company even in the face of
uncertainty.”52 At the same time, the entrepreneurial firm “will spend capital inefficiently” in
an effort to “become the first to scale.” PayPal and LinkedIn, of course, are some of the earlier
examples. More recent examples are unicorns such as Uber and Lyft, which have become
household names by burning billions of dollars of venture capital (VC) without showing
a trace of profits. A prerequisite to entertain blitzscaling is to obtain VC support. As a result,
entrepreneurs often make the choice of accepting more outside investment and agreeing to
give up some ownership and control rights.53
Internationally, the extent to which entrepreneurs draw on resources of family and
friends vis-à-vis formal outside investors (such as VCs) is different. Global Entrepreneurship
Monitor reports that in terms of formal VC investment, Sweden, South Africa, Belgium, and
the United States lead the world in VC investment as a percentage of GDP.54 In contrast,
Greece and China have the lowest levels of VC investment. In terms of informal investment
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
125
Table 5.2 Routes of Entrepreneurial Harvest and Exit
●●
●●
●●
Selling an equity stake
Selling the business
Merging with another firm
●●
●●
●●
Considering an initial public offering (IPO)
Becoming inactive
Declaring bankruptcy
from family and friends, China leads the world with the highest percentage of GDP. In comparison, Brazil and Hungary have the lowest level of informal investment. While there is a
lot of noise in such worldwide data, the case of China (second lowest in VC investment and
highest in informal investment) is easy to explain: China’s lack of formal market-supporting
institutions, such as VCs and credit-reporting agencies, requires a high level of informal
investment for Chinese entrepreneurs and new ventures, particularly during a time of
entrepreneurial boom.55
A highly innovative solution called microfinance has emerged in response to the lack of
financing for entrepreneurial opportunities in many countries. Microfinance involves lending small sums ($50–$300) to start small businesses with the intention of ultimately lifting
the entrepreneurs out of poverty. Starting in Bangladesh in the 1970s by an economics
professor, Muhammad Yunus, microfinance has now gone global.56 Yunus won the Nobel
Peace Prize in 2006. More recently, microfinance has inspired the crowdfunding movement
that can be seen throughout developed economies as well. Crowdfunding refers to efforts
by entrepreneurial individuals and groups to fund their ventures by drawing on relatively
small contributions from a large number of individuals without standard financial intermediaries.57
Harvest and Exit
Outlined in Table 5.2, entrepreneurial harvest and exit can take a number of routes. First,
selling an equity stake to outside strategic investors can substantially increase the value of
the firm, and therefore offer an excellent harvest option. But entrepreneurs must be willing to
give up some ownership and control rights.
Second, selling the firm to other private owners or companies may be done with a painful
discount if the business is failing or a happy premium if the business is booming. Selling the
firm is typically one of the most significant and emotionally charged events that entrepreneurs
confront. It is important to note that “selling out” does not necessarily mean failure. Many
entrepreneurs deliberately build up businesses in anticipation of being acquired by larger
corporations and profiting handsomely.58
Third, when a business is not doing well, merging with another company is another alternative. The drawbacks are that the firm may lose its independence, and some entrepreneurs
may have to personally exit the firm to leave room for executives from another firm. It is obvious that a lackluster entrepreneurial firm is not in a great position to bargain for a good deal.
However, if properly structured and negotiated, a merger will allow entrepreneurs to reap the
rewards for which they have worked so hard.
Fourth, entrepreneurs can take their firms through an initial public offering (IPO),
which is the goal of many entrepreneurs.59 An IPO has several advantages and disadvantages
(Table 5.3). Among the advantages, first and foremost is financial stability, in that the firm
no longer needs to constantly “beg” for money. For entrepreneurs themselves, an IPO can
potentially result in financial windfalls. For the firm, stock options can be issued as incentives
to attract, motivate, and retain capable employees. The IPO is also a great signal indicating
that the firm has “made it.” Such enhanced reputation and legitimacy enable it to raise more
capital to facilitate future growth such as acquisitions.
On the other hand, an IPO carries a number of nontrivial disadvantages. The firm is subject
to the rational and irrational exuberance (and also pessimism) of the financial market. After
the IPO, founding entrepreneurs may gradually lose their majority control. The firm, legally
speaking, is no longer “theirs.” Instead, founding entrepreneurs have the new fiduciary duty
to look after the interests of outside shareholders. As a result, certain constraints restrict
microfinance
A practice to provide
microloans ($50–$300) to
start small businesses with
the intention of ultimately
lifting the entrepreneurs out
of poverty.
crowdfunding
Efforts by entrepreneurial
individuals and groups
to fund their ventures by
drawing on relatively small
contributions from a large
number of individuals.
initial public offering
(IPO)
The first round of public
trading of company stock.
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Table 5.3 Advantages and Disadvantages of an Initial Public Offering (IPO)
Advantages
●●
●●
●●
●●
●●
●●
●●
Disadvantages
Improved financial condition
Access to more capital
Diversification of shareholder base
Ability to cash out
Management and employee incentives
Enhanced corporate reputation
Greater opportunity for future acquisitions
●●
●●
●●
●●
●●
●●
●●
Subject to the whims of financial market
Forced to focus on the short term
Loss of entrepreneurial control
New fiduciary responsibilities for
shareholders
Loss of privacy
Limits on management’s freedom of action
Demands of periodic reporting
entrepreneurs’ freedom of action. They are scrutinized by securities authorities, shareholders,
and the media, which often force firms to focus on the short term. There is also a loss of
privacy, as information about personal wealth, shareholding, and compensation must be
disclosed. In a worst case, the founder can be ousted by new management—a humiliation
that Steve Jobs suffered at Apple in 1985. Because of these concerns, some entrepreneurs,
such as Ingvar Kamprad (founder of the Swedish furniture behemoth IKEA), Tadao Yoshida
(founder of the Japanese zipper king YKK), and Ren Zhengfei (founder of the Chinese
telecom equipment giant Huawei), have refused to go public.
Finally, while taking the firm through an IPO is the most triumphant way of harvest,
many entrepreneurial firms that are failing do not have such a luxury. The only viable exit
is often to become inactive or declare bankruptcy. How bankruptcy laws deal with bankrupt
entrepreneurs differs around the world (see the Closing Case). Overall, a number of harvest
and exit options are available to entrepreneurs. They are encouraged to think about the exit
plan early in the business cycle and aim to maximize the gains from the fruits of their labor.60
Internationalizing the Entrepreneurial Firm
born global firm
(international new
venture)
A start-up that attempts to
do business abroad from
inception.
direct export
Directly selling products
made in the home country
to customers in other
countries.
There is a myth that only large MNEs do business abroad and that SMEs mostly operate
domestically. This myth, based on historical stereotypes, is being increasingly challenged as
more SMEs go international.61 Furthermore, some start-ups attempt to do business abroad
from inception (see the Opening Case). In the digital age, many new Internet-enabled
ventures make no distinction between domestic and overseas markets.62 These are often
called born global firms (or international new ventures).63 This section examines how
entrepreneurial firms internationalize. Table 5.4 shows how entrepreneurial firms can
internationalize by entering foreign markets or staying at home.
International Strategies for Entering Foreign Markets
SMEs can enter foreign markets through three broad modes: (1) direct exports, (2) licensing/
franchising, and (3) foreign direct investment (FDI) (see Chapter 6 for more details).64 First,
direct exports entail the sale of products made by entrepreneurial firms in their home
country to customers in other countries. This strategy is attractive because entrepreneurial
firms are able to reach foreign customers directly. When domestic markets experience some
TABLE 5.4
Internationalization Strategies for Entrepreneurial Firms
Entering Foreign Markets
●●
●●
●●
Direct exports
Franchising or licensing
Foreign direct investment
(through greenfield wholly owned
subsidiaries, strategic alliances, or
foreign acquisitions)
Staying in Domestic Markets
●●
●●
●●
●●
●●
Indirect exports (through export intermediaries)
Supplier of foreign firms
Franchisee or licensee of foreign brands
Alliance partner of foreign direct investors
Harvest and exit (through sell-off to foreign
entrants)
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
downturns, sales abroad may compensate for such drops. However, a major drawback is that
SMEs may not have enough resources to turn overseas opportunities into profits.65
A second way to enter international markets is licensing and/or franchising. Usually used
in manufacturing industries, licensing refers to Firm A’s agreement to give Firm B the rights
to use A’s proprietary technology (such as a patent) or trademark (such as a corporate logo)
for a royalty fee paid to A by B. Assume (hypothetically) that a US exporter cannot keep
up with demand in Turkey. It may consider granting a Turkish firm the license to use its
technology and trademark for a fee. Franchising is essentially the same, except it is typically
used in service industries, such as fast food. A great advantage is that SME licensors and
franchisors can expand abroad while risking relatively little of their own capital. Foreign
firms interested in becoming licensees or franchisees have to put their own capital up front.
For example, a McDonald’s franchise now costs the franchisee approximately $1 million.
But licensors and franchisors also take a risk because they may suffer a loss of control over
how their technology and brand names are used. If a (hypothetical) McDonald’s licensee
in Finland produces sub-standard products that damage the brand and refuses to improve
quality, McDonald’s has two difficult choices: sue its licensee in an unfamiliar Finnish court,
or discontinue the relationship. Either choice is complicated and costly.
A third entry mode is FDI, which may involve greenfield wholly owned subsidiaries
(see Chapter 6), strategic alliances with foreign partners (see Chapter 7), or acquisitions of
foreign firms (see Chapter 9). By planting some roots abroad, a firm becomes more committed to serving foreign markets. Relative to licensing and franchising, a firm is better able to
control how its proprietary technology is used. However, FDI has two major drawbacks: its
cost and complexity. It requires both a nontrivial sum of capital and a significant managerial
commitment.
While many entrepreneurial firms have aggressively gone abroad, it is probably true that
a majority of SMEs will be unable to do so. They already have enough headaches struggling
with the domestic market. However, as discussed next, some SMEs can still internationalize
by staying at home.
127
licensing
Firm A’s agreement to
give Firm B the rights
to use A’s proprietary
technology (such as a
patent) or trademark (such
as a corporate logo) for a
royalty fee paid to A by B.
This is typically used in
manufacturing industries.
franchising
Firm A’s agreement to
give Firm B the rights
to use A’s proprietary
technology (such as a
patent) or trademark (such
as a corporate logo) for a
royalty fee paid to A by B.
This is typically used in
service industries.
International Strategies for Staying
in Domestic Markets
Table 5.4 shows five strategies for SMEs to internationalize without leaving their home
country: (1) export indirectly, (2) become a supplier for foreign firms, (3) become a licensee
or franchisee of foreign brands, (4) become an alliance partner of foreign direct investors, and
(5) harvest and exit through sell-offs.
First, whereas direct exports may be lucrative, many SMEs simply do not have the resources
to handle such work. But they can still reach overseas customers through indirect exports.
This involves exporting through domestic-based export intermediaries, which perform an
important middleman function by linking domestic sellers and overseas buyers who otherwise
would not have been connected. Being entrepreneurs themselves, export intermediaries
facilitate the internationalization of many SMEs.66 Among its several functions, Alibaba has
served as an export intermediary for many Chinese SMEs.
A second strategy is to become a supplier for a foreign firm that enters a domestic market.
For example, when Subway entered Northern Ireland, it secured a contract for partially baked
bread with a domestic bakery. This relationship was so successful that the firm now supplies
Subway franchisees throughout Europe. SME suppliers thus may be able to internationalize
by piggybacking on the larger foreign entrants.
Third, an entrepreneurial firm may become a licensee or franchisee of a foreign brand.
Foreign licensors and franchisors provide training and technology transfer—for a fee, of
course. Consequently, an SME can learn a great deal about how to operate at world-class
standards. Further, if enough learning is accomplished, it is possible to discontinue the
relationship and to reap greater entrepreneurial profits. In Thailand, Minor Group, which had
held the Pizza Hut franchise for 20 years, did not renew the relationship after it expired. Then
Minor Group’s new venture, The Pizza Company, became the market leader in Thailand.67
indirect export
Exporting indirectly
through domestic-based
export intermediaries.
export intermediary
A firm that performs an
important middleman
function by linking
domestic sellers and foreign
buyers that otherwise
would not have been
connected.
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PART 2
BUSINESS-LEVEL STRATEGIES
A fourth strategy is to become an alliance partner of a foreign direct investor. Facing an
onslaught of aggressive MNEs, many entrepreneurial firms may not be able to successfully defend
their market positions. Then it makes great sense to follow the old adage, “If you can’t beat them,
join them!” While dancing with the giants is tricky, it is better than being crushed by them.
Finally, as a harvest and exit strategy, entrepreneurs may sell an equity stake or the entire
firm to foreign entrants. An American couple, originally from Seattle, built a Starbucks-like
coffee chain in Britain called Seattle Coffee. When Starbucks entered Britain, the couple sold
the chain of 60 stores to Starbucks for a hefty $84 million. In light of the high failure rates of
start-ups (see the Closing Case), being acquired by foreign entrants may help preserve the
business in the long run.
Debates and Extensions
The entrepreneurial boom throughout the world has attracted significant controversies and
debates. This section introduces three leading debates.
Debate 1: Traits versus Institutions
serial entrepreneur
An individual who starts,
grows, and sells several
businesses.
This is probably the oldest debate on entrepreneurship. It focuses on the question: What
motivates entrepreneurs to establish new firms, while most others are simply content to work
for bosses? The “traits” school of thought argues that it is personal traits that matter. Compared with nonentrepreneurs, entrepreneurs seem more likely to possess a stronger desire
for achievement and are more willing to take risks and tolerate ambiguities. Overall, entrepreneurship inevitably deviates from the norm to work for others, and this deviation may be
in the “blood” of entrepreneurs.68 For instance, serial entrepreneurs are people who start,
grow, and sell multiple businesses throughout their career.69 One example is David Neeleman,
who as a serial entrepreneur has founded four airlines in three countries (Morris Air and
JetBlue in the United States, WestJet in Canada, and most recently Azul in Brazil).
Critics, however, argue that some of these traits, such as a strong achievement orientation,
are not necessarily limited to entrepreneurs, but instead are characteristic of many successful
individuals. The diversity among entrepreneurs makes any attempt to develop a standard
psychological or personality profile futile. Critics suggest what matters is institutions—
namely, the environments that set formal and informal rules of the game.70 Consider the
ethnic Chinese, who have exhibited a high degree of entrepreneurship throughout Southeast Asia. As a minority group (usually less than 10% of the population in countries such as
Indonesia and Thailand), ethnic Chinese control 70%–80% of the wealth in the region. Yet in
mainland China, for three decades—between the 1950s and the 1970s—there was virtually
no entrepreneurship, thanks to harsh communist policies. More recently, however, as government policies became relatively more entrepreneur-friendly, the institutional transitions have
opened the floodgates of entrepreneurship in China.71
Beyond the macro societal-level institutions, more micro-institutions also matter. Family
background and educational attainment are often correlated with entrepreneurship. Children
of wealthy parents, especially those who own businesses, are more likely to start their own
firms. So are people who are better educated. Taken together, informal norms governing one’s
socioeconomic group, in terms of whether or not starting a new firm is legitimate, assert
some powerful impact on the propensity to create new ventures.
Illustrated by Strategy in Action 5.3 that focuses on immigrant entrepreneurship, overall the
“traits versus institutions” debate is an extension of the broader debate on “nature versus nurture.” Most scholars now agree that entrepreneurship is the result of both nature and nurture.
stage model
A model that suggests that
firms internationalize by
going through predictable
stages from simple steps to
complex operations.
Debate 2: Slow Internationalizers versus Born
Global Start-ups
This debate deals with two questions. (1) Can SMEs internationalize faster than what has
been suggested by traditional stage models that portray SME internationalization as a
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Chapter 5
STRATEGY IN ACTION 5.3
Growing and Internationalizing the Entrepreneurial Firm
129
Emerging Markets Ethical Dilemma
Immigrant Entrepreneurs
In many countries, immigrants are more likely to start their own
business than the native-born. In the United States, although
immigrants account for just 15% of the workforce, they contribute
27% of entrepreneurs. About one-third of US start-ups are
launched by at least one immigrant. Overall, 45% of the Fortune 500
firms (including Apple and Google) were founded by immigrants
or their children. In Germany, 44% of start-ups are registered
by foreign passport holders. In Italy, the most common family
names for new firm founders are Hu, Chen, and Singh, followed
by Rossi as a distant fourth. The “traits” side of the “traits versus
institutions” debate suggests that due to self-selection, the more
adventuresome, more risk-taking, and harder working individuals
immigrate, while their less entrepreneurial cousins stay behind. In
other words, immigrants on average may be more entrepreneurial
than their native-born counterparts and their left-behind cousins.
The “institutions” side points out both institutional pull and
push. First, it is the pull of the more business-friendly institutional
environment of immigrants’ new home countries that nurtures
their entrepreneurial drive. In Silicon Valley, Asian immigrants
make up 69% of the workforce in highly technical occupations,
including 26% from India and 14% from China. Those from
other Asian countries such as Pakistan, the Philippines, and
Vietnam make up 29%. Immigrants from China and India alone
founded about a quarter of the Silicon Valley start-ups. Silicon
Valley not only attracts Asian immigrants, but also other immigrants. Approximately 50,000 Germans work there, and about
500 start-ups in the San Francisco Bay Area are founded by French
entrepreneurs. Thousands of Russian-speaking professionals and
entrepreneurs from Russia and the former Soviet Union countries
work in Silicon Valley. Of course, immigrant entrepreneurship is
not limited to Silicon Valley or the United States. Immigrants are
active in entrepreneurship throughout the world.
Second, other commentators point out that it is the unfriendly
business environment in immigrants’ new countries that push
many of them to become entrepreneurs. Language barriers,
religious differences, and country-of-origin stigma all contribute
to many immigrants’ inability to find good jobs in mainstream
sectors. To make a living in the United States, many Chinese
open restaurants, Koreans dry cleaners, Vietnamese nail polish
salons, and Hispanics janitorial services. Many such entrepreneurs
in low-tech, low-skill fields have advanced degrees that would
qualify them to be doctors, executives, lawyers, and professors.
Their second or third generation usually leave such low-tech, lowskill fields and join the professions.
Clearly, there are at least two types of entrepreneurship:
opportunity type and necessity type. Opportunity entrepreneurship
tends to be embraced by already successful individuals aspiring to
“reach the sky” or “breed the unicorn.” Necessity entrepreneurship
is often pursued by immigrants who must earn a living the hard
way. Regardless of the different types, entrepreneurship in general
generates jobs, contributes taxes, and strengthens the economy
and communities. This does not mean that there is only a rosy side
to immigrant entrepreneurship. A dark side is that relative to startups founded by native-born entrepreneurs, start-ups founded by
immigrant entrepreneurs are more likely to fail. Why this is the
case remains to be debated.
Sources: (1) Asian American News, 2019, Asian immigrants transforming Silicon Valley, April 7: asamnews.com; (2) Economist,
2017, Startup-kultur, February 4: 45; (3) Economist, 2019, The
magic of migration, November 16: Special Report; (4) Harvard
Business Review, 2017, How immigrants fuel start-ups, January: 26;
(5) E. Kulchina, 2016, A path to value creation for foreign entrepreneurs, Strategic Management Journal 37: 1240–1262; (6) J. Mata
& C. Alves, 2018, The survival of firms founded by immigrants,
Strategic Management Journal 39: 2965–2991; (7) H. Ndofor & R.
Priem, 2011, Immigrant entrepreneurs, the ethnic enclave strategy, and venture performance, Journal of Management 37: 790–818;
(8) A. Nikiforou, J. Dencker, & M. Gruber, 2019, Necessity entrepreneurship and industry choice in new firm creation, Strategic
Management Journal 40: 2165–2190; (9) S. Puffer, D. McCarthy,
& D. Satinsky, 2018, Hammer and Silicon, New York: Cambridge
University Press; (10) A. L. Saxenian, 2006, The Argonauts, Cambridge, MA: Harvard University Press; (11) J. Zhang, P. Wong, &
Y. Ho, 2016, Ethnic enclave and entrepreneurial financing, Strategic Entrepreneurship Journal 10: 318–335.
slow, stage-by-stage process?72 (2) Should they rapidly internationalize? The dust has largely
settled on the first question: It is possible for some (but not all) SMEs to make very rapid
progress in internationalization (see the Opening Case). Consider Logitech, now a global
leader in computer peripherals. It was established by entrepreneurs from Switzerland and
the United States, where the firm set up dual headquarters. Research and development
(R&D) and manufacturing were initially split between these two countries and then quickly
spread to Ireland and Taiwan through FDI. Its first commercial contract was with a Japanese
company. Logitech is not alone among such “born global” firms.73 The recent arrival of
Internet technology has reduced the cost of doing business abroad for SMEs, making them
less disadvantaged in competition with large firms.
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BUSINESS-LEVEL STRATEGIES
What is currently being debated is the second question. On the one hand, advocates argue
that every industry has become “global” and that entrepreneurial firms must rapidly pursue these opportunities.74 Firms following the prescription of stage models, when eventually
internationalizing, must overcome substantial inertia because of their domestic orientation.75
In other words, contrary to the inherent disadvantages in internationalization associated
with SMEs as suggested by stage models, there may be “inherent advantages” of being small
while venturing abroad. Therefore, SMEs without an established domestic orientation (such
as Logitech) may outperform their rivals who wait longer to internationalize.
On the other hand, stage models suggest that firms must enter culturally and
institutionally close markets first, spend enough time there to accumulate overseas experience, and then gradually move from more primitive modes (such as exports) to more
sophisticated strategies (such as FDI) in distant markets. Consistent with stage models,
Sweden’s IKEA waited 20 years (1943–1963) before entering a neighboring country,
Norway. Only more recently has it accelerated its internationalization. Stage models caution that inexperienced swimmers may drown in unfamiliar foreign waters. Some authors
argue that “the born-global view, although appealing, is a dangerous half-truth.” They
maintain that “You must first be successful at home, then move outward in a manner that
anticipates and genuinely accommodates local differences.”76 In other words, the teachings
of stage models are still relevant. Consequently, indiscriminate advice to “go global” may
not be warranted.77
Debate 3: High-Growth Entrepreneurship versus
Ethically Questionable Behavior
In the brutal competition where most start-ups either fail or struggle, becoming a unicorn is
an attractive entrepreneurial dream. To realize such a dream, high-growth entrepreneurship—
captured by the recent buzzword blitzscaling (discussed earlier in this chapter)—seems a
must. The subtitle of Reid Hoffman’s book, The Lightning-Fast Path to Building Massively
Valuable Companies, sums it well.78 “If a start-up determines that it needs to move very fast,
it will take on far more risk than a company going through the normal, rational process of
scaling up,” said Hoffman in an interview, “you want to scale faster than your competitors
because the first to reach customers may own them, and the advantage of scale may lead you
to a winner-takes-most position.”79
“In plain English,” according to the Economist, blitzscaling is “conducting a highspeed land grab in the hope of finding gold.”80 A major problem with this business
model is its inability to show profits. Uber famously burned $4 billion a year. WeWork,
an office space provider, lost more than $200,000 every hour every day in 2019 and then
collapsed.81 These are not isolated cases. By the late 2010s, 84% of firms pursuing IPOs
had no profits. Ten years earlier, the ratio was only one-third.82 The upshot? Massive
overvaluation.
However, profitless growth is not the only problem associated with high-growth entrepreneurship. Plenty of ethically questionable behavior, according to Fortune, has become “the
ugly underside of Silicon Valley”—a hotbed for high-growth entrepreneurship.83 “Fake it till
you make it.” In the beginning, entrepreneurship means promoting something that does not
exist.84 Fudging the facts is so common at the early stage that it becomes expected.85 In desperate efforts to grab attention, attract customers, and win VC support, some entrepreneurs
have engaged in ethically questionable behavior. For example, The Honest Company was
sued repeatedly for deceptive advertising in its household and beauty products—it was not
as “honest” as it claimed to be. Hampton Creek, which produced eggless mayonnaise, ordered
its own employees and contractors to fake as customers and buy such products back from
grocery stores in order to boost sales numbers. Theranos, which specialized in blood testing
and which was valued at $9 billion at one point, engaged in “massive fraud” such as lying and
cheating. It had to shut down.
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
“Move fast and break things.” “Charge ahead and beg forgiveness later.” These are some
of the battle cries that are often written up in a positive light by the press. Indeed, Uber
drove through taxi regulations in numerous cities and countries. Airbnb sidestepped taxes on
hotels. Breaking the rules not only makes certain entrepreneurs Silicon Valley heroes, but also
rewards them with huge firm valuations and personal financial windfalls. Uber’s $80 billion
valuation at IPO in May 2019 is a case in point.
Critics argue that the VC culture—especially the extreme version encouraged by
blitzscaling—is fanning ethically questionable behavior. This behavior is exactly what can
be expected when inexperienced (and often young) entrepreneurs are handed giant piles of
VC money and told to flout traditions, ignore rules, and employ wishful thinking. Overall,
high-growth entrepreneurship must be aggressive. But how aggressive it can be remains to
be hotly debated.
The Savvy Entrepreneur
Entrepreneurs and their firms are quintessential engines of the “creative destruction”
process underpinning global capitalism first described by Joseph Schumpeter. All three
leading perspectives can shed considerable light on entrepreneurship. The industrybased view suggests that entrepreneurial firms tend to choose industries with lower
entry barriers. The resource-based view posits that it is largely intangible resources such
as vision, drive, and willingness to take risk that have been fueling entrepreneurship.
Finally, the institution-based view argues that institutional frameworks explain a great
deal about what is behind the differences in entrepreneurial and economic development
around the world.
Consequently, the savvy entrepreneur can draw at least four important implications
for action (Table 5.5). First, establish an intimate understanding of your industry
to identify gaps and opportunities, or, alternatively, to avoid or exit from it if the
threats are too strong. Second, leverage entrepreneurial resources and capabilities
such as entrepreneurial drive, innovative capabilities, and network ties. Third, push
for more entrepreneur-friendly formal institutions such as rules governing how to set
up new firms (Figure 5.2) and how to go through bankruptcy (see the Closing Case).
Entrepreneurs also need to cultivate strong informal norms granting legitimacy to
start-ups, by talking to high school and college students, taking on internships, and
providing seed money as angels for new ventures. Finally, when internationalizing, be
bold but not too bold.86 Being bold does not mean being reckless. One insight from this
chapter is that for entrepreneurial firms not ready to embark on venturing abroad, it is
possible to internationalize while staying at home.
We conclude this chapter by revisiting the four fundamental questions. Because startups are an embodiment of the personal characteristics of their founders, why firms differ
(Question 1) and how they behave (Question 2) can be found in how entrepreneurs differ from nonentrepreneurs. What determines the scope of the firm (Question 3) boils down
to how successful entrepreneurs can expand their businesses. Finally, what determines the
international success and failure of firms (Question 4) depends on whether entrepreneurs can
select the right industry, leverage their capabilities, and take advantage of formal and informal
institutional resources—both at home and abroad.
Table 5.5 Strategic Implications for Action
●●
●●
●●
●●
Establish an intimate understanding of your industry to identify gaps and opportunities.
Leverage entrepreneurial resources and capabilities.
Push for institutions that facilitate entrepreneurship development—both formal and
informal.
When internationalizing, be bold but not too bold.
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131
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CHAPTER SUMMARY
1. Define entrepreneurship, entrepreneurs, and entrepreneurial
●●
firms.
●●
●●
●●
Entrepreneurship is the identification and exploration of previously unexplored opportunities.
Entrepreneurs may be founders and owners of new
businesses or managers of existing firms.
Entrepreneurial firms in this chapter are defined
as SMEs.
●●
2. Articulate a comprehensive model of entrepreneurship.
●●
●●
●●
Five forces of an industry shape entrepreneurship
associated with this industry.
Resources and capabilities largely determine entrepreneurial success and failure.
Institutions enable and constrain entrepreneurship
around the world.
3. Identify five strategies that characterize a growing entre-
5. Participate in three leading debates concerning entre­
preneurship.
●●
(1) Traits versus institutions, (2) slow versus rapid
internationalization, and (3) high-growth entrepreneurship versus ethically questionable behavior.
6. Draw strategic implications for action.
●●
preneurial firm.
●●
Entrepreneurial firms can internationalize by entering foreign markets through entry modes such as
(1) direct exports, (2) licensing and franchising, and
(3) FDI.
Entrepreneurial firms can also internationalize without venturing abroad, by (1) exporting indirectly,
(2) supplying foreign firms, (3) becoming licensees
or franchisees of foreign firms, (4) joining foreign
entrants as alliance partners, and (5) harvesting and
exiting through sell-offs to foreign entrants.
(1) Growth, (2) innovation, (3) network, (4) financing
and governance, and (5) harvest and exit.
●●
●●
4. Differentiate international strategies that enter foreign
markets and those that stay in domestic markets.
●●
Establish an intimate understanding of your industry
to identify gaps and opportunities.
Leverage entrepreneurial resources and capabilities.
Push for institutions that facilitate entrepreneurship
development.
When internationalizing, be bold, but not too bold.
Key Terms
Angel 124
Gig economy 118
Sharing economy 118
Blitzscaling 124
Indirect export 127
Blue ocean 122
Initial public offering (IPO) 125
Small and medium-sized
enterprise (SME) 116
Born global firm 126
International entrepreneurship 116
Corporate entrepreneurship 117
International new venture 126
Crowdfunding 125
Licensing 127
Direct export 126
Liability of newness 123
Entrepreneur 116
Microfinance 125
Entrepreneurship 116
Pivot 119
Export intermediary 127
Red ocean 123
Franchising 127
Serial entrepreneur 128
Social entrepreneurship 116
Stage model 128
Strong ties 123
Unicorn 122
Venture capital (VC) 124
Venture capitalist (VC) 124
Weak ties 123
CRITICAL DISCUSSION QUESTIONS
1. Why is entrepreneurship most often associated with SMEs
as opposed to large firms?
2. Given that most entrepreneurial start-ups fail, why do
entrepreneurs found so many new firms? Why are (most)
governments interested in promoting more start-ups?
3. ON ETHICS: Your former high school buddy invites you
to join a start-up that specializes in making counterfeit
products. She offers you the job of CEO and 10% of the
equity of the firm. The chances of getting caught are slim.
You are currently unemployed. How would you respond to
her proposition?
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Chapter 5
Growing and Internationalizing the Entrepreneurial Firm
133
TOPICS FOR EXPANDED PROJECTS
1. Some suggest that foreign markets are graveyards for
entrepreneurial firms to overextend themselves. Others
argue that foreign markets represent the future for SMEs. If
you were the owner of a small, reasonably profitable firm,
would you consider expanding overseas? Why or why not?
Write a short paper to state your case.
of some entrepreneurs described in the last Debates and
Extensions section. How can you ensure that you will be
both successful and ethical as an entrepreneur?
3. ON ETHICS: Everything is the same as in Critical Discus-
sion Question 3, except the “counterfeit” products involved
are the more affordable generic drugs to combat HIV/AIDS.
Providing these drugs at a lower cost would potentially help
millions of patients worldwide who cannot afford the highpriced patented drugs. How would you respond? Write a
short paper to explain your answer.
2. ON ETHICS: You have a brilliant idea for an entre­
preneurial venture. You have read Reid Hoffman’s best seller
Blitzscaling and are eager to follow its teaching. However,
you are also troubled by the ethically questionable behavior
CLOSING CASE
Emerging Markets
Ethical Dilemma
Boom in Busts: Good or Bad?
Corporate bankruptcies* climbed new heights during the
Great Recession of 2008–2009. Firms ranging from mighty
ones such as Lehman Brothers and General Motors to tiny
entrepreneurial outfits dropped out left and right around
the world. In the COVID-19 crisis of 2020, a wave of new
bankruptcies hit the world, thanks to lockdowns of entire
economies. Since bankruptcies do not sound good or
inspiring, is there anything that we—the government,
financial institutions, consumers, taxpayers, or the society
at large—can do to deal with widespread bankruptcies?
One perspective suggests that bankruptcies, which
are undoubtedly painful to individual entrepreneurs
and employees, may be good for society. Consequently,
bankruptcy laws need to be reformed to become more
entrepreneur-friendly by making it easier for entrepreneurs
to declare bankruptcy and move on. Consequently, financial,
human, and physical resources stuck with failed firms can
be redeployed in a socially optimal way.
A leading debate is how to treat failed entrepreneurs
who file for bankruptcy. Do we let them walk away from
debt or punish them? Historically, entrepreneur friendliness
and bankruptcy laws have been something of an oxymoron
because bankruptcy laws are usually harsh and even cruel.
The very term bankruptcy is derived from a harsh practice: In
medieval Italy, if bankrupt entrepreneurs did not pay their
debt, debtors would destroy the trading bench (booth) of
the bankrupt. The Italian word for broken bench, banca rotta,
has evolved into the English word bankruptcy. The pound
of flesh demanded by the creditor in Shakespeare’s The
Merchant of Venice is only a slight exaggeration. The world’s
first bankruptcy law, passed in England in 1542, considered
a bankrupt individual a criminal. Penalties ranged from incarceration to death sentence.
However, recently, many governments have realized
that entrepreneur-friendly bankruptcy laws not only
*The term bankruptcies in this case refers to corporate bankruptcies and
does not deal with personal bankruptcies.
can lower exit barriers but also lower entry barriers for
entrepreneurs. Although many start-ups will end up in
bankruptcy, it is impossible to predict up front which ones
will go under. Therefore, from an institution-based view,
if entrepreneurship is to be encouraged, there is a need to
ease the pain associated with bankruptcy by means such
as allowing entrepreneurs to walk away from debt, a
legal right that bankrupt US entrepreneurs appreciate. In
contrast, until recent bankruptcy law reforms, bankrupt
German entrepreneurs might remain liable for unpaid
debt for up to 30 years. Furthermore, German and Japanese
managers of bankrupt firms can also be liable for criminal
penalties, and numerous bankrupt Japanese entrepreneurs
have committed suicide. It is not surprising that many failed
entrepreneurs in Germany and Japan try to avoid business
exit despite escalating losses, while societal and individual
resources cannot be channeled to more productive uses.
In the United Arab Emirates (UAE), prior to bankruptcy
law reforms in 2016, even a bounced check could land
an entrepreneur in jail. In India, before the 2018 reforms,
bankruptcy cases could drag on for four years. Overall, as
rules of the “endgame,” harsh bankruptcy laws become
grave exit barriers. They can also create significant entry
barriers, as fewer would-be entrepreneurs may decide to
launch their ventures.
At a societal level, if many would-be entrepreneurs,
in fear of failure, abandon their ideas, there will not be
a thriving entrepreneurial sector. Given the risks and
uncertainties, it is not surprising that many entrepreneurs
do not make it the first time. However, if they are given
more chances, some of them will succeed. Approximately
50% of US entrepreneurs who filed bankruptcy
resumed a new venture in four years. This high level of
entrepreneurialism is, in part, driven by the relatively
entrepreneur-friendly bankruptcy laws (such as the
provision of Chapter 11 bankruptcy reorganization instead
of straight liquidation). On the other hand, a society that
severely punishes failed entrepreneurs (such as forcing
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
134
PART 2
BUSINESS-LEVEL STRATEGIES
financially insolvent firms to liquidate instead of offering a
US Chapter 11-style reorganization option) is not likely to
foster widespread entrepreneurship. Failed entrepreneurs
have nevertheless accumulated a great deal of experience
and lessons on how to avoid their mistakes. If they drop
out of the entrepreneurial game (or, in the worst case, kill
themselves), their wisdom will be permanently lost.
Recent bankruptcy law reforms in Germany, India,
Japan, and the UAE all endeavor to change the incentive
structure in order to promote more entrepreneurship.
Worldwide, an award-winning study conducted by your
author and colleagues, which leverages evidence from
29 countries (involving both developed and emerging
economies from five continents), has identified a strong
linkage between entrepreneur-friendly bankruptcy laws
and new firm entries.
In summary, one side of the debate asserts that at a
societal level, entrepreneurial failures may be beneficial,
since it is through a large number of entrepreneurial
experimentations—although many will fail—that winning
solutions will emerge and that economies will develop.
Thus, the boom in busts is not necessarily bad. However,
President Donald Trump’s history of walking away from
six corporate bankruptcies (although never personal
bankruptcy) has energized the other side of the debate.
Trump praised himself in public for “playing with the
bankruptcy laws.” Critics argue that people with lots of
money such as Trump can easily avoid the consequences of
big losses by cashing out at the first sign of trouble, because
bankruptcy laws protect them. But workers have no such
protection, are stuck with the mess, or are simply out of
work. Is that fair?
Sources: (1) Bloomberg Businessweek, 2018, India’s push to fasttrack bankruptcies, July 2: 31–32; (2) Bloomberg Businessweek,
2020, The bankruptcy trap, April 13: 24–25; (3) E. Danneels &
A. Vestal, 2020, Normalizing versus analyzing, Journal of Business
Venturing 35 (in press); (4) R. Eberhart, C. Eesley, & K. Eisenhardt, 2017, Failure is an option, Organization Science 28: 93–112;
(5) Gulf Business, 2017, Unravelling the UAE’s bankruptcy law, July:
26–27; (6) S. Lee, M. W. Peng, & J. Barney, 2007, Bankruptcy law
and entrepreneurship development, Academy of Management Review 32: 257–272; (7) S. Lee, Y. Yamakawa, M. W. Peng, & J. Barney,
2011, How do bankruptcy laws affect entrepreneurship development around the world? Journal of Business Venturing 26: 505–520;
(8) R. Reich, 2015, Donald Trump proves what’s wrong with bankruptcy laws in America, Politico, September 28: www.politico.com;
(9) World Bank, 2020, Doing Business 2020, Washington: World
Bank; (10) J. Xia, D. Dawley, H. Jiang, R. Ma, & K. Boal, 2016, Resolving a dilemma of signaling bankrupt-firm emergence, Strategic
Management Journal 37: 1754–1764; (11) Y. Yamakawa, M. W. Peng,
& D. Deeds, 2015, Rising from the ashes, Entrepreneurship Theory
and Practice 39: 209–236.
Case Discussion Questions
1. What are the pros and cons for entrepreneur-friendly
bankruptcy laws?
2. Why can bankruptcy laws become exit barriers for an
entrepreneurial firm? Entry barriers?
3. ON ETHICS: Some argue that entrepreneur-friendly
bankruptcy laws, which may allow entrepreneurs to walk
away from their debt, are unethical because they increase
the cost of financing for everybody. What do you think?
NOTES
[Journal Acronyms] AFJOM—Africa Journal of Management;
AMJ—Academy of Management Journal; AMP—Academy of
Management Perspectives; AMR—Academy of Management
Review; APJM—Asia Pacific Journal of Management; ASQ—
Administrative Science Quarterly; BI—Business Insider; BW—
Bloomberg Businessweek; B&S—Business and Society; ETP—
Entrepreneurship Theory and Practice; HBR—Harvard Business
Review; GSJ—Global Strategy Journal; IEEE—IEEE Transactions on Engineering Management; JBR—Journal of Business
Research; JBV—Journal of Business Venturing; JIBS—Journal
of International Business Studies; JIM—Journal of International Management; JM—Journal of Management; JMS—Journal
of Management Studies; JPE—Journal of Political Economy;
JWB—Journal of World Business; OSc—Organization Science;
SEJ—Strategic Entrepreneurship Journal; SMJ—Strategic Management Journal; SMR—MIT Sloan Management Review
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 5
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424–446; Y. Zheng, M. Devaughn, & M. Zellmer-Bruhn,
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41. D. de Lange, 2016, Legitimation strategies for clean technology entrepreneurs facing institutional voids in emerging economies, JIM 22: 403–415; M. Zimmerman & G.
Zeitz, 2002, Beyond survival, AMR 27: 414–431.
42. Y. Wang, 2016, Bringing the stages back in, SEJ 10:
300–317; R. Wuebker, N. Hampl, & R. Wustenhagen, 2015,
The strength of strong ties in an emerging industry, SEJ 9:
167–187; C. Zhang, J. Tan, & D. Tan, 2016, Fit by adaptation
or fit by founding? SMJ 37: 911–931.
43. B. Batjargal, M. Hitt, A. Tsui, J. Arregle, J. Webb, & T. Miller,
2013, Institutional polycentrism, entrepreneurs’ social networks, and new venture growth, AMJ 56: 1024–1049; S.
Opper, V. Nee, & H. Holm, 2017, Risk aversion and guanxi
activities, AMJ 60: 1504–1530; M. W. Peng & Y. Luo, 2000,
Managerial ties and firm performance in a transition
economy, AMJ 43: 486–501.
44. R. Burt, 1997, The contingent value of social capital, ASQ
42: 339–365.
45. R. Canales, 2016, From ideals to institutions, OSc 27:
1548–1573; G. de Rassenfosse & T. Fischer, 2016, Venture
debt financing, SEJ 10: 235– 256; A. Petkova, A. Wadhwa,
X. Yao, & S. Jain, 2014, Reputation and decision making under ambiguity, AMJ 57: 422– 448; P. Vaaler, 2011,
Growing and Internationalizing the Entrepreneurial Firm
46.
47.
48.
49.
50.
51.
52.
53.
54.
137
Immigrant remittances and the venture investment environment of developing countries, JIBS 42: 1121–1149;
M. Wright, T. Lumpkin, C. Zott, & R. Agarwal, 2016, The
evolving entrepreneurial finance landscape, SEJ 10: 229–234;
T. Wry, M. Lounsbury, & J. D. Jennings, 2014, Hybrid vigor,
AMJ 57: 1309–1333; J. Wu, S. Si, & X. Wu, 2016, Entrepreneurial finance and innovation, SEJ 10: 257–273.
R. Koth & G. George, 2012, Friends, family, or fools, JBV
27: 525–543.
D. Cumming & M. Zhang, 2019, Angel investors around
the world, JIBS 50: 692–719; Z. Ding, S. Sun, & K. Au, 2014,
Angel investors’ selection criteria, APJM 31: 705–731.
A. Buchner, S. Espenlaub, A. Khurshed, & A. Mohamed,
2018, Cross-border venture capital investments, JIBS 49
575–604; T. Dalziel, R. White, & J. Arthurs, 2011, Principal
costs in initial public offerings, JMS 48: 1346–1364; Y. Li
& T. Chi, 2013, Venture capitalists’ decision to withdraw,
SMJ 34: 1351–1366; E. Pahnke, R. McDonald, D. Wang, &
B. Hallen, 2015, Exposed, AMJ 58 1334–1360; K. Shafi, A.
Mohammadi, & S. Johan, 2020, Investment ties gone awry,
AMJ 63: 295–327.
D. Blevins & R. Ragazzino, 2018, An examination of the
effects of venture capitalists on the alliance formation
activity of entrepreneurial firms, SMJ 39: 2075–2091;
M. Colombo & K. Shafi, 2016, Swimming with sharks
in Europe, SMJ 37: 2307–2322; G. Fisher, S. Kotha, & A.
Lahiri, 2016, Changing with the times, AMJ 41: 383–409;
S. Garg, 2013, Venture boards, AMR 38: 90–108; S. Garg &
K. Eisenhardt, 2017, Unpacking the CEO-board relationship, AMJ 60: 1828–1858; B. Hallen, R. Katila, & J. Rosenberger, 2014, How do social defenses work? AMJ 57:
1078–1101; B. Hallen & E. Pahnke, 2016, When do entrepreneurs accurately evaluate venture capital firms’ track
record? AMJ 59: 1535–1560; L. Huang & A. Knight, 2017,
Resources and relationships in entrepreneurship, AMR
42: 80–102; R. Lungeanu & E. Zajac, 2016, Venture capital
ownership as a contingent resource, AMJ 59: 930–955; D.
Ma, M. Rhee, & D. Yang, 2013, Power source mismatch
and the effectiveness of interorganizational relations,
AMJ 56: 711–734; U. Ozmel, J. Reuer, & R. Gulati, 2013,
Signals across multiple networks, AMJ 56: 852–866; L.
Plummer, T. Allison, & B. Connelly, 2016, Better together?
AMJ 59: 1585–1604.
J. Chen & P. Thompson, 2015, New firm performance and
the replacement of founder-CEOs, SEJ 9 243–262.
R. Hoffman & C. Yeh, 2018, Blitzscaling: The Lightning-Fast
Path to Building Massively Valuable Companies, New York:
Random House.
Fortune, 2018, Q&A: Reid Hoffman, October 1: 41–42.
D. Hope, D. Thomas, & D. Vyas, 2011, Financial credibility,
ownership, and financing constraints in private firms, JIBS
42: 935–951; N. Wasserman, 2017, The throne versus the
kingdom, SMJ 38: 255–277.
Global Entrepreneurship Monitor 2006, 2006, Babson Park,
MA: Babson College.
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55. M. Humphrey-Jenner & J. Suchard, 2013, Foreign venture
capitalists and the internationalization of entrepreneurial
companies, JIBS 44: 607–621.
56. HBR, 2012, Muhammad Yunus: Life’s work, December:
136.
57. E. Mollick, 2014, The dynamics of crowdfunding, JBV 29:
1–16.
58. M. Oehme & S. Bort, 2015, SME internationalization
modes in the German biotechnology industry, JIBS 46:
629–655; R. Ruback & R. Yudkoff, 2017, Buying your way
into entrepreneurship, HBR January: 149–153.
59. U. D. Park, A. Borah, & S. Kotha, 2016, Signaling revisited,
SMJ 37: 2362–2377.
60. D. Elfenbein, A. Knott, & R. Croson, 2017, Equity stakes
and exit, SMJ 38: 278–299; E. Rouse, 2016, Beginning’s end,
AMJ 59: 1605–1629.
61. S. Christophe & H. Lee, 2017, Does going global or staying
local improve the long-term survival and performance of
IPOs? GSJ 8: 563–577; Y. Yamakawa, S. Khavul, M. W. Peng,
& D. Deeds, 2013, Venturing from emerging economies,
SEJ 7: 181–196.
62. E. Autio, 2017, Strategic entrepreneurial internationalization, SEJ 11: 211–227; K. Brouthers, K. Geisser, & F. Rothlauf,
2016, Explaining the internationalization of ibusiness firms,
JIBS 47: 513–534; L. Chen, N. Shaheer, J. Yi, & S. Li, 2019,
The international penetration of ibusiness firms, JIBS 50:
172–192; A. Ojala, N. Evers, & A. Rialp, 2018, Extending the
international new venture phenomenon to digital platform
providers, JWB 53: 725– 739; J. Onkelinx, T. Manolova, & L.
Edelman, 2016, The human factor, JIM 22: 351–364.
63. N. Hashai, 2011, Sequencing the expansion of geographic
scope and foreign operations by “born global” firms, JIBS
42: 995–1015.
64. B. Maekelburger, C. Schwens, & R. Kabst, 2012, Asset specificity and foreign market entry mode choice of SMEs,
JIBS 43: 458–476.
65. D. Clark, D. Li, & D. Shepherd, 2018, Country familiarity in the initial stage of foreign market selection, JIBS
49: 442–472; C. Schwens, F. Zapkau, K. Brouthers, & L.
Hollender, 2018, Limits to international entry mode learning in SMEs, JIBS 49: 809– 831; M. Stoian, P. Dimitratos, &
E. Plakoyiannaki, 2018, SME internationalization beyond
exporting, JWB 53: 768– 779.
66. M. W. Peng & A. York, 2001, Behind intermediary performance in export trade, JIBS 32: 327–346.
67. Minor Food, 2020, Minor Food history: 2001, www.
minorfood.com.
68. G. Cassar, 2010, Are individuals entering self-employment
overly optimistic? SMJ 31: 822–840; D. Gregoire, A. Corbett, & J. McMullen, 2011, The cognitive perspective in entrepreneurship, JMS 48: 1443–1477; J. Lee, B. Hwang, & H.
Chen, 2017, Are founder CEOs more overconfident than
professional CEOs? SMJ 38 751 769.
69. J. Eggers & L. Song, 2015, Dealing with failure, AMJ 58:
1785–1803.
70. W. Baumol, 1990, Entrepreneurship: Productive, unproductive, and destructive, JPE 98: 893–921; R. Sobel, 2008,
Testing Baumol, JBV 23: 641–655.
71. D. Ahlstrom, S. Chen, & K. Yeh, 2010, Managing in ethnic
Chinese communities, APJM 27: 341–354; J. Lu & Z. Tao,
2010, Determinants of entrepreneurial activities in China,
JBV 25: 261–273.
72. J. Johanson & J. Vahlne, 2009, The Uppsala internationalization process model revisited, JIBS 40: 1411–1431.
73. S. T. Cavusgil & G. Knight, 2015, The born global firm, JIBS
46: 3–16; N. Coviello, 2015, Re-thinking research on born
globals, JIBS 46: 17–26; I. Zander, P. McDougall-Covin,
& E. Rose, 2015, Born globals and international business,
JIBS 46: 27–35.
74. V. Govindarajan & A. Gupta, 2001, The Quest for Global
Dominance, San Francisco: Jossey-Bass; L. Li, G. Qian, & Z.
Qian, 2015, Speed of internationalization, GSJ 5: 303–320;
L. Zhou & A. Wu, 2014, Earliness of internationalization
and performance outcomes, JWB 49: 132–142.
75. S. Nadkarni, P. Herrmann, & P. Perez, 2011, Domestic
mindset and early international performance, SMJ 32:
510–531; A. R. Reuber, P. Dimitratos, & O. Kuivalainen,
2017, Beyond categorization, JIBS 48: 411–422.
76. S. Rangan & R. Adner, 2001, Profits and the Internet, SMR
summer: 44–53.
77. N. Coviello, L. Kano, & P. Liesch, 2017, Adapting the
Uppsala model to a modern world, JIBS 48: 1151–1164;
L. Lopez, S. Kundu, & L. Ciravegna, 2009, Born global or
born regional? JIBS 40: 1228–1238; J. Vahlne & J. Johanson,
2017, From internationalization to evolution, JIBS 48:
1087–1102.
78. Hoffman & Yeh, 2018, Blitzscaling: The Lightning-Fast Path
to Building Massively Valuable Companies, op. cit.
79. HBR, 2016, Blitzscaling (p. 46), April: 45–50.
80. Economist, 2019, The trouble with tech unicorns, April 20: 13.
81. BI, 2019, WeWork isn’t even close to being profitable,
July 3: www.businessinsider.com.
82. Economist, 2019, Herd instincts (pp. 25–26), April 20:
23–26.
83. Fortune, 2017, The ugly unethical underside of Silicon
Valley, January 1: 73–77. All examples in the remainder of
this section come from this source.
84. B. Burns, J. Barney, R. Angus, & H. Herrick, 2016, Enrolling stakeholders under conditions of risk and uncertainty,
SEJ 10: 97–106; T. Saxton, C. Wesley, & M. K. Saxton, 2016,
Venture advocate behaviors and the emerging enterprise,
SEJ 10: 107–125.
85. M. Schilling & C. Fang, 2014, When hubs forget, lie, and
play favoritism, SMJ 35: 974–994.
86. M. W. Peng, C. Hill, & D. Wang, 2000, Schumpeterian
dynamics versus Williamsonian considerations, JMS 37:
167–184.
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CHAPTER
6
iStock.com/golero
Entering Foreign Markets
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Understand the necessity to overcome liability of foreignness
2. Articulate a comprehensive model of foreign market entries
3. Match the quest for location-specific advantages with strategic goals (where to enter)
4. Compare and contrast first-mover and late-mover advantages (when to enter)
5. Follow a decision model that outlines specific steps for foreign market entries (how to enter)
6. Participate in four leading debates concerning foreign market entries
7. Draw strategic implications for action
140
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OPENING CASE
Emerging Markets
Ethical Dilemma
Amazon Enters India
Amazon must win India. This is an order from founder
Jeff Bezos. It is not hard to see why. Having failed in
China, Amazon is counting on India to drive major
growth. The population of India is four times as large
as that of the United States and more than double
that of Europe. By the time you read this case, India’s
population is likely to surpass China’s. As other major
emerging economies slow down, India continues to
feature exciting annual growth rates of 7%–8%. A win
in India can also be potentially replicated in other
promising markets such as Indonesia and Nigeria.
In 2013, Amazon launched its Indian website
Amazon.in. Bezos told the pioneering group of
expatriates who were Indian-born engineers who had
previously worked at Amazon in the United States
to “think like cowboys, who are wild and fast and a
little bit rude, and not like computer scientists.” In
2014, Bezos himself showed up in India, presenting
an oversize $2 billion check to Amit Agarwal, head of
the India operation.
But India is not an easy nut to crack. Not every
Indian household has a street address. Many addresses
are simply descriptions such as “the house behind
the temple.” A hurdle bigger than addresses is how
to get paid. Only 60% Indians have bank accounts,
and only a tiny fraction enjoy credit cards. Therefore,
Amazon has to accept cash on delivery.
In India’s rapidly advancing e-commerce industry,
Amazon is a late entrant. Two leading local start-ups—
Flipkart and Snapdeal—were founded in 2007 and
2010, respectively. Incumbent conglomerates such
as Tata and Reliance launched their own e-commerce
sites left and right. In 2017, Alibaba, which had
soundly beaten Amazon in China, entered India by
buying 5% of Snapdeal and 62% of Paytm. In 2018,
Walmart, after a decade of frustration associated
with its inability to run brick-and-mortar stores
(because of regulatory barriers), spent $16 billion to
acquire Flipkart. In summary, rivalry is intense and
entry barriers are not sky high.
In terms of substitutes, e-commerce obviously
competes with brick-and-mortar stores, because
only 5%–10% of the population have shopped
online. With the world’s highest density of retail outlets, India is the legendary land of small shops. It has
more than 15 million outlets, compared with 900,000
in the United States, whose market (by revenue) is
13 times bigger. Without online shopping, approximately 90%–95% of retail sales in India are made in
tiny independent mom-and-pop (kirana) shops. The
retail industry is the largest provider of jobs after
agriculture, accounting for 6%–7% of jobs and 10%
of GDP. Its participants also represent a huge bloc of
voters. As a result, the retail industry has been able
to repeatedly pressure politicians to sponsor legislation clipping the wings of foreign retailers such as
Walmart.
Indian regulations dictate that Amazon cannot sell
its own inventory. This forces Amazon to be a platform for sellers—akin to its “fulfillment by Amazon”
program in the United States. Therefore, it is crucial
to build good relationships with sellers. However,
most Indian merchants are not comfortable selling online. In response, Amazon sets up numerous
joint ventures (JVs) with local firms to facilitate the
migration of some of their business online. Amazon
would even pick up products from sellers and deliver
them—India is the only country where Amazon does
this. Amazon’s other response is to send a small army
of employees to local markets, introducing e-mail,
apps, and e-commerce to small merchants, who are
offered deep discounts and incentives.
All of this hard work will be useless if Amazon
cannot lure enough customers. Amazon’s (and
Flipkart’s) first group of customers are generally
sophisticated urban dwellers who speak English and
are already online. Getting them to start shopping
online is hard—but not that hard. The real challenge
is to attract the next 100 million people who are less
wealthy and speak one of India’s 22 major languages
at home. In 2018, Amazon launched its first website
and mobile app in Hindi. Translation cannot be
straightforwardly done from English. In fact, some
words such as free and mobile phones are left
in English because this is how Hindi speakers talk in
everyday conversation. Another form of adaptation
141
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PART 2
BUSINESS-LEVEL STRATEGIES
OPENING CASE
(Continued)
was delivering products to small kirana stores that
have reliable addresses, instead of delivering to
customers with unreliable addresses. Amazon relies
on kirana owners who practically know everybody in
the neighborhood to either call recipients to come to
collect products or deliver “the last mile” to recipients.
Instead of being wiped out by Amazon, some kirana
owners can not only make a little commission off every
delivery, but also attract more customers to their
stores—a win-win for both sides.
From a resource-based view, what is truly valuable
and unique about Amazon? It may be its willingness
to outspend rivals. “When will we make money?” is
a question that Bezos reportedly never asks his India
team. Having pledged $5.5 billion, he always raises a
provocative question: “Are we investing enough?” One
lesson from Amazon’s failure in China is that “We should
have spent way more.” In a bidding war, Amazon, in fact,
offered to acquire Flipkart more than Walmart offered,
but Amazon was rejected because Flipkart was afraid
that merging the two online giants—commanding a
combined 80% online market share—would not win
approval from antitrust authorities. Frustrated but
more determined to win, Amazon reportedly has been
spending $25 million a month. However, emboldened
by other deep-pocket investors such as Alibaba and
Walmart, Amazon’s rivals can also copy this strategy.
Despite India’s promise, institutional uncertainties
seem to deteriorate. In February 2019, Amazon (as well
as all foreign-invested e-commerce firms, which now
include Flipkart because it is no longer Indian owned)
had a rude awakening. The government banned
exclusive arrangements, deep discounts, and JVs with
sellers. Amazon was forced to draw up new contracts
with thousands of sellers, not only deleting wording
such as exclusive but also dissolving JV arrangements.
Before it was able to do that, all affected products had
to be taken offline, wiping out—literally overnight—
almost half of its products on Amazon.in. Consumer
uproar on social media was ballistic. “What’s wrong
with Amazon?” one frustrated shopper yelled, posting
a screenshot. “I had 20 items in my shopping cart and
suddenly 16 of them are now unavailable!”
“US tech firms bet on India, then the rules
changed.” This is the title of a Wall Street Journal
article summarizing the new deep freeze. Why
did the presumably “business-friendly” Narendra
Modi government do this? Given that Indianowned e-commerce firms were not affected by
such new regulations, the regulations were clearly
designed to discriminate against foreign entrants.
This seems to be the newest episode of the mighty
political muscle of the retail industry overpowering
the multinationals. After all, the retail industry can
deliver millions of votes, but Amazon can deliver
none. Although a government spokesperson
announced that even though India welcomes
foreign firms, they “cannot be allowed to indulge
in anticompetitive practices” that crush the momand-pop shops. Although a small number of
kirana owners signed up by Amazon are grateful
to Amazon, most shop owners frankly hate it. The
government, according to the commerce minister,
“is clear about standing together with the country’s
small retailers. We won’t let any harm to come to
them.” In January 2020, the government launched
an antitrust investigation of Amazon (and Walmart
and Flipkart), and Amazon pledged an additional
$1 billion for India. In such an environment, can
Amazon win?
Sources: (1) Bloomberg Businessweek, 2018, Amazon’s quest
to win India, October 22: 43–47; (2) Bloomberg Businessweek, 2018, The man who flipped Flipkart, May 14: 28–29;
(3) Bloomberg Businessweek, 2019, India’s e-commerce crackdown, February 11: 17–19; (4) Economic Times, 2017, Ali­
baba to hike stake in Paytm’s marketplace for $177 million,
March 3: economictimes.indiatimes.com; (5) Economist,
2017, Home and away, October 28 (special report): 7–8; (6)
Economist, 2018, Bentonville, meet Bangalore, May 12: 55–56;
(7) Fortune, 2016, Amazon invades India, January 1: 63–71;
(8) Wall Street Journal, 2019, US tech firms bet on India, then
the rules changed, December 4: A1, A12; (9) Wall Street Journal, 2020, Bezos vows $1 billion for Amazon in India, January
16: B3; (10) Wall Street Journal, 2020, India probes Amazon,
Flipkart, January 14: B4.
W
hy do firms such as Amazon enter foreign markets like India? How do they
manage industry conditions, competitive repertoire, and institutional uncertainties in host countries? Will Amazon win in India? These are some
of the key questions driving this chapter. Entering foreign markets is crucial for global
strategy.1 This chapter develops a comprehensive model based on the strategy tripod.2
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Chapter 6
Entering Foreign Markets
143
Then we focus on three crucial dimensions: where, when, and how—known as the
2W1H dimensions. Debates and extensions follow.
Overcoming Liability of Foreignness
Why is it so challenging to enter and succeed in overseas markets? This is primarily because
of the liability of foreignness, which is the inherent disadvantage foreign firms experience
in host countries because of their outsider status.3 Such a liability is manifested in at least
two ways. First, numerous differences in formal and informal institutions govern the rules
of the game in different countries. In the Indian retail and e-commerce industry, foreign
entrants have always been discriminated against (see the Opening Case). They cannot sell
their own inventory and can only serve as platforms selling other merchants’ products. More
recent regulations have further clipped the wings of foreign online giants such as Amazon by
declaring their joint ventures with merchants illegal and the deep discounts and incentives
they offer sellers and buyers “anticompetitive.” What is telling is the treatment of Flipkart,
a domestic firm founded by Indian entrepreneurs in India. However, thanks to Walmart’s
acquisition of Flipkart, which is now a foreign-owned firm, Flipkart finds itself suffer from
the same liability of foreignness that Amazon is experiencing.
Second, although customers in this age of globalization supposedly no longer discriminate
against foreign firms, the reality is that foreign firms are often still discriminated against,
sometimes formally and other times informally. Formally, procurement guidelines in most
governments discriminate against foreign firms. For example, the US government promotes
“buy American,” and the Chinese government emphasizes “indigenous innovation.” Informally, consumers often snub foreign products. For years, American beef, suspected (although
never proven) to contain long-term health hazards because of genetic modification, has been
informally resisted by consumers in Europe after formal discriminatory policies imposed by
their governments were removed. In Japan, some consumers worry that foreign rice may be
“poisonous.” Therefore, they stick with domestic products.
Against such significant odds, how do foreign firms crack new markets? The answer:
to deploy overwhelming resources and capabilities. Imagine overwhelming resources and
capabilities to be a lot of value (like pluses + + + +), and the liability of foreignness to be
some drawbacks (like minuses – – –). Then after offsetting the liability of foreignness
(taking out the minuses), there is still a significant number of pluses—delivering superb
value to customers.4 The key word is overwhelming. In other words, being good enough
is not good enough. For example, although the US government has banned Huawei from
working on installing 5G telecommunications networks in the United States, governments
from major US allies such as Germany defend their decisions of allowing Huawei to do
such work in their countries. Although the German government has its own reservations
about Huawei (and has placed safeguards), the advantages that Huawei brings are simply
overwhelming. No other firm in the world can deliver such an enviable combination of
world-class performance and cost competitiveness. The lesson for aspiring foreign entrants
from this example is clear: To overcome liability of foreignness, make your resources,
capabilities, and ultimately contributions (in terms of performance, jobs, and taxes to host
countries) bulletproof.
liability of foreignness
The inherent disadvantage
foreign firms experience in
host countries because of
their nonnative status.
Understanding the Propensity to Internationalize
Despite recent preaching by some gurus that every firm should go abroad, the reality is that
not every firm is ready for it. Prematurely venturing overseas may be detrimental to overall
firm performance, especially for smaller firms whose margin for error is small (see Chapter 5).
Then, what motivates some firms to go abroad, while others are happy to stay at home?
At the risk of oversimplification, we can identify two underlying factors: (1) the size of the
firm and (2) the size of the domestic market, which lead to a 2 × 2 framework (Figure 6.1). In
Cell 1, large firms in a small domestic market are likely to be enthusiastic internationalizers,
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144
PART 2
BUSINESS-LEVEL STRATEGIES
FIGURE 6.1 Firm Size, Domestic Market Size, and Propensity
to Internationalize
Size of the Firm
Size
of the
Domestic
Market
(Cell 1)
Enthusiastic
internationalizer
(Cell 2)
Follower
internationalizer
Small
Domestic
Market
(Cell 3)
Slow
internationalizer
(Cell 4)
Occasional
internationalizer
Large
Domestic
Market
Large Firm
Small Firm
because they can quickly exhaust opportunities in a small country (see Strategy in Action 6.1).
Consider Nestlé of Switzerland. Given Switzerland’s small population (seven million), the
demand for Nestlé’s food products is rather limited. As a result, a majority of Nestlé’s sales and
employees are outside of Switzerland.
In Cell 2, many small firms in a small domestic market are labeled follower internationalizers, because they often follow their larger counterparts such as Nestlé to go abroad as suppliers. Even small firms that do not directly supply large firms may similarly venture abroad
because of the inherently limited size of the domestic market. A considerable number of
small firms from small countries such as Austria, Denmark, Finland, New Zealand, Norway,
Singapore, Sweden, Switzerland, and Taiwan are active overseas.
STRATEGY IN ACTION 6.1
Nordic Multinationals
Nordic countries have small populations (six million in Denmark,
five million in Finland, five million in Norway, and nine
million in Sweden). But they are big in breeding multinational
enterprises (MNEs) that actively invest abroad and compete
globally. Denmark boasts world leaders in beer (Carlsberg), fur
(Kopenhagen Fur), medical insulin (Novo Nordisk), shipping
(Maersk), toys (LEGO), and wind turbines (Vestas). Tiny
Denmark is an agricultural superpower, which is home to 30 million
pigs—five pigs for every Dane. Leading global players include
Arla, Danish Crown, and DuPont Danisco (a household name
with more than 100 years of history, Danisco was acquired by
DuPont in 2011). Sweden is a world leader in fighter jets (SAAB),
mining equipment and machine tools (Atlas Copco and Sandvik),
retail (H&M and IKEA), telecom equipment (Ericsson), and
trucks (Scania). Finland leads the world in elevators and escalators
(Kone), games (Ravio, the creator of Angry Birds), and telecom
(Nokia). Norway has world-class competitors in oil services
(Statoil) and fishing (Aker BioMarine and Havfisk—formerly
Aker Seafoods). Although technically not an MNE, Norway’s
Government Pension Fund Global is the largest sovereign wealth
fund in the world, owning 1% of all listed shares globally.
Small domestic markets propel many Nordic firms to go
international at a relatively young age. Although most of them export
aggressively, they often find that merely exporting is not enough to
help penetrate new markets and facilitate growth. It is not unusual
to see Nordic firms directly invest abroad and manage operations in
areas ranging from neighboring European countries to distant
shores such as Australia, Brazil, India, China, and South Africa.
Sources: (1) The author’s interviews in Denmark, Finland, and
Sweden; (2) Economist, 2013, Global niche players, February 2
(special report: The Nordic countries): 8–10; (3) Economist, 2014,
Adventures in the skin trade, May 3: 62; (4) Economist, 2014,
Bringing home the bacon, January 4: 52; (5) Economist, 2016,
Norway’s global fund, September 24: 67–68.
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Chapter 6
Entering Foreign Markets
In Cell 3, large firms in a large domestic market are labeled slow internationalizers, because
their overseas activities are often (but not always) slower than those of enthusiastic internationalizers in Cell 1. For example, Walmart’s pace of internationalization is slower when compared with its two global rivals based in relatively smaller countries—Carrefour of France
and Metro of Germany.
Finally, in Cell 4, most small firms in a large domestic market confront a “double whammy”
on the road to internationalization, because of their relatively poor resource base and the
large size of their domestic market. For example, many small firms in Brazil, China, Japan,
Russia, and the United States do not feel compelled to go abroad. Overall, small firms in a
large domestic market can be labeled occasional internationalizers (if they have any international business at all). One joke is that if the United States were divided into 50 independent
countries, then the number of small US multinationals would skyrocket.
A Comprehensive Model of Foreign
Market Entries
Assuming the decision to internationalize is a “go,” managers must make a series of decisions
regarding the location, timing, and mode of entry. These are collectively known as the where,
when, and how (2W1H) aspects. Shown in Figure 6.2, underlying each decision is a set of
strategic considerations drawn from the three leading perspectives in the strategy tripod,
which form a comprehensive model (see the Opening Case).
Industry-Based Considerations
First introduced in Chapter 2, industry-based considerations are primarily drawn from the
five forces framework. First, rivalry among established firms may prompt certain moves.
FIGURE 6.2 A Comprehensive Model of Foreign Market Entries
Industry-based
considerations
Interfirm rivalry
Entry barriers/scale economies
Bargaining power of suppliers
Bargaining power of buyers
Substitute products/services
Resource-based
considerations
Value
Rarity
Imitability
Organization
Foreign
entry decisions
Where/When/How
Institution-based
considerations
Regulatory risks
Trade barriers
Currency risks
Cultural distances
Institutional norms
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Firms, especially those in oligopolistic industries, often match each other in foreign entries.
If Komatsu and FedEx enter a new country—let’s say Algeria—Caterpillar and DHL, respectively, probably would feel compelled to follow. Sometimes, firms may enter foreign markets
to retaliate. For example, Texas Instruments (TI) entered Japan not to make money but to
lose money. The reason was that TI faced low-price Japanese challenges in the United States,
whereas NEC and Toshiba were able to charge high prices in Japan and use domestic profits
to cross-subsidize their overseas expansion. By entering Japan and slashing prices there, TI
retaliated by incurring a loss. This forced the Japanese rivals to defend their home market
because they had more to lose.
Second, the higher the entry barriers, the more intensely firms will attempt to compete
abroad. A strong presence overseas in itself can be seen as a major entry barrier. By tapping
into wider and bigger markets, international sales can increase scale economies and deter
entry. It would be mind-boggling to imagine how high the costs of Boeing and Airbus aircraft
would be in the absence of international sales.
Third, the bargaining power of suppliers may prompt certain foreign market entries, often
called backward vertical integration because they involve multiple stages of the value chain.
Many extractive industries feature extensive backward integration (such as bauxite mining in
Papua New Guinea) in order to provide a steady supply of raw materials to late-stage production (such as aluminum smelting).
Fourth, the bargaining power of buyers may lead to certain foreign market entries, often
called forward vertical integration. Many electronics producers sell their products through
retail chains, which as corporate buyers often extract significant price concessions. Bypassing
such retail chains, Apple has undertaken forward vertical integration by establishing a series
of Apple Stores in major cities worldwide.
Finally, the market potential of substitute products may encourage firms to bring them
abroad. Kodak and Fujifilm used to comfortably lead the film industry. Their products were
substituted by digital camera makers such as Canon. More recently, cell phone makers such
as Apple and Samsung incorporated the camera function within their devices, which replaced
a lot of single-purpose digital cameras. In every round, producers of substitute products had
tremendous incentive to hawk their wares globally.
Overall, how an industry is structured and how its five forces are played out significantly
affect foreign entry decisions (see the Opening Case). Next, we examine the influence of
resource-based considerations.
Resource-Based Considerations
dissemination risk
Risk associated with the
unauthorized diffusion of
firm-specific assets.
The VRIO framework introduced in Chapter 3 sheds considerable light on entry decisions
(Figure 6.2).5 First, the value of firm-specific resources and capabilities plays a key role
behind decisions to internationalize.6 It is often the superb value of firm-specific assets that
allow foreign entrants such as GM in China, Toyota in the United States, and Louis Vuitton
in Japan to overcome the liability of foreignness. In the absence of overwhelmingly valuable
capabilities, Amazon, eBay, Home Depot, and Uber quit China; Walmart exited Germany and
South Korea; and Deutsche Bank withdrew from the United States—all in tears.
Second, the rarity of firm-specific assets encourages firms that possess them to leverage
such assets overseas. Patents, brands, and trademarks legally protect the rarity of certain
product features. It is not surprising that patented and branded products (such as cars and
smartphones) are often aggressively marketed overseas. However, here is a paradox: Given
the uneven protection of intellectual property rights, the more countries these products are
sold in (becoming less rare), the more likely counterfeits will pop up somewhere around
the globe. The question of rarity, therefore, directly leads to the next issue of imitability.
Third, if firms are concerned that their imitable assets may be expropriated in certain
countries, they may choose not to enter. In other words, the transaction costs may be too
high. This is primarily because of dissemination risks, defined as the risks associated with
the imitation and diffusion of firm-specific assets.7 The worst nightmare is to have nurtured
a competitor.
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Chapter 6
Entering Foreign Markets
147
Finally, the organization of firm-specific resources and capabilities as a bundle favors firms
with strong complementary assets integrated as a system and encourages them to utilize these
assets overseas.8 Many multinationals are organized in a way that protects them against entry
and favors them as entrants into other markets. Consider the near total vertical integration
of BP and Exxon Mobil.
In summary, the resource-based view suggests an important set of underlying
considerations underpinning entry decisions. In the case of imitability and dissemination
risk, it is obvious that these issues are related to property rights protection, which leads to
our next topic.
Institution-Based Considerations
Because Chapter 4 has already illustrated several informal institutional differences such as
cultural differences,9 here we focus on the formal institutional constraints confronting foreign
entrants: (1) regulatory risks, (2) trade barriers, and (3) currency risks (Figure 6.2).
Regulatory risks are defined as those risks associated with unfavorable government
policies. Foreign firms doing business with countries ruled by unfriendly governments
obviously confront a great deal of such risks. Ranging from Huawei to Hikvision, a number of
Chinese firms find themselves blacklisted by the US government—literally, on a list called the
entity list. On the other hand, the National Basketball Association, which was eager to develop
the China market, found itself at the receiving end of the Chinese government’s wrath after
one of its teams’ general manager posted a mere seven-word Tweet in support of protestors
in Hong Kong. However, regulatory risks are also relevant when doing business with friendly
countries. For example, Airbus in 2008 won a major $35 billion contract to supply the US
Air Force with next-generation refueling tankers. But Boeing was able to twist the arms of
politicians and change the regulatory rules. In 2010, Boeing emerged as the winner of this rich
prize, and Airbus had to drop out.
A well-known regulatory risk is the obsolescing bargain, referring to the deal struck by
multinational enterprises (MNEs) and host governments, which change their requirements
after the entry of MNEs. It typically unfolds in three rounds:
●●
●●
●●
In round one, the MNE and the government negotiate a deal. The MNE usually is not
willing to enter in the absence of government assurance of property rights or some
incentives (such as tax holidays).
In round two, the MNE enters and, if all goes well, earns profits that may become
visible.
In round three, the government, often pressured by domestic political groups, may
demand renegotiations of the deal that seems to yield “excessive” profits to the foreign
firm (which, of course, regards these as “fair” and “normal” profits). The previous
deal, therefore, becomes obsolete.
Having spent billions of dollars but before making a single penny of profits, Amazon found
that the original terms under which it entered India became obsolete.10 Specifically, its joint
ventures and exclusive deals with Indian suppliers were declared illegal. It was forced to draw
up new contracts with thousands of suppliers, not only deleting wording such as exclusive but
also dissolving joint ventures (see the Opening Case).
Trade barriers include (1) tariff and nontariff barriers and (2) entry mode restrictions. Tariff barriers, taxes levied on imports, are government-imposed entry barriers. The
US-China trade war launched by the Trump administration in 2018 forced importers ranging from Walmart to small furniture stores to cope with the rising costs. Thanks to Chinese
tariff retaliation, US exporters ranging from high-tech manufacturers such as Tesla to soybean farmers in the Midwest suffered. In addition, the Trump administration also imposed
tariffs on Argentina, Brazil, Canada, Japan, Mexico, and Turkey, as well as the European Union
(EU). These actions led a Wall Street Journal editorial to comment that the president seemed
to “use tariffs to punish any country for anything any time he is in the political mood.”11 The
upshot is tremendous economic uncertainties throughout the world.
regulatory risk
Risk associated with
unfavorable government
regulations.
obsolescing bargain
A deal struck by an MNE
and a host government,
which changes the
requirements after the entry
of the MNE.
trade barrier
Barrier blocking
international trade.
tariff barrier
Taxes levied on imports.
trade war
A country imposes tariffs
or quotas on imports and
other countries retaliate
with similar forms of trade
protectionism.
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nontariff barrier
Trade and investment
barrier that does not entail
tariffs.
currency risk
Risk stemming from
exposure to unfavorable
movements of the
currencies.
currency hedging
A transaction that protects
traders and investors from
exposure to the fluctuations
of the spot rate.
strategic hedging
Spreading out activities in
a number of countries in
different currency zones to
offset any currency losses in
one region through gains in
other regions.
Nontariff barriers—nontariff administrative means to discourage imports—are more
subtle. For example, Japanese customs inspectors, in the name of detecting unwanted
bacteria, often insist on cutting every tulip bulb exported from the Netherlands vertically
down the middle. The Dutch argument that their tulips have been safely exported to just
about every other country in the world has not been persuasive.
Certain entry modes also have restrictions. Many countries limit or even ban wholly
owned subsidiaries of foreign firms. For example, in the United States, foreign airlines are not
allowed to operate wholly owned subsidiaries or acquire US airlines. In Russia, foreign firms
are not allowed to operate wholly owned subsidiaries in the strategically important oil and
gas industry.
Currency risks stem from unfavorable movements of the currencies to which firms are
exposed. Known as a haven currency, the Swiss franc strengthens when US stock prices crash;
when bond prices in Greece, Italy, and Spain rise; and when the euro takes a beating. On
one of the most stressful days in recent history, September 11, 2001, the Swiss franc rose by
a remarkable 3% within two hours of the first jet crashing into the World Trade Center. The
Swiss franc often appreciates against the euro. If Swiss firms have a lot of sales in euros and
incur costs in Swiss francs, they can be severely squeezed by such currency risks.
In response, firms can engage in currency hedging or strategic hedging. Currency hedging
protects firms from exposure to foreign-exchange fluctuations. However, this is risky in case
of wrong bets on currency movements. Strategic hedging means spreading out activities
over several countries in different currency zones to offset the currency losses in certain
regions through gains in other regions. To cope with currency risks, multinationals from
Switzerland, such as ABB, Nestlé, Novartis, Roche, and Swatch, engage in significant strategic
hedging by producing and sourcing in different currency zones around the world. They will
not be devastated if one currency (such as the euro) takes a nasty turn.
In addition to formal institutional constraints, firms also need to develop a sophisticated
understanding of numerous informal aspects such as cultural distances and institutional
norms. Because Chapter 4 discusses these issues at length, we will not repeat them here other
than to stress their importance.
Overall, the value of the core proposition of the institution-based view—“institutions
matter”—is magnified in foreign entry decisions.12 Rushing abroad without a solid understanding of institutional differences can be hazardous and even disastrous. Failure to understand the driving forces behind institutional changes that result in obsolescing bargains will
catch foreign entrants off-guard (see the Opening Case).13
Where to Enter?
Like real estate, the motto for international business (IB) is “Location, location, location.”14
In fact, such a spatial perspective (that is, doing business outside of one’s home country) is
one of the defining features of IB.15 Two sets of considerations drive the location of foreign
entries: (1) strategic goals and (2) cultural and institutional distances. Each is discussed next.
Location-Specific Advantages and Strategic Goals
location-specific advantage
Advantage associated with
operating in a specific
location.
agglomeration
Clustering economic
activities in certain locations.
Favorable locations in certain countries may give firms operating in those countries
location-specific advantages. These advantages are the benefits a firm reaps from features specific to a particular location.16 Certain locations simply possess geographical features that are difficult for others to match. For example, Miami, the self-styled “Gateway of
the Americas,” is an ideal location for both North American firms looking south and Latin
American companies coming north. Vienna is an attractive site as multinational regional
headquarters for Central and Eastern Europe. Dubai is a fantastic stopping point for air traffic between Australasia and Europe, and between Asia and Africa.
Beyond geographic advantages, location-specific advantages also arise from the clustering
of economic activities in certain locations, which is usually referred to as agglomeration.
Essentially, agglomeration advantages stem from (1) knowledge spillovers among closely
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Chapter 6
TABLE 6.1
Entering Foreign Markets
Matching Strategic Goals with Locations
Strategic Goals
Location-Specific Advantages
Examples in the Text
Natural resource
seeking
Possession of natural resources and related
transport and communication infrastructure
Oil in the Middle East, Russia, Argentina, and
Venezuela
Market seeking
Abundance of strong market demand and
customers willing to pay
Automakers and business jet producers enter
China
Efficiency seeking
Economies of scale and abundance of
low-cost factors
US and Canadian firms in Mexico; Western
European firms in Eastern Europe, Morocco,
and Turkey
Capability seeking
Abundance of world-class capabilities
Silicon Valley and Bangalore (IT); Dallas
(telecom); Denmark (wind turbines); Britain
and Sweden (high-end car making)
located firms that attempt to hire individuals from competitors, (2) industry demand that
creates a skilled labor force whose members may work for different firms without having to
move out of the region, and (3) industry demand that facilitates a pool of specialized suppliers and buyers to also locate in the region.17 For example, because of agglomeration, Dallas
has the world’s heaviest concentration of telecommunications companies. US firms such as
AT&T, Cisco, HP, Raytheon, TI, and Verizon cluster there. Numerous leading foreign telecom
firms such as Alcatel-Lucent, Ericsson, Fujitsu, Huawei, Siemens, STMicroelectronics, and
ZTE have also converged in this region.
Given that different locations offer different benefits, it is imperative that a firm match its
strategic goals with potential locations. The four strategic goals are shown in Table 6.1.
●●
●●
●●
●●
Natural resource-seeking firms have to go to particular locations where those resources
are. The Middle East, Russia, Argentina, and Venezuela are all rich in oil. Although
the Argentine government nationalized Spanish firm Respol’s subsidiary YPF in
2012, Chevron (from the United States) and Total (from France) went ahead with
multibillion-dollar deals with YPF by 2014.18 Even when the Venezuelan government
became more hostile, Western oil firms had to put up with it.
Market-seeking firms go to countries that have a strong demand for their products
and services. For example, China is now the largest car market in the world, and
practically every automaker in the world has elbowed its way into this huge market.
GM has emerged as the leader. It now sells more cars in China than in the United
States. As demand for business aviation takes off in China, business jet makers such as
Dassault, Gulfstream, and Learjet are now intensely eyeing the new market.
Efficiency-seeking firms often single out the most efficient locations featuring
a combination of scale economies and low-cost factors. In manufacturing industries,
many US and Canadian firms go to Mexico, and many Western European firms enter
Eastern Europe, Morocco, and Turkey.
Capability-seeking firms target countries and regions renowned for world-class
capabilities. For example, for innovation capabilities in certain industries, these firms
focus on Silicon Valley and Bangalore (in IT), Dallas (in telecom), and Denmark
(in wind turbines). For world-class capabilities in the design, manufacturing, and
marketing of high-end cars, Tata and Geely went after Britain and Sweden to acquire
Jaguar-Land Rover and Volvo, respectively (see the Closing Case).
Note that location-specific advantages may grow, change, or decline, prompting firms to
relocate. If policy makers fail to maintain the institutional attractiveness (for example, by
raising taxes or failing to resolve political crises like protests) and if firms overcrowd and bid
up factor costs such as land and talents, then some firms may move out of certain locations
previously considered advantageous. For example, Hong Kong used to proudly present itself
as a “hub for hubs,” being an Asia Pacific center for arts, auction, aviation, conferences, cruise,
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education, entertainment, fashion, financial services, media, shipping, shopping, sports, and
telecom.19 However, a series of protests and violence since 2019 has severely undermined
foreign firms’ confidence, and Hong Kong’s location-specific advantages have plummeted.
Cultural and Institutional Distances
and Foreign Entry Locations
In addition to strategic goals, another set of considerations centers on cultural distance and
institutional distance (see also Chapter 4). Cultural distance is the difference between two
cultures along some identifiable dimensions (such as individualism).20 Institutional distance
is “the extent of similarity or dissimilarity between the regulatory, normative, and cognitive
institutions of two countries.”21 Many Western consumer products firms, such as L’Oreal
and Victoria’s Secret, have shied away from Saudi Arabia, citing its stricter rules of personal
behavior—in essence, its cultural and institutional distance from the West being too large.
Two schools of thought have emerged. The first is associated with stage models, which
argue that firms will enter culturally similar countries during their first stage of internationalization and may gain more confidence to enter culturally distant countries in later stages.22
This idea is intuitively appealing. It makes sense for Belgian firms to first enter France and
for Mexican firms to first enter Texas, taking advantage of common cultural, language, and
historical ties.23 Business between countries that share a language on average is three times
greater than between countries without a common language. Firms from common-law
countries (English-speaking countries and Britain’s former colonies) are more likely to be
interested in other common-law countries. Colony-colonizer links (such as Spain’s with Latin
America) boost trade significantly.
Citing numerous counterexamples, a second school of thought argues that considerations
of strategic goals such as market and efficiency are more important than cultural and institutional considerations.24 For instance, natural resource-seeking firms have compelling reasons to enter culturally and institutionally distant countries (such as Papua New Guinea for
bauxite and Zambia for copper). Because Western multinationals have few alternatives elsewhere, cultural, institutional, and geographic distance may be irrelevant. They simply have to
be there. Overall, in the complex calculus underpinning entry decisions, locations represent
but one of several important sets of considerations. As shown next, entry timing and modes
are also crucial.
When to Enter?
first-mover advantage
Advantage that first movers
enjoy and later movers
do not.
Entry timing refers to whether there are compelling reasons to be an early or late entrant in
a particular country. Some firms look for first-mover advantages, defined as the benefits
that accrue to firms that enter the market first and that later entrants do not enjoy.25 Speaking
of the power of first-mover advantages, FedEx, Google, and Xerox have now become verbs
in phrases such as “Google it.” In many African countries, Colgate is the generic term for
toothpaste. Unilever, a late mover, is disappointed to find out that its African customers call
its own toothpaste “the red Colgate”! Table 6.2 outlines such advantages.
●●
●●
●●
First movers may gain advantage through proprietary technology. Think about
Apple’s iPhone.
First movers may also make preemptive investments. Some Japanese multinationals
have cherry-picked leading local suppliers and distributors in Southeast Asia as new
members of the expanded keiretsu networks and prevented late entrants from the
West from accessing these local firms.26
First movers may erect entry barriers for late entrants, such as high switching
costs. Buyers of expensive equipment are likely to stick with the same producers for
components, training, and services for a long time. That is why American, British,
French, German, and Russian aerospace firms competed intensely for Poland’s first
post-Cold War order of fighters. America’s F-16 eventually won.
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Chapter 6
TABLE 6.2
Entering Foreign Markets
151
First-Mover Advantages and Late-Mover Advantages
First-Mover Advantages
Examples in the Text
Late-Mover Advantages
Examples in the Text
Proprietary, technological
leadership
Apple’s iPhone
Opportunity to free ride on
first mover investments
Amazon free rides on
Flipkart’s investment in
educating customers in India
Preemption of scarce
resources
Japanese MNEs in
Southeast Asia
Resolution of technological
and market uncertainties
Tesla as well as BMW,
GM, and Toyota wait until
the Nissan Leaf resolves
technical uncertainties
Establishment of entry
barriers for late entrants
Poland’s F-16 fighter
contract
First mover’s difficulty to
adapt to market changes
Greyhound is stuck with
the bus depots, whereas
Megabus simply uses
curbside stops
Avoidance of clash with
dominant firms at home
Sony, Honda, and Epson
went to the US market
ahead of their dominant
Japanese rivals
Relationships with key
stakeholders such as
governments
Citigroup, JP Morgan
Chase, and Metallurgical
Corporation of China
entered Afghanistan
●●
●●
Intense domestic competition may drive some nondominant firms abroad to avoid
clashing with dominant firms head-on at home. Matsushita, Toyota, and NEC were
leaders in their respective industries in Japan, but Sony, Honda, and Epson all entered
the United States ahead of the leading firms.
First movers may build precious relationships with key stakeholders such as customers
and governments. Citigroup, JP Morgan Chase, and Metallurgical Corporation
of China entered Afghanistan, earning a good deal of goodwill from the Afghan
government eager to woo more foreign investment.27
The potential advantages of first movers may be counterbalanced by various disadvantages
that result in late-mover advantages (also listed in Table 6.2).28 Numerous first-mover
firms—such as EMI in CT scanners and Netscape in Internet browsers—have lost market
dominance in the long run. It is such late-mover firms as GE and Microsoft (Explorer),
respectively, that win. Specifically, late-mover advantages are manifested in three ways.
●●
●●
●●
late-mover advantage
Advantage associated with
being a later mover.
Late movers can free ride on first movers’ pioneering investments. In India, Flipkart,
founded in 2007, was the first mover in e-commerce. As a late mover, Amazon hopes
to free ride on some of Flipkart’s earlier investments, which educated the Indian
public about e-commerce. Through massive spending, Amazon hopes to leapfrog
Flipkart’s market lead (see the Opening Case).
First movers face greater technological and market uncertainties. Nissan, for example,
launched the world’s first electric vehicle (EV), the Leaf, which could run without a
single drop of gasoline. However, there were tremendous uncertainties. After some
of these uncertainties were removed, Tesla as well as BMW, GM, and Toyota recently
joined the foray with their own EVs.
As incumbents, first movers may be locked into a given set of fixed assets or be
reluctant to cannibalize existing product lines in favor of new ones. Late movers may
be able to take advantage of the inflexibility of first movers by leapfrogging them.
Although Greyhound, the incumbent in intercity bus service in the United States, is
financially struggling, it cannot get rid of the expensive bus depots in inner cities that
are often ill maintained and dreadful. Megabus, the new entrant from Britain, simply
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has not bothered to build and maintain a single bus depot. Instead, Megabus uses
curbside stops (like regular city bus stops), making travel by bus more appealing to a
large number of passengers.29
Overall, evidence points out both first-mover advantages and late-mover advantages.
Unfortunately, a mountain of research is still unable to conclusively recommend a particular
entry timing strategy.30 Although first movers may have an opportunity to win, their
pioneering status is not a guarantee of success. For example, in Indian e-commerce, neither
the first mover Flipkart (now owned by Walmart) nor the late mover Amazon can be certain
of winning (see the Opening Case). It is obvious that entry timing cannot be viewed in
isolation and entry timing per se is not the sole determinant of success and failure of foreign
entries. It is through interaction with other strategic variables that entry timing has an impact
on performance—as discussed next.
How to Enter?
This section first focuses on large-scale versus small-scale entries and then introduces a
decision model. The first step is to determine whether to pursue equity or nonequity modes
of entry. Finally, we outline the pros and cons of various equity and nonequity modes.
Scale of Entry: Commitment and Experience
scale of entry
The amount of resources
committed to foreign
market entry.
One key dimension in international entry decisions is the scale of entry, which refers to
the amount of resources committed to entering a foreign market. The benefits of large-scale
entries are a demonstration of strategic commitment to certain markets. This both helps
assure local customers and suppliers (“We are here for the long haul!”) and deters potential
entrants. The drawbacks are (1) limited strategic flexibility elsewhere and (2) huge losses if
these large-scale “bets” turn out to be wrong.
Small-scale entries are less costly. They focus on “learning by doing” while limiting the
downside risk.31 Unlike most automakers that make vehicles in many countries (representing large-scale entries), Tesla only exports its Made-in-USA EVs. While limiting its downside risk, Tesla learns how to work with customers, dealers, and governments around the
world to spread the enthusiasm about EVs. The drawbacks of small-scale entries are a lack of
strong commitment, which may lead to difficulties in building market share and in capturing
first-mover advantages.
Overall, the longer foreign firms stay in host countries, the less liability of foreignness
they experience.32 Many firms, after their small-scale entries are successful, move to embark
on large-scale entries. Tesla has undertaken its first major foreign direct investment (FDI)
projects by building overseas factories in Shanghai and Berlin.
Modes of Entry: The First Step on Equity
versus Nonequity Modes
nonequity mode
Mode of foreign market
entry that does not involve
the use of equity.
equity mode
Mode of foreign market
entry that involves the use
of equity.
Managers are unlikely to consider the numerous modes of entry simultaneously. Given the
complexity of entry decisions, it is imperative that managers prioritize by considering only a
few manageable, key variables first and then contemplating other variables later. Therefore, a
decision model (illustrated in Figure 6.3 and explained in Table 6.3) is helpful.33
In the first step, considerations for small-scale versus large-scale entries usually boil
down to the equity (ownership) issue. Nonequity modes (exports and contractual
agreements) tend to reflect relatively smaller commitments to overseas markets, whereas equity modes (JVs and wholly owned subsidiaries) are indicative of relatively larger
and harder-to-reverse commitments. Equity modes call for the establishment of independent organizations overseas (partially or wholly owned), whereas nonequity modes do not
require such independent establishments. These modes differ significantly in terms of cost,
commitment, risk, and control.
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Chapter 6
TABLE 6.3
Entering Foreign Markets
153
Modes of entry
Entry Modes (Examples in the Text)
1. Nonequity
modes: Exports
Direct exports (Pearl River
exports pianos to more
than 80 countries)
Advantages
●●
●●
Indirect exports
(Commodities trade in
textiles and meats)
2. Nonequity
modes: Contractual agreements
Licensing/franchising
(Burger King and Hungry
Jack’s in Australia)
●●
●●
●●
●●
Economies of scale in
production concentrated
in home country
Better control over
distribution
Concentration of resources
on production
No need to directly handle
export processes
Low development costs
Low risk in overseas
expansion
Disadvantages
●●
●●
●●
●●
●●
●●
●●
●●
Turnkey projects (Safi
Energy in Morocco)
R&D contracts (wind
turbines research in
Denmark)
●●
●●
Ability to earn returns from
process technology in countries where FDI is restricted
Ability to tap into the best
locations for certain innovations at low costs
●●
●●
●●
●●
●●
Co-marketing (McDonald’s
deals with toymakers and
movie studios; airline
alliances)
3. Equity modes:
Partially owned
subsidiaries
Joint ventures (Shanghai
Volkswagen)
●●
●●
●●
●●
4. Equity modes:
Wholly owned
subsidiaries
Greenfield operations
(Amazon.in; Japanese
automobile plants in the
United States)
Acquisitions (Pearl River’s
acquisition of Ritmüller)
●●
●●
●●
●●
●●
●●
Ability to reach more
customers
Sharing costs, risks, and
profits
Access to partners’
knowledge and assets
Politically acceptable
Complete equity and
operational control
Protection of know-how
Ability to coordinate
globally
Same as greenfield (above)
Do not add new capacity
Fast entry speed
●●
●●
●●
●●
●●
●●
●●
●●
●●
●●
High transportation costs for bulky
products
Marketing distance from customers
Trade barriers and protectionism
Less control over distribution
(relative to direct exports)
Inability to learn how to operate
overseas
Little control over technology and
marketing
May create competitors
Inability to engage in global
coordination
May create competitors
Lack of long-term presence
Difficult to negotiate and enforce
contracts
May nurture innovative competitors
May lose core innovation capabilities
Limited coordination
Divergent goals and interests of
partners
Limited equity and operational
control
Difficult to coordinate globally
Potential political problems and risks
High development costs
Add new capacity to industry
Slow entry speed (relative to
acquisitions)
Same as greenfield (above), except
adding new capacity and slow
speed
Postacquisition integration problems
The distinction between equity and nonequity modes is not trivial. In fact, it is what defines
an MNE. An MNE enters foreign markets via equity modes through FDI. A firm that merely
exports or imports with no FDI is usually not regarded as an MNE. Why would a firm—say,
an oil importer—want to become an MNE by directly investing in the oil-producing country instead of relying on the market mechanism by purchasing oil from an exporter in that
country?
Relative to a non-MNE, an MNE has three principal advantages: ownership (O), location
(L), and internalization (I). Because we already discussed location, we focus on ownership and
internalization here. Let us use an example from the oil industry. By owning assets in both
oil-importing and oil-producing countries, the MNE is better able to coordinate cross-border
activities such as delivering crude oil to the oil refinery in the importing country right at
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BUSINESS-LEVEL STRATEGIES
FIGURE 6.3 The Choice of Entry Modes: A Decision Model
Choice of entry modes
Nonequity modes
Equity (FDI) modes
Exports
Contractual
agreements
Joint
ventures
Wholly owned
subsidiaries
Direct exports
Licensing/
franchising
Minority JVs
Greenfields
Indirect exports
Turnkey projects
50/50 JVs
Acquisitions
Others
R&D contracts
Majority JVs
Others
Co-marketing
Strategic alliances
Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business
Studies 31: 535–554. The dotted area labeled “strategic alliances,” including both nonequity modes (contractual agreements) and equity
modes (JVs), has been added by the current author. See Chapter 7 for more details on strategic alliances.
ownership advantage
Advantage associated with
directly owning assets
overseas.
internalization
The process of replacing a
market relationship with
a single multinational
organization spanning both
countries.
internalization advantage
Advantage associated
with replacing a market
relationship with an internal
organization.
OLI advantages
Ownership, location, and
internalization advantages,
which are typically
associated with MNEs.
the moment its processing capacity becomes available (just-in-time) instead of letting crude
oil sit in expensive ships or storage tanks for a long time. This advantage is therefore called
ownership advantage.
Another advantage stems from the removal of market relationship between an importer
and an exporter, which may suffer from high transaction costs. Using the market, deals have to
be negotiated and deliveries verified, all of which entail significant costs. What is more costly
is the possibility of opportunism on both sides. For instance, the oil importer may refuse to
accept a shipment after its arrival citing unsatisfactory quality, but the real reason may be the
importer’s inability to sell gasoline (refined oil) downstream (recessions reduce the need for
the unemployed to drive to work every day). The exporter is thus forced to find a new buyer
for a boatload of crude oil on a last-minute “fire sale” basis. On the other hand, the oil exporter
may demand higher-than-agreed-upon prices, citing reasons ranging from inflation to natural disasters. The importer thus has to either (1) pay more or (2) refuse to pay and suffer from
the huge costs of keeping expensive refinery facilities idle. These transaction costs increase
international market inefficiencies and imperfections. By replacing such a market relationship with a single organization spanning both countries—a process called internalization,
transforming external markets with in-house links—the MNE reduces cross-border transaction costs and increases efficiencies. This advantage is called internalization advantage.
Relative to a non-MNE, an MNE that operates in certain desirable locations enjoys a combination of ownership (O), location (L), and internalization (I) advantages (Figure 6.4). These
are collectively labeled as the OLI advantages by John Dunning, a leading MNE scholar.34
Overall, the first step in entry-mode considerations is extremely critical. A strategic decision
must be made in terms of whether to undertake FDI and become an MNE by selecting equity
modes (see Strategy in Action 6.1).
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Chapter 6
Entering Foreign Markets
FIGURE 6.4 The OLI Advantages Associated with Being a MNE through FDI
Ownership
Location
FDI/MNE
Internalization
Modes of Entry: The Second Step
in Making Actual Selections
During the second step, managers consider variables within each group of nonequity and
equity modes (see Table 6.3). An entry mode is a form of operation that a firm employs to
enter foreign markets.35 If the decision is to export, then the next consideration is direct versus indirect exports. Direct exports are the most basic mode of entry, capitalizing on economies of scale in production concentrated in the home country and providing better control
over distribution.36 Pearl River, for example, exports its pianos from China to more than
80 countries. This strategy essentially treats foreign demand as an extension of domestic
demand, and the firm is geared toward designing and producing first and foremost for
the domestic market. While direct exports may work if the export volume is small, this
entry mode is not optimal when the firm has a large number of foreign buyers. Marketing
101 suggests that the firm needs to be closer, both physically and psychologically, to its customers, prompting the firm to consider more intimate overseas involvement such as FDI.
In addition, direct exports may provoke protectionism, potentially triggering antidumping
actions (see Chapter 8).
Another export strategy is indirect exports—namely, exporting through domestically
based export intermediaries. This strategy not only enjoys the economies of scale similar to
direct exports but is also relatively worry free. A significant amount of export trade in commodities such as textiles and meats, which compete primarily on price, is indirect through
intermediaries.37 Indirect exports have some drawbacks. For example, third parties such as
export trading companies may not share the same objectives as exporters. Exporters choose
intermediaries primarily because of information asymmetries concerning foreign markets.38
Intermediaries with international contacts and knowledge essentially make a living by taking
advantage of such information asymmetries.39 They are not interested in reducing such asymmetries. Intermediaries, for example, may repackage the products under their own brand
and insist on monopolizing the communication with overseas customers. If the exporter is
interested in knowing more about how its products perform overseas, indirect exports would
not provide such knowledge.
The next group of nonequity entry modes involves the following types of contractual
agreement: (1) licensing or franchising, (2) turnkey projects, (3) research and development
contracts, and (4) co-marketing. In licensing and franchising agreements, the licensor or franchisor sells the rights to intellectual property such as patents and know-how to the licensee
or franchisee for a royalty fee.40 The licensor or franchisor thus does not have to bear the full
costs and risks associated with foreign expansion. However, the licensor or franchisor does
not have tight control over production and marketing.41 For example, Burger King alleged
that its Australian franchisee Hungry Jack’s violated conditions of the franchise agreement by
failing to expand the chain at the rate defined in the contract.
entry mode
A form of operation that
a firm employs to enter
foreign markets.
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155
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turnkey project
Project in which clients pay
contractors to design and
construct new facilities and
train personnel.
build-operate-transfer
(BOT) agreement
A special kind of turnkey
project in which contractors
first build facilities, operate
them for a period of time,
and then transfer them back
to clients.
research and development
(R&D) contract
Outsourcing agreement in
R&D between firms.
co-marketing
Agreements among a
number of firms to jointly
market their products and
services.
Joint venture (JV)
A “corporate child” that is a
new entity given birth and
jointly owned by two or
more parent companies.
wholly owned subsidiary
(WOS)
Subsidiary located in a
foreign country that is
entirely owned by the MNE.
greenfield operation
Building factories and
offices from scratch (on
a proverbial piece of
“greenfield” formerly used
for agricultural purposes).
In turnkey projects, clients pay contractors to design and construct new facilities and
train personnel. At project completion, contractors hand clients the proverbial key to facilities
ready for operations—hence the term turnkey. This mode allows firms to earn returns from
process technology (such as construction) in countries where FDI is restricted. The drawbacks, however, are twofold. First, if foreign clients are competitors, turnkey projects may
boost their competitiveness. Second, turnkey projects do not allow for a long-term presence
after the key is handed to clients. To obtain a longer term presence, build-operate-transfer
(BOT) agreements are now often used instead of the traditional build–transfer type of
turnkey projects. A BOT agreement is a nonequity mode of entry that first builds and then
operates a facility for a period of time before transferring operations to a domestic agency
or firm. For example, Safi Energy—a consortium among GDF Suez (France), Mitsui (Japan),
and Nareva Holdings (Morocco)—has been awarded a BOT power-generation project in
Morocco.42
Research and development (R&D) contracts refer to outsourcing agreements in R&D
between firms. Firm A agrees to perform certain R&D work for Firm B. Firms thereby tap
into the best locations for certain innovations at relatively low costs, such as wind turbines
research in Denmark. However, three drawbacks may emerge. First, given the uncertain
and multidimensional nature of R&D, these contracts are often difficult to negotiate and
enforce.43 Second, such contracts may cultivate competitors. Finally, firms that rely on outsiders to perform a lot of R&D may lose some of their core R&D capabilities in the long run.
Co-marketing refers to efforts among a number of firms to jointly market products and
services. Toy makers and movie studios often collaborate in co-marketing campaigns with
fast-food chains such as McDonald’s to package toys based on movie characters in kids’
meals. Airline alliances such as One World, Sky Team, and Star Alliance engage in extensive
co-marketing through code sharing. The advantages are the ability to reach more customers.
The drawbacks center on limited control and coordination.
Next are equity modes, all of which entail some FDI and transform the firm to an MNE.
As a corporate child, a joint venture (JV) is a new entity jointly created and owned by two
or more parent companies. It has three principal forms: minority JV (less than 50% equity),
50/50 JV (equal equity), and majority JV (more than 50% equity). JVs such as Shanghai
Volkswagen have three advantages. First, an MNE shares costs, risks, and profits with a local
partner, so the MNE possesses a certain degree of control but limits risk exposure. Second,
the MNE gains access to knowledge about the host country. The local firm, in turn, benefits
from the MNE’s technology, capital, and management. Third, JVs may be politically more
acceptable in host countries.
In terms of disadvantages, JVs often involve partners from different backgrounds and
with different goals, so conflicts are natural.44 Even without Indian government intervention,
the JVs set up between a multinational giant Amazon and numerous small Indian suppliers
are not likely to run smoothly (see the Opening Case). Furthermore, effective equity and
operational control may be difficult to achieve because everything has to be negotiated—in
some cases, fought over. Finally, the nature of the JV does not give an MNE the tight control over a foreign subsidiary that it may need for global coordination. Overall, all sorts of
nonequity-based contractual agreements and equity-based JVs can be broadly considered as
strategic alliances (within the dotted area in Figure 6.3). Chapter 7 will discuss them in detail.
The last entry mode is to establish a wholly owned subsidiary (WOS), defined as a subsidiary located in a foreign country that is entirely owned by the parent multinational. There
are two primary means to set up a WOS.45 One is to establish greenfield operations, building
new factories and offices from scratch (on a proverbial piece of “green field” formerly used
for agricultural purposes). For example, Amazon set up a wholly owned greenfield subsidiary
in India (see the Opening Case). There are three advantages. First, a greenfield WOS gives an
MNE complete equity and management control, thus eliminating the headaches associated
with JVs. Second, this undivided control leads to better protection of proprietary technology.
Third, a WOS allows for centrally coordinated global actions. Sometimes, a subsidiary (such as
TI’s subsidiary in Japan discussed previously) may be ordered to lose money. Local licensees/
franchisees or JV partners are unlikely to accept such a subservient role to lose money!
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Chapter 6
STRATEGY IN ACTION 6.2
Entering Foreign Markets
157
Emerging Markets
Thai Union’s Foreign Market Entries
A family business founded in Thailand in 1977 by a Chinese
immigrant, Thai Union Frozen Products has become one of the
world’s largest seafood processors, with subsidiaries in France,
India, Indonesia, Japan, Norway, the United States, and Vietnam.
Leveraging a number of entry modes, Thai Union’s international
growth started with exports to Japan and the United States in 1988.
In Japan, a joint venture with a local trading partner soon followed. In the United States, Thai Union went step-by-step to build
up its market presence. Exports were followed by sales offices.
Acquisitions of Chicken of the Sea and Empress International
then followed in the 2000s. In Europe, Thai Union made a big
splash in 2010 by acquiring MW Brands, a French canned seafood
processor. At €670 million ($740 million), this acquisition was
the second-largest outward foreign direct investment deal in the
history of Thailand. In 2014, Thai Union added further European
brands to its portfolio by acquiring King Oscar in Norway and
MerAlliance in France.
Thai Union’s international expansion strategy focuses on
exploiting its lower cost base arising from (1) low-cost labor in
Thailand and seafood caught off the Thai coast, and (2) product
diversification that enables full exploitation of the raw seafood.
The best parts of fish and shrimp become high-end food products,
whereas the residual is used for such products as pet food.
The acquisition of European firms is primarily motivated by
market-seeking motives, but also capability-seeking in terms of adding fishing and processing capacity. After taking over MW Brands,
the share of Europe in Thai Union’s total sales jumped from 11%
to more than one-third, thus reducing its dependence on the US
market. MW Brands became the market leader in Britain, France,
Ireland, Italy, and the Netherlands with brands such as Conserverie
Parmentier, John West, Mareblu, and Petite Navire. These brands
represent a strategic asset that could be further exploited in other
European markets. In addition, the European acquisitions also supported efficiency-seeking motives by adding four processing plants
in France, Ghana, Portugal, and the Seychelles to its existing facilities in Indonesia, Thailand, the United States, and Vietnam. These
acquisitions also increased the fishing fleet from four to nine vessels.
Sources: (1) Financial Times, 2015, Thai Union plans to real in
more Western catches, February 2: www.ft.com; (2) K. Meyer & O.
Thaijongarak, 2012, The dynamics of emerging economy MNEs,
Asia Pacific Journal of Management 30: 1125–1153; (3) M. W. Peng
& K. Meyer, 2016, Thai Union acquires market access (p. 349), in
International Business, 2nd ed., London: Cengage EMEA; (4) www.
mwbrands.com.
In terms of drawbacks, a greenfield WOS tends to be expensive and risky, not only financially but also politically. Its conspicuous foreignness may become a target for nationalistic
sentiments. Another drawback is that greenfield operations add new capacity to an industry,
which will make a competitive industry more crowded. For example, think of all the Japanese
automobile plants built in the United States that have severely squeezed the market share of
US automakers. Finally, relative to acquisitions, greenfield operations suffer from a slow entry
speed of at least one to several years.
The other way to establish a WOS is an acquisition. Pearl River’s acquisition of Ritmüller in
Germany is a case in point. Acquisition shares all the benefits of greenfield WOS and enjoys
two additional advantages: (1) adding no new capacity and (2) faster entry speed. In terms of
drawbacks, acquisition shares all of the disadvantages of greenfield WOS except for adding
new capacity and slow entry speed. But acquisition has a unique disadvantage: postacquisition integration problems (see Chapter 9 for details).
Overall, a firm is not limited to using only one entry mode. Skillfully using a bundle of foreign market entry modes is a hallmark of successful firms globally (see Strategy in Action 6.2).
Debates and Extensions
We have already covered some debates, such as first-mover versus late-mover advantages.
Here we discuss four additional debates that are previously unexplored in this chapter.
Debate 1: Liability versus Asset of Foreignness
Despite the widely understood notion of liability of foreignness, one contrasting view argues
that, under certain circumstances, being foreign can be an asset (a competitive advantage).46
In the United States and Japan, German cars are seen as higher quality than domestic cars.
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PART 2
BUSINESS-LEVEL STRATEGIES
country-of-origin effect
The positive or negative
perception of firms and
products from a certain
country.
In Central and Eastern Europe, American cigarettes are “cool” among smokers. In Southeast
Asia, anything Korean—ranging from handsets and TV shows to kimchi (pickled cabbage) flavored instant noodles—are considered hip. In China, consumers discriminate against Made-inChina luxury goods and prefer Made-in-France handbags and Made-in-Switzerland watches.
Conceptually, this is known as the country-of-origin effect, which refers to the positive
or negative perception of firms and products from a certain country.47 Although IKEA is now
registered and headquartered in Leiden, the Netherlands (and thus is technically a Dutch
company), it relentlessly shows off Swedish flags in front of its stores in an effort to leverage
the positive country-of-origin effect of Sweden. Pearl River’s acquisition of the Ritmüller
brand, which highlights its German origin, suggests that the negative country-of-origin
effect can be overcome, at least partially (see the Closing Case). Pearl River is not alone in
this regard. Here is a quiz: What is Häagen-Dazs ice cream’s country of origin? My students
typically say Belgium, Denmark, Germany, the Netherlands, Sweden, Switzerland, and other
European countries. Sorry, all wrong. Häagen-Dazs is American since its founding.
Whether foreignness is indeed an asset or a liability remains tricky. Tokyo Disneyland
became wildly popular in Japan because it played up its American image. But Paris
Disneyland received relentless negative press coverage in France because it insisted on its
wholesome American look. To play it safe, Hong Kong Disneyland endeavored to strike the
elusive balance between American image and Chinese flavor. Shanghai Disneyland claimed
to feature “authentically Disney and distinctly Chinese” (Disney’s own words).48
Debate 2: Old-Line versus Emerging
Multinationals: OLI versus LLL
LLL advantages
Linkage, leverage, and
learning advantages, which
are typically associated
with MNEs from emerging
economies.
MNEs presumably possess OLI advantages. The OLI framework is based on the experience
of MNEs from developed economies that typically possess high-caliber technology and
management know-how. However, emerging multinationals such as those from Brazil, Russia,
India, China, and South Africa are challenging such conventional wisdom.49 While these
emerging multinationals, like their old-line (established) counterparts, hunt for lucrative
locations and internalize transactions—conforming to the L and I parts of the OLI framework—
they typically do not own world-class technology or management capabilities. In other words,
the O part is largely missing. How can we make sense of these emerging multinationals?
One interesting new framework is the linkage, leverage, and learning (LLL) framework
advocated by John Mathews.50 Linkage refers to emerging MNEs’ ability to identify and bridge
gaps. For example, Pearl River has identified the gap between what its pianos can actually
offer and what price it can command given the negative country-of-origin effect it has to confront. Pearl River’s answer has been two-pronged: (1) develop the economies of scale to bring
down the unit cost of pianos while maintaining a high standard for quality, and (2) acquire
and revive the Ritmüller brand to reduce some of the negative country-of-origin effect (see
the Closing Case). Thus, Pearl River links China and Germany to propel its global push.
Leverage refers to emerging multinationals’ ability to take advantage of their unique resources and
capabilities, which are typically based on a deep understanding of customer needs and wants. For
example, Thai Union leverages its lower cost base arising from low-cost skilled labor in Thailand
and seafood caught off the Thai coast. Then it expands globally via product and geographic diversification to become a world-class competitor in the seafood industry (see Strategy in Action 6.2).
Learning probably is the most unusual aspect among the motives behind the internationalization push of many emerging multinationals.51 Instead of the “I-will-teach-you-what-to-do”
mentality typical of old-line MNEs from developed economies, many MNEs from emerging
economies openly profess that they go abroad to learn. When India’s Tata Motors acquired
Jaguar and Land Rover and China’s Geely acquired Volvo, they expressed a strong interest
in learning how to manage world-class brands (see the Closing Case). Additional skills they
need to absorb range from basic English skills to high-level executive skills in transparent
governance, market planning, and management of diverse multicultural workforces.
Of course, there is a great deal of overlap between OLI and LLL frameworks. So the debate
boils down to whether the differences are fundamental, which would justify a new theory such
as LLL advantages, or just a matter of degree, in which case OLI (with some modification)
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Chapter 6
Entering Foreign Markets
159
would be just fine to accommodate the new MNEs.52 Given the rapidly moving progress of
these emerging multinationals, one thing for certain is that our learning and debate about
them will not stop anytime soon (see the Closing Case)
Debate 3: Global versus Regional
Geographic Diversification
In this age of globalization, debate continues on the optimal geographic scope for MNEs.53
Despite the widely held belief that MNEs expand “globally,” Alan Rugman and colleagues
report that even among the largest Fortune Global 500 MNEs, few are truly “global.”54 Using
some reasonable criteria (at least 20% of sales in each of the three regions of the Triad consisting of Asia, Europe, and North America but less than 50% in any one region), fewer than
ten MNEs are found to be really “global.”
Should most MNEs further “globalize”? There are two answers. First, most MNEs know
what they are doing, and their current geographic scope may be the maximum they can manage.55 Most multinationals from emerging economies, having recently embarked on internationalization, obviously cannot spread themselves too thin (see the Closing Case). Some
multinationals from developed economies, despite having better capabilities, may be deliberately conservative. For example, Muji—a no-frills retailer from Japan—would only expand to
another country when its existing stores in that region are profitable.56 Some MNEs may have
already overdiversified and need to downscope.
Second, these data only capture a snapshot (the 2000s), and some MNEs may become
more “globalized” over time. However, more recent data do not show major changes.57 While
the debate goes on, it has at least taught us one lesson: Be careful when using the word global.
The majority of the largest MNEs are not necessarily global in their geographic scope.
Debate 4: Contractual versus Noncontractual
Approaches of Entry58
A vast majority of international market entries are governed by contracts.59 Can entries be
undertaken without contracts? Although some experts doubt the feasibility of a noncontractual approach, others point out that sometimes a noncontractual approach may emerge when
a contractual approach is infeasible. Specifically, a foreign entrant may endeavor to penetrate
an institutionally unfamiliar environment where formal market-supporting institutions are
lacking. A noncontractual approach is otherwise known as reciprocity. Reciprocity in international market entry can be viewed as an informal arrangement based on mutual exchange
of gratifications and governed by informal institutions that allow a firm to enter a new market.
The use of reciprocity involves the contributions of valuable resources such as money, goods,
technology, and personnel time by foreign entrants to (1) nonmarket local stakeholders such
as politicians, regulators, and local leaders in governments, nongovernmental organizations,
or even tribes; or (2) market counterparts such as buyers, sellers, and clients.60 Specifically, the
foreign entrant may initiate a first move by “paying forward,” whereas the local recipient of
the favor may feel obligated to reciprocate. However, there is no guarantee such a favor will
be returned, and the nature and the specifics of the return cannot be bargained.61 Given these
significant challenges, why would reciprocity be chosen in international market entry?
Reciprocity may be especially useful when foreign entrants from developed economies
eye newly opened emerging economies characterized by significant institutional voids—for
example, when Goldman Sachs endeavored to enter Libya (see Strategy in Action 6.3).62 The
expression institutional voids refers to the institutional conditions of a country lacking
market-supporting infrastructure that enable efficient operations supported by a contractual
approach.63 In general, the larger the deficiencies produced by institutional voids, the more
likely a noncontractual approach may be chosen for initial international market entry.64
Reciprocity does not necessarily mean illegitimate corruption and bribery activities.
Corruption and bribery involve quid pro quo, and reciprocity is open-ended and noncontractual in nature. For instance, in the 1990s, Western investment banks were eyeing the
massive but closed Chinese market for restructuring and initial public offerings (IPOs) of
reciprocity
An informal agreement
based on mutual exchange
of gratifications.
institutional void
Institutional conditions of
a country lacking marketsupporting infrastructure.
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160
PART 2
BUSINESS-LEVEL STRATEGIES
STRATEGY IN ACTION 6.3
Emerging Markets Ethical Dilemma
Goldman Sachs Enters Libya
After Western sanctions were lifted in 2003–2004, the Gaddafi
government in 2006 set up Libya’s first sovereign wealth fund
(SWF)—the Libyan Investment Authority (LIA). LIA had the
mandate of investing oil revenues (i.e., petrodollars) accrued
over many years during which no investments abroad could
be made because of sanctions. With $30 billion of assets, LIA
quickly became Africa’s largest SWF, which had the ambitious
target of generating large, quick returns of $3 billion every year to
support the government. The size of Libya’s vast oil wealth and the
eagerness of LIA to meet its aggressive investment goal attracted
numerous Western banks to rush in.
The problem was that nobody had figured out the “rules of
engagement” for dealing with the fledgling SWF. In Libya, financial institutions were few, regulations rare, and legal and financial
professionals scarce. In the words of a British lawyer who worked
for LIA, Libya at that time was the “Wild West where the normal
rules of commerce and standard business operating procedures
simply did not exist.”
In April 2008, Goldman Sachs offered the 25-year-old younger
brother of LIA’s chief executive a prestigious, paid internship in its
London office. The 38-year-old chief executive was a close friend
of one of Gaddafi’s sons. In Libya, such political connections were
crucial. The chief executive had asked Goldman Sachs to help his
younger brother learn the banking trade. However, because the
younger brother’s qualifications were substantially below those
of regularly recruited interns, there was “considerable resistance”
from Goldman Sachs’ human resources (HR) department. Still, the
brother was offered the highly coveted internship anyway. Goldman
Sachs’s sales team went an “extra mile” by not only persuading
HR to offer the internship, but also creating a special internship
program tailor-made just for this inexperienced individual.
Without a contract, the LIA chief executive’s simple promise
to reciprocate favors by “giving us something” in return was the
major argument put forward by the lead member of Goldman
Sachs’s sales team to convince his HR colleagues to make the
internship happen. Indeed, within days of the internship offer
to his younger brother, the chief executive authorized Goldman
Sachs to execute “several trades of astonishing size,” according to
Bloomberg Businessweek. Totaling $830 million, they represented
“the largest single trades that had ever been done in the history
of Goldman Sachs.” Overall, Goldman Sachs won a $1.2 billion
volume of trades in derivatives from LIA, from which Goldman
Sachs by its own admission enjoyed at least a $130 million profit.
While reciprocity seemed to work initially, LIA quickly
became unhappy. This was because the derivatives it bought from
Goldman Sachs in early 2008—based on shares of companies such
as Citigroup, ENI, and Santander—took a nose dive. Thanks to
the 2008 global financial crisis, LIA completely lost its $1.2 billion.
In 2014, LIA sued Goldman Sachs in London for abusing their
“relationship of trust and confidence,” alleging that Goldman
Sachs tricked the inexperienced SWF into buying highly complex derivatives that LIA knew little about. LIA also alleged that
Goldman Sachs, in order to win business from LIA, engaged in
corrupt activities such as lavish entertainment and the extraordinary placement of an unqualified intern—in violation of Goldman
Sachs’s own HR policy. In the legal battle, LIA accused Goldman
Sachs of “crossing the line,” whereas Goldman Sachs defended its
efforts by arguing that their relationship was “the normal cordial
and mutually beneficial relationship between a bank and a client.”
In the end, Goldman Sachs’s defense of its noncontractual approach to international market entry centered on reciprocity was
successful and the case was dismissed.
Sources: Unless otherwise noted, all quotations from this case
are from Judgment, 2016, Mrs. Justice Rose, case between The
Libyan Investment Authority and Goldman Sachs International,
October 10, London: Royal Courts of Justice. A secondary source
is Bloomberg Businessweek, 2016, Libya vs. Goldman, October 3:
66–73.
major state-owned enterprises (SOEs) at the New York Stock Exchange. But no SOE had
gone through such restructuring and overseas IPOs. At the same time, China needed a large
number of well-trained managers to restructure SOEs, but Chinese business schools were of
mediocre quality at that time. In 1999, Goldman Sachs’ chairman and CEO Henry “Hank”
Paulson was invited by China’s proreform premier Zhu Rongji to transform the School of
Economics and Management (SEM) at Tsinghua University, a leading university that was
the premier’s alma mater. Zhu was SEM’s founding dean and continued to serve as its dean
during his premiership. Paulson tirelessly worked the phone to enlist into SEM’s international advisory board many CEOs from leading global firms, such as AIG, BP, Kodak, Li
& Fung, Motorola, Nokia, Qualcomm, Soft Bank, Sony, and Walmart.65 SEM’s international
advisory board chaired by Paulson went on to propel the school to become a leading trainer
of thousands of Chinese managers who significantly contributed to China’s subsequent economic takeoff.66 While there was no explicitly mentioned quid pro quo, the fact that Goldman Sachs—in intense competition with rivals—repeatedly won lucrative IPO deals for such
major SOEs as China Telecom suggests that reciprocity had been successfully put to work.
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Chapter 6
Entering Foreign Markets
Reciprocity obviously cannot happen all the time.67 For international market entry to be
successful, reciprocity cannot displace contractual approaches. In other words, as a noncontractual approach, reciprocity may be the first entry mode. If reciprocity is successful, a
formal contractual approach will most likely be implemented later.
The Savvy Strategist
Expanding out of domestic cocoons, foreign market entries are crucial in global strategy.
The challenges associated with internationalization are daunting, the complexities enormous, and the stakes high. Consequently, the savvy strategist can draw four implications
for action (Table 6.4). First, from an industry-based view, you need to thoroughly understand the dynamism underlying the industry in a foreign market. For example, in the 1990s
Deutsche Bank sought to transform itself from a domestically focused commercial lender
and retail bank to a universal banking powerhouse that would disrupt the financial services
industry in Wall Street. It made a series of aggressive acquisitions in the United State, but
was engulfed in numerous missteps, scandals, and crises—in addition to being hit hard
by the Great Recession of 2008–2009. In 2019, Deutsche Bank announced its withdrawal
from Wall Street and its plans to lay off 18,000 employees, roughly one-fifth of its global
workforce.68
Second, from a resource-based view, you and your firm need to develop overwhelming
capabilities to offset the liability of foreignness. The key word is overwhelming. Merely outstanding, but not overwhelming, capabilities cannot ensure success in the face of strong
incumbents—a painful lesson that Amazon, Home Depot, and Uber learned from China.
Remember: Being good enough is not good enough.
Third, from an institution-based view, you need to understand the rules of the game, both
formal and informal, that govern competition in foreign markets. Failure to understand these
rules can be costly.69 In India, e-commerce giants such as Amazon and Walmart (which owns
Flipkart) take the Indian government’s “welcome” policy for its face value, ignore a series of
earlier actions that repeatedly protected small retailors at the expense of foreign entrants, and
thus are caught off-guard by the newest round of protectionist measures that severely curtail
foreign entrants’ room for growth (see the Opening Case).
Finally, the savvy strategist matches entries with strategic goals. If the goal is to deter rivals
in their home markets by slashing prices there (as TI did when entering Japan), then be prepared to fight a nasty price war and lose money. If the goal is to generate decent returns, then
withdrawing from some tough nuts to crack, although admittedly painful, may be necessary
(as Walmart withdrew from Germany and South Korea).
In conclusion, this chapter sheds considerable light on the four fundamental questions.
Why firms differ in their propensity to internationalize (Question 1) boils down to the
size of the firm and that of the domestic market. How firms behave (Question 2) depends
on how considerations for industry competition, firm capabilities, and institutional differences influence market entry decisions. What determines the scope of the firm
(Question 3)—in this case, the scope of its international involvement—fundamentally
depends on how to acquire and leverage the three-pronged OLI advantages. Firms committed to owning some assets overseas through equity modes of entry and, thus, to becoming MNEs are likely to have a broader scope overseas than those unwilling to do so.
Finally, entry strategies obviously have something to do with the international success and
failure of firms (Question 4).70
TABLE 6.4Strategic Implications for Action
●●
●●
●●
●●
Grasp the dynamism underlying the industry in a host country that you are looking into.
Develop overwhelming resources and capabilities to offset the liability of foreignness.
Understand the rules of the game—both formal and informal—governing competition in
foreign markets.
Match efforts in market entry and geographic diversification with strategic goals.
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161
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CHAPTER SUMMARY
1. Understand the necessity to overcome liability of
foreignness:
●●
●●
entries:
●●
●●
eign market entries (how to enter):
When entering foreign markets, firms confront a
liability of foreignness.
The propensity to internationalize differs among
firms of different sizes and different home market
sizes.
2. Articulate a comprehensive model of foreign market
●●
5. Follow a decision model that guides specific steps for for-
The industry-based view suggests that industry
dynamism in a host country cannot be ignored.
The resource-based view calls for the development
of capabilities along the VRIO dimensions.
The institution-based view focuses on institutional
constraints that foreign entrants must confront.
3. Match the quest for location-specific advantages with
●●
●●
●●
6. Participate in four leading debates on foreign market
entries:
●●
●●
Where to enter depends on certain foreign countries’ location-specific advantages and firms’ strategic goals, such as seeking (1) natural resources,
(2) market, (3) efficiency, and (4) capability.
●●
●●
4. Compare and contrast first-mover and late-mover advan-
●●
tages (when to enter):
●●
(1) Liability versus asset of foreignness, (2) old-line
versus emerging multinationals, (3) global versus
regional geographic diversification, and (4) contractual versus noncontractual approaches of entry.
7. Draw strategic implications for action:
strategic goals (where to enter):
●●
How to enter depends on the scale of entry: largescale versus small-scale.
A decision model first focuses on the equity (ownership) issue.
The second step makes the actual selection such as
exports, contractual agreements, JVs, and WOS.
Grasp the dynamism underlying the industry in a
host country.
Develop overwhelming resources and capabilities to
offset the liability of foreignness.
Understand the rules of the game governing competition in foreign markets.
Match efforts in market entry and geographic diversification with strategic goals.
Each has pros and cons, and there is no conclusive
evidence pointing to one direction.
KEY TERMS
Agglomeration 148
Institutional void 159
Ownership advantage 154
Build-operate-transfer (BOT)
agreement 156
Internalization 154
Reciprocity 159
Co-marketing 156
Internalization advantage 154
Regulatory risk 147
Joint venture (JV) 156
Research and development
(R&D) contract 156
Country-of-origin effect 158
Currency hedging 148
Currency risk 148
Dissemination risk 146
Entry mode 155
Equity mode 152
First-mover advantage 150
Greenfield operation 156
Late-mover advantage 151
Liability of foreignness 143
LLL advantages 158
Location-specific advantage 148
Nonequity mode 152
Strategic hedging 148
Tariff barrier 147
Trade barrier 147
Trade war 147
Nontariff barrier 148
Obsolescing bargain 147
OLI advantages 154
Scale of entry 152
Turnkey project 156
Wholly owned subsidiary (WOS) 156
CRITICAL DISCUSSION QUESTIONS
1. Pick an industry in which firms from your country are
internationally active. What are the top five most favorite
foreign markets for firms in this industry? Why?
2. From institution-based and resource-based views, identify
the liability of foreignness confronting MNEs from emerging economies interested in expanding overseas. How can
such firms overcome them?
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Chapter 6
3. ON ETHICS: By definition, entering foreign markets
Entering Foreign Markets
163
(1) MNE executives, (2) labor union leaders of your
domestic (home country) labor forces, (3) host country
officials, and (4) home country officials?
means not investing in a firm’s home country. What are the
ethical dilemmas here? What are your recommendations as
TOPICS FOR EXPANDED PROJECTS
1. ON ETHICS: You are CEO of Apple, whose smartphones
are all assembled in China (although designed in
California). The average retail price of an iPhone in the
United States is about $800, and China only contributes
approximately 5%–10% of that. Japan, Germany, and
South Korea provide, respectively, 34%, 17%, and 13%.
President Trump has publicly (via Twitter) and privately
(in meetings with you) asked you to move some of the
production back to the United States. However, an iPhone
that is entirely (all components and labor) made in the
United States would push the retail price up to $2,000.
What would you do?
CLOSING CASE
2. ON ETHICS: Foreign entrants are often criticized for
destroying local firms and cultures. As CEO of a leading
foreign entrant in a host country, you have been interviewed by a local TV reporter to comment on this issue on
TV. What would you say?
3. ON ETHICS: As CEO of a social media firm (such as
Facebook), you have been informed that your firm’s service
will be discontinued in the host country because it allegedly
incites social unrest (Egypt and Turkey did that in 2011 and
2013, respectively; and Britain and Hong Kong threatened
to do that in 2010 and 2019, respectively). How would you
prepare a press release on this incident?
Emerging Markets
Ethical Dilemma
How Firms from Emerging Economies Fight Back
Market opening throughout emerging economies often
means the arrival of multinational enterprises (MNEs)
from developed economies. Although MNEs put enormous
pressure on local firms, MNEs also serve a useful purpose
of demonstrating what is possible and motivating local
firms to try harder. Because the best defense is offense, trying
harder—in addition to mounting a rigorous defense—usually
means getting out of local firms’ increasingly crowded home
markets. How do firms from emerging economies fight
back? Specifically, how do they enter foreign markets?
At least four strategic patterns have emerged. The first is
to follow the well-known Japanese and Korean strategies of
first establishing a beachhead by exporting something good
enough and then raising quality, perception, and price. By
following these steps, Pearl River of China has dethroned
Yamaha to become the largest piano maker in the world. It
has also significantly improved quality so that the high-end
market leader Steinway, after first rejecting Pearl River for
an alliance proposal, more recently approached Pearl River
to become Steinway’s original equipment manufacturer
for low-end models. Pearl River also acquired Ritmüller, a
300-year-old German piano maker that had been inactive
for several decades. Likewise, Mahindra & Mahindra of
India solidly established itself in the American heartland,
and ended up becoming the world’s largest tractor maker
by volume.
A second path is to follow the diaspora. To bring Bollywood hits to the diaspora, Reliance Media of India launched
the BIG Cinemas chain in the United States. King of fast
food in the Philippines, Jollibee chased the diaspora by
expanding to Hong Kong, Dubai, and Southern California.
But joining the mainstream has been hard for companies
focusing on the diaspora. More interesting is a reverse diaspora strategy. Corona beer of Mexico, after giving American
drinkers a happy time when vacationing in Mexico, successfully chased such customers back home. Corona is now one
of the most frequently served beers in American bars and
restaurants that have nothing to do with Mexico or Mexican
food. In short, Corona has “gone native” to become a local
beer in the United States.
Third, some emerging multinationals simply buy
foreign companies or brands off the shelf. For example,
Tata Motors of India bought Jaguar Land Rover, Geely of
China acquired Volvo, and Yildiz Holdings of Turkey took
over Godiva. Such high-profile acquisitions significantly
enhanced the global profile and brand awareness of these
ambitious firms from emerging economies.
Finally, firms from emerging economies have to overcome enormous institution-based barriers, some formal and
some informal. Although Huawei of China successfully exported telecom equipment to 45 of the world’s top 50 telecom operators, it had a hard time penetrating the remaining
five, all of which are in the United States. A major reason
is blatant discrimination by the US government, which labeled Huawei a “national security threat” in the absence
of hard evidence. In addition to formal barriers, how to
overcome informal consumer perceptions that typically
associate emerging economies with poor quality is another
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164
PART 2
BUSINESS-LEVEL STRATEGIES
challenge. For example, cosmetics users in the world do not
think of Brazil highly—or even think of Brazil at all. Natura
of Brazil has no precedents to follow because no Brazilian
consumer products brands have succeeded outside Latin
America. Highlighting its natural ingredients from the
Amazon rainforest, Natura endeavored to tap into Brazil’s
positive country-of-origin image of biodiversity. This reigning queen of cosmetics in Brazil was trying hard to show its
charm overseas.
In summary, facing an onslaught of MNEs from deve­
loped economies, many firms from emerging economies
are determined to fight back by turning up the competitive
heat in developed economies as well as in numerous other
markets. How these emerging multinationals succeed or fail
will help write the next chapter on international entry.
Sources: (1) D. Boehe, G. Qian, & M. W. Peng, 2016, Export intensity, scope, and destinations: Evidence from Brazil, Industrial
Marketing Management 57: 127–138; (2) L. Casanova & A. Miroux,
2020, The Era of Chinese Multinationals, San Diego: Academic
Press; (3) P. Deng, A. Delios, & M. W. Peng, 2020, A geographic relational perspective on the internationalization of emerging market
firms, Journal of International Business Studies 51: 50–71; (4) Economist, 2013, Looks good, September 28 (special report): 14–15; (5)
Economist, 2013, The emerging-brand battle, June 22: 70; (6) F.
Jiang, A. Ananthram, & F. Li, 2018, Global mindset and entry
mode decisions, Management International Review 58: 413–447;
(7) K. Meyer, Y. Ding, J. Li, & H. Zhang, 2014, Overcoming distrust, Journal of International Business Studies 45: 1005–1028; (8)
K. Moghaddam, D. Sethi, T. Weber, & J. Wu, 2014, The smirk of
emerging market firms, Journal of International Management 20:
359–374; (9) M. W. Peng, 2012, The global strategy of emerging
multinationals from China, Global Strategy Journal 2: 97–107; (10)
E. Xie, Y. Huang, C. Stevens, & S. Lebedev, 2019, Performance feedback and outward foreign direct investment by emerging economy
firms, Journal of World Business 54.
CASE DISCUSSION QUESTIONS:
1. Why are firms from emerging economies so eager to
expand from their home markets?
2. What distinguishes firm-specific resources and capa-
bilities of some of the winning firms from emerging
economies?
3. ON ETHICS: Are the institution-based barriers in some
developed economies fair or unfair? How can firms
from emerging economies overcome such liability of
foreignness?
NOTES
[Journal Acronyms] AER—American Economic Review;
AMJ—Academy of Management Journal; AMP—Academy of
Management Perspectives; AMR—Academy of Management
Review; APJM—Asia Pacific Journal of Management; ASQ—
Administrative Science Quarterly; BJM—British Journal of
Management; BW—Bloomberg Businessweek; GSJ—Global
Strategy Journal; HBR—Harvard Business Review; IBR—
International Business Review; IMR—International Marketing
Review; JIBS—Journal of International Business Studies; JIM—
Journal of International Management; JM—Journal of Management; JMS—Journal of Management Studies; JWB—Journal of World Business; MBR—Multinational Business Review;
MIR—Management International Review; NYT—New York
Times; OSc—Organization Science; PR—Psychological Review;
SCMP—South China Morning Post; SEJ—Strategic Entrepreneurship Journal; SMJ—Strategic Management Journal; WSJ—
Wall Street Journal
1. T. Hult, M. Gonzalez-Perez, & K. Lagerstrom, 2020, The
theoretical evolution and use of the Uppsala model of internationalization in the international business ecosystem,
JIBS 51: 38–49; K. Meyer, S. Estrin, S. Bhaumik, & M. W.
Peng, 2009, Institutions, resources, and entry strategies in
emerging economies, SMJ 30: 61–80; S. Sun, M. W. Peng, R.
Lee, & W. Tan, 2015, Institutional open access at home and
outward internationalization, JWB 50: 234–246; J. Vahlne
& J. Johanson, 2020, The Uppsala model, JIBS 51: 4–10.
2. M. W. Peng, S. Sun, B. Pinkham, & H. Chen, 2009, The
institution-based view as a third leg for a strategy tripod,
AMP 23: 63–81. See also G. Gao, J. Murray, M. Kotabe, &
J. Lu, 2010, A strategy tripod perspective on export behaviors, JIBS 41: 377–396; A. Gaur, V. Kumar, & D. Singh, 2014,
Resources, institutions, and internationalization process
of emerging economy firms, JWB 49: 12–20; Y. Xie, H.
Zhao, Q. Xie, & M. Arnold, 2011, On the determinants of
post-entry strategic positioning of foreign firms in a host
market: A strategy tripod perspective, IBR 20: 477–490.
3. J. Johanson & J. Valne, 2009, The Uppsala internationalization process model revisited: From liability of foreignness
to liability of outsidership, JIBS 40: 1411–1431. See also C.
Asmussen & A. Goerzen, 2013, Unpacking dimensions of
foreignness, GSJ 3: 127–149; B. Baik, J. Kang, J. Kim, & J.
Lee, 2013, The liability of foreignness in international equity investments, JIBS 44: 391–411; Z. Bhanji & J. Oxley,
2013, Overcoming the dual liability of foreignness and
privateness in international corporate citizenship partnerships, JIBS 44: 290–311; N. Denk, L. Kaufmann, &
J. Roesch, 2012, Liabilities of foreignness revisited, JIM
18: 322–334; J. Li, P. Li, & B. Wang, 2019, The liability of
opaqueness, SMJ 40: 303–327; A. Newenham-Kahindi &
C. Stevens, 2018, An institutional logics approach to liability of foreignness, JIBS 49: 881–901; H. Yildiz & C. Fey,
2012, The liability of foreignness reconsidered, IBR 21:
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 6
4.
5.
6.
7.
8.
9.
10.
11.
12.
269–280; N. Zhou & M. Guillen, 2016, Categorizing the
liability of foreignness, GSJ 6: 309–329.
S. Chang, J. Chung, & J. Moon, 2013, When do foreign subsidiaries outperform local firms? JIBS 44: 853–860; H. Kim
& M. Jensen, 2014, Audience heterogeneity and the effectiveness of market signals, AMJ 57: 1360–1384.
R. Jiang, P. Beamish, & S. Makino, 2014, Time compression
diseconomies in foreign expansion, JWB 49: 114–121; A.
Kirca, G. T. Hult, S. Deligonul, M. Perryy, & S. T. Cavusgil, 2012, A multilevel examination of the drivers of firm
multinationality, JM 38: 502–530; M. W. Peng, 2001, The
resource-based view and international business, JM 27:
803–829; K. S. Powell, 2014, From M-P to MA-P, JIBS 45:
211–226.
K. Brouthers, K. Geisser, & F. Rothlauf, 2016, Explaining the internationalization of ibusiness firms, JIBS 47:
513–534; S. Lee & M. Makhija, 2009, Flexibility in internationalization, SMJ 30: 537–555; E. Maitland & A. Sammartino, 2015, Managerial cognition and internationalization,
JIBS 46: 733–760; N. Pisani, A. Muller, & P. Bogatan, 2018,
Top management team internationalization and firm-level
internationalization, JIM 24: 239–256; R. Rezk, J. Srai, & P.
Williamson, 2016, The impact of product attributes and
emerging technologies on firms’ international configuration, JIBS 47: 610–618; Y. Yamakawa, S. Khavul, M. W. Peng,
& D. Deeds, 2013, Venturing from emerging economies,
SEJ 7: 181–196.
F. Contractor, 2019, Can a firm find the balance between
openness and secrecy? JIBS 50: 261–274; A. Inkpen, D.
Minbaeva, & E. Tsang, 2019, Unintentional, unavoidable,
and beneficial knowledge leakage from the multinational
enterprise, JIBS 50: 250–260; X. Tian, 2010, Managing FDI
technology spillovers, JWB 45: 276–284.
W. Chen & F. Kamal, 2016, The impact of information and
communication technology adoption on multinational
firm boundary decisions, JIBS 47: 563–576; N. Malhotra
& C. Hinings, 2010, An organizational model for understanding internationalization process, JIBS 41: 300–349; K.
Rong, J. Wu, Y. Shi, & L. Guo, 2015, Nurturing business ecosystems for growth in a foreign market, JIM 21: 293–308.
J. Lu, Y. Song, & M. Shan, 2018, Social trust in subnational regions and foreign subsidiary performance, JIBS 49:
761–773.
WSJ, 2019, US tech firms bet on India, then the rules
changed, December 4: A1, A12.
WSJ, 2019, Mount tariff erupts again, December 3: A14.
M. W. Peng, D. Wang, & Y. Jiang, 2008, An institution-based
view of international business strategy, JIBS 39: 920–936.
See also A. Cuervo-Cazurra, A. Gaur, & D. Singh, 2019,
Pro-market institutions and global strategy, JIBS 50:
598–632; N. Jia & K. Mayer, 2017, Political hazards and
firms’ geographic concentration, SMJ 38: 203–231; M.
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Entering Foreign Markets
165
M. Maznevski, 2011, The relationship between networks,
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J. Alcacer, J. Cantwell, & L. Piscitello, 2016, Internationalization in the information age, JIBS 47: 499–512; J. Alcacer,
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& J. Zou, 2011, Generic and specific social learning mechanisms in foreign entry location choice, SMJ 32: 1309–1330;
S. Beugelsdijk & R. Mudambi, 2013, MNEs as border-crossing multi-location enterprises, JIBS 44: 413–426;
A. Goerzen, C. Asmussen, & B. Nielsen, 2013, Global cities
and multinational enterprise location strategy, JIBS 44:
427–450; M. Kim, 2013, Many roads lead to Rome, JIBS 44:
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R. De Figueiredo, P. Meyer-Doyle, & E. Rawley, 2013,
Inherited agglomeration effects in hedge fund spawns,
SMJ 34: 843–862; R. Funk, 2014, Making the most of where
you are, AMJ 57: 193–222; A. Lamin & G. Livanis, 2013,
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Biesebroeck, 2013, Proximity strategies in outsourcing relations, JIBS 44: 475–503; M. Stallkamp, B. Pinkham, & O.
Buchel, 2018, Core or periphery? JIBS 49: 942–966.
A. Arikan & M. Schilling, 2011, Structure and governance
in industrial districts, JMS 48: 772–803; S. Manning, J.
Ricart, M. Rique, & A. Lewin, 2010, From blind spots to
hotspots, JIM 16: 369–382; S. Mariotti, R. Mosconi, & L.
Piscitello, 2019, Location and survival of MNEs’ subsidiaries, SMJ 40: 2242–2270; B. McCann & G. Vroom, 2010,
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United Nations (UN), 2014, World Investment Report 2014,
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S. Lee, O. Shenkar, & J. Li, 2008, Cultural distance, investment flow, and control in cross-border cooperation, SMJ
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2010, Distribution system choice in a service industry, JIM
16: 275–287.
D. Xu & O. Shenkar, 2002, Institutional distance and the
multinational enterprise, AMR 27: 608–618. See also M.
Cho & V. Kumar, 2010, The impact of institutional distance
on the international diversity-performance relationship,
JWB 45: 93–103; G. Delmestri & F. Wezel, 2011, Breaking the wave, JIBS 42: 828–852; T. Kostova, S. Beugelsdijk,
W. R. Scott, V. Kunst, C. Chua, & M. van Essen, 2020, The
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
166
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
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PART 2
BUSINESS-LEVEL STRATEGIES
construct of institutional distance through the lens of different institutional perspectives, JIBS (forthcoming).
N. Bailey & S. Li, 2015, Cross-national distance and FDI,
JIM 21: 267–276; E. Hernandez, 2014, Finding a home
away from home, ASQ 59: 73–108; T. Hutzschenreuter,
J. Voll, & A. Verbeke, 2011, The impact of added cultural
distance and cultural diversity on international expansion
patterns, JMS 48: 305–329; Y. Li, E. Hernandez, & S. Gwon,
2019, When do ethnic communities affect foreign location choice? AMJ 62 172–195; J. Luiz, D. Stringfellow, & A.
Jefthas, 2017, Institutional complementarity and substitution as an internationalization strategy, GSJ 7: 83–103; D.
Williams & D. Gregoire, 2015, Seeking commonalities or
avoiding differences? JIBS 46: 253–284.
S. Makino & E. Tsang, 2011, Historical ties and foreign
direct investment, JIBS 42: 545–557.
J. Steen & P. Liesch, 2007, A note on Penrosian growth,
resource bundles, and the Uppsala model of internationalization, MIR 47: 193–206.
B. Dykes & K. Kolev, 2018, Entry timing in foreign markets,
JIM 24: 404–416; A. Hawk, G. Pacheci-de-Almeida, & B.
Yeung, 2013, First-mover advantages, SMJ 34: 1531–1550.
M. W. Peng, S. Lee, & J. Tan, 2001, The keiretsu in Asia, JIM
7: 253–276.
BW, 2011, Land of war and opportunity, January 10: 46–54.
N. Argyres, L. Bidelow, & J. Nickerson, 2015, Dominant
designs, innovation shocks, and the follower’s dilemma,
SMJ 36: 216–234; J. Yang, J. Li, & A. Delios, 2015, Will a
second mouse get the cheese? OSc 26: 908–922;
BW, 2011, The Mega bus effect, April 11: 62–67.
S. Dobrev & A. Gotsopoulos, 2010, Legitimacy vacuum,
structural imprinting, and the first mover disadvantage,
AMJ 53: 1153–1174; J. Gomez & J. Maicas, 2011, Do
switching costs mediate the relationship between entry
timing and performance? SMJ 32: 1251–1269; M. Semadeni & B. Anderson, 2010, The follower’s dilemma, AMJ 53:
1175–1193; F. Suarez, S. Grodal, & A. Gotsopoulos, 2015,
Perfect timing? SMJ 36: 437–448.
J. Clarke & P. Liesch, 2017, Wait-and-see strategy, JIBS 48:
923–940.
Y. Kim, J. Lu, & M. Rhee, 2012, Learning from age difference, JIBS 43: 719–745; R. Parente, K. Rong, J. Geleilate,
& E. Misati, 2019, Adapting and sustaining operations in
weak institutional environments, JIBS 50: 275–291.
K. Brouthers, 2013, A retrospective on: Institutional, cultural, and transaction-cost influences on entry mode
choice and performance, JIBS 44: 14–22.
J. Dunning, 1993, Multinational Enterprises and the Global Economy, Reading, MA: Addison-Wesley; J. Dunning &
S. Lundan, 2008, Institutions and the OLI paradigm of the
multinational enterprise, APJM 25: 573–593. See also L.
Brouthers, S. Mukhopadhyay, T. Wilkinson, & K. Brouthers,
2009, International market selection and subsidiary performance, JWB 44: 262–273; K. Ito & E. Rose, 2010, The
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
implicit return on domestic and international sales, JIBS
41: 1074–1089; S. Monaghan & E. Tippmann, 2018, Becoming a multinational enterprise, JIBS 49: 473–495.
H. Zhao, J. Ma, & J. Yang, 2017, 30 years of research on entry
mode and performance relationship, MIR 57: 653–682.
Z. Xie & J. Li, 2018, Exporting and innovating among
emerging market firms, JIBS 49: 222–245.
M. W. Peng, Y. Zhou, & A. York, 2006, Behind make or buy
decisions in export strategy, JWB 41: 289–300.
M. W. Peng, 1998, Behind the Success and Failure of US
Export Intermediaries, Westport, CT: Quorum.
C. Obadia, D. Bello, & D. Gillialand, 2015, Effect of exporter’s incentives on foreign distributor’s role performance,
JIBS 46: 960–983.
R. Hoffman, J. Munemo, & S. Watson, 2016, International
franchise expansion, JIM 22: 101–114; A. Perryman & J.
Combs, 2012, Who should own it? SMJ 33: 368–386.
A. Akremi, K. Mignonac, & R. Perrigot, 2011, Opportunistic behaviors in franchise chains, SMJ 32: 930–948; I. Ater
& O. Rigbi, 2015, Price control and advertising in franchising chains, SMJ 36: 148–158; P. Aulakh, M. Jiang, & S. Li,
2013, Licensee technological potential and exclusive rights
in international licensing, JIBS 44: 699–718; L. Mulotte, P.
Dussauge, & W. Mitchell, 2013, Does pre-entry licensing
undermine the performance of subsequent independent
activities? SMJ 34: 358–372.
UN, 2014, World Investment Report 2014 (p. 81), op. cit.
S. Carson & G. John, 2013, A theoretical and empirical
investigation of property rights sharing in outsourced
research, development, and engineering relationships, SMJ
34: 1065–1085.
M. W. Peng, 2000, Controlling the foreign agent, MIR 40:
141–165.
A. Slangen, 2013, Greenfield or acquisition entry? GSJ 3:
262–280.
K. Laursen, F. Masciarelli, & A. Prencipe, 2012, Trapped or
spurred by the home region? JIBS 43: 783–807; M. Mallon
& S. Fainshmidt, 2017, Assets of foreignness, JIM 23: 43–55;
V. Marano, P. Tashman, & T. Kostova, 2017, Escaping the
iron cage, JIBS 48: 386-408; D. Sethi & W. Judge, 2009,
Reappraising liabilities of foreignness within an integrated perspective of the costs and benefits of doing business
abroad, IBR, 18: 404–416; M. Taussig, 2017, Foreignness as
both a global asset and a local liability, JIBS 48: 498–522.
S. Samiee, 2011, Resolving the impasse regarding research
on the origins of products and brands, IMR 28: 473–485.
NYT, 2016, How China won the keys to Disney’s magic
kingdom, June 14: www.nytimes.com.
R. Hoskisson, M. Wright, I. Filatotchev, & M. W. Peng, 2013,
Emerging multinationals from mid-range economies, JMS
50: 1295–1321; K. Moghaddam, D. Sethi, T. Weber, & J.
Wu, 2014, The smirk of emerging market firms, JIM 20:
359–374; J. Li & M. Fluery, 2020, Overcoming the liability
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 6
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
of outsidership for emerging market MNEs, JIBS 51:
23–37; M. W. Peng, 2012, The global strategy of emerging
multinationals from China, GSJ 2: 97–107.
J. Mathews, 2006, Dragon multinationals, APJM 23: 5–27;
J. Mathews, 2017, Dragon multinationals powered by linkage, leverage, and learning, APJM 34: 769–775. See also J.
Lu, X. Ma, L. Taska, & Y. Wang, 2017, From LLL to IOL3,
APJM 34: 757–768.
Y. Luo & R. Tung, 2018, A general theory of springboard
MNEs, JIBS 49: 129–152.
P. Buckley, L. Clegg, H. Voss, A. Cross, X. Liu, & Z. Ping,
2018. A retrospective and agenda for future research on
Chinese outward foreign direct investment, JIBS 49: 4–23;
R. Ramamurti, 2012, What is really different about emerging market multinationals? GSJ 2: 41–47.
J. Arregle, T. Miller, M. Hitt, & P. Beamish, 2013, Do regions
matter? SMJ 34: 910–934; G. Qian, T. Khoury, M. W. Peng,
& Z. Qian, 2010, The performance implications of intraand inter-regional geographic diversification, SMJ 31:
1018–1030.
S. Collinson & A. Rugman, 2007, The regional character
of Asian multinational enterprises, APJM 24: 429–446; A.
Rugman & A. Verbeke, 2004, A perspective on regional and
global strategies of multinational enterprises, JIBS 35: 3–18.
E. Banalieva & C. Dhanaraj, 2013, Home-region orientation in international expansion strategies, JIBS 44: 89–116;
G. Qian, L. Li, & A. Rugman, 2013, Liability of country
foreignness and liability of regional foreignness, JIBS 44:
635–647.
M. Kanai, 2018, The chairman of Ryohin Keikaku on
charting Muji’s global expansion, HBR January: 35–40.
C. Oh & A. Rugman, 2014, The dynamics of regional and
global multinationals, 1999–2008, MBR 22: 108–117; A.
Rugman & C. Oh, 2013, Why the home region matters,
BJM 24: 463–473.
This section draws heavily from J. Boddewyn & M. W.
Peng, 2019, Reciprocity and informal institutions in international market entry, working paper, Jindal School of
Management, University of Texas at Dallas.
G. White, T. Hemphill, T. Weber, & K. Moghaddam, 2018,
Institutional origins of WOFS formal contracting, IBR 27:
654–668.
Entering Foreign Markets
167
60. S. Dorobantu, A. Kaul, & B. Zelner, 2017, Nonmarket
strategy research through the lens of new institutional
economics, SMJ 38: 114–140; S. Puffer, D. McCarthy, &
M. W. Peng, 2013, Managing favors in a global economy,
APJM 30: 321–326.
61. W. Baker & N. Bulkley, 2014, Paying it forward versus rewarding reputation, OSc 25: 1493–1510; F. Bridoux & J.
Stoelhorst, 2016, Stakeholder relationships and social welfare, AMR 41: 229–251.
62. Y. Luo, H. Zhang, & J. Bu, 2019. Developed country MNEs
investing in developing economies, JIBS 50: 633–667.
63. B. Pinkham & M. W. Peng, 2017, Overcoming institutional
voids via arbitration, JIBS 48: 344–359.
64. M. Teagarden & A. Schotter, 2013, Favor prevalence in
emerging markets, APJM 30: 477–460.
65. It is possible that these busy CEOs of world-class firms
agreed to serve on the advisory board of a business school
at a foreign university because of their own interest in
leveraging reciprocity to crack open the China market.
66. H. Paulson, 2015, Dealing with China (p. 110), New York:
Twelve.
67. A. Fiske, 1992, The four elementary forms of sociality,
PR 99: 689–723; Y. Breitmoser, 2015, Cooperation, but no
reciprocity, AER 105: 2882–2910.
68. Fortune, 2019, At Deutsche Bank, how two decades of disarray culminated in “Bloody Sunday,” July 12: fortune.com.
69. C. Oh & J. Oetzel, 2017, Once bitten twice shy? SMJ 38:
714–731; W. Zhong, Y. Lin, D. Gao, & H. Yang, 2019, Does
politician turnover affect foreign subsidiary performance?
JIBS 50: 1184–1212.
70. R. Garcia-Garcia, E. Garcia-Canal, & M. Guillen, 2017,
Rapid internationalization and long-term performance,
JWB 52: 97–110; J.-F. Hennart & A. Slangen, 2015, Yes, we
really do need more entry mode studies! JIBS 46: 114–
122; S. Li & S. Tallman, 2011, MNC strategies, exogenous
shocks, and performance outcomes, SMJ 32: 1119–1127;
G. Santangelo & K. Meyer, 2017, Internationalization as
an evolutionary process, JIBS 48: 1114–130; Q. Tan & C.
Sousa, 2017, Performance and business relatedness as drivers of exit decision, GSJ 8: 612–634.
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CHAPTER
7
iStock.com/golero
Making strategic alliances
and networks work
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Define strategic alliances and networks
2. Articulate a comprehensive model of strategic alliances and networks
3. Understand the decision processes behind the formation of alliances and networks
4. Gain insights into the evolution of alliances and networks
5. Identify the drivers behind the performance of alliances and networks
6. Participate in three leading debates concerning alliances and networks
7. Draw strategic implications for action
168
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OPENING CASE
Emerging Markets
Even Toyota Needs Friends
Toyota is the largest and most profitable automaker
in the world. It is the world’s first automaker to produce more than ten million vehicles every year, which
it has done since 2012. By revenue, it is also the largest company in Japan and is routinely among the top
ten largest multinationals in the world on the Fortune
Global 500 list.
Yet, even the number one automaker cannot do
everything alone. While the Toyota way of working together with suppliers as alliance partners
in a keiretsu network is world-renowned, Toyota
has recently intensified its efforts to create new
alliances. Following a strategy of “creating friends”
(in the words of chairman and CEO Akio Toyoda),
Toyota in 2019 formed three sweeping alliances with
new partners.
●●
●●
●●
Panasonic: Until 2019, Panasonic had been
the sole supplier of batteries to Tesla’s
electric vehicles (EVs). While Tesla was
looking to diversify its sources by also buying
batteries from South Korea’s LG, Panasonic
was interested in securing its batteries in
Toyota’s EVs.
BYD: China’s electric car pioneer BYD had deep
expertise in developing battery-equipped,
plug-in cars but lacked scale. Toyota and BYD
would jointly develop and manufacture EVs in
China.
Contemporary Amperex Technology Limited
(CATL): China’s CATL is the world’s third
largest provider of EV batteries behind
Panasonic and BYD.
In addition, in 2019, Toyota strengthened its
existing alliances, by increasing its equity holdings
in automakers Mazda, Subaru, and Suzuki; motorcycle producer Yamaha; and auto parts supplier Denso
(once part of Toyota). While these existing alliances
were more traditional, Toyota’s new alliances with
Panasonic, BYD, and CATL were clearly driven by its
strong commitment to EVs, by its lack of cutting-edge
EV battery technology, and by its desire to share the
tremendous risk and cost of such development with
capable partners.
This was not Toyota’s first time using alliances to
develop EVs. Between 2010 and 2016, Toyota and
Tesla were partners trying to develop EVs. Toyota
as a strategic investor injected $50 million in Tesla,
sold Tesla a $1 billion-worth factory in California for
only $42 million, and went to codevelop the electric RAV4 SUV with Tesla. Toyota had earlier been a
pioneer in hybrid vehicles with its Prius, which was
launched in 1997. But as competition focused on
pure EVs, it needed to tap into Tesla’s expertise.
However, conflicts quickly emerged. Engineers
from both sides clashed over design, marketers
over pricing, and executives over vision. Eventually,
Toyota’s decision to price the electric RAV4 at
$50,000—twice the price of a gasoline version and
higher than what Tesla would have liked—made it
stand little chance to succeed. After only selling
2,000 electric RAV4 vehicles, Toyota in 2016 pulled
the plug. It quietly sold off its stake in Tesla—valued
at $538 million at that time. While Toyota made
a handsome profit from its $50 million financial
investment, its dream of becoming a significant EV
player had to wait. Can Toyota’s new friends help it
revive its EV dream?
Sources: (1) Bloomberg Businessweek, 2014, Short-circuit, August 11:
20–22; (2) CNN, 2017, Toyota dumps stake in Tesla as former
partners become rivals, June 5: money.cnn.com; (3) Toyota, 2019,
BYD, Toyota agree to establish joint company for battery electric
vehicle research and development, press release, November 7:
global.toyota.com; (4) Wall Street Journal, 2019, Even Toyota
needs help sometimes, November 8: B12.
169
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170
PART 2
BUSINESS-LEVEL STRATEGIES
W
strategic alliance
A voluntary agreement of
cooperation between firms.
contractual (nonequitybased) agreement
A strategic alliance that is
based on contracts and does
not involve the sharing of
ownership.
hy does the world’s largest and most profitable automaker need strategic
alliances? What are their benefits and drawbacks? Why does Toyota not
develop electric vehicles (EVs) by itself ? Why does it not acquire a firm
that is strong in EVs? These are some of the key questions driving this chapter. As
competition intensifies, “the least attractive way to try to win on a global basis,”
according to GE’s former chairman and CEO Jack Welch, “is to think you can take
on the world all by yourself.”1 Proliferation of strategic alliances and networks can
now be seen in just about every industry and every country. Yet 30%–70% of all
alliances and networks reportedly fail, thus necessitating our attention to the causes
of their failures.2
This chapter will first define strategic alliances and networks, followed by a
comprehensive model drawing on the strategy tripod. Then we discuss the formation, evolution, and performance of alliances and networks, followed by debates and
extensions.
equity-based alliance
A strategic alliance that
involves the use of equity.
strategic investment
One partner invests in
another as a strategic
investor.
cross-shareholding
Both partners invest in each
other to become crossshareholders.
strategic networks
A strategic alliance formed
by multiple firms to
compete against other
such groups and against
traditional single firms (also
known as a constellation).
constellation
A multipartner strategic
alliance (also known as
strategic network).
Defining Strategic Alliances and Networks
Strategic alliances are voluntary agreements of cooperation between firms. 3
Remember that the dotted area in Figure 6.3 in Chapter 6 consists of contractual
(nonequity-based) agreements and equity-based joint ventures (JVs). These can all
be broadly considered strategic alliances. Figure 7.1 illustrates this further, visualizing
alliances as a compromise between pure market transactions and mergers and
acquisitions (M&As). Contractual (nonequity-based) alliances include co-marketing,
research and development (R&D) contracts, turnkey projects, strategic suppliers,
strategic distributors, and licensing/franchising. Equity-based alliances include
strategic investment (one partner invests in another), cross-shareholding (both
partners invest in each other), and JV. A JV is one form of equity-based alliance. It
involves the establishment of a new legally independent entity (in other words, a new
firm) whose equity is provided by two (or more) partners. In other words, a JV (such as
Fuji Xerox) is a child company with genes such as capital, management, and technology
from the two parent companies (such as Fujifilm and Xerox).
Strategic networks are strategic alliances formed by multiple firms to compete against
other such groups and against traditional single firms.4 The airline industry has three
multipartner alliances—One World, Sky Team, and Star Alliance. These strategic networks
are sometimes called constellations. Such multilateral strategic networks are inherently
more complex than single alliance relationships between two firms.5
FIGURE 7.1 The Variety of Strategic Alliances
Contractual (nonequity-based) alliances
Market
transactions
Comarketing
R&D
contract
Turnkey
project
Strategic
supplier
Strategic Licensing/
distributor franchising
Joint
Strategic
Crossinvestment shareholding venture
Mergers
and
acquisitions
(M&As)
Equity-based alliances
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Chapter 7
Making strategic alliances and networks work
171
A Comprehensive Model of Strategic
Alliances and Networks
Despite the diversity of cooperative interfirm relationships, underlying each decision
to engage in alliances and networks is a set of strategic considerations drawn from the
strategy tripod previously discussed. These considerations lead to a comprehensive model
(see Figure 7.2).
Industry-Based Considerations
According to the traditional industry-based view, firms are independent players
interested in maximizing their own performance. In reality, most firms in any industry
are embedded in many collaborative relationships, thus necessitating considerations of
their alliance and network ties if we are going to realistically understand the dynamics
of the five forces.6
First, because rivalry reduces profits, many competitors collaborate by forming strategic
alliances (often called horizontal alliances).7 For example, BMW and Mercedes-Benz
merged their ride-sharing businesses to form a new JV, Reach Now, to compete head-to-head
with Uber and Lime. GSK and Pfizer created ViiV Healthcare, a JV focusing on HIV and
AIDS drugs. This does not suggest that these rivals (BMW and Mercedes, Pfizer and GSK)
are no longer competing. They still are, in most cases. What is interesting is that they have
decided to collaborate in specific areas.
horizontal alliance
A strategic alliance formed
by competitors.
FIGURE 7.2 A Comprehensive Model of Strategic Alliances and Networks
Industry-based considerations
Resource-based considerations
Collaboration among rivals
(horizontal alliances)
Entry barriers scaled by alliances
Upstream/downstream vertical
alliances with suppliers/buyers
Alliances and networks to provide
substitute products/services
Value-added must outweigh costs
Rarity of relational capabilities
and desirable partners
Imitability of firm-specific and
relationship-specific capabilities
Organization of alliance activities
at the firm and relationship levels
Strategic alliances
and networks
Formation/Evolution/
Performance
Institution-based considerations
Formal regulatory pillar (antitrust
concerns and entry requirements)
Informal normative pillar (the
social pressures to find partners)
Informal cognitive pillar (the
internalized beliefs in the value of
collaboration)
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172
PART 2
BUSINESS-LEVEL STRATEGIES
upstream vertical alliance
A strategic alliance with
firms on the supply side
(upstream).
downstream vertical
alliance
A strategic alliance with
firms in distribution
(downstream).
Second, while high entry barriers may deter individual firms, firms may form strategic
alliances to scale these walls. Facing seemingly insurmountable entry barriers of the US
healthcare industry, three firms not in this industry—Amazon, Berkshire Hathaway, and
JPMorgan Chase—formed a new JV, Haven, to tackle rising healthcare costs. Haven endeavors
to create its own network of doctors, hospitals, and clinics for the 1.2 million employees
of the three parent firms. If the JV succeeds in building a cost-competitive internal system
for employees, Haven and its three parent firms will eventually offer healthcare solutions
externally to nonemployees, disrupting the healthcare industry.8 Overall, combining forces
allows for lower cost and lower risk entries into new markets for partner firms.
Third, although suppliers in the five forces framework are traditionally regarded as a
threat, that is not necessarily the case. As introduced in Chapter 2, it is possible to establish
strategic alliances with suppliers (often called upstream vertical alliances), as exemplified by the Japanese keiretsu networks (see the Opening Case). In essence, strategic supply
alliances transform the relationship from an adversarial one centered on hard bargaining to
a collaborative one featuring knowledge sharing and mutual assistance. Instead of dealing
with a large number of suppliers that are awarded contracts on a frequent short-term basis,
strategic supply alliances rely on a smaller number of key suppliers that are awarded longterm contracts. This helps align the interests of the focal firm with those of suppliers, which,
in turn, are more willing to make specialized investments to produce better components.
This is not to say that bargaining power becomes irrelevant. Instead, buyer firms increase
their dependence on a smaller number of strategic suppliers, whose bargaining power may,
in turn, increase. However, collaboration softens some rough edges of bargaining power by
transforming a zero-sum game into a win-win proposition.9
Fourth, similarly, instead of treating buyers and distributors as a possible threat, establishing strategic distribution alliances (also called downstream vertical alliances) may bind
the focal firm and buyers and distributors together. Numerous airlines, car rental companies, hotels, and publishers have set up alliances with leading Internet distributors such as
Amazon, Expedia, Priceline, and Travelocity.
Finally, the market potential of substitute products may encourage firms to form strategic
alliances and networks to materialize the commercial potential of these new products. For
instance, smartphones developed by the Android alliance centered on Google and Samsung
have now substituted some personal computers (PCs), books, maps, music CDs, and radios.
Within an industry, a single firm is not limited to one alliance relationship. A variety of
alliances can be developed. For example, Walgreens, which operates the largest chain of
drug stores in the United States, collaborates with grocer Kroger to set up minipharmacies
inside supermarkets, with FedEx to deliver drugs, and with Microsoft to reach customers
digitally.10
Resource-Based Considerations
The resource-based view, embodied in the VRIO framework, sheds considerable light on
strategic alliances and networks (Figure 7.2).11
Value. Striving for a win-win outcome, alliances must create value.12 The three global airline
alliance networks create value by reducing 18%–28% of the ticket costs booked on two-stage
flights compared with separate flights on the same route if these airlines were not allied.13
Table 7.1 identifies three broad categories of value creation in terms of how advantages outweigh disadvantages.
First, alliances reduce costs, risks, and uncertainties.14 As Toyota confronts Tesla (its former alliance partner), Toyota is using several alliances with Panasonic, BYD, and CATL to
reduce costs, risks, and uncertainties (see the Opening Case).
Second, alliances allow firms to tap into complementary assets of partners and facilitate
learning.15 When Renault entered Turkey via a JV, its Turkish partner that held 49% of the JV
was Oyak (Turkish Armed Forces Pension Fund).16 What complementary resources would
a nonautomaker such as Oyak bring to a JV that manufactures cars? In Turkey, where the
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Chapter 7
TABLE 7.1
●●
●●
Reduce costs, risks, and uncertainties
Access complementary assets and opportunities to learn from partners
Possibilities to use alliances and networks
as real options
Disadvantages
●●
●●
●●
Possibilities of choosing the wrong
partners
Possibilities of partner opportunism
Risks of helping nurture competitors
(learning race)
military enjoys a great deal of prestige, Oyak’s political connections are certainly helpful.
Oyak can help Renault learn how to navigate the Turkish market.
Finally, an important advantage of alliances lies in their value as real options.17 Conceptually,
an option is the right, but not the obligation, to take some action in the future. Technically,
a financial option is an investment instrument permitting its holder, having paid for a small
fraction of an asset (often known as a deposit), the right to increase investment to eventually
acquire it if necessary. A real option is an investment in real operations as opposed to financial capital.18 A real options view features two steps:
●●
●●
173
Strategic Alliances and Networks: Advantages
and Disadvantages
Advantages
●●
Making strategic alliances and networks work
In the first phase, an investor makes a relatively small, initial investment to buy an
option, which leads to the right to future investment without being obligated to do so.
The investor holds the option until a decision point arrives in the second phase, and
then decides between exercising the option or abandoning it.
For firms interested in eventually acquiring other companies but not sure about such moves,
working together in alliances affords an insider view to evaluate the capabilities of partners.
This is similar to trying on new shoes to see if they fit before buying them.19 Since acquisitions are not only costly but also very likely to fail, alliances permit firms to sequentially
increase their investment should they decide to pursue acquisitions. For example, only
after working together for five years as alliance partners did Fiat move from holding 20% to
eventually acquire 100% of Chrysler’s equity (see the Closing Case). On the other hand, after
working together as partners, if firms find that acquisitions are not a good idea, then there is
no obligation to pursue them. Overall, alliances have emerged as real options because of their
flexibility to sequentially scale up or scale down the investment.
On the other hand, alliances have three nontrivial drawbacks. First, there is always a possibility of being stuck with the wrong partners.20 Firms are advised to choose a prospective
mate with caution. The mate should be sufficiently differentiated to provide some complementary (nonoverlapping) capabilities.21 Many individuals have a hard time figuring out the
true colors of their spouses before they get married. Similarly, many firms find it difficult to
evaluate the true intentions and capabilities of their prospective partners until it is too late.
A second disadvantage is potential partner opportunism. While opportunism is likely in
any kind of economic relationship, an alliance setting may provide especially strong incentives for some partners to be opportunistic. Cooperation always entails some elements of
trust, which may be easily abused.22
Finally, alliances, especially those between rivals, may help nurture competitors. By opening “doors” to outsiders, alliances make it easier to observe and imitate firm-specific capabilities. In alliances between competitors, there is a learning race in which partners aim
to outrun each other by learning the “tricks” from the other side as fast as possible.23 Such a
learning race contributed to the collapse of the alliance between Toyota and Tesla (see the
Opening Case).
Rarity
The second component in the VRIO framework has two dimensions: (1) capability rarity and
(2) partner rarity. First, the capabilities to successfully manage interfirm relationships—often
called relational (collaborative) capabilities—are rare.24 Managers involved in alliances
real option
An option investment in
real operations as opposed
to financial capital.
learning race
A race in which alliance
partners aim to outrun
each other by learning the
“tricks” from the other side
as fast as possible.
relational (collaborative)
capability
Capability to successfully
manage interfirm
relationships.
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PART 2
BUSINESS-LEVEL STRATEGIES
partner rarity
The difficulty to locate
partners with certain
desirable attributes.
network centrality
The extent to which a firm’s
position is pivotal with
respect to others in the
alliance network.
require relationship skills rarely covered in the traditional business school curriculum that
emphasizes competition as opposed to collaboration.25 To truly derive benefits from alliances,
managers need to foster trust with partners while at the same time being on guard against
opportunism.26
As much as alliances represent a strategic and economic arrangement, they also constitute
a social, psychological, and emotional phenomenon. Words such as courtship, marriage, and
divorce often surface. Given that the interests of partner firms do not fully overlap and are
often in conflict, managers involved in alliances live a precarious existence, trying to represent
the interests of their own firms while attempting to make the complex relationship work.27
Given the general shortage of good relationship skills in the human population (remember:
50% of marriages in the United States fail), it is not surprising that sound relational capabilities to successfully manage alliances are in short supply.
A second aspect of rarity is partner rarity, defined as the difficulty to locate partners with
certain desirable attributes. This stems from two sources: (1) industry structure and (2) network position. First, from an industry structure standpoint, in many oligopolistic industries,
the number of available players as potential partners is limited. In some emerging economies
whereby only a few local firms may be worthy partners, latecomers may find that potential partners have already been “cherry-picked” by rivals. In the Chinese automobile industry
(where wholly owned subsidiaries [WOS] are not allowed), Ford, as a late mover, ended up
allying with second-tier partners in China and suffered from mediocre performance.
Second, from a network position perspective, firms located in the center of alliance
networks may have access to better and more opportunities (such as information, capital,
supplies, and services) and consequently may accumulate more power and influence.28 The
upshot is that firms with a high degree of network centrality—the extent to which the
position occupied by a firm is pivotal with respect to others in the alliance network—are
likely to be more attractive partners.29 Such firms are rare. Carrefour, Cisco, and Citigroup, for
example, routinely turn down alliance proposals coming from all over the globe.
Imitability
Imitability pertains to two levels: firm level and alliance level. First, one firm’s resources and
capabilities may be imitated by partners. A second imitability issue refers to the trust and
understanding among partners in successful alliances. Firms without such “chemistry” may
have a hard time imitating such activities. Fujifilm and Xerox have operated their strong JV—
Fuji Xerox—since 1962. Volkswagen (VW) and Shanghai Automotive Industrial Corporation
(SAIC) have run their thriving JV—Shanghai VW—since 1984. Rivals would have a hard time
imitating such enduring and successful relationships.
Organization
Similarly, the organizational issues affect two levels: firm level and alliance level. First, at the
firm level, how firms are organized to benefit from alliances and networks is an important
issue.30 When the number of such relationships is small, many firms adopt a trial-and-error
approach. It is not surprising that “misses” are frequent. But even for the successful “hits,” this
ad hoc approach does not allow for systematic learning from experiences. This obviously is a
hazardous way of organizing for large multinationals engaging in numerous alliances around
the globe. In response, many firms develop a dedicated alliance function (parallel with traditional functions such as finance and marketing), often headed by a vice president or director
with his or her own staff and resources. Such a dedicated function acts as a focal point for
leveraging lessons from prior and ongoing relationships.31 HP’s dedicated alliance function
has developed a 300-page manual, including 60 different tools and templates (such as alliance
contracts, metrics, and checklists). It also organizes a two-day course three times a year to
disseminate such learning about alliances to HP managers worldwide.
At the alliance level, some alliance relationships are organized in a way that makes it difficult for others to replicate. There is much truth behind Leo Tolstoy’s opening statement in his
classic novel Anna Karenina: “All happy families are like one another; each unhappy family is
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Chapter 7
Making strategic alliances and networks work
175
unhappy in its own way.” By definition, marriages are strategic alliances. Given the difficulty
for individuals in unhappy marriages to improve their relationship (despite an army of professional marriage counselors, friends, and family members), it is not surprising that firms in
unsuccessful alliances often find it exceedingly challenging, if not impossible, to organize and
manage their relationships better.
Institution-Based Considerations
Formal Institutions Supported by a Regulatory Pillar. Strategic alliances and
networks function within formal legal and regulatory frameworks.32 The impact of these
formal institutions can be found along two dimensions: (1) antitrust concerns and (2) entrymode requirements. First, many firms establish alliances with competitors. Cooperation
between competitors is usually suspected of at least some tacit collusion by antitrust
authorities (see Chapter 8). However, because integration within alliances is usually not as
tight as acquisitions (which would eliminate one competitor), antitrust authorities are more
likely to approve alliances as opposed to acquisitions.33 For instance, the proposed merger
between American Airlines and British Airways was blocked by both US and UK-EU antitrust
authorities. However, they have been allowed to form an alliance that has eventually grown
to become the multipartner One World alliance network. In another example, the proposed
merger between AT&T and T-Mobile (a WOS of Deutsche Telekom in the United States)
was torpedoed by US antitrust authorities. But the same US authorities blessed AT&T and
T-Mobile’s collaboration in roaming.34
Second, formal requirements on market entry modes affect alliances and networks. To
sell 150 Blackhawk helicopters to the Saudi military, Lockheed Martin must meet entry
requirements in terms of technology transfer and job creation. As a result, it formed a JV with
Taqnia—Rotary Aircraft Manufacturing Saudi Arabia—to assemble the helicopters in Saudi
Arabia.35 In many countries, governments discourage or simply ban acquisitions to establish
WOS, thereby leaving some sort of alliances with local firms to be the only entry choice for
foreign direct investment (FDI). Recently, many governments that historically only approved
JVs now allow WOS as an entry mode. Thus, there is now a noticeable decline of JVs and a
corresponding rise of acquisitions, especially in emerging economies.36
Informal Institutions Supported by Normative and Cognitive Pillars. The first set
of informal institutions centers on collective norms supported by a normative pillar. A core
idea of the institution-based view is that because firms act to enhance or protect their legitimacy, copying other reputable organizations—even without knowing the direct performance
benefits of doing so—may be a low-cost way to gain legitimacy. Therefore, when competitors
have a variety of alliances, jumping on the alliance “bandwagon” may be perceived as a cool
way to join the norm as opposed to ignoring industry trends. In other words, informal but
powerful normative pressures from the business press, investment community, and board
deliberations probably drove late-mover firms such as Ford to ally with relatively obscure
partners in China, as opposed to having no partner and, hence, no presence in the largest
automobile market in the world. For the same reason unmarried adults tend to experience
some social pressure to get married, firms insisting on “going alone,” especially when they
experience performance problems, often confront similar pressures and criticisms from
peers, analysts, investors, and the media. The flip side of such a behavior is that many firms
rush into alliance relationships without adequate due diligence (investigation prior to signing contracts) and then get burned.
A second set of informal institutions stresses the cognitive pillar, which centers on the
internalized taken-for-granted values and beliefs that guide firm behavior.37 BAE Systems
announced in the 1990s that all its future aircraft-development programs would involve
alliances. It evidently believed that given the extremely high cost and risk of developing new
aircraft, an alliance strategy was the right thing to do.
Overall, both of the two core propositions that underpin the institution-based view (first
introduced in Chapter 4) are applicable. The first proposition—individuals and firms rationally pursue their interests and make strategic choices within institutional constraints—is
due diligence
Thorough investigation
prior to signing contracts.
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PART 2
BUSINESS-LEVEL STRATEGIES
illustrated by the constraining and enabling power of the formal regulatory pillar and the
informal but powerful normative and cognitive pillars. The second proposition—when formal constraints fail, informal constraints may play a larger role—is also evident. Similar to the
institutions governing human marriages, formal regulations and contracts can only govern
a small (although important) portion of alliance behavior. The success and failure of such
relationships depend to a large degree on the day-in and day-out interaction between partners influenced by informal norms and cognitions. This point will be expanded in more detail
in the next three sections on the formation, evolution, and performance of strategic alliances.
Formation
How are alliances formed? Figure 7.3 illustrates a three-stage model to address this question.38
Stage One: To Cooperate or Not to Cooperate?
In Stage One, a firm must decide if growth can be achieved strictly through market transactions, acquisitions, or alliances.39 Just like some individuals can decide to be single all their
life, some firms may decide not to entertain alliances. However, to grow by pure market
transactions is very demanding, even for resource-rich multinationals. Acquisitions also have
some severe drawbacks (see Chapter 9). Therefore, many firms conclude that alliances are the
way to go (see the Opening Case). For example, Dallas-based Sabre Travel Network has used
alliances to enter Australia, Bahrain, India, Israel, Japan, and Singapore.
Stage Two: Contractual or Equity Modes?
In Stage Two, a firm must decide whether to take a contract or an equity approach.40
Table 7.2 identifies four driving forces. The first driving force is shared capabilities. The more
FIGURE 7.3 Alliance Formation
Co-marketing
R&D contracts
Contract
Turnkey project
Strategic supplier/distributor
Market transactions
To cooperate
or not to
cooperate?
Licensing/franchising
STAGE II
STAGE I
Pursue cooperative
alliance relationships
Contract
or equity?
STAGE III
Specifying the
relationship
Mergers and acquisitions
Strategic investment
Equity
Cross-shareholding
Joint venture
Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation (p. 101), Journal of International Business Studies 25: 91–113.
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Chapter 7
Table 7.2
Making strategic alliances and networks work
177
Equity-Based versus Non-Equity-Based Strategic
Alliances
Driving Forces
Equity-Based
Alliances
Nonequity-Based
Alliances
Nature of shared resources
(degree of tacitness and
complexity)
High
Low
Importance of direct
organizational monitoring
and control
High
Low
Potential as real options
High (for possible
upgrading to M&As)
High (for possible upgrading
to equity-based relationships
Influence of formal
institutions
High (when required or
High (when required or
encouraged by regulations) encouraged by regulations)
tacit (that is, hard to describe and codify) the capabilities, the greater the preference for equity
involvement.41 Although not the only way, the most effective way to learn complex processes
is through learning by doing. A good example is learning to cook by actually cooking and
not by simply reading cookbooks. Many business processes are the same way. A firm that
wants to produce cars will find that codified knowledge in books or reports is not enough.
Much tacit knowledge can only be acquired via learning by doing, preferably with capable
partners such as Toyota (see the Opening Case).42
A second driving force is the importance of direct monitoring and control. Equity
relationships allow firms to have some direct control over joint activities on a continuing
basis, whereas contractual relationships usually do not. In general, firms that fear that their
intellectual property may be expropriated prefer equity alliances (and a higher level of equity).
A third driver is real options thinking. Some firms prefer to first establish contractual
relationships, which can be viewed as real options (or stepping stones) for possible upgrading
into equity alliances should the interactions turn out to be mutually satisfactory. Through
contractual (nonequity-based) collaboration relationships within the Sky Team network,
Delta worked closely with Aeroméxico, Air France-KLM, China Eastern, and Korean Air.
Going beyond such relatively loose collaboration, Delta recently established equity-based
alliances with them (see Strategy in Action 7.1).
Finally, the choice between contract and equity also boils down to institutional constraints.
Some governments eager to help domestic firms climb the technology ladder either require
or encourage the formation of JVs between foreign and domestic firms. Other governments,
arguing that equity-based alliances may be too close to collusion, prefer firms to have contractual relationships. For example, the US government rejected a JV proposal between American
Airlines and Qantas, citing antitrust concerns, and forced them back to loose, code-sharing
collaboration within the One World network.43
learning by doing
A way of learning not
by reading books but by
engaging in hands-on
activities.
Stage Three: How to Position the Relationship?
Since many firms have multiple alliance relationships, it is important to manage them as a
portfolio (or network).44 The combination of several individually “optimal” relationships may
not create an optimal relationship portfolio for the entire firm, in light of some tricky alliances.45 For example, Renault and Nissan have had a long-running alliance since 1999. However, in 2019, when Renault sought to merge with Fiat Chrysler Automobiles (FCA), Nissan
blocked the deal. Frustrated, FCA went on to merge with Renault’s archrival: Peugeot SA
Group (PSA) (see the Closing Case). On the day of announcement of the FCA-PSA merger,
PSA’s stock rose 4.5% but Renault’s fell 4%.46
In a world of multilateral intrigues, one step down the alliance path may open some doors
but foreclose other opportunities. In other words, “my friend’s enemy is my enemy, and my
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PART 2
BUSINESS-LEVEL STRATEGIES
STRATEGY IN ACTION 7.1
Emerging Markets Ethical Dilemma
Delta Spreads Its Wings Globally
Airlines are used to alliances. For about two decades, One World,
Sky Team, and Star Alliances have emerged as three major networks featuring nonequity-based collaborations (mostly through
code sharing) among members. However, as competition intensifies, Atlanta-based Delta Air Lines, which is America’s oldest
surviving airline (founded in 1929), has recently made a series of
aggressive moves to establish equity-based alliance relationships.
●●
●●
●●
●●
J oint ventures (JVs) with Sky Team members: Aeroméxico,
Air France-KLM, and Korean Air.
S trategic investment in a Sky Team member: China
Eastern.
J Vs with non-Sky Team members (that are not members of
any of the Big Three airline networks): Alitalia (a former
Sky Team member), Virgin Atlantic, Virgin Australia, and
Westjet.
S trategic investment in a member of another Big Three
network: LATAM.
Founded in 2000, Sky Team currently has 19 members, and
several members have left. Since decisions are negotiated on
a consultative basis, Sky Team, headquartered in Amsterdam,
the Netherlands, sometimes feels like a mini-UN or a mini-EU.
Increasingly critical of such a slow pace of decision making,
Delta has embarked on a new alliance strategy in favor of deeper
collaboration, tighter integration, and stronger control weaved
together by equity relationships. Because the US domestic travel
market is mature, Delta believes that flying passengers in and
out of the country is where the growth opportunities are. This
realization has propelled its new thinking on alliances.
In terms of actual implementation, Delta’s JVs with
Aeroméxico, Air France-KLM, and Korean Air made great sense,
because together with Delta they were the four founding members
of Sky Team. Having satisfactorily worked together for nearly two
decades, their tighter collaborations via JVs would enjoy a great
deal of odds of success. Delta’s strategic investment in a fellow
Sky Team member China Eastern also made sense, because the
Shanghai-based carrier, second largest in China, had been
collaborating with Delta via Sky Team since 2011.
What is interesting is Delta’s new JVs with non-Sky Team
members with whom there was not much collaborative history
before: Virgin Atlantic, Virgin Australia, and Westjet—Delta did
collaborate with Alitalia before via Sky Team when Alitalia was a
member between 2001 and 2009.
What is extremely uncertain and risky is Delta’s strategic
investment in Chile-based LATAM, the largest airline in Latin
America. There was no collaboration between Delta and
LATAM before. Delta would pay $1.9 billion for a 20% stake
in LATAM, which was a member of One World. This would be a
steep 78% premium above market value. In addition, LATAM had
to leave One World, to which it needed to pay a $350 million exit
fee. Delta also paid for that. Overall, Delta spent $2.3 billion for the
right to be LATAM’s minority shareholder. Delta’s (and Sky Team’s)
interest in Latin America is well known. In 2010, during the
festivities celebrating Sky Team’s tenth anniversary, Delta and other
members openly expressed an interest in looking for partners in
Latin America. The question is: Was Delta in 2019 that desperate
to get into Latin America? Its JV with Aeroméxico already helped
Delta throughout the region. The result of a 2012 merger of two
major Latin American carriers—LAN from Chile and TAM from
Brazil—LATAM did not make much money. Delta’s move, while
scoring big to undermine One World, was likely to attract One
World and Star Alliance to retaliate by luring members away from
Sky Team. This bold move, thus, undermines the (relative) stability
of the alliance landscape of the industry. Whether such a disruptive
move would be worth it remains to be seen.
Sources: (1) Bloomberg, 2019, Delta expands in South America
with $2.25 billion LATAM deal, September 26: www.bloomberg.
com; (2) Economist, 2018, Come fly with me, March 17: 62;
(3) Wall Street Journal, 2019, Delta bets against global alliances,
October 2: B14; (4) www.skyteam.com.
enemy’s enemy is my friend.”47 Thus, to prevent an “alliance gridlock,” carefully assessing the
impact of each individual relationship before its formation on the firm’s other relationships
becomes increasingly important.
EVOLUTION
All relationships evolve—some grow, others fail.48 This section deals with three aspects: (1) combating opportunism, (2) evolving from strong ties to weak ties, and (3) going through a divorce.
Combating Opportunism
The threat of opportunism looms large on the horizon.49 Most firms want to make their
relationship work, but also want to protect themselves in case the other side is opportunistic.
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Chapter 7
Making strategic alliances and networks work
While it is difficult to completely eliminate opportunism, it is possible to minimize its threat by
(1) walling off critical capabilities or (2) swapping critical capabilities through credible
commitments.
First, both sides can contractually agree to wall off critical skills and technologies not meant
to be shared. GE and Snecma have cooperated to build jet engines in CFM International, a
JV. But GE is not willing to share its proprietary technology fully with Snecma. GE, thus,
presents sealed “black box” components (the inside of which Snecma has no access to), while
permitting Snecma access to final assembly. This type of relationship, in human marriage
terms, is like couples whose premarital assets are protected by prenuptial agreements. As
long as both sides are comfortable with these deals, their relationships can prosper. CFM
International has been operating successfully for more than 40 years.
The second approach—swapping skills, technologies, and markets—is the exact opposite
of the first one. Both sides not only agree not to hold critical resources back, but also make
credible commitments to hold each other “hostage.” In international alliances, setting up
parallel and reciprocal relationships in both partners’ home countries may increase the
incentive for both partners to cooperate. For example, France’s Pernod-Ricard and America’s
Heublein agreed to distribute Heublein’s Smirnoff vodka in Europe. This agreement was
balanced by another agreement in which Heublein agreed to distribute Pernod-Ricard’s Wild
Turkey bourbon in the United States. In a nutshell, such mutual “hostage taking” reduces the
threat of opportunism, and motivates better collaboration.
In human marriage terms, mutual hostage taking is similar to the following commitment:
“Honey, I will love you forever. If I betray you, feel free to kill me! But if you dare to betray
me, I’ll cut your head off!” To think slightly outside the box, the precarious peace during the
Cold War can be regarded as a case of mutual hostage taking that worked. Because both the
United States and the Soviet Union held each other as a “hostage,” nobody dared to launch a
first nuclear strike. As long as the victim of the first strike had only one nuclear ballistic missile submarine left (such as the American Ohio class or the Soviet Typhoon class), this single
submarine would have enough retaliatory firepower to wipe the top 20 US or Soviet cities off
the surface of Earth, an outcome that neither superpower found acceptable (see the movie
The Hunt for Red October). The Cold War did not turn hot in part because of such a “mutually
assured destruction” (MAD) strategy—a real jargon in military strategy.
Evolving from Strong Ties to Weak Ties
First introduced in Chapter 5, strong ties are more durable, reliable, and trustworthy relationships cultivated over a long period of time. Strong ties have two advantages:
●●
●●
Strong ties are associated with the exchange of finer-grained and higher-quality
information.
Strong ties serve as an informal social-control mechanism that is an alternative
to formal contracts and thus act to combat opportunism (see Chapter 4). It is not
surprising that many strategic alliances and networks are initially built on strong ties
among individuals and firms.
Defined as relationships characterized by infrequent interaction and low intimacy, weak ties,
paradoxically, are likely to provide more opportunities. Weak ties enjoy two advantages:
●●
●●
Weak ties are less costly to maintain, requiring less time, energy, and money.
Weak ties excel at connecting with distant others possessing unique and novel
information for strategic actions—often regarded as the strength of weak ties.50 This
may be especially critical as firms search for new knowledge for cutting-edge skills,
technologies, and markets.
In the same way that individuals tend to have a combination of a small number of good
friends (strong ties) and a large number of acquaintances (weak ties, such as your Facebook
friends), firms at any given point in time are likely to have a combination of strong ties and
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exploitation
Actions captured by terms
such as refinement, choice,
production, efficiency,
selection, and execution.
exploration
Actions captured by
terms such as search,
variation, risk taking,
experimentation, play,
flexibility, discovery, and
innovation.
weak ties. Both ties are beneficial, but under different conditions. One condition influencing
the types of advantages that firms require is the degree to which their strategies are designed
to exploit current resources (such as existing connections) or explore new opportunities
(such as future technologies).
Of particular interest to us is the distinction between exploitation and exploration
noted by James March, a leading organization theorist. Exploitation refers to “such
things as refinement, choice, production, efficiency, selection, and execution,” whereas
exploration includes “things captured by terms such as search, variation, risk taking,
experimentation, play, flexibility, discovery, and innovation.”51 While both kinds of strategic activities are important, there is a trade-off between the two because of the limited
resources firms possess. Thus, an emphasis on either set of the ties is often necessary
during a particular period. In environments conducive for exploitation, strong ties may
be more beneficial. Conversely, in environments suitable for exploration, weak ties may
be preferred.
Many strong ties evolve to become weak ties. An example is a two-partner alliance. Over
time as the initial set of opportunities are exploited and exhausted by the alliance, one partner, embarking on new searches, may prefer to establish some relationships based on weak
ties with a diverse set of players.52 In other words, the strong ties within the alliance may
become too limiting. However, the other partner may become upset. In a human marriage, it
is easy to appreciate the fury of one spouse when the other spouse is exploring other relationships (although only weak ties!). For example, McDonald’s, which had an alliance agreement
with Sinopec, was not happy with Sinopec’s new alliance partner—McDonald’s archrival Yum
Brands (see Strategy in Action 7.2).
From Corporate Marriage to Divorce
Alliances are often described as corporate marriages and, when terminated, as corporate divorces.53 Figure 7.4 portrays an alliance dissolution model. To apply the metaphor
of divorce, we focus on two-partner alliances such as the Danone-Wahaha relationship
(and ignore multipartner alliances such as Star Alliance). In the 2000s, the ten-year JV
(1996–2006) relationship between Danone and Wahaha deteriorated. Following the convention in research on human divorce, we label the party who begins the process of ending the
alliance the “initiator,” and the other party the “partner”—for lack of a better word.
The first phase is initiation. The process begins when the initiator starts feeling uncomfortable with the alliance (for whatever reason). Wavering begins as a quiet, unilateral process by the initiator.54 In the Danone-Wahaha case, Danone seemed to be the initiator. After
repeated requests to modify Wahaha’s behavior failed, Danone began to escalate its demands.
At that point, its display of discontent became bolder. Initially, Wahaha, the partner, simply
did not “get it.” The initiator’s “sudden” dissatisfaction may confuse the partner. As a result,
initiation tends to escalate.
The second phase is going public. The party that breaks the news first has a first-mover
advantage. By presenting a socially acceptable reason in favor of its cause, this party is able to
win sympathy from key stakeholders, such as parent company executives, investors, and journalists. It is not surprising that the initiator is likely to go public first. Alternatively, the partner
may preempt by blaming the initiator and establishing the righteousness of its position—this
was exactly what Wahaha did. Eventually, both Danone and Wahaha were eager to air their
grievances publicly, pointing fingers at each other.
The third phase is uncoupling. Like human divorce, alliance dissolution can be friendly or
hostile. In uncontested divorces, both sides attribute the separation more to, say, a change in
circumstances. For example, Eli Lilly and Ranbaxy phased out their JV in India and remained
friendly with each other. In contrast, contested divorces involve a party that accuses another.
The worst scenario is the “death by a thousand cuts” inflicted by one party at every turn. A
case in point are the numerous lawsuits and arbitrations against each other filed in many
countries by Danone and Wahaha, not only in France and China but also in the British Virgin
Islands, Italy, Sweden, and the United States.
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Chapter 7
STRATEGY IN ACTION 7.2
Making strategic alliances and networks work
181
Emerging Markets Ethical Dilemma
Yum Brands, McDonald’s, and Sinopec
Gas stations do everything they can to avoid heat and fire. But
in 2011 competition in gas stations operated by China Petroleum
and Chemical Corporation (known as Sinopec) was heating up.
It was triggered by a strategic alliance agreement signed between
Sinopec and Yum Brands (NYSE: YUM), the number one fast-food
chain in China with about 3,500 Kentucky Fried Chicken (KFC)
and 560 Pizza Hut restaurants in 650 Chinese cities at that time.
The agreement announced that KFC and Pizza Hut restaurants
would open inside Sinopec’s gas stations. By revenue, Sinopec in
2011 was the largest Chinese firm and the fifth largest in the world
(with $273 billion sales). It operated more than 30,000 gas stations
throughout China. As car ownership took off in China, the growth
potential for both Sinopec and for Yum Brands seemed enormous.
Both companies expect this important cooperation to
have a significant and far-reaching impact on the development and strategic growth of their businesses. Through
the complementary advantages of both companies, the
combination of the strengths will offer better service for
customers, promote both brands, generate more economic
returns, and improve their capabilities for sustainable
development.
This sounded like a quote from the press release from Sinopec
and Yum Brands—except, it was not (!). This was actually a quote
from a strategic alliance announcement between Sinopec and
Yum Brands’ archrival, McDonald’s, which was signed in 2007.
In their homeland, McDonald’s beat Yum Brands, and KFC was
struggling. But in China, McDonald’s 1,000 restaurants were no
match to the much larger number and wider spread of KFC, Pizza
Hut, and their Chinese cousin East Dawning, a new chain restaurant that only sells Chinese fast food. In an effort to catch up,
McDonald’s entered an alliance with Sinopec—focusing on setting
up “drive-thru” restaurants co-located at Sinopec gas stations, a
novel concept in China.
Yum Brands was a late mover into this tricky three-way
relationship. Because the deal between Sinopec and McDonald’s
was a 20-year deal, Yum Brands restaurants could not displace
McDonald’s at Sinopec gas stations. Yum Brands could operate
either in new stations not having McDonald’s or in established
stations alongside McDonald’s. In response to such “polygamy,”
McDonald’s announced that it was the first “spouse,” with all the
rights and privileges to pick high-priority locations. Emphasizing “healthy competition,” Yum Brands highlighted its two
advantages: (1) Its multiple restaurant brands could cater to different demographic groups, and (2) its supply chain was far more
widespread, thus enabling it to more efficiently team with Sinopec to reach China’s far corners. In the beginning, it was difficult
to tell whether Yum Brands or McDonalds’ would gain an upper
hand in their three-way alliance relationship with Sinopec—and
in China at large.
As competition unfolded, McDonald’s struggled. In ten years
(2007-2017), it only set up 150 “drive-thru” restaurants throughout China, and only 18 of them were co-located at Sinopec gas
stations. In 2017, it sold 80% of its China operations to Citic, a
Chinese state-owned conglomerate, and Carlyle Group, a US private equity firm.
Despite the challenges, Yum Brands continued to outperform McDonald’s in China. In 2016, Yum Brands span off its
entire China operations as Yum China, which is incorporated
in the United States and headquartered in Shanghai. With $6.8 billion of revenue in 2016 and more than 7,600 restaurants in more
than 1,000 cities, it was one of the largest restaurant companies
in China. Yum China became an independent, publicly traded
company in November 2016 (NYSE: YUMC). In 2019, Yum
China announced that its thriving partnership with Sinopec now
included China National Petroleum Corporation (CNPC)—
another oil giant. It would open more than 100 franchise
restaurants at these two oil giants’ gas stations throughout China.
Yum China aspired to expand its restaurant portfolio to 10,000 by
2021. Clearly, Yum Brands and now Yum China have won China.
Sources: (1) 21st Century Business Insights, 2011, KFC and
McDonald’s fight over Chinese gas stations, December 16:
60–61; (2) Bloomberg, 2011, McDonald’s no match for KFC in
China as colonel rules fast food, January 26: www.bloomberg.
com; (3) New York Times, 2017, McDonald’s China operations to
be sold to locally led consortium, January 9: www.nytimes.com;
(4) Reuters, 2019, Yum China to open restaurants at Sinopec,
CNPC gas stations in China, March 12: finance.yahoo.com;
(5) Sinopec, 2007, The first “drive-through” restaurant and
gas station complex is opened collaboratively by Sinopec
and McDonald’s, January 19: english.sinopec.com; (6) Sinopec,
2019, Our partners: McDonald’s, www.sinopec.com.
The last phase is aftermath. Like most divorced individuals, most (but not all) “divorced”
firms, such as Chrysler after its divorce with Daimler, are likely to search for new partners.
Understandably, the new alliance is often negotiated more extensively. However, excessive
formalization may signal a lack of trust—in the same way that prenuptials may scare away
some prospective human marriage partners.
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BUSINESS-LEVEL STRATEGIES
FIGURE 7.4
Alliance Dissolution
Initiation
Reconciliation
Going public
Mediation by third parties
Uncoupling
Last minute salvage
Aftermath
Go alone
New relationship
Source: Adapted from M. W. Peng & O. Shenkar, 2002, Joint venture dissolution as corporate divorce
(p. 95), Academy of Management Executive 16: 92–105.
Performance
Performance is a central focus for strategic alliances and networks. This section discusses
(1) the performance of alliances and networks and (2) the performance of parent firms.
The Performance of Strategic Alliances
and Networks
Although managers naturally focus on alliance performance, opinions vary on how to measure it.55 Table 7.3 shows that a combination of objective measures (such as profit and market
share) and subjective measures (such as managerial satisfaction) can be used. Figure 7.5
illustrates four factors that may influence alliance performance: (1) equity, (2) learning and
experience, (3) nationality, and (4) relational capabilities.
First, the level of equity may be crucial in how an alliance performs. A greater equity
stake means greater commitment, which is likely to result in higher performance. Second,
whether firms have successfully learned from partners is important when assessing alliance
Table 7.3
Alliance- and Network-Related Performance Measures
Alliance/Network Level
Parent Firm Level
Objective
Objective
●●
●●
●●
Financial performance (e.g., profitability)
Product market performance
(e.g., market share)
Stability and longevity
Subjective
●●
Level of top management satisfaction
●●
●●
●●
Financial performance (e.g., profitability)
Product market performance
(e.g., market share)
Stock market reaction
Subjective
●●
Assessment of goal attainment
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Chapter 7
FIGURE 7.5
Making strategic alliances and networks work
What Is Behind Alliance Performance?
Equity
Learning and experience
Strategic
alliance performance
Nationality
Relational capabilities
performance. Since learning is abstract, experience is often used as a proxy because it is
relatively easy to measure.56 While experience certainly helps, its impact on performance
is not linear. There is a limit beyond which further increase in experience may not enhance
performance.57 Third, nationality may affect performance. For the same reason that, on average,
marriages in which both parties have similar backgrounds are more stable, dissimilarities
in national culture may create strains in alliances.58 It is no surprise that international
alliances tend to have more problems than domestic ones. Finally, alliance performance may
fundamentally boil down to soft, difficult-to-measure relational capabilities.
However, none of these factors asserts an unambiguous, direct impact on performance.59
While they may have some correlations with performance, it would be naïve to think that any
of these single factors would guarantee success. It is their combination that jointly increases
the odds for the success of strategic alliances.
The Performance of Parent Firms
Do parent firms benefit from strategic alliances and networks?60 This goes back to
the value-added aspect of these relationships (discussed previously in the section on
resource-based considerations). Compared with the relative lack of consensus on alliance and
network performance, there has been some convergence on the benchmarks of objective firm
performance (such as profitability, product market share, and stock market reaction) (see
Table 7.3). However, subjective performance measures (such as alliance goal attainment) may
not necessarily match objective performance measures. Toyota’s alliance with Tesla resulted in
a tenfold (!) increase of its financial investment. The alliance performance was excellent using
this objective measure. However, Toyota’s goal of leveraging this alliance to develop EVs with
Tesla did not materialize. Thus, using the subjective performance measure of goal attainment,
this alliance failed (see the Opening Case).
For listed firms, if the event window of a decision to enter or exit an alliance relationship
is short enough (several days before and after the event), it is possible to view the “abnormal”
stock returns as directly caused by that particular event. Several such event studies indeed
find that stock markets respond favorably to alliance activities, but only under certain
circumstances such as (1) complementarities of resources, (2) previous alliance experience,
and (3) ability to manage host country political risks.61 Overall, it seems evident that strategic
alliances and networks can create value for their parent firms, although how to make that
happen remains a challenge.
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Debates and Extensions
The rise of alliances and networks has generated several debates. Three are introduced here.
Debate 1: Majority JVs as Control Mechanisms
versus Minority JVs as Real Options
A long-standing debate focuses on the appropriate level of equity in JVs.62 While the logic
of having a higher level of equity control in majority JVs is straightforward, its actual
implementation is often problematic.63 Asserting one party’s control rights, even when justified based on a majority equity position and stronger bargaining power, may irritate the other
party. This is especially likely in international JVs, whereby local partners often resent the
dominance of foreign multinationals.
Some advocate a 50/50 share of management control even when one side has majority
equity. But a 50/50 JV has its own headaches—everything must be negotiated or fought over.
Sometimes it may be better and more efficient to have a dominant partner. In part because of
this reason, in 2001, Fujifilm and Xerox reconfigured their long-running 50/50 JV active in
Asia—named Fuji Xerox, which started in 1962—to have a 75/25 split, with Fujifilm running
the show.64
In addition to the usual benefits associated with being a minority partner in JVs (such
as low cost and less demand on managerial resources and attention), an additional benefit
alluded to previously is exercising real options. In general, the more uncertain the conditions,
the higher the value of real options. In highly uncertain but potentially promising industries
and countries, majority JVs (or M&As) may be inadvisable, because the cost of failure may be
tremendous. Therefore, minority JVs are recommended toehold investments, seen as possible
stepping stones for future scaling up—if necessary.
While the real options logic is straightforward in theory, its practice—when applied to
acquisitions of JVs—is messy.65 This is because most JV contracts do not specify a previously
agreed-upon price for one party to acquire the other’s assets. Most contracts only give the
rights of first refusal to the parties, which agree to negotiate in “good faith.” It is understandable that “neither party will be willing to buy the JV for more than or sell the JV for less than
its own expectation of the venture’s wealth generating potential.”66 As a result, how to reach
an agreement on a “fair” price is tricky.
Debate 2: Alliances versus Acquisitions
An alternative to alliances is M&As (see Chapter 9).67 Many firms seem to pursue M&As and
alliances in isolation. While many large firms have an M&A function and some have set up an
alliance function (discussed earlier), few firms have established a combined “mergers, acquisitions, and alliance” function. In practice, it may be advisable to explicitly consider alliances
vis-à-vis acquisitions.
Shown in Table 7.4, alliances, which tend to be loosely coordinated, do not work well in
a setting that requires a high degree of interdependence. Such a setting would call for acquisitions. Alliances work well when the ratio of soft-to-hard assets is relatively high (such as a
heavy concentration of tacit knowledge), whereas acquisitions may be preferred when such a
ratio is low. Alliances create value primarily by combining complementary resources, whereas
TABLE 7.4
Alliances versus Acquisitions
Alliances
Acquisitions
Resource interdependence
Low
High
Ratio of soft-to-hard assets
High
Low
Source of value creation
Combining complementary
resources
Eliminating redundant
resources
Level of uncertainty
High
Low
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Chapter 7
Making strategic alliances and networks work
acquisitions derive most value by eliminating redundant resources. Finally, consistent with
real options thinking, alliances are more suitable under conditions of uncertainty, and acquisitions are more preferred when the level of uncertainty is low.68
While these rules are not exactly “rocket science,” few firms adhere to them. Consider the
50/50 JV between Coca-Cola (Coke) and Procter and Gamble (P&G), which combined their
fruit-drink businesses (Coke’s Minute Maid and P&G’s Sunny Delight). The goal was to combine Coke’s distribution system with P&G’s R&D capabilities. However, the stock market sent
a mixed signal in response, pushing P&G’s stock 2% higher and Coke’s 6% lower on the day
of the announcement. For three reasons, Coke probably could have done better by simply
acquiring P&G’s fruit-drink business. First, a higher degree of integration would be necessary
to derive the proposed synergies. Second, because Coke’s distribution assets were relatively
easy-to-value hard assets, whereas P&G’s R&D capabilities were hard-to-value soft assets,
the risk was higher for Coke. Finally, little uncertainty existed regarding the popularity of
fruit drinks, so investors found it difficult to understand why Coke would share 50% of this
fast-growing business with P&G, a laggard in the industry. It is not surprising that the JV was
quickly terminated within six months.69
On the other hand, many M&As (such as DaimlerChrysler) would have probably been
better off had the firms pursued alliances initially. But even when firms have collaborated for
a reasonable period, prematurely pushing for a merger insisted by one partner, when the other
partner is not ready, is likely to backfire (see Strategy in Action 7.3). Overall, acquisitions
may be overused as a primary means to access resources in another firm, whereas alliances,
guided by a real options logic, can provide a great deal of flexibility to scale up or scale down
investments (see the Closing Case).
Debate 3: Acquiring versus Not Acquiring
Alliance Partners
As noted earlier, alliance partners with a high degree of network centrality benefit from being
centrally located in a network of players. One debate deals with whether such centrally located
firms should acquire other more peripheral (less centrally located) and typically smaller
partners in the network. Recent comparative research involving US and Chinese firms reveals
interesting contrasts. In the United States, centrally located firms in an alliance network seem
to enjoy the benefits of high centrality and are not eager to acquire partners. This finding is
consistent with the predictions made from standard network theory advocated by Ronald Burt,
a social network expert.70 However, in China, centrally located firms seem to more aggressively
and more quickly acquire partners. This finding is opposite to standard predictions.71
Why are there such differences? Researchers speculate that due to the dynamic, fast-moving
transitions in China, any competitive advantage associated with high centrality is likely to
erode rapidly, prompting centrally located firms to quickly acquire partners. In comparison,
the pace of competitive dynamics in the United States may not be as fast, thus enabling some
centrally located firms to enjoy the benefits without having to go through the trouble of
acquiring partners.72 In other words, if the real options logic is in play, it is played out over a
longer period of time in the United States than in China.
Firms from other emerging economies, such as Brazil and India, also seem to have little
patience and often indulge on a “buying binge” in acquiring alliance partners overseas.
Used to their dynamic and fast-moving domestic competition, firms from emerging
economies may be interested in quickly acquiring partner firms overseas—out of fear that
any competitive advantage associated with the acquisition moves may erode rapidly if they
do not act quickly.73
Whether rapidly acquiring alliance partners results in better parent firm performance
remains to be seen. Two lessons out of this debate emerge. (1) Partner firms in developed
economies need to get used to the more “rapid fire” acquisitions initiated by firms in
emerging economies. (2) Firms from developed economies need to speed up their partner
acquisition process when venturing to emerging economies, where the pace for competitive
moves (such as acquisitions) is faster.74
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BUSINESS-LEVEL STRATEGIES
STRATEGY IN ACTION 7.3
Ethical Dilemma
Renaussanbishi: No Way!
The Renault-Nissan alliance started in 1999 with Renault’s strategic
investment of $5 billion to assume debt for Nissan, which was on the
verge of bankruptcy. This investment resulted in Renault holding
37% equity of Nissan. In 2001 after Nissan came back to life, it spent
$1.3 billion to buy a 15% stake in Renault via a cross-shareholding
arrangement. In 2002, the two partners set up a 50/50 joint venture (JV) simply named Renault-Nissan Alliance, which is a strategic management company based in Amsterdam, the Netherlands,
to oversee corporate governance and coordination from a neutral
location. The goal of the alliance was to increase economies of scale
for both sides without forcing one partner’s identity to be consumed by the other’s. The alliance leveraged its economies of scale
by jointly procuring materials and developing new vehicles.
The alliance was generally viewed as successful. It
significantly expanded its scope in 2016 when Nissan spent
$2.2 billion to acquire a 34% controlling ownership stake in
Mitsubishi. This move effectively made Mitsubishi the third
member of the alliance. In 2017, the JV formally changed its name
to Renault-Nissan-Mitsubishi Alliance. In early 2018, the alliance
proudly announced that its three partners sold a combined total
of 10.6 million vehicles in the previous year, thus dethroning both
Toyota and Volkswagen as the largest automaker in the world.
The man who held the alliance together was Carlos Ghosn,
a Brazilian-born executive from Renault who also held French
and Lebanese passports. Ghosn first came to Nissan as its chief
operating officer in 1999. Nicknamed “Le Cost Killer” from his
earlier work in turning around Renault, Ghosn smashed the lifetime-employment system at Nissan, and earned a new nickname
“Keiretsu Killer” by discontinuing some long-term but unproductive supplier relationships. While his approach was controversial,
his results were impressive. From the brink of bankruptcy, Nissan
returned to profitability within one year after Ghosn’s arrival.
Within three years, Nissan was one of the most profitable automakers worldwide, with operating margins consistently above
9%—more than twice the industry average. Over time, Ghosn
became Nissan’s chairman and CEO, Renault’s chairman and CEO,
and Mitsubishi’s chairman—as well as chairman and CEO of the
Renault-Nissan-Mitsubishi Alliance (the JV). Having saved an
iconic Japanese firm, he was widely adored in Japan. His life was
even chronicled in Japanese comics.
However, not everyone in Japan—or within Nissan—was
happy with Ghosn. In theory, the stronger partner Renault might
have acquired Nissan, eliminating redundancies and reaping
benefits from global economies of scale. In practice, Nissan did not
like this destiny. Since Nissan produced more vehicles (5.8 million
in 2017) and bigger profits ($6.9 billion) than Renault (3.8 million
vehicles, $3.8 billion profits) did, Nissan resented being the
junior partner—only holding a merger 15% non-voting shares
in Renault, which held 43% voting shares in Nissan. To make the
alliance more equitable, Nissan proposed that Renault reduce its
holding of Nissan shares, restore voting rights to Nissan’s holding
of Renault shares, and change the stipulation that Renault’s leader
would automatically be head of the alliance. All these proposals
were rejected by Renault and by its other major shareholder, the
French government, which owned 15%. While Ghosn consistently
advocated an evolutionary approach that resulted in increasing
integration for partners, in early 2018 he began talks to merge
Renault and Nissan, which would have kept both under his (and
French) control, with Mitsubishi to join the merged entity later.
Unfortunately, in November 2018, Ghosn was arrested
in Japan on charges of alleged personal financial misconduct.
His arrest was triggered by internal investigations by Nissan,
which turned the evidence over to authorities. The investigations revealed that Ghosn indeed lived large. In 2017, he fetched
$8.4 million from Renault, $6.5 million from Nissan, $2 million
from Mitsubishi, and $8.9 million from the alliance JV. The
globe-trotting, high-flying executive maintained residences in
Paris, Tokyo, Amsterdam, Beirut, and Rio de Janeiro—at shareholders’ expense. In May 2016, for his second marriage he threw
a huge party at the Palace of Versailles, with Renault picking up
the bill. Within days of his arrest, both Nissan and Mitsubishi
fired him. Renault declined to fire him, but he resigned in January
2019 while in a Japanese prison. The JV also fired him. Ghosn
maintained his innocence. In a media interview while in jail, he
claimed that he had “no doubt” that he was the victim of “plot and
treason” by Nissan executives who opposed the merger. In April
2019, Ghosn was released on bail and—having surrendered his
Brazilian, French, and Lebanese passports—put on house arrest
in Japan. In December 2019, he engineered a spectacular escape
from Japan and landed in Lebanon, where he kept a house.
Whether Ghosn’s questionable conduct is enough to justify
“a judicial roughing-up” can be debated. What is without a doubt
is that his vision for a full merger has been scuttled. While both
Nissan and Mitsubishi remained committed to the alliance, they
openly expressed zero interest in a merger. In March 2019, the
three-way alliance was restructured to form a “consensus-based”
board to replace the command-and-control structure imposed by
Ghosn. Renault chairman Jean-Dominique Senard served as chairman, and CEOs from the three partners served as equal members.
Going forward, tension looms large on the horizon. Nissan has
wrapped itself under the Japanese flag. The French government,
which controls the same percentage of Renault shares as Nissan
does, is even less likely to allow Renault to cede control than it was
before. An alliance that once was the envy of the industry turns out
to be, in the words of the Economist magazine, “an unholy mess.”
Sources: (1) Bloomberg Businessweek, 2019, Carlos Ghosn never
saw it coming, February 4: 38–47; (2) CNN, 2019, Renault may
have paid for Carlos Ghosn’s Versailles wedding, February 8:
www.cnn.com; (3) Economist, 2018, Unholy alliance, December 1:
12–13; (4) Economist, 2019, The end of the affair, March 16: 59;
(5) Fortune, 2019, The Ghosn show, January 1: 80–84; (6) M.
W. Peng, 2009, Renault–Nissan, in Global Strategy, 2nd ed.
(pp. 255–256), Boston: Cengage Learning; (7) Wall Street Journal,
2020, Ghosn unleashes tirade on Japan, January 9: A1, A9.
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Chapter 7
Making strategic alliances and networks work
TABLE 7.5Strategic Implications for Action
●●
●●
●●
Improve relational (collaborative) capabilities crucial for the success of strategic
alliances and networks.
Understand and master the rules of the game governing alliances and networks
around the world.
Carefully weigh the pros and cons of alliances vis-à-vis those of acquisitions.
The Savvy Strategist
Instead of concentrating on competition only, a new generation of strategists must be savvy
at both competition and cooperation—in other words, “co-opetition.”75 For example, Google’s
CEO Eric Schmidt responded to a reporter on the “co-opetition” relationship between Apple
and Google:
Apple is a company we both partner and compete with. We do a search deal with them,
recently extended, and we’re doing all sorts of things in maps and things like that. So the
sum of all this is that two large corporations, both of which are important, both of which
I care a lot about, will remain pretty close. But Android was around earlier than iPhone.76
The savvy strategist draws three important implications for action (Table 7.5). First,
improving relational (collaborative) capabilities is crucial for the success of alliances and
networks. Given that excellent relational skills are rare among the population in general
(think of the high divorce rates), you need to work extra hard to be good at collaboration.
The do’s and don’ts in Table 7.6 will provide a useful start.
Second, you need to understand the rules of the game governing alliances and networks—
both formal and informal.77 Formal rules dictating alliances to be the preferred mode of entry
and banning WOS would make it necessary to embark on an alliance strategy, as Eli Lilly did
when entering India in the 1990s. Over time, some rules have been relaxed and WOS allowed,
thus enabling some reconsideration of Eli Lilly’s JV strategy. Informal norms and values are
also crucial. In the absence of legal mandate for alliances, the norms for entering emerging
economies used to be in favor of alliances. However, the recent trend has moved toward phasing out (some) alliances and establishing stronger control over subsidiaries there.78
Third, you need to carefully weigh the pros and cons associated with alliances and
acquisitions. Diving into alliances (or acquisitions) without considering the other option may
be counterproductive, as Coke found out after it established a JV with P&G on fruit drinks.
TABLE 7.6
Improving the Odds for Alliance Success
Areas
Do’s and Don’ts
Contract versus
“chemistry”
No contract can cover all elements of the relationship. Relying
on a detailed contract does not guarantee a successful relationship. It may indicate a lack of trust.
Warning signs
Identify symptoms of frequent criticism, defensiveness (always
blaming others for problems), and stonewalling (withdrawal
during a fight).
Invest in the
relationship
Like married individuals working hard to invigorate their ties,
alliances require continuous nurturing. Once a party starts to
waver, it is difficult to turn back the dissolution process.
Conflict-resolution
mechanisms
“Good” married couples also fight. Their secret weapon is to
find mechanisms to avoid unwarranted escalation of conflicts.
Managers need to handle conflicts—inevitable in any alliance—
in a credible, responsible, and controlled fashion.
Source: Based on text in M. W. Peng & O. Shenkar, 2002, Joint venture dissolution as corporate divorce
(pp. 101–102), Academy of Management Executive 16: 92–105.
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187
188
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BUSINESS-LEVEL STRATEGIES
Considering alliances vis-à-vis acquisitions within an integrated decision framework may be
necessary.
Overall, this chapter sheds considerable light on the four fundamental questions in strategy.
The answers to Questions 1 (Why do firms differ?) and 2 (How do firms behave?) boil down
to how different industry-based, resource-based, and institution-based considerations drive
alliance and network activities. What determines the scope of the firm (Question 3)—or
more specifically, the scope of alliance and network relationships in this context—can be
found in the strategic goals. Some alliances may have a wide scope in anticipation of an
eventual merger, whereas other alliances may have a limited scope. Finally, the success and
failure of strategic alliances and networks (Question 4) are fundamentally determined by
how firms develop, possess, and leverage “soft” relational capabilities, in addition to “hard”
assets such as technology and capital. In conclusion, there is no doubt that strategic alliances
and networks are difficult to manage. But managing is hardly ever simple, whether managing
internal units or external relationships.
CHAPTER SUMMARY
1. Define strategic alliances and networks.
●●
●●
Strategic alliances are voluntary agreements of
cooperation between firms.
Strategic networks are strategic alliances formed by
multiple firms.
weak ties, and (3) turning from corporate marriages
to divorces.
5. Identify the drivers behind the performance of alliances
and networks.
●●
2. Articulate a comprehensive model of strategic alliances and
networks.
●●
Industry-based, resource-based, and institutionbased considerations form the backbone of a
comprehensive model of strategic alliances and
networks.
6. Participate in three leading debates concerning alliances
and networks.
●●
3. Understand the decision processes behind the formation of
alliances and networks.
●●
Principal phases of alliance and network formation
include (1) deciding whether to cooperate or not,
(2) determining whether to pursue contractual or
equity modes, and (3) positioning the particular
relationship.
(1) Majority JVs as control mechanisms versus
minority JVs as real options, (2) alliances versus
acquisitions, and (3) acquiring versus not acquiring
alliance partners.
7. Draw strategic implications of action.
4. Gain insights into the evolution of alliances and networks.
●●
At the alliance/network level, (1) equity, (2) learning and experience, (3) nationality, and (4) rational
capabilities are found to affect alliance and network
performance.
Three aspects of evolution highlighted are (1) combating opportunism, (2) evolving from strong ties to
●●
●●
●●
Improve relational (collaborative) capabilities.
Understand and master the rules of the game
governing alliances and networks around the world.
Carefully weigh the pros and cons of alliances vis-àvis those of acquisitions.
Key Terms
Constellation 170
Exploitation 180
Real option 173
Contractual (nonequity-based)
alliance 170
Exploration 180
Relational (collaborative)
capability 173
Cross-shareholding 170
Learning by doing 177
Downstream vertical alliance 172
Due diligence 175
Equity-based alliance 170
Horizontal alliance 171
Learning race 173
Network centrality 174
Partner rarity 174
Strategic alliance 170
Strategic investment 170
Strategic network 170
Upstream vertical alliance 172
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Chapter 7
Making strategic alliances and networks work 189
CRITICAL DISCUSSION QUESTIONS
1. Pick any recent announcement of the formation of an in-
ternational alliance. Predict its likely success or failure.
2. ON ETHICS: During the courtship and negotiation stages,
3. ON ETHICS: Some argue that engaging in a “learning race”
is unethical. Others believe that a “learning race” is part and
parcel of alliance relationships, especially those with competitors. What do you think?
managers often emphasize “equal partnerships” and do not
reveal (and try to hide) their true intentions. What are the
ethical dilemmas here?
TOPICS FOR EXPANDED PROJECTS
1. Some argue that at a 30%–70% failure rate (depending on
different studies), strategic alliances and networks have
a strikingly high failure rate and that firms need to scale
down their alliance and network activities. Others suggest that this failure rate is not particularly higher than the
failure rate of new entrepreneurial start-ups, new product
launches, and M&As. Therefore, such a failure rate is not of
grave concern. What do you think?
2. Working in pairs, find the longest-running alliance
relationship your research can find. Present its secrets for
such longevity.
3. What are the similarities and differences between human
marriages and interfirm alliances? How can the lessons behind the success and failure of human marriages enhance
the odds of alliance success?
CLOSING CASE
Fiat Chrysler: From Alliance to Acquisition
The year 2009 was one of the most tragic years in the history of the US automobile industry: two of the Big Three
automakers, GM and Chrysler, went bankrupt. However,
there was one glimmer of hope: Fiat was the “white knight”
who came to Chrysler’s rescue. Chrysler had recently
gone through a traumatic divorce with Daimler in 2007.
At that time, nobody wanted Chrysler, which was pulled
down by deteriorating products, hopeless finances, and
the Great Recession. Its desperate calls asking GM, Honda,
Renault-Nissan, Toyota, and Volkswagen to help went nowhere. Only Fiat answered the call with $5 billion as a strategic investor. As the “new Chrysler” emerged out of bankruptcy, the US government (which spent $8 billion to bail
out Chrysler) had 10% of equity, the Canadian government
2%, and the United Auto Workers (union) 68%. Although
Fiat only had 20%, clearly, as the senior partner in this new
alliance, it was calling all the shots.
While Chrysler got itself another European partner, Fiat
itself was a weak player. Would the relationship work? The
DaimlerChrysler marriage consisted of a luxury automaker
and a working-class truck and SUV maker, which had a
hard time working together. The Fiat-Chrysler alliance
at least consisted of two similar mass market operations.
Both offered each other a set of complementary skills and
capabilities. In addition to cash, Chrysler needed attractive
small cars. Fiat supplied Chrysler with its award-winning
Alfa Romeo Giulietta small car and its excellent smallengine technology that would comply with the increasingly
strict fuel-economy standards in the United States. In 2013,
while Chrysler’s US factories were running at nearly full
capacity, only 40% of the capacity of Fiat’s Italian factories
was being utilized. Thanks to Italian politics, Fiat could
not close any major factories. Therefore, Fiat needed novel
models from Chrysler to make them in Italy. Fiat recently
assigned Chrysler’s brand-new Jeep Renegade SUV to
be built in Italy. In third-country markets, although each
of these relatively smaller players was weak, their odds
became better by working together. In Brazil, which is Fiat’s
number one market (where Fiat sold more cars than in
Italy), Fiat faced major challenges from GM and Renault.
Assistance from Chrysler was valuable. In Asia, neither of
them was very strong, although Chrysler’s Jeep models did
better. Combining forces allowed them to scale new heights
in the tough but important Asian markets.
After several years of experimentation, both sides
seemed satisfied with the alliance. Sergio Marchionne,
who served as chairman and CEO for both Fiat and
Chrysler, was instrumental in making sure both sides worked
together. Thanks to their bad experience with Daimler,
many American managers at Chrysler used to resent
European dominance. This time, as Chrysler owed its
existence to Marchionne, its managers tended to give him the
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190
PART 2
BUSINESS-LEVEL STRATEGIES
benefit of the doubt as he turned Chrysler around. Instead
of the more centralized “German” style, Marchionne
practiced a more decentralized “Italian” style. He also hired
third-country (non-Italian and non-US) executives to help
reduce the bilateral cultural tension. By 2011, Chrysler repaid
$7.6 billion loans to the US and Canadian governments and
bought out the shares both governments held. Overall, Fiat
gradually increased its stake in Chrysler, reaching 59% by
2013. In 2014, Fiat acquired the remaining shares and owned
100% of Chrysler via a merger.
Set up in 2014, the merged entity is called Fiat Chrysler
Automobiles (FCA), which interestingly is headquartered in
neither Turin nor Detroit. Instead, it is registered in Amsterdam,
the Netherlands. But FCA’s CEO and the top management
team are based in London—its operational headquarters.
Cross-listed in both Borasa Italiana (BIT: FCA) and New York
Stock Exchange (NYSE: FCAU), FCA became the world’s
seventh-largest automaker. With combined annual output of
4.6 million vehicles, FCA was behind Toyota, Volkswagen,
GM, Hyundai, Ford, and Renault-Nissan; but ahead of Honda
and Peugeot. This was not bad for the 11th-ranked Chrysler
(2.4 million vehicles before the merger) and the 13th-ranked
Fiat (2.1 million vehicles). FCA has a broad portfolio of
brands such as Alfa Romeo, Chrysler, Dodge, Ferrari, Fiat,
Jeep, Maserati, and Ram Trucks. However, confronting the
brutal forces of economies of scale in the automobile industry,
Marchionne argued that even FCA was not big enough. He
openly called for FCA to entertain another megamerger. In
short: merge and grow or fade into irrelevance.
Unfortunately, Marchionne passed away in 2018 at
age 66. Regarded as one of the all-time stars in the industry,
he first rescued Fiat from near-bankruptcy in 2004 and then
engineered the alliance with Chrysler in 2009. After nursing
Chrysler to health, he successfully merged it with Fiat in
2014. Fulfilling Marchionne’s wish, FCA in 2019 announced
a merger with Peugeot SA Group (PSA) of France. Producing
8.7 million vehicles annually, the combined group would
become the fourth-largest automaker in the world. On
October 31, 2019, the day when the merger was announced,
FCA’s shares rose 9.5% and PSA’s 4.5%.
Sources: (1) Bloomberg Businessweek, 2014, Marchionne’s last lap,
October 13: 24–26; (2) Bloomberg Businessweek, 2019, Fiat is stalling
in the US, April 15: 18–19; (3) Economist, 2013, Hoping it will hold
together, August 24: 57; (4) Economist, 2014, Here, there, and everywhere, February 22: 56–57; (5) Economist, 2018, After Sergio Marchionne, July 28: 46–47; (6) FCA, 2019, Groupe PSA and FCA plan to
join forces to build a world leader for a new era in sustainable mobility,
press release, October 31: www.fcagroup.com; (7) Wall Street Journal,
2019, Fiat Chrysler, Peugeot agree on merger, October 31: B1–B2.
CASE DISCUSSION QUESTIONS
1. From a resource-based view, what does Fiat have in turn-
ing around Chrysler that Daimler did not have?
2. Prior to their merger in 1998, Daimler and Chrysler had
not collaborated in any alliance relationship. This probably
contributed to the eventual failure of DaimlerChrysler.
After Fiat made a strategic investment in Chrysler in
2009, both collaborated in an alliance, which eventually
resulted in a merger in 2014. Does FCA have better odds
of success than DaimlerChrysler?
3. Will the new FCA-PSA merger be successful?
NOTES
[Journal Acronyms] AFM—Air Forces Monthly; AJS—
American Journal of Sociology; AME—Academy of Management
Executive; AMJ—Academy of Management Journal; AMP—
Academy of Management Perspectives; AMR—Academy of Management Review; APJM—Asia Pacific Journal of Management;
BW—Bloomberg Businessweek; GSJ—Global Strategy Journal;
HBR—Harvard Business Review; IEEE—IEEE Transactions on
Engineering Management; JIBS—Journal of International Business
Studies; JIM—Journal of International Management; JM—Journal
of Management; JMS—Journal of Management Studies; JOM—
Journal of Operations Management; JWB—Journal of World Business; OSc—Organization Science; SMJ—Strategic Management
Journal; SO—Strategic Organization; WSJ—Wall Street Journal
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Making strategic alliances and networks work 191
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48. X. Jiang, F. Jiang, A. Arino, & M. W. Peng, 2017, Uncertainty,
adaptation, and alliance performance, IEEE 64: 605–615;
H. K. Steensma, J. Barden, C. Dhanaraj, M. Lyles, & L.
Tihanyi, 2008, The evolution and internalization of IJVs in
a transitioning economy, JIBS 39: 491–507.
49. F. Fonti, M. Maoret, & R. Whitbred, 2017, Free-riding in
multi-party alliances, SMJ 38: 363–383.
50. M. Granovetter, 1973, The strength of weak ties, AJS 78:
1360–1380.
51. J. March, 1991, Exploration and exploitation in organizational learning, OSc 2: 71–87.
52. S. Holloway & A. Parmigiani, 2016, Friends and profits
don’t mix, AMJ 59: 460–478.
53. This section draws heavily from M. W. Peng & O. Shenkar,
2002, Joint venture dissolution as corporate divorce, AME
16: 92–105. See also H. Greve, J. Baum, H. Mitsuhashi, &
T. Rowley, 2010, Built to last but falling apart, AMJ 53:
302–322; A. Madhok, M. Keyhani, & B. Bossink, 2015,
Understanding alliance evolution and termination, SO 13:
91–116; A. Mohr, C. Wang, & F. Fastoso, 2016, The contingent effect of state participation on the dissolution of
international joint ventures, JIBS 47: 408–426.
54. R. Bakker, 2016, Stepping in and stepping out, SMJ 37:
1919–1941; O. Bruyaka, D. Philippe, & X. Castaner, 2018,
Run away or stick together? AMR 43: 445–469.
55. R. Kaplan, D. Norton, & B. Rugelsjoen, 2010, Managing alliances with the balanced scorecard, HBR January:
114–120; J. Li, C. Zhou, & E. Zajac, 2009, Control, collaboration, and productivity, SMJ 30: 865–884.
56. M. Cheung, M. Myers, & J. Mentzer, 2011, The value of
relational learning in global buyer-supplier exchanges,
SMJ 32: 1061–1082; E. Fang & S. Zou, 2010, The effects of
absorptive and joint learning on the instability of IJVs in
emerging economies, JIBS 41: 906–924; C. Liu, P. Ghauri, &
R. Sinkovics, 2010, Understanding the impact of relational
capital and organizational learning on alliance outcomes,
JWB 45: 237–249; Y. Liu & T. Ravichandran, 2015, Alliance
experience, IT-enabled knowledge integration, and ex
ante value gains, OSc 26: 511–530; B. Nielsen & S. Nielsen,
2009, Learning and innovation in international strategic
alliances, JMS 46: 1031–1058; G. Vasudeva & J. Anand,
2011, Unpacking absorptive capacity, AMJ 54: 611–623; M.
Zollo & J. Reuer, 2010, Experience spillovers across corporate development activities, OSc 21: 1195–1212.
57. Y. Luo & M. W. Peng, 1999, Learning to compete in a transition economy, JIBS 30: 269–296.
58. I. Arikan & O. Shenkar, 2013, National animosity and
cross-border alliances, AMJ 56: 1516–1544.
59. C. Chung & P. Beamish, 2010, The trap of continual ownership change in international equity JVs, OSc 21: 995–1015;
J. Xia, 2011, Mutual dependence, partner substitutability,
and repeated partnership, SMJ 32: 229–253.
60. U. Wassmer, S. Li, & A. Madhok, 2017, Resource ambidexterity through alliance portfolios and firm performance,
SMJ 38: 384–394.
61. M. Kumar, 2011, Are JVs positive sum games? SMJ 32:
32–54; W. Pollitte, J. Miller, & A. Yaprak, 2015, Returns
to US firms from strategic alliances in China, JWB 50:
144–148; S. Yeniyurt, J. Townsend, S. T. Cavusgil, &
P. Ghauri, 2009, Mimetic and experiential effects in international marketing alliance formations of US pharmaceutical firms, JIBS 40: 301–320.
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 7
62. M. Nippa & J. Reuer, 2019, On the future of international
joint venture research, JIBS 50: 555–597.
63. C. Westman & S. Thorgren, 2016, Power conflicts in international joint ventures, JIM 22: 168–185.
64. In 2019, Fujifilm acquired the remaining 25% stake of Fuji
Xerox from Xerox. See WSJ, 2019, Fujifilm chief looks beyond Xerox, November 6: B3.
65. R. Klingebiel & R. Adner, 2015, Real options logic revisited,
AMJ 58: 221–241; R. Ragozzino & C. Moschieri, 2014,
When theory doesn’t meet practice, AMP 28: 22–37.
66. T. Chi, 2000, Option to acquire or divest a JV (p. 671), SMJ
21: 665–687. See also T. Tong & S. Li, 2013, The assignment of call option rights between partners in IJVs, SMJ
34: 1232–1243.
67. J. Reuer & R. Ragozzino, 2012, The choice between JVs
and acquisitions, OSc 23: 1175–1190; J. Reuer, T. Tong, B.
Tyler, & A. Arino, 2013, Executive preferences for governance modes and exchange partners, SMJ 34: 1104–1122;
L. Wang & E. Zajac, 2007, Alliance or acquisition? SMJ 28:
1291–1317.
68. K. Brouthers & D. Dikova, 2010, Acquisitions and real
options, JMS 47: 1048–1070.
69. J. Dyer, P. Kale, & H. Singh, 2004, When to ally and when to
acquire, HBR July: 109–115.
Making strategic alliances and networks work 193
70. R. Burt, 1992, Structural Holes, Cambridge, MA: Harvard University Press; H. Yang, Z. Lin, & M. W. Peng,
2011, Behind acquisitions of alliance partners, AMJ 54:
1069–1080.
71. Z. Lin, M. W. Peng, H. Yang, & S. Sun, 2009, How do networks and learning drive M&As? SMJ 30: 1113–1132.
72. H. Yang, S. Sun, Z. Lin, & M. W. Peng, 2011, Behind M&As
in China and the United States, APJM 28: 239–255.
73. S. Lebedev, M. W. Peng, E. Xia, & C. Stevens, 2015, Mergers and acquisitions in and out of emerging economies,
JWB 50 651–662; S. Sun, M. W. Peng, B. Ren, & D. Yan,
2012, A comparative ownership advantage framework for
cross-border M&As, JWB, 47: 4–16.
74. M. W. Peng, 2012, The global strategy of emerging multinationals from China, GSJ 2: 97–107.
75. A. Brandenburger & B. Nablebuff, 1996, Co-opetition, New
York: Doubleday.
76. BW, 2010, Charlie Rose talks to Eric Schmidt, September
27: 39.
77. S. Dorobantu, T. Lindner, & J. Mullner, 2019, Political risk
and alliance diversity, AMJ (in press).
78. S. Chang, 2019, When to go it alone, JIBS 50: 998–1020.
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CHAPTER
8
iStock.com/golero
Managing Competitive Dynamics
KNOWLEDGE OBJECTIVES
After studying this chapter, you should be able to
1. Articulate the “strategy as action” perspective
2. Understand the industry conditions conducive for cooperation and collusion
3. Explain how resources and capabilities influence competitive dynamics
4. Outline how antitrust and antidumping laws affect domestic and international competition
5. Identify the drivers for attacks, counterattacks, and signaling
6. Participate in two leading debates concerning competitive dynamics
7. Draw strategic implications for action
194
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OPENING CASE
Emerging Markets
Jetstar’s Rise in the Asia Pacific
Jetstar Airways is a low-cost airline launched by
Qantas in 2003. After dominating Australia for
decades, in 2000 Qantas was threatened by a lowcost foreign entrant, Virgin Blue, which was a sister
airline of Britain’s Virgin Atlantic. Virgin Blue launched
a price war and immediately pushed a 65-year-old
incumbent, Ansett, the smaller one of the Big Two
duopoly, into liquidation bankruptcy in 2002.
Founded in 1920, Qantas is the world’s third-oldest
airline. Nationalized during the postwar years,
Qantas had been a state-owned enterprise (SOE)—
in aviation jargon, a flag carrier—for three decades
before it was privatized in 1997. Qantas knew its own
limitations as a large, slow-moving former SOE that
would not comfortably fight a price war for which a
nimble low-cost rival Virgin Blue was designed. Qantas decided to launch a fighter brand—a brand (and
subsidiary) designed to combat low-cost rivals while
protecting the incumbent’s premium offerings.
In 2003, Jetstar was born. It was based in Melbourne
with 14 Airbus A-320s flying to 14 destinations. These
were tourist routes such as those going to Ayers
Rock (Uluru) on which Qantas had lost money. Jetstar was not built from scratch. It was rebranded from
Impulse Airlines, which Qantas had acquired in 2001.
Although 100% owned by Qantas, Jetstar operated
largely independent of Qantas. While Virgin operated
a low-frills model, Jetstar offered no frills. Peanuts on
board? Forget about them. Even water had to be purchased. There was no handling of baggage between
Jetstar flights and between Jetstar and Qantas flights.
Passengers had to fetch their own baggage and check
in and drop it off again. The upshot? A 20% cost
advantage over Virgin Blue. Passengers flocked to
Jetstar, and it quickly became profitable, grabbing a
22% domestic market share in five years. Like a wingman in aerial combat, Jetstar protected Qantas, which
was able to refocus on its more profitable routes internationally and among major cities domestically with
more frequency and better service. This strengthened
differentiation between Qantas and Jetstar.
Leveraging Jetstar’s success at home, Qantas has
used the brand to fight other competitors throughout the Asia Pacific region by bringing the fight to
their skies. In 2005, Jetstar commenced international
flights by flying from Sydney, Melbourne, Brisbane,
and Gold Coast to Christchurch, New Zealand—
fighting off Air New Zealand.
Also, in 2005, Jetstar Asia was set up in
Singapore—a joint venture (JV) with Qantas holding
a 49% stake, two Singaporean businessmen 32%, and
the Singapore government’s investment company
Temasek 19%. This was in response to the emergence
of low-cost rivals in Southeast Asia such as Scoot
(from Singapore) and AirAsia (from Malaysia). From
Singapore, Jetstar Asia flies to Cambodia, Indonesia,
Malaysia, Myanmar, the Philippines, Thailand, and
Vietnam. Its longer routes go to Hong Kong, Japan,
and Taiwan. It is the main feeder airline for Jetstar
Airways for budget passengers flying to and from
Australia. (For international flights connecting with
domestic flights, Jetstar does provide in-flight food
and beverages as well as baggage connectivity.)
In 2007, Qantas acquired an 18% stake in Vietnam’s
Pacific Airlines, with the stake increasing to 30% by
2010. A JV between Qantas and the Vietnamese government, the airline was rebranded in 2008 as Jetstar
Pacific. Based in Ho Chi Minh City, Jetstar Pacific flies
to destinations throughout Vietnam. It offers neither
in-flight entertainment nor catering—only food and
beverages for purchase. After the dominant stateowned Vietnam Airlines, Jetstar Pacific established
itself as the second largest airline in the country.
In 2012, Jetstar entered Japan by forming a JV
called Jetstar Japan. It was owned by Qantas (33%),
Japan Airlines (JAL) (33%), Mitsubishi Corporation (17%), and Century Tokyo Leasing Corporation
(17%). Similar to Qantas, JAL used to be the dominant, state-owned flag carrier of Japan. After being
privatized in 1987, JAL was threatened by All Nippon
Airways (ANA), which recently dethroned JAL to
become the largest airline in Japan. Always privately
owned, ANA was nimbler and more entrepreneurial. To eat JAL’s lunch, ANA launched two low-cost
subsidiaries: its wholly owned Peach and a JV with
AirAsia called AirAsia Japan, which later became
Vanilla. Concerned that it might not do a good job
in beating off such low-cost attacks, JAL sought to
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195
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OPENING CASE
(Continued)
import Jetstar’s no-frills expertise. Based both at Narita
Airport in Tokyo and Kansai Airport in Osaka, Jetstar
Japan flies to 11 cities throughout Japan, as well as
Hong Kong, Manila, Shanghai, and Taipei.
Today, the Jetstar Group is made up of Jetstar Airways
in Australia and New Zealand, Jetstar Asia in Singapore,
Jetstar Pacific in Vietnam, and Jetstar Japan in Japan.
Jetstar-branded carriers operate as many as 5,000 flights
a week to more than 85 destinations. It is one of the
Asia Pacific’s fastest-growing airline brands with one of
the most extensive ranges of destinations in the region.
According to Richard Branson, owner of Virgin Group
that launched Jetstar’s first designated competitor, Virgin
Blue (now Virgin Australia), the airline industry is notorious for turning billionaires into millionaires. Running
competitive dynamics
Actions and responses
undertaken by competing
firms.
competitor analysis
The process of anticipating
rivals’ actions in order to
both revise a firm’s plan
and prepare to deal with
rivals’ responses.
low-cost airlines is especially risky. At about the same
time Jetstar was launched, United launched Ted, and
Delta started Song. Both shut down after a few years.
Stand-alone low-cost airlines also have a nasty tendency of dying prematurely. Recent examples include
Air Berlin (Germany), Kingfisher (India), and Wow (Iceland). In such a structurally unattractive industry, Jetstar has indeed risen as one of the rare shining stars.
Sources: (1) The author’s interviews; (2) Australian Aviation,
2017, Fleet management, July: 26–29; (3) Australian Aviation,
2017, Shaping up, July: 10–11; (4) Jetstar In-Flight Magazine,
July 2017; (5) Jetstar, 2020, About us, www.jetstar.com; (6) M.
Ritson, 2009, Should you launch a fighter brand? Harvard Business
Review October: 87–92.
W
hy do airlines such as Jetstar, Qantas, and their rivals take certain actions?
Once one side initiates an action, how do others respond? These are some
of the strategic questions we address in this chapter, which focuses on
such competitive dynamics—actions and responses undertaken by competing firms.1
Since one firm’s actions are rarely unnoticed by rivals, the initiating firm would
naturally like to predict rivals’ responses before making its own move.2 This process
is called competitor analysis. It was advocated a long time ago by ancient Chinese
strategist Sun Tzu’s teaching to not only know “yourself,” but also “your opponents.”
Recall that Chapter 1 introduced the “strategy as plan” and “strategy as action”
schools. As military officers have long known, a good plan never survives the first
contact with the enemy because the enemy does not act according to our plan (!).
Thus, strategy’s defining feature is action, not planning. This chapter first highlights the “strategy as action” perspective, followed by a comprehensive model. Then,
attack, counterattack, and signaling are outlined. Debates and extensions follow.
Strategy as Action
multimarket competition
Firms engage the same
rivals in multiple markets.
The heart of this chapter is the strategy as action perspective (Figure 8.1). It suggests that the
essence of strategy is interaction, which comprises actions and reactions that lead to competitive advantage. Firms, like militaries, often compete aggressively. Note the explicit military
tone of terms such as attacks, counterattacks, and price wars.3 For example, General Motors
(GM) runs a war game among its top 60 executives. Six teams with ten executives each play
GM’s major rivals trying to crush GM.4
So, business is war—or is it? It is obvious that military principles cannot be completely
applied, because the marketplace, after all, is not a battlefield whose motto is “Kill or be killed.”
If fighting to the death destroys the “pie,” there will be nothing left. In business, it is possible
to compete and win without killing the opposition. In a nutshell, business is simultaneously
war and peace. Alternatively, most competitive dynamics concepts can also be explained in
sports terms such as offense and defense.
While militaries fight over territories, waters, and air spaces, firms compete in markets
along product dimensions and geographic dimensions. Multimarket competition occurs
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Chapter 8
Managing Competitive Dynamics
197
FIGURE 8.1 Strategy as Action
Action
Competitive
interaction
Response
Competitive
advantage and
performance
Source: C. Grimm & K. Smith, 1997, Strategy as Action: Industry Rivalry and Coordination (p. 62),
Cincinnati: Cengage Learning.
when firms engage the same rivals in multiple markets.5 Because a multimarket competitor
can respond to an attack not only in the attacked market but also in other markets in which
both firms meet, its challenger has to think twice before launching any attack. In other words,
while firms “act local,” they must “think global.” Because firms recognize their rivals’ ability
to retaliate in multiple markets, such multimarket competition may result in reduction of
competitive intensity among rivals, an outcome known as mutual forbearance.6
Overall, the strategy tripod sheds considerable light on competitive dynamics, leading to a
comprehensive model (Figure 8.2). The next three sections discuss the three “legs” for the tripod.
mutual forbearance
Multimarket firms respect
their rivals’ spheres of
influence in certain markets
and their rivals reciprocate,
leading to tacit collusion.
FIGURE 8.2 A Comprehensive Model of Global Competitive Dynamics
Resource-based considerations
Industry-based considerations
Valuable abilities to attack, deter,
and retaliate
Rarity of certain assets
Imitability of actions
Organizational skills for actions
Resource similarity with rivals
Concentration
Industry price leader
Product homogeneity
Entry barriers
Market commonality with rivals
Competitive
dynamics
Attack/Counterattack/
Cooperation
Institution-based considerations
Domestic competition:
Competition/antitrust policy
International competition:
Trade/antidumping policy
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PART 2
BUSINESS-LEVEL STRATEGIES
Industry-Based Considerations
Collusion and Prisoner’s Dilemma
collusion
Collective attempts between
competing firms to reduce
competition.
coordination
Formal or informal cooperation among competitors.
tacit collusion
Firms indirectly coordinate
actions to reduce competition by signaling to others
their intention to reduce
output and maintain pricing
above competitive levels.
explicit collusion
Firms directly negotiate
output, fix pricing, and
divide markets.
cartel
An entity that engages in
output fixing and price
fixing, involving multiple
competitors. Also known as
a trust.
trust
Cartel
antitrust law
Law that attempts to curtail
anticompetitive business
practices such as cartels and
trusts.
prisoner’s dilemma
In game theory, a type of
game in which the outcome
depends on two parties
deciding whether to cooperate or to defect.
game theory
A theory that focuses on
competitive and cooperative interaction (such as
in a prisoner’s dilemma
situation).
Industry-based considerations focus on the very first of the Porter five forces—rivalry within
an industry (see Chapter 2). Most firms in an industry, if given a choice, would probably
prefer a reduced level of competition. “People of the same trade seldom meet together, even
for merriment and diversion,” wrote Adam Smith in The Wealth of Nations (1776), “but their
conversation often ends in a conspiracy against the public.” In modern jargon, this means
that competing firms in an industry may have an incentive to engage in collusion, which is
defined as collective attempts to reduce competition.
Because managers (and students) generally do not like to discuss collusion, another “C”
word, coordination—referring to formal or informal cooperation among competitors—is
now frequently used in preference over collusion.7 However, given the legal battles centered
on collusion, managers (and students) cannot shy away from it. Instead they must be aware
of the definitions and debates about collusion, which can be tacit or explicit. Firms engage in
tacit collusion when competitors indirectly coordinate actions by signaling their intention to
reduce output and maintain pricing above competitive levels. Explicit collusion exists when
competitors directly negotiate output, fix pricing, and divide markets. Explicit collusion leads
to a cartel—an output-fixing and price-fixing entity involving multiple competitors that seek
to increase joint profits.8 A cartel is also known as a trust, whose members have to trust each
other in honoring agreements. Since the Sherman Antitrust Act of 1890, cartels have often
been labeled anticompetitive and outlawed by antitrust laws in many countries.
In addition to antitrust laws, collusion often suffers from a prisoner’s dilemma, a decision
paradox that underpins game theory.9 The term prisoner’s dilemma derives from a simple
game in which two prisoners suspected of a major joint crime (such as burglary) are separately interrogated and told that if either one confesses, the confessor will get a one-year sentence
while the other will go to jail for ten years. Since the police do not have strong incriminating
evidence for the more serious burglary charges, if neither confesses, each will be convicted
of a lesser charge (such as trespassing) and jailed for two years. If both confess, both will go
to jail for ten years. At a first glance, the solution to this problem seems clear enough. The
maximum joint payoff would be for neither of them to confess. However, even if both parties
have agreed not to confess before they are arrested, there are still tremendous incentives to
confess and finger each other.
Translated to an airline setting, Figure 8.3 illustrates the payoff structure for both airlines
A and B in a given market—let’s say between Sydney, Australia, and Auckland, New Zealand.
Assuming a total of 200 passengers and A and B are the only two airlines serving this market
each with one flight a day, Cell 1 represents the most ideal outcome for both airlines to maintain the price at $500. Each gets 100 passengers and makes $50,000—the “industry” revenue
reaches $100,000. In Cell 2, if B maintains its price at $500 while A drops it to $300, B is likely
to lose all customers. Assuming perfectly transparent pricing information on the Internet,
who would want to pay $500 when you can get a ticket for $300? Thus, A may make $60,000
on 200 passengers and B gets nobody. In Cell 3, the situation is reversed. In both Cells 2 and
3, although the industry decreases revenue by 40%, the price dropper increases its revenue
by 20%. Thus, both A and B have strong incentives to reduce price and hope the other side
becomes a “sucker.” However, neither side likes to be a “sucker.” Because both A and B want
to chop prices, then, as in Cell 4, each still gets 100 passengers. But both firms as well as the
industry end up with a 40% reduction of revenue. A key insight of game theory is that even
if A and B have a prior agreement of collusion to fix the price at $500, both still have strong
incentives to cheat, thus pulling the industry to Cell 4, in which both are clearly worse off.10
Industry Characteristics and Collusion
vis-à-vis Competition
Given the benefits of collusion and incentives to cheat, what industries are conducive for
collusion vis-à-vis competition? Five factors emerge (Table 8.1).11 The first relevant factor
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Chapter 8
Managing Competitive Dynamics
199
FIGURE 8.3 A Prisoner’s Dilemma for Two Airlines (Assuming a Total
of 200 Passengers)
Airline A
Action 1
B keeps
price at $500
Action 1
A keeps
price at $500
Action 2
A drops
price to $300
(Cell 1)
A: $50,000
B: $50,000
(Cell 2)
A: $60,000
B: 0
(Cell 3)
A: 0
B: $60,000
(Cell 4)
A: $30,000
B: $30,000
Airline B
Action 2
B drops
price to $300
is the number of firms or—more technically—the concentration ratio, which is typically
defined as the percentage of total industry sales accounted for by the top four firms. In general, the higher the concentration, the easier it is to organize collusion. Because the top four
concentration in mobile wireless telecommunications services in the United States accounted
for more than 90% of market share, the antitrust authorities blocked the second-largest firm
AT&T’s merger with the fourth-largest firm, T-Mobile. The US Department of Justice (DOJ)
argued:
concentration ratio
The percentage of total
industry sales accounted for
by the top four firms.
The substantial increase in concentration that would result from this merger, and the reduction in the number of nationwide providers from four to three, likely will lead to lessened
competition due to an enhanced risk of anticompetitive coordination.12
Second, the existence of a price leader—a firm that has a dominant market share and sets
“acceptable” prices and margins in the industry—helps maintain order and stability needed
for tacit collusion. The price leader can signal to the entire industry, with its own pricing
behavior, when it is appropriate to raise or reduce prices without jeopardizing the overall
industry structure. The price leader also possesses the capacity to punish, which is defined
as sufficient resources to deter and combat defection. To combat cheating, the most frequently
used punishment entails undercutting the defector by flooding the market with deep discounts, thus making the defection fruitless. Such punishment is costly because it will bring
significant financial losses in the short run. However, if small-scale cheating is not dealt with,
defection may become endemic. Thus, the price leader must have both the willingness and
TABLE 8.1
●●
●●
●●
●●
A firm that has a dominant market share and sets
“acceptable” prices and
margins in the industry.
capacity to punish
Having sufficient resources
to deter and combat defection.
Industry Characteristics and Possibility of Collusion
vis-à-vis Competition
Collusion Possible
●●
price leader
Few firms (high concentration)
Existence of an industry price leader
Homogeneous products
High entry barriers
High market commonality (mutual
forbearance)
Collusion Difficult (Competition Likely)
●●
●●
●●
●●
●●
Many firms (low concentration)
No industry price leader
Heterogeneous products
Low entry barriers
Lack of market commonality (no mutual
forbearance)
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200
PART 2
BUSINESS-LEVEL STRATEGIES
capability to carry out punishments and bear the costs. On the other hand, an industry without an acknowledged price leader is likely to be more chaotic. Prior to the 1980s, GM played
the price leader role, announcing in advance the percentage of price increases and expecting
Ford and Chrysler to follow (which they often did). Should the latter two have stepped “out of
bounds,” GM would have punished them. However, more recently, when Asian and European
challengers have refused to follow GM’s lead, GM—itself bankrupt in 2009—is no longer
willing and able to play this role. Thus, the industry has become much more competitive and
chaotic. From the Big Three, the US auto industry is now mostly populated by the Magnificent Seven (the other four are Toyota, Honda, Nissan, and Hyundai).13
Third, an industry with homogeneous products in which rivals are forced to compete on
price is likely to lead to collusion. Because price competition is often “cutthroat,” firms may
have strong incentives to collude.14 Since the 1990s, many firms in commodity industries such
as car parts, semiconductor chips, shipping, and vitamins have been convicted for price fixing
(see Strategy in Action 8.1).
STRATEGY IN ACTION 8.1
Ethical Dilemma
The Global Vitamin Cartel
One of the largest and most wide-ranging cartels ever convicted
was the global vitamin cartel in operation between 1990 and 1999.
It involved mainly four firms that controlled more than 75% of
worldwide production: (1) Hoffman-La Roche of Switzerland,
(2) BASF of Germany, (3) Rhône-Poulenc (now Aventis) of
France, and (4) Eisai of Japan. Four other Dutch, German, and
Japanese firms were also involved. The ringleader was the industry leader, Hoffman-La Roche. This cartel was truly extraordinary: By 1999, prices were meticulously set in at least nine currencies. The discovery of the cartel led to numerous convictions and
fines during 1999–2001 by US, EU, Canadian, Australian, and
South Korean antitrust authorities. According to the US Assistant
Attorney General:
The criminal conduct of these companies hurt the pocketbook of virtually every American consumer—anyone
who took a vitamin, drank a glass of milk, or had a bowl
of cereal. . . . These companies fixed the price; they allocated sales volumes; they allocated consumers; and in the
United States they even rigged bids to make absolutely
sure that their cartel would work. The conspirators actually
held “annual meetings” to fix prices and to carve up
world markets, as well as frequent follow-up meetings to
ensure compliance with their illegal scheme.
While this statement only referred to the damage to the US
economy, it is plausible to argue that every vitamin consumer in
the world was ripped off. Average buyers paid 30%–40% more.
The total illegal profits—known as global injuries—were estimated
to be $9 billion–$12 billion, of which 15% occurred in the United
States and 26% in the European Union. Firms and managers in
this conspiracy paid a heavy price: Worldwide, firms paid record
fines of about $5 billion, including $500 million from Hoffman-La
Roche and $225 million from BASF to the United States alone.
In addition, for the first time in US antitrust history, Swiss and
German executives working for Hoffman-La Roche and BASF
served prison terms of 3–4 months and paid personal fines of
$75,000–$350,000.
This case has both triumphs and frustrations. A leading triumph stems from the US Corporate Leniency Program. Tapping
into the powerful incentive to defect in this real prisoner’s dilemma, the program offers the first company to voluntarily confess
blanket amnesty from criminal prosecution while its fingered
co-conspirators are hit with criminal fines and jail time. The amnesty prize goes only to the first company that comes forward. In
this case, it was Rhône-Poulenc that provided antitrust authorities
overwhelming evidence that made other defendants decide not to
contest the charges and to plead guilty. In terms of frustrations,
despite the record fines and penalties, the criminal and civil justice systems of the world have failed to recover more than half of
the cartel’s illegal profits. In other words, given the low probability
of detection, as experts noted, it may still be “utterly rational for
would-be cartelists to form or join an international price-fixing
conspiracy.” The deterrence, as powerful as this case indicates,
may still not be enough.
Sources: (1) D. Bush et al., 2004, How to Block Cartel Formation and
Price-Fixing, Washington: AEI-Brookings Joint Center for Regulatory Studies; (2) Guardian, 2001, Vitamin cartel fined for price
fixing, November 21: www.theguardian.com; (3) C. Hobbs, 2004,
The confession game, Harvard Business Review September: 20–21;
(4) J. Kwoka & L. White, 2014, The Antitrust Revolution, 5th ed.,
New York: Oxford University Press; (5) US Department of Justice,
2000, Four foreign executives agree to plead guilty to participating in
international vitamin cartel, press release, April 6, Washington:
DOJ.
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Chapter 8
Managing Competitive Dynamics
Fourth, an industry with high entry barriers for new entrants (such as airlines) is more
likely to facilitate collusion than an industry with low entry barriers (such as restaurants). New
entrants are likely to ignore the existing industry norms by introducing less-homogeneous
products with newer technologies or new business models—in one word, disruption.15 As
“mavericks,” new entrants can be loose cannons in otherwise tranquil industries. Founded
in 1993, AirAsia from Malaysia is one of the pioneers that brought the low-cost discount airline business model to Asia. It has entered many Asia Pacific countries, and usually its entry
would terrify incumbents. For example, AirAsia’s entry into Japan motivated Japan Airlines to
collaborate with one of its leading incumbent rivals Qantas via the formation of Jetstar Japan
(see the Opening Case).
Finally, market commonality, which is defined as the degree of overlap between two
competitors’ markets, also has a significant bearing on the intensity of rivalry.16 In certain markets, multimarket firms may respect rivals’ sphere of influence—dominance
acknowledged by competitors. Their competitors may reciprocate, leading to tacit collusion. To make that happen, firms must establish multimarket contact by following each
other to enter new markets.17 To enhance market commonality with rivals such as Air New
Zealand, All Nippon Airways, Japan Airlines, Singapore Airlines, and Vietnam Airlines
was one of the major reasons that Jetstar was dispatched by Qantas to fly to these countries
(see the Opening Case).
Mutual forbearance, due to a high degree of market commonality, primarily stems from
two factors: (1) deterrence and (2) familiarity.18 Deterrence stems from a high degree of
market commonality. If a firm attacks in one market, its rivals may engage in cross-market
retaliation, leading to a costly all-out war nobody can afford. Familiarity is the extent to
which tacit collusion is enhanced by a firm’s awareness of the actions, intentions, and capabilities of rivals.19 Repeated interactions lead to such familiarity, resulting in more mutual
respect. In the words of GE’s then-CEO Jeff Imelt:
201
market commonality
The degree to which two
competitors’ markets
overlap.
sphere of influence
Dominance acknowledged
by competitors.
cross-market retaliation
Retaliation in other markets
when one market is
attacked by rivals.
GE has tremendous respect for traditional rivals like Siemens, Philips, and Rolls-Royce.
But it knows how to compete with them; they will never destroy GE. By introducing products
that create a new price-performance paradigm, however, the emerging giants [such as
Mindry, Suzlon, Goldwind, and Haier] very well could.20
Overall, the industry-based view, underpinned by industrial organization (IO) economics
(see Chapter 2), has generated a voluminous body of insights on competitive dynamics. IO
economics has been influential in antitrust policy. For example, concentration ratios used
to be mechanically applied by US antitrust authorities. For many years (until 1982), if an
industry’s top-four firm concentration ratio exceeded 20%, it would automatically trigger
an antitrust investigation. However, since the 1980s, such a mechanical approach has been
abandoned, in part because “cartels have formed in markets that bear few of the suggested
structural criteria and have floundered in some of the supposedly ideal markets.”21 Evidently,
industry-based considerations, while certainly insightful, are unable to tell the complete story,
thus calling for contributions from resource-based and institution-based views. They will be
outlined in the next two sections.
Resource-Based Considerations
A number of resource-based imperatives, informed by the VRIO framework first outlined in Chapter 4, drive decisions and actions associated with competitive dynamics (see
Figure 8.2).
Value
Firm resources must create value when engaging rivals.22 For example, the ability to attack
in multiple markets—of the sort Apple and Samsung possessed when launching their smartphones in numerous countries simultaneously—throws rivals off balance, thus adding value.
Likewise, the ability to rapidly respond to challenges also adds value.23 Another example
is a dominant position in key markets (such as flights in and out of Dallas–Fort Worth for
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American Airlines). Such a strong sphere of influence poses credible threats to rivals, which
understand that the firm will defend its core markets vigorously.
Rarity
Either by nature or nurture (or both), certain assets are very rare, thus generating significant
advantage in competitive dynamics. Emirates Airlines, in addition to claiming one of the best
geographic locations—Dubai—as its home base, is a well-run organization supported by a
supportive government. Airlines elsewhere, such as British Airways (BA) based at London
Heathrow airport, cannot run certain flights at night and cannot expand the airport due to
complaints from the surrounding community. Emirates is unhindered by airport curfews
in Dubai and is able to push through dramatic airport-expansion proposals. Also, because
Emirates primarily flies long-haul routes, its aircraft are in the air 18 hours a day—making its
fleet one of the hardest working and most utilized in the industry. This combination of both
geographic advantage and organizational advantage is rare, thus fueling Emirates to soar to
become one of the world’s largest airlines.
Imitability
Most rivals watch each other and probably have a fairly comprehensive (although not
necessarily accurate) picture of how their rivals compete. However, the next hurdle lies in
how to imitate successful rivals.24 For example, despite its prowess in running superefficient
store operations, Walmart has a hard time imitating Amazon’s e-commerce capabilities.
Organization
fighter brand
A brand (and subsidiary)
designed to combat lowcost rivals while protecting
the incumbent’s premium
offerings.
Some firms are better organized for competitive actions such as launching stealth
attacks and answering challenges “tit-for-tat.”25 An intense “warrior-like” culture not
only requires top management commitment, but also employee involvement down to
the “soldiers in the trenches.” While Qantas has successfully run Jetstar (see the Opening
Case), many legacy airlines fail to successfully operate a low-cost subsidiary as a fighter
brand—a brand (and subsidiary) designed to combat low-cost rivals while protecting the
incumbent’s premium offerings. For example, BA launched Go, Continental Lite, Delta
Song, SAS Snowflake, and United Ted. All of them failed. This is because these legacy airlines lack organizational capabilities to be nimble, entrepreneurial, and market-oriented,
which are some of the defining characteristics of their smaller, more flexible, and more
entrepreneurial low-cost rivals. It is difficult for slow-moving firms to suddenly wake up
and become more aggressive.26
Resource Similarity
resource similarity
The extent to which a given
competitor possesses
strategic endowments
comparable to those of the
focal firm.
Resource similarity is defined as “the extent to which a given competitor possesses strate-
gic endowment comparable, in terms of both type and amount, to those of the focal firm.”27
Firms with a high degree of resource similarity are likely to have similar competitive actions.
In the personal computer (PC) market, IBM and Apple used to have a lot of resource similarity in the 1990s, so they fought a lot. Why did they not fight a lot recently? One reason is
that their level of resource similarity decreased. Recently, IBM has to fight Amazon in cloud
computing, where they share a great deal of resource similarity.
Competitor Analysis
If we put together resource similarity and market commonality (discussed earlier), we can
yield a 2 × 2 framework of competitor analysis for any pair of rivals (Figure 8.4).28 In Cell
4, because two firms have a high degree of resource similarity but a low degree of market
commonality (little mutual forbearance), the intensity of rivalry is likely to be the highest.
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Chapter 8
Managing Competitive Dynamics
FIGURE 8.4 A Framework for Competitor Analysis between a Pair of Rivals
Resource Similarity
High
Low
High
(Cell 1)
Intensity of rivalry
Lowest
(Cell 2)
Intensity of rivalry
Second lowest
(Cell 3)
Intensity of rivalry
Second highest
(Cell 4)
Intensity of rivalry
Highest
Market
Commonality
Low
Sources: Adapted from (1) M. Chen, 1996, Competitor analysis and interfirm rivalry (p. 108), Academy
of Management Review 21: 100–134; (2) J. Gimeno & C. Woo, 1996, Hypercompetition in a multimarket
environment (p. 338), Organization Science 7: 322–341.
Conversely, in Cell 1, since both firms have little resource similarity but a high degree of
market commonality, the intensity of their rivalry may be the lowest. Cells 2 and 3 present an
intermediate level of competition.
For example, the high-flying Starbucks and the down-to-earth McDonald’s used to
have little resource similarity. Both had high market commonality: In the United States,
both blanketed the country with chain stores. In other words, they were in Cell 1 with
the lowest intensity of rivalry. However, recently McDonald’s aspired to go “up market”
and offered products such as iced coffee designed to eat some of Starbucks’ lunch (or
drink some of Starbucks’ coffee). After the Great Recession (2008–2009), due to profit
pressures, Starbucks seemed to go “down market” by offering cheaper drinks and instant
coffee. Therefore, their resource similarity has increased. Given that they still maintain
high market commonality, their rivalry has migrated to Cell 2, whose intensity of rivalry
is higher than that in Cell 1.
In another example, prior to Fox’s entry into the US TV broadcasting industries in the
mid 1990s, the three incumbents—ABC, CBS, and NBC—enjoyed relatively tranquil and
gentlemanly competition in Cell 2. However, Fox’s entry pulled competition down to Cell
4, whose rivalry is the most intense. The primary reason is that Fox is a wholly owned
subsidiary of News Corporation, which is active not only in the United States, but also in
Australia (its original country), Britain, Asia Pacific, and India. In other words, Fox and
News Corporation had very little market commonality with the three incumbents, which
were US-centric. Not afraid of retaliation elsewhere, Fox unleashed a series of relentless
attacks on the incumbents and rocketed ahead to become the leader in the US TV broadcasting industry.
Overall, for any pair of rivals, conscientious mapping along the dimensions outlined
in Figure 8.4 can help managers sharpen their analytical focus, allocate resources in
proportion to the degree of threat each rival presents, and avoid nasty surprises. Further,
competitive moves do not take place in one round. Strategy in Action 8.2 leverages the
example of Alibaba versus Amazon in three rounds to illustrate the evolution of such
competitive dynamics.
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203
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STRATEGY IN ACTION 8.2
Emerging Markets
Alibaba versus Amazon
While managers, journalists, and students are often fascinated by
rivalries between multinational enterprises (MNEs) such as Airbus versus Boeing and FedEx versus UPS, much less is known
about how domestic firms cope with MNE attacks. Competitive
dynamics do not take place in one round. Quite often firms engage
each other through several rounds. How Alibaba fights Amazon is
a good illustration about such multiround competitive dynamics
(see Figure 8.5).
Founded in 1999, Alibaba was indeed inspired by Amazon.
In 1995, on his first trip to the United States to see friends, Jack
Ma visited Seattle. He for the first time experienced a new technology called the Internet and also heard about a fascinating new
company, Amazon, which was founded in Seattle a year earlier and
caused quite a bit of buzz. Alibaba started as a business-to-business
(B2B) portal. While Alibaba grew rapidly, by 2004 when Amazon
entered China, it was widely believed that Alibaba would be
doomed. Amazon chose to spend $75 million to acquire a Chinese
startup, Joyo, which was a more direct imitator of Amazon: an
online bookstore. Thus, Round 1 opened, with a series of initial
skirmishes. The URL designation “amazon.cn” became the seventh regional website of Amazon after the United States, Canada,
France, Germany, Japan, and Britain. Clearly, Amazon was motivated to win, and Alibaba was determined to fight.
During Round 2, while Amazon had a number of missteps,
Alibaba offered Tmall, an Amazon-like business-to-consumer (B2C)
portal that assists global brands such as Levi’s and Disney to reach
the middle class in China. But outside China, few people heard about
it, whereas everybody in the world heard about Amazon. Alibaba
trademarked “Double 11” for the Singles’ Day, November 11—“1”
represents a “bare stick,” a Chinese slang for a lonely single man.
As a result, Alibaba attracted significant shopping volume on that
day, encouraging singles to be “nice to themselves.” Alibaba also
unleashed a number of innovations such as Alipay and Alifinance.
Ultimately, Alibaba became known as the “Amazon of China.” Such
a widely acknowledged nickname indicated the equal influence
between Alibaba and Amazon—at least within China. Eventually,
Amazon started to show significant difficulties trying to catch up
with Alibaba, which offered more locally tailored services.
FIGURE 8.5 Three Rounds of Competitive Dynamics
Round 1:
Attack of the
MNE
Round 2:
A new
hope
Round 3:
Domestic firm
strikes back
Domestic firm’s
market influence
decreases
Domestic firm
improves capabilities
to fight back
Domestic firm goes
abroad: Multimarket
competition
Host
Country
Host
Country
Host
Country
MNE attacks
domestic firm’s
home market
MNE’s influence is
evenly matched with
domestic firm’s
influence
MNE’s influence in
the host economy is
less than domestic
firm’s influence
Another
Host
Country
Source: Adapted from C. Mutlu, W. Zhan, M. W. Peng, & Z. Lin, 2015, Competing in (and out of) transition economies
(p. 575), Asia Pacific Journal of Management 32: 571–596.
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Chapter 8
Round 3 opened with Alibaba’s IPO in September 2014 on the
New York Stock Exchange, which successfully raised $25 billion.
Alibaba struck back, not only dominating domestically but also
venturing abroad. Domestically, Alibaba made the Singles’ Day
the biggest shopping day in the world, selling a record-breaking
$31 billion merchandise on November 11, 2018. Internationally,
Alibaba became an MNE itself, entering a number of foreign
countries starting in Southeast Asia. In 2017, Alibaba entered
India by buying 5% of Snapdeal and 62% of Paytm. In India,
Alibaba met Amazon again. Amazon had first entered India in
2013. By meeting Amazon in India and other countries, Alibaba
was no longer fighting Amazon only in China. Instead, Alibaba
and Amazon engaged in multimarket competition. Back in China,
Alibaba’s dominance was so complete that in 2019, Amazon closed
its domestic e-commerce business. It had long struggled to gain
traction in China despite operating there for more than a decade.
From Alibaba’s standpoint, by establishing multimarket contact
with its number-one global rival, Alibaba successfully reduced the
level of intensity of rivalry at home.
Using the framework for competitor analysis in Figure 8.4,
the three rounds of competitive interaction betweesn Alibaba and
Amazon can be illustrated in Figure 8.6. In Round 1, because the
MNE and the domestic firm had low resource similarity and low
market commonality (Amazon was in many countries, Alibaba
only one), the rivalry was relatively mild. In Round 2, Alibaba first
matched Amazon’s offerings and then exceeded Amazon’s capabilities.
In other words, their resource similarity increased. But Alibaba’s
and Amazon’s market commonality was still low, because Alibaba
was still primarily competing in China while Amazon had a global
footprint. Therefore, their rivalry became most intense. In Round 3,
their rivalry moved to a cell where both their resource similarity and
market commonality became high, resulting in moderate rivalry
with reduced levels of intensity (such as their rivalry in China).
Managing Competitive Dynamics
205
FIGURE 8.6 Intensity of Rivalry between an
MNE and a Domestic Firm (DF)
Resource Similarity
High
Low
High
(Cell 1)
(Cell 2)
Round 3:
The DF strikes back
Moderate Rivalry
(Cell 3)
Round 1:
Attack of the MNE
Mild Rivalry
(Cell 4)
Round 2:
A new hope
Intense Rivalry
Market
Commonality
Low
Source: Adapted from C. Mutlu, W. Zhan, M. W. Peng, & Z. Lin,
2015, Competing in (and out of) transition economies (p. 577),
Asia Pacific Journal of Management 32: 571–596.
Sources: This case is written by Professor Canan Mutlu (Kennesaw
State University). Based on (1) Y. Li & J. Li, 2015, Amazon goes
global, case, Ivey Business School, University of Western Ontario;
(2) C. Mutlu, W. Zhan, M. W. Peng, & Z. Lin, 2015, Competing in
(and out of) transition economies, Asia Pacific Journal of Management 32: 571–596; (3) M. W. Peng, 2017, The rise of Alibaba, in
Global Business, 4th ed. (pp. 315–316), Boston: Cengage.
Institution-Based Considerations
The institution-based view advises managers to be well versed in the “rules of the game” governing domestic and international competition. In a nutshell, free markets are not free. Plenty
of institutional constraints exist. This section shows why this is the case.
Formal Institutions Governing Domestic
Competition: A Focus on Antitrust
Formal institutions governing domestic competition are broadly guided by competition
policy, which “determines the institutional mix of competition and cooperation that gives rise
to the market system.”29 Of particular relevance to us is one branch called antitrust policy,
which is designed to combat monopolies and cartels. Competition and antitrust policy seeks
to balance efficiency and fairness. While efficiency is relatively easy to understand, it is often
hard to agree on what is fair. In the United States, fairness means equal opportunities for
incumbents and new entrants. It is “unfair” for incumbents to fix prices and raise entry barriers to shut out new entrants. However, in Japan, fairness means the opposite—incumbents
that have invested in and nurtured an industry for a long time deserve to be protected from
new entrants. What the Americans approvingly describe as “market dynamism” is negatively
labeled by the Japanese as “market turbulence.” The Japanese ideal is “orderly competition,”
which may be labeled “collusion” by Americans. Overall, the American antitrust policy is
competition policy
Policy governing the rules
of the game in competition,
which determine the institutional mix of competition
and cooperation that gives
rise to the market system.
antitrust policy
Competition policy designed
to combat monopolies,
cartels, and trusts.
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PART 2
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TABLE 8.2 Major Antitrust Laws and Landmark Cases in the United States
Major Antitrust Laws
Landmark Cases
Sherman Act of 1890
It is illegal to monopolize or attempt to monopolize an
industry.
●● “Every person who shall monopolize, or attempt to
monopolize, or combine or conspire with any person or
persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations,
shall be deemed guilty of a misdemeanor.”
●● Explicit collusion is clearly illegal.
●● Tacit collusion is in a gray area, although the spirit of the
law is against it.
Standard Oil (1911)
●● Had a US market share exceeding 85%.
●● Found guilty of monopolization.
●● Dissolved into several smaller firms.
●●
Clayton Act of 1914
Created the Federal Trade Commission (FTC) to regulate
the behavior of firms.
●● Empowered the FTC to prevent firms from engaging in
harmful business practices.
●●
Hart-Scott-Rodino Act of 1976
Empowered the Department of Justice (DOJ) to require
firms to submit internal documents.
●● Empowered state attorneys general (AGs) to initiate
triple-damage suits.
●●
collusive price setting
Monopolists or collusion
parties setting prices at a
level higher than the competitive level.
predatory pricing
(1) Setting prices below costs
in the short run to destroy
rivals and (2) intending to
raise prices to cover losses in
the long run after eliminating rivals.
Aluminum Company of America (1945)
Had 90% of the US aluminum ingot market.
●● Found guilty of monopolization.
●● Ordered to subsidize rivals’ entry and sold plants.
●●
IBM (1969–1982)
Had 70% of US computer market share.
●● Sued by DOJ for monopolization.
●● Case dropped by the Reagan administration.
●●
AT&T (1974–1982)
A legal “natural monopoly” since the 1900s.
●● Still sued by DOJ for monopolization.
●● Ordered to break up.
●●
Microsoft (1998–2001)
MS-DOS and Windows had an 85% market share.
●● Sued by DOJ, FTC, and 22 state AGs for monopolization
and illegal product bundling.
●● Ordered to split into two in 2000. Judgment to split the
firm reversed on appeal in 2001.
●●
procompetition and proconsumer, while the Japanese approach is proincumbent and proproducer. It is difficult to argue who is right or wrong here, but managers need to be aware of
such crucial differences when competing globally.
Table 8.2 outlines the three major US antitrust laws and five landmark cases. Competition
and antitrust policy focuses on collusive price setting and predatory pricing. Collusive price
setting refers to price setting by monopolists or collusion parties at a level higher than the
competitive level. The global vitamin cartel convicted in the 2000s artificially jacked up prices
by 30%–40% (see Strategy in Action 8.1).
Another area of concern is predatory pricing, which is defined as (1) setting prices below
cost and (2) intending to raise prices after eliminating rivals to cover losses in the long run
(“an attempt to monopolize”). This is an area of significant contention. First, it is not clear
what exactly constitutes “cost.” Second, even when firms are found to be selling below cost, US
courts have ruled that if rivals are too numerous to eliminate, then one firm cannot recoup
the losses incurred via charging low prices by later jacking up prices, so its pricing cannot be
labeled “predatory.” This seems to be the case in most industries. These two legal tests have
made it extremely difficult to win a (domestic) predation case in the United States.
A third area of concern is extraterritoriality—namely, the reach of one country’s laws to
other countries. US courts have taken it upon themselves to unilaterally punish non-US cartels (some of which may be legal elsewhere). One example is the diamond cartel led by De
Beers that was pursued by US antitrust authorities for six decades (between the 1940s and the
2000s). The case was settled in 2008.
Since the Reagan era, US antitrust enforcement has generally become more permissive.30
It is no accident that strategic alliances among competitors have proliferated since the 1980s
(see Chapter 7). However, despite improved clarity and permissiveness, the legal standards
are still ambiguous. In 1996, Boeing was allowed to acquire McDonnell Douglass, creating a
real monopoly in commercial aircraft (at least domestically). However, in 2011, AT&T was
not allowed to take over T-Mobile, even though the combined nationwide market share of the
two firms would barely exceed 40%. Given such fluctuating and inconsistent application of
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207
antitrust laws within one country, it is easy to understand the unpredictability and the frustration associated with the international application of antitrust laws in different countries
(see the Debates and Extensions section and the Closing Case)
Formal Institutions Governing International
Competition: A Focus on Antidumping
In the same spirit of predatory pricing, dumping is defined as (1) an exporter selling below
cost abroad and (2) planning to raise prices after eliminating local rivals. While domestic
predation is usually labeled “anticompetitive,” cross-border dumping is often emotionally
accused of being “unfair.”
Consider the following two scenarios. First, a steel producer from Indiana enters a new
market in Texas, where it offers prices lower than those in Indiana, resulting in a 10% market
share in Texas. Texas firms have two choices. The first one is to initiate a lawsuit against the
Indiana firm for “predatory pricing.” However, it is difficult to prove (1) that the Indiana firm
is selling below cost and (2) that its pricing is an “attempt to monopolize.” Under US antitrust
laws, a predation case like this will have no chance of succeeding. Thus, Texas firms are most
likely to opt for their second option—to retaliate in kind by offering lower prices to customers
in Indiana, benefiting consumers in both Texas and Indiana.
Now in the second scenario, the “invading” firm is not from Indiana but India. Holding
everything else constant, Texas firms can argue that the Indian firm is dumping. Under US
antidumping laws, Texas producers “would almost certainly obtain legal relief on the very
same facts that would not support an antitrust claim, let alone antitrust relief.”31 Note that
imposing antidumping duties on Indian imports reduces the incentive for Texas firms to
counterattack by entering India, resulting in higher prices in both Texas and India, where
consumers are hurt. These two hypothetical scenarios are highly realistic. A study by the
Organization for Economic Cooperation and Development (OECD) reports that 90% of the
practices found to be unfairly dumping in Australia, Canada, the European Union (EU), and
the United States would never have been questioned under their own antitrust laws if used
between domestic firms.32 Thanks to their liability of foreignness, foreign firms are discriminated against by the formal rules of the game.
Discrimination is also evident in the actual antidumping investigation. A case is usually
filed by a domestic firm with the relevant government authorities. In the United States, the
authorities are the International Trade Administration (a unit of the Department of Commerce) and International Trade Commission (an independent agency). These government
agencies then send lengthy questionnaires to the foreign firms accused of dumping and
request comprehensive, proprietary data on their cost and pricing, in English and using US
generally accepted accounting principles (GAAP) with a deadline of 30–45 days. Many foreign defendants fail to provide such data on time because they are not familiar with US GAAP.
The investigation can proceed to have one of the four following outcomes:
●●
●●
●●
dumping
An exporter selling below
cost abroad and planning to
raise prices after eliminating
local rivals.
antidumping law
A law that punishes foreign
companies that engage in
dumping in a domestic
market.
If no data are forthcoming from abroad, then the estimated data provided by the
complainant become the evidence, and the complainant can easily win.
If foreign firms do provide data, then the complainant can still argue that these unfair
foreigners have lied: “There is no way their costs can be so low!”
Even if the low-cost data are verified, US (and EU) antidumping laws allow the
complainant to argue that these data are not “fair.” In the case of China, the argument
goes, its cost data reflect “huge distortions” due to government intervention because
China is still a “nonmarket” economy. Wages may be low, but workers may also be
provided with low-cost housing and government-subsidized benefits. In the case of
Louisiana versus Chinese crawfish growers, this case boiled down to how much it
would cost hypothetically to raise crawfish in a market economy. In this particular
case, Spain was mysteriously chosen. Because Spanish costs were about the same
as Louisiana costs, despite vehement objections the Chinese were found guilty of
dumping in America by selling below Spanish costs. Thus, 110%–123% import duties
were levied on Chinese crawfish.
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●●
The fourth possible outcome is that the defendant wins the case. But this is rare and
happens in only 5% of the antidumping cases in the United States. One recent highprofile cases was the Boeing versus Bombardier case, which Boeing lost in 2018.
One study reports that simply filing an antidumping petition (regardless of the outcome)
may result in a nontrivial 1% increase in the stock price for US listed firms (a cool $46 million
increase in market value).33 Evidently, Wall Street knows that Uncle Sam favors US firms.
Globally, this means that governments usually protect their domestic firms in antidumping investigations. It is no surprise that antidumping cases have proliferated throughout the
world. The institution-based message to firms defending home markets is clear: Get to know
your country’s antidumping laws. The institution-based message to firms interested in doing
business abroad is also clear: Your degree of freedom in overseas pricing is significantly less
than that in domestic pricing. Do please drop the four-letter “F” word (free) in “free market”
competition.
Overall, institutional elements such as antidumping protection are not just the “background.” They are part of a firm’s arsenal when waging competitive battles. Next we outline
two main action items.
Attack and Counterattack
attack
An initial set of actions to
gain competitive advantage.
counterattack
A set of actions in response
to attacks.
thrust
The classic frontal attack
with brute force.
feint
A firm’s attack on a focal
arena important to a competitor, but not the attacker’s
true target area.
In the form of price cuts, advertising campaigns, market entries, new product introductions,
and lawsuits, attack is defined as an initial set of actions to gain a competitive advantage.
Consequently, counterattack is defined as a set of actions in response to an attack. This section focuses on: (1) What are the main types of attacks? (2) What kinds of attacks are more
likely to be successful?
Three Main Types of Attack
The three main types of attack are: (1) thrust, (2) feint, and (3) gambit.34 Shown in Figure 8.7,
thrust is the classic frontal attack with brute force. In 2000, a new entrant, Virgin Blue, thrust
into Australia, going head-to-head in a brutal price war with the Big Two—Qantas and Ansett,
which had been a comfortable duopoly for decades. Within two years, Ansett, which had been
founded in 1936, dropped dead and was liquidated. A terrified Qantas then had to launch a
fighter brand, Jetstar (see the Opening Case).
A feint in basketball is one player’s effort to fool a defender, pretending he or she will go
one way but instead charging ahead another way. Shown in Figure 8.8, a feint in competitive
FIGURE 8.7 Thrust
First round
B engaged in A’s target market X
B
Second round
B withdraws from target market X
B
Target
X
Target
X
A
A
A massively attacks
target market X
A’s sphere of influence in
target market X is enhanced
Source: Adapted from R. McGrath, M. Chen, & I. MacMillan, 1998, Multimarket maneuvering in uncertain spheres of influence (p. 729), Academy of Management Review 23: 724–740.
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Chapter 8
Managing Competitive Dynamics
209
FIGURE 8.8 Feint
First round
B engaged in A’s target market X
Second round
B redeploys from target market X
to defend focal market Y
B
B
Target
X
Focal
Y
Target
X
A
A
A attacks focal
market Y salient to B
Focal
Y
A’s sphere of influence in target
market X is enhanced
Source: Adapted from R. McGrath, M. Chen, & I. MacMillan, 1998, Multimarket maneuvering in uncertain spheres of influence (p. 731), Academy of Management Review 23: 724–740.
dynamics is a firm’s attack on a focal arena important to a competitor but one that is not the
attacker’s true target area. The feint is followed by the attacker’s commitment of resources to
its actual target area. Consider the “Marlboro war” between Philip Morris and R. J. Reynolds
(RJR). In the 1990s, both firms’ traditional focal market, the United States, experienced a
15% decline over the previous decade. Both were interested in Central and Eastern Europe
(CEE), which grew rapidly. Philip Morris executed a feint in the United States by dropping
20% off the price on its flagship brand, Marlboro, on one day (April 2, 1993, which became
known as the “Marlboro Friday”). Confronting this ferocious move, RJR diverted substantial
resources earmarked for CEE to defend its US market. Philip Morris, thus, rapidly established
its dominance in CEE.
In chess, a gambit is a move that sacrifices a low-value piece in order to capture a high-value
piece. The competitive equivalent is to withdraw from a low-value market (in the eyes of the
focal firm) to attract rivals to divert resources into it in order to capture a high-value market
elsewhere (Figure 8.9). During 2018–2019, a series of moves between Alaska and Southwest Airlines illustrate such gambits.35 In 2018, Seattle-based Alaska Airlines withdrew from
low-value markets to Alaska—between Dallas Love Field (DAL, Southwest’s home base) and
New York LaGuardia (LGA) and Washington Reagan National (DCA) airports. The DALLGA and DAL-DCA markets obviously have high value to Southwest. Respecting Southwest’s
sphere of influence in and out of Dallas, Alaska leased all of its slots at LGA and its short-haul
slots at DCA to Southwest, which gladly took them. At the same time, Southwest withdrew
flights between San Francisco (SFO) and Portland (PDX), given the obvious importance of
such a major West Coast market to Alaska.
The newest development was the fight and then the détente for the newly opened Payne
Field (PAE) in Everett, Washington, a city 25 miles (40 kilometers) north of downtown
Seattle. A working airport, PAE is where Boeing builds its 747, 767, 777, and 787 aircraft.
Other than general aviation, PAE had no commercial service—until 2019. Opening PAE
would reduce traffic congestion to and from Seattle-Tacoma (SEA) airport, which is located
14 miles (22 kilometers) south of downtown Seattle and is Alaska’s home base. It is not unusual
for commute time from Seattle’s northern suburbs such as Everett to SEA to exceed one
hour. Alaska naturally saw that offering flights out of PAE would provide better service to its
customers. Interestingly, Southwest first decided to fight by announcing flights out of PAE,
but then decided not to operate them—offering détente. Instead, Southwest transferred its five
slots at PAE to Alaska, enabling Alaska to operate 18 (out of a total of 26) daily departures
gambit
A firm’s withdrawal from
a low-value market to
attract rival firms to divert
resources into the low-value
market so that the original
withdrawing firm can
capture a high-value market.
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FIGURE 8.9
Gambit
First round
B engaged in A’s target market X
Second round
B redeploys from target market X to enhance
sphere of influence in focal market Y
B
B
Target
X
Focal
Y
Target
X
Focal
Y
A
A
A withdraws from focal
market Y salient to B
A’s sphere of influence in target
market X is enhanced
Source: Adapted from R. McGrath, M. Chen, & I. MacMillan, 1998, Multimarket maneuvering in
uncertain spheres of influence (p. 733), Academy of Management Review 23: 724–740.
out of PAE commencing in March 2019. Such gambits can be regarded as an exchange of
the spheres of influence.
Awareness, Motivation, and Capability
awareness-motivationcapability (AMC) framework
A competitive dynamics
framework that suggests
that a competitor will not be
able to respond to an action
unless it is aware of the
action, motivated to react,
and capable of responding.
Obviously, unopposed attacks are more likely to be successful. Thus, attackers need to
understand the three drivers for counterattacks: (1) awareness, (2) motivation, and (3) capabilities.36 Such an awareness-motivation-capability (AMC) framework suggests that “a
competitor will not be able to respond to an action unless it is aware of the action, motivated
to react, and capable of responding.”37
If an attack is so subtle that rivals are not aware of it, then the attacker’s objectives are likely
to be attained. Consider how Haier entered the United States. Although Haier dominated
China with a broad range of appliances, it chose to enter the US in a most nonthreatening segment: minibars (compact refrigerators) for hotels and dorms. Do you remember the
brand of the minibar in the last hotel room where you stayed? Evidently, not only did you fail
to pay attention to that brand, but incumbents such as GE and Whirlpool also dismissed this
segment as peripheral and low margin. In other words, they were not aware they were being
attacked. Thanks in part to the incumbents’ lack of awareness, Haier now commands a 50%
US market share in compact refrigerators and has built a factory in South Carolina to go after
more lucrative product lines. In 2016, Haier acquired GE Appliances.
Motivation to counterattack is also crucial. Counterattack requires managers to disrupt
their routines and reposition their forces, which can be costly and complicated.38 If the
attacked market is of marginal value, managers may decide not to counterattack. One interesting idea is the blue ocean strategy that endeavors to find a virgin market (a “blue ocean”)
for yourself and avoids attacking core markets defended by rivals.39 A thrust on rivals’ core
markets is likely to result in a bloody price war—in other words, a red ocean. In Brazil, a
new airline start-up, Azul (which literally means “blue” in Portuguese), founded in 2008, has
deliberately avoided the busiest route between São Paulo and Rio de Janeiro. The 45-minute
trip between them is already the most-traveled route in the world, with an astounding 284 (!)
flights every day dominated by two incumbents: Gol and TAM (now LATAM).40 Sticking
Azul’s nose into such a crowded airspace (which would be a thrust) will immediately attract
retaliation and result in a red ocean—remember Cell 4 in Figure 8.4? Instead, Azul uses its
limited slots at São Paulo’s and Rio’s airports to strengthen its service connecting these two
cities and Brazil’s vast hinterland. Azul has risen to enjoy an 18% market share of Brazil’s
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Chapter 8
Managing Competitive Dynamics
growing air traffic by positioning itself as a small-town carrier. In three-quarters of the cities
it serves, it is the only or the dominant airline. Clearly, Brazil’s vast, underserved hinterland is
the blue ocean for the blue airline. While certainly being aware of Azul’s rise, the incumbents
are not motivated to counterattack the markets that they did not bother to enter in the first
place. The upshot? It is too late to stop Azul’s growth by the time the incumbents wake up.
Even if an attack is identified and a firm is motivated to respond, it requires strong
capabilities to carry out counterattacks—as discussed in our previous section on resources.
Cooperation and Signaling
Some firms choose to compete, and others choose to cooperate. How do firms signal their
intention to cooperate in order to reduce competitive intensity? Short of illegally talking
directly to rivals, firms have to resort to signaling: “While you can’t talk to your competitors
on pricing, you can always wink at them.” We outline four means of such winking:
●●
●●
●●
●●
Firms may enter new markets, not necessarily to challenge incumbents but to seek
mutual forbearance by establishing multimarket contact. Thus, multinational
enterprises (MNEs) often chase each other, entering one country after another. MNEs
meet in many markets are often less aggressive than MNEs that meet in one or a few
markets (see Strategy in Action 8.2).
Firms can send an open signal for a truce. When confronting a price war triggered by
overcapacity, at an airline industry conference Delta’s CEO told the media that Delta
was “continuing with the capacity discipline,” a not-so-subtle code for limiting the
number of seats available. American Airlines CEO confirmed with reporters that
“I think everybody in the industry understands that,” indicating that the signal for
a truce was received.41
Sometimes firms can send a signal to rivals by enlisting the help of governments.
Although it is illegal to hold direct talks with rivals on what constitutes “fair” pricing,
holding such discussions is legal under the auspices of government investigations.
Thus, filing an antidumping petition or suing a rival does not necessarily indicate
a totally hostile intent but rather a signal to talk. When Cisco sued Huawei, they were
able to legally discuss a number of strategic issues during settlement negotiations,
which were mediated by US and Chinese governments. In the end, Cisco dropped
its case against Huawei after both firms negotiated a settlement, whose terms were
confidential.
Strategic alliances with rivals can reduce cost. Although price fixing is illegal,
reducing cost through strategic alliances is legal (see Chapter 7).
Debates and Extensions
Numerous debates revolve around this sensitive area. We outline two of the most significant
ones.
Debate 1: Strategy versus Antitrust Policy
Managers deploy strategy to lead their firms to win. But antitrust officials often get in the
way by accusing firms (such as Microsoft and Google) of being “anticompetitive.” Most
business school students do not study antitrust policy. After they graduate and become
managers, they do not care about it. Antitrust officials, on the other hand, tend to study
economics and law but not business. A background in economics and law, however, does
not give antitrust officials an intimate understanding of how firm-level competition or
cooperation unfolds. It is possible that none of these officials made business decisions
more significant than those associated with buying their own family homes. It is also possible that few of these officials have ever taken a business school class—or have studied a
strategy textbook like this one.
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market power
Ability to raise prices
without the fear of losing
customers.
Yet, such officials are in a position of power governing competition involving millions
and sometimes billions of dollars. They often believe that in the absence of government
intervention (specifically, antitrust action), competitive advantage of large firms—known as
market power (the ability to raise prices without the fear of losing customers) in the antitrust vocabulary—will last forever and monopoly will prevail. Managers know better: Given
rapid technological changes, ambitious new entrants, and strong global competition, no
competitive advantage lasts forever (see Chapter 3).42 For example, the churn rate of firms on
the Fortune Global 500 list is significant. Many firms that formerly made the list are no longer
on the list, and some are no longer in existence. In other words, managers understand that
competitive advantage is dynamic and does not last forever. Antitrust officials, in contrast,
have a static view of the sustainability of competitive advantage. Such a disconnect naturally
breeds mutual suspicion and frustration on both sides. Business school students and managers will be better off if they arm themselves with knowledge about antitrust concerns and
engage in intelligent conversations and debates with officials and policy makers. A key question is: Why were large and successful firms such as IBM and Microsoft (Table 8.2) accused
of engaging in illegal “anticompetitive” conduct for the very same competitive conduct that
made them successful in the first place?
On behalf of managers, strategy and management scholars have made four arguments.43
First, antitrust laws were often created in response to the old realities of mostly domestic
competition—the year 1890 for the Sherman Act is not a typo for 1990. In other words, antitrust policy in the United States now spans three different centuries. The largely global competition since the late 20th century means that a dominant firm in one country (such as
Boeing) does not automatically translate into a dangerous monopoly. The existence of one
foreign rival (such as Airbus) alone forces the large domestic incumbent to be more competitive. In the 21st century, the emergence of dominant platform firms such as Facebook, whose
customers do not pay a penny, is now challenging the antitrust community on how to rein
them in. The traditional tool—finding evidence of incumbents hurting consumers by jacking
up prices—is simply irrelevant (see the Closing Case).
Second, the very actions accused to be “anticompetitive” may actually be highly “competitive” or “hypercompetitive.” In the 1990s, the hypercompetitive Microsoft was charged with
“anticompetitive” behavior. Its alleged crime? Not voluntarily helping its competitors such
as Netscape. It is puzzling why Microsoft—or any firm—should have voluntarily helped its
competitors.
Third, US antitrust law enforcement creates inconsistencies and confusion (see
Figure 8.10).44 In 2011, AT&T’s proposed merger of T-Mobile was torpedoed by the DOJ,
primarily because the number of nationwide wireless service providers would be reduced
from four to three (see quote on p. 199).45 In the wireless industry, four, thus, became
known as “a magic number,” below which antitrust approval was unlikely.46 However, in
2020, T-Mobile was allowed to merge with Sprint, bringing down the number of competitors to three.47 In another example, in 2017, the Federal Trade Commission (FTC)
sued Qualcomm for its alleged monopolistic misconduct in the mobile semiconductor
chip market.48 In 2019, the FTC won the case, and Qualcomm appealed. However, in the
appeals court, the DOJ—together with the Departments of Defense and Energy—defended Qualcomm, creating the “strange spectacle of two trustbusting agencies battling each
other in court.”49 In other words, the DOJ argued that a monopolist such as Qualcomm
needs to be protected from competition (!).50 Why would the DOJ take such an unusual
step? This is primarily because Qualcomm is the last remaining US mobile chip producer,
and punishing it may undermine national security. This confusing antitrust battle is still
ongoing as Global Strategy’s fifth edition went to press.51
Finally, US antitrust laws may be unfair because these laws discriminate against US firms.
In 1983, if GM and Ford were to propose to jointly manufacture cars, antitrust officials would
have turned them down, citing an (obvious!) intent to collude. The jargon is per se (in and
of itself) violation of antitrust laws. Ironically, starting in 1983, Toyota was allowed to jointly
make cars with GM. After 30 years, Toyota became the number-one automaker in the United
States. The upshot? American antitrust laws have helped Toyota but not Ford or GM.
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Chapter 8
FIGURE 8.10
Managing Competitive Dynamics
Confusion Stemming from Antitrust Enforcement
Source: Anarchy In Your Head
One country’s (or region’s) antitrust laws may be used against other countries’ firms. For
example, the Indian antitrust authorities are investigating Amazon’s alleged “anticompetitive”
behavior in India. The EU antitrust authorities have been very harsh on US firms: stopping
the merger between GE and Honeywell and severely fining Microsoft, Intel, and Google (see
Strategy in Action 8.3). Learning from such actions, Chinese trustbusters now seem eager to
punish (certain) foreign firms.52 In 2018, in possible retaliation against the tariffs imposed by
the Trump administration, Chinese antitrust authorities killed Qualcomm’s merger with NXP
of the Netherlands.53 While these actions provoked protests from the American side, they are
at least understandable from a protectionist standpoint. What is difficult to understand is why
US firms are sometimes discriminated against by their own government. In 2011, AT&T was
forced to abandon its merger of T-Mobile, a wholly owned subsidiary of Deutsche Telekom
(DT), and to pay a $3 billion (!) breakup fee to T-Mobile. A US firm was, thus, forced by the
US government to subsidize a foreign firm.54 In 2020, this same foreign firm, T-Mobile, was
allowed by the US government to acquire Sprint.
Far from being theoretical, this institution-based debate has far-reaching ramifications for
the future of global competition. Both at home and abroad, stakes are high. Business school
students and future managers should pay attention to this debate (see the Closing Case). As
managers rise to assume more strategic, C-level positions (such as CEO, CFO, and CIO),
knowledge about this debate becomes more important.
Debate 2: Competition versus Antidumping
Two arguments exist against antidumping restrictions on foreign firms. First, because dumping centers on selling “below cost,” it is often difficult (if not impossible) to prove the case
given the ambiguity concerning “cost.” The second argument is that if foreign firms are
indeed selling below cost, so what? This is simply a (hyper)competitive action. When entering a new market, virtually all firms lose money on Day 1 (and often in Year 1). Until some
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STRATEGY IN ACTION 8.3
Ethical Dilemma
Brussels versus Google
Since 2010, the European Commission has been investigating
whether Google is abusing its dominance to provide preferential
links to its own businesses by manipulating the sequence of search
results. To avoid a fine, Google in 2014 agreed to make concessions on how to display competitors’ links on its website. Leading
the complaint were price-comparison-based shopping websites
such as Foundem and TripAdvisor. The settlement would let three
rivals display their websites in a prominent box. However, they
would need to pay for the display based on an auction.
This prompted a furious response from smaller rivals who
considered that the settlement failed to level the playing field between Google’s own services and those of smaller rivals. Such smaller
rivals were not “small” businesses. One of them is Axel Springer, the
largest and most powerful media company in Germany and perhaps all of Europe. Its CEO wrote an open letter to Google published
by Frankfurter Allgemelne Zeitung titled: “Why We Fear Google.”
This was, according to Bloomberg Businessweek, “an extraordinary
admission of powerlessness by a very powerful man.” On competitors’
need to pay Google in an auction in order to be properly displayed,
“this is the introduction, sanctioned by an EU authority,” the letter
said, “of that kind of business practice which in less honorable circles
is called extortion.” Given such an uproar, the investigation continued. In 2017, the Commission, led by the new EU antitrust czar
Margrethe Vestager, fined Google a record €2.4 billion ($2.7 billion)
for abuse of market power. Known as the “shopping case,” this was
only the beginning of Google’s antitrust challenges in Europe.
A separate investigation focused on Google’s Android smartphone platform, which was installed on about 70% of new smartphones in Europe in 2018 (as opposed to 28% for Apple’s iOS and
1.6% for Microsoft’s Windows Phone). The investigation was triggered by complaints from competitors, including Microsoft and
Nokia. The Commission was considering (1) whether Google
obstructed or delayed the launch of smartphone devices using
competing operating systems or rival mobile services, and (2)
whether Google was abusing Android’s market dominance to
promote its own services. Specifically, when choosing Android,
phone makers such as Samsung and Lenovo would also have to
install Google software, which would hinder competitors such as
Dropbox and Spotify. In 2018, Google in the second case known as
the Android case was fined a new record: €4.3 billion ($5 billion).
Google’s troubles did not end there. In 2019, in a third case
known as AdSense, Vestager ordered Google to pay a fine of
€1.49 billion ($1.7 billion) for abusive practices in online advertising. Many European competitors and Google’s US rivals hailed Vestager’s work as a heroic trustbuster, turning Europe into a hotbed of
antitrust challenges against the Big Tech—something about which
US trustbusters were still quietly grinding their axes with little action (see the Closing Case). However, many US politicians and executives at Apple, Intel, and Qualcomm that had also been fined by
the European Commission argued that such attacks on Google and
other leading US firms were driven by protectionism. In Brussels,
trustbusters did not have to go to court to challenge firms they did
not like. The Commission acted as prosecutor, judge, and executioner at the same time. How could it be fair and impartial?
In its defense, the Commission pointed out that it also made
a number of controversial decisions clipping the wings of dominant European businesses. In 2019, it blocked a merger of the rail
operations of Alstom and Siemens, which was supported by both
the French and German governments. In the words of a frustrated
French executive, “the ayatollahs of competition” in Brussels were
hurting European businesses’ chances of taking on global rivals.
In 2020, Google appealed to the European Court of Justice
(the EU’s supreme court) in Luxembourg, seeking to overturn the
three antitrust cases—shopping, Android, and AdSense—with
fines totaling more than $9 billion. As Global Strategy’s fifth edition went to press, Google’s appeals were still ongoing. Can you
predict their outcomes?
Sources: (1) Bloomberg Businessweek, 2015, How Google lost
Europe, August 10; (2) Bloomberg Businessweek, 2019, Silicon Valley’s worst nightmare, March 18; (3) Economist, 2010,
Engine trouble, December 4; (4) Economist, 2012, Over to you, and
hurry, May 26; (5) Economist, 2017, Big Tech’s nemesis,
September 17; (6) Economist, 2018, Antitrust theatre, July 21;
(7) Economist, 2018, Merger track, December 22; (8) Financial
Times, 2013, Google faces Brussels probe over Android licensing,
June 13; (9) Globe Investor, 2014 Google avoids fine with
European Union antitrust deal, February 5; (10) InformationWeek, 2014, Google breakup, December 1; (11) Wall Street Journal, 2019, EU regulators see no letup for tech, September 3; (12)
Wall Street Journal, 2020, Google argues case against $9 billion
in antitrust fines, February 13.
point when the firm breaks even, it will lose money because it sells below cost. Domestically,
cases abound of such dumping, which is perfectly legal. We all receive numerous coupons in
the mail or online offering free or cheap goods. Coupon items are frequently sold (or given
away) below cost. Do consumers complain about such good deals? Of course not. “If the
foreigners are kind enough (or dumb enough) to sell their goods to our country below cost,
why should we complain?”55
A classic response is: What if, through “unfair” dumping, foreign rivals drive out local
firms and then jack up prices? Given the competitive nature of most industries, it is often
difficult to eliminate all rivals and then recoup losses by charging higher monopoly prices.
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Chapter 8
Managing Competitive Dynamics
The fear of foreign monopoly is often exaggerated by special interest groups who benefit at
the expense of consumers in the entire country. By excluding foreign entrants, antidumping
may facilitate collusion among domestic firms. Joseph Stiglitz, a Nobel laureate in economics,
wrote that antidumping duties “are simply naked protectionism” and one country’s “fair trade
laws” are often known elsewhere as “unfair trade laws.”56
One solution is to phase out antidumping laws and use the same standards against domestic
predatory pricing. Such a waiver of antidumping charges has been in place between Australia
and New Zealand, between Canada and the United States, and within the European Union.
Thus, a Canadian firm, essentially treated as a US firm, can be accused of predatory pricing
in the United States, but cannot be accused of dumping. Since antidumping is about “us versus them,” such harmonization represents essentially an expanded notion of “us.” However,
domestically, as previously noted, a predation case is very difficult to make. Thus, by legalizing dumping, competition can be fostered, aggressiveness rewarded, and consumer welfare
enhanced.
According to the Economist, there is “a corrosive lack of competition” in the United States,
as evidenced by the excess cash generated domestically by US firms beyond their investment
budgets.57 In 2016, the amount was a stunning $800 billion—4% of GDP. Their returns on
equity were 40% higher at home than abroad. Beyond Big Tech (see the Closing Case), most
industries have become more concentrated, in part resulting from allegedly anticompetitive forces.58 It seems plausible that aggressive antidumping actions have protected domestic
incumbents at the expense of consumers. The Economist also finds that the British economy has similarly experienced increased concentration of most of its industries in the last
decade.59 As large incumbent firms become more powerful, they can get away with offering
lower wages, contributing to income inequality in the society. By excluding EU firms from
freely competing in Britain (without the fear of being hit by antidumping charges), Brexit is
likely to make this problem worse.
The Savvy Strategist
If capitalism, according to Joseph Schumpeter, is about “creative destruction,” then the “strategy as action” perspective highlights how such power of creative destruction is unleashed.60
Consequently, three implications for action emerge for the savvy strategist (Table 8.3). First,
you need to thoroughly understand the nature of your industry that may facilitate competition or cooperation. Some industries, by nature, are more rivalrous than others. You and your
firm need to be prepared to vigorously compete.
Second, you and your firm must strengthen capabilities to compete or cooperate effectively. In attacks and counterattacks, subtlety, complexity, and unpredictability are helpful. In
cooperation, market similarity and mutual forbearance may be better. As Sun Tzu advised,
you need to not only “know yourself ” but also “know your opponents,” by developing skills
and instincts like your opponents’ skills and instincts.
Third, you need to appreciate the rules of the game governing competition around the
world. Aggressive language such as “Let’s beat rivals” is not allowed in countries such as the
United States. Remember: An e-mail or a smartphone conversation—like a diamond—is
forever. “Deleted” e-mails and smartphone conversations are still stored on servers and can
be recovered. Therefore, don’t e-mail, text, or talk on a smartphone about something you
will regret. Otherwise, managers can end up in court. In contrast, non-US firms often use
TABLE 8.3Strategic Implications for Action
●●
●●
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Thoroughly understand the nature of your industry that may facilitate competition or
cooperation.
Strengthen resources and capabilities that more effectively compete or cooperate.
Understand the rules of the game governing domestic and international competition
around the world.
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PART 2
BUSINESS-LEVEL STRATEGIES
warlike language: Komatsu is famous for “Encircling Caterpillar!” and Honda for “Annihilate,
crush, and destroy Yamaha!” Hiroshi Mikitani, the third-richest man in Japan and founder
of Rakuten, Japan’s largest e-commerce marketplace and one of the world’s largest, has given
subordinates T-shirts emblazoned with the words “Destroy Amazon.”61
The formal rules of the game and the informal sentiments in a country can change. In 2004,
Lenovo was allowed to acquire IBM’s PC division in a $1.3 billion deal. But in 2018, Alibaba
Group’s subsidiary Ant Financial was blocked by the Committee on Foreign Investment in
the United States (CFIUS) to acquire MoneyGram in a $1.2 billion deal. This was entirely because “the geopolitical environment has changed considerably since we first announced the
proposed transaction with Ant Financial nearly a year ago,” according to MoneyGram’s CEO
in a press release.62 In short, the rules of the game have changed.
In terms of the four fundamental questions, why firms differ (Question 1) and how firms
behave (Question 2) boil down to how the strategy tripod influences competitive dynamics.
What determines the scope of the firm (Question 3) is driven, in part, by an interest in
establishing mutual forbearance with multimarket rivals—in other words, “the best defense is
a good offense.” Finally, what determines the international success and failure of firms (Question 4), to a large extent, depends on how firms carry out their competitive and cooperative
actions. A winning formula, as in war and chess, is “Look ahead, reason back.”
CHAPTER SUMMARY
1. Articulate the “strategy as action” perspective.
●●
5. Identify the drivers for attacks, counterattacks, and
signaling.
Underpinning the “strategy as action” perspective, competitive dynamics refers to actions and
responses undertaken by competing firms.
●●
●●
2. Understand the industry conditions conducive for coope-
ration and collusion.
●●
Such industries tend to have (1) a small number of
rivals, (2) a price leader