Global Strategy 2020949397, 9780357512364, 0357512367

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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)

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Global Strategy, Fifth Edition Mike W. Peng

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Brief Contents List of In-Chapter Features and Integrative Cases  xi Preface xv About the Author  xx

PA R T

1 Foundations of Global Strategy 



1 Strategizing Around the Globe  2

1

2 Managing Industry Competition  32

3 Leveraging Resources and Capabilities  58



4 Emphasizing Institutions, Cultures, and Ethics  84

PA R T

2 Business-Level Strategies 



5 Growing and Internationalizing the Entrepreneurial Firm  114



6 Entering Foreign Markets  140



7 Making Strategic Alliances and Networks Work  168



8 Managing Competitive Dynamics 

PA R T

3 Corporate-Level Strategies 



9 Diversifying and Managing Acquisitions Globally  224

113

194

223



10 Strategizing, Structuring, and Innovating Around the World  254



11 Governing the Corporation Globally  282



12 Strategizing on Corporate Social Responsibility  314

PA R T

4 Integrative Cases 

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

P A 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 2 Managing 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

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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 3 Leveraging 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 4 Emphasizing 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

2 Business-Level Strategies

chapter 5 Growing 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

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Contents  vii

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 6 Entering 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

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 7 Making 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 8 Managing 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

P A R T

3 Corporate-Level Strategies

chapter 9 Diversifying 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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Contents  ix

Closing Case: Puzzles Behind Emerging Multinationals’ Acquisitions  249 Notes  250

chapter 10 Strategizing, 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 11 Governing the Corporation Globally 282 Opening Case: The Murdochs versus Minority Shareholders  283

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 12 S 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). 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.

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 (by M. W. Peng)  414

IC 2 The Asia Pacific Airline Industry (by M. W. Peng)   346

IC 22 Samsung’s Global Strategy Group

IC 3 LEGO’s Secrets

IC 23 Corporate Governance the HP Way (by M. W. Peng)  419

IC 4 BMW at 100 (by K. Meyer)  351

IC 24  When CSR Is Mandated by the Government in



(by M. W. Peng)  349

IC 5  Occidental Petroleum (Oxy): From Also-Ran to

Segment Leader (by C. F. Hazzard)  355

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



(by M. W. Peng)  417

India (by N. Kathuria)  422

IC 25 Wolf Wars



(by M. W. Peng)  424

Glossary 426 Index of Names  438 Index of Organizations  451 Index of Subjects  454

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

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.

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  xiii

Action location

Headquarters location

Industry

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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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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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

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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

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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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Preface  xix

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)

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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© 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

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Emphasizing Institutions, Cultures, and Ethics

1

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CHAPTER

1

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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  5

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! 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.

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  7

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

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 1.2 Four 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  9

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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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  11

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.

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 1.4 Strategic 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  13

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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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 1.5 Performance 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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20  PART 1  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  21

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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22  PART 1  Foundations of Global Strategy

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  23

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.

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  25

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?

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?

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

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?

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,

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

FIGURE 1.6  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  27

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

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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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. 4. Time, 2020, Foreign spies are targeting Americans on Zoom and other video chat platforms, April 9: time.com. 5. Zoom, 2020, Coming April 18: Control your Zoom data routing, April 13: zoom.us. 6. R. Barker, 2010, No, management is not a profession (p. 58), HBR July: 52–60; G. Bell, I. Filatotchev, R. Krause, & M. Hitt, 2018, Opportunities and challenges for advancing strategic management education (p. 235), AMLE 17: 233–240. 7. McKinsey Global Institute, 2019, Globalization in Transition, report; S. Smit, M. Hirt, & K. Buchler, 2020, Safeguarding our lives and our livelihoods, McKinsey Quarterly March. 8. D. Ahlstrom, D. Lamond, & Z. Ding, 2009, Reexamining some management lessons from military history, APJM 26: 617–642; A. Carmeli & G. Markman, 2011, Capture, governance, and resilience: Strategy implications from the history of Rome, SMJ 32: 322–341; L. Freedman, 2013, Strategy: A History, New York: Oxford University Press. 9. Sun Tzu, 1963, The Art of War, translation by S. Griffith, Oxford: Oxford University Press. 10. I. Ansoff, 1965, Corporate Strategy, New York: McGrawHill; D. Schendel & C. Hofer, 1979, Strategic Management, Boston: Little, Brown. For history of the strategic management field, see D. Hambrick & M. Chen, 2008, New academic fields as admittance-seeking social movements, AMR 33: 32–54; C. Summer, R. Bettis, I. Duhaime, J. Grant, D. Hambrick, C. Snow, & C. Zeithaml, 1990, Doctoral education in the field of business policy and strategy, JM 16: 361–398. 11. R. Burt & G. Soda, 2017, Social origins of great strategies, SS 2: 226–233; A. Brandenburger, 2019, Strategy needs creativity, HBR March: 59–65; S. Paroutis & L. Heracleous, 2013, Discourse revisited, SMJ 34: 935–956. 12. K. von Clausewitz, 1976, On War, London: Kegan Paul. 13. B. Liddell Hart, 1967, Strategy, New York: Meridian. 14. H. Mintzberg, 1994, The Rise and Fall of Strategic Planning, New York: Free Press. See also R. Thietart, 2016, Strategy dynamics, SMJ 37: 774–792. 15. BW, 2011, Charlie Rose talks to Mark Zuckerberg, November 14: 50. 16. D. McMillon, 2017, We need people to lean into the future (p. 99), interview, HBR March: 94–100. 17. A. Chandler, 1962, Strategy and Structure, Cambridge, MA: MIT Press. 18. O. de Oliveira & S. Forte, 2018, Pentágono da Estratégia Empresarial (The Corporate Strategy Pentagon, in Portuguese),

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Chapter 1 Strategizing Around the Globe  29

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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), New York: Norton. 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.

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Chapter 1 Strategizing Around the Globe  31

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;

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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.

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CHAPTER

2

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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.

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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

Bargaining power of suppliers

TABLE 2.1  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  37

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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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  39

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

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  41

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.

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  43

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

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

digital strategy (digital business model)

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  Managing Industry Competition  47

FIGURE 2.2  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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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  Managing Industry Competition  53

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

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. 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?

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?

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 1. L. Einav & J. Levin, 2010, Empirical industrial organization, JEP 24: 145–162. 2. M. Porter, 1981, The contribution of industrial organization to strategic management, AMR 6: 609–620; C. Zott & R. Amit, 2008, The fit between product market strategy and business model, SMJ 29: 1–26. 3. M. Porter, 1980, Competitive Strategy, New York: Free Press. 4. J. Zhou, L. Booth, & B. Chang, 2013, Import competition and disappearing dividends, JIBS 44: 138–154. 5. J. Shamsie, 2003, The context of dominance, SMJ 24: 199–215. 6. Economist, 2013, An inferno of unprofitability, July 6: 53–54; H. Tan & J. Mathews, 2010, Identification and analysis of industry cycles, JBR 63: 454–462. 7. D. Elfenbein & A. Knott, 2015, Time to exit, SMJ 36: 957–975; A. Fortune & W. Mitchell, 2012, Unpacking firm exit at the firm and industry levels, SMJ 33: 794–819. 8. S. Lee, M. W. Peng, & J. Barney, 2007, Bankruptcy law and entrepreneurship development, AMR 32: 257–272. 9. X. Du, M. Li, & B. Wu, 2019, Incumbent repositioning with decision biases, SMJ 40: 1984–2010; L. Jiang, J. Tan, & M. Thursby, 2010, Incumbent firm invention in emerging fields, SMJ 32: 55–75; A. Konig, N. Kammerlander, & A.

10.

11. 12. 13. 14.

15.

Enders, 2013, The family innovator’s dilemma, AMR 38: 418–441; R. Seamans, 2013, Threat of entry, asymmetric information, and entry, SMJ 34: 426–444. M. Benner & M. Tripsas, 2012, The influence of prior industry affiliation on framing in nascent industries, SMJ 33: 277–302; G. Markman & T. Waldron, 2014, Small entrants and large incumbents, AMP 28: 179–197; M. Moeen, 2017, Entry into nascent industries, SMJ 38: 1986–2004; L. Mulotte, P. Dussauge, & W. Mitchell, 2013, Does pre-entry licensing undermine the performance of subsequent independent activities? SMJ 34: 358–372; F. Polidoro, 2013, The competitive implications of certifications, AMJ 56: 597–627; D. Souder & J. M. Shaver, 2010, Constraints and incentives for making long horizon corporate investments, SMJ 31: 1316–1336; F. Zhu & M. Iansiti, 2012, Entry into platform-based markets, SMJ 33: 88–106. BW, 2018, Amazon’s bottomless appetite, March 19: 50–53; Economist, 2018, The year of the incumbent, January 6: 49. C. Asmussen, 2015, Strategic factor markets, scale free resources, and economic performance, SMJ 36: 1826–1844. A. Barroso & M. Giarratana, 2013, Product proliferation strategies and firm performance, SMJ 34: 1435–1452. A. Afuah, 2013, Are network effects really all about size? SMJ 34: 257–273; T. Eisenmann, G. Parker, & M. Van Alstyne, 2011, Platform envelopment, SMJ 32: 1270–1285; J. Lee, J. Song, & J. Yang, 2016, Network structure effects on incumbency advantage, SMJ 37: 1632–1648; D. McIntyre & A. Srinivasan, 2017, Networks, platforms, and strategy, SMJ 38: 141–160; P. Skilton & E. Bernardes, 2015, Competition network structure and product market entry, SMJ 36: 1688–1696; P. Soh, 2010, Network patterns and competitive advantage before the emergence of a dominant design, SMJ 31: 438–461. F. Zhu & N. Furr, 2016, Products to platforms, HBR April: 73–78.

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Chapter 2  Managing Industry Competition  55

16. T. Eisenmann, G. Parker, & M. Alstyne, 2011, Platform envelopment, SMJ 32: 1270–1285; H. Ozalp, C. Cennamo, & A. Gawer, 2018, Disruption in platform-based ecosystems, JMS 55: 1203–1241; S. Nambisan, S. Zahra, & Y. Luo, 2019, Global platforms and ecosystems, JIBS 50: 1464–1486; J. Rietveld, M. Schilling, & C. Bellavitis, 2019, Platform strategy, OSc 30: 1232–1251; A. Srinivasan & N. Venkatraman, 2017, Entrepreneurship in digital platforms, SEJ 12: 54–71. 17. Economist, 2013, Patriotic but pricey, September 7: 38; S. Globerman, 2013, An Assessment of Spectrum Auction Rules and Competition Policy, Vancouver: Fraser Institute. 18. J. Eggers, 2016, Reversing course, SMJ 37: 1578–1596; C. Hill & F. Rothaermel, 2003, The performance of incumbent firms in the face of radical technological innovation, AMR 28: 257–274; G. MacDonald & M. Ryall, 2018, Do new entrants sustain, destroy, or create guaranteed profitability? SMJ 39: 1630–1649; M. Moeen & R. Agarwal, 2017, Incubation of an industry, SMJ 38: 566–567; R. Roy & M. Sarkar, 2016, Knowledge, firm boundaries, and innovation, SMJ 37: 835–854; B. Uzunca, 2018, A competence-based view of industry evolution, AMJ 61: 738–768. 19. G. Zervas, D. Proserpio, & J. Byers, 2017, The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry, JMR 54: 687–705. 20. Economist, 2015, Fashion designers: Strutting their stuff, February 14: 58. 21. V. Moatti, C. Ren, J. Anand, & P. Dussauge, 2015, Disentangling the performance effects of efficiency and bargaining power in horizontal growth strategies, SMJ 36: 745–757. 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.

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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56  PART 1  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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60  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  61

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.

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.

Table 3.1  Examples of Resources and Capabilities Tangible Resources

Intangible Resources

Dynamic Capabilities

Financial

Human

Sensing

Physical

Innovation

Seizing

Technological

Reputation

Reconfiguring

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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  65

●●

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  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  Leveraging Resources and Capabilities  67

STRATEGY IN ACTION 3.1

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  Leveraging Resources and Capabilities  69

STRATEGY IN ACTION 3.2

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  71

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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72  PART 1  FOUNDATIONS OF GLOBAL STRATEGY

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  73

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

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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74  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  Leveraging Resources and Capabilities  79

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,

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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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 advantage, JM 17: 99–120; J. Barney, D. Ketchen, & M. Wright, 2011, The future of resource-based theory, JM 37: 1299–1315; M. W. Peng, 2001, The resource-based view and international business, JM 27: 803–829. 2. M. Garbuio, A. King, & D. Lovallo, 2011, Looking inside, JM 37: 1444–1463; D. Sirmon, M. Hitt, J. Arregle, & J. Campbell, 2010, The dynamic interplay of capability strengths and weaknesses, SMJ 31: 1386–1409. 3. M. W. Peng & P. Heath, 1996, The growth of the firm in planned economies in transition, AMR 21: 492–528. See also N. Foss, 2011, Why micro-foundations for resourcebased theory are needed and what they may look alike, JM 37: 1413–1428; M. Huesch, 2013, Are there always synergies between productive resources and resource deployment capabilities? SMJ 34: 1288–1313; C. Maritan & M. Peteraf, 2011, Building a bridge between resource acquisition and resource accumulation, JM 37: 1374–1389; T. Reus, A. Ranft, B. Lamont, & G. Adams, 2009, An interpretive systems view of knowledge investments, AMR 34: 382–400; S. Sonenshein, 2014, How organization foster the creative use of resources, AMJ 57: 814–848; W. Wan, R. Hoskisson, J. Short, & D. Yiu, 2011, Resource-based theory and corporate diversification, JM 37: 1335–1368. 4. J. Barney, 2001, Is the resource-based view a useful perspective for strategic management research? (p. 54), AMR 26: 41–56. 5. D. Teece, G. Pisano, & A. Shuen, 1997, Dynamic capabilities and strategic management, SMJ 18: 509–533. See also C. Bingham, K. Heimeriks, M. Schijven, & S. Gates, 2015, Concurrent learning, SMJ 36: 1802–1825; J. Denrell, C. Fang, & Z. Zhao, 2013, Inferring superior capabilities from sustained superior performance, SMJ 34: 182–196; G. Di Stefano, M. Peteraf, & G. Verona, 2014, The organizational drivetrain, AMP 28: 307–327; T. Felin & T. Powell, 2016, Designing organizations for dynamic capabilities, CMR 58: 78–96; W. Henisz, 2016, The dynamic capability of corporate diplomacy, GSJ 6: 183–196; S. Kahl, 2014, Association, jurisdictional battles, and the development of dual-purpose capabilities, AMP 28: 381–394; A.

6.

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Kleinbaum & T. Stuart, 2014, Network responsiveness, AMP 28: 353–367; Y. Kor & A. Mesko, 2013, Dynamic managerial capabilities, SMJ 34: 233–244; O. Schilke, 2014, Second-order dynamic capabilities, AMP 28: 368–380; I. Nonaka, A. Hirose, & Y. Takeda, 2016, “Meso”-foundations of dynamic capabilities, GSJ 6: 168–182; D. Teece & S. Leih, 2016, Uncertainty, innovation, and dynamic capabilities, CMR 58: 5-12; P. Williamson, 2016, Building and leveraging dynamic capabilities, GSJ 6: 197–210. C. Bingham, K. Eisenhardt, & N. Furr, 2007, What makes a process a capability? SEJ 1: 27–47; C. Helfat & S. Winter, 2011, Untangling dynamic and operational capabilities, SMJ 32: 1243–1250. R. D’Aveni, 2018, Business models for additive manufacturing (p. 112), HBR July: 107–113. R. Coff & D. Kryscynski, 2011, Drilling for microfoundations of human capital-based competitive advantages, JM 37: 1429–1443; D. Kryscynski & D. Ulrich, 2015, Making strategic human capital relevant, AMP 29: 357–369; J. Mahoney & Y. Kor, 2015, Advancing the human capital perspective on value creation by joining capability and governance approaches, AMP 29: 296–308; M. Mannor, J. Shamsie, & D. Conlon, 2016, Does experience help or hinder top managers? SMJ 37: 1330–1340; J. Molloy & J. Barney, 2015, Who captures the value created within human capital? AMP 29: 309–325; A. Nyberg & P. Wright, 2015, 50 years of human capital research, AMP 29: 287–295; R. Ployhart, 2015, Strategic organizational behavior (STROBE), AMP 29: 342–356; J. Raffiee & R. Coff, 2016, Micro-foundations of firm-specific human capital, AMJ 59: 766–790. T. Brown, 2019, Change by Design, New York: HarperCollins; J. Liedtka, 2018, Why design thinking works, HBR September: 72–79. G. Davies, R. Chun & M. Kamins, 2010, Reputation gaps and the performance of service organizations, SMJ 31: 530–546; Y. Mishina, E. Block, & M. Mannor, 2012, The path dependence of organizational reputation, SMJ 33: 459–477; S. Raithel & M. Schwaiger, 2015, The effects of corporate reputation perceptions on the general public on shareholder value, SMJ 36: 945–956; J. Wei, Z. Ouyang, & H. Chen, 2017, Well known or well liked? SMJ 38: 2103–2120. D. Teece, 2007, Explicating dynamic capabilities, SMJ 28: 1319–1350; D. Teece, 2012, Dynamic capabilities, JMS 49: 1395–1401. A. Dong, M. Garbuio, & D. Lovallo, 2016, Generative sensing, CMR 58: 97–117. D. Teece, 2014, A dynamic capabilities-based entrepreneurial theory of the multinational enterprise, JIBS 45: 8–37; D. Teece, 2014, The foundations of enterprise performance, AMP 28: 328–352. M. Porter, 1985, Competitive Advantage, New York: Free Press.

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Chapter 3  Leveraging Resources and Capabilities  81

15. L. Capron & W. Mitchell, 2012, Build, Borrow, or Buy, Boston: Harvard Business School Press; L. Kano, 2018, Global value chain governance, JIBS 49: 684–705; R. Mudambi & J. Puck, 2016, A global value chain analysis of the “regional strategy” perspective, JMS 53: 1076–1093. 16. J. Clampit, B. Kedia, F. Fabian, & N. Gaffney, 2015, Offshoring satisfaction, JWB 50: 79–93; K. Kumar, P. van Fenema, & M. von Glinow, 2009, Offshoring and the global distribution of work, JIBS 40: 642–667; Q. Li, P. Maggitti, K. Smith, P. Tesluk, & R. Katila, 2013, Top management attention to innovation, AMJ 56: 893–916; S. Mudambi & S. Tallman, 2010, Make, buy, or ally? JMS 47: 1434–1456; P. Puranam, R. Gulati, & S. Bhattacharya, 2013, How much to make and how much to buy? SMJ 34: 1145–1161; V. Van de Vranke, 2013, Balancing your technology-sourcing portfolio, SMJ 34: 610–621; C. Weigelt & M. Sarkar, 2012, Performance implications of outsourcing for technological innovations, SMJ 33: 189–216. 17. S. Lahiri, B. Kedia, & D. Mukherjee, 2012, The impact of management capability on the resource-performance linkage, JWB 47: 145–155; R. Mudambi & M. Venzin, 2010, The strategic nexus of offshoring and outsourcing decisions, JMS 47: 1510–1533; E. Verwaal, 2017, Global outsourcing, explorative innovation, and firm financial performance, JWB 52: 17–27; C. Weigelt, 2013, Leveraging supplier capabilities, SMJ 34: 1–21. 18. C. Grimpe & U. Kaiser, 2010, Balancing internal and external knowledge acquisition, JMS 47: 1483–1509; M. Kenney, S. Massini, & T. Murtha, 2009, Offshoring administrative and technical work, JIBS 40: 887–900; A. Lewin, S. Massini, & C. Peeters, 2009, Why are companies offshoring innovation? JIBS 40: 901–925; Y. Li, Z. Wei, & Y. Liu, 2010, Strategic orientation, knowledge acquisition and firm performance, JMS 47: 1457–1482; M. Sartor & P. Beamish, 2014, Offshoring innovation to emerging markets, JIBS 45: 1072–1095. 19. S. Hadley & C. Angst, 2015, The impact of culture on the relationship between governance and opportunism in outsourcing relationships, SMJ 36: 1412–1434; R. Liu, D. Fails, & B. Scholnick, 2011, Why are different services outsourced to different countries? JIBS 42: 558–571; M. Demirbag & K. Glaister, 2010, Factors determining offshore location choice for R&D projects, JMS 47: 1534–1560; S. Manning, M. Larsen, & P. Bharati, 2015, Global delivery models, JIBS 46: 850–877. 20. F. Contractor, V. Kuma, S. Kundu, & T. Pedersen, 2010, Reconceptualizing the firm in a world of outsourcing and offshoring, JMS 47: 1417–1433. 21. A. Pande, 2011, How to make onshoring work, HBR March: 30. 22. D. Levy, 2005, Offshoring in the new global political economy (p. 687), JMS 42: 685–693. 23. J. Barney, 2002, Gaining and Sustaining Competitive Advantage (pp. 159–174), Upper Saddle River, NJ: Prentice Hall. 24. R. Adner & R. Kapoor, 2010, Value creation innovation ecosystems, SMJ 31: 306–333; G. Ahuja, C. Lampert, & E. Novelli, 2013, The second face of appropriability,

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AMR 38: 248–269; F. S. Bentley & R. Kehoe, 2020, Give them some slack—they’re trying to change! AMJ 63: 181–204; F. Bridoux, R. Coeurderoy, & R. Durand, 2011, Heterogenous motives and the collective creation of value, AMR 36: 711–730; O. Chatain & D. Mindruta, 2017, Estimating value creation for revealed preferences, SMJ 38: 1964–1985; P. Deb, P. David, & J. O’Brien, 2017, When is cash good or bad for firm performance? SMJ 38: 436–454; J. Gans & M. Ryall, 2017, Value capture theory, SMJ 38: 17–41; R. Kehoe & D. Tzabbar, 2015, Lighting the way or stealing the shine? SMJ 36: 709–727; M. Kunc & J. Morecroft, 2010, Managerial decision making and firm performance under a resource-based paradigm, SMJ 31: 1164–1182; M. Lieberman, R. Garcia-Castro, & N. Balasubramanian, 2017, Measuring value creation and appropriation in firms, SMJ 38: 1193–1211; J. Luoma, S. Ruutu, A. King, & H. Tikkanen, 2017, Time delays, competitive interdependence, and firm performance, SMJ 38: 506–525; J. Macher & C. Boerner, 2012, Technological development at the boundaries of the firm, SMJ 33: 1016–1036; T. Madsen & G. Walker, 2017, Competitive heterogeneity, cohorts, and persistent advantage, SMJ 38: 184–202; R. Makadok, 2011, The four theories of profit and their joint effects, JM 37: 1316–1334; A. McWilliams & D. Siegel, 2011, Creating and capturing value, JM 37: 1480–1495; T. Obloj & P. Zemsky, 2015, Value creation and value capture under moral hazard, SMJ 36: 1146– 1163; G. Pacheco-de-Almeida, A. Hawk, & B. Yeung, 2015, The right speed and its value, SMJ 36: 159–176; L. Paolella & R. Durand, 2016, Category spanning, evaluation, and performance, AMJ 59: 330–351; J. Pehmichen, S. Schrapp, & M. Wolff, 2017, Who needs experts most? SMJ 38: 645–656; M. Porter & J. Heppelmann, 2017, Why every organization needs an augmented reality strategy, HBR November: 46–57; E. Smith & H. Chae, 2016, We do what we must, and call it by the best names, SMJ 37: 1021–1033; K. Zhou & C. Li, 2012, How knowledge affects radical innovation, SMJ 33: 1090–1102. P. Demerjian, B. Lev, & S. McVay, 2012, Quantifying managerial ability, MS 58: 1229–1248; R. Dadun, N. Bloom, & J. Van Reenen, 2017, Who do we undervalue competent management? HBR September: 119–127; A. Vomberg, C. Homburg, & T. Bornemann, 2015, Talented people and strong brands, SMJ 36: 2122–2131. J. Schmidt & T. Keil, 2013, What makes a resource valuable? AMR 38: 206–228; D. Sirmon, S. Gove, & M. Hitt, 2008, Resource management in dyadic competitive rivalry, AMJ 51: 919–935. BW, 2011, Can this IBMer keep Big Blue’s edge? October 31: 31–32. See also G. Rometty, 2017, Don’t try to protect the past, HBR July: 126–132; W. Shih, 2018, Why high-tech commoditization is accelerating, SMR Summer: 53–58. F. Aime, S. Johnson, J. Ridge, & A. Hill, 2010, The routine may be stable but the advantage is not, SMJ 31: 75–87; L. Costa, K. Cool, & I. Dierickx, 2013, The competitive implications of the deployment of unique resources, SMJ 34: 445–463.

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29. M. Bebber & M. Tushman, 2015, Reflections on the 2013 Decade Award—“Exploitation, exploration, and process management” ten years later, AMR 40: 497–514. 30. S. Berinato, 2019, Data science and the art of persuasion, HBR January: 127–136. 31. J. Molly, C. Chadwick, R. Ployhart, & S. Golden, 2011, Making intangibles “tangible” in tests of resource-based theory, JM 37: 1496–1518. 32. J. Joseph & V. Gaba, 2015, The fog of feedback, SMJ 36: 1960–1978; F. Vermeulen, 2017, Breaking Bad Habits, Boston: Harvard Business School Press. 33. R. Casadesus-Masanell & F. Zhu, 2013, Business model innovation and competitive imitation, SMJ 34: 464–482; F. Polidoro & P. Toh, 2011, Letting rivals come close or warding them off? AMJ 54: 369–392; H. Posen, J. Lee, & S. Yi, 2013, The power of imperfect imitation, SMJ 34: 149–164; Z. Wu & R. Salomon, 2016, Does imitation reduce the liability of foreignness? SMJ 37: 2441–2462. 34. Economist, 2015, Apple: iThrone, January 31: 53. 35. V. Aggarwal, H. Posen, & M. Workiewicz, 2017, Adaptive capacity to technological change, SMJ 38: 1212–1231; J. Birkinshaw & M. Haas, 2016, Increase your return on failure, HBR May: 88–93; D. Blettner, Z. He, S. Hu, & R. Bettis, 2015, Adaptive aspirations and performance heterogeneity, SMJ 36: 987–1005; A. Chatterji & K. Fabrizio, 2016, Does the market for ideas influence the rate and direction of innovative activity? SMJ 37: 447–465; L. Downes & P. Nunes, 2018, Finding your company’s second act, HBR January: 98–107; I. Kastalli, B. Van Looy, & A. Neely, 2013, Steering manufacturing firms towards service business model innovation, CMR 56: 100–123; M. Kownatzki, J. Walter, S. Floyd, & C. Lechner, 2013, Corporate control and the speed of strategic business unit decision making, AMJ 56: 1295– 1324; A. Krzeminska, G. Hoetker, & T. Mellewigt, 2013, Reconceptualizing plural sourcing, SMJ 34: 1614–1627; P. Liesch, P. Buckley, B. Simonin, & G. Knight, 2012, Organizing the modern firm in the worldwide market for market transactions, MIR 52: 3–21; Y. Luo, S. Wang, Q. Zheng, & V. Jayaraman, 2012, Task attributes and process integration in business process offshoring, JIBS 43: 498–524; D. Rigby, J. Sutterland, & H. Takeuchi, 2016, Embracing agile, HBR May: 41–50. 36. O. Alexy, G. George, & A. Slater, 2013, Cui bono? AMR 38: 270–291; T. Caner, S. Cohen, & F. Pil, 2017, Firm heterogeneity in complex problem solving, SMJ 38: 1791–1811; G. Carnabuci & E. Operti, 2013, Where do firms’ recombinant capabilities come from? SMJ 34: 1591–1613; S. Ethiraj, N. Ramasubbu, & M. Krishnan, 2012, Does complexity deter customer-focus? SMJ 33: 137–161; M. Gruber, F. Heinemann, M. Brettel, & S. Hungeling, 2010, Configurations of resources and capabilities and their performance implications, SMJ 31: 1337–1356; T. Haerem, B. Pentland, & K. Miller, 2015, Task complexity, AMR 40: 446–460; S. Musaji, W. Schulze, & J. De Castro, 2020, How long does it take to get to the learning curve? AMJ 63: 205–223; R. Ployhart,

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Chapter 3  Leveraging Resources and Capabilities  83

46. O. Williamson, 1999, Strategy research (p. 1093), SMJ 20: 1087–1108. 47. D. Collis, 1994, How valuable are organizational capabilities (p. 151), SMJ 15: 143–152. 48. B. Wernerfelt, 1984, A resource-based view of the firm (p. 171), SMJ 5: 171–180. 49. V. Bamiatzi, K. Bozos, S. T. Cavusgil, & S. T. Hult, 2016, 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 source of competitive advantage in the National Basketball Association, AMJ 45: 13–32. 52. K. Eisenhardt & J. Martin, 2000, Dynamic capabilities: What are they? (p. 1113), SMJ 21: 1105–1121. 53. E. Chen, R. Katila, R. McDonald, & K. Eisenhardt, 2010, 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, SMJ 31: 1431–1457. 54. J. Shamsie, X. Martin, & D. Miller, 2009, In with the old, in with the new, SMJ 30: 1440–1452. 55. F. Ceci & A. Prencipe, 2013, Does distance hinder coordination? JIM 19: 324–332; J. Chen, R. McQueen, & P. Sun, 2013, Knowledge transfer and knowledge building at offshored technical support centers, JIM 19: 362–376; S. Houseman, C. Kurz, P. Lengermann, & B. Mandel, 2011, Offshoring bias in US manufacturing, JEP 25: 111–132; P. Jensen, M. Larsen, & T. Pedersen, 2013, The organizational design of offshoring, JIM 19: 315–323; R. Raman, D. Chadee, B. Roxas, & S. Michailova, 2013, Effects of partnership quality, talent management, and global mindset on performance of offshore IT service providers in India, JIM 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. 57. D. Farrell, 2005, Offshoring, JMS 42: 675–683. 58. M. Gottfredson, R. Puryear, & S. Phillips, 2005, Strategic sourcing (p. 132), HBR February: 132–139.

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: HarperCollins. 66. BW, 2019, The Nadellaissance, May 6: 36–41. 67. M. Chari & P. David, 2012, Sustaining superior performance in an emerging economy, SMJ 33: 217–229; R. 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: 649–672; D. Souder & P. Bromiley, 2012, Explaining temporal orientation, SMJ 33: 550–569. 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 3: 147–160; D. S. Rockart & N. Dutt, 2015, The rate and 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

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.

Table 4.1  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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Chapter 4  Emphasizing Institutions, Cultures, and Ethics   89

Figure 4.1  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   93

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

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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94  PART 1  FOUNDATIONS OF GLOBAL STRATEGY

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).

Nick Hobart

FIGURE 4.6  Integrity Can Command a Premium

Source: Harvard Business Review, June 2006 (p. 94).

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98  PART 1  FOUNDATIONS OF GLOBAL STRATEGY

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  Emphasizing Institutions, Cultures, and Ethics   99

Table 4.4  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

corruption

The abuse of public power for private benefit usually in the form of bribery.

Table 4.5  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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100  PART 1  FOUNDATIONS OF GLOBAL STRATEGY

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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102  PART 1  FOUNDATIONS OF GLOBAL STRATEGY

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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Chapter 4  Emphasizing Institutions, Cultures, and Ethics   103

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.

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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104  PART 1  FOUNDATIONS OF GLOBAL STRATEGY

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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Chapter 4  Emphasizing Institutions, Cultures, and Ethics   105

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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106  PART 1  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, AMP 23: 63–81; M. W. Peng, D. Wang, & Y. Jiang, 2008, An 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 and moral conation, AMR 36: 663–685; M. Voronov & K. Weber, 2016, The heart of institutions, AMR 41: 456–478. 6. Reuters, 2007, Starbucks, Ethiopia settle licensing dispute, June 20: www.reuters.com; World Intellectual Property Organization (WIPO), 2010, The coffee war: Ethiopia and the Starbucks story, September 3: www.wipo.int. 7. M. W. Peng, 2000, Business Strategies in Transition Economies (pp. 42–44), Thousand Oaks, CA: Sage. See also H. Holm, S. Opper, & V. Nee, 2013, Entrepreneurs under uncertainty, MS 59: 1671–1687; E. Maitland & A. Sammartino, 2015, Decision making and uncertainty, SMJ 36: 1554–1578. 8. O. Branzai & S. Abdelnour, 2010, Another day, another dollar, JIBS 41: 804–825; M. Czinkota, G. Knight, P. Liesch, & J. Steen, 2010, Terrorism and international business, JIBS 41: 826–843; T. Khoury & M. W. Peng, 2011, Does institutional reform of intellectual property rights lead to more inbound FDI? JWB 46: 337–345; L. Weber & K. Mayer, 2014, Transaction cost economics and the cognitive perspective, AMR 39: 344–363.

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Chapter 4  Emphasizing Institutions, Cultures, and Ethics   109

9. J. Chipman, 2016, Why your company needs a foreign policy, HBR September: 37–43; L. Dai, L. Eden, & P. Beamish, 2013, Place, space, and geographic exposure, JIBS 44: 554–578; J. Luiz, B. Ganson, & A. Wennmann, 2019, Business environment reforms in fragile and conflictaffected states, JIBP 2: 217–236. 10. BW, 2019, Small businesses, big problems, March 11: 12–13. 11. O. Williamson, 1985, The Economic Institutions of Capitalism (pp. 1–2), New York: Free Press. 12. E. Giambona, J. Graham, & C. Harvey, 2017, The management of political risk, JIBS 48: 523–533. 13. J. Zhou & M. W. Peng, 2010, Relational exchanges versus arm’s-length transactions during institutional transitions, APJM 27: 355–370. 14. M. W. Peng, 2003, Institutional transitions and strategic choices, AMR 28: 275–296. See also S. Li, 1999, The benefits and costs of relation-based governance, working paper, City University of Hong Kong. 15. North, 1990, Institutions (p. 34), op. cit. 16. M. Clemente & T. Roulet, 2015, Public opinion as a source of deinstitutionalization, AMR 40: 96–114; B. Gray, J. Rurdy, & S. Ansari, 2015, From interactions to institutions, AMR 40: 115–143; M. Koning, G. Mertens, & P. Roosenboom, 2018, Drivers of institutional change around the world, JIBS 49: 249–271; W. Ocasio, J. Loewenstein, & A. Nigam, 2015, How streams of communication reproduce and change institutional logics, AMR 40: 28–48; D. McCarthy, S. Puffer, & D. Satinsky, 2019, Will Russia have a role in the changing global economy? CCSM 26: 265–289. 17. Peng, 2003, Institutional transitions and strategic choices (p. 275), op. cit. 18. K. Meyer & M. W. Peng, 2005, Probing theoretically into Central and Eastern Europe, JIBS 36: 600–621. 19. M. W. Peng, H. W. Nguyen, J. Wang, M. Hasenhuttl, & J. Shay, 2018, Bringing institutions into strategy teaching, AMLE 17: 259–278. 20. M. Porter, 1990, Competitive Advantage of Nations, New York: Free Press. The model is named “diamond” by Porter himself, because its shape looks like a diamond. 21. D. Breznitz & M. Murphree, 2011, Run of the Red Queen, New Haven, CT: Yale University Press. 22. K. Meyer & M. W. Peng, 2016, Theoretical foundations of emerging economy business research, JIBS 47: 3–22. See also R. Corredoira & G. McDermott, 2014, Adaptation, bridging, and firm upgrading, JIBS 45: 699–672; A. CuervoCazurra & L. Dau, 2009, Promarket reforms and firm profitability in developing countries, AMJ 52: 1348–1368; R. Hoskisson, M. Wright, I. Filatotchev, & M. W. Peng, 2013, Emerging multinationals from mid-range economies, JMS 50: 1295–1321; C. Mbalyohere & T. Lawton, 2018, Engaging stakeholders through corporate political activity, JIM 24: 369–385; G. McDermott, R. Corredoira, & G. Kruse, 2009, Public-private institutions as catalysts of upgrading in emerging market societies, AMJ 52: 1270–1296; G. Shinkle

23.

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& A. Kriauchiunas, 2010, Institutions, size, and age in transition economies, JIBS 41: 267–286. J. Doh, S. Rodrigues, A. Saka-Helmhout, & M. Makhija, 2017, International business responses to institutional voids, JIBS 48: 293–307; T. Khanna & K. Palepu, 2010, Winning in Emerging Markets, Boston: Harvard Business School Press; B. Pinkham & M. W. Peng, 2017, Overcoming institutional voids via arbitration, JIBS 48: 344–359. P. Ingram & B. Silverman, 2002, The New Institutionalism in Strategic Management (p. 20, added italics), Amsterdam: Elsevier. M. Abdi & P. Aulakh, 2012, Do country-level institutional frameworks and interfirm governance arrangements substitute or complement in international business relationships? JIBS 43: 477–497; A. Chacar, W. Newburry, & B. Vissa, 2010, Bringing institutions into performance persistence research, JIBS 41: 1119–1140; C. Crossland & D. Hambrick, 2011, Differences in managerial discretion across countries, SMJ 32: 797–819; V. Desai, 2016, Under the radar, AMJ 59: 636–657; T. Kostova, K. Roth, & M. T. Dacin, 2008, Institutional theory in the study of multinational corporations, AMR 33: 994–1006; K. Meyer & H. Thein, 2014, Business under adverse home country institutions, JWB 49: 156–171; R. Salomon & Z. Wu, 2012, Institutional distance and local isomorphism strategy, JIBS 43: 343–367; A. van Hoorn & R. Maseland, 2016, How institutions matter for international business, JIBS 47: 374–381. G. Gan & B. Qiu, 2019, Escape from the USA, JIBS 50: 1156–1183; P. Jarzabkowski & S. Kaplan, 2015, Strategy tools-in-use, SMJ 36: 537–558; R. Krishnan & R. Kozhikode, 2015, Status and corporate illegality, AMJ 58: 1287– 1312; C. Oh & J. Oetzel, 2017, Once bitten twice shy? SMJ 38: 714–731. P. Chaudhry & A. Zimmerman, 2009, The Economics of Counterfeit Trade, New York: Springer. M. W. Peng, D. Ahlstrom, S. Carraher, & W. Shi, 2017, An institution-based view of global IPR history, JIBS 48: 893–907. D. Kahneman, 2003, A perspective on judgment and choice: Mapping bounded rationality (Nobel Lecture), AP 58: 697–720. See also D. Ariely, 2009, The end of rational economics, HBR July: 78–84; P. Rosenzweig, 2010, Robert S. McNamara and the evolution of modern management, HBR December: 87–93. D. Baron, 1995, Integrated strategy, CMR 37: 47–65. See also J. Bonardi, G. Holburn, & R. Bergh, 2006, Nonmarket strategy performance, AMJ 49: 1209–1228; M. Bucheli & M. Kim, 2015, Attacked from both sides, GSJ 5: 1–26; M. Hadani & D. Schuler, 2013, In search of El Dorado, SMJ 34: 165–181; M. Hung, Y. Kim, & S. Li, 2018, Political connections and voluntary disclosure, JIBS 49: 272–302; M. King, 2015, Political bargaining and multinational bank bailouts, JIBS 46: 206–222; S. Lazzarini, 2015, Strategizing by the government, SMJ 36: 97–112; S. Lux, T. Crook, & D. Woehr, 2011, Mixing business with politics, JM 37:

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110  PART 1  FOUNDATIONS OF GLOBAL STRATEGY

31. 32. 33.

34.

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223–247; J. Macher & J. Mayo, 2015, Influencing public policymaking, SMJ 36: 2021–2038; K. Mellahi, J. Frynas, P. Sun, & D. Siegel, 2016, A review of the nonmarket strategy literature, JM 42: 143–173; E. Sojli & W. Tham, 2017, Foreign political connections, JIBS 48: 244–266. M. W. Peng & Y. Luo, 2000, Managerial ties and firm performance in a transition economy, AMJ 43: 486–501. BW, 2007, Inside the hidden world of earmarks, September 17: 56–59. T. Lawrence & R. Suddaby, 2006, Institutions and institutional work, in S. Clegg, C. Gardy, & T. Lawrence (eds.), Handbook of Organization Studies, 2nd ed. (pp. 215–254), London: Sage. BW, 2011, Pssst . . . wanna buy a law? December 5: 66–72; Y. Li, M. W. Peng, & C. Macaulay, 2013, Market-political ambidexterity during institutional transitions, SO 11: 205–213. P. Thornton, W. Ocasio, & M. Lounsbury, 2012, The Institutional Logics Perspective, New York: Cambridge University Press. See also J. Battilana & T. Casciaro, 2012, Change agents, networks, and institutions, AMJ 55: 381–398; W. Helms, C. Oliver, & K. Webb, 2012, Antecedents of settlement on a new institutional practice, AMJ 55: 1120–1145; J. Lepoutre & M. Valente, 2012, Fools breaking out, AMJ 53: 285–313. P. Hall & D. Soskice, 2001, Varieties of Capitalism, Oxford, UK: Oxford University Press. See also M. Carney, E. Gedajlovic, & X. Yang, 2009, Varieties of Asian capitalism, APJM 26: 361–380; W. Judge, S. Fainshmidt, & J. Brown, 2014, Which model of capitalism best delivers both wealth and equality? JIBS 45: 363–386; S. Mariotti & R. Marzano, 2019, Varieties of capitalism and the internationalization of state-owned enterprises, JIBS 50: 669–691; A. Musacchio, S. Lazzarini, & R. Aguilera, 2015, New varieties of state capitalism, AMP 19: 115–131; M. Witt & G. Jackson, 2016, Varieties of capitalism and institutional comparative advantage, JIBS 47: 778–806. M. Besharov & W. Smith, 2014, Multiple institutional logics in organizations, AMR 39: 364–381. A. Pache & F. Santos, 2013, Inside the hybrid organization (p. 972), AMJ 56: 972–1001. G. Bruton, M. W. Peng, D. Ahlstrom, C. Stan, & K. Xu, 2015, State-owned enterprises around the world as hybrid organizations (p. 92), AMP 29: 92–114. See also H. Greve & C. Zhang, 2017, Institutional logics and power sources, AMJ 60: 671–694. C. Inoue, S. Lazzarini, & A. Musacchio, 2013, Leviathan as a minority shareholder, AMJ 56: 1775–1801. G. Hofstede, 1997, Cultures and Organizations: Software of the Mind (p. 5), New York: McGraw-Hill. See also G. Hofstede, 2007, Asian management in the 21st century, APJM 24: 421–428. V. Taras, P. Steel, & B. Kirkman, 2016, Does country equate with culture? MIR 56: 455–487.

43. M. W. Peng & S. Lebedev, 2017, Intra-national business (IB), APJM 34: 241–245. 44. BW, 2012, Behind every great woman: The perfect husband, January 9: 54–59. 45. S. Beugelsdijk, T. Kostova, & K. Roth, 2017, An overview 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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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.

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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

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Managing Competitive Dynamics

113

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CHAPTER

5

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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   117

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

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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120  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   121

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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122  PART 2  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   123

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.

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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124  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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126  PART 2  BUSINESS-LEVEL STRATEGIES

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   127

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.

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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128  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  Growing and Internationalizing the Entrepreneurial Firm   129

STRATEGY IN ACTION 5.3

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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130  PART 2  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   131

“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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132  PART 2  BUSINESS-LEVEL STRATEGIES

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.

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

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.

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

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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 1. S. Alvarez, D. Audretsch, & A. Link, 2016, Advancing our understanding of theory in entrepreneurship, SEJ 10: 3–4;

B. Anderson, P. Krieser, D. Kuratko, J. Hornsby, & Y. Eshima, 2015, Reconceptualizing entrepreneurial orientation, SMJ 36: 1579–1596; P. Patel, M. Kohtamaki, V. Parida, & J. Wincent, 2015, Entrepreneurial orientation-as-experimentation and firm performance, SMJ 36: 1739–1749. 2. M. Hitt, R. D. Ireland, S. M. Camp, & D. Sexton, 2001, Strategic entrepreneurship (p. 480), SMJ 22: 479–491. See also R. Hoskisson, J. Covin, H. Volberda, & R. Johnson, 2011, Revitalizing entrepreneurship, JMS 48: 1141–1168; S. Ramoglou & E. Tsang, 2016, A realist perspective of entrepreneurship, AMR 41: 410–434; S. Zahra & M. Wright, 2011, Entrepreneurship’s next act, AMP 25: 67–83. 3. S. Shane & S. Venkataraman, 2000, The promise of entrepreneurship as a field of research, AMR 25: 217–226. 4. M. W. Peng, S. Lee, & S. Hong, 2014, Entrepreneurs as intermediaries, JWB 49: 21–31. See also N. Dutt, O. Hawn, E. Vidal, A. Chatterji, A. McGahan, & W. Mitchell, 2016, How open system intermediaries address institutional failures,

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Chapter 5  Growing and Internationalizing the Entrepreneurial Firm   135

5.

6.

7.

8.

9.

10.

11.

AMJ 59: 818–840; D. Lin, J. Lu, X. Liu, & X. Zhang, 2016, International knowledge brokerage and returnees’ entrepreneurial decisions, JIBS 47: 295–318. P. McDougall & B. Oviatt, 2000, International entrepreneurship (p. 903), AMJ 43: 902–906. See also Y. Chandra & N. Coviello, 2010, Broadening the concept of international entrepreneurship, JWB 45: 228–236; A. R. Reuber, G. Knight, P. Liesch, & L. Zhou, 2018, International entrepreneurship, JIBS 49: 395–406. J. Ault, 2016, An institutional perspective on the social outcome of entrepreneurship, JIBS 47: 951–967; G. Calic & E. Mosakowski, 2016. Kicking off social entrepreneurship, JMS 53: 738–767; J. Mair, I. Marti, & M. Ventresca, 2012, Building inclusive markets in rural Bangladesh, AMJ 55: 819–850; J. McMullen & B. Bergman, 2017, Social entrepreneurship and the development of prosocial motivation, SEJ 11: 243–270; T. Miller, M. Grimes, J. McMullen, & T. Vogus, 2012, Venturing from others with heart and head, AMR 37: 616–640; U. Stephan, L. Uhlander, & C. Stride, 2015, Institutions and social entrepreneurship, JIBS 46: 308–331; T. Waldron, G. Fisher, & M. Pfarrer, 2016, How social entrepreneurs facilitate the adoption of new industry practices, JMS 53: 821–845. B. Barringer & R. D. Ireland, 2006, Entrepreneurship (p. 460), Upper Saddle River, NJ: Pearson Prentice Hall. See also S. Basu, C. Phelps, & S. Kotha, 2016, Search and integration in external venturing, SEJ 10: 129–152; J. H. Burgers & J. Covin, 2016, The contingent effects of differentiation and integration on corporate entrepreneurship, SMJ 37: 521–540; M. Gruber & I. MacMillan, 2017, Entrepreneurial behavior, SEJ 11: 271–286; A. Van de Ven, D. Polley, R. Garud, & S. Venkataraman, 1999, The Innovation Journey, New York: Oxford University Press; Y. Yang, V. Narayanan, & D. De Carolis, 2014, Relationship between portfolio diversification and firm value, SMJ 35: 1993–2011. W. Baumol, R. Litan, & C. Schramm, 2007, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, New Haven, CT: Yale University Press; C. Bjornskov & N. Foss, 2016, Institutions, entrepreneurship, and economic growth, AMP 30: 292–315; S. Bradley & P. Klein, 2016, Institutions, economic freedom, and entrepreneurship, AMP 30: 211–221; M. Minniti & M. Levesque, 2010, Entrepreneurial types and economic growth, JBV 25: 305–314. Y. Yamakawa, M. W. Peng, & D. Deeds, 2008, What drives new ventures to internationalize from emerging to developed economies? ETP 32: 59–82. W. Baumol, J. Panzar, & R. Willig, 1982, Contestable Markets and the Theory of Industry Structure, San Diego, CA: Harcourt. See also S. Bradley, H. Aldrich, D. Shepherd, & J. Wiklund, 2011, Resources, environmental change, and survival, SMJ 32: 486–509; M. Keyhani & M. Levesque, 2016, The equilibrating and disequilibrating effects of entrepreneurship, SEJ 10: 65–88; A. Kiss & P. Barr, 2015, New venture strategic adaptation, SMJ 36: 1245–1263. BW, 2018, Space: China’s final frontier, October 22: 14–15; BW, 2018, The new space age, July 30: The entire issue.

12. S. Aryinger & T. Powell, 2016, Entrepreneurial failure, SMJ 37: 1047–1064. 13. Economist, 2017, Taking flight (p. 4), June 10: Technology Quarterly section. 14. Global Entrepreneurship Monitor 2018/2019 Global Report (pp. 34-35), 2018, Babson Park, MA: Babson College. 15. S. Lee, H. Mun, & K. Park, 2015, When is dependence on other organizations burdensome? SMJ 36: 2058–2074. 16. R. Adner & R. Kapoor, 2016, Innovation ecosystems and the pace of substitution, SMJ 37: 625–648. 17. R. Amit & X. Han, 2017, Value creation through novel resource configurations in a digitally enabled world, SEJ 11: 228–242; A. Arora & A. Nandkumar, 2012, Insecure advantage? SMJ 33: 231–251; J. Brinckmann & S. Kim, 2015, Why we plan, SEJ 9: 153–166; B. Campbell, M. Ganco, A. Franco, & R. Agarwal, 2012, Who leaves, where to, and why worry? SMJ 33: 65–87; J. Dencker & M. Gruber, 2015, The effects of opportunities and founder experience on new firm performance, SMJ 36: 1035–1052; M. Fern, L. Cardinal, & H. O’Neill, 2012, The genesis of strategy in new ventures, SMJ 33: 427–447; D. Hsu & R. Ziedonis, 2013, Resources as dual sources of advantage, SMJ 34: 761–781; M. Keyhani, M. Levesque, & A. Madhok, 2015, Toward a theory of entrepreneurial rents, SMJ 36: 76–96; K. Moghaddam, D. Bosse, & M. Provance, 2016, Strategic alliances of entrepreneurial firms, SEJ 10: 153–168; H. D. Park & H. K. Steensma, 2012, When does corporate venture capital add value for new ventures? SMJ 33: 1–22; V. Rindova, A. Yeow, L. Martins, & S. Faraj, 2012, Partnering portfolios, value-creation logics, and growth trajectories, SEJ 6: 133–151; S. Sui & M. Baum, 2014, Internationalization strategy, firm resources, and the survival of SMEs in the export market, JIBS 45: 821–841; R. Van Ness & C. Seifert, 2016, A theoretical analysis of the role of characteristics in entrepreneurial propensity, SEJ 10: 89–96. 18. R. Amit & C. Zott, 2015, Crafting business architecture, SEJ 9: 331–350; B. Demil, X. Lecocq, J. Ricart, & C. Zott, 2015, Business models within the domain of strategic entrepreneurship, SEJ 9: 1–11. 19. H. Brea-Soli, R. Casadesus-Masanell, & E. Grifell-Tatje, 2015, Business model evaluation, SEJ 9: 12–33; V. Gerasymenko, D. De Clercq, & H. Sapienza, 2015, Changing the business model, SEJ 9: 79–98; S. Kim & S. Min, 2015, Business model innovation performance, SEJ 9: 34–57; L. Martins, V. Rindova, & B. Greenbaum, 2015, Unlocking the hidden value of concepts, SEJ 9: 99–117; O. Osiyevskyy & J. Dewald, 2015, Explorative versus exploitative business model change, SEJ 9: 58–78. 20. M. W. Peng, 2014, Enter the United States by bus, in Global Strategy 3rd ed. (pp. 155–156), Boston: Cengage. 21. R. Agarwal, M. Moeen, & S. Shah, 2017, Athena’s birth, SEJ 11: 287–305; R. Angus, 2019, Problemistic search distance and entrepreneurial performance, SMJ 40: 2011–2023; Y. Chandra, 2017, A time-based process model of international entrepreneurial opportunity evaluation, JIBS 48:

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136  PART 2  BUSINESS-LEVEL STRATEGIES

22. 23.

24. 25. 26.

27. 28. 29.

30. 31. 32.

423–451; M. Gruber, S. Kim, & J. Brinckmann, 2015, What is an attractive business opportunity? SEJ 9: 205–225; C. Navis & O. V. Ozbek, 2016, The right people in the wrong places, AMR 41: 109–129; W. Powell & K. Sandholtz, 2012, Amphibious entrepreneurs and the emergence of organizational forms, SEJ 6: 94–115; D. Shepherd, J. McMullen, & W. Ocasio, 2017, Is that an opportunity? SMJ 38: 626–644; A. Smith, K. Moghaddam, & S. Lanivich, 2019, A set-theoretic investigation into the origins of creation and discovery opportunities, SEJ 13: 75–92; U. Uygur & S. Kim, 2016, Evolution of entrepreneurial judgment with venture-specific experience, SEJ 10: 169–193. BW, 2016, Asylum for profit, January 11: 53–67. A. Chakrabarti, 2015, Organizational adaptation in an economic shock, SMJ 36: 1717–1738; R. Katila, E. Chen, & H. Piezunka, 2012, All the right moves, SEJ 6: 116–132; J. Sorensen & M. Fassiotto, 2011, Organizations as fonts of entrepreneurship, OSc 22: 1322–1331. M. Grimes, 2018, The pivot, AMJ 61: 1692 –1717. J. Scahill, 2007, Blackwater, New York: Nation Books. S. Anokhin & J. Wincent, 2012, Start-up rates and innovation, JIBS 43: 41–60; R. Devine & M. Kiggundu, 2016, Entrepreneurship in Africa, AFJOM 2: 349–380; C. Eesley, J. Li, & D. Yang, 2016, Does institutional change in universities influence high-tech entrepreneurship, OSc 27: 446–461; K. Gurses & P. Ozcan, 2015, Entrepreneurship in regulated markets, AMJ 58: 1709–1739; T. Khoury & A. Prasad, 2016, Entrepreneurship amid concurrent institutional constraints in less developed countries, B&S 55: 934–969; J. Levie & E. Autio, 2011, Regulatory burden, rule of law, and entry of strategic entrepreneurs, JMS 48: 1392–1419; S. Puffer, D. McCarthy, & M. Boisot, 2010, Entrepreneurship in Russia and China, ETP 34: 441–467; J. Vermeire & G. Bruton, 2016, Entrepreneurial opportunities and poverty in Sub-Saharan Africa, AFJOM 2: 258–280; S. Young, C. Welter, & M. Conger, 2018, Stability versus flexibility, JIBS 49: 407–441. World Bank, 2010, Doing Business 2010, Washington: World Bank. World Bank, 2020, Doing Business 2020, Washington: World Bank. J. Almandoz, 2012, Arriving at the starting line, AMJ 55: 1381–1406; E. Autio, S. Pathak, & K. Wennberg, 2013, Consequences of cultural practices for entrepreneurial behaviors, JIBS 44: 334–362; D. Kim, E. Morse, R. Mitchell, & K. Seawright, 2010, Institutional environment and entrepreneurial cognitions, ETP 34: 491–516; S. Kwon & P. Arenius, 2010, Nations of entrepreneurs, JBV 25: 315–330; S. Opper & F. Andersson, 2019, Are entrepreneurial cultures stable over time? APJM 36: 1165–1192. Global Entrepreneurship Monitor 2018/2019 Global Report (p. 48), op. cit. Economist, 2011, Son also rises, November 27: 71–72. Y. S. Bermiss, B. Hallen, R. McDonald, & E. Pahnke, 2017, Entrepreneurial beacons, SMJ 38: 545–565; J. Cerdin, M.

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Chapter 5  Growing and Internationalizing the Entrepreneurial Firm   137

38. B. Campbell, D. Kryscynski, & D. Olson, 2017, Bridging strategic human capital and employee entrepreneurship research, SEJ 11: 344–356. 39. J. Broschak & E. Block, 2014, With or without you, AMJ 57: 743–765; Y. Li, H. Chen, Y. Liu, & M. W. Peng, 2014, Managerial ties, organizational learning, and opportunity capture, APJM 31: 271–291; R. Ma, Y. Huang, & O. Shenkar, 2011, Social networks and opportunity recognition, SMJ 32: 1183–1205; M. Ozer & W. Zhang, 2013, The effects of geographic and network ties on exploitative and exploratory product innovation, SMJ 36: 1105–1114; F. Qin & S. Estrin, 2015, Does social influence span time and space? SEJ 9: 226–242; W. Stam, S. Arzlanian, & T. Elfring, 2014, Social capital of entrepreneurs and small firm performance, JBV 29: 152–173; D. Sullivan & M. Marvel, 2011, Knowledge acquisition, network reliance, and early-stage technology venture outcomes, JMS 48: 1169–1193; B. Vissa, 2011, A matching theory of entrepreneurs’ tie formation intentions and initiation of economic exchange, AMJ 54: 137–158; L. Zhou, B. Barnes, & Y. Lu, 2010, Entrepreneurial proclivity, capability upgrading, and performance advantage of newness among international new ventures, JIBS 41: 882–905. 40. T. Manolova, I. Manev, & B. Gyoshev, 2010, In good company, JWB 45: 257–265; S. Prashantham & C. Dhanaraj, 2010, The dynamic influence of social capital on the international growth of new ventures, JMS 47: 965–994; N. Tocher, S. Oswald, & D. Hall, 2015, Proposing social resources as the fundamental catalyst toward opportunity creation, SEJ 9: 119–135; J. Yu, B. Gilbert, & B. Oviatt, 2011, Effects of alliances, time, and network cohesion on the initiation of foreign sales by new ventures, SMJ 32: 424–446; Y. Zheng, M. Devaughn, & M. Zellmer-Bruhn, 2016, Shared and shared alike? SMJ 37: 2503–2520. 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,

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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

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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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142  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  145

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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146  PART 2  BUSINESS-LEVEL STRATEGIES

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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148  PART 2  BUSINESS-LEVEL STRATEGIES

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  Entering Foreign Markets  149

TABLE 6.1  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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150  PART 2  BUSINESS-LEVEL STRATEGIES

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  Entering Foreign Markets  151

TABLE 6.2  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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152  PART 2  BUSINESS-LEVEL STRATEGIES

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  Entering Foreign Markets  153

TABLE 6.3  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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154  PART 2  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  155

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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156  PART 2  BUSINESS-LEVEL STRATEGIES

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  Entering Foreign Markets  157

STRATEGY IN ACTION 6.2

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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158  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  161

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 6.4 Strategic 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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162  PART 2  BUSINESS-LEVEL STRATEGIES

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  Entering Foreign Markets  163

3. ON ETHICS: By definition, entering foreign markets

means not investing in a firm’s home country. What are the ethical dilemmas here? What are your recommendations as

(1) MNE executives, (2) labor union leaders of your domestic (home country) labor forces, (3) host country officials, and (4) home country officials?

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:

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Chapter 6  Entering Foreign Markets  165

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. Sartor & P. Beamish, 2018, Host market government corruption and the equity-based foreign entry strategies of multinational enterprises, JIBS 49: 346–370; J. Shaner &

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M. Maznevski, 2011, The relationship between networks, institutional development, and performance in foreign investments, SMJ 32: 556–568. C. Stevens, E. Xie, & M. W. Peng, 2016, Toward a legitimacy-based view of political risk, SMJ 37: 945–963. P. Deng, A. Delios, & M. W. Peng, 2020, A geographic relational perspective on the internationalization of emerging market firms, JIBS 51: 50–71. J. Alcacer, J. Cantwell, & L. Piscitello, 2016, Internationalization in the information age, JIBS 47: 499–512; J. Alcacer, C. Dezso, & M. Zhao, 2015, Location choices under strategic interactions, SMJ 36: 197–215; R. Belderbos, W. Olffen, & 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: 898–921; A. Schotter & P. Beamish, 2013, The hassle factor, JIBS 44: 521–544; S. Zaheer & L. Nachum, 2011, Sense of place, GSJ 1: 96–108. 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, Agglomeration, catch-up and the liability of foreignness in emerging economies, JIBS 44: 579–606; A. Schmitt & J. Van 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, Pricing response to entry and agglomeration effects, SMJ 31: 284–305. United Nations (UN), 2014, World Investment Report 2014, New York & Geneva: UN. SCMP, 2015, How Hong Kong became a hub … for hubs, July 26: A3. S. Lee, O. Shenkar, & J. Li, 2008, Cultural distance, investment flow, and control in cross-border cooperation, SMJ 29: 1117–1125; R. Parente, B. Choi, A. Slangen, & S. Ketkar, 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

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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

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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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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.

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.

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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 Making strategic alliances and networks work  173

TABLE 7.1  Strategic Alliances and Networks: Advantages and Disadvantages Advantages ●● ●●

●●

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: ●●

●●

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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174  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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176  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 Making strategic alliances and networks work  177

Table 7.2  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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178  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  179

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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180  PART 2  BUSINESS-LEVEL STRATEGIES

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 Making strategic alliances and networks work  181

STRATEGY IN ACTION 7.2

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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182  PART 2  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 Making strategic alliances and networks work  183

FIGURE 7.5  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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184  PART 2  BUSINESS-LEVEL STRATEGIES

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  185

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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186  PART 2  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  187

TABLE 7.5 Strategic 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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188  PART 2  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.

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?

2. ON ETHICS: During the courtship and negotiation stages,

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 1. Cited in J. Reuer (ed.), 2004, Strategic Alliances (p. 2), New York: Oxford University Press. 2. J. Bamford, B. Gomez-Casseres, & M. Robinson, 2003, Mastering Alliance Strategy, San Francisco: Jossey-Bass. 3. P. Beamish & N. Lupton, 2009, Managing joint ventures, AMP May, 75–94; A. Shipilov, R. Gulati, M. Kilduff, S. Li,

4. 5.

6. 7.

8. 9.

10.

& W. Tsai, 2014, Relational pluralism within and between organizations, AMJ 57: 449–459. S. Nambisan & M. Sawhney, 2011, Orchestration processes in network-centric innovation, AMP August: 40–56. D. Li, L. Eden, M. Hitt, R. D. Ireland, & R. Garrett, 2012, Governance in multilateral R&D alliances, OSc 23: 1191–1210. X. Yin & M. Shanley, 2008, Industry determinants of the “merger versus alliance” decision, AMR 33: 473–491. B. Garrette, X. Castaner, & P. Dussauge, 2009, Horizontal alliances as an alternative to autonomous production, SMJ 30: 885–894. CNBC, 2019, Amazon’s joint health-care venture finally has a name: Haven, March 6: www.cnbc.com. Y. Li, E. Xie, H. Teo, & M. W. Peng, 2010, Formal control and social control in domestic and international buyersupplier relationships, JOM 28: 333–344. BW, 2019, Trouble at the corner store, April 22: 18–20.

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Chapter 7 Making strategic alliances and networks work  191

11. L. Mesquita, J. Anand, & T. Brush, 2008, Comparing the resource-based and relational views, SMJ 29: 913–941; B. Park & M. Rogan, 2019, Capability reputation, character reputation, and exchange partners’ reactions to adverse events, AMJ 62: 553–578; M. Schreiner, P. Kale, & D. Corsten, 2009, What really is alliance management capability and how does it impact alliance outcomes and success? SMJ 30: 1395–1419. 12. J. Adegbesan & M. Higgins, 2010, The intra-alliance division of value created through collaboration, SMJ 32: 187–211; R. Agarwal, R. Croson, & J. Mahoney, 2010, The role of incentives and communication in strategic alliances, SMJ 31: 413–437; L. Diestre & N. Rajagopalan, 2012, Are all “sharks” dangerous? SMJ 33: 1115–1134; E. Fang, 2011, The effect of strategic alliance knowledge complementarity on new product innovativeness in China, OSc 22: 158–172; A. Joshi & A. Nerkar, 2011, When do strategic alliances inhibit innovation by firms? SMJ 32: 1139–1160; E. Klijn, J. Reuer, F. Van den Bosch, & H. Volberda, 2013, Performance implications of IJV boards, JMS 50: 1245–1266; M. Srivastava & D. Gnyawali, 2011, When do relational resources matter? AMJ 54: 797–810. 13. Economist, 2003, Open skies and flights of fancy, October 4: 65–67. 14. S. Ang, 2008, Competitive intensity and collaboration, SMJ 29: 1057–1075; P. Ozcan & F. Santos, 2015, The market that never was, SMJ 36: 1486–1512; B. Tyler & T. Caner, 2016, New product introductions below aspirations, slack, and R&D alliances, SMJ 37: 896–910; C. Wang, S. Rodan, M. Fruin, & X. Xu, 2014, Knowledge networks, collaboration networks, and exploratory innovation, AMJ 57: 484–514. 15. P. Kumar & A. Zaheer, 2019, Ego-network stability and innovation in alliances, AMJ 62: 691–716; M. Schilling, 2015, Technology shocks, technological collaboration, and innovation outcomes, OSc 26: 668–686. 16. M. Koza, S. Tallman, & A. Ataay, 2011, The strategic assembly of global firms, GSJ 1: 27–46. 17. A. Chintakananda & D. McIntyre, 2014, Market entry in the presence of network effects, JM 40: 1535–1557; I. Cuypers & X. Martin, 2010, What makes and what does not make a real option? JIBS 41: 47–69. 18. T. Chi, J. Li, L. Trigeorgis, & A. Tsekrekos, 2019, Real options theory in international business, JIBS 50: 525–553; T. Tong, J. Reuer, & M. W. Peng, 2008, International joint ventures and the value of growth options, AMJ 51: 1014–1029; L. Trigeorgis & J. Reuer, 2017, Real options theory in strategic management, SMJ 38: 42–63. 19. M. McCarter, J. Mahoney, & G. Northcraft, 2011, Testing the waters, AMR 36: 621–640. 20. L. Hsieh, S. Rodrigues, & J. Child, 2010, Risk perception and post-formation governance in IJVs in Taiwan, JIM 16: 288–303. 21. D. Li, L. Eden, M. Hitt, & R. D. Ireland, 2008, Friends, acquaintances, or strangers? AMJ 51: 315–334; X. Luo & L. Deng, 2009, Do birds of a feather flock higher? JMS 46:

22. 23. 24.

25.

26.

27.

28.

29.

30.

31. 32.

33.

1005–1030; F. Rothaermel & W. Boeker, 2008, Old technology meets new technology, SMJ 29: 47–77. A. Arino & P. Ring, 2010, The role of fairness in alliance formation, SMJ 31: 1054–1087. H. Yang, Y. Zheng, & A. Zaheer, 2015, Asymmetric learning capabilities and stock market returns, AMJ 58: 356–374. D. Frudlinger, O. Hart, & K. Vitasek, 2019, A new approach to contracts, HBR September: 116–125; S. Schillebeeckx, S. Chaturvedi, G. George, & Z. King, 2016, What do I want? SMJ 37: 1493–1506. C. Lioukas & J. Reuer, 2015, Isolating trust outcomes from exchange relationships, AMJ 58: 1826–1847; L. Liu, W. Adair, & D. Bello, 2015, Fit, misfit, and beyond fit, JIBS 46: 830–849; O. Schilke & K. Cook, 2015, Sources of alliance partner trustworthiness, SMJ 36: 276–297; D. Zoogah & M. W. Peng, 2011, What determines the performance of strategic alliance managers? APJM 28: 483–508. C. Jiang, R. Chua, M. Kotabe, & J, Murray, 2011, Effects of cultural ethnicity, firm size, and firm age on senior executives’ trust in their overseas business partners, JIBS 42: 1150–1173; S. Kwon, J. Haleblian, & J. Hagedoorn, 2016, In country we trust? JIBS 47: 807–829; Y. Luo, 2009, Are we on the same page? JWB 44: 383–396; F. Molina-Morales & M. Martinez-Fernandez, 2009, Too much love in the neighborhood can hurt, SMJ 30: 1013–1023; A. Phene & S. Tallman, 2012, Complexity, context, and governance in biotechnology alliances, JIBS 43: 61–83; J. Roy, 2012, IJV partner trustworthy behavior, JMS 49: 332–355. R. Krishnan, I. Geyskens, & J. Steenkamp, 2016, The effectiveness of contractual and trust-based governance in strategic alliances under behavioral and environmental uncertainty, SMJ 37: 2521–2542; O. Schilke & F. Lumineau, 2018, The double-edged effect of contracts on alliance performance, JM 44: 2827–2858. B. Koka & J. Prescott, 2008, Designing alliance networks, SMJ 29: 639–661; C. Phelps, 2010, A longitudinal study of the influence of alliance network structure and composition on firm exploratory innovation, AMJ 53: 890–913. W. Shi, S. Sun, B. Pinkham, & M. W. Peng, 2014, Domestic alliance network to attract foreign partners, JIBS 45: 338–362. V. Aggarwal, N. Siggelkow, & H. Singh, 2011, Governing collaborative activity, SMJ 32: 705–730; J. Reuer & S. Devarakonda, 2016, Mechanisms of hybrid governance, AMJ 59: 510–533. M. Findikoglu & D. Lavie, 2019, The contingent value of the dedicated alliance function, SO 17: 177–209. D. Chen, Y. Paik, & S. Park, 2010, Host-country policies and MNE management control in IJVs, JIBS 41: 526–537; B. Pinkham & M. W. Peng, 2017, Overcoming institutional voids via arbitration, JIBS 48: 344–359; W. Shi, S. Sun, & M. W. Peng, 2012, Sub-national institutional contingencies, network positions, and IJV partner selection, JMS 49: 1221–1245. Federal Trade Commission, 2000, Antitrust Guidelines for Collaborations among Competitors, Washington: FTC.

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192  PART 2  BUSINESS-LEVEL STRATEGIES

34. M. W. Peng, 2014, The antitrust case on the AT&T–TMobile merger, in Global Strategy, 3rd ed. (pp. 456–459), Boston: Cengage. 35. AFM, 2017, Saudi Arabia lines up helicopter buys, July: 25. 36. M. W. Peng, 2006, Making M&As fly in China, HBR March: 26–27; H. K. Steensma, L. Tihanyi, M. Lyles, & C. Dhanaraj, 2005, The evolving value of foreign partnerships in transitioning economies, AMJ 48: 213–235. 37. L. Weber & C. Bauman, 2019, The cognitive and behavioral impact of promotion and prevention contracts on trust in repeated exchanges, AMJ 62: 361–382. 38. This section draws heavily from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation, JIBS 25: 91–113. 39. G. Lee & M. Lieberman, 2010, Acquisition versus internal development, SMJ 31: 140–158; J. Xia, Y. Wang, Y. Lin, H. Yang, & S. Li, 2018, Alliance formation in the midst of market and network, JM 44: 1899–1925. 40. J. Choi & F. Contractor, 2016, Choosing an appropriate alliance governance mode, JIBS 47: 210–232; A. Ghosh, R. Ranganathan, & L. Rosenkopf, 2016, The impact of context and model choice on the determinants of strategic alliance formation, SMJ 37: 2204–2221. 41. K. Heimeriks, C. Bingham, & T. Laamanen, 2015, Unveiling the temporally contingent role of codification in alliance success, SMJ 36: 462–473. 42. Z. Khan, O. Shenkar, & Y. Lew, 2015, Knowledge transfer from international joint ventures to local suppliers in a developing economy, JIBS 46: 656–675; D. Minbaeva, C. Park, I. Vertinsky, & Y. Cho, 2018, Disseminative capacity and knowledge acquisition from foreign partners in international joint ventures, JWB 53: 712–724. 43. Economist, 2018, Come fly with me, March 17: 62. 44. D. Lavie & S. Miller, 2008, Alliance portfolio internationalization and firm performance, OSc 19: 623–646; L. Ozmel & I. Guler, 2015, Small fish, big fish, SMJ 36: 2039–2057. 45. C. Beckman, C. Schoonhoven, R. Rottner, & S. Kim, 2014, Relational pluralism in de novo organizations, AMJ 57: 460–483; N. Lahiri & S. Narayanan, 2013, Vertical integration, innovation, and alliance portfolio size, SMJ 34: 1042–1064; U. Wassmer & P. Dussauge, 2011, Network resource stocks and flows, SMJ 32: 871–883. 46. WSJ, 2019, Fiat Chrysler, Peugeot agree on merger, October 31: B1–B2. 47. M. Howard, M. Withers, C. Carnes, & A. Hillman, 2016, Friends or strangers? SMJ 37: 2222–2234; H. Jiang, J. Xia, A. Cannella, & T. Xiao, 2018, Do ongoing networks block out new friends? SMJ 39: 217–241. 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.

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Chapter 7 Making strategic alliances and networks work  193

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.

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

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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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196  PART 2  BUSINESS-LEVEL STRATEGIES

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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198  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

price leader

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.

TABLE 8.1  Industry Characteristics and Possibility of Collusion vis-à-vis Competition Collusion Possible ●● ●● ●● ●● ●●

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  201

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:

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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202  PART 2  BUSINESS-LEVEL STRATEGIES

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  203

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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204  PART 2  BUSINESS-LEVEL STRATEGIES

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  Managing Competitive Dynamics  205

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).

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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206  PART 2  BUSINESS-LEVEL STRATEGIES

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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Chapter 8  Managing Competitive Dynamics  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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208  PART 2  BUSINESS-LEVEL STRATEGIES

●●

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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210  PART 2  BUSINESS-LEVEL STRATEGIES

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  211

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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212  PART 2  BUSINESS-LEVEL STRATEGIES

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  Managing Competitive Dynamics  213

FIGURE 8.10  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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214  PART 2  BUSINESS-LEVEL STRATEGIES

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  215

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 8.3 Strategic Implications for Action ●●

●● ●●

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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216  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, (3) homogenous products, (4) high entry barriers, and (5) high market commonality (mutual forbearance).

●●

6. Participate in two leading debates concerning competitive

dynamics.

3. Explain how resources and capabilities influence competitive

dynamics. ●●

Resource similarity and market commonality can yield a powerful framework for competitor analysis.

●●

●●

Domestically, antitrust laws focus on monopoly, collusion, and predation. Internationally, antidumping laws discriminate against foreign firms and protect domestic firms.

●●

national competition.

●●

(1) Strategy versus antitrust policy and (2) competition versus antidumping.

7. Draw strategic implications for action

4. Outline how formal institutions affect domestic and inter●●

The three main types of attacks are (1) thrust, (2) feint, and (3) gambit. Counterattacks are driven by (1) awareness, (2) motivation, and (3) capability—resulting in an AMC framework. Without talking directly to competitors, firms can signal to rivals through various means.

●●

Thoroughly understand the nature of your industry that may facilitate competition or cooperation. Strengthen resources and capabilities to compete or cooperate more effectively. Understand the rules of the game governing domestic and international competition around the world.

KEY TERMS Antidumping law 207 Antitrust law 198 Antitrust policy 205 Attack 208

Awareness-motivation-capability (AMC) framework 210

Collusion 198

Capacity to punish 199

Competition policy 205

Cartel (trust) 198

Collusive price setting 206 Competitive dynamics 196

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Chapter 8  Managing Competitive Dynamics  217

Competitor analysis 196

Fighter brand 202

Price leader 199

Concentration ratio 199

Gambit 209

Prisoner’s dilemma 198

Coordination 198

Game theory 198

Resource similarity 202

Counterattack 208

Market commonality 201

Sphere of influence 201

Cross-market retaliation 201

Market power 212

Tacit collusion 198

Dumping 207

Multimarket competition 196

Thrust 208

Explicit collusion 198

Mutual forbearance 197

Trust 198

Feint 208

Predatory pricing 206

CRITICAL DISCUSSION QUESTIONS 1. ON ETHICS: As a CEO, you feel the price war in your

industry is killing profits for all firms. However, you have been warned by corporate lawyers not to openly discuss pricing with rivals, whom you know personally (you went to school with them). How would you signal your intentions?

3. ON ETHICS: As part of a feint attack, your firm (firm A)

announces that in the next year, it intends to enter country X where the competitor (firm B) is very strong. Your firm’s real intention is to march into country Y where B is very weak. There is actually no plan to enter X. However, in the process of intentionally trying to “fool” B, customers, suppliers, investors, and the media are also being inadvertently misled. What are the ethical dilemmas here? Do the pros of this action outweigh its cons?

2. ON ETHICS: As a CEO, you are concerned that your firm

and the industry in your country are being devastated by foreign imports. Trade lawyers suggest that you file an antidumping case against leading foreign rivals and assure you a win. Would you file an antidumping case or not? Why?

TOPICS FOR EXTENDED PROJECTS 1. Find some competitive moves made by some multination-

als from emerging economies. How do Figures 8.4, 8.5, and 8.6 help you understand these moves? How do you predict their likelihood of success?

3. ON ETHICS: As a staff member at one of the 48 state attor-

ney general’s offices that are investigating Google, you need to write a report recommending to the attorney general of your state what actions to take—and of course, if any action is called for. Focus on Google in your state. What will be your recommendations?

2. If your country has competition or antitrust laws, find a

landmark case, and explain whether you support the plaintiff or the defendant. If your country does not have competition or antitrust laws, explain why.

CLOSING CASE



Ethical Dilemma

Is There an Antitrust Case Against Big Tech? “Big Tech” (for the purposes of this case) refers to Alphabet (which owns Google), Amazon, Apple, and Facebook—the four firms being investigated by the Federal Trade Commission (FTC) starting in February 2020. Table 8.4 shows how big they are. Collectively, these four firms plus Microsoft accounted for 18% of the stock market capitalization of the Standard & Poor’s 500 at the end of 2019. Starting in 2018, Apple was the first US firm to hit a $1 trillion capitalization, soon followed by Alphabet, Amazon and Microsoft. Facebook is expected to follow.

Starting with the 1890 enactment of the Sherman Act— the world’s first antitrust law—Americans have loved to hate big firms. A small army of antitrust enforcers in the two federal agencies—the Department of Justice (DOJ) and the FTC—as well as state attorney general’s offices work day in and day out to curb anticompetitive misconduct and challenge big “evil” firms, ranging from Standard Oil (1911) to Microsoft (1998–2001). “A lot of people wonder,” according to William Barr, the US attorney general during his January 2019 confirmation hearings, “how such huge behemoths

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218  PART 2  BUSINESS-LEVEL STRATEGIES

TABLE 8.4  How Big is Big Tech? Internet Search US market share

Google (90%)2

Online Commerce Amazon (38%)2

Mobile Operating Systems Apple iOS (56%), Google Android (44%)2

Social Media Facebook (68%3 or 99%1)

Digital Ad Revenue Google (37%), Facebook (22%)2

Sources: Data extracted from (1) D. Srinivasan, 2019, The antitrust case against Facebook, Berkeley Business Law Journal 16: 39–101; (2) Wall Street Journal, 2019, The government v. the tech giants, September 10: B4; (3) T. Wu, 2019, Blind spot: The attention economy and the law, Antitrust Law Journal 82: 771–806. that now exist in Silicon Valley have taken shape under the nose of the antitrust enforcers.” Recently, there is no shortage of loud voices calling for the antitrust agencies to wake up. Here are some headlines: “Should Digital Monopolies Be Broken Up?” (Economist, 2014), “Taming the Behemoths” (Fortune, 2018), “Antitrust Wall Street” (Bloomberg Businessweek, 2019), and “The Government v. the Tech Giants” (Wall Street Journal, 2019). Antitrust is always controversial. After all, being big does not necessarily mean being bad. “Obtaining a monopoly by superior products, innovation, or business acumen is legal,” according to the FTC’s Guide to Antitrust Laws, “however, the same result achieved by exclusionary or predatory acts may raise antitrust concerns.” Politically, Big Tech seem to be a great punching bag for politicians to score points and attract votes. Socially, backlash against Big Tech has coined a new word: techlash. But legally, does the government have a case? Picking targets, the antitrust community has focused neither on Amazon and Apple, which face formidable competitors, nor on Microsoft, which has been dealt with in a landmark case earlier (see Table 8.2). Google and Facebook are the top two targets for now. Since Google has been repeatedly fined by the European Commission (see Strategy in Action 8.3), the focus is now on Facebook, which has more than two billion users worldwide. Facebook is free, but users willingly pay with data about themselves tracked by Facebook—a business model very similar to Google. In an influential article “The Antitrust Case Against Facebook,” Dina Srinivasan, an entrepreneur, argued that Facebook has engaged in a series of anticompetitive conduct that elbows out competitors and tricks customers to trust it. Founded in 2004, Facebook’s history is one that is constantly on the edge of violating user privacy. In the beginning, in competition with MySpace, Facebook promised that “We do not and will not use cookies to collect private information from any user.” It, thus, won numerous customers. However, by 2007, Facebook had been publicly caught for tracking users. Facing an uproar, founder and CEO Mark Zuckerberg apologized and even promised to let users to vote on its privacy policy. Then in 2011, Facebook was again caught tracking users. It first claimed that the finding was a “bug” and then pleaded to users: “Please trust us . . . we don’t use our cookies to track you.” But in the same year, Facebook quietly obtained a patent “for a method . . . for tracking information about the activities of users of a social

networking system while on another domain,” according to its patent registration. In 2011, it settled charges with the FTC regarding false statements regarding privacy policy. In 2012, with more than a billion users and a recordbreaking IPO (a $104 billion market capitalization), Facebook discarded the results of a user referendum, whereby 88% of participating users voted against its proposed privacy changes. Its excuse was that for a binding referendum result, 30% of its one billion users would need to vote—per the rules it set by itself. Since only 589,000 users bothered to vote, the results were invalid. This was the end of “user democracy.” By 2014, with all competitors gone, Facebook’s monopoly was complete. It announced it would track users, even those who indicated “No, thanks.” According to Srinivasan, Facebook “would do precisely what it had spent seven years promising it did not and would not do, and finally accomplished what the previous competitive market had restrained it from doing.” Further, it demanded millions of websites that had signed up for Facebook plugins to change their privacy policy to extract from their users the consent to have Facebook track them. At the same time, Facebook was involved in a series of scandals, such as those associated with Cambridge Analytics’ abuse of user data and with alleged Russian interference in the 2016 US presidential election. Facing a mess, Zuckerberg was yanked to Congress for hearings in 2018 and 2020. While Facebook is unpopular, has it violated antitrust laws? A leading challenge for antitrust enforcement is market definition. Critics argue that there is a blind spot in antitrust enforcers’ understanding of the nature of markets in which Facebook operates. A case in point is the 2012 unconditional clearance of the Facebook-Instagram merger. Antitrust enforcers first focused on the photo app (consumer) market. Since Facebook did not have a significant photo app, it was viewed not a serious competitor to Instagram. The second focus was on the advertising market. Because Instagram was earning no advertising revenue, it was found by antitrust enforcers to be a noncompetitor to Facebook. Having amassed 30 million users, Instagram was widely viewed by the media as one of Facebook’s most serious competitors. A second case is the 2014 unconditional clearance of the Facebook-WhatsApp merger. Again, Facebook’s motive to eliminate a viable competitor was so clear to the media but invisible to antitrust enforcers. How can these two mergers that according to critics have clear anticompetitive implications be cleared by the antitrust agencies? What is the problem?

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Chapter 8  Managing Competitive Dynamics  219

The problem, according to Columbia law professor Tim Wu, is that Facebook (and Google and others) operate in a previously ignored market: the attention market. He made three points: (1) Attention is scarce—limited by 168 hours every week. (2) Attention cannot be stored or saved and must be consumed. (3) Attention has value. Globally, more than $580 billion was spent on advertising every year (of which $200 billion in the United States). Viewed this way, Facebook is a leading-edge practitioner of “attention brokerage”—resale of attention to make money. As a finite resource, attention taken (measured in time) has economic value lost to consumers. “Sure, we may waste plenty of time as it is,” Wu wrote, “but at least it is ours to waste.” In this sense, taking away attention becomes the deprivation of a liberty, which has constitutional value. Facebook clearly understands the value of such attention. Despite promises to regulators that after the mergers, it would not pool user data with Instagram and WhatsApp, Facebook ended up doing exactly that—sharing data to better capture user attention via targeted ads. Using time spent as a proxy for attention, Wu estimated that Facebook had a 55% social media market share and Instagram 13%—a combined total of 68%. Srinivisan estimated Facebook’s and Instagram’s market share to be 66% and 18%, respectively—a combined total of 84%. In comparison, using the number of users as a market, Srinivasan reported that 99% of US adults who use social media, representing two-thirds of all US adults, use Facebook. Clearly, there is a lack of consensus on how to define the markets in which Facebook and other Big Tech firms operate. However, this has not prevented antitrust advocates from prescribing medicines: (1) Break up Big Tech firms— and unwind some of the previously approved mergers such as Instagram and WhatsApp. (2) Turn Big Tech firms such as Facebook and Google into regulated utilities and cap their prices and return on capital. (3) Constrain their growth by preventing them from acquiring smaller rivals. Although unpopular, Big Tech have many defenders. Breaking up the crown jewel of American capitalism carries a national-security risk in light of heightened strategic competition with China. Alibaba, Baidu, and Tencent would love to see the wings of their global rivals clipped. Turning Big Tech into utilities will definitely cripple their incentive to innovate. Constraining their growth simply may not work. Two decades after the “successful” antitrust case against Microsoft (which escaped from being broken up on appeal), Microsoft’s browser market share increased from 85% in 2000 to more than 90% now. More philosophically, anti-antitrust

authors ask whether trustbusting is “really about protecting consumers or merely about expanding the power of government.” In their view, competition will take care of the Big Tech problem. Antitrust represents “the grotesque contradiction of attempting to preserve the freedom of the market by government controls—to preserve the benefits of laissez-faire by abrogating it.” The last point was not written by a fringe author. It was penned by Alan Greenspan, who served as chair of the Federal Reserve (1987–2006). As the debate rages, next time when you start Facebook, can you spare a thought on this debate? Sources: (1) Bloomberg Businessweek, 2019, Antitrust Wall Street, June 10: 38–39; (2) R. Bork, 1978, The Antitrust Paradox, New York: Basic; (3) Economist, 2014, Should digital monopolies be broken up? November 29: 11; (4) Economist, 2018, The next capitalist revolution, November 17: 13; (5) Economist, 2018, Trustbusting in the 21st century, November 17: special report; (6) Economist, 2019, The break-up conversation, June 15: 57; (7) Economist, 2020, Big Tech’s $2 trillion bull run, February 22: 11; (8) Economist, 2020, Goldilocks and the three bears, February 8: 53–54; (9) R. Foroohar, 2019, Don’t Be Evil, New York: Currency; (10) A. Greenspan, 1961, Antitrust, Cleveland: National Association of Business Economists; (11) Fortune, 2019, Taming the behemoths, March 1: 7–8; (12) S. Majumdar, 2020, Breaking up Big Tech: A cliometric assessment and recommendations on the way ahead, working paper, University of Texas at Dallas; (13) E. Rockefeller, 2007, The Antitrust Religion, Washington: Cato Institute; (14) D. Srinivasan, 2019, The antitrust case against Facebook, Berkeley Business Law Journal 16: 39–101; (15) Wall Street Journal, 2019, “Big bad trusts” are a progressive myth, October 3: A19; (16) Wall Street Journal, 2019, The antitrust threat to national security, October 23: A17; (17) Wall Street Journal, 2020, FTC widens investigation of tech deals, February 12: A1, A10; (18) T. Wu, 2019, Blind spot: The attention economy and the law, Antitrust Law Journal 82: 771–806. CASE DISCUSSION QUESTIONS 1. ON ETHICS: From an antitrust standpoint, do Big Tech

(in particular Facebook) represent a problem?

2. ON ETHICS: If you believe Facebook represents a prob-

lem that can be (at least partially) solved by antitrust actions, what would be your recommendations?

3. ON ETHICS: As CEO of the leading firm in a traditional

industry (such as meat packing or shoemaking) with a 60% market share, do you think Big Tech’s market share to be too large that would justify antitrust actions?

NOTES [Journal Acronyms] AMJ—Academy of Management Jour-

nal; AMR—Academy of Management Review; BW—Bloomberg Businessweek; CMR—California Management Review; FA—Foreign Affairs; HBR—Harvard Business Review; IBR—International Business Review; JBR—Journal of Business Research; JEL—Journal of Economic Literature; JEP—Journal of Economic Perspectives;

JIBS—Journal of International Business Studies; JM—Journal of Management; JMS—Journal of Management Studies; JSCM—Journal of Supply Chain Management; JWB—Journal of World Business; MF—Motley Fool; NYT—New York Times; OSc—Organization Science; SMJ—Strategic Management Journal; SO—Strategic Organization; WSJ—Wall Street Journal

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220  PART 2  BUSINESS-LEVEL STRATEGIES

1. M. Chen & D. Miller, 2015, Reconceptualizing competitive dynamics, SMJ 36: 758–775; H. Gao, T. Yu, & A. Cannella, 2017, Understanding word responses in competitive dynamics, AMR 42: 129–144; D. Ross, 2014, Taking a chance, AMR 39: 202–226; W. Yang & K. Meyer, 2015, Competitive dynamics in an emerging economy, JBR 68: 1176–1185. 2. L. Capron & O. Chatain, 2008, Competitors’ resourceoriented strategies, AMR 33: 97–121; K. Coyne & J. Horn, 2009, Predicting your competitor’s reaction, HBR April: 90–97; D. Tan, 2016, Making the news, SMJ 37: 1341– 1353; W. Tsai, K. Su, & M. Chen, 2011, Seeing through the eyes of a rival, AMJ 54: 761–778. 3. L. Ellram, W. Tate, & E. Feizinger, 2013, Factor-market rivalry and competition for supply chain resources, JSCM 49: 29–46; G. Kilduff, A. Galinsky, E. Gallo, & J. Reade, 2016, Whatever it takes to win, AMJ 59: 1508–1534; G. Markman, P. Gianiodis, & A. Buchholtz, 2009, Factor-market rivalry, AMR 34: 423–441. 4. BW, 2011, Dan Akerson is not a car guy, August 29: 56–60. 5. J. Anand, L. Mesquita, & R. Vassolo, 2009, The dynamics of multimarket competition in exploration and exploitation activities, AMJ 52: 802–821; H. Greve, 2008, Multimarket contact and sales growth, SMJ 29: 229–249; Z. Guedri & J. McGurie, 2011, Multimarket competition, mobility barriers, and firm performance, JMS 48: 857–890; J. Prince & D. Simon, 2009, Multimarket contact and service quality, AMJ 52: 336–354. 6. A. Bowers, H. Greve, H. Mitsuhashi, & J. Baum, 2014, Competitive parity, status disparity, and mutual forbearance, AMJ, 57: 38–62; T. Yu, M. Subramanian, & A. Cannella, 2009, Rivalry deterrence in international markets, AMJ 52: 127–147. 7. J. Baker, 1999, Developments in antitrust economics, JEP 13: 181–194. 8. O. Bertrand & F. Lumineau, 2016, Partners in crime, AMJ 59: 983–1008. 9. D. Ross, 2018, Using cooperative game theory to contribute to strategy research, SMJ 39: 2859–2976. 10. S. Brenner, 2011, Self-disclosure at international cartels, JIBS 42: 221–234; Y. Zhang & J. Gimeno, 2010, Earnings pressure and competitive behavior, AMJ 53: 743–768. 11. J. Kwoka & L. White, 2014, The Antitrust Revolution (p. 198), New York: Oxford University Press. 12. United States et al. v. AT&T Inc. et al., 2011, Second amended complaint (p. 17), September 30, Washington: US District Court for the District of Columbia. 13. Economist, 2011, From Big Three to Magnificent Seven, January 15: 67–68. 14. Economist, 2014, Boring can still be bad, March 29: 16; Economist, 2017, Exhausted, July 29: 56. 15. M. Benner, 2007, The incumbent discount, AMR 32: 703–720; M. Withers, R. D. Ireland, D. Miller, J. Harrison, & D. Boss, 2018, Competitive landscape shifts, AMR 39: 302-323.

16. M. Chen, 1996, Competitor analysis and interfirm rivalry, AMR 21: 100–134. 17. E. Rose & K. Ito, 2008, Competitive interactions, JIBS 39: 864–879. 18. G. Clarkson & P. Toh, 2010, “Keep out” signs, SMJ 31: 1202–1225. 19. G. Kilduff, H. Elfenbein, & B. Staw, 2010, The psychology of rivalry, AMJ 53: 943–969. 20. J. Immelt, V. Govindarajan, & C. Trimble, 2009, How GE is disrupting itself, HBR October: 56–65. 21. D. Spar, 1994, The Cooperative Edge: The Internal Politics of International Cartels (p. 5), Ithaca, NY: Cornell University Press. See also M. Levenstein & V. Suslow, 2006, What determines cartel success? JEL 44: 43–95. 22. J. Eckhardt, 2016, Welcome contributor or no price competitor? SMJ 37: 742–762; S. Levine, M. Bernand, & R. Nagel, 2017, Strategic intelligence, SMJ 38: 2390–2423; S. Miller, D. Indro, M. Richards, & D. Chng, 2013, Financial implications of local and nonlocal rival isomorphism, JM 39: 1979–2008; D. Sirmon, S. Gove, & M. Hitt, 2009, Resource management in dynamic competitive rivalry, AMJ 51: 919–935; D. Sirmon, M. Hitt, J. Arregle, & J. Campbell, 2010, The dynamic interplay of capability strengths and weaknesses, SMJ 31: 1386–1409; K. Uhlenbruck, M. Hughes-Morgan, M. Hitt, W. Ferrier, & R. Brymer, 2016, Rivals’ reactions to mergers and acquisitions, SO 15: 40–66. 23. H. Ndofor, D. Sirmon, & X. He, 2011, Firm resources, competitive actions, and performance, SMJ 32: 640–657. 24. K. Hsieh, W. Tsai, & M. Chen, 2015, If they can do it, why not us? AMJ 58: 38–58; N. Nuruzzaman, D. Singh, & C. Pattnaik, 2019, Competing to be innovative, IBR 28: 101490; D. Pacheco & T. Dean, 2015, Firm responses to social movement pressures, SMJ 36: 1093–1104; H. Saranga, A, Schotter, & R. Mudambi, 2019, The double helix effect, IBR 28: 101495. 25. R. Agarwal, M. Ganco, & R. Ziedonis, 2009, Reputations for toughness in patent enforcement, SMJ 30: 1349–1374; M. Chen, H. Lin, & J. Michel, 2010, Navigating in a hypercompetitive environment, SMJ 31: 1410–1430; E. Hernandez, W. G. Sanders, & A. Tuschke, 2015, Network defense, AMJ 58: 1233–1260; C. Lee, N. Venkatraman, H. Tanriverdi, & B. Iyer, 2010, Complementarity-based hypercompetition in the software industry, SMJ 31: 1431–1456; W. Ryu, B. McCann, & J. Reuer, 2018, Geographic co-location of partners and rivals, AMJ 61: 945–965; G. Vroom & J. Gimeno, 2007, Ownership form, managerial incentives, and the intensity of rivalry, AMJ 50: 901–922. 26. J. Boyd & R. Bresser, 2008, Performance implications of delayed competitive responses, SMJ 29: 1077–1096; B. Connelly, L. Tihanyi, S. T. Certo, & M. Hitt, 2010, Marching to the beat of different drummers, AMJ 53: 723–742; N. Kumar, 2006, Strategies to fight low-cost rivals, HBR December: 104–107; V. Rindova, W. Ferrier, & R. Wiltbank, 2010, Value from gestalt, SMJ 31: 1474–1497. 27. Chen, 1996, Competitor analysis and interfirm rivalry (p. 107), op. cit. See also B. Connelly, K. Lee, L. Tihanyi,

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Chapter 8  Managing Competitive Dynamics  221

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Part 3 CorporateLevel Strategies 9

Diversifying and Managing Acquisitions Globally

10

Strategizing, Structuring, and Innovating Around the World

11

Governing the Corporation Globally

12

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Strategizing on Corporate Social Responsibility

223

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CHAPTER

9

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Diversifying and Managing Acquisitions Globally

KNOWLEDGE OBJECTIVES After studying this chapter, you should be able to 1. Define product diversification and geographic diversification 2. Articulate a comprehensive model of diversification 3. Gain insights into the motives and performance of acquisitions 4. Participate in four leading debates concerning diversification and acquisitions 5. Draw strategic implications for action

224

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OPENING CASE

Emerging Markets

The Growth of Marriott International From a single root beer stand in Washington, DC, in 1927, Marriott International Corporation (hereafter “Marriott”—referring to the corporation, not to “Marriott Hotels” or “JW Marriott Hotels”) has grown to become the largest hotel company in the world. In 2019, Marriott—headquartered in Bethesda, Maryland (a Washington, DC, suburb)—operated and franchised more than 6,900 properties with 30 hotel brands spanning 130 countries. Its strategy of product diversification and international diversification has been a hallmark of its growth. Marriott’s recent $13.6 billion acquisition of Starwood in 2016, the largest deal in the hotel industry, was a case in point. This acquisition added several iconic brands such as Sheraton, St. Regis, W, and Westin. Before the acquisition, Marriott and Hilton were similar in size. After adding 380,000 hotel rooms, Marriott reached 1.2 million hotel rooms, making it 50% larger than Hilton (790,000 hotel rooms) and 62% larger than the third-place InterContinental Hotels (730,000 hotel rooms). In addition to becoming larger, the Starwood acquisition also enabled Marriott to diversify further into the luxury segment (such as St. Regis and W) and the premium segment (such as Sheraton and Westin) (see Table 9.1). Before the acquisition, Marriott’s brands were mostly midmarket “select service” properties such as Courtyard, Fairfield, and Springhill Suites that targeted price-sensitive road warriors and vacationing families. More than 53% of Marriott’s rooms were in these select service (read “limited service”) brands. In contrast, close to 80% of Starwood’s rooms were either in luxury or premium segments. The merger made Marriott a much more solid

player in these two high-end segments. In addition to acquiring Starwood properties, Marriott also embarked on numerous building projects. Here is one “astounding” statistic according to Fortune: 36% of all hotel rooms under construction in North America and 23% worldwide would be managed or franchised by Marriott. Marriott executives remained optimistic about the industry’s growth prospects, pointing out that the 1.2 billion international trips made in 2016 could reach 1.8 billion by 2030. However, would the entire industry suffer from massive overcapacity if a much-anticipated slowdown (or recession) took place in Marriott’s home country? The Starwood acquisition enabled Marriott to kill two birds with one stone. It not only enabled Marriott to grow bigger and diversify to become more high end, but also could compensate for a possible US slowdown. This was because Starwood was far more globally positioned, with 75% of its revenues from non-US markets. In short, the acquisition made Marriott International literally more international. This was especially true in the world’s fastest growing major hotel market: China. Before the merger, Marriott was relatively weak in China (and across Asia). By contrast, Starwood was the leading global chain in the region, propelled by Sheraton’s pioneering position as a full-service brand. In China, the most thriving segment would be select service hotels catering to domestic business travel. Chinese road warriors used to stay in domestically owned, superbudget properties. But now increasing affluence made some favor an upgrade in quality found in select service hotels with a Western brand—a game that would play to Marriott’s strength. However,

Table 9.1  Merging Marriott International with Starwood Hotels Hotel Brands

From Marriott International Before the Merger

From Starwood

Luxury

Edition, JW Marriott, Ritz-Carlton

Luxury Collection, St. Regis, W Hotels

Premium

Autograph, Delta, Gaylord, Marriott, Renaissance

Le Meridian, Sheraton, Tribute, Westin

Select service

AC, Courtyard, Fairfield, Moxy, Protea, Springhill

Aloft, Four Points

Longer stays

Marriott Executive Apartments, Residence, Timeshare

Element 225

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226  PART 3  Corporate-Level Strategies

OPENING CASE  (Continued) the combined group at the time of merger only had 54 such hotels in China. Therefore, a majority of Marriott’s 100 new hotels planned to open in China every year during 2016–2020 were select service properties. From a synergy standpoint, pushing into China would also help boost Marriott’s business globally. The Chinese were already the world’s largest group of business and tourist travelers. More than 100 million Chinese did business or vacationed abroad every year. Familiarity with Marriott brands such as Courtyard, JW Marriott, and Ritz-Carlton at home might attract them to seek out the same brands abroad. Beyond China, Marriott was actively diversifying internationally. In 2018 alone, its brands made their debut in Finland, Lithuania, Mali, New Zealand, and Ukraine. In terms of integration, merging thousands of hotels with 176,000 employees and annual revenues of $17 billion was not an easy job. Combining the loyalty programs across the 30 brands resulted in 125 million

members—by far the world’s largest hotel loyalty program. Integration was especially challenging in the beginning. Thanks to system glitches, customers who could redeem their points with an old brand could not enjoy the perks in the new combined loyalty program, causing some backlash. Externally, Marriott needs to fight off challengers such as Airbnb, Expedia, and Priceline that are nipping at its heels. Given COVID-19, how long Marriott can stay on top of the industry remains to be seen.

Sources: (1) Fortune, 2017, Marriott goes all in, June 15: 200–208; (2) Los Angeles Times, 2019, An unhappy Marriott rewards points customer is leading a revolt, April 4: www.latimes. com; (3) Marriott International, 2019, Marriott International announces three-year growth plan, March 18: news.marriott.com; (4) Marriott International, 2019, Marriott International sets new record for growth in 2018 fueling global expansion and adding choices for travelers, January 22: news.marriott.com.

W corporate-level strategy (corporate strategy)

Strategy about how a firm creates value through the configuration and coordination of its multimarket activities. business-level strategy

Strategy that builds competitive advantage in an identifiable market. diversification

Adding new businesses to the firm that are distinct from its existing operations. product diversification

Entries into new product markets. geographic diversification

Entries into new geographic markets.

hy is Marriott interested in diversifying its product offerings into luxury and premium segments of the hotel industry? What benefits does its international diversification bring? Does its integration of Starwood hotels have room for improvement? These are some of the key questions driving this chapter.1

Starting from this chapter, Part III (Chapters 9, 10, 11, and 12) focuses on corporate-level strategy (in short, corporate strategy), which is how a firm creates value through the configuration and coordination of its multimarket activities. In comparison, Part II (Chapters 5, 6, 7, and 8) dealt with business-level strategy, which is defined as a way to build competitive advantage in an identifiable market. Although business-level strategy is crucial, corporate-level strategy is more important for larger firms.2 In other words, an understanding of corporate-level strategy helps us see the forest, whereas business-level strategy focuses on the trees. In this chapter, we focus on a key aspect of corporate strategy, diversification, which is adding new businesses to the firm that are distinct from its existing operations. Diversification is probably the single most researched, discussed, and debated topic in corporate strategy.3 It can be accomplished along two dimensions: (1) product diversification (through entries into different industries) and (2) geographic diversification (through entries into different countries). Although market entries can entail greenfield investments (see Chapter 6) and strategic alliances (see Chapter 7), our focus here is on acquisitions. We will first introduce product and geographic diversification. Then we will develop a comprehensive model that draws on the strategy tripod. Acquisitions are examined next, followed by debates and extensions.

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Chapter 9  Diversifying and Managing Acquisitions Globally   227

Product Diversification

single business strategy

Most firms start as small businesses focusing on a single product or service with little diversification. This is known as a single business strategy. Over time, a product diversification strategy, with two broad categories (related and unrelated), may be embarked on.

Product-Related Diversification Product-related diversification refers to entries into new product markets or activities that

are related to a firm’s existing markets or activities. For instance, Starbucks diversified into tea by acquiring Teavana (see Strategy in Action 9.1). The emphasis is on operational synergy (also known as economies of scale), which is defined as increases in competitiveness beyond what can be achieved by engaging in two product markets or activities separately. In other words, 2 1 2 5 5. Shown in the Opening Case, the sources of operational synergy for Marriott International can be (1) technologies (such as common booking platforms), (2) marketing (such as common advertising campaigns), and (3) logistics (such as common procurement).

A strategy that focuses on a single product or service with little diversification. product-related diversification

Entries into new product markets and/or business activities that are related to a firm’s existing markets and/or activities. operational synergy

Synergy derived by having shared activities, personnel, and technologies.

Product-Unrelated Diversification

product-unrelated diversification

Product-unrelated diversification refers to entries into industries that have no obvious

Entries into industries that have no obvious productrelated connections to the firm’s current lines of business.

product-related connections to the firm’s current lines of business.4 Product-unrelated diversifiers (such as Samsung) are called conglomerates, and their strategy is known as conglomeration. Instead of operational synergy, conglomerates focus on financial synergy (also known as economies of scope or scope economies)—namely, increases in competitiveness for each individual unit financially controlled by the corporate headquarters beyond what can be achieved by each unit competing independently as a stand-alone firm. The mechanism to obtain financial synergy is different from operational synergy. The key role of corporate headquarters is to identify and fund profitable investment opportunities,

conglomerate

Product-unrelated diversifier.

STRATEGY IN ACTION 9.1 Starbucks Diversifies into Tea Most readers of this book are likely to be familiar with Starbucks Coffee. However, few realize that Starbucks’ original store in Seattle, Washington, founded in 1971, was actually called “Starbucks Coffee, Tea, and Spices.” Given such roots, Starbucks’s diversification into tea by acquiring Atlanta-based Teavana in 2012 was not surprising. Starbucks had already entered tea with a smaller $8 million acquisition of Portland, Oregon-based Tazo in 1999. However, the $620 million deal to acquire Teavanna—Starbucks’ largest deal— was a game changer, immediately elevating Starbucks to the top echelon of the tea industry. Founded in Atlanta, Teavana, through more than 300 stores in upscale shopping malls in the United States, Canada, Mexico, Puerto Rico, and the Middle East, offered tea enthusiasts and connoisseurs alike its “Heaven of Tea” retail experience. The complementarity between coffee and tea was strong. Many people prefer one beverage or the other at different times of day and for different reasons. Your author, for example, drinks coffee to perk up (in the morning and early afternoon), and enjoys tea to calm down (late afternoon and evening). Endeavoring to make tea the next big thing since coffee, Starbucks integrated a line of Teavana hot teas and iced teas in Starbucks stores across North America and Asia. By 2017, its tea business had indeed grown 40% since the acquisition.

Unfortunately, Teavana stores themselves turned out to be bitter brew. Severe losses caused Starbucks to close all 379 Teavana stores by 2018. Whether the 30,000-store behemoth with $25 billion in annual revenues “intentionally” purchased a small competitor in order to shut it down will never be known. However, a more plausible reason seemed to be that Starbucks was genuinely interested in product-related diversification. Starbucks might not have sufficient stomach to grow a second chain, but Teavana as a brand continued to live on. After closing Teavana stores, Starbucks executives announced that “we remain committed to executing our plan to increase our tea business to $3 billion over the next five years through Starbucks global retail, packaged tea, and ready-to-drink premium Teavana Craft Iced Teas.” Sources: (1) Business Insider, 2017, Starbucks blew $750 million on stores that are now closing—and it’s brilliant business move, August 1: www.businessinsider.com; (2) QSR, 2018, Starbucks enters $1.2B packaged tea category with Teavana, June: www.qsrmagazine. com; (3) Starbucks, 2012, Starbucks closes Teavana acquisition, December 31: stories.starbucks.com; (4) The Street, 2017, Starbucks closing all 379 Teavana stores because who buys expensive loose leaf tea in a mall, July 27: www.thestreet.com; (5) University of Washington Foster Business, 2015, What tea can be, Fall: 11–15.

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228  PART 3  Corporate-Level Strategies

conglomeration

A strategy of productunrelated diversification. financial synergy

The increase in competitiveness for each individual unit that is financially controlled by the corporate headquarters beyond what can be achieved by each unit competing independently as standalone firms. economies of scope (scope economies)

Reduction in per unit costs and increases in competitiveness by enlarging the scope of the firm. internal capital market

A term used to describe the internal management mechanisms of a productunrelated diversified firm (conglomerate) that operate as a capital market inside the firm. diversification premium

Increased levels of performance because of association with a productdiversified firm (also known as conglomerate advantage). diversification discount

Product Diversification and Firm Performance Research suggests that, on average (although not always), performance increases as firms shift from a single business strategy to a product-related diversification strategy, but performance may decrease as firms change from product-related to product-unrelated diversification— in other words, the relationship seems to be an inverted U shape (Figure 9.1).9 Essentially “putting all eggs in one basket,” a single business strategy can be potentially risky and vulnerable. Therefore, Coach is now diversifying away from only relying on its iconic handbag and has entered fashion apparel.10 Likewise, Levi Strauss wants to be more than a jeans brand by crossing over into sweatshirts, backpacks, and accessories.11 “Putting your eggs in different baskets”—product-unrelated diversification—may reduce risk, but its successful execution requires strong organizational capabilities that many firms lack (discussed later). Consequently, product-related diversification, essentially “putting your eggs in similar baskets,” has emerged as a balanced way to both reduce risk and leverage synergy. For example, the share prices of more focused diversifiers such as Coca-Cola (beverages), Hershey’s (sweets), and L’Oréal (cosmetics) are usually higher than those of more diversified rivals such as PepsiCo (both beverages and snacks) and Procter & Gamble (beauty, foods, household goods, and snacks).12 However, important caveats exist. Not all product-related diversifiers outperform unrelated diversifiers. In an age of “core competencies,” the prosperity of the likes of Alphabet (Google), Amazon, easyGroup, Samsung, Siemens, and Virgin Group suggests that for a small group of highly capable firms, conglomeration may still add value in developed economies. In emerging economies, a conglomeration strategy seems to be persisting with some units (such as those affiliated with India’s Tata Group, Turkey’s Koc Group, and China’s Wanda Group) outperforming stand-alone competitors.13 Figure 9.1 Product Diversification and Firm Performance: An Inverted U Shape

Performance

Reduced levels of performance because of association with a productdiversified firm (also known as conglomerate discount).

such as the new industries that Samsung has entered recently—solar panels, biotech drugs, and electric car batteries.5 In other words, a conglomerate can serve as an internal capital market that allocates financial resources to high-potential, high-growth areas. Given that external capital markets already exist, a key issue is whether units affiliated with conglomerates in various industries (such as GE’s aircraft-engine division) outperform their stand-alone independent competitors in respective industries (such as Rolls-Royce Holdings). Stated differently, at issue is whether by operating internal capital markets, corporate headquarters can do a better job in identifying and taking advantage of profitable opportunities than do external capital markets.6 If conglomerate units beat stand-alone rivals, then there is a diversification premium (or conglomerate advantage)—in other words, product-unrelated diversification adds value.7 Otherwise, there can be a diversification discount (or conglomerate disadvantage) when conglomerate units are better off by competing as stand-alone entities.8

Single business

Product-related Product-unrelated diversification diversification Level of product diversification

Source: Adapted from R. Hoskisson, M. Hitt, R. D. Ireland, & J. Harrison, 2008, Competing for Advantage, 2nd ed. (p. 214), Boston: Cengage.

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Chapter 9  Diversifying and Managing Acquisitions Globally   229

The reason many conglomerates fail is not because this strategy is inherently unsound, but because firms fail to implement it. Conglomeration calls for managers at corporate headquarters to impose a strict financial discipline on constituent units and hold unit managers accountable— of the sort GE’s former chairman and CEO Jack Welch (1981–2001) famously imposed on all divisions: “Either become the world’s top one or two in your industry, or expect your unit to be sold.” However, most managers—including GE’s two more recent chairmen and CEOs Jeff Immelt (2001–2017) and John Flannery (2017–2018)—were not so strict, and they tolerated the poor performance of some units, which can be subsidized by better units.14 By robbing the better units to aid the poor ones, managers in essence practice “socialism.” Over time, better units may lose their incentive to do well, and eventually corporate performance suffers. Exhibit A: GE’s recent performance collapse across a number of its previously excellent units.15

Geographic Diversification Although geographic diversification can be done domestically, we focus on international diversification—namely, the number and diversity of countries in which a firm competes

international diversification

Limited versus Extensive International Diversification

The number and diversity of countries in which a firm competes.

(see also Chapter 6).

Two broad categories of geographic diversification can be identified. The first is limited international scope, such as French and Italian firms concentrating on Europe. The emphasis is on geographically and culturally adjacent countries in order to reduce the liability of foreignness (see Chapters 4 and 6 for details). The second category is extensive international scope—maintaining a substantial presence beyond geographically and culturally neighboring countries. For example, the largest market for General Motors (GM) is China. The largest market for Manpower (which provides part-time staff to employers) is France. While neighboring countries are not necessarily easy markets, success in distant countries likely calls for a stronger set of advantages to compensate for the liability of foreignness there.

Geographic Diversification and Firm Performance Recently we often hear the calls that all firms need to go “global,” that domestic firms should start venturing abroad, and that firms with a little international presence must widen their geographic scope. The ramifications for failing to heed such calls are presumably grave. However, we need to critically evaluate the validity of these assertions. The evidence is not fully supportive. As captured by the S curve in Figure 9.2, two findings emerge. First, at a low level of internationalization, there is a U-shaped relationship between geographic scope

Performance

Figure 9.2  Geographic Diversification and Firm Performance: An S Curve

Limited

Intermediate Extensive Level of geographic diversification

Sources: Adapted from (1) F. Contractor, S. Kundu, & C.-C. Hsu, 2003, A three stage theory of international expansion: The link between multinationality and performance in the service sector (p. 7), Journal of International Business Studies 34: 5–18; (2) J. Lu & P. Beamish, 2004, International diversification and firm performance: The S-curve hypothesis (p. 600), Academy of Management Journal 47: 598–609.

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230  PART 3  Corporate-Level Strategies

and firm performance, which suggests an initially negative effect of international expansion on performance before the positive returns can be realized. This stems from the well-known hazard of liability of foreignness (see Chapter 6). Second, at moderate to high levels of internationalization, there is an inverted U shape, implying a positive relationship between geographic scope and firm performance—but only to a certain extent. In other words, the conventional wisdom—“the more global, the better”—is not always true. Not all firms have been sufficiently involved overseas to experience the ups and downs captured by the S curve. On the one hand, many studies report a U-shaped relationship, because they only sample firms in the early to intermediate stages of internationalization. Small, inexperienced firms are often vulnerable during the initial phase of overseas expansion, as they have to “pay tuition” and learn. On the other hand, other studies document an inverted U shape because their samples are biased toward larger firms with moderate to high levels of internationalization. Many large firms have a “flag planting” mentality, bragging about how many countries in which they have a presence. However, their performance, beyond a certain limit, often suffers, thus necessitating withdrawals. For example, Amazon, eBay, Home Depot, and Uber exited China, and Walmart withdrew from Germany, Russia, and South Korea—all in tears. Given this complexity, it is hardly surprising there is debate about geographic diversification.16 Figure 9.2 shows an intermediate range within which firm performance increases with an expanding geographic scope—a sweet spot. This is where Marriott hopes to position itself (see the Opening Case). Some studies that sample firms in this range conclude that “there is value in internationalization itself because geographic scope is found to be related to higher firm profitability.”17 However, other studies that sample firms with a higher level of geographic scope caution that “multinational diversification is apparently less valuable in practice than in theory.”18 Consequently, the recent consensus emerging out of the debate is not only to acknowledge the validity of both perspectives, but also to specify conditions under which each perspective (geographic diversification helps or hurts firm performance) is likely to hold.19 Finally, given the larger debate of globalization versus deglobalization (see Chapter 1), some internationally active firms are being discouraged by their governments, which call on these firms to bring business and jobs back to their home countries. Given the inconclusive performance outcomes (that always exist) and the recent political pressure, the debate on geographic diversification will continue to rage.

Combining Product and Geographic Diversification Except for single-business firms with no interest to internationalize, most firms have to entertain both dimensions of diversification simultaneously.20 Figure 9.3 illustrates the four possible combinations. Figure 9.3  Combining Product and Geographic Diversification

Related

Extensive

Product Scope Unrelated

(Cell 1) Multinational replicator

(Cell 2) Far-flung conglomerate

(Cell 3) Anchored replicator

(Cell 4) Classic conglomerate

Geographic Scope

Limited

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Chapter 9  Diversifying and Managing Acquisitions Globally   231

Firms in Cell 3 are anchored replicators, because they focus on product-related diversification and a limited geographic scope. They seek to replicate a set of activities in related industries in a small number of countries anchored by the home country. For example, Walgreens, until its recent merger with Alliance Boots, only operated drug stores in the United States, Puerto Rico, and the US Virgin Islands. Firms in Cell 1 can be called multinational replicators because they engage in product-related diversification on the one hand and far-flung multinational expansion on the other hand. Walgreens recently acquired the UK- and Switzerland-based Alliance Boots and formed a new combined company called Walgreens Boots Alliance, which operates drug stores in 25 countries.21 Firms in Cell 2 can be labeled as far-flung conglomerates because they pursue both significant product-unrelated diversification and extensive geographic diversification. Multinational giants such as Alphabet, Amazon, easyGroup, GE, Mitsui, Samsung, Siemens, and Tata are cases in point. Finally, in Cell 4 we find classic conglomerates that engage in product-unrelated diversification within a small set of countries centered on the home country. Examples include Turkey’s Koc Group and China’s Wanda Group. Although difficult, migrating from one cell to another is possible. For instance, most of the current multinational replicators (Cell 1) can trace their roots as anchored replicators (Cell 3). One interesting migratory pattern in the last two decades is that many classic conglomerates, such as Denmark’s Danisco and Finland’s Nokia, which formerly dominated multiple unrelated industries in their home countries (Cell 4), have reduced their product scope but significantly expanded their geographic scope—in other words, migrating from Cell 4 to Cell 1.22 In broad strategic terms, this means that the costs for doing business abroad have declined and the costs for managing conglomeration while mostly staying at home have risen. In other words: Costs in Cell 4 (managing conglomeration while mostly staying at home)

>

anchored replicator

A firm that seeks to replicate a set of activities in related industries in a small number of countries anchored by the home country. multinational replicator

A firm that engages in product-related diversification on the one hand and far-flung multinational expansion on the other hand. far-flung conglomerate

A conglomerate firm that pursues both extensive product-unrelated diversification and extensive geographic diversification. classic conglomerate

A firm that engages in product-unrelated diversification within a small set of countries centered on the home country.

Costs in Cell 1 (doing business extensively abroad but maintaining product relatedness in diversification)

Recently, given the heightened geopolitical tensions and uncertain trade wars, the costs of doing business abroad may have increased. For example, tariffs by definition increase the costs of doing business abroad. Therefore, whether costs in Cell 4 will continue to be larger than costs in Cell 1 remains to be seen. But even without such uncertainties, asserting that firms in one cell always outperform those in other cells is naïve if not foolhardy. In every cell, both successful and unsuccessful firms exist. Next we explore why this is the case.

A Comprehensive Model of Diversification Why do firms diversify? The strategy tripod suggests a comprehensive model of diversification (Figure 9.4) to answer this complex and important question.

Industry-Based Considerations A straightforward motivation for diversification is growth opportunities in an industry.23 If an industry has substantial growth opportunities (such as robotics), most incumbents have an incentive to engage in product-related or international diversification and new entrants are eager to jump in. However, in a “sunset” industry (think of typewriters), incumbents have to exit through divestitures (selling off assets) and pursue opportunities elsewhere.24 In addition to growth opportunities, the structural attractiveness of an industry, captured by the five forces framework, also has a significant bearing on diversification. Intense interfirm rivalry may motivate firms to diversify. PepsiCo recently diversified into sports drinks. When demand for carbonated beverages (such as Mountain Dew) fell, PepsiCo’s considerable distribution capabilities could leverage some synergy by adding the newly acquired Gatorade products.

divestiture

Selling off assets.

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232  PART 3  Corporate-Level Strategies

Figure 9.4  A Comprehensive Model of Diversification

Industry-based considerations

Resource-based considerations

Industry growth opportunities Interfirm rivalry Entry barriers Power of suppliers and buyers Threat of substitutes Possible conglomeration

Value (risk reduction and core competencies) Rarity Imitability Organization (different for related or unrelated diversifiers)

Diversification strategies Product/Geographic

Institution-based considerations Formal institutions constrain or enable diversification Lack of formal institutions promotes conglomeration Informal norms and cognitions (managerial motives)

Second, high entry barriers facilitate certain kinds of firms to diversify. Most of the industries in which Samsung successfully competed—such as LCD and mobile phones— are characterized by high entry barriers. The new industries that Samsung has aggressively entered—such as solar panels and electric car batteries—share the same characteristics. The choices are not random. Samsung has deliberately targeted such capital-intensive industries that would deter many potential entrants because of high entry barriers. The bargaining power of suppliers and buyers may prompt firms to broaden their scope by acquiring suppliers upstream or buyers downstream. For example, Coca-Cola recently acquired its leading bottlers. The threat of substitutes also has a bearing on diversification. Many cameras, calculators, maps, newspapers, and print books have been substituted by smartphones made by Apple, Huawei, Samsung, and Xiaomi, which diversified into (or invaded) these industries. In summary, the industry-based view, by definition, has largely focused on product-related diversification with an industry focus (often in combination with geographic diversification). Next we introduce resource-based and institution-based considerations to enrich this discussion.

Resource-Based Considerations Value.  Does diversification create value?25 The answer is “Yes,” but only under certain conditions.26 Compared with nondiversified single-business firms, diversified firms are able to spread risk. Even when overly diversified firms are forced to restructure, they rarely return all the way to only a single business strategy with no diversification. The most optimal point tends to be a moderate level of diversification.

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Chapter 9  Diversifying and Managing Acquisitions Globally   233

Beyond risk reduction, diversification can create value by leveraging certain core competencies. Honda is renowned for its product-related diversification by leveraging its core competencies in internal combustion engines. It competes not only in automobiles and motorcycles, but also in boat engines and lawn mowers. HondaJet—an innovative new business jet—represents its most recent efforts. Will HondaJet fly high? Rarity.  For diversification to add value, firms must have rare and unique capabilities. Although acquirers from emerging economies generally have a hard time delivering value from their acquisitions, Lenovo, according to Bloomberg Businessweek, was able to “find treasure in the PC industry’s trash” by turning around the former IBM PC division and using it to propel Lenovo to become the biggest PC maker in the world.27 Such capabilities are rare not only among emerging acquirers, but also among many established acquirers. Imitability.  While many firms undertake acquisitions, a much smaller number have mastered the art of postacquisition integration.28 Consequently, firms that excel in integration possess hard-to-imitate capabilities. At Northrop Grumman, integrating acquired businesses has progressed to a “science.” Each business must conform to a carefully orchestrated plan listing nearly 400 items—from how to issue press releases to which accounting software to use. Unlike its bigger defense rivals such as Boeing and Raytheon, Northrop Grumman thus far has not stumbled with any of the acquisitions. Such skills in integration are extremely hard to imitate. Organization.  Fundamentally, whether diversification adds value boils down to how firms are organized to take advantage of the benefits while minimizing the costs. Because Chapter 10 will be devoted to organizational issues in geographic diversification, we focus here on product diversification. Given the lack of popularity of product-unrelated diversification (think of the recent GE meltdown), many people believe this strategy to be inherently value destroying. However, this is not true. With proper organization, both product-related and product-unrelated diversification strategies can add value. Shown in Table 9.2, product-related diversifiers need to foster a centralized organizational structure with a cooperative culture.29 The key is to explore operational linkages (or synergies) among various units, and certain units’ individual performance may need to be sacrificed to coordinate with other units for the benefit of the entire corporation. To maximize corporate profits, Marvel Studios’ movie division responsible for producing the Marvel Cinematic Universe films such as Iron Man, Captain America, and Avengers: Endgame had to wait before launching them—until the merchandise divisions were ready to hawk related merchandise such as blankets, comic books, costumes, pillow covers, toys, and video games. If movie managers’ bonuses were linked to the annual box-office receipts, they would wish to release the movies as soon as possible. But if bonuses were linked with overall corporate profits, then movie managers would be more willing to coordinate with their merchandise colleagues and wait until the merchandise was ready. Consequently, corporate headquarters should not evaluate division performance solely based on strict financial targets (such as sales). The principal control mechanism is strategic control (or behavior control), based on largely subjective criteria to monitor and evaluate units’ contributions with rich communication between corporate and divisional managers.

strategic control (behavior control)

Controlling subsidiary/ unit operations based on whether they engage in desirable strategic behavior (such as cooperation).

Table 9.2  Product-Related versus Product-Unrelated Diversification Product-Related Diversification

Product-Unrelated Diversification

Synergy

Operational synergy

Financial synergy

Economies

Economies of scale

Economies of scope

Control emphasis

Strategic (behavior) control

Financial (output) control

Organizational structure

Centralization

Decentralization

Organizational culture

Cooperative

Competitive

Information processing

Intensive rich communication

Less intensive communication

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234  PART 3  Corporate-Level Strategies

financial control (output control)

Controlling subsidiary/unit operations strictly based on whether they meet financial/output criteria.

However, the best way to organize conglomerates is exactly the opposite. The emphasis is on financial control (or output control), which is based on largely objective criteria (such as return on investment) to monitor and evaluate units’ performances. Because most corporate managers have experience in only one (or a few) industry and cannot be experts in the wide variety of unrelated industries represented in a conglomerate, corporate headquarters is forced to focus on financial control, which does not require a lot of industryspecific expertise. Otherwise, corporate managers will experience tremendous information overload (too much information to process). Consequently, the appropriate organizational structure is decentralization with substantial divisional autonomy—in other words, structurally separate units. To keep divisional managers focused on financial performance, their compensation should be directly linked with quantifiable unit performance. Thus, the relationship among various divisions is competitive, with each trying to attract a larger share of corporate investment. Such competition within an internal capital market is similar to stand-alone firms competing for more funds from investors via the external capital market. The Virgin Group, for example, considers itself as “a branded venture capital firm” whose portfolio includes airlines, railways, beverages, and music. The corporate headquarters supplies a common brand (Virgin) and leaves divisional managers “alone” as long as they deliver sound performance. Overall, the key to adding value is the appropriate match between diversification strategy and organizational structure and control.

Institution-Based Considerations

business group

A term to describe a conglomerate, which is often used in emerging economies.

Formal Institutions  Formal institutions affect diversification strategies.30 The rise of conglomerates in the 1950s and the 1960s in developed economies was inadvertently promoted by formal institutional constraints designed to curtail product-related diversification. In the United States, the post-1950 antitrust authorities viewed product-related diversification (especially mergers), which were designed to enhance firms’ market power within an industry, as “anticompetitive” and challenged them (see Chapter 8). Thus, firms seeking growth were forced to look beyond their industry, triggering a great wave of conglomeration. By the 1980s, the US government changed its mind and no longer critically scrutinized related mergers within the same industry. It is not a coincidence that the movement to dismantle conglomerates and focus on core competencies has taken off since the 1980s. Similarly, the popularity of conglomeration in emerging economies is often underpinned by their governments’ protectionist policies. Conglomerates (often called business groups in emerging economies) can leverage connections with governments by obtaining licenses, arranging financing (often from state-controlled banks), and securing technology. As long as protectionist policies prevent significant foreign entries, conglomerates can dominate domestic economies. However, when governments start to dismantle protectionist policies, competitive pressures from foreign multinationals (as well as domestic nondiversified rivals) may intensify. These changes may force conglomerates to improve performance by reducing their scope and focusing on a smaller number of more manageable industries.31 Likewise, the significant rise of geographic diversification undertaken by numerous firms can be attributed, at least in part, to the gradual opening of many economies initiated by formal market-supporting and policy changes (see Chapter 6). Informal Institutions  Informal institutions can be found along normative and cognitive dimensions. Normatively, managers often behave in ways that will not cause them to be singled out for criticism by shareholders, board directors, and the media. Therefore, when the norm is to engage in conglomeration, more managers may simply follow such a norm. Poorly performing firms are especially under such normative pressures. While early movers in conglomeration may have special skills and insights to make such a complex strategy work, many late movers probably do not have these capabilities and simply jump on the bandwagon.32 Over time, this explains—at least partially—the massive disappointment with conglomeration in developed economies.

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Chapter 9  Diversifying and Managing Acquisitions Globally   235

Another informal driver for conglomeration is the cognitive dimension—namely, the internalized beliefs that guide managerial behavior. Managers may have motives to advance their personal interests, which are not necessarily aligned with the interests of the firm and its shareholders.33 These managerial motives for diversification include (1) reduction of managers’ employment risk and (2) pursuit of power, prestige, and income. Because single-business firms are vulnerable to economywide business cycles (such as recessions), managers’ jobs and careers may be at risk. Thus, managers may have an interest in diversifying their firms to reduce their own employment risk even though such diversification does not help the firm or its shareholders. In addition, because power, prestige, and income are typically associated with a larger firm size, some managers may have incentives to overdiversify their firms, which results in value destruction. Such excessive diversification is known as empire building (see Chapter 11). In summary, the institution-based view suggests that formal and informal institutional conditions directly shape diversification strategy.34 Overall, the industry-based, resource-based, and institution-based views collectively explain how the scope of the firm evolves around the world, which is discussed next.

The Evolution of the Scope of the Firm

35

At its core, diversification is essentially driven by economic benefits versus bureaucratic costs. Economic benefits are the various forms of synergy (operational or financial) previously discussed. Bureaucratic costs are the additional costs associated with a larger, more complex organization with more employees and more complicated information systems. Overall, it is the difference between the benefits and costs that leads to certain diversification strategies. The economic benefits of the last unit of growth (such as the last acquisition) can be defined as marginal economic benefits (MEB), and the additional bureaucratic costs incurred (such as the additional expenditures on payroll and insurance from hiring more employees) can be defined as marginal bureaucratic costs (MBC). Therefore, the scope of the firm is determined by a comparison between MEB and MBC. Shown in Figure 9.5, the optimal scope is at point A, where the appropriate level of diversification should be D1. If the level of diversification is D2, some economic benefits can be gained by moving up to D1. Conversely, if a firm overdiversifies to D3, reducing the scope to D1 becomes necessary. Thus, how the scope of the firm evolves over time can be analyzed by focusing on MEB and MBC.36

economic benefit

Benefit brought by the various forms of synergy in the context of diversification. bureaucratic cost

Additional cost associated with a larger, more diversified organization. marginal economic benefit (MEB)

The economic benefit of the last unit of growth (such as the last acquisition). marginal bureaucratic cost (MBC)

The bureaucratic cost of the last unit of organizational expansion (such as the last subsidiary established).

Figure 9.5  What Determines the Scope of the Firm?

Costs/benefits

Marginal bureaucratic costs (MBC)

A

Marginal economic benefits (MEB)

D2

D1

D3

Level of diversification Source: Adapted from G. Jones & C. Hill, 1988, Transaction cost analysis of strategy-structure choices (p. 166), Strategic Management Journal 9: 159–172.

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236  PART 3  Corporate-Level Strategies

Figure 9.6 The Evolution of the Scope of the Firm in the United States: 1950–1970 and 1970–1990 Marginal bureaucratic costs (MBCUS1990)

Costs/benefits

Marginal bureaucratic costs (MBCUS1950 and 1970)

Marginal economic benefits (MEBUS1970) Marginal economic benefits (MEBUS1950) D1 D3

D2

Level of diversification Source: M. W. Peng, S. Lee, & D. Wang, 2005, What determines the scope of the firm over time? A focus on institutional relatedness (p. 627), Academy of Management Review 30: 622–633.

refocusing

Narrowing the scope of the firm to focus on a few areas. downscoping

Reducing the scope of the firm through divestitures and spin-offs.

In the United States (Figure 9.6), between the 1950s and the 1970s, if we hold MBC constant (an assumption relaxed later), the MEB curve shifted upward, resulting in an expanded scope of the firm on average (moving from D1 to D2). This is because (1) the lack of growth opportunities within the same industry through product-related diversification (especially for large firms—thanks to formal institutions such as antitrust policies), and (2) the emergence of organizational capabilities to derive financial synergy from conglomeration. The diffusion of these actions through imitation led to an informal but visible norm among managers that such conglomerate growth was legitimate. During that time, external capital markets, which were less sophisticated (compared to currently), were supportive, believing that conglomerates had an advantage in allocating capital. However, by the 1980s, significant transitions occurred along industry, resource, and institutional dimensions. First, M&As within the same industry were no longer critically scrutinized by the US government, making it unnecessary to focus on unrelated diversification. Second, a resource-based analysis suggests that given the VRIO hurdles, it would be extremely challenging—though not impossible—to derive competitive advantage from conglomeration (see Table 9.2). In other words, with an expanded scope of the firm, MBC also increased, often outpacing the increase in MEB (Figure 9.6). Many firms overdiversified and destroyed value by operating beyond D1 in Figure 9.5 (such as D3). Consequently, a dramatic reversal in US investor sentiment occurred toward conglomeration: positive in the 1960s, neutral in the 1970s, and negative in the 1980s. Parallel to these developments, external capital markets became more efficient, with more analysts and more transparent and real-time reporting (for example, the first Bloomberg terminal appeared in 1982), all of which allowed for more efficient channeling of financial resources to high-potential firms. As a result, the conglomerate advantage of serving as an internal capital market to allocate resources became less attractive. Finally, informal norms and cognitions changed, as managers increasingly became more disciplined and focused on shareholder value maximization. They believed that reducing the scope of the firm was the “right” thing to do. All these combined to push the appropriate scope of the firm from D2 to D3 in Figure 9.6 by the 1990s. This process is known as refocusing (narrowing the scope of the firm to focus on a few areas), downscoping (reducing the scope of the firm

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Chapter 9  Diversifying and Managing Acquisitions Globally   237

Figure 9.7 The Optimal Scope of the Firm: Developed versus Emerging Economies at the Same Time Marginal bureaucratic costs (MBCDevelopedEcon) Marginal bureaucratic costs (MBCEmergingEcon)

Costs/benefits

C A

B E Marginal economic benefits (MEBEmergingEcon) Marginal economic benefits (MEBDevelopedEcon)

D1

D3

D2

Level of diversification Source: M. W. Peng, S. Lee, & D. Wang, 2005, What determines the scope of the firm over time? A focus on institutional relatedness (p. 628), Academy of Management Review 30: 622–633.

through divestitures, sell-offs, and spin-offs), and downsizing (reducing the number of employees through layoffs and outsourcing).37 Globally, it is interesting to consider why conglomeration, which has been largely discredited in developed economies, continues to be in vogue and also in some (but not all) cases adds value in emerging economies. Figure 9.7 shows how highly diversified conglomerates in emerging economies may add value, whereby firms in developed economies are unable to do so. This analysis relies on two crucial and reasonable assumptions: (1) At a given level of diversification, MEBEmergingEcon > MEBDevelopedEcon. This is reasonable because underdeveloped external capital markets in emerging economies make conglomerates as internal capital markets more attractive. (2) At a given level of diversification, MBCEmergingEcon < MBCDevelopedEcon. In emerging economies, because of the weaknesses of formal institutions, informal constraints play a larger role in regulating economic exchanges (see Chapter 4). Most conglomerates in these countries are family firms, whose managers rely more on informal personal (and often family) relationships. Such firms typically feature a (relatively) lower level of bureaucratization, formalization, and professionalization, which may result in lower bureaucratic costs. Consequently, for any scope between D1 and D2 (such as D3) in Figure 9.7, firms in developed economies at point C need to be downscoped toward point A (D1), whereas there is still room to gain for firms in emerging economies at point E, which can move up to point B (D2). However, bear in mind that conglomerates in emerging economies confront the same problem as those in developed economies: The wider the scope, the harder it is for corporate headquarters to coordinate, control, and invest effectively in different units. It seems evident that for conglomerates in emerging economies, there is also a point beyond which further diversification may backfire. In 1997, conglomerates in South Korea hit a wall, having diversified too much, ranging from “missiles to noodles.” The painful financial crisis forced some much-needed restructuring, which essentially pushed these conglomerates that had operated in a zone right of D2 back to D2 in Figure 9.7 (or, alternatively from D3 to D1 in Figure 9.5). Since 1997, the restructured conglomerates such as Samsung and LG have been able to scale new performance heights.38 Overall, industry dynamics, resource repertoires, and institutional conditions are not static, nor are diversification strategies. The next two sections describe acquisitions as a primary means for expanding the scope of the firm.

downsizing

Reducing the number of employees through layoffs, early retirements, and outsourcing.

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238  PART 3  Corporate-Level Strategies

merger and acquisition (M&A)

Merging with or acquiring other firms. acquisition

The transfer of control of assets, operations, and management from one firm (target) to another (acquirer); the former becomes a unit of the latter. merger

The combination of assets, operations, and management of two firms to establish a new legal entity. horizontal M&

A n M&A deal involving competing firms in the same industry. vertical M&

A n M&A deal involving suppliers (upstream) and/ or buyers (downstream).

Acquisitions Setting the Terms Straight Although the term mergers and acquisitions (M&As) is often used, in reality acquisitions dominate the scene. For practical purposes, we can use the two terms M&As and acquisitions interchangeably. An acquisition is transfer of the control of assets, operations, and management from one firm (target) to another (acquirer), the former becoming a unit of the latter. For instance, Volvo is now a unit of Geely. A merger is the combination of assets, operations, and management of two firms to establish a new legal entity. An example is Fiat Chrysler Automobiles, a new entity formed from the merger of Fiat and Chrysler. In the 2010s, approximately 40% of M&As were cross-border deals. In the 1990s, only around one-sixth were cross-border deals.39 Of all cross-border M&As, only 3% are mergers. Even many so-called mergers of equals turn out to be one firm taking over another. Figure 9.8 illustrates various types of cross-border M&As. Three primary categories of M&As are (1) horizontal, (2) vertical, and (3) conglomerate. Horizontal M&As refer to deals involving competing firms in the same industry (such as Nomura’s acquisition of Lehman Brothers’ assets).40 Approximately 70% of the cross-border M&As are horizontal. Vertical M&As, another form of product-related diversification, are deals that allow the focal firms to acquire (upstream) suppliers or (downstream) buyers (such as Coca-Cola’s acquisition of its bottler, Coca-Cola Enterprises).41 Approximately 10% of cross-border M&As are vertical. Conglomerate M&As are transactions involving firms in product-unrelated industries (such as Siemens’s acquisition of Denmark’s Bonus Energy, which became Siemens Wind Power). Roughly 20% of cross-border M&As are conglomerate deals. Figure 9.8  The Variety of Cross-Border Mergers and Acquisitions

Consolidation (equal mergers) Mergers (about 3% of all M&As) Statutory merger (only one firm survives) Cross-border M&As Acquisition of a foreign affiliate Acquisitions (about 97% of all M&As)

Acquisition of a private local firm Acquisition of a local firm Privatization (acquisition of a public enterprise)

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Chapter 9  Diversifying and Managing Acquisitions Globally   239

The terms of M&As can be friendly or hostile. In friendly M&As, the board and management of a target firm agree to the transaction. Hostile M&As (also known as hostile takeovers) are undertaken against the wishes of the target firm’s board and management, who have rejected the offers. The $19 billion hostile takeover of Britain’s Cadbury by America’s Kraft was a high-profile example of hostile cross-border M&A.

conglomerate M&

Motives for Mergers and Acquisitions

n M&A deal in which the A board and management of a target firm agree to the transaction.

What drives M&As? Table 9.3 shows three drivers: (1) synergistic, (2) hubristic, and (3) managerial motives. They can be illustrated by the three leading perspectives. In terms of synergistic motives, the most frequently mentioned industry-based rationale is to enhance and consolidate market power. For this reason, United Technologies Corporation (UTC) in a $30 billion deal recently acquired Rockwell Collins to become an aircraft parts giant to help fight back against two giant plane makers—Boeing and Airbus.42 From a resource-based view, the most important synergistic rationale is to leverage superior resources.43 In a $4 billion deal, Seattle-based Alaska Airlines acquired San Francisco-based Virgin America. “Flying better together” was the rationale behind the endeavor to create the premier airline for people on the West Coast.44 Another motive is to gain access to complementary resources, as evidenced by Nomura’s interest in Lehman Brothers’ talents. Sometimes, such acquisition of talents is known as acqui-hiring.45 Finally, some acquisitions are driven by a desire to learn and develop new skills (see the Closing Case). In terms of synergistic motives, from an institution-based view acquisitions are often a response to formal institutional constraints and transitions.46 It is not a coincidence that the number of cross-border M&As has skyrocketed since the 1990s. This is the same period during which trade and investment barriers have generally gone down. It remains to be seen whether this trend will continue in the 2020s as new trade barriers are erected and geopolitical tensions rise. While synergistic motives add value, hubristic and managerial motives reduce value. Hubris refers to managers’ overconfidence in their capabilities.47 Managers of acquiring firms make two strong statements. The first is “We can manage your assets better than you [target firm managers] can!” The second statement is even bolder because acquirers of publicly listed firms always have to pay an acquisition premium (an above-the-market price to acquire another firm).48 The second statement is essentially saying: “We are smarter than the market, and here is exactly how much smarter we are!” Acquirers of US firms on average pay a 20%–30% premium, and acquirers of EU firms pay a slightly lower premium (18%).49 When bidding for targets in developed economies, acquirers from emerging economies on average pay a premium that is 16% higher than premium from acquirers from developed economies.50 When bidding for targets in Europe, the average Chinese acquirers’ premium is double the size of the average European acquirers’ premium (see the Closing Case).51

n M&A deal involving A firms in product-unrelated industries. friendly M&

hostile M&A (hostile takeover)

An M&A deal undertaken against the wishes of target firm’s board and management, who reject the M&A offer.

hubris

Managers’ overconfidence in their capabilities. acquisition premium

The difference between the acquisition price and the market value of target firms.

Table 9.3  Motives Behind Mergers and Acquisitions Industry-Based Issues Synergistic motives

●●

●● ●● ●●

Hubristic motives Managerial motives

Enhance and consolidate market power Overcome entry barriers Reduce risk Leverage scope economies

Resource-Based Issues ●●

●●

●●

●●

Leverage superior managerial capabilities Access complementary resources Learning and developing new skills Managers’ overconfidence in their abilities

Institution-Based Issues ●●

●●

●●

●●

Respond to formal institutional constraints and transitions Take advantage of market openings and globalization

Herd behavior—following norms and chasing fads Self-interested actions such as empire building guided by informal norms and cognitions

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240  PART 3  Corporate-Level Strategies

To the extent that the capital market is relatively efficient and that market price of target firms reflects their intrinsic value,52 there is simply little hope to profit from such acquisitions. Even when we assume the capital market to be inefficient, it is still apparent that when the premium is too high, acquiring firms must have overpaid. This is especially true when multiple firms bid for the same target. The winning acquirer may suffer from the “winner’s curse” by overpaying. From an institution-based view, many managers join the acquisition bandwagon after some first movers start doing deals in an industry. The fact that M&As come in “waves” speaks volumes about such herd behavior.53 In fear of missing out (FOMO), late movers in such waves often rush in, prompted by a “Wow! Get it!” mentality.54 It is no surprise that many deals go bust. Although the hubristic motives suggest that managers may unknowingly overpay for targets, managerial motives posit that for self-interested reasons, some (although certainly not all) managers may have knowingly overpaid for target firms. Driven by such norms and cognitions, some managers may have deliberately overdiversified their firms through M&As (see Chapter 11). After all, they use other people’s (shareholders’) money to fund acquisitions and enrich themselves.55 In summary, synergistic motives add value, and hubristic and managerial motives destroy value. They may simultaneously exist. Next, we discuss the performance of M&As.

Performance of Mergers and Acquisitions Despite the popularity of M&As, their performance record is rather sobering.56 As many as 70% of M&As reportedly fail.57 On average, the performance of acquiring firms does not improve after acquisitions.58 Target firms, after being acquired and becoming internal units, often perform worse than when they were independent. At the plant or establishment level, there is hardly any improvement in productivity.59 The only identifiable group of winners is the shareholders of target firms, who experience on average a 25% increase in their stock value—thanks to an acquisition premium.60 Shareholders of acquiring firms experience a 4% loss in their stock value during the same period. The combined wealth of shareholders of both acquiring and target firms is only marginally positive—less than 2%.61 Unfortunately, many M&As destroy value. Why do so many acquisitions fail? Problems can be identified in both preacquisition and postacquisition phases (Table 9.4). During the preacquisition phase, because of executive hubris or managerial motives, acquiring firms may overpay for targets—in other words, they fall into a synergy trap. For example, in 1998, when Chrysler was profitable, Daimler-Benz acquired it by paying $40 billion, a 40% premium over its market value. Chrysler’s expected performance was already built into its existing share price at a zero premium. Daimler-Benz’s willingness to pay such a high premium was indicative of (1) strong capabilities to derive synergy, (2) high levels of hubris, (3) significant managerial self-interests, or (4) all of the above. As it turned out, by the time Chrysler was sold in 2007, it only fetched $7 billion. In 2018, IBM, in a $34 billion deal, paid a 63% premium to acquire Red Hat.62 Although not a household name, Red Hat was the biggest vendor of open-source software. But was it worth that much? Table 9.4  Symptoms of Merger and Acquisition Failures Problems for All M&As Preacquisition: Overpayment for targets

●●

●●

●●

Postacquisition: Failure in integration

●● ●●

Managers overestimate their ability to create value Inadequate preacquisition screening Poor strategic fit Poor organizational fit Failure to address multiple stakeholder groups’ concerns

Particular Problems for Cross-Border M&As ●●

●● ●●

●●

●●

Lack of familiarity with foreign cultures, institutions, and business systems Inadequate number of worthy targets Nationalistic concerns against foreign takeovers (political and media levels) Clashes of organizational cultures compounded by clashes of national cultures Nationalistic concerns against foreign takeovers (firm and employee levels)

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Chapter 9  Diversifying and Managing Acquisitions Globally   241

STRATEGY IN ACTION 9.2

Ethical Dilemma

GE–Alstom: A Deal Too Far? Many reasons contributed to the recent meltdown of General Electric (GE)—from being one of the most respected conglomerates (with frequent praises from previous editions of Global Strategy) to being kicked out of the Dow Jones Industrial Average in 2018 (GE was a founding member in 1896 and had been on it continuously between 1907 and 2018). During Chairman and CEO Jeff Immelt’s tenure (2001–2017), GE made a series of acquisitions that turned sour. Of these deals, its $10 billion deal to acquire Alstom’s power generation assets during 2014–2015—GE’s largest—turned out to be one of the worst. Alstom was a French heavy industry giant. Its power generation business directly competed with GE’s largest division, GE Power. From a strategic fit perspective, acquiring Alstom’s power generation business would presumably establish GE as the undisputed global leader in gas turbines. Because Alstom was one of France’s “national champions,” the negotiations triggered a political storm against this “American takeover.” To calm such a political storm and fend off competing bids from Siemens and Mitsubishi, Immelt himself personally negotiated the deal, aided by John Flannery, GE’s head of M&As who later took over the CEO position after Immelt retired in 2017. As it turned out, GE vastly overpaid for Alstom, whose profit margins were lower than GE Power’s. GE thought it could raise them by selling more services across Alstom’s largest installed base. However, regulators

made GE divest Alstom’s service unit, causing the rosy projections to leverage services to propel profits to collapse. To make matters worse, technological advances and upgrades earlier reduced outages and extended the turbines’ life, shaving the demand for services. According to Bloomberg Businessweek, “the underlying cash-flow assumptions for the Alstom deal now appear to have been dead wrong.” Worst of all, according to Fortune, the deal “was spectacularly ill-timed.” GE doubled down on turbines powered by fossil fuels just as renewable clean energy became more cost competitive and demand for gas turbines took a beating. The upshot? Profits in GE Power fell 45% in 2017. Instead of adding another 1,000 jobs as GE promised French regulators, GE Power was shedding 12,000 jobs worldwide. In August 2017, Immelt retired as CEO and was replaced by Flannery. A mere 14 months later, in October 2018, Flannery was fired by the board. During the same month, GE announced a $23 billion write-down, the majority of which was attributed to the Alstom deal. Sources: (1) Bloomberg Businessweek, 2018, The deal that’s making GE sick, October 28: 76; (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) Wall Street Journal, 2019, GE still has much to prove, October 31: B12.

Another primary preacquisition problem is inadequate screening and failure to achieve

strategic fit, which is the effective matching of complementary strategic capabilities.63 For

example, Bank of America spent only 48 hours in September 2008 before agreeing to acquire Merrill Lynch for $50 billion. Such failure to do adequate homework—technically referred to as due diligence (thorough investigation before signing contracts)—led to numerous problems. Consequently, this acquisition was labeled by the Wall Street Journal as “a deal from hell.”64 Even when more time is spent on due diligence, some seeming strategic fit may turn out to be illusionary (see Strategy in Action 9.2). In 1996, Dallas-based department store chain JCPenney acquired the drug store chain Eckerd for $3 billion. However, the presumed strategic fit because both were “retail” operations was not enough to generate real synergy. “JCPenney operated in the clothing sector of retail and Eckerd was in the drug store and small grocery business. The vendors were completely different so JCPenney was not able to leverage any of its relationships,” according to a JCPenney executive. “We tried very hard to make the merger successful but ultimately we had to sell the business.”65 Cross-border M&As have an even worse record because institutional and cultural distances are even larger, and nationalistic concerns over foreign acquisitions may erupt (see the Closing Case).66 In the 1980s and 1990s, when Japanese firms acquired Rockefeller Center and Columbia Pictures, US media reacted with indignation. In the 2000s, when DP World from the United Arab Emirates and CNOOC from China attempted to acquire US assets, they had to back off because of a political backlash. In 2015, when GE acquired Alstom, the French and EU governments became deeply concerned (see Strategic in Action 9.2).

strategic fit

The complementarity of partner firms’ “hard” skills and resources, such as technology, capital, and distribution channels.

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242  PART 3  Corporate-Level Strategies

STRATEGY IN ACTION 9.3

Ethical Dilemma

Can Mergers of Equals Work? Romanticized by the ideal of human marriages, mergers of equals between firms sound nice. But can they work? The answer is “Hardly.” In 1998, Daimler and Chrysler announced their “merger of equals” (their own words). It was soon clear who was calling the shots at DaimlerChrsyler. After two years, Chrysler’s former boss, Robert Eaton, left. Jürgen Schrempp, Daimler’s boss, shared with the media that the term “merger of equals” had been used only for “psychological reasons.” It is no surprise that the two sides divorced each other in 2007. In case you think the DaimlerChrysler tragedy was caused in part by the cross-cultural difficulties (which undoubtedly added to the challenges), mergers of equals between two firms from the same country may still be unworkable. In 1998, two US firms— Citibank and Travelers—merged with great fanfare to become Citigroup. Within two years, only one boss survived. Within five years, Citigroup had a divorce by spinning off Travelers, suggesting that the celebrated merger should never have taken place. In 2000, AOL Time Warner was born of a $114 billion merger between a “new economy” Internet firm, America Online, and an “old economy” media firm, Time Warner. The burst of the dotcom bubble in 2001 quickly revealed the shaky economics and unstable

organizational fit

The complementarity of partner firms’ “soft” organizational traits, such as goals, experiences, and behaviors, that facilitate cooperation.

power-sharing arrangements. In 2009, AOL was spun off. The new boss of Time Warner called the merger “the biggest mistake in corporate history.” Why are mergers of equals so hard? Because neither firm is willing to let the other have an upper hand, and neither boss, typically with a huge ego, is willing to let the other be in charge. It is possible at least one of them is opportunistic in the beginning and determined to drive away the other—as evidenced in the case of Schrempp at Daimler. But even in the absence of opportunism, when both bosses truly believe they can share power, a merger of equals can effectively translate into a “rudderless behemoth.” The Economist put it more bluntly: “Forget the romance of power sharing. When it comes to the tricky business of making a merger work, someone must be in charge.” Sources: (1) Economist, 2013, Riding the wave, November 5: 71; (2) Economist, 2013, Shall we? February 9: 65; (3) Economist, 2014, Love on the rocks, May 17: 65; (4) Economist, 2014, Return of the big deal, May 3: 55–57; (5) Economist, 2014, The new rules of attraction, November 15: 66–67.

Numerous integration problems may surface during the postacquisition phase.67 Although “a merger of equals” sounds nice, its integration is difficult to achieve (see Strategy in Action  9.3). Defined as similarity in cultures, systems, and structures, organizational fit is just as important as strategic fit. Many acquiring firms do not bother to adequately assess organizational fit with targets. In 2008, when Nomura decided to acquire Lehman Brothers’ assets in Asia and Europe in just 24 hours, no consideration was given to the lack of organizational fit between a hard-charging New York investment bank and a conservative, seniority-based Japanese firm practicing lifetime employment. For managers and employees involved (especially those at the target firms), business as usual virtually ceases, and the M&A process is often personally disruptive and full of uncertainty, tension, and chaos (see Figure 9.9).68 Working on both their day job and M&A job at the same time, their stress levels go up as they must adapt to unfamiliar practices, policies, and politics; work with strangers who may speak a different language; and worry about their own jobs—approximately 30% of employees (including numerous managers) lose their jobs because of redundancies (or synergies).69 Most firms focus on task issues such as standardizing reporting and pay inadequate attention to people issues, which typically results in low morale and high turnover.70 Every merger will have its integration difficulties, but integration difficulties will likely be even worse in cross-border M&As because clashes of organizational cultures are compounded by clashes of national cultures.71 Cultural differences sometimes mean acquirers from emerging economies (such as Geely) often have a hard time integrating Western firms (such as Volvo) (see the Closing Case). But even when both sides are from the West, cultural conflicts may still erupt. When Four Seasons acquired a hotel in Paris, the simple American request that employees smile at customers was resisted by French employees and laughed at by the local media as “la culture Mickey Mouse.” After Alcatel

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Chapter 9  Diversifying and Managing Acquisitions Globally   243

FIGURE 9.9  Stakeholder Concerns during Mergers and Acquisitions.

Investors

Top management

Middle management

Front-line employees

Customers

Will synergy benefits be downscaled?

Optimistic view of return on investment?

Synergies difficult to attain

Concern over job security

Internal conflicts: fractious management groups, key staff leave

Expected to do M&A + day jobs at the same time

What should I tell my customers?

So what?

Will efficiency & short-term revenues fall? Unrealistic euphoria

Overwhelmed by scale and scope When do lay-offs begin?

Service quality dips, relationship suffers

Who is setting my priorities and objectives? No one is listening to me. Do I still matter?

acquired Lucent, the situation became “almost comically dysfunctional.”72 At an all-hands gathering, employees threw fruits and vegetables at executives announcing another round of restructuring. Although acquisitions are often the largest capital expenditures most firms ever make, they frequently are the worst-planned and worst-executed activities of all.73 Unfortunately, while merging firms are sorting out the mess, rivals are likely to launch aggressive attacks. When Daimler struggled first with the chaos associated with its marriage to Chrysler (1998) and then was engulfed in its divorce from Chrysler (2007), BMW overtook Mercedes-Benz to become the world’s number one luxury carmaker. Adding all of above together, it is hardly surprising that most M&As fail.

Debates and Extensions Diversification and acquisitions have no shortage of controversies. Four leading debates are discussed here.

Debate 1: Product Relatedness versus Other Forms of Relatedness What exactly is relatedness? While intuitively product relatedness (such as HondaJet) seems straightforward, it has attracted at least three significant points of contention. First, how to actually measure product relatedness remains debatable.74 Consider Google, which has called itself Alphabet since 2015. In addition to its roots in search engines and online advertising, 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. How do we characterize Google’s product relatedness? Many people would probably characterize Google as a “technology company”—or more specifically, “an Internet-related products and services company.” But in today’s economy, what products

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244  PART 3  Corporate-Level Strategies

dominant logic

A common underlying theme that connects various businesses in a diversified firm.

institutional relatedness

A firm’s informal linkages with dominant institutions in the environment that confer resources and legitimacy.

and services are not related to the Internet? Therefore, such “relatedness” may not be very meaningful. Some argue that Google has become a “classic GE-type” conglomerate, with little product relatedness among its diverse businesses.75 Given that most of Google’s “other bets” have tiny revenues and major losses and that its search engines generate the lion’s share of revenues and profits, a sarcastic answer to the question “What is Google?” can be that Google is an advertising company with a bunch of hobbies (!).76 Second, beyond measurement issues, an important school of thought, known as the dominant logic school, argues that it is not only the visible product linkages that count as product relatedness, but also a set of common underlying dominant logics that connect various businesses in a diversified firm.77 Consider Britain’s easyGroup, which operates easyBus, easyJet (airline), easyCinema, easyHotel, and easyInternetcafé, among others. Underneath its conglomerate skin, a dominant logic is to actively manage supply and demand. Early or nonpeak-hour customers grab cheap deals (such as 20 cents a movie), and late or peak-hour customers pay a lot more. Charges at easyInternetcafés rise as seats fill up. While many firms (such as airlines) practice such yield management, none has been so aggressive as easyGroup. Thus, instead of treating easyGroup as a product-unrelated conglomerate, perhaps we can label it a related yield management firm. Finally, from an institution-based view, some product-unrelated conglomerates may be linked by institutional relatedness, defined as “a firm’s informal linkages with dominant institutions in the environment that confer resources and legitimacy.”78 For example, sound informal relationships with government agencies—in countries (usually emerging economies) where such agencies control crucial resources such as licensing and financing—would encourage firms to leverage such relationships by entering multiple industries. In other words, Koc, Samsung, Tata, and Wanda, which are often classified as product-unrelated conglomerates, may actually enjoy a great deal of institutional relatedness with the Turkish, Korean, Indian, and Chinese governments, respectively.79 For foreign firms, failing to appreciate the value of institutional relatedness with host country governments may court trouble. Exhibit A: Google’s trouble with the Chinese government, which forced Google to abandon that country.80

Debate 2: Old-Line versus New-Age Conglomerates Running an internal capital market, conglomerates always have to confront the challenge of capital allocation and coordination across a variety of product-unrelated businesses.81 Can a strategy of sprawl really work? In the United States, old-line conglomerates such as Beatrice, Gulf & Western, ITT, Litton Industries, and LTV were praised by Wall Street in the 1960s, but were discredited and broken up in the 1980s and 1990s. The major exception seemed to be GE, which emerged to be one of the most iconic American companies—until recently. Few corporate meltdowns have been as dramatic and swift as GE’s (see Strategy in Action 9.2). In 2015–2016, GE sold GE Capital and GE Appliances in a desperate effort to raise cash and simplify its portfolio. GE announced that it intended to focus on one commonality that seemed to unite its remaining business: spinning. Specifically, CT scanners, drives, jet engines, locomotive engines, motors, and turbines all spin. However, CT scanners and jet engines remain quite different. Investors were not convinced that GE could do a good job presiding over a still broad range of industries. In 2017, its long-serving CEO who started his tenure in 2001 retired. The next CEO only lasted 14 months (2017–2018). The most recent CEO (since 2018) announced that the “new GE” would only focus on three areas—power, aerospace (engines), and health care. The lesson seems to be that even the previously admired GE turned out to be, according to Fortune, “a typical crummy conglomerate.”82 The upshot? Deconglomeration. This is exactly why some conglomerates such as HP, News Corporation, and UTC recently downscoped, downsized, and refocused around the same time GE melted down.

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Chapter 9  Diversifying and Managing Acquisitions Globally   245

Although many old-line conglomerates (such as GE) demonstrate the huge challenges of profitably managing product-unrelated diversification, this has not prevented many new-age conglomerates from trying. Amazon and Alibaba represent a new breed of conglomerates. While dominating e-commerce (and thereby threatening the traditional retail industry), they have expanded into advertising, artificial intelligence, cloud computing, drones, entertainment, the Internet of things (IoT), logistics, mobile payments, and reading devices. In short, Amazon sells soaps and produces soap operas. Alibaba’s scope is even wider. It is, according to the Economist, “a combination of Amazon, Twitter, eBay, and PayPal, but broader.”83 Like their old-line counterparts, new-age conglomerates do not always win. The aptly named Amazon Fire smartphone ended up flaming out after its 2014 launch. In China, Alipay is routinely beaten by WeChatPay, which is offered by Alibaba’s archrival Tencent. The increasing dominance of these new-age conglomerates and their aggressive global expansion makes one wonder when they will hit their limits, beyond which downscoping will be necessary. While Amazon and Alibaba are relatively well-known new-age conglomerates, lesser known new-age conglomerates, which leverage 3D-printing technology (see Chapter 2), may emerge. Currently, manufacturers (and divisions within conglomerates) specialize because the same factory cannot produce, say, dental fixtures and engine parts. Relying on different levels of economies of scale, different products are based on different configurations of technology and expertise. Traditionally, switching from producing for one industry to another has been prohibitively expensive. However, some conglomerates, if they can master 3D printing, may be able to position “farms” of 3D printers to make almost anything and to switch without a great deal of cost. Three-dimensional printing enables products to be manufactured economically in smaller batches more flexibly with a much lower amount of waste. Switching costs will be insignificant and economies of scale trivial. Dartmouth College professor Richard D’Aveni has called such new-age conglomerates pan-industrials.84 Candidates to become pan-industrials include Dassault Systèmes, HP, Jabil, Siemens, and Sumitomo Heavy Industries.85 While such pan-industrials are likely to enjoy a period of strong growth as 3D-printing technology thrives, at some point they are likely to bump into the diminishing MEB curve and the increasing MBC curve (see Figure 9.5). If and how this scenario will play out remains to be seen.86

Debate 3: High Road versus Low Road in Integration In the postacquisition phase, integration is crucial. What is the optimal way to integrate acquired targets? Two primary approaches have emerged. The first is the “low road” to integration in which the acquirer acts quickly and aggressively to impose its systems and rules on the acquired target. This is often undertaken in many acquisitions centered on restructuring (reduction of firm size, scope, and complexity). Although the strategic rationale to derive synergies and reduce costs is well known, the alienation it can cause can be significant (see Figure 9.9). For example, in 1998, after Daimler acquired Chrysler, Daimler quickly undertook a series of aggressive restructuring initiatives. Many Chrysler managers and employees viewed their workplace as “occupied Chrysler” and left. The second way is the “high road” “in which the acquirer deliberately allows the acquired company to retain autonomy—within certain boundaries—and then gradually encourages interaction and integration between the two sides.”87 The high road obviously facilitates more rapport between the two sides. Many acquirers from developed economies embark on the low road, often resulting in poor postacquisition performance. In comparison, the high road that many acquirers from emerging economies embark on appears to be more refreshing. Acquisitions are not an event that just “happens.” Instead, targets are influential and active participants in the two phases of the M&A process.88 First, in the preacquisition phase, they need to agree to lose their independence and be acquired. While some financially

restructuring

Reducing firm size, scope, and complexity.

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246  PART 3  Corporate-Level Strategies

desperate firms may have little choice, successful firms, especially those with multiple suitors (bidders), can reject acquisition offers or be choosy in picking acquirers. Second, in the postacquisition phase, target firm managers and employees need to cooperate with new owners. However, after being acquired, target firms tend to lose their preexisting identity, resulting in their incentive loss (see Figure 9.9).89 Because targets suffer incentive loss, postacquisition arrangements need to minimize such loss to maximize joint value creation. Taking the high road is one of the most effective ways to overcome target firm resistance and motivate target firm managers and employees to strive for joint value creation. In other words, taking the high road is not merely being overly kind and possibly naïve, but is actually consistent with the goal of facilitating joint value creation after the acquisition. The high road in integration may be especially called for under two conditions: (1) the deal price is high, and (2) the goal is to acquire knowledge assets (see the Closing Case).90 In 2016, China’s electronics giant Midea offered to buy Kuka, one of Germany’s most innovative engineering companies, for $5 billion, a premium close to 60%. The primary goal was to gain access to Kuka’s knowledge assets—advanced robotics technology. Despite being the only bidder, Midea made assurances in meetings with German government officials. It offered extraordinary autonomy: Kuka would continue to be under German management, with headquarters, factories, and jobs intact for the next seven years—until 2023, far longer than the norm of two to three years for similar acquisitions.91 Conversely, targets for whom bidding prices are low are often underperforming in product markets or are in financial difficulties. Value-creation potential for such acquisitions is limited. Under these circumstances, a low-road approach that can quickly facilitate restructuring and stop financial hemorrhaging may be appropriate. Overall, debate continues to rage over the best way to implement postacquisition integration.

Debate 4: Acquisitions versus Alliances Despite the proliferation of acquisitions, their lackluster performance has led some to question whether they have been overused. Strategic alliances are an alternative to acquisitions (see Chapter 7). GE, HP, IBM, Microsoft, and Oracle are known as “rapid-fire” acquirers, often swallowing a dozen firms in any given year. Even when some firms pursue both M&As and alliances, they are often undertaken in isolation.92 While many large multinationals have an M&A function and some have set up an alliance function, few firms have established a combined “mergers, acquisitions, and alliances” function.93 In practice, it may be advisable to explicitly compare and contrast acquisitions vis-à-vis alliances. Compared with acquisitions, alliances, despite their own problems, cost less and allow for opportunities to learn from each other before engaging in full-blown acquisitions.94 Many poor acquisitions (such as DaimlerChrysler) would probably have been better off had firms pursued alliances first. On the other hand, Fiat and Chrysler, having worked together as alliance partners, may have better odds of maintaining an enduring relationship as Fiat Chrysler Automobiles.

The Savvy Strategist Guided by the three leading perspectives underpinning the strategy tripod, the savvy strategist draws three important implications for action (Table 9.5). First, understand the nature of your industry, which may call for diversification and acquisitions. In new growth industries, new entrants often feel compelled to acquire to ensure a timely presence. In some “sunset” industries (especially for some struggling firms), diversifying out of them is a must.

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Chapter 9  Diversifying and Managing Acquisitions Globally   247

Table 9.5  Strategic Implications for Action ●●

●● ●●

Understand the nature of your industry, which may call for diversification and acquisitions. Develop capabilities that facilitate successful diversification and acquisitions. Master the rules of the game governing diversification and acquisitions around the world.

Second, you and your firm need to develop capabilities that facilitate successful diversification and acquisitions by following the suggestions outlined in Table 9.6. These would include not overpaying for targets and focusing on both strategic and organizational fit. Avoiding getting caught up in a bidding war and admitting failure in proposed deals by walking away are painful but courageous. Worldwide, 10%–20% of the proposed deals collapse.95 Despite the media hoopla about the “power” of emerging multinationals from China, in reality more than half of their announced deals are not closed. Indian multinationals do better, but still one-third of their deals cannot close (see the Closing Case). This is not a problem that only affects emerging acquirers. Experienced acquirers such as AT&T, News Corporation, and Pfizer, respectively, withdrew from their multibillion dollar deals to acquire T-Mobile, Time Warner, and AstraZeneca recently. For targets, leveraging whatever value they have to fetch a good price is critical. In 2008, Yahoo rejected a $45 billion offer from Microsoft. In 2018, Yahoo sold itself to Verizon for only $4.8 billion.96 Finally, you need to master the rules of the game governing acquisitions around the world.97 When negotiating its acquisition of IBM’s PC assets, Lenovo clearly understood and tapped into the Chinese government’s support for homegrown multinationals. IBM likewise understood the necessity for the new Lenovo to maintain an American image when it persuaded Lenovo to set up a second headquarters in North Carolina. This highly symbolic action made it easier to win approval from the US government. In contrast, GE and Honeywell proposed to merge and cleared US antitrust scrutiny, but then failed to clear the EU antitrust authorities, who torpedoed the deal. The upshot is that, in addition to the economics of diversification and acquisitions, managers must pay attention to the politics behind such high-stakes strategic moves. In terms of the four most fundamental questions, this chapter directly answers Question 3: What determines the scope of the firm? Industry conditions, resource repertoire, and institutional frameworks shape corporate scope. In addition, why firms differ (Question 1) and how firms behave (Question 2) boil down to why and how they choose different diversification strategies. Finally, what determines the international success and failure of firms (Question 4)? The answer lies in whether they can successfully overcome the challenges associated with diversification and acquisitions. Table 9.6  Improving the Odds for Acquisition Success Phases

Do’s and Don’ts

Preacquisition

●●

●●

Postacquisition

●●

●●

Do not overpay for targets and avoid a bidding war when premiums are too high. Engage in thorough due diligence concerning both strategic fit and organizational fit. Address the concerns of multiple stakeholders and try to keep the best talents. Be prepared to deal with roadblocks thrown out by people whose jobs and power may be jeopardized.

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248  PART 3  Corporate-Level Strategies

CHAPTER SUMMARY 1. Define product diversification and geographic diver­

sification: ●●

●●

●●

●●

●●

Product-related diversification focuses on operational synergy and scale economies. Product-unrelated diversification (conglomeration) stresses financial synergy and scope economies. Geographically diversified firms can have a limited or extensive international scope. Most firms pursue product and geographic diversification simultaneously.

2. Articulate a comprehensive model of diversification: ●●

●●

The strategy tripod suggests industry-based, resource-based, and institution-based factors for diversification.

3. Gain insights into the motives and performance of

Most M&As are acquisitions. M&As are driven by (1) synergistic, (2) hubristic, or (3) managerial motivations.

4. Participate in four leading debates concerning diversifica-

tion and acquisitions ●●

(1) Product relatedness versus other forms of related­ ness, (2) old-line versus new-age conglomerates, (3) high road versus low road in integration, and (4) acquisitions versus alliances.

5. Draw strategic implications for action. ●●

●●

●●

acquisitions.

Understand the nature of your industry that may call for diversification and acquisitions. Develop capabilities that facilitate successful diversification and acquisitions. Master the rules of the game governing diversification and acquisitions around the world.

KEY TERMS Acquisition 238

Downscoping 236

Merger 238

Acquisition premium 239

Downsizing 237

Merger and acquisition (M&A) 238

Anchored replicator 231

Economic benefit 235

Multinational replicator 231

Bureaucratic cost 235 Business group 234

Economies of scope (scope economies) 228 Operational synergy (economies of scale) 227 Far-flung conglomerate 231

Business-level strategy 226

Financial control (output control) 234

Organizational fit 242

Conglomerate 228

Financial synergy (economies of scope) 228 Product diversification 226 Product-related diversification 227 Friendly M&A 239

Conglomerate M&A 239

Geographic diversification 226

Product-unrelated diversification 227

Conglomeration 227

Horizontal M&A 238

Corporate-level strategy (corporate strategy) 226

Hostile M&A (hostile takeover) 239

Diversification 226

Institutional relatedness 244

Diversification discount 228

Internal capital market 228

Diversification premium 228

International diversification 229

Divestiture 231

Marginal bureaucratic cost (MBC) 235

Dominant logic 244

Marginal economic benefit (MEB) 235

Classic conglomerate 231

Hubris 239

Refocusing 236 Restructuring 245 Single business strategy 227 Strategic control (behavior control) 233 Strategic fit 241 Vertical M&A 238

CRITICAL DISCUSSION QUESTIONS 1. M&As are a rare event for most firms. How can

firms enhance their capabilities for completing M&As effectively?

2. ON ETHICS: As a CEO leading an acquisition of a famous

foreign firm, you are interviewed by a reporter from the host country. The reporter asks, “A lot of people in our

country are mad about this foreign takeover of our iconic company. How would you alleviate their concerns?” 3. ON ETHICS: CEOs’ pay is typically linked to the size of

their firms. Some argue that CEOs have an inherent bias in favor of undertaking M&As using shareholders’ money. Do you agree or disagree with this view?

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Chapter 9  Diversifying and Managing Acquisitions Globally   249

TOPICS FOR EXPANDED PROJECTS 1. ON ETHICS: Some people argue that shareholders can

diversify their stockholdings and that there is no need for corporate diversification to reduce risk. The upshot is that any excess earnings (known as free cash flows) should be returned to shareholders as dividends. Do you agree or disagree with this statement? Why?

2. Product-unrelated diversification (conglomeration) is widely

discredited in developed economies. However, in some cases it still seems to add value in emerging economies—think of Tata and Wanda. Is this interest in conglomeration likely to hold or decrease in emerging economies over time? Why?

CLOSING CASE

3. ON ETHICS: As a CEO, you are trying to decide whether

to acquire a foreign firm. The size of your firm will double after this acquisition to become the largest in your industry. On the one hand, you are excited about the opportunities to be a leading captain of industry and the associated power, prestige, and income (you expect your income to double next year). On the other hand, you have just read this chapter and are troubled by the 70% M&A failure rate. How would you proceed?

Emerging Markets   Ethical Dilemma

Puzzles Behind Emerging Multinationals’ Acquisitions Multinational enterprises from emerging economies (EMNEs) have recently emerged as a new breed of acquirers around the world. In comparison with acquirers from developed economies, two unique and interesting patterns have emerged. First, during the preacquisition phase, EMNEs often bid higher for certain assets, especially those in developed economies. Second, during the postacquisition phase, EMNEs tend to allow acquired targets in developed economies significant autonomy as opposed to centralized, tight integration. However, when venturing to other emerging economies, EMNEs do not typically bid higher and do not generally grant significant autonomy to acquired targets. As a result, two puzzles have emerged: (1) Why do EMNEs often bid higher for acquisition targets in developed economies? (2) Why do they often grant significant autonomy to such targets? Eagerness to tap into strong complementarity is likely to motivate emerging multinationals to bid higher. Tata Motors’ 2008 acquisition of Jaguar Land Rover (JLR) from Ford is a case in point. At $2.3 billion, the all-cash deal was costly—one of the top five largest cross-border acquisitions undertaken by Indian firms. While Tata Motors had a leading position in lowend vehicles in India, JLR’s two iconic brands and advanced technology complemented Tata Motors’ strengths. Such strong complementarity is typical between acquirers from emerging economies and targets from developed economies. During the preacquisition phase, a number of stakeholders in the host country can jeopardize the deal. Externally, politicians can weaponize the issue under the cloak of nationalism, the media can cause an uproar against “foreign takeover,” and regulators can scuttle the deal citing elusive criteria such as national security concerns. For example, in 2006, Vale of Brazil met severe resistance when attempting to take over Inco, one of Canada’s largest mining companies. This acquisition, according to local politicians critical of the deal, would allegedly “undermine Canada’s

status as a force in the mining industry,” resulting in “the hollowing out of Canadian mining.” Internally, target firm managers and shareholders need to be convinced that EMNEs are the most suitable acquirers. Although bidding prices are important, target firm managers and shareholders often carefully weigh the match of the combination potential and organizational rapport between targets and acquirers. If emerging acquirers’ skills are viewed as too poor and legitimacy aspects as too low, they are not likely to get the nod. To overcome such resistance, emerging multinationals typically deploy two tactics. The first is to provide a more lucrative offer by enhancing the acquisition premium. In the Vale-Inco case, Vale proposed an all-cash offer of $18 billion and the assumption of $1 billion in debt, totaling a whopping $19 billion. In 2016, China’s electronics giant Midea offered to buy Kuka, one of Germany’s most innovative engineering companies, for $5 billion, a premium close to 60%. The primary goal was to gain access to Kuka’s robotics technology—technology so advanced that Germany’s deputy chancellor made a rare public appeal for alternative German and European bidders so that the technology would be kept out of Chinese hands. However, with a premium so high, no one else came forward. Second, granting targets significant autonomy is part of a crucial effort to soften target resistance and eventually reap benefits from these deals. Many emerging acquirers embark on a “high road” strategy in which acquirers deliberately allow acquired target companies to retain autonomy, keep the top management intact, and then gradually encourage interaction between the two sides. The high road obviously facilitates more rapport between the two sides. Many acquirers from developed economies use the “low road” (fast, aggressive integration), which often results in poor postacquisition performance. Therefore, many emerging acquirers’ high road approach is preferred by targets.

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250  PART 3  Corporate-Level Strategies

CLOSING CASE  (Continued) How much autonomy to grant acquired targets is correlated with how high the bidding prices are. Higher bidding prices intensify the need to reduce targets’ resistance by offering them significant autonomy. Take the case of the largest cross-border acquisition undertaken by a Chinese firm: ChemChina’s $43 billion takeover of Syngenta of Switzerland in 2017. This deal is almost three times the second-largest one undertaken by a Chinese multinational, which was CNOOC’s $15 billion takeover of Nexen of Canada in 2013. Syngenta is one of the world’s largest providers of agricultural chemicals and seeds. At such a high bidding price, ChemChina simply needed to offer sufficient autonomy to Syngenta to ensure joint value creation. When announcing the deal, ChemChina’s chairman promised that “the running of Syngenta would remain in Swiss hands,” and Syngenta’s chairman (who would become vice chairman of the new combined group) assured all stakeholders that the deal “would minimize operational disruption.” In fact, Syngenta rejected a similar offer from Monsanto and chose to be acquired by ChemChina. One reason was the autonomy that ChemChina would respect but that Monsanto would not. Finally, the goal for acquisitions is crucial in determining the magnitude of autonomy. If a primary goal is to gain access to knowledge assets (such as advanced technologies, strong brands, and superb talents), then a high road approach is advisable. Otherwise, knowledge assets may simply dissipate. In a worst-case scenario, knowledge workers may leave and some may join competitors, causing the original rosy projections for the acquisition to collapse. In terms of the two puzzles, bidding higher and offering autonomy seem to be “two sides of the same coin.” As rela­ tively inexperienced acquirers globally, emerging multi­ nationals have to pay a higher price (literally) to win the nod from target firm managers and shareholders as well as host country governments and stakeholders. Having paid a higher premium, offering significant autonomy to acquired targets becomes one of the most effective means to ensure joint value creation. Taking the high road is not merely being overly kind or naïve, but is driven by a strong need to enhance the odds for acquisition success. In other words, the high road is not

only politically smart and psychologically appealing, but also financially prudent. Sources: (1) Bloomberg Businessweek, 2016, The new barbarians at the gate, October 31: 39–41; (2) BNN, 2016, The hollowing out of Canadian mining, September 23: www.bnn.ca; (3) Fortune, 2017, China’s $43 billion bid for food security, May 1: 79–86; (4) W. Guo, J. Clougherty, & T. Duso, 2016, Why are Chinese MNEs not financially competitive in cross-border acquisitions? Long Range Planning 49: 614–631; (5) O. Hope, W. Thomas, & D. Vyas, 2011, The cost of pride, Journal of International Business Studies 42: 128–151; (6) R. Hoskisson, M. Wright, I. Filatotchev, & M. W. Peng, 2013, Emerging multinationals from mid-range economies, Journal of Management Studies 50: 1295–1321; (7) V. Kumar, D. Singh, A. Purkayastha, M. Popli, & A. Gaur, 2020, Springboard internationalization by emerging market firms, Journal of International Business Studies 51: 172–193; (8) S. Lebedev, M. W. Peng, E. Xie, & C. Stevens, 2015, Mergers and acquisitions in and out of emerging economies, Journal of World Business 50: 651–662; (9) M. W. Peng, 2012, The global strategy of emerging multinationals from China, Global Strategy Journal 2: 97–107; (10) S. Sun, M. W. Peng, B. Ren, & D. Yan, 2012, A comparative ownership advantage framework for cross-border M&As, Journal of World Business 47: 4–16; (11) Vale, 2006, CVRD announces proposed all-cash offer to acquire Inco, August 11: www.vale.com; (12) J. Zhang, M. Young, W. Sun, & J. Tan, 2018, Marrying up, Journal of World Business 53: 752–767; (13) H. Zhu & Q. Zhu, 2016, Mergers and acquisitions by Chinese firms, Asia Pacific Journal of Management 33: 1107–1149. CASE DISCUSSION QUESTIONS 1. Why do firms from emerging economies often pay

higher premiums for targets in developed economies?

2. Why do they often grant significant autonomy to

acquired targets in developed economies?

3. ON ETHICS: What are the benefits and drawbacks of

their high road approach to postacquisition integration in developed economies?

NOTES [Journal Acronyms] ABM—Alaska Beyond Magazine; 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; BW—BusinessWeek (before 2010) or Bloomberg Businessweek (since 2010); GSJ—Global Strategy Journal; HBR—Harvard Business Review; JEL—Journal of Economic Literature; JEP—Journal of Economic Perspectives; JF—Journal of Finance; JIBS—Jour-

nal of International Business Studies; JM—Journal of Management; JMS—Journal of Management Studies; JWB—Journal of World Business; OMEE—Organization and Markets in Emerging Economies; OSc—Organization Science; SMJ—Strategic Management Journal; SO—Strategic Organization; WSJ—Wall Street Journal. 1. M. W. Peng & A. Delios, 2006, What determines the scope of the firm over time and around the world? APJM 24: 385–405.

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Chapter 9  Diversifying and Managing Acquisitions Globally   251

2. E. Bowman & C. Helfat, 2001, Does corporate strategy matter? SMJ 22: 1–23. 3. J. Haleblian, C. Devers, G. McNamara, M. Carpenter, & R. Davison, 2009, Taking stock of what we know about mergers and acquisitions, JM 35: 469–502; M. Nippa, U. Pidun, & H. Rubner, 2011, Corporate portfolio management, AMP 25: 50–66. 4. D. Miller, M. Fern, & L. Cardinal, 2007, The use of knowledge for technological innovation within diversified firms, AMJ 50: 308–326. 5. BW, 2017, The surprising resilience of Samsung, July 31: 42–47. 6. M. Arrefelt, R. Wiseman, G. McNamara, & G. T. Hult, 2015, Examining a key corporate role, SMJ 36: 1017–1034. 7. K. B. Lee, M. W. Peng, & K. Lee, 2008, From diversification premium to diversification discount during institutional transitions, JWB 43: 47–65. 8. S. Chang, B. Kogut, & J. Yang, 2016, Global diversification discount and its discontents, SMJ 37: 2254–2274. 9. F. Brahm, J. Tarzijan, & M. Singer, 2017, The impact of frictions in routine execution on economies of scope, SMJ 38: 2121–2142; P. Chen, C. Williams, & R. Agarwal, 2012, Growing pains, SMJ 33: 252–276; L. Palich, L. Cardinal, & C. Miller, 2000, Curvilinearity in the diversification-performance linkage, SMJ 21: 155–174. 10. Fortune, 2017, Coach thinks outside the bag, June 1: 80–87. 11. BW, 2019, Levi Strauss wants to be bigger than jeans, March 25: 14–16. 12. Economist, 2014, Let my Fritos go, March 1: 65. 13. M. Carney, E. Gedajlovic, P. Heugens, M. van Essen, & J. Van Oosterhout, 2011, Business group affiliation, performance, context, and strategy, AMJ 54: 437–460; T. Khanna & Y. Yafeh, 2007, Business groups in emerging markets, JEL 45: 331–372. 14. D. Lange, S. Boivie, & A. Henderson, 2009, The parenting paradox, AMJ, 52: 179–198. 15. BW, 2018, What the hell is wrong with GE? February 5: 42–49; WSJ, 2019, CEO’s plan for GE, October 8: A1, A10. 16. M. Abdi & P. Aulakh, 2018, Internationalization and performance, JIBS 49: 832–857; A. Gande, C. Schenzler, & L. Senbert, 2009, Valuation effects of global diversification, JIBS 40: 1515–1532. 17. A. Delios & P. Beamish, 1999, Geographic scope, product diversification, and the corporate performance of Japanese firms (p. 724), SMJ 20: 711–727. 18. J. M. Geringer, S. Tallman, & D. Olsen, 2000, Product and international diversification among Japanese multinational firms (p. 76), SMJ 21: 51–80. 19. M. Kim, 2016, Geographic scope, isolating mechanisms, and value appropriation, SMJ 37: 695–713; G. Qian, T. Khoury, M. W. Peng, & Z. Qian, 2010, The performance implications of intra- and inter-regional geographic diversification, SMJ 31: 1018–1030. 20. A. Goerzen & S. Makino, 2007, Multinational corporation internationalization in the service sector, JIBS 38:

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1149–1169; M. Mayer, C. Stadler, & J. Hautz, 2015, The relationship between product and international diversification, SMJ 36: 1458–1468. Fortune, 2016, Pharmageddon? February 1: 66–75. K. Meyer, 2006, Global focusing, JMS 43: 1109–1144. N. Hashai, 2015, Within-industry diversification and firm performance, SMJ 36: 1378–1400; S. Kim, J. Arthurs, A. Sahaym, & J. Cullen, 2013, Search behavior of the diversified firm, SMJ 34: 999–1009; T. Zahavi & D. Lavie, 2013, Intra-industry diversification and firm performance, SMJ 34: 978–998. N. Damaraju, J. Barney, & A. Makhija, 2015, Real options in divestment alternatives, SMJ 36: 728–744; R. Durand & J. Vergne, 2015, Asset divestment as a response to media attacks in stigmatized industries, SMJ 36: 1205–1223; C. Moschieri & J. Mair, 2012, Managing divestitures through time, AMP 26: 35–50; W. McKinley, S. Latham, & M. Braun, 2014, Organizational decline and innovation, AMR 39: 88– 110; W. Wan, H. Chen, & D. Yiu, 2015, Organization image, identity, and international divestment, GSJ 5: 205–222; J. Xia & S. Li, 2013, The divestiture of acquired subunits, SMJ 34: 131–148. J. Campbell, D. Sirmon, & M. Schijven, 2016, Fuzzy logic and the market, AMJ 59: 163–187; S. Gubbi, P. Aulakh, S. Ray, M. Sarkar, & R. Chittoor, 2010, Do international acquisitions by emerging-economy firms create shareholder value? JIBS 41: 397–418; A. Kaul & B. Wu, 2016, A capabilities-based perspective on target selection in acquisitions, SMJ 37: 1220–1239; T. Mackey, J. Barney, & J. Dotson, 2017, Corporate diversification and the value of individual firms, SMJ 38: 322–341; S. Malhotra & A. Gaur, 2014, Spatial geography and control in foreign acquisitions, JIBS 45: 191–210; Y. Yu, N. Umashankar, & V. Rao, 2016, Choosing the right target, SMJ 37: 1808–1825. K. Ellis, T. Reus, B. Lamont, & A. Ranft, 2011, Transfer effects in large acquisitions, AMJ 54: 1261–1276; A. Phene, S. Tallman, & P. Almeida, 2012, When do acquisitions facilitate technological exploration and exploitation? JM 38: 753–783; A. Sleptsov, J. Anand, & G. Vasudeva, 2013, Relational configurations with information intermediaries, SMJ 34: 957–977. BW, 2014, Jackpot! How Lenovo found treasure in the PC industry’s trash, May 12: 46–51. J. Kim & S. Finkelstein, 2009, The effects of strategic and market complementarity on acquisition performance, SMJ 30: 617–646. J. Oxley & G. Pandher, 2016, Equity-based incentives and collaboration in the modern multibusiness firm, SMJ 37: 1379–1394. R. Levine, C. Lin, & B. Shen, 2020, Cross-border acquisitions, JIBS 51: 194–217; B. Tan & A. Chintakananda, 2016, The effects of home country political and legal institutions on firms’ geographic diversification performance, GSJ 6: 105–123. M. Carney, M. van Essen, S. Estrin, & D. Shapiro, 2018, Business groups reconsidered, AMP 32: 493–516; H. Hu,

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252  PART 3  Corporate-Level Strategies

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L. Cui, & P. Aulakh, 2019, State capitalism and performance persistence of business group-affiliated firms, JIBS 50: 193–222; A. Iona, L. Leonida, & P. Navarra, 2013, Business group affiliation, innovation, internationalization, and performance, GSJ 3: 244–261; A. Lamin, 2013, Business groups as information resource, AMJ 56: 1487–1509; D. Mukherjee, E. Makarius, & C. Stevens, 2018, Business group reputation and affiliates’ internationalization strategies, JWB 53: 93–103. J. Haleblian, G. McNamara, K. Kolev, & B. Dykes, 2012, Exploring firm characteristics that differentiate leaders from followers in industry merger waves, SMJ 33: 1037–1052. E. Matta & P. Beamish, 2008, The accentuated CEO career horizon problem, SMJ 29: 683–700. P. Brockman, O. Rui, & H. Zhou, 2013, Institutions and the performance of politically connected M&As, JIBS 44: 833–852; E. Vaara, R. Sarala, G. Stahl, & I. Bjorkman, 2012, The impact of organizational and national cultural differences on social conflict and knowledge transfer in international acquisitions, JMS 49: 1–26; H. Zhu, X. Ma, S. Sauerwald, & M. W. Peng, 2019, Home country institutions behind cross-border acquisition performance, JM 45: 1315–1342. This section draws heavily from M. W. Peng, S. Lee, & D. Wang, 2005, What determines the scope of the firm over time? A focus on institutional relatedness, AMR 30: 622–633. G. Jones & C. Hill, 1988, Transaction cost analysis of strategy-structure choices, SMJ 9: 159–172. See also E. Rawley, 2010, Diversification, coordination costs, and organizational rigidity, SMJ 31: 873–891; Y. Zhou, 2011, Synergy, coordination costs, and diversification choices, SMJ 32: 624–639. D. Miller & H. Yang, 2016, The dynamics of diversification, SMJ 37: 2323–2345. H. Kim, H. Kim, & R. Hoskisson, 2010, Does market-oriented institutional change in an emerging economy make business group-affiliated multinationals perform better? JIBS 41: 1141–1160; Lee, Peng, & Lee, 2008, From diversification premium to diversification discount, op. cit. Economist, 2014, The new rules of attraction (p. 66), November 15: 66–67. J. Clougherty & T. Duso, 2009, The impact of horizontal mergers on rival, JMS 46: 1365–1395. M. Jacobides, 2008, How capability differences, transaction costs, and learning curves interact to shape vertical scope, OSc 19: 306–326. Economist, 2017, Dogfight in the skies, September 9: 61. S. Chen, 2008, The motives for international acquisitions, JIBS 39: 454–471. ABM, 2016, Flying better together, May: 42–47. K. Younge, T. Tong, & L. Fleming, 2015, How anticipated employee mobility affects acquisition likelihood, SMJ 36: 686–708. Z. Lin, M. W. Peng, H. Yang, & S. Sun, 2009, How do networks and learning drive M&As? SMJ 30: 1113–1132;

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H. Yang, S. Sun, Z. Lin, & M. W. Peng, 2011, Behind M&As in China and the United States, APJM 28: 239–55. P. Picone, G. Dagnino, & A. Mina, 2014, The origin of failure, AMP 28: 447–468. S. Malhotra, P. Zhu, & T. Reus, 2015, Anchoring on the acquisition premium decisions of others, SMJ 36: 1866–1876. C. Moschieri & J. Campa, 2009, The European M&A industry (p. 82), AMP 23: 71–87. O. Hope, W. Thomas, & D. Vyas, 2011, The cost of pride, JIBS 42: 128–151. L. Urbsiene, V. Nemunaityte, & A. Zatulinas, 2015, Comparison of premiums of Chinese and European companies in mergers and acquisitions in Europe, OMEE 6: 67–102. A. Gaur, S. Malhotra, & P. Zhu, 2013, Acquisition announcements and stock market valuations of acquiring firms’ rivals, SMJ 34: 215–232. M. Fuad & A. Gaur, 2019, Merger waves, entry-timing, and cross-border acquisition completion, JWB 54: 107–118. S. Graffin, J. Haleblian, & J. Kiley, 2016, Ready, aim, acquire, AMJ 59: 232–252; J. Kim, S. Finkelstein, & J. Haleblian, 2015, All aspirations are not created equal, AMJ 58: 1361–1388. G. Dagnino, C. Giachetti, M. Rocca, & P. Picone, 2019, Behind the curtain of international diversification, GSJ 9: 555–594; D. Gamache, G. McNamara, S. Griffin, J. Kiley, J. Haleblian, & C. Devers, 2019, Impression offsetting as an early warning signal of low CEO confidence in acquisitions, AMJ 62: 1307–1332; S. Malhotra, T. Reus, P. Zhu, & E. Roelofsen, 2018, The acquisitive nature of extraverted CEOs, ASQ 63: 370–408; P. Meyer-Doyle, S. Lee, & C. Helfat, 2019, Disentangling the microfoundations of acquisition behavior and performance, SMJ 40: 1733–1756; W. Shi, Y. Zhang, & R. Hoskisson, 2017, Ripple effects of CEO awards, SMJ 38: 2080–2102; C. Zhang & H. Greve, 2019, Dominant coalitions directing acquisitions, AMJ 62: 44–65. S. Moeller, F. Schlingemann, & R. Stulz, 2005, Wealth destruction on a massive scale? JF 60: 757–782; D. Siegel & K. Simons, 2010, Assessing the effects of M&As on firm performance, SMJ 31: 903–916; G. Valentini, 2012, Measuring the effect of M&A on patenting quantity and quality, SMJ 33: 336–346. C. Christensen, R. Alton, C. Rising, & A. Waldeck, 2011, The new M&A playbook, HBR March: 48–57. D. King, D. Dalton, C. Daily, & J. Covin, 2004, Meta-analyses of post-acquisition performance, SMJ 25: 187–200. B. Blonigen & J. Pierce, 2016, Evidence for the effects of mergers on market power and efficiency, NBER Working Paper 22750. Economist, 2014, Mergers and acquisitions: The new rules of attraction (p. 67), November 15: 66–67. G. Andrade, M. Mitchell, & E. Stafford, 2001, New evidence and perspectives on mergers, JEP 15: 103–120. CNBC, 2019, IBM closes its $34 billion acquisition of Red Hat, July 9: www.cnbc.com; Economist, 2018, IBM’s rebel yell, November 3: 63–64.

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63. C. Meyer & E. Altenborg, 2008, Incompatible strategies in international mergers, JIBS 39: 508–525. 64. WSJ, 2009, Bank of America–Merrill Lynch: A $50 billion deal from hell, January 22: blogs.wsj.com. 65. B. Mesa, 2014, Strategic fit versus organizational fit, EMBA homework, Jindal School of Management, University of Texas at Dallas, November 7. 66. Z. Huang, H. Zhu, & D. Brass, 2016, Cross-border acquisitions and the asymmetric effect of power distance value difference on long-term post-acquisition performance, SMJ 38: 972–991; H. E. Yildiz & C. Fey, 2016, Are the extent and effect of psychic distance perceptions symmetrical in cross-border M&As? JIBS 47: 830–857. 67. J. Allatta & H. Singh, 2011, Evolving communication patterns in response to an acquisition event, SMJ 32: 1099–1118; M. Brannen & M. Peterson, 2009, Merging without alienating, JIBS 40: 468–489; R. Chakrabarti, S. Gupta-Mukherjee, & N. Jayaraman, 2009, Mars-Venus marriages, JIBS 40: 216–236; G. Chung, J. Du, & J. Choi, 2014, How do employees adapt to organizational change driven by cross-border M&As? JWB 49: 78–86; S. Mantere, H. Schildt, & J. Sillince, 2012, Reversal of strategic change, AMJ 55: 172–196; P. Monin, N. Noorderhaven, E. Vaara, & D. Kroon, 2013, Giving sense to and making sense of justice in postmerger integration, AMJ 56: 256–284. 68. P. Haspeslagh & D. Jemison, 1991, Managing Acquisitions, New York: Free Press. 69. J. Krug, P. Wright, & M. Kroll, 2014, Top management turnover following M&As, AMP 28: 147–163; M. Marks, P. Mirvis, & R. Ashkenas, 2017, Surviving M&A, HBR March: 145–149; V. Ng, E. Huang, & M. Young, 2019, Should I stay or should I go? APJM 36: 1023–1051. 70. M. Cording, J. Harrison, R. Hoskisson, & K. Jonsen, 2014, Walking the talk, AMP 28: 38–56. 71. T. Reus, B. Lamont, & K. Ellis, 2016, A darker side of knowledge transfer following international acquisitions, SMJ 37: 932–944; R. Sarala & E. Vaara, 2010, Cultural differences, convergence, and crossvergence as explanations of knowledge transfer in international acquisitions, JIBS 41: 1365–1390. 72. BW, 2011, Hi-yah! Alcatel-Lucent chops away at years of failure (p. 29), May 2: 29–31. 73. M. Cording, P. Christmann, & D. King, 2010, Reducing causal ambiguity in acquisition integration, AMJ 51: 744– 767. 74. V. Bennett & L. Pierce, 2016, Motivation matters, SMJ 37: 1304–1315; M. Lieberman, G. Lee, & T. Folta, 2017, Entry, exit, and the potential for resource redeployment, SMJ 38: 526–544; F. Neffke & M. Henning, 2013, Skill relatedness and firm diversification, SMJ 34: 297–316; A. Sakhartov & T. Folta, 2015, Getting beyond relatedness as a driver of corporate value, SMJ 36: 1939–1959. 75. Economist, 2014, The new GE: Google, everywhere, January 18: 63–64.

76. BW, 2016, Google returns to earth, December 12: 44– 49; WSJ, 2019, Alphabet backs off on experimentation, December 6: B1. 77. C. K. Prahalad & R. Bettis, 1986, The dominant logic, SMJ 7: 485–501. 78. Peng, Lee, & Wang, 2005, What determines the scope of the firm over time? (p. 623), op. cit. 79. Y. Li, M. W. Peng, & C. Macaulay, 2013, Market-political ambidexterity during institutional transitions, SO 11: 205–213; D. Wang, F. Du, & C. Marquis, 2019, Defending Mao’s dream, AMJ 62: 1111–1136. 80. C. Stevens, E. Xie, & M. W. Peng, 2016, Toward a legitimacybased view of political risk: The case of Google and Yahoo in China, SMJ 37: 945–963. 81. M. Chen, A. Kaul, & B. Wu, 2019, Adaptation across multiple landscapes, SMJ 40: 1791–1821; A. Colpan & T. Hikino, 2018, Business Groups in the West, Oxford, UK: Oxford University Press. 82. Fortune, 2015, Breaking up GE, September 1: 114–120. 83. Economist, 2017, The new bazaar, October 28: special report. 84. R. D’Aveni, 2018, The Pan-Industrial Revolution, New York: Houghton Mifflin Harcourt. 85. WSJ, 2018, Printing the future, October 17: www.wsj.com. 86. N. Argyres, J. Mahoney, & J. Nickerson, 2019, Strategic responses to shocks, SMJ 40: 357–376. 87. J. Birkinshaw, H. Bresman, & R. Nobel, 2010, Knowledge transfer in international acquisitions (p. 24), JIBS 41: 21–26. 88. M. Graebner & K. Eisenhardt, 2004, The seller’s side of the story, ASQ 49: 366-403. 89. A. Madhok & M. Keyhani, 2012. Acquisitions as entrepreneurship, GSJ 2: 26 –40. 90. S. Wang, Y. Luo, X. Lu, J. Sun, & V. Maksimov, 2014, Autonomy delegation to foreign subsidiaries, JIBS 45: 111–130. 91. BW, 2016, The new barbarians at the gate, October 31: 39–41. 92. B. McCann, J. Reuer, & N. Lahiri, 2016, Agglomeration and the choice between acquisitions and alliances, SMJ 37: 1085–1106; X. Yin & M. Shanley, 2008, Industry determinants of the “merger versus alliance” decision, AMR 33: 473–491. 93. A. Trichterborn, D. Knyphausen-Aufseb, & L. Schweizer, 2016, How to improve acquisition performance, SMJ 37: 763–773. 94. H. Yang, Z. Lin, & M. W. Peng, 2011, Behind acquisitions of alliance partners, AMJ 54: 1069–1080. 95. Economist, 2014, Coming unstuck, August 9: 53–54. 96. Economist, 2018, Verizon buys Yahoo, July 30: 49–50. 97. J. Clougherty, K. Gugler, L. Sorgard, & F. Szucs, 2014, Cross-border mergers and domestic firm wages, JIBS 45: 450–470.

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CHAPTER

10

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Strategizing, Structuring, and Innovating Around the World

KNOWLEDGE OBJECTIVES After studying this chapter, you should be able to 1. Understand the four basic configurations of multinational strategies and structures in an integration-responsiveness framework 2. Articulate a comprehensive model of multinational strategy, structure, and innovation 3. Outline the challenges associated with learning, innovation, and knowledge management 4. Participate in two leading debates concerning multinational strategy, structure, and innovation 5. Draw strategic implications for action

254

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OPENING CASE

Launching the McWrap It is hard to believe, but McDonald’s is no longer the world’s largest fast-food chain—at least measured by the number of restaurants. Subway has rocketed ahead, with close to 41,000 restaurants worldwide vis-à-vis McDonald’s’ 38,000. While McDonald’s still sells more than Subway ($21 billion versus $18 billion in 2019), McDonald’s seems to have lost momentum, with US sales slowing down noticeably. McDonald’s, of course, competes not only with Subway, but also with the likes of Five Guys and Chipotle. In these three competitors, customers can see their food being prepared and feel that it is fresher and seemingly healthier. In the Fresh Wars, Subway has elevated its food preparers to become “sandwich artists.” Chipotle has bragged about its “food with integrity” and released a short film critical of industrial farming—with a finger pointing at you know what. In response, McDonald’s has unleashed the McWrap, a high-profile salvo in the Fresh Wars in an effort to grab customer attention. At $3.99 in the United States, the McWrap is a ten-inch, white-flour tortilla wrapped around three ounces of chicken (grilled or crispy), lettuce, spring greens, sliced cucumbers, tomatoes, and cheddar jack cheese. Customers can choose their preferred dressing: ranch, sweet chili, or creamy garlic. Only made to order (not premade), the McWrap can be prepared under 60 seconds. When served, it comes with a cool cardboard wrapper with a top that can be zipped open. The whole thing can fit vertically in a cup holder in a car. The two-year, nine-ingredient, focus-grouped efforts to fix McDonald’s freshness problem are an amazing case study of how a multinational changes its strategy, taps into its global organization, and leverages its knowledge— all under the pressures of cost reduction and local responsiveness. Dissecting what is behind the launch of McWrap, we can see at least three things. The idea did not come from the United States. It came from three operations in Europe. In 2004, ­McDonald’s in the Czech Republic started selling

the Chicken Roll Up. In 2005, McDonald’s in ­Poland introduced a tortilla sandwich, inspired by the ­kebab, a popular street food. In 2009, Austria pioneered the nifty cardboard container that can be unzipped. Thanks to a European food studio (which would be called a research-and-development [R&D] lab in other firms), these local innovations were noticed and diffused to the rest of the McDonald’s worldwide organization. The attention that the McWrap idea attracted from the headquarters was driven by a strategic interest in search of fresher and healthier items to outcompete rivals in the Fresh Wars. Specifically, it was the search for local responsiveness—in this case primarily in McDonald’s home country—that identified the wrap to be a potential good fit. Americans are eating more chicken and prefer more fresh food, and the wrap might enable McDonald’s to respond to such changing tastes. Significant experimentation, learning, and innovation went into the process. While the idea seemed appealing, McDonald’s did not operate on gut feelings. Its menu-innovation team undertook intense research and numerous experiments that ultimately took two years (2011–2013) to finish. To introduce new items to a restaurant chain as large as McDonald’s was mind-boggling. The food must be tasty, the cost low, and the time to serve short—without compromising quality. To enhance freshness, two slices of English cucumber were added for the first time to McDonald’s offerings. While adding a tiny bit of cucumber did not sound like a big deal, it actually was quite a challenge to McDonald’s supply chain. About a decade ago, McDonald’s introduced sliced apples to its menu, and it quickly became one of the largest buyers of apples in the United States. Initially, a half-breast of chicken was used. But focus groups thought the wrap was a salad—with too many vegetables. ­Despite the rising health awareness, customers actually wanted more meat—as long as it was chicken. So the final version of the wrap had

255

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256  PART 3  Corporate-Level Strategies

OPENING CASE  (Continued) a full breast of chicken. The wrap’s name also went through intense testing. In the first trial in Chicago, it was called the Grande Wrap. But customers could not figure out what “grande” was. Then the name Fresh Garden Wrap was tested in Orlando, and it flopped too. Eventually, McWrap was chosen.

Sources: (1) The author’s interviews; (2) Bloomberg Businessweek, 2013, McFresh, July 8: 44–49; (3) Bloomberg Businessweek, 2014, Have we reached peak burger? September 8: 21–22; (4) Wall Street Cheat Sheet, 2013, 8 reasons McDonald’s is praying the McWrap is a smash hit, July 10: wallstcheatsheet.com; (5) www.mcdonalds.com; (6) www.subway.com.

H

ow can multinational enterprises (MNEs) such as McDonald’s strategically manage growth around the world so that they can be successful both locally and internationally? How can they learn country tastes, global trends, and market transitions? How can they improve the odds for better innovation such as the McWrap? These are some of the key questions driving this chapter, which focuses on relatively large MNEs. We start by discussing the crucial relationship between four strategies and four structures. Next, a comprehensive model drawing from the strategy tripod sheds light on these issues. Then, we discuss worldwide learning, innovation, and knowledge management. Debates and extensions follow.

Multinational Strategies and Structures This section first introduces an integration-responsiveness framework centered on the pressures for cost reduction and local responsiveness. We then outline the four strategic choices and the four corresponding organizational structures that MNEs typically adopt.

Pressures for Cost Reduction and Local Responsiveness integration-responsiveness framework

A framework of MNE management on how to simultaneously deal with two sets of pressures for global integration and local responsiveness. local responsiveness

The necessity to be responsive to different customer preferences around the world.

MNEs confront primarily two sets of pressures: cost reduction and local responsiveness. These two sets of pressures are captured in the integration-responsiveness framework, which allows managers to deal with the pressures for both global integration and local ­responsiveness. Cost pressures often call for global integration, whereas local responsiveness pushes MNEs to adapt locally. In both domestic and international competition, pressures to reduce costs are universal. What is unique in international competition is the pressures for local responsiveness, which means reacting to different consumer preferences and hostcountry demands. Consumer preferences vary tremendously around the world. For example, McDonald’s ­beef-based hamburgers would obviously find few (or no) customers in India, a land where the Hindu majority holds cows as sacred. Instead, McDonald’s best-­selling item in India is Chicken Maharajah Mac. In addition, McDonald’s sells beer in ­Germany, McRice in Indonesia, meat pies in New Zealand, and prawn burgers in Singapore. Kentucky Fried Chicken (KFC) sells egg tarts, lotus soup, porridge, rice rolls, and soybean milk in China. In addition to consumer preferences, host-country demands and expectations add to the pressures for local responsiveness. In the name of “digital sovereignty,” many countries now demand data about their citizens be kept within their territories, forcing global platform firms such as Amazon, Facebook, and Google to reluctantly comply. Taken together, being locally responsive certainly makes local customers and governments happy, but it unfortunately increases costs. Given the universal interest in lowering cost, a natural tendency is to downplay or ignore the different needs and wants of various local markets and instead market a global version of products and services. The movement to globalize offerings can be traced to a 1983 article by Theodore Levitt: “The Globalization of Markets.”1 Levitt argued that consumer tastes are converging worldwide. As evidence, Levitt

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   257

pointed to the global success of Coke Classic, Levi Strauss jeans, and Sony TV. Levitt predicted that such convergence would characterize most product markets in the future. Levitt’s idea has often become the intellectual force propelling many MNEs to globally integrate their offerings while minimizing local adaptation. Ford experimented with “world car” designs. MTV pushed ahead with the belief that viewers would flock to global (essentially American) programming. Unfortunately, most of these experiments were not successful. Ford found that consumer tastes range widely around the globe. MTV eventually realized that there is no “global song.” In a nutshell, one size does not fit all. With the recent antiglobalization movement, this is especially likely to be the case. Therefore, we need to carefully examine how MNEs can pay attention to both dimensions: cost reduction and local responsiveness.

Four Strategic Choices Based on the integration-responsiveness framework, Figure 10.1 plots the four strategic choices: (1) home replication, (2) localization, (3) global standardization, and (4) ­transnational. Each strategy has a set of pros and cons outlined in Table 10.1, and their corresponding structures are discussed in the next section. Home replication strategy, sometimes known as international strategy, duplicates homecountry-based competencies in foreign countries. Such competencies include production scales, distribution efficiencies, and brand power. In manufacturing, this is usually manifested in an export strategy. In services, this is often done through licensing and franchising. This strategy is relatively easy to implement and usually the first one adopted when firms venture abroad. On the disadvantage side, home replication strategy often lacks local responsiveness because it focuses on the home country. This strategy makes sense when the majority of a firm’s customers are domestic. However, when a firm aspires to broaden its international scope, failing to be mindful of foreign customers’ needs and wants may alienate them. When Walmart entered Brazil, the stores had exactly the same inventory as its US stores, including a large number of American footballs. Considering that Brazil is the land of soccer and has won the World Cup five times (more than any other country), nobody—except a few homesick American expatriates in their spare time—plays American football there. When Walmart

home replication strategy

A strategy that emphasizes the international replication of home country–based competencies such as production scales, distribution efficiencies, and brand power.

Pressures for cost reductions Low High

Figure 10.1 Multinational Strategies and Structures: The IntegrationResponsiveness Framework

Global standardization strategy Global product division

Home replication strategy International division

Transnational strategy Global matrix

Localization strategy Geographic area

Low High Pressures for local responsiveness Note In some other textbooks, home replication may be referred to as international or export strategy, localization as multidomestic strategy, and global standardization as global strategy. Some of these ­labels are confusing, because one can argue that all four strategies here are international or global, thus ­resulting in some confusion if we label one of these strategies as international and another as global. The present set of labels is more descriptive and less confusing.

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258  PART 3  Corporate-Level Strategies

Table 10.1  Four Strategic Choices for Multinational Enterprises Advantages Home replication

●● ●●

Localization

●●

Leverages home country-based advantages Relatively easy to implement Maximizes local responsiveness

Disadvantages ●● ●● ●● ●●

Global standardization

●●

Leverages low-cost advantages

●● ●●

Transnational

●● ●●

localization (multidomestic) strategy

An MNE strategy that focuses on a number of foreign countries/regions, each of which is regarded as a standalone local (domestic) market worthy of significant attention and adaptation.

global standardization strategy

An MNE strategy that relies on the development and distribution of standardized products worldwide to reap the maximum benefits from low-cost advantages. center of excellence

MNE subsidiary explicitly recognized as a source of important capabilities, with the intention that these capabilities be leveraged by and/or disseminated to other subsidiaries. worldwide (global) mandate

The charter to be responsible for one MNE function throughout the world. transnational strategy

An MNE strategy that endeavors to be cost efficient, locally responsive, and learning driven simultaneously.

Cost efficient while being locally responsive Global learning and diffusion of innovations

●● ●●

Lack of local responsiveness May result in foreign customer alienation High costs due to duplication of efforts Too much local autonomy Lack of local responsiveness Too much centralized control Organizationally complex Difficult to implement

went to Germany, it insisted that its store employees smile at customers—not socially acceptable in the country. Employees hated this, and customers felt such “unnatural” smile creepy.2 Localization strategy is an extension of home replication strategy.3 Localization (or m ­ ultidomestic) strategy focuses on a number of foreign countries or regions, each of which is regarded as a stand-alone local (domestic) market worthy of significant adaptation. While sacrificing global efficiencies, this strategy is effective when differences among national and regional markets are clear. For example, KFC has pioneered the use of facial-recognition technology fueled by artificial intelligence (AI) in China (see Strategy in Action 10.1). Mary Kay lets each region manage its own product portfolio. While Mary Kay has more than 500 stock keeping units (SKUs) worldwide, it carries much fewer SKUs in China because skin colors are not so varied there.4 Disney’s newest theme park—Shanghai Disneyland—has dropped a standard feature common in all Disney parks, Main Street USA. It has created a number of new rides based on Chinese culture.5 In terms of disadvantages, localization strategy has high costs due to duplication of efforts in multiple countries. The costs of producing a variety of programming for MTV are obviously greater than the costs of producing one set of programming. As a result, this strategy is only appropriate in industries where the pressures for cost reductions are not significant. Another drawback is too much local autonomy, which happens when each subsidiary regards its country as so unique that it is difficult to introduce corporate-wide changes. In the 1980s, Unilever had 17 country subsidiaries in Europe. It took four years to persuade all 17 subsidiaries to introduce a single new detergent across Europe. As the opposite of localization strategy, global standardization strategy is sometimes referred to simply as global strategy. Its hallmark is the development and distribution of standardized products worldwide in order to reap the maximum benefits from low-cost advantages. While both home replication and global standardization strategies minimize local responsiveness, a crucial difference is that an MNE pursuing a global standardization strategy is not limited to its major operations at home. In a number of countries, the MNE may designate centers of excellence, which are defined as subsidiaries explicitly recognized as a source of important capabilities, with the intention that these capabilities be leveraged by or disseminated to other subsidiaries. Centers of excellence are often given a worldwide (or global) mandate—a charter to be responsible for one MNE function throughout the world. For example, Huawei’s Sweden subsidiary has a worldwide mandate in network consulting. In terms of disadvantages, a global standardization strategy obviously sacrifices local responsiveness. This strategy makes great sense in industries where pressures for cost reduc­ tions are paramount and pressures for local responsiveness are relatively minor (particularly in commodity industries, such as tires). However, as noted earlier, in industries ranging from automobiles to consumer products, a one-size-fits-all strategy may be inappropriate. Transnational strategy aims to capture the best of both worlds by endeavoring to be both cost efficient and locally responsive. In addition to cost efficiency and local responsiveness, a third hallmark of this strategy is global learning and diffusion of innovations. Traditionally, the diffusion of innovations in MNEs is a one-way flow from the home country to various host countries—the label home replication says it all (!). Underpinning the traditional one-way

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   259

STRATEGY IN ACTION 10.1 Emerging Markets  Ethical Dilemma KFC Leverages Artificial Intelligence in China Kentucky Fried Chicken (KFC) is one of the world’s largest fastfood chains, with more than 22,000 restaurants in 130 countries. KFC’s fanciest restaurants are in China. They are characterized by cashless stores, individualized menus, and localized food items anchored by artificial intelligence (AI). Starting in 2017, KFC has teamed up with Baidu—“China’s Google”—to develop facial-recognition technology that can be used to predict customers’ orders. “The AI-enabled system can recommend menu items based on a customer’s estimated age and mood,” according to a press release from Baidu, “a female customer in her 50s” would be offered “porridge and soybean milk for breakfast,” and “a male customer in his early 20s” would be offered “crispy chicken hamburger, roasted chicken wings, and Coke for lunch.” A reporter went to try the smart restaurant by herself. She stood in front a touch-screen order machine, which first scanned her face. She was read as being female (correct) and in her 30s (only a decade off). On this basis, she was recommended a chicken hamburger meal. If she had visited any KFC in China earlier, the machine would also tailor the recommendation based on her previous preferences. If she did not agree with the suggestion, she could click through some alternatives. In other words, the machine showed her a shorter menu. Once happy with the order, she could pay with her mobile phone at the machine—with neither cash nor credit or debit card—and collect her meal moments later at the counter. Overall, such digitalization was about convenience, providing faster and easier services. Dealing with a classic dilemma of convenience versus privacy, some customers initially had goose bumps when having a machine capture data about them. However, when they lined up in front the counter, they could see those brave ones who dealt with the machine received their meals faster. The side-by-side comparison convinced many customers to try the AI-enabled machine—after all, they came to a fast-food restaurant looking for fast service. By 2019, hundreds of KFC restaurants in China were equipped with such AI-enabled machines. China’s largest fast-food chain, Yum China Holdings runs more than 8,400 KFC, Pizza Hut, and Taco Bell restaurants, as well as their cousin East Dawning, which

only sells Chinese fast food. In comparison with customers elsewhere, customers in China are uncommonly tech-savvy and ready to try new things—and also indifferent about their privacy. For all Yum China Holdings restaurants, 86% of transactions were already cashless and about half of all orders were placed via mobile app or digital kiosk. Leveraging such big data from the more than 180 million Chinese who belong to KFC and Pizza Hut loyalty programs, the AI would customize a menu for each diner based on preferences and local tastes. During its first year, the AI-powered menu already boosted the average per-order spending by 1%—the equivalent of about $840 million worth of fried chicken each year. In their homeland, McDonald’s routinely beats Yum Brands, and KFC is struggling. But in China, McDonald’s 1,000 restaurants are no match to the much larger number of KFC, Pizza Hut, Taco Bell, and East Dawning. Yum China is endeavoring to maintain its dominance and repel renewed attacks from a newly aggressive McDonald’s (under Chinese management since 2017) and local fast-food competitors eager to eat Yum China’s lunch. The AI-powered menu and increasing automation will help boost sales and outcompete rivals. “We need to stay ahead of the clear trend in digital development,” CEO Joey Wat says. “That’s the future.” Yum China was spun off from parent Yum Brands in 2016. A key reason for the spin-off was that headquarters executives sitting in Louisville, Kentucky—KFC’s home state—had a hard time keeping up with all the developments in China. So far, KFC and Yum China have succeeded in the local experiment of leveraging AI to improve service and boost sales. Can Yum Brands as a multinational leverage this experience and disseminate such capabilities in presumably advanced economies where cashless payment is rare and concerns about privacy are more sensitive? Sources: (1) The author’s interviews; (2) Bloomberg Businessweek, 2019, How AI ate the Colonel, March 25: 16–17; (3) Guardian, 2017, KFC China is using facial recognition tech to serve customers— but are they buying it? January 11: www.theguardian.com.

flow is the assumption that the home country is the best location for generating innovations. However, given that innovations are inherently risky and uncertain, there is no guarantee that the home country will generate the highest-quality innovations (see Strategy in Action 10.1). MNEs that engage in a transnational strategy promote global learning and diffusion of innovations in multiple ways. Innovations not only flow from the home country to host countries (which is the traditional flow), but also flow from host countries to the home country and flow among subsidiaries in multiple host countries. Kia Motors, for example, designs cars not only in Seoul but also in Los Angeles and Frankfurt, tapping into automotive innovations generated in three continents. On the disadvantage side, a transnational strategy is organizationally complex and difficult to implement. The large amount of knowledge sharing and coordination may slow down decision making. Trying to achieve cost efficiencies, local responsiveness, and global learning simultaneously places contradictory demands on MNEs (to be discussed in the next section, Four Organizational Structures).

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260  PART 3  Corporate-Level Strategies

Figure 10.2  International Division Structure at Starbucks Headquarters

Supply Chain and Coffee Operations Division

Consumer Products Division

Partner Resources Division

Starbucks Coffee US Division

Starbucks Coffee International Division

Overall, it is important to note that given the various pros and cons, there is no optimal strategy. The new trend in favor of a transnational strategy needs to be qualified with an understanding of its significant organizational challenges.6 This point leads to our next topic. international division

An organizational structure typically set up when firms initially expand abroad, often engaging in a home replication strategy. geographic area structure

An organizational structure that organizes the MNE according to different countries and regions. country (regional) manager

The business leader in charge of a specific country (or region) for an MNE. global product division

An organizational structure that assigns global responsibilities to each product division.

Four Organizational Structures Figure 10.1 also shows four organizational structures that are appropriate for each strategic choice: (1) international division, (2) geographic area, (3) global product division, and (4) global matrix. International division is typically used when firms initially expand abroad, often engaging in a home replication strategy. Figure 10.2 shows Starbucks’s international division in addition to its four US-centric divisions. Although this structure is intuitively appealing, it often leads to two problems. First, foreign subsidiary managers, whose input is channeled through the international division, are not given sufficient voice relative to the heads of domestic divisions. Second, by design, the international division serves as a silo whose activities are not coordinated with the rest of the firm, which focus on domestic activities. Consequently, many firms phase out this structure after their initial stage of overseas expansion. Geographic area structure organizes the MNE according to different geographic areas (countries and regions). It is appropriate for a localization strategy. Figure 10.3 illustrates such a structure for Avon. A geographic area can be a country or a region, led by a country (or regional) manager. Each area is largely stand-alone. In contrast to the limited voice of subsidiary managers in the international division structure, country (and regional) managers carry a great deal of weight in a geographic area structure. Interestingly and paradoxically, both the strengths and weaknesses of this structure lie in its local responsiveness. While being locally responsive can be a virtue, it also encourages the fragmentation of the MNE into fiefdoms. Global product division structure, which is the opposite of the geographic area structure, supports the global standardization strategy by assigning global responsibilities

Figure 10.3  Geographic Area Structure at Avon Products Headquarters

Avon North America

Avon Latin America

Avon Asia Pacific

Avon Western Europe, Middle East, & Africa

Avon Central & Eastern Europe

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   261

Figure 10.4  Geographic Product Division Structure at Airbus Group Headquarters

Airbus Defence and Space Division

Airbus Helicopters Division

Airbus Division

to each product division. Figure 10.4 shows an example from Airbus Group. This structure treats each product division as a stand-alone entity with full worldwide responsibilities. This structure is highly responsive to pressures for cost efficiencies, because it allows for consolidation on a worldwide (or at least regional) basis and reduces inefficient duplication in multiple countries. For example, Unilever reduced the number of soap-producing factories in Europe from ten to two after adopting this structure. Recently, because of the popularity of global standardization strategy, the global product division structure is on the rise.7 Its main drawback is that local responsiveness suffers, as Ford discovered when it phased out the geographic area structure. A global matrix alleviates the disadvantages associated with both geographic area and global product division structures, especially for MNEs adopting a transnational strategy. Shown in Figure 10.5, its hallmark is the coordination of responsibilities between product divisions and geographic areas.8 In this example from Bosch, the country manager in charge of Japan—in short, the Japan manager—reports to Product Division 1 and Asia Division, both of which have equal power. In theory this structure supports the goals of the transnational strategy, but in practice it is often difficult to deliver. The reason is simple: While managers (such as the Japan manager in Figure 10.5) usually find dealing with one boss gives them enough headache, they do not appreciate having two bosses who are often in conflict (!). For example, Product Division 1 may decide that Japan is too tough a nut to crack and that there are more promising markets

global matrix

An organizational structure often used to alleviate the disadvantages associated with both geographic area and global product division structures.

Figure 10.5  Global Matrix Structure at Bosch Headquarters

Asia

Europe

Product Division 1

Product Division 2

Japan manager here belongs to Asia Division and Product Division 1

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262  PART 3  Corporate-Level Strategies

elsewhere, thus ordering the Japan manager to curtail his investment and channel resources elsewhere. This makes sense because Product Division 1 cares about its global market position and is not wedded to any particular country. However, Asia Division, which is evaluated by how well it does in Asia, begs to differ. Asia Division argues that it cannot afford to be a laggard in Japan if it endeavors to be a leading player in Asia. Therefore, Asia Division demands that the Japan manager increase his investment in the country. Facing these conflicting demands, the Japan manager, who prefers to be politically correct, does not want to make any “wrong” move before consulting with corporate headquarters. Eventually, headquarters may provide a resolution. But crucial time may be lost in the process, and important windows of opportunity for competitive actions may be missed. Despite its merits on paper, the matrix structure may add layers of management, slow down decision speed, and increase costs. It can be “infuriatingly hard to navigate without strong leadership and accountability.”9 But there is no conclusive evidence for its superiority in terms of firm performance. The following quote from William Stavropoulos, CEO of Dow Chemical—an early adopter of the matrix structure—is sobering: We were an organization that was matrixed and depended on teamwork, but there was no one in charge. When things went well, we didn’t know whom to reward; and when things went poorly, we didn’t know whom to blame. So we created a global product division structure, and cut out layers of management. There used to be 11 layers of management between me and the lowest-level employees; now there are five.10 Overall, the positioning of the four structures in Figure 10.1 is not random. They develop from the relatively simple international division through either geographic area or global product division structures and may eventually reach the more complex global matrix stage. Not every MNE experiences all of these structural stages, and the movement is not necessarily in one direction. For example, the matrix structure’s poster child, the Swedish-Swiss conglomerate ABB, recently withdrew from this structure.

The Reciprocal Relationship between Multinational Strategy and Structure In one word, the relationship between strategy and structure is reciprocal. Three ideas stand out: ●●

●●

●●

Strategy usually drives structure.11 The fit between strategy and structure, as exemplified by the pairs in each of the four cells in Figure 10.1, is crucial. A misfit, such as combining a global standardization strategy with a geographic area structure, may have grave consequences. The relationship is not one way. As much as strategy drives structure, structure also drives strategy. The unworkable matrix structure has called into question the wisdom of transnational strategy. Neither strategy nor structure are static. It is often necessary to change strategy, structure, or both. In an effort to move toward a global standardization strategy, many MNEs have adopted a global product division structure while deemphasizing the role of country headquarters. However, unique challenges in certain large and important host countries, especially China, have now pushed some MNEs to revive the country headquarters to coordinate numerous activities.12 Panasonic, for example, set up Panasonic Corporation of China to manage more than 40 operations in China.

A Comprehensive Model of Multinational Strategy, Structure, and Innovation Having outlined the basic strategy and structure configurations, let us introduce a comprehensive model that, as before, draws on the strategy tripod (see Figure 10.6).

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   263

Figure 10.6  A Comprehensive Model of Multinational Strategy, Structure, and Innovation

Industry-based considerations

Resource-based considerations

Nature of industry Interfirm rivalry on integration, responsiveness, and learning Entry barriers Power of suppliers and buyers Threat of substitutes

Value Rarity Imitability Organization

Multinational strategy, structure, and innovation

Institution-based considerations Formal/informal external institutions governing MNEs and home/host country environments Formal/informal internal institutions on MNE governance

Industry-Based Considerations Why are MNEs structured differently? Why do they emphasize different forms of learning and innovation? For example, industrial-products firms (such as semiconductors) tend to adopt global product divisions, and consumer-goods firms (such as cosmetics) often rely on geographic area divisions. Industrial-products firms typically emphasize technological innovations, whereas consumer-goods firms place premiums on learning consumer trends and generating repackaged and recombined products as marketing innovations (such as Heinz’s marketing of green ketchup that appeals to children). A short answer is that the different nature of their industries provides a clue. Industrial-products firms value technological knowledge that is not location-specific (such as how to most efficiently make semiconductor chips). Consumer-goods industries, on the other hand, require deep knowledge about consumer tastes that is location-specific (such as what kinds of potato chips consumers in Nicaragua or Nigeria would prefer). In addition, the five forces framework again sheds considerable light on the issue at hand. Within a given industry, as competitors increasingly match each other in cost efficiencies and local responsiveness, their rivalry naturally focuses on learning and innovation. This is especially the case in oligopolistic industries (such as automobiles and cosmetics) (see Chapter 8). Entry barriers also shape MNE strategy, structure, and innovation. Why do many MNEs phase out the multidomestic strategy and geographic area division structure by consolidating

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264  PART 3  Corporate-Level Strategies

production in a small number of world-scale facilities? One underlying motivation is that smaller suboptimal-scale production facilities, scattered in a variety of countries, are not effective deterrents against potential entrants. Massive, world-scale facilities in strategic ­locations can serve as more formidable deterrents. For example, Foxconn built a world-scale factory complex employing 300,000 workers in Shenzhen, China. The bargaining power of suppliers and buyers also has a bearing. When buyer firms move internationally, they increasingly demand integrated offerings from their suppliers—the ability to buy the same supplies at the same price and quality in every country in which they operate. Components suppliers are, thus, often forced—or at least encouraged (!)—to internationalize. Otherwise, suppliers run the risk of losing a substantial chunk of business. Not surprisingly, as Volkswagen set up a factory in Brazil, all of its top-tier suppliers set up factories in adjacent areas at their own expenses. The threat of substitute products has a direct bearing on learning and innovation. R&D often generates innovative substitutes. Smartphones and mobile devices are now substituting some personal computers.

Resource-Based Considerations

organizational culture

The collective programming of the mind that distinguishes members of one organization from another.

Shown in Figure 10.6, the resource-based view—exemplified by the VRIO framework— adds a number of insights.13 First, when looking at structural changes, it is critical to consider whether a new structure (such as a matrix) adds concrete value. The value of innovation must also be considered.14 A vast majority of innovations simply fail to reach market, and most new products that do reach market end up being financial failures. The difference between an innovator and a profitable innovator is that the latter not only has plenty of good ideas, but also lots of complementary assets (such as appropriate organizational structures and capable marketing muscles) to add value to innovation. Philips, for example, is a great innovator. It invented rotary shavers, videocassettes, and CDs. Still, its ability to profit from these innovations lags behind that of Panasonic, Samsung, and Sony. As another example, Xerox—via its Palo Alto Research Center known as Xerox PARC—pioneered software innovation that led to graphical interfaces. But it was Microsoft and Apple that made tons of money on such technology. Xerox PARC also invented laser printers, but HP, not Xerox, became king of printers. A second question is rarity. Certain strategies or structures may be in vogue at a given point in time. When a firm’s rivals all move toward a global standardization strategy, this strategy cannot be a source of differentiation. To improve global coordination, many MNEs spend millions of dollars to equip themselves with enterprise resource planning packages provided by SAP and Oracle. However, such packages are designed to be implemented widely and appeal to a broad range of firms, thus providing no firm-specific advantage for the particular adopting firm. Even when capabilities are valuable and rare, they have to pass a third hurdle—imitability. Formal structures are easier to observe and imitate than informal structures. This is one reason why the informal, flexible matrix is in vogue. It is “less a structural classification than a broad organizational concept or philosophy, manifested in organizational capability and management mentality.”15 Obviously imitating an intangible mentality is harder than imitating a tangible structure. The last hurdle is organization—namely, how MNEs are organized, both formally and informally, around the world.16 One elusive but important concept is organizational culture. Recall from Chapter 4 that culture is defined by Hofstede as “the collective programming of the mind which distinguishes the members of one group or category of people from another.” We can extend this concept to define organizational culture as the collective programming of the mind that distinguishes members of one organization from another. Huawei, for example, is known to have a distinctive “wolf ” culture, which centers on “continuous hunting” and “relentless pursuit” with highly motivated employees who routinely work over time and sleep in their offices. Although rivals can imitate everything Huawei does technologically, their biggest hurdle lies in their lack of ability to wrap their arms around Huawei’s wolf culture.

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   265

Institution-Based Considerations MNEs face two sets of the rules of the game: formal and informal institutions governing (1) external relationships and (2) internal relationships. Each is discussed in turn. Externally, MNEs are subject to the formal institutional frameworks erected by various home-country and host-country governments.17 Strategy in Action 10.2 illustrates how the Canadian firm Apotex, which has a sizable production facility in India, has to meet EU, UK, and US institutional requirements. Space constraints have prevented any discussion of the obvious fact that Apotex is also heavily regulated by Canadian and Indian authorities. Host-country governments often attract, encourage, or coerce MNEs into undertaking activities that they otherwise would not. For example, basic manufacturing generates lowpaying jobs, does not provide sufficient technology spillovers, and carries little prestige. Advanced manufacturing, R&D, and regional headquarters, in comparison, generate better and higher-paying jobs, provide more technology spillovers, and lead to better prestige. Therefore, host-country governments (such as those in China, Hungary, and ­Singapore) often use a combination of carrots (such as tax incentives) and sticks (such as threats to block market access) to attract MNE investments in higher value-added areas. In addition to formal institutions, MNEs also confront a series of informal institutions governing their relationships with home countries. In the United States, few laws ban MNEs from aggressively setting up overseas subsidiaries. However, this issue is a hot button in public debate and is always subject to political pressures—such as tweets from President Trump. Therefore, managers contemplating such moves must consider the informal but vocal backlash against such activities due to the associated losses in domestic jobs.

STRATEGY IN ACTION 10.2 Emerging Markets Canadian Apotex, Indian Production, and EU, UK, and US Regulations Apotex is Canada’s leading generic pharmaceutical producer with $2.2 billion annual revenues and more than 10,000 employees worldwide. It develops generic drugs (drugs that no longer have patent protection) primarily in Canada and sells them in many countries, focusing on competitive pricing. Since 2005, Apotex has been supplying Canadian, US, EU, and Australian markets from Bengaluru (formerly Bangalore), India. The production facility in Bengaluru has been continuously upgraded not only for manufacturing but also for testing and clinical evaluation, with the addition of a global business service center in 2017. It employs 2,500 people. Because the pharmaceutical industry is one of the world’s most regulated, Apotex has to negotiate complex regulatory environments with overlapping authorities of regulators in different countries. Before drugs can be marketed, they need a product approval from relevant medical authorities, who request evidence of their safety and efficacy. In the EU, such an approval needs to be obtained from the European Medicines Agency, a powerful institution based in London (but relocating to Amsterdam due to Brexit). However, product approval is not enough. The authorities also inspect the actual plants where the medications are manufactured. Only after they issue a Good Manufacturing Practice (GMP) certificate can medications from the plant then be marketed. Apotex had gained the relevant approvals to sell the generic drugs in the EU. But when the British Medicines and Healthcare Regulatory Agency visited the Bengaluru plant in 2017, it was

not satisfied. It found “failures in the cross-contamination controls applied by the manufacturer resulting in a risk of crosscontamination above Permitted Daily Exposure (PDE) from some products.” As a result, the agency withdrew its GMP certificate and ruled that, with few exceptions, “no batches to be supplied to EU markets whilst this statement of non-compliance remains in force.” This was not the first time Apotex had been in conflict with a regulator. In 2014, the US Food and Drug Administration (FDA) expressed concerns regarding its Bengaluru plant, which took two years to resolve and inhibited Apotex’s sales in the United States. The FDA regularly inspects production sites of generic manufacturers and had similarly blocked some local Indian firms from US market access. The case of Apotex highlights the challenges for a globally integrated MNE to navigate multiple regulatory environments simultaneously. While production in India may lower costs, it is still subject to the quality criteria and procedures of the regulatory authorities in each of the markets in which Apotex operates. Sources: (1) Apotex, 2020, India operations, www.apotex.ca ­(accessed January 2018); (2) European Medicines Agency, 2017, Report No UK GMP 31540 InspGMP 31540/1075658-006 NCR, December 8: endragmpd.ema.europa.eu; (3) Economist, 2018, In need of a new prescription, March 24; (4) Globe & Mail, 2018, Apotex in hot water with UK health officials, January 9.

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266  PART 3  Corporate-Level Strategies

Dealing with host countries also involves numerous informal institutions. Airbus spends 40% of its procurement budget with US suppliers in 40 states. While there is no formal ­requirement for Airbus to farm out supply contracts, its sourcing is guided by the informal norm of reciprocity: If one country’s suppliers are involved with Airbus, then airlines based in that country are more likely to buy Airbus aircraft. Institutional factors affecting MNEs are more than external. How MNEs are governed internally is also determined by various formal and informal rules of the game. Formally,­ organizational charts, such as those in Figures 10.2 through 10.5, specify the scope of ­responsibilities for various parties. Most MNEs have systems of evaluation, reward, and punishment in place based on these formal rules. What the formal organizational charts do not reveal are the informal rules of the game such as organizational norms, values, and networks. The nationality of the head of foreign subsidiaries is an example. Given the lack of formal regulations, MNEs essentially have three choices:18 ●●

●● ●●

a home-country national as the head of a subsidiary (such as an American for a subsidiary of a US-headquartered MNE in India), a host-country national (such as an Indian for the same subsidiary), or a third-country national (such as an Australian for the same subsidiary).

MNEs from different countries have different norms when making these appointments. The norm for most Japanese MNEs seems to be that heads of foreign subsidiaries, at least initially, must be Japanese nationals. In comparison, European MNEs are more likely to appoint host-country and third-country nationals to lead subsidiaries. As a group, US MNEs are somewhere between Japanese and European practices. These staffing approaches may reflect strategic differences. Home-country nationals, especially long-time employees of the same MNE, are more likely to have developed a better understanding of the informal workings of the firm and to be better socialized into its dominant norms and values. Consequently, the Japanese propensity to appoint home-country nationals is conducive to their preferred global standardization strategy, which values globally coordinated actions. Conversely, the European comfort in appointing host-country and third-country nationals is indicative of European MNEs’ (traditional) preference for a localization strategy. Beyond the nationality of subsidiary heads, the nationality of top executives at the highest level (such as chairman, CEO, and board members) seems to follow another informal norm: They are almost always home-country nationals. To the extent that top executives are ambassadors of the firm and that the MNE’s country of origin is a source of differentiation (for example, a German MNE is often perceived to be different from an Italian MNE), home-­ country nationals would seem to be the most natural candidates for top positions. In the eyes of stakeholders such as employees and governments around the world, however, a top echelon consisting of largely one nationality does not bode well for an MNE aspiring to globalize everything it does. Some critics argue that this “glass ceiling” reflects “corporate imperialism.”19 In response, Air France, BP, Citigroup, Coca-Cola, Electrolux, Google, GSK, HP, Lenovo, McDonald’s, Microsoft, Mitsubishi, Nissan, Nokia, PepsiCo, SAP, Sony, Takeda, and other MNEs have appointed foreign-born executives to CEO posts. Such foreign-born executives bring substantial diversity to the organization, which may be a plus. But such diversity puts an enormous burden on these non-native top executives to clearly articulate the values and exhibit behaviors expected of senior managers of an MNE associated with a particular country. In 2010, HP appointed Léo Apotheker, a native of Germany, to be its CEO. Unfortunately, HP lost $30 billion in market capitalization during his short tenure (less than 11 months)—thanks to his numerous change initiatives. He was quickly fired in 2011. Since then, the old rule is back: HP is again led by an American executive. In the absence of informal rules “written in stone,” firms need to continuously experiment in order to harvest their multinational sources of talent. In general, a stronger commitment to globalizing the senior leadership ranks can make a difference when competing globally. An interesting comparison can be made between Acer of Taiwan and Lenovo of China—ranked

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   267

third and fourth, respectively, in worldwide PC market share in the mid-2000s. In 2005, Lenovo acquired IBM’s PC division. In 2007–2008, Acer bought Gateway in the United States and Packard Bell in Europe. Acer struggled with “de-Taiwanization.” In 2010, among its top 24 executives, there were six foreigners. In 2014, the number went down to three. During the same time, the board went from having two foreign directors to none. In contrast, Lenovo’s Chinese CEO himself relocated to the United States. By 2012, among its top team of nine executives, six nationalities were represented. Lenovo also elevated the role of vice president for cultural integration and diversity to the C-suite. Such conscientious efforts propelled Lenovo to be the top PC producer and became a strong player in software and cloud services globally. In part due to its inward-looking senior leadership, Acer slipped to the sixth spot in the PC market and had a mediocre presence in cloud services.20 Overall, while formal internal rules on how the MNE is governed may reflect conscientious strategic choices, informal internal rules are often taken for granted and deeply embedded in administrative heritages, thus making them difficult to change. Strategy in Action 10.3 illustrates one of the highest level strategic decisions when confronting institutional demands at home and abroad: moving headquarters.

STRATEGY IN ACTION 10.3 Emerging Markets  Ethical Dilemma Moving Headquarters A number of MNEs have moved headquarters (HQ) overseas (see Table 10.2). In general, there are two levels of HQ: business unit HQ and corporate HQ. The question is: Why? If you have moved from one place to another in the same city, you can appreciate the enormous logistical challenges (and

nightmares!) associated with relocating HQ overseas. One simple answer is that the benefits must significantly outweigh the drawbacks. At the business unit level, the answer is straightforward: The “center of gravity” of the activities of a business unit may pull its HQ toward a host country. See the following letter to suppliers

Table 10.2  Examples of Moving Headquarters Overseas Company

From

To

Corporate

Burger King*

Miami, Florida, USA

Toronto, Canada

headquarters

HSBC

Hong Kong

London, UK

IKEA

Stockholm, Sweden

Leiden, Netherlands

Lenovo**

Beijing, China

Raleigh (suburb), North Carolina, USA

News Corporation

Melbourne, Australia

New York, USA

Old Mutual

Cape Town, South Africa

London, UK

Tetra Pak

Lund, Sweden

Lausanne (suburb), Switzerland

Chevron Asia Pacific Division

San Francisco (suburb), California, USA

Singapore

IBM Global Procurement Division

Armonk, New York, USA

Shenzhen, China

P&G Global Cosmetics and Personal Care

Cincinnati, Ohio, USA

Singapore

Nokia Finance Division

Helsinki, Finland

New York, USA

Nomura Investment Banking Division

Tokyo, Japan

London, UK

Business unit headquarters

*Burger King merged with Tim Horton of Canada to form Restaurant Brands International (RBI), whose corporate headquarters is in Toronto. Now a part of RBI, Burger King maintains its business unit headquarters in Miami. **Lenovo maintains dual headquarters in both Beijing and North Carolina

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268  PART 3  Corporate-Level Strategies

from IBM’s chief procurement officer informing them of the move to China: IBM Global Procurement is taking a major step toward developing a more geographically distributed executive structure. . . By anchoring the organization in this location, we will be better positioned to continue developing the skills and talents of our internal organization in the region. At the corporate level, there are at least five strategic rationales. First, a leading symbolic value is an unambiguous statement to various stakeholders that the firm is a global player. News Corporation’s new corporate HQ in New York is indicative of its global status, as opposed to being a relatively parochial firm from “down under.” Lenovo’s coming of age is undoubtedly underpinned by the establishment of its second corporate HQ in the United States. Second, there may be significant efficiency gains. If the new corporate HQ is in a major financial center such as London, the MNE can have more efficient and more frequent communication with institutional shareholders, financial analysts, and investment banks. The MNE also increases its visibility in a financial market, resulting in a broader shareholder base and greater market capitalization. Three leading (former) South African firms—­Anglo American, Old Mutual, and SABMiller—have now joined the ­ ­Financial Times Stock Exchange (FTSE) 100 (the top 100 UK firms by capitalization). Third, firms benefit from their visible commitment to the laws of the new host country. They can also benefit from the higherquality legal and regulatory regime under which they now operate. These benefits are especially crucial for firms from emerging economies where local rules are not world class. A lack of confidence about South Africa’s political stability drove Anglo ­American, Old Mutual, and SABMiller to London. By moving to London in 1992, HSBC likewise deviated from its Hong Kong roots at a time when the political future of Hong Kong was uncertain. Fourth, moving corporate HQ to a new country clearly indicates a commitment to that country. In addition to political motivation, HSBC’s move to London signaled its determination to become a more global player instead of being a regional p ­ layer centered on Asia. HSBC indeed carried out this more global strategy since the 1990s. However, in an interesting twist of events, HSBC’s CEO relocated back to Hong Kong in 2010. Technically, HSBC’s corporate HQ is still in London, and its chairman has remained in London. But the symbolism of the CEO’s return to Hong Kong is clear. As China becomes more economically powerful, HSBC is interested in demonstrating its commitment to that important part of the world, which was where HSBC started. (HSBC was set up in Hong Kong in 1865 as Hongkong and Shanghai Banking Corporation.) Finally, by moving (or threatening to move) HQ, firms enhance their bargaining power vis-à-vis that of their (original) home-country governments. Tetra Pak’s move of its HQ to ­Switzerland was driven primarily by the owners’ tax disputes with the Swedish government. Likewise, as three of Britain’s large banks—Barclays, HSBC, and Standard Chartered, the three bestrun ones that did not need bailouts during the Great Recession of 2008–2009—faced higher taxes and more government intervention, they also threatened to move HQ out of London. HSBC, for

example, threatened to move back to Hong Kong. The message is clear: If necessary, we will pack our bags. The last point, of course, is where the ethical and social responsibility controversies erupt. In 2014, Fiat announced its plan to merge itself and Chrysler into a new Netherlands-based holding company Fiat Chrysler Automobiles NV. Fiat, thus, left Italy—on paper at least. Although the absolute number of jobs lost is not great, these are high-quality (and high-paying) jobs that every government would prefer to see. For MNEs’ home countries, if a sufficient number of HQ move overseas, there is a serious ramification that other high-quality service providers such as lawyers, bankers, and accountants will follow them. In response, proposals are floating to offer tax incentives for these “footloose” MNEs to keep HQ at home. However, critics question why these wealthy MNEs (and executives) need to be subsidized (or bribed) when many other sectors and individuals are struggling. Not all such moves can proceed. For years, some US-based shareholders of Teva, the world’s largest generic drug manufacturer, have wanted it to move HQ from Israel to the United States. A symbol of Israeli pride, Teva was founded by entrepreneurs who insisted that it stay in Israel. From a strategic standpoint, the move would make sense as a majority of its business is outside of Israel, and it is cross-listed on the New York Stock Exchange (in addition to the Tel Aviv Stock Exchange). From an executive talent perspective, moving HQ to the United States can broaden the globally competent talent pool, instead of limiting the pool to those willing to reside in Israel. Finally, from a corporate governance view, such a move would please a majority of its shareholders, since 81% of its shareholders are US residents—only 8% reside in Israel. Yet as of now, Teva’s corporate HQ will remain in Tel Aviv. In another example, Unilever—the result of a merger between British and Dutch firms in the 1930s—has always maintained two corporate HQ in both London and Rotterdam. In 2018, Unilever announced its plan to shut down the London HQ and move its functions to a single HQ in Rotterdam. Although Unilever is one of the biggest firms in the FTSE, per listing rules if it is not headquartered in Britain, it would be kicked out of FTSE, thus triggering a valuereducing sell-off. Many shareholders who bought Unilever stock because of its FTSE membership rebelled against this plan and voted it down. Therefore, Unilever will still have an HQ in London even after Brexit. Sources: (1) BBC, 2018, Unilever scraps Dutch relocation plan, October 5: www.bbc.com; (2) R. Belderbos, H. Du, & A. Goerzen, 2017, Global cities, connectivity, and the location choice of MNC regional headquarters, Journal of Management Studies 54: 1271– 1302; (3) M. Baaij & A. Slangen, 2013, The role of headquarterssubsidiary geographic distance in strategic decisions by spatially disaggregated headquarters, Journal of International Business Studies 44: 941–952; (4) J. Balogun, K. Fahy, & E. Vaara, 2019, The interplay between HQ legitimation and subsidiary legitimation judgments in HQ relocation, Journal of International Business Studies 50: 223–249; (5) G. Benito, R. Lunnan, & S. Tomassen, 2011, Distant encounters of the third kind, Journal of Management Studies 48: 373–394; (6) Bloomberg Businessweek, 2017, The difficulties of cloning a CEO, August 28: 50–53; (7)

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   269

R. Coeurderoy & A. Verbeke, 2016, The unbalanced geography of the world’s largest firms, Global Strategy Journal 6: 127–148; (8) Economist, 2017, HSBC: Gulliver’s travels, April 16: 75–77; (9) Economist, 2014, Here, there and everywhere, February 22: 56–57; (10) IBM, 2006, IBM Procurement headquarters moves to Shenzhen, China, press release, May 22: www-03.ibm.com; (11) T. Laamanen, T. Simula, & S. Torstila, 2012, Cross-border relocations of headquarters in Europe, Journal of International Business Studies 43: 187–210; (12) K. Meyer & G. Benito, 2016,

Where do MNEs locate their headquarters? Global Strategy Journal 6: 149–159; (13) P. Nell & B. Ambos, 2013, Parenting advantage in the MNC, Strategic Management Journal 34: 1086–1103; (14) M. W. Peng & W. Su, 2014, Cross-listing and the scope of the firm, Journal of World Business 49: 42–50; (15) A. Schotter, M. Stallkamp, & B. Pinkham, 2017, MNE headquarters disaggregation, Journal of Management Studies 54: 1144–1169; (16) Wall Street Journal, 2013, Chevron is placing big bets on Australia, July 8: www.wsj.com.

Worldwide Learning, Innovation, and Knowledge Management Knowledge Management Underpinning the recent emphasis on worldwide learning and innovation is the emerging interest in knowledge management.21 Knowledge management can be defined as the structures, processes, and systems that actively develop, leverage, and transfer knowledge. Many managers regard knowledge management as simply information management. Taken to an extreme, “such a perspective can result in a profoundly mistaken belief that the installation of sophisticated information technology (IT) infrastructure is the be-all and end-all of knowledge management.”22 Knowledge management depends not only on IT, but also on informal social relationships within the MNE.23 There are two categories of knowledge: ●●

●●

Explicit knowledge is codifiable—it can be written down and transferred with little loss of

richness. Virtually all of the knowledge captured, stored, and transmitted by IT is explicit. Tacit knowledge is noncodifiable, and its acquisition and transfer require hands-on practice. For example, reading a driver’s manual (a ton of explicit knowledge) without any road practice does not make you a good driver. Tacit knowledge is evidently more important and harder to transfer and learn. It can only be acquired through learning by doing (driving in this case). Consequently, from a resource-based view, explicit knowledge captured by IT may be strategically less important. What counts is the hard-to-codify and hard-to-transfer tacit knowledge.

Knowledge Management in Four Types of Multinational Enterprises

knowledge management

The structures, processes, and systems that actively develop, leverage, and transfer knowledge.

explicit knowledge

Knowledge that is codifiable (can be written down and transferred without losing much of its richness). tacit knowledge

Knowledge that is not codifiable (that is, hard to be written down and transmitted without losing much of its richness).

Shown in Table 10.3, differences in knowledge management among four types of MNEs in Figure 10.1 fundamentally stem from the interdependence (1) between the headquarters and subsidiaries and (2) among various subsidiaries.24 In MNEs pursuing a home replication strategy, such interdependence is moderate, and the role of subsidiaries is largely to adapt and leverage parent-company competencies. Thus, knowledge on new products and technologies is mostly developed at the center and flown to subsidiaries, representing the traditional oneway flow (see Mary Kay in 2005 in Figure 10.7). Starbucks, for example, insists on replicating its US coffee shop concept around the world down to the elusive “atmosphere.” When MNEs adopt a localization strategy, the interdependence is low. Knowledge management centers on developing insights that can best serve local markets. Ford of Europe used to develop cars for Europe, with a limited flow of knowledge to and from headquarters. KFC’s successful learning from AI-enabled touch-screen order machines in China, for the time being, is not being actively transferred to certain markets, where customers are not embracing facial recognition due to privacy concerns (see Strategy in Action 10.1).

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270  PART 3  Corporate-Level Strategies

Table 10.3  Knowledge Management in Four Types of Multinationals Strategy

Home Replication

Localization

Global Standardization

Transnational

Interdependence Moderate

Low

Moderate

High

Role of foreign subsidiaries

Adapting and leveraging parent company competencies

Sensing and ­exploiting local ­opportunities

Implementing parent company initiatives

Differentiated con­tributions by subsi­ diaries to integrate worldwide operations

Development and diffusion of knowledge

Knowledge developed at the center and transferred to subsidiaries

Knowledge ­developed and retained within each ­subsidiary

Knowledge mostly developed and retained at the center and key locations

Knowledge deve­loped jointly and shared worldwide

Flow of knowledge

Extensive flow of knowledge and people from headquarters to subsidiaries

Limited flow of knowledge and ­people in both ­directions (to and from the center)

Extensive flow of know­­ ledge and people from center and key ­locations to subsidiaries

Extensive flow of knowledge and people in multiple directions

Examples

Apple, Baidu, Carrefour, Google, Harley Davidson, Kraft, P&G, Starbucks, Walmart

Avon, Johnson & Johnson, KFC, Nestlé, Pfizer, Unilever, Walt Disney

Airbus, Boeing, Canon, Caterpillar, Haier, HP, Huawei, LVMH, Otis, Texas Instruments, Toyota

Bosch, Coca-Cola, GE Häagen-Dazs, IBM, Kia, Kikkoman, Mary Kay, Panasonic, Tata, Zara

Sources: Adapted from (1) C. Bartlett & S. Ghoshal, 1989, Managing Across Borders: The Transnational Solution (p. 65), Boston: Harvard Business School Press; (2) T. Kostova & K. Roth, 2003, Social capital in multinational corporations and a micro-macro model of its formation (p. 299), Academy of Management Review 28: 297–317. Examples are added by M. W. Peng—with the caveat that MNEs may change from one type to another (see Figures 10.7 and 10.8 on Mary Kay).

In MNEs pursuing a global standardization strategy, the interdependence is increased. Knowledge is developed and retained at the headquarters and a few centers of excellence. Consequently, knowledge and people typically flow from headquarters and these centers to other subsidiaries. For example, Yokogawa Hewlett-Packard, HP’s subsidiary in Japan, won a coveted Japanese Deming Award for quality. The subsidiary was then charged with transferring such knowledge to the rest of HP, which resulted in a tenfold improvement in ­corporate-wide quality in ten years.

Figure 10.7  Mary Kay in 2005

Source: © Mary Kay Inc.

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   271

A hallmark of transnational MNEs is a high degree of interdependence and extensive and bidirectional flows of knowledge. Coca-Cola transfers its learning from Latin America (especially Mexico) to Africa. Kikkoman first developed teriyaki sauce specifically for the US market as a barbecue glaze. It was then marketed to Japan and the rest of the world. Similarly, Häagen-Dazs developed a popular ice cream in Argentina that was based on a locally popular caramelized milk dessert. The company then took the new flavor and sold it as “dulce de leche” throughout the United States and Europe. Within one year, it became the secondmost popular Häagen-Dazs ice cream (next only to vanilla). Particularly fundamental to transnational MNEs is knowledge flow among dispersed subsidiaries. Instead of a top-down hierarchy, the MNE, thus, can be conceptualized as an integrated network of subsidiaries. Each subsidiary not only develops locally relevant knowledge, but also aspires to contribute knowledge to benefit the MNE as a whole (see the Opening Case). As an example, Figure 10.8 illustrates such practices at Mary Kay today.

Globalizing Research and Development R&D represents a crucial arena for knowledge management. Relative to production and marketing, only more recently has R&D emerged as an important function to be internationalized—often known as innovation-seeking investment.25 The intensification of competition for innovation drives the globalization of R&D. Such R&D provides a vehicle to access a foreign country’s talents and expertise.26 Recall that Chapter 6 has discussed the importance of agglomeration of high-caliber innovative firms within a country. A most effective way to access such a cluster is to be there through foreign direct investment—as Shiseido did by setting up a perfume lab in France and Alibaba did with an innovation center in Silicon Valley. From a resource-based standpoint, a fundamental basis for competitive advantage is ­innovation-based firm heterogeneity (being different). Decentralized R&D performed by different locations and teams around the world virtually guarantees that there will be persistent heterogeneity in the solutions generated (see the Closing Case).27 GSK has aggressively spun off R&D units, because it realizes that adding more researchers in centralized R&D units does not necessarily enhance global learning and innovation.28 GE’s China units have developed low-cost, portable ultrasound machines at a fraction of the cost of existing machines developed in the United States. GE has not only been selling the developed-in-China machines throughout emerging economies, but has also brought them back to the United States and other developed economies.

Figure 10.8  Mary Kay Today

Source: © Mary Kay Inc.

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272  PART 3  Corporate-Level Strategies

Problems and Solutions in Knowledge Management

open innovation

The use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation.

global virtual team

Team whose members are physically dispersed in multiple locations in the world. They cooperate on a virtual basis. absorptive capacity

The ability to absorb new knowledge by recognizing the value of new information, assimilating it, and applying it.

social capital

The informal benefits individuals and organizations derive from their social structures and networks.

Institutionally, how MNEs employ the formal and informal rules of the game has a significant bearing behind the success or failure of knowledge management.29 Shown in Table 10.4, a number of informal “rules” can become problems in knowledge management. In knowledge acquisition, many MNEs prefer to invent everything internally. However, for large firms, R&D actually offers diminishing returns. Consequently, a new model, open innovation, is emerging.30 Open innovation is “the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation.”31 It relies on more collaborative research among various internal units, external firms, and university labs. Firms that skillfully share research generally outperform those that fail to do so. In knowledge retention, the usual problems of employee turnover are compounded when such employees are key R&D personnel, whose departure will lead to knowledge leakage.32 In knowledge outflow, there is the “How does it help me?” syndrome. Specifically, managers of the source subsidiary may view the outbound sharing of knowledge as a diversion of scarce time and resources. Further, some managers may believe that “knowledge is power.” Monopolizing certain knowledge may be viewed as the currency to acquire and retain power within the MNE.33 Even when certain subsidiaries are willing to share knowledge, inappropriate transmission channels may torpedo effective sharing.34 To transfer knowledge, it is tempting to establish global virtual teams. But such teams often have to confront tremendous communication and relationship barriers.35 Videoconferences can hardly show body language, and often break down. Thus, face-to-face meetings are often necessary. Finally, recipient subsidiaries may block successful knowledge inflows for two reasons. First, the “not invented here” syndrome creates resistance to ideas from elsewhere.36 Second, recipients may have limited absorptive capacity—the “ability to recognize the value of new information, assimilate it, and apply it.”37 As solutions to combat these problems, MNEs can manipulate the formal “rules of the game,” such as (1) tying bonuses to measurable knowledge outflows and inflows, (2) using high-powered corporate-based or unit-based incentives (as opposed to individual-based and single-subsidiary-based incentives), and (3) investing in codifying tacit knowledge (such as the codification of the HP Way and the Toyota Way). However, these formal policies fundamentally boil down to the very challenging (if not impossible) task of how to accurately measure inflows and outflows of tacit knowledge. The nature of tacit knowledge simply resists such formal bureaucratic practices. Consequently, MNEs often have to rely on a great deal of informal integrating mechanisms, such as (1) facilitating management and R&D personnel networks among various subsidiaries through joint teamwork, training, and conferences; and (2) promoting strong organizational (that is, MNE-specific) cultures and shared values and norms for cooperation among subsidiaries.38 For example, Schenck has facilitated the establishment of such networks among German and Chinese managers and engineers in an effort to promote more knowledge sharing (see the Closing Case). Instead of using traditional formal command-and-control structures that are often ineffective, knowledge management is best facilitated by social capital, which refers to the Table 10.4  Problems in Knowledge Management Elements of Knowledge Management

Common Problems

Acquisition

Failure to share and integrate external knowledge

Retention

Employee turnover and knowledge leakage

Outflow

“How does it help me?” syndrome and “knowledge is power” mentality

Transmission

Inappropriate channels

Inflow

“Not invented here” syndrome and absorptive capacity

Source: Adapted from A. Gupta & V. Govindarajan, 2004, Global Strategy and Organization (p. 109), New York: Wiley.

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   273

informal benefits individuals and organizations derive from their social structures and networks.39 Because of the existence of social capital, individuals are more likely to go out of their way to help friends and acquaintances. Consequently, managers of the Canada subsidiary are more likely to help managers of the Chile subsidiary with needed knowledge if they know each other and have some social relationship. Otherwise, managers of the Canada subsidiary may not be as enthusiastic to provide such help if the call for help comes from managers of the Colombia subsidiary, with whom there is no social relationship. Overall, the micro informal interpersonal relationships among managers of various units may greatly facilitate macro intersubsidiary cooperation among various units—in short, a micro-macro link.40

Debates and Extensions The question of how to manage complex MNEs has led to numerous debates, some of which have been discussed earlier (such as the debate on the matrix structure). Here we outline two leading debates that have not been previously discussed.

micro-macro link

The link between micro, informal interpersonal relationships among managers of various units and macro, interorganizational cooperation among various units.

Debate 1: Headquarters Control versus Subsidiary Initiative One of the leading debates on how to manage large firms is centralization versus decentralization.41 Within an MNE, the debate boils down to headquarters (HQ) control versus subsidiary initiative. A starting point is that subsidiaries are not necessarily at the receiving end of commands from HQ. When HQ promotes certain practices (such as ethics training), some subsidiaries may be in full compliance, others may pay lip service to them, and still others may simply refuse to adopt them, citing local differences.42 Some subsidiaries actively pursue their own subsidiary-level strategies and agendas.43 These activities are known as subsidiary initiatives, defined as the proactive and deliberate pursuit of new opportunities by a subsidiary (see the Closing Case). Advocates argue that such initiatives may inject a much-needed spirit of entrepreneurship throughout the larger bureaucratic MNE. However, from the perspective of HQ, it is hard to distinguish between good-faith subsidiary initiative and opportunistic “empire-building.”44 A lot is at stake when determining which subsidiary initiatives are supported.45 Subsidiaries whose initiatives fail to receive HQ support may see their roles marginalized and, in the worst case, their facilities closed. Subsidiary managers are often host-country nationals, who would naturally prefer to strengthen their subsidiary. However, these tendencies, although very understandable, are not necessarily consistent with the MNE’s corporate-wide goals. These tendencies, if not checked and controlled, can surely lead to chaos. Commenting on the debate between HQ control and subsidiary initiative, L’Oréal’s CEO Jean-Paul Agon shared with a reporter:

subsidiary initiative

The proactive and deliberate pursuit of new business opportunities by an MNE’s subsidiary to expand its scope of responsibility.

For many years, our competitors—especially those in the US—called us a kind of “organized chaos,” because for them, we are not very organized. But such organized chaos is intentional, because it allows us to always keep our mind open to new ideas, ready to jump on new trends, and take new opportunities.46 Likewise, according to the title of an influential article authored by Andy Grove, former chairman and CEO of Intel, the challenge for MNE management is: “Let chaos reign, then reign in chaos—repeatedly.”47

Debate 2: Customer-Focused Dimensions versus Integration, Responsiveness, and Learning As discussed earlier, juggling the three dimensions of integration, responsiveness, and learning has often made the global matrix structure so complex that it is unworkable. However, instead of simplifying, many MNEs have added new dimensions. Often, new customer-focused

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274  PART 3  Corporate-Level Strategies

global account structure

A customer-focused structure that supplies customers (often other MNEs) in a coordinated and consistent way across various countries. solutions-based structure

An MNE organizational structure that caters to the needs of providing solutions for customers’ problems.

dimensions of structure are placed on top of an existing structure, resulting in a four- or five-dimension matrix.48 Of the two primary customer-focused dimensions, the first is a global account structure to supply customers (which often are other MNEs) in a coordinated and consistent way across various countries.49 Most original equipment manufacturers—namely, contract manufacturers that produce goods not carrying their own brands (such as the makers of ­Apple iPhones and Nike shoes)—use this structure. The second customer-focused dimension is the oft-used solutions-based structure. For instance, as a “customer solutions” provider, IBM will sell whatever combination of hardware, software, and services that customers prefer, whether that means selling IBM products or rivals’ offerings. The typical starting point is to put in place temporary solutions rather than create new layers or units. However, this ad hoc approach can quickly get out of control, resulting in subsidiary managers’ additional duties of reporting to three or four “informal bosses” (acting as global account managers) on top of their “day jobs.”50 Eventually, new formal structures may be called for, resulting in more bureaucracy. So what is the solution when confronting the value-added potential of customer-focused dimensions and their associated complexity and cost? One solution is to simplify. For instance, ABB, when facing performance problems, transformed its sprawling “Byzantine” matrix structure to a mere two product divisions.

The Savvy Strategist MNEs are the ultimate large, complex, and geographically dispersed business organizations. To manage effectively, four clear implications emerge for the savvy strategist (Table 10.5). First, understand the nature and evolution of your industry in order to come up with the right strategy-structure configurations. When the Japanese automobile industry was primarily exporting, Honda adopted a home replication strategy supported by an international division. However, as the industry evolved to become more geographically dispersed in terms of production and innovation, Honda’s strategy and structure had to adapt to keep up. Second, managers need to develop learning and innovation capabilities to leverage multinational presence. A winning formula is “think global, act local.”51 For example, McDonald’s leveraged its global presence and learned from its European operations in order to solve a local problem—back home in the United States, customers do not find McDonald’s food to be as fresh, healthy, and cool as those offered by rivals. The upshot? The McWrap (see the Opening Case). How KFC can disseminate its developed-in-China capabilities in using AI to boost sales throughout the world remains to be seen (see Strategy in Action 10.1). Third, mastering the external rules of the game governing MNEs and home- and hostcountry environments is a must.52 Google first entered China, knowing that its searches would be censored. Google then demanded that the Chinese government change its censorship

Table 10.5  Strategic Implications for Action ●●

●●

●●

●●

Understand the evolution of your industry to come up with the right strategy-structure configurations. Develop learning and innovation capabilities to leverage multinational presence as an asset—“think global, act local.” Master the external rules of the game governing MNEs and home- and host-country environments. Be prepared to change the internal rules of the game governing MNE management.

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   275

regulations. Otherwise, Google threatened to leave China. The Chinese government adamantly refused to change its rules. Thus, Google had to leave the world’s largest search engine market at the expense of its hard-fought market share.53 Having a better understanding of the rules of the game, Google’s local competitor Baidu and its global competitor Microsoft Bing went to eat Google’s “lunch” by dividing up its market share. With an alliance between Baidu and Microsoft, all English-language searches on Baidu would be routed through Bing—of course, subject to censorship. Finally, managers need to understand and be prepared to change the internal rules of the game governing MNE management. Different strategies and structures call for different internal rules of the game. Some facilitate and others constrain MNE actions. It is impossible for a home replication firm to entertain having a foreign-born executive as its CEO. Yet as operations become more global, an MNE’s managerial outlook needs to be broadened as well. In terms of the four fundamental questions, why do MNEs differ in their structure and innovation (Question 1)? A short answer is that their different strategies drive these activities. How do MNEs behave (Question 2)? Given the reciprocal relationship between strategy and structure, the structural arrangements that MNEs put in place both help them accomplish certain strategies and constrain them from pursuing other strategies—unless they unleash strategic changes, structural changes, or both. What determines the scope of the firm (Question 3)? Because Chapter 9 has focused on product scope, this chapter emphasizes international scope. The particular strategies the MNEs choose significantly determine their international scope. For example, a home replication strategy results in a relatively smaller scope, whereas a multidomestic scope leads to a wider geographical scope worldwide. Finally, what determines the international success and failure of firms (Question 4)? This chapter suggests two answers: (1) an appropriate match between strategies and structures, and (2) strong capabilities in knowledge management and innovation.

CHAPTER SUMMARY 1. Understand the four basic configurations of multinational

●●

strategies and structures. ●●

●●

Governing multinational strategy and structure is an integration-responsiveness framework. There are four strategy and structure pairs: (1) home replication strategy and international division structure, (2) localization strategy and geographic area structure, (3) global standardization strategy and global product division structure, and (4) trans­ national strategy and global matrix structure.

2. Articulate a comprehensive model of multinational stra­

tegy, structure, and innovation. ●●

●●

●●

Industry-based considerations drive a number of decisions affecting strategy, structure, and ­innovation. Management of MNE strategy, structure, and innovation needs to take into account VRIO. MNEs are governed by external and internal rules of the game around the world.

Globalization of R&D calls for capabilities to combat a number of problems associated with knowledge acquisition, retention, outflow, transmission, and ­inflow.

4. Participate in two leading debates on multinational ­strategy,

structure, and innovation. ●●

(1) HQ control versus subsidiary initiative and (2) customer-focused dimensions versus integration, ­responsiveness, and learning.

5. Draw strategic implications for action. ●●

●●

●●

●●

Understand the evolution of your industry to come up with the right strategy-structure configurations. Develop learning and innovation capabilities around the world—“think global, act local.” Master the external rules of the game from homeand host-country environments. Be prepared to change the internal rules of the game governing MNEs.

3. Outline the challenges associated with learning, inno­

vation, and knowledge management. ●●

Knowledge management primarily focuses on tacit knowledge.

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276  PART 3  Corporate-Level Strategies

KEY TERMS Absorptive capacity 272

Global virtual team 272

Micro-macro link 273

Center of excellence 258

Home replication strategy 257

Open innovation 272

Country (regional) manager 260

Integration-responsiveness framework 256

Organizational culture 264

International division

Solutions-based structure 274

Explicit knowledge 269 Geographic area structure 260 Global account structure 274 Global matrix 261 Global product division 260 Global standardization strategy 258

260

Knowledge management 269 Local responsiveness 256 Localization (multidomestic) strategy 258

Social capital 272 Subsidiary initiative 272 Tacit knowledge 269 Transnational strategy 258 Worldwide (global) mandate 258

CRITICAL DISCUSSION QUESTIONS 1. As a Chinese MNE executive working in the United States

or an American MNE executive working in China in 2020, you feel that the host-country government officials and media have become noticeably more hostile than five years ago when you first arrived. How does this affect your daily interactions with host-country colleagues, suppliers, and customers? What are your recommendations to corporate headquarters regarding the future of the firm’s operations in the host country for the next five years?

2. From time to time, managers may be faced with the need

to change the internal rules of the game within their MNE. What skills and capabilities may be useful in achieving this?

3. ON ETHICS: If you were a CEO or a business unit head,

under what conditions would you consider moving your headquarters overseas?

TOPICS FOR EXPANDED PROJECTS 1. ON ETHICS: You are head of the best-performing subsi­

diary in an MNE. Because bonus is tied to subsidiary performance, your bonus is the highest among managers of all subsidiaries. Now headquarters is organizing managers from other subsidiaries to visit and learn from your subsidiary. You worry that if your subsidiary is no longer the star unit when other subsidiaries’ performance catches up, your bonus will go down. What are you going to do?

2. ON ETHICS: Working in pairs or small groups, review a

high-profile case of an MNE moving its headquarters out of your country and the media and political outcry surrounding this move. Pick your role as either a student or a manager of that MNE. Determine whether you are for or against the firm’s move. Defend your position.

3. ON ETHICS: You are a Peruvian national who serves as

head of the Brazilian subsidiary of a large US multinational. While Brazil is theoretically attractive, the going has been tough and chances for becoming profitable in the next five years are not great. Headquarters has asked for your recommendation on whether to increase or decrease investment in Brazil. If a decision to cut investment in Brazil is indeed made, it is possible to focus on other Latin American countries such as Peru. Since your parents are aging, you personally would be interested in leading operations in Peru so that you can be closer to them. What would be your recommendation?

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   277

CLOSING CASE

Emerging Markets Ethical Dilemma

Subsidiary Initiative at Schenck Shanghai Machinery Leveraging excellent engineering, German machine toolmakers are world leaders in their industry. As China’s industrialization takes off, they are often sought after in newly built factories that make cars and electronics. However, not all German-engineered machines sold well in China. Schenck, a division of Dürr, produced in Germany one of the best balancing machines for armatures (small engines), achieving world-leading performance in accuracy and speed by balancing an armature in less than five seconds. Customers in developed economies appreciated the highly automated machine that helped to eliminate manual labor. Yet for several years after its founding in the mid-1990s, its ­Chinese subsidiary, Schenck Shanghai Machinery (SSM), failed to sell a single one of these excellent ­machines. ­China-based manufacturers considered the machine “over-engineered.” At a unit price of $550,000, it was too expensive. Industrial customers’ main purchasing criteria were brand, price, quality, service, and delivery. Schenck had a very good brand name, and it sold expensive highquality machines in other segments in China. However, the delivery period for Schenck was longer than that for its competitors, as its machines were tailor-made and had to go through rigorous testing before delivery. In comparison, two Japanese rivals—DSK and Kokusai—served the “goodenough” market with machines manufactured in China priced at $110,000. They dominated the segment that SSM found difficult to penetrate. Overall, SSM’s cost base was too high, even after moving production to China. The subsidiary leadership at SSM believed that there was a market in China for balancing machines for armatures if they were cost competitive. Yet serving the good-enough segment was not in line with Schenck’s global strategy, which focused on the premium segment, offering the best of German engineering. The subsidiary managers faced a difficult choice: Should they give up this market segment or take some action? If so, should they take the machine made in Germany and strip it down to the essentials? Or should they develop a new machine from scratch for China? On its own initiative, SSM started to develop its own machine for China by forming a development team of five engineers in 2005. The team reached out to marketing staff familiar with potential local customers and to sourcing staff who could identify suitable suppliers in China. The work of this development team was kept low profile, without engaging corporate headquarters (HQ) or other units outside China. At that time, the subsidiary leadership believed that it would be difficult to convince HQ and engineers in Germany to develop a new machine for China. Only by developing a new machine first did the subsidiary leadership expect to be able to earn the support from Germany. The Shanghai-based development team created a new machine entirely from local components. The subsidiary

leadership presented its prototype to HQ. The subsidiary managers were somewhat anxious how HQ would react. HQ generally did not favor adding lower-quality machines to Schenck’s product portfolio because of the potential damage to the brand image. The idea of a less sophisticated machine under the Schenck name conflicted with the positioning of Schenck. How would clients in Europe react if they learned that Schenck offered a similar machine in China at a much lower price? Moreover, HQ at that time did not have an in-depth understanding of the nuances of the China market, and Germany-based R&D teams had little trust in the ability of their China-based colleagues. To ensure the subsidiary initiative was a success, SSM invested considerable efforts in communicating with HQ and R&D colleagues in Germany. SSM found that managing the relationship with HQ was less difficult than anticipated. Key players in Germany quickly realized that SSM’s approach was probably the right one for China. Essentially, the prototype convinced HQ that the China-based development team was both technically capable and savvy about the local context. On this basis, engineers from Germany and China worked together to finalize the development. Once ready for market, the new product quickly secured orders. Customers were pleasantly surprised to see that Schenck was able to produce a machine suitable for the China market. Priced at the same level as the machines from DSK and Kokusai, the Schenck machine quickly attracted customers away from these Japanese rivals. The new machine benefited not only from the reputation of Schenck, but also from SSM’s ability to provide a range of different machines and integrated solutions. Overall, SSM successfully built a leading position in the market for balancing machines for armatures in China, with a market share of 35%–40%. The products were also extensively exported, especially to Southeast Asia. Sources: An earlier version was published in M. W. Peng & K. Meyer, 2019, International Business, 3rd ed. (pp. 439–440), ­London: Cengage EMEA. Based on (1) field research by K. Meyer; (2) K. Meyer & J. Zhu, 2014, Dürr AG: A G ­ erman premium manufacturer goes mid-market in China, case study, Shanghai: CEIBS. CASE DISCUSSION QUESTIONS: 1. From a resource-based view, what resources are needed

to develop a machine for a distant market such as China? Are such resources most likely to be found at the HQ or subsidiary level?

2. What are the adaptations needed to compete in the

good-enough market?

3. ON ETHICS: From the HQ’s perspective, what are the pros

and cons of this subsidiary initiative? From SSM’s perspective, what are the pros and cons of this particular initiative?

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278  PART 3  Corporate-Level Strategies

NOTES [Journal Acronyms] AME—Academy of Management Executive; AMJ—Academy of Management Journal; AMP—Academy of Management Perspectives; APJM—Asia Pacific Journal of Management; ASQ—Administrative Science Quarterly; CMR—California Management Review; GSJ—Global Strategy Journal; HBR—Harvard Business 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; MIR—Management International Review; OSc—Organization Science; SMJ—Strategic Management Journal 1. T. Levitt, 1983, The globalization of markets, HBR May: 92–102. 2. Fortune, 2018, The world according to Walmart, October 1: 70–76. 3. J. Arregle, P. Beamish, & L. Hebert, 2009, The regional dimension of MNEs’ foreign subsidiary localization, JIBS 40: 86–107; C. Asmussen, 2009, Local, regional, or global? JIBS 40: 1192–1205. 4. S. Adkins-Green, 2015, Chief Marketing Officer presentation, March 26, Dallas: Mary Kay headquarters. 5. Fortune, 2016, Building Tomorrowland, June 15: 59–64. 6. K. Meyer & Y. Su, 2015, Integration and responsiveness in subsidiaries in emerging economies, JWB 50: 149–158; C. Williamsons, A. Colovic, & J. Zhu, 2017, Integration-­ responsiveness, local hires, and subsidiary performance amidst turbulence, JWB 52: 842–853. 7. J. Mees-Buss, C. Welch, & E. D. Westney, 2019, What happened to the transnational? JIBS 50: 1513–1543. 8. W. Egelhoff, J. Wolf, & M. Adzic, 2013, Designing matrix structures to fit MNC strategy, GSJ 3: 205–226. 9. T. Casciaro, A. Edmondson, & S. Jang, 2019, Cross-silo leadership (p. 134), HBR May: 130–139. 10. R. Hodgetts, 1999, Dow Chemical CEO William Stavropoulos on structure, AME 13: 30. 11. A. Chandler, 1962, Strategy and Structure, Cambridge, MA: MIT Press. See also W. C. Kim & R. Mauborgne, 2009, How strategy shapes structure, HBR September: 73–80; J. Galan & M. Sanchez-Bueno, 2009, The continuing validity of the strategy-structure nexus, SMJ 30: 1234–1243. 12. M. W. Peng & S. Lebedev, 2016, Intra-national business (IB), APJM 34: 241–245; X. Ma, A. Delios, & C. Lau, 2013, Beijing or Shanghai? JIBS 44: 953–961. 13. S. Hsu, A. Iriyama, & J. Prescott, 2016, Lost in translation or lost in your neighbor’s yard? JIM 22: 84–99; D. Lessard, D. Teece, & S. Leih, 2016, The dynamic capabilities of meta-multinationals, GSJ 6: 211–224; S. Morris, R. Hammond, & S Snell, 2014, A microfoundations approach to transnational capabilities, JIBS 45: 405–427; Q. Nguyen & A. Rugman, 2015, Internal equity financing and the performance of multinational subsidiaries in emerging economies, JIBS 46: 468–490; J. Pla-Barber, C. Villar, & A.

14. 15. 16.

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Madhok, 2018, Co-parenting through subsidiaries, GSJ 8: 536–562; J. Oehmichen & J. Puck, 2016, Embeddedness, ownership mode and dynamics, and the performance of MNE subsidiaries, JIM 22: 17–28; J. Vahlne & I. Ivarsson, 2014, The globalization of Swedish MNEs, JIBS 45: 227–247. S. Michailova & W. Zhan, 2015, Dynamic capabilities and innovation in MNC subsidiaries, JWB 50: 576–583. C. Bartlett & S. Ghoshal, 1989, Managing Across Borders (p. 209), Boston: Harvard Business School Press. J. Anand, L. Mulotte, & C. Ren, 2016, Does experience imply learning? SMJ 37: 1395–1412; M. Hada, R. Grewal, & M. Chandrashekaran, 2013, MNC subsidiary channel relationships as extended links, JIBS 44: 787–812; L. Nachum & S. Song, 2011, The MNE as a portfolio, JIBS 42: 381–405; G. McDermott, R. Mudambi, & R. Parente, 2013, Strategic modularity and the architecture of multinational firm, GSJ 3: 1–7; J. MacDuffie, 2013, Modularity-as-property, modularization-as-process, and “modularity”-as-frame, GSJ 3: 8–40; M. Piao & E. Zajac, 2016, How exploitation impedes and impels exploration, SMJ 37: 1431–1447; T. Swift, 2016, The perilous leap between exploration and exploitation, SMJ 37: 1688–1698; C. Weigelt & D. Miller, 2013, Implications of internal organization structure for firm boundaries, SMJ 34: 1411–1434. S. Castaldi, S. Gubbi, V. Kunst, & S. Beugelsdijk, 2019, Business group affiliation and foreign subsidiary p ­ erformance, GSJ 9: 595–617; R. Chittoor, P. Aulakh, & S. Ray, 2015, Accumulative and assimilative learning, institutional infrastructure, and innovation orientation of developing economy firms, GSJ 5: 133–153; E. Clark & M. Geppert, 2011, Subsidiary integration as identity construction and institution building, JMS 48: 395–416; J. Geleilate, P. Magnusson, R. Parente, & M. Alvarado-Vargas, 2016, Home country institutional effects on the multinationality-performance relationship, JIM 22: 380–402; X. Ma, T. Tong, & M. Fitza, 2013, How much does subnational region matter to foreign subsidiary performance? JIBS 44: 66–87; P. Regner & J. Edman, 2014, MNE institutional advantage, JIBS 45: 275–302; G. Santangelo, K. Meyer, & B. Jindra, 2016, MNE subsidiaries’ outsourcing and insourcing of R&D, GSJ 6: 247–268; Y. Zeng, O. Shenkar, S. Lee, & S. Song, 2013, Cultural differences, MNE learning abilities, and the effect of experience on subsidiary mobility in a dissimilar culture, JIBS 44: 42–65. O. Levy, S. Taylor, N. Boyacigiller, T. Bodner, M. Peiperl, & S. Beechler, 2015, Perceived senior leadership opportunities in MNCs, JIBS 46: 285–307; M. Rickley & S. Karim, 2018, Managing institutional distance, JWB 53: 740–751. C. K. Prahalad & K. Lieberthal, 1998, The end of corporate imperialism, HBR August: 68–79. N. Anand & J. Barsoux, 2017, What everyone gets wrong about change management, HBR November: 79–85.

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Chapter 10  Strategizing, Structuring, and Innovating Around the World   279

21. Y. Lu, E. Tsang, & M. W. Peng, 2008, Knowledge management and innovation strategy in the Asia Pacific, APJM 25: 361–374. See also H. Berry, 2015, Knowledge inheritance in global industries, AMJ 58: 1438–1458; N. Driffield, J. Love, & S. Menghinello, 2010, The MNE as a source of international knowledge flows, JIBS 41: 350– 359; N. Foss & T. Pedersen, 2019, Microfoundations in international management research, JIBS 50: 1594–1621; A. Fransson, L. Hakanson, & P. Liesch, 2011, The underdetermined knowledge-based theory of the MNC, JIBS 42: 427–435; K. Grigoriou & F. Rothaermel, 2017, Organizing for knowledge generation, SMJ 38: 395–414; J. Hotho, M. Lyles, & M. Easterby-Smith, 2015, The mutual impact of global strategy and organizational learning, GSJ 5: 85–112; J. Martin & K. Eisenhardt, 2010, Rewiring, AMJ 53: 265–301; J. Oldroyd, S. Morri, & J. Dotson, 2019, Principles or templates? SMJ 40: 2191–2213; H. Yang, C. Phelps, & H. K. Steensma, 2010, Learning from what others have learned from you, AMJ 53: 371–389; J. Zhang & C. Baden-Fuller, 2010, The influence of technological knowledge base and organizational structure on technology collaboration, JMS 47: 679–704. 22. A. Gupta & V. Govindarajan, 2004, Global Strategy and Organization (p. 104), New York: Wiley. 23. P. Gooderham, D. Minbaeva, & T. Pedersen, 2011, Governance mechanisms for the promotion of social capital for knowledge transfer in MNCs, JM 48: 123–150. 24. T. Ambos, P. Nell, & T. Pedersen, 2013, Combining stocks and flows of knowledge, GSJ 3: 283–299. 25. K. Asakawa, Y. Park, J. Song, & S. Kim, 2018, Internal embeddedness, geographic distance, and global knowledge sourcing by overseas subsidiaries, JIBS 49: 743–752; R. Belderbos, B. Lokshin, & B. Sadowski, 2015, The returns to foreign R&D, JIBS 46: 491–504; M. Cano-Kollmann, J. Cantwell, T. Hannigan, R. Mudambi, & J. Song, 2016, Knowledge connectivity, JIBS 47: 255–262; D. Castellani, A. Jimenez, & A. Zanfei, 2013, How remote are R&D labs? JIBS 44: 649–675; D. Castellani & K. Lavorateri, 2020, The lab and the plant, JIBS 51: 121–137; A. Di Minin & M. Bianchi, 2011, Safe nests in global nets, JIBS 42: 910–934; D. Hillier, J. Pindado, V. de Queiroz, & C. Torre, 2011, The impact of country-level corporate governance on R&D, JIBS 42: 76–98; N. Lahiri, 2010, Geographic distribution of R&D activity, AMJ 53: 1194–1209; A. Minin & M. Bianchi, 2011, Safe nests in global nets, JIBS 42: 910–934; M. Nieto & A. Rodriguez, 2011, Offshoring of R&D, JIBS 42: 345–361; C. A. Un, 2016, The liability of localness in innovation, JIBS 47: 44–67; S. Zhao, M. Papanastassiou, R. Pearce, & C. Iguchi, 2020, MNE internationalization in developing Asia, APJM (in press). 26. S. Awate, M. Larsen, & R. Mudambi, 2015, Access vs sourcing knowledge, JIBS 46: 63–86; P. Bromiley, D. Rau, & Y. Zhang, 2017, Is R&D risky? SMJ 38: 876–889; N. Foss, J. Lyngsie, & S. Zahra, 2013, The role of external knowledge sources and organizational design in the process of opportunity exploitation, SMJ 34: 1453–1471; M. W. Peng

27.

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& D. Wang, 2000, Innovation capability and FDI, MIR 40: 79–83; T. Schubert, E. Baier, & C. Rammer, 2018, Firm capabilities, technological dynamism, and the internationalization of innovation, JIBS 49: 70–95. R. Erkelens, B. Hooff, Huysman, & P. Vlaar, 2015, Learning from locally embedded knowledge, GSJ 5: 177–197; I. Guler & A. Nerkar, 2012, The impact of global and local cohesion on innovation in the pharmaceutical industry, SMJ 33: 535–549. A. Witty, 2011, Research and develop (p. 140), The World in 2011, London: The Economist Group. Witty is CEO of GSK. U. Andersson, P. Buckley, & H. Dellestrand, 2015, In the right place at the right time, GSJ 5: 27–47; Gupta & Govindarajan, 2004, Global Strategy and Organization, op. cit. M. Bogers, H. Chesbrough, & C. Moedas, 2018, Open innovation, CMR 60: 5–16; B. Cassiman & G. Valentini, 2016, Open innovation, SMJ 37: 1034–1046; P. Gianiodis, J. Ettlie, & J. Urbina, 2014, Open service innovation in the global banking industry, AMP 28: 76–91; H. Hoang & F. Rothaermel, 2010, Leveraging internal and external experience, SMJ 31: 734–758; F. Monteiro & J. Birkinshaw, 2017, The external knowledge sourcing process in MNCs, SMJ 38: 342–362; P. Toh & F. Polidoro, 2013, A ­competition-based explanation of collaborative invention within the firm, SMJ 34: 1186–1208. H. Chesbrough, W. Vanhaverbeke, & J. West (eds.), 2006, Open Innovation (p. 1), Oxford, UK: Oxford University Press. F. Contractor, 2019, Can a firm find the balance between openness and secrecy? JIBS 50: 261–274; M. Haas & J. Cummings, 2015, Barriers to knowledge seeking within MNC teams, JIBS 46: 36–62; A. Inkpen, D. Minbaeva, & E. Tsang, 2019, Unintentional, unavoidable, and beneficial knowledge leakage from the MNE, JIBS 50: 250–260. Y. Chang, Y. Gong, & M. W. Peng, 2012, Expatriate knowledge transfer, subsidiary absorptive capacity, and subsidiary performance, AMJ 55: 927–948. H. Gardner, F. Gino, & B. Staats, 2012, Dynamically integrating knowledge in teams, AMJ 55: 998–1022; A. Pieterse, D. van Knippenberg, & D. van Dierendonck, 2013, Cultural diversity and team performance, AMJ 56: 782–804. T. Ambos, B. Ambos, K. Eich, & J. Puck, 2016, Imbalance and isolation, JIM 22: 316–332; C. Gibson, P. Dunlop, & J. Cordery, 2019, Managing formalization to increase global team effectiveness and meaningfulness of work in multinational organization, JIBS 50: 1021–1052; M. Haas, 2010, The double-edged swords of autonomy and external knowledge, AMJ 53: 989–1008; L. Huang, C. Gibson, B. Kirkman, & D. Shapiro, 2017, When is traditionalism an asset and when is it a liability for team innovation? JIBS 48: 693–715; K. Raab, B. Ambos, & S. Tallman, 2014, Strong or invisible hands? JWB 49: 32–41; D. Tzabbar & A. Vestal, 2015, Bridging the social chasm in geographically dispersed R&D teams, OSc 26: 811–829.

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280  PART 3  Corporate-Level Strategies

36. D. Antos & F. Piller, 2015, Opening the black box of “not invented here,” AMP 29: 193–217; F. Monteiro, 2015, Selective attention and the initiation of the global knowledgesourcing process in MNCs, JIBS 46: 506–527. 37. W. Cohen & D. Levinthal, 1990, Absorptive capacity, ASQ 35: 128–152. See also A. Cuervo-Cazurra & C. A. Un, 2010, Why some firms never invest in formal R&D, SMJ 31: 759–779; L. Perez-Nordtvedt, E. Babakus, & B. Kedia, 2010, Learning from international business affiliates, JIM 16: 262–274; H. Schildt, T. Keil, & M. Maula, 2012, The temporal effects of relative and firm-level absorptive capacity on interorganizational learning, SMJ 33: 1154–1173; S. Schleimer & T. Pedersen, 2014, The effects of MNC parent effort and social structure on subsidiary absorptive capacity, JIBS 45: 303–320. 38. C. Chung, H. Park, J. Lee, & K. Kim, 2015, Human capital in MNEs, JIBS 46: 806–829; K. Kim, S. Pathak, & S. ­Werner, 2015, When do international human capital enhancing practices benefit the bottom line? JIBS 46: 784– 805; S. Morris, B. Zhong, & M. Makhija, 2015, Going the distance, JIBS 46: 552–573; S. Paruchuri & S. Awate, 2017, Organizational knowledge networks and local search, SMJ 38: 657–675. 39. F. Fonti & M. Maoret, 2016, The direct and indirect effects of core and peripheral social capital on organizational performance, SMJ 37: 1765–1786. 40. M. W. Peng & Y. Luo, 2000, Managerial ties and firm performance in a transition economy, AMJ 43: 486–501. See also D. Levin & H. Barnard, 2013, Connections to distant knowledge, JIBS 44: 676–698; S. Jang, 2017, Cultural brokerage and creative performance in multicultural teams, OSc 28: 965–992; M. Mors, 2010, Innovation in a global consulting firm, SMJ 31: 841–872; M. Reinholt, T. Pedersen, & N. Foss, 2011, Why a central network position isn’t enough, AMJ 54: 1277–1297; Z. Zhao & J. Anand, 2013, Beyond boundary spanners, SMJ 34: 1513–1530. 41. H. Dellestrand & P. Kappen, 2012, The effects of spatial and contextual factors on headquarters resource to MNE subsidiaries, JIBS 43: 219–243; M. Kreutzer, J. Walter, & L. Cardinal, 2015, Organizational control as antidote to politics in the pursuit of strategic initiatives, SMJ 36: 1317– 1337; L. Rabbiosi & G. Santangelo, 2019, Host country corruption and the organization of HQ-subsidiary relationships, JIBS 50: 111–124; M. Reitzig & B. Maciejovsky, 2015, Corporate hierarchy and vertical information flow inside the firm, SMJ 36: 1979–1999. 42. F. Ciabuschi, M. Forsgren, & O. Martin, 2011, Rationality versus ignorance, JIBS 42: 958–970; K. Conroy, D. Collings, & J. Clancy, 2019, Sowing the seeds of subsidiary influence, GSJ 9: 502–526; A. Cuervo-Cazurra, R. Mudambi, & T. Pedersen, 2019, Subsidiary power, GSJ 9: 491–501; R. Durand & A. Jacqueminet, 2015, Peer conformity, attention, and heterogeneous implementation of practices in MNEs, JIBS 46: 917–937; H. Haq, R. Drogendijk, &

43.

44.

45.

46. 47. 48. 49. 50.

51.

52.

53.

D. Holm, 2017, Attention in words, not in deeds, JWB 52: 111–123; A. Hoenen & T. Kostova, 2015, Utilizing the broader agency perspective for studying headquarters-subsidiary relations in MNCs, JIBS 46: 104–113; M. Lazarova, H. Peretz, & Y. Fried, 2017, Locals know best? JWB 52: 83 –90; A. Verbeke & W. Yuan, 2013, The drivers of MNE subsidiary entrepreneurship in China, JMS 50: 236–258. C. Asmussen, N. Foss, & P. Nell, 2019, The role of procedural justice for global strategy and subsidiary initiatives, GSJ 9: 527–534; X. Tian & J. Slocum, 2014, What determines MNC subsidiary performance? JWB 49: 421–430. T. Ambos, U. Andersson, & J. Birkinshaw, 2010, What are the consequences of initiative-taking in multinational subsidiaries? JIBS 41: 1099–1118; I. Filatotchev & M. Wright, 2011, Agency perspectives on corporate governance of MNEs, JMS 48: 471–486; T. Kostova, P. Nell, & A. Hoenen, 2018, Understanding agency problems in headquarters-subsidiary relationships in MNCs, JM 44: 2611–2637; A. Pant & J. Ramachandran, 2017, Navigating identity duality in multinational subsidiaries, JIBS 48: 664–692; D. Vora, T. Kostova, & K. Roth, 2007, Roles of subsidiary managers in MNCs, MIR 47: 595–620. J. Balogun, P. Jarzabkowski, & E. Vaara, 2011, Selling, resistance, and reconciliation, JIBS 42: 765–786; C. Dorrenbacher & J. Gammelgaard, 2010, MNCs, interorganizational networks, and subsidiary charter removals, JWB 45: 206–216; P. Scott, P. Gibbons, & J. Coughlan, 2010, Developing subsidiary contribution to the MNC-subsidiary entrepreneurship and strategy creativity, JIM 16: 328–339. Fortune, 2017, Managing L’Oréal’s “organized chaos,” March 15: 26–27. R. Burgelman & A. Grove, 2007, Let chaos reign, then reign in chaos—repeatedly, SMJ 28: 965–979. S. Segal-Horn & A. Dean, 2009, Delivering “effortless” ­experience across borders, JWB 44: 41–50. L. Shi, C. White, S. Zou, & S. T. Cavusgil, 2010, Global ­account management strategies, JIBS 41: 620–638. R. Hollister & M. Watkins, 2018, Too many projects, HBR September: 65–71; M. Mortensen & H. Gardner, 2017, The overcommitted organization, HBR September: 58–65. S. Gould & A. Grein, 2009, Think glocally, act glocally, JIBS 40: 237–254; T. Yu, M. Subramaniam, & A. Cannella, 2013, Competing globally, allying locally, JIBS 44: 117–137. E. Meyer, 2017, Being the boss in Brussels, Boston, and Beijing, HBR July: 70–77; K. Meyer, R. Mudambi, & R. Narula, 2011, MNEs and local contexts, JMS 48: 235–252; P. Konara & V. Shirodkar, 2018, Regulatory institutional distance and MNCs’ subsidiary performance, JIM 24: 333–347; M. W. Peng, D. Ahlstrom, S. Carraher, & W. Shi, 2017, An institution-based view of global IPR history, JIBS 48: 893–907. C. Stevens, E. Xie, & M. W. Peng, 2016, Toward a legitimacybased view of political risk, SMJ 37: 945–963.

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CHAPTER

11

iStock.com/golero

Governing the Corporation Globally

KNOWLEDGE OBJECTIVES After studying this chapter, you should be able to 1. Differentiate various ownership patterns around the world 2. Articulate the role of managers in both principal-agent and principal-principal conflicts 3. Explain the role of the board of directors 4. Identify voice-based and exit-based governance mechanisms and their combination as a package 5. Acquire a global perspective on how governance mechanisms vary around the world 6. Elaborate on a comprehensive model of corporate governance 7. Participate in four leading debates concerning corporate governance 8. Draw strategic implications for action

282

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OPENING CASE

Ethical Dilemma

The Murdochs versus Minority Shareholders Founded in Adelaide, Australia, in 1980 by Rupert Murdoch, News Corporation was headquartered in New York starting in 2004. In 2008, it moved its primary listing from NYSE to NASDAQ, while maintaining secondary listing on the Australian Securities Exchange. While the unethical conduct of its British tabloid operations rocked the world in 2011, this was not the first time News Corporation, which enjoyed reporting the controversies of others, stirred up controversies itself. One consistent theme of controversies is how controlling shareholders Rupert Murdoch and his family treated minority shareholders. ●●

●●

●●

Exhibit A: In 2003, the 30-year-old James Murdoch became CEO of BSkyB (now simply called Sky), Europe’s largest satellite broadcaster, in the face of loud minority shareholder resistance. The reason? James’s father, Rupert, controlled 35% of BSkyB’s equity and controlled the board. Exhibit B: In 2007, Rupert Murdoch pursued a pet project by paying a rich $5.6 billion price to buy Dow Jones, publisher of the Wall Street Journal—against the wishes of numerous minority shareholders and the advice of Peter Chernin, News Corporation president and a nonfamily member. The upshot? After four months, News Corporation wrote down its value by $2.8 billion. In 2009, Chernin left. Exhibit C: In 2011, in a related transaction, News Corporation announced that it would pay $673 million to buy Shine Group, a London-based media studio owned by Rupert’s daughter, Elisabeth Murdoch. While Shine produced some hit shows such as NBC’s The Office and The Biggest Loser, minority shareholders alleged that News Corporation had overpaid for Shine with 13 times Shine’s $46 million in earnings before interest, taxes, depreciation, and amortization (EBITDA). In contrast, Apollo Global Management, a leading private

equity firm, paid $510 million to purchase the popular show American Idol’s owner CKX, a deal valued at 8.5 times CKX’s $60 million in EBITDA. Frustrated minority shareholders, such as Amalgamated Bank and other pension funds, filed a lawsuit in Delaware (where News Corporation was registered) to block the sale. The complaint alleged that “Murdoch did not even pretend there was a valid strategic purpose for News Corporation to buy Shine. . . . The transaction is a naked and selfish endeavor by Murdoch to further infuse the upper ranks of News Corporation with his offspring.” In 2013, Amalgamated Bank secured a $139 million settlement with News Corporation. Rupert Murdoch has been named by the Economist as the “last of the moguls.” The problem is that “no one could say no to Rupert Murdoch,” according to Michael Wolff, author of Murdoch’s biography The Man Who Owns the News. As a result, News Corporation’s stock performance trailed behind that of its rivals such as Walt Disney. “There’s just this sort of generic Murdoch discount, which encompasses the concern that he will make decisions that are not consistent with other shareholder interests,” noted one analyst. In 2013, Rupert Murdoch split News Corporation into two: (1) 21st Century Fox (21CF), which focused on film and television operations, and (2) (the new) News Corp—always using the short form “Corp” to differentiate from its predecessor News Corporation—which focused on mass media and publishing. At 21CF, he first appointed himself chairman and chief executive officer (CEO), and later appointed his son Lachlan as co-chairman and his other son James as co-CEO. In 2019, 21CF was sold to Walt Disney for $71 billion. At the new News Corp, Rupert and Lachlan serve as co-chairmen of the board of directors, and James is another director. While the board has the CEO of News Corp and seven outside directors, the Murdochs continue to run the show.

283

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284  PART 3  Corporate-Level Strategies

OPENING CASE  (Continued) Sources: (1) American Banker, 2013, Amalgamated secures $139M settlement with Murdoch’s News Corp, April 22: www.americanbank.com; (2) Bloomberg Businessweek, 2011, Will the scandal tame Murdoch? July 25: 18–20; (3) Bloomberg Businessweek, 2013, You old fox: The escape artist, April 13: 59–62;

(4) Economist, 2011, Last of the moguls, July 23: 9; (5) Economist, 2013, Breaking up is not so very hard to do, June 22: 65–66; (6) Economist, 2017, Rupert stops the presses, November 25: 57–58; (7) News Corp, 2020, Board of directors, newscorp.com (accessed March 10, 2020).

W corporate governance

The relationship among various participants in determining the direction and performance of corporations.

hy were minority shareholders unhappy with some of the decisions the Murdochs made as managers? What are the advantages and dis­ advantages of publicly listed corporations such as News Corporation and 21st Century Fox? While a majority of directors on the board at (the new) News Corp are outside directors, can the board rein in the Murdochs? These are some of the key questions addressed in this chapter, which focuses on how to govern the corporation around the world. Corporate governance is “the relationship among various partici­ pants in determining the direction and performance of corporations.”1 The primary participants are owners, managers, and board of directors (Figure 11.1). We first discuss the primary participants. Next, we cover internal and external governance mechanisms from a global perspective, followed by a comprehensive model drawn from the strategy tripod. Debates and extensions follow.

Owners Owners provide capital, bear risks, and own the firm.2 Three broad patterns exist: (1) concentrated versus diffused ownership, (2) family ownership, and (3) state ownership.

Concentrated versus Diffused Ownership concentrated ownership and control

Ownership and control rights concentrated in the hands of owners. diffused ownership

An ownership pattern involving numerous small shareholders, none of whom has a dominant level of control.

Founders usually start up firms and completely own and control them. This is referred to as concentrated ownership and control. At some point, if the firm aspires to grow and needs more capital, the owners’ desire to keep the firm in family hands may have to accommodate the arrival of other shareholders. Approximately 80% of listed US firms and 90% of listed UK firms are recently characterized by diffused ownership, with numerous small shareholders but none with a dominant level of control.3 First identified by Adolf Berle and Gardiner Means in The Modern Corporation and Private Property (1932), there is FIGURE 11.1  The Primary Participants in Corporate Governance

Owners

Managers

Board of Directors

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Chapter 11 Governing the Corporation Globally   285

separation of ownership and control in such firms. Specifically, ownership is dispersed among many small shareholders and control is largely concentrated in the hands of salaried professional managers who own little (or no) equity. In short, this refers to separation of ownership (by dispersed shareholders) and day-to-day control (by managers). If majority or dominant owners (such as founders) do not personally run the firm, they are naturally interested in keeping a close eye on how the firm is run. However, dispersed owners, each with a small stake, have neither incentives nor resources to do so. In other words, they either “don’t care” or “don’ know” about what is going on inside the firm. Most small shareholders do not bother to show up at annual shareholder meetings. They prefer to free ride and hope that other shareholders will properly monitor and discipline managers. If small shareholders are not happy, they will simply sell the stock and invest elsewhere. However, if all shareholders behave in this manner, then no shareholder would care, and managers would end up acquiring significant de facto control power. The rise of institutional investors, such as professionally managed mutual funds and pension pools, has significantly changed this picture.4 In the United States, institutional investors accounted for less than 10% of outstanding equity of stocks in 1950. Now they control more than 70%.5 Institutional investors have both incentives and resources to closely monitor and control managerial actions. However, the increased size of institutional holdings limits the ability of institutional investors to dump the stock. This is because when one’s stake is large enough, selling out depresses the share price and harms the seller. As a result, institutional shareholders have been spearheading the shareholder activism movement (discussed later). While the image of widely held corporations is a reasonably accurate description of most modern large US and UK firms, it is not the case in other parts of the world. Outside the Anglo-American world, there is relatively little separation of ownership and control. Most large firms are typically owned and controlled by families or the state.6 Next, we turn our attention to such firms.

separation of ownership and control

The dispersal of ownership among many small shareholders, with control of the firm largely concentrated in the hands of salaried, professional managers who own little or no equity.

institutional investors

Professionally managed mutual fund or pension pool.

Family Ownership The vast majority of large firms throughout continental Europe, Asia, Latin America, and Africa feature concentrated family ownership and control.7 At present, approximately 85% of $1 billion-plus firms in Southeast Asia are in family hands, 75% in Latin America, 67% in India, and 40% in China. In Europe, families control 40% of listed firms. In the United States, 15% of the largest firms—those in the Fortune Global 500—are family owned and controlled.8 On the positive side, family ownership and control may provide better incentives for firms to focus on long-term performance. It may also minimize the conflicts between owners and professional managers typically encountered in widely owned firms. Family firms typically look for a virtuous balance between long-term nonfinancial goals and short-term financial goals, with the ultimate purpose to protect “the stock of affect-related value that the family has invested in the firm”—known as socioemotional wealth (SEW).9 However, on the negative side, family ownership and control may lead to the selection of less-qualified managers (who happen to be the sons, daughters, and relatives of founders), the destruction of value because of family conflicts, and the expropriation of minority shareholders (see the Opening Case). At present, there is no conclusive evidence on the positive or negative role of family ownership and control on firm performance.10

socioemotional wealth (SEW)

The stock of affect-related value that the family has invested in the family firm.

State Ownership Other than families, the state is another major owner of firms around the world. Since the 1980s, many countries—ranging from Britain to Brazil to Belarus—realized that their state-owned enterprises (SOEs) often perform poorly. SOEs typically suffer from an incentive problem. Although in theory all citizens (including employees) are owners, in practice, they have neither the rights to enjoy dividends generated from SOEs (as shareholders would), nor the rights to transfer or sell “their” property. SOEs are de facto owned and controlled by government agencies far removed from ordinary citizens and employees.

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286  PART 3  Corporate-Level Strategies

Thus, SOE managers and employees have little incentive to improve performance, from which they can hardly benefit personally. In a most cynical fashion, SOE employees in the former Soviet Union summed it up: “They pretend to pay us and we pretend to work.” A wave of privatization has swept the world since the 1980s. However, SOEs staged a spectacular comeback recently. In 2008, many governments in developed economies nationalized major firms ranging from General Motors (GM, which earned a nickname “Government Motors”) to Royal Bank of Scotland (RBS) in order to prevent massive bankruptcies and job losses. At present, SOEs represent approximately 10% of global GDP.11 Many SOEs today are no longer “classic” SOEs with concentrated ownership and control in the hands of the state. Many are publicly listed and become hybrid organizations that incorporate elements from both state ownership and private ownership (the latter represented by private shareholders who bought shares). Some of them have become more market-oriented, produced more competitive products and services, and sometimes competed abroad.

Managers Managers, especially executives on the top management team (TMT) led by the CEO, represent another important group of players in corporate governance.

Principal-Agent Conflicts agency relationship

The relationship between principals and agents. principal

Person (such as owner) who delegates agent

Person (such as manager) to whom authority is delegated.

The relationship between shareholders and professional managers is a relationship between principals and agents—in short, an agency relationship. Principals are persons (such as owners) delegating authority, and agents are persons (such as managers) to whom authority is delegated. Agency theory suggests a simple yet profound proposition: To the extent that the interests of principals and agents do not completely overlap, there will inherently be principal-agent conflicts. These conflicts result in agency costs, including (1) the principals’ costs of monitoring and controlling the agents and (2) the agents’ costs of bonding (signaling their trustworthiness).12 In a corporate setting, when shareholders (principals) are interested in maximizing the long-term value of their stock, managers (agents) may be more interested in maximizing their own power, income, and perks. Manifestations of agency problems include:

agency theory

●●

The theory about principal– agent relationships (or agency relationships in short).

●● ●●

Principal-agent conflict

Conflict of interests between principals (such as shareholders) and agents (such as professional managers). agency cost

The cost associated with principal-agent relationships. They are the sum of (1) the principals’ costs of monitoring and controlling agents and (2) the agents’ costs of bonding. information asymmetry

Asymmetric distribution of information between two sides.

●● ●●

excessive executive compensation (such as bonuses and stock grants, in addition to cash pay), on-the-job consumption (such as corporate jets), low-risk short-term investments (such as maximizing current earnings while cutting long-term R&D), empire building (such as value-destroying acquisitions), and excess CEO returns (CEO financial returns in excess of shareholder returns).13

Consider executive compensation. In 1980, the average US CEO earned approximately 40 times what the average worker earned. Today, the ratio is approximately 150 times.14 Despite some performance improvement, it seems difficult to argue that the average CEO improved his/her productivity four times faster than his/her workers since 1980. In other words, one can “smell” some agency costs. Directly measuring agency costs, however, is difficult. In two most innovative (and hair-raising) studies to directly measure agency costs, scholars find that some sudden CEO deaths (plane crashes or heart attacks) are accompanied by an increase in share prices of their firms.15 These CEOs reduced agency costs that shareholders had to shoulder by dropping dead (!). Conversely, we can imagine how much value these CEOs destroyed when they had been alive. The capital market, sadly, was pleased with such human tragedies. A primary reason agency problems persist is because of information asymmetries between principals and agents—in other words, agents such as managers almost always know

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Chapter 11 Governing the Corporation Globally   287

more about the property they manage than principals do.16 While it is possible to reduce information asymmetries through governance mechanisms, it is not realistic to completely eliminate agency problems.

Principal-Principal Conflicts Since concentrated ownership and control by families is the norm in many parts of the world, different kinds of conflicts are at play. One of the leading indicators of concentrated family ownership and control is the appointment of family members as board chair, CEO, and other TMT members. In East Asia, approximately 70% of the corporations have board chairs and CEOs from the controlling families.17 In continental Europe, the ratio is 68%.18 The families are able to do so, because they are controlling (although not necessarily majority) shareholders. For example, at News Corporation, neither the board nor angry shareholders can get rid of the Murdochs, who are controlling shareholders (see the Opening Case). The Murdochs case is a classic example of the conflicts in family-owned and familycontrolled firms. Instead of between principals (shareholders) and agents (professional managers), the primary conflicts are between two classes of principals: controlling shareholders and minority shareholders—in other words, principal-principal conflicts (Figure 11.2 and Table 11.1).19 Family managers such as the Murdochs, who represent (or are) controlling shareholders, may engage in cronyism and advance family interests at the expense of minority shareholders. Controlling shareholders’ dominant position as both principals and agents (managers) may allow them to override traditional governance mechanisms designed to curtail principal-agent conflicts such as the board of directors.

principal-principal conflict

Conflict of interests between two classes of principals: controlling shareholders and minority shareholders.

FIGURE 11.2  Principal-Agent Conflicts and Principal-Principal Conflicts Minority shareholders

Principal-agent conflicts

Professional managers

Minority shareholders

Principal-principal conflicts

Family managers

Family managers are appointed by controlling shareholders Controlling shareholders

Source: Adapted from M. Young, M. W. Peng, D. Ahlstrom, G. Bruton, & Y. Jiang, 2008, Corporate governance in emerging economies: A review of the principal-principal perspective (p. 200), Journal of Management Studies 45: 196–220.

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288  PART 3  Corporate-Level Strategies

Table 11.1  Principal-Agent versus Principal-Principal Conflicts Principal-Agent Conflicts

Principal-Principal Conflicts

Ownership pattern

Dispersed—shareholders holding 5% of equity are regarded as “blockholders.”

Dominant—often greater than 50% of equity is controlled by the largest shareholders.

Manifestations

Strategies that benefit entrenched managers at the expense of shareholders (such as shirking, excessive compensation, and empire building).

Strategies that benefit controlling shareholders at the expense of minority shareholders (such as minority shareholder expropriation and cronyism).

Protection of minority shareholders

Formal constraints (such as courts) are more protective of shareholder rights. Informal norms adhere to shareholder wealth maximization.

Formal institutional protection is often lacking. Informal norms are typically in favor of controlling shareholders.

Market for corporate control

Active, at least in principle as the “governance mechanism of last resort.”

Inactive even in principle. Concentrated ownership thwarts notions of takeover.

Source: Adapted from M. Young, M. W. Peng, D. Ahlstrom, G. Bruton, & Y. Jiang, 2008, Corporate governance in emerging economies: A review of the principal-principal perspective (p. 202), Journal of Management Studies 45: 196–220.

expropriation

Activities that enrich the controlling shareholders at the expense of minority shareholders. tunneling

Activities of managers from the controlling family of a corporation to divert resources from the firm for personal or family use. related transaction

Controlling owners sell firm assets to another firm they own at below-market prices or spin off the most profitable part of a public firm and merge it with another of their private firms. inside director

A director serving on a corporate board who is also a full-time manager of the company. outside (independent) director

A nonmanagement member of the board.

A manifestation of principal-principal conflicts is that family managers may have the potential to engage in expropriation of minority shareholders, defined as activities that enrich controlling shareholders at the expense of minority shareholders. For example, managers from the controlling family may simply divert resources from the firm for personal or family use. This activity is vividly labeled tunneling—digging a tunnel to sneak resources out. While such tunneling (often known as corporate theft) is illegal, expropriation can be legally done through related transactions, whereby controlling owners buy firm assets from another firm they own at above-market prices or spin off the most profitable part of a public firm and merge it with another private firm of theirs (see the Opening Case).

Board of Directors As an intermediary between owners and managers, the board of directors oversees and ratifies strategic decisions; and evaluates, rewards, and if necessary penalizes top managers.

Board Composition Otherwise known as the insider-outsider mix, board composition has attracted significant attention. Inside directors are top executives of the firm. Outside (independent) directors are defined as nonmanagement members of the board. Outside directors are presumably more independent and can better safeguard shareholder interests. They are often ideally labeled independent directors. Despite the widely held belief in favor of a higher proportion of outside directors, academic research has failed to empirically establish a link between the outsider/insider ratio and firm performance.20 Even “stellar” firms with a majority of outside directors on the board can still be plagued by governance problems. In the world’s largest financial services firms, the more outside directors on their boards, the worse their stock returns during the 2008 crisis.21 For example, in 2008, of the 18 directors on Citigroup’s board, 16 were independent directors, but only one had ever worked at a financial services firm.22 It is possible that some of these outside directors are affiliated directors who may have family, business, and/or professional relationships with the firm or firm management. In other words, such affiliated outside directors are not necessarily “independent.” Nevertheless, boards have become significantly more independent since the 2000s. Since 2003, the Securities and Exchange Commission (SEC) required that listed firms to have a majority of their directors to be independent directors—and entirely independent nominating,

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Chapter 11 Governing the Corporation Globally   289

compensation, and audit committees. By 2013, 85% of the directors serving on Standard & Poor’s (S&P) 500 were independent, and 60% of S&P 500 boards had only one inside director: the CEO.23 The movement to add more outside directors and the debate about their effectiveness are now global (see Strategy in Action 11.1).

STRATEGY IN ACTION 11.1 Emerging Markets The Debate about Independent Directors in China As of 2001, China required publicly listed firms to appoint independent directors on corporate boards and mandated at least onethird of the board to be independent. In comparison, the United States only required that independent directors be appointed in 2003—specifically, a majority of the directors at NYSE- and NASDAQ-listed firms needed to be independent. Do independent directors really make a positive influence on firms’ financial performance? Earlier research in China, including a pioneering study by your author (Peng, 2004), found that when independent directors were not required, they made no difference in financial performance at firms that appointed them. While a small number of independent directors undoubtedly could make a difference, from a resource-based view, if every firm had them (as required by post-2001 regulations), independent directors would no longer be rare and would be unable to help differentiate one firm from another. Some independent directors might be friends and (former) colleagues of the CEO and other top management team members, and whether they were really “independent” was debatable. Such findings were not China-specific. A meta-analysis (quantitatively combining all the data from previous studies) (Dalton et al., 1998) found that independent directors made no difference in financial performance of US firms either. A similar meta-analysis for Asian firms (excluding Chinese ones) (van Essen et al., 2012) likewise reported no significant relationship. As a result, there was a great deal of skepticism in China on whether independent directors would really make a difference. Given China’s relationship-oriented culture, debate rages on whether “good” governance practices (such as promoting board independence) would lead to good performance. Consolidating all known China studies in the last two decades, a more recent meta-analysis (Mutlu et al., 2018) reported that independent directors indeed help improve the financial performance of the firms on whose boards they serve. It is true that earlier research failed to detect a positive relationship between independent directors—a proxy for board independence—and firm performance. However, over time, as China’s reforms deepen, independent directors have increasingly asserted a positive and significant influence on firm performance. In comparison with the “near zero” relationship between independent directors and firm performance reported in the United States (Dalton et al., 1998) and Asia (van Essen et al.,

2012), the China literature overall has, thus, generated the globally strongest findings in support of the effectiveness of board independence. A more developed labor market for directors enhanced directors’ sensitivity for personal reputation and credibility. Furthermore, to meet transparency requirements, Chinese listed firms began reporting key board activities such as independent directors’ dissent during board meetings. Such requirements went beyond the global standards of “good” corporate governance. Although Chinese policy makers—like their colleagues elsewhere—initially charged ahead to impose board independence measures in the absence of solid empirical support, the lessons from this crucial debate seem to be that given enough time, patience, and institutional refinement, board independence can become effective. Sources: (1) V. Chen, J. Li, & D. Shapiro, 2011, Are OECD-prescribed “good corporate governance practices” really good in an emerging economy? Asia Pacific Journal of Management 28: 115–138; (2) A. Chizema, X. Liu, J. Lu, & L. Gao, 2015, Politically motivated boards and top executive pay in Chinese listed firms, Strategic Management Journal 36: 890–906; (3) D. Dalton, C. Daily, A. Ellstrand, & J. Johnson, 1998, Meta-analytic reviews of board composition, leadership structure, and performance, Strategic Management Journal 19: 269–290; (4) J. Ma & T. Khanna, 2016, Independent directors’ dissent on boards: Evidence from listed companies in China, Strategic Management Journal 37: 1547–1557; (5) L. Markoczy, S. Sun, M. W. Peng, W. Shi, & B. Ren, 2013, Social network contingency, symbolic management, and boundary stretching, Strategic Management Journal 34: 1367–1387; (6) C. Mutlu, M. van Essen, M. W. Peng, S. Saleh, & P. Duran, 2018, Corporate governance in China: A meta-analysis, Journal of Management Studies 55: 943–979; (7) M. W. Peng, 2004, Outside directors and firm performance during institutional transitions, Strategic Management Journal 25: 453–471; (8) M. W. Peng, 2019, Guanxi and corporate governance: Waging war on best practice, presentation, Booth School of Business, University of Chicago, April; (9) M. van Essen, J. Van Oosterhout, & M. Carney, 2012, Corporate boards and the performance of Asian firms: A meta-analysis, Asia Pacific Journal of Management 29: 873–905; (10) H. Zhu & T. Yoshikawa, 2016, Contingent value of director identification, Strategic Management Journal 37: 1787–1807.

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290  PART 3  Corporate-Level Strategies

Leadership Structure CEO duality

The CEO doubles as chairman of the board.

lead independent director

An independent director designated to be the leader of a board whose chair is the CEO.

Is the board led by a separate chair or by the CEO who doubles as chair—a situation known as CEO duality? This is an important corporate governance question. From an agency theory standpoint, if the board is to supervise the CEO as an agent, it seems imperative that the board be chaired by a separate individual. Otherwise, how can the CEO be evaluated by the body that he or she chairs? However, a corporation led by two top leaders may lack a unity of command and experience top-level conflicts. As a powerful executive, a CEO obviously does not appreciate being constantly second-guessed by a board chair. It is not surprising that there is significant divergence across countries. For instance, while a majority of large UK firms separate the two top jobs, many large US firms combine them. A practical difficulty often cited by US boards is that it is very hard to recruit a capable CEO without the board chair title. In firms that still practice CEO duality, a lead independent director is often appointed. Academic research is inconclusive on whether nonduality is more effective.24 However, pressures have arisen for firms to split the two jobs to at least show that they are serious about controlling the CEO. In 2002, 48% of the new CEOs around the world were also appointed as chair. In 2010, the percentage went down to 12%. Although US firms typically favor CEO duality, S&P 500 firms practicing CEO duality fell from 78% in 2002 to 47% in 2019.25 In 2019, when Boeing had to ground its 737 MAX, the board, instead of firing the CEO Dennis Mullenburg, dismantled CEO duality by stripping him of his board chair title. A separate board chair was appointed.

Board Interlocks interlocking directorate (board interlock)

Two or more firms share one director on their boards.

Directors tend to belong to the economic and social elite who share a sense of camaraderie and reciprocity.26 When one person affiliated with one firm sits on the board of another firm, an interlocking directorate (or board interlock) has been created.27 Firms often establish relationships through such board appointments. Outside directors from financial institutions can facilitate financing. Outside directors experienced in acquisitions may help the focal firms find better deals. For example, Indra Nooyi, chair and CEO of PepsiCo, has served on eight boards throughout her career—most recently at Amazon.28 While current executives (especially CEOs) are likely to be sought after, bankers, consultants, lawyers, and retired executives are also often invited to join boards.

The Role of Boards of Directors In a nutshell, boards of directors perform (1) control, (2) service, and (3) resource acquisition functions. Boards’ effectiveness in serving the control function stems from their independence, deterrence, and norms: ●●

●●

●●

The ability to effectively control managers boils down to how independent directors are. Outside directors who are personally friendly and loyal to CEOs are unlikely to challenge managerial decisions. Exactly for this reason, CEOs often nominate family members, personal friends, and other passive directors.29 There is a lack of deterrence on the part of directors should they fail to protect shareholder interests. Courts usually will not second-guess board decisions in the absence of bad faith or insider dealing. However, most corporations purchase directors and officers liability insurance to protect these individuals. When challenging management, directors have few norms to draw on. Directors who “stick their necks out” by confronting the CEO in meetings tend to be frozen out of board deliberations, or not invited back to join the board in the next term (see Strategy in Action 11.2).

In addition to control, another important function of the board is service—primarily advising the CEO.30 Finally, another crucial board function is resource acquisition for the focal firm, often through board interlocks. How boards perform these three functions is discussed next.

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Chapter 11 Governing the Corporation Globally   291

STRATEGY IN ACTION 11.2 Ethical Dilemma Professor Michael Jensen as an Outside Director Harvard Business School professor Michael Jensen, a leading agency theorist, served on the board of Armstrong World Industries as an outside director between 1990 and 1996. He described this experience at a conference: Let me say that there were very good people on that board. But what was true at Armstrong is that even the outside directors basically see themselves as employees of the CEO. That’s just the way it is. The outside directors in this case seemed even more deferential and beholden to the CEO than the managers who actually reported to him. I was put on the compensation committee. At the first meeting of that committee, there was a proposal to give the management a substantial bonus for the excellent performance they’d had that year. The problem, however, was that the equity value of the company had fallen by roughly 50% over that period. So I was listening to this discussion—and, by the way, the CEO was there running the meeting whose main focus was his own compensation. When I pointed out that it was really hard to argue that management had done a good job when the value of the company had fallen by

50%, my fellow members of the compensation committee acted as if they were shocked. The response I got was, “How did you calculate that?” My own experience suggests that one person on a board can make a difference. It took a couple of years, but we did fire the CEO for poor performance. I would show up at every meeting and say, “We’ve destroyed $50 million since the last meeting.” Finally things moved. After we eventually fired the CEO, I kept asking hard questions. Then the next CEO fired me from the board because, as he put it, I had a tendency to ask “trick questions.” That, apparently, was inappropriate behavior. A trick question, as I gathered from this experience, is one that the CEO either can’t answer or finds it uncomfortable to do so. Source: Excerpts from Journal of Applied Corporate Finance, 2008, US corporate governance accomplishments and failings: A discussion with Michael Jensen and Robert Monks (p. 34), 20(1): 28–46.

Directing Strategically If boards are to function effectively, being a director is one of the most demanding jobs, calling for an active “nose in but hands off ” approach.31 The key is setting goals jointly with the CEO, but not getting into operations. Ideal boards should be neither absentee boards nor heavy-handed boards. Given (1) the comprehensive functions of control, service, and resource acquisition, and (2) the limited time and resources, directors must strategically prioritize.32 How directors strategically prioritize differs significantly around the world. In US and UK firms, the traditional focus, which stems from their separation of ownership and control, is on the control function. While the service function is still important, the resource acquisition role, although important in practice, tends to be criticized by policy makers, activists, and the media, who often regard activities such as board interlocks as “collusive.” Consequently, recent US regulations, especially the Sarbanes-Oxley (SOX) Act of 2002, emphasize the control function almost to the exclusion of the resource acquisition function. For example, Apple acquired certain resources from Google to power its iPhones and Google’s CEO Eric Schmidt used to serve on Apple’s board. However, as competition between Apple and Google (which launched its own Android phone) heated up recently, Schmidt had to give up his Apple board membership in order to avoid any impression of “collusion.” Since outside directors are not likely to have enough firsthand knowledge about the firm, they are, thus, forced to focus on financial performance targets and numbers—known as financial control (see Table 11.2). Financial control may encourage CEOs to focus on the short term (such as maximizing current earnings by reducing R&D) at the expense of longterm shareholder interests. Therefore, inside directors, who are executives, can bring firsthand knowledge to board deliberations, allowing for a more-sophisticated understanding of some managerial actions (such as investing in R&D for future growth while not maximizing current earnings). A board informed by such inside views is able to exercise strategic

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292  PART 3  Corporate-Level Strategies

Table 11.2  Outside Directors versus Inside Directors Pros Outside directors

●●

●●

●●

Inside directors

●●

●●

Presumably more independent from management (especially the CEO). More capable of monitoring and controlling managers. Good at financial control. Have firsthand knowledge about the firm. Good at strategic control.

Cons ●● ●●

●● ●●

Independence may be illusionary. “Affiliated” outside directors may have family or professional relationships with the firm or management. Not good at strategic control. Non-CEO inside directors (executives) may be unable to control the CEO.

control, basing its judgment beyond a mere examination of financial numbers. It seems that a healthy board requires both kinds of control, thus calling for a balanced composition of insiders and outsiders.33

Governance Mechanisms as a Package voice-based mechanism

Corporate governance mechanism that focuses on shareholders’ willingness to work with managers, usually through the board of directors, by “voicing” their concerns. exit-based mechanisms

Corporate governance machanism that focuses on exit, indicating that shareholders no longer have patience and are willing to “exit” by selling their shares.

shareholder activism

(1) Activities of large shareholders eager to maximize their returns, and (2) activities of small shareholders pushing their own proposals.

Governance mechanisms can be classified as internal and external ones—otherwise known as voice-based and exit-based mechanisms, respectively. Voice-based mechanisms refer to shareholders’ willingness to work with managers, usually through the board, by “voicing” their concerns. Exit-based mechanisms indicate that shareholders no longer have patience and are willing to “exit” by selling their shares.

Internal (Voice-Based) Governance Mechanisms The two internal governance mechanisms typically employed by boards can be characterized as (1) “carrots” and (2) “sticks.” In order to better motivate managers, increasing executive compensation as “carrots” is often a must. Stock options that help align the interests of managers and shareholders have become increasingly popular.34 The underlying idea is pay for performance, which seeks to link executive compensation with firm performance. While in principle this idea is sound, in practice it has a number of drawbacks.35 If accounting-based measures (such as return on sales) are used, managers are often able to manipulate numbers to make them look better. Short-termism and myopic behavior (such as cutting R&D for better quarterly numbers) are likely. If market-based measures (such as stock prices) are adopted, stock prices obviously are subject to too many forces beyond the control of managers, who may be unfairly punished (or rewarded). Consequently, the pay-for-performance link in executive compensation is usually not very strong.36 Boards are likely to use “carrots” before welding “sticks.” However, when facing continued performance failures, boards may have to dismiss the CEO.37 In a high-profile case, Steve Jobs was dismissed by Apple’s board in 1985. Among the world’s largest 2,500 listed firms, CEO tenure has decreased from eight years in 2000 to six-seven years in the 2010s.38 In brief, boards seem to be more “trigger-happy” recently.39 In 2011, Léo Apotheker served only ten months as CEO before HP’s board fired him. Because CEOs must shoulder substantial firm-specific employment risk (a fired CEO such as Apotheker is unlikely to run another publicly traded company), they naturally demand more generous compensation—a premium on the order of 30% or more—before taking on new CEO jobs. This in part explains the rising levels of executive compensation. In 2018, the median CEO pay for S&P 500 firms rose to $12 million, up 7% from 2017.40 Embodying the voice of shareholders, shareholder activism a generation ago referred to large shareholders demanding major strategic changes (including agreeing to be taken over

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Chapter 11 Governing the Corporation Globally   293

by “corporate raiders” to better unleash value). Now shareholder activism—in addition to the continued activities of large shareholders—also includes the activities of small shareholders pushing their own proposals.41 While some of these proposals are related to firms’ core business, others are not. Focusing on environmental, social, and governance (ESG) issues, examples of such proposals include demands for Amazon to cut food waste, Apple to set up a human-rights committee, and Citigroup to avoid violating the rights of indigenous people worldwide.42 In other words, activist shareholders not only include traditional shareholders interested in maximizing their wealth, but also social activists eager to promote their agendas. In the name of promoting shareholder democracy, the current rules set a low bar for submitting proposals for proxy voting.43 In the United States, as long as a shareholder owns at least $2,000 of a firm’s stock for a year, he or she can submit a proposal to address issues affecting at least 5% of its business. As a result, the voice of shareholders has become louder and more diverse recently, resulting in a new term—shareholder empowerment. It is defined as a shift in the allocation of power from corporate managers and directors to shareholders—often implemented directly via shareholder participation in corporate decision making and advisory votes or indirectly via shareholders’ ability to hold managers and directors accountable.44 Managers (especially CEOs) and directors have to navigate the increasingly active shareholder empowerment movement.45

External (Exit-Based) Governance Mechanisms There are three external governance mechanisms: (1) market for product competition, (2) market for corporate control, and (3) market for private equity. Product market competition is a powerful force compelling managers to maximize profits and, in turn, shareholder value. From a corporate governance perspective, product market competition complements the market for corporate control and the market for private equity, each of which is outlined next.

activist shareholder

(1) A traditional shareholder interested in maximizing his/her wealth, or (2) a social activist eager to promote his/her agenda. shareholder democracy

A movement to let shareholders have more control of the management of the firm. shareholder empowerment

Shift in the allocation of power from corporate managers and directors to shareholders.

Market for Corporate Control. This is the main external governance mechanism, otherwise known as the takeover market or the mergers and acquisitions (M&A) market (see Chapter 9). The market for corporate control is an extension of the capital market, which provides a minute-by-minute report on management. The market for corporate control is essentially an arena where different management teams contest for the control rights of corporate assets. As an external governance mechanism, it serves as a disciplining mechanism of last resort when internal governance mechanisms fail. The underlying logic is spelled out by agency theory, which suggests that when managers engage in selfinterested actions and internal governance mechanisms fail, firm stock will be undervalued by investors. Under these circumstances, other management teams, which recognize an opportunity to create new value, bid for the rights to manage the firm (see Chapter 9). How effective is the market for corporate control? Three findings emerge: ●● ●● ●●

On average, shareholders of target firms earn sizable acquisition premiums. Shareholders of acquiring firms experience slight but insignificant losses. A substantially higher level of top management turnover occurs following M&As.

In summary, while internal mechanisms aim at “fine-tuning,” the market for corporate control enables the “wholesale” removal of entrenched managers. As a radical approach, the market for corporate control has its own limitations. It is very costly to wage such financial battles, because acquirers must pay an acquisition premium. In addition, a large number of M&As are driven by acquirers’ sheer hubris or empire building, and the long-term profitability of postmerger firms is not particularly impressive (see Chapter 9). Nevertheless, the net impact, at least in the short run, seems to be positive, because the threat of takeovers does limit managers’ divergence from shareholder wealth maximization.

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294  PART 3  Corporate-Level Strategies

private equity

Equity capital invested in private (nonpublic) companies. leveraged buyout (LBO)

A means by which private investors, often in partnership with incumbent managers, issue bonds and use the cash raised to buy the firm’s stock.

Market for Private Equity.  Instead of being taken over, a large number of publicly listed firms have gone private by tapping into private equity—equity capital invested in private (nonpublic) companies (see the Closing Case). Private equity is primarily invested through leveraged buyouts (LBOs). Dell, for example, went private in a $24 billion LBO.46 In an LBO, private investors, often in partnership with incumbent managers, issue bonds and use the cash raised to buy the firm’s stock—in essence replacing shareholders with bondholders and transforming the firm from a public to a private entity.47 As another external governance mechanism, private equity utilizes the bond market, as opposed to the stock market, to discipline managers. LBO-based private equity transactions are associated with three major changes in corporate governance:48 ●●

●● ●●

LBOs change the incentives of managers by providing them with substantial equity stakes. The high amount of debt imposes strong financial discipline. LBO sponsors closely monitor the firms in which they have invested.

Overall, evidence suggests that private equity results in relatively small job losses (about 1%–2%) and improves efficiency by about 2%, at least in the short run.49 The picture is less clear regarding the long run, because LBOs may have forced managers to reduce investments in long-term R&D. The Closing Case outlines the recent challenge associated with private equity.

Internal Mechanisms + External Mechanisms = Governance Package

shareholder capitalism

A view of capitalism that suggests that the most fundamental purpose for firms to exist is to serve the economic interests of shareholders.

Taken together, the internal and external mechanisms can be considered a “package.”50 Michael Jensen, a leading agency theorist, argued that in the United States, failures of internal governance mechanisms in the 1970s activated the market for corporate control in the 1980s (see Strategy in Action 11.2).51 Managers initially resisted. But over time, many firms that are not takeover targets or that have successfully defended themselves against such attempts end up restructuring and downsizing—doing exactly what “raiders” would have done had these firms been taken over. In other words, the strengthened external mechanisms force firms to improve internal mechanisms. Thus, managers have become much more focused on stock prices, resulting in a new term, shareholder capitalism, which has been spreading around the world.

A Global Perspective Illustrated in Figure 11.3, different corporate ownership and control patterns around the world lead to a different mix of internal and external mechanisms. The most familiar type is Cell 4, exemplified by most large US and UK firms. While external governance mechanisms (M&As and private equity) are active, internal mechanisms are relatively weak due to the separation of ownership and control. The opposite can be found in Cell 1, namely, firms in continental Europe and Japan where the market for corporate control is relatively inactive (although there is more activity recently). Consequently, the primary governance mechanisms remain concentrated ownership and control. Overall, the Anglo-American and continental European-Japanese (otherwise known as German-Japanese) systems represent the two primary corporate governance families in the world, with a variety of labels (see Table 11.3). Given that both the United States and the United Kingdom as a group and continental Europe and Japan as another group are highly developed, successful economies, it is difficult and probably not meaningful to argue whether the Anglo-American or German-Japanese system is better.

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Chapter 11 Governing the Corporation Globally   295

FIGURE 11.3  A Global Perspective on Internal and External Governance Mechanisms External governance mechanisms

Strong

Weak

Strong

(Cell 1) Germany Japan

(Cell 2) Canada

(Cell 3) State-owned enterprises

(Cell 4) United States United Kingdom

Internal governance mechanisms Weak

Source: Cells 1, 2, and 4 are adapted from E. Gedajlovic & D. Shapiro, 1998, Management and ownership effects: Evidence from five countries (p. 539), Strategic Management Journal 19: 533–553. The label of Cell 3 is suggested by M. W. Peng.

Some other systems do not easily fit into such a dichotomous world. Placed in Cell 2, Canada has both a relatively active market for corporate control and a large number of firms with concentrated ownership and control—more than 380 of the 400 largest Canadian firms are controlled by a single shareholder.52 Canadian managers, thus, face powerful internal and external constraints. Finally, SOEs (of all nationalities) are typically in a position of both weak external and internal governance mechanisms (Cell 3). Externally, the market for corporate control usually does not exist. Internally, managers are supervised by officials who act as de facto “owners” with little control. Overall, firms around the world are governed by a combination of internal and external mechanisms. For firms in Cells 1, 2, and 4, there is some partial substitution between internal and external mechanisms (for example, weak boards may be partially substituted by a strong market for corporate control). Worldwide, how to best govern large firms remains a huge debate with multiple experiments (see Strategy in Action 11.3). Table 11.3  Two Primary Families of Corporate Governance Systems Corporations in the United States and United Kingdom

Corporations in Continental Europe and Japan

Anglo-American corporate governance models

German-Japanese corporate governance models

Market-oriented high-tension systems

Bank-oriented network-based systems

Rely mostly on exit-based external mechanisms

Rely mostly on voice-based internal mechanisms

Shareholder capitalism

Stakeholder capitalism

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296  PART 3  Corporate-Level Strategies

STRATEGY IN ACTION 11.3 Emerging Markets    Ethical Dilemma Global Competition in How to Best Govern Large Firms In global competition, large firms compete not only in product markets, but also in terms of how they are organized, financed, and governed. Definitions of what consists of a “large firm” vary around the world. A reasonable definition is that if a firm is large enough to be publicly listed, then it would be a “large firm” in that country. Almost all large firms started as small firms. Small firms typically feature concentration of ownership and control—the founders own, manage, and control them. There was a time that many small firms aspired to become large enough so that they could become publicly listed, which would be an awesome hallmark that these firms have “made it.” As firms grow larger, the founding families may run out of money so that introducing outside shareholders would be necessary. The founding families may also run out of sons, daughters, in-laws, and relatives to staff key positions so that employing nonfamily, professional managers would be a must—so the theory goes. This theory was first published in a 1932 book, The Modern Corporation and Private Property, by law school professor Adolf Berle and economist Gardiner Means. Generalizing from several decades of transformation at leading American firms in which founding families such as the Carnegies and the Rockefellers gradually reduced their holdings and introduced outside shareholders and professional managers, Berle and Means argued that such transformation would be inevitable. In brief, their theory predicted separation of ownership and control as firms grow larger. What if the founding families refused to let go? In 1983, economists Eugene Fama (who won a Nobel Prize in economics in 2013) and Michael Jensen (see Strategy in Action 11.2) asserted that failure to separate ownership and control “tends to penalize the corporation in the competition for survival.” The question is: Really? The other two major forms of corporate governance are family ownership and state ownership. While the Berle and Means theory does a good job characterizing the evolution of large firms in the United States (and, to a lesser extent, Britain), the theory ends up not explaining the ownership and control pattern in the rest of the world very well. Numerous publicly listed firms continue to feature concentration of ownership and control in the hands of families. While there is no shortage of family drama and intrigue—remember the TV show Dallas?—evidently family ownership and control have no problem surviving and prospering. The Fama and Jensen prediction that large firms with concentration of ownership and control would suffer from terrible performance cannot really be supported. In South Korea, Samsung Group, led by the capable Lee Kun-hee family, has triumphed from industry to industry, contributing 20% of GDP. In India, Tata Group, in the hands of the House of Tata, contributes 5% of GDP. An extension of the Fama and Jensen prediction is that while some large family firms may do well domestically, once they go overseas they would surely fail to become world-class in global competition. Again, this conjecture can be refuted. For example, Tata Group has emerged as one of the leaders of Indian firms’ globalization. In Britain, Tata Group is now the single largest private-sector employer, proudly supporting 50,000 jobs—an accomplishment none of the UK-owned (and non-family-managed) firms can match. In the United States, some of the best-performing and largest firms, such as Walmart, Ford, and McKesson, are family

owned and controlled. Newly listed high-tech firms such as Google and Facebook have carried on this tradition. In addition to family ownership, state ownership remains a rival form of corporate governance. Despite privatization around the world between the 1980s and the 2000s, during the Great Recession of 2008–2009, Western governments in an effort to rescue ailing firms nationalized numerous private firms and turned them into state-owned enterprises (SOEs). During the coronavirus outbreak of 2020, some Western governments ended up doing the same. For example, the Italian government turned Alitalia into an SOE in March 2020. Today SOEs represent approximately 10% of global GDP. Even in developed economies, they command 5% of GDP. Anchored by SOEs, China over the past four decades has become the second largest economy in the world. SOEs represent 80% of China’s stock market capitalization. But China is not alone. In Russia, the figure is 62%, in Brazil 38%, and in Norway 38%. SOEs include some of the largest oil and gas companies (such as Sinopec), the biggest telecom service provider (China Mobile), and the biggest ports operator (Dubai Ports). Some SOEs are active worldwide as multinationals. In short, SOEs as an organizational form can be both large and successful. Recently what seems to be under siege is the publicly listed corporation. In 1997, the number of US listed firms reached a high watermark: more than 8,000. After two decades, the number is now only 4,400. The hassles associated with public ownership have facilitated the rise of private equity (see the Closing Case). While existing firms can go private, many aspiring new firms do not bother to list at all. As a result, there is now a severe initial public offering (IPO) famine. In short, going public is no longer as sexy as it was before. Commenting on the global competition in terms of how to best govern large firms, the Economist suggests that “there is every reason to celebrate the fact that businesses have more corporate forms to choose from.” Source: (1) G. Bruton, M. W. Peng, D. Ahlstrom, C. Stan, & K. Xu, 2015, State-owned enterprises around the world as hybrid organizations, Academy of Management Perspectives 29: 92–114; (2) G. Davis, 2016, Can an economy survive without corporations? Academy of Management Perspectives 30: 129–140; (3) P. Duran, M. van Essen, P. Heugens, T. Kostova, & M. W. Peng, 2019, The impact of institutions on the competitive advantage of publicly listed family firms in emerging markets, Global Strategy Journal 9: 243–274; (4) Economist, 2012, The endangered public company, May 19: 13; (5) Economist, 2012, The big engine that couldn’t, May 9: 27–30; (6) Economist, 2015, Reinventing the company, October 24: 9–10; (7) E. Fama & M. Jensen, 1983, Separation of ownership and control, Journal of Law and Economics 26: 301–326; (8) Flight Global, 2020, Alitalia to be renationalised under broad emergency decree, March 17: www.flightglobal. com; (9) Fortune, 2016, So long, Wall Street, June 1: 51–57; (10) Y. Jiang & M. W. Peng, 2011, Are family ownership and control in large firms good, bad, or irrelevant? Asia Pacific Journal of Management 28: 15–39; (11) S. Lahiri, D. Mukherjee, & M. W. Peng, 2020, Behind the internationalization of family SMEs, Global Strategy Journal (in press); (12) M. W. Peng, W. Sun, C. Vlas, A, Minichilli, & G. Corbetta, 2018, An institution-based view of large family firms, Entrepreneurship Theory and Practice 42: 187–205.

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Chapter 11 Governing the Corporation Globally   297

A Comprehensive Model of Corporate Governance Figure 11.4 shows a comprehensive model drawn from the strategy tripod. This section discusses the model.

Industry-Based Considerations The nature of industry sometimes questions certain widely accepted conventional wisdom regarding (1) outside directors, (2) insider ownership, and (3) CEO duality. Having more outside directors on the board is often regarded as a performance-enhancing practice. However, such thinking ignores industry differences. In industries characterized by a rapid pace of innovation requiring significant R&D investments (such as IT), outside directors often have a negative impact on firm performance.53 This is because of the necessity for directors to have intimate knowledge about these industries, which require more strategic control. Inexperienced outside directors often focus on financial control—inappropriate in these industries. Another example is the widely noted positive link between inside management ownership and firm performance. However, such relationship may not exist in low-growth stable industries. Only in relatively high-growth, turbulent industries has this relationship been found. While increased insider ownership is designed to encourage managers to take more risks, opportunities to profitably take such risks probably may be more likely in high-growth turbulent industries. A third example is the often-criticized practice of CEO duality. In industries experiencing great turbulence, the presence of a single leader may allow a faster and more unified response to changing events. These benefits may outweigh the potential agency costs brought by such duality. Overall, governance practices need to create a fit with the nature of the industry in which firms are competing.54 This cautions against universal prescriptions of certain “best” practices. FIGURE 11.4  A Comprehensive Model of Corporate Governance Resource-based considerations

Industry-based considerations

Value Rarity Imitability Organizational capabilities

Outside directors Inside ownership CEO duality

Corporate governance

Institution-based considerations

Formal frameworks Informal frameworks

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298  PART 3  Corporate-Level Strategies

Resource-Based Considerations managerial human capital

Skills and abilities acquired by top managers.

From a corporate governance standpoint, some of the most valuable, rare, and hard-to-imitate firm-specific resources (the first three in the VRIO framework) are the skills, abilities, and experiences of top managers and directors—often regarded as managerial human capital.55 Some of these capabilities are highly unique, such as international experiences.56 Managers without such firsthand experience are often handicapped when they endeavor to expand overseas. In addition, the social networks of these executives, often through board interlocks, are likely to be valuable, unique, and hard to imitate.57 In another example, the abilities to successfully list on a high-profile exchange such as New York Stock Exchange (NYSE) and London Stock Exchange (LSE) are valuable, rare, and hard to imitate. In 1997, the valuations of foreign firms listed in New York were 17% higher than their domestic counterparts in the same country that were either unable or unwilling to list abroad.58 Now, despite hurdles such as SOX, the select few that are able to list on NYSE are rewarded more handsomely: Their valuations are now 37% higher than comparable groups of domestic firms in the same country.59 LSE-listed foreign firms do not enjoy such high valuations.60 This is classic resource-based logic at work: Precisely because it is much more challenging to list in New York in the SOX era, the small number of foreign firms that are able to do this are truly exceptional. Thus, they deserve much higher valuations. The last crucial component in the VRIO framework is O: organizational. It is within an organizational setting (in TMTs and boards) that managers and directors function.61 Overall, the few people at the top of an organization can make a world of difference—Steve Jobs at Apple and Sergio Marchionne at Fiat Chrysler are two great examples.62 Governance mechanisms need to properly motivate and discipline them to make sure they make a positive impact.

Institution-Based Considerations Formal Institutional Frameworks. The institution-based view posits that differences around the world are affected on the one hand by formal securities laws, corporate charters, and governance codes; and on the other hand by informal conventions, norms, and values—collectively known as institutions.63 A fundamental difference is between the separation of ownership and control in (most) Anglo-American firms and the concentration of ownership and control in the rest of the world (see Strategy in Action 11.3). Why is there such a difference? While explanations abound, a leading answer is an institutional one.64 In brief, better formal legal protection of shareholder rights in the United States and Britain, especially those held by minority shareholders, encourages founding families to dilute their equity to attract minority shareholders and delegate day-to-day operations to professional managers.65 Given reasonable investor protection, founding families themselves (such as the Rockefellers) may, over time, feel comfortable becoming minority shareholders. On the other hand, when formal legal and regulatory institutions are dysfunctional, founding families must run their firms directly. In the absence of investor protection, inviting outside professional managers may invite abuse and theft. Strong evidence exists that the weaker the formal legal and regulatory institutions protecting shareholders, the more concentrated ownership and control rights become—in other words, there is some substitution between the two. Common-law countries generally have the strongest legal protection of investors and the lowest concentration of corporate ownership.66 Among common-law countries, such ownership concentration is higher for firms in emerging economies (such as India and Israel) than developed economies (such as Australia, Canada, and New Zealand). In short, concentrated ownership and control is an answer to potentially rampant principal-agent conflicts in the absence of sufficient legal protection of shareholder rights. However, what is good for controlling shareholders is not necessarily good for minority shareholders and for an economy. As noted earlier, the minimization of principal-agent conflicts through concentration of ownership and control, unfortunately, introduces more

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Chapter 11  Governing the Corporation Globally   299

principal-principal conflicts. Consequently, many potential minority shareholders may refuse to invest. “How does one avoid being expropriated as a minority shareholder?” One popular saying suggests: “Don’t be one!” If minority shareholders are informed enough to be aware of principal-principal conflicts and still decide to invest, they are likely to discount the shares floated by family owners. For example, thanks to the “Murdoch discount,” News Corporation’s stock performance has trailed behind that of its rivals such as Walt Disney (see the Opening Case). Overall, such principal-principal conflicts can result in lower valuations, fewer publicly traded firms, inactive and smaller capital markets, and, in turn, lower levels of economic development in general. Given that almost every country desires vibrant capital markets and economic development, it seems puzzling why strong investor protection is not universally embraced. This is because corporate governance ultimately is a choice about political governance. For largely historical reasons, most countries have made hard-to-reverse political choices. For example, the German practice of codetermination (employees control 50% of the votes on supervisory boards) is an outcome of political decisions made by postwar German governments. If German firms had US- or UK-style dispersed ownership and still allowed employees to control 50% of the votes on supervisory boards, these firms would end up becoming employee-dominated firms. Thus, concentrated ownership and control becomes a natural response in German firms. Changing political choices, although not impossible, will encounter significant resistance. Incumbents (such as German labor unions or Asian families) who benefit from the present system are not likely to give up without a fight. Some of the leading families not only have great connections with the government, sometimes they are the government. Recent government leaders from three countries—Silvio Berlusconi of Italy, Thaksin Shinawatra and Yingluck Shinawatra of Thailand, and Donald Trump of the United States—come from leading families and are among the richest individuals in these countries. Only when extraordinary events erupt would some politicians muster sufficient political will to initiate major corporate governance reforms. The spectacular corporate governance scandals in the United States (such as Enron in 2001) are an example of such extraordinary events prompting more serious political reforms, such as SOX. The 2008 financial crisis resulted in the enactment of the Dodd-Frank Act in 2010, which for the first time allows shareholders to cast proxy votes on executive compensation—in short, “say on pay.” Informal Institutional Frameworks.  Why have informal norms and values concerning corporate governance recently changed to such a great extent?67 As the idea of shareholder capitalism rapidly spreads, three underlying sources can be identified: (1) the rise of capitalism, (2) the impact of globalization, and (3) the global diffusion of “best practices.” First, recent changes in corporate governance around the world are part of the greater political, economic, and social movement embracing capitalism. The triumph of capitalism at the end of the Cold War naturally boils down to the triumph of capitalists (also known as shareholders). Even some of the most developed countries have experienced significant governance failures, calling for a sharper focus on shareholder value. Second, at least three aspects of recent globalization have a bearing on corporate governance. ●●

●●

●●

Thanks to more trade and investment, firms with different governance norms increasingly come into contact and expose their differences. Being aware of alternatives, shareholders as well as managers and policy makers are no longer easily persuaded that “our way” is the best way of corporate governance. Foreign portfolio investment (FPI)—foreigners purchasing stocks and bonds—has scaled new heights. These investors naturally demand better shareholder protection before committing their funds.68 The global thirst for capital has prompted many firms to pay attention to corporate governance. New York- and London-listed foreign firms have to be in compliance with US and UK listing requirements.

foreign portfolio investment (FPI)

Foreigners’ purchase of stocks and bonds in one country.

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300  PART 3  Corporate-Level Strategies

Third, the changing norms and values are also directly promoted by the global diffusion of “best practices” in the form of corporate governance codes.69 A lot of codes are advisory and not legally binding. However, strong pressures exist for firms to “voluntarily” adopt them. In Russia, although adopting the Code of Corporate Conduct is voluntary, firms not adopting it have to publicly explain why, essentially naming and shaming themselves. The Organization for Economic Cooperation and Development (OECD)—a rich countries’ club—has spearheaded efforts to globally diffuse “best practices” through the OECD Principles of Corporate Governance. The Principles are nonbinding even for the 34 OECD member countries. Nevertheless, the global norms seem to be moving toward the Principles. China and Taiwan, which are non-OECD members, have recently taken a page from the Principles and allowed for class-action lawsuits brought by shareholders. Slowly but surely, change is in the air. But such change is not necessarily in one direction. The ferociousness of the 2008 global financial crisis and the 2020 COVID-19 pandemic have caused tremendous resentment toward fat executive pay packages and income inequality. Protest movements such as Occupy Wall Street and Occupy London during 2011–2012 are a tangible indication of the changing informal sentiments, which have triggered or intensified formal regulatory changes.

Debates and Extensions Corporate governance often generates intense debates.70 In fact, the notion of shareholder capitalism itself clashes with that of stakeholder capitalism—a huge debate that we will cover in Chapter 12. Here, this section discusses four major debates that have not been addressed previously.

Debate 1: Opportunistic Agents versus Managerial Stewards

stewardship theory

A theory that suggests that managers should be regarded as stewards of owners’ interests.

Agency theory assumes managers to be agents who may engage in self-serving opportunistic activities if left to their own devices. However, critics contend that most managers are likely to be honest and trustworthy. Managerial mistakes may be due to a lack of competence, information, or luck; but not necessarily due to self-serving motives. Thus, it may not be fair to characterize all managers as opportunistic agents. Although very influential, agency theory has been criticized as an “anti-management theory of management.”71 A “pro-management” theory, stewardship theory, has emerged recently. It suggests that most managers can be viewed as owners’ stewards. Safeguarding shareholders’ interests and advancing organizational goals will maximize (most) managers’ own utility functions.72 If all principals view all managers as self-serving agents with control mechanisms to put managers on a “tight leash,” some managers, who initially view themselves as stewards, may be so frustrated that they end up engaging in the very self-serving behavior agency theory seeks to minimize. In other words, as a self-fulfilling prophecy, agency theory may induce such behavior. One radio station manager wrote: I have managed two radio stations in my career. The owner of the first station gave me the metrics and goals I needed to achieve. He left the strategy of how to achieve those goals up to me. . . . I put in some long hours and felt completely responsible for the results. I was the owner’s steward. My second station had an extremely suspicious and micromanaging owner. Every decision I made had to be approved by her. She would call my subordinates to “check up” on what I had said in staff meetings. . . . At the beginning of my tenure, I saw myself as a steward and tried very hard to put in place best practices. Finally, I was on such a short leash that I became frustrated and began to not to take initiative on things where normally I would. . . . When I was treated as an agent, after a time I became the kind of manager that agency theory tries to avoid.73

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Chapter 11 Governing the Corporation Globally   301

Debate 2: Global Convergence versus Divergence Globally, is corporate governance converging or diverging? Convergence advocates argue that globalization unleashes a “survival-of-the-fittest” process by which firms will be forced to adopt globally best (essentially Anglo-American) practices. Global investors are willing to pay a premium for stock in firms with Anglo-American-style governance, prompting other firms to follow. One interesting phenomenon often cited by convergence advocates is cross-listing— namely, listing shares on foreign stock exchanges.74 Cross-listing is primarily driven by the desire to tap into larger pools of capital. Foreign firms, thus, must comply with US and UK securities laws and adopt Anglo-American governance norms.75 A US or UK listing can be viewed as a signal of the firm’s commitment to strengthen shareholder value, resulting in higher valuations. Critics contend that governance practices will continue to diverge throughout the world.76 For example, promoting more concentrated ownership and control is often recommended as a solution to combat principal-agent conflicts in US and UK firms. However, making the same recommendation to reform firms in the rest of the world may be counterproductive or even disastrous. This is because the main problem there is that controlling shareholders typically already have too much ownership and control. Finally, some US and UK practices differ significantly. In addition to the split on CEO duality (the UK against, the US for) discussed earlier, none of the US anti-takeover defenses (such as “poison pills”) is legal in the UK. In the case of cross-listed firms, divergence advocates make two points. First, despite some convergence on paper (such as having more outside directors), cross-listed foreign firms do not necessarily adopt US governance norms before or after listing.77 Second, despite the popular belief that US and UK securities laws would apply to cross-listed foreign firms, in practice, these laws have rarely been effectively enforced against foreign firms’ tunneling.78 At present, complete divergence is probably unrealistic, especially for large firms in search of capital from global investors. Complete convergence also seems unlikely. What is more likely is “cross-vergence,” balancing the expectations of global investors and those of local stakeholders.79

cross-listing

Firms list their shares on foreign stock exchanges.

Debate 3: Value versus Stigma of Multiple Directorships Since most outside directors serve on one board, individuals holding multiple directorships are always a small minority among thousands of directors—a few dozen people known as the inner circle or the corporate elite. For these individuals, multiple directorships offer social connections, business intelligence, and personal prestige in corporate and social (and sometimes political) circles.80 For firms, board interlocks help gain access to corporate and social (and perhaps political) networks, expertise, and legitimacy.81 As a result, individuals holding multiple directorships were especially likely to be sought-after candidates to join more boards. In 1974, more than 90 directors each held five or more directorships in US firms. In 1994, 75 individuals each served on five or more US boards. Documented by numerous studies, the existence of such an inner circle seemed to be an enduring feature of the corporate governance landscape in the United States—and elsewhere.82 However, it turns out that in the United States, the value of multiple directorship was largely a 20th-century phenomenon, and that in the first two decades of the 21st century, serving on multiple boards can carry stigma. Two developments emerge. First, given the heightened needs for directors to “do their job” (as opposed to “taking a nap during board meetings”), simply serving on multiple boards by definition becomes evidence of inattention. They must be stretching themselves too thin—becoming “overboarded.” The financial scandals of the early 21st century (such as Enron) and the attendant public outcry pushed directors to be accountable. Starting in 2004, Institutional Shareholder Services (ISS), an influential proxy advisory (consulting) firm that advises institutional investors on how to vote their shares where directors are elected, recommended against non-CEO directors who served on more than six public company boards.83 Second, for CEOs, ISS reduced the recommended number of outside directorships to two. As the CEO job becomes more demanding, CEOs obviously need to

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302  PART 3  Corporate-Level Strategies

pay primary attention to their own firms. Overall, the informal norm in favor of appointing well-connected directors—consisting of both CEOs and non-CEO directors—has changed. Some firms have formally codified the maximum limit of the number of outside directorships that their own directors can accept. Bank of America, GM, and Altria, respectively, limit their directors to serve on no more than five, four, and three other public company boards. In summary, there is some stigma associated with multiple directorships. As a result, much of what was true of the US board interlock network in the 20th century became no longer true in the 21st. Such a network suffered a significant decline in connectedness. Because firms are afraid of attracting the wrath of ISS and other proxy advisers, individuals with three or more multiple directorships now become less likely than those with one directorship to be invited to join a new board. Therefore, the value of multiple directorships has declined. In 2012, only one individual—Shirley Jackson, president of Rensselaer Polytechnic Institute—served on five S&P 500 boards, and she did not have a corporate background. Whether the decline of multiple directorships and the consequent decline of the connectedness of US board interlock network is beneficial to society remains to be debated. One of the first “casualties” of the new development is our understanding of the nature of US board interlocks, accumulated over decades of research and accepted as “facts.” Much earlier findings may no longer hold in the new era. Network theory in favor of individuals with high network centrality seems in need of significant revision.84 Another “casualty” may be the corporate elite. Given the pressures from shareholder capitalism, CEOs have lost job security and struggled to survive. They have neither time nor energy as before to serve on other firms’ boards. Non-CEO directors, if they are too popular, would lose their popularity. In much of the 20th century, the corporate elite were highly concentrated and politically moderate. However, the US society may have lost “a powerful consensus-building, politically moderate interest group.”85 Does this have anything to do the more divisive politics and heightened social conflicts between the haves and have-nots?86

Debate 4: State Ownership versus Private Ownership87

Washington Consensus

A view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policy making, which is often spearheaded by the US government and two Washington-based international organizations: the International Monetary Fund and the World Bank.

Private ownership is good. State ownership is bad. Although crude, these two statements fairly accurately capture the intellectual and political reasoning behind three decades of privatization around the world between 1980 and 2008. Table 11.4 summarizes their key differences. Obviously, both forms of ownership have their pros and cons. So the debate on which form of ownership is better boils down to whether the pros outweigh the cons (see Strategy in Action 11.3). The debate on private versus state ownership underpinned much of the global economic evolution in the 20th century. The Great Depression (1929–1933) was widely seen as a failure of capitalism centered on private ownership. As a result, the postwar decades saw an increase in state ownership and a decline in private ownership. State ownership was not only extensive throughout the former Eastern bloc (the former Soviet Union, Central and Eastern Europe, China, Vietnam, and Cuba), but also widely embraced throughout developed economies in Western Europe. By the early 1980s, close to half of the GDP in major Western European countries such as Britain, France, and Italy was contributed by SOEs. Experience throughout the former Eastern bloc and Western Europe indicated that SOEs typically suffer from a lack of accountability and a lack of economic efficiency. SOEs were known to feature relatively equal pay between managers and the rank and file. Since extra work did not translate into extra pay, employees had little incentive to improve the quality and efficiency of their work. Britain’s prime minister Margaret Thatcher privatized many British SOEs in the 1980s. SOEs throughout the former Soviet Union and Central and Eastern Europe soon followed suit. Eventually, the privatization movement became global, reaching Brazil, China, India, Mexico, Vietnam, and most countries in Africa, Asia, and Latin America. In no small part, such a global movement was championed by the Washington Consensus, spearheaded by the US government and the two Washington-based international organizations: the

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Chapter 11 Governing the Corporation Globally   303

Table 11.4  Private Ownership versus State Ownership Private Ownership

State Ownership

Objective of the firm

Maximize profits for private owners who are capitalists (and maximize shareholder value for shareholders if the firm is publicly listed).

Optimal balance for a “fair” deal for all stakeholders. Maximizing profits is not the sole objective of the firm. Protecting jobs and minimizing social unrest are legitimate goals.

Establishment of the firm

Determined by entrepreneurs, owners, and investors.

Determined by government officials.

Financing of the firm

From private sources (and public shareholders if the firm is publicly traded).

From state sources (such as direct subsidiaries or banks owned or controlled by governments).

Liquidation of the firm

Forced by competition. A firm has to declare bankruptcy or be acquired if it becomes financially insolvent.

Determined by government officials. Firms deemed “too big to fail” may be supported by taxpayer dollars indefinitely.

Appointment of management

Made by owners and investors largely based on Made by government officials who may also merit. use noneconomic criteria.

Compensation of management

Determined by competitive market forces. Managers tend to be paid more under private ownership.

Determined politically with some consideration given to a sense of fairness and legitimacy in the eyes of the public.

Sources: (1) M. W. Peng, 2000, Business Strategies in Transition Economies (p. 19), Thousand Oaks, CA: Sage; (2) M. W. Peng, G. Bruton, C. Stan, & Y. Huang, 2016, Theories of the (state-owned) firm, Asia Pacific Journal of Management 33: 293–317.

International Monetary Fund and the World Bank. A core feature of the Washington Consensus is the unquestioned belief in the superiority of private ownership over state ownership. The widespread privatization movement suggested that the Washington Consensus had clearly won the day—or so it seemed. But in 2008, the pendulum suddenly swung back (see Chapter 1). During the unprecedented Great Recession, many governments in developed economies, led by the US government, bailed out numerous failing private firms using public funds, effectively turning them into SOEs. As a result, the arguments in favor of private ownership and “free market” capitalism collapsed. Since SOEs had such a dreadful reputation (essentially a “dirty word”), the US government has refused to acknowledge that it has SOEs. Instead, the US government refers to them as “government-sponsored enterprises” (GSEs). Conceptually, what are the differences between SOEs and GSEs? Hardly any! The right column in Table 11.4 is based on research on the “classic” SOEs in prereform China and Russia published two decades ago. This column also accurately summarizes what is happening in developed economies featuring GSEs now. For example, protecting jobs is one of the stated goals behind bailouts. Entry and exit are determined by government officials, and some firms that have been clearly run to the ground, such as GM, are deemed “too big to fail” and are bailed out with taxpayer dollars. One crucial concern is that despite noble goals to rescue the economy, protect jobs, and fight recession, government bailouts serve to heighten moral hazard—recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions.88 In other words, capitalism without the risk of failure becomes socialism. It is long known that managers in SOEs face a “soft budget constraint” in that they can always dip into state coffers to cover their losses.89 When managers in private firms make risky decisions that turn sour, but their firms do not go under—thanks to generous bailouts— they are likely to embrace more risk in the future. From the ashes of the Washington Consensus emerged a Beijing Consensus, which centers on state ownership and government intervention. Anchored by SOEs, China’s economy has emerged to become the second largest in the world. But China is not alone.90 As of this writing, five of the top ten largest firms by revenue on the Fortune Global 500 list are

moral hazard

Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions. Beijing Consensus

A view that questions Washington Consensus’ belief in the superiority of private ownership over state ownership in economic policy making, which is often associated with the position held by the Chinese government.

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304  PART 3  Corporate-Level Strategies

SOEs: Sinopec (#2), CNPC (#4), and State Grid (#5) of China, Saudi Aramco (#6) of Saudi Arabia, and Volkswagen (#8) of Germany.91 While some SOEs have become large and profitable, the majority of them have continued to be inefficient. Despite the hoopla about the alleged “muscle” of Chinese SOEs, as a group their return on assets (ROA) has been barely 3%.92 In summary, some SOEs do well, most muddle through, but they are unlikely to disappear any time soon.

The Savvy Strategist In the corporate governance arena, the savvy strategist capitalizes on three strategic implications for action (Table 11.5). First, understand the nature of principal-agent and principalprincipal conflicts to create better governance mechanisms. For example, the rise of private equity is a direct response to principal-agent conflicts typically found in publicly listed firms. Amazingly, private equity typically makes the same managers, managing the same assets, perform much more effectively (see the Closing Case). In terms of mechanisms to alleviate principal-principal conflicts, one practice is to introduce a second controlling shareholder that may monitor and constrain the action of the first controlling shareholder.93 Second, savvy strategists need to develop firm-specific capabilities to differentiate on governance dimensions. In India, a leading IT firm Infosys has emerged as an exemplar. It is the first Indian firm to follow US generally accepted accounting principles (GAAP), the first to offer stock options to all employees, and one of the first to introduce outside directors. Since its listings in Mumbai in 1993 and NASDAQ in 1999, it has gone far beyond disclosure requirements mandated by both Indian and US standards. On NASDAQ, Infosys voluntarily behaves like a US domestic issuer, rather than subjecting itself to the less-stringent standards of a foreign issuer. The primary reason is to gain credibility with Western customers. In other words, excellent governance practices make Infosys stand out in product market competition. Third, savvy strategists need to understand the formal and informal rules, anticipate changes, and be prepared.94 In the first year that shareholders were granted a “say on pay” in US firms (2011), median pay for CEOs at S&P 500 firms jumped 35% to $8.4 million.95 While shareholders only rejected executive pay at fewer than 2% of these firms, this practice of significantly increasing CEO compensation seemed to deviate from the spirit—if not the letter—of the Dodd-Frank Act that unleashed “say on pay.” As a result, more tightening of the rules is likely. Overall, a better understanding of corporate governance can help us answer the four fundamental questions in strategy. First, why do firms differ? Firms differ in corporate governance because of the different nature of industries, different abilities to motivate and discipline managers, and different institutional frameworks. Second, how do firms behave? Given that most corporations throughout the world have similar basic components of corporate governance (owners, managers, and boards), the primary sources of differences stem from how these components interact with each other. Third, what determines the scope of the firm? From a corporate governance standpoint, a wide scope may be indicative of managers’ empire building and risk reduction. Finally, what determines the success and failure of firms around the globe? Although research is still inconclusive, there is reason to believe—in the aggregate and in the long run—that better governed firms will be rewarded with a lower cost of capital and better firm performance.96 Table 11.5  Strategic Implications for Action ●●

●●

●●

Understand the nature of principal-agent and principal-principal conflicts to create better governance mechanisms. Develop firm-specific capabilities to differentiate a firm on corporate governance dimensions. Master the rules affecting corporate governance and anticipate changes.

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Chapter 11 Governing the Corporation Globally   305

CHAPTER SUMMARY 1. Differentiate various ownership patterns (concentrated/

diffused, family, and state ownership) . ●●

●●

principal-principal conflicts.

●●

In firms with separation of ownership and control, the primary conflicts are principal-agent conflicts. In firms with concentrated ownership, principalprincipal conflicts prevail.

3. Explain the role of the board of directors. ●●

●●

nisms vary around the world.

In the US and UK, firms with separation of ownership and control dominate. Elsewhere, firms often feature concentrated ownership and control in the hands of families or governments.

2. Articulate the role of managers in both principal-agent and ●●

5. Acquire a global perspective on how governance mecha-

The board of directors performs (1) control, (2) service, and (3) resource acquisition functions. Around the world, boards differ in composition, leadership structure, and interlocks.

4. Identify voice-based and exit-based governance mecha-

●●

●●

6. Elaborate on a comprehensive model of corporate gover-

nance. ●●

●●

Industry-based, institution-based, and resourcebased views shed considerable light on governance issues.

7. Participate in four leading debates concerning corporate

governance. ●●

(1) Opportunistic agents versus managerial stewards, (2) global convergence versus divergence, (3) value versus stigma of multiple directorships, and (4) state ownership versus private ownership.

8. Draw strategic implications for action.

nisms and their combination as a package. ●●

Different combinations of internal and external governance mechanisms lead to four main groups. Privatization around the world represents efforts to enhance governance effectiveness.

Internal voice-based mechanisms and external exit-based mechanisms combine as a package to determine corporate governance effectiveness. The market for corporate control and the market for private equity are two primary external mechanisms.

●●

●●

●●

Understand the nature of principal-agent and principal-principal conflicts. Develop firm-specific capabilities to differentiate on corporate governance dimensions. Master the rules affecting corporate governance and anticipate changes.

KEY TERMS Activist shareholder 293

Foreign portfolio investment (FPI) 299

Principal-principal conflict 287

Agency cost 286

Information asymmetry 286

Private equity 294

Agency relationship 286

Inside director 288

Related transaction 288

Agency theory 286

Institutional investor 285

Separation of ownership and control 285

Agent 286

Interlocking directorate (board interlock) 290

Shareholder activism 292

Lead independent director 290

Shareholder democracy 293

Beijing Consensus 303 CEO duality 290

Concentrated ownership and control 284 Leveraged buyout (LBO) 294 Managerial human capital 298 Corporate governance 284 Cross-listing 301 Diffused ownership 284 Exit-based mechanism 292 Expropriation 288

Moral hazard 303

Outside (independent) director 288 Principal 286 Principal-agent conflict 286

Shareholder capitalism 294 Shareholder empowerment 293 Socioemotional wealth (SEW) 285 Stewardship theory 300 Tunneling 288 Voice-based mechanism 292 Washington Consensus 302

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306  PART 3  Corporate-Level Strategies

CRITICAL DISCUSSION QUESTIONS 1. If you can choose to list your firm anywhere in the world,

which country would you prefer? Why?

2. Recent corporate governance reforms in various countries

urge (and often require) firms to add more outside directors to their boards and separate the jobs of board chair and CEO. Yet, academic research has not been able to conclusively support the merits of both practices. Why?

3. ON ETHICS: You are 30 years old and obtained your MBA

from a top business school two years ago. You are being promoted to be CEO of a multibillion-dollar firm that is publicly listed in your country. There is loud minority shareholder resistance to your appointment because you are too young. Too bad—your father and your family are the controlling shareholders and you get the job. What are you going to say at your first press conference as CEO, knowing that there will be some tough questions from reporters?

TOPICS FOR EXPANDED PROJECTS 1. Starting from Berle and Means (1932), some argue that the

Anglo-American style separation of ownership and control is an inevitable outcome in corporate governance for large firms. Others contend that this is one variant (among several) on how large firms can be effectively governed and that it is not necessarily the most efficient form. What do you think?

2. How do you participate in the debate on state ownership

versus private ownership?

CLOSING CASE

3. ON ETHICS: As a chairman/CEO, you are choosing

between two candidates for one outside director position on your board. One is another CEO, a longtime friend on whose board you have served for many years. The other is a known shareholder activist whose tag line is “No need to make fat cats fatter.” Placing him on the board will earn you kudos among analysts and journalists for inviting a leading critic to scrutinize your work. However, he may try to prove his theory that CEOs are overpaid. Who would you choose?

Emerging Markets Ethical Dilemma

The Private Equity Challenge If you grabbed a Burger King for lunch, did some shopping at Neiman Marcus, munched at Outback Steakhouse for dinner, enjoyed a Budweiser, checked into a Hilton hotel, took a ride on an elevator made by Thyssenkrupp, turned on your Dell laptop, and watched the Weather Channel before going to sleep, you never left the world of private equity. Private equity is one of the hottest and most controversial buzzwords in corporate governance. Private equity firms often take an underperforming publicly listed firm off the stock exchange, add some heavy dose of debt, throw in sweet “carrots” to incumbent managers, and trim all the “fat” (typically through layoffs). Private equity firms get paid by (1) the fees and (2) the profits reaped when they take the private firms public again through a new initial public offering (IPO). Private equity first emerged in the 1980s, with a stream of deals peaked by Kohlberg Kravis Robert’s (KKR) $25

billion takeover of RJR Nabisco in 1988—then the highest price paid for a public firm. While KKR disciplined deadwood managers who destroyed shareholder value, it received a ton of bad press, cemented in a best-selling book Barbarians at the Gate that portrayed KKR as a greedy and barbarous raider. After the RJR Nabisco deal, the private equity industry stagnated during the 1990s. However, in the 2000s, private equity rose again. In 1991, just 57 private equity firms existed. In 2007, close to 700 chased deals. Now it is a $3 trillion industry, with more than 3,500 firms and more than $1 trillion “dry powder” (unspent cash in search of deals). Private equity deals now routinely represent 25% of all mergers and acquisitions (M&As) in the world (and 35% in the United States). In 2007, Cerberus, a private equity firm, purchased Chrysler from DaimlerChrysler (now Daimler) for $7.4 billion. In the same year, APAX Partners spent

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Chapter 11  Governing the Corporation Globally   307

$7.75 billion to buy Thomson Learning—the publisher of this book (which changed its name to Cengage)—from Thomson Corporation (now Thomson-Reuters) listed in New York and Toronto. However, private equity suffered a tremendous setback during the Great Recession of 2008– 2009. Many deals struck in the easy credit environment of 2006–2007 collapsed. In a record-breaking $43 billion deal in 2007, Texas Pacific Group (now TPG) and KKR jointly took over Dallas-based utility TXU (now Energy Future Holdings). However, by 2011, KKR valued its investment at only ten cents on the dollar. More recently, private equity scaled new heights, routinely bagging deals worth billions of dollars. Although controversial, private equity is a response to the corporate governance deficiency of the public firm. Private equity excels in four ways: ●● Private owners, unlike dispersed individual shareholders, care deeply about the return on investment. Private equity firms always send experts to sit on the board and are hands-on in managing. ●● A high level of debt imposes strong financial discipline to minimize waste. ●● Private equity turns managers from agents to principals with substantial equity (typically 5% equity for the CEO and 16% for the whole top management team). Private equity firms pay managers more generously, but also punish failure more heavily. Managers’ compensation at firms under private ownership, according to Michael Jensen (see Strategy in Action 11.2), is 20 times more sensitive to performance than at firms listed publicly. ●● Private equity makes the same managers, managing the same assets, perform much more effectively. On average there is a 2% boost in productivity and efficiency. Finally, privacy is fabulous. For managers, no more short-term burden to “meet the numbers” every quarter for Wall Street, no more burdensome paperwork from regulators (an especially crushing load thanks to SOX and Dodd-Frank laws), and better yet, no more disclosure in excruciating detail of their pay (an inevitable invitation to be labeled “fat cats”). Top managers under private ownership are indeed fatter cats. It is no surprise that more managers prefer a quieter but far more lucrative life. In 1997, more than 8,000 firms were listed on US stock exchanges. In 2017, thanks to private equity, only more than 4,400 bothered to be listed. All of the above, according to critics, are exactly what is wrong with private equity. Other than “barbarians,” private equity has also been labeled “asset strippers” and “locusts.” As high executive compensation at public firms has already become a huge controversy, private equity has further increased the income inequality between the high financiers and top managers as the top 1% and the rest of the 99%.

Inherently global, private equity has rapidly proliferated, reaching emerging economies such as China, South Korea, and the United Arab Emirates, as well as developed economies in Europe. Some of the fuss reflects the shock in countries suddenly facing the full rigor of Anglo-American-style private equity. In Germany, some politicians labeled foreign private equity groups as “locusts who feast on German firms for profit before spitting them out.” In South Korea, Lone Star Funds of Dallas was initially hailed in 2003 as a brave outsider willing to save troubled Korean firms. However, in 2006, when Lone Star tried to cash out by selling its 51% equity of Korea Exchange Bank, unions took to the street to protest and prosecutors issued a warrant to arrest its co-founder for alleged financial manipulation. But over time, private equity has become an accepted part of the corporate governance landscape in many countries. Despite the initial resistance, Germany has recently become the most popular European destination for private equity deals, reaching an all-time high of $32 billion in 2019. In the largest private equity deal in Germany (and one of the largest in Europe), Thyssenkrupp sold its elevator division to Advent International and Cinven for $19 billion in 2020. Is private equity “Monsters, Inc.?” asked an Economist editorial in 2012. To be sure, private equity results in job cuts (about 1%–2% of the jobs). But the same would happen if targets were acquired by public firms. In other words, private equity buyers are no more barbaric than public firms. In terms of returns, private equity investors earn slightly more than S&P 500 before the fees are charged. However, after the fees are charged, private equity performs slightly below S&P. In other words, investors would do as well or better with their money in an S&P index fund. In summary, while private equity is under attack for destroying jobs, its real problem is that returns to investors are low. With too many private equity firms with “dry powder” chasing a limited number of worthy deals, the returns are unlikely to be too fabulous. Now that four of the leading players—Apollo Global Management, Blackstone, Carlyle Group, and KKR—have themselves become publicly listed, they may become less glamorous and more boring “middle age” corporations struggling to deliver better returns to their investors. Sources: (1) Bloomberg Businessweek, 2011, The people vs. private equity, November 28: 90–93; (2) Bloomberg Businessweek, 2012, You’re so Bain, January 16: 6–8; (3) Bloomberg Businessweek, 2014, Private equity discovers deals in the Middle East, September 29; 47–48; (4) Bloomberg Businessweek, 2014, Gold at the Hilton! September 15: 50–55; (5) Bloomberg Businessweek, 2019, It’s always sunny in private equity, March 11: 8–10; (6) G. Bruton, I. Filatotchev, S. Chahine, & M. Wright, 2010, Governance, ownership structure, and performance of IPO firms, Strategic Management Journal 31: 491–509; (7) F. Castellaneta & O. Gottschalg, 2016, Does ownership matter in private equity? Strategic Management Journal 37: 330–348; (8) Economist, 2012, Monsters, Inc.?

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308  PART 3  Corporate-Level Strategies

January 28: 10–11; (9) Economist, 2012, Private equity in China, September 21: 69–70; (10) Economist, 2014, Barbarians at middle age, April 19: 65–66; (11) Economist, 2018, Barbarians grow up, July 28: 53–54; (12) Economist, 2020, Locusts of attention, March 7: 60; (13) M. Jensen, 1989, Eclipse of the public corporation, Harvard Business Review September: 61–74; (14) S. Kaplan & P. Stromberg, 2009, Leveraged buyouts and private equity, Journal of Economic Perspectives 23: 121–146.

CASE DISCUSSION QUESTIONS 1. ON ETHICS: What are the pros and cons of private equity? 2. If you were a private equity specialist, what kind of target

firms would you look for?

3. If you were CEO of a publicly traded firm and were ap-

proached by a private equity firm, how would you proceed?

NOTES [Journal Acronyms] AJS—American Journal of Sociology; AMA—Academy of Management Annals; AMJ—Academy of Management Journal; AMP—Academy of Management Perspectives; AMR—Academy of Management Review; APJM—Asia Pacific Journal of Management; ARS—Annual Review of Sociology; ASQ—Administrative Science Quarterly; BEQ—Business Ethics Quarterly; BW—Bloomberg Businessweek; EMR—Emerging Markets Review; ETP—Entrepreneurship Theory and Practice; HBR—Harvard Business Review; JAE—Journal of Accounting and Economics; JBE—Journal of Business Ethics; JCF—Journal of Corporate Finance; JEP— Journal of Economic Perspectives; JF—Journal of Finance; JFE—Journal of Financial Economics; JIBS—Journal of International Business Studies; JIM—Journal of International Management; JM—Journal of Management; JMH—Journal of Management History; JMS—Journal of Management Studies; JOB—Journal of Organizational Behavior; JWB—Journal of World Business; OSc—Organization Science; RFS—Review of Financial Studies; SMJ—Strategic Management Journal; WSJ—Wall Street Journal 1. R. Monks & N. Minow, 2001, Corporate Governance (p. 1), Oxford, UK: Blackwell. See also L. Ryan, A. Buchholtz, & R. Kolb, 2010, New directions in corporate governance and finance, BEQ 20: 673–694. 2. L. Tihanyi, S. Graffin, & G. George, 2014, Rethinking governance in management research, AMJ 57: 1535–1543. 3. R. Stulz, 2005, The limits of financial globalization (p. 1618), JF 60: 1595–1638. 4. K. Schnatterly, K. Shaw, & W. Jennings, 2008, Information advantages of large institutional owners, SMJ 29: 219–227. 5. Economist, 2015, American capitalism, October 24: 21– 24; K. Rydqvist, J. Spizman, & I. Strebulaev, 2014, Government policy and ownership and financial assets, JFE 111: 70–85. 6. R. La Porta, F. Lopez-de-Silanes, & A. Shleifer, 1999, Corporate ownership around the world, JF 54: 471–517. 7. E. Gedajlovic, M. Carney, J. Chrisman, & F. Kellermanns, 2012, The adolescence of family firm research, JM 38:

1010‒1037; Y. Lu, K. Au, M. W. Peng, & E. Xu, 2013, Strategic management in private and family business, APJM 30: 633–639. 8. Economist, 2012, The endangered public company, May 19: 13. 9. P. Berrone, C. Cruz, L. Gomez-Mejia, & M. LarrazaKintana, 2010, Socioemotional wealth and corporate responses to institutional pressures (p. 82), ASQ 55: 82‒113. See also S. Belenzon, A. Patacconi, & R. Zarutskie, 2016, Married to the firm? SMJ 37: 2611–2638; J. Chua, J. Chrisman, L. Steier, & S. Rau, 2012, Sources of heterogeneity in family firms, ETP 36: 1103‒1113; F. Kellermanns, K. Eddleston, & T. Zellweger, 2012, Extending the socioemotional wealth perspective, ETP 36: 1175–1182; M. Leitterstorf & S. Rau, 2014, Socioemotional wealth and IPO underpricing of family firms, SMJ 35: 751-760; G. T. Lumpkin & K. Brigham, 2011, Long-term orientation and intertemporal choice in family firms, ETP 35: 1149–1169; D. Souder, A. Zaheer, H. Sapienza, & R. Ranuch, 2017, How family influence, socioemotional wealth, and competitive conditions shape new technology adoption, SMJ 38: 1774–1790. 10. Y. Jiang & M. W. Peng, 2011, Are family ownership and control in large firms good, bad, or irrelevant? APJM 28: 15–39. See also A. Ali, T. Chen, & S. Radhakrishnan, 2007, Corporate disclosures by family firms, JAE 44: 238–286; E. Banalieva, K. Eddelston, & T. Zellweger, 2015, When do family firms have an advantage in transitioning economies? SMJ 36: 1358–1377; E. Feldman, R. Amit, & V. Villalonga, 2016, Corporate divestitures and family control, SMJ 37: 429–446; W. Liu, H. Yang, & G. Zhang, 2012, Does family firm excel in firm performance? APJM 29: 965‒987; D. Miller, A. Minichilli, & G. Corbetta, 2013, Is family leadership always beneficial? SMJ 34: 553‒571; W. Schulze & E. Gedajlovic, 2010, Whither family business? JMS 47: 191–204; K. Xu, M. Hitt, & S. Miller, 2020, The ownership structure contingency in the sequential international entry mode decision process, JIBS 51: 151–171.

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Chapter 11 Governing the Corporation Globally   309

11. G. Bruton, M. W. Peng, D. Ahlstrom, C. Stan, & K. Xu, 2015, State-owned enterprises around the world as hybrid organizations (p. 92), AMP 29: 92–114. 12. M. Jensen & W. Meckling, 1976, Theory of the firm, JFE 3: 305–360. 13. A. Nyberg, I. Fulmer, B. Gerhart, & M. Carpenter, 2010, Agency theory revisited, AMJ 53: 1029–1042; S. Sauerwald, Z. Lin, & M. W. Peng, 2016, Board social capital and excess CEO returns, SMJ 37: 498–520. 14. In 2018, for the first time US listed firms, as required by the Dodd-Frank Act, reported the ratio of CEO pay versus median employee pay—in short, the CEO pay ratio. Bloomberg Businessweek reported the average ratio to be 160 times (see Bloomberg Businessweek, 2018, Workers of the world shrug, August 27: 28–29). Pearl Meyer—a leading executive compensation consulting firm—reported the average ratio to be 144 times (see Pearl Meyer, 2018, The CEO Pay Ratio, research report, New York: Pearl Meyer). This ratio is considerably lower than other media estimates that use different methodologies. For example, at about the same time CNBC reported the ratio to be 271 times (see CNBC, 2018, CEOs make $15.6 million on average, January 22: www.cnbc.com). 15. J. Combs, D. Ketchen, A. Perryman, & M. Donahue, 2007, The moderating effect of CEO power on the board composition-firm performance relationship, JMS 44: 1309– 1322; W. Johnson, R. Magee, N. Nagarajan, & H. Newman, 1985, An analysis of the stock price reaction to sudden executive deaths, JAE 7: 151–174. 16. S. Graffin, M. Carpenter, & S. Boivie, 2011, What’s all that (strategic) intent? SMJ 32: 748–770; J. Lee, J. Park, & T. Folta, 2018, CEO career horizon, corporate governance, and real options, SMJ 39: 2703–2725; T. Quigley, T. Hubbard, A. Ward, & S. Graffin, 2020, Unintended consequences, AMJ 63: 155–180. 17. R. Carney & T. Child, 2013, Changes to the ownership and control of East Asian corporations between 1996 and 2008, JFE 107: 494–513. 18. M. Faccio & L. Lang, 2002, The ultimate ownership of Western European corporations, JFE 65: 365–395. 19. M. Young, M. W. Peng, D. Ahlstrom, G. Bruton, & Y. Jiang, 2008, Corporate governance in emerging economies, JMS 45: 196–220. See also J. Li & C. Qian, 2013, Principal-principal conflicts under weak institutions, SMJ 34: 498–508; P. Sun, H. Hu, & A. Hillman, 2016, The dark side of board political capital, AMJ 59: 1801–1822. 20. D. Dalton, C. Daily, A. Ellstrand, & J. Johnson, 1998, Metaanalytic reviews of board composition, leadership structure, and performance, SMJ 19: 269–290; M. Miletkov, A. Poulsen, & M. B. Wintoki, 2017, Foreign independent directors an the quality of legal institutions, JIBS 48: 267–292; M. W. Peng, 2004, Outside directors and firm performance during institutional transitions, SMJ 25: 453–471. 21. D. Erkins, M. Hung, & P. Matos, 2012, Corporate governance in the 2007–2008 financial crisis, JCF 18: 389–411.

22. R. Pozen, 2010, The case for professional boards (p. 52), HBR December: 51–58. 23. M. Goranova & L. Ryan, 2015, Shareholder Empowerment (p. 8), New York: Palgrave Macmillan. 24. R. Krause & M. Semadeni, 2013, Apprentice, departure, and demotion, AMJ 56: 805–826; M. W. Peng, Y. Li, E. Xie, & Z. Su, 2010, CEO duality, organizational slack, and firm performance in China, APJM 27: 611–624; T. Quigley & D. Hambrick, 2012, When the former CEO stays on as board chair, SMJ 33: 834–859. 25. Economist, 2012, The shackled boss, January 21: 76; WSJ, 2019, More big companies divide their chairman, CEO roles, November 4: B3. 26. M. Flickinger, M. Wrage, A. Tuschke, & R. Bresser, 2016, How CEOs protect themselves against dismissal, SMJ 37: 1107–1117; M. Geletkanycz & B. Boyd, 2011, CEO outside directorships and firm performance, AMJ 54: 335–352. 27. L. Markoczy, S. Sun, M. W. Peng, W. Shi, & B. Ren, 2013, Social network contingency, symbolic management, and boundary stretching, SMJ 34: 1367–1387. 28. Time, 2014, Indra Nooyi, October 13: 8. 29. D. Gomulya & W. Boeker, 2016, Reassessing board member allegiance, SMJ 37: 1898–1918; J. Tang, M. Crossan, & W. G. Rowe, 2011, Dominant CEO, deviant strategy, and extreme performance, JMS 48: 1479–1502. 30. A. Chizema & J. Kim, 2010, Outside directors on Korean boards, JMS 47: 109–129; L. Diestre, N. Rajagopalan, & S. Dutta, 2015, Constraints in acquiring and utilizing directors’ experience, SMJ 36: 339–359; A. Gore, S. Matsunaga, & P. E. Yeung, 2011, The role of technical expertise in firm governance structure, SMJ 32: 771–786. 31. L. Hill & G. Davis, 2017, The board’s new innovation imperative, HBR November: 103–109; S. Shekshnia, 2018, How to be a good board chair, HBR March: 96–105; J. Sonnenfeld, M. Kusin, & E. Walton, 2013, What CEOs really think of their boards, HBR April: 98–106. 32. R. Adams, A. Licht, & L. Sagiv, 2011, Shareholders and stakeholders, SMJ 32: 1331–1355; P. Brandes, R. Dharwadkar, & S. Suh, 2016, I know something you don’t know, SMJ 37: 964–981; R. Charan, 2016, The secrets of great CEO selection, HBR December: 52–59; K. Desender, R. Aguilera, R. Crespi, & M. Garcia-Cestona, 2013, When does ownership matter? SMJ 34: 823–842; E. Feldman, 2016, Dual directors and the governance of corporate spinoffs, AMJ 59: 1754–1776; D. Hambrick, V. Misangyi, & C. Park, 2015, The quad model for identifying a corporate director’s potential for effective monitoring, AMR 40: 323–344; E. Harrell, 2016, Succession planning, HBR December: 71–74; J. Hoppmann, F. Naegele, & B. Girod, 2019, Boards as a source of inertia, AMJ 62: 437–468. 33. J. Joseph, W. Ocasio, & M. McDonnell, 2014, The structural elaboration of board independence, AMJ 57: 1834–1858; D. Zhu & G. Chen, 2015, Narcissism, director selection, and risk-taking spending, SMJ 36: 2075–2098.

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34. G. Martin, R. Wiseman, & L. Gomez-Mejia, 2016, Going short-term or long-term? SMJ 37: 2463–2480; G. Pandher & R. Currie, 2013, CEO compensation, SMJ 34: 22–41; A. Wowak, M. Mannor, & K. Wowak, 2015, Throwing caution to the wind, SMJ 36: 1082–1092. 35. W. Shi, B. Connelly, J. Mackey, & A. Gupta, 2019, Placing their bets, SMJ 40: 2047–2077. 36. L. Bebchuk & J. Fried, 2004, Pay without Performance, Cambridge, MA: Harvard University Press; D. Chng & J. Wang, 2016. An experimental study of the interaction effects of incentive compensation, career ambition, and task attention on Chinese managers’ strategic risk behaviors, JOB 37: 719–737; A. Cowen, A. King, & J. Marcel, 2016, CEO severance agreements, AMR 41: 151–169. 37. A. Cowen & J. Marcel, 2011, Damaged goods, AMJ 54: 509–527. 38. Economist, 2012, The shackled boss, January 21: 76; HBR, 2019, The truth about CEO tenure, December: 10. 39. M. Mannor, A. Wowak, V. Bartkus, & L. Gomez-Mejia, 2016, Heavy lies the crown? SMJ 37: 1968–1989; M. Wiersema & Y. Zhang, 2013, Executive turnover in the stock option backdating wave, SMJ 34: 590–609. 40. WSJ, 2019, CEOs on the hot spot, December 13: R1–R2. 41. M. Goranova & L. Ryan, 2014, Shareholder activism, JM 40: 1230–1268. See also C. Eesley, K. Decelles, & M. Lenox, 2016, Through the mud or in the boardroom, SMJ 37: 2425–2440; M. Goranova, R. Abouk, P. Nystrom, & E. Soofi, 2017, Corporate governance antecedents to shareholder activism, SMJ 38: 415–435. 42. Economist, 2015, Capitalism’s unlikely heroes, February 7: 11; Economist, 2018, Voting with your pocket, April 14: 61–62; Fortune, 2015, The leader of Europe’s activist invasion, September 1: 45–46. 43. Economist, 2013, Shareholders at the gates, March 9: 63 –64. 44. Goranova & Ryan, 2015, Shareholder Empowerment (p. 3), op. cit. 45. Economist, 2017, Active measures, May 13: 60. 46. Economist, 2013, Dell goes private, February 9: 63–64. 47. Fortune, 2016, So long, Wall Street, June 1: 51–57. 48. P. Klein, J. Chapman, & M. Mondelli, 2013, Private equity and entrepreneurial governance, AMP 27: 39–51. 49. N. Bacon, M. Wright, R. Ball, & M. Meuleman, 2013, Private equity, HRM, and employment, AMP 27: 7–21; S. Kaplan & P. Stromberg, 2009, Leveraged buyouts and private equity, JEP 23: 147–166. 50. M. Bednar, E. G. Love, & M. Kraatz, 2015, Paying the price? AMJ 58: 1740–1760; B. Boyd, K. Haynes, & F. Zona, 2011, Dimensions of CEO-board relations, JMS 48: 1892–1923; G. Dowell, M. Shackell, & N. Stuart, 2011, Boards, CEOs, and surviving a financial crisis, SMJ 32: 1025–1045; V. Misangyi & A. Acharya, 2014, Substitutes or complements? AMJ 57: 1681–1705.

51. M. Jensen, 1989, Eclipse of the public corporation, HBR September: 61–74. 52. E. Gedajlovic & D. Shapiro, 1998, Management and ownership effects, SMJ 19: 533–553. 53. Y. Kor & V. Misangyi, 2008, Outside directors’ industry-specific experience and firms’ liability of foreignness, SMJ 29: 1345–1355. 54. C. Gartenberg & L. Pierce, 2017, Subprime governance, SMJ 38: 300–321; S. Paruchuri & V. Misangyi, 2015, Investor perceptions of financial misconduct, AMJ 58: 169–194. 55. M. W. Peng, S. Sun, & L. Markoczy, 2015, Human capital and CEO compensation during institutional transitions, JMS 52: 117–147. See also S. Abdullah, K. Ismail, & L. Nachum, 2016, Does having women on board create value? SMJ 37: 466–476; G. Chen, S. Luo, Y. Tang, & J. Tong, 2015, Passing probation, AMJ 58: 1389–1418; P. Choudhury, D. Wang, N. Carlson, & T. Khanna, 2019, Machine learning approaches to facial and text analysis, SMJ 40: 1705–1732; C. Crossland, J. Zyung, N. Hiller, & D. Hambrick, 2014, CEO career variety, AMJ 57: 652–674; C. Fracassi & G. Tate, 2012, External networking and internal firm governance, JF 67: 153–194; J. Kish-Gephart & J. Campbell, 2015, You don’t forget your roots, AMJ 58: 1614–1636; J. Lee, D. Yoon, & S. Boivie, 2020, Founder CEO succession, AMJ 63: 224–245; J. Lovelace, J. Bundy, D. Hambrick, & T. Pollock, 2018, The shackles of CEO celebrity, AMR 43: 419–444; M. McDonald & J. Westphal, 2011, My brother’s keeper? AMJ 54: 661–693; D. Miller, X. Xu, & V. Mehrotra, 2015, When is human capital a valuable resource? SMJ 36: 930–944; T. Quigley, C. Crossland, & R. Campbell, 2017, Shareholder perceptions of the changing impact of CEOs, SMJ 38: 939–949; B. S. Reiche, A. Bird, M. Mendenhall, & J. Osland, 2017, Contextualizing leadership, JIBS 48: 552–572; I. Stern & S. James, 2016, Whom are you promoting? SMJ 37: 1413–1430; J. Tian, J. Haleblian, & N. Rajagopalan, 2011, The effects of board human and social capital on investor reactions to new CEO selection, SMJ 32: 731–747; A. Wowak, M. Mannor, M. Arrfelt, & G. McNamara, 2016, Earthquake or glacier? SMJ 37: 586–603. 56. S. Le & M. Kroll, 2017, CEO international experience, JIBS 48: 573–595; B. Nielsen & S. Nielsen, 2013, Top management team nationality diversity and firm performance, SMJ 34: 373–382; L. Oxelheim, A. Gregoric, T. Randoy, & S. Thomsen, 2013, On the internationalization of corporate boards, JIBS 44: 173–194. 57. A. Alexiev, J. Jansen, F. Van den Bosch, & H. Volberda, 2010, Top management team advice seeking and exploratory innovation, JMS 47: 1343–1364; C. Chung & R. Luo, 2013, Leadership succession and firm performance in an emerging economy, SMJ 34: 338–357; H. Jiang, A. Cannella, J. Xia, & M. Semadeni, 2017, Choose to fight or choose to flee? SMJ 38: 2061–2079. 58. C. Doidge, A. Karolyi, & R. Stulz, 2004, Why are foreign firms listed in the US worth more? JFE 71: 205–238. 59. A. Karolyi, 2012, Corporate governance, agency problems, and international cross–listings, EMR 13: 516–547.

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60. C. Doidge, A. Karolyi, & R. Stulz, 2009, Has New York become less competitive than London in global markets? JFE 91: 253–277; N. Fernandes, U. Lel, & D. Miller, 2010, Escape from New York, JFE 95: 129–147. 61. S. Boivie, D. Lange, M. McDonald, & J. Westphal, 2011, Me or we, AMJ 54: 551–576; G. Chen, C. Crossland, & S. Huang, 2016, Female board representation and corporate acquisition intensity, SMJ 37: 303–313; V. Desai, 2016, The behavioral theory of the (governed) firm, AMJ 59: 860–879; C. Devers, G. McNamara, J. Haleblian, & M. Yoder, 2013, Do they walk the talk? AMJ 56: 1679– 1702; O. Guldiken, M. Mallon, S. Fainshmidt, W. Judge, & C. Clark, 2019, Beyond tokenism, SMJ 40: 2024–2046; D. Hambrick, S. Humphrey, & A. Gupta, 2015, Structural interdependence within top management teams, SMJ 36: 449–461; J. He & Z. Huang, 2011, Board informal hierarchy and firm financial performance, AMJ 54: 1119–1139; A. Karaevli & E. Zajac, 2013, When do outside CEOs generate strategic change? JMS 50: 1267–1294; R. Krause, M. Semadeni, & M. Withers, 2016, That special someone, SMJ 37: 1990–2002; H. Ndofor, D. Sirmon, & X. He, 2015, Utilizing the firm’s resources, SMJ 36: 1656–1674; A. Raes, M. Heijltjes, U. Glunk, & R. Roe, 2011, The interface of the top management team and middle managers, AMR 36: 102–126; O. Petrenko, F. Aime, T. Recendes, & J. Chandler, 2019, The case for humble expectations, SMJ 40: 1938– 1964; T. Quigley & D. Hambrick, 2015, Has the “CEO effect” increased in recent decades? SMJ 36: 821–830; J. Seo, D. Gamache, C. Devers, & M. Carpenter, 2015, The role of CEO relative standing in acquisition behavior and CEO pay, SMJ 36: 1877–1894; W. Shi, Y. Zhang, & R. Hoskisson, 2019, Examination of CEO-CFO social interaction through language style matching, AMJ 62: 383–414; M. Withers & M. Fitza, 2017, Do board chairs matter? SMJ 38: 1343–1355. 62. BW, 2019, Into a world without Marchionne, April 29: 8–10. 63. M. W. Peng, W. Sun, C. Vlas, A. Minichilli, & G. Corbetta, 2018, An institution-based view of large family firms, ETP 42: 187–205. See also R. Aguilera, V. Marano, & I. Haxhi, 2019, International corporate governance, JIBS 50: 457–498; J. Ellis, S. Moeller, F. Schlingemann, & R. Stulz, 2017, Portable country governance and cross-border acquisitions, JIBS 48: 148–173; T. Greckhamer, 2016, CEO compensation in relation to worker compensation across countries, SMJ 37: 793–815; I. Haxhi & R. Aguilera, 2017, An institutional configurational approach to cross-national diversity in corporate governance, JMS 54: 262–303; W. Judge et al., 2015, Corporate governance and IPO underpricing in a cross-national sample, SMJ 36: 1174–1185; E. Kandel, K. Kosenko, R. Morck, & Y. Yafeh, 2019, The great pyramids of America, SMJ 40: 781–808; I. Koch-Bayram & G. Wernicke, 2018, Drilled to obey? SMJ 39: 2943–2964; R. Krause, W. Li, X. Ma, & G. Bruton, 2019, The board chair effect across countries, SMJ 40: 1570–1592; U. Lel, D. Miller, & N. Reisel, 2019, Explaining top management turnover in private corporations, JIBS 50: 720–739; T. Rowley,

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A. Shipilov, & H. Greve, 2017, Board reform versus profits, SMJ 38: 815–833; L. Shao, C. Kwok, & R. Zhang, 2013, National culture and corporate investment, JIBS 44: 745–763; M. van Essen, P. Heugens, J. Otten, & J. van Oosterhout, 2012, An institution-based view of executive compensation, JIBS 43: 396–423. M. W. Peng & Y. Jiang, 2010, Institutions behind family ownership and control in large firms, JMS 47: 253–273. R. D. McLean, T. Zhang, & M. Zhao, 2012, Why does the law matter? JF 67: 313–350. A. Bris & C. Cabolis, 2008, The value of investor protection, RFS 21: 605–648. R. Aguilera, W. Judge, & S. Terjesen, 2018, Corporate governance deviance, AMR 43: 87–109; S. Estrin & M. Prevezer, 2011, The role of informal institutions in corporate governance, APJM 28: 41–67; D. Griffin, O. Guedhami, C. Kwok, K. Li, & L. Shao, 2017, National culture, JIBS 48: 740–762; R. Krause, I. Filatotchev, & G. Bruton, 2016, When in Rome, be like Caesar? AMJ 59: 1361–1384; J. Lyngsie & N. Foss, 2017, The more, the merrier? SMJ 38: 487–505; J. Ridge, F. Aime, & M. White, 2015, When much more of a difference makes a difference, SMJ 36: 618–636; J. Wang, L. Markoczy, S. Sun, & M. W. Peng, 2019, She’-E-O compensation gap, JBE 159: 745–760; J. Westphal & G. Shani, 2016, Psyched-up to suck-up, AMJ 59: 479–509. R. Aguilera, K. Desender, M. Lamy, & J. Lee, 2017, The governance impact of a changing investor landscape, JIBS 48: 195–221; C. Liu, C. Chung, H. Sul, & K. Wang, 2018, Does hometown advantage matter? JIBS 49: 196–221. I. Haxhi & H. van Ees, 2010, Explaining diversity in the worldwide diffusion of codes of good governance, JIBS 41: 710–726. M. Bednar, 2012, Watchdog or lapdog? AMJ 55: 131–150; T. Donaldson, 2012, The epistemic fault line in corporate governance, AMR 37: 256–271; L. Lan & L. Heracleous, 2010, Rethinking agency theory, AMR 35: 294– 314; C. Marquis & M. Lee, 2013, Who is governing whom? SMJ 34: 483–497; M. van Essen, J. van Oosterhout, & P. Heugens, 2013, Competition and cooperation in corporate governance, OSc 24: 530–551. L. Donaldson, 1995, American Anti–management Theories of Management, Cambridge, UK: Cambridge University Press. M. Hernandez, 2012, Toward an understanding of the psychology of stewardship, AMR 37: 172–193. S. Colmark, 2017, Debate summary: Opportunistic agents vs. managerial stewards, EMBA homework, Jindal School of Management, University of Texas at Dallas, November 17. M. W. Peng & W. Su, 2014, Cross-listing and the scope of the firm, JWB 49: 42–50. D. Herrmann, T. Kang, & Y. Yoo, 2015, The impact of cross-listing in the United States on the precision of public and private information, JIBS 46: 87–103.

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76. K. Desender, R. Aguilera, M. Lamy, & R. Crespi, 2016, A clash of governance logics, SMJ 37: 349–369; Y. Shi, M. Magnan, & J. Kim, 2012, Do countries matter for voluntary disclosure? JIBS 43: 143–165. 77. M. W. Peng, C. Mutlu, S. Sauerwald, K. Au, & D. Wang, 2015, Board interlocks and corporate performance among firms listed abroad, JMH 21: 257–282; P. Rejchrt & M. Higgs, 2015, When in Rome, JBE 129: 131–159. 78. J. Siegel, 2009, Is there a better commitment mechanism than cross-listings for emerging-economy firms? JIBS, 40: 1171–1191. 79. A. Chizema & Y. Shinozawa, 2012, The “company with committees,” JMS 49: 77–101; X. Geng, T. Yoshikawa, & A. Colpan, 2016, Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms, SMJ 37: 1472–1492. 80. S. Boivie, S. Graffin, & T. Pollock, 2012, Time for me to fly, AMJ 55: 1334–1359. 81. G. Martin, R. Gozubuyuk, & M. Becerra, 2015, Interlocks and firm performance, SMJ 36: 235–253. 82. G. Davis & H. Greve, 1997, Corporate elite networks and governance changes in the 1980s, AJS 103: 1–37; M. Mizruchi, 1996, What do interlocks do? ARS 22: 271– 296; J. Westphal & E. Zajac, 2013, A behavioral theory of corporate governance, AMA 7: 605–659. 83. S. Sauerwald, J. van Oosterhout, M. van Essen, & M. W. Peng, 2018, Proxy advisors and shareholder dissent, JM 44: 3364–3394. 84. R. Burt, 1992, Structural Holes, Cambridge, MA: Harvard University Press. 85. J. Chu & G. Davis, 2016, Who killed the inner circle? (p. 751) AJS 122: 714–754. 86. M. Mizruchi, 2013, The Fracturing of the American Corporate Elite, Cambridge, MA: Harvard University Press. 87. State ownership can also be referred to as “public ownership.” However, since a lot of privately owned firms are publicly listed and often called “public companies,” I have decided to use “state ownership” here to minimize confusion. 88. P. Bernstein, 2009, The moral hazard economy, HBR July: 101–102.

89. C. Stan, M. W. Peng, & G. Bruton, 2014, Slack and the performance of state-owned enterprises, APJM 31: 473–495. 90. Economist, 2012, The rise of state capitalism, January 21: 11; L. Tihanyi, R. Aguilera, P. Heugens, M. van Essen, S. Sauerwald, P. Duran, & R. Turturea, 2019, State ownership and political connections, JM 45: 2293–2321. 91. Fortune, 2019, Global 500, July 15. Among the top ten, the other five are Walmart (#1) of the United States, Royal Dutch Shell (#3) of the Netherlands and Britain, BP (#7) of Britain, Exxon Mobil (#8) of the United States, and Toyota Motor (#10) of Japan. 92. A. Batson, 2013, The SOE irritant in US-China relations, WSJ July 8: 13. 93. X. He, L. Eden, & M. Hitt, 2016, Shared governance, JIM 22: 115–130; Y. Jiang & M. W. Peng, 2011, Principal-principal conflicts during crisis, APJM 28: 683–695. 94. R. G. Bell, I. Filatotchev, & A. Rasheed, 2012, The liability of foreignness in capital markets, JIBS 43: 107–122; D. Gomulya & W. Boeker, 2014, How firms respond to financial restatement, AMJ 57: 1759–1785; E. Feldman, C. Gartenberg, & J. Wulf, 2018, Pay inequality and corporate divestitures, SMJ 39: 2829–2858; J. Kang & J. Kim, 2010, Do foreign investors exhibit a corporate governance disadvantage? JIBS 41: 1415–1438; I. Larkin, L. Pierce, & F. Gino, 2012, The psychological costs of pay-for-performance, SMJ 33: 1194–1214; A. Pe’er & O. Gottschalg, 2011, Red and blue, SMJ, 32: 1356–1367; E. Rhee & P. Fiss, 2014, Framing controversial actions, AMJ 57: 1734–1756; W. Shi, B. Connelly, & R. Hoskisson, 2017, External corporate governance and financial fraud, SMJ 38: 1268–1286; Y. Zhang & H. Qu, 2016, The impact of CEO succession with gender change on firm performance and successor early departure, AMJ 59: 1845–1868. 95. BW, 2011, After much hoopla, investor “say on pay” is a bust, June 20: 23–24. 96. X. Castaner & N. Kavadis, 2013, Does good corporate governance prevent bad strategy? SMJ 34: 863–876; J. Ho, A. Wu, & S. Xu, 2011, Corporate governance and returns on information technology investment, SMJ 32: 595–623.

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CHAPTER

12

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Strategizing on Corporate Social Responsibility

KNOWLEDGE OBJECTIVES After studying this chapter, you should be able to 1. Articulate what a stakeholder view of the firm is 2. Develop a comprehensive model of corporate social responsibility 3. Participate in four leading debates concerning corporate social responsibility 4. Draw strategic implications for action

314

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OPENING CASE

Ethical Dilemma

Starbucks’s Corporate Social Responsibility Journey Starting with a single store in Seattle in 1971, Starbucks grew to 30,000 stores worldwide with revenues of $25 billion in 2019. Since its 1987 purchase by Howard Schultz, Starbucks has positioned itself as a company that, in the words of Schultz, “puts people first and profits last.” In the 1990s, it created a corporate social responsibility (CSR) department and named a senior vice president for CSR. Since 2001, Starbucks—in addition to its traditional Annual Report to Shareholders—has been publishing a Global Corporate Social Responsibility Annual Report, whose title changed to Global Social Impact Report in 2017. Running hundreds of pages, the Global Social Impact Report is available in nine languages. Yet, for a company so serious about CSR, it has become a perpetual target for CSR activists. Episode 1: Fair Trade In 2000, Global Exchange, a nongovernmental organization (NGO) promoting the idea of “Fair Trade,” launched a campaign against Starbucks. The Fair Trade movement advocated a minimum “fair” price of $1.26 per pound to ensure a “living wage” for coffee producers—regardless of the highly volatile market price, which was only 64 cents per pound at that time. Global Exchange activists demonstrated in front of a San Francisco Starbucks store after a local TV station aired a clip on child labor on Guatemalan coffee farms. A few days later, during Starbucks’s shareholders meeting, Global Exchange activists took the microphone and demanded that Starbucks offer Fair Trade coffee. Things got heated and the activists were physically removed from the meeting. After rounds of protests and negotiations, Starbucks eventually agreed to sell Fair Trade coffee in its domestic stores. Soon it became the largest US purchaser of Fair Trade coffee, purchasing 20 million pounds (6% of its coffee purchases). In addition, Starbucks launched Coffee and Farmer Equity (CAFE) guidelines, with inspectors, to “ensure the sustainable supply of high quality coffee, achieve economic accountability, promote social responsibility within the coffee supply chain, and protect the environment.” By 2009, Starbucks had purchased 77% of its coffee from CAFE suppliers. However, Global Exchange continued to

be unhappy, demanding that Starbucks serve Fair Trade coffee once a week instead of once a month (the current practice). Although Global Exchange acknowledged CAFE to be a “launching point for improvements,” it “in no way reduces our initial and still unmet demands.” Episode 2: UK Tax In 2012, news broke out that since entering the United Kingdom in 1998, Starbucks, despite its thriving business, had paid only 0.3% of its sales of £3 billion ($4 billion) for UK corporation tax between 1998 and 2011 for a total of £8.6 million payment. The tax rate should be 24%. Starbucks Coffee Company (UK) Ltd. claimed to be losing money. However, the parent company informed investors that the subsidiary was profitable. Such news triggered a media storm, store pickets, and consumer boycotts. Starbucks executives were yanked before the UK Parliament to explain such behavior. It turned out that such tax-avoidance behavior was legal. The parent company set up a European headquarters in the Netherlands, where it needed to pay a combined Dutch and US tax rate of 16%—as opposed to the 24% in the UK. After paying a 6% royalty of its sales to the European headquarters, the UK subsidiary hardly made any money and thus was hardly taxable. “We’re not accusing you [Starbucks] of being illegal,” thundered a member of Parliament in the public hearing, “we’re accusing you of being immoral.” Quite a devastating attack on a company that was serious about CSR. Overall, Starbucks was accused of using artificial corporate structures to shift profits and tax burdens from the UK to lower-tax jurisdictions. Facing relentless pressure, Starbucks agreed to voluntarily pay £20 million in additional UK corporation tax. Episode 3: Philadelphia Bathroom Incident In April 2018, two African American college students in a Philadelphia Starbucks store who did not buy anything and were waiting for someone else asked to use the bathroom. Instead, the store manager called the police, claiming the two men were trespassing, leading to their arrest. This incident sparked a media firestorm and triggered protests outside Starbucks stores. CEO Kevin Johnson apologized, and 315

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OPENING CASE  (Continued) founder and chairman Schultz said in an interview that he was “ashamed” by the incident. Starbucks reached an undisclosed settlement with the two men. In May 2018, it closed all 8,000 US stores for an entire afternoon to provide racial bias training for all employees—at a cost of $16.7 million in lost sales. The company clarified that “any person who enters our spaces, including patios, cafes, and restrooms, regardless of whether they make a purchase, is considered a customer.” While such an “open bathroom” policy calmed CSR activists down, it came with a heavy cost—not only in terms of extra cleaning cost, but also in terms of lost customers and reduced in-store time for (the paying) customers who do show up. This effect is especially large among Starbucks locations close to homeless shelters. Given the large homeless population in many cities, can the “open bathroom” policy be sustainable?

Sources: (1) BBC, 2012, Starbucks, Google and Amazon grilled over tax avoidance, November 12: www.bbc.com; (2) Business Week, 2007, Saving Starbucks’ soul, April 9: 56–61; (3) Forbes, 2019, Starbucks’ open bathroom policy comes with heavy cost, November 12: www.forbes.com; (4) PR Week, 2018, Timeline of a crisis, July 6: www.prweek.com; (5) Reuters, 2012, Starbucks’s European tax bill disappears down $100 million hole, November 1: uk.reuters.com; (6) Starbucks, 2018, Global Social Impact Report, www.starbucks.com; (7) Vox, 2018, Starbucks says everyone’s a customer after Philadelphia bias incident, May 19: www.vox.com.

W corporate social responsibility

The social responsibility of corporations. It pertains to consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains that the firm seeks.

fiduciary duty A duty required by law.

hy does Starbucks choose to commit significant resources to corporate social responsibility? Can a firm ever be socially responsible enough? When a firm pursues a social mission, is it setting itself up to be a target? Facing criticisms and protests, what are the appropriate responses? These are some of the crucial questions driving this chapter. Corporate social responsibility (CSR) refers to “consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks.”1 Historically, CSR issues have been on the back burner for many managers. Recently, these issues are increasingly brought to the forefront of strategy discussions.2 While this chapter is positioned as the last in this book, by no means do we suggest that CSR is the least important topic. Instead, we believe that this chapter is one of the best and most comprehensive ways to integrate previous chapters drawing on the strategy tripod.3

At the heart of CSR is the concept of stakeholder, which is “any group or individual who can affect or is affected by the achievement of the organization’s objectives.”4 Shown in Figure 12.1, while shareholders certainly are an important group of stakeholders, other stakeholders include managers, nonmanagerial employees (hereafter employees), suppliers, customers, communities, governments, and social and environmental groups. Since Chapter 11 has already dealt with shareholders at length, this chapter focuses on nonshareholder stakeholders, which we term stakeholders here for compositional simplicity. A leading debate on CSR is whether managers’ efforts to promote the interests of these stakeholders are at odds with their fiduciary duty to safeguard shareholder interests.5 To the extent that firms’ primary function is to serve as economic enterprises, it is certainly true that firms cannot take on all the social problems of the world. Yet, on the other hand, failing to heed to certain CSR imperatives may be self-defeating in the long run. Therefore, the key is how to strategize on CSR with various stakeholders in mind (see the Opening Case).

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Chapter 12  Strategizing on Corporate Social Responsibility   317

FIGURE 12.1 A Stakeholder View of the Firm Shareholders Social groups

Governments

Suppliers

THE FIRM Managers

Environmental groups

Customers

Communities Employees

Source: Adapted from T. Donaldson & L. Preston, 1995, The stakeholder theory of the corporation: Concepts, evidence, and implications (p. 69), Academy of Management Review 20: 65–91.

The remainder of this chapter introduces a stakeholder view of the firm and discusses a comprehensive model of CSR drawn from the “strategy tripod.” Debates and extensions follow.

A Stakeholder View of the Firm A Big Picture Perspective A stakeholder view of the firm, with a quest for global sustainability, represents a “big picture.”6 A key goal for CSR is global sustainability, which is defined as the ability “to meet the needs of the present without compromising the ability of future generations to meet their needs.”7 It refers not only to a sustainable social and natural environment, but also to sustainable capitalism.8 Globally, at least four sets of drivers are related to the urgency of sustainability: ●●

●●

●●

●●

Rising levels of population, poverty, and income inequality call for new solutions. The repeated protests staged around the world are but tips of an iceberg of such sentiments. Debates on globalization, deglobalization, and nationalism become increasingly ferocious, resulting in geopolitical rivalry, trade wars, migrant crises, civil wars, and international conflicts. Nongovernmental organizations (NGOs) and other civil-society stakeholders have often assumed the role of monitor and enforcer of social and environmental standards (see the Opening Case). Industrialization has created irreversible effects on the environment (see Strategy in Action 12.1).9 Global warming has emerged as a leading problem demanding solutions.10 The world is now 1°C (1.8°F) hotter than it was before the Industrial Revolution. The 2010s were, on average, 0.5°C hotter than the 1980s, making extreme weather events more frequent and more intense, driving up sea levels, and disrupting ecosystems.11 In the world’s first comprehensive climate agreement—the 2015 Paris Agreement—more than 180 countries agreed to holding the increase in the global average temperature to well below 2°C above pre-Industrial Revolution levels at the end of the 21st century to reduce the risks of climate change. Given the debates and setbacks (such as the US withdrawal announced by the Trump administration in 2017), whether the Paris Agreement goals will be met remains to be seen.

global sustainability The ability to meet the needs of the present without compromising the ability of future generations to meet their needs.

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STRATEGY IN ACTION 12.1 Ethical Dilemma Global Warming and Arctic Boom “Global warming” is one of the most dreadful terms in recent times. Hotter summers. Longer droughts. More-frequent hurricanes. Rising sea levels that may wash away many island nations and coastal regions. Can anyone like global warming? Can any firms profit from it? It turns out: Plenty. As a stunning illustration of global warming, Arctic sea ice has lost half of its area since record keeping began in 1979. The Intergovernmental Panel on Climate Change predicted that Arctic summers would become ice free beginning in 2070. Other estimates moved the date to 2035. Instead of being terrified by such warming, many people, firms, and governments in the Arctic region are excited about it. Two sources of excitements stand out. First, ships sailing between the Pacific and Atlantic Oceans can now go through

the Arctic Ocean. The distance between Shanghai and Rotterdam can be shortened by 15% if ships use the Northwest Passage going through the Canadian Arctic Archipelago, or by 22% if ships sail through the Northeast Passage (which the Russians call the Northern Sea Route) hugging the Siberian coast (see Figure 12.2). An expert noted that “the Arctic stands to become a central passageway for global maritime transportation, just as it already is for aviation.” It is likely to become “an emerging epicenter of industry and trade akin to the Mediterranean Sea.” While Canada and Russia look forward to profiting from maritime services such as refueling and pilotage, “such cities as Anchorage and Reykjavik could someday become major shipping centers and financial capitals—the high-latitude equivalents of Singapore and Dubai.”

FIGURE 12.2 The Arctic Region Summer sea-ice extent: September 2011

Peter Hermes Furian/Shutterstock.com

Average 1979–2000

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Chapter 12  Strategizing on Corporate Social Responsibility   319

Second, the melting north can unearth tremendous oil and mineral wealth in the Arctic region. Canada, Norway, Russia, and the United States have all recently opened more of their Arctic offshore to oil exploration. Although Greenland only has 60,000 people, it is the world’s largest island, and its area is larger than all of Western Europe combined. Global warming not only means oil and mineral riches made available by the melting glaciers, but also Greenland’s ultimate freedom: independence. Colonized by Denmark in the 1700s, Greenland in 2009 gained more autonomy assuming self-government in all affairs except foreign affairs and defense. Denmark provided Greenland an annual grant of 3.6 billion Danish kroner ($660 million), which is a quarter of Greenland’s GDP and close to half of the government budget. Both sides agreed to split revenue from oil, gas, and minerals until Greenland would not need the subsidy, which meant $12,000 for every Greenlander. Then Greenland can gain its full independence. Endeavoring to generate more revenue, the Greenlandic government has been eager to grant permissions for energy and mining companies to explore the underground and offshore

riches. For example, an Australian company called Greenland Minerals and Energy has been developing Greenland’s first openpit uranium and rare earth mine. However, some environmentalists and traditionalists are not happy with such development. Overall, how to strike the right balance between exploration and environmentalism is a challenge not only for Greenland, but also for all the firms, communities, and governments that aspire to take advantage of the coming Arctic boom brought by global warming. Sources: (1) Bloomberg Businessweek, 2014, Drill sergeant, May 5: 62–67; (2) S. Borgerson, 2013, The coming Arctic boom, Foreign Affairs July: 76–89; (3) Economist, 2012, The melting north, June 16 (special report): 3–5; (4) Economist, 2012, Short and sharp, June 16 (special report): 14–15; (5) Economist, 2015, Not so cool, January 31: 51–52; (6) Economist, 2017, Polar bare, April 28: 11–12; (7) Economist, 2018, Throwing off the Danish yoke, May 5: 52; (8) Economist, 2019, A warmer Russia, September 21: 57–58; (9) Economist, 2019, Ice would suffice, September 21: 93.

Drivers underpinning global sustainability are complex and multidimensional. For multinational enterprises (MNEs) with operations spanning the globe, their CSR areas seem mind-boggling.12 This bewilderingly complex “big picture” forces managers to prioritize. To be able to do that, primary and secondary stakeholders as well as performance criteria must be specified.13

Stakeholder Groups, Triple Bottom Line, and ESG A stakeholder view focuses on managing the demands of stakeholders, who can be divided into primary and secondary groups. Primary stakeholder groups are constituents on which the firm relies for its continuous survival and prosperity. Shareholders, managers, employees, suppliers, and customers—together with governments and communities whose laws and regulations must be obeyed and to whom taxes and other obligations may be due—are typically considered primary stakeholders. Secondary stakeholder groups are defined as “those who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival.”14 Environmental groups often take it upon themselves to fight pollution. Fair labor practice groups frequently challenge firms that allegedly fail to provide decent labor conditions for employees. While firms do not depend on secondary stakeholder groups for their survival, such groups may have the potential to cause significant embarrassment and damage (see the Opening Case). Managers as a primary stakeholder group are unique in that they are the only group that is positioned at the center of all these relationships.15 A key proposition of the stakeholder view of the firm is that instead of only pursuing the economic bottom line, such as profits and shareholder returns, managers should pursue a more balanced set, called the triple bottom line. First introduced in Chapter 1, the triple bottom line consists of economic, social, and environmental performance.16 Managers confront several measures and jargons when dealing with the triple bottom line. One measure is corporate social performance (CSP), defined as the social performance outcome of a firm’s CSR activities.17 A newer jargon is to evaluate firms along environmental, social, and governance (ESG) performance dimensions. Currently, more than 8,000 publicly listed firms report on their ESG performance. Investors are also paying greater attention to corporate engagement on CSR issues.18 In 2014, ESG criteria guided $21 trillion in investment—about one-third of all professionally managed global investment capital.19

primary stakeholder group Constituents on which the firm relies for its continuous survival and prosperity.

secondary stakeholder group Stakeholders who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival.

corporate social performance (CSP) Social performance outcome of a firm’s CSR activities

environmental, social, and governance (ESG) performance A performance yardstick consisting of economic, social, and governance dimensions.

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320  PART 3  CORPORATE-LEVEL STRATEGIES

socially responsible investment (SRI) Investment in firms that have excellent environmental, social, and governance (ESG) performance.

social impact investment Socially responsible investment (SRI).

shareholder primacy A view that explicitly places shareholders as the single most important stakeholder group.

Such investment is known as socially responsible investment (SRI) or social impact investment.20 Some recent authors have used sustainability, ESG, and CSR interchangeably.21

Given the multiple and often conflicting demands along the triple bottom line or along the ESG dimensions,22 it seems evident that the CSR proposition represents a dilemma for managers (see the Opening Case). In fact, it has provoked a fundamental debate, which is introduced next.

A Fundamental Debate The CSR debate centers on the nature of the firm in society. Why does the firm exist? What is the purpose of the firm? Most people would intuitively answer: “To make money.” Milton Friedman, a University of Chicago economist and Nobel laureate, eloquently argued: “The business of business is business.”23 The idea that the firm is an economic enterprise seems uncontroversial. At issue is whether the firm is only an economic enterprise. Although Friedman died in 2006, his ideas continue to be influential.24 One side of the debate argues that “the social responsibility of business is to increase its profits,” which is the title of Friedman’s influential 1970 article previously mentioned. This free market school of thought draws on Adam Smith’s idea that pursuit of economic self-interest (within legal and ethical bounds) leads to efficient markets. Free market advocates believe that the first and foremost stakeholder group is shareholders, whose interests managers have a fiduciary duty (a duty required by law) to look after. To the extent that the hallmark of our economic system remains capitalism, the providers of capital—namely, capitalists or shareholders—deserve a commanding height in managerial attention. Since the 1980s, a term that explicitly places shareholders as the single most important stakeholder group, shareholder capitalism, has become increasingly influential around the world (see Chapter 11). This is otherwise known as a shareholder primacy view. In 1997, Business Roundtable—a group of CEOs of prominent US firms—issued its Statement on Corporate Governance, which endorsed such a view (Table 12.1). TABLE 12.1 Business Roundtable Statements: 1997 and 2019 Statement on Corporate Governance (1997, excerpts): The paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders. The notion that the board must somehow balance the interests of stockholders against the interests of other stakeholders fundamentally misconstrues the role of directors. . . . Statement on the Purpose of a Corporation (2019) While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to: ●● Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. ●● Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. ●● Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. ●● Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. ●● Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow, and innovate. We are committed to transparency and effective engagement with shareholders. ●● Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country. Sources: (1) Business Roundtable, 1997, Statement on corporate governance, www.businessroundtable. org; (2) Business Roundtable, 2019, Business Roundtable redefines the purpose of a corporation to promote “an economy that serves all Americans,” press release, August 19: www.businessroundtable.org.

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Chapter 12  Strategizing on Corporate Social Responsibility   321

Free market advocates argue that if firms attempt to attain social goals, such as providing social welfare, managers will lose their focus on profit maximization (and its derivative, shareholder value maximization). Consequently, firms may lose their character as capitalistic enterprises and become socialist organizations. This perception of socialist organization is not a pure argumentative point, but an accurate characterization of numerous state-owned enterprises throughout the pre-reform Soviet Union, Central and Eastern Europe, and China, as well as many developing countries in Africa, Asia, and Latin America. Privatization, in essence, is to remove the social function of these firms and restore their economic focus through private ownership (see Chapter 11). Overall, the free market school is influential around the world. It is against such a formidable and influential school of thought that the CSR movement has emerged, endeavoring to build stakeholder capitalism. CSR advocates argue that a free market system that takes the pursuit of self-interest and profit as its guiding light—although in theory constrained by rules, contracts, and property rights—may in practice fail to constrain itself, thus often breeding greed, excesses, and abuses. Firms and managers, if left to their own devices, may choose self-interest over public interest. The financial meltdown in 2008–2009 is often fingered as a case in point. While not denying that shareholders are important stakeholders, CSR advocates argue that all stakeholders have an equal right to bargain for a “fair deal.” Given stakeholders’ often conflicting demands, the very purpose of the firm, instead of being a profit-maximizing entity, is argued to serve as a vehicle for coordinating their interests. Of course, a very thorny issue in the debate is whether all stakeholders indeed have an equal right and how to manage their (sometimes inevitable) conflicts.25 Starting in the 1970s as a peripheral voice in an ocean of free market believers, the CSR school of thought has slowly but surely made progress in becoming a more central part of strategy discussions. Recently, strategy guru Michael Porter has been vehemently advocating the importance of creating shared value, “which involves creating economic value in a way that also creates value for society by addressing its needs and challenges.”26 The CSR movement has two driving forces. First, even as free markets march around the world, the gap between the haves and have-nots has widened. While 2% of the world’s children living in the United States enjoy 50% of the world’s toys, one-quarter of the children in Bangladesh and Nigeria are in their countries’ workforce. Within developed economies, the income gap between the upper and lower echelons of society has widened. In 1980, the average American CEO was paid 40 times more than the average worker. The ratio is now about 150 (see Chapter 11). Although American society accepts greater income inequality than many other societies do, aggregate data of such widening inequality often serve as a stimulus for reforming the “leaner and meaner” capitalism. Participants in the Occupy Wall Street movement in 2011 argued that the top 1% have gained at the expense of the 99%. However, the response from free market advocates is that to the extent there is competition, there will always be both winners and losers. What CSR critics describe as “greed” is often viewed as “incentive” in the vocabulary of free market advocates. A second reason behind the rise of the CSR movement seems to be waves of disasters and scandals, resulting in a term: corporate social irresponsibility (CSI).27 In 2009, excessive amounts of Wall Street bonuses distributed by banks receiving government bailout funds were criticized as socially insensitive and irresponsible. In 2010, a BP oil-production facility made a huge mess in the Gulf of Mexico. In 2011, a Japanese earthquake triggered the meltdown of the Fukushima nuclear power station. In 2013, a textile factory in Bangladesh collapsed, killing more than 1,000 workers. In 2015, Volkswagen was busted by the US Environmental Protection Agency (EPA) for circumventing environmental regulations. In 2017, the negligence of PG&E—a giant utility in California—contributed to massive wildfires. In 2019, Purdue Pharma, a major opioid producer, had to file for bankruptcy after being sued by multiple victims and state governments. It is no surprise that new disasters and scandals often contribute to a perceived decline in business ethics and perceived rise of CSI, propelling CSR to the forefront of public policy and corporate strategy discussions. In 2019, Business Roundtable released a new Statement on the Purpose of a Corporation (hereinafter Statement) signed by 181 CEOs of major US firms such as Amazon, Apple,

stakeholder capitalism A view of capitalism that suggests that firms must respect stakeholders’ interests.

corporate social irresponsibility A lack of corporate social responsibility that can result in disasters and scandals.

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322  PART 3  CORPORATE-LEVEL STRATEGIES

stakeholder primacy A view that suggests that a firm needs to have a fundamental commitment to all of its stakeholders— customers, employees, suppliers, communities, and shareholders.

Exxon Mobil, GM, IBM, JPMorgan Chase, Procter & Gamble, and Walmart. It declared that the 1997 Statement that enshrined the shareholder primacy view was superseded by the new 2019 Statement, which outlined “a modern standard for corporate responsibility.”28 Endorsing a stakeholder primacy view, the Statement proclaimed “a fundamental commitment to all of our stakeholders”—customers, employees, suppliers, communities, and shareholders (see Table 12.1). By renouncing the shareholder primacy view, the 2019 Statement has been widely hailed as a “a big deal,” “a sea change,” and “a major turning point” in the CSR movement.29 Not everyone is pleased. Backlash has been immediate. Critics embracing the shareholder primacy view denounce the Statement as appeasement to left-wing politicians, and some argue that it is a decisive step toward “the death of capitalism.”30 Critics suggest that if resources are plentiful, there is nothing wrong taking care of stakeholders. However, if there ever is a conflict, the interests of shareholders will override the interests of others— as required by law. As the debate rages, managers have to navigate the crosscurrents. It will be important to understand how they make decisions concerning CSR, as illustrated next.

A Comprehensive Model of Corporate Social Responsibility A comprehensive model of CSR drawn from the strategy tripod (Figure 12.3) shows that the three traditional perspectives on strategy can shed considerable light on CSR. This section articulates why this is the case.

FIGURE 12.3 A Comprehensive Model of Corporate Social Responsibility Industry-based considerations

Resource-based considerations

Rivalry among competitors Threat of potential entry Bargaining power of suppliers Bargaining power of buyers Threat of substitutes

Value Rarity Imitability Organizational capabilities

Scale and scope of corporate social responsibility

Institution-based considerations Reactive strategy Defensive strategy Accommodative strategy Proactive strategy

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Chapter 12  Strategizing on Corporate Social Responsibility   323

STRATEGY IN ACTION 12.2 Giants of the Sea Every day, container ships carry 90% by value of the world’s traded cargo. Taking off since the 1970s, container shipping has significantly reduced shipping costs so that China’s location in the Far East does not seem to be too far away from major markets in North America and Europe. Yet, this industry is far from smooth sailing. Just as numerous new ships joined the fleet in the late 2000s, the Great Recession of 2008–2009 reduced trade volume, causing pricing levels to collapse. Then the slowly recovering industry took another hit by the trade wars starting in 2018. Most recently, the global shutdown caused by the 2020 coronavirus pandemic created new challenges. As various shipping lines struggle and look for solutions, Maersk, the Copenhagen, Denmark-based largest shipping line in the world, has come up with some of the biggest splashes. In 2011, Maersk awarded Daewoo Shipbuilding of South Korea a $3.8 billion contract to build 20 of the world’s largest ships: the Maersk Triple-E class. The maiden journey of the first ship, the Maersk Mc-Kinney Møller, sailed in August 2013. The name “Triple-E” is derived from the class’s three design principles: economy, energy, and environment. With a dead weight of 165,000 tons, the colossal ship is 400 meters (1,312 feet) long and 59 meters (194 feet) wide—in other words, its length is longer than the Eiffel Tower (324 meters or 1,070 feet). The first E, economy of scale, is achieved not only by such dimensions but also by fundamental design changes. Instead of a V-shaped hull, the ship’s hull is much rectangular and closer to U-shaped. The upshot? A whopping 18,000 twenty-foot-equivalent unit containers—2,500 more than the next biggest ships (the Maersk E class) launched in 2006. Packing a lot of new automation technologies, each ship only requires a crew of between 22 (standard) and 34 (maximum) members.

Energy efficiency is achieved by deliberate slow steaming. Slower than earlier generations, the Triple-E ships’ design speed is 19 knots (35 kilometers or 22 miles per hour), which reduces fuel consumption by 20% compared to the E class. Despite their size, these ships are the most energy-efficient vessels in the world. The final E, environmental friendliness, is also enabled by such low fuel burn. For each ton of cargo transported one kilometer, a Maersk Triple-E ship only emits three grams of CO2. This is a far smaller environmental footprint than other modes of transportation: 18 grams of CO2 for rail, 47 grams for truck, and 560 grams for air freight. The last but nontrivial component of environmental friendliness is that each ship is designed and built for recycling. All components are traced and listed so that when the ship is scrapped (often at a beach in South Asia), the useful materials can be efficiently channeled to various recycling categories, tremendously reducing the lifetime (and postlifetime) environmental footprint of the colossal giant. For its entire fleet, Maersk cut emissions by 39% between 2007 and 2015, even as cargo grew by 27%. Winner of the “Sustainable Ship Operator of the Year” award in 2011 (before the launch of the Triple-E class), Maersk believes that environmental friendliness will increasingly be a competitive differentiation factor and that the new giants of the sea will help strengthen its edge. Sources: (1) Bloomberg Businessweek, 2013, An ill-timed bet on the world’s largest ship, April 29: 21; (2) Economist, 2007, Container ships, March 3: 71; (3) Economist, 2009, Sea of troubles, August 1: 55–56; (4) Economist, 2019, Ship recycling, March 9: 60; (5) Focus Denmark, 2014, A slow steaming giant, Summer-Autumn: 68–71; (6) Fortune, 2015, Maersk, September 1: 72.

Industry-Based Considerations The industry-based view, exemplified by the five forces framework, can be extended to help understand the emerging competition on CSR. Rivalry Among Competitors.  We have learned from Chapter 2 that competitors within an industry are often eager to outcompete each other along some dimensions, such as cost or differentiation.31 In ocean shipping, Maersk, the industry leader in terms of fleet size and revenue, has launched a class of giant new ships that are not only fuel-efficient (and thus are cheaper to operate), but also designed with reduced lifetime (and postlifetime) environmental footprint in mind (see Strategy in Action 12.2). Maersk believes that fuel efficiency and environmental friendliness will increasingly be competitive differentiation factors in this industry. Threat of Potential Entry.  Elevating entry barriers is one of incumbents’ leading responses to deal with potential entry. MNEs such as Starbucks that compete around the world constant face the threat of local entrants. Investing in CSR, therefore, becomes a means to deter entry. Devoting significant resources to CSR causes, Starbucks is essentially challenging all potential entrants to match not only its quality, service, and attractiveness, but also its ability to engage

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324  PART 3  CORPORATE-LEVEL STRATEGIES

CSR supported by its high profit margins (see the Opening Case). The unspoken message is that potential entrants that cannot afford to play the CSR game should not bother. Bargaining Power of Suppliers.  If socially and environmentally conscious suppliers provide unique differentiated products with few or no substitutes, their bargaining power is likely to be substantial. For example, Coca-Cola is the sole provider of Coke syrup to its bottlers around the world. Coca-Cola is, thus, able to assert its bargaining power by requiring that all its bottlers certify that their social and environmental practices are responsible. Coca-Cola also encourages its bottlers to support social programs, such as financing start-up kiosks in South Africa and Vietnam, donating free drinks to earthquake victims in China and Japan, and promoting reading among school children in 42 countries, including the United States. Bargaining Power of Buyers.  By leveraging their bargaining power, individual and corporate buyers interested in CSR may extract substantial concessions from the focal firm. The reason that Starbucks chose to “voluntarily” pay an additional £20 million ($25 million) UK corporation tax after it only paid £8.6 million tax in the previous decade was largely driven by consumer boycotts and protests (see the Opening Case). While the media as a secondary stakeholder could give Starbucks’s controversial (but still legal) tax avoidance behavior a hard time, it is individual consumers as primary stakeholders who Starbucks could not afford to upset. An example of how corporate buyers extract concessions is the recent efforts made by Walmart, which has been targeted by NGOs to improve its supply chain. Out of approximately 10,000 suppliers in China, Walmart demanded that their environmental compliance be improved. It suspended 126 suppliers for a year because of unsatisfactory compliance and permanently halted purchases from 35.32 Finally, buyers can increase bargaining power when they are in great difficulties. Dying AIDS patients in Africa, Asia, and Latin America, backed by their governments and CSR groups, often demand that pharmaceutical firms headquartered in developed economies (1) develop new drugs, (2) lower drug prices, and (3) release patents to allow for local manufacturing of cheaper generic versions of such drugs. While pharmaceutical firms have resisted these attempts, they may eventually give in (see the Closing Case). Threat of Substitutes. If substitutes are superior to existing products and costs are reasonable, they may attract more customers. Wind and solar power, which is much more environmentally friendly than fossil-fuel power (such as oil and coal) and safer than nuclear power, has great potential. It is true that wind power and solar power currently require heavy government subsidies if they are to become commercially viable. But their future is likely to be promising. At the moment, using wind and solar power to completely substitute fossil fuels may be unrealistic. However, fossil-fuel incumbents need to develop wind and solar technology themselves or acquire firms with such new energy expertise—otherwise, such incumbents face a grim future of being substituted by wind and solar power firms.33 Overall, the possible threat of substitutes requires firms to vigilantly scan the broader environment instead of narrowly focusing on their focal industry. Turning Threats to Opportunities.  Taken together, the five forces framework suggests two lessons. First, not all industries are equal in terms of their exposure to CSR challenges. Energy-intensive and materials-intensive industries (such as chemicals ad extractive industries) are more vulnerable to environmental scrutiny.34 Labor-intensive industries (such as apparel) are more likely to be challenged on fair labor practice grounds. However, despite varying degrees of exposure, no industry may be completely immune from CSR. The second lesson is that industries and firms may want to selectively but proactively turn some of these threats into opportunities. For example, instead of treating NGOs as threats, Dow Chemical, Home Depot, Lowe’s, and Unilever work with them. Many managers traditionally treat CSR as a nuisance, involving heavy regulation, added costs,

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Chapter 12  Strategizing on Corporate Social Responsibility   325

and unwelcome liability. Such an attitude may underestimate strategic opportunities associated with CSR. The most proactive managers and firms are farsighted enough to embrace CSR challenges through selective but preemptive investments and sustained engagement—in essence, making their CSR activities a source of differentiation, as opposed to an additional item of cost.35

Resource-Based Considerations CSR-related resources can include tangible technologies and processes as well as intangible skills and attitudes.36 The VRIO framework can shed considerable light on CSR. Value.  Do CSR-related resources and capabilities add value?37 This is the litmus test for CSR work. Many large MNEs can apply their tremendous financial, technological, and human resources toward a variety of CSR causes. For example, managers and firms can speak out on a series of important social issues, such as affordable housing, climate change, deforestation, gender equality, gun control, immigration, income inequality, race relations, sustainable fishing and farming, and world peace. Such activities can be categorized as social issue participation, which refers to a firm’s participation in social causes not directly related to the management of its primary stakeholders.38 Research suggests that these activities may actually reduce shareholder value.39 Overall, although social issue participation may create some remote social and environmental value, it does not satisfy the economic leg of the triple bottom line, so these abilities may not qualify as value-adding firm resources.

social issue participation Firms’ participation in social causes not directly related to managing primary stakeholders.

Rarity.  CSR-related resources are not always rare. Remember that even a valuable resource is not likely to provide a significant advantage if competitors also possess it. Both Home Depot and Lowe’s have NGOs such as the Forest Stewardship Council certify that suppliers in Brazil, Indonesia, and Malaysia use only material from renewable forests. These complex processes require strong management capabilities such as negotiating with local suppliers, undertaking internal verification, coordinating with NGOs for external verification, and disseminating such information to stakeholders. Such capabilities are valuable.40 But since both competitors possess capabilities to manage these processes, they are common (but not rare) resources. Imitability.  Although valuable and rare resources may provide some advantage, the advantage will only be temporary if competitors can imitate it. Resources must not only be valuable and rare, but also hard to imitate in order to give firms a sustainable (not merely temporary) competitive advantage. Since 2005, Nestlé has embraced a strategy called “Creating Shared Value,” not only to improve nutrition, but also to conserve water and enhance productivity of its many small suppliers and their farming communities.41 Its competitors quickly imitated such CSR initiatives. In 2007, Unilever committed to sustainably sourcing its tea from certified farms. In 2009, Danone set aside a $110 million ecosystem fund to invest in improving the sustainability of its suppliers. In 2012, PepsiCo announced a sustainable farming initiative. As a result, Nestlé’s CSR moves—due to their imitability—have not translated into tangible product market gains. Organization.  Shown in Strategy in Action 12.3, a key question is whether firms have the right organizational capabilities to do a good job to exploit the potential of CSR?42 Natural disasters such as earthquakes, tsunamis, and wildfires are unpredictable. When such disasters strike, many firms—as well as individuals, NGOs, and governments—want to help. But few have the organizational capabilities to be truly helpful. UPS has leveraged its capabilities in running time-sensitive supply chain and logistics operations to become a leader in the disaster relief field, routinely earning kudos and winning awards for its contributions around the world.43 For example, it was active in the Haitian earthquake (2010), Hurricane Sandy (New York ad New Jersey, 2012), California’s fires (2017), India’s flooding (2018), and the coronavirus outbreak (2020). Such corporate philanthropy—firms’ donation to social causes—helps build reputation and inspires employees.44

corporate philanthropy Firms’ donation to social causes.

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326  PART 3  CORPORATE-LEVEL STRATEGIES

STRATEGY IN ACTION 12.3 Ethical Dilemma Can McDonald’s Set the Chickens Cage-Free? Since 2016, McDonald’s has embarked on a ten-year journey to liberate chickens from cages—eventually serving only cage-free eggs by 2025. The era of mass-produced food that McDonald’s helped create and came to embody is being phased out. McDonald’s did not make this strategic decision just to appease animal-welfare activists (a secondary stakeholder group). Instead, it had customers (a primary stakeholder group) in mind. Given its recent push for the All Day Breakfast menu, eggs and chicken now contribute 50% of the menu items. Without transitioning to cage-free eggs, McDonald’s in the long run would risk losing customers, especially the millennials who care about the source of their food. A vast majority of henhouses will need to be redesigned and built from scratch. (A technical note: Cage-free is not freerange. Free-range would mean letting chickens roam freely on a farm, which would be risky for the birds and the eggs. Cagefree means chickens will still be in a multistory henhouse, in which they can walk around.) Each “fancy” cage-free henhouse costs two to three times as much as a caged version. The total cost to the industry is estimated to be $7 billion, a tremendous burden by any standard. But freedom, according to Fortune, “for chicken, isn’t all it’s cracked up to be.” Cage-free hens fight more and are killed more. Such casualties combined with a dirtier environment (they can poop everywhere) lead to twice the

fatality rate of caged birds. Cage-free eggs also require higher labor costs because employees have to protect the weaker birds at the bottom of the pecking order from being bullied by the more dominant birds. Stressed-out chickens will stop producing eggs. As a result, on average each cage-free hen produces fewer eggs. While McDonald’s will cover “some of the cost” for the transition, egg suppliers are not likely to happily cough up the remaining cost. Some recently invested in “enriched henhouse systems” that would give chickens more cage space than the traditional, supertight cages, and they are not willing to see such new investment become irrelevant so soon. At the same time, McDonald’s is also banning the use of antibiotics, thus blocking another way for suppliers to reduce chicken fatalities and thus reduce cost. Given consumers’ lack of willingness to pay a higher price and suppliers’ inevitable resistance, whether McDonald’s indeed has the right organizational capabilities to both free the birds and make consumers, suppliers, animal-welfare activists, and shareholders happy remains to be seen. Sources: (1) Fortune, 2016, Free bird, September 1: 78–88; (2) McDonald’s, 2019, Sharing progress on our cage-free egg commitment, April 11: news.mcdonalds.com.

The CSR-Economic Performance Puzzle The resource-based view helps solve a major puzzle in the CSR debate: the CSR-economic performance puzzle. Consistent evidence shows that corporate social irresponsibility (evidenced by environmental disasters and violations) destroys shareholder value (see Table 12.2). The puzzle—a source of frustration to CSR advocates—is why there is no conclusive evidence on a direct, positive link between CSR and economic performance such as profits and shareholder returns. Some studies do indeed report a positive relationship between CSR and economic performance.45 However, other studies find a negative relationship,46 or no relationship.47 Viewed together, “CSR does not hurt [economic] performance, but there is no concrete support to believe that it leads to supranormal [economic] returns.”48 A resource-based explanation suggests that because of the capability constraints previously discussed, many firms are not cut out for a CSR-intensive (differentiation) strategy.49 Remember: Chapter 2 tells us that most firms are stuck with a cost leadership strategy and are incapable of embracing a differentiation strategy. Since all studies have some sampling bias (no study is perfect), studies that oversample firms not yet ready for a high level of CSR activities are likely to report a negative relationship between CSR and economic performance. Likewise, studies that oversample firms ready for CSR may find a positive relationship. Also, studies with more balanced (more random) samples may fail to find any statistically significant relationship. In summary, since each firm is different (a basic assumption of the resource-based view), not every firm’s economic performance is likely to benefit from CSR. In addition, the same firm’s same CSR activities may generate different economic performance in different countries it operates. For example, starting in 2007, Unilever, producer of Lipton Tea, committed significant resources to help its geographically diverse and fragmented supply chain—including numerous small tea farmers in Africa, Asia, and Latin America—to

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Chapter 12  Strategizing on Corporate Social Responsibility   327

TABLE 12.2 How Much Shareholder Value Is Destroyed by Environmental Disasters and Violations Countries

Event Window (Days Before the Event, Days After the Event)

Reduction of Shareholder Wealth (Cumulative Average Returns, %)

Argentina, Chile, Mexico1

(–5, 5)

–6.29

Canada

(–1, 1)

–2

(–8, 8)

–2.7

(1, 5) / (1, 10)

–2.97 / –5.02

(–3, 3)

–9.7

(–1, 1)

–1.5

2

China3 India

4

South Korea

5

United States6

Sources: Extracted from findings reported in (1) S. Dasgupta, B. Laplante, & N. Mamingi, 2001, Pollution and capital markets in developing countries, Journal of Environmental Economics and Management 42: 310–335; (2) P. Lanoie, B. Laplante, & M. Roy, 1998, Can capital markets create incentives for pollution control? Ecological Economics 26: 31–41; (3) X. Xu, S. Zeng, & C. Tam, 2012, Stock market’s reaction to disclosure of environmental violation: Evidence from China, Journal of Business Ethics 107: 227–237; (4) S. Gupta & B. Goldar, 2005, Do stock markets penalize environment-unfriendly behavior? Evidence from India, Ecological Economics 52: 81–95; (5) S. Dasgupta, J. Hong, B. Laplante, & N. Mamingi, 2006, Disclosure of environmental violations and stock market in the Republic of Korea, Ecological Economics 58: 759–777; (6) R. Klassen & C. McLaughlin, 1996, The impact of environmental management on firm performance, Management Science 42: 1199–1214.

engage in sustainable practices certified by Rainforest Alliance, a major sustainability NGO. Unilever committed to having every kilogram of its tea sustainably sourced by 2020. Its advertising campaign to brag about all this hard CSR work has met different reactions in its major markets.50 In Britain and Australia, consumers rewarded Unilever by buying more Lipton Tea. In the United States, consumers were indifferent—no change to the overall market share for Lipton Tea. In France, consumers did not like such changes and punished Lipton with a lower market share. At Unilever and elsewhere, debate continues to rage about the puzzle.

Institution-Based Considerations The institution-based view sheds considerable light on the gradual diffusion of the CSR movement and the strategic responses of firms.51 At a most fundamental level, regulatory pressures underpin formal institutions, whereas normative and cognitive pressures support informal institutions. First introduced in Chapter 4 (see Table 4.6), a strategic response framework consists of (1) reactive, (2) defensive, (3) accommodative, and (4) proactive strategies. This framework can be extended to explore how firms make CSR decisions. A reactive strategy is indicated by relatively little or no support by top management for CSR causes. Firms do not feel compelled to act in the absence of disasters and outcries. Even when problems arise, denial is usually the first line of defense. Put another way, the need to accept some CSR is neither internalized through cognitive beliefs, nor does it result in any norms in practice.52 That leaves only formal regulatory pressures to compel firms to comply. For example, in the United States, food and drug safety standards that we now take for granted were fought by food and drug companies in the early half of the 20th century. The basic idea that food and drugs should be tested before being sold to customers and patients was bitterly contested even as unsafe foods and drugs were killing thousands of people. As a result, the Food and Drug Administration (FDA), which was founded in 1906, was progressively granted more powers. This era is not necessarily over. Today, many dietary supplement makers, whose products are beyond the FDA’s regulatory reach, continue to sell untested supplements, claim fantastic health benefits, and deny responsibility.

reactive strategy A strategy that is passive about corporate social responsibility. Firms do not act in the absence of disasters and outcries. When problems arise, denial is usually the first line of defense.

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328  PART 3  CORPORATE-LEVEL STRATEGIES

defensive strategy A strategy that is defensive in nature. Firms admit responsibility, but often fight it.

accommodative strategy A strategy that tries to accommodate corporate social responsibility considerations into decision making.

A defensive strategy focuses on regulatory compliance. Top management involvement is piecemeal at best, and the general attitude is that CSR is an added cost or nuisance. Firms admit responsibility but often fight it. After the establishment of the EPA in 1970, the US chemical industry resisted the EPA’s intrusion. In 1975, an editorial published by Chemical Week, the industry’s mouthpiece, asserted that “No agency in a democracy should have that authority like a chemical czar.”53 Clearly, the regulatory requirements were at significant odds with the norms and cognitive beliefs held by the industry at that time. How do various institutional pressures change firm behavior? In the absence of informal normative and cognitive beliefs, formal regulatory pressures are the only feasible way to push firms ahead.54 A key insight of the institution-based view is that individuals and organizations make rational choices given the right kind of incentives. For example, one efficient way to control pollution is to make polluters pay some “green” taxes—ranging from gasoline retail taxes to landfill charges. But how demanding these regulatory pressures should be remains controversial. One side of the debate argues that tough environmental regulation may lead to higher costs and reduced competitiveness, especially when competing with foreign rivals not subject to such demanding regulations. Others argue, however, that green taxes (such as carbon taxes) simply force firms to pay real costs that they would otherwise place on others. If a firm pollutes, it is imposing a cost on the surrounding community that must either live with the pollution or pay to clean it up. By imposing a pollution tax that roughly equals the cost to the community, the firm has to account for pollution as a real cost. Economists refer to this as “internalizing an externality.” CSR advocates further argue that stringent environmental regulation may force firms to innovate, thus benefiting the competitiveness of both the industry and country.55 For example, tougher emissions standards have in part triggered automakers’ interest in producing more hybrid or electric vehicles. An accommodative strategy is characterized by some support from top managers, who may increasingly view CSR as a worthwhile endeavor. Since formal regulations may be in place and informal social and environmental pressures may be increasing, many firms themselves may be concerned about CSR, leading to the emergence of some new industry norms. Further, new managers who are passionate about or sympathetic toward CSR causes may join the organization, or some traditional managers may change their outlook, leading to increasingly strong cognitive beliefs that CSR is the right thing to do.56 In other words, from both normative and cognitive standpoints, it becomes legitimate to accept responsibility and do all that is required.57 For example, Burger King, Kraft, Nestlé, and Unilever were pressured by Greenpeace to be concerned about the deforestation practices undertaken by their major palm oil supplier, Sinar Mas, in Indonesia. Eventually, the food giants accommodated such demands and dumped Sinar Mars. Adopting a code of conduct is a tangible indication of a firm’s willingness to accept CSR.58 First mentioned in Chapter 4, a code of conduct (sometimes called a code of ethics) is a set of written policies and standards outlining the proper practices for a firm. The global diffusion of codes of conduct is subject to intense debate. First, some argue that firms adopting these codes may not necessarily be sincere. This negative view suggests that an apparent interest in CSR may simply be window dressing. Some firms feel compelled to appear sensitive to CSR, following what others are doing, but have not truly and genuinely internalized CSR concerns.59 For example, voluntary codes of conduct in the apparel industry failed to prevent the 2013 collapse of a textile factory building in Bangladesh that killed more than 1,000 workers. Second, an instrumental view suggests that CSR activities simply represent a useful instrument to make good profits.60 Firms are not necessarily becoming more ethical. For example, after the 2010 oil spill in the Gulf of Mexico, BP reshuffled its management and created a new worldwide safety division. The instrumental view would argue that these actions did not really mean that BP became more responsible. Finally, a positive view believes that (at least some) firms and managers may be self-motivated to do it right regardless of social pressures.61 Codes of conduct tangibly express some enduring core values. Business Roundtable’s recent Statement on the Purpose of a Corporation (see Table 12.1) can be viewed as a code of conduct. Advocates embracing these three different views have wasted no time in airing their thoughts. First, authors holding a negative view point out that the 181 firms whose CEOs signed the Statement “are not leaders in socially conscious

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Chapter 12  Strategizing on Corporate Social Responsibility   329

environmental, social, or governance practices or stakeholder orientation.”62 In comparison with publicly listed nonsignatory firms in the same industries, the average signatories are incumbents that have a dominant market share, have more violations of federal EPA regulations, and have more share buybacks (a practice that allegedly enriches shareholders at the expense of other stakeholders). These firms might have chosen to sign the Statement to preempt attacks from the left that threatens tougher regulations—in short, “sheep’s clothing continuing to cover corporate rapacity.”63 Second, a more charitable explanation advanced by authors holding an instrumental view is that as long as such a Statement helps firms make more profits—given today’s political, social, and economic tensions—this is to be expected. Finally, commentators holding a positive view appreciate such a major milestone or turning point. Stakeholder management advocates are reportedly “running victory laps.”64 On both the general movement to adopt codes of conduct and on the specific publication of Business Roundtable’s Statement, the institution-based view suggests that all three perspectives are probably valid. This is to be expected given how institutional pressures work to instill value. Regardless of actual motive, the fact that firms are practicing CSR— and so many major firms’ CEOs signed the Statement—is indicative of the rising legitimacy of CSR in strategy discussions. Even firms that adopt a code of conduct (or sign the Statement) simply as window dressing open doors for more scrutiny by stakeholders because they have publicized a set of CSR criteria against which they can be judged.65 The CEOs who signed the Statement, according to the Wall Street Journal, “should brace themselves for the consequences.”66 Such pressures are likely to transform (at least some) firms internally to become more self-motivated, better corporate citizens. It probably is fair to say that the average Business Roundtable member firm is—or at least aspires to be—a more socially responsible corporate citizen in 2019 than it was in 1997 (see Table 12.1). From a CSR perspective, the best firms embrace a proactive strategy, constantly anticipating responsibility and endeavoring to do more than what is required.67 Top management at a proactive firm not only supports and champions CSR activities, but also views CSR as a source of differentiation that permeates throughout the corporate DNA. Shown in the Opening Case, Starbucks since 2001 has voluntarily published an annual report on CSR, which embodies its founder and chairman Howard Schultz’s vision that “we must balance our responsibility to create value for shareholders with a social conscience.”68 Similarly, Whole Foods’ cofounder John Mackey commented:

proactive strategy A strategy that focuses on proactive engagement in corporate social responsibility.

When people are really happy in their jobs, they provide much higher degrees of service to the customers. Happy team members result in happy customers. Happy customers do more business with you. They become advocates for your enterprise, which results in happy investors. That is a win, win, win, win strategy. You can expand it to include your suppliers and the communities where you do business, which are tied in to this prosperity circle.69 Proactive firms often engage in three areas of activity. First, some firms such as Swiss Re and Duke Energy actively participate in regional, national, and international policy and standards discussions.70 To the extent that policy and standards discussions today may become regulations in the future, it seems better to get involved early and (hopefully) steer the course toward a favorable direction.71 Otherwise—as the saying goes—“If you’re not at the table, you’re on the menu.” For example, Duke Energy operates 20 coal-fired power plants in five states. It is the third largest US emitter of CO2 and the 12th largest in the world. But its CEO Jim Rogers has proactively worked with green technology producers, activists, and politicians to engage in policy and legislative discussions. Unlike his industry peers, Rogers has been “bitten by the climate bug” and is genuinely interested in reducing greenhouse gas emissions.72 Second, proactive firms often build alliances with stakeholder groups. For example, many firms collaborate with NGOs.73 Home Depot and Lowe’s have done that by working with the Forest Stewardship Council. Because of the historical tension and distrust, these “sleeping-with-the-enemy” alliances are not easy to handle. The key lies in identifying relatively short-term, manageable projects of mutual interests. Third, proactive firms often engage in voluntary activities that go beyond what is required by regulations.74 While examples of industry-specific self-regulation abound, an area of

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330  PART 3  CORPORATE-LEVEL STRATEGIES

TABLE 12.3 Distribution of Marks & Spencer’s Consumers and Employees Conceptual Category

Marks & Spencer’s Label

Percentage of Consumers

Percentage of Employees

Reactive Defensive

“Not my problem”

24

1

“What’s the point”

38

21

Accommodative

“If it’s easy”

27

54

Proactive

“Green crusaders”

11

24

Source: Extracted from text in Marks & Spencer, 2008, Plan A: Year 1 Review (p. 16), January 15: plana. marksspencer.com. Conceptual categories are added by M. W. Peng.

intense global interest is the pursuit of the International Standards Organization (ISO) 14001 certification of the environment management system (EMS). Headquartered in Geneva, Switzerland, the ISO is an influential NGO consisting of 164 national standards bodies. Launched in 1996, the ISO 14001 EMS has become the gold standard for CSR-conscious firms.75 Although not required by law, many MNEs, such as Ford and IBM, have adopted ISO 14001 standards in all their facilities worldwide. Firms such as Siemens and Toyota have demanded that all of their top-tier suppliers be ISO 14001 certified. From an institution-based view, these proactive activities are indicative of the normative and cognitive beliefs held by many managers on the importance of doing the right thing.76 While there is a certain element of window dressing, these efforts do provide some tangible social and environmental benefits. Making Strategic Choices. The typology of (1) reactive, (2) defensive, (3) accommodative, and (4) proactive strategies is an interesting menu provided for different firms. Currently, the number of proactive firms is still a minority, and most firms engage in “business as usual.”77 While many firms are compelled to do something, a lot of CSR activities probably are still window dressing. Only sustained pressures along regulatory, normative, and cognitive dimensions may push and pull more firms to do more. After publicizing its CSR plan, British retailer Marks & Spencer reported interesting data on the distribution of its consumers and employees along these four dimensions (Table 12.3). Since CSR cannot be embarked on in a vacuum, a firm’s particular strategic choice needs to be made in some alignment with the CSR propensity of its consumers, employees, and other stakeholders.78 In other words, it is not realistic to implement a proactive strategy when the firm has numerous reactive employees and consumers.

Debates and Extensions Without exaggeration, CSR is about debates. It is not far-fetched to suggest that there is a huge debate between this chapter (focusing on stakeholder primacy) and Chapter 11 (focusing on shareholder primacy). In addition, this chapter has already gone through debates about the CSR-economic performance relationship and codes of conduct. This section discusses four recent, previously unexplored debates.

Debate 1: Reducing versus Contributing toward Income Inequality Gini coefficient A measure of income distribution, with zero representing perfect equality and one representing perfect inequality (one person holding all the wealth).

Since the 1990s, global income inequality has dropped. The global Gini coefficient—a measure of income distribution, with zero representing perfect equality and one representing perfect inequality (one person holding all the wealth)—went down from 0.70 in the 1990s to 0.60 in the 2010s.79 This is largely because of strong economic growth and rising income throughout emerging economies led by China and India, which collectively lifted more than one billion people out of poverty. In fact, China since 2010 has been classified by the World Bank as an upper middle-income country.80 Foreign MNEs that have participated in the

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Chapter 12  Strategizing on Corporate Social Responsibility   331

economic transformation of such emerging economies can rightly claim some credit for having contributed to such global transformation.81 While income inequality between countries has decreased, income inequality within countries has grown significantly in most parts of the world. In the United States, the Gini coefficient has risen from 0.35 in 1979 to 0.45 today.82 In China, it has increased from 0.30 in 1980 to 0.55 today, overtaking the United States.83 In the middle of the stormy political debate on whether such income inequality is unjust or unfair, French economist Thomas Piketty in 2014 published an influential book, Capital in the Twenty-First Century, which focused on wealth and income inequality in the West.84 Its thesis is that inequality is not an accident but rather a feature of capitalism. When the rate of return on capital is greater than the rate of economic growth over the long term, the result is the concentration of wealth, and this unequal distribution of wealth causes social and economic instability. More than one million copies in multiple languages have been sold. Sweeping in its scope, Piketty’s book, which emulates Karl Marx’s title (Capital, 1867) and his critique of capitalism, has received numerous praises. However, the book’s quest to uncover “general laws of capitalism” has also been mildly criticized for ignoring country-specific institutions and politics.85 Calling the book “the neosocialist delusion,” harsher critics contend that the book is “politically significant but theoretically uninteresting.”86 This is because the capitalism-versus-socialism debate has been long settled. Capitalism (despite its imperfections) has won. Socialism (especially Marxism) has lost. While economists renew their debate about the specific functioning of capitalism, management scholars address a firm-level question that is relevant from a CSR standpoint but is not covered by Piketty’s supporters and critics: What specific role do firms play behind rising income inequality within capitalist societies? Emerging management research suggests that (1) how firms use external or internal market mechanisms to hire employees, (2) how firms compensate executives, and (3) how entrepreneurs succeed may contribute to income inequality in a society.87 Specifically, in countries where firms prefer to hire workers through external, market-based mechanisms rather than internal, promotion-based mechanisms, income levels for star employees will rise. For example, US firms extensively raid the employee ranks of other firms, resulting in higher job mobility and higher income inequality. Japanese firms rely largely on promotion within, ending up with lower job mobility and lower income inequality. Likewise, in countries where firms favor the use of performance-based pay to compensate executives, executives can fetch sky-high compensation packages, contributing to income inequality. The United States again takes the lead in this regard. In 2018, two-thirds of CEOs’ compensation was linked to share price. The median CEO pay for Standard & Poor’s 500 firms rose to $12 million, up 7% from 2017.88 Finally, phenomenally successful entrepreneurs—known as disruptors—do capture phenomenal wealth. According to Piketty, income inequality can only be reversed through state intervention— otherwise, the very democratic order will be threatened. Specifically, he proposes a global system of progressive wealth taxes—up to 80% (although he admits this is “politically impossible”). In this debate, firms are not neutral, and highly paid executives and wealthy entrepreneurs obviously resent higher income taxes. Whether firms indeed reduce or contribute toward income inequality—and whether such inequality is unjust or unfair—is likely to be one of the most heated CSR debates in the years to come.

Debate 2: Domestic versus Overseas Social Responsibility Given that corporate resources are limited, devoting resources to overseas CSR often means fewer resources left for domestic CSR. Consider two primary stakeholder groups: domestic employees and communities. Expanding overseas, especially toward emerging economies, may not only increase corporate profits and shareholder returns, but also provide employment to host countries and develop these economies at the “base of the pyramid,” all of which seem to have noble CSR dimensions. However, this is often done at the expense of domestic employees and communities. Executives making these decisions are often criticized by the media, unions, and politicians. For example, President Donald Trump repeatedly called for 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.

332  PART 3  CORPORATE-LEVEL STRATEGIES

US firms to bring back jobs. In this new age of nationalism, few executives can afford such criticisms. However, from a corporate governance perspective, especially the “shareholder capitalism” variant, MNEs are doing nothing wrong by maximizing shareholder returns (see Chapter 11). Although framed in a domestic versus overseas context, the heart of this debate boils down to a fundamental point that frustrates CSR advocates: In a capitalist society, it is shareholders (otherwise known as capitalists) who matter at the end of the day. According to the late Jack Welch, GE’s former chairman and CEO, “Unions, politicians, activists—companies face a Babel of interests. But there’s only one owner. A company is for its shareholders. They own it. They control it. That’s the way it is, and the way it should be.”89 When firms have enough resources, it would be nice to take care of domestic employees and communities. However, when confronted with relentless pressures for cost cutting, managers have to prioritize. While such a traditional shareholder primacy view may be changing, whether signatories on the Business Roundtable Statement who presumably now espouse a stakeholder primacy view will indeed give high priority to domestic stakeholders at the expense of shareholders remains to be seen.

Debate 3: Active versus Inactive CSR Engagement Overseas Active CSR engagement is now increasingly expected of MNEs. Those that fail to do so are often criticized by NGOs. In the 1990s, Shell was harshly criticized for “not lifting a finger” when the Nigerian government cracked down on rebels in the Ogoni region where Shell operated. In 2009, Shell settled a long-running case brought by Ogoni activists with $15.5 million.90 However, such well-intentioned calls for greater CSR engagement directly conflict with a long-standing principle governing the relationship between MNEs and host countries: nonintervention in local affairs. The nonintervention principle originated from concerns that MNEs may engage in political activities against the national interests of the host country. Chile in the 1970s serves as a case in point. After the democratically elected socialist President Salvador Allende had threatened to expropriate the assets of MNEs, ITT (a US-based MNE), allegedly in connection with the Central Intelligence Agency (CIA), promoted a coup that killed Allende. Consequently, the idea that MNEs should not interfere in the domestic political affairs of the host country has been enshrined in a number of codes of MNE conduct sponsored by international organizations such as the United Nations (UN). However, CSR advocates have been emboldened by some MNEs’ actions during the apartheid era in South Africa, when local laws required racial segregation of the workforce. While many MNEs withdrew, those that remained (such as BP) challenged the apartheid regime by desegregating their employees and thus undermining the government’s base of power. Emboldened by the successful removal of the apartheid regime in 1994, CSR advocates have unleashed a new campaign, stressing the necessity for MNEs to engage in actions that often constitute political activity, particularly in the human rights area. However, in almost every country, there are local laws and norms that some foreign MNEs may find objectionable. In Estonia, ethnic Russians are being discriminated against. In many Arab countries, women do not have the same legal rights as men do. In the United States, a number of groups (ranging from certain racial groups to homosexuals) claim to be discriminated against. At the heart of this debate is whether (1) foreign MNEs should spearhead efforts to remove some of these discriminatory practices or (2) should remain politically neutral by conforming to current host-country laws and norms. Naturally, most MNEs are likely to opt for the second option.

Debate 4: Race to the Bottom (“Pollution Haven”) versus Race to the Top One side of this debate argues that because of heavier environmental regulation in developed economies, MNEs may shift pollution-intensive production to developing countries with

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Chapter 12  Strategizing on Corporate Social Responsibility   333

lower environmental standards. To attract investment, developing countries may enter a “race to the bottom” by lowering (or at least not tightening) environmental standards, and some may become “pollution havens.” The other side argues that globalization does not necessarily have negative effects on the environment in developing countries to the extent suggested by the “pollution haven” hypothesis. This is largely because many MNEs voluntarily adhere to environmental standards higher than those required by host countries.91 Most MNEs outperform local firms in environmental management. The underlying motivations behind MNEs’ voluntary “green practices” can be attributed to (1) CSR demands made by customers in developed economies, and (2) requirements of MNE headquarters for worldwide compliance of higher CSR standards (such as ISO 14001). Although it is difficult to suggest that the “race to the bottom” does not exist, MNEs as a group do not necessarily add to the environmental burden in developing countries. Some MNEs, such as Dow, have facilitated the diffusion of better environmental technologies to many developing countries.

The Savvy Strategist Concerning CSR, the strategy tripod suggests three clear implications for action (Table 12.4). First, the industry-based view points out that while managers in certain industries may face stronger CSR challenges, savvy managers in all industries need to be prepared to confront these challenges. Given the increasingly inescapable responsibility to be good corporate citizens, managers may want to integrate CSR as part of the core activities of the firm—instead of “faking it,” making cosmetic changes, or just giving away some money.92 Many managers traditionally treat CSR as a nuisance that involves regulation, added costs, and liability. Such an attitude may underestimate potential opportunities associated with CSR. Table 12.5 outlines suggestions made by Michael Porter on how to create shared social value via economic value creation instead of just narrowly focusing on CSR. Second, savvy managers need to pick CSR battles carefully.93 The resource-based view suggests an important lesson, which is captured by Sun Tzu’s timeless teaching: “Know yourself, know your opponents.” While your opponents may engage in high-profile CSR activities to earn bragging rights while contributing to their triple bottom line, blindly imitating these practices while not knowing enough about yourself (yourself as a manager and your firm or unit) may lead to disappointment. Instead of always chasing the latest fads, firms are advised to select CSR practices that fit with their existing capabilities. Likewise, savvy managers need to know “your customers.” Merely bragging about the sustainability benefits of green products is only likely to attract a small number of customers. Most customers need something more. Ideal products may offer a “green bundle,” which not only is environmentally friendly but also provides improved performance, health benefits, savings, and status.94 Third, savvy managers need to understand the formal and informal rules of the game, anticipate changes, and seek to shape changes.95 Although the Trump administration in 2017 announced to withdraw from the Paris Agreement, many US firms such as Chevron, DuPont, ExxonMobil, Google, and Microsoft voluntarily participate in CSR activities not thus far mandated by law (such as being prepared to pay green taxes for carbon emissions, which is known as carbon pricing) in anticipation of more stringent environmental regulations down the road.96 Globally, more than 230 firms that are worth in excess of $6 trillion have committed to cutting carbon emissions in line with the Paris Agreement’s goal of limiting global warming to less than 2°C. TABLE 12.4 Strategic Implications for Action ●●

●● ●●

Integrate CSR as part of the core activities and processes of the firm—faking it doesn’t last very long. Pick your CSR battles carefully—don’t blindly imitate other firms’ CSR activities. Understand the rules of the game, anticipate changes, and seek to shape and influence such changes.

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334  PART 3  CORPORATE-LEVEL STRATEGIES

TABLE 12.5  From Corporate Social Responsibility to Creating Shared Value (Relatively Isolated) Corporate Social Responsibility

Creating Shared Value (via Economic Value Creation)

Value: Doing good

Value: Economic and societal benefits relative to cost

Citizenship, philanthropy, and sustainability

Joint company and community value creation

Discretionary or in response to external pressure

Integral to competing

Separate from profit maximization

Integral to profit maximization

Agenda is determined by personal preferences

Agenda is company specific and internally generated

Impact limited by corporate footprint and CSR budget

Realigns the entire company budget

S ource: Adapted from M. Porter & M. Kramer, 2011, Creating shared value (p. 76), Harvard Business Review January: 62–77.

For current and would-be strategists, this chapter has clearly shown that we can revisit the four fundamental questions in strategy from a CSR perspective. First, why do firms differ in CSR activities? Firm differences can be found in (1) industry structures, (2) resource repertoire, and (3) formal and informal institutional pressures. Second, how do firms behave in the CSR arena? Some are reactive and defensive, others accommodative, and still others proactive. Third, what determines a firm’s CSR scope? While industry structures, resource repertoire, and formal institutional pressures are likely to ensure some minimal involvement, firms with a broad range of CSR engagements are likely to be characterized by a large percentage of managers and employees who intrinsically feel the need to “do it right” (see Table 12.3). Finally, what determines the success and failure of firms around the world? Undoubtedly, CSR will increasingly become an important part of the answer. The best-performing firms are likely to be those that can integrate CSR activities into their core economic functions while addressing ESG concerns. The globally ambiguous and different CSR standards, norms, and expectations make many managers uncomfortable. However, nobody has ever told managers that managing complexity is easy. Given the crisis of capitalism with tensions centered on political, social, and economic issues such as nationalism, terrorism, racism, and income inequality, managers—as a unique group of stakeholders—have an important and challenging responsibility. From a CSR standpoint, this means building more humane, more inclusive, and fairer firms that not only generate wealth and develop economies, but also respond to changing societal expectations concerning firms’ social and environmental roles around the world.97

CHAPTER SUMMARY 1. Articulate what a stakeholder view of the firm is. ●●

●●

●●

A stakeholder view focuses on managing the demands of all stakeholders—both primary and secondary. A stakeholder view urges firms to pursue a more balanced triple bottom line, consisting of economic, social, and environmental performance (along ESG dimensions). Despite the fierce defense of the free market school, especially its shareholder capitalism variant, the CSR movement has now become a more central part of strategy discussions around the globe.

2. Develop a comprehensive model of CSR. ●●

●●

●●

The industry-based view argues that the nature of different industries drives different CSR strategies. The resource-based view posits that not all CSR activities satisfy the VRIO requirements. The institution-based view suggests that when confronting CSR pressures, firms may employ (1) reactive, (2) defensive, (3) accommodative, or (4) proactive strategies.

3. Participate in four leading debates concerning CSR. ●●

(1) Reducing versus contributing toward income inequality, (2) domestic versus overseas social

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Chapter 12  Strategizing on Corporate Social Responsibility   335

responsibility, (3) active versus inactive CSR engagement overseas, and (4) race to the bottom versus race to the top.

●●

●●

4. Draw strategic implications for action. ●●

Pick your CSR battles carefully—don’t blindly imitate other firms’ CSR activities. Understand the rules of the game, anticipate changes, and seek to influence such changes.

Integrate CSR as part of the core activities and processes of the firm.

Key Terms Accommodative strategy 328

Environmental, social, and governance (ESG) performance 319

Secondary stakeholder group 319

Corporate philanthropy 325 Corporate social irresponsibility (CSI) 321

Fiduciary duty 316 Gini coefficient 330

Stakeholder capitalism 321

Corporate social performance (CSP) 319

Global sustainability 317

Corporate social responsibility (CSR) 316

Proactive strategy 329

Defensive strategy 328

Stakeholder primacy 322

Primary stakeholder group 319 Reactive strategy 327

Shareholder primacy 320

Social impact investment 320 Social issue participation 325 Socially responsible investment (SRI) 320

CRITICAL DISCUSSION QUESTIONS 1. ON ETHICS: Between the two opposing views of stake-

holder capitalism (Chapter 12) and shareholder capitalism (Chapter 11), which view do you support? Why?

2. ON ETHICS: Your CPA firm is organizing a one-day-long

CSR activity using company time such as cleaning up a dirty road or picking up trash on the beach. A colleague tells you: “This is so stupid. I already have so much unfinished work. Now to take a whole day away from work? Come on! I don’t mind CSR. If the company is serious about CSR, why

doesn’t it donate one day of my earnings, which I am sure will be more than the value I can generate by cleaning up the road or picking up trash? With that money, they can hire someone like a professional cleaner to do a better job than I would.” What are you going to say to her? (Your colleague makes $146,000 a year or $400 per day.) 3. ON ETHICS: As the CEO of a leading bank in the City of

London, you have decided to directly meet protestors in the Occupy London movement. What will you say?

TOPICS FOR EXPANDED PROJECTS 1. ON ETHICS: In the landmark Dodge v. Ford case in 1919, the

Michigan State Supreme Court determined whether Henry Ford could withhold dividends from the Dodge brothers (and other shareholders of Ford Motor Company) to engage in what today would be called CSR activities. With a resounding “No,” the court opined, “A business organization is organized and carried on primarily for the profits of the stockholders.” If the court in your country were to decide on this case next year, what do you think would be the likely outcome?

2. ON ETHICS: The California Public Employees’ Retire-

ment System (CalPERS) is one of the world’s largest pension funds and one of the earliest to divest stocks of firms that did not meet its ESG criteria. For example, in 2001, it dumped tobacco stocks, which then outperformed. Over the long run, CalPERS suffered a $7 billion loss because of this divestment. By 2017 CalPERS was underfunded by 30% (short of $130 billion), and 1.8 million public employees worried about whether there would be enough funds to cover their retirements. Alarmed, Jason Perez, a police

sergeant and CalPERS member, argued that “When ESG has nothing to do with maximizing returns and it is just for the sake of being socially conscious, it shouldn’t have a place in our retirement plan.” He campaigned for a board seat on the basis that CalPERS should invest in law-abiding, profit-maximizing firms such as tobacco companies. In 2019, he gained national publicity when he beat an ESG guru and won a CalPERS board seat. At a board meeting, if you were (1) Perez, (2) one of the other 12 board members who prefer to keep the ESG criteria, or (3) a strategy consultant brought in by the board, what would you say? (Source: Chief Investment Officer, 2019, New CalPERS board member has serious concerns, January 14: www.ai-cio.com.) 3. ON ETHICS: Hypothetically, your MNE is the largest for-

eign investor in (1) Vietnam, where religious leaders are being prosecuted; (2) Estonia, where ethnic Russian citizens are being discriminated against by law; or (3) the United States, where undocumented migrant children are separated from their families and detained in camps with poor conditions for

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336  PART 3  CORPORATE-LEVEL STRATEGIES

months. As the country manager there, you are being pressured by NGOs of all stripes to help the oppressed groups in your host country. But you also understand that the host government will be upset if your firm engages in local political

CLOSING CASE

activities deemed inappropriate. These activities, which you personally find distasteful, are not directly related to your operations. How would you proceed?

Emerging Markets Ethical Dilemma

The Ebola Challenge First reported in 1976 in Sudan and Zaire (now called the Democratic Republic of the Congo [DRC]), Ebola has been a known virus for more than four decades. Yet, there is still no effective vaccine or medicine. Between 1976 and 2013, sub-Saharan Africa saw 24 outbreaks with 1,716 cases. What really put Ebola on the center stage of global media—and on the pages of this book—was the 2014 outbreak, which was the most devastating outbreak: 15,000 reported cases and 6,000 deaths. Starting in Guinea, Liberia, and Sierra Leone, the disease quickly diffused to other West African countries such as the DRC, Nigeria, and Senegal. By September 2014, a Liberian man who traveled to Dallas was diagnosed to have Ebola. He died there in early October. Two American nurses who treated the patient became the first confirmed cases to be infected by Ebola in the United States, triggering panic throughout the country. State governments in Connecticut, Illinois, New Jersey, and New York demanded that anyone who traveled from affected African countries be subject to 21 days of quarantine—the longest period the Ebola virus was thought to need to incubate. In mid-October 2014, President Obama appointed a national Ebola response coordinator. All passengers arriving from affected African countries now had to go through screening, and all patients showing up at a US health care establishment had to answer a questionnaire regarding whether they traveled from these countries. In the absence of effective vaccine or medicine, treatment was indirect. It centered on early supportive care with rehydration and symptomatic treatment. The measures included management of pain, nausea, fever, and anxiety, as well as rehydration via the oral or intravenous (IV) route. Blood products such as packed red blood cells, platelets, or fresh frozen plasma might also be used. Intensive care was often used in the developed world. This included maintaining blood volume and electrolyte (salts) balance as well as treating any bacterial infections. Thankfully, the two American nurses recovered after several weeks of treatment. By December 2014, there had been ten Ebola cases in the United States, and only two resulted in death—the second case of death was an African doctor who was contaminated by his patients in an Ebola-infested country. Throughout the crisis, the initial silence of the phar­ maceutical industry was conspicuous. Dr. Margaret Chan, Director-General of the World Health Organization (WHO), criticized the industry for failing to develop a vaccine for Ebola over the four decades during which the virus had threatened poor African countries. She complained that “a profit-driven industry does not invest in products for markets that cannot pay.” Initially reluctant, some pharmaceutical firms jumped in. In October 2014, GSK, a British drugmaker, announced that

it expedited its research and development (R&D) in search of a vaccine. In 2010, the Canadian government had developed an experimental vaccine, VSV-EBOV, and licensed it to a small, virtually unknown biotech firm, NewLink Genetics in Ames, Iowa, for clinical trials. However, progress was slow and funding tight. In November 2014, Merck, a US giant, paid NewLink $50 million to buy the rights to the vaccine and to expedite R&D, and the Canadian government retained noncommercial rights to it. Also in November 2014, Sanofi, a French Big Pharma player, announced its intention to work with industry partners to combat Ebola. The reason why pharmaceutical firms—especially Big Pharma—were reluctant until recently to apply their resources to find a cure for Ebola was simple. Even if successful, these efforts, which would mostly benefit African countries, would not be profitable. In other words, there was “no compelling business case.” After the disease arrived in the United States (and a few European countries), firms felt compelled to move. Debates continued to rage. One side argued that pharmaceutical firms only focused on markets and products from which they could profit—with “Botox, baldness, and bonus” as their guiding light. Tropical diseases such as malaria and Ebola naturally would receive little (or no) attention. Another side argued that given limited resources, pharmaceutical firms rightly and strategically ignored (relatively) smaller-scale diseases such as Ebola because other diseases such as HIV and AIDS affect many more people. A number of pharmaceutical firms jumped onto the “Ebola bandwagon” simply to earn kudos for CSR, knowing that they would be unlikely to make any profits for their efforts. Or they were simply driven to do so because of public pressure—the series of eager announcements made in October and November 2014 were defensive in nature. Given the long lead time to develop any effective vaccine and the urgency to have a vaccine at hand when confronting an outbreak of Ebola (and other contagious diseases such as the coronavirus), how pharmaceutical firms manage their quest for the triple bottom line remains one of the leading strategic challenges they face. Sources: (1) C. Campos, C. Cole, & J. Steele, 2014, Ebola and corporate social responsibility, EMBA strategy class term project, Jindal School of Management, University of Texas at Dallas, December; (2) CBC, 2014, Canada should cancel NewLink Ebola vaccine contract, November 19: www.cbc.ca; (3) Economist, 2020, Coronavirus: Run, don’t walk, February 8: 51–52; (4) Independent, 2014, Ebola outbreak: Why has “Big Pharma” failed deadly virus’ victims? September 7: www.independent.co.uk; (5) National Public Radio, 2014, Merck partners with NewLink to speed up work on Ebola vaccine, November 24: www.npr.org; (6) Time, 2014, WHO pillories drug industry for failure to develop Ebola

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Chapter 12  Strategizing on Corporate Social Responsibility   337

vaccine, November 4: www.time.com; (7) World Health Organization, 2014, Ebola virus disease fact sheet, November: www.who.int. CASE DISCUSSION QUESTIONS 1. ON ETHICS: Until recently, why were firms in the phar-

maceutical industry reluctant to find a cure for Ebola?

2. ON ETHICS: What motivated the pharmaceutical firms

to jump onto the “Ebola bandwagon” lately?

3. ON ETHICS: Did the pharmaceutical really want to

solve a major public health problem or just want to earn some CSR kudos? (HINT: Use the typology of reactive, defensive, accommodative, and proactive strategies.)

NOTES [Journal Acronyms] AMJ—Academy of Management Journal;

AMP—Academy of Management Perspectives; AMR—Academy of Management Review; APJM—Asia Pacific Journal of Management; AR—Accounting Review; BW—BusinessWeek (before 2010) or Bloomberg Businessweek (since 2010); CMR—California Management Review; FA—Foreign Affairs; GSJ—Global Strategy Journal; HBR—Harvard Business Review; JBE—Journal of Business Ethics; JEP—Journal of Economic Perspectives; JIBS— Journal of International Business Studies; JM—Journal of Management; JMS—Journal of Management Studies; JWB—Journal of World Business; NYTM—New York Times Magazine; OSc— Organization Science; PNAS—Proceedings of the National Academy of Sciences; SMJ—Strategic Management Journal; SEJ— Strategic Entrepreneurship Journal; WSJ—Wall Street Journal 1. K. Davis, 1973, The case for and against business assumption of social responsibilities, AMJ 16: 312–322. See also J. Campbell, L. Eden, & S. Miller, 2012, Multinationals and CSR in host countries, JIBS 43: 84–106; G. George, S. Schillebeeckx, & T. Liak, 2015, The management of natural resources, AMJ 58: 1595–1613; H. Wang, L. Tong, R. Takeuchi, & G. George, 2016, Corporate social responsibility, AMJ 59: 534–544; D. Matten & J. Moon, 2008, “Implicit” and “explicit” CSR, AMR 33: 404–424. 2. H. Aguinis & A. Glavas, 2012, What we know and don’t know about CSR, JM 38: 932–968; R. Aguilera, D. Rupp, C. Williams, & J. Ganapathi, 2007, Putting the S back in CSR, AMR 32: 836–863; T. Devinney, A. McGahan, & M. Zollo, 2013, A research agenda for global stakeholder strategy, GSJ 3: 325–337; T. London, 2009, Making better investments at the base of the pyramid, HBR May: 106–113. 3. K. O’Shaughnessy, E. Gedajlovic, & P. Reinmoeller, 2007, The influence of firm, industry, and network on the corporate social performance of Japanese firms, APJM 24: 283–304; A. Scherer & G. Palazzo, 2011, The new political role of business in a globalized world, JMS 48: 899–931. 4. E. Freeman, 1984, Strategic Management: A Stakeholder Approach (p. 46), Boston: Pitman. See also D. Crilly, 2011, Predicting stakeholder orientation in the MNE, JIBS 42: 694–717; A. Kacperczyk, 2009, With greater power comes greater responsibility? SMJ 30: 261–285. 5. J. Harrison, D. Bosse, & R. Phillips, 2010, Managing for stakeholders, stakeholder utility functions, and competitive advantage, SMJ 31: 58–74; S. Sarasvathy & A. Ramesh, 2019, An effectual model of collective action for addressing sustainability

6.

7.

8.

9.

10.

11. 12.

13.

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challenges, AMP 33: 405–424; J. Schrempf-Stirling, G. Palazzo, & R. Phillips, 2016, Historic CSR, AMR 41: 700–719. F. Bridoux & J. Stoelhorst, 2016, Stakeholder relationships and social welfare, AMR 41: 229–251; T. Jones, J. Harrison, & W. Felps, 2018, How applying instrumental stakeholder theory can provide sustainable competitive advantage, AMR 43: 371–391; R. Mitchell, G. Weaver, B. Agle, A. Bailey, & J. Carlson, 2016, Stakeholder agency and social welfare, AMR 41: 252–275. World Commission on Environment and Development, 1987, Our Common Future (p. 8), Oxford, UK: Oxford University Press. S. Hart, 2005, Capitalism at the Crossroads, Philadelphia: Wharton School Publishing; A. Kim, P. Bansal, & H. Haugh, 2019, No time like the present, AMJ 62: 607–634; R. Rajan, 2010, Fault Lines, Princeton, NJ: Princeton University Press; N. Slawinski & P. Bansal, 2015, Short on time, OSc 26: 531–539. J. Howard-Grenville, S. Buckle, B. Hoskins, & G. George, 2014, Climate change and management, AMJ 57: 615–623; J. Pinkse & A. Kolk, 2012, Multinational enterprises and climate change, JIBS 43: 332–341; G. Whiteman, B. Walker, & P. Perego, 2013, Planetary boundaries, JMS 50; 307–336. J. Surroca, J. Tribo, & S. Zahra, 2013, Stakeholder pressure on MNEs and the transfer of socially irresponsible practices to subsidiaries, AMJ 56: 549–572; J. York, S. Vedula, & M. Lenox, 2018, It’s not easy building green, AMJ 61: 1492–1523. Economist, 2019, The climate issue (p. 28), September 21: The entire issue. J. A. Aragon-Correa, A. Marcus, & N. Hurtado-Torres, 2016, The natural environmental strategies of international firms, AMP 30: 24–39; D. Crilly, N. Ni, & Y. Wang, 2016, Do-no-harm versus do-good social responsibility, SMJ 37: 1316–1329; N. Rathert, 2016, Strategies of legitimation, JIBS 47: 858–879. J. Bundy, C. Shropshire, & A. Buchholtz, 2013, Strategic cognition and issue salience, AMR 38: 352–376; J. Vergne, 2012, Stigmatized categories and public disapproval of organizations, AMJ 55: 1027–1052. M. Clarkson, 1995, A stakeholder framework for analyzing and evaluating corporate social performance (p. 107), AMR 20: 92–117. See also S. Dorobantu & K. Odziemkowska, 2017, Valuing stakeholder governance, SMJ 38: 2682– 2703; G. T. Lumpkin & S. Bacq, 2019, Civic wealth creation, AMP 33: 383–404.

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15. L. Christensen, A. Mackey, & D. Whetten, 2014, Taking responsibility for CSR, AMP 28: 164–178; R. Hoskisson, E. Gambeta, C. Green, & T. Li, 2018, Is my firm-specific investment protected? AMR 43: 284–306; M. Ihrig & I. MacMillan, 2017, How to get ecosystem buy-in, HBR March: 102–107; B. King, T. Fellin, & D. Whetten, 2010, Finding the organization in organization theory, OSc 21: 290–305; R. Nasan, S. Bacq, & D. Gras, 2018, A behavioral theory of social performance, AMR 43: 259–283; W. Su & E. Tsang, 2015, Product diversification and financial performance, AMJ 58: 1128–1148. 16. T. Donaldson & L. Preston, 1995, The stakeholder theory of the corporation, AMR 20: 65–91; J. Elkington, 1997, Cannibals with Forks: The Triple Bottom Line of 21st Century Business, New York: Wiley; S. Jayachandran, K. Kalaignanam, & M. Eilert, 2013, Product and environmental social performance, SMJ 34: 1255–1264. 17. I. Ioannou & G. Serafeim, 2012, What drives corporate social performance? (p. 835) JIBS 43: 834–864; X. Luo, H. Wang, S. Raithel, & Q. Zheng, 2015, Corporate social performance, analyst stock recommendations, and firm future returns, SMJ 36: 123–136. 18. R. Eccles & S. Klimenko, 2019, The investor revolution, HBR May: 107–116; I. Filatotchev & C. Nakajima, 2014, Corporate governance, responsible managerial behavior, and CSR, AMP 28: 289–306. 19. M. Kramer, 2018, Creating shared value (p. 4), module note for instructors, Boston: Harvard Business School. 20. Economist, 2017, Generation SRI, November 25: 65–66. 21. M. Khan, G. Serafeim, & A. Yoon, 2016, Corporate sustainability (p. 1697), AR 91: 1697–1724. 22. A. Chatterji, R. Durand, D. Levine, & S. Touboul, 2016, Do ratings of firms converge? SMJ 37: 1597–1614; M. Delmas, D. Etzion, & N. Nairn-Birth, 2013, Triangulating environmental performance, AMP 27: 255–267. 23. M. Friedman, 1970, The social responsibility of business is to increase its profits, NYTM September 13: 32–33. 24. D. Ahlstrom, 2010, Innovation and growth, AMP 24: 11–24. 25. A. Delios, 2010, How can organizations be competitive but dare to care? AMP 24: 25–36; M. Hollerer, 2013, From taken-for-granted to explicit commitment, JMS 50: 573–606; R. Rajan & L. Zingales, 2003, Saving Capitalism from Capitalists, New York: Crown. 26. M. Porter & M. Kramer, 2011, Creating shared value (p. 76), HBR January: 62–77. 27. D. Lange & N. Washburn, 2012, Understanding attributions of corporate social irresponsibility, AMJ 37: 300–326; Y. Mishina, B. Dykes, E. Block, & T. Pollock, 2010, Why “good” firms do bad things, AMJ 53: 701–722; C. Shea & O. Hawn, 2019, Microfoundations of corporate social responsibility and irresponsibility, AMJ 62: 1609–1642. 28. Business Roundtable, 2019, Business Roundtable redefines the purpose of a corporation to promote “an economy that serves all Americans,” press release, August 19: www.businessroundtablec.org. 29. J. Harrison, R. Philips, & R. E. Freeman, 2020, On the 2019 Business Roundtable “Statement on the Purpose of a

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Chapter 12  Strategizing on Corporate Social Responsibility   339

43. HBR, 2019, In practice: Eduardo Martinez, January: 20. 44. Y. Jeong & T. Kim, 2019, Between legitimacy and efficiency, AMJ 62: 1583–1608; P. Madsen & Z. Rodgers, 2015, Looking good by doing good, SMJ 36: 776–794; M. Mithani, 2017, Liability of foreignness, natural disasters, and corporate philanthropy, JIBS 48: 941–963; A. Muller & R. Kraussl, 2011, Doing good deeds in times of need, SMJ 32: 911–929; C. Oh & J. Oetzel, 2011, Multinationals’ response to major disasters, SMJ 32: 658–681. 45. M. Barnett & R. Salomon, 2012, Does it pay to be really good? SMJ 33: 1304–1320; R. Chan, 2010, Corporate environmentalism pursuit by foreign firms competing in China, JWB 45: 80–92; A. Edmans, 2012, The link between job satisfaction and firm value, with implications for corporate social responsibility, AMP 26: 1–19; O. Hawn & I. Ioannou, 2016, Mind the gap, SMJ 37: 2569–2588; B. Lev, C. Petrovits, & S. Radhakrishnan, 2010, Is doing good good for you? SMJ 31: 182–200; N. Ortiz-de-Mandojana & P. Bansal, 2016, The long-term benefits of organizational resilience through sustainable business practices, SMJ 37: 1615–1631; S. Ramchander, R. Schwebach, & K. Staking, 2012, The informational relevance of CSR, SMJ 33: 303–314; S. Waddock & S. Graves, 1997, The corporate social performance-financial performance link, SMJ 18: 303–319; H. Wang & C. Qian, 2011, Corporate philanthropy and corporate financial performance, AMJ 54: 1159–1181. 46. S. Ambec & P. Lanoie, 2008, Does it pay to be green? AMP 22: 45–62; R. Garcia-Castro & C. Francoeur, 2016, When more is not better, SMJ 37: 406–424; M. Orlitzky, 2013, CSR, noise, and stock market volatility, AMP 27: 238–254; C. Qian, L. Yu, & Y. Yu, 2019, Financial analyst coverage and corporate social performance, SMJ 40: 2271–2286; T. Wang & P. Bansal, 2012, Social responsibility in new ventures, SMJ 33: 1135–1153; X. Zhao & A. Murrell, 2016, Revisiting the corporate social performance-financial performance link, SMJ 37: 2378–2388. 47. S. Brammer & A. Millington, 2008, Does it pay to be different? SMJ 29: 1325–1343; A. McWilliams & D. Siegel, 2000, CSR and financial performance, SMJ 21: 603–609; J. Surroca, J. Tribo, & S. Waddock, 2010, Corporate responsibility and financial performance, SMJ 31: 463–490. 48. T. Devinney, 2009, Is the socially responsible corporation a myth? (p. 53) AMP 23: 44–56. 49. J. Choi & H. Wang, 2009, Stakeholder relations and the persistence of corporate financial performance, SMJ 30: 895–907; C. Hull & S. Rothenberg, 2008, Firm performance, SMJ 29: 781–789. 50. R. Henderson & F. Nellemann, 2012, Sustainable tea at Unilever, Harvard Business School case 9-712-438. 51. B. Gifford, A. Kestler, & S. Anand, 2010, Building local legitimacy into CSR, JWB 45: 304–311; Q. Han, J. Jennings, R. Liu, & P. D. Jennings, 2019, Going home and helping out? JIBS 50: 857–872; J. Jones, J. York, S. Vedula, M. Conger, & M. Lenox, 2019, The collective construction of green building, AMP 33: 425–449; J. Murillo-Luna, C. Garces-Ayerbe, & P. Rivera-Torres, 2008, Why do patterns of environmental response differ? SMJ 29: 1225–1240;

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340  PART 3  CORPORATE-LEVEL STRATEGIES

63. Harrison et al., 2020, On the 2019 Roundtable, op. cit., p. 9. 64. Harrison et al., 2020, On the 2019 Roundtable, op. cit., p. 9. 65. A. Zavyalova, M. Pfarrer, R. Reger, & T. Hubbard, 2016, Reputation as a benefit and a burden? AMJ 59: 253–276. 66. WSJ, 2019, CEOs on the hot seat, December 13: R1–R2. 67. N. Darnall, I. Henriques, & P. Sadorsky, 2010, Adopting proactive environmental strategy, JMS 47: 1072–1094. 68. Starbucks Global Responsibility Report 2010, 2011, Message from Howard Schultz, www.starbucks.com. 69. J. Mackey, 2011, What is it that only I can do? HBR January: 119–123. 70. G. Unruh & R. Ettenson, 2010, Winning in the green frenzy, HBR November: 110–116. 71. S. Patnaik, 2019, A cross-country study of collective political strategy, JIBS 50: 1130–1155. 72. BW, 2010, The smooth-talking king of coal—and climate change, June 7: 65. 73. A. Kourula, 2010, Corporate engagement with NGOs in different institutional contexts, JWB 45: 395–404; M. Kramer & M. Pfitzer, 2016, The ecosystem of shared value, HBR October: 81–89; J. Nebus & C. Rufin, 2010, Extending the bargaining power model, JIBS 41: 996–1015. 74. M. Delmas & M. Montes-Sancho, 2010, Voluntary agreements to improve environmental quality, SMJ 31: 575–601. 75. B. Husted, I. Montiel, & P. Christmann, 2016, Effects of local legitimacy on certification decisions to global and national CSR standards by multinational subsidiaries and domestic firms, JIBS 47: 382–397. 76. B. Arya & G. Zhang, 2009, Institutional reforms and investor reactions to CSR announcements, JMS 46: 1089–1112; M. Delmas & M. Toffel, 2008, Organizational responses to environmental demands, SMJ 29: 1027–1055; I. Montiel, B. Husted, & P. Christmann, 2012, Using private management standard certification to reduce information asymmetries in corrupt environments, SMJ 33: 1103– 1113; Y. Sarason & T. Dean, 2019, Lost battles, Trojan horses, open gates, and wars won, AMP 33: 469–490; P. Tashman, V. Marano, & T. Kostova, 2019, Walking the walk or talking the talk? JIBS 50: 153–171; E. Wong, M. Ormiston, & P. Tetlock, 2011, The effects of top management team integrative complexity and decentralized decision making on corporate social performance, AMJ 54: 1207–1228. 77. C. Wright & D. Nyberg, 2017, An inconvenient truth, AMJ 60: 1633–1661. 78. A. Grinstein & P. Riefler, 2015, Citizens of the (green) world? JIBS 46: 694–714. 79. B. Milanovic, 2020, The clash of capitalisms (p. 13), FA, January: 10–21. The author is formerly the chief economist at the World Bank. 80. G. Bruton, D. Ahlstrom, & J. Chen, 2020. China has emerged as an aspirant economy, APJM (in press). 81. Y. Luo, H. Zhang, & J. Bu, 2019, Developed country MNEs investing in developing countries, JIBS 50: 633–667; K. Meyer & M. W. Peng, 2016, Theoretical foundations of emerging economy business research, JIBS 47: 3–22.

82. Milanovic, 2020, op cit., p. 13. 83. Y. Xie & X. Zhou, 2014, Income inequality in today’s China, PNAS 111: 6928–6933. See also V. Nee & S. Opper, 2012, Capitalism from Below (p. 3), Cambridge, MA: Harvard University Press. 84. T. Piketty, 2014, Capital in the Twenty-First Century, Cambridge, MA: Belknap. See also T. Piketty, 2020, Capital and Ideology, Cambridge, MA: Harvard University Press. 85. D. Acemoglu & J. Robinson, 2015, The rise and decline of general laws of capitalism, JEP 29: 3–28; A. Banerjee & E. Duflo, 2019, Good Economics for Hard Times, New York: Public Affairs. 86. J. Muller, 2020, The neosocialist delusion (p. 44), FA, January: 44–49. 87. J. A. Cobb, 2016, How firms shape income inequality, AMR 41: 324–348; M. Packard & P. Bylund, 2018, On the relationship between inequality and entrepreneurship, SEJ 12: 3–22. 88. WSJ, 2019, CEOs on the hot seat, op. cit., p. R3. 89. J. Welch & S. Welch, 2006, Whose company is it anyway? BW October 9: 122. 90. Economist, 2009, Spilling forever, June 13: 51. 91. M. Bu & M. Wagner, 2016, Racing to the bottom and racing to the top, JIBS 47: 1032–1057; P. Christmann & G. Taylor, 2006, Firm self-regulation through international certifiable standards, JIBS 37: 863–878; P. Madsen, 2009, Does corporate investment drive a “race to the bottom” in environmental protection? AMJ 52: 1297–1318. 92. D. Crilly, M. Zollo, & M. Hansen, 2012, Faking it or muddling through? AMJ 55: 1429–1448; K. de Roeck, A. Akremi, & V. Swaen, 2016, Consistency matters! JMS 53: 1141–1168; C. Wickert, A. Scherer, & L. Spence, 2016, Walking and talking CSR, JMS 53: 1169–1196. 93. T. Waldron, C. Navis, & G. Fisher, 2013, Explaining differences in firms’ responses to activism, AMJ 38: 397–417; M. Zhao, S. Park, & N. Zhou, 2014, MNC strategy and social adaptation in emerging markets, JIBS 45: 842–861. 94. M. Delmas & D. Colgan, 2018, The Green Bundle, Stanford, CA: Stanford Business Books. 95. D. Bosse & R. Phillips, 2016, Agency theory and bounded self-interest, AMR 41: 276–297; S. Buchanan & J. Marques, 2018, How home country industry associations influence MNE international CSR practices, JWB 53: 63–74; K. Jackson, 2016, Economy of mutuality, JBE 133: 499–517; T. Lyon et al., 2018, CSR needs CPR, CMR 60: 5–24; C. Marquis & Y. Bird, 2018, The paradox of responsive authoritarianism, OSc 29: 948–968; W. T. Selmier, A. Newenham-Kahindi, & C. Oh, 2015, Understanding the words of relationships, JIBS 46: 153–179. 96. J. Aldy & G. Gianfrate, 2019, Future-proof your climate strategy, HBR May: 87–97; BW, 2014, If it’s good enough for Big Oil … November 17: 10–11. 97. T. Jones, T. Donaldson, R. E. Freeman, J. Harrison, C. Leana, J. Mahoney, & J. Pearce, 2016, Management theory and social welfare, AMR 41: 216–228.

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Part 4 Integrated Cases IC 1 IC 2 IC 3 IC 4 IC 5 IC 6 IC 7 IC 8 IC 9 IC 10 IC 11 IC 12 IC 13 IC 14 IC 15 IC 16 IC 17 IC 18 IC 19

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The Consulting Industry The Asia Pacific Airline Industry LEGO’s Secrets BMW at 100 Occidental Petroleum (Oxy): From Also-Ran to Segment Leader Tesla’s CEO Quits Presidential Councils Legalization of Ride-Hailing in China The Final Frontier of Outsourcing to India Volkswagen’s Emissions Scandal Private Military Companies SnowSports Interactive: A Global Start-Up’s Challenges Business Jet Makers Eye China Carlsberg in Russia Enter North America by Bus Etihad Airways’ Alliance Network Jobek do Brasil’s Joint Venture Challenges Saudi Arabia in OPEC: Price Leader in a Cartel AGRANA: From a Local Supplier to a Global Player Nomura’s Integration of Lehman Brothers Cyberattack on TNT Express and Impact on Parent Company FedEx Shanghai Disneyland Samsung’s Global Strategy Group Corporate Governance the HP Way When CSR Is Mandated by the Government in India Wolf Wars

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342  PART 2  BUSINESS-LEVEL STRATEGIES

Integrative Case

1

The Consulting Industry1 How do the five forces affect the consulting industry? What are some of its challenges beyond the five forces? Mike W. Peng, University of Texas at Dallas Many strategy students are interested in consulting— specifically, strategy consulting. Therefore, a deep understanding of the five forces affecting the consulting industry is a must. Before proceeding, it is useful to dispel the notion about “pure” (or “classical”) strategy consulting, which hardly exists any more. Even at the Big Three firms—McKinsey, Bain, and Boston Consulting Group (BCG)—revenue from such traditional strategy consulting, which used to be their meat and potatoes, decreased from 20% of total revenue in 2013 to 10% in 2019. Therefore, for the purposes of this case, “consulting” refers to broader management consulting.

Sellers and Buyers Universities broadly or business schools specifically can be viewed as sellers to consulting firms (also known as consultancies). Because consulting firms generally pay well and offer a glamorous career, they often attract top applicants. In 2018, 800,000 applicants went after 8,000 jobs at the industry leader McKinsey. Of course, individual applicants can be viewed as sellers of their services. Given the eagerness to compete for jobs in consulting firms, the bargaining power of universities, business schools, and applicants as sellers is not a significant cause of concern for the industry. On the other hand, buyers (hereafter “clients”—­using the consulting industry language) enjoy significant bargaining power. From the beginning of the consulting industry, clients have always wondered about their return on investment (ROI). The opacity of consulting work and the typical refusal to be held accountable for the effectiveness of implementation after recommendations are made by consultants have made ROI difficult to assess. Just like consulting firms evolve, clients also evolve and many have

hired ex-consultants. The Big Three alone have a small army of 50,000 “alumni,”2 and many now work for former client firms. It is no surprise that many consulting alumni, now corporate executives, are spearheading the efforts to reduce the scope of their firms’ engagements with consultants and migrate more of such outsourced work in-house. Traditional engagement often uses a billable hour model, whose costs may be difficult to control. Bringing more work in-house, headed by former consultants who possess some expertise in the work consultants perform, can allow firms to better control costs. Even when these firms do need help from consultants, corporate executives with earlier consulting experience often have enough knowledge to identify the most appropriate consulting firms, as opposed to relying on the largest name-brand firms that may not necessarily have the most appropriate expertise but will certainly charge the highest fees. Overall, clients increasingly leverage their bargaining power by either bringing some work in-house or demanding a more transparent understanding of ROI for consulting engagements.

Rivalry Rivalry for high-end clients primarily takes place among the Big Three. Their primary value proposition is (1) the knowledge and insights packed in their advice to clients, and (2) the prestige and legitimacy they bring to clients, which may have to make some challenging, high-stakes strategic decisions. It was the Big Three—primarily McKinsey, which was founded in 1926—that helped diffuse the idea that management was a profession rather than a mere trade. They thrive on brainpower more than specialist industry knowledge or mere common sense. Leading consultants who have awesome brainpower can

1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 2. Like law firms and universities, consulting firms use an “up or out” employment system. Junior consultants who fail to become partners need to exit the consulting firms, looking for employment elsewhere. 342

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make boards and top management teams (TMTs) feel more comfortable to proceed with high-stakes decisions. Knowing their power to bring legitimacy, consulting firms work closely with boards and TMTs in order to gain a better understanding of their preferences and constraints prior to delivering the “appropriate” recommendations. A well-known “secret” of consulting firms is to get nonroutine, cutting-edge engagements that can teach them a great deal—all paid for by the first clients on such problems—and then to market and reuse such learning in future engagements across multiple clients. Another “secret” to make money is their business model of leverage by deploying a small army of (relatively) lowly paid junior consultants. The higher the ratio of junior consultants to senior consultants, the more lucrative an engagement becomes. At McKinsey, most senior consultants who are partners can fetch $1.5 million a year. Therefore, the pressure to generate revenue is intense. Clients that believe they are getting “gray hair” consulting may not know that most (and sometimes all) of the underlying work is performed by “brains” consulting done by junior consultants. In addition to mainstream solution-shop consulting firms (such as the Big Three famed for “undefined” problems), there are specialized value-added process service providers, which address problems of defined scope with standard processes. The Big Four accounting firms (Deloitte, EY, KPMG, and PwC) and leading information technology (IT) firms (such as Gartner, IBM, Infosys, SAP, and Tata Consulting Service) belong to this category. There are also a number of boutique shops in specialized areas. Examples include (1) executive search (headhunting) and leadership coaching consultants (such as Spencer Stuart, Heidrick & Struggles, Russel Reynolds Associates, Egon Zehnder, and Korn Kerry—known as “SHREK” firms), (2)  executive compensation consultants (such as Frederic W. Cook, Pearl Meyer, and Mercer), and (3) corporate-governance proxy advisors (such as Institutional Shareholder Services [ISS]). Hard lines separating different segments within the consulting industry do not exist. Starting in 2010, the Big Four accounting firms entered the core strategy consulting market, and elbowed Monitor Group—a  relatively “young” strategy consulting firm that was co-founded by Harvard strategy guru Michael Porter in 1983—into Chapter 11 bankruptcy in 2012. Deloitte then bought

it out for $120 million and turned it into Monitor Deloitte in 2013. PwC acquired PRTM in 2011 and Booz & Company in 2013—now Strategy&. EY followed the trend by acquiring Parthenon Group in 2014 and the European businesses of OC&C in 2016 and 2017—now all under the EY-Parthenon brand. In response, the Big Three have significantly expanded their technology consulting, focusing on lower-margin but longer-term engagements. For example, starting in 2007, McKinsey offered McKinsey Solutions, a technologybased analytics software that can be embedded at clients, providing ongoing engagements outside the traditional one-off, project-based model. Overall, “pure” (or “classical”) strategy consulting has become, in the words of the Economist, a “side dish,” accounting for about 10% of the Big Three’s revenue in 2019.

New Entrants Unlike law and medicine, consulting is an unregulated profession. Any individual or company can enter at will. Recent examples include BTG, CEB, Eden McCallum, Gerson Lehman Group, and IDEO. These firms provide online marketplaces that cater to the increasing number of freelance consultants. In addition, the steady rise of data analytics is a certainty. Sophisticated data technology has already automated average costing and pricing analysis. The speed and quantifiable output of such technology can reduce the importance of brands such as the Big Three in (traditional) strategy consulting and the Big Four in (traditional) accounting. For example, enterprise analytics player Beyond Core can automatically crunch a vast amount of data, capture statistically significant patterns, and present such insights in an animated briefing. Such big-data-based capabilities can eat junior consultants’ lunch. In 2016, Beyond Core was acquired by Salesforce for $110 million. Overall, (traditional) strategy consulting firms such as the Big Three have been good at bundling—putting a lot of different consulting services into a single, high-priced package. The new entrants with deep and specialized capabilities—in combination with clients’ rising interest in containing consulting engagement costs and their enhanced ability to evaluate the true value of each service (discussed earlier)—are eating away some of the lower-end, more routinized work, resulting in significant disruption 343

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344  Part 4  Integrated Cases

to the industry. Some of the basic work under the cloak of “high-end” consulting can be routinized, commoditized, and even automated.

Substitutes A number of serious substitutes exist for highly paid consultants from leading consulting firms. For clients, a simple substitute is: do not engage consultants. In executive search, since a majority of client firms end up hiring an internal candidate for a top job such as CEO or board member, some clients wonder why they need to spend one-third of the chosen candidate’s first-year compensation (including any bonuses) on one of the SHREK search firms. As CEO pay skyrockets, such executive search fees can easily exceed $1 million. Another substitute is a dedicated, in-house strategy group maintained by some large multinationals. Samsung, for example, is famous for nurturing a Global Strategy Group, consisting of non-Korean MBA graduates who have previously worked for world-class firms such as Apple, Goldman Sachs, and Intel. Samsung deploys Global Strategy team members on internal consulting projects for its various units around the world. Many individuals are given an opportunity to take on a leadership role in a high-level consulting project much earlier than a typical consulting career provides (see Integrative Case 22: Samsung’s Global Strategy Group). A third substitute is freelance consultants, who have diverse skills and experiences but do not have to shoulder the overhead costs for “gray hair” seniors and expensive downtown office space. For example, in 2003, in a project assessing UK competitiveness, the British government engaged Monitor Group, which delivered a report first authored by Michael Porter.3 In 2013, after Monitor Group went bankrupt, in a new project assessing UK competitiveness, the British government discovered your author, whose more reasonable consulting fee saved a bundle of money for UK taxpayers.4

Challenges In summary, of the five forces affecting the consulting industry, only one—bargaining power of sellers—is relatively weak or nonthreatening. Four other forces— bargaining power of buyers, rivalry among competitors, threat of new entrants, and threat of substitutes—are strong. This analysis helps us understand why this industry that has long helped others sidestep strategic threats is itself facing some disruptive strategic threats.

Beyond the five forces analysis, which is a cornerstone of the industry-based view, the resource-based view would obviously highlight the necessity for consulting firms to develop new capabilities (such as McKinsey Solutions). Left unexplored thus far, but strategically important, is the institution-based view, which focuses on the impact of formal and informal institutions. Part of the value that consulting firms deliver is a reputation built not only on technical excellence but also on integrity and legitimacy. Consulting firms whose integrity and judgments are questionable will have a hard time winning new clients. One example is Monitor Group’s engagement with Muammar Gaddafi’s Libyan government in 2005–2007 to not only assess the state of Libya’s economy, but also ghostwrite a book to be published in Gaddafi’s name, which would glorify this notorious leader. The book was never completed, and Monitor Group later stated that the project had been a “serious mistake on our part.” This fiasco contributed to Monitor Group’s collapse in 2012. In another example, in 2012, a former managing partner of McKinsey was convicted of insider trading. In 2016, McKinsey was engulfed in a scandal in South Africa after it worked with a politically disgraced family that allegedly “captured” the state and engaged in significant corruption. Its new managing partner, in position since 2018, had to repeatedly apologize for such misdeeds. From an informal institutions standpoint, such scandals, which damage the integrity, reputation, and legitimacy of consulting firms, did not help win clients. However, a defining characteristic of consulting firms is agility. While some individual firms have failed or disappeared, some have successfully transformed themselves throughout their history. For an industry dating back to 1886—when Arthur D. Little (which is still active in 28 countries) was founded—being agile about the new threats and opportunities is part of its DNA. As of this writing (April 30, 2020) when the world is engulfed in the coronavirus crisis, how to manage in lockdown conditions, how to deal with pandemics, and how to manage “black swan” (low probability) risks going forward are rapidly becoming a new area of practice in the consulting industry. Sources: (1) Arthur D. Little, 2020, Leading businesses through the COVID-19 crisis, www.adlittle.com; (2) C. Christensen, D. Wang, & D. van Bever, 2013, Consulting on the cusp of disruption, Harvard Business Review October: 107–114; (3) Economist, 2013, The future of the firm, September 21: 72; (4) Economist, 2019, Rethinking McKinsey, November 23: 62; (5) Economist, 2020, Take me to a leader, February 8: 58–60; (6) R. McGrath, 2019, The trouble with consulting, August 21: www. ritamcgrath.com; (7) Monitor Group, 2011, Statement by Monitor Group concerning Libya, March 24.

3. M. Porter & C. Ketels, 2003, UK Competitiveness: Moving to the Next Stage, London: Department of Trade and Industry. 4. M. Peng & K. Meyer, 2013, Winning the Future Markets for UK Manufacturing Output, London: UK Government Office for Science. In addition, your author has consulted for multinationals (such as AstraZeneca, Berlitz, Ericsson, KOSTA, Nationwide, SAFRAN, and Texas Instruments) and governmental and international organizations (such as Canada Research Chair, National Science Foundation, and The World Bank).

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Integrative Case 1  The Consulting Industry  345

Case Discussion Questions 1. Of the five forces affecting the consulting industry, which one is the most significant? 2. Which segment of the broad consulting industry will provide the best likelihood of success for a potential new entrant? 3. Based on Question 2, how would you prepare yourself to have the right combination of educational

qualifications and practical experiences in order to compete successfully in that segment? 4. As a consultant to the consulting industry, please advise how consulting firms can best prepare themselves for competition in the postcoronavirus environment.

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346  PART 2  BUSINESS-LEVEL STRATEGIES

Integrative Case

2

The Asia Pacific Airline Industry1 How do the five forces affect the international competition in the Asia Pacific airline industry? Can they survive the onslaught of the coronavirus? Mike W. Peng, University of Texas at Dallas From India to New Zealand, from Indonesia to Japan, the airline industry in the Asia Pacific region is vast. It carries 30% of the world’s passenger traffic and 40% of the cargo traffic and is growing fast. In this industry, competition is tough, discounting often a must, and profit margin thin. With the exception of Hong Kong, Macau, and Singapore, where there is no domestic competition, in every country the industry can be broadly divided into a domestic segment and an international segment. How does international airline competition unfold in this region? This is the focus of this case.

Substitutes and Suppliers Viewed from a five forces framework, as a majority of international flights in this region fly over oceans, no viable substitutes exist for aircraft. The pickings of suppliers are slim. The menu consists of either Airbus or Boeing. To minimize costs, most airlines prefer one of these two suppliers over the other. Larger airlines enjoy stronger bargaining power due to their larger quantities of purchase. If they refuse to support an aircraft model, that model cannot survive long. A recent example is the Airbus A380, the world’s largest jetliner, which can carry 525 passengers. Launched in 2007 by Singapore Airlines, the A380 production would be stopped in 2021 due to a lack of customer demand. (In contrast, A380’s archrival, Boeing 747, launched in 1970, is still in production.)

Customers Customers are enjoying a great deal of bargaining power. With online price comparisons at their fingertips, they often reap the best deals. Since 2014, the average fare for Los Angles–Seoul flights dropped 20% and that for San

Francisco–Beijing flights 40%. In 2018, United offered $715 to fly from New York to Bangkok via Hong Kong. But China Eastern—making one stop in Shanghai—lured passengers away with $570, a 20% discount.

Rivalry Among Incumbents The most relevant competitive force is the rivalry among incumbents. Competitive battles are typically waged among large, full-service carriers such as Air China, Air India, Japan Airlines, Korean Airlines, Malaysian Airlines, and Qantas. There are intense dogfights jockeying for positions, usually with one or a few hub cities as their home base or sphere of influence. Sometimes, up to a dozen airlines compete on a single popular route such as Hong Kong–Shanghai. While China currently has the world’s second largest aviation market (domestic + international), the Chinese are already the world’s largest group of international travelers. In 2016, the number of international routes from China jumped 35%, reaching 660. Air China, China Eastern, and China Southern—the Big Three—have captured a lion’s share (about 60%–70%) of such expanding demand from international travelers from China. In addition to traditional gateway cities such as Beijing, Shanghai, and Guangzhou, Chinese airlines have launched a series of international flights from lesser-known cities such as Chengdu and Wuhan to destinations throughout the Asia Pacific and beyond. Using low fares, they have also been increasingly attracting passengers not traveling from or going to China. For example, travelers between Europe and Australasia typically make a stop in Singapore or Dubai. Now many of them make a stop in Guangzhou thanks to China Southern, Asia’s largest airline.

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New Entrants The biggest threats to incumbents are the new entrants. At least three groups are interested in eating incumbents’ lunch. The first is the low-cost (discount) carrier such as AirAsia in Malaysia, IndiGo in India, and Virgin in Australia. They started by challenging full-service (legacy) airlines at home with short-haul, domestic flights. Salivating for the spoils of long-haul, international routes, they have now aggressively forayed overseas. A second group is three Middle East-based supercarriers: Emirates, Etihad, and Qatar. Positioning Dubai (for Emirates), Abu Dhabi (for Etihad), and Doha (for Qatar) as the only stop for passengers going from Asia to Africa or from Australasia to Europe, these three new entrants are “superconnecting” airlines. A vast majority of their passengers do not travel from or to these airlines’ bases, but make a stop there. In fact, Chinese airlines’ recent interest in luring connecting passengers is a page taken from the playbook of the three superconnecting airlines from the Middle East. A third group is three US giants, American, Delta, and United, which are eager to tap into the strong demand in the Asia Pacific. In the last decade, American launched nonstop daily services from its hub Dallas–Fort Worth to Beijing, Hong Kong, Shanghai, and Sydney. Before the recent expansion of international passengers from China, US airlines used to dominate the US–China routes. Because most American travelers fly on US airlines and most Chinese ones fly on Chinese airlines, now Chinese airlines dominate as far more Chinese travel to the United States than the number of Americans traveling to the other side. By 2021, Chinese would probably become the top visitors to the United States among visitors from all countries. To share in the bounty, US airlines have sought to strengthen ties with Chinese carriers, such as United’s collaboration with Air China in the Star Alliance network. Going beyond their collaboration in the Sky Team network, Delta in 2015 made a $450 million investment in China Eastern for a 4% stake as a strategic investor.

The Bright Future According to International Air Transport Association (IATA), a global industry association, the Asia Pacific will be the biggest driver of demand from 2015 to 2035, with more than half of the world’s new passenger traffic coming

from the region. By 2024, China will displace the United States to become the world’s largest aviation market (defined by traffic to, from, and within the country). While the United States will become the second largest market, India will replace Britain for the third place in 2025, whereas Indonesia and Japan will be ranked fifth and seventh, respectively. ​Of the five fastest-growing markets in terms of additional passengers per year over the forecast period, four will be from Asia. These top-five markets (in descending order) are China, the United States, India, Indonesia, and Vietnam.

Coping with the Coronavirus While the prospects for the Asia Pacific airline industry in the long run are bright, the situation in the short run is bleak. The most relevant competitive forces do not seem to come from any of the five forces, but come from a “black swan” (low probability) event: the coronavirus. Thanks to the virus, starting in January 2020 air traffic plummeted first within China. Starting in February, air traffic worldwide essentially came to a standstill. The virus already claimed a major victim in the Asia Pacific airline industry. In February, Hainan Airlines, the fourth largest in China, collapsed. To keep flying, Hainan had to be bailed out by Hainan Provincial Government and China Development Bank. (Elsewhere, in March 2020, Alitalia was similarly taken over by the Italian government to keep flying, and Flybe, a regional airline in Britain, entered bankruptcy and ceased flying.) Based on a scenario of lifting severe travel restrictions after three months, IATA reported that passenger demand in 2020 in the Asia Pacific region to be reduced by 35%– 45%, with a combined revenue loss of $88 billion. Fighting for survival, airlines “would need financial relief urgently to sustain their businesses through this volatile situation,” said Conrad Clifford, IATA’s Regional Vice President, Asia-Pacific. Looking back in history, the airline industry has always bounced back from every crisis it has experienced. After the 2003 SARS outbreak, which caused Asia Pacific airlines to lose $6 billion, travel returned to normal within nine months. One glimmer of hope in the midst of the coronavirus devastation was the oil price war between Saudi Arabia and Russia. In January 2020, crude hovered above $70 a barrel. By March, it fell to $30. This would 347

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348  Part 4  Integrated Cases

be a tremendous lift for airlines, because fuel burn was one of their biggest expenses. While the weak players were washed out by the virus, would the rest of the industry regain altitude? Sources: (1) Association of Asia Pacific Airlines, 2015, Competitive challenges and growth dynamics, presentation, aapaairlines.org; (2) Australian Aviation, 2017, Fleet management: Qantas looks to Asia for its A380, July: 26–29; (3) Bloomberg Businessweek, 2016, China challenges the giants with low fares, December 19: 22–23; (4) Bloomberg Businessweek, 2020, Will airlines regain altitude? March 16: 38–39; (5) Economist, 2018, Now boarding, April 7: 56–57; (6) Economist, 2018, Dragons fly, April 7: 11–12; (7) Economist, 2018, Prepare for landing, December 8: 85; (8) International Air Transport Association (IATA), 2015, Asia Pacific leads 20-year passenger demand forecast, www.iata.org; (9) IATA, 2020, More Asia-Pacific states urgently need to support their industry, April 3: www.iata.org

Case Discussion Questions 1. Pick a major Asia Pacific country such as Australia, China, India, Indonesia, Japan, or Korea. Identify how incumbents fight new entrants. Do the incumbents make the right strategic choices? 2. For the majority of the airlines mentioned in the case, do they use a cost leadership strategy or a differentiation strategy? Why is such a strategy popular? 3. What airlines will be the winners and losers in the postcoronavirus environment?

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Integrative Case

3

LEGO’s Secrets1 From a small town in rural Denmark, LEGO has become the world’s largest toy maker by revenue, with one of the most recognizable brands of toys. What are its secrets for success? Mike W. Peng, University of Texas at Dallas LEGO is everywhere—toys, games, books, magazines, competitions, retail stores, theme parks, and now movies. If all of the approximately 400 billion colorful interlocking bricks ever produced by LEGO were to be divided equally among the world’s population, each person would have 86 bricks (!). Fortune magazine half-joked that “at least ten billion are under sofa cushions and three billion are inside vacuum cleaners.” By itself, a single LEGO brick is lifeless. But snap two of these plastic blocks together, and suddenly they take on a life of their own. A world of nearly infinite possibilities opens up. Igniting the imaginations of millions of children and adults around the world, the little LEGO brick has become a universal building block for fostering creativity. Accolades such as “the toy of the (20th) century” and “the most popular toy of all time” are routine for LEGO. Around the world, LEGO fan clubs abound, often with their own conferences and competitions. “With the possible exception of Apple, arguably no brand sparks as much cult-like devotion as LEGO,” noted one expert. What are LEGO’s secrets? Relentless innovation and experimentation are one of the foremost characteristics of LEGO. Derived from the Danish phase leg godt (“play well”), LEGO was founded in 1932 by Ole Kirk Christiansen, a carpenter from Billund, Denmark—a rural town three hours from Copenhagen. (LEGO Group is still headquartered in Billund today.) As a firm self-styled “to stimulate children’s imagination and creativity” and “to nurture the child in each of us,” LEGO is known for its willingness to entertain numerous experiments in order to capture the hearts and minds of its fickle primary customers—boys age seven to 16—as well as the wallets of their parents. You may not know that LEGO started out making wooden toys. In 1947, it became the first Danish toymaker to experiment with plastics, even

though trade magazines predicted at the time that plastics would never replace wooden toys. The now-ubiquitous LEGO brick was not the company’s original invention. Actually, it was based on “self-locking bricks,” which were patented in Britain in 1939 and released to the public domain in 1947. LEGO tinkered with the brick, and initial efforts were not successful. The bricks snapped together, but could not be separated easily. LEGO continued to experiment, eventually hitting a stud-and-tube coupling design that the company patented in Denmark in 1958. When a child snapped two bricks together, they would click into place and stick together. The two bricks would stay together until separated with an easy tug. Because such bricks would not come apart, kids could build from the ground up, leveraging what LEGO continues to call “clutch power.” While the brick proved to be one of the toy industry’s greatest innovations, LEGO’s experiments marched on, with numerous hits and also numerous misses in the six decades since the finalization of the basic brick design. Another LEGO hallmark is insisting on excellence. Coming from the founder, “Only the best is good enough” is a company motto engraved on a plaque that graces the entrance to LEGO Group headquarters’ cafeteria even today. The seemingly simple tight fit of two bricks—and their easy separation—calls for extremely precise manufacturing. Because the size of each brick is so tiny, misalignment in the range of a few millimeters can easily create misfit when bricks are stacked together. Competitors can produce LEGO look-alikes that tolerate higher levels of variations, but kids often quickly figure out that LEGO is the best after playing with competing products for a short while. This is not to say LEGO’s quality is perfect. On average, 18 out of one million bricks produced fail to meet LEGO’s quality standards and have to be tossed. In addition to

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350  Integrative Case 3  LEGO’s Secrets

tight fit and easy separation, LEGO bricks are also known for being virtually indestructible. More than half a million people (mostly parents) have liked the Facebook page “For those who have experienced the pain caused by stepping on LEGO.” LEGO is famous in the business world for generating a system—not merely a product. Long before the days when computer programs were supposed to be backward compatible (a new version of Windows must allow users to open old files), LEGO made its bricks backward compatible— new bricks would click with old bricks of the 1950s vintage. As a result, kids (and adults) can mix and match old and new sets, and the LEGO universe can grow exponentially. Likewise, the bewildering array of new LEGO gadgets and experiences—such as board games, online games, competitions, books, magazines, theme parks, retail stores, and movies—unleash a powerful and mutually reinforcing ecosystem (or product family) centered on the brick. Being privately held enables LEGO to sacrifice short-term profit to supply building blocks for long-term growth. Given the current slowdown in developed economies, LEGO is now focusing on China and India. Between 2017 and 2019, it opened 90 LEGO stores in China, enjoying strong, double-digit growth. It is a lot easier to persuade parents who enjoyed playing LEGO themselves as kids—as often is the case in developed economies. But in emerging economies, LEGO is often trying to attract first-generation users. To promote interest in China, LEGO has developed three toy sets specifically for China—the first time it has done that for any

country. With a 4.5% market share, LEGO has become the number-one player in the toy industry in China (not including video games). It is also planning to open its first store in India in 2020, endeavoring to replicate its success in China. Of course, numerous other secrets reside within LEGO, each contributing to its success. Dozens of books and hundreds of articles have been written, slicing and dicing LEGO in a variety of ways in order to probe its secrets. In the end, what exactly these secrets are remain elusive. Sources: (1) The author’s interviews of LEGO customers and store personnel in Copenhagen and Dallas; (2) 1843, 2019, Brick flicks, February: 18–22; (3) Bloomberg Businessweek, 2011, Lego is for girls, December 19: 68–73; (4) Economist, 2013, Lego in Asia, November 16: 72; (5) Economist, 2014, Unpacking Lego, March 8: 71; (6) Economist, 2019, Lego v. Barbie in China, July 27: 56; (7) D. Robertson, 2013, Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry, New York: Crown; (8) Wall Street Journal, 2019, LEGO sacrifices profit to supply building blocks for future growth, September 4: B5.

Case Discussion Questions 1. From a VRIO standpoint, what are LEGO’s resources and capabilities that contribute to its success? 2. From an industry-based view, how would you characterize the five forces governing competition in the toy industry? 3. What are some of LEGO’s weaknesses and potential sources of concern?

350

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Integrative Case

Integrative Case 4  BMW at 100  351

4

BMW at 1001 BMW celebrated its 100th anniversary in 2016. As a global premium brand and market leader, where should BMW set its priorities and allocate its resources—especially R&D investments—to lead the industry in the digital age? Klaus Meyer, Ivey Business School

In 2016, BMW celebrated its 100th anniversary. With changes in digital technology, lifestyles, and regulatory requirements, the car industry faces the challenge that people of the future may no longer view individually owned cars as their main way to move around. As a global premium brand and market leader, BMW aims to be at the forefront of these technology-driven revolutions. It has positioned itself as a brand for safe and sustainable individual mobility of premium quality. Yet, where should BMW set its priorities and allocate its resources—especially research and development (R&D) investments—to lead the industry in the digital age? Who should it partner with, and for which initiatives?

One Hundred Years Young Bayerische Motoren Werke (BMW) was founded in 1916 as an aircraft engine manufacturer. In 1928, it entered the automotive industry by acquiring Fahrzeugfabrik Eisenach. In 1961, it entered the modern automotive industry with the BMW 1500. Since the year 2000, BMW has positioned itself as a global premium car brand. By 2016, BMW’s product portfolio covers the BMW, Mini, and Rolls-Royce brands. Mini is an icon with British roots in the premium small car segment, whereas Rolls-Royce is an ultraluxury brand with its own 110 years of history. The BMW brand serves a broad range of premium customers, including BMW-M for high performance vehicles with the flair of motorsport and BMW-i for energy-efficient cars with electrical drivetrains and lightweight construction. The BMW Group operates in more than 150 countries, employing 130,000 people worldwide. BMW’s car sales network consists of 3,310 BMW, 1,550 MINI, and 140 RollsRoyce car dealerships. Its research and innovation network spans 13 locations in five countries, whereas its production

network comprises 30 locations in 14 countries. At  its historical Munich location, BMW produces the BMW 3 and BMW 4 series, as well as diesel and petrol engines. The most modern plants are in Leipzig (Saxony, Germany), Spartanburg (South Carolina, USA), and Shenyang (Liaoning, China). Its largest factory in Spartanburg produces sport-utility vehicles (SUVs) for global markets. In recent years, BMW has become the largest automobile exporter in  the United States, exporting 70% of its cars made in Spartanburg and generating US export revenues of $10 billion every year. BMW Group sales reached 2.46 million vehicles in 2017, compared to 2.29 million sold by its archrival MercedesBenz and 1.88 million by Audi. BMW’s global revenue grew 10% in 2017 to $12 billion with an EBT margin of 10.8%. Of revenues, about 6.2% were invested in R&D. In 2015, BMW updated its strategy with a new vision statement: “We are Number ONE. We inspire people on the move. We shape tomorrow’s individual premium mobility.” BMW aimed to transform from an automobile manufacturer to a mobility service provider by exploiting opportunities created by the Internet of Things (IoT), digitalization, and new energy vehicles.

Innovations in Mobility Rapid advances in technology, especially the use of big data and online connectivity, are creating new opportunities for changing how people interact with their cars. Yet, the bright new world of connectivity and artificial intelligence also brings the prospect of convergence across industries. Critical new technologies are developed not only by car brands, but also by technology companies like Google, Apple, Alibaba, and Baidu; by suppliers like Bosch, Continental,

1. © Klaus Meyer. Reprinted with permission. 351

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352  PART 2  BUSINESS-LEVEL STRATEGIES

and Denso; and by start-ups like Tesla, Borgvard, and Neo. Control over future technologies and platforms entailed the possibility of major shifts in bargaining power and profit potential in the car industry.

Connected Cars New forms of data exchange between vehicles, drivers, and their environment open opportunities for new types of carrelated services. For example, BMW offers ConnectedDrive, a package of intelligent technologies that integrates driverassistance systems enhancing comfort and safety functions with infotainment and mobility products. Connected cars provide drivers not only with more opportunities for in-car entertainment, but also up-to-date information on shops and services available in the vicinity. Moreover, connecting the car with the manufacturer’s server hub enables real-time performance diagnostics and hence improved maintenance and performance. Car-to-car connections provide, for example, information on road congestion to support route planning. Connectivity-based services also enhance drivers’ experience after they leave the car. For example, ParkNow, an app and web-based service, not only makes the parking space situation in a city more transparent, but also allows users to book their parking space in advance and then guide them to their selected spot. In addition, ConnectedDrive uses an intermodal routing service to find and book public transport or reserve bicycles from Call a Bike—a bike rental system in Germany. In this way, BMW contributes towards increasing intermodal mobility in cities.

New Energy Vehicles Environmental regulation and new technologies push the development of cars with engines other than the traditional combustion engine. BMW launched its first fully electric car, the BMW i3, in 2013 followed by the hybrid BMW i8 in 2014. These models with new standards for energy efficiency through lightweight construction use new materials such as carbon fiber and new battery technology. Innovations developed for the i series are gradually transferred to other car series. By 2017, several BMW models as well as the MINI Cooper Countryman were available in an electrified version, and sales of electrified cars reached 100,000 units. However, uptake of electrical cars in Germany has been slow. A critical barrier to the adoption of electrical cars was the charging infrastructure as drivers want to be sure

they can recharge their car anytime anywhere. BMW aims to overcome this bottleneck with its 360° ELECTRIC service package, which includes recharging both at home with the BMW-i Wallbox and at 38,000 public charging points worldwide. The service also helps to install charging points at their home. Globally, pressures to develop new energy vehicles have arisen especially in China, where regulators require all major car makers to sell a substantive share of the cars as new energy vehicles.

Autonomous Driving Driver-assistance systems already play an important role in the premium segment. Using a variety of sensors, they observe what is happening on the road in order to warn and support drivers. BMW’s personalized digital driving assistance uses state-of-the-art sensor systems to provide early warnings, speed control, and assisted driving on congested roads. For example, the Driving Assistant Plus is a steering and lanecontrol assistant that also enables remote-controlled parking. The lane-control assistant with side-collision protection not only ensures that cars do not leave their lane, but also actively controls the steering wheel to avoid accidents caused by vehicles approaching from the side. In 2016, BMW announced a new collaboration with two leading technology companies to deliver fully self-driving vehicles by 2021. The partnership with Intel and the Israeli computer vision company Mobileye aimed to create an open platform for the next generation of vehicles. The objective was to develop the “iNEXT” as a basis for future fleets of fully autonomous vehicles for both highways and urban environments. However, BMW predicted that steering wheels and pedals would remain in the fully self-driving vehicle in case the driver wanted to be in control. CEO Harald Krüger announced this breakthrough agreement: “With this technological leap forward, we are offering our customers a whole new level of sheer driving pleasure, whilst pioneering new concepts for premium mobility.” A critical technology for automated driving and other connected car services is highly detailed and up-to-date maps. Thus, in 2015, BMW teamed up with Audi and Daimler to acquire from Nokia the map service HERE, which provides maps and location-based data for almost 200 countries in more than 150 languages. They aimed to develop HERE as an independent platform for the automotive industry that is accessible beyond the industry. The

352

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  Integrative Case 4  BMW at 100  353 Integrative Case 4  BMW at 100  353

combination of high-accuracy maps and data from the vehicle’s environment are essential for many of the services envisaged to enhance diving comfort, and autonomous driving in particular. To broaden the shareholder base, additional investors, including Intel, Bosch, and Continental, joined HERE in 2017.

Urban Mobility Systems BMW anticipates that the ways people use cars will change fundamentally over the next decade, especially in urban areas. Individual car ownership will no longer be the norm but will be replaced by business models offering temporary use of cars. Anticipating these trends, BMW partnered with car rental company Sixt to create a joint venture to offer a car-sharing service branded as DriveNow. The service provided shared use of BMW cars, including electric vehicles. By September 2016, DriveNow had a total of 700,000 customers worldwide, more than half of which were in Germany. Since 2015, DriveNow’s car-sharing fleets include the BMW i3—including a lead project in Copenhagen, Denmark, with 400 BMW-i. In 2018, BMW pools its ride-sharing operation with Daimler’s in a mobility services joint venture. BMW also established a research center for urban mobility. This interdisciplinary team has the task of working with cities and local stakeholders to develop and promote solution for urban mobility. New business concepts are to use cars more efficiently by applying new digital technologies and by partnering with local authorities and complementary service providers.

Digitalization of Operations Digital technologies also offer opportunities to revolutionize production processes. In particular, new technologies help to produce more flexibly and efficiently and thus respond more individually to customers. IT-supported technologies can enhance complex workflows by using automated data collection and analysis, flexible robot systems, intelligent tools for staff, and production simulations. Oliver Zipse, a board member with responsibility for production, argued: Digitalization gives us new leeway and greater efficiency in some processes, and this provides a sustainable benefit to our workforce. In the future, people in production will be creators of their work environment to an even greater extent than they are today. Plus, they benefit from the declining share of physically strenuous tasks. Automated data analysis enables major improvements in product quality and operational efficiency. Especially in parts provision and component production processes, connected and automated data provide transparency and safety by recording the flow of goods and providing specific information about the quality of each part. Fully integrated data management helps optimize logistics and production

processes. For instance, data of any individual screw bonding process can be automatically assessed by comparing them to standard process curves to identify potential faults. Any deviations from the standard can then be remedied immediately before affecting the production process.

Human Robot Co-working New generation robots are able to interact directly with humans. Accident risk traditionally associated with workers operating in the vicinity of robots can be eliminated using lightweight designs and sensors that recognize the actions of humans. Thus, no more safety fences are needed. The new robots in particular reduce the strain on workers arising from physically demanding and nonergonomic tasks. Lightweight robots, thus, ensure the same high level of quality throughout, especially for repetitive and tedious tasks. Since 2013, BMW has been using lightweight robots for a variety of tasks, such as fixing the sound insulation to the inside of the doors under precise and steady high pressure or applying adhesive to windscreens. Lightweight robots are integrated into regular production at the plants in Germany (Regensburg, Dingolfing, and Leipzig) and the United States (Spartanburg). Intelligent tools also directly support staff in carrying out their tasks and simplifying complex processes. In a pilot project, BMW’s Munich and Leipzig plants are testing smartwatches that alert workers when a car with special requirements is approaching on the production line. A display light and vibration alarm informs workers of the next process step required—for instance, a different number of screws needs to be fitted. As another innovation, in the Wackersdorf plant an autonomous guided vehicle (AGV) moves parts weighing up to half a ton in the supply logistics hall. Equipped with a wireless transmitter and a digital map, the AGV can find its own way through the complex system of halls. Built-in sensors recognize possible obstacles and stop the AGV if necessary.

Additive Manufacturing BMW’s Rapid Technologies Centre produced the first prototype parts by additive manufacturing in 1991. This technology, popularly known as 3D printing, is especially useful for components that are both highly customized and complex. It is less effective for producing large volumes of standardized parts where scale economies are important. For instance, more than 10,000 additively manufactured parts are built into every Rolls-Royce Phantom. Replacements parts for historical cars are produced with a batch size of one to serve specific maintenance requests. Another important application for 3D printing is new vehicle development, where prototypes can now be built much faster and more cost efficiently. Udo Hänle, Head of Production Strategy, explains:

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354  Part 4  354  Integrated PART 2  BUSINESS-LEVEL Cases STRATEGIES

Additive technologies will be one of the main production methods of the future for the BMW Group—with promising potential. The integration of additively manufactured components into Rolls-Royce series production is another important milestone for us on the road to using this method on a large-scale.

Outlook In view of technological disruptions on many fronts, BMW is facing challenging decisions on how to invest in the future. Standing still is not an option. With limited financial and human resources (compared to high-volume competitors such as Toyota, VW, and General Motors), BMW faces the key challenge of how to set priorities and how to partner with others to develop capabilities and business models for human mobility in the 21st century.

Case Discussion Questions 1. What are BMW’s key resources and capabilities? 2. How has BMW been able to maintain and extend these resources and capabilities for more than 100 years? 3. What are the main competitive threats for BMW in 2016? 4. How do you propose to address these competitive threats?

Sources: (1) Bloomberg, 2017, BMW CEO pleads for free trade after Trump border tariff threat, February 1; (2) BMW, 2017, BMW Group Investor Factbook (version September 2017); (3) BMWBLOG, 2016, BMW uses digitalization to improve processes in production; (4) BMWBLOG, 2016, BMW Group expands use of additive manufacturing processes. (5) CNN Money, 2016, BMW promises fully driverless cars, November 13; (6) Handelsblatt, 2016, BMW fährt allen davon, January 11.

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Integrative Case

5

Occidental Petroleum (Oxy): From Also-Ran to Segment Leader1 How does Oxy grow from poor profitability to a consistent number-one ranking on both Fortune’s “Most Admired” and “Business Sector Ranking” lists? Charles F. Hazzard, University of Texas at Dallas In 1956, when Armand Hammer took over as CEO of a  small company, Occidental Petroleum (Oxy), he had a vision for the future that involved multiple businesses and dramatic growth. By the early 1980s, Hammer had achieved the growth but not the profitability that should have come with it. His search for someone to turn around his company had led him to fire seven presidents over the prior ten years—actions not seen before or since. Finally in 1983, Hammer asked Dr. Ray R. Irani to come in and make Oxy profitable. Irani was highly regarded in the chemical industry, having graduated from the University of Southern California with a PhD in chemistry at the age of 20. He had developed 150 US patents over his career and had been president of Olin Corporation, a smaller, $2 billion chemical conglomerate, when Hammer’s headhunters called. Attracting Irani to a company that Fortune had ranked number one out of the Five “Worst Managed” Companies in the Top 500 in 1982 was a major effort by Hammer and, ultimately, saved his company. In the early 1980s, Irani joined as Executive Vice President, Occidental Petroleum Corporation (NYSE: OXY, the parent company—in short, Oxy); and Chairman and CEO, Occidental Chemical Corporation (OxyChem, a division within Oxy). At that time, Oxy was a $14 billion firm that was a struggling alsoran in the oil industry. By 2013, when Irani retired as CEO, Oxy was consistently ranked number one on both Fortune’s “Most Admired” and “Business Sector Ranking” lists. What happened?

Starting Small In 1983, Irani and his team of three executives who he handpicked from Olin came to Oxy. They were put in charge of OxyChem, which was Oxy’s smallest and least

profitable division. While in most companies, profitimprovement programs are immediately launched in dire situations, OxyChem had no profits to improve. Shown in Exhibit 1, OxyChem was, in fact, in a negative profitability situation. When there are no profits, look for cash flow. In a commodity business, find cash flow and become the lowcost producer. That in fact was Irani’s plan for OxyChem. By 1986, OxyChem had purchased Diamond Shamrock Chemical from Maxxus Energy. Maxxus needed cash. OxyChem wanted to double its chlorine capacity. The deal was good for both sides. Through asset sales, cash-flow improvements, and profits, OxyChem made back the cost of that purchase within 18 months. By 1988, OxyChem was making a much larger deal to buy Cain Chemical that focused on ethylene with a leveraged buyout (LBO) worth roughly $2.2 billion. Ethylene was EXHIBIT 1  Turning Around OxyChem Cash flow

OxyChem (Worst division) 1983

1989

Sales

$1.5 Billion

$5 Billion

Net profit

$(-73) Million

$1 Billion

Reduce BEPs Buy smartly

(Be the low cost producer) (Oxy) Oil: Lowest cost per barrel (find) (becomes) Highest profit per barrel

1. The author thanks Professor Mike Peng for helpful discussions and editorial assistance. The author served as executive vice president, administration, at OxyChem between 1983 and 2000. © Charles F. Hazzard. Reprinted with permission. 355

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an essentially cyclical chemical but highly profitable in predictable cycles. In this case, OxyChem was competing with a much larger company to make the deal to purchase Cain. To purchase Cain, OxyChem quickly dipped into an $8 billion credit line that the banks gave Oxy (the parent company) for Hammer to use for an acquisition if he needed to act quickly. By offering $2.2 billion first, OxyChem was able to leverage its agility as a smaller company. In comparison, the larger company had to go through a capital review committee, which was more time consuming. OxyChem’s net profit from that deal the following year was $1 billion. Fortune ranked the deal in its Top 30 Business Deals for 1988.

Saving the Parent Company Less than two years into Irani’s tenure at OxyChem, Hammer asked him to come to Oxy’s Los Angeles headquarters to save the rest of the company. For any big deals that OxyChem made (such as Cain), Irani led the discussions. But Hammer was satisfied with the game plan and the quality of the management in place at OxyChem. Between 1985 and 1990, Irani worked hard to improve Oxy’s profitability while waiting until 1990, when he took over as CEO, to change the overall mix of businesses for the company. For example, Iowa Beef was the largest operating division (by sales) of Oxy. It had very low profit margins. Fortune categorized companies by whatever product category their largest operating division occupied. This made Oxy a “food company.” Explaining that to security analysts and investors was problematic. By 1990, Hammer had passed away and Irani had become CEO. His first moves were to divest divisions that did not make sense for an oil company (such as Iowa Beef) and to look forward to Oxy’s future as an oil company (Exhibit 2). Among Oxy’s strengths was having the best oil finders in the world. Irani’s emphasis was to harness that and spend capital on finds that would eventually enable Oxy to become the lower or lowest cost producer (see Exhibit 1). As oil prices languished in the late 1990s ($11–$14 per barrel), Oxy had invested in aging oil fields in Texas and California, which was consistent with its goal to get cost per barrel as low as possible. Oxy’s expertise at enhanced

EXHIBIT 2  A 20-year Strategy to Turn Around Oxy

A 20 Year Strategy • 1990s • Dr. Irani takes over as OXY CEO: 1990 • Garage Sale • All cash goes to search for oil • Oil Price Languishes through 1999 ($11 to $14 pb) • 2000s • Oxy cements its place as Low Cost Producer • Oil prices begin to rise • By 2005 – Oxy highest profit per barrel of oil

oil recovery (EOR) positioned Oxy to maximize these opportunities. As the century turned, oil prices began to rise again. By 2005, Oxy was the world’s most profitable oil company with an impressive $20-per-barrel profit (Exhibit 3), tops in the industry.

Argentina and Agility Security analysts preach about and respect “quality of earnings” concerns. While the term wears many hats, dependability of earnings or earnings growth fits most situations. A case in point is Oxy’s withdrawal from Argentina and reinvestment in its home country. Reproduced in Exhibit 4, Irani’s December 2010 presentation to the board was entitled: “Divestment of Argentine Assets, Purchase of New US Assets, Dividend Increase.” In a refreshingly short set of slides, Irani advocated monetizing the value of its Argentine oil for cash ($2.5 billion) and investing that cash into shale oil plays in Texas and North Dakota. In other words, Irani wanted out of Argentina, where its assets could be nationalized at any time. Irani approached a Chinese oil giant, Sinopec, which was charged with acquiring oil as a priority for the Chinese government. In 2010, 15% of foreign direct investment (FDI) in South America was China’s investment in oil, copper, and soy.2

2. Ian James, Associated Press, June 6, 2011. 356

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Integrative Case 5  Occidental Petroleum (Oxy): From Also-Ran to Segment Leader  357  Integrative Case 5  Occidental Petroleum (Oxy): From Also-Ran to Segment Leader  357

EXHIBIT 3  Oxy was Ranked 6th by the BusinessWeek 50 Ranking in 2006

Ray R. Irani, 71 CEO since 1990

6 Occidental Petroleum

Company Info 2005 RANK

6

GET MORE COMPANY INFO

OXY

MARKET VALUE $ MILLION

36,809.9

TOTAL RETURN $ MILLION

(1-YR.) 32.4 (3-YR.) 227.6

2005 SALES $ BILLION

15.2

SALES GROWTH $ MILLION

(1-YR.) 34 (3-YR.) 26.9

LONG-TERM GROWTH EST. %

10.0

NET INCOME $ MILLION

5,272.0

NET INCOME GROWTH $ MILLION

(1-YR.) 102 (3-YR.) 65.3

NET MARGIN %*

34.7

RETURN ON INV. CAPITAL (%)*

28.9

Mel Melcon/Los Angeles Times/Getty Images

SHARE PRICE

98/64 BACK IN THE LATE 1990s, when oil prices 12-MO. HI/LO were low, Occidental’s CEO placed two big P/E RATIO 7 bets, spending just over $7 billion to snap INDUSTRY ENERGY up aging oil fields in Texas and California. Today, with near record prices for crude, those wells have turned Oxy into the world’s most profitable oil company. Last year the Los Angeles outfit managed an impressive $20-per-barrel profit, tops in the industry, according to Deutsche Bank Securities Inc. Lebanese- born Irani is still on the hunt. Last year he pounced on Tulsa’s Vintage Petroleum for $3.8 billion and built up the biggest acreage position in Libya, newly open to American companies after years of sanctions. That nation was the site of Oxy’s largest discoveries back in the day when industry legend Armand Hammer ruled the roost. Irani figures that new projects and acquisitions could boost production to nearly 1 million barrels a day by 2010, a sizable jump from the current 590,000.

Source: http://www.businessweek.com/bw50/2006/6.htm

The strong implication here is that Argentina would be less inclined to nationalize the oil assets of a Chinese company, as opposed to those of an American one. Just getting the value of Oxy’s oil assets out of Argentina was an improvement in the quality of its earnings, because it removed a threat of loss stemming from very real political risk. The withdrawal from Argentina (and sale to Sinopec) was also good timing, because in 2012, Argentina nationalized the oil

company YPF by expropriating 51% of the shares belonging to its majority owner, Repsol, from Spain. The agility that Oxy showed in finding the right buyer (Sinopec) and reinvesting the sale proceeds back into the United States was another improvement in earnings quality, because the investment back home had a high potential for growth and a substantial reduction in risk.

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358  Part 4  358  Integrated PART 2  BUSINESS-LEVEL Cases STRATEGIES

EXHIBIT 4 A Slide from Irani’s Presentation to the Board in December 2012 Discussing the Impact of Assets in Argentina on the Quality of Earnings

Impact of Transactions • These new acquisitions and the sale of Argentina will:* – be immediately accretive to our earnings, ROCE and cash flow after capital; – provide greater certainty in achieving both our short-term and long-term average annual production growth outlook of 5 to 8%; – increase the domestic weighting of our Oil and Gas operations; – not materially alter the mix between our oil and natural gas reserves or production. • These properties, combined with acquisitions completed earlier this year, will more than replace the production from the sale of Argentina • We expect that each of these new acquisitions together with future drilling, potential exploration and consolidation opportunities in these areas, over time, will grow to 50+ mboe/d *NY Times, “DealBook,” December 2010, Andrew Ross Sorkin

Oxy Today Few CEOs of top 500 companies stay in their positions for 20 years or more. Irani was one of those. Thanks to a massive effort to divest noncore assets when he took over in 1990 and an emphasis on capital spending to find oil and gas throughout the 1990s, Oxy was positioned to reap record profits as the new century began and oil prices went back up. Over the five-year period between 2001 and 2005, Oxy’s total debt decreased 53% while oil and gas production increased 23%. Although Oxy paid dividents every year since 1975, between 2001 and 2005, it paid $2 billion in dividends to stockholders for a total increase in shareholder value of $22.6 billion.3 Overall, the Oxy turnaround and growth strategy between 1985 and 2010 was the most successful in its history. In the decade from 2010 to 2020, both the oil industry and Oxy saw substantial changes. In 2011, Irani retired and was succeeded by a woman who had spent her entire career at Oxy: Vicki Hollub. She became the first female CEO of a major oil company. A mid-decade (2014 to 2016) oil price depression ($120 per barrel down to $26 per barrel) saw more than 175 companies go bankrupt. Normally, these cycles lead to consolidations. For example, Exxon bought Mobil in 1998, and Chevron acquired Texaco in 2000. In 2019, after lengthy negotiations Oxy entered into a deal to buy Anadarko (see Exhibit 5). However, at the last

EXHIBIT 5  The Occidental–Anadarko Deal An occident waiting to happen Energy deals, target value including net debt, $bn

Market capitalisation, May 7th 2019, $bn Chevron

Concho resources

Anadarko 225.3

44.6

38.1

Occidental

24.9

Pioneer natural resources

Share prices, April 1st 2019=100 Chevron bid

Occidental bid

21.3

Occidental revised bid

180

Buyer

Target

Year

Royal Dutch

Shell

2004 95.4

Value

Exxon

Mobil

1998 85.1

Shell

BG Group

2015 81.0

Occidental

Anadarko

2019 57.0

Total

Elf Aquitane 1999 55.3

BP

Amoco

1998 52.7

Chevron

Texaco

2000 43.3

160 January 31st 2014=100 140

175

S&P 500 ETF*

150

120

125

100

1

8

April

15

22

29

6 May

2019 Sources: Bloomberg; Datastream from Refinitiv

E&P† ETF*

Brent crude

100 75 50

80 2014

15

16

*Exchange-traded fund

17 †Exploration

18

19

25

and production

Source: Economist, 2019, The bidding war for Anadarko, May 11: 54. 3. Oxy proxy 2006.

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Integrative Case 5  Occidental Petroleum (Oxy): From Also-Ran to Segment Leader  359 Integrative Case 5  Occidental Petroleum (Oxy): From Also-Ran to Segment Leader  359

minute Chevron jumped in with a higher bid: $33 billion plus debt. To save the deal, Hollub made two trips. The first trip was to Paris where TOTAL agreed to buy $8.8 billion in North African oil and gas assets owned by Anadarko the minute the Oxy acquisition of Anadarko was finalized. This cut down on Oxy’s debt immediately. The second trip was to Omaha, Nebraska, where Warren Buffet agreed to pay $10 billion for 100,000 Oxy preferred shares, which would receive a generous 8% yearly dividend. As a result, Oxy was able to enhance its offer to Anadarko via borrowing. Specifically, Oxy topped Chevron with a $57 billion offer plus debt. In the end, Chevron lost its bid but walked away with a check for $1 billion as a consolation prize (a penalty the Anadarko board had agreed to if it did not accept Chevron’s bid). While Oxy, through shrewd maneuvers, won the bidding war and accomplished its goals, how it can derive value from this mega deal would remain one of its leading challenges.

Case Discussion Questions 1. What were unique about Oxy’s resources and capabilities that enabled it to reap the highest profit per barrel of oil in this industry? 2. How effective did Oxy deal with the consolidations in the industry in the 2010s? 3. Although sizable, Oxy is a relatively smaller player in an industry populated by giants. How will it sail through the turmoil in the coronavirus-induced recession?

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Integrative Case

6

Tesla’s CEO Quits Presidential Councils1 In 2017, Tesla’s CEO Elon Musk resigned from two presidential councils—the Strategy and Policy Forum and the Manufacturing Jobs Initiative—in protest of President Trump’s withdrawal from the Paris Agreement. Why did Musk do that? Young H. Jung, Montclair State University “You quit Paris, so I quit you.” It may sound like a part of the conversation pertaining to travel or airline industries that debate about the stop of service to Paris, France. However, this is the title of a CNN news article reporting that Elon Musk, CEO of Tesla, quit two presidential councils— the Strategy and Policy Forum and the Manufacturing Jobs Initiative—after President Donald Trump officially announced that the United States would withdraw from the Paris Agreement on June 1, 2017. What is the Paris Agreement? What made the CEO of an innovative company become the first council member who gave up the honorary position with a tremendous opportunity to network with the brand-new president who had been only in the White House for slightly more than five months? The Paris Agreement is an international convention on climate change, specifically aiming at the reduction of greenhouse gas (GHG). The Obama administration decided to join this agreement in December 2015. The Paris Agreement was the first international convention or protocol that the United States officially signed up since the climate change issue emerged in international societies in the 1990s. The US government had been lukewarm with the climate change issue. It might be because the United States was one of the largest GHG-emitting countries in the world. If the US government supports the global movement toward the reduction of GHG emission, the US domestic industries that heavily engage in fossil fuel usage would not be so happy with their government’s apparently ethical but industry-unfriendly decision making. This might be one reason why the US government warded off the global trend of GHG reduction pursued by other major countries such as the EU and Japan, which were the initial signatory countries of the Kyoto Protocol in 1997, the predecessor of the Paris Agreement.

The Obama administration deviated from the conventional attitude of the US government and entered the Paris Agreement. However, Trump vowed to withdraw from the Paris Agreement even when he was a presidential candidate. One of the first actions Trump took right after his inauguration ceremony was the removal of climate change issues from the White House website, which was a clear barometer of how the new president would lead his country pertaining to climate change. Although many US companies may support Trump’s attitude against the reduction of GHG emission, several business leaders attempted to persuade the new president to stay in the Paris Agreement. Musk was one of those business leaders who were appointed to Trump’s two advisory presidential councils, and he left the two councils upon Trump’s withdrawal from the Paris Agreement. The business leaders might raise their hands and ask Trump to think twice, but it might be “too much” to quit the councils and lose the opportunity to network with the current administration. Why did Musk quit President Trump? Is it because Musk is an ethical business person? That might also be true. Yet, there might be another driver—the business characteristics of Tesla. Musk himself holds a diverse spectrum in his business lineup from spacecraft to tunnel, but he focuses on electric vehicles (EVs) under Tesla. Different from conventional EVs, the Tesla models had strong horsepower to qualify as luxury sedans or sports cars. Customers welcomed this attractiveness offered by Tesla because they were less enthusiastic about the conventional EVs due to their smaller size and lower horsepower than gasoline vehicles. Then, how about Tesla’s firm performance?

1. © Young H. Jung. Reprinted with permission. 360

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TABLE 1  Market Capitalization and Net Income of Tesla Inc. (Unit: Million USD) Item

2010

2011

2012

2013

2014

2015

2016

2017

2018

Market Cap.

2,322

3,517

4,378

31,168

26,057

23,638

40,421

59,468

52,791

Net Income

(154)

(254)

(396)

(74)

(294)

(889)

(675)

(1,961)

(976)

Source: Capital IQ Database

Table 1 shows two streams of firm performance since Tesla went public in 2010. Its market capitalization shows increasing trend, whereas its net income remains in red consistently. In other words, investors see that Tesla will make money in the future, but the company is not making any money right now. If you were Musk, you may not be so comfortable with these results. Although you may promise the results to be fine in the near future, you cannot provide dividends to your shareholders at this moment. Why was Musk so desperate with the Paris Agreement that he quit the two presidential councils in protest of Trump’s withdrawal and ran the risk of damaging his political connections in Washington? Without Trump’s withdrawal from the Paris Agreement, the US government may commence the stricter enforcement of the environmental protection regulations against GHG emission than before. Given that traditional gasoline vehicles are one of the principal sources of GHG emission, such stricter curb would provide Tesla with more opportunities to sell its EVs than before. EVs emit no GHG and therefore stricter enforcement of environmental protection against GHG emission may encourage the production and consumption of such environment-friendly vehicles. Trump’s withdrawal from the Paris Agreement means that Musk may lose the chance to enhance the sales of Tesla vehicles and improve its financial performance. Musk’s reaction to Trump’s withdrawal from the Paris Agreement might gain public attention in that Musk is an ethical business person. Musk might be an ethical person and thus might have behaved in the same way even if he

did not have EVs in his business portfolio. The notable thing here may be, however, the closer a firm’s business is in line with public good as Tesla’s environment-friendly products are, the easier it is for a firm to behave ethically in front of social issues. Societal pressures are burgeoning when it comes to the ethical behavior of companies. To meet such requests, managers may want to consider philanthropic donations or green energy usages. However, if managers can align product offerings to customers with such societal needs as Tesla’s Musk does, such a business model may be able to achieve sustainability efficiently. In other words, firms’ activities to increase profits may enhance social values as well—as a proverb has it, you can kill two birds with one stone.

Case Discussion Questions 1. From a resource-based view, what would be the sources of Tesla’s competitive advantages? 2. ON ETHICS: If you were Musk, would you also quit the presidential councils in order to protest? Why? Or why not? 3. From an institution-based view, President Trump’s withdrawal from the Paris Agreement may be regarded as the weaker enforcement of formal institutions against GHG. When these formal institutions against GHG become unclear or failing, how would Tesla leverage informal institutions against GHG?

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Integrative Case

7

Legalization of Ride-Hailing in China1 Although increasingly used, private cars serving passengers using ride-hailing apps had been illegal in China until July 2016. Why did the government consider ride-hailing illegal? What would be the benefits of ride-hailing after it became legal? Yugang Li, East China University of Science and Technology Since Uber officially launched online taxi reservation in San Francisco in October 2010, many ride-hailing companies have emerged in China, such as Didi Chuxing (hereafter “Didi”), Kuaidi, Yidao Yongche, and Shenzhou as well as Uber China. After fierce market competition, Didi has become dominant. But since Meituan entered the industry in 2017, there has been a battle over subsidies for customers. Since the emergence of online ride-hailing, there has been an ongoing controversy, and the conflict between traditional taxis and online ride-hailing has never ceased. As a pioneer in the global ride-hailing industry, Uber first encountered resistance from taxi companies in the United States and then resistance globally. In China, taxi drivers in Tianjin and Wuhan staged a series of strikes, demanding that the government ban Didi, Shenzhou, and other ride-hailing apps. It was not until July 28, 2016, when the “Interim Management Regulations for the Operation and Service of the Online Ride-Hailing Industry” was issued by the central government that China became the first country to legalize ride-hailing on a nationwide basis. How did ride-hailing become legalized in China?

Beijing Cracked Down on Ride-Hailing in 2015 In early 2015, Beijing stepped up its crackdown on private cars offering rides through ride-hailing apps, following the suspension of ride-hailing services in Nanjing, Shanghai, and Shenyang.

Beijing Authorities Identified Didi and Other Private Cars as “Black (Unlicensed) Taxis” From January 2015, the Beijing Traffic Management Department cracked down on illegal private vehicles that used the Internet and mobile phone software to provide rides. Responsible officials said that many of the software provided ride-hailing services, essentially offering passengers an unlicensed taxi ride. This was the first time that Beijing made it illegal for private cars to use ride-hailing apps. Once found to be operating illegally, the service providers would be fined up to 20,000 yuan.2 According to Liang Jianwei, a spokesperson of the Beijing Traffic Management Department, it was very common for some private cars to engage in illegal operations with the help of online platforms and mobile software. Many of them were “clone taxis,” which had received many complaints from passengers. According to article 4 of the “Measures to Investigate, Punish, and Ban Unlicensed Businesses (Decree No. 370 of the State Council of the People’s Republic of China),” which had still been in effect at that time,3 this was a kind of unauthorized operation without the operational licenses, which seriously affected the normal operational order of taxis. From January 2015, combined with the upcoming work to ensure the important Spring Festival transportation to be uneventful, the Beijing Traffic Management Department focused on all kinds of “unlicensed taxis,” especially those illegally operated by ride-hailing software such as Didi and Yidao Yongche. These behaviors that seriously disturbed the order of taxi operations would be severely punished

1. © Yugang Li. Reprinted with permission. 2. The approximate exchange rate during the time of this case was US $1 = 7 yuan. 3. This measure was abolished on October 1, 2017, and replaced by new regulations. 362

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according to the law. In fact, throughout 2014, Beijing investigated 47 cases of illegal operations using Internet platforms and mobile-phone software. Two “Private Cars” Were Seized On January 6, 2015, at Terminal 3 of Beijing Capital Airport, a Volkswagen Sagitar owner who was using mobile-phone software to conduct transactions with passengers was found by law enforcement officials of Beijing Traffic Management Department. According to the driver’s bill of Yidao Yongche seized by officials, a passenger took a ride worth 171 yuan from Sanlitun district to Beijing Capital Airport. Excluding the subsidy from Yidao Yongche, the passengers paid 91 yuan, which was 10 yuan more than the normal taxi fare. According to the investigation, from the morning until the time when the car was seized in the afternoon, the driver received a total of eight orders and profited more than 800 yuan (excluding fuel and other costs). Then a Volkswagen Passat owner was spotted by law enforcement officials. The passenger showed the order to the officers. Arriving at the Capital Airport from a hotel, the passenger actually paid 196 yuan after using the 50 yuan voucher. According to the passenger, he was on a business trip from Fujian to Beijing, a friend from Ctrip (a travel reservation company) booked the private car online for himself. “I found it convenient and the service was great. I  didn’t consider whether the vehicle was licensed.” According to the investigation, the driver had already been fined for driving an unlicensed taxi in 2013. According to law enforcement officials, those who provided services would be fined 20,000 yuan and have their vehicles detained after verifying the existence of illegal operations. The vehicle would not be returned until the fine was paid. According to officials, it was easy for private cars to join the list of available vehicles when drivers registered for various kinds of ride-hailing software, and their status (whether licensed or not) was not strictly reviewed by the software operators. Traditional “black (unlicensed) car” drivers could also use the platform to “whitewash” themselves in an effort to appear more legitimate. For private car drivers, driving could be a well-paid part-time job. But because private car insurance was generally lower than that of regular taxis, if an accident occurred, passengers’ rights and interests could not be guaranteed. At the same time, the charge of private

cars was high and damaged the normal operational order of the industry. It would be unfair to taxis. A reporter from Beijing Youth Daily found in an interview that it would take a combination of written record of a driver’s behavior and proof from a passenger to determine whether an operation was illegal. If a passenger insisted on knowing the driver, who provided the ride as a friend, even if the law enforcement official identified the “unlicensed taxis” driver, the official could not enforce the law. Unlike traffic police who could stop cars, law enforcement officials could not stop cars on the street. They could work in places such as railway stations’ passenger drop-off areas that were convenient for law enforcement. Unlike traditional “cloned taxis” that looked like regular taxis (and would be easier to catch), these unlicensed private cars looked like ordinary civilian vehicles, which were difficult to identify and could only be caught using law enforcement officials’ experience. At that time, Beijing did not have a specific law for all kinds of private car service software, the law enforcement officials could only fine the driver from the perspective of traffic violation (such as illegal parking in a no-parking zone). There were no effective restrictions on operators who offered software on the Internet or mobile phones. Officials Said that “Private Car” Service Was Unlicensed and Illegal The “private cars” actually provided passengers with doorto-door, pay-per-ride, and pay-per-mile service, which was actually a taxi service. According to “Regulations on Taxi Administration in Beijing,” no organization or individual could provide taxi service except regular taxis. Previously, Yidao Yongche indicated that all the vehicles it operated came from car-rental companies, whereas the drivers came from manpower-service providers. It said Yidao Yongche actually had four-party agreements with car-rental companies and manpower-service providers. The company did not contract directly with individual car owners to use their vehicles. However, Liang argued that private cars engaged in taxi  service were illegal no matter what kind of agreement was signed. In fact, in 2014, 47 cases of illegal operations were prosecuted, all of which were private vehicles. Officials did not uncover any contracts signed with car-rental companies. If law enforcement officials encountered vehicles that were actually from the car-rental companies, these vehicles 363

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People can easily order customized travel services through the app. Private car service provides consumers with a choice of high-quality travel mode in addition to buses, subways, and taxis, which is consistent with improving the quality of people’s travel experience in the era of upgrading in all areas of consumption. The cars are more comfortable, the service is more friendly, and the safety is guaranteed. Consumers have more exclusive rights and interests such as airport exclusive VIP quick-security check. In foreign countries, such services have become an important part of urban transportation. This is something that the traditional “black (unlicensed) cars” cannot match.

Passengers Said that “the Private Car Service Has Hidden Dangers, But It Should Not Be Completely Banned” Being easier to hail, more attentive, and more comfortable than a taxi are common experiences for passengers who used ride-hailing software. Some passengers said that the service was a good solution to the difficulty of getting a taxi in busy downtown areas. However, a number of early adopters of private car apps admitted that while they enjoyed a ride home in a BMW, they still worried about whom to blame and how to claim compensation in case of an accident. As for the crackdown on private cars, many passengers believed that although understandable, the crackdown was regrettable. They hoped there would be relevant regulations to help private cars optimize. A passenger said that on New Year’s Eve, it was almost impossible to find a taxi on the road, neither was taxi software possible, so she chose to use software to call a “private car.” “Although a lot more expensive than a taxi, the ride was very comfortable, with bottled water offered on the car. I see the driver also opened the door for passengers, where taxi drivers can hardly provide this service.” On the news of the crackdown, the passenger said: “I may think it can be banned for the sake of safety, but for the sake of service and convenience, it’s a pity. If it is just because of the lack of an operational license, I am not satisfied with the reason that they are banned simply because they are not licensed to operate.” One passenger who used various ride-hailing apps said that if private car service was banned, he would have to raise his tip to get a taxi during peak hours. Therefore, he wanted regulations to legalize private cars. “Although private car service has hidden dangers, it should not be completely banned. For companies that want to improve, they should be given the opportunity to qualify legally. And then authorities crack down on truly illegal vehicles.”

According to the person in charge, in addition to meeting the needs of differentiated travel market, private car service can integrate and optimize the traditional car-rental market, effectively improve the utilization rate of idle vehicles, and indirectly reduce traffic pressure. In addition, it can be used as an effective solution for reforms on how government entities and companies used cars. Didi and Kuaidi did not respond. However, earlier, the Shanghai Transportation Committee made it clear that Didi cars were unlicensed cars, and seized them. In response, Didi issued a statement at the time, saying that Didi and all its partner companies had signed contracts according to the law to ensure that users’ requirements for multidimensional, personalized, and safe service were met and that the whole service process was transparent, open, standardized, and controllable. This service was quite different from traditional “black (unlicensed) cars” with no service specification, no pricing standard, and no security guarantee.

Expert Opinion: To Use the Internet to Make Travel More Convenient in Accordance with the Law Wang Limei, secretary general of the China Road Transport Association, noted that ride-hailing apps had triggered intense debate in many countries. In India, ride-hailing services had been suspended nationwide after several terrible incidents. Private cars are like “traveling doctors,” who can treat people in remote areas, but they are unlicensed and risky. They need to be regulated. Ride-hailing cars can bring convenience to people, but they are not licensed to operate, thus not conforming to legal requirements. Recently, there have been many incidents of missing college students, some involving homicide cases. These college students took rides, either hailing on the side of the road or through software. No matter by what means, the cars they took were unlicensed, which made it difficult to hold the operators accountable for accidents, and there were no clear rules on how to pay for accident insurance.

would be treated as unlicensed vehicles as well. According to the “Measures for the Administration of Car Rental in Beijing,” which came into effect on May 1, 2012, car rental refers to the business activities in which the operator delivered the automobile to the renter for use within the agreed-upon period of time, collected the rental fee, and did not provide a driver. It clearly stated that the vehicles should be owned by car-rental operators. “In actual law enforcement process, we will investigate exactly who provided this service. If we find a car from a car-rental company, we will investigate who exactly organized the service. If it is a car-rental company, we will fine the company. If it is a driver who operates privately, we will fine the driver,” Liang introduced. The Software Operators Said that “Private Cars Are Not the Same as Unlicensed Cars” In response to the Beijing Traffic Management Department’s increasing efforts to crack down on private cars, the person in charge of Yidao Yongche said that “private cars are not the same as unlicensed cars.” Private car service was the general trend of travel service improvement, which was required by the market. Authorities needed to listen more to consumers.

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Integrative Case 7  Legalization of Ride-Hailing in China  365

“No company has clear rules on these and no company has said publicly that its cars are licensed.” Many parts of the country issued strict regulations to severely restrain private cars, treating private cars as traditional “black (unlicensed) cars.” However, compared with the traditional unlicensed cars, private cars were less recognizable, making them difficult to restrain. Wang said the crackdown on private cars was to regulate the market and, more important, to protect consumer safety. “Passengers should understand this and cooperate,” she said. If cracking down on private cars was so difficult, why didn’t the authorities just stop ride-hailing apps? In this regard, this expert believed that the Internet was just a tool that should be used in accordance with laws and regulations, rather than being blocked if someone used it to commit a crime. “Like many frauds using the Internet, the crackdown targets the frauds, but not the Internet.” Wang thought how the Internet could be used to bring people more convenience also needed laws and regulations. If a private vehicle wished to participate in the operation, it should be licensed according to laws. “The current crackdown on private cars, I think, is part of the process to enforce laws. The key is to let private cars apply for a license, so that it can operate legitimately.”

Online Ride-Hailing Has Gained Legal Status The Introduction of New Policies On July 28, 2016, a series of new policies that had been closely watched regarding reforms on taxis and private cars (especially online ride-hailing cars)—two years in the making—surfaced. Seven ministries, including the Ministry of Transport, officially announced “Guiding Opinions of the General Office of the State Council on Deepening Reform and Promoting the Healthy Development of the Taxi Industry” and “Interim Management Measures for the Operation and Service of the Online Ride-Hailing Industry” (hereinafter “Interim Measures”). The new policies legalized the status of online ride-hailing, and authorized private cars that met the requirements be converted to online ride-hailing. Passengers were encouraged to carpool in private cars. The new policies had a three-month grace period and would be implemented on November 1. According to the new policies, the vehicles to be used in the online ride-hailing business should be registered as passenger taxis. Prior to the new policies, China’s laws dictated that the depreciation period—after which, the vehicles needed to be scrapped—for all vehicles used for business purposes would be no more than eight years, which meant that online ride-hailing vehicles should also comply with the standard after being registered as passenger taxis. In the 2015 solicitation of opinions, the biggest debate focused on the eight-year period. Some experts thought that the eightyear depreciation time for online ride-hailing should be

extended, because a large number of online ride-hailing vehicles would not engage in full-time operations, so they should be scrapped according to the actual operating mileage. The new policies allowed cars to be scrapped after 600,000 kilometers (375,000 miles), and but after eight years these cars must quit the online ride-hailing business rather than be scrapped. The new policies, thus, provided a great benefit to private car operators. In addition, the new policies provided for a three-month grace period, requiring local governments to come up with detailed local rules during that period. In three months, the legalization of “private cars” would be truly implemented. Response of Online Ride-Hailing Companies Didi, an important participant in the online ride-hailing market, said after the new policies were introduced that legalizing ride-hailing was an encouragement for the country to develop a sharing economy. But ride-hailing only accounted for about 1% of China’s daily urban travel, and there was plenty of room for further growth. Didi would be in accordance with the “Interim Measures” requirements, professionalize the operations, and actively apply for licenses needed for ride-hailing platforms. Didi would actively explore with relevant government departments and fellow companies in the travel industry to increase technological innovation, improve the utilization of transportation resources and urban transportation efficiency, improve the travel experience, create more flexible employment opportunities for the society, and better provide hundreds of millions of people with safe, convenient, and comfortable travel services. Uber China said the new policies reflected the government’s recognition and support for new forms of ride-hailing, making China the first major economy in the world to enact such nationwide regulations. Uber China would fully cooperate with the cities to formulate the corresponding implementation rules and was confident to obtain the operation license issued by the local governments at the first available time. Uber also said that “Uber has provided travel services in more than 60 cities, and is expected to cover more than 100 cities by the end of 2016.” In addition to the legalization of ride-hailing, the accompanying “Guiding Opinions of the General Office of the State Council on Deepening Reform and Promoting the Healthy Development of the Taxi Industry” also made corresponding adjustments to the taxi industry. For a long time, taxi enterprises collected money from drivers and paid a large part of it to the government for their operating rights. However, according to the taxi-reform plan, all new operating rights of taxi should be free of charge. In this way, the operating cost of taxi enterprises would be greatly reduced. In addition, the reform plan also proposed to encourage, support, and guide taxi enterprises, trade associations, taxi drivers, and trade unions to consult with each other on an equal basis to reasonably determine and dynamically adjust the taxi-driver contract fee standard (the minimum

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366  Part 4  Integrated Cases

revenue that drivers must make every shift) and reduce the existing contract fee standard if it was too high. Commenting on these new changes, Wang Xue, Dean of Transportation Research Center of Shenzhen Polytechnic, said in an interview with Securities Daily, “legalization of online ride-hailing will break the closed industry and incumbent special-interest. The new policies will turn excellent drivers and operational management experience into scarce resources, which will become the core competitiveness of the taxi or online ride-hailing industry in the future.” Sources: (1) S. Liu, 2016, Didi Chuxing and Uber respond to the new policy which will legalize ride-hailing in November, saying it would actively apply for a license, Securities Daily, July 29: C1; (2) J. Zhao, 2015, The special pick-up services are identified to be illegal operation, Beijing Youth Daily, January 7: auto.people.com.cn/n/2015/0107/c1005-26339499.html.

Case Discussion Questions 1. From an industry-based view, why did the taxi industry not like ride-hailing? 2. From an institution-based view, why were Didi Chuxing and other ride-hailing activities considered illegal at the early stage? 3. From an institution-based view, which institutions or individuals have played an active role in the legalization process of ride-hailing? 4. From a resource-based view, why would “the new policies turn excellent drivers and operational management experience into scarce resources”?

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Integrative Case

Integrative Case 8  The Final Frontier of Outsourcing to India  367

8

The Final Frontier of Outsourcing to India1 Until 2016, India had a booming outsourcing industry—commercial surrogacy. However, the government passed a law in 2016 to ban it. Why was such a demand? Can the ban be effective? Arun Perumb Krishnan, University of Texas at Dallas Outsourcing to India—especially in information technology (IT)—has been going on for several decades. This case is on the final frontier of outsourcing to India—commercial surrogacy. Surrogacy arrangement is the carrying of a pregnancy by a woman who is a surrogate mother on behalf of the intended parents. There are two main types of surrogacy: (1) gestational surrogacy and (2) traditional surrogacy. In gestational surrogacy, a surrogate is implanted with an embryo created by in vitro fertilization (IVF) using the intended mother’s egg and a donor’s sperm. The resulting child is genetically related to the intended mother but genetically unrelated to the surrogate. In traditional surrogacy, the surrogate mother uses her own egg to produce a child that she carries for the intended parents. The child is genetically related to the surrogate mother. Altruistic surrogacy, for which no financial gain is provided to the surrogate mother, has existed for some time. However, from a business standpoint, this case deals with commercial surrogacy: The surrogate mother receives compensation for her services apart from the medical expenses. Until 2016, India had a booming outsourcing industry—commercial surrogacy. However, the government passed a law in 2016 to ban it. We focus on the key question: What factors determines the success and failure of commercial surrogacy in India?

In the United States, the cost for a gestational surrogacy including all agencies’ fees, attorneys’ fees, screening and surrogate fees, and medical and insurance expenses is approximately $100,000 to $150,000, depending on the chosen program. There is an increase in demand for the intended parents to have their own biological children. However, the high cost in the United States and the cost competitiveness of India have made most couples interested in commercial surrogacy to go to India—the same compelling logic for IT outsourcing to India. This interest has opened up a new classification in the medical tourism industry called fertility tourism or reproductive tourism. India is now one of the most popular destinations for international commercial surrogacy. Similar to the competition for outsourcing in other industries, India has several competitors. With increased demand and available good medical facilities and legal regulations, the commercial surrogacy industry has spread to countries such as Cambodia, Nepal, and  Thailand.

Players of Commercial Surrogacy Before proceeding, it is useful to outline the “cast of characters” involved in commercial surrogacy. ●●

A Global Industry Although low profile, commercial surrogacy has become a sizable multibillion-dollar industry. In the United States, California is the pioneer in surrogacy legislation that supports surrogacy arrangements. For the entire country, the laws are different from state to state and sometimes even county by county within a state.

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Intended parents: Heterosexual couples who face issues with infertility as well as homosexual couples and single parents. Surrogate mother: A woman who carries a child from either her own egg fertilized by another woman’s partner or the implantation of a fertilized egg from another woman into her uterus. Doctor: A physician who performs the IVF procedure and the gynecologist.

1. © Arun Perumb Krishnan (UT Dallas MBA 2017). Reprinted with permission. This case was written under the supervision of Professor Mike Peng. The author thanks Byung Kim, Jiayang Wang, and Xiaoran Wang for collaborative work that provides the background for this case. 367

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368  Part 4  Integrated Cases

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Attorney: A lawyer who is the expert in surrogacy laws and helps make the transnational commercial surrogacy arrangements possible for intended parents.

Next, we proceed with our analysis, starting with the institution-based view.

The Institution-Based View The institution-based view has two components: formal and informal. From a formal institutions standpoint, the formal rules that surround surrogacy in India greatly impact the availability and the outcome of surrogacy as an assisted reproductive technology option. India’s Surrogacy Regulation Bill of 2016 offers formal rules to the unregulated commercial surrogacy industry in that country. To protect poor women who become surrogates as a source of income, the bill proposes a ban on commercial surrogacy. Instead, only altruistic surrogacy will be tolerated. Altruistic surrogacy is when a surrogate women is given no financial gain for carrying an infertile couple’s child. In addition, surrogacy will only be allowed for heterosexual couples, whereas surrogacy was previously available for single parents and homosexual couples. The bill clearly outlines the conditions that must be met for surrogacy. For instance, those permitted to apply must be infertile couples between ages 23 and 50 for women and 26 and 55 for men who have been married for five years with no children. Surrogate mothers should be close relatives of the couple and between ages 25 and 35. In addition, the surrogate mother is allowed to act as a surrogate only once in her lifetime. The Surrogacy Regulation Bill also establishes strict punishments for those who fail to comply with its restrictions. Establishments that allow commercial surrogacy, abandonment of a child, exploitation of a surrogate mother, and selling or importing a human embryo are punishable with imprisonment of at least 10 years and fines up to $16,000. Prior to this bill, attempts were made to regulate surrogacy. In 2005, the Indian Council of Medical Research (ICMR) and National Academy of Medical Sciences, a government funded agency, constructed the National Guidelines for Accreditation, Supervision, and Regulation of Assisted Reproductive Technology Clinics in India. These guidelines attempted to highlight the potential for misuse, support the research of reproductive technology, and create

a national database to track infertility. In 2008, the Assisted Reproductive Technology Bill was drafted and redrafted several times afterward. The bill featured the creation of a National Advisory Board for Assisted Reproductive Technology. In addition, the bill helped to catch the legal pitfalls that ICMR guidelines failed to recognize. Although efforts were made to create formal rules to regulate surrogacy, little was said on the commercial aspect of surrogacy. From an informal institutions standpoint, the general public perception of commercial surrogacy is very negative. “Surrogate Mothers Exploited,”“Wombs Being Rented,” “Money Is Corrupting this Whole Technology”—these are just some of the media headlines that showed the darker sides of commercial surrogacy. But the media’s reports are not without justification. There are many cases that contributed to this unfavorable view of commercial surrogacy. There is no easy way for the public to find information about how surrogacy firms deal with special circumstances that may go wrong during surrogacy arrangements. The questions that may arise include: How do we deal with a miscarriage? What happens when the newborn baby has a disability or mismatch of DNA? What happens when the newborn baby is rejected from his or her intended parents’ home country? These are questions for which the surrogacy centers are unable to offer acceptable solutions. There are more extreme cases that even many attorneys felt truly distressed when they heard about them. One of these cases was with a US attorney, Theresa Erickson, who was charged with running a baby-selling racket in the United States in 2011. The other case was with an Australian gay couple who had taken surrogacy for the sole purpose of sexually exploiting their own son. All these incidents have added fuel to the media’s attacks on commercial surrogacy. From an informal ethical and legitimacy standpoint, such phenomena made the public consider commercial surrogacy as a very dirty deal. The surrogacy arrangements made between the intended parents from developed countries such as the United States and the surrogate mothers from developing countries such as India can be misinterpreted as rich people exploiting poor women by using them as reproductive machines. Another consideration is that the intended parents could simply leave the babies behind and pay very little compensation if they were unsatisfied with the baby. Because of the absence of laws and regulations, the responsible party was set free without legal punishment.

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Integrative Case 8  The Final Frontier of Outsourcing to India  369

Other informal institutional considerations include the following. ●●

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Attachment of the surrogate mother: Surrogacy can be a very taxing process with the physical and emotional attachments the surrogate mother may develop with the baby. Identity of the child: Similar to adoption, would it be ethical for the (intended) parents to not inform the child that he or she was born under surrogacy arrangements? Religious constraints: Paragraph 2376 of the Catechism of the Catholic Church states, “Techniques that entail the dissociation of husband and wife, by the intrusion of a person other than the couple (donation of sperm or ovum, surrogate uterus), are gravely immoral.” While this statement from the Catholic Church seems to be condemnation, it may have been loosely interpreted. The original meaning could have been meant for a different topic altogether. The book mentioning the above statement was written in 1992 by John Paul II.

At the same time, we need to look at the surrogate mothers, who are poor individuals seeking to support their families. Women who are interested in surrogacy arrangements are typically in desperate situations. The money earned as a surrogate mother can potentially significantly improve their living standard. In addition, the success rate of surrogacy is significantly higher in India than in other countries, including the United States.

The Resource-Based View The resource-based view can be used to determine the factors that result in the success and failure of commercial surrogacy in India. The value, rarity, imitability, and organization (VRIO) framework can be used to evaluate the considered resources. In terms of value, surrogacy is very valuable because it is the only method that infertile heterosexual couples, homosexual couples, and single parents can use to have a child who is genetically related to the intended parents. Surrogacy in India also delivers more value than that in other countries such as the United States because of the higher success rate and the more affordable cost. Even though the medical facilities in India are not as outstanding as those in the United States, India still has fairly good medical facilities and English-speaking doctors who are trained in reputable medical centers abroad. It is reflected in the differences in the success rate: The United States only has a 31% success rate, whereas India has a 44% success rate. The operation done in India is also only one-third to one-fifth of the cost in the United States. In terms of rarity, commercial surrogacy is only allowed—in addition to India—in a few countries around

the globe: Cambodia, Georgia, Mexico, Nepal, Russia, Thailand, Ukraine, and the United States (in some but not all states). Therefore, on a worldwide basis, commercial surrogacy is quite rare. However, India alone hosts more than 3,000 fertility clinics. While international competition does not appear to be very strong, domestic competition in India is fierce. It is difficult for other countries to imitate India’s success in commercial surrogacy. Although the first successful IVF surrogacy was performed in the United Kingdom, India was quick to follow and delivered the second successful IVF procedure 67 days after the British baby was born. India was also the first country to try to push for legal commercial surrogacy. This first-mover advantage has allowed India to host the largest number of surrogacy centers in the world and to become the most favorable location for surrogacy arrangements, especially for people who are unable to afford the expensive care in the United States. Its competitors in Asia are a distance away from catching up because of higher costs and lower-quality medical facilities. A majority of surrogacy centers around the globe lack organization. Only a handful of surrogacy centers around the world seem to successfully organize and exploit their resources. The complementary assets for surrogacy centers are not how well the doctors can perform and how good the medical facilities are, but it is managers’ abilities to create a good working system that provides clear guidance for both surrogate mothers and intended parents. Unfortunately, a majority of the surrogacy centers in India have many of these organizational problems. Some surrogate mothers mentioned that the Indian surrogacy centers did not clearly explain the compensation, and some surrogate mothers felt cheated by the centers. The centers also did not thoroughly explain the international legal issues associated with intended parents from other countries. Most centers also do not have legal experts or insurance that could resolve any issues during or after a surrogacy procedure. Overall, even though Indian surrogacy centers excel at delivering value and inimitability in comparison to those centers in other countries, value and inimitability will not help them with the domestic competition because most surrogacy centers in India are competing at the same level. Although only a limited number of countries allow commercial surrogacy, the fact that India has 3,000 centers does not make it rare domestically. Finally, a majority of surrogacy centers lack solid organization and do not have good systems in place.

Expert Input: Mr. Hari G. Ramasubramanian Our preceding analysis can help address some of the ongoing issues in the commercial surrogacy industry that would help a developing country such as India become a

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370  Part 4  Integrated Cases

dominate global player in this new form of outsourcing. In addition, we have also obtained excellent insights after speaking to Mr. Hari G. Ramasubramanian on the actual truth versus negative impressions created by the media. Mr.  Ramasubramanian founded India’s first law firm specializing in fertility law through which he has helped hundreds of international and domestic couples navigate the daunting and uncertain legal issues. He is currently a full-time litigation lawyer practicing at Madras High Court and in India’s Supreme Court. This section shows a few highlights of our Q&A session with him. Question 1. What was Mr. Hari G. Ramasubramanian’s motivation to start the first law firm in India on surrogacy law? He was part of a law firm with a core practice in criminal litigation and medical–legal litigation. He came to know about surrogacy when engaged by a client in 2008. His research showed that India was the worldwide leader of surrogacy, but there were no specialized law firms in India. He was then motivated to specialize in third-party reproduction and private international law issues related to surrogacy. In his own words: I was able to identify the vacuum in this space at the earliest point of time and was able to forecast the possible growth in the foreseeable future. There were no law firms in India that specialized in third-party reproduction at that time. I came to understand through my research that every country has different laws with regard to surrogacy. People from different countries came down to India and it is pertinent to be a core practitioner in the field for the client to benefit. I then chose to specialize in this field and to have a dedicated practice for which I started up India’s first surrogacy law firm. Question 2. What are the laws and medical benefits currently available to protect the surrogate mother? The intended parents and surrogate mother come to a written agreement on several aspects of the surrogacy arrangements, including the rights of the child, pregnancy period arrangements, and postpartum arrangements before going through hospital formalities. Intended parents also have the rights to obtain the medical fitness certificate from the physician on the surrogate mother to eliminate the risks associated with the pregnancy and to make sure the surrogate mother is not currently affected with any disease. When it comes to the medical benefits, there are no medical insurance policies from Indian insurance companies through which “a surrogacy health package” could be provided to the surrogate mother. The intended parents are responsible for any such medical complications, and the surrogacy clinics are recommended for providing some medical benefit packages, which could be beneficial to the surrogate mother.

Question 3. We are hearing a lot about the Surrogacy Regulation Bill 2016. How effective is this going to be for the surrogacy outsourcing industry for India in the future? Even though the Indian government has proposed such a regulatory bill in the beginning of 2016, the government authorities are still evaluating the implications of this once it becomes effective. This is still under evaluation and has not been enforced. From the growth and size of commercial surrogacy in India—about a billion dollars each year—a major chunk of this comes from foreign nationals. The domestic intended parents still face a lot of religious and cultural setbacks for them to become motivated to engage in such surrogacy arrangements. Even though the government is taking actions to enforce such a regulatory bill, considering the tremendous growth and size of this industry, it is probable that the government will revisit some of the rules to encourage commercial surrogacy, taking into consideration that the best value is provided to players—surrogate mothers, intended parents, and hospital facilities.

Going Forward Going forward, recommendations can be made along institution-based and resource-based dimensions. From an institution-based view, the Surrogacy Regulation Bill 2016, which bans commercial surrogacy, needs to be revised and improved. Creating a ban pushes a desired commodity into the black market. In other words, the demand for a child by infertile individuals and couples will remain despite the ban on commercial surrogacy. Also, finding women willing to take part in an altruistic surrogacy is difficult. Instead, carrying a child for someone else should be paid. Therefore, the unsatisfied demand and the low supply of potential surrogate mothers will trigger the emergence of a black market. Essentially, women who look to surrogacy as a last-ditch effort to support their families may expose themselves to hazardous situations. According to the Economist, the ban would “make it both more dangerous and more costly, and create legal uncertainty for all.” It is imperative that a safe and fair environment where both parties can gain from the experience be established. Journalists and the public should pay more attention to surrogate mothers and their surrogate clinics to closely monitor the operation and process of the surrogacy. From a resource-based view, managers at surrogacy centers need to continue to build firm strengths based on the VRIO framework. Currently, Indian surrogacy centers have a lot of advantages in terms of value, rarity, and inimitability in comparison to surrogacy centers in other countries. Indian surrogacy centers need to improve their organization, and managers need to set clearer guidelines for both surrogate mothers and intended parents. Managers will need to work with legal professionals and insurance companies to make these guidelines clearer. Improving on

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Integrative Case 8  The Final Frontier of Outsourcing to India  371

organization will not only help the Indian surrogacy centers compete with surrogacy centers from other countries, but also help them outcompete domestic rivals. Sources: (1) N. Bhalla & M. Thapliyal, 2013, India seeks to regulate its booming surrogacy industry, Reuters Health Information, September 30; (2)  S. Carney, 2010, Inside India’s rent-a-womb business, Mother Jones, March/ April issue, http://www.motherjones.com/politics/2010/02/surrogacytourism-india-nayna-patel?page=2; (3) Economist, 2017,  Surrogacy: The gift of life, May 13: 12; (4) http://icmr.nic.in/art/Corrigendum.pdf; http:// www.issuesinmedicalethics.org/index.php/ijme/article/view/596/1510; (5) https://lawandotherthings.blogspot.com/2008/10/draft-art-bill-2008.html; (6) http://www.nytimes.com/2014/07/06/us/foreign-couples-heading-toamerica-for-surrogate-pregnancies.html?_r=0; (7) http://www.prsindia. org/uploads/media/vikas_doc/docs/1241500084~~DraftARTBill.pdf; (8) https://archives.fbi.gov/archives/sandiego/press-releases/2011/babyselling-ring-busted

Case Discussion Questions 1. O  N ETHICS: What is driving the demand for this industry? 2. O  N ETHICS: From a resource-based view, what are the characteristics of winning countries and surrogacy centers? 3. ON ETHICS: From an institution-based view, how can the Surrogacy Regulation Bill 2016 be revised and improved?

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372  PART 2  BUSINESS-LEVEL STRATEGIES

Integrative Case

9

Volkswagen’s Emissions Scandal1 In 2015, Volkswagen was engulfed in a scandal associated with its use of the “defeat” device to cheat in emissions tests for its diesel engines. Breena E. Coates, California State University, San Bernardino

Volkswagen’s Notorious “Defeat” Device On September 18, 2015, the Volkswagen Group (VW) was served with a notice of violation of the US Clean Air Act by the US Environmental Protection Agency (EPA). The EPA had discovered that VW had deliberately programmed turbocharged direct injection of its diesel engines to activate certain emissions controls only during laboratory emissions testing. This “defeat device,” as it came to be known, allowed the cars’ nitrogen oxide (NOx) output to meet US standards during regulatory testing but emit up to 40 times more NOx in actual onroad circumstances—violating the standards of the Clean Air Act. When the cars were operating under controlled laboratory conditions, which typically involve putting them on a stationary test rig, the device appeared to have put the vehicle into a sort of safety mode in which the engine ran below normal power and performance. Once on the road, however, the engines switched out of this test mode and emitted the nitrogen oxide pollutants. VW was also accused by the EPA of modifying software on the three-liter diesel engines fitted to some Porsche and Audi cars as well as VW models. VW had put this deceptive programming in about 11  million cars worldwide (including 500,000 in the United States) during model years 2009 through 2015. In November 2015, VW admitted that it had found “irregularities” in tests to measure carbon dioxide emissions levels that could affect about 800,000 cars in Europe, including petrol vehicles. However, in December 2015 it said that following investigations, it had established that this had only affected about 36,000 of the cars it produced each year.

How the Deception was Unearthed In 2014, US regulators were already raising red flags about VW emissions levels. However, VW dismissed these as “technical issues” and “unexpected” real-world conditions. An analysis of emissions inconsistencies between European and US automobiles had been commissioned in 2014 by the International Council on Clean Transportation (ICCT). Among the groups doing the analysis was one of five scientists from West Virginia University, who detected additional emissions during live road tests on two out of three diesel cars. The scientists provided their data to ICCT, which also purchased data from two other sources. ICCT then provided all the findings to the California Air Resources Board in May 2014. Following this, VW became subject to regulatory investigations in various countries. The news of these investigations caused a major VW stock price drop by one-third immediately following the disclosure. The widening scandal also prompted Moody’s Investors Service to cut the rating on VW’s debt, which could make borrowing money more expensive for the company. The company cited “mounting risks to Volkswagen’s reputation and future earnings.”

Corporate Fallout It is clear that top management must have known about and approved fitting cheating devices onto the vehicle’s engines. Implications for the chain-of-command deception resulted in the resignation of senior executives in VW. VW Group CEO Martin Winterkorn resigned, saying that his company had “broken the trust of our customers and the public.” The VW Group brand development head Heinz-Jakob Neusser, Audi research and development head Ulrich Hackenberg, and Porsche research and development

1. © Breena E. Coates. Reprinted with permission. 372

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head Wolfgang Hatz were fired. VW announced plans to spend $7.3 billion on rectifying the emissions issues and planned to refit the affected vehicles as part of a recall campaign. The Volkswagen emissions scandal raised awareness over the higher levels of pollution being emitted by all vehicles built by a wide range of automakers, which under real-world driving conditions were prone to exceed legal emission limits. A study conducted by ICCT and Allgemeiner Deutscher Automobil-Club showed that the biggest deviations were from Citroën, Fiat, Hyundai, Jeep, Renault, and Volvo. A discussion was sparked that software-controlled machinery would generally be prone to cheating, and one way out would be to make the software source code accessible to the public. Matthias Mueller, the former boss of Porsche and the new CEO of VW, stated on taking up his new position, “My most urgent task is to win back trust for the Volkswagen Group—by leaving no stone unturned.” VW also launched an internal inquiry. With VW recalling millions of cars worldwide from early 2016, it set aside $7.3 billion to cover costs. That resulted in the company posting its first quarterly loss in 15 years of $2.7 billion in late October 2015. The financial impact would continue to plague VW. The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards—up to a maximum fine of about $18 billion.

diesel vehicles didn’t meet emission limits when they drive on the road. We are talking about millions of vehicles,” said Jos Dings of the nongovernmental organization Transport and Environment. Car analysts at the financial research firm Bernstein LP agreed that European standards are not as rigorous as those in the United States. However, they noted that as a consequence of the lax standards there has been “less need to cheat.” Bernstein also argued that if other European carmakers’ results were called into question, “consequences are likely to be a change in the test cycle rather than legal action and fines.” Sales of diesel cars were already slowing when the VW emissions scandal erupted. “The revelations are likely to lead to a sharp fall in demand for diesel engine cars,” said Richard Gane, automotive expert at consultant firm Vendigital. The UK trade body for the car industry, the Society of Motor Manufacturers & Traders (SMMT), said: “The EU operates a fundamentally different system to the US—with all European tests performed in strict conditions as required by EU law and witnessed by a government-appointed independent approval agency.” The SMMT went on to say, “The industry acknowledges that the current test method is outdated and is seeking agreement from the European Commission for a new emissions test that embraces new testing technologies and is more representative of on-road conditions.”

Impact on the Diesel Auto Industry

“Dieselgate” Continues to Assail Volkswagen

Under the assumption that diesel is better for the environment, governments over the last ten years had promoted the production of diesel cars, and the automobile industry had poured its money into their manufacture. Scientific evidence indicated that this was untrue. As a result, there was greater push to reduce diesel cars in some localities. Throughout the world, decision makers in political, regulatory, and environmental sectors were examining the validity of VW’s emissions testing, and the investigations by the US EPA created concerns in countries such as Britain, France, Germany, Italy, and South Korea. In the European Union alone, VW would recall 8.5 million cars. The VW scandal has had far-reaching impacts. Environmental activists in Europe maintained that emissions standards were being defied there. “Diesel cars in Europe operate with worse technology on average than that in the US. Our latest report demonstrated that almost 90% of

VW’s troubles with its “Dieselgate” scandal never seem to cease. On March 15, 2019, the US Securities and Exchange Commission charged former CEO Martin Winterkorn and two of VW’s subsidiaries “for defrauding US investors, raising billions of dollars through the corporate bond and fixed income markets while making a series of deceptive claims about the environmental impact of the company’s ‘clean diesel’ fleet.” One after another, the elements in the aftermath of the Dieselgate scandal continue to bubble up. On January 2, 2020, the Guardian newspaper reported that VW was in negotiations about an out-of-court settlement with 40,000 German car owners who were affected by the emissions cheating scandal. The Associated Press reported on January 14, 2020, that VW continued to be hounded by German prosecutors. Six additional executives, who were part of the 373

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374  Part 4  Integrated Cases

original scandal, were cited by prosecutors, bringing the total number to eleven corporate leaders. Of these executives, three were accused of direct illegalities and three of being accessories. Prosecutors, however, made it clear that this was not the end of their investigations and revealed that 32 additional individuals were under scrutiny. The VW scandal just keeps popping up in diverse locations and never seems to die, primarily because a whopping 11 million cars are involved. As reported in the Guardian in April 2020, the World Health Organization (WHO) put out a forceful statement to the effect that VW had subverted key air pollution tests “to deliberately hide this toxicity.” It also stated that the environmental hazard of diesel emissions worldwide “cannot go on.” The WHO then took another threatening swipe at the diesel car industry, stating forcefully that the sale of all diesel and petrol cars and vans should be banned by 2030. According to a Reuters report, in December 2019 British VW car owners had launched a class-action lawsuit against the corporation for cheating on emissions tests. Then on April 6, 2020, the Guardian reported that the British High Court affirmed that VW had indeed subverted key airpollution tests. This verdict was seen as a shot in the arm for UK petitioners and campaigners to force the carmaker to address the lung-damaging effects of its cars, which emitted air toxicities at greater levels than legally allowed. The Guardian also reported that 91,000 plaintiffs were taking the car manufacturer to court in what was said to be one of the biggest class-action cases—or group litigations—in England and Wales. Although VW has been found guilty in the United States and in Europe, the company continues to deny that it cheated on emissions tests. However, the carmaker’s arguments continue to be seen as preposterous by the general public, and it will predictably face a steep climb to repair its corporate reputation in the coming years.

Case Discussion Questions 1. ON ETHICS: What were the ethical issues underlying the VW scandal? 2. ON ETHICS: VW recalled cars with the diesel device. In your opinion, does this reduce VW’s responsibility? 3. ON ETHICS: Did the fact that VW’s profit goals seemed immediate and concrete while the victims of pollution seemed very distant impact the decision making of the company’s leadership? Explain. 4. ON ETHICS: Volkswagen engineers and leaders argued that environmental measures are intolerably harsh. In what ways did emissions tests and regulation standards embolden car manufacturers to game the system when testing their automobiles? How might these factors lead companies’ ethical frameworks to fade from view? 5. ON ETHICS: Besides economic costs, what other costs did VW generate for itself? 6. ON ETHICS: What fallout concerns have resulted for the diesel auto industry as a whole?

Sources: Reports from the Associated Press, BBC News, Guardian, Reuters, SEC News, SMMT, Transport and Environment, Venedigital, and Wall Street Journal.

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Integrative Case

Integrative Case 10  Private Military Companies  375

10

Private Military Companies1 Private military companies are entrepreneurial, profiting from land wars in Afghanistan, Iraq, and Syria as well as Somali piracy in the Indian Ocean. Are private military companies dogs of war or pussycats of peace? Mike W. Peng, University of Texas at Dallas This industry dates back thousands of years, is visible in TV news, is global in nature, and has annual sales of $100 billion. Yet participants do not even agree on how to label it, and most outsiders are clueless about its entrepreneurial nature and ethical dilemma. So, what industry is this? Many journalists and scholars call it the “private military industry.” Others label it the “private security industry.” A leading British industry association formed in 2006 calls itself the British Association of Private Security Companies (BAPSC). A leading American industry association founded in 2001 names itself the International Peace Operations Association (IPOA). It has coined postmodern labels the “peace and stability industry” and the “peace operations industry.” For compositional simplicity, in this case, we call this industry the private military industry to emphasize its twin nature of private and military. Companies in this industry are thus called private military companies (PMCs).

From Rome to Syria The roots of this industry can be found in mercenaries. In fact, the very word “soldier” derives from solidus, the Roman gold coin. In other words, a soldier, by classical definition, is one who fought for money. During the American Revolution, mercenaries from Germany fought on the British side. The stereotype of mercenaries is the “dogs of war” who help win civil wars and topple governments (usually in resource-rich African countries). However, modern PMCs hate to be associated with mercenaries. Today’s PMCs are proud of their professionalism and value added. Led by entrepreneurs who are often retired military officers, PMCs compete globally. There are three main types. First, closest to the battlefield are military provider firms that supply hired guns (often known as

private contractors) who serve alongside national military forces. Blackwater is perhaps the best-known military provider firm. Second, military consulting firms offer assistance but do not directly engage in the battlefield. One example is Military Professional Resources, Inc. Third, military support firms such as Halliburton provide nonlethal support such as intelligence, logistics, technical support, and transportation. One of the rare publicly listed PMCs is DynCorp International, which went public in 2006 (NYSE: DCP). It has more than 16,800 employees and generates more than $2 billion revenue around the world. Entrepreneurs thrive on chaos. To PMCs, the war in Iraq and Afghanistan was a pot of gold. While the United States and its allies were withdrawing their forces, PMCs rushed in. In Afghanistan in 2009, PMCs were the largest military force (130,000 personnel), outnumbering both the Afghan National Army (100,000 personnel) and US (national) forces (64,000 personnel). In Iraq, PMCs were the second-largest military contingent (about 113,000 personnel) after US (national) forces (130,000 personnel at its peak). Long after the official withdrawal of the US (national) military in Iraq in 2011, PMCs remain active in the country. The State Department alone at one point employed 5,000 PMC personnel in Iraq. Private soldiers drive convoy trucks, build camps, guard dignitaries, and gather intelligence. The most lucrative job is not “guns on trucks,” but less glamorous but more steady work such as logistics. Well-muscled men with wraparound sunglasses may steal headlines (especially after they allegedly shoot Iraqi civilians), but the real money is in other lines of work. Long before Iraq, the use of PMCs alongside US troops had become an indispensable component of America’s

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“Total Force.” In an age of outsourcing, the Pentagon has followed suit, contracting dozens of PMCs to carry out essential military work that were once exclusively performed by uniformed soldiers. It is not surprising that the driver behind such outsourcing is cost—both political and financial. Dead private soldiers mean fewer dead uniformed soldiers. Military casualties are carefully recorded and often provoke fierce antiwar protests. Neither the media nor the public seem to care about PMC casualties, although about 1,800 died and 40,000 were wounded in Iraq and Afghanistan. One study reported that PMCs absorbed more than 25% of those killed in action in Iraq. Overall, given the scale and scope of PMC involvement (representing 50% of the defense workforce deployed to the Balkans, Iraq, and Afghanistan—see Exhibit 1), many experts now believe that the US (national) military is incapable of successfully carrying out large missions without PMCs. “Defense workforce” is defined as the combination of contractor (PMC) and uniformed (national military) workforce deployed to these theaters of operations. Civilian employees working for the Department of Defense (DOD) are excluded from these calculations. If they were included, the percentage would not change much because the DOD civilian employees represented less than 1% of the total force deployed there.

Global Competition and Challenges While well-connected American PMCs often win big contracts handed out by the US government, the competition is global. British PMCs, whose services represent Britain’s biggest export to Iraq and Afghanistan, grab more work from the private sector. Why are the British so competitive EXHIBIT 1  Personnel of Private Military Companies as Percentage of Defense Workforce in Three Recent US Operations Balkans Afghanistan Iraq 50%

62%

47%

Three operations combined 50%

Source: Extracted from Figure 1 in M. Schwartz, 2009, Department of Defense Contractors in Iraq and Afghanistan: Background and Analysis (p. 2), Washington, DC: Congressional Research Service.

in this line of work? Three reasons. First, many British PMCs are first movers, tracing their roots to the days when they were real mercenaries active in Africa when the British Empire collapsed in the 1950s and the 1960s. Second, British PMCs benefit from the clustering of many energy and mining companies in London, whose dangerous work often demands more security services. Third, British PMCs recruit from the British army, whose soldiers patrolled the mean streets of Northern Ireland without killing too many civilians. Such portable skills are highly sought after in Iraq, Afghanistan, and Syria. Two ethical challenges associated with PMCs emerge. The first is the morality issue associated with their deployment. For many regular soldiers, aid workers, and government officials, an instinctive reaction is, “Why should we respect these people who fight for money?” Nevertheless, privatization of government services is a global trend in general. In the military arena, the cost-effectiveness of PMCs is compelling. Some argue that the UN Security Council should have contracted PMC services to limit the Rwanda genocide in the 1990s, as it was contemplating at the time but failed to do so. The more recent genocide in Sudan’s Darfur region and UN member countries’ hesitation to commit national troops as Blue Helmets again led to calls for PMCs, which, in theory, can be deployed more rapidly and at a lower cost than Blue Helmets. The second and probably larger challenge confronting PMCs is accountability—or the apparent lack of it. For example, private contractors were involved in the torture scandal at the Abu Ghraib prison near Baghdad, but only military personnel were court-martialed while private contractors were outside the scope of court-martial jurisdiction. Further, contracts are often impossible to monitor, particularly when private soldiers are deployed in dangerous situations. Where there is no accountability, “rogue” firms and individuals may enter, severely undermining the industry’s reputation. The presence of PMCs in conflict and postconflict environments creates a significant institutional challenge as to what and whose rules of the game should govern PMCs. During a traditional war, national militaries are governed by the law of war or more specifically law of armed conflicts, whose most famous institution is the Geneva Convention. At all other times, the law of peace prevails and civilian casualties are not acceptable. However, the  distinction

376

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Integrative Case 10  Private Military Companies  377

between “war” and “peace” has broken down. Technically, the US Congress never bothered to issue a declaration of war against Afghanistan or Iraq, but nobody would argue there was much “peace” in Afghanistan or Iraq since the 2000s. Given such ambiguity of “neither war nor peace,” PMCs are essentially unregulated. In 2004, Paul Bremer, head of the Coalition Provisional Authority (CPA) in charge of Iraq, signed CPA Order 17 stating that “[private military] contractors shall not be subject to Iraqi laws or regulations in matters relating to the terms and conditions of their contracts.” In other words, PMCs working for the CPA—representing the US government—were granted immunity from Iraqi law. In October 2007, Blackwater found itself in hot water. The Iraqi government alleged that on September 16, 2007, Blackwater personnel opened fire indiscriminately at a Baghdad crossroad and killed 17 innocent civilians. Blackwater maintained that its men were under fire. Because Blackwater (and other PMCs) were formally immune from Iraqi law—thanks to Order 17—the best that the Iraqi government could do was to demand that Blackwater leave the country. The US Congress was in uproar concerning such an embarrassing incident and in October 2007 held a hearing on Blackwater—and, in fact, on the entire private military industry. Naturally, Blackwater’s staunchest defenders were the US officials protected by its private soldiers. US officials preferred Blackwater and other PMCs because PMC personnel were regarded as more highly trained than (national) military guards. Blackwater’s founder, Erik Prince, told the congressional committee that “no individual protected by Blackwater has ever been killed or seriously injured,” while 30 of its staff died on the job (up to that point). While measures for increased legal and regulatory oversight were called for by the highest levels of the US government, whether these measures would be implemented on the messy and dangerous ground in Iraq (and elsewhere) was not clear. Because Blackwater had immunity from Iraqi law at the time of the incident, the most severe punishment it received for its alleged misconduct was the US government’s decision not to renew its contract for Iraq in January 2009. However, the Iraqi government leveraged this incident and forced the US government to repudiate all PMCs’ immunity from Iraqi law in a status of forces agreement signed in December 2008. In other words, PMCs no longer have the “get out of jail free card” in Iraq. Back home, Blackwater faced a series of lawsuits, criminal charges, and investigations. In February 2009, Blackwater’s notoriety forced it to rename itself Xe Services LLC (pronounced “zee”). In 2011, Blackwater was sold to new investors and changed its name to Academi. In December 2009, President Obama announced the surge of 30,000 additional US (national) military personnel to be sent to Afghanistan. What he did not announce was that according to a study by the Congressional

Research Service (CRS), these 30,000 US (national) military personnel would be accompanied by another surge of 26,000–56,000 PMC personnel, bringing the total number of PMC personnel in Afghanistan to more than 130,000. Prior to these two surges, the percentage of people working for Pentagon who were PMC personnel already reached more than 60%, which, according to the same CRS study, “apparently represented the highest recorded percentage of contractors used by the Defense Department in any conflict in the history of the United States.” Clearly, despite the notoriety of some PMCs such as Blackwater, the private military industry has no problem increasing its market share in the business of war.

In Search of New Hot Spots As land wars in Iraq and Afghanistan were scaled back, some PMCs diversified. More recently, pirates in the Somali waters generated tremendous new business for PMCs that offer maritime security services. As of 2012, PMC personnel patrolled the decks of 40% of large vessels in the high-risk area in the Indian Ocean that stretches from the Somali coast to the Seychelles to the south and Maldives to the east. A four-man team can make $45,000 for safe passage through the high-risk area. While the price is high, PMCs have delivered value—no ship carrying PMC guards has been hijacked so far. If a ship were hijacked, ship owners would need to pay out millions of dollars in ransoms. Ship owners can offset some of the additional costs of having PMC maritime guards by savings on insurance. Basically, ships armed with PMC personnel can enjoy a lower insurance rate when plying the dangerous waters. Other new hot spots were Libya and Syria. The turmoil generated new opportunities. Some PMCs rushed in. The bloody Libyan and Syrian civil wars turned out to be another gold mine for enterprising PMCs. Who said entrepreneurs couldn’t handle chaos?

Enlightened Self-Regulation? As the industry aspires to become a “mature” one by diversifying into postconflict reconstruction and risk management such as in post-Qaddafi Libya (after all, there are only so many shooting wars to fight), its current unregulated nature is not sustainable. In the absence of regulation, PMCs’ seemingly secretive nature prevents them from being recognized as legitimate players. In response, the PMC community has set up the IPOA and BAPSC to advocate self-regulation. A very unmercenary code of conduct governing all IPOA members went into effect in 2001. Its 11th revision, publicized in 2006, promised that member PMCs only work for legitimate governments and organizations and that all rules of engagement must “emphasize appropriate restraint and caution to minimize casualties and damage.” In the long run, PMCs adhering to “aggressive self-regulation” hope to be perceived as

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378  Part 4  Integrated Cases

reliable, professional, and high-quality service providers. Far from being the dogs of war, declared BAPSC’s director-general, “we are actually the pussycats of peace.” This thought-provoking statement is indicative of the ethical dilemma of PMCs: While they prefer to dispel any mercenary notion that they are dogs of war, they also thrive on the mean-and-tough warrior mystique. After all, wrote the Economist, “who would use a pussycat as a guard-dog?” Sources: (1) Bloomberg Businessweek, 2011, As war winds down in Libya, enter the consultants, September 26: 17–18; (2) BusinessWeek, 2006, Tainted past? No problem, July 17; (3) Bloomberg Businessweek, 2011, For sale, cheap, December 19: 32–35; (4) Economist, 2007, Blackwater in hot water, October 13; (5) Economist, 2009, Splashing and clashing in murky waters, August 22; (6) Economist, 2012, Laws and guns, April 14: 69; (7) Economist, 2013, Beyond Blackwater, November 23: 65–66; (8)  Economist, 2016, Cruisin’ with guns, January 23: 41; (9) T. Hammes, 2010, Private contractors in conflict zones, Strategic Forum of National Defense University, 260: 1–15; (10) International Peace Operations Association, 2006, Code of conduct, ipoaonline.org; (11) Newsweek, 2007, Blackwater is soaked, October 15; (12) C. Ortiz, 2007, Assessing the accountability of private security provision, Journal of International Peace Operations, January; (13) J. Scahill, 2007, Blackwater: The Rise of the World’s Most Powerful Mercenary Army, New York: Nation Books; (14) M. Schwartz, 2009, Department of Defense Contractors in Iraq and Afghanistan: Background and Analysis, Washington: Congressional Research Service.

Case Discussion Questions 1. From an institution-based view, explain what is behind the rise of this industry. 2. From a resource-based standpoint, explain (1) how PMCs can outperform national militaries and (2) how certain PMCs outperform others. 3. Why are industry associations such as the IPOA and BAPSC so interested in self-regulation? 4. ON ETHICS: As an investor, would you consider buying the stock of a PMC such as DynCorp? Why or why not? Do you have any ethical reservations? 5. ON ETHICS: As an oil company executive setting up operations in a politically unstable and dangerous country, would you consider hiring security personnel from Blackwater?

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Integrative Case

11

SnowSports Interactive: A Global Start-Up’s Challenges1 SnowSports Interactive executives confronted a number of challenges: Could they attract investors who could share their dream? Which countries could they spread their wings to? How should they spread their wings—that is, what global strategy should they implement? Could a start-up based in Brisbane, Australia, expand globally? If so, how? Marilyn L. Taylor, University of Missouri at Kansas City Xiaohua Yang, University of San Francisco Diaswati (Asti) Mardiasmo, PRD Real Estate “The best trick this season won’t be done on skis or a board, it will be worn.” SnowSports Interactive (SSI) executives felt that phrase appropriately described the new technology they were planning to introduce to the world of the ski industry in the winter of 2006–2007. However, in June 2006, the company confronted a number of challenges. What, executives wondered, did they need to do to maximize the potential for their company?

History of the Company SSI was born over a beer at a conference in Melbourne, Australia, in January 2004. Company founders Steve Kenny and Shubber Ali quickly envisioned their initial product as a skier tracker system. During 2004, Kenny completed an analysis of the global ski industry. He identified key gaps in the market and the combination of technologies available to fill them. In May 2005, SSI was legally born with Kenny as CEO and Ali as Chairman. The company’s core intellectual property combined the latest positioning, wireless, and identification technologies with proprietary tracking and analysis software. In simple English, SSI technology could locate people and assets at any ski resort in the world where the company’s technology was installed. The company was located in Brisbane, Australia, and became an i.Lab member in November 2005. The i.Lab was part of the Queensland government’s new Statewide Technology Incubation Strategy. Location in the i.Lab provided

the company with the opportunity to work with some of the leading business minds in Queensland and Australia. Nurturing, mentoring, and resources from i.Lab helped the company reach the next stage/level.

The Product and Services From 2004 through spring 2006, SSI associates concentrated on product design and technology development. The company called its initial product, a small lightweight tag worn by skiers and snowboarders, the Flaik (Exhibit 1). The Flaik device included multiple technologies, including GPS units to continuously monitor the position and time of users and GSM communications units to transmit position and time data to a network operating center. In March 2006, SSI and Mt. Buller Alpine Resort agreed to a beta test of SSI technology. The Mt. Buller Alpine Resort was located near Melbourne and was the fourth largest among Australia’s five major ski resorts. SSI provided both tracking technology and the firm’s wireless Internet service called whispar™ at Mt. Buller. The partners used a significant proportion of available funds to install the wireless system. SSI established an on-site office for company personnel who dealt directly with customers and observed firsthand how the technology operated on the slopes. The system came into operation on June 9, 2006, and the beta test ran successfully during the 2006 season. Sales of the whispar system increased daily during the first month of operation and continued a favorable growth pattern.

1. The case was developed based on face-to-face interviews with company executives and publicly available sources. The authors wish to express thanks to the SSI executives and other associates who continue to contribute to the ongoing development of this case study. © Marilyn L. Taylor, Xiaohua Yang, and Diaswati (Asti) Mardiasmo. Reprinted with permission. 379

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SSI executives wanted to dramatically enhance the experience of skiers, snowboarders, and downhill sliders worldwide. The company had developed extensive intellectual property combining the latest in GPS, Wi-Fi, and RFID technologies with proprietary tracking and analysis software. When asked what the company’s competitive advantage was, an SSI representative responded, “The SSI advantage is simple. We provide a simple, compelling user experience through the integration of the latest technology with unique, proprietary applications and services, all in a sleek package with a simple user interface.” The Flaik would be another accessory offering for the skier. Accessories, apparel, and apparel accessories were a must on the slopes. Among items that had been popular in recent years were anti-outerwear, urban influences for edgy looks, hip in the city, hip on the slopes, denim in snowboard pants, synthetic leather pants, prints like zebra, military fatigues, great fitting clothes for women, pockets with CD players, and avalanche devices in garments for backcountry (see Exhibit 1).

The Industry The snow sports industry comprised many facets, including manufacturing, retailing, resort development, and tourism. The industry’s success was dependent on an often fickle Mother Nature—that is, on whether the season had

EXHIBIT 1  The Flaik: “Red, Hot, and Sexy”

Source: Snowsports Interactive, 2006.

sufficient snow. The snow season was different on the five populated continents, and SSI would need to adapt its business model accordingly. Snow depth was considered very important in the skiing industry because it determined whether a ski resort stayed open or not, the amount of operational days within a season, and the number of lifts operating within the season. The industry reported that the 2003–2004 ski season was the third best season ever in terms of skier visits despite persistent negative factors such as a slowly rebounding international economy, a jobless recovery in many sectors of the economy, high gas prices, muted consumer confidence levels, and international tensions. The snow sports industry was primarily known for its skiing, snowboarding, and cross-country skiing. In the United States, the demand for alpine ski lessons had increased, with a 1.1% increase between 2002–03 and 2003–04 (from 17,935 lessons in 2002–03 to 18,135 in 2003–04). The number of snowboard lessons had a smaller increase of 0.2% (from 6,101 in 2002–03 to 6,113 in 2003–04). A new sport that had become recently popular was New School—a youth movement about music, festivals, and action sports. The movement was a fusion of snowboarding, skiing, skateboarding, bike stunt riding, motocross, and surfing. The movement was hot with those 12 to 16 years of age. Another sport that had become popular was telemark skiing, where downhill skiers “floated” down the mountain with their heels unattached. Telemark skiers mostly accessed backcountry because it offered freedom and untouched powder for advanced skiers who wanted to push their limits. The industry had created many innovative products and experienced significant gains in women’s and children’s equipment and apparel stores. The industry recognized that it heavily relied on affluent but aging baby boomers. However, the industry was also marketing itself to Generation Y (Gen Y). The Gen Y group was defined as those born immediately after Generation X (Gen X), those born in the 20th century. Thus, Gen Y included people in their early and mid 20s, teenagers, and children over age five. The term Gen Y was most popularly used in the United States, but its use had gone far beyond there and thus came to refer to the youth throughout the Anglophone world. The Gen  Y age group was more diverse than previous generations. For example, 40% of those 16 to 24 years of age were not Caucasian.

380

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Integrative Case 11  SnowSports Interactive: A Global Start-Up’s Challenges  381

In the United States, the snow sports industry was governed by SnowSports Industries America (SIA). SIA was a national, not-for-profit, member-owned trade association of competing snow sports companies. Its membership was open to product manufacturers, distributors, suppliers, and retail shops. Service providers, including Internet and web designers, could be involved through limited memberships. SIA was known for its comprehensive report on the global skiing market. The industry also included manufacturers, importers, distributors, and retail suppliers of equipment, apparel, and accessories. Some of these companies were divisions of major corporations listed on the New York Stock Exchange. Others were small, independent companies. The greatest strength of the independent companies lay in their ability to innovate in the design of new products, products that were constantly giving skiers and riders fresh reasons to hit the slopes. In the United States alone, there were 8,500 retailers and other companies that offered winter sports products for sale, rental, use as promotions, and use for professional purposes. Out of that 8,500, about 2,000 were specialty and chain stores that sold apparel or accessories related to winter sports but were not what would be called a ski and snowboard shop. The consumer profile of the snow sports industry continued to exhibit stability with many visitor characteristics and gradually shifted with others. Among the most prominent shifts were the continued aging of the visitor base and a related increase in experience in snow sports. There are also signs of gradual increase in participation by children in the 10–14 and 15–17 age groups, first-timers and beginners, and different races and ethnicities. Currently, SSI’s main competitors for the Flaik included NASTAR, Slope Tracker, Suunto, and NAVMAN. SSI

identified its competitive advantage in real-time remote monitoring, the ability to locate friends, and safety applications. SSI’s potential competition came from two main streams—namely, recreational GPS receiver and sports tool manufacturers and recreational snow sports analysis service providers. However, SSI executives felt they were differentiating themselves as a company that would provide customers a low-cost, easy-to-use service with functionality that far outstripped that provided by existing manufacturers and service providers.

The Financial Situation One of the challenges SSI as a global start-up continued to face in mid-2006 was how to finance growth and capitalize on its current greenfield opportunity presented by the lack of dedicated ski-tracking companies. SSI was initially funded by Kenny and Ali. The two founders then relied on a round of financing provided by “three F’s” (family, friends, and fools). In mid-2006, SSI was in the process of placing a round for US$1.5 million at US$3.50 a share (i.e., a company valuation of US$6.06 million). The company had recruited Mike Wallas, CEO of Enterprise Growth Solutions, to secure this round from a combination of high-net-worth individuals, investment groups, and venture capitalists. The company had also secured government funding through Commercializing Emerging Technologies (COMET) and was currently preparing grant applications for Commercial Ready, the Queensland Innovation Start-Up Scheme, and the (Australian) federal government’s Export Market Development Grant. Most experts identify financial issues as among global start-ups’ major challenges. SSI executives agreed. The company’s five-year profit and loss forecast is presented in Exhibit 2.

EXHIBIT 2  SSI Five-Year Profit and Loss Forecast (in US$)

$60,000,000 $50,000,000

Revenue Total Expenses Operating Profit/(Loss) Before Tax

$40,000,000 $30,000,000 $20,000,000 $10,000,000 $-

2006–2007 2007–2008 2008–2009 2009–2010 2010–2011

Source: Snowsports Interactive, 2006.

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382  Part 4  382  Integrated INTEGRATIVE CasesCASE 11  SNOWSPORTS INTERACTIVE: A GLOBAL START-UP’S CHALLENGES

The Company Strategy SSI identified five potential revenue sources in its business model: ski school applications, user applications, resortmanagement applications, sponsorship and advertising, and wireless Internet. A tentative global strategy SSI had adopted to raise funds involved creating partnerships with ski resorts. SSI executives envisioned approaching target markets for expressions of interest. Each partnership would involve creating a limited liability company with a ski resort company. The limited liability company would be operated by a combination of the existing SSI Australian team and a local team. SSI executives identified the benefits offered to the resort itself as well as to the users of the system. These benefits included: ●●

●● ●●

●●

●●

improved efficiency of ski school operations resulting in increased utilization of resort assets, including the ski runs and thus increased revenue; increased safety for ski school participants; improved peace of mind for participants who could locate current positions of friends and family anywhere on the mountain—an aspect deemed to be especially useful to parents in trying to keep track of children, ski schools instructors tracking the whereabouts of their students, or the ski patrol trying to locate missing skiers; enhanced skier experiences on the slopes by keeping score of performance statistics and enabling the skier to compare rankings with friends, family, and competitors; and extension of the skiing experience beyond the slopes by creating an online memory of skiers’ time on the mountain to share at a later date.

As an SSI partner, each resort would have two options for infrastructure deployment. The infrastructure would support the range of applications that SSI would provide to the resort operators and guests. The options were: (1) a resort purchases infrastructure that included a three-year life span with license and services contract charges yearly for three years, or (2) a resort leases infrastructure for three years with the license and services contract charged annually for three years. The partnership agreement called for SSI to provide a user-friendly process for customers through three elements: (1) integrating Flaik into existing point-of-sales systems to simplify the rental process for users, (2) providing upselling of data to parents of ski school participants, and (3) providing optimal placement locations for interactive kiosks in congregation areas such as lodges for customers to use across the resort. Revenue-sharing opportunities between SSI and its resort partners included the upselling of performance data

to parents of ski school participants, provision of wireless access to customers using the whispar service, and rental of Flaik devices to non-ski school participants during the first phase of deployment. The infrastructure and supporting technologies utilized by SSI were sourced from leading technology providers around the world and, where necessary, adapted to alpine environmental conditions. SSI’s current ecosystem of network partners included Wireless Tech Group, CMD, Power Converter Technologies, Strix Systems Inc., MassMedia Studios, and Abuzz Technologies. SSI believed that its primary competitive advantages lay in continual innovation through an evergreen researchand-development (ERD) program that would allow SSI to update the functionality, flexibility, and interactivity of its front-end user software on a seasonal basis and its hardware every 12 to 18 months. The company planned to protect its intellectual property through a variety of means, including patents, trademarks, copyrights, trade secret designs, and circuit layouts. The company also planned to use and enforce confidential nondisclosure agreements. SSI identified the company’s business activities as subject to relatively high risk factors, risks that were related to its business activities and also of a general business nature. SSI executives fully acknowledged that the company’s risks were higher than those generally faced by other companies. These risks included limited operating history and forecasted losses, intellectual property, national and international regulations, specific country laws, dependence on third-party suppliers, schedule delays, seasonal market fluctuations, and competition. To manage such risks, SSI managers prepared a risk-management plan detailing both preventive and contingency actions.

A Global Market for SSI? SSI executives recognized that signing the agreement with Mt. Buller was “just baby steps” on a long road and the only way to grow business was to expand into international markets given the seasonality of the ski industry. The company’s executives had identified several countries as its target market, including the United States, Canada, Japan, Europe, China, and New Zealand. In-house market research suggested that the North American market was the most promising market. One reason was the abundance of information SSI had been able to acquire on the North American market. Although there was more limited information on other target market countries, the executives aimed to spend time investigating those other country markets. They wanted to identify and aggressively address countries throughout the world  that  had snow skiing activities. As Kenny put it in June 2006:

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IntegrativeIntegrative Case 11  SnowSports Case 11  Interactive: SnowSportsAInteractive: Global Start-Up’s A Global Challenges  Start-Up’s Challenges  383 383

We currently have one location, i.e., Mt. Buller. And, we need to be in more resorts in Australia, but there are only five major ski resorts and four minor ones here in this country. The most lucrative market, of course, is the USA where there are 493 ski resorts. We could focus on Japan, but that takes a different protocol and we would have to redesign our technology. However, we have had inquiries from Japan and there are a couple of people associated with Hokkaido resorts. We need to think this through. Sources: (1) The authors’ interviews; (2) SnowSports Interactive, 2006, SnowSports Interactive Information Memorandum, Brisbane, Australia; (3)  SnowSports Interactive, 2006, Resort Visitor Statistics, Brisbane, Australia.

Case Discussion Questions 1. Assess the company as a potential investor. Use a thorough SWOT analysis as a basis for your assessment. Utilize the VIRO analytical tools from the resource-based view to assess SSI’s core competences. 2. What are the major risks the company faces as it implements a. its domestic market strategy? b. “born global” strategy? 3. What advice do you have for SSI founders for future international expansion? Which market(s) should SSI expand into first?

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Integrative Case

12

Business Jet Makers Eye China1 Business jet makers of all stripes are elbowing their way into China’s virgin skies. Will China’s institutions facilitate or prohibit their flights? Do they have the necessary resources and capabilities to soar? Mike W. Peng, University of Texas at Dallas “The Chinese economy slows down” is one of the leading themes in global business news. Foreign firms interested in the legendary “one billion customers” are advised to adjust their high-flying expectations down to Earth. Defying this trend, business jet makers continue to have skyhigh expectations for China—for a good reason. Arriving in China as recently as in 2003, this industry is literally just “taking off.” Business jets (also known as corporate jets or private jets) are ideal for China, which has a vast territory good for flying—the third largest in the world behind Russia and Canada. China has also amassed the world’s second largest number of billionaires (behind the United States) and is rapidly churning out new ones who can afford to buy jets. Yet, only fewer than 400 business jets currently fly in China, a number that is not only smaller than the number in Brazil and Mexico, but also smaller than what can be found in one single airport in the United States—Orange County airport outside Los Angeles.

Institutions The rise of China for business aviation also coincides with the aftermath of the 2008 global financial crisis, during which many buyers canceled their orders. It is not surprising that anybody who is somebody in business aviation is eager to elbow its way into essentially the virgin skies of China. But here is an institution-based catch. The skies in China are formally controlled by the military, and flight plans have to be submitted via a cumbersome process. Beijing’s airport only gives two takeoff slots an hour to business jets. Buyers importing jets are hit by onerous duties and taxes, and officials have talked about slapping a new luxury tax on top of those. Further, an anticorruption (and anticonspicuous consumption) campaign unleashed

by President Xi Jinping has scared away a lot of large stateowned enterprises (SOEs), which used to make up approximately 15% of the business jet market in China. SOEs now buy only about 5%. While institution-based barriers persist, the government has offered a glimmer of hope. It seems to have realized the value of business aviation. The latest five-year plan explicitly calls for the development of non-airline aviation, and the military is instructed to give up some chunks of air space to leave room for business jets. The industry, of course, has been marketing and lobbying intensely, claiming that business aviation is not merely a luxury, but also a productivity booster that can propel firms’ (and China’s) growth to new heights.

Resources and Capabilities Leveraging resources and capabilities, each business jet maker is endeavoring to outshine the others. Beech Hawker, Cessna, and Gulfstream of the United States, Dassault Falcon of France, and Learjet of Canada (owned by Bombardier) are the traditional competitors. Each carries eight to 12 passengers and offers privacy, luxury, and often very long range flight capabilities. Salivating over growth potential, the top three larger jet makers—Boeing, Airbus, and Embraer (of Brazil)—have also entered the fray. Boeing adapted its 737 to offer the Boeing Business Jet (up to 60 passengers). Airbus modified its A320 to launch the Airbus Corporate Jet (up to 40 passengers). Embraer turned its ERJ 190 regional jet into Lineage 1000 (up to 20 passengers). These ultralarge business jets offer more spacious interiors, better air circulation (due to their larger cabin), and longer range—at price points competitive with those of the traditional business jets.

1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 384

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In China, the current market leader is Gulfstream, which has sold more than 100 jets and holds the biggest market share. Gulfstream does whatever it takes to win orders, including changing the model number instead of offending potential buyers with an unintended meaning. Specifically, in 2011, Gulfstream renamed its G250 introduced in 2008 to G280. Its website explained: “As demand for Gulfstream business jets grows around the world, the move was prompted by the company’s sensitivity to the varied cultures of its international customer base.” While it never explained exactly why, it was because “250” means “stupid” or “useless” in some parts of northern China. One senior executive explained to the press that “we determined that G280 is a more amenable number sequence in certain cultures.” Such market-oriented efforts have been handsomely rewarded by eager Chinese customers. In April 2014 at the Asian Business Aviation Conference and Exhibition in Shanghai—a major industry gathering—Gulfstream signed a 60-plane deal with Minsheng Financial Leasing, the aviation-finance arm of a major private bank in China. This is not only one of the largest deals for Gulfstream, but also one of the largest worldwide. As the industry takes off, rising signs of sophistication emerge. A decade ago, the first Chinese buyers tended to pay cash and flew rarely—only to impress friends. Today’s buyers often take advantage of financing or leasing (as evidenced by the Gulfstream–Minsheng deal). They fly more and endeavor to get more bang out of their bucks. Some of them cannot wait one to two years, so they have done something unthinkable for the superrich: buying used jets. Experts estimate that in the next 20 years, demand in China will be the third largest in the world, resulting in 1,500 business jets— behind 9,500 in the United States and 4,000 in Europe.

Case Discussion Questions 1. Why are business jet makers so eager to enter China? 2. From an institution-based view, what needs to be done to enhance the prospects of this industry in China? 3. From a resource-based view, what does it take to win in China? 4. ON ETHICS: As CEO of a business jet maker in the United States who is eager to sell more planes to China, you are going to meet with a senator who is famous for advocating a policy of “decoupling from China.” What are you going to say to her?

Sources: (1) Airport Journal, 2013, Business jet player plans to spreads its wings in China, June: 17–49; (2) Economist, 2014, Business aviation: Fasten seat belts, April 19; (3) South China Morning Post, 2012, Bargain hunting takes flight, July 10: A4; (4) www.abace.aero; (5) www.gulfstreamnews.com.

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Integrative Case

13

Carlsberg in Russia1 The world’s fourth largest beer maker, Carlsberg has become the undisputed leader in Russia. What are some of its lessons from operating in Russia? Mike W. Peng, University of Texas at Dallas In the early 1900s, Danish firms rushed to invest in czarist Russia, building engine factories, cement plants, and slaughterhouses. Their advanced technologies gave them competitive advantages in the vast Russian market that gradually opened to foreign direct investment (FDI). Then came the Russian Revolution of 1917, and all was lost as these businesses were expropriated. For the next seven decades, Russia had essentially zero FDI. When Soviet rule came to an end in 1991, Danish firms rushed in again. After all, Russia was the crucial “R” in BRICS (Brazil, Russia, India, China, and South Africa). The world’s fourth largest beer maker, Carlsberg was particularly successful, building a 38% market share and becoming the undisputed leader in Russia. As part of its commitment to Russia, Carlsberg sponsored the national hockey league and the Sochi Olympic Games. In 2013, Russia contributed 35% of Carlsberg’s global revenues. The success in Russia, however, exposed Carlsberg to its political and economic volatilities. In the 1990s, when Russia was experimenting with democracy, the economy collapsed. By official estimates, GDP fell by approximately 40%. In the early 2000s, the economy was surging at 7% annually, but remained highly volatile. Russia significantly depended on exports of oil and gas, and thus on the world market prices of these commodities. Moreover, as Russia became richer and stronger (in part thanks to high oil prices), the government seemed to become more assertive vis-à-vis foreign firms. For example, the government put pressure on foreign oil companies such as BP to relinquish control over their operations to Russian partners. While brewing is not a politically sensitive industry, institutional transitions still have a profound impact on Carlsberg. Russian leaders from the czars to Vladimir Putin periodically attempted to convince their citizens to

drink less alcohol. As Putin unleashed fresh efforts to reduce alcohol consumption by increasing alcohol tax, the beer market shrank. In addition, new laws banned TV, radio, and outdoor advertising of alcohol. Also banned was the selling of alcohol in street kiosks, which traditionally enjoyed 26% of off-trade sales (retail sales other than those in restaurants, bars, and hotels) of beer in Russia. Such changes deeply impacted brewers such as Carlsberg in three ways. First, demand surged ahead of the first implementation date of the new tax as consumers stocked up their supplies, only to sharply drop in the next quarter as supplies purchased earlier were gradually consumed. Such ups and downs created enormous stress for logistics and supply chain management. Second, marketing resources had to be reallocated to, for example, in-store displays and  online marketing. Third, constraints on sales channels and advertising shifted the pattern of consumption, leading to sales drops. Then the economic crisis—thanks to the collapsing oil price— further knocked off the demand for beer, especially in the premium segment. By 2014, capacity utilization in Carlsberg’s Russian breweries did not exceed  60%, prompting speculation about possible brewery closures. In 2014, Carlsberg was hit by the deteriorating Russian economy, worsening geopolitical relationships between Russia and the West, and collapse of the ruble. The trade sanctions imposed by the European Union and the United States did not hit Carlsberg directly, because most of the beer it sold in Russia was made locally. Yet the economic crisis did: Beer consumption dropped, and the value of its Russian investments depreciated when the ruble dropped in value. Therefore, every time there was bad news from Russia, Carlsberg’s share price took a hit. In the second half of 2014, its shares lost 20% value.

1. An earlier version was published in Mike W. Peng and Klaus E. Meyer, 2016, International Business, 2nd ed. (pp. 54–55), London: Cengage EMEA. © Mike W. Peng. Reprinted with permission. 386

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Doing business in Russia is never easy. Foreign firms deploy different coping mechanisms. In fear of greater political risk such as the possible introduction of capital controls, some foreign investors such as Danish building materials giant Rockwool divested major assets in Russia. When the ruble collapsed, importers faced grave losses because their sales were invoiced in the ruble but their costs were in a foreign currency. As a coping mechanism, French–Japanese automaker Renault Nissan simply stopped taking orders because it could not appropriately price the cars, which had major imported components. In 2015, Carlsberg reduced capacity by closing two breweries. Despite the challenges, Carlsberg remained committed to Russia, hoping for an economic recovery and a warming up of the geopolitical relationship between its host country and the West. Political risk aside, Russia’s fundamental strengths remain. While its GDP is smaller than that of China and Brazil, it is  larger than India’s. Russia’s per capita GDP (approximately $16,000 at purchasing power parity) is one-third higher than that of Brazil, three times that of China, and five times that of India. In Europe, Russia not only has the

second largest beer market but also the second largest car market (both behind Germany). Worldwide, Russia has more college graduates (as a percentage of population) than any other country, offering a highly educated workforce. Simply put, Russia may be too big and too rich to ignore. Sources (1) BBC News, 2014, Manufacturers face “bloodbath” in Russia, says Renault Nissan boss, December 19; (2) Carlsberg Annual Report, 2011–2016, various issues; (3) Carlsberg Shareholder News, 2012–2014, various issues; (4) Economist, 2011, BP in Russia: Dancing with bears, February 5; (5) M. W. Peng, 2017, The peril and promise of Russia, in Global Business, 4th ed. (pp. 35–36), Boston: Cengage.

Case Discussion Questions 1. Why is investment in Russia considered politically risky? 2. Despite the political risk, why do foreign multinationals such as Carlsberg eager to invest in Russia? 3. If you were a Carlsberg board member, would you vote “yes” or “no” for a new project to acquire a local brewery in Russia?

387

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Integrative Case

14

Enter North America by Bus1 A new entrant from Britain, Megabus has transformed a lackluster travel mode—intercity bus travel—to one that attracts a younger and more educated crowd. How does it accomplish this? Mike W. Peng, University of Texas at Dallas If you are a college student in the United States or Canada, you may have heard of (or taken a ride on) Megabus. Its website announces that it is “the first, low-cost, express bus service to offer city-to-city travel for as low as $1 via the Internet.” Currently serving hundreds of North American cities from 12 hubs (Atlanta; Chicago; Dallas; Fort Lauderdale; Janesville, Wisconsin; Los Angeles; Miami; New York; Orlando; Philadelphia; Toronto; and Washington, DC), Megabus, according to Bloomberg Businessweek, “has fundamentally changed the way Americans—especially the young—travel.” A generation ago, Greyhound was a national icon for intercity bus travel. Unfortunately, as Americans and Canadians fell more in love with cars and the cost of airfares dropped further, intercity bus ridership steadily decreased. Further, as inner cities, where the bus depots (terminals) were situated, decayed, bus travel had become the travel mode of last resort. In 1990, Greyhound filed for Chapter 11 bankruptcy. Yet, the demand for medium-distance trips that are ideal for intercity bus does not go away. For some of the most traveled routes (such as between Chicago and Detroit and between New York and Washington, DC), the distance is too far for a leisurely drive but too close to justify the expense (and increasingly the hassle) of air travel. While Greyhound has been in decline, small, entrepreneurial bus operators known as the Chinatown buses emerged. They started by shuttling passengers (primarily recent Chinese immigrants) between Chinatowns in New York and Boston. Such niche operators quickly grabbed the attention of many college students. Despite four decades of decline, overall US intercity bus ridership spiked in 2006, the year during which Megabus entered the US market. In 2008, Megabus entered Canada.

Although Megabus is a brand new, no-frills entrant into the North America market, it is backed by the full strengths of the second-largest transport firm in Britain, Stagecoach Group, which employs 18,000 people there. Founded in 1980 and headquartered in Perth, Scotland, Stagecoach not only operates buses, but also trains, trams, and ferries throughout Britain, moving 2.5 million people every day. It is listed on the London Stock Exchange, where it is a member of the FTSE 250. Megabus is a brand of Stagecoach’s wholly owned US subsidiary, Coach USA. Stagecoach is not a stranger to international forays, having previously operated in Hong Kong, Kenya, Malawi, New Zealand, Portugal, and Sweden. However, these operations turned out to be lackluster and were all sold. For now, the sole international market it focuses on is North America. Although Megabus is clearly a late mover in North America, its future looks bright. So what allows Megabus to turn a declining national trend of bus ridership around? At least four features stand out. First, tickets are supercheap, starting at $1 (!). Megabus uses a yield management system, typically used by airlines, which offers early passengers dirt-cheap deals and late passengers progressively higher prices. Although only one or two passengers per trip can get the $1 deal, even the “higher” prices are very competitive. In routes where it competes with Amtrak (the railway), Megabus costs about a tenth of Amtrak. All tickets have to be booked online. This not only eliminates the expenses of maintaining ticket booths, but also attracts a more educated demographic group. Second, instead of using depots, Megabus follows the Chinatown buses by using curbside stops (like regular city bus stops) to board and disembark passengers. Interestingly, dumping the depot model not only saves a lot of money, but also makes Megabus more attractive because passengers do

1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 388

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not have to spend time in the typically poorly maintained (and sometimes filthy and unsafe) bus depots. Third, all Megabus coaches are equipped with Wi-Fi and power outlets, allowing the time on board to be more productive (or more fun). These features have made travel by bus totally cool to the online savvy, younger crowd. Among surveyed passengers, 37% said that Wi-Fi and power outlets were central to their decision to travel by Megabus. Finally, as gas prices and environmental consciousness rise, bus travel offers an unbeatable “green” advantage. At eight cents per mile, a bus is four times more fuel-efficient than a car. US curbside carriers, led by Megabus, have already reduced fuel consumption by 11 million gallons a year, equivalent to taking 24,000 cars off the road. While politicians like to talk about the “bright future” of highspeed rail and $10 billion has been budgeted to jump-start the new rail projects, not a single high-speed railway has been in service as of this writing. At the same time, Megabus has been charging ahead and carrying more than 13 million

passengers since its entry, while requiring zero additional investment in infrastructure. Given the cost and political headache to build new high-speed rail, Bloomberg Businessweek speculated: “The Megabus approach works so well, it may scuttle plans for high-speed rail.” Sources: (1) Bloomberg Businessweek, 2011, How to keep the world moving, December 5: 80–86; (2) Bloomberg Businessweek, 2011, The Megabus effect, April 11: 62–67; (3) Megabus, 2020, Bus route guides, www.megabus.com; (4) Stagecoach Group, 2012, www.stagecoachgroup.com

Case Discussion Questions 1. Facing an iconic local incumbent, how does Megabus overcome its liability of foreignness? 2. Why is Megabus able to transform a lackluster travel mode to one that attracts a younger and more educated crowd? 3. If you were CEO of the “new (post-Chapter 11 bankruptcy) Greyhound,” how would you react to the competitive challenges brought by Megabus?

389

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Integrative Case

15

Etihad Airways’ Alliance Network1 Unable to join any one of the major multipartner airline networks, Etihad Airways has built its own alliance network around the world. Does Etihad have what it takes to lead a bunch of also-rans? Mike W. Peng, University of Texas at Dallas Founded in 2003 and based in Abu Dhabi, Etihad Airways is both inspired by Emirates Airlines and a direct competitor of Emirates, which is based in Dubai, a fellow emirate in the United Arab Emirates (UAE). Etihad, which means “union” in Arabic, has quickly become the fastest-growing airline in the history of commercial aviation. With more than 100 aircraft, Etihad flies 11 million passengers to nearly 100 destinations around the world. Now the fourth-largest airline in the world, Emirates is a mammoth with 220 aircraft that carry 40 million passengers to more than 100 cities. Etihad imitates the highly successful Emirates by (1) equipping itself with modern long-haul jets (such as Airbus A380 and Boeing 777 Extended Range [ER]) and (2) leveraging the enviable location of the Abu Dhabi International Airport, which is only an hour away by car from Dubai’s storied airport. Given the small local population (three million in Abu Dhabi vis-à-vis four million in Dubai), Etihad—like Emirates—can only grow by being a “superconnector” airline. In other words, most of the passengers travel neither from nor to Abu Dhabi. Blessed by its Middle East location, Abu Dhabi, just like Dubai, is an ideal stopping point for air traffic between Europe and Australasia and between Asia and Africa. One area that Etihad has decisively deviated from its role model Emirates is an interest in weaving an alliance network. Other than a single alliance with Qantas, Emirates either has been very shy or does not care about collaboration. In an industry with three major multipartner networks—One World, Sky Team, and Star Alliance—airlines are no strangers to alliances. But Etihad’s alliances are unique. Its talks to join these three mega networks did not go anywhere, because none of them was interested in admitting an ambitious new member determined to eat their lunch. Frustrated, Etihad built its own alliance network consisting of eight smaller

airlines, in which it made a series of equity-based strategic investments. In 2011, Etihad took a 29% equity in Air Berlin, Europe’s sixth-largest airline at that time. Since then, Etihad acquired stakes in the following airlines: ●● ●●

●●

●● ●●

●● ●●

Aer Lingus based in Dublin, Ireland (4% equity); Alitalia based in Rome, Italy (49%), the largest airline in Italy; Air Serbia based in Belgrade, Serbia (49%), the largest airline in Serbia, formerly known as Jat Airways; Air Seychelles based in Mahe, Seychelles (40%); Darwin Airline based in Lugano, Switzerland (34%), which was recently rebranded as Etihad Regional; Jet Airways based in Mumbai, India (24%); and Virgin Australia based in Brisbane, Australia (20%).

Etihad CEO James Hogan, who is an Australian, is viewed as a “white knight” who bailed out a bunch of money-losing or cash-poor airlines, including the struggling flag carriers of Ireland, Italy, Serbia, and Seychelles. Hogan has argued that his multibillion-dollar investments in airlines that serve smaller markets made economic sense by increasing Etihad’s passenger tally and securing economies of scale when competing with Emirates. But can Etihad turn such an alliance network profitable? The most challenging member is Alitalia, which lost $1.5 billion in five years, and Etihad spent $760 million to breathe new life into it. Always known for using nasty language, Michael O’Leary, CEO of Ireland’s and Europe’s largest airline Ryanair, bluntly told journalists that Etihad “bought a lot of rubbish, and increasing their stake in Aer Lingus is consistent with that.” Indeed, no other airline in the world is doing what Etihad is doing at this scale. Does Etihad, despite its

1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 390

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deep pockets, have what it takes to turn around a whole bunch of also-rans? In 2017, with mounting losses at Air Berlin, Etihad stopped financial support. Totally bankrupt, Air Berlin entered insolvency procedures and ceased operations in 2017. The biggest headache is Alitalia, from which Etihad also pulled the plug in 2017. Then Alitalia entered into bankruptcy but kept flying. In the onslaught of the coronavirus in 2020, air travel was dramatically reduced. Alitalia collapsed, and the Italian government—having failed to find a buyer since 2017—in March 2020 took full control of it, turning it into a state-owned enterprise but keeping it flying. Can Etihad, which is struggling itself, afford to keep its other junior partners flying?

Case Discussion Questions 1. From the perspective of Etihad, what are the pros and cons of its alliance network? 2. Why was Etihad’s application to join the three major multipartner alliance networks rejected? 3. In the postcoronavirus environment, can Etihad, which is struggling itself, afford to keep its junior partners flying?

Sources: (1) Bloomberg Businessweek, 2014, Will Etihad’s flock of also-rans fly? April 14: 22–24; (2) CEO Middle East, 2013, Airline alliances: New world order, June: 36–42; (3) Economist, 2020, The lockdown and the long haul, March 21: 15–18; (4) Flight Global, 2020, Alitalia to be renationalised under broad emergency decree, March 17: www.flightglobal.com; (5) Reuters, 2017, Etihad says it will no longer invest in Italy’s Alitalia, May 2: www.reuters.com

391

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Integrative Case

16

Jobek do Brasil’s Joint Venture Challenges1 Jobek do Brasil’s joint venture with a US partner, Hatteras Hammocks, is in trouble. The environmentally conscious Jobek do Brasil insists on using certified (sustainable) wood to make hammocks, but Hatteras has demanded uncertified wood products at more competitive prices. The troubled relationship has been compounded by the global economic crisis, which has reduced customers’ willingness to pay a premium for socially and environmentally responsible products. Will the joint venture survive? Dirk Michael Boehe, Massey University Luciano Barin Cruz, HEC Montréal Barny Köpf had just returned from Spoga, the international trade fair for outdoor equipment and furniture held in Germany. Despite the global economic crisis, the results achieved at the fair had been very positive for his company, Jobek do Brasil, a Brazil-based multinational manufacturer of leisure furniture and hammocks. However, Barny must resolve some issues before he can relax and enjoy the magical sunset from the patio of his beach house in Iguape, 50 kilometers from the city of Fortaleza on Brazil’s northeast coast. The main issue is what to do with the international joint venture (IJV) forged seven years ago with the US company Hatteras Hammocks. The IJV, which began with the sale of a 49.5% interest in Barny’s company, was causing him to lose sleep. Jobek had always maintained a focus on environmental protection. The wood used to make its hammocks came from certified sources, a fact that the company had always used as a competitive advantage. The owners of Hatteras, however, had never been concerned with environmental matters. Historically, its clients were large chains such as Walmart, and the focus was on low prices. What worried Barny was the fact that Jobek had adopted a strategy to enter international markets that had little or nothing in common with Hatteras’s strategy. This difference had become apparent over the years of

the partnership, which led to the initial terms of the IJV agreement not being fully observed. If the IJV agreement had been complied with to the letter, Hatteras would not be buying from China but from Jobek. At the same time, the contract for the exclusive distribution of Jobek products in the US market by Hatteras prevented Barny from selling to other US retailers and distributors he had met at the last trade fair. An ideal move would be to terminate the partnership, but how? Barny quickly dialed the number of his brother, Josef, the co-owner of Jobek.

The Hammock and Leisure Furniture Industry In Brazil, production is concentrated in a few centers of small-scale manufacturers located in the Northeast, especially in the state of Ceará. In Latin America, there are several such centers in Mexico and Colombia. In Asia, especially in India and China, there are various producers of diversified outdoor leisure furniture products, including sun umbrellas, tables, chairs, swing chairs, hammocks, and other textile products for the export market. In developed economies (such as Europe and the United States), companies have emerged with strong brands. They often

1. This case study is solely for the purpose of classroom discussion and does not propose to render an opinion on managerial effectiveness or ineffectiveness or serve as a primary source of data. © Insper Institute of Education and Research. Reprinted with permission. No part of this case study may be reproduced or transmitted by any electronic or mechanical means, including photocopying, recording or any storage system, without the express written consent of Insper Institute of Education and Research. Infractions are punishable under articles 102, 104, 106, and 107 of Brazilian Federal Law 9610 of February 19, 1998. For a Portuguese version, please email [email protected]. 392

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outsource production to or operate manufacturing plants in emerging economies. In recent years the sector has been undergoing change on a global scale. In the 1970s and 1980s, developed economies were responsible for most of production, as well as exports of the final product. As of 1980, however, emerging economies began to play a more important role due to their cheaper labor and raw materials. As a result, companies in developed economies began to specialize in design, product development, distribution, and sales, handing over production to producers in emerging economies. In this process, the importance of agencies that verify product quality and conformity began to increase.

Social and Environmental Certifications Preoccupation over the environment and sustainability has become increasingly apparent in the media and in public policies. Companies have come under increasing pressure to adopt the path of sustainability. However, a new problem arises. What does being responsible mean and how does it add value to a company that uses sustainability as a competitive advantage? It is well known that the cost of being environmentally responsible can be extremely high and that consumers around the world respond to it in different ways. As a result, more certifications have been created to support a reliable sustainability and social responsibility seal. They include the well-known ISO series, international reporting standards (such as the Global Reporting Initiative), and certifications in specific areas and sectors (such as those granted by the Forest Stewardship Council [FSC]). The FSC is an international and independent nongovernmental organization (NGO), and its seal is the most widely recognized by other international NGOs (including the WWF, Greenpeace, and Friends of the Earth) and by the consumer market. The FSC fosters responsible forest management, aiming to preserve the forests’ main economic, environmental, and social characteristics. The FSC provides two types of certification: Forest Management certifies organizations or agents that manage the forest in a sustainable manner in accordance with international standards and technical, economic, environmental, and social requirements. The main Chain of

Custody Certificate requirement is the traceability of raw material from the forests in question (in every stage of production from extraction to the final product sold to the customer). Jobek possesses the FSC Chain of Custody Certificate, granted after an audit to ensure that only certified wood was used in its products. The certification is valid for five years, during which the firm is subject to annual inspections to ensure compliance. Despite the FSC’s initiatives to reduce certification costs, it is still up to the contracting company to pay for the annual audits and inspections, in addition to an annual fee whose precise amount is determined by the size of the operation to be certified. Nevertheless, sustainability certificates are increasingly valued by consumers, especially in developed countries. Consequently, obtaining the FSC seal is an attractive option for Jobek do Brasil in that the seal adds value to its products through the green seal and a guarantee of high quality.

History of Jobek do Brasil At the end of the 1980s, Jobek’s founders, two German brothers, Barny and Josef Köpf, put their enterprising idea into practice. Barny recalls: In 1989, we started with the traditional Latin hammock, as we call it here: the hammock of Brazil and Mexico, hammocks without a rope, without a wooden framework. And so we started to import 400 hammocks as a test (from Ceará, Brazil, to Germany). We had no idea how it was going to work out but […] our neighbors liked them, since we started selling them straight from our garage […] Later we added support, accessories etc. Today Jobek is a multinational manufacturer of hammocks and leisure furniture based in two countries. The  first base was established in 1992 in Schwangau, Germany, where Barny and Josef Köpf were born. The second was founded in 2000 in Maracanaú, in the metropolitan region of Fortaleza, Ceará, in Brazil. Today they run the Maracanaú facility, which is also where the products are manufactured. The German headquarters is in charge of quality management and product sales. In Brazil, Jobek has 250 employees in the high season and 80 in the low season. The German facility has a staff of 25. 393

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394  Part 4  Integrated Cases

EXHIBIT 1  Jobek do Brasil’s Key Markets by Percentage Export markets Germany Canada

2005

2006

2007

2008

2009

47

47

45

47

66 5

7

USA France Switzerland

30

5

5

5

5

10

3

30

28

32

17

1

1

1

Spain

10

10

9

10

7

Other

5

2

2

3

5

100

100

100

100

100

1

1

2

3

5

Total exports Domestic market (Brazil) % of total produced Source: Jobek

Between  2005  and  2007, Jobek’s  annual  export revenue averaged more than US$5 million. In 2008, however, it was less. Export profitability varies between 1% and 10% of revenue. Germany is the main export destination, followed by France and Spain (see Exhibit 1).

Product Design Due to growing competition for mass-produced, low valueadded products, Jobek do Brasil has been focusing more on the premium niche. Some hammocks with accessories sell for more than €1,500 (US$2,000) each, thanks to innovative and exclusive design, rapid renewal of the product range, and possession of FSC certification, international safety certification (GS), and quality certification (ISO). In addition, some of the products’ attributes are beneficial for health. Hatteras Hammocks supplies a synthetic yarn called DuraCord exclusively to Jobek do Brasil, replacing the old cotton-based yarn. In addition to being cheaper than cotton, DuraCord is more resistant and durable while maintaining cotton’s soft texture. Jobek usually protects its more innovative products by patenting them. According to the quality and purchasing manager at the south German facility, the company is concerned with the continuous development of new products and is constantly striving to stay ahead of its competitors: “We are always two years ahead of the Asians because we’re continuously coming up with new products.” Jobek’s global value chain formed in the last few years encompasses suppliers in Brazil and China, production in Brazil, and distributors in Canada, the United States, and several countries in Europe.2

The Adoption of the FSC Certification Standard and the Supply of Certified Wood Although the FSC seal is only one certification among many, its name, brand, and reputation have become established in several markets and is the most widely recognized and respected in Europe. To promote the seal, the FSC attends trade shows and also communicates its proposal through television and magazines. Given the characteristics of the hammock-production sector and the growing tendency of seeking environmental and social certifications, companies need to ensure the sustainability of the global value chain within which they operate to maintain the global and general consistency of the differentiation proposal based on social and environmental responsibility. However, this is no easy task. Although Jobek do Brasil has been attempting to do precisely this, its IJV with Hatteras Hammocks has raised certain issues that merit some reflection. Certified wood suppliers are few in number and in a position to impose payment conditions almost unilaterally. In 2008, the FSC’s representatives in Brazil admitted that “there is a problem of wood supply and, at the moment, certified forests have stopped increasing.” While Jobek do Brasil’s distributors and retailers can make use of a 180-day credit line, the company has to pay for its certified wood in cash. Barny comments on the reasons for this imbalance: Like everything else, there are two sides to the story. The bad side is [that] today we are dependent on FSC

2. See Barin Cruz and Boehe (2008) for a detailed description of this global value chain.

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Integrative Case 16  Jobek do Brasil’s Joint Venture Challenges  395

suppliers, which is very difficult, since we are not the only ones seeking FSC-certified wood. The Chinese, the Vietnamese, the entire world is after this wood. Unfortunately, Brazil’s rules put us at a disadvantage. When it arrives here, from the interior of Pará (Brazil), our wood is already loaded with taxes, and freight is also very expensive. The Chinese go there, to Belém (Brazil) or Curitiba (Brazil), pay for their wood for export and get it tax-free. For us, buying wood is very complicated, not to mention frustrating. We currently have only one  FSC supplier. One! We are in the hands of a single supplier. Due to growing demand for certified wood, Jobek’s quality and purchasing manager in Germany and Jobek do Brasil’s export manager admit that the company has had to turn down orders. In fact, it has been suffering legal problems due to the bottlenecks in the supply of certified wood to a major German retail chain. Jobek has been trying to obtain alternative suppliers, in addition to certification from Brazilian agencies. However, this new certification has limited potential, since it is much less well-known than the FSC’s, which hinders the penetration of international markets. Jobek’s owners visit their supplier regularly to verify the quality of the wood and the volume produced, which has helped increase the company’s credibility with its international distributors and clients. The wood-certification auditor firm even considers Jobek as a pioneer in its sector.

International Marketing The success of Jobek’s international hammock sales depends heavily on public awareness of the company’s FSC certification. Barny points out that because Europe keeps a very close eye on what is happening in the Amazon region, Brazilian producers with a dubious ecological pedigree cannot take part in trade fairs in Europe. “If you sell an uncertified product, there’s a good chance you’ll have Greenpeace protesting in front of your store and no one wants that.” In this sense, the FSC’s disclosure efforts are already producing results worldwide. Jobek’s Canadian distributor believes that consumers are changing and that the green seal constitutes a definite advantage for the product. “Previously, it was the sellers who used to tell clients about the certification, but today it’s the customers who are demanding the FSC seal.” However, Jobek’s US distributor believes that certified wood products have no market there, since both retailers and customers regard price as the most important factor in purchasing decisions. As a result, Hatteras Hammocks began to demand uncertified wood products at more competitive prices. A Hatteras representative leaves us in no doubt regarding his opinion of certified wood:

Personally, I think it’s a great idea and everyone should support it. The problem is that the people who go to Walmart or stores of that type are not willing to pay more. It’s all or nothing. You can’t have a company that’s competitive just because it’s sustainable if there’s no market for it. The thing is that everyone wants to be environmentally correct, but they don’t realize the cost and they’re not willing to pay for it. Obviously, the emphasis on FSC certification is not enough in itself to promote Jobek’s products abroad. The product is closely associated with the Latin American culture—think of the life style of Latin American people, life in tropical regions, and beaches surrounded by palm trees. Because many people in the Northern Hemisphere envy such a life style, it makes perfect sense to exploit these concepts when promoting the product internationally. According to Barny, this is part of the strategy: We associated Brazilian culture with the product, which I personally think is very important. I used this strategy in Europe and at the trade fair. I said: in Brazil the culture is hammocks, the culture is coffee. What comes from Brazil? Fruit, caipirinha, exuberance—a hammock can’t come from India or China. And we used this as a marketing tool; we put it on the packaging. These products are the most expensive line we have, they use a lot of wood, 100% certified wood of course. The packaging with the coffee sack stamp […] was a great success.

Production and Distribution In June 2000, following investments of R$3.5 million (US$2 million), Jobek do Brasil opened a 6,900-square-meter factory in Maracanaú, which produces the entire line of hammocks, hanging chairs, and accessories. After peaking in 2004, when the facility turned out 500,000 items, production plunged in 2008 and 2009 due to dwindling US demand and the global economic crisis. As a result, Jobek reduced its direct workforce to around 80 in the low season and outsourced part of production. Until 2008, Jobek exported almost its entire output. It is the sector leader in Europe, with a market share of around 80%, but competition from Asia had begun to threaten its performance. Currently, it exports to more than 40 countries: more than three-quarters of production goes to Europe, whereas 15% goes to the United States, and 5% to Asia. Only 1% of output is sold in Brazil itself, mostly in the South and Southeast. Exports exceed 200,000 hammocks per year.

The International Joint Venture with Hatteras Walter R. Perkins, Jr., the founder and current CEO of Hatteras, acquired Pawleys Island and became the world’s largest hammock producer. Pawleys Island Hammocks was

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396  Part 4  Integrated Cases

the oldest hammock manufacturer in the United States, which had been handcrafting cotton hammocks since its founding in 1889. Pawleys Island Rope Hammock stood for high-quality material, mixing comfort and art. One of the Hatteras’s competitive advantages is the DuraCord yarn that was specially created for it. In view of the stronger competition, Jobek sought to increase its strength by forming an IJV. The partnership with Hatteras started in a curious way, as Barny explains: At the beginning of 2001 and 2002, we began to take part in trade fairs in the US, in Chicago, and apparently Hatteras had heard about us. They came to our stand, talked […]. In 2002, we began selling to Walmart and Sam’s, and Hatteras were seriously upset, because someone had broken their monopoly and they lost a major client. Hatteras’s response caught Barny and his brother by surprise: Hatteras’s CEO told me he thought we should talk instead of becoming competitors. Then they invited me to come to their headquarters in Greenville, North Carolina, so I did, and we were really interested in establishing a partnership with them, with production in Brazil, and so were they. The two biggest companies in the US and Europe were going to get together. To create more! Two times two doesn’t make four, it makes five. That was the idea. In 2002 and 2003, the dollar was exceptionally strong, almost four reais (Brazilian currency), so it was cheap for them to produce here (in Brazil). At the time, we had very little working capital, so we decided: “let’s sell 49.5% of Jobek to them.” And they promised to transfer all their production to Brazil, expand the factory here, the infrastructure, everything. We drew up the agreement, sold 49.5% to them and began to build a larger factory. In addition to building the new factory, the IJV agreement also established that Hatteras would have the exclusive right to distribute Jobek’s products in the United States, whereas Jobek would distribute Hatteras and Pawleys Island brand products in Europe. Jobek products would be sold in the United States under the Jobek do Brasil name, aiming to associate Brazil’s image with the Latin American hammock made of fabric, thus differentiating it from the typical American hammocks. The Americans were visibly committed to the new venture. The son of Hatteras’s founder, Walter Perkins III, spent four weeks in Maracanaú to help implement the basis for Hatteras hammock production, whose process is completely different from that used for the production of Jobek hammocks. In fact, the IJV got off to an excellent start. The Americans trained the Brazilian workers, who learned extremely quickly. For the Americans, who already had business ties with Chinese suppliers, Brazil was also ideal from a logistics point of view. Proximity to the

United States shortened sea transport significantly: from 35 days from China to only 12 days from Pecém, Ceará, to Norfolk, Virginia. However, much to Barny and Josef ’s surprise, in the course of the IJV, Jobek’s annual US sales plunged from US$3 million to just US$100,000. Initially, Jobek employees did not realize what was happening. Barny recalls: “We weren’t aware of it. Since they sold through a distributor, we never got the correct figure. Unfortunately, that was a mistake.” The experience left Jobek’s owners with a bitter taste because they were expecting to double the company’s revenue through the partnership. After all, they had changed the company’s entire infrastructure in Maracanaú and reserved “2,500 square meters of the factory just for them.” But in 2003 the exchange rate started to worsen: moving from 3.6 Brazilian reais per US dollar in January 2003 to 1.75 Brazilian reais per US dollar in January 2008. It did not take long for Brazil-based production of hammocks to lose its allure for Hatteras, which ordered more products from India and China. In hindsight, Barny remarks: They cut down on their orders and their idea was always to produce as little as possible—it wasn’t to sell our products in the US—and we began to realize that. They were not bad partners in the beginning. When you are a partner with almost 50%, when things become difficult, I expect you to remain a partner because the company is yours. Three years ago I called them and we had a meeting: “You have to place the orders or we’re going to have to change the infrastructure here. . . .” “No, but the orders are coming. . . .” And they continued acting like that […] they had come through the door but had never really entered. The situation got so bad that Hatteras has not placed a single order since May 2008. Barny concludes: “We have the infrastructure, their things are completely idle here and we no longer communicate with Hatteras.” On the other hand, European sales of Hatteras products through Jobek’s distribution channels were not very significant either. Analyzing the Hatteras IJV in hindsight, Barny observes: I think it was a big cultural problem. I’m German, they are Americans, and we are in Brazil. As a German, I see everything from a long-term perspective. Like this warehouse, which was built to last a lifetime. I think it’s a very different culture. And I saw a little of the difference between idealism and capitalism. I understood that it was no longer working with the Americans, not with that exchange rate. But maybe we could have come up with an alternative for another product line, adding more value. With a cheaper product I can’t produce more due to labor and infrastructure costs. I have to manufacture a product with greater added value or I have to rationalize more.

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Integrative Case 16  Jobek do Brasil’s Joint Venture Challenges  397

The Crisis and Future Challenges The impasse in the Hatteras–Jobek partnership was compounded by the global economic crisis, which affected people’s willingness to pay a premium for socially and environmentally responsible products, in turn penalizing those companies committed to such products. As a result, many certified wood suppliers (such as Precious Wood in Belém, Brazil) have gone out of business. Others (such as El Dorado) are in the process of doing so. “How can we honor our commitments to our clients abroad?” Barny wonders, “We only have a few orders, but we still have to fill a container with FSC-certified wood products by the end of the season.” As if that were not enough, the crisis also affected the other side of the global value chain: “On December 22, 2008, our largest French distributor, Interproduct, went under,” Barny recalls. It is Hatteras that is keeping Jobek’s owners awake at night. Barny and Josef both know that they would have been able to easily weather the crisis if they had not formed a IJV with the Americans and expanded the company’s infrastructure. “High fliers have the most to lose; now we have no working capital. In addition to being stuck for capital, there is also the agreement giving Hatteras the exclusive right to distribute Jobek’s products in the US. If it were not for that, we could capitalize on our advantages with sustainable products,” Barny declares. A possible change in US environmental policy could help Jobek. “Last night, the new American president Obama said on TV that the US economy would have to grow with […] renewable energy. In this case we are two steps ahead of Hatteras, who will be our competitor because they never cared about the issue.” At that moment, Barny remembers everything he learned from the Americans when they were in the factory in Maracanaú:

from products to how they estimated the costs. Nevertheless, it wouldn’t make any sense to compete with the same products. The products that Hatteras buys from China are cheaper. It would be smarter to compete with design, quality, innovation, with products that are not yet sold in the US. And we learned a lot from the Americans. If it weren’t for this exclusivity agreement […] they wanted to sell us their share, but since we don’t have enough working capital, how can we pay them? Barny questions, “Working capital is hard to come by because of the global crisis. They offered to sell their 49.5% for the same price they paid when they entered the partnership. That’s absurd,” he exclaims, outraged. “Because in the meantime they caused us a huge loss due to the lack of orders. So, how am I going to buy at the same price? You come in with no risk and you get out with no risk? Perfect, isn’t it?” Sources: (1) The authors’ interviews; (2) L. Barin Cruz & D. M. Boehe, 2008, CSR in the global marketplace: Towards sustainable global value chains, Management Decision, 46(1): 1187–1209; (3) Forest Stewardship Council, http://www.fsc.org; (4) Internal documents provided by Jobek GmbH, http://www.jobek.com.br

Case Discussion Questions 1. How would you evaluate the IJV between Jobek and Hatteras? 2. What was the international market strategy of Jobek? And of Hatteras? 3. ON ETHICS: What are the differences between the concept of corporate social responsibility used by Hatteras and Jobek? 4. Based on your evaluation, what should Jobek do? 5. Describe Jobek’s current competitive environment. What changes do you foresee in the future? How do you think they will influence Jobek?

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398  PART 2  BUSINESS-LEVEL STRATEGIES

Integrative Case

17

Saudi Arabia in OPEC: Price Leader in a Cartel1 Saudi Arabia is the undisputed price leader in OPEC—a cartel that engages in output-fixing and price-fixing involving multiple competitors that seek to increase joint profits. What are the characteristics of the behavior of the price leader? How does it leverage its capacity to punish in order to maintain the order of the cartel? Mike W. Peng, University of Texas at Dallas

OPEC The Organization of the Petroleum Exporting Countries (OPEC) was founded by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela in 1960. Headquartered in Vienna, Austria, since 1965, OPEC currently has 13 member countries— Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, Republic of the Congo, and the United Arab Emirates, in addition to the five founding members.2 OPEC members control approximately 44% of the world’s oil output. In 2016, a larger group—OPEC+—was formed, incorporating ten loosely allied members (not full members): Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. The combined group of 23 countries account for half of the world’s output. OPEC’s official mission is to “coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” OPEC is a textbook example of a cartel—defined as an output-fixing and price-fixing entity involving multiple competitors that seek to increase joint profits. OPEC members engage in explicit collusion, by directly negotiating output and pricing in order to divide markets. The injured parties are customers— oil-importing countries. During the two Oil Shocks in the 1970s (1973–1974 and 1979–1980), OPEC reduced output, drove up prices, and caused worldwide oil shortages and economic recessions. However, as a cartel OPEC is different from cartels formed by companies, which are often illegal and—if caught—prosecuted by governments.

As an intergovernmental organization, OPEC is formed by sovereign countries and their collusion (hereafter coordination, which is a term used by OPEC itself) is protected by the doctrine of state immunity under international law. In other words, there is no higher authority in the world that can punish such cartel behavior—the United Nations is toothless in this regard. Because most cartels are secretive, OPEC whose functioning is relatively transparent and widely reported by the world media can serve as a great case study to enhance our understanding of cartel behavior.

Saudi Arabia in the 1980s Of particular interest is the behavior of Saudi Arabia, which, as the largest player, has served as a price leader—a leading cartel member that has a dominant market share and sets acceptable prices and margins in order to help maintain order and stability needed for collusion in the industry. In theory, Saudi Arabia is “the first among equals” within OPEC. In practice, Saudi Arabia has served as OPEC’s undisputed price leader, dictating terms and enforcing compliance of cartel agreements. A key weapon possessed by a price leader is the capacity to punish—sufficient resources to deter and combat defection. Most cartels have a hard time reaching agreements and—having reached such agreements—enforcing such agreements. Thanks to the “prisoner’s dilemma,” members have an incentive in undercutting each other in order to maximize individual market share. OPEC was originally formed for the common interest of enhancing member countries’ bargaining power when dealing with the “Seven Sisters”—another cartel formed by the seven major

1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 2. Ecuador, Indonesia, and Qatar are former members. 398

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oil-producing multinationals that dominated the industry from the 1940s to the 1970s.3 The diverse, expanded membership, now with 13 countries as full members and with ten more as OPEC+, has made OPEC diplomacy more Byzantine and agreements more difficult to reach. According to Bloomberg Businessweek, the only common interest that unifies OPEC members is “their addiction to petrodollars”—virtually all members significantly rely on oil revenues to fund government spending. Furthermore, after reaching agreements, members have tremendous incentive to defect from such agreements. In the 1980s, OPEC began setting production quotas for its members. However, a number of members soon defected by “secretly” increasing production to grab more market share. To combat such defection, Saudi Arabia in 1982 pressed OPEC for audited national production quotas in order to limit output and boost prices. When other OPEC members failed to comply, Saudi Arabia in 1985 first slashed its own production from 10 million barrels per day typical during the period of 1979–1981 to just one-third of that. When that action proved ineffective, Saudi Arabia reversed course and flooded the market with cheap oil, causing prices to fall below $10 per barrel—from a thenpeak of $40 per barrel during 1979–1981. While Saudi Arabia lost money, its losses as the lowest cost producer were manageable. However, its action to flood the market made the economic losses for high-cost members unbearable. Facing increasing economic hardship, the “free-riding” members that had previously failed to comply with OPEC agreements eventually followed Saudi Arabia’s wishes by reducing production and thus jointly jacking up prices in 1986. Overall, the effectiveness of Saudi Arabia’s capacity to punish depended on both its willingness and capability to carry out punishments. Saudi Arabia was willing to unleash such costly punishment, because it realized that if smallscale cheating was not dealt with, defection might become endemic, and the cartel might collapse.

Saudi Arabia in 2020 The biggest threat to OPEC in the 2010s was the shale revolution, which made the United States the top oilproducing country ahead of Saudi Arabia as number two

and Russia as number three. Such a rise of US production not only reduced US reliance on Middle East oil, but also threatened OPEC’s 40-year dominance in international energy pricing. After Russia led the other nine countries to join the OPEC+ group in 2016, Saudi Arabia and Russia as well as the rest of the OPEC+ group collaborated and engaged in voluntary production cuts in order to promote higher prices between 2017 and 2019. OPEC+ committed to cutting oil production by 1.2 million barrels per day— about 3% of members’ output—from a benchmark level in October 2018. While Saudi Arabia and Russia agreed to bear the brunt of the cuts, Saudi Arabia actually cut production by more than 850,000 barrels per day—covering more than two-thirds of the entire OPEC+ target single-handedly. However, defecting from the production cut agreement, Russia had been overproducing by 250,000 barrels per day. In March 2020, the tension-filled negotiations between the Saudi and Russian oil ministers in Vienna broke down. Saudi Arabia issued an ultimatum: accept a deal for OPEC+ to have additional cuts of 1.5 million barrels per day (about 1.5% of world output) beyond what was implemented during 2017–2019 or no deal at all. Russia called what many thought was a bluff, and rejected the deal. As a result, as of April 1, 2020, every OPEC+ member country would be free to pump at will. On March 8, 2020, the first day of oil trading after the OPEC+ negotiations broke down, the price of Brent crude, a global oil benchmark based on European production, dropped by more than 30% within seconds after opening. It was the largest single-day drop since the 1991 Gulf War. In January 2020, Brent crude hovered around $70 per barrel. By March 30, it fell to $22. Enjoying the world’s lowest production cost of $3 per barrel, Saudi Arabia would boost its daily production from 12 million to 13 million starting on April 1, thus unleashing a massive gamble with global ramifications. This gamble would not only punish Russia but also threaten the stability of most OPEC member countries, and disrupt plans for oil companies ranging from giants such as ExxonMobil to small shale producers. It seemed possible that Saudi Arabia had been preparing to unleash such a massive capacity to punish for some time. First, organizationally, the kingdom during 2018–2019

3. The “Seven Sisters” included five from the United States (Exxon [now ExxonMobil], Mobil [now ExxonMobil], Chevron, Gulf Oil [now Chevron], and Texaco [now Chevron]) and two from Europe (BP and Shell). 399

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400  Part 4  Integrated Cases

pushed its sole state-owned enterprise in the oil industry, Saudi Aramco, to raise public funds by going through an initial public offering (IPO) in order to reduce the funding cost for the government. In December 2019, although only offering 1.5% of its equity on the Saudi Stock Exchange, Saudi Aramco raised $26 billion, making it the world’s largest IPO to date (on top of Alibaba’s IPO in 2014). Its $1.88 trillion market capitalization made it the world’s most valuable listed company. Second, competitively, Saudi Arabia—as well as Russia— was interested in driving down the oil prices to bankrupt their common number-one threat: US shale producers, which needed $48 a barrel to break even. In response, US shale producers, already having mounting debts, had to quickly cut their production. If Saudi Arabia and Russia drove a large number of US shale producers out of business, it would be possible that they might sit down to negotiate again. This is how cartel members typically behave after driving out nonmembers. Third, externally, Saudi Arabia might have changed its policy to maximize pricing for the long run. This is because in the long run, its huge oil assets may become rapidly depreciating, as green (non-fossil-fuel-based) energy sources rise. In fact, Aramco’s prospectus for its 2019 IPO predicted that oil demand might peak in the next two decades. Therefore, pumping out as much as oil as possible, even at a lower price, seemed better than being stuck with increasingly unpopular fossil-fuel assets whose demand might eventually plummet. This has become known as a fast monetization policy. A nontrivial benefit is that low oil prices can reduce the incentive for utilities, companies, governments, and households to switch to green energy sources. However, the timing of Saudi Arabia’s specific action— in the middle of the coronavirus-induced global recession—could not have been worse. The devastation of the coronavirus shut down one economy after another. As people worked at home, they did not need to burn fuel to commute to work. As passengers quit flying and airlines cancelled flights, the demand for fuel collapsed. Therefore, pushing the oil price to rock-bottom levels in order to incentivize more consumption by the end of March 2020 seemed a desperate measure for Saudi Arabia to defend its market share in the world. Saudi Arabia’s action came at a great cost to itself. This was typical of a price leader’s endeavors to flood the market with cheap products. Different media sources suggested that Saudi Arabia needed $50–$80 per barrel to balance its budget. But by April 9, 2020, OPEC daily basket price—the average price of the 13 crudes from all member countries—went down to $21 per barrel. Fighting the price war at such low oil prices would certainly result in balanceof-payments deficits. Although it could sustain losses for quite some time, there would be severe economic pains for Saudi Arabia to live in a world of low oil prices. For a while,

neither the price leader nor the leading rebel (Russia) in the cartel was blinking. Every member was pumping at will. The lose-lose price war did not last very long. On April 12, 2020, barely 12 days after the commencement of “hostilities,” Saudi Arabia, Russia, and the rest of OPEC+ came to an agreement brokered by US President Donald Trump. OPEC+ agreed to cut 9.7 million barrels per day. To provide better incentives for the cuts, the United States, Canada, and Brazil would contribute another 3.7 million barrels to cut on paper as their production declined, and other G20 countries would contribute 1.3 million. The G20 numbers did not represent real deliberate, voluntary cuts, but rather reflected the impact of low prices on output. As recently as in earlier April, Trump told reporters that “I hated OPEC” for its price fixing. However, in the larger context of protecting jobs in the American oil industry (especially shale-production jobs), Trump became the first American president to push for higher oil prices in more than 30 years, reversing his personal opposition to the cartel. April 12 was a Sunday. On Monday, April 13, the price of Brent crude jumped 8% in the first few seconds of trading on Monday in Asia, where markets opened first. At the end of the day, price went up to $31 per barrel. However, on April 20, the future contracts for May delivery of West Texas Intermediate—the US benchmark price and one of the two global benchmarks (the other is Brent crude)—dropped to minus $37.63 a barrel. The jaw-dropping development meant producers were paying buyers to take the oil away. Clearly, the deal brokered by Trump about a week ago was too little, too late. The industry’s chronic oversupply—magnified by the Saudi Arabia-led price war and the rapidly shrinking demand due to the coronavirus— simply overwhelmed the world’s storage capacity. The Brent crude ended April 20 down sharply—above $25 a barrel. For Saudi Arabia as the price leader of the world’s largest cartel, the new agreement was a truce, but not peace. It would not take effect until May 1. Everybody was still free to pump at will for the three remaining weeks of April, thus contributing to the tumultuous price collapse in late April. In the long run, uncertainties associated with how to verify cuts and how to punish defections—given the well-known incentive to cheat in any cartel—will continue to loom large on the horizon. Sources: (1) Associated Press, 2020, OPEC calls for big production cut, but will Russia agree? March 5: apnews.com; (2) Bloomberg, 2020, Oil for less than nothing? April 20: www.bloomberg.com; (3) Bloomberg Businessweek, 2020, Behind the oil war, March 23: 8–10; (4) CCN, 2020, Collapsing crude prices will bankrupt US shale oil stocks, March 9: www.ccn.com; (5) Fortune, 2020, Saudi-Russia oil price war ends with OPEC+ deal to slash output, but prices stay near lows, April 13: fortune.com; (6) Fortune, 2020, Trump’s oil deal, April 14: fortune.com; (7) Moscow Times, 2019, 6 things you need to know about OPEC+, December 4: www.themoscowtimes. com; (8) OPEC, 2020, Member countries, www.opec.org; (9) OPEC, 2020, OPEC daily basket price stood at $21.19 a barrel, April 8: www.opec.org; (10) Saudi Aramco, 2020, Who we are, www.saudiaramco.com

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Integrative Case 17  Saudi Arabia in OPEC: Price Leader in a Cartel  401

Case Discussion Questions 1. O  N ETHICS: What are the characteristics of a cartel? 2. What are the benefits and burdens of being a price leader in a cartel? 3. What are the benefits and burdens of being an OPEC+ member?

4. O  N ETHICS: As CEO of a US shale producer, you have a chance to meet the president. In addition to lobbying for bailout funds from the US government, how would you advise the president what his administration can do diplomatically to help your firm when dealing with Saudi Arabia?

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Integrative Case

18

AGRANA: From a Local Supplier to a Global Player1 How did Vienna-based AGRANA grow from having five factories in Austria in 1988 to operating 54 factories around the world in 2014? Maria Hasenhüttl, University of Texas at Dallas Erin Pleggenkuhle-Miles, University of Nebraska at Omaha Although most readers of this book probably have never heard of AGRANA, virtually everybody has heard of Coca-Cola, Danone, Hershey Foods, Nestlé, PepsiCo, and Tyson Foods. Headquartered and listed in Vienna, Austria, AGRANA was one of the leading suppliers to these multinational brands around the world. With revenues of $3.4  billion and capitalization of $1.4 billion, AGRANA was the world’s leader in fruit preparations and one of Central Europe’s leading sugar and starch companies. AGRANA was formed in 1988 as a holding company for three sugar factories and two starch factories in Austria. In the last three decades, it has become a global player, with 54 production plants in 26 countries with three strategic pillars: sugar, starch, and fruit. AGRANA supplied most of its fruit preparations and fruit juice concentrates to the dairy, baked products, ice-cream, and soft-drink industries. In fact, its fruit preparations were in one-third of the world’s yoghurt. AGRANA saw its fruit preparations rise alongside the growing popularity of Greek yoghurt, which used twice as much fruit as traditional yoghurt.2 In other words, you may not know AGRANA, but you have probably enjoyed many AGRANA products. So, just how did AGRANA grow from a small local supplier serving primarily the small Austrian market to a global player?

From Central and Eastern Europe to the World In many ways, the growth of AGRANA mirrored the challenges associated with regional integration in Europe and then with global integration of multinational production over the last three decades. There were two components of European integration. First, European Union (EU) integration accelerated throughout Western Europe in the 1990s. This meant that a firm such as AGRANA, based in a relatively smaller country, Austria (with a population of 8.4 million), needed to grow its economies of scale to fend off the larger rivals from other European countries blessed with larger home country markets and hence larger economies of scale. Second, since 1989, Central and Eastern European (CEE) countries, formerly off limits to Western European firms, have opened their markets.3 For Austrian firms such as AGRANA, the timing of CEE’s arrival as potential investment sites was fortunate. Facing powerful rivals from larger Western European countries but being constrained by its smaller home market, AGRANA aggressively expanded its foreign direct investment (FDI) throughout CEE. Most CEE countries have become EU members since then. As a result, CEE provided a much larger playground for AGRANA, allowing it to enhance its scale, scope, and thus competitiveness.

1. © Maria Hasenhüttl and Erin Pleggenkuhle-Miles. Reprinted with permission. 2. R. Moriarty, 2013, Riding yogurt boom, fruit company Agrana plans Lysander plant; 120 jobs possible, www.syracuse.com/news/index.ssf/2013/03 /fruit_company_agrana_picks_lys.html. 3. Central and Eastern Europe (CEE) typically refers to (1) Central Europe (former Soviet bloc countries such as the Czech Republic, Hungary, Poland, and Romania and three Baltic states of the former Soviet Union) and (2) Eastern Europe (the European portion of the 12 post-Soviet republics such as Belarus, Russia, and Ukraine). 402

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EXHIBIT 1  AGRANA Plant Locations Segment

1988–1989

2002–2003

2006–2007

2010–2011

2013–2014

Sugar

4

15

13

10

10

Starch

2

5

5

5

5

Fruit

0

0

37

37

39

Total

6

20

55

52

54

Source: AGRANA company presentation, June 2007, www.agrana.com; AGRANA annual reports 2013–2014 and 2010–2011.

At the same time, multinational production by global giants such as Coca-Cola, ConAgra, Danone, Nestlé, and PepsiCo had grown by leaps and bounds, thus reaching more parts of the world. Emerging as a strong player not only in Austria and CEE but also in the EU, AGRANA further “chased” its corporate buyers by investing in and locating supplier operations around the world. This strategy allowed AGRANA to better cater to the expanding needs of its corporate buyers. Until 1918, Vienna had been the capital of the Austro-Hungarian Empire, whose territory not only included today’s Austria and Hungary, but also numerous CEE regions. Although formal ties were lost (and, in fact, cut during the Cold War), informal ties through cultural, linguistic, and historical links had never disappeared. These ties had been reactivated since the end of the Cold War, fueling a rising interest among Austrian firms to enter CEE. Overall, from an institution-based view, it seems natural that Austrian firms would be pushed by pressures arising from the EU integration and pulled by the attractiveness of CEE. However, among hundreds of Austrian firms that have invested in CEE, not all are successful and some have failed miserably. So how can AGRANA emerge as a winner from its forays into CEE? The answer boils down to AGRANA’s firm-specific resources and capabilities, a topic we turn to next.

Product-Related Diversification AGRANA had long been associated with sugar and starch production in CEE. Until 2003, AGRANA’s focus on the sugar and starch industries worked well. However, the reorganization of the European sugar market by the EU Commission in 2006 motivated AGRANA to look in new directions for future growth opportunities.4 This new direction—fruit— became the third and largest division at AGRANA (see Exhibit 1), and in less than ten years, AGRANA became the world market leader in the production of fruit preparations. But the question remained as to how to diversify. As a well-known processor in the sugar and starch industries, AGRANA wanted to capitalize on its core competence—the refining and processing of agricultural raw materials (sugar beets, cereals, and potatoes). To capitalize on its accumulated knowledge of the refinement process, AGRANA decided to diversify into the fruit-processing sector (Exhibit 2 gives a brief description of each of the three current divisions). First, entry into the fruit sector ensured additional growth and complemented AGRANA’s position in the starch sector. Since the starch division was already a supplier to the food and beverage industry, this allowed AGRANA to benefit from those relationships previously developed when it entered the fruit sector. Second, because the fruit sector is closely related to AGRANA’s existing core sugar and starch businesses, AGRANA could employ the

4. One component of the Common Agricultural Policy of the EU is the common organization of the markets in the sugar sector (CMO Sugar). CMO Sugar regulates both the total EU quantity of sugar production and the quantity of sugar production in each sugar-producing country. It also controls the range of sugar prices, essentially limiting competition by assigning quotas to incumbent firms such as AGRANA. In 2006, the EU passed sugar reforms reducing subsidies and price regulation, influencing the competition in the marketplace. These reforms included a reduction of sugar production by six million tons over a four-year transition period. Sugar reforms such as these have forced some of AGRANA’s competitors to close a number of sugar facilities. However, AGRANA’s executives were optimistic about AGRANA’s future due to its investments in the fruit and starch markets. 403

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404  Part PART 4  2  Integrated BUSINESS-LEVEL Cases STRATEGIES

EXHIBIT 2  AGRANA Divisions Sugar: AGRANA sugar division maintains nine sugar factories in five EU countries (Austria, Czech Republic, Hungary, Romania, and Slovakia) and one in Bosnia-Herzegovina. AGRANA is one of the leading sugar companies in Central and Eastern Europe. The sugar AGRANA processes is sold to both consumers (via the food trade) and manufacturers in the food and beverage industries. Within this sector, AGRANA maintains customer loyalty by playing off its competitive strengths, which include high product quality, matching product to customer needs, customer service, and just-in-time logistics. Starch (including bioethanol): AGRANA operates five starch factories in three countries (Austria, Hungary, and Romania). The products are sold to the food and beverage, paper, textile, construction chemicals, pharmaceutical, and cosmetic industries. To maintain long-term client relationships, AGRANA works in close collaboration with its customers and develops “made-to-measure solutions” for its products. As a certified manufacturer of organic products, AGRANA is Europe’s leading supplier of organic starch. The GM-free and strong organic focus are a competitive strength in this sector. Bioethanol is part of the starch segment. The raw material for bioethanol production in Europe is mostly corn, wheat, and concentrated sugar beet juice. AGRANA produces bioethanol in combined starch and bioethanol manufacturing plants in Austria and Hungary. Fruit: This third segment was added to the core sugar and starch segments to ensure continued growth during a time when AGRANA reached the limits allowed by competition law in the sugar segment. The fruit division operates 39 production plants across every continent. Like the starch division, the fruit division does not make any consumer products, limiting itself to supplying manufacturers of brand-name food products. Its principal focus is on fruit preparations and the manufacturing of fruit-juice concentrates. Fruit preparations are special customized products made from a combination of high-grade fruits and sold in liquid or lump form. Manufacturing is done in the immediate vicinity of AGRANA customers to ensure a fresh product. Fruit-juice concentrates are used as the basis for fruit juice drinks and are supplied globally to fruit juice and beverage bottlers and fillers. The strategic focus in this division is to continue to grow through geographic diversification. Source: AGRANA International website, http://www.agrana.com.

expertise and market knowledge it had accumulated over time, thus benefiting its new fruit division. AGRANA’s core competence of the refinement process allowed it to diversify into this new segment smoothly. Johann Marihart, AGRANA’s CEO since 1992, believes that growth is an essential requirement for the manufacturing of high-grade products at competitive prices. Economies of scale have become a decisive factor for manufacturers in an increasingly competitive environment. In both the sugar and starch segments, AGRANA developed from a locally active company to one of Central Europe’s major manufacturers in a very short span of time. Extensive restructuring in the sugar and starch divisions allowed AGRANA to continue to operate efficiently and competitively in the European marketplace. Since its decision to diversify into the fruitprocessing industry in 2003, Marihart had pursued both an aggressive acquisition policy to exploit strategic opportunities in the fruit-preparation and fruit-juice concentrates sectors as well as an emphasis on organic growth through expansion.

Acquisitions How did AGRANA implement its expansion strategy? Through acquisitions and organic growth. Between 1990 and 2001, AGRANA focused on dynamic expansion into CEE sugar and starch markets by expanding from five

plants to 13 and almost tripling its capacity. As the sugar division reached a ceiling to its growth potential due to EU sugar reforms, AGRANA began searching for a new opportunity for growth. Diversifying into the fruit industry aligned with AGRANA’s goal to be a leader in the industrial refinement of agricultural raw materials. AGRANA began its diversification into the fruit segment in 2003 with the acquisitions of Denmark’s Vallø Saft and Austria’s Steirerobst. By July 2006, AGRANA’s fruit division had acquired three additional holding firms and was reorganized so all subsidiaries were operating under the AGRANA brand. AGRANA diversified into the fruit segment in 2003 through the acquisition of five firms. With the acquisition of Denmark’s Vallø Saft Group (fruit-juice concentrates) in April 2003, AGRANA gained a presence in Denmark and Poland. The acquisition of an interest (33%) in Austria’s Steirerobst (fruit preparations and fruit-juice concentrates) in June 2003 gave AGRANA an increased presence in Austria, Hungary, and Poland, while also establishing a presence in Romania, Ukraine, and Russia. AGRANA fully acquired Steirerobst in February 2006. The acquisition of France’s Atys Group (fruit preparations) in December 2005 was AGRANA’s largest acquisition because Atys had 20 plants across every continent. Within a short period, AGRANA had fruit preparation facilities in 23 countries. In June 2006, with the 50/50 joint

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Integrative Case 18  AGRANA: From a Local Supplier to a Global Player  405

EXHIBIT 3  AGRANA Plant Locations as of February 2014 Segment

Sugar

Starch

Fruit

North America (USA, Mexico)

4

15

4

South America (Argentina, Brazil)

2

5

2

EU-28 (Austria, Belgium, Czech Republic, Denmark, France, Germany, Hungary, Poland, Romania, Slovakia)

9

5

19

Europe Non-EU (Bosnia-Herzegovina, Russia, Serbia, Turkey, Ukraine)

1

2*

5

Asia (China, South Korea)

3

Africa (Egypt, Morocco, South Africa)

4

Australia and Oceania (Australia, Fiji)

2

Total Plants

Ethanol

10

5

39

*The starch plants in Pischelsdorf, Austria, and Hungrana, Hungary, also produce bioethanol. Source: AGRANA 2013–2014 Annual Report.

venture between the Vallø Saft Group and Xianyang Andre Juice Co. Ltd. (fruit-juice concentrates), AGRANA extended its reach to China. These acquisitions allowed AGRANA to quickly (within two years!) become a global player in the fruit segment. Exhibit 3 provides an overview of AGRANA’s current locations around the globe. After this initial “acquisition spree,” AGRANA focused on select acquisitions and expansions into markets that would bring it closer to customers and allow it to take advantage of favorable market conditions. From 2010 to 2012, AGRANA expanded its fruit preparations in four emerging markets— China, Egypt, Russia, and South Africa—to take advantage of future growth expectations. In May 2014, AGRANA opened its fourth US fruit-preparations plant in Lysander, New York, to serve the rising customer demand in Canada and the Northeastern region of the United States and to counterbalance the flat growth in Europe. US markets offered strong growth mostly because of the trend toward Greek yoghurt, which contained double the fruit preparations of regular yoghurt.

In addition to acquisitions and organic growth, AGRANA focused on streamlining and restructuring its operations to increase efficiencies, reduce costs, and create synergies. The merger in 2012 between AGRANA Juice Holding GmbH and Ybbstaler Fruit Austria GmbH that formed YBBSTALER AGRANA Juice GmbH was expected to increase synergies and create further opportunities for growth. AGRANA further consolidated operations in 2014, when (a) food-preparation production in Austria was moved to Gleisdorf, (b) the plant in Cape Town was closed and all South African production was moved to the plant in Johannesburg, and (c) two separate research and innovation facilities in Tulln, Austria, were combined to form the new AGRANA Research and Innovation Center. Research-anddevelopment (R&D) spending had increased every year— from $12 million in 2007–2008 to almost $20 million in 2013–2014 (Exhibit 4). The new research center was tasked with exploiting synergies through research across divisions and through networking with other institutions.

EXHIBIT 4  AGRANA Operating Margin and R&D Expenditures Fiscal Year

Operating Margin (%)*

R&D to Revenues (%)

R&D Expenditure (US$ Millions)**

2013–2014

5.6

0.57

19.6

2012–2013

7.7

0.59

20.7

2011–2012

9.0

0.59

17.2

2010–2012

5.9

0.67

16.5

2009–2010

4.6

0.67

15.2

2008–2009

1.9

0.62

14.2

2007–2008

5.9

0.63

12.0

*Operating profit before exceptional items. **Exchange rate used in calculation: US$1 = €0.88. Source: AGRANA annual reports.

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406  Part 4  Integrated Cases

EXHIBIT 5  AGRANA by Division

Staff 2014

Sugar

Starch

Fruit

Total

2,399

1,008

5,371

8,778

2009-2010 Revenue

840.19 (37%)

608.52 (27%)

918.83 (40%)

2,215.92

2010-2011 Revenue

878.47 (33%)

703.72 (27%)

996.12 (40%)

2,469.13

2011-2012 Revenue

1,102.64 (37%)

881.47 (30%)

1,060.5 (36%)

2,938.50

2012-2013 Revenue

1,370.52 (39%)

927.65 (26%)

1,301.03 (37%)

3,495.13

2013-2014 Revenue

1,265.03 (34%)

978.75 (28%)

1,336.85 (38%)

3,615.39

*Reported in USD, February 28, 2014. Exchange rate used in calculation: US$1 = €0.88. **Figures are reported in millions. Source: AGRANA 2009-2010 to 2013-2014 Annual Reports.

The strategy of AGRANA was clearly laid out in its 2013–2014 annual report: “Through organic (nonacquisitive) growth and with the help of acquisitions and cooperative new ventures, the Group aims to consolidate and steadily add to its worldwide market position.” AGRANA’s growth strategy, consistent improvement in productivity, and value-added approach enabled it to provide continual increases in its enterprise value and dividend distributions to shareholders. The key to AGRANA’s global presence in the fruit segment was not only its many acquisitions, but also its ability to quickly integrate those acquired into the group to realize synergistic effects. In Exhibit 5, the annual revenue is given for each sector. Although the sugar division was the leader in 2005–2006, the fruit division had been the revenue leader for most years since it was established. The latest annual report (2013– 2014) showed that the fruit division made up 38% of total revenue. AGRANA attributed its growth in the fruit sector to increases in dietary awareness and per capita income, two trends that were projected to continue to rise in the future.

Diversifying into Biofuel In light of further EU sugar reforms, AGRANA continually looked for new growth opportunities. In May 2005, the supervisory board of AGRANA gave the go-ahead for the construction of an ethanol facility in Pichelsdorf, Austria, and production began in 2008. AGRANA first began making alcohol in 2005 in addition to starch and isoglucose at its Hungrana, Hungary, plant in a preemptive move to accommodate forthcoming EU biofuel guidelines. This move into ethanol was seen as a logical step by CEO Marihart. Similar to its move into the fruit sector, the production of ethanol allowed AGRANA to combine

its extensive know-how of processing agricultural raw materials with its technological expertise and opened the door for further growth. Even though AGRANA became a major manufacturer of bioethanol in Europe, this segment was dealing with low prices and a continuing difficult market situation. Sources: Based on media publications and company documents. The following sources were particularly helpful: (1) AGRANA investor information provided by managing director, Christian Medved, to Professor Mike Peng at the Strategic Management Society Conference, Vienna, October 2006; (2) AGRANA Company Profile 2007 and 2014; (3) AGRANA Annual Reports 2005-2006 through 2013-2014, www.agrana. com (accessed February 15, 2015); (4) European Association of Sugar Traders, www.sugartraders.co.uk/ (accessed May 4, 2007, and February 15, 2015); (5) N. Merret, 2007, Fruit segment drives Agrana growth, Food Navigator.com Europe, January 12; (6) N. Merret, 2006, Agrana looks east for competitive EU sugar markets, Confectionery News.com, November 29; (7) C. Blume, N. Strang, & E. Farnstrand, 2002, Sweet Fifteen: The Competition on the EU Sugar Markets, Swedish Competition Authority Report, December.

Case Discussion Questions 1. From an industry-based view, how would you characterize competition in this industry? 2. From a resource-based view, what is behind AGRANA’s impressive growth? 3. From an institution-based view, what opportunities and challenges have been brought by the integration of EU markets in both Western Europe and CEE? 4. From an international perspective, what challenges do you foresee AGRANA facing as it continues its expansion into other regions? Where and how should it expand?

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Integrative Case

Integrative Case 19  Nomura’s Integration of Lehman Brothers  407

19

Nomura’s Integration of Lehman Brothers1 Is there strategic fit between Nomura and Lehman? Is there organizational fit? Does Nomura have what it takes to successfully integrate these two companies with contrasting management styles? Mike W. Peng, University of Texas at Dallas

The Opportunity of a Lifetime

Integration Challenges

In September 2008, Lehman Brothers went bankrupt. Britain’s Barclay Capital bought Lehman’s North America operations for $3.75 billion. Lehman’s assets in Asia and Europe were purchased by Nomura for the bargain-basement price of $200 million. Founded in 1925, Nomura is the oldest and largest securities brokerage and investment banking firm in Japan. Although Nomura had operated in 30 countries prior to the Lehman deal in 2008, it had always been known as a significant but still primarily regional (Asian) player in the big league of the financial services industry. In addition to Lehman, the list of elite investment banking firms in early 2008 would include Goldman Sachs, Morgan Stanley, Bear Stearns, JP Morgan, and Citigroup of the United States, Credit Suisse and UBS of Switzerland, and Deutsche Bank of Germany. No one would include Nomura in this group. Nomura viewed itself primarily as an Asian version of Merrill Lynch. The tumultuous 2008 left Bear Stearns dead first, Lehman second, and all of the firms in the big league just named in deep financial trouble. To Nomura, this became the opportunity of a lifetime. Within a lightning 24 hours, CEO Kenichi Watanabe decided to acquire Lehman’s remnants in Asia and Europe. Some of the Lehman assets were dirt cheap. For example, its French investment banking operations were sold to Nomura for only one euro (that is, €1!). Overall, by cherry-picking Lehman’s Asia and Europe operations and adding 8,000 employees who tripled Nomura’s size outside Japan, Nomura transformed itself into a global heavyweight overnight. The question was: Does Nomura have what it takes to make this acquisition a success?

The answer was a decisive “No!” from Nomura’s investors, who drove its shares from a high of 1,900 yen ($17.67) in 2008 to a low of 200 yen ($1.86) in 2012. Since the purchase price seemed reasonable and there was little evidence that Nomura overpaid, the biggest challenge was postacquisition integration, merging a hard-charging New York investment bank with a hierarchical Japanese firm that still largely practiced lifetime employment. Clearly, Lehman’s most valuable, rare, and hard-to-imitate assets were its talents. To ensure that Nomura retain most of the ex-Lehman talents, Nomura set aside a compensation pool of $1 billion (five times the acquisition price) and guaranteed all ex-Lehman employees who chose to stay with Nomura not only their jobs, but also their 2007 pay level (including bonuses) for three years. About 95% of them accepted Nomura’s offer. Given the ferociousness of the financial meltdown in 2008–2009 (which was triggered by Lehman’s collapse), many employees at other firms that were not bankrupt lost their jobs. The fact that Nomura guaranteed both jobs and pay levels was widely appreciated by ex-Lehman employees who otherwise would have been devastated. Instead, acquiring Lehman introduced significant stress to Nomura’s long-held traditions. A leading challenge was pay level. Most senior executives at Lehman made on average $1 million in 2007. Nomura employees typically only received half the pay of their Lehman counterparts. It is not surprising that guaranteeing ex-Lehman employees such an astronomical pay level (viewed from a Nomura perspective) created a major problem among Nomura’s Japanese employees. In response, Nomura in 2009 offered

1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 407

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408  Integrative Case 19  Nomura’s Integration of Lehman Brothers

its employees in Japan higher pay and bonuses that would start to approach the level ex-Lehman employees were commanding in exchange for less job security—in other words, they could be fired more easily if they underperformed. So far, about 2,000 Japanese employees accepted the offer, which would link pay to individual and departmental performance rather the firm as a whole. Another challenge was the personnel rotation system. Like many leading Japanese firms, Nomura periodically rotated managers to different positions. For example, Yoshihiro Fukuta, who served as head of Nomura International Hong Kong Ltd. in 2008, was rotated back to Tokyo as head of the Internal Audit Division in 2009. While these practices produced well-rounded generalist managers, they generated a rigid hierarchy: A manager in a later cohort year, no matter how superb his (always a male) performance was, was unlikely to supervise a manager in an earlier cohort year. These Nomura practices directly clashed with Western norms: (1) Work was increasingly done by specialists who developed deep expertise and (2) superstars were typically on a fast track rocketing ahead. Although the personnel rotation system largely did not apply to Nomura’s overseas employees, it resulted in a top echelon that entirely consisted of Japanese executives who went through the rotations. In an effort to globalize, Nomura’s top echelon needed to attract diverse talents, especially those from Lehman. Could the rotation system accommodate the arrival of ex-Lehman employees who had neither experience nor stomach for it?

Postacquisition Performance Four years after the acquisition, the performance was disappointing. In 2009, Nomura moved its investment banking headquarters to London to demonstrate its commitment to break into the top tier. In 2011, in Europe Nomura was number 13 in underwriting equities and number 15 in advising on mergers. In Asia outside of Japan and in the United States, it was a distant number 24 and 22, respectively, in underwriting equity offerings. Its dominance in Japan was indeed strengthened by the Lehman deal. Nomura’s market share in advising Japanese acquirers that made deals overseas shot up from 10% in 2007 to 25% in 2011. Integration continued to be Nomura’s headache number one. Outside Japan, the deal turned out to be a “reverse”

takeover with gaijin (foreigners) running most of the show. Nomura undertook a campaign to expunge the long shadows of the Lehman hangover. Both symbolically and comically, mentioning the “L” word (such as “This is how we did it at Lehman”) during senior executive meetings in London would cost executives £5 ($6.25) every time—they had to toss the money into a box as a penalty. In 2012, Jesse Bhattal, who was the former Asia Pacific CEO of Lehman, the deputy president of the Nomura group, and the CEO of Nomura’s investment banking group (the highest ranked non-Japanese executive at Nomura), resigned amid heavy losses. Bhattal failed to see eye to eye with the board and was frustrated by his inability to undertake much needed cost cutting. His departure was regarded as “the culmination of a clash with Nomura’s old guard,” according to Bloomberg. Over time, Nomura’s shares recovered from its 2012 low of 200 yen ($1.86). By 2017, they hovered at 700 yen ($6.51)—but still less than half of its 2008 high of 1,900 yen ($17.67). Top executives admitted that Nomura underestimated the cost of executing the integration of Lehman and now emphasized cost cutting. For example, in 2017 it completely exited European cash equities and completely laid off its staff of 500. Sources: (1) Bloomberg, 2012, Nomura reeling from Lehman hangover, February 28; (2) BusinessWeek, 2009, Nomura is starting to flex its Lehman muscles, September 28; (3) E. Choi, H. Leung, J. Chan, S. Tse, & W. Chu, 2009, How can Nomura be a true global financial company? case study, University of Hong Kong; (4) Economist, 2009, Nomura’s integration of Lehman, July 11; (5) Financial Times, 2017, Singed by Lehman purchase, Nomura tries expansion again, July 2: www.ft.com; (6) A. Huo, E. Liu, R. Gampa, & R. Liew, 2009, Nomura’s bet on Lehman, case study, University of Hong Kong; (7) Reuters, 2012, Ex-Lehman’s Bhattal quits Nomura amid deep losses, January 10: www.reuters.com

Case Discussion Questions 1. What is the strategic fit between Nomura and Lehman? 2. Is there any organizational fit? How to bridge the gaps between the cultures of these two firms? 3. What are the key lessons from Nomura’s integration efforts?

408

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Integrative Case

Integrative Case 20  Cyberattack on TNT Express and Impact on Parent Company FedEx  409

20

Cyberattack on TNT Express and Impact on Parent Company FedEx1 In May 2016, FedEx acquired TNT Express, expecting to derive value from the combined assets. In June 2017, TNT Express suffered a devastating cyberattack, and FedEx’s stock fell 4.5%. William E. Hefley, University of Texas at Dallas On June 27, 2017, a malware infection—NotPetya—began spreading from Ukraine. It affected firms in many countries, although the greatest impact was in Ukraine. As a result of this malware infection, FedEx acknowledged that this software infection might have a material impact on its operations and financial results. On June 28, FedEx halted trading of its stock while it assessed the impact of an outbreak of the malware on the network of TNT Express, the recently acquired FedEx subsidiary based in Amsterdam, the Netherlands. The disruption caused by the malware significantly affected communications and operations at TNT Express due to the infiltration of an information system virus. Investors commented that such trading halts were not common among large companies such as FedEx, “unless the news is pretty material to investors/the company.”2 While trading of FedEx stock resumed soon after the temporary halt, the decision to halt trading was significant, with some commenters noting that FedEx might be concerned that the infection could spread and cause more significant disruptions to its global package-delivery operation.3 On July 17, FedEx warned that the impact of NotPetya on its TNT subsidiary would “materially impact” its profits. FedEx indicated in its form 10-K annual report filing with the US Securities and Exchange Commission (SEC), “Our 2018 results will be negatively affected by our TNT Express integration and restructuring activities, as well as

the impact of the TNT Express cyberattack.”4 It continued with other telling statements, indicating that it had: experienced [a] loss of revenue due to decreased volumes at TNT and incremental costs associated with the implementation of contingency plans and the remediation of affected systems. . . . We cannot yet estimate how long it will take to restore the systems that were impacted, and it is reasonably possible that TNT will be unable to fully restore all of the affected systems and recover all of the critical business data that was encrypted by the virus. How would these material financial impacts affect FedEx? How could the operational impacts, including the loss of data, impair FedEx’s ability to operate? FedEx has long believed that “the information about a package is as important as the package itself.”5 What more could FedEx have done to prevent this occurrence? Did it do the right things in preparing to ensure that this information was available, uncorrupted, and usable in directing its worldwide operations? What will be the ongoing impact on FedEx’s share price as a result of this cybersecurity incident?

Fedex’s 2016 Acquisition of TNT Express Founded in 1973, FedEx had grown to more than 400,000 employees providing services in more than 220 countries and

1. Professor Bill Hefley and Research Associate Deepima Pathania prepared this case. © William E. Hefley. This case was prepared for the purpose of class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Reprinted with permission. 2. M. Nichols, 2017, FedEx “significantly affected” by virus, trading briefly halted, Memphis Business Journal June 28: www.bizjournals.com/memphis /news/2017/06/28/fedex-trading-halted.html, accessed August 31, 2017. 3. D. Paul, 2017, More companies warn on financial impact from Petya infection, Security Ledger July 7: securityledger.com/2017/07/dear-sec-more -companies-warn-on-financial-impact-from-petya-infection/, accessed August 31, 2017. 4. FedEx Corporation, 2017, FORM 10-K (Annual report) filed 07/17/17 for the period ending 05/31/17, available from EDGAR, accessed July 31, 2017. 5. W. Risher, 2017, FedEx targeted in cyber attack as hackers hit companies across globe, Commercial Appeal May 12: http://www.commercialappeal.com/story /money/industries/logistics/2017/05/12/fedex-targeted-cyber-attack-possibly-part-global-ransomware-hack/320156001/, accessed August 31, 2017. 409

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earning revenue in excess of $60 billion by 2017.6 In May 2016, FedEx acquired TNT Express, B.V. (hereafter “TNT Express”) for $4.9 billion.7 TNT Express’s revenue in 2015 was €6.9 billion. It had operations in 61 countries and delivered parcels to more than 200 countries. It provided both road- and airdelivery services in Europe, the Middle East and Africa, Asia Pacific, and the Americas. A  key  value  proposition of this acquisition was the potential coupling of TNT’s European road network with FedEx’s air network. FedEx announced that the integration process would begin immediately after the acquisition. The intent was “to leverage investments in technology, infrastructure, facilities and operational capabilities to position the combined companies for long-term growth and success.”8 While customers could continue to interact with each company as they had previously, FedEx announced its intentions to offer customers an integrated global offering, building on the combined expertise of both FedEx and TNT Express. However, this intent was not without challenges. In its fiscal year 2017 (FY17) earnings guidance, FedEx warned that there was uncertainty about how the integration activities would impact TNT Express’s ongoing business, and how the integration activities would impact TNT Express’s previously announced turnaround strategy.9 By September following the acquisition, FedEx chairman, president, and CEO Frederick Smith reported that the “integration of TNT Express is proceeding smoothly, and the level of team members’ engagement is outstanding.”10 During FY17, 64 countries had fully integrated operations

and integration activities had begun across additional countries, including many of the largest operations in TNT’s global network.11 Among the FY17 accomplishments was the implementation of the first phase of cross-scan technology that would enable handling TNT Express packages in the FedEx network and FedEx packages in the TNT Express network, as well as the ability to manage and coordinate inquiries from both FedEx and TNT customers. As part of this integration, FedEx had integrated air operations with TNT Express by connecting the FedEx Express and TNT  worldwide networks with a new Boeing 777 flight from the TNT air hub in Liège, Belgium, to the FedEx hub in Memphis. This around-the-world flight would continue onward to Shanghai, China, before returning to Liège.12

Preparing for Cybersecurity Incidents How had FedEx prepared for the kind of cybersecurity incident that it saw unfolding in its business? FedEx made available to its officers, directors, managers, and employees of FedEx and its subsidiaries throughout the world a FedEx Code of Business Conduct and Ethics.13 This code was first adopted in 2003 and updated in September 2016. It is explained that managers were to “anticipate, prevent, and detect compliance risks.” It also went on to require that FedEx resources, including computers, software, and other office equipment, be protected and their efficient and proper use ensured by all.

6. FedEx Corporation, 2017, News Release: FedEx files 10-K with additional disclosure on cyber-attack affecting TNT Express systems, July 17: http://investors.fedex.com/news-and-events/investor-news/news-release-details/2017/FedEx-Files-10-K-with-Additional-Disclosure-on-Cyber-Attack -Affecting-TNT-Express-Systems/default.aspx, accessed July 31, 2017. 7. M. Schwartz, 2017, FedEx warns NotPetya will “negatively affect” profits, Bank Info Security, https://www.bankinfosecurity.com/fedex-warns-notpetya -will-negatively-affect-profits-a-10118, accessed August 31, 2017. 8. FedEx Corporation, 2016, News Release: FedEx acquires TNT Express, May 25: http://investors.fedex.com/news-and-events/investor-news/news -release-details/2016/FedEx-Acquires-TNT-Express/default.aspx, accessed August 1, 2017. 9. FedEx Corporation, 2017, FORM 8-K (Current report filing) filed 06/21/16 for the period ending 06/21/16, available from EDGAR, accessed September 25, 2017. 10. FedEx Corporation, 2016, News Release: FedEx Corp. reports higher first quarter earnings, September 20 (FORM 8-K [Current report filing] filed 09/20/16 for the period ending 09/20/16), available from EDGAR, accessed September 25, 2017. 11. FedEx Corporation, 2017, FedEx Annual Report 2017, http://s1.q4cdn.com/714383399/files/oar/2017/AnnualReport2017/AnnualReport2017flat /index.html, accessed August 16, 2017. 12. FedEx Corporation, 2017, TNT Express integration is in full swing, http://s1.q4cdn.com/714383399/files/oar/2017/ AnnualReport2017 /AnnualReport2017flat/tnt-express.html, accessed October 12, 2017. 13. FedEx Corporation, 2016, FedEx Code of Business Conduct and Ethics, http://s1.q4cdn.com/714383399/files/ code_of_business/2016/Code_of _Business_Conduct_and_Ethics_2016_Final_Version.pdf, accessed September 25, 2017. 410

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Integrative Case 20  Cyberattack on TNT Express and Impact on Parent Company FedEx  411

To implement its corporate governance guidelines,14 FedEx had a Board of Directors consisting of 12 members. In November 2015, a new member was added to the board—John Inglis, a professor of cybersecurity at the United States Naval Academy and former chief operating officer of the National Security Agency (NSA), who had served as the highest ranking civilian in the NSA.15 The Information Technology Oversight Committee was one of four standing committees within the Board of Directors. During 2016, the charter for this six-member committee was updated with the following charge. The purpose of the Information Technology Oversight Committee is to: ●●

●●

●●

●●

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Review major information technology (“IT”)-related projects and technology architecture decisions; Assess whether the Company’s IT programs effectively support the Company’s business objectives and strategies; Assist Board oversight of cybersecurity risks and management efforts to monitor and mitigate those risks; Advise the Company’s senior IT management team; and Advise the Board of Directors on IT-related matters.16

Windows 10, Windows Server 2008, Windows Server 2012, and Windows Server 2016. When Petya was unleashed, it infected the master boot record to execute a component of the ransomware that initiated a malicious activity known as a payload that encrypted the master file table of a computer’s hard drive and forced the computer to restart. It then displayed a message to the users that their files were now encrypted and that they needed to send $300 (in Bitcoin) to one of three wallets to receive instructions to decrypt their computer. At the same time, the software exploited the server message block protocol in Windows to infect local computers on the same network and any remote computers it could find. Therefore, it not only infected one machine, but also actively sought out other machines to infect.

WannaCry Cyberattacks in May 2017 WannaCry extortion attacks spread around the globe in May 2017.19 FedEx was one of the organizations affected. On May 12, FedEx issued a statement indicating that malware was interfering with some of its computers and that remediation steps were being taken. At this point in time, FedEx was unsure if this was related to the global outbreak of the WannaCry malware and whether this was going to cause the company to issue service alerts about potential delays in shipments being delivered.20

WannaCry and Petya Ransomware

NotPetya Cyberattacks in June 2017

WannaCry was the fastest and largest ransomware attack to date.17 This ransomware outbreak affected more than 300,000 computers across 200,000 organizations in more than 150 countries.18 The Petya ransomware was first detected in 2016 and attacked Microsoft Windows-based operating systems. Like the WannaCry ransomware attack in May 2017, Petya used the EternalBlue exploit that had previously been discovered in older versions of Windows. The EternalBlue exploit had been previously identified, and Microsoft issued patches in March 2017 to shut down the exploit for the latest versions of Windows Vista, Windows 7, Windows 8.1,

On June 27, firms across the globe found themselves again confronted with a new wave of cyberattacks.21 These attacks appeared to target or stem from locations in Ukraine. Various estimates suggested that between 60% and 80% of the infections were in Ukraine.22 Security experts dubbed the malware used in the Ukraine  cyberattacks NotPetya or Nyetna to distinguish it from the original Petya malware. NotPetya encrypted all files on infected computers, not just the master file table. In some cases the computer’s files were completely wiped or rewritten in a manner that could not be undone through decryption.

14. FedEx Corporation, 2017, Corporate Governance Guidelines, http://investors.fedex.com/governance-and-citizenship/policies/governanceguidelines / default.aspx, accessed September 25, 2017. 15. FedEx Corporation, 2017, Board of Directors, http://investors.fedex.com/ governance-and-citizenship/board-of-directors/default.aspx, accessed September 25, 2017. 16. FedEx Corporation, 2016, Information Technology Oversight Committee Charter, March 6: http://investors.fedex.com/English/governance-and -citizenship/committee-charters/information-technology-oversight-committee-charter/default.aspx, accessed September 25, 2017. 17. Varonis, 2017, Ransomware Guide, New York: Varonis Systems, Inc. 18. A. Gonzalez, 2017, The WannaCry cyberattack: Another warning for supply chain executives, Talking Logistics with Adrian Gonzalez May 15: https://talkinglogistics.com/2017/05/15/the-wannacry-cyberattack-another-warning-for-supply-chain-executives/, accessed August 31, 2017; J. Marks, 2017, White House: No US federal systems hit by WannaCry ransomware, NextGov May 15: https://www.nextgov.com/cybersecurity/2017/05 / white-house-no-us-federal-systems-hit-wannacry-ransomware/137866/, accessed July 12, 2018. 19. Veritas, 2017, How Ransomware Ready Are You? Mountain View, CA: Veritas Technologies LLC. 20. Risher, 2017, FedEx targeted in cyberattack as hackers hit companies across globe, op. cit. 21. G. Burton, 2017, TNT Express still struggling with NotPetya malware, London, UK: Incisive Business Media (IP) Limited, https://www.v3.co.uk /v3-uk/news/3014453/tnt-express-still-struggling-locked-up-in-borked-systems-as-staff-grapple-with-manual-procedures, accessed August 4, 2017. 22. J. Wakefield, 2017, Tax software blamed for cyber-attack spread, BBC News, https://www.bbc.com/news/technology-40428967.

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412  Part 4  Integrated Cases

Security experts believed the attack originated from an update of a Ukrainian tax-accounting package called MeDoc (M.E.Doc) developed by Intellect Service. MeDoc provided periodic updates to its program through an update server. On the day of the attack, June 27, 2017, an update for MeDoc was pushed out by the update server, and the ransomware attacks soon began. It was believed that the software’s automatic update system was compromised and used to download and run malware rather than legitimate updates for the software. Security company ESET discovered that a back door had been installed on MeDoc’s updater service as early as May 2017, whereas Cisco Systems found evidence of the back door as early as April 2017. Such findings pointed to the cyberattack as a “thoroughly well-planned and well-executed operation.” While numerous Ukrainian government agencies, companies, and organizations were attacked, non-Ukrainian companies reporting incidents related to the attack—in addition to TNT Express—include food processor Mondelez International, the APM Terminals subsidiary of international shipping company A.P. Moller-Maersk, consumer goods giant Reckitt Benckiser, British advertising agency WPP, pharmaceutical company Merck, Russian oil and gas giant Rosneft, and French construction firm Saint-Gobain.

TNT Struggles to Operate Following the Cyberattack FedEx confirmed that its operations at the TNT subsidiary were impacted by this malware attack, indicating that the attack “involved the spread of an information technology virus through a Ukrainian tax software product.”23 On June 28, a senior vice president at FedEx announced, “Like many other companies worldwide, TNT Express operations have been significantly affected by an information system virus. No data breach is known to have occurred.” On the same day, FedEx filed a Form 8-K with the SEC indicating that same message but ending with this ominous disclosure: “We cannot measure the financial impact of this service disruption at this time, but it could be material.”24 On July 17, FedEx indicated that customers of its TNT Express subsidiary were still experiencing “widespread” service and invoicing delays.25 Employees were using manual processes and workarounds due to their systems not being available.26 By August 2017, TNT Express’s deliveries were still disrupted due to the attack.

The Impact Customers were defecting from TNT Express.27 They were being contacted about parcels days after these parcels were due to be delivered. Some customers were waiting 25 days or more for “next day” delivery. They were wondering why they could retrieve FedEx tracking information but not TNT tracking information, and why TNT had not switched over to using the FedEx systems, which seemed to be running. The Guardian reported that a major TNT hub in the United Kingdom was packed with undelivered parcels, each awaiting manual processing. TNT had to resort to manual processes because its package-tracking data, as well as billing data, were locked in malware-infected encrypted hard drives and not accessible to the firm. In addition to not being able to estimate (in mid-July) when FedEx would be able to fully restore operations at TNT, the company also acknowledged that the lack of cyberinsurance meant that FedEx might have to bear the full cost of recovery and the financial losses due to the attack. It stated: We do not have cyber or other insurance in place that covers this attack. Although we cannot currently quantify the amounts, we have experienced loss of revenue due to decreased volumes at TNT and incremental costs associated with the implementation of contingency plans and the remediation of affected systems. This situation caused FedEx to acknowledge that the NotPetya ransomware attack in late June directly led to both financial and material consequences in its TNT Express subsidiary, which would impact the ability of FedEx to both meet its projections and know whether its financial reporting was accurate. According to a study by Comparitech, stocks generally see a  0.43% drop immediately following a data breach.28 Within a day of the attack, according to Yahoo Finance data, Maersk’s stock had dropped 0.69%, Mondelez International’s 0.93%, and FedEx’s 0.53%. Shown in Exhibit 1, FedEx stock declined 4.5% over the week following the announcement of the NotPetya ransomware. On September 19, 2017, FedEx reported earnings of $2.19 per diluted share for the quarter ending August 31, 2017.29 These earnings reflected the estimated negative impact of the June 27 cyberattack affecting TNT Express

23. FedEx Corporation, 2017, FORM 10-K (Annual report) filed 07/17/17 for the period ending 05/31/17, available from EDGAR, accessed July 31, 2017. 24. FedEx Corporation, 2017, FORM 8-K (Current report filing) filed 06/28/17 for the period ending 06/28/17, available from EDGAR, accessed September 25, 2017. 25. C. Baraniuk, 2017, Petya cyber-attack still disrupting firms weeks later, BBC News, http://www.bbc.com/news/technology-40645569, accessed October 10, 2017 26. Schwartz, 2017, FedEx warns NotPetya will “negatively affect” profits, op. cit. 27. Burton, 2017, TNT Express still struggling with NotPetya malware, op. cit. 28. P. Bischoff, 2017, Analysis: How data breaches affect stock market share prices, Comparitech July 11: https://www.comparitech.com/blog /information-security/data-breach-share-price/, accessed July 31, 2017. 29. FedEx Corporation, 2017, FORM 8-K (Current report filing) filed 09/19/17 for the period ending 09/19/17, available from EDGAR, accessed September 25, 2017.

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Integrative Case Integrative 20  Cyberattack Case 20 onCyberattack TNT Express onand TNTImpact Express onand Parent Impact Company on Parent FedEx  Company 413 FedEx  413

EXHIBIT 1  FedEx Stock Price Following 10-K Announcement Filed on July 17, 2017 FedEx Corporation (FDX) 212.51 0.63 (0.30%) As of July 21 4:02 PM EDT. Market closed. Add Indicator

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219.25 219.38 219.25 219.45 45.55K 0.43%

4.5% DROP IN A WEEK

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209.39 Fri 4:55 AM

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208.00 0.00 Fri 7:15 AM

Source: FedEx

($0.79 per diluted share) and Hurricane Harvey (only $0.02 per diluted share). In this quarterly filing, FedEx disclosed the following: The worldwide operations of TNT Express were significantly affected during the first quarter by the June 27 NotPetya cyberattack. Most TNT Express services resumed during the quarter and substantially all TNT Express critical operational systems have been restored. However, TNT Express volume, revenue, and profit still remain below previous levels.

Case Discussion Questions 1. From a resource-based view, an acquisition is supposed to add value. Why did the acquisition of TNT Express reduce so much value for FedEx? 2. Is this cyberattack a black swan event? Or should this have been anticipated? 3. From a postmerger integration standpoint, what are the lessons from this case?

How far below the previous levels was also disclosed by FedEx in its regulatory reporting. First-quarter financial results following the attack showed that operating results for FedEx Express (including TNT Express) declined due to an estimated $300 million impact from the NotPetya cyberattack.

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414  Integrative Case 21  Shanghai Disneyland

Integrative Case

21

Shanghai Disneyland1 Two decades in the making, the world’s biggest Disneyland opened in Shanghai in 2016. “Authentically Disney and distinctly Chinese” is the tagline coined by Disney’s chairman and CEO. Does the Magic Kingdom have what it takes to prosper in the Middle Kingdom? Mike W. Peng, University of Texas at Dallas On June 16, 2016, the world’s biggest Disneyland opened in Shanghai with a great deal of fanfare. It features a supersized 200-foot-tall castle. In comparison, the height for similar castles in Anaheim, California, and Orlando, Florida, is 77 feet and 180 feet, respectively. Approximately 80% of the Shanghai rides, such as the Tron Lightcycle Power Run roller coaster, are unique. Chinese elements are found throughout the theme park. The flagship restaurant, the Wandering Moon Teahouse, has sections representing different regions of China. Some old staples found in other Disney parks, such as Main Street USA, Jungle Cruise, and Space Mountain, have been banished—in fear of criticism about cultural imperialism. “Authentically Disney and distinctly Chinese” is an interesting tagline coined by Robert Iger, then-chairman and CEO of the Walt Disney Company (“Disney” hereafter). More than 330 million people live within a three-hour car drive or train ride. Disney is eager to turn them into lifelong customers not only for the $5.5-billion theme park, but also for its movies, games, toys, clothes, books, TV programs, cruises, and resorts. Mickey’s journey to the Middle Kingdom has been a tortuous one. The two-decade courtship started in the late 1990s when Jiang Zemin was president of China and Michael Eisner was Disney’s chairman and CEO. At that time, Disney was starting to have some success in China with its cartoon series aired on Sunday evenings by major TV stations. Then Disney launched a movie about the exiled Tibetan spiritual leader the Dalai Lama, Kundun, which triggered the wrath of the Chinese government. “All of our business in China stopped overnight,” Eisner recalled. Out of desperation, Disney hired as a consultant former

Secretary of State Henry Kissinger, who had spearheaded American efforts to establish diplomatic ties with China in the 1970s and was regarded as a trustworthy friend by the Chinese. The government only agreed to reopen China after intense lobbying by Kissinger and humiliating apologies by Eisner, who admitted Kundun was “a stupid mistake” in meetings with Chinese officials. Financially, Kundun was indeed a stupid mistake. It burned through a $30 million budget to reap only $5 million box office receipts. Eisner then introduced Iger, Disney’s international president at that time, as being in charge of negotiations for a theme park. The negotiations were slow and painful. Looking back, Iger, who succeeded Eisner as CEO in 2005 and as chairman in 2012, recalled that he had “engaged with three [Chinese] presidents, a few premiers, a number of vice premiers, a number of [Communist] Party secretaries, and five or six mayors of Shanghai.” By 2009, the Chinese government finally gave its blessing, but only after Disney agreed to be a minority partner. Disney took a 43% stake in the Shanghai Disney Resort. Shanghai Disney Resort would not only include the flagship Shanghai Disneyland, but also two additional theme parks, two themed hotels, shopping malls, and entertainment facilities. When completed, it would be three times the size of Hong Kong Disneyland. Disney’s joint venture (JV) partner, the state-owned Shanghai Shendi Group controlled by the Shanghai government, owned a 57% stake. In the management company that actually ran the property, Disney gave up a 30% piece. In comparison, the Hong Kong government gave a 48% share to Disney for the JV that owned Hong Kong Disneyland, and the government

1. This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission. 414

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itself took 52%. Disney gave up no management control in Hong Kong. Why was Disney so eager to go to China? While China’s pull in terms of market size and potential is obvious, Disney is also pushed by its lackluster performance in other areas such as cable TV, movies, and some of its other theme parks. In April 2011, Shanghai Disneyland broke ground, with Iger and Chinese officials scooping up loose dirt, Mickey and Minnie Mouse frolicking in Chinese costumes, and a children’s choir singing When You Wish Upon a Star—in Mandarin. Despite such hoopla, there was no guarantee that Disney’s high-profile entry would be profitable. Exhibit A: Disneyland Paris, which opened in 1992, is still struggling to be consistently profitable. For Shanghai Disneyland, the attention to detail was meticulous. In addition to the tremendous efforts to showcase local responsiveness with 80% of the rides being uniquely tailored to local interests, Iger also pretasted the food (such as waffles in the shape of Donald Duck) and decided which characters would appear in the parade. When first unveiled in March 2016, Shanghai Disneyland’s website registered five million hits within 30 minutes. The first two weeks of tickets sold out in hours. Yet as Shanghai Disneyland celebrated its first Chinese New Year in January 2017, disappointing news came. In its first six months ending on December 31, 2016, 5.6 million guests came. Although impressive, these numbers fell far short of rosy initial projections of an estimated 15 million visitors for the first year. If attendance continued at its current pace, then the first full-year result would barely reach more than ten million. In the Disney universe, ten million visitors in the first year would not be too bad. Hong Kong only attracted seven million in 2015—its 11th year. In comparison, in 2015, Paris reported 15 million, Tokyo 17 million, Anaheim 18 million, and Orlando 19 million. While these sister parks are a lot more established, Shanghai Disneyland clearly has a long way to go. In 2017, Shanghai Disneyland attendance reached 11 million. In 2018, the number reached 12 million. However, the number went down a little in 2019, and Disney had to lower ticket prices to drive attendance. Then the

coronavirus hit. In January 2020, Shanghai Disneyland had to shut down. On May 11, Shanghai Disneyland reopened— the first Disney theme park to reopen anywhere in the world. The Chinese government limited the park’s capacity to 24,000 visitors, less than one-third of its pre-COVID-19 capacity. Disney actually reduced ticket sales “far below” the government’s limit to make sure that employees could enforce new safety rules, including temperature checks for visitors on arrival and maintaining social distance inside the park. The limited number of tickets that Disney put on sale during the week before reopening sold out within hours. Clearly, even without a vaccine, (at least some) people were eager to have a good time. Although fewer ticket sales meant decreased revenues, Disney shares climbed 8% in the week before May 5—investors in the bleak world of global shutdowns appreciated the glimmer of hope that the reopening of Shanghai Disneyland brought. Even after the reopening, it remains to be seen how Shanghai Disneyland would be affected by the increasing geopolitical tension between China and the United States—intensifying in the first two years before the coronavirus and worsening during the virus outbreak thanks to the “blame game.” As the Magic Kingdom embarks on its residence in the Middle Kingdom, one thing is clear: This China business is not going to be Mickey Mousy. Sources: (1) Bloomberg Businessweek, 2011, Disney gets a second chance in China, April 18: 21–22; (2) Fortune, 2016, Building Tomorrowland, June 15: 59–64; (3) Fox Business, 2019, Disney CEO: Complications from US-China trade dispute would be “short-lived,” May 30: www.foxbusiness.com; (4) Guardian, 2016, Middle Kingdom v Magic Kingdom, June 15: www.theguardian.com; (5) New York Times, 2016, How China won the keys to Disney’s Magic Kingdom, June 14: www.nytimes.com; (6) New York Times, 2020, Shanghai Disneyland reopens with strict safety procedures, May 11: www.nytimes.com; (7) M. W. Peng, 2017, Mickey goes to Shanghai, in Global Business, 4th ed. (pp. 339–340), Boston: Cengage; (8) Shanghaiist, 2017, Shanghai Disneyland welcomes 5.6 million visitors in first six months, is kind of a disappointment, January 17: www.shanghaiist.com; (9) Skift, 2019, Disney CEO still bullish on China despite Shanghai park slump, November 8: www.skift.com; (10) Statista, 2019, Attendance at the Shanghai Disneyland theme park in China from 2016 to 2018, www.statista.com; (11) Travel Pulse, 2019, Disney World attendance up, Disneyland visitor numbers down, November 8: www.travelpulse.com.

415

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416  Part 4  Integrated Cases

Case Discussion Questions 1. Elaborate on Shanghai Disneyland’s tagline “Authentically Disney and distinctly Chinese,” which was coined by Disney’s then chairman and CEO Bob Iger. Using the integration-responsiveness framework, how would you characterize Disney’s strategic choice? 2. How does Disney overcome its liability in China? Will Disney prosper in China?

3. ON ETHICS: Given the ongoing US–China geopolitical tension (with a number of manifestations such as trade wars and diplomatic spats), how would you—as CEO of Shanghai Disneyland—respond to a Chinese online post calling for boycotts of your park? (Your nationality can be either American or Chinese.)

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Integrative Case

Integrative Case 22  Samsung’s Global Strategy Group  417

22

Samsung’s Global Strategy Group1 To build a pipeline of tomorrow’s leaders who will lead Samsung and its subsidiaries worldwide, Samsung has set up a Global Strategy Group that attracts non-Korean talents from top Western business schools. Global Strategists serve as internal consultants for various Samsung units and are required to live and work in South Korea for four years before embarking on assignments worldwide. Mike W. Peng, University of Texas at Dallas Founded in 1938, Samsung Group is South Korea’s leading conglomerate. It has 320,000 employees in 510 units in 80 countries, with more than $300 billion in annual revenues in 2019. The flagship company within Samsung Group is Samsung Electronics Corporation (SEC), which enjoyed $206 billion revenues in 2019. In addition to SEC, other major Samsung Group companies include Samsung Life Insurance (the 13th-largest life insurer in the world), Samsung C&T Corporation (one of the world’s largest developers of skyscrapers and solar and wind power plants), and Samsung Heavy Industries (the world’s largest shipbuilder). Contributing approximately 20% of South Korea’s GDP, Samsung’s performance has been impressive. Clearly, Samsung has done something right. However, it has not been easy. To increasingly compete outside South Korea, Samsung needs to attract more non-Korean talents. But given its traditionally rigid hierarchical structure and the language barrier, its efforts to attract and retain non-Korean talents was often disappointing. In response, Samsung Group headquarters in 1997 set up a unique internal consulting unit, the Global Strategy Group, which reports directly to the CEO. Members of the Global Strategy Group are non-Korean MBA graduates of top Western business schools who have worked for leading multinationals such as Goldman Sachs, Intel, and McKinsey. They are required to spend two years in Seoul and study basic Korean. The group’s mission, according to its website, is to “(1) develop Samsung managers, (2) grow Samsung performance, and (3) expand Samsung globally.” Newly hired Global Strategists, which is the official job title, work on

critical and high-impact projects across diverse industries, functions, and locations. The overall goal of the Global Strategy Group is to build a pipeline of tomorrow’s leaders who will lead Samsung and its affiliated companies. By 2013, Samsung’s Global Strategists came from 18 countries with 19 native languages, had six years of average work experience, and was on average 30 years old. With Samsung’s rapid global growth, the Global Strategy Group has successfully trained and transitioned many alumni to various management roles at subsidiaries worldwide. Today, these alumni have key roles in driving Samsung’s growth and transforming Samsung into a premier global organization. Global Strategy teams work on various internal strategy consulting projects for different Samsung companies. Each team has a project leader, which gives the individual an opportunity to take on a leadership role in a high-level consulting project much earlier than in a typical consulting career. Each team has one to two Global Strategists. It also has a project coordinator, a senior Korean manager acting as a liaison between the team and the management of the (internal) client company. On average, projects last three months and typically involve some overseas travel. Starting with 20 Global Strategists in the class of 1997, hundreds of projects have been completed. These projects help Global Strategists form informal ties and expose them to the organizational culture. After two years, Global Strategists “graduate” and are assigned to Samsung headquarters as strategic staff or subsidiaries in South Korea as line managers for an additional two years. Overall, Global Strategists are required to live

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418  Integrative Case 22  Samsung’s Global Strategy Group

and work in South Korea for four years. After this period, they are typically assigned to Samsung subsidiaries in various countries, many of which are in their home countries. There are also opportunities for alumni from the Global Strategy Group to work in South Korea or in countries other than their own. Why does Samsung impose this highly unusual four-year residence requirement? Global Strategy Group’s website explains: “This requirement is in place so that it gives a Global Strategist ample time to learn and understand the Samsung culture as well as how to work effectively and achieve great success with corporate headquarters after transitioning to an overseas subsidiary.” Despite good-faith efforts by both Korean and non-Korean sides, the success of the Global Strategy Group is anything but ensured. Overall, cultural integration is a tough nut to crack. Of the 208 non-Korean MBAs who joined the group since its inception, 135 were still with Samsung as of 2011. The most successful ones are those who have taken the greatest pains to fit into the Korean culture, including eating kimchi and drinking Korean wine at dinner parties. Before the establishment of the Global Strategy Group, not a single non-Korean MBA lasted more than three years at SEC. With the Global Strategy Group as a cohort group, one-third of the non-Korean MBAs in the first class of 1997 were still with SEC three years later (in 2000). Over the next decade, the retention rate went up to two-thirds. Three experts noted how the non-Korean members of the Global Strategy Group have slowly, but surely, globalized Samsung’s corporate DNA:

The effects of these employees on the organization have been something like that of a steady trickle of water on stone. As more people from the Global Strategy Group are assigned to SEC, their Korean colleagues have had to change their work styles and mindsets to accommodate Westernized practices, slowly and steadily making the environment more friendly to ideas from abroad. Today, SEC goes out of its way to ask the Global Strategy Group for more newly hired employees. Sources: (1) S. Chang, 2008, Sony vs. Samsung, Singapore: Wiley; (2) T. Khanna, J. Song, & K. Lee, 2011, The paradox of Samsung’s rise, Harvard Business Review, July: 142–147; (3) Samsung Global Strategy Group, 2020, FAQ, sgsg.samsung.com

Case Discussion Questions 1. Using the integration-responsiveness framework for multinational strategic choices, can you explain why Samsung is so interested in tapping into the non-Korean talent pool? 2. In competition with other multinationals, how can Samsung attract and retain top talents from around the world? 3. As a non-Korean graduate from a top MBA program, why would you choose to commit four years of your life to working for Samsung and living in South Korea, a country that you have never visited before?

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Integrative Case

23

Corporate Governance the HP Way1 Between 2005 and 2011, Hewlett-Packard (HP) experienced a series of corporate governance intrigues. During these years, it had four CEOs. Turmoil at the top combined with product market challenges made this iconic Silicon Valley company vulnerable. Appointed in 2011 as CEO, Meg Whitman restored HP’s stability. To unleash shareholder value, Whitman then split the technology conglomerate into two $50-billion-plus companies, each with a narrower set of businesses and a stronger focus. Mike W. Peng, University of Texas at Dallas Founded in 1939 in a garage, Hewlett-Packard is the original Silicon Valley company. The “HP Way” is the legendary culture of innovation and creativity that the iconic company had codified and disseminated itself. To most readers of Global Strategy, HP probably represents a leading producer of printers and laptops—in fact, most of the manuscript of Global Strategy was printed on an HP printer, which has become a standard feature in many offices.

Lost Its Way By the late 1990s, with founders Bill Hewlett and David Packard long gone, HP had more than 100,000 employees and $31 billion in revenues. While the product market competition intensified, HP also experienced a series of corporate governance intrigues that involved boardroom coups, corporate spying scandals, and rapid-fire CEO turnover. In short, it seemed to have lost its way. In 1999, Carly Fiorina was brought in as the first female CEO of a Dow Jones 30 company. She spearheaded the controversial $25 billion acquisition of Compaq in 2002. In 2005, she was fired after HP lost half of its value. For her trouble, Fiorina was paid $20 million to leave. Patricia Dunn, chair of the board, was frustrated by unauthorized leaks from the board when the decision to fire Fiorina was deliberated. Dunn hired a private security firm to illegally spy on board members and journalists, and she herself was then fired in 2006. The board hired Mark Hurd to be its next CEO in 2006. In four years, HP’s share price doubled, and it became the

first IT company to have sales of more than $100 billion. Hurd did all this while squeezing costs. Even though Hurd seemed to have restored HP to its former glory, he suddenly resigned in August 2010 amid stories of sexual harassment and iffy expense reports. He left HP with a severance packet of $12 million and joined Oracle—one of HP’s archrival—as co-CEO. Oracle’s founder and CEO Larry Ellison called the HP board’s decision to let its star CEO go “the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.” In November 2010, HP’s board hired Léo Apotheker as the new CEO, but quickly fired him in September 2011 after HP lost $30 billion in market capitalization. For Apotheker’s less than 11 months of hard work, he walked away with $13  million: severance payment of $7.2 million, HP shares worth $3.4 million, and a performance bonus of $2.4 million. In September 2011, Meg Whitman, an HP board member and eBay’s former CEO, was named HP’s newest CEO—the fourth CEO since 2005 and the seventh since 1999 (there were several interim CEOs between “permanent” CEO appointments). At this point, turmoil at the top—in combination with the challenging competitive landscape in which PC sales were not growing and demand for printing was reduced—contributed to what Bloomberg Businessweek reported was a “free fall.” In August 2010, HP was worth $100 billion. In January 2013, it was worth only $29 billion—less than Carnival Cruise Lines, which had one-ninth of the revenue. While HP continued to sell and profit from PCs and printers, where it was the worldwide

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market leader, the disarray at the top was viewed as “one of the great corporate destructions of all time,” noted an expert. Could Whitman stop the free fall?

Stopping the Free Fall Whitman did stop the free fall and restore stability. She had successfully initiated and implemented a five-year turnaround plan. But whatever HP once had been, it was no longer. Its new innovations were more incremental as opposed to radical. Its cost cutting was painful, and Whitman laid off 85,000 employees from a total head count of 300,000 when she took over. “Very few people have run a $110 billion company,” Whitman commented in a Harvard Business Review interview. “Everything has more zeros attached to it, more complexity, more countries, more tax jurisdictions.” Because HP became such a sprawling technology conglomerate, it shares were trading at a conglomerate discount. To unlock value for shareholders, in 2016 Whitman engineered a split of HP into two new $50-billion-plus publicly traded companies, each with a narrower set of businesses. ●●

●●

Hewlett Packard Enterprise (HPE—dropping the hyphen between Hewlett and Packard in the name of the original entity): the data center, cloud, and consulting company, with revenues of $58 billion and an operating profit of $6 billion in 2015. HP Inc.: the PC and printer company, with revenues of $57 billion and an operating profit of $6 billion in 2015.

Each became more focused and easier for shareholders to value and appreciate. When the decision was announced, the stock of HP (the original company) went up. However, to minimize board room intrigue, Whitman did not tell board members which child company they were going to until about a month and a half before the event. The move was viewed by Bloomberg Businessweek (and many other commentators) as “a sign of defeat,” admitting HP’s inability to slow the commoditization of its PC and printer businesses.

A Tale of two HP Companies Of the two new child companies, HPE, packed with technologies of the future, was sexier and seemed to have more momentum to grow. Whitman kept it for herself as CEO.

HP Inc. had a bunch of commoditized businesses that were believed to have a low probability of growth and every likelihood of slow decline. PC sales were not growing, and demand for printing hard copies was lower than before. Whitman named herself chair of the board for HP Inc. and appointed another executive as CEO for HP Inc. Whitman’s goal as chair of HP Inc. was—in her own words—“to make sure both companies are working together.” Surprisingly, HP Inc.’s stock climbed 67% in its first two years. Both PC and printer sales increased significantly. The printer company was also endeavoring to transform itself to become a serious player in 3D printing, which has potential to transform manufacturing. In contrast, Hewlett Packard Enterprise was a laggard in a high-growth field. Both Amazon and Microsoft crushed its cloud services. In July 2017, Whitman stepped down as chairman of HP Inc. In November 2017, she announced that she would step down as HPE’s CEO after six years at the helm of HP and HPE. The announcement resulted in a 6% drop in HPE’s stock price. In February 2019, Whitman announced that she would not seek reelection to HPE’s board, ending her involvement in HPE. In September 2019, HPE acquired Cray for $1.4 billion. In January 2020, HP Inc., which was struggling to fight off low-cost rivals from Asia, received a takeover bid from Xerox, another former American technology icon that was now fading. With only $10 billion in annual revenues, Xerox was much smaller than HP Inc., which had $58 billion in annual revenues. For decades, HP and Xerox were among the most innovative companies in the world. In their public debate related to the acquisition in terms of who could manage HP Inc.’s assets better, both were arguing about who had the superior vision to acquire and then eliminate competitors and who had better plans to jettison employees—not an inspiring debate. HP Inc. believed that Xerox’s bid was driven by activist shareholder Carl Icahn, who owned 11% of Xerox (and 4% of HP Inc.). On March 5, 2020, HP Inc., whose stock was trading at $21 per share, rejected Xerox’s offer of $24 per share. On March 31, 2020, Xerox withdrew its bid, noting that “The current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19 have created an environment that is not conducive to Xerox continuing to pursue an acquisition of HP Inc.” However, the same press release complained, “There remain compelling

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Integrative Case 23  Corporate Governance the HP Way  421

long-term financial and strategic benefits from combining Xerox and HP. The refusal of HP’s board to meaningfully engage over many months and its continued delay tactics have proven to be a great disservice to HP stockholders.” From a corporate governance standpoint, HP Inc.’s successful defense against Xerox’s takeover bid is not likely to be the last episode of the saga involving not only HP Inc. itself, but also its sibling, Hewlett Packard Enterprise. The next time you print something on an HP printer, spare a thought about the corporate governance intrigues and the product market challenges that surround both HP companies. Sources: (1) Bloomberg Businessweek, 2013, Free fall: Inside Meg Whitman’s plan to keep HP from going . . . splat, January 14: 44–50; (2) Bloomberg Businessweek, 2015, HP takes the King Solomon approach, October 13: 36–37; (3) Bloomberg Businessweek, 2020, Printing is not dead, March 2: 44 –47; (4) Economist, 2010, The curse of HP, August 14: 54; (5) Economist, 2014, Still in the garage, June 14: 57–58; (6) D. Packard, 1995, The HP Way: How Bill Hewlett and I Built Our Company, New York: HarperBusiness; (7) M. Whitman, 2016, We need to intensify our sense and urgency, Harvard Business Review May: 95–101; (8) Xerox, 2020, Xerox provides update on proposal to acquire HP, press release, March 31: www.news.xerox.com.

Case Discussion Questions 1. As a corporate governance consultant, if you had been engaged by HP’s board in 2012, what would be your advice to reduce the frequency and the embarrassment of corporate governance intrigues and fiascos that took place between 2005 and 2011? 2. What are the benefits and drawbacks of splitting HP into two halves? 3. As an HP Inc. shareholder, do you support management’s decision to reject Xerox’s takeover offer on March 5, 2020, which would have given you a 14% premium?

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Integrative Case

24

When CSR Is Mandated by the Government in India1 Instead of encouraging firms to voluntarily engage in corporate social responsibility (CSR) activities, the Indian government in 2013 passed a law mandating that CSR is a must. How would firms respond before and after the enactment of the government mandate? Nishant Kathuria, University of Texas at Dallas While corporate social responsibility (CSR) is always a voluntary activity, the Indian government has mandated that CSR is a must—among the first such government actions in the world. Specifically, a recent change in regulations has moved discussion about CSR from “backroom to boardroom.” According to the Companies Act signed by the president of India on August 29, 2013, all firms that exceed a certain threshold of profitability, net worth, or sales are required to both perform and report CSR activities. There are two primary drivers behind the CSR mandate: (1) the need of the Indian government and society that firms help mitigate socioeconomic problems, and (2) the normative expectations that it is a moral responsibility of firms to engage in CSR. Some Indian conglomerates such as Tata, Wipro, Mahindra, and Godrej have historically spent significant resources on CSR activities. The firms owned by these groups maintain their positions on the lists of “best companies to work for.” Consumers admire these firms for offering high-quality products and making efforts to solve socioeconomic issues. However, the mandate to spend 2% of net profits on CSR drew attacks even from these socially responsible firms. Mr. Ratan Tata, chairman of Tata group, contended: We have a phenomenon which is meant to be good but is going to be somewhat chaotic . . . we don’t as yet know what kind of monitoring there’ll be in terms of how well this money is used.2 The CSR mandate faced a similar criticism from Mr. Azim Premji, the founder of Wipro group. He raised the following concern:

My worry is the stipulation should not become a tax at a later stage. . . . Spending 2% on CSR is a lot, especially for companies that are trying to scale up in these difficult times. It must not be imposed.3 Despite facing opposition from the corporate sector, the Indian government remained determined to make the CSR proposal a reality. The law, however, needs to overcome institutional, organizational, and individual barriers to become a success story. Weak enforcement of institutions in addition to challenges in measuring the effectiveness of CSR activities needs to be carefully addressed. The CSR budget may be potentially misused by managers, nongovernmental organizations (NGOs), and local politicians, thereby promoting corruption. Doing a one-time donation is different from planning and spending a significant sum of money on CSR. After all, firms would need support not only from management and staff, but also from external organizations such as NGOs, which are less efficient and effective in India. A manager of an Indian firm raised concern about the NGOs: Almost 180,000 registered NGOs are there. Some are good but most of them are maligned. . . . Some NGOs will come and say that they can do this and that and everything under the sun. Those who claim so will be good for nothing.4 Other significant barriers to embracing the law include a lack of expertise in doing CSR, finding ways to align CSR and business goals, and the willingness of top and midlevel

1. © Nishant Kathuria. Reprinted with permission. 2. http://www.theguardian.com/sustainable-business/india-csr-law-debate-business-ngo. See N. Subramaniam, M. Kansal, & S. Babu, 2017, Governance of mandated corporate social responsibility: Evidence from Indian government-owned firms, Journal of Business Ethics 143: 543–563. 3. http://www.businesstoday.in/current/corporate/azim-premji-aima-convention-corporate-social-responsibility/story/198960.html. 4. Quoted by Subramaniam et al., 2017, p. 555, op. cit. 422

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management to do CSR. KPMG, a leading management consulting firm, reports that delays in operations, delays in obtaining regulatory clearances, scaling up of activities, incorrect estimation of project costs, and the long-term nature of projects are the major reasons why some of the big firms in India fail to meet the required CSR spending.5 The situation, however, is indeed improving with time as firms are getting better at managing CSR projects. The mandate, despite in its infancy, does reflect some promising changes in the Indian society. The average spending by firms on CSR activities is up around three times from US$0.7 billion during 2010–2014 to US$1.9 billion during 2014 –2018.6 With the transformation of the concept of CSR from volunteerism to obligation, the mandate may create deeper effects that make the management and staff in firms more considerate toward integrating business and society. According to Ruby Thapar, Dow India’s director of corporate affairs, “What is good for the planet and society is also good for business.”7 One managers of another firm mentioned: Legislation has brought CSR to a level where it is genuinely discussed in the board. CSR has quietly but very strongly entered the boardroom sphere and that is very healthy for the entire country.8 Overall, this institutional change requires firms to change their DNA to integrate CSR with the way they do business. There are some questions that the top management will need to consider before making any rational decision in compliance with the CSR mandate. How do firms align CSR with business? How do firms develop quantifiable measures to monitor and evaluate CSR goals? Can firms do CSR all by themselves, or would they need support of NGOs to access the resources firms lack? Should the CSR activities be centralized at firms’ headquarters or be localized to cater to needs of varied communities? Do firms actually understand the socioeconomic issues they choose to solve? How can firms leverage CSR to build moral reputation? Because India is a diverse nation and problems and

expectations of people differ from one region to another, what criteria can firms use to select CSR activities? Many firms still spend less than the required amount on CSR. Noncompliant firms can explain why they cannot meet the target CSR, using the provision of “comply or explain” given in the mandate. Of all the firms that are affected by the mandate, less than half have met the target of spending 2% on CSR. Recently, the government announced its plans for a CSR audit committee to improve compliance. How can the firms be motivated to meet the required CSR target? Instead of merely encouraging firms to voluntarily engage in CSR activities, the government mandate for CSR may pave the road for making future managers and employees more responsible and better citizens. For instance, a significant proportion of Indian firms surpass the minimum requirement of spending 2% of profits on CSR. Moreover, the mandate, if successful, may have a rippling effect across the globe, such that the idea of mandating CSR may be tested and improved by multiple nations, leading to a better world. However, if not handled properly, the mandate may also lead firms and individuals to associate CSR with superficial and symbolic behavior. It is yet to be seen whether the CSR mandate will be successful.

Case Discussion Questions 1. What is the difference between voluntary CSR and mandatory CSR? Which of the two is better suited to solving problems in society? 2. How can the Indian government support firms in pursuing CSR? 3. How can firms transform organizational culture to integrate business and CSR? 4. ON ETHICS: If you were CEO of an Indian firm and a big-shot bureaucrat demanded that you use your firm’s CSR money to fund his family member’s NGO that has a noble cause, what would you do?

5. KPMG, 2018, India’s CSR Reporting Survey 2018. 6. Values represent the four-year average using the Prowess database, with US$1 assumed to be equal to 70 Indian rupees. 7. https://indiacsr.in/category/interviews/page/6/. 8. Quoted by Subramaniam et al., 2017, p. 553, op. cit. 423

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Integrative Case

25

Wolf Wars1 Since the reintroduction of wild wolves into the western United States, wolf wars have erupted. Wildlife enthusiasts, environmentalists, and tourists are elated, but ranchers, farmers, and hunters are howling mad. Should humans protect wolves or kill them? Mike W. Peng, University of Texas at Dallas Wolves are the planet’s most widespread land-based large mammals. They used to be humans’ most direct competitors for meat. As a result, the Big Bad Wolf occupied a center stage in our psyche as a demonic character in many cultures. Humans fought wolves for ages. Relentlessly shot, poisoned, and trapped, wolves were completely defeated in these old wolf wars. In Yellowstone National Park, the last gray wolf was killed in 1926. In the continental United States (except northern Minnesota), the gray wolf was completely exterminated by 1950. However, winning the wolf wars made (some) humans feel guilty. In 1995 and 1996, the US Fish and Wildlife Service deliberately reintroduced 66 wolves captured in Canada into the wild by releasing them into Yellowstone National Park and central Idaho’s wilderness. By 2009, more than 1,600 wolves populated the northern Rocky Mountain states (primarily Idaho, Montana, and Wyoming), and smaller packs penetrated California, Colorado, Oregon, and Washington (state). “The West is getting wilder by the hour,” declared National Geographic. Wildlife enthusiasts, environmentalists, and tourists were elated. In Yellowstone, thousands of tourists came to watch wolves every year, adding approximately $35  million to the local economy. The revival of the gray wolves was viewed one of the most resounding victories of the Endangered Species Act enacted in 1973. In 2008, gray wolves in Wyoming were declared no longer endangered by the Department of the Interior. In 2009, gray wolves in Montana and Idaho started to enjoy such a status. Finally, in 2011, gray wolves in eight states across the West and upper Great Lakes were taken off the endangered species list. Will humans and wolves live happily ever after? Not likely! “Packs are back,” wrote National Geographic,

“Westerners are glad, scared, and howling mad.” Other than the groups that are glad, a lot of people are scared. Small children, cats, and dogs are no longer safe in wolf-infested areas. A pleasant walk in the woods may result in unpleasant encounters. But two groups are howling mad. First, hunters complain that too many elk have become wolf food. In a region struggling with economic hardship such as lumber mill closures, wolves are direct competitors for meat to feed families. In some places, “Howdy?” is replaced by “Get your elk yet?” Some folks openly talk about taking the matter into their own hands by shooting the wolves as their forefathers did. A popular bumper sticker sports a crossed-out wolf with the caption “Smoke a Pack a Day.” The second group that opposes the reappearance of gray wolves is ranchers and farmers who raise livestock such as cattle and sheep for a living. Wolves literally eat into the thin profits of ranchers and jack up the price of beef, lamb, milk, cheese, yogurt, and ice cream that all of us have to pay. A pack of wolves (generally about three to ten) typically kills a (wild) elk or a cattle calf every two to three days. In a single night, a pack of three adult wolves and five pups killed 122 sheep on a ranch in Montana, consuming little to no meat—the adults were probably teaching the pups how to kill. Wyoming and Montana compensate ranchers for livestock loss to wolves (for example, about $600 a calf) if ranchers can prove that such losses are due to wolf kills. The trouble is that if ranchers do not find and document a carcass right away, scavengers such as grizzly bears may drag off or shred all the evidence. For every wolf kill that is compensated, several more are uncompensated. In addition, surviving cattle harassed by wolves over one season can lose 30 to 50 pounds each. Further, livestock

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with injuries scratched by unsuccessful wolf chases or with infections from wounds are not marketable, and ranchers have to eat such losses. Finally, stress results in a lot of livestock miscarriages. Some ranchers are aware of their corporate social responsibility (CSR). One was quoted as saying: “We have to realize that the general US population wants wolves. That population is also our customers for beef. It’s not a good idea to tell your customers they don’t know what they’re doing.” But, the other side of the debate argues, “Isn’t the thinking that the CSR of cattle ranchers is to tolerate their livestock being wolf feed going too far?” Frustrated ranchers cannot defend their private property by shooting wolves. Instead, they vote politicians on a prowolf platform out of office and fill state legislatures in Idaho, Montana, and Wyoming with candidates who vow to make wolves go away. After gray wolves were delisted from the (federal) engendered species list in Wyoming, the state government immediately labeled them vermin (or pests), allowing virtually unlimited shooting and trapping. A resulting lawsuit filed by environmental and animal-protection groups forced the Department of the Interior to temporarily put wolves back on the endangered list. Taking the lesson, Montana and Idaho, after wolves were delisted in their states, labeled them game animals and set quotas for the first legal wolf hunts in their history—75 in Montana and 220 in Idaho. In addition, Idaho started shooting wolves from helicopters to kill predators that biologists said were harming elk herds. In response, angry environmentalists went back to court again, arguing that the legislative removal of wolves from federal protection was unconstitutional and that wolves would be annihilated again. Some environmentalists argue that killing wolves would make wolves more dangerous. This is because, according to a group Living with Wolves, “when people hunt and trap wolves, packs can dissolve completely or be broken up into smaller, less-functional groups. Smaller packs are less successful at bringing down large prey . . . Smaller packs are often forced to find prey that’s easier to kill, and may turn to livestock out of desperation.” Overall, the age-old wolf wars continue to rage. But in this new chapter, wolf wars are not waged between wolves

and humans—instead, they are waged between different groups of humans with opposing views (the rural folks populating the cattle country versus the urban types who vow to protect wild animals at all costs). So stay tuned. Sources: (1) Christian Science Monitor, 2011, Wolf wars: Can man and predator coexist in the West, June 3; (2) Missoula News, 2009, Three views of the wolf wars, August 25; (3) Living with Wolves, 2020, The consequences of killing wolves, www.livingwithwolves.org; (4) National Geographic, 2010, Wolf wars, March: 34–55.

Case Discussion Questions 1. O  N ETHICS: Do ranchers have any CSR to help preserve the wolves by tolerating livestock losses? Or does their CSR lie in their efforts to get rid of the wolves from their private property? (By doing that, they also generate the social benefits of bringing down the costs on beef, lamb, milk, cheese, yogurt, and ice cream for all of us.) 2. O  N ETHICS: If ranchers cannot make a living, they are likely to sell property to developers, who will facilitate more urban sprawl. Urban land almost never goes back to agricultural or ranch use. Should CSR advocates help ranchers make a living, or should they push ranchers to accept more losses from wolf predation? 3. ON ETHICS: Compensating ranchers for wolf kills is a solution. However, as state budgets shrink and economic recession bites, should taxpayers (including many who do not hunt and do not make a living by ranching) foot such an escalating bill? (An expanding wolf population will need more food, which will result in more livestock losses.) 4. O  N ETHICS: While “wolf wars” take place in the United States and Canada, “elephant wars” in Africa (elephants leave protected areas and destroy crops) and “tiger wars” in India (tigers leave protected areas and attack livestock and children) feature similar tensions. Answer Questions 1 to 3 using either “elephant wars” or “tiger wars” as your background.

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Glossary A

absorptive capacity  The ability to absorb new knowledge by recognizing the value of new information, assimilating it, and applying it. accommodative strategy  A strategy that tries to accommodate corporate social responsibility considerations into decision making. acquisition  The transfer of control of assets, operations, and management from one firm (target) to another (acquirer); the former becomes a unit of the latter. acquisition premium  The difference between the acquisition price and the market value of target firms. activist shareholder  (1) A traditional shareholder interested in maximizing his/her wealth, or (2) a social activist eager to promote his/her agenda. additive manufacturing (3D printing)  Manufacturing three-dimensional 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. agency cost  The cost associated with principal-agent relationships. They are the sum of (1) the principals’ costs of monitoring and controlling agents and (2) the agents’ costs of bonding. agency relationship  The relationship between principals and agents. agency theory  The theory about principal–agent relationships (or agency relationships in short). agent  Person (such as manager) to whom authority is delegated. agglomeration  Clustering economic activities in certain locations. 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). anchored replicator  A firm that seeks to replicate a set of activities in related industries in a small number of countries anchored by the home country. angel  A wealthy individual investor.

antidumping law  Law that punishes foreign companies that engage in dumping in a domestic market. antitrust law  Law that attempts to curtail anticompetitive business practices such as cartels and trusts. antitrust policy  Competition policy designed to combat monopolies, cartels, and trusts. arm’s-length transaction  Transaction in which parties keep a distance, develop little social relationship, and rely on contracts. artificial intelligence (AI)  Simulation of human intelligence processes by machines, especially computer systems. attack  An initial set of actions to gain competitive advantage. awareness-motivation-capability (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.

B

backward integration  Acquiring and owning upstream assets. base of the pyramid (BoP)  The vast majority of humanity, about five billion people, who make less than US$2,000 a year. balanced scorecard  A performance evaluation method from the customer, internal, innovation and learning, and financial perspectives. bargaining power of buyer  The ability of buyer to reduce prices or demand quality improvement of goods and services. bargaining power of supplier  The ability of supplier to raise prices or reduce the quality of goods and services. Beijing Consensus  A view that questions Washington Consensus’ belief in the superiority of private ownership over state ownership in economic policy making, which is often associated with the position held by the Chinese government. benchmarking  Examination as to whether a firm has resources and capabilities to perform a particular activity in a manner superior to competitors. Big Data (data analytics)  Analyzing extremely large data sets that may reveal previously unknown patterns, trends, and associations.

426 

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black swan event  An unpredictable event that is beyond what is normally expected and that has severe consequences.

that these capabilities be leveraged by and/or disseminated to other subsidiaries.

blitzscaling  Prioritizing speed over efficiency in the development of a start-up even in the face of uncertainty.

CEO duality  The CEO doubles as chairman of the board.

blue ocean  Unexplored new market areas discovered by entrepreneurs

chief executive officer (CEO)  The top executive in charge of the strategy and operations of a firm.

born global firm (international new venture)  A startup that attempts to do business abroad from inception.

classic conglomerate  A firm that engages in productrelated diversification within a small set of countries centered on the home country.

bounded rationality  The necessity of making rational decisions in the absence of complete information.

code of conduct (code of ethics)  Written policies and standards for corporate conduct and ethics.

BRIC  Brazil, Russia, India, and China.

cognitive pillar  The internalized, taken-for-granted values and beliefs that guide individual and firm behavior.

BRICS  Brazil, Russia, India, China, and South Africa. 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. bureaucratic cost  Additional cost associated with a larger, more diversified organization. business group  A term to describe a conglomerate, which is often used in emerging economies. business-level strategy  Strategy that builds competitive advantage in an identifiable market. business model  A firm’s way of doing business and creating and capturing value. business process outsourcing (BPO)  Outsourcing of business processes such as loan origination, credit card processing, and call center operations.

C

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). collusion  Collective attempts between competing firms to reduce competition. collusive price setting  Monopolists or collusion parties setting prices at a level higher than the competitive level. co-marketing  Agreements among a number of firms to jointly market their products and services. 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.” 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.

capability  The tangible and intangible assets a firm uses to choose and implement its strategies.

competitive advantage  Performance superiority over rivals.

capacity to punish  Having sufficient resources to deter and combat defection.

competitive dynamics  Actions and responses undertaken by competing firms.

captive sourcing  Setting up subsidiaries to perform inhouse work in foreign locations. Conceptually identical to foreign direct investment (FDI).

competitor analysis  The process of anticipating rivals’ actions in order to both revise a firm’s plan and prepare to deal with rivals’ responses.

cartel  An entity that engages in output fixing and price fixing, involving multiple competitors. Also known as a trust.

complementary asset  Noncore asset that complements and supports the value-adding activities of core assets.

causal ambiguity  The difficulty of identifying the causal determinants of successful firm performance.

complementor  A firm that sells products that add value to the pro­ducts of a focal industry.

center of excellence  MNE subsidiary explicitly recognized as a source of important capabilities, with the intention

concentrated ownership and control  Ownership and control rights concentrated in the hands of owners. 427

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428  Glossary

concentration ratio  The percentage of total industry sales accounted for by the top four firms.

cross-market retaliation  Retaliation in other markets when one market is attacked by rivals.

conduct  Firm actions such as product differentiation.

cross-shareholding  Both partners invest in each other to become cross-shareholders.

conglomerate  Product-unrelated diversifier. conglomerate M&A  An M&A deal involving firms in product-unrelated industries. conglomeration  A strategy of product-unrelated diversification. constellation  A multipartner strategic alliance. Also known as strategic network. contractual (nonequity-based) agreement  A strategic alliance that is based on contracts and does not involve the sharing of ownership. coordination  Formal or informal cooperation among competitors. corporate entrepreneurship  Behavioral orientation exhibited by established firms with an entrepreneurial emphasis that is innovative, proactive, and risk-taking.

crowdfunding  Efforts by entrepreneurial individuals and groups to fund their ventures by drawing on relatively small contributions from a large number of individuals. cultural distance  The difference between two cultures along some identifiable dimensions. culture  The collective programming of the mind that distinguishes the members of one group or category of people from another. currency hedging  A transaction that protects traders and investors from exposure to the fluctuations of the spot rate. currency risk  Risk stemming from exposure to unfavorable movements of the currencies.

D

corporate governance  The relationship among various participants in determining the direction and performance of corporations.

defensive strategy  A strategy that is defensive in nature. Firms admit responsibility, but often fight it.

corporate-level strategy (corporate strategy)  Strategy about how a firm creates value through the configuration and coordination of its multimarket activities.

design thinking  An iterative process in which firms seek to understand users, challenge assumptions, and solve problems in a creative way.

corporate philanthropy  Firms’ donation to social causes.

differentiation  A competitive strategy that focuses on how to deliver products that customers perceive as valuable and different.

corporate social irresponsibility (CSI)  A lack of corporate social responsibility that can result in disasters and scandals. corporate social performance (CSP)  Social performance outcome of a firm’s CSR activities corporate social responsibility (CSR)  The social responsibility of corporations. It pertains to consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains that the firm seeks. corruption  The abuse of public power for private benefit usually in the form of bribery. cost leadership  A competitive strategy that centers on competing on low costs and prices. counterattack  A set of actions in response to attacks. country-of-origin effect  The positive or negative perception of firms and products from a certain country. country (regional) manager  The business leader in charge of a specific country (or region) for an MNE. cross-listing  Firms list their shares on foreign stock exchanges.

diffused ownership  An ownership pattern involving numerous small shareholders, none of whom has a dominant level of control. digital strategy (digital business model)  An application of digital technologies to existing business activities and/ or to develop new ways of competition. direct export  Directly selling products made in the home country to customers in other countries. dissemination risk  Risk associated with the unauthorized diffusion of firm-specific assets. diversification  Adding new businesses to the firm that are distinct from its existing operations. diversification discount  Reduced levels of performance because of association with a product-diversified firm (also known as conglomerate discount). diversification premium  Increased levels of performance because of association with a product-diversified firm (also known as conglomerate advantage). divestiture  Selling off assets.

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Glossary  429

domestic demand  Demand for products and services within a domestic economy. dominance  A situation whereby the market leader has a very large market share. dominant logic  A common underlying theme that connects various businesses in a diversified firm. downscoping  Reducing the scope of the firm through divestitures and spin-offs. downsizing  Reducing the number of employees through layoffs, early retirements, and outsourcing. downstream vertical alliance  A strategic alliance with firms in distribution (downstream). due diligence  Thorough investigation prior to signing contracts. dumping  An exporter selling below cost abroad and planning to raise prices after eliminating local rivals. duopoly  A special case of oligopoly that has only two players. 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.

E

economic benefit  Benefit brought by the various forms of synergy in the context of diversification. economies of scale  Reduction in per unit costs by increasing the scale of production. economies of scope (scope economies)  Reduction in per unit costs and increases in competitiveness by enlarging the scope of the firm. ecosystem  A community of organizations interacting as a system. emergent strategy  A strategy based on the outcome of a stream of smaller decisions from the “bottom up.” emerging economy (emerging market)  A label that describes fast-growing developing economies since the 1990s. entrepreneur  An individual who identifies and explores previously unexplored opportunities. entrepreneurship  The identification and exploitation of previously unexplored opportunities. entry barrier  Industry structures that increase the costs of entry. entry mode  A form of operation that a firm employs to enter foreign markets.

environmental, social, and governance (ESG) performance  A performance yardstick consisting of economic, social, and governance dimensions. equity-based alliance  A strategic alliance that involves the use of equity. equity mode  Mode of foreign market entry that involves the use of equity. ethical imperialism  The imperialistic thinking that one’s own ethical standards should be applied universally around the world. ethical relativism  The relative thinking that ethical standards vary significantly around the world and that there are no universally agreed-upon ethical and unethical behaviors. ethics  The norms, principles, and standards of conduct governing individual and firm behavior. excess capacity  Additional production capacity currently underutilized or not utilized. exit-based mechanisms  Corporate governance machanism that focuses on exit, indicating that shareholders no longer have patience and are willing to “exit” by selling their shares. explicit collusion  Firms directly negotiate output, fix pricing, and divide markets. explicit knowledge  Knowledge that is codifiable (can be written down and transferred without losing much of its richness). 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. export intermediary  A firm that performs an important middleman function by linking domestic sellers and foreign buyers that otherwise would not have been connected. expropriation  Activities that enrich the controlling shareholders at the expense of minority shareholders. extraterritoriality  The reach of one country’s laws to other countries.

F

factor endowment  The endowment of production factors such as land, water, and people in one country. far-flung conglomerate  A conglomerate firm that pursues both extensive product-unrelated diversification and extensive geographic diversification.

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430  Glossary

feint  A firm’s attack on a focal arena important to a competitor, but not the attacker’s true target area. femininity  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. fiduciary duty  A duty required by law. fighter brand  A brand (and subsidiary) designed to combat low-cost rivals while protecting the incumbent’s premium offerings. financial control (output control)  Controlling subsidiary/ unit operations strictly based on whether they meet financial/ output criteria. financial synergy  The increase in competitiveness for each individual unit that is financially controlled by the corporate headquarters beyond what can be achieved by each unit competing independently as standalone firms. firm strategy, structure, and rivalry  How industry structure and firm strategy interact to affect interfirm rivalry. first-mover advantage  Advantage that first movers enjoy and later movers do not. 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. 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). focus  A competitive strategy that  serves the needs of a particular segment or niche of an industry. Foreign Corrupt Practices Act (FCPA)  A US law enacted in 1977 that bans bribery of foreign officials. foreign direct investment (FDI)  A firm’s direct investment in production and/or service activities abroad. foreign portfolio investment (FPI)  Foreigners’ purchase of stocks and bonds in one country. formal institution  Institution represented by laws, regulations, and rules. formal, rule-based, impersonal exchange  A way of economic exchange based on formal transactions in which parties keep a distance. forward integration  Acquiring and owning downstream assets.

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. friendly M&A  An M&A deal in which the board and management of a target firm agree to the transaction.

G

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. game theory  A theory that focuses on competitive and cooperative interaction (such as in a prisoner’s dilemma situation). generic strategy  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. geographic area structure  An organizational structure that organizes the MNE according to different countries and regions. geographic diversification  Entries into new geographic markets. gig econnomy  Finding short-term online or onsite service jobs (such as driving, translations, or baby-sitting). Gini coefficient  A measure of income distribution, with zero representing perfect equality and one representing perfect inequality (one person holding all the wealth). global account structure  A customer-focused structure that supplies customers (often other MNEs) in a coordinated and consistent way across various countries. global matrix  An organizational structure often used to alleviate the disadvantages associated with both geographic area and global product division structures. global product division  An organizational structure that assigns global responsibilities to each product division. global standardization strategy  An MNE strategy that relies on the development and distribution of standardized products worldwide to reap the maximum benefits from low-cost advantages. 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. global sustainability  The ability to meet the needs of the present without compromising the ability of future generations to meet their needs.

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Glossary  431

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.

industry life cycle  The evolution of an industry that typically goes through introduction, growth, maturity, and decline phases.

global virtual team  Team whose members are physically dispersed in multiple locations in the world. They cooperate on a virtual basis.

industry positioning  Ways to position a firm within an industry in order to minimize the threats presented by the five forces.

globalization  The close integration of countries and peoples of the world.

informal institution  Institution represented by norms, cultures, and ethics.

greenfield operation  Building factories and offices from scratch (on a proverbial piece of “greenfield” formerly used for agricultural purposes).

informal, relationship-based, personalized exchange  A way of economic exchange based on informal relationships among transaction parties. Also known as relational contracting.

H

home replication strategy  A strategy that emphasizes the international replication of home country–based competencies such as production scales, distribution efficiencies, and brand power. horizontal alliance  A strategic alliance formed by competitors. horizontal M&A  An M&A deal involving competing firms in the same industry. hostile M&A (hostile takeover)  An M&A deal undertaken against the wishes of target firm’s board and management, who reject the M&A offer. hubris  Managers’ overconfidence in their capabilities. hybrid organization  An organization that incorporates elements from different institutional logics. 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.

I

information asymmetry  Asymmetric distribution of information between two sides. information overload  Too much information to process. in-group  Individuals and firms regarded as part of “us.” initial public offering (IPO)  The first round of public trading of company stock. inside director  A director serving on a corporate board who is also a full-time manager of the company. institution  Humanly devised constraints that structure human interaction—informally known as the “rules of the game.” 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. institutional distance  The extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries. institutional framework  A framework of formal and informal institutions governing individual and firm behavior.

incumbent  A current member of an industry that competes against other members.

institutional investor  Professionally managed mutual fund or pension pool.

indirect export  Exporting indirectly through domestic-based export intermediaries.

institutional logic  A socially constructed set of practices, assumptions, and values that shape behavior.

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).

institutional pluralism  The existence of multiple institutional logics.

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. industry  A group of firms producing products (goods and/or services) that are similar to each other.

institutional relatedness  A firm’s informal linkages with dominant institutions in the environment that confer resources and legitimacy. institutional transition  Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players.

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432  Glossary

institutional void  Institutional conditions of a country lacking market-supporting infrastructure. institutional work  Purposive action aimed at creating, maintaining, and disrupting institutions. intangible resources and capabilities  Hard-to-observe and difficult-to-codify resources and capabilities.

L

late-mover advantage  Advantage associated with being a later mover. lead independent director  An independent director designated to be the leader of a board whose chair is the CEO.

integration-responsiveness framework  A framework of MNE management on how to simultaneously deal with two sets of pressures for global integration and local responsiveness.

leadership  Transforming organizations from what they are to what the leaders would have them become.

intellectual property right (IPR)  Right associated with the ownership of intellectual property.

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.

intended strategy  A strategy that is deliberately planned for. interlocking directorate (board interlock)  Two or more firms share one director on their boards. internal capital market  A term used to describe the internal management mechanisms of a product-unrelated diversified firm (conglomerate) that operate as a capital market inside the firm. 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. international diversification  The number and diversity of countries in which a firm competes. international division  An organizational structure typically set up when firms initially expand abroad, often engaging in a home replication strategy. international entrepreneurship  A combination of innovative, proactive, and risk-seeking behavior that crosses national borders and is intended to create wealth in organizations. Internet of things (IoT)  A system of interconnected devices and machines linked by the Internet.

J

joint venture (JV)  A “corporate child” that is a new entity given birth and jointly owned by two or more parent companies.

K

knowledge management  The structures, processes, and systems that actively develop, leverage, and transfer knowledge.

learning by doing  A way of learning not by reading books but by engaging in hands-on activities.

leveraged buyout (LBO)  A means by which private investors, often in partnership with incumbent managers, issue bonds and use the cash raised to buy the firm’s stock. liability of foreignness  The inherent disadvantage foreign firms experience in host countries because of their nonnative status. liability of newness  The inherent disadvantage that entrepreneurial firms experience as new entrants. 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. LLL advantages  Linkage, leverage, and learning advantages, which are typically associated with MNEs from emerging economies. localization (multi-domestic) strategy  An MNE strategy that focuses on a number of foreign countries/regions, each of which is regarded as a standalone local (domestic) market worthy of significant attention and adaptation. local responsiveness  The necessity to be responsive to different customer preferences around the world. location-specific advantage  Advantage associated with operating in a specific location. long-term orientation  A perspective that emphasizes perseverance and savings for future betterment.

M

managerial human capital  Skills and abilities acquired by top managers. marginal bureaucratic cost (MBC)  The bureaucratic cost of the last unit of organizational expansion (such as the last subsidiary established). marginal economic benefit (MEB)  The economic benefit of the last unit of growth (such as the last acquisition).

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Glossary  433

market commonality  The degree to which two competitors’ markets overlap. market power  Ability to raise prices without the fear of losing customers. 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. mass customization  Mass produced but customized products. merger  The combination of assets, operations, and management of two firms to establish a new legal entity. merger and acquisition (M&A)  Merging with or acquiring other firms. microfinance  A practice to provide microloans ($50–$300) to start small businesses with the intention of ultimately lifting the entrepreneurs out of poverty. microfoundation  Proximate causes of a given strategy phenomenon at a level of analysis lower than that of the phenomenon itself. micro-macro link  The link between micro, informal interpersonal relationships among managers of various units and macro, inter-organizational cooperation among various units.

network externality  The value a user derives from a product increases with the number (or the network) of other users of the same product. nonequity mode  Mode of foreign market entry that does not involve the use of equity. nonmarket (political) strategy  A strategy that centers on leveraging political and social relationships. non-scale-based advantage  Low-cost advantage that is not derived from the economies of scale. nontariff barrier  Trade and investment barrier that does not entail tariffs. norm  The prevailing practice of relevant players that affect the focal individuals and firms. normative pillar  How the values, beliefs, and norms of other relevant players influence the behavior of individuals and firms.

O

obsolescing bargain  A deal struck by an MNE and a host government, which changes the requirements after the entry of the MNE. offshoring  International/foreign outsourcing.

mission  Statement of a firm’s purpose.

OLI advantages  Ownership, location, and internalization advantages, which are typically associated with MNEs.

mobility barrier  Within-industry difference that inhibits the movement between strategic groups.

oligopoly  A situation whereby a few firms control an industry.

monopoly  A situation whereby only one firm provides the goods and/or services for an industry.

onshoring  Outsourcing to a domestic firm.

moral hazard  Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions. multimarket competition  Firms engage the same rivals in multiple markets.

open innovation  The use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation. operational synergy  Synergy derived by having shared activities, personnel, and technologies. opportunism  Self-interest seeking with guile.

multinational enterprise (MNE)  A firm that engages in foreign direct investment (FDI) by directly controlling and managing value-adding activities in other countries.

organizational culture  The collective programming of the mind that distinguishes members of one organization from another.

multinational replicator  A firm that engages in productrelated diversification on the one hand and far-flung multinational expansion on the other hand.

organizational fit  The complementarity of partner firms’ “soft” organizational traits, such as goals, experiences, and behaviors, that facilitate cooperation.

mutual forbearance  Multimarket firms respect their rivals’ spheres of influence in certain markets and their rivals reciprocate, leading to tacit collusion.

organizational slack  A cushion of resources that allow an organization to adapt successfully to pressures.

N

network centrality  The extent to which a firm’s position is pivotal with respect to others in the alliance network.

original brand manufacturer (OBM)  A firm that designs, manufactures, and markets branded products. original design manufacturer (ODM)  A firm that both designs and manufactures products.

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434  Glossary

original equipment manufacturer (OEM)  A firm that executes design blueprints provided by other firms and manufactures such products. out-group  Individuals and firms not regarded as part of “us.” outside (independent) director  A nonmanagement member of the board. outsourcing  Turning over all or part of an activity to an outside supplier to improve the performance of the focal firm. ownership advantage  Advantage associated with directly owning assets overseas.

P

partner rarity  The difficulty to locate partners with certain desirable attributes. 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.

product differentiation  The uniqueness of products that customers value. product diversification  Entries into new product markets. product proliferation  Efforts to fill product space in a manner that leaves little “unmet demand” for potential entrants. product-related diversification  Entries into new product markets and/or business activities that are related to a firm’s existing markets and/or activities. product-unrelated diversification  Entries into industries that have no obvious product-related connections to the firm’s current lines of business.

R

reactive strategy  A strategy that is passive about corporate social responsibility. Firms do not act in the absence of disasters and outcries. When problems arise, denial is usually the first line of defense.

performance  The result of firm conduct.

real option  An option investment in real operations as opposed to financial capital.

pivot  Being adaptive and flexible in a creative revision process to reach entrepreneurial goals.

reciprocity  An informal agreement based on mutual exchange of gratifications.

platform  An intermediary that connects two or more distinct groups of users and enables their direct interaction.

reconfiguration  Abilities to remain flexible by redesigning business models, realigning assets, and revamping routines.

power distance  The degree of social inequality.

red ocean  Known markets infested by price wars.

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.

refocusing  Narrowing the scope of the firm to focus on a few areas.

price leader  A firm that has a dominant market share and sets “acceptable” prices and margins in the industry. primary stakeholder group  Constituents on which the firm relies for its continuous survival and prosperity. principal  Person (such as owner) who delegates principal-agent conflict  Conflict of interests between principals (such as shareholders) and agents (such as professional managers). principal-principal conflict  Conflict of interests between two classes of principals: controlling shareholders and minority shareholders.

regulatory pillar  How formal rules, laws, and regulations influence the behavior of individuals and firms. regulatory risk  Risk associated with unfavorable government regulations. related and supporting industries  Industries that are related to and/or support the focal industry. related transaction  Controlling owners sell firm assets to another firm they own at below-market prices or spin off the most profitable part of a public firm and merge it with another of their private firms. relational (collaborative) capability  Capability to successfully manage interfirm relationships.

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.

relational contracting  Contracting based on informal relationships. Also known as infromal, relationship-based, personalized exchange.

private equity  Equity capital invested in private (nonpublic) companies.

replication  Repeated testing of theory under a variety of conditions to establish its applicable boundaries.

proactive strategy  A strategy that focuses on proactive engagement in corporate social responsibility.

research and development (R&D) contract  Outsourcing agreement in R&D between firms.

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Glossary  435

reshoring  Moving formerly offshored activities back to the home country of the focal firm. resource  The tangible and intangible assets a firm uses to choose and implement its strategies. 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 similarity   The extent to which a given competitor possesses strategic endowments comparable to those of the focal firm. restructuring  Reducing firm size, scope, and complexity. reverse innovation (frugal innovation)  Low-cost innovation from emerging economies that has potential in developed economies.

shareholder capitalism  A view of capitalism that suggests that the most fundamental purpose for firms to exist is to serve the economic interests of shareholders. shareholder democracy  A movement to let shareholders have more control of the management of the firm. shareholder empowerment  Shift in the allocation of power from corporate managers and directors to shareholders. shareholder primacy  A view that explicitly places shareholders as the single most important stakeholder group. sharing economy  Making available to others part of one’s own goods and services (such as renting out a room in one’s apartment). single business strategy  A strategy that focuses on a single product or service with little diversification.

risk management  The identification and assessment of risks and the preparation to minimize the impact of highrisk, unfortunate events.

small and medium-sized enterprise (SME)  A firm with fewer than 500 employees in the United States or with fewer than 250 employees in the European Union.

S

social capital  The informal benefits individuals and organizations derive from their social structures and networks.

scale-based advantage  Advantage derived from economies of scale (the more a firm produces some products, the lower the unit costs become). scale of entry  The amount of resources committed to foreign market entry. scenario planning  A technique to prepare and plan for multiple scenarios (either high or low risk). secondary stakeholder group  Stakeholders who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival.

social complexity  The socially complex ways of organizing typical of many firms. social entrepreneurship  Innovative, proactive, and risk-seeking entrepreneurial behavior that endeavors to meet social goals that benefit people and the society. social impact investment  Socially responsible investment (SRI).

seizing  Abilities to capture value from opportunities.

social issue participation  Firms’ participation in social causes not directly related to managing primary stakeholders.

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.

socially responsible investment (SRI)  Investment in firms that have excellent environmental, social, and governance (ESG) performance.

sensing  Abilities to discover opportunities.

socioemotional wealth (SEW)  The stock of affect-related value that the family has invested in the family firm.

separation of ownership and control  The dispersal of ownership among many small shareholders, with control of the firm largely concentrated in the hands of salaried, professional managers who own little or no equity.

solutions-based structure  An MNE organizational structure that caters to the needs of providing solutions for customers’ problems.

serial entrepreneur  An individual who starts, grows, and sells several businesses.

sphere of influence  Dominance acknowledged by competitors.

servitization  Smart combination of manu­facturing and services.

stage model  A model that suggests that firms internationalize by going through predictable stages from simple steps to complex operations.

shareholder activism  (1) Activities of large shareholders eager to maximize their returns, and (2) activities of small shareholders pushing their own proposals.

stakeholder  Any group or individual who can affect or is affected by the achievement of the organization’s objectives.

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436  Glossary

stakeholder capitalism  A view of capitalism that suggests that firms must respect stakeholders’ interests. stakeholder primacy  A view that suggests that a firm needs to have a fundamental commitment to all of its stakeholders—customers, employees, suppliers, communities, and shareholders. state-owned enterprise (SOE)  A firm owned and controlled by the state (government). stewardship theory  A theory that suggests that managers should be regarded as stewards of owners’ interests. strategic alliance  A voluntary agreement of cooperation between firms. strategic control (behavior control)  Controlling subsidiary/unit operations based on whether they engage in desirable strategic behavior (such as cooperation). strategic fit  The complementarity of partner firms’ “hard” skills and resources, such as technology, capital, and distribution channels. strategic group  A group of firms within a broad industry. 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.

strategy tripod  A framework that suggests that strategy as a discipline has three “legs” or key perspectives: industrybased, resource-based, and institution-based views. strong ties  More durable, reliable, and trustworthy relationships cultivated over a long period of time. structure  Structural attributes of an industry such as the cost of entry. structure-conduct-performance (SCP) model  An industrial organization economics model that suggests that industry structure determines firm conduct (strategy), which in turn determines firm performance. subsidiary initiative  The proactive and deliberate pursuit of new business opportunities by an MNE’s subsidiary to expand its scope of responsibility. substitute  Product and service of a different industry that satisfies customer needs currently met by the focal industry. 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.

T

strategic investment  One partner invests in another as a strategic investor.

tacit collusion  Firms indirectly coordinate actions to reduce competition by signaling to others their intention to reduce output and maintain pricing above competitive levels.

strategic leadership  How to most effectively manage organizations’ strategy formulation and implementation processes to create competitive advantage.

tacit knowledge  Knowledge that is not codifiable (that is, hard to be written down and transmitted without losing much of its richness).

strategic management  A way of managing the firm from a strategic, “big picture” perspective.

tangible resources and capabilities  Observable and quantifiable resources and capabilities.

strategic network  A strategic alliance formed by multiple firms to compete against other such groups and against traditional single firms. Also known as constellation.

tariff barrier  Taxes levied on imports.

strategy  An organization’s theory about how to compete successfully. strategy as action  A perspective that suggests that strategy is most fundamentally reflected by firms’ pattern of actions. 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.

thrust  The classic frontal attack with brute force. top management team (TMT)  The team consisting of the highest level of executives of a firm led by the CEO. trade barrier  Barrier blocking international trade. trade war  A country imposes tariffs or quotas on imports and other countries retaliate with similar forms of trade protectionism. transaction cost  Cost associated with economic transaction—or more broadly, cost of doing business.

strategy as plan  A perspective that suggests that strategy is most fundamentally embodied in explicit, rigorous formal planning as in the military.

transnational strategy  An MNE strategy that endeavors to be cost efficient, locally responsive, and learning driven simultaneously.

strategy formulation  The crafting of a firm’s strategy.

triple bottom line  A performance yardstick consisting of economic, social, and environmental dimensions.

strategy implementation  The actions undertaken to carry out a firm’s strategy.

trust  Cartel

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Glossary  437

tunneling  Activities of managers from the controlling family of a corporation to divert resources from the firm for personal or family use. turnkey project  Project in which clients pay contractors to design and construct new facilities and train personnel.

vision  Articulation of a firm’s envisioned future. voice-based mechanism  Corporate governance mechanism that focuses on shareholders’ willingness to work with managers, usually through the board of directors, by “voicing” their concerns.

U

VRIO framework  A resource-based framework that focuses on the value (V), rarity (R), imitability (I), and organizational (O) aspects of resources and capabilities.

unicorn  A privately held technology firm valued at over $1 billion.

Washington Consensus  A view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policy making, which is often spearheaded by the US government and two Washington-based international organizations: the International Monetary Fund and the World Bank.

uncertainty avoidance  The extent to which members in different cultures accept ambiguous situations and tolerate uncertainty.

upstream vertical alliance  A strategic alliance with firms on the supply side (upstream).

V

W

value chain  Goods and services produced through a chain of vertical activities that add value.

weak ties  Relationships that are characterized by infrequent interaction and low intimacy.

venture capitalist (VC)  An investor who invests capital in early-stage, high-potential start-ups.

wholly owned subsidiary (WOS)  Subsidiary located in a foreign country that is entirely owned by the MNE.

venture capital (VC)  Capital invested in early-stage, high-potential start-ups.

worldwide (global) mandate  The charter to be responsible for one MNE function throughout the world.

vertical M&A  An M&A deal involving suppliers (upstream) and/or buyers (downstream).

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438  Index of Names

Index of Names A

Abdelnour, S., 108 Abdi, M., 109, 251 Abdullah, S., 310 Abouk, R., 310 Acemoglu, D., 340 Acharya, A., 310 Adair, W., 191 Adams, G., 80 Adams, R., 309 Adegbesan, J., 191 Adkins-Green, S., 278 Adler, P., 82 Adner, R., 81, 135, 193 Adolfsen, Kristian, 119 Adolfsen, Roger, 119 Adzic, M., 278 Afuah, A., 54 Agarwal, R., 55, 135, 137, 191, 220, 251 Aggarwal, V., 82, 191 Agle, B., 337 Agon, Jean-Paul, 273 Aguilera, R., 30, 110, 111, 309, 311, 312, 337, 339 Aguinis, H., 337 Ahlstrom, D., 28, 109, 110, 280, 309, 338, 340 Ahmed, M., 83 Ahuja, G., 29, 81 Aime, F., 81, 311 Akremi, A., 166, 340 Alcacer, J., 165 Aldrich, H., 135 Aldy, J., 340 Alexiev, A., 310 Alexy, O., 82 Ali, A., 308 Allatta, J., 253 Allende, Salvador, 332 Allison, T., 137 Almandoz, J., 136 Almeida, P., 251 Alstyne, M., 55 Altenborg, E., 253 Alton, R., 252 Alvarado-Vargas, M., 278 Alvarez, S., 134 Ambec, S., 339 Ambos, B., 111, 279 Ambos, T., 29, 31, 279, 280 Amit, R., 54, 135, 308 Anand, J., 55, 191, 192, 220, 251, 278, 280 Anand, N., 278 Anand, S., 339 Andersen, T., 30 Anderson, B., 134, 166 Anderson, E., 28 Andersson, F., 136 Andersson, U., 29, 279, 280 Andrade, G., 252 Andrus, J., 55 Ang, S., 191 Angst, C., 81 Angus, R., 135, 138 Anokhin, S., 136 Ansari, S., 55, 109 Ansoff, I., 28 Antos, D., 280

Aoki, K., 56 Apotheker, Léo, 266, 292, 419 Aragon-Correa, J. A., 338 Arenius, P., 136 Argyres, N., 166, 253 Ariely, D., 109 Arikan, A., 165 Arikan, I., 192 Arino, A., 191, 192, 193 Arnardottir, A., 111 Arnold, M., 29, 164 Arora, A., 135 Arrefelt, M., 251 Arregle, J., 80, 137, 167, 220, 278 Arrfelt, M., 310 Arthurs, J., 137, 251 Artz, K., 30 Arya, B., 340 Aryinger, S., 135 Arzlanian, S., 137 Asakawa, K., 279 Ashkenas, R., 253 Asmussen, C., 54, 164, 165, 280 Ataay, A., 191 Ater, I., 166 Au, K., 110, 308, 312 Audretsch, D., 134 Augier, M., 29 Aulakh, P., 29, 109, 166, 251, 252, 278 Ault, J., 135 Autio, E., 55, 136, 138 Autor, D., 30 Avolio, B., 108 Awate, S., 279, 280

B

Babakus, E., 280 Bacon, N., 310 Bacq, S., 338 Baden-Fuller, C., 279 Baer, M., 28 Baier, E., 279 Baik, B., 164 Bailey, A., 337 Bailey, N., 166 Baker, J., 220 Baker, T., 136 Baker, W., 167 Bakker, R., 192 Bal, P. M., 340 Balasubramanian, N., 81, 82 Baldauf, A., 82 Ball, R., 310 Balogun, J., 280 Bamford, J., 190 Bamiatzi, V., 83 Banalieva, E., 111, 167, 308 Banerjee, A., 340 Bansal, P., 110, 337, 338, 339 Bapuji, H., 31 Barbulescu, R., 82 Barden, J., 192 Barker, R., 28 Barnard, H., 280 Barnes, B., 137 Barnett, M., 339 Barney, J., 29, 54, 80, 81, 82, 138, 251, 339

Baron, D., 109 Barr, P., 135 Barr, William, 217 Barreto, T., 110 Barringer, B., 135 Barroso, A., 54 Barsoux, J., 278 Bartkus, V., 310 Bartlett, C., 278 Basu, S., 135 Batjargal, B., 111, 137 Batson, A., 312 Battilana, J., 110, 339 Baum, J., 192, 220 Baum, M., 135 Bauman, C., 192 Baumol, W., 135 Bazerman, M., 110 Beamish, P., 31, 81, 109, 165, 167, 190, 192, 251, 252, 278 Bebber, M., 82 Bebchuk, L., 310 Becerra, M., 312 Becker, M., 82 Beckman, C., 192 Bednar, M., 310, 311 Beechler, S., 29, 278 Belderbos, R., 165, 279 Belenzon, S., 136, 308 Bell, G., 28 Bell, R. G., 312 Bellavitis, C., 55 Bello, D., 166, 191 Benito, G., 31 Benner, M., 54, 220 Bennett, V., 253 Bentley, F. S., 81 Berchicci, L., 339 Bergh, R., 109 Bergman, B., 135 Berinato, S., 82 Berle, Adolf, 284, 296 Berman, S., 83 Bermiss, Y. S., 28, 136 Bernand, M., 220 Bernardes, E., 54 Bernstein, P., 312 Berrone, P., 308, 339 Berry, H., 111, 279 Bertrand, O., 220 Besharov, M., 110 Best, S., 221 Bettis, R., 28, 30, 82, 253 Beugelsdijk, S., 110, 111, 165, 278 Bezos, Jeff, 118, 141, 142 Bhagat, R., 30 Bhanji, Z., 164 Bharadwaj, S., 338 Bharati, P., 81 Bhattacharya S., 81 Bhaumik, S., 29, 164 Bianchi, M., 279 Bidelow, L., 166 Bidwell, M., 82 Bingham, C., 28, 80, 192 Bird, A., 310 Bird, Y., 340

438 

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Index of Names  439

Birkinshaw, J., 82, 221, 253, 279, 280 Bjorkman, I., 252 Bjorn, P., 83 Bjornskov, C., 135 Blake, D., 82 Blettner, D., 82 Blevins, D., 137 Block, E., 80, 137, 338 Blonigen, B., 252 Bloom, N., 81 Boddewyn, J., 167 Bodner, T., 278 Boehe, Dirk Michael, 392–397 Boeker, W., 55, 191, 309, 312 Boerner, C., 81 Bogatan, P., 165 Bogers, M., 279 Boisot, M., 136 Boivie, S., 28, 251, 309, 310, 311, 312 Bonardi, J., 109 Bond, M., 111 Booth, J., 340 Booth, L., 54 Borah, A., 138 Borgerson, S., 319 Bornemann, T., 81 Bort, S., 138 Boss, D., 220 Bosse, D., 135, 337, 340 Bossink, B., 192 Bou, J., 56 Boubakri, N., 110 Boudreau, K., 55, 136 Bowers, A., 220 Bowman, E., 251 Boyacigiller, N., 29, 278 Boyd, B., 309, 310 Boyd, J., 220 Bozos, K., 83 Bradley, S., 30, 135 Brahm, F., 28, 251 Brammer, S., 339 Brandenburger, A., 28, 193 Brandes, P., 309 Brannen, M., 253 Branson, Richard, 118 Branzai, O., 108 Brass, D., 253 Braun, M., 251 Brea-Soli, H., 135 Breitmoser, Y., 167 Bremer, Paul, 377 Brenner, S., 220 Bresman, H., 253 Bresser, R., 220, 309 Brettel, M., 82 Brewster, C., 136 Breznitz, D., 109 Bridoux, F., 81, 167, 337 Brigham, K., 308 Brinckmann, J., 135, 136 Bris, A., 311 Briscoe, F., 340 Brockman, P., 252 Bromiley, P., 83, 279 Broschak, J., 137 Brouthers, K., 29, 138, 165, 166, 193

Brouthers, L., 29, 111, 166 Brown, J., 31, 110 Brown, S., 55 Brown, T., 80 Brush, T., 191 Bruton, G., 31, 110, 136, 309, 311, 312, 339, 340 Bruyaka, O., 192 Brymer, R., 220 Bu, J., 167, 340 Bu, M., 338, 340 Buchanan, S., 340 Buche, I., 28 Buchel, O., 165 Bucheli, M., 109 Buchholtz, A., 220, 308, 338 Buchler, K., 28 Buchner, A., 137 Buckle, S., 338 Buckley, P., 28, 82, 167, 279 Bulkley, N., 167 Bundy, J., 110, 310 Burch, Tory, 122 Burgelman, R., 280 Burgers, J. H., 135 Burke, L., 111 Burns, B., 138 Burrus, D., 83 Burt, R., 28, 111, 137, 193, 312 Butzbach, O., 30 Byers, J., 55 Bylund, P., 340

C

Cabolis, C., 311 Calic, G., 135 Caligiuri, P., 110 Cameron, David, 85 Camp, S. M., 134 Campa, J., 252 Campbell, B., 135, 137 Campbell, J., 80, 220, 251, 310, 337 Campbell, R., 310 Campbell-Hunt, C., 56 Canales, R., 137 Caner, T., 82, 191 Cannella, A., 28, 192, 220, 221, 280, 310 Cano-Kollmann, M., 279 Cantwell, J., 165, 279 Caplice, C., 30 Caprar, D., 110 Capron, L., 81, 220 Cardinal, L., 135, 251, 280 Cardon, M., 136 Carlson, J., 337 Carlson, N., 310 Carmeli, A., 28 Carnabuci, G., 82 Carnes, C., 192 Carney, M., 110, 251, 308 Carney, R., 309 Carpenter, M., 251, 309, 311 Carraher, S., 109, 280 Carroll, T., 28 Carson, S., 56, 166 Casadesus-Masanell, R., 82, 135 Casanova, L., 30 Casciaro, T., 110, 278

Cassar, G., 138 Cassiman, B., 279 Castaldi, S., 278 Castaner, X., 190, 192, 312 Castellani, D., 279 Cattani, G., 55 Cavusgil, S. T., 83, 165, 192, 280 Ceccagnoli, M., 55 Ceci, F., 83 Cennamo, C., 55 Cerdin, J., 136 Certo, S. T., 220, 221 Cesinger, B., 31 Chacar, A., 109 Chadee, D., 83 Chadwick, C., 82 Chae, H., 81 Chakrabarti, A., 30, 83, 136 Chakrabarti, R., 253 Chan, C., 29 Chan, Margaret, 336 Chan, R., 339 Chandler, A., 28, 278 Chandler, J., 311 Chandra, Y., 135 Chandrashekaran, M., 278 Chang, B., 54 Chang, S., 30, 165, 193, 251 Chang, Y., 279 Chapman, J., 310 Charan, R., 309 Chari, M., 83 Chatain, O., 81, 220 Chatterji, A., 82, 134, 338 Chaturvedi, S., 191 Chaudhry, P., 109 Chelekis, J., 75 Chen, C., 29, 111 Chen, D., 191 Chen, E., 83, 136, 221 Chen, G., 309, 310, 311, 339 Chen, H., 29, 80, 108, 137, 138, 164, 251 Chen, J., 83, 137, 340 Chen, L., 55, 138 Chen, M., 28, 29, 220, 221, 253, 340 Chen, P., 251 Chen, S., 55, 252 Chen, T., 221, 308 Chen, W., 82, 165 Chesbrough, H., 279 Cheung, M., 192 Cheung, Y., 338 Chi, T., 82, 137, 191, 193 Child, J., 191 Child, T., 309 Chintakananda, A., 191, 251 Chipman, J., 109 Chittoor, R., 29, 251, 278 Chizema, A., 309, 312 Chng, D., 220, 310 Cho, M., 165 Cho, Y., 192 Choi, B., 165 Choi, J., 192, 253, 339 Choi, T., 31 Choudhury, P., 310 Chrisman, J., 308 439

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440  Index of Names

Christensen, C., 28, 30, 136, 252 Christensen, L., 338 Christiansen, Ole Kirk, 10 Christmann, P., 111, 253, 340 Christophe, S., 138 Chu, J., 312 Chua, C., 165 Chua, J., 308 Chua, R., 191 Chun, R., 80 Chung, C., 192, 280, 310, 311 Chung, G., 253 Chung, J., 165 Chung, Y., 28 Ciabuschi, F., 280 Clampit, J., 81 Clancy, J., 280 Clark, C., 311 Clark, D., 138 Clark, E., 278 Clarke, C., 30 Clarke, J., 136, 166 Clarkson, G., 220 Clarkson, M., 338 Clegg, L., 167 Clegg, S., 110 Clemente, M., 109 Clinton, Bill, 21 Clougherty, J., 111, 252, 253 Coates, Breena E., 372–374 Cobb, J. A., 340 Coeurderoy, R., 31, 81 Coff, R., 80 Cohen, S., 82 Cohen, W., 280 Colgan, D., 340 Collings, D., 280 Collinson, S., 167 Colmark, S., 311 Colombo, M., 137 Colovic, A., 278 Colpan, A., 253, 312 Combs, J., 166, 309 Conger, M., 136, 339 Conlon, D., 80 Connelly, B., 137, 220, 221, 310, 312 Conroy, K., 280 Contractor, F., 28, 81, 192, 279 Cook, K., 191 Cook, Tim, 67 Cool, K., 55, 81 Coombs, W. T., 110 Corbetta, G., 29, 308, 311 Cordery, J., 279 Cording, M., 253 Corredoira, R., 109 Corsten, D., 191 Costa, L., 81 Coughlan, J., 280 Courtney, H., 30 Coviello, N., 135 Covin, J., 134, 135, 252 Cowen, A., 310 Coyne, K., 220 Crane, A., 339 Crespi, R., 309, 312 Crilly, D., 337, 338, 340 Crook, T., 109 Croson, R., 138, 191 Cross, A., 167 Crossan, M., 309 Crossland, C., 109, 310, 311

Cruz, C., 308 Cruz, Luciano Barin, 392–397 Cuervo-Cazurra, A., 30, 31, 109, 111, 165, 280 Cui, L., 252 Cullen, J., 111, 251 Cumming, D., 137 Cummings, J., 279 Currie, R., 310 Cusumano, M., 56 Cuypers, I., 111, 191 Czinkota, M., 108

D

D’Aveni, R., 56, 80, 83, 221, 253 Dachs, B., 83 Dacin, M. T., 109 Dadun, R., 81 Dagnino, G., 83, 221, 252 Dai, L., 31, 109 Daily, C., 252, 309 Dalton, D., 252, 309 Dalziel, T., 137 Damaraju, N., 251 Darendeli, I., 111 Darnall, N., 340 Dau, L., 109 David, P., 81, 83 Davies, G., 80 Davis, G., 31, 309, 312 Davis, K., 337 Davison, R., 251 de Bakker, F., 31 De Carolis, D., 30, 83, 135 De Castro, J., 82 de Dlercq, D., 135 de Figueiredo, R., 31 de Fontenay, C., 56 de Lange, D., 137 de Mello, Anil, 120 de Oliveira, O., 28 de Queiroz, V., 279 de Roeck, K., 340 De Sarbo, W., 55 Dean, A., 280 Dean, T., 220, 340 Deb, P., 81 Decelles, K., 310 Decker, C., 56 Deeds, D., 29, 30, 83, 135, 136, 138, 165 Deligonul, S., 165 Delios, A., 30, 111, 165, 166, 250, 251, 278, 338 Dell, Michael, 41 Dellestrand, H., 279, 280 Delmas, M., 29, 338, 340 Delmestri, G., 165 Demerjian, P., 81 Demil, B., 135 Demirbag, M., 81 Dencker, J., 135 Deng, L., 191 Deng, P., 30, 165 Denk, N., 164 Denrell, J., 80 Desai, V., 109, 311 Desender, K., 309, 311, 312 Deshpande, R., 110 Devarakonda, S., 191 Devaughn, M., 137 Devers, C., 251, 252, 311 Devine, R., 136 Devinney, T., 30, 110, 337, 339 Dewald, J., 135

Dezso, C., 165 Dhanaraj, C., 28, 137, 167, 192 Dharwadkar, R., 309 Di Minin, A., 279 Dierickx, I., 81 Diestre, L., 191, 309 Dikova, D., 193 Dimitratos, P., 138 Dine, M., 136 Ding, Z., 28, 29, 137 Dirks, K., 28 Dobrev, S., 166 Doh, J., 109 Doidge, C., 310, 311 Donahue, M., 309 Donaldson, L., 311 Donaldson, T., 98, 99, 111, 317, 338, 340 Dong, A., 80 Dorfman, P., 110 Dorn, D., 30 Dorobantu, S., 167, 193, 338 Dorrenbacher, C., 280 Doshi, A., 339 Dotson, J., 251, 279 Dow, D., 111 Dow, S., 56 Dowell, G., 310, 339 Down, J., 83 Downes, L., 82 Doz, Y., 31 Driffield, N., 279 Drnovsek, M., 136 Drogendijk, R., 280 Drucker, P., 8, 28 Du, F., 111, 253 Du, J., 253 Du, X., 54, 221 Duanmu, J., 338 Duflo, E., 340 Duhaime, I., 28 Dunlop, P., 279 Dunning, J., 28, 166 Dunning, John, 154 Duran, P., 312 Durand, R., 81, 108, 251, 280, 338 Duso, T., 252 Dussauge, P., 54, 55, 166, 190, 192 Dutt, N., 83, 134 Dutta, A., 83 Dutta, S., 309 Dyer, J., 193 Dykes, B., 166, 252, 338

E

Easterby-Smith, M., 279 Eccles, R., 338 Echambadi, R., 55 Eckhardt, J., 220 Eddelston, K., 308 Eddleston, K., 308 Edelman, L., 138 Eden, L., 31, 109, 190, 191, 312, 337 Edman, J., 278 Edmans, A., 339 Edmondson, A., 278 Eesley, C., 136, 310 Egelhoff, W., 56, 278 Eggers, F., 31 Eggers, J., 55, 138 Eich, K., 279 Eilert, M., 338 Einav, L., 54

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Index of Names  441

Eio, Peter, 10 Eisenhardt, K., 28, 80, 83, 137, 221, 253, 279 Eisenman, M., 136 Eisenmann, T., 54, 55 Eisner, Michael, 414 Elfenbein, D., 54, 138 Elfenbein, H., 220 Elfring, T., 137 Elkington, J., 338 Ellis, J., 311 Ellis, K., 251, 253 Ellison, Larry, 419 Ellram, L., 220 Ellstrand, A., 309 Enders, A, 54 Erickson, Theresa, 368 Erkelens, R., 279 Erkins, D., 309 Ertug, G., 111 Eshima, Y., 134 Espenlaub, S., 137 Estrin, S., 29, 137, 164, 251, 311 Ethiraj, S., 82 Ettenson, R., 340 Ettlie, J., 279 Etzion, D., 338 Evers, N., 138

F

Fabian, F., 81 Fabrizio, K., 82 Faccio, M., 309 Fails, D., 81 Fainshmidt, S., 110, 166, 311 Fama, Eugene, 296 Fang, C., 80, 138 Fang, E., 191, 192 Fang, T., 110 Faraj, S., 135 Farrell, D., 83 Fassiotto, M., 136 Fastoso, F., 192 Feizinger, E., 220 Feldman, E., 31, 308, 309, 312 Felin, T., 28, 29, 80 Fellin, T., 338 Felps, W., 337 Fern, M., 135, 251 Fernandes, N., 311 Ferrier, W., 220 Fey, C., 164, 253 Figge, F., 340 Filatotchev, I., 28, 30, 109, 166, 280, 311, 312, 338 Findikoglu, M., 191 Finkelstein, S., 28, 251, 252 Fiorina, Carly, 419 Fischer, T., 137 Fisher, G., 135, 137, 340 Fishman, C., 55 Fiske, A., 167 Fiss, P., 312 Fitza, M., 278, 311 Flammer, C., 110, 339 Flannery, John, 241 Fleming, L., 252 Flickinger, M., 309 Floyd, S., 82 Fluery, M., 166 Folta, T., 253, 309 Fonti, F., 192, 280 Ford, J., 339 Forrer, J., 339

Forsgren, M., 280 Fort, T., 339 Fortanier, F., 31 Forte, S., 28 Fortune, A., 54 Fosfuri, A., 339 Foss, N., 28, 29, 80, 135, 279, 280, 311 Fox, C., 28 Fracassi, C., 310 Franco, A., 135 Francoeur, C., 339 Fransson, A., 279 Freedman, L., 28 Freeman, E., 337 Freeman, R. E., 338, 340 Fremeth, A., 340 Frese, E., 56 Frick, W., 31 Fried, J., 310 Fried, Y., 280 Friedman, M., 320, 338 Friedman, T., 30, 83 Friedman, Thomas, 20 Friesl, M., 28 Fritzsimmons, S., 111 Frudlinger, D., 191 Fruin, M., 191 Frynas, J., 110 Fu, N., 29 Fuad, M., 252 Fuentelsaz, L., 111 Fukuyama, F., 111 Fuller, D., 30 Fulmer, I., 309 Funk, R., 165 Furr, N., 54, 55, 80

G

Gaba, V., 82 Gaffney, N., 81 Galang, R., 111 Galinsky, A., 29, 220 Gallo, E., 220 Galunic, C., 28 Gamache, D., 252, 311 Gambeta, E., 338 Gammelgaard, J., 280 Gan, G., 109 Ganapathi, J., 337 Ganco, M., 135, 220 Gande, A., 251 Gans, J., 56, 81 Ganson, B., 109 Gao, D., 167 Gao, G., 29, 164 Gao, H., 220 Garbuio, M., 80 Garces-Ayerbe, C., 339 Garcia-Canal, E., 167 Garcia-Castro, R., 81, 339 Garcia-Cestona, M., 309 Garcia-Garcia, R., 167 Gardner, H., 279, 280 Gardy, C., 110 Garg, S., 137 Garrett, R., 190 Garrette, B., 190 Garrido, E., 111 Gartenberg, C., 310, 312 Garud, R., 55, 135 Gates, S., 80 Gaur, A., 29, 31, 83, 136, 164, 165, 251, 252

Gaur, S., 136 Gawer, A., 55 Gedajlovic, E., 110, 251, 308, 310, 337 Geisser, K., 138, 165 Gelabert, L., 339 Geleilate, J., 166, 278 Geletkanycz, M., 309 Geng, X., 312 George, G., 31, 82, 137, 191, 308, 337, 338 Geppert, M., 278 Gerasymenko, V., 135 Gereffi, G., 31 Gerhart, B., 309 Geringer, J. M., 251 Geyskens, I., 191 Ghauri, P., 192 Ghemawat, P., 30 Ghosh, A., 192 Ghoshal, S., 278 Ghosn, Carlos, 186 Ghoul, S., 110 Giachetti, C., 252 Giambona, E., 109 Gianfrate, G., 340 Gianiodis, P., 220, 279 Giarratana, M., 54, 339 Gibbons, P., 280 Gibson, C., 110, 279 Gifford, B., 339 Gilbert, B., 137 Gillialand, D., 166 Gimeno, J., 220 Gino, F., 279, 312 Girod, B., 309 Giustiziero, G., 221 Glaister, K., 81 Glavas, A., 337 Globerman, S., 55 Glozer, S., 339 Glunk, U., 311 Gnyawali, D., 191 Godart, F., 29 Godfrey, P., 82 Goerzen, A., 164, 165, 251 Golden, S., 82 Golovko, E., 136 Gomez, C., 111 Gomez, J., 166 Gomez-Casseres, B., 190 Gomez-Mejia, L., 308, 310, 339 Gomulya, D., 309, 312 Gong, Y., 279 Gonzalez-Perez, M., 164 Gooderham, P., 279 Gopal, R., 136 Goranova, M., 309, 310 Gordon, B., 55 Gore, A., 309 Gotsopoulos, A., 55, 166 Gottfredson, M., 83 Gottschalg, O., 312 Gould, S., 280 Gove, S., 81, 220, 340 Govindarajan, V., 27, 30, 220, 279 Gozubuyuk, R., 312 Graebner, M., 253 Graffin, S., 252, 308, 309, 312 Graham, E., 221 Graham, J., 109 Grajek, M., 111 Granovetter, M., 192 Grant, J., 28

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.

442  Index of Names

Gras, D., 338 Graves, S., 339 Gray, B., 109 Greckhamer, T., 311 Green, C., 338 Greenbaum, B., 135 Gregoire, D., 138, 166 Gregoric, A., 310 Grein, A., 280 Greve, H., 29, 110, 111, 192, 220, 252, 311, 312 Grewal, R., 55, 278 Grifell-Tatje, E., 135 Griffin, D., 311 Griffin, R., 221 Griffin, S., 252 Griffith, S., 28 Grigoriou, K., 279 Grimes, M., 135, 136 Grimpe, C., 81 Grinstein, A., 340 Grodal, S., 55, 166 Grogaard, B., 111 Grove, A., 46, 55, 280 Grove, Andy, 273 Gruber, M., 82, 135, 136 Gubbi, S., 251, 278 Gudiken, O., 29 Guedhami, O., 110, 311 Guedri, Z., 220 Gugler, K., 253 Guillen, M., 111, 165, 167 Gulati, R., 81, 137, 190 Guldiken, O., 311 Guler, I., 136, 192, 279 Guo, G., 82 Guo, L., 165 Gupta, A., 27, 28, 279, 310, 311 Gupta, V., 110 Gupta-Mukherjee, S., 253 Gurses, K., 136 Gwon, S., 166 Gyoshev, B., 137

H

Haas, M., 82, 279 Hackenberg, Ulrich, 372 Hada, M., 278 Hadani, M., 109 Hadley, S., 81 Haerem, T., 82 Hagedoorn, J., 191 Hahn, T., 340 Hakanson, L., 111, 279 Haleblian, J., 191, 251, 252, 310, 311 Hall, D., 137 Hall, P., 110 Hallen, B., 136, 137 Hambrick, D., 28, 109, 309, 310, 311, 340 Hammer, Armand, 355 Hammond, R., 278 Hampl, N., 137 Han, Q., 339 Han, X., 135 Hanges, P., 110 Hannah, S., 108 Hannigan, T., 279 Hansen, M., 340 Hanson, G., 30 Haq, H., 280 Hargrave, T., 340 Harrell, E., 309 Harrison, J., 220, 253, 337, 338, 340

Hart, Liddell, 6 Hart, O., 191 Hart, S., 30, 111, 337 Hartley, J., 136 Hartog, D., 110 Hartwell, C., 30 Harvey, C., 109 Hasenhuttl, Maria, 29, 109, 402 Hashai, N., 138, 251 Haspeslagh, P., 253 Hatz, Wolfgang, 373 Haugh, H., 337 Hautz, J., 251 Hawk, A., 81, 166 Hawn, O., 134, 338, 339 Haxhi, I., 311 Haynes, K., 310 Hazzard, Charles F., 355–359 He, J., 311 He, W., 29 He, X., 220, 311, 312 He, Z., 82 Heath, P., 29, 80 Hebert, L., 278 Hefley, William E., 409 Heijltjes, M., 311 Heimeriks, K., 80, 192 Heinemann, F., 82 Helfat, C., 80, 221, 251, 252 Helms, W., 110 Hemphill, T., 29, 167 Henderson, A., 83, 251 Henderson, J., 55 Henderson, R., 339 Hengst, I., 340 Henisz, W., 80 Hennart, J.-F., 167 Henning, M., 253 Henriques, I., 340 Heppelmann, J., 81 Heracleous, L., 28, 311 Herman, K., 339 Hermelo, F., 221 Hermreck, I., 28 Hernandez, E., 166, 220 Hernandez, M., 311 Herrick, H., 138 Herrmann, D., 311 Hess, A., 82 Heugens, P., 111, 251, 311, 312 Hewlett, Bill, 419 Higgins, C., 31 Higgins, M., 191 Higgs, M., 312 Hikino, T., 253 Hill, A., 81 Hill, C., 28, 55, 56, 82, 83, 138, 221, 252 Hill, L., 309 Hill, T., 111 Hiller, N., 310 Hillier, D., 279 Hillman, A., 192, 309, 339 Hinings, C., 165 Hirose, A., 80 Hirsh, E., 56 Hirt, M., 28 Hitt, M., 28, 30, 80, 81, 134, 137, 167, 190, 191, 220, 308, 312 Ho, J., 312 Hoang, H., 279 Hobdari, B., 338 Hodgetts, R., 278

Hodgkinson, G., 29 Hoegel, M., 111, 340 Hoenen, A., 280 Hoetker, G., 82 Hofer, C., 28 Hoffman, A., 339 Hoffman, R., 137, 166 Hoffman, Reid, 124, 130 Hoffmann, W., 82 Hofstede, G., 110 Hofstede, Geert, 94–96 Hogan, James, 390 Hohberger, J., 110 Holburn, G., 109 Hollender, L., 138 Hollerer, M., 338 Hollister, R., 280 Holloway, S., 192 Holm, D., 280 Holm, H., 108, 111, 137 Homburg, C., 81 Hong, S., 111, 134 Hooff, B., 279 Hoopes, D., 28 Hoorn, A., 110 Hope, D., 137 Hope, O., 252 Hoppmann, J., 309 Horn, J., 220 Hornsby, J., 134 Hoskins, B., 338 Hoskisson, R., 30, 80, 109, 134, 166, 252, 253, 311, 312, 338 Hotho, J., 279 House, R., 110 Houseman, S., 83 Howard, M., 55, 192 Howard-Grenville, J., 31, 338 Hsieh, K., 220 Hsieh, L., 191 Hsu, D., 135 Hsu, S., 278 Hu, H., 251, 309 Hu, S., 82 Huang, E., 253 Huang, L., 137, 279 Huang, S., 311 Huang, Y., 137 Huang, Z., 253, 311 Hubbard, T., 309, 340 Huckman, R., 56 Huesch, M., 80 Hughes-Morgan, M., 220 Hull, C., 339 Hult, G. T., 165, 251 Hult, S. T., 83 Hult, T., 164 Humphrey, S., 311 Humphrey-Jenner, M., 138 Hung, M., 109, 309 Hungeling, S., 82 Hurd, Mark, 419 Hurtado-Torres, N., 338 Husted, B., 111, 340 Hutzschenreuter, T., 166 Hwang, B., 138

I

Iansiti, M., 54 Iger, Robert, 414 Iguchi, C., 279 Ihrig, M., 338

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.

Index of Names  443

Immelt, J., 220 Immelt, Jeff, 201, 229, 241 Indro, D., 220 Ingram, P., 109 Inkpen, A., 30, 165, 279 Inkson, K., 111 Inoue, C., 110 Ioannou, I., 338, 339 Iona, A., 252 Irani, Ray R., 355, 356 Ireland, R. D., 134, 135, 136, 190, 191, 220 Iriyama, A., 278 Ismail, K., 310 Isobe, T., 29 Ito, K., 166, 220 Ivarsson, I., 278 Iyer, A., 30 Iyer, B., 83, 220

J

Jackson, G., 110 Jackson, K., 340 Jacobides, M., 55, 56, 252 Jacqueminet, A., 280 Jager, A., 83 Jain, S., 137 James, S., 310 Jang, S., 278, 280 Janney, J., 340 Jansen, J., 310 Jarzabkowski, P., 109, 280, 340 Javidan, M., 110 Jayachandran, S., 338 Jayaraman, N., 253 Jayaraman, V., 82 Jayasinghe, M., 340 Jefthas, A., 166 Jemison, D., 253 Jennings, J. D., 137, 339 Jennings, P. D., 339 Jennings, W., 308 Jensen, M., 165, 309, 310 Jensen, Michael, 291, 296 Jensen, P., 83 Jeong, Y., 339 Jeppesen, L., 55 Jia, N., 165 Jiang Zemin, 414 Jiang, C., 191 Jiang, F., 192 Jiang, H., 192, 310 Jiang, L., 54, 55 Jiang, M., 166 Jiang, R., 165 Jiang, X., 192 Jiang, Y., 29, 108, 165, 308, 309, 311, 312 Jimenez, A., 279 Jindra, B., 278 Jobs, Steve, 292 Johan, S., 137 Johanson, J., 164 John, G., 166 Johnson, Boris, 85 Johnson, J., 221, 309 Johnson, Kevin, 315 Johnson, R., 134 Johnson, S., 81, 136 Johnson, W., 309 Jones, D., 340 Jones, G., 28, 252 Jones, J., 339 Jones, T., 337, 340

Jong, S., 340 Jonsen, K., 253 Jorde, T., 221 Joseph, J., 82, 309 Joshi, A., 31, 191 Ju, M., 29 Judge, W., 110, 166, 311 Julian, S., 28 Jung, Young H., 360

K

Kabanoff, B., 55 Kabst, R., 138 Kacperczyk, A., 337 Kahl, S., 56, 80 Kahneman, D., 109 Kaiser, U., 81 Kalaignanam, K., 338 Kale, P., 191, 193 Kamal, F., 165 Kamins, M., 80 Kammerlander, N., 54 Kamprad, Ingvar, 126 Kanai, M., 167 Kandel, E., 311 Kang, J., 164, 312 Kang, T., 311 Kano, L., 31, 81 Kaplan, R., 192 Kaplan, S., 109, 136, 310 Kapoor, R., 55, 81, 135 Kappen, P., 280 Karaevli, A., 311 Karim, S., 28, 278 Karna, A., 82 Karniouchina, E., 56 Karolyi, A., 310, 311 Kastalli, I., 82 Katila, R., 81, 83, 136, 137, 221 Kathuria, Nishant, 422 Katsos, J., 339 Kaufmann, L., 164 Kaul, A., 167, 221, 251, 253 Kavadis, N., 312 Kedia, B., 81, 280 Kehoe, R., 81 Keig, D., 111 Keil, T., 81, 280 Keim, G., 339 Kellermanns, F., 308 Kenney, M., 81 Kestler, A., 339 Ketchen, D., 56, 80, 136, 221, 309 Ketkar, S., 165 Keyhani, M., 135, 192, 253 Khan, M., 338 Khan, Z., 192 Khanna, R., 136 Khanna, T., 29, 109, 251, 310 Khavul, S., 138, 165, 339 Khoobdeh, M., 29 Khoury, T., 29, 108, 136, 167, 251 Khurshed, A., 137 Kiggundu, M., 136 Kilduff, G., 220 Kilduff, M., 190 Kiley, J., 252 Kim, A., 337 Kim, D., 136 Kim, E., 338 Kim, H., 165, 252 Kim, J., 30, 164, 251, 252, 309, 312

Kim, K., 83, 280 Kim, M., 109, 165, 251 Kim, S., 135, 136, 192, 251, 279 Kim, T., 339 Kim, W. C., 55, 123, 136, 221, 278 Kim, Y., 31, 109, 166 Kimsey, M., 339 King, A., 80, 81, 310, 339 King, B., 338 King, D., 252, 253 King, M., 109 King, Z., 191 Kinkel, S., 83 Kirca, A., 165 Kirkman, B., 110, 279 Kish-Gephart, J., 310 Kiss, A., 135 Kissinger, Henry, 414 Kivleniece, I., 339 Klein, P., 135, 310 Kleinbaum, A, 80 Kleinberg, J., 111 Klepper, S., 55 Klijn, E., 191 Klimenko, S., 338 Klingebiel, R., 193 Knight, A., 137 Knight, G., 82, 108, 135 Knott, A., 28, 54, 138 Knudsen, T., 29, 82 Knyphausen-Aufseb, D., 253 Koch, B., 111 Koch, P., 111 Koch-Bayram, I., 311 Kogut, B., 111, 251 Kohtamaki, M., 134 Koka, B., 191 Kolb, R., 308 Kolev, K., 166, 252 Kolk, A., 31, 338, 339, 340 Konara, P., 280 Konig, A., 54 Koning, M., 109 Kooij, D., 340 Köpf, Barny, 392, 393, 396 Köpf, Josef, 393, 396 Kor, Y., 80, 310 Kosenko, K., 311 Kostova, T., 109, 110, 111, 165, 166, 280, 339, 340 Kotabe, M., 29, 164, 191 Koth, R., 137 Kotha, S., 82, 135, 137, 138 Kourula, A., 340 Kownatzki, M., 82 Koza, M., 191 Kozhikode, R., 109 Kraatz, M., 310 Kramer, M., 338, 339, 340 Kraus, S., 31 Krause, R., 28, 309, 311 Kraussl, R., 339 Kreutzer, M., 280 Kriauciunas, A., 29, 109 Krieser, P., 134 Krishna, S., 83 Krishnan, Arun Perumb, 367–371 Krishnan, M., 82 Krishnan, R., 109, 191 Kriz, A., 136 Kroll, M., 253, 310 Kroon, D., 253

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.

444  Index of Names

Krug, J., 253 Kruse, G., 109 Kryscynski, D., 80, 136, 137 Krzeminska, A., 82 Kudina, A., 56 Kuma, V., 81 Kumar, K., 81 Kumar, M., 192 Kumar, N., 220 Kumar, P., 191 Kumar, V., 164, 165 Kumaraswamy, A., 55 Kunc, M., 81 Kundu, S., 28, 81 Kunisch, S., 28 Kunst, V., 165, 278 Kuratko, D., 134 Kurz, C., 83 Kusin, M., 309 Kwok, C., 110, 311 Kwoka, J., 220 Kwon, S., 82, 136, 191 Kwon, W., 28

L

La Porta, R., 308 Laamanen, T., 192 Lafley, A. G., 12, 29 Lagerstrom, K., 164 Lahiri, A., 137 Lahiri, N., 192, 253, 279 Lahiri, S., 28, 29, 81 Lakhani, K., 136 Lama, Dalai, 414 Lamin, A., 165, 252 Lamond, D., 28 Lamont, B., 80, 251, 253 Lampert, C., 81 Lamy, M., 311, 312 Lan, L., 311 Lane, H., 111 Lang, L., 309 Lange, D., 28, 251, 311, 338 Lanivich, S., 136 Lanoie, P., 339 Larkin, I., 312 Larraza-Kintana, M., 308 Larsen, M., 81, 83, 279 Latham, S., 251 Lau, C., 278 Lauder, D., 110 Laursen, K., 166 Lavie, D., 191, 192, 251 Lavorateri, K., 279 Lawrence, T., 55, 110 Lawton, T., 109 Lazarova, M., 280 Lazzarini, S., 109, 110 Le Breton-Miller, I., 83 Le, S., 310 Leana, C., 340 Lebedev, S., 29, 30, 110, 193, 278 Lechner, C., 82 Lecocq, X., 135 Lee, A., 136 Lee, C., 83, 220 Lee, E., 28 Lee, G., 192, 253 Lee, H., 138 Lee, J., 54, 55, 82, 138, 164, 280, 309, 310, 311 Lee, K., 220, 251 Lee, K. B., 251

Lee, M., 311 Lee, R., 164 Lee, S., 29, 54, 55, 111, 134, 135, 165, 166, 252, 278 Leih, S., 80, 278 Leitterstorf, M., 308 Lel, U., 311 Lenfant, F., 339 Lengermann, P., 83 Lennerfors, T., 56 Lenox, M., 82, 310, 338, 339 Leonardi, P., 82 Leonida, L., 252 Lepoutre, J., 110 Lessard, D., 278 Lev, B., 81, 339 Levenstein, M., 220 Levesque, M., 135 Levie, J., 136 Levin, D., 280 Levin, J., 54 Levine, D., 338 Levine, R., 251 Levine, S., 220 Levinthal, D., 280 Levitt, T., 278 Levitt, Theodore, 256–257 Levy, D., 81 Levy, O., 29, 278 Lew, Y., 192 Lewin, A., 81, 82, 165 Lewis, D., 30 Li, C., 81 Li, D., 138, 190, 191 Li, G., 28 Li, J., 55, 136, 164, 165, 166, 191, 192, 309 Li, K., 30, 311 Li, L., 167 Li, M., 54, 221 Li, P., 164 Li, Q., 81 Li, S., 30, 109, 138, 166, 167, 190, 192, 193, 251 Li, T., 338 Li, W., 311 Li, X., 136, 221 Li, Y., 29, 81, 82, 110, 137, 166, 190, 253, 309 Li, Yugang, 364 Liak, T., 337 Liao, J., 55 Liao, Y., 110, 111 Licht, A., 309 Liddell Hart, B., 28 Lieberman, M., 29, 81, 82, 192, 253 Lieberthal, K., 278 Liedtka, J., 80 Liesch, P., 82, 108, 135, 166, 279 Lifschitz, A., 29 Lin, C., 251 Lin, D., 135 Lin, H., 220 Lin, S., 31 Lin, Y., 167, 192 Lin, Z., 193, 252, 253, 309 Lindenberg, S., 29 Lindner, T., 193 Link, A., 134 Liou, F., 82 Lioukas, C., 191 Lipstein, R., 221 Litan, R., 135 Liu, C., 192, 311 Liu, L., 191 Liu, R., 81, 339

Liu, W., 308 Liu, X., 135, 167 Liu, Y., 81, 137, 192 Livanis, G., 165 Loewenstein, J., 109 Lokshin, B., 279 London, T., 337 Long, C., 28 Lopez-de-Silanes, F., 308 Lounsbury, M., 110, 137 Lovallo, D., 28, 30, 80 Love, E. G., 310 Love, J., 279 Lovelace, J., 310 Lowe, K., 110 Lu, J., 29, 135, 164, 165, 166, 167 Lu, X., 253 Lu, Y., 137, 279, 308 Lucke, G., 111 Luiz, J., 109, 166 Lumineau, F., 191, 220 Lumpkin, G. T., 137, 308, 338 Lund, S., 30 Lundan, S., 166 Lungeanu, R., 137 Luo, J., 339 Luo, R., 310 Luo, S., 310 Luo, X., 191, 338 Luo, Y., 28, 29, 55, 82, 110, 137, 167, 191, 192, 253, 280, 340 Luoma, J., 81 Lupton, N., 190 Lux, S., 109 Lyles, M., 192, 279 Lynch, J., 340 Lyngsie, J., 279, 311 Lyon, T., 340

M

Ma, D., 137 Ma, J., 166 Ma, R., 137 Ma, X., 29, 167, 252, 278, 311 Macaulay, C., 29, 82, 110, 111, 253 MacDonald, G., 55 MacDuffie, J., 278 Macharzina, K., 28 Macher, J., 81, 109 Maciejovsky, B., 280 Mackenzie, W., 82 Mackey, A., 338, 339 Mackey, J., 310, 340 Mackey, T., 251, 339 MacMillan, I., 135, 221, 338 Maddux, W., 29 Madey, S., 340 Madhok, A., 135, 192, 253, 278 Madsen, P., 339, 340 Madsen, T., 81 Maekelburger, B., 138 Magee, R., 309 Maggitti, P., 81 Magnan, M., 312 Magnusson, P., 278 Mahoney, J., 80, 191, 253, 340 Maicas, J., 111, 166 Mair, J., 135, 251 Maitland, E., 108, 165 Makadok, R., 55, 81 Makarius, E., 252 Makhija, A., 251

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.

Index of Names  445

Makhija, M., 109, 165, 280, 339 Makino, S., 29, 165, 166, 251 Maksimov, V., 253 Malhotra, N., 165 Malhotra, S., 251, 252 Mallon, M., 166, 311 Malnight, T., 28 Mandel, B., 83 Manev, I., 137 Manning, S., 81, 165 Mannor, M., 80, 310 Manolova, T., 137, 138 Mantere, S., 253 Mao, J., 55 Maoret, M., 192, 280 Marano, V., 30, 166, 311, 339, 340 Marcel, J., 310 March, J., 192 Marchionne, Sergio, 298 Marcus, A., 338, 340 Mardiasmo, Diaswati, 379–383 Marihart, Johann, 404 Mariotti, S., 110, 165 Maritan, C., 80 Markman, G., 28, 29, 54, 220 Markoczy, L., 28, 309, 310, 311 Marks, M., 253 Marques, J., 340 Marquis, C., 253, 311, 340 Marsh, S., 221 Marshall, V., 111 Marti, I., 135 Martin, G., 310, 312 Martin, J., 83, 279 Martin, O., 280 Martin, R., 29 Martin, X., 83, 191 Martinez-Fernandez, M., 191 Martins, L., 135 Marvel, M., 137 Marx, Karl, 331 Marzano, R., 110 Mas-Ruiz, F., 55 Masciarelli, F., 166 Maseland, R., 109, 110, 111 Maslach, D., 136 Mason, P., 28 Massini, S., 81 Mathews, J., 54, 167, 338 Matos, P., 309 Matsunaga, S., 309 Matt, T., 31 Matta, E., 252 Matten, D., 337 Mauborgne, R., 55, 123, 136, 221, 278 Mauer, R., 136 Maula, M., 280 May, D., 108 May, Theresa, 85 Mayer, K., 108, 165 Mayer, M., 251 Mayo, J., 110 Maznevski, M., 165 Mbalyohere, C., 109 Mcara, S., 339 McCann, B., 165, 220, 253 McCarter, M., 191 McCarthy, D., 109, 110, 136, 167 McCarthy, I., 55 McCormick, M., 30 McDermott, G., 109, 278 McDonald, M., 310, 311

McDonald, R., 83, 136, 137, 221 McDonnell, M., 309 McDougall, P., 135 McGahan, A., 134, 337 McGrath, R., 221 McGuire, J., 56, 220 McIntyre, D., 54, 191 McKinley, W., 251 McLean, R. D., 311 McMillon, D., 28 McMillon, Doug, 7, 21 McMullen, J., 30, 135, 136, 138 McNab, R., 29 McNamara, G., 251, 252, 310, 311 McNett, J., 111 McQueen, R., 83 McVay, S., 81 McWilliams, A., 81, 339 Means, Gardiner, 284, 296 Meckling, W., 309 Mees-Buss, J., 278 Mehrotra, V., 310 Mehta, Sanjiv, 115, 119 Mellahi, K., 30, 110 Mellewigt, T., 56, 82 Melnyk, S., 29 Mendenhall, M., 111, 310 Meng, S., 111 Menghinello, S., 279 Menon, A., 221 Menon, T., 111 Mentzer, J., 192 Menz, M., 28 Mertens, G., 109 Mesa, B., 253 Mesko, A., 80 Mesquita, L., 191, 220 Meuleman, M., 310 Meyer, C., 253 Meyer, E., 280 Meyer, K., 29, 31, 56, 109, 164, 167, 220, 251, 278, 280, 338, 340, 351–354 Meyer-Doyle, P., 165, 252 Miao, G., 31 Michailova, S., 83, 278 Michel, J., 220 Mignonac, K., 166 Mikitani, H., 221 Milanovic, B., 340 Miletkov, M., 309 Miller, C., 251 Miller, D., 83, 220, 251, 252, 278, 308, 310, 311 Miller, J., 192 Miller, K., 31, 82 Miller, S., 192, 220, 308, 337 Miller, T., 135, 137, 167 Millington, A., 339 Min, S., 135 Mina, A., 252 Minbaeva, D., 165, 192, 279 Mindruta, D., 81 Minichilli, A., 29, 308, 311 Minin, A., 279 Minniti, M., 135 Minow, N., 308 Mintzberg, H., 6, 28 Miroux, A., 30 Mirvis, P., 253 Misangyi, V., 309, 310 Misati, E., 166 Mishina, Y., 80, 338 Mitchell, M., 252

Mitchell, R., 136, 337 Mitchell, W., 54, 81, 134, 166 Mithani, M., 339 Mitsuhashi, H., 192, 220 Mizruchi, M., 312 Moatti, V., 55 Moedas, C., 279 Moeen, M., 54, 55, 135 Moeller, S., 252, 311 Moghaddam, K., 135, 136, 166, 167 Mohamed, A., 137 Mohammadi, A., 137 Mohr, A., 192 Molina-Morales, F., 191 Molinsky, A., 111 Mollick, E., 82, 138 Molloy, J., 80 Molly, J., 82 Monaghan, S., 166 Mondelli, M., 310 Monin, P., 253 Monks, R., 308 Monteiro, F., 279, 280 Montes-Sancho, M., 340 Montiel, I., 111, 340 Moon, J., 165, 337 Moore, K., 30 Morck, R., 311 Morecroft, J., 81 Morrell, D., 110 Morri, S., 279 Morris, S., 278, 280 Mors, M., 280 Morse, E., 136 Mortensen, M., 280 Mosakowski, E., 135 Moschieri, C., 82, 193, 251, 252 Mosconi, R., 165 Mudambi, R., 81, 165, 220, 278, 279, 280 Mudambi, S., 75, 81 Muethel, M., 111, 340 Mukherjee, D., 29, 81, 83, 136, 252 Mukhopadhyay, S., 166 Muller, A., 165, 339, 340 Muller, J., 340 Mullner, J., 193 Mulotte, L., 54, 166, 278 Mun, H., 135 Munemo, J., 166 Murdoch, Rupert, 283, 287 Murillo-Luna, J., 339 Murmann, J., 28 Murphree, M., 109 Murray, J., 29, 164, 191 Murrell, A., 339 Murtha, T., 81 Musacchio, A., 30, 110 Musaji, S., 82 Musk, Elon, 118, 360–361 Muthulingam, S., 339 Mutlu, C., 204–205, 312 Myers, M., 192

N

Nablebuff, B., 193 Nachum, L., 111, 165, 278, 310 Nadkarni, S., 55 Naegele, F., 309 Nagarajan, N., 309 Nagel, R., 220 Nairn-Birth, N., 338 Nakajima, C., 338

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.

446  Index of Names

Nambisan, S., 55, 190 Nandkumar, A., 135 Narayanan, S., 192 Narayanan, V., 55, 135 Narula, R., 280 Nasan, R., 338 Navarra, P., 252 Navis, C., 136, 340 Ndofor, H., 220, 311 Nebus, J., 340 Nee, V., 108, 111, 137, 340 Neeleman, David, 128 Neeley, T., 82 Neely, A., 82 Neffke, F., 253 Nell, P., 111, 279, 280 Nellemann, F., 339 Nelling, E., 30, 83 Nemunaityte, V., 252 Nerkar, A., 136, 191, 279 Neumann, K., 82 Neusser, Heinz-Jakob, 372 Newburry, W., 109 Newenham-Kahindi, A., 164, 340 Newman, H., 309 Ng, V., 253 Nguyen, H. W., 29, 109 Nguyen, Q., 278 Ni, N., 338 Nickerson, J., 28, 166, 253 Nielsen, B., 165, 192, 310 Nielsen, S., 192, 310 Nieto, M., 279 Nigam, A., 109 Nippa, M., 193, 251 Nobel, R., 253 Nohria, N., 29 Nonaka, I., 80 Noorderhaven, N., 253 Nooyi, Indra, 290 North, D., 108 North, Douglass, 87 Northcraft, G., 191 Norton, D., 192 Novelli, E., 81 Nunes, P., 82 Nuruzzaman, N., 29, 220 Nyberg, A., 80, 309 Nyberg, D., 340 Nystrom, P., 310

O

O’Brien, D., 29 O’Brien, J., 81 O’Neil, Jim, 25 O’Neill, H., 135 O’Shaughnessy, K., 337 Obadia, C., 166 Obloj, T., 81 Ocasio, W., 109, 110, 136, 309 Oddou, G., 111 Odziemkowska, K., 338 Oehme, M., 138 Oehmichen, J., 278 Oetzel, J., 30, 109, 167, 339 Ofori-Dankwa, J., 28 Oh, C., 30, 109, 167, 338, 339, 340 Ojala, A., 138 Ojomo, E., 30 Oldroyd, J., 279 Olffen, W., 165 Oliver, C., 110

Olsen, D., 251 Olson, D., 137 Onkelinx, J., 138 Operti, E., 82 Opper, S., 108, 111, 136, 137, 340 Ordonez, L., 110 Orlitzky, M., 339 Ormiston, M., 340 Ortiz-de-Mandojana, N., 339 Osiyevskyy, O., 135 Osland, J., 310 Oster, S., 56 Oswald, S., 137 Ott, T., 28 Otten, J., 311 Ouyang, Z., 80 Oviatt, B., 135, 137 Oxelheim, L., 310 Oxley, J., 164, 251 Ozalp, H., 55 Ozbek, O. V., 136 Ozcan, P., 136, 191 Ozer, M., 137 Ozmel, L., 192 Ozmel, U., 137

P

Pache, A., 110, 339 Pacheci-de-Almeida, G., 166 Pacheco, D., 220, 340 Pacheco-de-Almeida, G., 55, 81, 83 Packard, David, 419 Packard, M., 340 Pahnke, E., 136, 137 Paik, Y., 191 Palazzo, G., 337, 340 Palepu, K., 109 Palich, L., 251 Pan, W., 30, 108 Panagopoulos, A., 29 Pande, A., 81 Pandher, G., 251, 310 Pant, A., 280 Panzar, J., 135 Paolella, L., 81 Papanastassiou, M., 279 Paranikas, P., 55 Parboteeah, K. P., 111 Parente, R., 165, 166, 278 Parida, V., 134, 136 Park, B., 191 Park, C., 192, 309 Park, H. D., 135, 280 Park, J., 309 Park, K., 135 Park, S., 191, 340 Park, U. D., 138 Park, Y., 279 Parker, G., 54, 55 Parmigiani, A., 192 Paroutis, S., 28 Paruchuri, S., 280, 310 Patacconi, A., 308 Patel, P., 134, 136 Pathak, S., 136, 280 Patnaik, S., 30, 340 Patro, A., 82 Pattnaik, C., 220 Paul II, John, 368 Paulson, H., 167 Pe’er, A., 312 Pearce, J., 340

Pearce, R., 279 Pedersen, T., 29, 81, 83, 279, 280 Peeters, C., 81 Pehmichen, J., 81 Peiperl, M., 278 Peng, Grace, 122 Peng, M. W., 29, 30, 31, 54, 55, 56, 80, 82, 108, 109, 110, 111, 134, 135, 136, 137, 138, 164, 165, 166, 167, 190, 191, 192, 193, 221, 250, 251, 252, 253, 278, 279, 280, 308, 309, 310, 311, 312, 338, 340, 349–350, 375–378, 388–391 Peng, W., 30 Pentland, B., 82 Perego, P., 338 Pereira, V., 30 Peretz, H., 280 Perez-Nordtvedt, L., 280 Perkins, Walter R., Jr., 395 Perretti, F., 340 Perrigot, R., 166 Perryman, A., 166, 309 Perryy, M., 165 Peteraf, M., 80 Petersen, B., 31 Peterson, M., 110, 253 Petkova, A., 137 Petrenko, O., 311 Petricevic, O., 31 Petrovits, C., 339 Pfarrer, M., 110, 135, 340 Pfitzer, M., 340 Phadnis, S., 30 Phelps, C., 135, 191, 279 Phene, A., 191, 251 Philippe, D., 108, 192 Phillips, R., 337, 338, 340 Phillips, S., 83 Piao, M., 278 Piazza, A., 340 Picone, P., 252 Pidun, U., 251 Pierce, J., 252 Pierce, L., 253, 310, 312 Pieterse, A., 279 Piezunka, H., 136 Piketty, T., 340 Piketty, Thomas, 331 Pil, F., 82 Piller, F., 280 Pindado, J., 279 Ping, Z., 167 Pinkham, B., 29, 108, 109, 164, 165, 167, 191 Pinkse, J., 338, 340 Pisani, N., 31, 165 Pisano, G., 80, 136 Piscitello, L., 165 Pittman, R., 338 Pla-Barber, J., 278 Plakoyiannaki, E., 138 Pleggenkuhle-Miles, E., 30, 402 Ployhart, R., 80, 82 Plummer, L., 137 Polidoro, F., 54, 82, 279 Polley, D., 135 Pollitte, W., 192 Pollock, T., 310, 312, 338 Porac, J., 55 Porter, E., 56 Porter, M., 29, 35, 43, 54, 55, 56, 80, 81, 90–91, 109, 118, 321, 333, 338, 339, 343 Posen, H., 82

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.

Index of Names  447

Poulsen, A., 309 Powell, E., 136 Powell, K. S., 165 Powell, T., 28, 80, 135 Powell, W., 136 Pozen, R., 309 Prahalad, C. K., 30, 253, 278 Prasad, A., 136 Prashantham, S., 137 Premji, Azim, 422 Prencipe, A., 83, 166 Prescott, J., 191, 278 Presley, Elvis, 76 Preston, L., 317, 338 Preuss, L., 340 Prevezer, M., 311 Priem, R., 31, 339 Prince, Erik, 377 Prince, J., 220 Proserpio, D., 55 Provance, M., 135 Pryor, C., 136 Puck, J., 81, 278, 279 Puffer, S., 109, 110, 136, 167 Puranam, P., 28, 82 Purdy, J., 55 Puryear, R., 83 Pustay, M., 221 Putin, Vladimir, 386

Q

Qian, C., 309, 339, 340 Qian, G., 29, 167, 251 Qian, Z., 29, 167, 251 Qin, F., 137 Qiu, B., 109 Qu, H., 312 Quelin, B., 339 Quigley, T., 309, 310, 311

R

Raab, K., 279 Rabbiosi, L., 280 Radhakrishnan, S., 308, 339 Raes, A., 311 Raffiee, J., 80 Ragazzino, R., 137 Raghunandan, A., 340 Ragozzino, R., 193 Rahmandad, H., 83 Raina, A., 110 Raisch, S., 82 Raithel, S., 80, 338 Rajagopalan, N., 191, 309, 310 Rajan, R., 337–338 Rajgopal, S., 340 Ramachandran, J., 280 Ramamurti, R., 167 Raman, R., 83 Ramasubbu, N., 82 Ramasubramanian, Hari G., 369–371 Ramaswamy, K., 30 Ramchander, S., 339 Ramesh, A., 337 Rammer, C., 279 Ramoglou, S., 134 Randoy, T., 310 Ranft, A., 80, 221, 251 Rangan, K., 56 Ranganathan, R., 192 Ranuch, R., 308

Rao, V., 251 Rasheed, A., 312 Rassenfosse, G. de, 137 Rathert, N., 338 Rau, D., 279 Rau, S., 308 Ravichandran, T., 192 Ravlin, E., 110 Rawley, E., 31, 165, 252 Ray, G., 82 Ray, S., 29, 251, 278 Raynor, M., 28, 83 Reade, J., 220 Recendes, T., 311 Redding, G., 111 Reger, R., 110, 340 Regner, P., 278 Rehbein, K., 31, 339 Reiche, B. S., 310 Reinholt, M., 280 Reinmoeller, P., 337 Reisel, N., 311 Reisenkampff, E., 82 Reiss, Dani, 59–60 Reiss, David, 59 Reitzig, M., 280 Rejchrt, P., 312 Ren, B., 193, 309 Ren, C., 55, 278 Ren Zhengfei, 126 Repenning, N., 83 Reuber, A. R., 135 Reuer, J., 137, 190, 191, 192, 193, 220, 253 Reus, T., 80, 251, 252, 253 Rezk, R., 165 Rhee, E., 312 Rhee, M., 137, 166 Rialp, A., 138 Ricart, J., 135, 165 Rice, C., 30 Richard, O., 28 Richards, M., 220 Richardson, D., 221 Richter, A., 82 Rickley, M., 278 Ridge, J., 81, 311 Riefler, P., 340 Rietveld, J., 55 Rigbi, O., 166 Rigby, D., 82 Rindova, V., 135, 220 Ring, P., 191 Rique, M., 165 Rising, C., 252 Ritchie, W., 29 Rivera-Torres, P., 339 Robinson, J., 340 Robinson, M., 190 Roca, E., 339 Rocca, M., 252 Rockart, D. S., 83 Rockart, S., 82 Rockefeller, E., 221 Rodan, S., 191 Rodell, J., 340 Rodgers, Z., 339 Rodrigues, S., 109, 191 Rodriguez, A., 279 Rodrik, D., 30 Roe, R., 311 Roelofsen, E., 252 Roesch, J., 164

Rogan, M., 191 Rogers, D., 31 Romani, L., 111 Rometty, G., 81 Rometty, Ginni, 66 Rong, K., 165, 166 Roosenboom, P., 109 Rose, E., 166, 220 Rosen-Berger, J., 137 Rosenkopf, L., 192 Rosenzweig, P., 29, 109 Ross, D., 55, 220 Roth, K., 109, 110, 111, 280 Rothaermel, F., 55, 82, 191, 279 Rothenberg, S., 339 Rothlauf, F., 138, 165 Rottner, R., 192 Roulet, T., 109 Rouse, E., 138 Rowe, W. G., 309 Rowley, T., 192, 311 Roxas, B., 83 Roy, J., 191 Roy, R., 55, 82 Ruback, R., 138 Rubner, H., 251 Ruefli, T., 221 Rufin, C., 340 Rugelsjoen, B., 192 Rugman, A., 167, 278 Rui, O., 252 Ruiz-Moreno, F., 55 Rumelt, R., 29, 56 Rupp, D., 337 Rurdy, J., 109 Ruutu, S., 81 Ryall, M., 55, 81 Ryan, L., 308, 309, 310 Rydqvist, K., 308 Ryu, W., 220

S

Sadler-Smith, E., 29 Sadorsky, P., 340 Sadowski, B., 279 Saffar, W., 110 Sagiv, L., 309 Sahaym, A., 251 Saka-Helmhout, A., 109 Sakhartov, A., 253 Salomon, R., 82, 109, 339 Sambharya, R., 29 Samiee, S., 166 Sammartino, A., 108, 165 Sanders, W. G., 220 Sandholtz, K., 136 Santangelo, G., 167, 278, 280 Santos, F., 110, 191 Saparito, P., 111 Sapienza, H., 135, 308 Sarala, R., 252, 253 Saranga, H., 220 Sarason, Y., 340 Sarasvathy, S., 337 Sarathy, R., 111 Sarkar, M., 55, 81, 251 Sartor, M., 81, 165 Satinsky, D., 109 Satorra, A., 56 Sauerwald, S., 252, 309, 312 Sawhney, M., 190 Saxton, M. K., 138

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.

448  Index of Names

Saxton, T., 138 Scahill, J., 136 Schankerman, M., 136 Schendel, D., 28, 29, 56 Schenzler, C., 251 Scherer, A., 337, 340 Scherr, A., 340 Schijven, M., 80, 251 Schildt, H., 253, 280 Schilke, O., 80, 191, 339 Schillebeeckx, S., 191, 337 Schilling, M., 28, 55, 138, 165, 191 Schleimer, S., 280 Schlingemann, F., 252, 311 Schmid, F., 136 Schmidt, Eric, 291 Schmidt, J., 81 Schmitt, A., 165 Schnatterly, K., 308 Schnyder, G., 30 Schoemaker, P., 30 Scholnick, B., 81 Schoonhoven, C., 192 Schotter, A., 165, 167, 220 Schramm, C., 135 Schrapp, S., 81 Schreiner, M., 191 Schrempf-Stirling, J., 337 Schubert, T., 279 Schuler, D., 109 Schultz, Howard, 315, 316, 329 Schulze, W., 82, 308 Schumpeter, Joseph, 215 Schwaiger, M., 80 Schwebach, R., 339 Schweiger, S., 82 Schweizer, L., 253 Schwens, C., 138 Scott, P., 29, 280 Scott, Richard, 87 Scott, W. R., 108, 165 Seamans, R., 54 Seawright, K., 136 Segal-Horn, S., 280 Seidl, D., 340 Seifert, C., 135 Selmier, W. T., 340 Semadeni, M., 166, 309, 310, 311 Senard, Jean-Dominique, 186 Senbert, L., 251 Sengul, M., 339 Seo, J., 311 Serafeim, G., 338 Seth, A., 82 Sethi, D., 166 Sexton, D., 134 Shackell, M., 310 Shafi, K., 137 Shah, S., 135 Shaheer, N., 138 Shamsie, J., 54, 80, 83 Shan, M., 165 Shane, S., 134 Shaner, J., 165 Shani, G., 311 Shanley, M., 190, 253 Shao, L., 311 Shapiro, C., 221 Shapiro, D., 110, 251, 279, 310, 338 Shaver, J. M., 54 Shaw, K., 308 Shay, J., 29, 109

Shea, C., 338 Sheffi, Y., 30 Shekshnia, S., 309 Shen, B., 251 Shen, R., 339 Shenkar, O., 111, 137, 165, 192, 278 Shepherd, D., 135, 136, 138 Shi, L., 280 Shi, W., 109, 191, 252, 280, 309, 310, 311, 312 Shi, Y., 165, 312 Shih, W., 81 Shinkle, G., 29, 109 Shinozawa, Y., 312 Shipilov, A., 29, 190, 311 Shirodkar, V., 280 Shittu, E., 338 Shiu, Y., 110 Shleifer, A., 308 Shomaker, M., 111 Short, J., 56, 80, 340 Shropshire, C., 338 Shuen, A., 80 Si, S., 137 Siegel, D., 81, 110, 252, 339, 340 Siegel, J., 312 Siggelkow, N., 191 Sillince, J., 253 Silverman, B., 109 Simester, D., 28 Simon, D., 220 Simonin, B., 82 Simons, K., 252 Simsek, Z., 136 Singer, M., 251 Singh, D., 164, 165, 220 Singh, H., 111, 136, 191, 193, 253 Singh, M., 30 Sinkovics, R., 192 Sirmon, D., 80, 81, 220, 251, 311 Sitaraman, G., 221 Skilton, P., 54 Slangen, A., 165, 166, 167 Slater, A., 82 Slawinski, N., 338 Sleptsov, A., 251 Sloan, P., 340 Slocum, J., 83, 280 Smimiyu, E., 30 Smit, S., 28 Smith, A., 136 Smith, Adam, 35, 198, 320 Smith, E., 81 Smith, K., 81, 83, 221 Smith, W., 110 Snell, S., 278 Snow, C., 28 Soda, G., 28 Soderberg, A., 83 Sojli, E., 110 Somaya, D., 30 Sonenshein, S., 80, 340 Song, J., 54, 279 Song, S., 278 Song, Y., 165 Sonnenfeld, J., 309 Soofi, E., 310 Sorensen, J., 136 Sorgard, L., 253 Soskice, D., 110 Souder, D., 54, 83, 136, 308 Sousa, C., 167 Spar, D., 220

Speckbacher, G., 82 Spence, L., 340 Spencer, J., 111 Spicer, A., 31 Spizman, J., 308 Srai, J., 165 Srikanth, K., 82 Srinivasan, A., 54, 55 Srinivasan, Dina, 218 Srivastava, M., 191 Staats, B., 279 Stadler, C., 251 Stafford, E., 252 Stahl, G., 110, 252 Staking, K., 339 Stalk, G., 30 Stallkamp, M., 165 Stam, W., 137 Stan, C., 31, 110, 309, 312 Stanislaw, J., 30 Staw, B., 220 Steel, P., 110, 111 Steele, L., 110 Steen, J., 108, 166 Steenkamp, J., 191 Steensma, H. K., 135, 192, 279 Stefano, Di, 80 Steier, L., 308 Stephan, U., 135 Stern, I., 310 Stetter, T., 82 Stevens, C., 29, 30, 111, 164, 165, 193, 252, 253, 280 Stieglitz, N., 82 Stiglitz, J., 30, 221 Stoelhorst, J., 167, 337 Stoian, M., 138 Stone, R., 31 Strebulaev, I., 308 Stride, C., 135 Stringfellow, D., 166 Stromberg, P., 310 Stuart, N., 310 Stuart, T., 80 Stulz, R., 252, 308, 310, 311 Su, K., 220, 221 Su, W., 311, 338 Su, Y., 278 Su, Z., 29, 309 Suarez, F., 55, 56, 166 Subramaniam, M., 220, 280 Suchard, J., 138 Suddaby, R., 110 Suh, S., 309 Sui, S., 135 Sul, H., 311 Sullivan, D., 137 Summer, C., 28 Sun Tzu, 6, 215 Sun, J., 29, 253 Sun, P., 83, 110, 309 Sun, S. L., 29, 108, 136, 137, 164, 191, 193, 252, 309, 310, 311 Sun, W., 29, 311 Surroca, J., 338, 339 Suslow, V., 220 Sutterland, J., 82 Swaen, V., 340 Swift, T., 278 Sytch, M., 136 Szkudlarek, S. B., 111 Szucs, F., 253

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.

Index of Names  449

T

Takeda, Y., 80 Takeuchi, H., 82 Takeuchi, R., 337 Taleb, N., 19, 30 Tallman, S., 27, 28, 29, 30, 81, 167, 191, 192, 251, 279 Tamouri, Y., 30 Tan, B., 251 Tan, D., 137, 220 Tan, H., 54, 338 Tan, J., 31, 54, 55, 137, 166 Tan, Q., 167 Tan, W., 164, 338 Tang, J., 309 Tang, Y., 82, 310, 339 Tanriverdi, H., 83, 220 Tantalo, C., 339 Taras, V., 110 Tarzijan, J., 28, 251 Tashman, P., 166, 339, 340 Taska, L., 167 Tata, Ratan, 422 Tatarynowicz, A., 136 Tate, G., 310 Tate, W., 220 Taussig, M., 111 Taylor, G., 340 Taylor, Marilyn L., 379–383 Taylor, S., 29, 278 Teagarden, M., 167 Teece, D., 29, 31, 56, 80, 221, 278 Teece, David, 53 Teegen, H., 30 Teo, H., 190 Terjesen, S., 311 Terziovski, M., 136 Tesluk, P., 81 Tetlock, P., 30, 340 Tevelson, B., 55 Tham, W., 110 Thapar, Ruby, 423 Thatcher, Margaret, 302 Thein, H., 109 Thietart, R., 28 Thomas, D., 110, 111, 137 Thomas, H., 55 Thomas, L., 55 Thomas, W., 252 Thompson, P., 137 Thompson, T., 55 Thomsen, S., 310 Thorgren, S., 193 Thornhill, S., 56 Thornton, P., 110 Thursby, M., 54 Tian, J., 310 Tian, X., 83, 165, 280 Tick, Sam, 59 Tihanyi, L., 31, 192, 220, 308, 312 Tikkanen, H., 81 Tippmann, E., 166 Tocher, N., 137 Toffel, M., 339, 340 Toh, P., 82, 220, 279 Tolstoy, Leo, 174 Tong, J., 310 Tong, L., 337 Tong, T., 55, 191, 193, 252, 278 Torre, C., 279 Touboul, S., 338 Townsend, J., 192

Tribbitt, M., 221 Tribo, J., 338, 339 Trichterborn, A., 253 Trigeorgis, L., 191 Trimble, C., 30, 220 Tripsas, M., 54 Trump, Donald, 19, 20, 331–332, 360 Tsai, W., 83, 190, 220, 221 Tsang, E., 31, 134, 165, 166, 279, 338 Tsekrekos. A., 191 Tsui, A., 137 Tuchman, B., 7 Tung, R., 110, 167 Turturea, R., 312 Tuschke, A., 220, 309 Tushman, M., 82 Tyler, B., 191, 193 Tyson, L., 30 Tzabbar, D., 81, 279

U

Uhlander, L., 135 Uhlenbruck, K., 220 Ulrich, D., 80 Umashankar, N., 251 Un, C. A., 279, 280 Unruh, G., 340 Upson, J., 221 Urbina, J., 279 Urbsiene, L., 252 Uygur, U., 136 Uzunca, B., 55

V

Vaaler, P., 137 Vaara, E., 252, 253, 280 Vahlne, J., 164, 278 Vakil, B., 31 Vakili, K., 136 Valente, M., 110 Valentini, G., 136, 252, 279 Van Alstyne, M., 54 van Bever, D., 30 Van Biesebroeck, J., 165 Van de Ven, A., 29, 135 Van de Vranke, V., 81 Van den Bosch, F., 191, 310 van Dierendonck, D., 279 van Ees, H., 311 van Essen, M., 165, 251, 311, 312 van Fenema, P., 81 van Hoorn, A., 109 Van Iddekinge, C., 82 van Knippenberg, D., 279 Van Looy, B., 82 Van Ness, R., 135 Van Oosterhout, J., 251, 311, 312 Van Reenen, J., 81 Vanhaverbeke, W., 279 Vassolo, R., 220, 221 Vasudeva, G., 192, 251 Vedula, S., 338, 339 Venkataraman, S., 134, 135 Venkatraman, N., 55, 83, 220 Ventrasca, M., 55 Ventresca, M., 135 Venzin, M., 81 Verbeke, A., 31, 166, 167, 280 Vergne, J., 251, 338 Vermeire, J., 136 Vermeulen, F., 82 Verona, G., 80

Vertinsky, I., 192 Verwaal, E., 81 Vestal, A., 279 Vidal, E., 134 Vila, O., 338 Villalonga, V., 308 Villar, C., 278 Visnjic, I., 221 Vissa, B., 109, 137 Vitasek, K., 191 Vlaar, P., 279 Vlas, C., 29, 311 Vogus, T., 135 Volberda, H., 134, 191, 310 Voll, J., 166 Vomberg, A., 81 von Clausewitz, Carl, 6, 7 von Clausewitz, K., 28 von Furstenberg, Diane, 101 von Glinow, M., 81 von Nordenflycht, A., 83 Vora, D., 280 Voronov, M., 108 Voss, H., 167 Vroom, G., 165, 220 Vuitton, Louis, 101 Vyas, D., 137, 252

W

Waddock, S., 339 Wadhwa, A., 137 Wagner, M., 340 Waldeck, A., 252 Waldron, T., 29, 54, 135, 340 Wales, W., 136 Walker, B., 338 Walker, G., 81 Walter, J., 82, 280 Walton, E., 309 Wan, W., 31, 80, 251 Wang, B., 164 Wang, C., 191, 192 Wang, D., 29, 108, 137, 138, 165, 221, 252, 253, 279, 310, 312 Wang, H., 337, 338, 339 Wang, J., 29, 109, 310, 311 Wang, K., 311 Wang, L., 193 Wang, R., 55 Wang, S., 29, 82, 253 Wang, T., 29, 339 Wang, Y., 137, 167, 192, 338 Ward, A., 309 Washburn, N., 338 Wasserman, N., 137 Wassmer, U., 192 Watanabe, Kenichi, 407 Watkins, M., 280 Watson, S., 166 Watts, L., 110 Weaver, G., 337 Webb, J., 136, 137 Webb, K., 110 Weber, K., 108 Weber, L., 108, 192 Weber, T., 166, 167 Wei, J., 80 Wei, S., 111 Wei, Z., 81 Weigelt, C., 81, 278, 338 Welch, C., 136, 278 Welch, J., 170, 229, 340

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450  Index of Names

Welch, L., 31 Welch, S., 340 Welsh, D., 110 Welter, C., 136 Weng, D., 111 Wennberg, K., 136 Wennmann, A., 109 Werner, S., 29, 280 Wernerfelt, B., 83 Wernicke, G., 311 Wesley, C., 138 Wessel, D., 221 West, J., 279 Westermann-Behaylo, M., 339 Westman, C., 193 Westney, E. D., 278 Westphal, J., 28, 310, 311, 312 Wezel, F., 165 Whetten, D., 338 Whitbred, R., 192 White, C., 280 White, G., 29, 167 White, L., 220 White, M., 311 White, R., 56, 137 Whiteford, G., 55 Whiteman, G., 338 Whitman, Meg, 419–420 Wickert, C., 340 Wiersema, M., 310 Wiggins, R., 221 Wijen, F., 339 Wiklund, J., 135 Wilkinson, T., 166 Williams, C., 251, 337 Williams, D., 136, 166 Williamson, O., 55, 83, 109 Williamson, P., 80, 165 Williamsons, C., 278 Willig, R., 135 Willness, C., 340 Wiltbank, R., 220 Wincent, J., 134, 136 Winter, A., 30 Winter, S., 80, 221 Winterkorn, Martin, 372 Wintoki, M. B., 309 Wiseman, R., 251, 310 Withers, M., 192, 220, 311 Witt, M., 30, 110 Witty, A., 279 Wixted, B., 55 Woehr, D., 109 Woldu, H., 29 Wolf, J., 278 Wolff, M., 81, 283 Won, S., 82 Wong, E., 340 Wood, M., 136 Workiewicz, M., 82 Wowak, A., 310 Wowak, K., 310 Wrage, M., 309 Wright, C., 340 Wright, M., 30, 55, 80, 109, 134, 137, 166, 280, 310 Wright, P., 80, 253 Wry, T., 137 Wu, A., 312 Wu, B., 54, 221, 251, 253 Wu, J., 28, 137, 165, 166 Wu, Tim, 218, 219 Wu, X., 137

Wu, Z., 82, 109 Wuebker, R., 136, 137 Wulf, J., 312 Wustenhagen, R., 137

X

Xi Jinping, 384 Xia, E., 193 Xia, J., 192, 251, 310 Xiao, T., 192 Xie, E., 29, 30, 111, 165, 190, 253, 280, 309 Xie, Q., 29, 164 Xie, Y., 29, 164, 340 Xie, Z., 166 Xu, D., 111, 165 Xu, E., 308 Xu, K., 110, 308, 309 Xu, S., 312 Xu, X., 191, 310 Xu, Y., 108 Xue, L., 82

Y

Yafeh, Y., 29, 251, 311 Yagi, N., 111 Yamakawa, Y., 29, 135, 136, 138, 165 Yan, D., 193 Yang, D., 136, 137 Yang, H., 167, 191, 192, 193, 252, 253, 279, 308 Yang, J., 54, 166, 251 Yang, S., 110 Yang, W., 220 Yang, X., 110 Yang, Xiaohua, 379–383 Yang, Y., 30, 83, 135, 221 Yao, D., 221 Yao, X., 137 Yaprak, A., 192 Yayavaram, S., 29, 82 Yeh, C., 137 Yeniyurt, S., 192 Yeow, A., 135 Yergin, D., 30 Yeung, B., 81, 166 Yeung, H., 31 Yeung, P. E., 309 Yi, J., 55, 111, 138 Yi, S., 82 Yildiz, H., 164 Yildiz, H. E., 253 Yin, X., 190, 253 Yip, G., 27 Yiu, D., 30, 31, 80, 108, 251 Yoder, M., 311 Yoo, Y., 311 Yoon, A., 338 Yoon, D., 310 York, A., 138, 166 York, J., 338, 339, 340 Yoshida, Tadao, 126 Yoshikawa, T., 312 Young, M., 253, 309 Young, S., 136, 339 Younge, K., 252 Yu, J., 137 Yu, L., 339 Yu, T., 220, 221, 280 Yu, Y., 251, 339 Yuan, Eric, 3, 4 Yuan, W., 280 Yudkoff, R., 138 Yunus, Muhammad, 125

Z

Zahavi, T., 251 Zaheer, A., 191, 308 Zaheer, S., 111, 165 Zahra, S., 55, 134, 279, 338 Zajac, E., 137, 192, 193, 278, 311, 312 Zamudio, C., 82 Zanfei, A., 279 Zapkau, F., 138 Zarutskie, R., 308 Zatulinas, A., 252 Zavyalova, A., 110, 340 Zegart, A., 30 Zeithaml, C., 28 Zeitz, G., 137 Zellmer-Bruhn, M., 137 Zellweger, T., 308 Zelner, B., 167 Zemsky, P., 81 Zeng, Y., 278 Zenger, T., 28 Zervas, G., 55 Zhan, W., 278 Zhang, C., 110, 137, 252 Zhang, G., 308, 340 Zhang, H., 167, 340 Zhang, J., 279 Zhang, M., 136, 137 Zhang, R., 311 Zhang, T., 311 Zhang, W., 137 Zhang, X., 135 Zhang, Y., 252, 279, 310, 311, 312 Zhao, H., 29, 164, 166 Zhao, M., 165, 311, 340 Zhao, S., 279 Zhao, X., 339 Zhao, Z., 80, 280 Zheng, Q., 82, 338 Zheng, X., 110 Zheng, Y., 137, 191 Zhong, B., 280 Zhong, W., 167 Zhou, J., 109 Zhou, C., 192 Zhou, H., 252 Zhou, J., 54, 111 Zhou, K., 81, 111 Zhou, L., 135, 137 Zhou, N., 111, 165, 340 Zhou, X., 340 Zhou, Y., 166, 252 Zhu, D., 309 Zhu, F., 54, 82 Zhu, H., 252, 253 Zhu, J., 278 Zhu, P., 252 Ziedonis, R., 135, 220 Zimmerman, A., 82, 109 Zimmerman, M., 137 Zingales, L., 338 Zinner, D., 56 Zipay, K., 340 Zollo, M., 192, 337, 340 Zona, F., 310 Zoogah, D., 29, 191 Zott, C., 54, 135, 137 Zou, B., 136 Zou, J., 165 Zou, S., 192, 280 Zou, T., 111 Zuckerberg, Mark, 7, 104, 218 Zyung, J., 310

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Index of Organizations  451

Index of Organizations A

ABC, 33, 203 Acer, 266, 267 Advanced Semiconductor Materials International (ASMI), 67 AGRANA, 402–406 AirAsia, 44, 201 Air Berlin, 390, 391 Airbnb, 39, 40, 119, 122, 226 Airbus, 38, 40, 49, 66, 67, 118, 146, 147, 239, 261, 346, 384 Air France, 266 Air New Zealand, 201 Alaska Airlines, 209 Alcatel-Lucent, 149 Alibaba, 14, 39, 69, 204–205, 216, 245 Alitalia, 391 Alliance Boots, 231 All Nippon Airways (ANA), 195, 201 Alstom, 241 Amazon, 4, 22, 37, 38, 39, 76, 93, 102, 118, 141–142, 143, 146, 151, 152, 156, 161, 172, 203, 204–205, 217, 228, 230, 245, 256, 290, 293, 321, 420 AMD, 67 American Airlines, 175, 211 Anglo American, 268 Ansett, 208 Apollo Global Management, 307 Apotex, 265 Apple, 16, 27, 39, 40, 43, 61, 64, 67, 76, 129, 146, 187, 202, 214, 232, 291, 292, 293, 321, 344 Arla, 144 Arthur D. Little, 344 ASML, 66–67, 77 AstraZeneca, 247 AT&T, 149, 175, 206, 212, 213, 247 Audi, 45 Autel, 118 Avon, 260 Axel Springer, 214 Azul, 128, 210

B

Baidu, 69 Bain, 342 Bank of America, 241 Barclays, 85, 268 Barnes and Noble, 118 BASF, 200 Beech Hawker, 384 Berkshire Hathaway, 172 Best Buy, 75 Beyond Core, 343 Big Pharma, 336 Big Tech, 217–219 Blackstone, 307 Blackwater, 375, 377 Blue Origin, 118

BMW, 39, 40, 44, 45, 61, 62, 101, 105, 171, 243, 351–354 Boeing, 38–39, 40, 44, 49, 66, 118, 146, 147, 204, 206, 233, 239, 346, 384 Bonus Energy, 238 Bosch, 261–262 Boston Consulting Group (BCG), 342 BP, 147, 266, 321, 328 British Airways (BA), 175, 202 Brussels, 214 BTG, 343 Burger King, 155, 306, 328 BYD, 169, 172

C

Canada Goose, 59–60, 61, 67, 68, 77 Canon, 67, 146 Carlsberg, 144, 386–387 Carlyle Group, 307 Carrefour, 75, 174 Caterpillar, 146 CBS, 203 CEB, 343 Cengage Learning, 39 Cessna, 384 CFM International, 179 Champagne, 39 ChemChina, 94, 250 Chevron, 149, 333 China International Maritime Containers (Group) (CIMC), 69 China Merchants Group, 69 China Ocean Shipping Company, 69 Chipotle, 255 Chrysler, 173, 189–190, 200, 240, 242, 243, 246 CIMC, 77 Cisco, 3, 149, 174, 211 Citigroup, 85, 99, 151, 174, 242, 266, 293 Citroën, 372 Coalition Provisional Authority (CPA), 377 Coca-Cola, 5, 39, 185, 228, 232, 238, 257, 266, 271, 324 Committee on Foreign Investment in the United States (CFIUS), 216 Compaq, 419 Contemporary Amperex Technology Limited (CATL), 169, 172 Corona (beer), 163 Costco, 41 Craigslist, 39

D

DaimlerChrysler, 242, 243, 245 Danisco, 231 Danish Crown, 144 Danone, 22, 325 Dassault, 149 Dassault Falcon, 384 De Beers, 37

Dell, 40, 294 Deloitte, 343 Delta, 178, 211 Deutsche Bank, 85, 146 Deutsche Telekom (DT), 213 DHL, 22, 64, 146 Didi, 53, 69, 122 Discovery, 45 Disney, 414–415 DJI Technology, 118, 122 Dow Chemical, 324 Dropbox, 122 Duke Energy, 329 DuPont, 333 DuPont Danisco, 144 DynCorp International, 375

E

East Dawning, 258 easyGroup, 228, 244 eBay, 39, 146 Eckerd, 241 Eden McCallum, 343 Eisai, 200 Electrolux, 96t, 266 Eli Lilly, 180, 187 Embraer, 14, 384 EMI, 151 Emirates Airlines, 202, 390 Ericsson, 149 Etihad Airways, 390–391 Expedia, 172, 226 ExxonMobil, 147, 322, 333, 399 EY, 343

F

Facebook, 7, 39, 101, 104, 218, 219, 256 FedEx, 22, 146, 150, 204, 409–413 Ferrari, 37 Fiat, 189–190, 246, 373 Fiat Chrysler Automobiles (FCA), 190, 238, 268 Five Guys, 255 Flipkart, 122, 143, 151, 152, 161 Flyability, 118 Ford, 4, 40, 61, 62, 64, 101, 174, 200, 261, 269, 296, 330 Forest Stewardship Council (FSC), 393, 394 Foundem, 214 Four Seasons, 242 Fox, 203 Foxconn, 64, 264 Fujifilm, 146, 170, 174, 184 Fujitsu, 149

G

Gartner, 343 GDF Suez, 156 Geely, 149, 158

451

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452  Index of Organizations

General Electric (GE), 16, 74, 151, 179, 201, 229, 241, 244, 246, 271 General Motors (GM), 21, 47, 53, 64, 100, 146, 149, 189, 196, 200, 212, 229, 286, 303, 322 Gerson Lehman Group, 343 Global Exchange, 315 Global Strategy Group, 344 Goldman Sachs, 25, 26, 159, 160, 344, 417 Google, 3, 43, 53, 61, 93, 101, 104, 116, 117, 129, 150, 172, 187, 211, 213, 214, 218, 243–244, 256, 266, 274–275, 291, 333 GoPro, 118 Greenland Minerals and Energy, 319 Greyhound, 119, 151, 388 GSK, 171, 266, 271 Gulfstream, 149, 384, 385

H

Häagen-Dazs, 271 Haier, 69, 74, 210 Hampton Creek, 130 Harrods, 115 Hatteras Hammocks, 392–397 Haven, 172 H-E-B, 76, 77, 78–79 Hero Norway, 119 Hershey’s, 228 Hewlett-Packard (HP), 40, 149, 174, 246, 266, 270, 419–421 Hewlett Packard Enterprise (HPE), 420 Hoffman-La Roche, 200 Home Depot, 146, 230, 324, 325, 329 Honda, 40, 46, 85, 200, 233, 274 Honeywell, 22 Hong Kong Disneyland, 158 HP Inc., 420 HSBC, 85, 268 Huawei, 14, 43, 69, 126, 149, 211, 232, 258, 264 Hungry Jack, 155 Hyundai, 46, 200, 373

I

IBM, 46, 61, 62, 64, 66, 73, 76, 123, 202, 212, 216, 233, 240, 246, 247, 268, 274, 322, 330, 343 IDEO, 343 IKEA, 74, 107–108, 126, 130, 158 IndiGo, 44 Infosys, 14, 64, 343 Instagram, 219 Intel, 43, 46, 66, 67, 213, 273, 344, 417 Intelligentsia, 45 International Monetary Fund (IMF), 303

J

Japan Airlines (JAL), 195–196, 201 JCPenney, 241 Jeep, 373 JetBlue, 128 Jetstar Airways, 195–196, 208 Jetstar Group, 195–196

Jobek do Brasil, 392–397 John Deere, 18 Johnson & Johnson, 41 JP Morgan Chase, 85, 151, 172, 322

K

Keurig Green Mountain, 123 KFC, 181, 256, 258 Koc Group, 231, 244 Kodak, 146 Kohlberg Kravis Robert (KKR), 306–307 Komatsu, 146 Kopenhagen Fur, 144 KPMG, 343, 423 Kraft Foods, 45, 328 Kroger, 172 Kuka, 246, 249

L

Lamborghini, 37 Learjet, 149, 384 LEGO, 10, 144, 349–350 Lehman Brothers, 238, 242, 407–408 Lenovo, 40, 46, 66, 233, 247, 266, 267 Levi Strauss, 228, 257 Lime, 171 LinkedIn, 124 L’Oreal, 75, 150, 228, 273 Louis Vuitton, 146 Lowe’s, 324, 325, 329 Lucasfilm, 10 Lyft, 53

M

Maersk, 144, 323 Mahindra Group, 115, 422 Mahindra & Mahindra, 163 Manpower, 64, 228 Marks & Spencer, 41, 330, 330t Marriott International Corporation, 225–226, 225t Mary Kay, 270f, 271f Maxwell House, 45 Mazda, 46 McDonald’s, 20, 45, 48, 127, 156, 180, 181, 203, 255–256, 266, 274, 326 McDonnell Douglass, 206 McKesson, 296 McKinsey, 342–343, 344, 417 Media Markt, 75 Megabus, 119, 151–152, 388–389 Mercedes-Benz, 45, 171 Merrill Lynch, 241 Metallurgical Corporation of China, 151 Microsoft, 3, 40, 76, 151, 172, 211, 212, 213, 217, 246, 247, 266, 275, 333, 420 Midea, 246, 249 Military Professional Resources, Inc., 375 Minor Group, 127 Mitsubishi, 186, 241, 266 Mitsui, 156

Mobil, 322 Monitor Group, 343, 345 Monsanto, 94 Monsters, inc., 307 Morris Air, 128 MTR Corporation, 11 Muji, 159 MySpace, 62, 218

N

Nareva Holdings, 156 NASTAR, 381 Natura, 77, 164 NAVMAN, 381 NBC, 203 NEC, 146 Neiman Marcus, 306 Nestlé, 44, 66, 144, 325, 328 Netscape, 151 News Corporation, 247, 283, 287 Nike, 64 Nikon, 67 Nissan, 46, 85, 151, 177, 186, 200, 266 Nokia, 16, 231, 266 Nomura, 85, 238, 242, 407–408 Northrop Grumman, 233 Novo Nordisk, 144

O

Occidental Petroleum (Oxy), 355–359 Old Mutual, 268 One World, 156, 170, 175, 178, 390 Oracle, 4, 246, 264, 419 Organization for Economic Cooperation and Development (OECD), 26 Ozon, 118

P

Pacific Airlines, 195 Panasonic, 169, 172, 262, 264 Paris Disneyland, 158 Parrot, 118 PayPal, 124 Pearl River, 155, 157, 158, 163 PepsiCo, 228, 231, 266, 290, 325 Pfizer, 171, 247 PG&E, 321 Philip Morris, 209 Philips, 67, 264 Pizza Hut, 127, 181, 258 Prada, 40, 43 Priceline, 172, 226 PricewaterhouseCoopers, 66 Procter & Gamble (P&G), 12, 41, 44, 185, 228, 322 Purdue Pharma, 321 PwC, 343

Q

Qantas, 195, 201, 208, 390 Qualcomm, 67, 212

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Index of Organizations  453

R

R. J. Reynolds (RJR), 209 Rakuten, 39 Ranbaxy, 180 Raytheon, 149, 233 Reach Now, 171 Reliance Media, 163 Renault, 172, 177, 186, 373 Respol, 149 Rhône-Poulenc, 200 Ritmüller, 157, 158, 163 RJR Nabisco, 306 Rockwell Collins, 239 Rolls-Royce, 37 Royal Bank of Scotland (RBS), 286 Royal Caribbean, 33 Ryanair, 44

S

SABMiller, 268 Sabre Travel Network, 176 Safi Energy, 156 Samsung, 16, 43, 61, 66, 67, 146, 172, 228, 232, 244, 264, 296, 344, 417–418 SAP, 123, 264, 266, 343 Schenck Shanghai Machinery (SSM), 272, 277 Seattle Coffee, 128 Shanghai Automotive Industrial Corporation (SAIC), 174 Shanghai Disneyland, 158, 414–416 Siemens, 16, 67, 149, 228, 238, 241, 330 Singapore Airlines, 49, 201 Sinopec, 181 Skype, 3, 120 Sky Team, 156, 170, 178, 390 Slope Tracker, 381 Snapchat, 122 Snecma, 179 SnowSports Industries America (SIA), 381 SnowSports Interactive, 379–383 Sony, 257, 264, 266 Southwest Airlines, 44, 209–210 SpaceX, 118, 122 Spotify, 120 Stagecoach Group, 388 Standard Chartered, 268 Star Alliance, 156, 170, 178, 390 Starbucks, 45, 87–88, 102, 203, 227, 260, 260f, 315–316, 323–324 Starwood Hotels, 225, 225t

Steinway, 163 STMicroelectronics, 149 Stumptown, 45 Subway, 127, 255 Suunto, 381 Swiss Re, 329 Syngenta, 94, 250

T

Taco Bell, 258 Taiwan Semiconductor Manufacturing Company (TSMC), 67 Takeda, 266 Target, 75 Tata, 244 Tata Consulting Service, 343 Tata Group, 5, 14, 149, 296, 422 Tata Motors, 85, 158, 249 Tazo, 227 Teavana, 227 Tencent, 69 Tesco, 41 Tesla, 47, 52–53, 152, 172, 360–361 Teva, 268 Texas Instruments (TI), 67, 146, 149 Texas Pacific Group (TPG), 307 Thai Union Frozen Products, 157 Thomson Learning, 307 3G Capital, 14 3M, 22, 74 Time Warner, 247 T-Mobile, 175, 199, 206, 212, 247 TNT Express, 409–413 Tokyo Disneyland, 158 Toshiba, 146 Total, 149 Toyota, 41, 46, 47–48, 53, 146, 169, 172, 200, 212, 330 Travelocity, 172 TripAdvisor, 214 Twitter, 104

U

Uber, 39, 53, 119, 122, 146, 171, 230 Ultratech, 67 Unilever, 150, 324, 325, 326–327, 328 United Technologies Corporation (UTC), 239, 244 UPS, 22, 204, 325

Vestas, 144 Victoria’s Secret, 44, 150 Vietnam Airlines, 195, 201 ViiV Healthcare, 171 Virgin Atlantic, 195 Virgin Blue, 195, 208 Virgin Galactic, 118 Virgin Group, 228, 234 Volkswagen (VW), 4, 53, 67, 156, 174, 264, 372–374 Volvo, 158, 238, 373

W

Walgreens, 172, 231 Walmart, 7, 9, 10, 11, 17, 21, 39, 40, 44, 48, 74–75, 143, 146, 161, 230, 257–258, 296, 322, 324, 392 Wanda, 244 Wanda Group, 231 Waymo, 53 Webex, 3 WeChat, 39 WestJet, 128 WeWork, 62, 130 WhatsApp, 219 Wipro, 422 World Bank, 120, 303, 330

X

Xerox, 150, 170, 174, 184, 264, 420–421 Xe Services LLC, 377 Xiaomi, 69, 122, 232

Y

Yahoo, 62, 247 Ybbstaler Fruit Austria GmbH, 405 Yellowstone National Park, 424 YKK, 126 Yokogawa, 270 YouTube, 104 Yum Brands, 181 Yum China Holdings, 258 Yuneec, 118

Z

Ziegler, 69 Ziemann, 69 Zoom, 3–4, 5, 8, 11, 16 ZTE, 149

V

Verity Studios, 118 Verizon, 149, 247

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454  Index of Subjects

Index of Subjects A

Absorptive capacity, 272 Accommodative strategy, 328 Acquisition. See also Diversification defined, 238 emerging multinationals’, 249–250 success, improving odds for, 247t Acquisition premium, 239 Activist shareholders, 293 Additive manufacturing, 48, 353–354 Adults in early stage entrepreneurship, 120 in gig and sharing economy, 118, 118t Agency costs, 286 Agency relationship, 286 Agency theory, 286 Agents, 286 Agglomeration, 148–149 AI (artificial intelligence), 42, 258, 259 Airline industry, 49, 156, 170, 172, 178, 195–196, 201 Asia Pacific, 346–348 in China, 384–385 Alliance dissolution, 182f Alliances. See Strategic alliances and networks Altruistic surrogacy, 367 Ambidexterity, 68 “America First” policy, 20 Anchored replicators, 231 Angels, 124 Antidumping, 207–208 competition vs., 213–215 Antiglobalization protests, 21 Antitrust laws, 198, 206t Antitrust policy, 205–206 strategy vs., 211–213 Arab Spring, 104 Arctic boom, global warming and, 318–319 Arm’s-length transaction, 89 Artificial intelligence (AI), 42, 258, 259 The Art of War (Sun Tzu), 6 Asset of foreignness, 157–158 Assisted Reproductive Technology Bill of 2008, 368 Attack defined, 208 types of, 208–210 Attention market, 219 Australia snow-sports industry, 379–383 Statewide Technology Incubation Strategy, 379 Automobile industry, 4–5, 37, 40–41, 85, 151, 169, 189–190, 200, 351–354, 360–361, 372–374 alliances, 172–173 in China, 149 future of, 52–54 strategic groups in, 46, 47f Autonomous driving, 352–353 Autonomous vehicle (AV), 53 Awareness-motivation-capability (AMC) framework, 210–211

B

Backward integration, 41 Backward vertical integration, 146 Balanced scorecard, 15–16, 16t Bangladesh, microfinance in, 125 Bankruptcy, 37, 133–134 Bargaining power of buyer, 40–41, 42, 118, 146, 324 Bargaining power of supplier, 40, 42, 118, 146, 324 Base of the pyramid (BoP), 18, 19 Behavior control, 233

Beijing Consensus, 303 Belgium, 7 Benchmarking, 62 Bidding prices, 249–250 Big Data (data analytics), 42, 43 Big Three in consulting industry, 342 in cruise industry, 33–34 Big ticket products, 37 Biofuels, 406 Black swan event, 19 Blitzscaling, 124, 130 Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies (Hoffman), 130 Blue ocean, 122–123 Blue ocean strategy, 2107 Blurred boundaries, 46 Board of directors board composition, 288–289 board interlocks, 290 directing strategically, 291–292 leadership structure, 290 role of, 290 BOT (build-operate-transfer) agreements, 156 Bounded rationality, 92 Brazil, 12, 14, 18, 75, 94 adults in early stage entrepreneurship, 120 BRIC, 18, 25, 85 informal investment, 125 Brexit, 19, 27, 85–86, 88, 90 Bribery, 99 BRIC/BRICS, 18, 25–26, 27, 85, 91 Britain, 5, 19, 85–86, 87, 115–116. See United Kingdom adults in early stage entrepreneurship, 120 G-7, 25, 26 British Association of Private Security Companies (BAPSC), 375 Build-operate-transfer (BOT) agreements, 156 Bureaucratic cost, 235 Burundi, 120–121 Business groups, 234 Business-level strategy, 226 Business model, 5 Business Roundtable Statement, 320, 321–322, 328–329 Buyers, 342 bargaining power of, 40–41, 42, 118, 146

C

Canada cultural distance, 103 G-7, 25, 26 Capabilities. See also Resources and capabilities crucial, 62 defined, 61 dynamic, 60, 71–72, 72t international/cross-border, 74–75 Capability-seeking firms, 149 Capacity to punish, 199 Capital in the Twenty-First Century (Piketty), 331 Capitalism, 94, 331 shareholder, 294, 332 Captive sourcing, 64f, 65 Carbon pricing, 333 Cartel, 198, 398 Causal ambiguity, 67 Centers of excellence, 258 Central Intelligence Agency (CIA), 332 CEO duality, 290, 297

Chief executive officer (CEO), 11, 12, 12t Chile, 332 adults involved in gig and sharing economy, 118, 118t China, 12, 14, 18, 19, 98, 323, 414–415 acquirers’ premium, 239 adults in early stage entrepreneurship, 120 antitrust authorities, 213 artificial intelligence in, 257, 258 automobile industry in, 149, 174 BRIC, 18, 25, 85 business jet makers in, 384–385 censorship of Internet, 104 China International Maritime Containers (Group) (CIMC), 69 coronavirus outbreak in, 22, 23, 74 cultural distance, 103 debate about independent directors in, 289 Gini coefficient, 331 hotel industry, 225–226 industrialization, 277 informal investment, 125 luxury goods industry, 38 as nonmarket economy, 207 out-group, 103 per capita income, 26 ride-hailing in, legalization of, 362–366 as shipbuilding nation, 33 stock keeping units, 258 Texas Instruments Global Standard Guidelines, 99t Christchurch shooting, New Zealand, 101 Classic conglomerates, 231 Clayton Act (1914), 206t Clear boundaries, 46 Code of conduct (code of ethics), 97, 99, 328 Coffee and Farmer Equity (CAFE) guideline, 315 Cognitive pillar, 87, 175–176 Collaborative capabilities, 173–174 Collectivism, 95, 96, 102–103 Collusion, 198 vis-à-vis competition, industry characteristics and, 198–201, 199t Collusive price setting, 206 Co-marketing, 156 Commercializing Emerging Technologies (COMET), 381 Commoditization, 63 Competition, 27 collusion vis-à-vis, industry characteristics and, 198–201, 199t in cruise industry, 33–34 global, 296 perfect, 35 vs. antidumping, 213–215 Competition policy, 205 Competitive advantage, 15 Competitive Advantage (Porter), 43 Competitive dynamic attack and counterattack, 208–211 comprehensive model of, 197, 197f industry-based considerations, 198–201 institution-based considerations, 205–208 resource-based considerations, 201–203 cooperation and signaling, 211 debates and extensions competition vs. antidumping, 213–215 strategy vs. antitrust policy, 211–213 defined, 196 implications for action, 215–216, 215t strategy as action, 196–197, 197f Competitive Strategy (Porter), 35

454 

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Index of Subjects  455

Competitor analysis, 196, 202–203, 203f Competitor rivalry, 37, 323 Complementary assets, 68 Complementor, 46 Computer industry, 46, 202, 233, 266–267, 419–421 Concentrated ownership and control, 284 Concentration ratio, 199 Conduct, 35 Conglomerate M&A, 238 Conglomerates/conglomeration, 227, 234–235 classic, 231 far-flung, 231 old-line vs. new-age, 244–245 Connected Cars, 352 Constellations, 170 Consulting industry, 342–345 Continued globalization, 25, 26 Continuous experimentation, 9 Contractual agreement, 155 Contractual (non-equity-based) alliances, 170, 170f Contractual approaches of entry, 159–161 Controlling shareholders, 287 Cooperation and signaling, 211 Coordination, 198 Coronavirus (COVID-19) pandemic, 19, 20, 74, 119, 300 and airline industry, 347–348 and economic crisis, 37 recession due to, 27 and virtual meeting, 3–4 Corporate divorce, 180–181 Corporate entrepreneurship, 117 Corporate governance (CG), 419–420 board of directors board composition, 288–289 board interlocks, 290 directing strategically, 291–292 leadership structure, 290 role of, 290 Business Roundtable Statement on, 320 comprehensive model of, 297–300, 297f industry-based considerations, 297 institution-based considerations, 298–300 resource-based considerations, 298 debates and extensions global convergence vs. divergence, 301 opportunistic agents vs. managerial stewards, 300 state ownership vs. private ownership, 302–304, 303t value vs. stigma of multiple directorships, 301–302 defined, 284 global perspective on, 294–295, 295f implications for action, 304 managers principal-agent conflicts, 286–287, 287f, 288t principal-principal conflicts, 287–288, 287f, 288t mechanisms exit-based, 293–294 voice-based, 292–293 ownership concentrated, 284 diffused, 284 family, 285 package, 294 participants in, 284f primary families of, 295t

Corporate-level strategy, 226 Corporate philanthropy, 325 Corporate social irresponsibility (CSI), 321 Corporate social performance (CSP), 319 Corporate social responsibility (CSR), 102, 425 comprehensive model for, 322–330 CSR-economic performance puzzle, 326–327, 327t industry-based considerations, 323–325 institution-based considerations, 327–330 resource-based considerations, 325 debates and extensions active vs. inactive CSR engagement overseas, 332 domestic vs. overseas social responsibility, 331–332 race to bottom (“pollution haven”) vs. race to the top, 332–333 reducing vs. contributing toward income inequality, 330–331 defined, 316 implications for action, 333–334, 334t, 335t mandate, 422–423 stakeholders and, 316 fundamental debate, 320–322 primary stakeholder groups, 319 secondary stakeholder groups, 319 VRIO framework, 325 Corporate theft, 288 Corruption defined, 99 ethics and, 99–100 Cost leadership, 43, 44 Counterattack, 208, 210 Country manager, 260 Country-of-origin effect, 158 COVID-19, 3–4, 19, 21–23, 34, 78–79, 133–134, 226 Cross-border M&A, 238, 238f, 241 Cross-cultural blunders, 96t Cross-listing, 301 Cross-market retaliation, 201 Cross-shareholding, 170 Crowdfunding, 125 Cruise industry, competition in, 33–34 CSR. See Corporate social responsibility (CSR) CSR-economic performance puzzle, 326–327, 327t Cultural distance, 103 and foreign entry locations, 150 Culture five dimensions of, 95–96 and strategic choices, 96–97 strategic role of, 94–97 Currency hedging, 148 Currency risks, 148 Customer loyalty, 39 Customers, bargaining power of, 346 Cyberattack, 409–413 Cybersecurity, 410–411

D

Data analytics, 42, 43 Debates and extensions competitive dynamics competition vs. antidumping, 213–215 strategy vs. antitrust policy, 211–213 corporate governance global convergence vs. divergence, 301 opportunistic agents vs. managerial stewards, 300

state ownership vs. private ownership, 302–304, 303t value vs. stigma of multiple directorships, 301–302 corporate social responsibility active vs. inactive CSR engagement overseas, 332 domestic vs. overseas social responsibility, 331–332 race to bottom (“pollution haven”) vs. race to the top, 332–333 reducing vs. contributing toward income inequality, 330–331 entrepreneurial firm high-growth entrepreneurship vs. ethically questionable behavior, 130–131 slow internationalizers vs. born global start-ups, 128–130 traits vs. institutions, 128 foreign markets, entering, 157–161 contractual vs. noncontractual approaches of entry, 159–161 global vs. regional geographic diversification, 159 liability vs. asset of foreignness, 157–158 old-line vs. emerging multinationals, 158–159 industry-based view, 45–50 clear vs. blurred definitions of industry, 46 economies of scale vs. 3D printing, 48–49 industry rivalry vs. strategic groups, 46–47 industry-specific vs. firm-specific and institution-specific determinants of performance, 50 integration vs. outsourcing, 47–48 stuck in the middle vs. all rounder, 48 institution-based view, 102–105 cultural distance vs. institutional distance, 103 freedom of speech vs. censorship on internet, 104–105 opportunism vs. individualism/ collectivism, 102–103 multinational enterprise customer-focused dimensions vs. integration, responsiveness, and learning, 273–274 headquarters control vs. subsidiary initiative, 273 resources and capabilities, 70–75 domestic resources vs. international (cross-border) capabilities, 74–75 firm-specific vs. industry-specific determinants of performance, 71 offshoring vs. nonoffshoring, 72–74 static resources vs. dynamic capabilities, 71–72, 72t strategic alliances and networks, 184–185 acquiring vs. not acquiring alliance partners, 185 alliances vs. acquisitions, 184–185, 184t majority vs. minority JVs, 184 Decision model, in value chain analysis, 63 Deconglomeration, 244 Defense workforce, 376 Defensive strategy, 101, 328 Deglobalization, 26 globalization vs., 20–22 Denmark, 144 Department of Justice (DOJ), 199, 217 Design thinking, 61 “Diamond” model (Porter), 90–91, 91f

455

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.

456  Index of Subjects

Differentiation, 44–45 Diffused ownership, 284 Digital business model, 42, 43 Digital strategy, and five forces, 42, 43 Direct exports, 126, 155 Discrimination, 207 Disruptors, 331 Dissemination risks, 146 Diversification comprehensive model of, 231–237, 232f industry-based considerations, 231–232 institution-based considerations, 234–235 resource-based considerations, 232–234 debates and extensions acquisitions vs. alliances, 246 high road vs. low road in integration, 245–246 old-line vs. new-age conglomerates, 244–245 product relatedness vs. other forms of relatedness, 243–244 defined, 226 evolution of, 235–237 geographic, 226, 229–231 and firm performance, 229–230, 229f implications for action, 246–247, 247t managerial motives for, 235 product, 226 and firm performance, 228–229, 228f product-related diversification, 226 product-unrelated diversification, 227–228 Diversification discount, 228 Diversification premium, 228 Divestitures, 231 Doing Business (World Bank Survey), 120, 121 Domestic demand, 91 Domestic markets, 127–128 size of, 143–144 Domestic resources, 74–75 Dominance, 37 Dominant logic, 244 Downscoping, 236–237 Downsizing, 237 Downstream vertical alliances, 172 Driver-assistance systems, 352 Due diligence, 175, 241 Dumping, 207 Duopoly, 35 Dynamic capabilities, 60, 61, 62, 71–72

E

East India Company, 115–116, 119 Ebola, 336–337 E-commerce, 151 Economic benefit, 235 Economic uncertainty, 88 Economies of scale, 39, 226 3D printing vs., 48–49 Economies of scope, 227 Ecosystem, 46 Efficiency-seeking firms, 149 Electric vehicle (EV), 53, 151, 152, 360–361 Emergent strategy, 7 Emerging economies/markets, 18 Emissions scandal, 372–374 Empire building, 235 Endangered Species Act, 1973, 424 Enterprise resource planning (ERP), 123 Enthusiastic internationalizers, 143–144 Entity list, 147 Entrant, threat of, 37–40, 42, 347 Entrepreneurial firm debates and extensions high-growth entrepreneurship vs. ethically questionable behavior, 130–131 slow internationalizers vs. born global start-ups, 128–130 traits vs. institutions, 128

entrepreneurship and. See Entrepreneurship implications for action, 131, 131t internationalizing, 126–128, 126t strategies for entering foreign markets, 126–127 strategies for staying in domestic markets, 127–128 strategies, 121–126 financing and governance, 124–125 growth, 122–123 harvest and exit, 125–126, 125t innovation, 123 network, 123–124 Entrepreneurs, 116 Entrepreneurship comprehensive model of, 117–121, 117f industry-based considerations, 118–119 institution-based considerations, 120–121, 121f resource-based considerations, 119 corporate, 117 defined, 116 entry barriers, 118 high-growth, 130 necessity, 129 opportunity, 129 social, 116 Entrepreneurship deficit, Europe, 120 Entry barriers, 38–39, 118, 323–324 Environmental, social, and governance (ESG), 319 Environmental Protection Agency (EPA), 321, 329, 372 Equity-based alliances, 170, 177t Equity modes, 152 ESG. See Environmental, social, and governance (ESG) Ethical challenges, strategic response framework for, 100–101, 100t Ethical imperialism, 98 Ethical relativism, 98 Ethics and corruption, 99–100 defined, 97 managing overseas, 98–99, 99t strategic role of, 97–100 EU-Japan Economic Partnership Agreement, 85 Europe, entrepreneurship deficit, 120 European Union (EU), 7, 19, 85–86, 116 Excess capacity, 39 Exit-based governance mechanisms, 293–294 Explicit collusion, 198 Explicit knowledge, 269 Exploitation, 180 Exploration, 180 Export intermediaries, 127, 155 Expropriation, 288 Extensions. See Debates and extensions Extensive international scope, 229 External governance mechanisms, 293–294 Extraterritoriality, 100

F

Factor endowments, 90–91 Fair Trade movement, 315 Family ownership, 285, 296 Far-flung conglomerates, 231 Fashion industry, 38 Fast-moving industries, 71, 72t FDI (foreign direct investment), 4 Fear of missing out (FOMO), 240 Federal Trade Commission (FTC), 212, 217 Guide to Antitrust Laws, 218 Feint, 208–209, 209f Femininity, 95 Fiduciary duty, 316 Fighter brand, 202

Financial control, 234, 291 Financial resources and capabilities, 61 Financing and governance strategy, 124–125 Finland, 33 Firm, 12–16 behavior of, 14 best-connected, 93 difference within, causes of, 12–14 distribution of, 12, 13f, 14 domestic, 17 management quality, variation in, 12, 13f performance, 15–16, 16t, 228–229, 228f, 229–230, 229f scope of, 15, 235–236f, 235–237, 237f social media, 104 strategic choices, 92 Firm strategy, structure, and rivalry, 90 First-mover advantages, 150–151, 151t Five forces framework, 35–42, 36f, 36t, 118 bargaining power of buyers, 40–41 bargaining power of suppliers, 40 defined, 35 digital strategy and, 42, 43 lessons from, 41–42, 42t rivalry among competitors, 37 threat of entrants, 37–40 threat of substitutes, 41 Flexible manufacturing technology, 48 FOMO (fear of missing out), 240 Food and Drug Administration (FDA), 327 Foreign Corrupt Practices Act (FCPA), 100 Foreign direct investment (FDI), 4, 64f, 85, 99, 127, 152, 156, 175, 386 Foreign markets, entering, 140–164 comprehensive model of, 145–148, 145f industry-based considerations, 145–146 institution-based considerations, 147–148 resource-based considerations, 146–147 debates and extensions, 157–161 contractual vs. noncontractual approaches of entry, 159–161 global vs. regional geographic diversification, 159 liability vs. asset of foreignness, 157–158 old-line vs. emerging multinationals, 158–159 implications for action, 161, 161t liability of foreignness, 143 location-specific advantages and strategic goals, 148–150, 149t modes of entry, 152–157, 153t, 154–155f propensity to internationalize, 143–145 scale of entry, 152 2W1H dimensions, 143 how, 152–157 when, 150–152 where, 148–150 Foreign portfolio investment (FPI), 299 Formal, rule-based, impersonal exchange, 89, 90f Formal institutions corporate governance, 298–299 defined, 87 diversification, 234 and firm behavior, 93 governing domestic competition, 205–207 governing international competition, 207–208 strategic alliances and networks, 175 Forward vertical integration, 146 Foundations of Global Strategy, 14 FPI (foreign portfolio investment), 299 France, 7, 33 adults in early stage entrepreneurship, 120 G-7, 25 Franchising, 127 Franchisor, 155 Franco–Prussian War, 7 Freedom of speech, 104–105

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.

Index of Subjects  457

Free market, 320, 321 Free trade agreement (FTA), 85 Friendly M&A, 239 Friends of the Earth, 393 Frugal innovation, 18 FTSE 250 Index, 85 Fukushima nuclear power station, 321

G

Gambit, 209–210, 210f Game theory, 198 Generally accepted accounting principles (GAAP), 207, 304 Generic strategy, 43–45, 43t cost leadership, 43, 44 defined, 43 differentiation, 44–45 focus, 45 lessons from, 45 Geographic area structure, 260 Geographic diversification, 226, 229–231 and firm performance, 229–230, 229f product diversification and, 230–231, 230f Germany, 7, 9, 12, 16, 33, 39 adults in early stage entrepreneurship, 120 bankruptcy in, 37 bankruptcy law reforms in, 134 G-7, 25 start-ups in, 129 Gestational surrogacy, 367 Gifts, in China Texas Instruments Guidelines on, 99t Gig economy, 118 Gini coefficient, 330 Global account structure, 274 Global competition, 296 Global economy, in 2050, 25–27, 25f Global Entrepreneurship Monitor, 118, 120, 124 Global injuries, 200 Globalization debate on, 20–22 defined, 17–18 deglobalization vs., 20–22 pendulum view, 18–19 Global mandate, 258 Global matrix, 261–262 Global Positioning System (GPS), 380 Global product division structure, 260–261 Global Reporting Initiative (GRI), 393 Global standardization strategy, 258 Global start-ups, 379–383 Global strategies, 382 Global strategy defined, 17 need to study, 5 overview, 4–5 Global Strategy Group, 417, 418 Global sustainability, 317 Global value chain, 22 Global virtual team, 272 Global vitamin cartel, 200 Global warming, 317, 318–319 Gossip Girl (TV show), 122 Government-sponsored enterprise (GSE), 303 Great Depression, 19, 27, 302 Great Recession, 12, 19, 22, 38, 45, 53, 203, 268, 296, 303, 307, 323 Greece, 14, 96 Greek debt crisis, 19 Greenfield operations, 156 Greenhouse gas (GHG) emission, 360–361 Greenpeace, 393 Group of Seven (G-7), 25, 26 Growth strategy, 122–123 Guanxi, 93, 103 Gulf of Mexico oil spill, 321, 328

H

Hart-Scott-Rodino Act (1976), 206t Harvest and exit strategy, 125–126, 125t Haven currency, 148 High-volume, low-margin approach, 44 Home replication strategy, 257–258 Hong Kong, 18, 103, 115 Horizontal alliances, 171 Horizontal M&A, 238 Hostile M&A/takeover, 239 Hotel industry, 225–226 Hubris, 239 Hubristic motive, 239, 239t Human resources and capabilities, 61 Hungary, informal investment, 125 Hybrid organizations, 94 Hypercompetition, 72

I

i.Lab, 379 Imitability competitive dynamics, 202 corporate social responsibility, 325 diversification, 233 leveraging resources and capabilities, 66–68 strategic alliances and networks, 174 surrogacy, 369 Immigrant entrepreneurs, 129 Implications for action competitive dynamic, 215–216, 215t competitive dynamics management, 196–197, 197f corporate governance, 304 diversification, 246–247, 247t entering foreign markets, 161, 161t entrepreneurial firm, 131, 131t institution-based view, 105, 105t multinational enterprise, 274–275, 274t resources and capabilities, 76–77 strategic alliances and networks, 187t Incumbents, 37, 38, 40, 346 Independent directors. See Outside directors India, 12, 14, 18, 19, 104 adults in early stage entrepreneurship, 120 Amazon in, 141–142 BRIC, 18, 25, 85 per capita income, 26 Indirect exports, 127, 155 Individualism, 95, 96, 102–103 Industrial economics, 35 Industrial organization (IO) economics, 35 Industry, 35 Industry-based consideration competitive dynamics, 198–201 corporate governance, 297 corporate social responsibility, 323–325 diversification, 231–232 entrepreneurship, 118–119 foreign market entries, 145–146 multinational strategy, structure, and innovation, 263–264 strategic alliances and networks, 171–172 Industry-based view debates and extensions, 45–50 clear vs. blurred definitions of industry, 46 economies of scale vs. 3D printing, 48–49 industry rivalry vs. strategic groups, 46–47 industry-specific vs. firm-specific and institution-specific determinants of performance, 50 integration vs. outsourcing, 47–48 stuck in the middle vs. all rounder, 48 Industry competition management, 33–54 debates and extensions, 45–50 clear vs. blurred definitions of industry, 46 economies of scale vs. 3D printing, 48–49

industry rivalry vs. strategic groups, 46–47 industry-specific vs. firm-specific and institution-specific determinants of performance, 50 integration vs. outsourcing, 47–48 stuck in the middle vs. all rounder, 48 five forces framework, 35–42, 36f, 36t bargaining power of buyers, 40–41 bargaining power of suppliers, 40 defined, 35 digital strategy and, 42, 43 lessons from, 41–42, 42t rivalry among competitors, 37 threat of entrants, 37–40 threat of substitutes, 41 generic strategies, 43–45, 43t cost leadership, 43, 44 defined, 43 differentiation, 44–45 focus, 45 lessons from, 45 Industry life cycle, 46 Industry positioning, 42 Industry rivalry, 46–47 Industry-specific determinants of performance, 50 Informal economic transaction, 88, 89f Informal institution corporate governance, 298–299 defined, 87 diversification, 234–235 and firm behavior, 93 Information asymmetries, 286–287 Information overload, 15 Information Technology Oversight Committee, 411 In-group, 103 In-house vs. outsource, 63f Initial public offering (IPO), 3, 296 advantages and disadvantages of, 125–126, 126t defined, 125 Innovation resources and capabilities, 61 Innovation-seeking investment, 271 Innovation strategy, 123 Inside directors, 288 outside directors vs., 291–292, 292t Institutional distance, 103 and foreign entry locations, 150 Institutional framework, 87 Institutional investors, 285 Institutional logics, 94 Institutional pluralism, 94 Institutional relatedness, 244 Institutional transition, 90 Institutional voids, 159 Institutional work, 93 Institution-based considerations competitive dynamic, 205–208 corporate governance, 298–300 corporate social responsibility, 327–330 diversification, 234–235 entrepreneurship, 120–121, 121f foreign markets enteries, 147–148 multinational strategy, structure, and innovation, 265–267 strategic alliances and networks, 175–176 Institution-based view, 86 core propositions of, 92–93, 92t debates and extensions, 102–105 cultural distance vs. institutional distance, 103 freedom of speech vs. censorship on internet, 104–105 opportunism vs. individualism/ collectivism, 102–103 hybrid organizations, 94

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.

458  Index of Subjects

Institution-based view (Continued) implications for action, 105, 105t institutional logics, 94 overview, 90–92 surrogacy, 368–369 Institutions, 298 defined, 87 dimensions of, 87t formal. See Formal institutions informal. See Informal institutions role of, 88 traits vs., 128 and uncertainty, 88–90 Intangible resources and capabilities, 61 Integration backward, 41 forward, 40 outsourcing vs., 47–48 Integration-responsiveness framework, 256, 257–260, 257f, 258t global standardization strategy, 258 home replication strategy, 257–258 localization/multidomestic strategy, 258 transnational strategy, 258, 259 Intellectual property rights (iPR), 92 Intended strategy, 6–7 Interfirm rivalry, 118 Intergovernmental Panel on Climate Change, 318 Intermediary, 116, 155 Internal capital market, 228 Internal governance mechanism, 292–293 Internalization, 154 Internalization advantage, 154 International Air Transport Association (IATA), 347 International (cross-border) capabilities, 74–75 International Council on Clean Transportation (ICCT), 372, 373 International diversification, 229 International division, 260 International entrepreneurship, 116 International joint venture (IJV), 392–397 International marketing, 395 International new ventures, 126 International Peace Operations Association (IPOA), 375, 377 International safety certification (GS), 394 International Standards Organization (ISO), 330 International Trade Administration, 207 International Trade Commission, 207 Internet, censorship on, 104–105 Internet of things (IoT), 42 In vitro fertilization (IVF), 367 IO (industrial organization) economics, 35 IoT (Internet of things), 42 Iraq, 39 Ireland, adults involved in gig and sharing economy, 118, 118t Israel, adults involved in gig and sharing economy, 118, 118t Italy, 33 adults in early stage entrepreneurship, 120 G-7, 25 IT industry, 65

J

Japan, 12, 39, 95, 96, 98 bankruptcy in, 37 earthquake in, 23, 321 EU-Japan Economic Partnership Agreement, 85 G-7, 25 luxury goods industry, 38 onsen in, 98 as shipbuilding nation, 33 tattoos in, 98

Joint venture (JV), 156, 170 equity-based, 170 international, 392–397 Just-in-case management, just-in-time management vs., 22–23 Just-in-time management vs. just-in-case management, 22–23

K

keiretsu, 47, 48, 169, 172 Kenya, 101 Knowledge management among four types of MNEs, 269–271, 270t defined, 269 problems and solutions in, 272–273 problems in, 272t research & development, 271 Kyoto Protocol, 360

L

Late-mover advantages, 151–152, 151t Leadership defined, 11 strategic, 11–12 Lead independent director, 290 Learning by doing, 177 Learning race, 173 Liability of foreignness, 143, 157–158 Liability of newness, 123 Libya, 160 Licensing, 127 Licensor, 155 Limited international scope, 229 Linkage, leverage, and learning (LLL) framework, 158–159 Localization strategy, 258 Local responsiveness, 256 Location-specific advantages defined, 148 and strategic goals, 148–150, 149t London Stock Exchange (LSE), 298 Long-term orientation, 96 Love Boat (ABC), 33 Low-volume, high-margin approach, 44 Loyalty, 39 Luxury goods industry, 38

M

Maasai, 101–102 Maasai Intellectual Property Initiative (MIPI), 102 Malaysia, 96t, 104 Manager principal-agent conflicts, 286–287, 287f, 288t principal-principal conflicts, 287–288, 287f, 288t Managerial human capital, 298 Managerial motive, 239, 239t Marginal bureaucratic cost (MBC), 235 Marginal economic benefit (MEB), 235 Market commonality, 201 Market power, 212 Market-seeking firms, 149 Masculinity, 95 Mass customization, 48 MBC (marginal bureaucratic cost), 235 MEB (marginal economic benefit), 235 The Merchant of Venice (Shakespeare), 133 Merger, 238 Merger and acquisition (M&A), 184–185, 236, 293 conglomerate, 238 cross-border, 238, 238f, 241 defined, 238 failures, symptoms of, 240t friendly, 239

horizontal, 238 hostile, 239 motives for, 239–240, 239t performance of, 240–243 stakeholder concerns during, 243f vertical, 238 Mexico, 18, 100 Microfinance, 125 Microfoundation, 12 Micro-macro link, 273 Micromanaging, 12 “Middle-of-the-road” guiding principles, 98, 99t Military strategy, 7 Minority shareholders, 287, 298 Mission statement, 11 MNE. See Multinational enterprise (MNE) Mobility barriers, 46–47 The Modern Corporation and Private Property (Berle and Means), 284, 296 Modes of entry, 152–157, 153t, 154–155f Monopoly, 35, 272 Moral hazard, 303 Multidomestic strategy, 258 Multimarket competition, 196–197 Multinational enterprise (MNE), 17, 116, 163–164, 204, 319, 323–324, 332 advantages, 153–154 debates and extensions customer-focused dimensions vs. integration, responsiveness, and learning, 273–274 headquarters control vs. subsidiary initiative, 273 defined, 4 from emerging economies, 249–250 foreign market entry, 153 geographic diversification by sales, 159 implications for action, 274–275, 274t moving headquarters, 267–269 Nordic, 144 strategies and structures comprehensive model, 262–267, 263f cost reduction and local responsiveness, 256–257 integration-responsiveness framework, 257–260, 257f, 258t knowledge management, 269–273, 270t organizational structures, 260–262 reciprocal relationship between, 262 research & development, 271 “think global, act local” approach, 5 Multinational replicators, 231 Mutual forbearance, 197, 201

N

National Security Agency (NSA), 411 Natural resource-seeking firms, 149 Network centrality, 174 Network externality, 39 Networks. See Strategic alliances and networks Network strategy, 123–124 New York Stock Exchange (NYSE), 298 New Zealand, Christchurch shooting, 101 Next Eleven (N-11), 26 NGOs (nongovernmental organizations), 422 Noncontractual approaches of entry, 159–161 Non-equity-based alliances, 170, 177t Nonequity modes, 152, 155 Nongovernmental organizations (NGOs), 393, 422 Nonintervention principle, 332 Nonmarket (political) strategy, 93 Nonoffshoring, offshoring vs., 72–74 Non-scale-based advantage, 39 Nonshareholder stakeholder, 316 Nonstrategic industries, strategic industries vs., 22 Nontariff barriers, 148

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.

Index of Subjects  459

Normative pillar, 87, 175–176 Norms, 87 North America Free Trade Agreement (NAFTA), 19 Norway, 144 NotPetya cyberattack, 419–420

O

Obsolescing bargain, 147 Occasional internationalizer, 144 Occupy London, 300 Occupy Wall Street, 300, 321 Offshoring, 64, 65 nonoffshoring vs., 72–74 OLI advantages, 154, 155, 155f, 158–159 Oligopoly, 35 Onsen, 98 Onshoring, 65 “Open bathroom” policy, 316 Open innovation, 272 Operational synergy, 226 Opportunism, 88, 102–103, 178–179 Opportunity entrepreneurship, 129 Organization competitive dynamics, 202 corporate governance, 298 corporate social responsibility, 325 diversification, 233 leveraging resources and capabilities, 68–70 multinational strategy, structure, and innovation, 264 strategic alliances and networks, 174–175 surrogacy, 369 Organizational culture, 264 Organizational fit, 242 Organizational slack, 23 Organization for Economic Cooperation and Development (OECD), 207, 300 Organization of the Petroleum Exporting Countries (OPEC), 398–401 Original brand manufacturer (OBM), 73 Original design manufacturer (ODM), 73, 73f Original equipment manufacturer (OEM), 73, 73f Out-group, 103 Output control, 234 Outside directors, 288, 290, 291 inside directors vs., 291–292, 292t Outsourcing, 65 defined, 64 to India, 367–371 in-house vs., 63 Ownership concentrated, 284 diffused, 284 family, 285, 296 state, 285–286, 296 Ownership advantage, 154

P

Paris Agreement, 2015, 317, 333, 360–361 Partner rarity, 174 Perfect competition, 35 Performance, 35 firm, 15–16, 16t, 228–229, 228f, 229–230, 229f of merger and acquisition, 240–243 of parent firms, 183 of strategic alliances and networks, 182–183, 182t, 183f Personalized exchange, 88, 89f Petya ransomware, 411 Philadelphia Starbucks incident, 315–316 Physical resources and capabilities, 61 PIGS debt crisis, 19 Pivot, 119 Plan 17, 7 Platform, 39

PMC (private military companies), 375–378 Political uncertainty, 88 Portugal, 14 Power distance, 95 Predatory pricing, 206, 207 Price leader, 199, 398 Primary stakeholder group, 319 Principal-agent conflicts, 286–287, 287f, 288t Principal-principal conflicts, 287–288, 287f, 288t Principals, 286 Prisoner’s dilemma, 198, 199f Private contractors, 375 Private equity, 294, 306–308 Private military companies (PMC), 375–378 Proactive strategy, 329 Product differentiation, 39 Product diversification, 226 and firm performance, 228–229, 228f geographic diversification and, 230–231, 230f product-related diversification, 226, 233t product-unrelated diversification, 227–228, 233t Product proliferation, 39 Product-unrelated diversification, 227–228, 233t Proprietary technology, 39

Q

Quality certification (ISO), 394

R

Rarity competitive dynamics, 202 corporate social responsibility, 325 diversification, 233 multinational strategy, structure, and innovation, 264 resource capabilities and leverage, 66 strategic alliances and networks, 173–174 surrogacy, 369 Reactive strategy, 100, 327 Real option, 173 Reciprocity, 159–161 Reconfiguration capability, 62 Red ocean, 123 Refocusing, 236 Refugee crisis, Europe, 119 Regional geographic diversification, 159 Regional manager, 260 Regulatory pillar, 87, 175 Regulatory risks, 147 Related and supporting industries, 91 Related transactions, 288 Relational (collaborative) capabilities, 173–174 Relational contracting, 88 Relationship. See Strategic alliances and networks Relationship-based economic transaction, 88, 89f Replication, 9 Research and development (R&D) contracts, 156 Reshoring, 74 Resource-based consideration, 60 competitive dynamics, 201–203 corporate governance, 297 corporate social responsibility, 325 diversification, 232–234 entrepreneurship, comprehensive model of, 119 foreign market entries, 146–147 multinational strategy, structure, and innovation, 264 strategic alliances and networks, 172–173 surrogacy, 369 Resources defined, 60 domestic, 74–75 Resources and capabilities debates and extensions, 70–75 domestic resources vs. international (cross-border) capabilities, 74–75

firm-specific vs. industry-specific determinants of performance, 71 offshoring vs. nonoffshoring, 72–74 static resources vs. dynamic capabilities, 71–72, 72t examples of, 61t financial, 61 implications for action, 76–77 intangible, 61 physical, 61 tangible, 61 technological, 61 understanding, 60–62 value chain and, 62–63f, 62–65 VRIO framework, 65–70 imitability, 66–68 value, 66 Resource similarity, 202 Restructuring, 245 Return on investment (ROI), 342 Reverse innovation, 18 RFID technologies, 380 Ride-hailing in China, legalization of, 362–366 Risk management, 19 Rivalry, 342–343 among competitors, 37, 42, 323 among incumbents, 346 Russia, 386–387 BRIC, 18, 25, 85

S

Sarbanes-Oxley (SOX) Act (2002), 291, 298 Saudi Arabia, 104, 107–108, 398–401 Scale-based advantage, 39 Scale of entry, 152 Scenario planning, 19 Schlieffen Plan, 7 Scope economies, 227 SCP (structure-conduct-performance) model, 35 Secondary stakeholder group, 319 Securities and Exchange Commission (SEC), 288–289, 409 Seizing capability, 62 Sellers/consulting firms, 342, 343 Semiconductor industry, 67 Semiglobalization, 20 Sensing capability, 62 Separation of ownership and control, 285 Serial entrepreneurs, 128 Servitization, 49 Sexual discrimination, 98 Shanghai Disneyland, 258, 414–416 Shareholder activism, 292–293 Shareholder capitalism, 294, 320, 332 Shareholder democracy, 293 Shareholder empowerment, 293 Shareholder primacy, 320 Shareholders, 287, 299 Sharing economy, 118 Sherman Antitrust Act (1890), 198, 206t SHREK firms, 343, 344 Sierra Leone, 121 Silicon Valley, 129 Singapore, 18, 99–100, 115 Single business strategy, 227 Ski resorts, 379 Slow internationalizes, 144 Slow-moving industries, 71, 72t Small and medium-sized enterprises (SMEs), 116, 117, 120 entering foreign markets, 126–127 strategies for staying in domestic markets, 127–128 Smartphones, 232 Snow sports industry, 379–383 Social capital, 272–273

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.

460  Index of Subjects

Social complexity, 68 Social entrepreneurship, 116 Social impact investment, 320 Socialism, 331 Social issue participation, 325 Socially responsible investment (SRI), 320 Socioemotional wealth (SEW), 285 SOEs (state-owned enterprises), 160 Solutions-based structure, 274 South Africa BRICS, 18, 85 South Korea, 9, 18 adults involved in gig and sharing economy, 118, 118t as shipbuilding nation, 33 Sphere of influence, 201 SRI. See Socially responsible investment (SRI) Stage models, 128–129 Stakeholder, 15, 316–322, Stakeholder capitalism, 321 Stakeholder primacy, 322 Start-up business, 379–383 Statement on Purpose of Corporation (Business Roundtable), 320 State-owned enterprises (SOEs), 94, 160, 285–286, 303 State ownership, 285–286, 296 Stewardship theory, 300 Strategic alliances and networks advantages and disadvantages, 173t comprehensive model of, 171–176, 171f industry-based considerations, 171–172 institution-based considerations, 175–176 resource-based considerations, 172–173 debates and extensions for, 184–185 alliances vs. acquisitions, 184–185, 184t majority vs. minority JVs, 184 defined, 170 evolution, 178–181 combating opportunism, 178–179 corporate divorce, 180–181 from strong ties to weak ties, 179–180 formation of, 176–178, 176f contractual/equity modes, 176–177 relationship positioning, 177–178 implications for action, 187t performance, 182–183, 182t, 183f Strategic choices, 92 culture and, 96–97 Strategic control, 233 Strategic fit, 241 Strategic groups, 46–47, 47f Strategic hedging, 148 Strategic implications for action. See Implications for action Strategic industries vs. nonstrategic industries, 22 Strategic investment, 170 Strategic leadership, 11–12 Strategic management, 6 Strategy as action, 6, 6t defined, 6 emergent, 7 essence of, 9f formulation, 8 fundamental questions in, 12–16 implementation, 8 as integration, 6t, 7 intended, 6–7 origin of, 6 as plan, 6, 6t as theory, 7–11, 8t tripod, 14, 14f

Strong ties, 123 Structure, 35 Structure-conduct-performance (SCP) model, 35 Subsidiary initiatives, 273, 277 Substitute, 344 defined, 41 products and services, 118–119 and suppliers, 346 threat of, 41, 42, 324 Supplier bargaining power of, 40, 42, 118, 146, 324 substitute and, 346 Supply chain management, 22–23 Surrogacy, 367–371 commercial, 367–368 institution-based view, 368–369 resource-based view, 369 types of, 367 VRIO framework, 369 Surrogacy Regulation Bill of 2016, 368 Sweden, 95, 144 Switzerland, 91, 144 SWOT analysis, 8, 14, 34, 60, 76 Synergistic motive, 239, 239t Synergy trap, 240

T

Tacit collusion, 198 Tacit knowledge, 71, 269 Taiwan, 18 Tangible resources and capabilities, 61 Tanzania, 101 Tariff barriers, 147 Tattoos, 98 Tax-deductible expenses, 16 Technological resources and capabilities, 61 Terrorism, 97, 101 Texas Instruments (TI) Global Standard WGuidelines, 99t Threat of entrants, 37–40, 42 of substitutes, 41, 42, 324 turn into opportunities, 324–325 3D printing, 48–49 Thrust, 208, 208f Top management team (TMT), 11, 286–288 Trade barriers, 147 Trade war, 147 Traits, 128 Transaction costs, 88 Transnational strategy, 258, 259 Trans-Pacific Partnership (TPP), 19 Triple bottom line, 15 Triple-E class, 323 Trust, 198 Tunneling, 288 Turnkey projects, 156 TV broadcasting industry, 203 2W1H dimensions, 143 how, 152–157 when, 150–152 where, 148–150

U

Uncertainty economic, 88 political, 88 reduction in, institutions and, 88–90 Uncertainty avoidance, 95–96 Unicorn, 122 United Arab Emirates (UAE) bankruptcy law reforms in, 133

United Kingdom. See Britain United States, 12, 17, 95 adults in early stage entrepreneurship, 120 in gig and sharing economy, 118, 118t “America First” policy, 20 antitrust laws, 206t, 212 BRIC and, 25f Department of Justice, 199, 217 economy by 2050, 25, 25f evolution of scope of firm in, 236, 236f G-7, 25, 26 generally accepted accounting principles, 207, 304 Gini coefficient, 331 International Trade Administration, 207 International Trade Commission, 207 landmark cases, 206t multinational enterprise, 266 snow-sports industry, 381 TV broadcasting industry, 203 Upstream vertical alliances, 172 US Corporate Leniency Program, 200 US-Mexico-Canada Agreement (USMCA), 19

V

Value competitive dynamics, 201–202 corporate social responsibility, 325 diversification, 232–233 multinational strategy, structure, and innovation, 264 resource capabilities and leverage, 66 strategic alliances and networks, 172–173 surrogacy, 369 Value chain, 62–63f, 62–65 Venture capital (VC), 124–125 Venture capitalist (VC), 124 Vertical M&A, 238 Videoconference, 272 Virtual meeting, COVID-19 and, 3–4 Vision statement, 11 Vitamin cartel, global, 200 Voice-based governance mechanisms, 292–293 VRIO framework, 60, 65–70, 65t, 76, 119, 146 competitive dynamics, 201–202 corporate governance, 298 diversification, 232–233 leveraging resources and capabilities, 65–70 multinational strategy, structure, and innovation, 264 organization, 68–70 rarity, 66 strategic alliances and networks, 172–175 surrogacy, 369 value, 66, 172–173

W

WannaCry (ransomware attack), 411 Washington Consensus, 302 Weak ties, 123 The Wealth of Nations (Smith), 35, 198 Wholly owned subsidiary (WOS), 156–157 Wi-Fi, 380 Wolf wars, 424–425 World War I, 7 Worldwide mandate, 258 WOS (wholly owned subsidiary), 156–157 WWF, 393

Y

Yield management, 244

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.