Issues In International Business Management
The tripod of international business strategy is a framework that suggests that strategy as a discipline has three key perspectives: industry-, resource- and institution- based views. Each focus on different perspectives, yet they are interrelated. In fact, a comprehensive strategy will consider the three views, instead of one. The industry-based view primarily focused on the external opportunities and threats, whereas the resource-based view concentrates on the internal strength and weaknesses (Peng, 2009). On the other hand, Peng et al (2009b) proposed that the institutional view of international business strategy can be positioned as a leg to sustain the strategy tripod and clarified context that both industry- and resource- based views did not pay attention to. This essay proposes the relationship of the strategy tripod is complementary and will be illustrated by multiple cases. It will show how they are related and combined to explain the international business strategy in reality.
The industry-based view, or the structure-conduct-performance paradigm, concentrates on the ‘opportunities’ and ‘threats’ in the SWOT analysis. It claims to a large extent, firms’ performances rely on the conditions within the industry. In other words, the external factors determine the firm’s strategy, which in turn affects its performance (Scherer & Ross, 1990). Hence, firms construct and apply competitive strategies so as to alter their positions in the industry vis-à-vis competitors and suppliers. In fact, it mainly focused on using Porter’s Five Forces Model and inter-firm rivalry to explain firms’ strategy. Porter’s model (1980) stated there are five forces (threat of the new competition, threat of the substitute products or services, bargaining power of customers, bargaining power of suppliers and intensity of competitive rivalry) to analyse market and construct strategy accordingly. It suggests three generic strategies: cost leadership, differentiation and focus. Apple would be used as an example. Its products are high-tech electronics products, such as iPhone and iPad. It faced little threat from new entrants as it requires a huge amount of capital to enter the high-tech electronics industry. However, the suppliers have considerable bargaining power and there are substitutes like Samsung Smartphones available to customers. The buyers have medium bargaining power as Apple’s products are not necessities for daily life and they can compare products easily on web. Therefore, Apple focused on a niche market and built a supreme image to differentiate its products. Thus, the industry-based view can explain the firms’ strategy in real life.
However, Mintzberg et al (2003) stated such analysis could be applicable to more than one firms, yet in reality, different firms would need tailor-made strategy to succeed. Barney (1991) also suggested it ignored possible competitors’ advantages of the idiosyncratic firms have in competition. Indeed, the industry condition of the above can be applicable to Microsoft as well. It cannot indicate any firm-specific differences, for instance, Microsoft held a significant amount of market share and Apple will need a comprehensive marketing strategy to attract customers to buy their products instead. Certain institutional conditions could limit the strategic choice of the firms. For example, in Japan, price competition is forbidden while price fixing is possible. Hence, a cost leadership strategy becomes illegal (Stevenson, 2009). On the whole, the industry-based view emphases the external impact on strategy development but ignored other factors such as internal resources and institutions.
In contrast, the resource based view (RBV) focuses on the ‘Strength’ and ‘Weakness’ in the SWOT analysis. It considers the resources and capabilities of firms as the root of its strategy. The competitive advantage is achieved and sustained by the possession of certain key resources, which can, for example, create value or barriers to new entrants, rather than the correct position in the external environment (Barney et al., 2001). RBV stresses the firms should position themselves strategically by firms’ specific resources and capabilities. Therefore, this view considers firm-specific differences to drive strategy and performance. As the resources and capabilities of firms are heterogeneous, it clarifies the variations of firms’ strategies within the same industry. It can reflect valuable resources that the industry based view ignored, such as production experience, technology and brand names. For example, the production experience of H&M helped the corporation to discover their targeted customers in the international market and continue to gain success. The Walt Disney Company holds a unique set of own cartoon character franchise that allows Disney to enter a range of businesses, from soft toys to movies to theme parks. Organisational capabilities can also become organisations’ competitive advantages. Japanese automobile industry, for instance, enhance its skills over time. It worked as low-cost, lean manufacturing; next in high-quality production; and then in fast product development. It shows that companies can build up its capabilities and transform inputs into superior products, so the firm can then differentiate its products and gain success in markets (Collis & Montgomery, 2008). Therefore, the resource-based can assist in analysing the companies’ strategy.
Nonetheless, it lacks a tight definition on ‘key resources’ and explanatory power (Barney et al, 2001). It has been criticized its ‘little effort to establish appropriate context’ (Priem & Butler, 2001, p. 32). In fact, many proposed (Brouthers et al., 2008; Oliver, 1997) valuable, rare, and hard-to-imitate resources and capabilities in one context can turn to non-valuable, plentiful, and easy to imitate in other contexts. Barney et al (2001) also noted such weakness and claimed many failed to develop a more complete theory of firms’ advantages. For example, Dell’s capabilities in “build-to-order manufacturing” of PCs reduced storage cost and maximise cash flow in the past. However, the market demand had changed and such capability was no longer a competitive advantage. Eventually, Dell had to outsource the manufacturing process of PCs and sell its computer factories (Scheck, 2008). As a result, the resources-based view analyses the internal strength and weaknesses that the industry-based view ignored. The two views can be complementary to construct a competitive strategy in reality but they still remain insufficient to illustrate certain contexts. Consequently, it gave rise to a new theoretical framework- institution-based view (Peng et al, 2008) that can overcome the weaknesses.
The institutional-based view claimed other than the industry- and firm-level condition, the formal and informal ‘rules of the game’ can also influence the firms’ strategy and performance. Institutions mean ‘regulative, normative, and cognitive structures and activities that provide stability and meaning to social behaviour’ (Scott, 1995). The institution-based view focuses on the interaction between organisations and institutions, and considers firms’ strategy as an outcome of such an interaction (Peng et al., 2008). Both industry- and resource-based views assumed the institutions were market-based, as they were derived based on the patterns of developed countries. However, critics discovered institutional factors such as corruptions and culture could no longer treat as background as they had significant impact on corporates’ strategies, especially in the emerging economies (Peng et al, 2009a; Lau & Bruton, 2008). For example, in China, the networking, or Guangxi of the executives in company is regarded as a key factor of corporations’ successes. Inter-firm strategy relies on the managers’ networks and companies’ alliances to grow the enterprises (Peng & Luo, 2000; Ren, Au, & Birtch, 2009). Another example will be Japanese pharmaceutical firms. In Japan, there is no reward for new drugs invented (Mahlich, 2009) and their price will be fixed by the government for the perceived shelf life after negotiation. The oldest drugs are the most profitable if the price stays the same and the manufacturing cost decreases due to economies of scale, as found by Peng et al (2009b). Therefore, the Japanese pharmaceutical firms were no longer motivated to place large investment in R&D. On the contrary, western countries’ institutional environment has allowed pharmaceutical corporations to earn highest margin with the newest drug. It drives them to emphasise innovations and invest in the R&D section heavily. Therefore, the two examples clearly indicate that the institutional-based view is necessary to illustrate the rationality of the strategy corporations made.
Due to globalisation, the current market of the firms facing are more complicated and dynamic. Therefore, the three views can provide a more comprehensive analysis on the strategic choices of corporations. All the views, hence the industry conditions, firms’ capabilities and the formal and informal constraints of a specific institutional framework, help to shape enterprises’ strategy and performances.
Globalisation has allowed the corporations to face an international market and Peng (2009) proposed if firms want to enter foreign markets, the executives will need to make decisions regarding the location, timing and mode of entry. Underlying each decision is a set of strategic considerations drawn from the three leading perspectives discussed above. The industry-based view, for instance, can explain why firms need to enter foreign markets. Rivalry between firms drives them to match each other in foreign entries. For example, if Komatsu and FedEx enter a new country- such as Afghanistan, DHL and Caterpillar would probably be pressurised to follow. Also, if the bargaining power of supplier increases and so as the production cost, the firms may seek for backward integration overseas (Peng, 2009). On the other hand, the resource-based view illustrates the entry decisions. The value of firm-specific resources and capabilities are the keys behind the decisions to internationalise (Berry, 2006; Doukas & Kan, 2006). For example, patents ensure the rarity of certain products feature, like the cars from Ferrari. The patented and branded products are thus more likely to enter the international market. Also, firms may not want to enter foreign markets due to dissemination risks (Peng, 2009), defined as the risk associated with the unauthorised imitation and diffusion of firm-specific resources. For example, in Thailand, Pizza Hut’s franchise operator imitated Pizza Hut’s techniques and established the Pizza Company. It became a direct competitor and controlled 70% of the market share (Tasker, 2002). Regarding institution-based view, institutional factors, such as culture differences and regulatory risks, magnified in foreign entry decisions (Chan & Makino, 2007; Estrin & Meyer, 2004). For example, Boots struggled to enter the Japanese health and beauty market due to institutional barriers. It was hard for Boots to open stores as most of the Japanese landlords were suspicious of foreign companies. Moreover, Boots needed to reformulate more than 2000 of its products so as to get a Japanese license. Regulations also restricted Boots from bringing many of its products to Japan. Some of its marketing and sales strategies were proved to be useless in Japan, such as ‘Buy two, get one free campaign’, as the family size in Japan was small and they did not need to buy in bulk (Rahman, 2000). Overall, each perspective support a partial part of companies’ strategic decision and together they give a more all-inclusive view.
Although the views are complementary, one view can be more significant than the others to explain strategy according to certain circumstances. Recent research (Makino, Isobe, & Chan, 2004) has discovered in developed economies, firm-specific effects are more critical in explaining the variations in foreign subsidiary performance (supportive of the resource-based view), whereas in developing economies, country effects, which are equivalent to institutional differences, are more prominent (consistent to the institution-based view). For example, developed countries like US have strong and market-supporting legal system and regulations, so the institutional factors will not be dominant as they are no longer barriers. The internal resources and the industrial conditions determine the organisations’ strategies. In China, the corruptions in the government turn to be barrier for western corporations, thus they may need to alter their strategy like partnering with local companies to develop their businesses. Institutional factors become a major concern for corporations.
In conclusion, the industry-based, resource-based and institution-based perspectives represent different views of companies’ strategies. The industry-based view focus on the ‘O’ and ‘T’ while the resource-based view concentrates on the ‘S’ and ‘W’ in the SWOT analysis. The institution-based view further investigates firms’ SWOT by exploring the environment that firm faces. One view can be more paramount than the others depending on the situation that the firm faces. Still, a full explanation of international business strategy will consider all three views. As Peng (2009) concluded, ‘Overall, although different schools of thought often debate with each other, the true determinants of firm performance probably involve a combination of these three-pronged forces, thus calling for a strategy tripod perspective.’ They are not replacing each other, but linked and complementary to determine firms’ strategy.
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