Managerial Challenges

MPM703 Business Strategy & Analysis
Week 4
Managerial Challenges:
How do you, as a manager, describe the institutional environment of
firms such that you can identify the imminent opportunities and
threats that require strategic focus and action?
How do you, as a manager, explain the impact of business risks to the
firm’s competitive advantage and sustainable performance?
1
Outline
Understanding institutions
An institution-based view of strategy
The strategic role of cultures
Business risks in the knowledge economy
Implications for strategists
2
Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
3
GLO7: Teamwork
The Strategy Tripod: Three Views of Strategic Choices of Firms
4
INDUSTRY FORCES
INSTITUTIONAL
FORCES

ORGANISATIONAL
CAPABILITIES

STRATEGIES
OF FIRMS
PERFORMANCE
OUTCOMES
Our
main
focus
today!

Institutional theory
The strategic choices of a firm
are largely determined by the
constraints and incentives
emanating from its formal and
informal institutional
environment.
Institutions are ‘humanly
devised constraints that
structure human interaction”
environment’ (Douglass North)
5
Formal Institutions
(formal and written rules of a society,
community, country)
Examples: government policies, laws,
ordinances, regulations
Informal Institutions
(informal, not formally codified rules and
constraints in a society, community, country)
Examples: culture, norms, values, beliefs
The
strategic
choices
of firms

etermined
nfluenced
onstrained
allowed
prohibited
limited
supported

Both Formal
and
Informal
Institutions
are embedded
in a firm’s
P.E.S.T.E.L.
environment

4–6
Formal
institutions
Example:
– Government support for innovation, R&D (e.g. incentives)
– Regulatory burden (tax and compliance to business laws)
– Protection of property rights
– Free trade agreements with other countries
– Tariff and non-tariff barriers: limits on amount of imports, setting up complex
procedures, customs and admin procedures, discriminating standards
(quarantine), government fees)
Informal
institutions
Example:
– code of conduct within an industry to promote healthy competition
– Inter-firm relationship building & collaboration (e.g. guanxi in China) to access
resources
– managerial ties and networks
– Social norms/mores – feasibility and desirability of new business, product, service

Importance of Institutions
Key Functions of Institutions:
Reduce uncertainty and risk (e.g. political risk)
Set the written and unwritten (codified and tacit) ‘rules of the game’
How Do Institutions Reduce Uncertainty?
Governed
mostly by
formal
institutions
Governed
mostly by
informal
institutions
7
An Institution-Based View of Strategy
There is a need to discuss the relationship between strategic choices and
institutional frameworks
Strategic choices are selected within and constrained by institutional frameworks
in developed economies
Striking differences between institutions in developed and emerging economies
has pushed the institution-based view to the forefront
Strategic choices are direct outcomes of the dynamic interaction between
institutions and firms
8
Interplay of Institutions and Firm Strategies
9
INSTITUTIONS FIRM STRATEGIES
Institutional Influences:
Adapt
Appeal
Avoid
Institutional strategies:
Inform
Influence
Incentivise
Institutional spillovers
Compete
Command
Copy
Adapted from
Cuervo-Cazurra
et al, 2019

Institutions shape or
influence firm strategies by:
10
a. Adapting: Firms adapt to institutions and follow the
requirements of the prevailing institutional regime where
they do business; obeying the laws and policies and practices
set by the government or observed by the
community/society; gain legitimacy
b. Appealing: Firms seek understanding of government
objectives with regards to laws and policies and find some
flexibilities in their implementation; appeal to government
authorities for modification in application of laws and
regulations (e.g. lobbying; negotiating with govt)
c. Avoiding: avoid engaging in business activities that require
government engagement; avoid setting up a business in a
country or location; get-around tactics to avoid government
attention or intervention

Institutions are shaped or influenced
by firm strategies through:
11
a. Informing: Firms work closely with government and
provide them with information about regulations and
policies that lead to desired outcomes; ‘helping’
politicians make informed decisions about business
policies and laws (e.g. through business chambers,
advisory councils, etc.)
b. Influence: Informal mechanisms to influence politicians
by using social capital, personal ties, advertising
campaigns, supporting grassroots efforts to put
pressure on government
c. Incentivise: firms can use financial incentives to shape
regulations by financing politicians (i.e. election)

Institutional spillovers are indirect mechanisms that
enable firms to further influence their institutional
environment
12
a. Competing: Through competition, firms with
perceivably superior institutional practices may lead to
the demise of companies with inferior institutional
practices. Over time, only companies that have
superior institutional practices remain, and such
institutional practices become the norms of operation
in the country
b. Commanding: Firms may command or require their
business partners (in the value chain) to adopt to
certain institutional practices (e.g. no to child labour)
c. Copying: firms copy or adopt voluntarily some
institutional practices of other companies due to
perceived benefits (e.g. pollution prevention to respond
to climate change)

Enabling and constraining institutions:
Duran et al 2017 model
13

Formal Institutions Informal Institutions
Constraining Role Government policies, laws and
regulations that restrict or prohibit
business activities or practices
e.g. anti-competitive practices; unfair
consumer practices; illegal activities;
exorbitant tariff and non-tariff
fees/duties and taxes; political
instability; judicial inefficiency; poor
protection of property rights;
Social norms or practices that do not support
certain activities, businesses, products or services
e.g. non-halal products cannot be marketed to
Muslim consumers; tampons as taboo in some
countries; expectations from business or trade
associations; prevalence of criminal activities;
patronage politics/political favouritism
Enabling Role Government policies and incentives
to entice foreign investors
e.g. export processing zones, tax
incentives, R&D and Innovation
support systems, government grants
Social norms, cultural practices, community fads,
that are favourable for businesses (e.g. rising
consumer demand for fashionable consumer goods,
wide acceptance and increasing use of ICT –
businesses and consumers, globally conscious
societies or communities; acceptance of foreign
goods

Core Propositions
Managers and firms rationally pursue their interests and make choices
within the formal and informal constraints in a given institutional framework.
Both formal and informal institutions present to a firm a range of
opportunities (i.e. business enhancers/support) and/or threats (i.e.
Pressures or constraints)
Formal and informal constraints have confounding impact in ‘controlling’
business conduct
When formal institutions are absent or unclear (i.e. institutional voids),
players rely on informal institutions to address business risks and
uncertainties
14
A key informal institution: A society’s culture
‘Culture … is that complex whole which includes knowledge, belief, art, morals, law, custom, and
any other capabilities and habits acquired by man as a member of society.’
Tyler (British anthropologist) 1870: 1; cited by Avruch 1998: 6
‘Culture consists of the derivatives of experience, more or less organized, learned or created by the
individuals of a population, including those images or encodements and their interpretations
(meanings) transmitted from past generations, from contemporaries, or formed by individuals
themselves.’
T.Schwartz 1992; cited by Avruch 1998: 17
‘Culture is the collective programming of the mind which distinguishes the members of one group
or category of people from another.’
Hofstede 1994: 5
15
The Six Dimensions of Culture: Hofstede’s Model
Power Distance
degree to which the less powerful members of a society
accept and expect that power is distributed unequally
beliefs about the appropriate distribution of power in
society.
fundamental issue is how a society handles inequalities
among people
people in societies exhibiting a large degree of Power
Distance accept a hierarchical order in which everybody has
a place and which needs no further justification.
In societies with low Power Distance, people strive to
equalise the distribution of power and demand justification
for inequalities of power.
China and Saudi Arabia are countries with a high Power
Distance index.
United States is an example of a country with low power
distance
16
The Six Five Dimensions of Culture
Individualism vs. Collectivism: the relative
importance of individual versus group interests
Individualism
Ties between individuals are loose
Individual achievement and freedom highly valued
Collectivism
Ties between individuals are strong
Collective accomplishments highly valued
Masculinity versus femininity
Degree of sex role differentiation
Men – occupations that reward assertiveness
Women – caring professions
17
18
19
20
The Six Dimensions of Culture
Uncertainty avoidance:
expresses the degree to which the members of a society feel
uncomfortable with uncertainty and ambiguity.
fundamental issue here is how a society deals with the fact
that the future can never be known: should we try to control
the future or just let it happen?
High uncertainty avoidance: maintain rigid codes of belief and
behaviour and are intolerant of unorthodox behaviour and
ideas
Low Uncertainty Avoidance: maintain a more relaxed attitude
in which practice counts more than principles, tolerance for
ambiguity is accepted and the need for rules to constrain
uncertainty is minimal
21
The Six Dimensions of Culture
Time Orientation
In a long-time-oriented culture, the basic notion about the world is that
it is in flux, and
preparing for the future is always needed; take a more
pragmatic approach: they are future oriented and encourage thrift and
efforts in modern education as a way to prepare for the future.
In a short-time-oriented culture, the world is essentially as it was
created, so
that the past provides a moral compass, and adhering to it
is morally good
; prefer to maintain time-honoured traditions and
norms while viewing societal change with suspicion; they are past and
present oriented and value traditions and social obligations.
Indulgence
this is the newest addition to the Hofstede model
the extent to which people try to control their desires and impulses, based on the
way they were raised.
relatively weak control is called Indulgence
relatively strong control is called Restraint
Cultures: Indulgent or Restrained
Indulgence stands for a society that allows relatively free gratification of basic
and natural human drives related to enjoying life and having fun.
Restraint stands for a society that suppresses gratification of needs and regulates
it by means of strict social norms.
22
Formal and Informal Institutions and
International Business Risks
Formal and informal institutions shape and define the nature and type of
risks in doing business in countries other than one’s own
International
Business (IB)
Risks
Formal Institutions
(e.g. government
laws, policies, legal
& political system
etc)
Informal Institutions
(e.g. culture, norms,
codes of conduct,
values, sociallyaccepted behaviour,
etc.)
IB Risk: the unpredictability of various
environmental variables that impact on the
achievement of goals of a firm as it ventures in
international markets (Miller 1992)
23
Major Types of Risks in International Business
Adapted from Cavusgil et al (2014): International Business: The
New Realities; 3
rd Edition 6–24
Risks in
International
Business
CrossCultural
Risks
Country
(Political) Risks
Ecological &
Environmental
Risks
Currency
(Financial)
Risks
Commercial
Risks
Cybersecurity
Risks

Major Types of Risks in International Business
Adapted from Cavusgil et al (2014): International Business: The
New Realities; 3
rd Edition
Risks in
International
Business
CrossCultural Risks
Country
(Political) Risks
Ecological &
Environmental
Risks
Currency
(Financial)
Risks
Cybersecurity
Risks
Commercial
Uncertainties
• Cultural differences
• Negotiation patterns
• Decision-making style
• Ethical practices
25
Major Types of Risks in International Business
Adapted from Cavusgil et al (2014): International Business: The
New Realities; 3
rd Edition
Risks in
International
Business
Cross-Cultural
Risks
Country
(Political) Risks
Ecological &
Environmental
Risks
Currency
(Financial)
Risks
Commercial
Risks
Cybersecurity
Risks
• Cultural differences
• Negotiation patterns
• Decision-making style
• Ethical practices
• Harmful or unstable political
system
• Laws and regulations
unfavourable to foreign firms
• Inadequate or underdeveloped
legal system
• Bureaucracy and red tape
• Government intervention,
protectionism and barriers to
trade and investment
• Mismanagement or failure of
the national/regional/local
economy
26
Characteristics of Political Risks (Daniels 2016)
27
Managing Political Risks (Daniels 2016)
Be a good corporate citizen (example: participate in development
projects, literacy etc.)
Expand power bases through business relationships (example: joint
venture, licensing, political payoffs etc.)
Study government attitude and participate government incentive
programs
Maintain good relationship with political allies, other embassies in the
country
28
Country Risks: Lack or Weak Protection of
Intellectual Property Rights
Intellectual property: the creative ideas, innovative expertise, and intangible insight that gives an
individual, company, or country a competitive advantage
Intellectual property rights (IPRs): refers to rights of the registered owner of the particular
invention, literary or artistic work, symbol, name, image, or design
World Intellectual Property Organization (WIPO): a United Nations agency established in 1907,
administers agreements
A country’s view of IPRs is influenced by:
Level of economic development
National cultural attitudes
Social and economic institutions
29
30
Major Types of Risks in International Business
Adapted from Cavusgil et al (2014): International Business: The
New Realities; 3
rd Edition
Risks in
International
Business
CrossCultural Risks
Country
(Political) Risks
Ecological &
Environmental
Risks
Currency
(Financial)
Risks
Commercial
Risks
Cybersecurity
Risks
• Cultural differences
• Negotiation patterns
• Decision-making style
• Ethical practices
• Harmful or unstable political
system
• Laws and regulations
unfavourable to foreign firms
• Inadequate or underdeveloped
legal system
• Bureaucracy and red tape
• Government intervention,
protectionism and barriers to
trade and investment
• Mismanagement or failure of
the national/regional/local
economy
• Currency
exposure/fluctuations
• Asset valuation
• Foreign taxation
• Inflation
31
Major Types of Risks in International Business
Adapted from Cavusgil et al (2014): International Business: The
New Realities; 3
rd Edition
Risks
in
International
Business
Cross-Cultural
Risks
Country
(Political) Risks
Ecological &
Environmental
Risks
Currency
(Financial)
Risks
Commercial
Risks
Cybersecurity
Risks
• Cultural differences
• Negotiation patterns
• Decision-making style
• Ethical practices
• Harmful or unstable political
system
• Laws and regulations
unfavourable to foreign firms
• Inadequate or underdeveloped
legal system
• Bureaucracy and red tape
• Government intervention,
protectionism and barriers to
trade and investment
• Mismanagement or failure of
the national/regional/local
economy
• Currency
exposure/fluctuations
• Asset valuation
• Foreign taxation
• Inflation
• Weak local partners
• The Five Forces (in
Porter’s Industry
model)
32
Major Types of Risks in International Business
Adapted from Cavusgil et al (2014): International Business: The
New Realities; 3
rd Edition
Risks in
International
Business
Cross-Cultural
Risks
Country
(Political) Risks
Ecological &
Environmental
Risks
Currency
(Financial)
Risks
Commercial
Risks
Cybersecurity
Risks
• Cultural differences
• Negotiation patterns
• Decision-making style
• Ethical practices
• Harmful or unstable political
system
• Laws and regulations
unfavourable to foreign firms
• Inadequate or underdeveloped
legal system
• Bureaucracy and red tape
• Government intervention,
protectionism and barriers to
trade and investment
• Mismanagement or failure of
the national/regional/local
economy
• Currency
exposure/fluctuations
• Asset valuation
• Foreign taxation
• Inflation
• Weak local partners
• The Five Forces (in
Porter’s Industry
model)
• Natural and man-made
disasters/catastrophes
• Environmental issues
33
Major Types of Risks in International Business
Adapted from Cavusgil et al (2014): International Business: The
New Realities; 3
rd Edition
Risks in
International
Business
Cross-Cultural
Risks
Country
(Political) Risks
Ecological &
Environmental
Risks
Currency
(Financial)
Risks
Commercial
Risks
Cybersecurity
Risks
• Cultural differences
• Negotiation patterns
• Decision-making style
• Ethical practices
• Harmful or unstable political
system
• Laws and regulations
unfavourable to foreign firms
• Inadequate or underdeveloped
legal system
• Bureaucracy and red tape
• Government intervention,
protectionism and barriers to
trade and investment
• Mismanagement or failure of
the national/regional/local
economy
• Currency
exposure/fluctuations
• Asset valuation
• Foreign taxation
• Inflation
• Weak local partners
• The Five Forces (in
Porter’s Industry
model) • Natural and man-made
disasters/catastrophes
• Environmental issues
• Risks of breaches of
the integrity of
protection system –
information and digital
assets : compromise,
theft or loss
34
Cross-cultural risks
Cultural Differences – arising from differences in language, lifestyle,
attitudes, customs, and religion, where a cultural miscommunication
jeopardizes a culturally-valued mindset or behaviour.
Negotiation Patterns. Negotiations are required in many types of
business transactions. e.g., where Thais are friendly and
emphasize social relations, Americans are assertive
and get down to business quickly.
35
Cross-Cultural Risks
Decision-Making Styles. Managers make decisions continually on the
operations and future direction of the firm. For example, some
cultures may take considerable time to make important decisions
while others tend to be decisive and direct to the point.
Ethical Practices. Standards of right and wrong vary considerably
around the world. For example, bribery is may be acceptable in some
countries but is generally unacceptable in Sweden/New
Zealand/Singapore.
36
Country (Political) Risks
• Government intervention, protectionism, and barriers to trade
and investment.
• Bureaucracy, red tape, administrative delays, corruption
• Lack of legal safeguards for intellectual property rights
• Legislation unfavorable to foreign firms
• Economic failures and mismanagement
• Social and political unrest and instability
37
Country (Political) Risks
• Government intervention, protectionism, and barriers to trade
and investment.
• Bureaucracy, red tape, administrative delays, corruption
• Lack of legal safeguards for intellectual property rights
• Legislation unfavorable to foreign firms
• Economic failures and mismanagement
• Social and political unrest and instability
• Security issues such as terrorrism, anarchy, rebellion, etc.
38
Currency Risks (Financial Risks)
Currency exposure. General issue of unfavorable exchange rate
fluctuations.
Asset valuation. Fear that exchange rate fluctuations will
adversely affect the value of the firm’s assets and liabilities.
Foreign taxation. Income, sales, and other taxes vary widely
worldwide, with implications for company performance and profitability.
Inflation. High inflation, common to many countries, complicates
business planning, and the pricing of inputs and finished goods
39
Commercial Risks
General commercial uncertainties such as these lead to suboptimal formulation and implementation of the firm’s international
value-chain activities.
• Five Forces:
• Unfair competitive behaviours of current players
• High bargaining power of buyers/suppliers
• Presence of substitutes
• High barriers to entry
• Difficulty in finding reliable local partners (e.g. suppliers,
distributors, etc.)
40
Environmental or Ecological Risks
Closely-related to country uncertainties but:
Vulnerability of a country to climate change
Environmental disasters
Natural: typhoons, flood, hurricanes, earthquake, etc.
Man-made: e.g. collapse of poorly-built building/factory/infrastructure
e.g. Rana Plaza in Bangladesh; Chernobyl nuclear disaster
Effects:
Impact on local operations: safety and security of facilities and human resource
Impact on value chain: e.g. suppliers of raw materials, logistics
Corporate social and environmental responsibility of foreign firms
41
Cybersecurity Risks
The unique risks individuals and businesses face as a result of using
interconnected technological systems
Cyber security is both a technology and a business issue
Cybersecurity specifically refers to the protection of digital information
transmitted over networks, computers or other systems
$5.85 Million – average cost suffered by firms for data breach (mitigation, fines,
litigation, business disruption and lost productivity)
Risks from attacks using malware, ransomware, insider sabotage or insider
attack/data breaches, phishing, among others
42
Cybersecurity Risks
What You Need to Know: Who poses a threat to cybersecurity?
Scammers and thieves seeking information and planning advanced persistent threats (APTs), which are
sophisticated, well-resourced attacks, usually backed by political or financial motivation
Individual hackers or hacker collectives seeking fame, profit or publicity for activist agenda
State-sponsored criminals who want to disrupt operations, create an atmosphere of fear and uncertainty or
steal sensitive information for profit or espionage
Disgruntled employees, contractors and other insiders who aim to leak, steal or sell classified information
Employees that inadvertently aid cyber thieves by falling for scams
Organisations practicing poor security management, leading to non-malicious attacks or data leakage
(Governing Institute, 2019)
43
Cybersecurity Risks
Cyber security is a big problem for small business, too!
Small business is the target of 43% of all cybercrimes
22% of small businesses that were breached by the 2017 Ransomware attacks
were so affected they could not continue operating
33% of businesses with fewer than 100 employees don’t take proactive measures
against cyber security breaches
87% of small businesses believe their business is safe from cyberattacks because
they use antivirus software alone
Cybercrime costs the Australian economy more than $1 billion annually
(Australian Small Business and Family Enterprise Ombudsman 2019)
44
Summary
The role of institutions in shaping a firm’s strategic choices
Institutional theory
Formal and informal institutions
Mechanisms of dynamic interplay between institutions and firm
strategies
Culture as a key informal institution in a given society or country
Hofstede’s Cultural Framework
Institutions may pose significant RISKS in international business
45
Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
46
GLO7: Team work