Tripod Peng, Wang and Jiang (2008) Argue

Tripod

Peng, Wang and Jiang (2008) argue the case that the institution-based view of international business strategy is the third leg of a strategy tripod that also includes the industry- and resource-based strategies. The authors believe that, in combination with those other views, that the institution-based view will "shed significant light on the most fundamental questions confronting international business."

The authors argue that the institution-based view makes up for gaps in the other two views. The industry-based view, for example, argues that the industry conditions are largely responsible for the success of industries. This view is based on Michael Porter's competitive forces that shape the attractiveness of an industry and therefore determine how firms compete (Porter, 2008). The resource-based view argues that strategy is largely determined by the organization's internal capabilities. Mahoney and Pandian (1992) notes that firm's distinctive competencies and heterogeneous capabilities are the key resources that drive successful strategy. Richard (2000) makes the further point that racial diversity is another key resource that can contribute to success. In particular diversity can contribute to the ability of a firm to compete in international markets where cultural differences can be a significant barrier.

Peng, who is involved in most studies about the institution-based view, positions this view not as a contrast to the resource and industry-based views but as a complement. At the heart of his case is that those views do not reflect "the formal and informal underpinning that provides the context of competition among industries." An underlying premise of his work is that the strategies firms use in different countries differ (Peng, 2009). This is not always the case -- Apple is among the firms that does not change its strategy from one country to the next -- but is the case in other instances. Coca-Cola owns its bottlers in China, for example, but not in the United States. Google's approach to China has been forced by government intervention to be drastically different than its approach to other nations.

Government is one of the institutions that can exert a significant influence. Other formal institutions include laws, regulations and rules; informal institutions include norms, cultures and ethics (Peng, Sun, Pinkham & Chen, 2009). These aspects of international business will be familiar to anybody who is studying the subject, or who takes part in international business on a daily basis. Some adjustments are tactical in nature, but others can be significantly different in terms of functional strategies. The Coca-Cola example shows how firms vary their degree of vertical and horizontal integration in different markets. In other cases, product positioning can vary, for example the way that Budweiser is positioned as an everyday value product in the United States but has a high-end premium product in many other countries around the world.

Peng's view is that the institution-based theory works as a complement to the other two -- the tripod analogy. Firms take all of the different factors into account when forming their international strategies. This is view is an accurate reflection of the way that business is conducted -- businesses take into account the different variables in their internal and external environments when setting their strategy. Even in a situation where a company has the same strategy in every country, that decision is usually a reflection of the fact that its resources, its industry and the local institutional conditions allow it to take that approach.

Peng builds his case with a discussion of emerging markets. The "profound differences between institutional frameworks between emerging economies and developed economies force scholars to pay more attention to these differences" (p.923). In earlier international business strategy literature, the resource and industry-based views were prominent because they were extensions of how strategy was conceptualized by firms operating primarily in Western markets.

The case made is effective. In a highly globalized world, business does not leave stones unturned when formulating strategy. The anecdotal evidence from multinational companies around the world is clear -- institutions matter. The other views are not invalidated by any means -- as noted they are complementary to the institution-based view. Companies take all of the different factors into account. Firms operating around the world might use their resources to shape the nature of competition, but in many larger, more powerful markets this is simply not the case. Even multinational companies have little leverage to manage the formal institutions in large markets. The informal institutions are even more difficult to imagine. A move towards a global business and consumer cultures is not the same thing as actually having them. Until there is just one business and consumer culture worldwide, firms will always need to take these factors into account. As Peng accurately describes, it is in this way that the institutions provide the framework for competition, which is then based on both the firm's internal resources and the external industry conditions. The case is well-argued, and there is considerable support in the business world for Peng's argument.