What Are the Relationships among the Tripod of International Business Strategy - Essay Example

STRATEGY TRIPOD ………………………….. College ……………………………… ……………….. Introduction Strategy is one of the mostly debated buzzwords in the contemporary business literatures. Strategy is a specific pattern of decisions that define and determine the organizational objectives and provide certain structures to achieve these goals (Mintzberg, Lampel and Quinn, 2003, p. 72). When it comes to global business, strategy is perceived in two dynamics, 1- strategy as action, and 2) strategy tripod. The ‘strategy as action’ perspective suggests that the essence of strategy is interaction because actions and reactions such as ‘competing aggressively’, ‘price war’, ‘attack’, ‘counterattacks’ etc lead to competitive advantage (Peng and Gokalp, 2011, p. 250). The ‘strategy tripod’ model sheds light on global competitive dynamic based on the major three perspectives, namely industry-based, resource-based and institution-based views. The Strategy Tripod The fundamental objective of the competitive strategy of a company is to gain sustainable competitive advantage in the industry. There has been a great amount of academic debates during recent years concerning competitive strategies to explain ‘why do firms succeed and often fail’. There are different approaches concerning competitive strategy such as SWOT, Porter’s five force etc. The strategy tripod is another approach to explain competitive strategy that states that a company’s competitive strategy derives from three main sources: the pressure of the industry the company operates in, the impact of the institutions that a company is surrounded by and the resources that a company possesses (Wallner, 2012, p. 12- 13). Peng (2008, p.14) identified the very fundamental four questions in strategy. They are: 1) ‘why do firms differ’? 2) ‘How do firms behave’? 3) ‘What are the main determinants of the scope of a firms’? 4) What are the main determinants of a firm’s success or failure? He elucidated the concept of ‘strategy tripod’ to answer ‘how do firms behave’. According to him, strategy tripod is a framework that states that a competitive strategy as a discipline has three ‘legs’, that are the basic three perspectives; industry-based, resource-based and institution-based views of a firm. Three leading strategy perspectives, namely industry-based view, institution-based view and resource-based view of the firm collectively lead to a strategy tripod. The industry-based view highlights the five-forces affecting an industry and explains that the strategic effort is meant to examine the five competitive forces namely competitive rivalry, threat of entry, threat of substitutes, bargaining power of suppliers and bargaining power of customers. The resource-based view concentrates on strengths and weaknesses internal to a firm, whereas the industry-based view focuses on the opportunities and threats that are external to a firm. Industry-based view thus concentrates on the O and T whereas the resource-based view concentrates on the S and W in the SWOT (Peng, 2008, p. 14). The institution-based view suggests that a firm and its competitive strategy conditions are influenced by the institutions that the firm is surrounded by. The three ‘legs’ of strategy tripod are explained in detail below: Industry-based view The industry-based view, which is pioneered by Michel Porter in early years of 1980s, emphasized that the primary principle of competitive strategy formulation is the relationship that a firm builds with its environment. External factors are the major determinants of a firm’s competitive strategy because these factors not only affect firm’s performance but also its way to achieving competitive advantage (Gao, Murray and Kotabe, 2010). Firms are largely depending on various external industry forces such as threats of substitutes and new entrants, bargaining power of buyers and suppliers and competition rivalry among the major counterparts. Industry factors play critical role in determining and controlling a firm’s strategic behavior and therefore firms are attempting to develop and implement competitive strategies so as to adjust their position in the industry. One of the most widely used strategy-analysis tool is Porter’s five-force framework. It analyzes a particular industry’s attractiveness according to the five significant factors in relation to how each of them impacts the competitive position of the firm. The five-force analysis model is developed from the perspective of an incumbent organization meaning that the organization is operating in a specific industry. Each different firm in an industry is unique, but the forces in the industry affecting firm’s operation and performance will be common to all different firms (Henry, 2008, p. 69). The five-force framework developed by Michael Porter can be used to analyze, assess and evaluate the general industry-related factors and thus to measure the competitive position of a firm in its industry. Peng (2008, p. 54) argued that industry-based view of the firm gives answer to the four fundamental questions related to competitive strategy. This industry based view; more specifically the five-force framework suggests that the five-forces in different industries lead to diversity among firms. This answers the question- ‘why do firms differ’? The five-forces are also critical determinants of business opportunities and threats and therefore firms are attempting to maximize opportunities and minimize threats presented by these five forces. This framework thus answers the question- ‘How do firms behave’? The third question related to competitive strategy is –‘What determines the scope of the firm’? There are arguable varied and significant factors that determine the scope of a firm in its industry. As far as the five-forces related to the industry-based view are concerned, bargaining power of suppliers as well as customers is a critical determinant of the scope of the firm. For the last question- ‘What determines the success and failures of firms around the globe’?, the answer is that the industry-specific conditions play very pivotal role in determining the performance of firms around the globe ( Peng, 2008, 55). Resource-Based view The resource-based view suggests that differences in firms’ performance level are driven by differences in their resources and capabilities (Peng, 2010, p. 96). This view focuses on the internal resources and capabilities, generally termed as strengths and weaknesses represented by the S and W of SWOT. The resource-based view revolves around the norm that a company’s performance is influenced by its resources that are considered to be something that are fixed, something that cannot be altered easily for short-run such as capital assets and physical plants (Flouris and Oswald, 2006, p. 89). Profitability and performance differs from firm to firm rather than from industry to industry. Many researchers are literatures have explained that firms’ performance are largely influenced by their capacities, resources, core competencies, operational efficiencies, technology, people and processes. The internal strengths and weaknesses comprise of a large numbers of factors such as people, process, technology, materials etc. More specifically, a firm that is highly competent in resources and is rich with highly efficient human capital can easily achieve competitive advantage than those firms that don’t have. A firm’s resources can be categorized basically in to three, 1- physical capital resources, 2- human capital resources, and 3- organizational capital resources. Resources can still be either tangible or intangible. For instance, human capital in terms of their physical presence is tangible, whereas their skills, knowledge, wisdom, experience, information etc are intangible resources. Some firms implement effective ‘knowledge management’ as a corporate business strategy to enhance employees’ performance and thus to achieve sustainable competitive advantage whereas some other firms try to increase the numbers of employees in the firm with a view to increase in the general performance of the firm. Tangible resources are financial, physical, technological and organizational resources and intangible resources are human, innovation and reputational-related resources. Examples of tangible and intangible resources are detailed below: Financial: Generating internal funds & raising external capital Physical: Location of plants and equipments, & availability of raw-materials Technological: Patent, trademark, copyright, information technology advancements etc Organizational: Planning and control system, Human Skills, Knowledge, Experience, Talent, leadership skill, etc, Organizational culture and structure Innovation R&D capabilities, innovation and change Reputational People’s perception about products quality and durability, Reputation as socially responsible firm, etc The resource-based view of the firm articulates that firms in a particular industry vary significantly and systematically in performance overtime mainly because their tangible and intangible resource represent the ultimate sources of competitive advantage. Resources are distributed among various firms heterogeneously. In order to achieve sustainable competitive advantage, firms are attempting to improve their accumulated resource endowments and to enhance further advances in their accumulated knowledge and skills. Thus, the resource-based view of the firm stresses that that firms with superior or advanced systems and structures show better performance than others (Gao, Murray and Kotabe, 2010). Institution-Based view The institution-based view of the global business strategy focuses on the dynamic interaction between institutions and firms and considers firm’s specific behaviors as the outcome of such interaction (Peng, 2010, p. 37). According to this view, the basic four questions concerning competitive strategy such as ‘why do firms differ, how do firms behave and what are the determinants of their success or failure’ etc can be answered on the ground that it is the institutions the firms are surrounded by (Wallner, 2012, p. 14). A company is operating in an institutional framework and therefore its competitive strategy is largely influenced by the institutions the firms are surrounded by. It is very evident that company managers and leaders keep on looking at the business environment and other critical factors such as competition, technology, strategies and capabilities of other institutions in order to combat and adjust with the changes that influence the firms. How other firms play in the market is always a critical element that managers have to consider while strategizing and developing business ideas. Peng (2010, p. 37) developed two propositions to explain how institutions matter. The first core proposition is that managers and firms think rationally to pursue their interests and accordingly make choices within the institutional constraints. The second proposition is that firms and their behavior are also influenced by the informal constraints in reducing uncertainty when formal constraints are unclear. Institutions are commonly regarded as ‘rules of the game’ because institutions are defined as the ‘humanly devised constraints that bring forms of human interactions’. Institutions are regulative, normative and cognitive forms of activities that provide stability and meanings to social behavior (Peng, Sun and Pinkham, 2009, p. 64). All these explanations about institutions make it clear that institutions largely impact the behavior and structural factors of various firms in a particular industry. Evaluative Conclusion The strategy tripod framework states that competitive strategy has three elements; they are industry-based, resource-based and institution-based views. Industry based view suggests that a firm is largely influenced by the major five industry-related forces, namely potential entrants, threat of substitutes, bargaining power of buyers and suppliers and competitive rivalry among the market players. Resource-based view suggests that a firm’s competitive strategy is influenced by the internal resources and capabilities of the firm. The institution-based view suggests that a firm’s competitive strategy is driven by the institutions that the firm is surrounded by. The major relations among the three legs of the strategy tripod are summarized below: All the three legs of the strategy tripod explain how firms in a particular industry achieve competitive strategy. Industry-based view states that firms achieve competitive advantage by combating the five-forces, whereas resource-based view suggests that competitive can be achieved by enhancing internal resources and capabilities. The institution-based view says that it can be achieved when the manager or firms adjust the environment according to institutions. All the three views lead to performance and thus to achieving competitive edge. Resource-based view is concerned about the S and W, whereas the institution-based view is concerned about the O and T of the SWOT. References Flouris, T.G and Oswald, S.L., 2006, Designing And Executing Strategy in Aviation Management, Ashgate Publishing, Ltd Gao, G. Y., Murray, J.Y and Kotabe, M., 2010, A "strategy tripod" perspective on export behaviors: Evidence from domestic and foreign firms based in an emerging economy, ProQuest, EBSCO database Henry, A., 2008, Understanding Strategic Management, Oxford University Press Mintzberg, H, Lampel, J & Quinn, J.B., 2003, The Strategy Process: Concepts, Contexts, Cases, Global Fourth Edition, Prentice Hall, Pearson Education, Inc Peng, M.W., 2008, Global Strategy, Second edition, Cengage Learning Peng, M.W., 2010, Global Business, Second edition, Cengage Learning Peng, M.W and Gokalp, O. N., 2011, Managing global competitive dynamics, In Keillor and Kannan, ed. International Business in the 21st Century: Three Volumes, ABC, CLIO Peng, M.W., Sun, S.L and Pinkham, B., 2009, Institution-Based View as a Third Leg for a Strategy Tripod, Academy of Management Perspectives, EBSCO database Wallner, B., 2012, Competitive Strategies of Foreign Original Equipment Manufacturers in the Indian Passenger Car Industry: An Analysis of Competitive Advantage in the Small to Mid-Size Segment, GRIN Verlag Read More