Carla I. Koen. Comparative International Management
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Learning Objectives
By the end of this chapter you will be able to:
understand the concept of corporate strategy
appreciate the different types of corporate strategy that firms adopt
understand the different theories that are used to explain corporate strategies
evaluate the usefulness of these theories for explaining differences and
similarities in cross-national corporate strategies
critically assess the ability of institutional theory to explain comparative
corporate strategy
explain the variables that firms should ensure that they take into account when
they choose a corporate strategy
assess whether corporate strategies converge or diverge across regions.
Chapter
10
Multinational
Corporations:
Comparative
Corporate Strategy
ASWIN VAN OIJEN AND PATRICK VAN ROOY
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Chapter Outline
10.1 Introduction
10.2 Corporate Strategy
10.3 Theoretical Approaches to Corporate Strategy
Universalistic Explanations of Corporate Strategy
Particularistic Explanations of Corporate Strategy
10.4 Comparative Empirical Studies
Kogut, Walker and Anand
Mayer and Whittington
The car and steel industry
10.5 Model
Strategic planning
The model
Expectations
10.6 Conclusions
Study Questions
Further Reading
Case: Examples of Five Different Firms
References
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10.1 Introduction
Strategy occupies the minds, not only of managers, but also of other important stake-
holders of the firm, such as directors, shareholders and unions. The reason is that
strategic decisions are both influential and enduring. They have major consequences for
many stakeholders. Moreover, they commit a firm for a long period, because revocations
are difficult, costly or both.
The importance of strategy is reflected in the academic literature. Following the
seminal contributions from Ansoff (1965), Chandler (1962) and Rumelt (1974), strategy
has developed into one of the largest fields, if not the largest field, within management
research. It should come as no surprise, then, that strategy today is a rich field, encom-
passing a rather wide variety of more specific topics, such as entry modes (Chapter 9),
decision-making processes, implementation mechanisms and different types of strategy,
like functional strategy, business strategy, global strategy and corporate strategy.
In this chapter, we confine ourselves to corporate strategy. This type of strategy rep-
resents the highest level of firm strategy. Developments in corporate strategy are often
highly visible, making it to the headlines of newspapers (at least of their financial sec-
tions) every day. We examine whether and how corporate strategy is influenced by the
environment of the firm, and whether corporate strategy is characterized by convergence
or divergence across countries. More precisely, we try to answer whether there are differ-
ences or similarities between the corporate strategies adopted by firms in different
countries and whether they are becoming smaller or larger.
Before we answer these questions, for readers who do not have a background in
strategy, in the next section, we briefly explain the concept as well as the different types of
corporate strategy firms can adopt. Readers who are familiar with these topics can go
immediately to Section 10.3, which discusses several theories that can be used to explain
corporate strategy. Section 10.3 starts by addressing the widely used universalistic expla-
nations of corporate strategy. Next, it explains how the institutional approach can be
usefully applied to explaining differences in corporate strategy between countries.
The application of institutional theory to corporate strategy is relatively new and few
studies have applied it in their empirical analysis. Nevertheless, there are some interesting
studies of which we think students of international comparative management should be
aware. Hence, in Section 10.4, we present a summary of two larger-scale empirical
studies that compare corporate strategies across countries – the study by Kogut et al.
(2002) and research by Mayer and Whittington (1999, 2000). We add the results of our
own study on the car and the steel industry in the USA, Germany and Japan. The analysis
in these three studies is based on institutional theory. This provides us with a blunt illus-
tration of the limits of the approach for explaining cross-national differences and
similarities in corporate strategy.
In Section 10.5, we present a model that should help us to arrive at a more complete
understanding of cross-national corporate strategies. The model should also enable us to
predict the direction of change in corporate strategy across countries – in other words,
whether corporate strategies will converge or diverge across countries. The model incor-
porates factors from both the particularistic and universalistic theories. The last Section,
10.6, presents the conclusions to this chapter.
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10.2 Corporate Strategy
Different types of strategy can be distinguished: international strategy, corporate strategy,
business strategy and functional strategy. Each type of strategy answers a distinct ques-
tion. International strategy answers the question ‘In what geographic regions does a
company compete?’ For example, a company could limit its activities to its home country
or expand globally. Corporate strategy deals with the question ‘In what industries or busi-
nesses does a company compete?’ A company could be, for example, active in just one
industry or in many different industries. The question that is central to business or com-
petitive strategy is ‘How does a company compete in a given industry or geographic
region?’ For example, a company could compete by minimizing its costs, enabling it to
charge lower prices for its products or services than competitors do and thus attract many
customers. Alternatively, the company could compete by offering a product or service
with unique features, enabling it to attract customers who are prepared to pay a premium
price (Porter, 1985). Finally, functional strategy revolves around the question ‘How does
a company improve the competitiveness of functional activities within the company?’
Examples of functional activities are production, marketing, finance, and research and
development. In production, for example, a company could embrace Taylorism or the
Japanese model.
This chapter is about corporate strategy. Other types of strategy that are interesting
from a comparative management perspective are treated in different parts of the book. For
example, international strategy is explained in Chapter 9. Aspects of finance strategy and
production strategy are discussed in Chapters 6 and 7, respectively. Strategy in this
chapter deals with the industries in which a company is active, or, in other words, its port-
folio of businesses.
Within the broad category of corporate strategy, various more specific options exist.
Several schemes to classify these options have been developed (see e.g. Ansoff, 1965;
Porter, 1980; Palepu, 1985). Probably the best-known scheme was designed by Rumelt
(1974). Rumelt assigns firms to nine different diversification categories, depending on
their scores on a number of quantitative and qualitative criteria. For our purpose, a less
elaborate classification is sufficient (Figure 10.1). We distinguish two dimensions – level
and direction – which, in combination, lead to three types of corporate strategy.
With respect to the level, a distinction can be made between companies that generate
their sales in just one industry or business, and companies that generate their sales in
more than one industry or business. Consequently, there are single-business companies
and diversified companies. In the second case, the businesses can be related or unrelated.
This results in, respectively, related-diversified companies and unrelated-diversified
companies. Companies that are active in many unrelated businesses can also be referred
to as conglomerates.
This classification scheme may seem quite straightforward. The application in prac-
tice, however, often proves to be tricky. There is always an element of judgement involved.
For example, it is not always clear what constitutes a separate industry or business and,
as a result, whether a company is active in one industry or in several industries.
Furthermore, there is no clear separation between related and unrelated. Some similari-
ties between a company’s activities can always be detected, but the question is whether
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these are strong enough to allow the label related-diversified instead of unrelated-diversi-
fied. Since unrelated diversification has been in bad odour with the financial media, top
managers often maintain that their companies’ activities are related, whereas, in reality,
the relationships are often superficial. A final caveat is that companies might actually
belong to more than one category. Hanson Trust, for example, consisted of four clusters of
businesses that were clearly unrelated. Nevertheless, within each cluster the similarities
were very strong.
10.3 Theoretical Approaches to Corporate
Strategy
Various theories have been used to explain corporate strategy. Following the suggestions
presented in the introductory chapter, these theories can be divided into universalistic and
particularistic. This section starts off by explaining several universalistic theories that are
commonly used to explain corporate strategy. Subsequently, we discuss industrial organ-
ization, transaction cost economics, agency theory, dominant logic, the resource-based
view of the firm, the organizational learning perspective and strategic contingency
theory.
After that, we focus on institutional theory as the sole example of a particularistic
theory, which has been applied to explaining corporate strategy. The application of other
particularistic theories, like the cultural approach, to corporate strategy has yet to take off
in the literature.
448 COMPARATIVE INTERNATIONAL MANAGEMENT
Figure 10.1 Corporate strategy types
Unrelated-diversified
Related-diversified
Related
Unrelated
Single business
One
business
Several
businesses
Diversified: direction
Level
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Universalistic explanations of corporate strategy
Industrial organization
According to the structure–conduct–performance paradigm from industrial economics,
the structure of an industry determines the behaviour of the firms active in that industry,
which, in turn, drives their performance. For example, if the concentration in the industry
is low (i.e. there are many competitors with small market shares), firms are expected to
engage in fierce competition, which reduces their profitability. In this view, firms diversify
because this gives access to market power, which reduces competition and, consequently,
boosts their performance (Montgomery, 1994).
Diversified firms can use several instruments to reduce competition (Williamson,
1975; Palepu, 1985; Montgomery, 1994). Cross-subsidization involves the use of profits
gained in one industry to support activities in another. Specifically, a diversified firm can
afford ‘predatory pricing’, charging low prices that attract many customers, but do not
cover all the costs. A single-business competitor, which presumably lacks the ‘deep
pockets’ required to sustain low price levels, may eventually be forced to exit the industry.
Reciprocal buying and selling can be applied if a firm’s potential customer is, at the same
time, the firm’s potential supplier. The firms can then come to an agreement like ‘I buy
from you if you buy from me’ (Williamson, 1975: 163). The chances that a firm can be
supplier and buyer simultaneously are higher when it is diversified into several businesses.
The result is that markets are closed to undiversified competitors. A final instrument is
mutual forbearance. Diversified firms meeting each other in multiple industries sooner or
later recognize their mutual dependence. For example, if a firm competes too fiercely in
one industry, a diversified competitor can retaliate in this particular industry, but also in
all the other industries they share. Therefore, the decision could be made to compete less
vigorously.
Product diversification to wield market power can thus be very beneficial to the
financial health of the firm. The verdict from a policy-maker’s perspective is the reverse,
though. Any strategy that has anti-competitive effects is seen as potentially harmful to
society as a whole.
Transaction cost economics
Transaction cost economics can be seen as a response to neoclassical economics.
Departing from the neoclassical economist’s strong belief in the infallibility of markets,
firms are, at best, irrelevant. However, Williamson (1975) identified a number of factors
that lead to high transaction costs and, as a result, cause market failure. Activities should
then be coordinated within firms, instead of across markets.
Product diversification can also be regarded as a response to market failure. In theory,
activities in two different industries could be assigned to two independent firms. Any
necessary coordination between the two firms could take place via the market. For example, if
one firm produces jet engines and the other produces aircraft, the two could write a contract
for the supply of jet engines. Nevertheless, markets can fail, necessitating the coordination of
the activities in the different industries within one firm, which then becomes diversified. Two
types of markethave beenemphasized: thecapital market and the marketfor excess resources.
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A company may need to attract outside capital to fund an investment proposal.
However, it is likely to be reluctant to disseminate all relevant information to potential
outside investors, since they could use the information opportunistically and copy the
investment proposal to start their own activities or pass the information on to competi-
tors. This danger would be greatly reduced if the company were not independent, but part
of a multibusiness corporation. All businesses would present their investment proposals
to corporate headquarters, which has no incentive to use the information opportunisti-
cally. Subsequently, corporate headquarters would reallocate the cash flows it has
withdrawn from the businesses to the most attractive investment proposals. This creates,
in effect, an internal capital market, in which the allocation of funds is more efficient than
in the external capital market. Besides, corporate headquarters has at its disposal a wide
range of subtle mechanisms to motivate business managers. The external capital market
only has crude mechanisms to discipline managers (Williamson, 1975).
A single-business company could possess excess resources (Teece, 1982). It may have
physical equipment or know-how that is not needed for its current activities, but that
could be put to use in a new industry. Because the costs of developing the resources have
already been incurred, economies of scope would be the result. Economies of scope arise
when the cost of combined production of several products or services are lower than the
cost of producing each product or service separately (Panzar and Willig, 1975).
Economies of scope do not provide a sufficient reason for a single-business company to
diversify, since the excess resources could also be traded across a market to another
company active in a different industry. However, markets for excess resources may also
fail. For example, know-how often cannot be described in the form of a blueprint or
formula because it has a tacit and learning-by-doing character. Therefore, the transfer of
the know-how to the buying company necessitates continuing support by a team of
people from the selling company. This may be costly to organize across markets. To econ-
omize on these transaction costs, the managers of the single-business company may
decide to use the excess resources to start activities in the other industry on their own, or,
in other words, to diversify.
Because the same resources can only be used when the activities in the different
industries are similar, economies of scope can only be achieved in the case of related diver-
sification. In contrast, the internal capital market can be realized both by unrelated-
diversified and by related-diversified firms. Since economies of scope and the internal
capital market require different and conflicting implementation mechanisms, related-
diversified firms have to focus on either economies of scope or the internal capital market
(Hill and Hoskisson, 1987).
Agency theory
Agency theory revolves around the conflict of interest between principal and agent. The
agent is hired to perform some activity on behalf of the principal, but the agent also has
his or her personal interests, which may urge him or her not to act in the best interests of
the principal. Traditionally, and also in the context of corporate diversification, the prin-
cipals are the owners or shareholders of a firm, while the agents are the firm’s top
managers (Berle and Means, 1932). Firms, in particular those that are active in mature
industries, often have what Jensen (1986) calls ‘free cash flow’. Free cash flow is cash flow
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