The Third Leg of Strategy

In the study of strategy, Porter focuses on industry structure. Barney focuses on firm resources. Peng’s third leg—institutions—is the focus of this chapter. Peng’s argument is that institutions play a critical role in strategy formulation. They are more than ‘background’ factors. This chapter examines the role of institutions and national cultures in strategy formulation, with particular reference to developed, developing, and transition societies. The central idea is that strategy cannot be divorced from institutions and cultures. As institutions and cultures change, strategies also need to change. Strategy models make sense only in the context of institutions and cultures. Strategy models developed in the West with different institutions and cultures may not apply to other countries whose institutions and cultures are different. The chapter reviews the meaning of institutions, the impact of institutions on strategy, and the nexus between culture and strategy. There is discussion on how business decision making in emerging and transition societies differs from the West because of differences in institutions. This has important implications for Western corporations engaged in international business. Their successful strategies in the West may be totally irrelevant to competing in emerging and transition countries. The implicit assumption that strategies are generic and apply everywhere is not supported by research. Countries matter. Emerging and transition societies are changing. This means businesses operating in these societies will also need to change their strategies. These and similar issues and challenges form the core of the discussion in this chapter.