Friday, May 21, 2010

Corporate Strategy: Sustaining Strategic Fit Across Culturally Diverse Supply Chain Relationships.

Corporate Strategy: Sustaining Strategic Fit Across Culturally Diverse Supply Chain Relationships.

FRED VICTOR MBA (MARKETING)
Chief Consultant, GĒ Cônsult Group, Malaysia.

Abstract
This paper explored the importance of sustaining strategic fit in defining and influencing competitive strategies on nowadays’ for corporations. Further to the highlights of complexities of achieving strategic fit, I diagnosed and critically evaluated the strategic position of a firm and considered the complexities of sustaining strategic fit over time. This paper discussed the performance implications of strategic fit in global supply chain relationships between Volkswagen AG (German firm – VW) and Proton Holdings Berhad (Malaysian firm – Proton). Implications for theory and practice are discussed hereunder.

Keywords Strategic Management, Corporate Strategy, Strategic Fit.

Introduction

he heyday of both agricultural and industrial economy, where farming and manufacturing were the primary value-creating activity, have come to an end. As Sun Tzu advised that “none of the four seasons can last forever” (Khoo, 2004). Not surprisingly, the world has entered the knowledge economy, where the secret to sustainable market success no longer lies in the ability to add value, but rather to create value. The competitive battlefield has shifted initially from farming, then manufacturing to a more knowledge-intensive activity. Hence with response to rapid changing business and socioeconomic environment, one company should be well-prepared to take advantage of the new industrial era (Balogun, 2004).

One of the most common difficulties firms face in strategic planning is TURNING THEIR VISION INTO A REALITY. To transform a firm into the one envision takes more than great strategy and implementation. The search for strategic fit has become a CORE CONCEPT of strategy formulation. The issue of strategic fit is becoming increasingly important in today’s manufacturing business as managers and academics examine the effectiveness of culturally founded strategies across multiple supply chain relationships.

Searching for Strategic Fit

In the late 1950s, Philip Selznick was one of the first writers to suggest that a firm’s developmental history gave a distinctive set of capabilities that influenced its success, and should influence managers’ strategic decision making (Campbell, 1997). Later, business-policy researchers adapted these ideas to analyze an organization’s strengths and weaknesses in the presence of external opportunities and threats. This has resulted in the emergence of the familiar SWOT model in the 1960s. However, difficulties in identifying an organization’s strengths and weaknesses, and the attention was diverted to environmental-based strategy such as the Porter’s Five-Forces analysis, resulted on the subject of skills-based thinking for over a decade.

Intense competition and constant change are ever-present in the marketplace, hence managers engage in an ongoing search for competitive advantage. Management theory and business literature identify nearly as many potential paths to success, however, some literature explicitly discusses ways in which managers can use their ORGANIZATION’S INHERENT KEY STRENGTHS AS A SOURCE OF COMPETITIVE ADVANTAGE. As a matter of strategic management, strategic fit helps an organization not only to become but also to remain competitive within a stiff competition.

According to Srivastava et al. (1999), global supply chain management can be viewed as a primary driver of both customer and shareholder value. Organizational global supply chain consists of multiple business partners across world wide nations. The issue of global supply chain management necessitates a manager’s understanding of the unique needs of each relationship and the effective management of multiple relationships simultaneously. By appropriately allocating governance resources across relationships, a company can maximize its overall performance (Day, 2000), where organizational performance is conceptualized under a model that views firms as striving productivity and efficiency (Kumar et al., 1992). Management effectiveness depends greatly on the ability of managers to appropriately fit (or align) organizational elements with environmental opportunities and threats (Srivastava et al., 1999).

Fit is defined as “the degree to which the needs, demands, goals, objectives and structures of one component” (Nadler and Tushman, 1980). This conceptualization implies that high level of strategic fit is advantageous; therefore, AN ORGANIZATION’S FIT SHOULD BE MAXIMIZED. The search for strategic fit has been a core concept in normative models of strategy formulation (Zajac et al., 2000). Generally, supply chains are managed through governance structures. Governance, whether formal or informal, is rule of exchange between partners (Wathne and Heide, 2004). This area is important since fitting of relational governance across cultural diverse supply chain partners could provide economic performance gains. Therefore, the purpose of this study is to examine the implications of strategic fit across culturally diverse partners.

SWOT Analysis

SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis identifies VW’s and Proton’s internal strengths and weaknesses and possible external opportunities and threats. With this useful information, they can begin to formulate, and possibly implement competitive strategies to achieve the fitness.

(SWOT Analysis between VW and Proton as depicted in PDF format)
http://www.geconsultgroup.com/Journals/Sustaining_Strategic_Fit.pdf

Strategic Fit for Governance Strategies

Inter-organizational governance settings has been studied under a variety of theoretical models including power dependence (Gaski, 1984), transaction cost analysis (Wathne and Heide, 2004), and agency theory (Bergen et el., 1992). Underlying these perspectives is the assumption that governance is implemented through hierarchical authority. However, Heide (1994) differentiates that relational governance norms are based on bilateral nature. For instance, the relational governance norm between VW and Proton is based on their mutual agreement. Heide and John (1992) indicate that though prior governance perspectives provide insight into inter-organizational governance, theoretical deficiencies are owing to the omission of a key social element that is relational norms. Accordingly, the importance of such norms within a relationship is that they set forth the scope of acceptable limits on behaviour.

Change in agreements are expected, but may not be carried out by means of a formally designed mechanism. Moreover, the change process is bilateral in nature that the parties in question jointly negotiate and implement changes (Dwyer et al., 1987).

Cultural Entrenched Norms

Culture is the homogeneity of characteristics that separates one human group from another and provides a society’s characteristics profile with respect to norms and values that affords understanding of how societies manage relations (Hofstede, 2001). He argues that national cultures can be positioned along five dimensions to provide an overall summary of a country’s culture type: individualism, power distance, uncertainty avoidance, masculinity and long-term orientation. While Hofstede’s dimensions provide a manner of classifying a country’s culture, it is important to note that countries share both similarities and differences across cultural dimensions. For instance, Germany is generally more individualistic, smaller power distance, weaker in uncertainty avoidance, more feminine and more short-term oriented than Malaysia. Though an earlier confusion that VW wanted a controlling stake in Proton. According to The Star Online dated 23 January 2007, in fact, VW’s bid involved the creation of a joint venture company (JVC) in which VW wanted to protect its intellectual property rather than control stake in Proton. The JVC engages in joint development of vehicles, while Proton can continue to produce and market cars independently or in some other arrangements.

Given the cultural artifacts embedded in bilateral established relational norms, it can be theorized that A COMPANY CAN ENHANCE ITS PERFORMANCE BY FITTING ITS SUPPLY CHAIN GOVERNANCE STRATEGIES to the culturally founded relational norm expectation across partners.

Information Exchange

Information exchange defines a bilateral expectation that partners will proactively provide information useful to their partner supportive of the ongoing relationship (Heide and John, 1992). However, to facilitate information exchange, firms must invest finite resource stocks such as time, money etc. in developing the systems necessary to select, edit and format information to be exchange with each partner (Day, 2000).

Culturally, many German managers view information as a basis of power in governing exchange relationships (Gaski, 1984). As German managers operate from an individualistic, small power distance, short-term culture perspective, sharing information, upon which a partner may act opportunistically, in turn creates threats to its partner’s governance position in the relationship. Hence, German managers theoretically tend not to engage in full information exchange with its partners, but rather to control information to maintain dependency within the relationship. Consider the VW-Proton relation, many said that Proton would benefit from access to better VW’s technology.

Given the finite nature of resource stocks necessary to engage in information exchange with a firm’s global supply chain partners, and the cultural norm expectation of information exchange, it is theorized that a firm can enhance it performance by working toward the establishment of information exchange within its supply chain relationships. Specifically, Proton may be able to achieve performance gains by working toward the establishment of high levels of information exchange in its relationship with VW though it depends greatly on their relational norm of flexibility.

Relational Flexibility

According to Heide and John (1992), the relational norm of flexibility is conceptualized as a WILLINGNESS TO ADAPT TO ONE’S PARTNER WITHIN THE CONTEXT OF AN EXCHANGE RELATIONSHIP. Further, flexibility in a firm’s inter-organizational strategy necessitates that management expend cognitive resources not only to become aware of alternatives, but also willing to change organizational behaviour (Martin and Rubin, 1995). The concept of flexibility is consistent with German managers’ cultural dimensions of weak uncertainty avoidance and short-term orientation. No doubt, German managers tend to believe that the future is uncertain and therefore they must adapt to change. From this point of view, it is believed that flexibility enables a firm to easily adjust to changing environment conditions, allowing it to reap above-normal returns. As a German partner, therefore, Proton has an expectation of flexibility in the governance process.

Given that the necessary to engage in flexibility with a firm’s global supply chain partners, and cultural foundation of information exchange, it is theorized that a Malaysian firm managing a global supply chain inclusive of German partners would benefit most by working toward the establishment of relational flexibility. Specifically, Proton may be able to achieve performance gains by working toward the establishment of high relational flexibility within its relationship with its German partner.

Inter-Organizational Solidarity

Solidarity refers to the bilateral expectation that high value is placed on the relationship (Heide and John, 1992). Accordingly, solidarity in a firm’s relational strategy necessitates that management expend resource stocks such as managerial skills and time via face-to-face meetings, empathy and trust-building activities.

Some researchers have suggested that German managers, operating from an individualistic, short-term cultural orientation, focus primarily on the economic rewards of the relationship, and place less emphasis on social issues of the relationship. However, Japanese-based inter-organizational relationships, integrating the cultural form of solidarity within relationship is critical for effective business operation (Hofstede, 2001). In fact, the Japanese partners socialize within a collectivist, long-term oriented culture characterized by social harmony and adherence to group, expect solidarity among their exchange partners. Thus, if a German partner does not incorporate a high level of solidarity in its governance strategies, the inter-organizational relationship will have difficulty in achieving operational efficiency.

Given the finite nature of resource stocks necessary to engage in solidarity with a firm’s global supply chain partners, and the cultural foundation of solidarity, it is theorized that working toward the establishment of relational governance strategy of solidarity consistent with each partner’s culture will enhance a firm’s overall performance. Specifically, if VW is willing to, Proton may be able to achieve its performance gains by working toward the establishment of relational of high solidarity in its relationship with German partner.
Analytical Assessment

Overall, it is believed that the VW-Proton relation is an “OK” deal for VW but a very good deal for Proton. The assessment is briefly described as follows:

First and foremost, consider the TECHNOLOGICAL FIT. Proton would benefit from access to better VW’s German auto-making technology. Second, take CULTURAL FIT. The real value of VW is that it knows how to manufacture technology-advanced automobile. In other words, VW sells German automobile technology. But, Proton does the opposite. Proton offers FACILITY FIT as third. Having said that, the German automaker would have accessed to Proton’s Tanjung Malim factory, allowing VW to save substantially from setting up its own production facilities in the region (The Star Online, 23 January 2007).

Consider NETWORK FIT as fourth is more interesting. Due to the worldwide distribution network of VW, Proton inherits it and may be able implement a low-cost rapid expansion program, thus enhance its economic performance gains instantly. Fifth, consider SKILL FIT. No doubt, state-of-the-art management as well as training would be provided to Proton’s technical staff. Hence, local technical staff may be able to learn German technical know-how.
Future Prospects
Global automobile industry is now undergoing an intense and rapid restructuring. For instance, in recent years, there are some major mergers within bigger global car producer groups such as DaimlerChrysler-Mitsubishi, Renault-Nissan etc. How will VW-Proton react when competing with car producers stationed in Thailand under new AFTA regime? What is more, these huge global players are in the extremely competitive car market worldwide, and gaining competitive advantage by setting up their factories in a “low-cost” destination – Thailand. In contrast to Malaysia, rental and labour costs seem relatively high.

Conclusion

Exploring on the importance of strategic fit within the inter-organization relationship in order to improve economic performance has emerged as an important issue within strategic management. In this study, the underlying theme is the performance implications of the strategic fit of global supply chain governance relational norm strategies across culturally diverse relationships. This paper demonstrates that, when relational norm governance strategies are appropriately fitted to the culturally founded relational norm expectations across global supply chain partners, a firm may be able to achieve the overall performance gains. Hence, the VW-Proton relation provides substantive theoretical as well as practitioner insights into global supply chain governance.

In sum, the key contribution of this paper is in the area of inter-cultural norm formation. RELATIONAL NORMS ARE DETERMINED BILATERALLY. However, while determined bilaterally between VW and Proton, each of them works toward the establishment of the relational norm. By exploring the underlying cultural norm expectations, both theoretical and practical implications are drawn.

Acknowledgement
This paper is based on Fred Victor’s thesis (University of Bolton, England) completed in June 2007.

Reference

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Boston.com, 2006. Volkswagen Sales Rises 11 Percent, September 20, 2006.
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Campbell A. Sommers L., 1997. Core Competence-Based Strategy, International Thompson Business Press, London, pp. 13-27.

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Khoo, Kheng Hor, 2004. Abdullah Administration: Abdullah Ahmad Badawi and His Government from Sun Tzu’s Perspective, Pelanduk Publications, Kuala Lumpur, p. 43.

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The Star Online, German Chamber Sees VW as Best Fit for Proton, 23 January 2007.
http://biz.thestar.com.my/news/story.asp?file=/2007/1/23/business/16646777&sec=business

VW.com, 2005. Record: 100 Millionth Volkswagen Leaves The Assembly Line, May 24, 2005. http://media.vw.com/article_display.cfm?article_id=9587

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