Comparative Institutional Analysis

Angela FarmerMelinda Lobaugh

Patat AyuwathanaChris Fishback

Different varieties of capitalism are shown throughout the world.

Post-war West Germany: Coordinated market economy

America: Liberal market economy

We need to understand what has lead to different factions of capitalism throughout the world.

Introduction

Changing conditions determine strategy-effectiveness.

“Fordist Model”: low-cost production, price-based competition.

Large firms removing barriers, small firms reducing trust in coordinated districts could destroy economic viability.

Changes in the business environment are likely to affect conditions for different competition models.

Introduction

It’s important to understand the context of given markets to gauge the effectiveness of capitalistic strategies.

Post-war competition models Socio-economic conditions Impact of institutional, market, and tech changes

Introduction

Seven ideal types of competition models Each reflects the priorities firms adopt in changing

markets.

Different conditions seem likely to encourage firms to follow particular types

Summary of market changes since the 60’s that have influenced business system restructuring.

Introduction

What are competition models?

Institutions governing the economy encourage companies to form idealized combinations of specific trade-offs when they are competing in a particular market economy.

Purpose: develop organization-specific competitive advantages

Key Dimensions for Comparing Different Social Systems of Production

1. Production volume2. Competition3. Response to market changes

Trade-offs for Different Social Systems of Production Large economies of scale v. customization

Low prices v. high quality

Responding quickly to changing demand v. reducing costs by limiting changes to production processes and products

Fordist Model Mass markets dominated by large

oligopolistic enterprises and mass productionDedicated technologies and routinesStandardized products using unskilled laborRelies on large and predictable market demandLow prices

Advantages and Disadvantages of Fordist Model Advantages:

Ability to design and control production processesSystematically utilize and coordinate capabilities

to gain large economies of scaleConsistently reduce costs Large market share

through low pricesProducer driven production system

Disadvantages:High barriers for entry and exitNot as flexible in response to change

Opportunistic Production Model Ability to quickly shift production between

product lines and adapt to changing demands

Competes on price and fast responsiveness to customer demand

Key focus: entrepreneurial seize new opportunities and manage semi-skilled labor

Does NOT involve developing new products

Craft Production Model Small-batch production with highly skilled

workers Large customization and focus on ability to

respond to demand changes Response to changes may be slow limits

the degree of work restructuring in the short-run

Flexible Customized Production Model Small production volume of customized

goods AND faster market responsiveness Highly skilled staff working together to

produce specialized services Innovation is key for growth Easily coordinate and develop new

knowledge and skills Variation in outputs and not bound by

certified skills

Diversified Quality Production Model Large production volume of differentiated

goods + high quality and responsiveness to customer demands

German firms in 1970’s:Micro-electronic control devicesLower breakeven point of mass productionCombine small batch of customized goods with

large-batch of basic components

Flexible Mass Production of Differentiated Goods and Services Model Enhancing organizational capabilities Quicker response to market change than

DQP model Restructure production and implement

technical changes into developing new products

Rapid development and commercialization of new products (R&D)

Core competence: cross-functional project team

Discontinuous Innovation Model Inventing disruptive technologies that

change the market and threaten dominant firms

New skills are distinctive and inevitably destroy the current dominant firms

Competence: fast responsiveness to new scientific and technological knowledge and opportunities

Innovation develop manufacturing new products dominate current market OR create new market

Conditions Supporting Different Competition ModelsSix key conditions Product market size and differentiation Constraints on short term economic

opportunism Availability of knowledgeable risk capital Supply of technical specialists Availability of new technical knowledge Ease of Modularizing the value chain and

disintegrating production process

Fordism Mass production/undifferentiated Few legal restrictions on employers hiring

and firing Highly routinized and easy to carry out jobs Take advantage of their size in negotiating

with their suppliers Important roles of Technical specialists and

managers

Opportunistic Large, price/fashion focused Lower cost, simpler products production Access and efficient management of easily

trained and low-cost labor Harder access to technical specialist

compare to Fordism

Craft Production Niche, quality focused There must be barrier that prevent large

firms from using predatory pricing Practitioner elites control access to their

services and the certifications Collective competition goods, i.e. Sakaki

township Have to maintain high wages, challenging

jobs, and access to training

Flexible Customized Production Niche, quality focused Combining and enhancing skills and expert

knowledge Enhance current and create new

competencies Depends on employee’s commitment Required a large supply of certified

specialists

Diversified Quality Production Large, differentiated, and quality focused Short term opportunistic behaviors are

restricted Employers and workers are encouraged

develop broad skills and ability to learn new knowledge

Encourage trust and commitment between major group involved

DQP replaced Fordism in many of the richer market economies during the last third of the twentieth century

Flexible MPDG Large, differentiated, and quality focused Ability to translate new knowledge into new

products or services Extensive investment in engineers and

managers Relies on high level of organizational

commitment and cross-functional collaboration

Weak occupational identities, organization-specific career paths

Discontinuous Innovation Large, price and/or quality focused Flexible labor markets Strong and knowledgeable venture capital

companies Environment that supports the development

of innovative technologies Winner takes all market

ConditionsFordis

mOpportunist

icCraft

Flexible customize

d productio

n

Diversified quality

production

Flexible MPDG

Discontinuous

innovation

Product Market size

and differentiatio

n

Mass, undiffer-entiated

Large, price/fashion focused

Niche, quality focused

Niche, quality focused

Large, differentiated, quality focused

Large, differentiated, quality focused

Large, price/quality focused

Constraints on short

term opportunism

Low Low High Med High High Low

Availability of

knowledgeable risk capital

Low Low Low Low Low Low High

Supply of technical

specialists

High Low Low High High High High

Availability of new

technical knowledge

Low Low Low Med Med High High

Modularization

Med High Low Med Low High High

Changes in Business Environment Reason:

◦ Changing interest groups coalitions◦ Reduction of controls over competitive behavior in and entry into

markets

1. Internationalization of product markets, capital markets, and managerial coordination of economic activities

2. Changes in geo-political regimes 3. Changes in information and communication

technologies4. Extensive periods of economic growth 5. National governments have invested in the

expansion of education systems

1. Internationalization of Product Markets Reduce national institutional constraints on

opportunism Reduce cohesion of national interest groups

supporting them Quality based competitive strategies and

integrate supply chains◦ Follow DQP logics

Reduce domestic diversification and focus on delivering specified outputs◦ ICT innovations help

Internationalization of Capital Markets Reduced ability to coordinate activities Limit opportunism within national borders Seek to improve investment fund

performance and limit labor unions Migrated or negated by restrictions on

shareholder powers, variations in shareholders’ voting rights, limitations on hostile takeovers, and the capacity to mobilize opposition to foreign investors

Increasing access to well-informed venture capital

Managerial Coordination of Economic Activities Enhanced conditions supporting Fordist

strategies MNC able to access low cost labor and

variable integration with national and regional governance arrangements

Able to opt out of local associations, collective agreements, and other processes that restrain short-term economic opportunism

Reduced cohesion and effectiveness of regional and national institutions

2. Changes in Geo-Political Regimes Enlarged markets for many goods and

services Increased availability of unskilled and low-

cost labor for MNC Weakened the power of labor unions

organizing lower skilled workers

3. Changes in Informational and Communication Technologies Reducing the cost of communicating over

long distances and enhanced codification of knowledge and data

Driving international economic integration ◦ Firms communicate more effectively with

suppliers and customers across large distances Increase the mutual dependence and

integration of customers and suppliers Risk sharing and mutual trust

Changes IT and Communication Consequences 1. Improve the flow of codified knowledge

◦ Reduces employee process information◦ Facilitating managerial control over work processes◦ Reduce coordination costs and speed up product

development and production◦ Increase flexibility of production lines

Smaller batches and cheaper product changeover

2. Enhance skilled workers’ abilities and integrate planning and execution activities– Enables faster responses to market and technical

changes– Greater employee involvement in problem solving and

business development activities

5. National governments have invested in the expansion of education systems Easier to adapt to new technologies and

work processes without needing detailed supervision

Limit the degree of managerial direction of task performance

Facilitate competitive strategies based on radical, discontinuous innovations

Fordism and Opportunism Int’l expansion of mass markets Increasing the ease of coordination thru ICT

Fordism has declined on a national level, but is thriving internationally.

In many service sectors, changes have encouraged internationalization and standardization of service provision.

Changing Competition Models

Opportunistic encouragement Internationalization Use of ICT (coordination)

However, ease of entry to many buyer-driven commodity chains mean a constant threat from competitors of low-cost economies.

Changing Competition Models

Large firms using ICT severely threatens small firms emphasizing local markets.

Italy: moved SMEs to low-cost countries (China)

China has moved to Italy (made in Italy)

By upgrading technical knowledge, more competencies are offered than just one craft.

Denmark

Changing Competition Models

That method also enables companies to extend their services by dealing with new problems and concerns of their customers.

Many flexible project teams This depends greatly on low-cost training. Denmark has been supported by social protection

that enables workers to experiment with new ways of working.

Changing Competition Models

Flexible competition models are encouraged by: Enlarging number of potential customers for specialized

goods/services Expanding supply of highly educated workers to acquire

new technical skills Using ICT to coordinate skills/activities both within and

across national boundaries.

Internationalization grows the market Increase a company’s niche Allows them to access staff from different labor markets.

Changing Competition Models

Advantage to internationalization Locating production facilities in larger foreign

markets/lower labor cost countries produces greater revenue.

Coordination of managerial procedures with domestic operations, companies can combine DQP with lower costs. (especially where ICT innovations facilitate cross-national integration)

Companies that employ these strategies should benefit from internationalization.

Changing Competition Models

The combination of the following has supported the development of discontinuous innovation competition models.

Internationalizing product/capital markets Expanding higher education/public science systems

and income growth ICT innovations

Changing Competition Models

A few points

1. Most of the changes considered here vary in their expected impact on firms’ priorities depending on current competition models/institutional contexts.

Some threaten quality-based models. Many offer opportunities.

Conclusion

2. Identification of national institutional regimes with a single dominant economic logic is weakening with greater internationalization.

Many competition models involve cross-border economic coordination.

Conclusion

3. The combination of internationalization, increasingly differentiated patterns of demand, and an increased rate of product innovation is encouraging many firms to respond rapidly to changing circumstances.

Adaptability is critical.

Conclusion

4. How firms respond to such pressures and opportunities still seems to be strongly affected by their domestic environment and its conditioning of priorities/capabilities.

While US companies embrace outsourcing, Japan prefers to maintain centrality in design, development, and manufacturing.

In the early 2000s, Japan outsourced routine things while retaining their established patterns of collaboration at home.

Conclusion

While changing environments offer potential opportunities and threats, how leaders respond is influenced by their established capabilities and the context in which they are utilized.

Final Thought