The influence of the institutional context on the strategic management of MNCs during the global financial and economic crisis.

The influence of the institutional context on the

strategic management of MNCs during the global

financial and economic crisis

Master Thesis

Fiolet, Josephine Anna Margo

5737044

MSc Business Studies: International Management

University of Amsterdam, Faculty of Economics and Business

First reader and supervisor: Mr. R. Bohnsack

Second reader: Mr. M. van der Veen

Abstract

This research investigates the influence of the institutional context on strategic

change management of multinational corporations (MNCs) during the global

financial and economic crisis. The purpose of this research is to combine

knowledge from the international business perspective with knowledge from the

strategy perspective and herewith create more understanding about the

institutional pressures organizations are facing, and gain insight how MNCs

respond to them strategically. With a qualitative research design three MNCs in

the banking industry are analyzed and compared. Subsequent analysis showed

that the working propositions are largely supported. Herewith three new

strategic types are developed: the Stabilizer, the Progressor and the Balancer.

Keywords: Institutionalism, strategic change, MNCs, global financial

economic crisis

Acknowledgements

I would sincerely like to thank my supervisor Mr. R. Bohnsack. From the

beginning on he did not give too many answers to the many questions I had. At

first this resulted in the struggle of finding the right way of conducting the

research, but resulted in a thesis I built, refined and constructed by myself. I

experienced this process as very instructive and have Mr Bohnsack to thank for

guiding me in the right directions and challenging me during the process.

Furthermore, I would like to thank my parents. They made it possible for me to

continue studying. Because of them I was able to develop myself further and to

do what I like to do. Also, I would like to thank Jill Whittaker, who gave me

useful instructions and suggestions that were very valuable in completing this

research.

Table of content

Chapter 1: Introduction -1

Chapter 2: Background on the case -4

2.1 Global financial and economic crisis -4

2.2 Rise in consumer debt -5

2.3 Financial speculation -8

2.4 Risks of speculation -9

2.5 The crisis -10

2.6 How the banking sector in particular was affected -10

2.7 Focus banks included in the analysis -11

2.7.1 ING -12

2.7.2 Rabobank -13

2.7.3 ABN AMRO -14

Chapter 3: Theory -15

3.1 Strategic change from International Business perspective -15 3.1.1 Strategic importance of institutional environment for MNCs -15 3.1.2 Strategic decision making of MNCs during economic crisis -17 3.1.3 Strategic decision making of MNCs during institutional change -18 3.1.4 Strategic responses for aligning with the institutional environment -19 3.1.5 Strategic response typology of O liver -21 3.1.6 Circumstances in which strategy responses occur -24

3.1.7 Limitations of the model -26

3.2 Strategic change from Strategy perspective -26

3.2.1 Strategic importance of the environment -26

3.2.2 Strategic decision making during economic crisis -28 3.2.3 Strategies for aligning with the environment -30 3.2.4 Miles and Snow strategic response typology -31

3.2.5 Performance of strategic response types -35

3.3 Theoretical framework: IB literature and strategy literature combined -37 3.3.1 Strategic responses of both perspectives compared -37 3.3.2 Three types of strategic responses for MNCs -39

Chapter 4: Methodology -44

4.1 Research design -44

4.2 Data collection (1) -45

4.3 Data collection (2) -46

4.4 Analysis of the data -48

Chapter 5: Results -49

5.1 Annual reports -49

5.1.1 ING -49

5.1.2 Rabobank -52

5.1.3 ABN AMRO -54

5.2 Analysis of the news articles -56

5.3 Working propositions -59 5.3.1 Working proposition 1 -59 5.3.2 Working proposition 2 -60 5.3.3 Working proposition 3 -62 5.3.4 Working proposition 4 -63 5.3.5 Working proposition 5 -64

Chapter 6: Discussion and conclusion -67

Index of tables and figures

Tables

Table 1. O utstanding consumer debt as percentage of disposable income -5 Table 2. Family debt burden. Debt service payments as percentage of family income -7

Table 3. Key figures of the three Dutch banks -12

Table 4. Strategic responses to institutional pressures -22

Table 5. Generic strategies -34

Table 6. Comparing the typologies on key dimensions -38

Table 7. Selection procedure The Financial Times -47

Table 8. Selection procedure Het Financieele Dagblad -48

Table 9. Representation of quotes from annual reports ING -51 Table 10. Representation of quotes from annual reports Rabobank -54 Table 11. Representation of quotes from annual reports ABN AMRO -56

Table 12. Coding of the articles in The Financial Times -57

Table 13. Coding of the articles in Het Financieele Dagblad -57

Table 14. Table 10 and table 11 combined -58

Table 15. Coding of strategies in percentages -58

Table 16. Performance of the three banks -66

Figures

Figure 1. Timeline of the Global Financial Economic Crisis -6 Figure 2. The house price bubble in historical and international context -8

Figure 3. GDP and total debt -8

Figure 4. Composition of US debt in 1975 and 2005 -8

Figure 5. Manufacturing vs. financial profits between 1965 and 2005 -9

Figure 6. Market concentration of Dutch banks -12

Figure 7. Predictive factors of resistance to institutional pressures -25 Figure 8. O liver (1991) and Miles and Snow (1978) integrated -40 Figure 9. Selection criteria for the classification o f the three banks -46 Figure 10. Percentages of strategies per organization for remuneration issue -59 Figure 11. Percentages of strategies per organization for regulation issue -60 Figure 12. Representation of quotes from news articles ABN AMRO -61 Figure 13. Representation of quotes from news articles Rabobank -62 Figure 14. Representation of quotes from news articles ING -63

1

1. Introduction

Multinational corporations (MNCs) exist in a complex and unpredictable environment, which pose constant threats to the competitiveness and viability of the organization (Grewal & Tansuhaj, 2001). In the literature it is assumed that the business environment is becoming increasingly volatile and even hostile, which makes strategic management more difficult (Grant, 2003). A central assumption of strategic management is that organizations need to align with their environment (e.g. Child, 1997; Cui, Griffith, Cavusgil & Dabic, 2006; Luo & Park, 2001; Smith & Grimm, 1987; Suova & Ranoha, 2012; Tan & Litschert, 1994; Tan, Weston & Tang, 2010). For international management more specifically, multiple, dynamic elements of the institutional environment are considered to influence firm- level outcomes (Boyd, Haynes, Hitt, Bergh & Ketchen, 2012). When organizations are not able to cope and align with their institutional context, this is believed to negatively affect competitive advantage and organizational survival (Greenwood & Hinings, 1996). Considering the recent global financial and economic crisis (GFEC), which represents a major institutional change which affected almost all companies around the world (Berkmen Gelos, Rennhack & Walsh, 2009), one would therefore expect to find a significant level of strategic change in organizations in this period.

Many studies have examined how MNCs react to institutional change (e.g; Lee, Makhija & Paik, 2008; Levy & Kolk 2002; Muralidharan, 1999; 2003; Peng, 2003). However, the GFEC represents a time period in which existing logics have reached a point of exhaustion (Jackson & Deeg, 2012). It is therefore interesting to see how MNCs align with their environment when faced with a changing institutional environment of such magnitude as the recent GFEC. This paper therefore attempts to broaden the understanding of how such an event influe nces the strategic management of MNCs, which is a relatively unexplored field due to the recent nature of the GFEC. The central question in this research will be:

“How does the institutional environme nt influence strategic manage ment of multinational corporations during the global financial economic crisis?”

From an international business (IB) perspective the literature is mainly concerned with how MNCs deal with their institutional environment. How MNCs are likely to respond to institutional pressures is discussed by O liver (1991). She developed an extensive strategic response typology in which organizations vary between passive acceptance to active resistance towards institutional pressures. However, institutional theory is criticized for being

2 weak in analyzing the internal dynamics of institutional change (Greenwood & Hinings, 1996). Oliver’s (1991) typology reasons from an outside- in approach and says little about the internal dynamics of change and about the likelihood of performance of different strategies. These issues are addressed in the strategy literature more commonly than in the IB literature. In the strategy literature the strategic response typology of Miles and Snow (1978) is seen as the classical theory to describe how organizations react strategically to their environment and the relevance of the typology is confirmed in many studies (Blackmore & Nesbitt, 2012; Desarbo, Di Benedetto, Song & Sinha, 2005; Ginn, 1990; Tan, et al., 2010). This theory is more about the internal dynamics of o rganizations and research is mainly concerned with performance of different strategic types. The Miles and Snow (1978) typology is however not specifically designed for organizations operating in different home and host country institutional contexts. However, the link between strategic decisions and the environment is even greater for MNCs than for other, non-MNCs mostly due to the fact that the MNC headquarter (HQ) has to make decisions for different subsidiaries, based on information gathered from different environments (Muralidharan, 2003). Further, the typology of Miles and Snow (1978) does not actually describe how organizations change, which is in turn discussed by the typology of O liver (1991). This is why this research paper argues that the IB literature and strategy literature can learn and benefit from each other and should be combined in order to broaden the understanding of the relation between the institutional environment and strategic change. To this end, this paper develops a strategic response typology which takes into consideration both internal and external dynamics and is able to explain performance differences between MNCs. The primary purpose of this paper is to explore the dynamic relationship between environmental variations and the strategic response of multinational corporations and herewith to combine knowledge on strategic change from a n international business perspective with knowledge on strategic change from a strategy perspective.

A qualitative, longitudinal research design adds a few pieces to the jigsaw puzzle and leads to a more comprehensive picture of strategic management of MNCs and their influences. The industry of focus in this paper will be the banking sector. This industry is considered to be at the heart of the crisis and is particularly affected by the GFEC (Crotty, 2008). The time frame of this research is focused on the period is 2005-2013, which represents the period shortly before and during the GFEC. The paper will be structured as follows. In chapter two background information on the GFEC and the banking industry in particular will be given, to ensure a full understanding of the topic. In chapter three a description will be given of what

3 has already been said in the literature and working propositions will derive from that. In chapter four the research design is explained, followed by the findings in chapter five. This paper ends with a discussion and conclusion of the findings in chapter six.

4

2. Background on the case

To ensure a full understanding of the topic, in the following chapter background information will be given about the GFEC, the causes and effects, how the banking ind ustry in particular is affected and which banks will be the focus in this research.

2.1 Global financial and economic crisis

The global financial and economic crisis is seen as the worst financial meltdown since the Great Depression (Crotty, 2008). The cause of the crisis is found in the mortgage finance boom and the house price bubble in the United States (US) and other western countries that started in the late 1990s and accelerated in the early –to-mid 2000s (Crotty, 2008; Martin, 2011). Various factors are considered to be the cause of the housing bubble. For example, Taylor (2008) argues that specific government actions and monetary excesses caused, prolonged and worsened the crisis. Crotty (2008) focuses on institutions such as the investment banks and hedge funds and their practices, which he refers to as the ‘new financial architecture’, and Martin (2011) takes the ‘deregulated world’ with increased geographical and financial instability as his starting point. These different views are not all contradictory and probably heavily intertwined, but are not in themselves sufficient explanations for the crisis. Foster and Magdoff (2009) therefore do not attribute it to these kind of ‘mistakes’, but take a more historical perspective in which they argue that the tendency of the US capitalist economy towards stagnation, and the contradictions reflected in the twin processes of financialization and stagnation are the cause of the development of the US economy in the recent years. Their analysis is based on the US economy solely, which has to be kept in mind when drawing conclusions about the ‘global crisis’. However, as Foster and Magdoff (2009) also explain, the world economy depends largely on the US. The massive account deficit of the US makes it the largest debtor economy, meaning there is a surfeit of dollars globally. For example, China already holds no less than a trillion US dollars in their reserve. Under these circumstances it is not hard to imagine that a crisis in the US will soon develop into a worldwide crisis (Foster & Magdoff, 2009; Crotty, 2008).

In a nutshell, it was continuing household consumption, in combination with declining real wages that spurred the level of household debt. As a result, home-secured borrowing increased, so mortgage debt increased which, in turn, had an adverse effect on consumption. Therefore the Fed raised interests, which in combination with stagnation could have resulted in a burst of the ‘household debt bubble’. The explosion of debt was accompanied by growth

5 in financial speculation in which huge risks were taken. The initial crash that led to the crisis was in July 2007 when two Bearn Stearns hedge funds imploded setting off a chain reaction leading to financial panic. This resulted eventually in insolvency for most major banks (Foster & Magdoff, 2009). Figure 1 shows a timeline of the crisis, in which the important and outstanding events are included. The next section will explain the causes and events in more depth.

2.2 The rise in consumer debt

Consumption and investment, both drivers of the capitalist economy, are greatly determined by the uneven class based distribution of income. Average spending on consumer goods is dependent on the income of the working class. The amount spent on consumption by householders at the bottom 60 percent of the income pyramid in 2003 equaled or exceeded average pre-tax income while people in the high end spent a much smaller part of their income on consumption. When real-wages declined, one would therefore expect that crisis tendencies would arise, since consumption will be constrained. However the contrary happened, between 1994 and 2004 the growth in consumption exceeded growth of national income. The explanation for this is that people increased their borrowing to raise their living standards or to pay off debts. This led to a rise of consumer debt in comparison to income, which is shown in table 1(Foster & Magdoff, 2009, p.29).

TABLE 1: Outstanding Consumer Debt as a Percentage of Disposable Income (in billions of dollars)

Consumer Debt Consumer disposable income Disposable Income De bt as % o f disposab le inc o me 1975 736.3 1,187.4 62.0 1980 1,397.1 2,009.0 69.5 1985 2,272.5 3,109.3 73.0 1990 3,592.9 4,285.8 83.8 1995 4,858.1 5,408.2 89.8 2000 6,960.6 7,194.0 96.8 2005 11,496.6 9,039.5 127.2

Note: Disposable income after paying taxes. (Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, Historical Series and Annual Flows and Outstandings, Fourth Quarter 2005 (March 9, 2006). Available at http://www.federalreserve.gov/releases/Zl/Current/ cited in Foster & Magdoff, 2009, p.29)

6 FIGURE 1 Timeline of the GFEC: Constructe d on the basis of: ECB (2013), Fe de ral Rese rve (2013), Foste r & Magdoff (2009); Guillén (2009) and Kingship (2012).

7 The income to debt ratio doubled from 62 percent in 1975 to 127 percent in 2005. Interest rates were very low, which made it easier to service the debt. Table 2 (Foster & Magdoff, 2009, p.31) shows what is best known as the ‘family debt burden’ by income percentiles. The family debt burden constitutes debt payment as a percentage of disposable income. For families in the median-income percentiles (40.0-59.9) debt burdens were at the highest for the period of 1995-2004. Personal bankruptcies reached their peak in this period. What allowed the system of debt expansion to grow so fast was home-secured borrowing (Foster & Magdoff, 2009) and a low interest rate policy (Taylor, 2008). The larger proportion of debt was secured by primary residence, and in order to satisfy spending needs and pay off debts homeowners progressively withdrew equity from their homes. This resulted in an enormous

increase in the volume of new net home mortgage borrowing which ultimately led to an amount of mortgage debt that matched 69,4 percent of US GDP. This ensuing housing-bubble could easily burst under circumstances of rising interest rates and stagnating or declining house prices (Foster & Magdoff, 2009). It was expected that this would lead to further delinquencies and foreclosures (Taylor, 2008). Meanwhile investment declined which resulted in continued slow growth and increasing debt (Foster & Magdoff, 2009).

The house price bubble was not strictly a US phenomenon, several other countries also experienced a significant increase in house price inflation (Martin, 2008). Figure 2 shows the house price bubble in historical and international context (Martin, 2008, p.593), and shows that for instance in the UK, Ireland and Spain the house price bubble was even more evident than in the US.

8

2.3 Financial speculation

Because profits via investments were hard to make in the “real” economy, the financial system expanded. Banks became massive borrowers in order to make money with borrowed money via speculation. This had however no stimulatory effect on production since the profits earned with the transactions were mostly turned into new speculations, in order to make more profit. So, this changing composition of debt can explain the decreased stimulation of the economy. Figure 3 shows the increase of total debt in comparison with GDP and figure 4 shows the changing composition of debt between 1975 and 2005 (Foster & Magdoff, 2009, p.46 & p.48). In this way, finance in the capitalist economy was no longer only the ‘glue that connected various parts’, but became a dominant activity (Foster & Magdoff, 2009, p.54). This is shown in figure 5, where it is clear that fina ncial profits grew remarkably compared with manufacturing (Foster & Magdoff, 2009, p.55).

FIGURE 2: The house price bubble in historical and international context. (McKinsey Global Institute ,2009 cited in Martin, 2008, p.593)

FIGURE 3: GDP an d total debt (Foster & Magdoff, p.46)

FIGURE 4: Composition of US debt in 1975 and 2005 (Foster & Magdoff, 2009, p.48)

9

2.4 Risks of speculation

A term used by Foster and Magdoff (2009). to describe the stock markets and currency trading markets is that of a ‘giant casino’, which refers to the enormous bets and risks that are taken. The number and values of transactions have increased, out of proportion to the underlying economy. To illustrate, in 1975 19 million stock shares were traded daily on the New York Stock Exchange, while in 2006 that volume reached 1600 million shares, with a value over USD60 billion. The daily trading on the currency market is even bigger, increasing from USD18 billion a day in 1977 towards USD1.8 trillion in 2009. Although attractive, the risks are enormous (Foster & Magdoff, 2009; Taylor, 2008). O f which the fall of the Icelandic stock market in 2008 is an example (Guillén, 2009).

Besides currency trading, hedge funds and derivatives played a role in the enormous increase of financial speculation. Between 2005 and 2009 this market grow at a pace of 100 percent per year. With assets of USD1.2 trillion the US hedge funds are responsible for half of the daily trading of stocks in the US. By quickly moving money in and out of investment they are able to claim high returns (Foster & Magdoff, 2009). However, there are also tremendous risks associated with it (Taylor, 2008), as is shown in the case of Amaranth Advisors. This hedge fund lost USD6 billion during one week in September 2006, after placing the ‘wrong bet’ on natural gas prices. After this, Muriel Siebert, former superintendent of banking for the state of New York, stated in the

Financial Times that there “is an urgent need for global security regulations for hedge funds,

especially with the globalization of exchange” (Gangahar, 2006 ) herewith implying that this type of speculation leads to instability of the financial system. The incentives for financial market participants are one of the reasons these risks were taken (Crotty, 2008; Taylor, 2008). An example is that of manager Stan O’Neill, who generated (temporarily) high returns for US bank Merill Lynch, and received a bonus for it of USD161million. Later it became evident that it was hidden risk, and Merill Lynch reported total losses of USD8.4 billion during the crisis. However, his compensation “did nothing to dissuade the rest of the flock from

Figure 5: Manufacturing vs. financial profits between 1965 and 2005 (Foster & Magdoff, p.55)

10 following his example in the future”, as former IMF chief economist Rajan states (Crotty, 2008, p.24) He argues that the incentives were an importa nt factor in prolonging the crisis (Crotty, 2008).

2.5 The crisis

In September 2006 the IMF in its Global Financial Stability Report expressed concerns about the rapid growth of hedge funds and the possible consequences for financial stability. It warned that a further slowdown of growth and the cooling of the housing market could lead to great financial turbulence with possible unexpected shocks. It was the implosion of two Bear Stearns hedge funds in July 2007 that set off the initial crash (Crotty, 2008; Foster & Magdoff, 2009). These hedge funds held nearly EUR10 billion in mortgage-backed securities and one lost 90 percent of its value while the other imploded entirely. Since these hedge funds were unable to calculate precisely the actual value of their holdings, many banks in the US, Europe and Asia had to adjudge that they were exposed to toxic subprime mortgages. This led to fear among other financial institutions, with a severe credit crunch as a result (Foster & Magdoff, 2009). Another subsequent key event was the nationalization of the British mortgage lender Northern Rock in the early 2008 (Guillén, 2009), after in September 2007 it has become the first British bank to see their customers line up outside to withdraw their savings. Soon the financial panic reached global proportions and by January 2008 the Wall

Street Journal stated the world was in a financial crisis. The Federal Reserve Board responded

as a lender of last resort by lowering interest rates (Foster & Magdoff, 2009). Another policy response was the Economic Stimulus Act of February 2008, whereby over USD100 billion was made available to individuals and families in the US, which would stimulate consumption and herewith the economy (Taylor, 2008). They were, however, unable to stop the crisis from evolving. Another policy response believed by Taylor to ha ve further increased the crisis was the reduction of the federal funds rates, going from 5.25 percent in August 2007 to 2 percent in April 2008. A consequence was the acute depreciation of the US dollar and the rise of oil prices. Gasoline prices reached a peak and the sales of automobiles decreased heavily between May and September 2008. In October 2008 it became clear that the world economy was suffering and oil prices fell again, but the damage was already done (Taylor, 2008).

2.6 How the banking sector in particular was affected.

Economic analyses of the crisis almost always focus on the failures of the banking system, since they are seen as one of the key players in, and causes of the crisis. Yet, according to

11 Martin (2008) it seems that fundamental changes in these organizations in general are not made: culture, practice and structural characteristics are considered to be more or less the same. Beginning in July 2007 (the implosion of Bearn Stearn hedge funds ) the Federal Reserve Board and the US treasury department injected the financial sector with enormous amounts. However, as banks and other financial institutions sought the safety of cash this failed to stimulate lending. This in turn encouraged the financial authorities in among others the US, Britain, France and Germany, to partially nationalize banks (Foster & Magdoff, 2009).

At first, the financial crisis was seen as a lack of money or liquidity, which could be solved by flooding the financial markets with money or by lowering interest rates. However, the financial institutions had a lot of cash but were not willing to lend it when there is no guarantee it would be paid back. With this de crease in value of their loans (their assets), the balance sheet of the financial institutions was negatively affected. By October 2008 most banks were insolvent resulting in an explosion of mergers and acquisitions, leading to a monopolistic banking sector (Foster & Magdoff, 2009).

2.7 Focus banks included in the analysis

As explained, the crisis that started in the U.S. soon reached global proportions. Within Europe, most countries are currently experiencing too much debt and an increasing budget deficit (Rijksoverheid, 2013). In reference to the European crisis, a distinction is made between the banking crisis and a sovereign debt crisis. The first has its origin in the losses in capital market securities, for instance the US subprime products, and also in the bursting of the housing bubble in the property markets of some EU countries. The second considers the crisis sharpened by recession. Both are considered to be a threat to the financial markets (Blundell-Wignall & Slovik, 2011). Therefore banks are subject to strict supervision and stricter rules imposed by government are forcing banks to take action. The primary concern for banks is to strengthen their capital reserves to be able to cope with the consequences of the crisis (Rijksoverheid, 2013). This also applies to the Dutch banking sector, which is four times as large as the Dutch economy and thereby one of the largest banking sectors in Europe. Within the Dutch banking system the three biggest banks are ING, Rabobank and ABN AMRO who count for over 90 percent of total assets. The market concentration is showed in figure 6 (Banken, 2013).

12 The three banks are all universal and “own or control value creating activities in more than one country”, making them MNCs according to the definition of Buckley and Cason (2009, p.1564). In the following section background information on the three banks will be briefly discussed, in which it becomes clear all three banks were hit severely by the GFEC and had to make strategic changes in order to survive. Table 3 provides a quick overview.

TABLE 3: Key figures of the three Dutch banks (2013)

ING Rabobank ABN AMRO

Number of clients worldwide 85 million 10 million 120.000 Number of employees worldwide (FTEs) 84.718 59.625 23.059 Total amount of assets (2012, in EUR)

1.169 billion 752 million 394 million

Credit ratings Moody’s Standard & Poor’s Fitch A2 A+ A+ Aa2 AA-AA A2 A A+ 2.7.1 ING

The ‘Internationale Nederlanden Groep’ (ING) is a global financial services company providing banking, investments, life insurance and pensions. ING exists since 1991, when Dutch insurer Nationale Nederlanden and Dutch bank NMB Postbank group merged. ING is the largest bank in the Netherlands with over 85 million customers in Europe, the United

13 States, Canada, Latin America, Asia and Australia and has 84.718 full-time employees worldwide (ING, 2013a). Throughout 2008 ING suffered a loss of EUR 729 million. By the end of October 2008 it received state support with an injection of EUR 910 million in exchange for securities and veto rights on major operational changes and investments ( De Witt, 2008). In January 2009 management announced a significant restructuring involving the certain loss of 7000 jobs, and divestment of activities worth EUR 2 to 3 billion will be sold (Willems, 2009). Eventually the bank shrank from 130.000 employees to 84.000. By September 2013 the majority part of the state support had been repaid and the bank expects to return the rest by May 2015. As former ING CEO Jan Hommen stated in September 2013 (in his farewell speech) “the bank has become smaller and stronger. ING is now European orientated, with a few parts in Asia that can lead to further growth” (Wiessing, 2013). The bank received single-A status from Standard and Poor’s, Moody’s and Fitch and had EUR 1.169 billion of total assets by the end of 2012 (ING, 2013b).

2.7.2Rabobank

The Rabobank Group is a private cooperative bank, active in the field of banking, asset management, leasing, insurance and real estate. In the home market the emphasis is on broad financial services, internationally the bank focuses mostly on the food,- and agriculture business. In total the Rabobank Group is active in 47 countries, currently having worldwide 59.625 full- time employees and around 10 million customers. The bank is the only private bank that held the AAA ratings from both Moody's and Standard and Poor's (Rabobank, 2013a). Although during the crisis a lot of banks experienced severe problems and received capital injections from government or were nationalized, Rabobank is seen as the exception. It is considered to be one of the most stable banks since it is the only Dutch bank that did not need any government support. In 2008 profit grew with 2 percent, while most banks were experiencing major losses. It did experience difficulties with exposure on the US markets and needed to reorient its international business. When the Dutch economy went into a deep recession in 2009 profits declined by 17 percent towards EUR 2.3 billion (NOS, 2010) and in February 2013 the bank announced a reorganization, which will cost around 3000 jobs in the coming two years (ANP, 2013). As of March 2013 the Rabobank had double AA statuses from Moody’s, Standard and Poor’s, making it the bank with highest credit ratings in the Netherlands. By the end of 2012 Rabobank reported EUR752 million of total assets (Rabobank, 2013b).

14 2.7.3 ABN AMRO

The current ABN AMRO was created in 2010, when the legal merger between ABN AMRO and the Dutch Fortis Bank was completed. The Dutch state acquired Fortis Bank Nederland in October 2008, when Fortis announced it would sell its shares in RFS Holdings. The previous parts of ABN AMRO were a large part of RFS Holdings. In December 2009 the state founded the ABN AMRO Group. At this time the state is still the sole shareholder of the bank and the goal is to reduce the state interest towards zero by 2014 when the state will sell via IPO (Rekenkamer, 2013). In July 2010 ABN AMRO merged with Fortis Bank Nederland, signaling the end of that bank entity. ABN AMRO serves retail, private and commercial banking customers both domestically and internationally. ABN AMRO serves over 120.000 clients domestically and in 12 international markets (ABN, 2013) and in 2012 ABN AMRO Group had 23.059 full-time employees, after reorganizing in 2010 and 2011. In the first quarter of 2013 the bank made a profit of EUR415 million, which is 17 percent less than the same period in 2012, but much higher than the last quarter of 2012 in which the bank experienced a loss of EUR38 million (NOS, 2013). ABN AMRO received stable ratings from Standard and Poor’s and negative ones of Moody’s and of Fitch and by the end of 2012 reported an amount of EUR393.8 million of total assets (ABN, 2013).

These three banks will be the case subject of this research. To repeat, the central question is how these three international organizations changed strategically in reaction to the changing institutional environment. In the following chapter the theoretical concepts on which this research is built will be explained.

15

3. Theory

In the following section the main theoretical concepts of this paper will be explained. From both the international business perspective and the strategy perspective it is argued why and how the environment matters for organizations and what type of strategic responses are possible. After this, both streams of research will be combined, from which a new theoretical framework will emerge that helps answer the question “how do MNCs react to institutional change?”. From this framework working propositions are derived that will be further explored in this research.

3.1 Strategic change from an international business perspective: How do organizations respond to environmental change when ope rating in an inte rnational context?

The IB literature is mainly concerned with the role of the MNC HQ and of the different subsidiaries and how organizations deal with home and host country institutional environments. There are various differences between home and host country environments. Examples are culture, political and eco nomic systems and business practices (Muralidharan, 2003). In an international context, these environmental factors are considered to have a substantial influence on the strategy and success of MNCs foreign subsidiaries (Cui, et al., 2006). These environmental factors are often evaluated in international management research from an institutional perspective, since it “provides a rich theoretical foundation for examining a wide range of critical issues and also allow for theorizing at multiple levels of analysis, which is essential for MNC research” (Kostova, Roth & Dacin, 2008, p. 994). In the following section it will be explained what is meant by the institutional environment and how this is considered to affect the strategic decision making of MNCs.

3.1.1 Strategic importance of the institutional environment for MNCs

In his analysis of economic structures, North (1991) developed an analytical framework for explaining the ways in which institutions and institutional change affect the performance of economies. North defines institutions the following: “institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints and formal rules” (p.97). Examples of informal constraints are traditions, codes of conduct, taboos or sanctions and are often also described as culture. The formal constraints derive from constitutions, laws and property rights also explained as economic and political factors. For instance, Cui, et al. (2006) find that market environmental components such as competitive intensity and market dynamism are of influence on MNC subsidiaries

16 strategic initiatives towards technology transfers. Cui, et al. further describe how the cultural environment is of strategic importance for MNCs. The cultural environment refers to “the cultures in which a firm operates” (p.103). Culture is “the pattern of beliefs and values that are manifested in practices, behaviours, and various artefacts that distinguish the members of one group or category of people from another (Hofstede, 1994, p1). For international business ‘national cultural distance’ is of importance, which refers to the differences between cultures of home and host countries. The similarities and distinctions form the basis on which managers make strategic decisions and the greater these differences are between the MNC and its subsidiaries, the more complex and ineffective communication and operations will become. National cultural distance increases conflicts and decreases the knowledge and information flows between MNCs and their local subsidiaries. These national cultural differences can be of lesser impact when there is a strong shared organizational culture and organizational cultural distance is low (Cui, et al., 2006). These results, that market and cultural environmental factors influence specific strategic initiatives of MNC subsidiaries, are in line with the research of Luo and Park (2001).

These multiple, dynamic elements of the institutional context are considered to influence firm- level outcomes (Boyd, et al., 2012). More specifically, it is mostly the ability of organizations to cope with changing institutional contexts that determines competitive advantage and organizational survival (Greenwood & Hinings, 1996). The institutional context plays a huge role in particular for MNCs, since they have to deal with conflicting institutional pressures from their home country, host country and from the global industry (Levy & Kolk, 2002). In order to cope with the institutional environment, MNCs need to align their strategies with this institutional environment (Peng, 2003). The reaction of organizations to institutional pressures is further explained by DiMaggio and Powell (1983). They argue that organizations are becoming more and more the same. Structural changes are increasingly driven by processes that make organizations more similar, instead of by competition or a need for efficiency. This process of homogenization is described as isomorphism and explains a constraining process that forces organizations to look like other organizations that are operating in the same environment with the same conditions. Isomorphism can be divided between competitive,- and institutional isomorphism. The first describes the process in which organizations become more similar because of market competition, niche change and fitness measures, and the latter concerns forces pressing organizations towards accommodation with others (DiMaggio & Powell, 1983). In this research emphasis is placed on institutional isomorphism, in which the question is: how do institutions pressure organizations towards

17 accommodation, resulting in changing strategy. In this analysis, organizations are seen as populations within the organizational field (Greenwood & Hinings, 1996). There are three factors that can lead to isomorphism in the organizational field: coercive isomorphism, mimetic isomorphism and normative isomorphism. The first results from pressures of other organizations in the organizational field, the second result from the fact that managers deal with uncertainty, they tend to look at processes and structures of other organizations ; and the third stems from increasing professionalization in modern societies (Tempel & Walgenbach, 2007). For all three forms, the underlying logic is that organizations want to increase their probability of survival and gain legitimacy, and therefore conform to their institutional environment (Greenwood & Hinings, 1996).

3.1.2 Strategic decision making of MNCs during economic crisis

A study that gives first insights in how MNCs responded to the current GFEC is that of Schuh (2012). He looked at the current GFEC and what effect it had on the strategic orientation of MNCs in Central and Eastern Europe (CEE). An economic crisis forces management to review its strategies and in MNCs, managers must decide how to allocate scarce resources across geographical markets. Their main consideration is to what extent the current portfolio of international markets contributes to growth and profitability and to ensure a balanced spread of risks across countries. For many MNCs in CEE the business strategy had to be reviewed. Primary courses of action during the GFEC were more centralized management programs with cost-reduction programmes with at the forefront cost-reduction programmes and putting investments on hold. Before 2008 the general trend among MNCs in CEE was decentralized businesses, but during the crisis HQ wanted to exercise better control over investments, costs, liquidity and key accounts. In 2011 most companies switched back to the growth mode again, which favoured a more decentralized model in which local managers have more freedom in decision making. Schuh argues that organizational structure follows strategy, and performance results of the activities has yet to be reviewed. The main challenge for managers seems to be to balance strict cost disciplines and the encouragement of growth initiatives. Schuh also noticed that diversification is a strategy better suited to deal with the complex and changing environment. He argues that the fluctuations in prices and demand make narrow niche strategies difficult, while spreading business activities over different geographic areas helps to reduce risk. His research showed that companies which had narrow product lines often switched to more diversification strategies. Another finding is that MNCs with regional production networks, a multi-tier strategy (a strategy in which well-known local

18 brands are marketed alongside international o nes) and brands covering all price levels were in the best position to deal with changing consumer behaviour. However, it is too early to argue that this is a general trend. One of the main and perhaps most obvious consequences of the crisis is that the focus for MNC managers lies more on risk management. Risk is now better and more realistically evaluated than in the past (Schuh, 2012). Since little research has been done so far on strategic change of MNCs during the GFEC, in the following section literature will be discussed that concerns institutional change and strategic decision making in general. The aim is to give a broad picture of what capabilities MNCs need when dealing with institutional change.

3.1.3 Strategic decision making of MNCs during institutional change

With the institutional environment influencing MNCs on so many levels, gathering information about this environment is a crucial part of the strategic decision making process (Muralidharan, 2003). This is even more the case when the enviro nment is changing, since institutional influences are stronger under conditions of uncertainty (Levy & Kolk, 2002). Environmental scanning is a useful tool for MNCs to accomplish this and to help MNCs make appropriate decisions in response to changes in the environment (Muralidharan 1999; 2003). How actively MNC HQs scan the environments of foreign subsidiaries and to what extent they differentiate their scanning activities is not always clear. Research by Muralidharan (1999) shows that MNC HQ differentiates across macro, financial and market-competitive segments of the foreign subsidiary environment and that its scanning activities are moderate, meaning that only 50 percent of HQs scans certain dimensions of the environment two or more times per month. Considering the increased importance for MNCs to scan their environment Muralidharan expresses his concerns about this finding. He also finds that MNCs that integrate their products and production processes across operations in different countries will have a higher demand for environmental information from foreign subsidiaries in order to make operational and strategic coordination possible. Further, MNCs with high levels of foreign sales (as compared to total sales) are more dependent on the international environment and will have greater exposure to opportunities and risks. Therefore they will have a greater demand for environmental information from foreign subsidiaries. Another factor influencing environmental scanning activities is the strategic interdependency of MNCs and foreign subsidiaries. The higher the interdependence, the greater the need for information (Muralidharan, 1999).

19 After assessing information about the environment, MNC HQ has to make strategic decisions for their foreign subsidiaries. Peng (2003) looks at how MNCs make strategic decisions during institutional transitions. Institutional transitions are defined as “fundamental and comprehensive changes introduced in the formal and informal rules of the game that affect organizations as players” (p.275). The institutional transition in Peng’s research concerns the transition of emerging economies from central planned economies to ones of market competition and the main question is “how do organizations play the new game when the new rules are not completely known” (p.283). Two primary strategic choices seem to emerge when MNCs have to deal with changing institutions. The first one is that of a network-based strategy, focusing on the intangible assets (e.g. human and reputation), which are embodied in managers’ and firms’ interpersonal relations with other players. The second strategic choice is that of a market-based strategy, in which emphasis is placed on competitive resources and capabilities which are separate from the interpersonal relat ionships and networks and are more rule-based (Peng, 2003). In the literature the latter perspective seems to be prevalent, and different capabilities for MNCs when dealing with environmental change are distinguished. An important capability of MNCs to deal with institutional change is strategic flexibility. Lee, Beamish, Lee and Park (2009) argue that firms with non- location bound flexible capabilities are able to adapt to the changing environment better than organizations with location-bound inflexible capabilities. Flexible capabilities allow organizations in these situations to outperform other competitors. One of the non- location -bound capabilities Lee, et al mention is research and development (R&D). Firms that invest in R&D will be more competitive in the international arena than firms who do so to a lesser e xtent. Location-bound capabilities that are considered important for gaining a competitive advantage are advertising and human resource management, but these are limited to the domestic market. Competitive advantage is ultimately considered to be key to survival in an uncertain environment.

To summarize, from an IB perspective change is often described from an institutional perspective. The literature shows that MNCs which actively scan their environment will be better able to make appropriate strategic decisions and non- location-bound flexible capabilities will help MNCs deal with the institutional environment. This paper now proceeds to describe the possible strategic responses of MNCs when dealing with institutional change.

3.1.4 Strategic responses for aligning with the institutional environment

A study that looks at strategic response during institutional transitions is that of Chittoor, Ray, Aulakh and Sarkar (2008). In their study the economic liberalization of India represents the

20 institutional change. They distinguish between three broad types of strategic responses, exit strategy, defensive strategy or assertive strategy. In the first the business is divested, in the second the position in the market is defended in the same product market domains and the third strategy represents aggressively building new capabilities to expand geographically. In their research they find that companies in the Indian pharmaceutical industry mostly responded in assertive ways, internationalizing quickly. It should, however, be kept in mind that these findings are heavily context depending, and comparison between economic liberalization and economic crisis as institutional change does not seem to be logical. However, a similar distinction between strategic responses to institutional pressures is made in the research of Levy and Kolk (2002). In their reach they note that MNCs in the oil industry either aggressively reject or accept and adapt to increasing press ures on global environmental issues. They distinguish between four different responses, resistant, proactive, avoidant and compliant. The oil majors in their research adopted mostly assertive responses (resistance or proactive). The explanation for these d ifferences lies in the level of embeddedness in particular home country institutional contexts. Home level influences are economic and physical resources, national economic and industrial policies and cultural values and institutional norms. These divergent pressures influenced companies mainly in the early phase of responding to environmental demands, while in the later phase convergent pressures at the global industry level were more prevalent. It is in the later phase that frequent interactions between different players result in similar outlooks on markets and technologies (Levy & Kolk, 2002). This is somehow contradictory to what Peng (2003) states, that managers rely on interactions and relationships in the first phase due to uncertainty, while Levy and Kolk (2002) argue this is a common phenomenon in the later phase. An possible explanation for this finding is that in the case of climate issues, global standards came to existence as the issue matured, since it is an issue of global proportions. Organizations had to comply with risen regulations, which is a form of coercive isomorphism. What Peng (2003) discusses is more mimetic isomorphism, which is indeed closely associated with uncertainty of the early phase of change. The responses previously mentioned seem to be captured in the strategic response typologies that O liver (1991) proposes. She distinguishes five strategic response types, which follow a continuum of acquiescence towards manipulation. O n the left hand side of the continuum, organizations comply with rules and imitate institutional models, on the right hand side organizations try to shape values and dominate institutional constituents and processes. In between are strategic responses of compromising, avoiding and defying. The research of O liver (1991) has been often cited and is seen as a comprehensive framework

21 which explains how institutions facilitate strategy (e.g. Clemens, Bamford & Douglas, 2008; Goodstein, 1994; Hoskisson, Eden, Lau & Wright, 2000) and which does so in more detail than the previous mentioned response typologies. Therefore the strategic response typology of Oliver (1991) will be leading in this research.

3.1.5 Strategic response typology of Oliver

Oliver (1991) combines insights of institutional and resource dependence perspectives to develop a framework that predicts strategic responses to institutional pressures. In both the institutional and resource dependence perspective it is assumed that organizational choice is possible within the context of external constraints. Oliver argues that organizations are pressured towards conformity with their environment, and that their responses vary between compliance and active resistance. The five strate gic responses are acquiesce, compromise, avoid, defy and manipulate. These are summarized in table 4 and will be further explained in the following section.

3.1.5.1 Acquiesce

The first strategy, that of acquiesce, occurs when organizations concede to ins titutional pressures. They can do so by habit, where organizations reproduce actions and practices with which they are familiar. Imitation is another form of acquiescence, where organizations either conscious or unconscious engage in mimetic isomorphism. The last form is that of compliance, where organizations consciously incorporate institutional requirements. This is a more active response than habit and imitation. In general, organizational acquiescence depends on the level of awareness of institutional pressures and the expectation that conformity will lead to benefits for the organization. The main goal is to increase stability and maintain legitimacy and confidence. This tactic is likely to occur when the organization is experiencing pressures to enhance social or economic fitness, when organizations depend heavily on the external constituents, when external pressures are exerted via legal coercion or enforcement and when organizations perceive the environment as uncertain (O liver, 1991).

22 TABLE 4: S trategic responses to institutional processes (Oliver, 1991, p.152).

3.1.5.2 Compromise

The second strategic response possibility for organizations as described by Oliver (1991) is compromise. Although organizations recognize the need to comply with the institutional environment, they can consider it as unworkable. This is the case when organizations are faced with conflicted demands or when demands do not align with the internal goals of the organization. Organizations then try to use compromise tactics such as balancing, pacifying or bargaining. When balancing, organizations try to achieve equality among or between different stakeholder demands. Pacifying tactics refer to organizations which conform to at least the minimum requirements and try to appease the institutional sources they are resisting. Bargaining is a more active form of the compromise strategy and aims to reduce the demands of external institutions by negotiating with them. The compromise response is, like acquiescence, aimed at accommodating institutional pressures, but is more active in promoting own interests. This tactic is likely to occur when there are multiple constituents on which the organization heavily depends, when the organization is pressured via voluntary diffusion of norms instead of legal coercion, and when the environment is perceived as uncertain and highly interconnected (O liver, 1991).

3.1.5.3. Avoidance

The third strategic response type of Oliver is that of avoidance. Avoidance is defined as “the organizational attempt to preclude the necessity of conformity” (p.154). This is achieved by concealing their non-conformity, buffering against external pressures or by trying to escape

23 from them. When concealing, organizations try to make it seem like they are willing to conform, but they have no intention of actually implementing their proposed plans. Buffering is also a form of avoidance, where organizations attempt to get detached from institutional pressures and try to reduce the extent to which they are externally controlled. When the need for public approval is low, buffering can be a tool to keep autonomy and to maximize efficiency. When the need for public approval is high on the other hand, buffering may lead to suspicion and will reduce legitimacy. An organization may also choose to exit the domain in which it faces institutional pressures, which is the third form of avoidance. Examples are moving to different locations or altering the goals and activities of the organization. In general, organizations follow avo idance strategies when they wish to circumvent the conditions that necessarily lead to conforming behaviour. This tactic is likely to occur when there are multiple constituents of which pressures come, when the organization perceives this pressures as constraints for the organization and when the environment is seen as uncertain (Oliver, 1991).

3.1.5.4 Defiance

The fourth response strategy of O liver (1991) is that of defiance, which is a more active form of resistance to institutional pressures. Dismissal, challenge and attack are tactics associated with this response. With dismissing, authority is ignored and this is likely to be a tactic when dependence on government and the perceived likelihood of getting caught is low. Challenging is a tactic whereby rules are contested and is likely to occur when the organization attaches less value to externally held beliefs than to their own. When organizations aggressively challenge institutional pressures, this falls under the attack tactic and occurs when organizations belief that their rights are being jeopardized and demands are specific to their organization and not to business in general. Defiance is a common tactic when organizations perceive the costs of active departure as low, when there is a discrepancy between internal interests and external values or when organizations feel like they have little to lose. This tactic is likely to occur when there are multiple constituents who are exerting pressures, the constraints of these pressures are perceived as high and when environmental uncertainty is perceived to be lower (O liver, 1991).

3.1.5.5 Manipulation

The fifth and final strategic response of O liver (1991) is that of manipulation, which is the most active response. Organizations that manipulate try to co-opt, influence or control

24 institutional pressures. With co-optation an organization will, for example, attempt to join the organization or board from directors of which it experiences pressures. It hereby tries to neutralize institutional opposition and enhance legitimacy. When organizations aim more at general institutionalized values and beliefs, or perceptions of acceptable practices for instance, these are influence tactics. Lobbying is a common example of this. A more actively aggressive response is that of controlling tactics, whereby the organization tries to exert power and dominance on external constituents who are pressuring it. In these three tactics, organizations do not take pressures and expectations from the institutional environment as given but actively try to redefine them by exerting power over the content. This tactic is likely to occur under the same circumstances as the defiance tactic, in which there are multiple constituents who are exerting pressures, the constraints are high and when the environment is seen as not very uncertain (O liver, 1991).

3.1.6 Circumstances in which the strategic responses occur

Oliver (1991) describes antecedents of strategic responses and develops expectations based on these, how organizations will react to institutional pressures. She expects that when organizations think that conformity will lead to either legitimacy or efficiency compliance is likely to occur. Another expectation concerns the level of, and dependence on the external constituents who are exerting pressures. The higher the degree of constituents and the lower the organization depends on them, the more it is expected that organizations will follow resistance tactics over conformity. Another predictor of responses is the content of institutional pressures the organization is facing. When the pressures are consistent with organizational goals, it is more likely that organizations will conform to these pressures. When conformity would lead to constraints imposed on the organization, then it is more like ly organizations will resist them. Another institutional predictive factor is that of control, whether or not the institutional pressures are exerted via legal coercion or voluntary diffusion of norms. The lower the degree of voluntary diffusion, the greater the likelihood of resistance. The final predictive factor is that of context, which concerns perceptions of the environment. When organizations perceive the level of uncertainty and level of interconnectedness in the organization’s environment as low, the greater the likelihood of resistance. These expectations are visualized in figure 7, in which the pluses and minuses refer to the effect on resistance to institutional pressures. These hypotheses are not tested in the research of O liver (1991), but have been verified in other research, which will be discussed in the following section.

25 FIGURE 7: Predictive factors of resistance to institutional pressures (based on Oliver, 1991).

The research of Clemens and Douglas (2005) tests O liver’s (1991) hypotheses in the steel industry, where organizations faced pressures concerning the issue of radioactive contamination of scrap steel. Their research confirms all hypotheses, except one. They find that the manipulation strategy is an active positive response, in which organizations try to participate in the institutional process in a productive manner. A possible explanation for this finding is that this research does not use a n institutional lens alone, but also an organizational lens. Therefore the authors suggest that using separate lenses for institutions and organizations may be appropriate. The research of Goodstein (1994) also confirms the work of O liver (1991), and extends it with some findings. For instance, organizational size is related to the need for legitimacy. They find that larger organizations are exposed to more pressures from state, media and professional groups than smaller organizations, and therefore legitimacy and social fitness is more salient. This is also confirmed in research of Clemens, et al. (2008). They state that larger firms have better capabilities for complying with institutional pressures, for instance due the willingness to use slack resources. Ingram and Simons (1995) build upon the work of Goodstein (1994) and come to the same conclusions. Both use work-family issues as institutional pressure. Clemens, et al. (2008) also extend the earlier work by putting more emphasis on environmental uncertainty. They state and confirm that increasing perceived uncertainty leads to innovative, proactive and risk-taking strategies. These strategies are labelled as active strategies, which correlate with the right side of the continuum of O liver (1991), where manipulation is located. They also state that active strategies are more effective when they are implemented quickly (Clemens, et al., 2008). As far as known, the strategic response typology of O liver (1991) has not been empirically tested further. The

26 previously discussed research confirms the expected relations hips between institutional pressures and strategic responses, and the distinguished predictive factors seem to apply. To what extent they apply to the GFEC is a unexplored field, which will be addressed in this research.

3.1.7 Limitations of the model

The typology of O liver (1991) argues from an external angle of incidence, in which the institutional processes determine how organizations react. This framework then seems to assume that all organizations, facing the same circumstances, will react in a similar ma nner. Assuming for now that that is the case, then how are performance differences explained between different organizations in the same industry, operating in similar institutional environments? The framework of O liver (1991) seems not to be capable of answering such questions. Neither does it take into consideration the internal dynamics of institutional change, which is a commonly known critique on institutional theory (Greenwood & Hinings, 1996). A framework that seems be better able to provide insights to such matters, is the strategic response typology of Miles and Snow (1978). This typology has its roots in the strategy field of research and is seen as the classical theory to describe how organizations react strategically to their environment. What type of organization is likely to outperform others is central in this stream of research. In other words, the belief is that the field of international business can be complemented here with perspectives from the strategy field of research. The following section will proceed with describing strategic change from a strategy perspective. After this, the two perspectives from the IB and strategy literature will be combined and propositions will be derived from that.

3.2 Strategic change from a strategy pers pe ctive: How do organizations respond to environme ntal change?

3.2.1 Strategic importance of the environment

When considering strategic choices available to managers in an organization, it is not possible to abstract from the environment (Child, 1997; Tan, et al. 2010). Moreover, organizations’ strategies are the reflection of the extent of match or alignment between their external environment and internal structure and processes (Desarbo, et al., 2005; Miles & Snow, 1978; Mintzberg, 1978). The environment presents threats and opportunities, which influences the strategic decision making of managers in organizations. Especially for firms in competitive environments there is a need for a distinctive strategic orientation which enables the firm to