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T E N T H E D I T I O N

Gregory Dess Gerry McNamara

Alan Eisner Seung-Hyun Lee

Text & Cases

Strategic Management

GREGORY G. DESS University of Texas at Dallas

GERRY McNAMARA Michigan State University

ALAN B. EISNER Pace University

SEUNG-HYUN (SEAN) LEE University of Texas at Dallas

With contributions by Steve Sauerwald University of Illinois at Chicago

text & cases

tenth edition

STRATEGIC MANAGEMENT

Nico Muller Art/Shutterstock

Strategic Management: Text and Cases

STRATEGIC MANAGEMENT: TEXT AND CASES, TENTH EDITION

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Strategic Management: Text and Cases

To my family, Margie, Taylor, Alex - our new son- in-law, and my parents, the late Bill and Mary Dess

To my first two academic mentors—Charles Burden and Les Rue (of Georgia State University)

–Greg

To my wonderful wife, Gaelen, and my children, Megan and AJ

–Gerry

To my family, Helaine, Rachel, and Jacob

–Alan

To my family, Hannah, Paul, and Stephen; and my parents, Kenny and Inkyung

–Sean

dedication

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Gregory G. Dess is the Andrew R. Cecil Endowed Chair in Management at the University of Texas at Dallas. His primary research interests are in strategic management, organization environment relationships, and knowledge management. He has published numerous articles on these subjects in both academic and practitioner-oriented journals. He also serves on the editorial boards of a wide range of practitioner-oriented and academic journals. In August 2000, he was inducted into the Academy of Management Journal’s Hall of Fame as one of its charter members. Professor Dess has conducted executive programs in the United States, Europe, Africa, Hong Kong, and Australia. During 1994 he was a Fulbright Scholar in Oporto, Portugal. In 2009, he received an honorary doctorate from the University of Bern (Switzerland). He received his PhD in Business Administration from the University of Washington (Seattle) and a BIE degree from Georgia Tech.

Gerry McNamara is the Eli Broad Professor of Management at Michigan State University. His research draws on cognitive and behavioral theories to explain strategic phenomena, including strategic decision making, mergers and acquisitions, and environmental assessments. His research has been published in the Academy of Management Journal, the Strategic Management Journal, Organization Science, Organizational Behavior and Human Decision Processes, the Journal of Applied Psychology, the Journal of Management, and the Journal of International Business Studies. Gerry’s research has also been abstracted in the Wall Street Journal, Harvard Business Review, New York Times, Bloomberg Businessweek, the Economist, and Financial Week. He serves as an Associate Editor for the Strategic Management Journal and previously served as an Associate Editor for the Academy of Management Journal. He received his PhD from the University of Minnesota.

about the authors

Gregory G. Dess ©He Gao

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Alan B. Eisner is Professor of Management and Associate Dean for Graduate Programs at the Lubin School of Business, Pace University. He received his PhD in management from the Stern School of Business, New York University. His primary research interests are in strategic management, technology management, organizational learning, and managerial decision making. He has published research articles and cases in journals such as Advances in Strategic Management, International Journal of Electronic Commerce, International Journal of Technology Management, American Business Review, Journal of Behavioral and Applied Management, and Journal of the International Academy for Case Studies. He is the former Associate Editor of the Case Association’s peer-reviewed journal, The CASE Journal.

Seung-Hyun Lee is a Professor of strategic management and international business and the Area Coordinator of the Organization, Strategy, and International Management area at the Jindal School of Business, University of Texas at Dallas. His primary research interests lie on the intersection between strategic management and international business spanning from foreign direct investment to issues of microfinance and corruption. He has published in numerous journals including Academy of Management Review, Journal of Business Ethics, Journal of International Business Studies, Journal of Business Venturing, and Strategic Management Journal. He received his MBA and PhD from the Ohio State University.

Alan B. Eisner Seung-Hyun Lee

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Welcome to the Tenth Edition of Strategic Management: Text and Cases! We always appreciate the constructive and helpful feed- back that we have received on our work. And, later in the Preface, we are happy to acknowledge the reviewers for all of the 10 editions of Strategic Management by name. The following are some examples of the encouraging feedback we have received:

Dess and colleagues have crafted a globally compelling, innovatively current, and poi- gnantly challenging strategic tool for those of us passionate about teaching strategy. Edu- cators will be inspired and impressed by the portfolio of relevant concepts linked to

practical applications through Learning From Mistakes (my favorite), Strategy Spotlights, Insights from Executives, Reflecting on Career Implications, and Cases. Nicely done!

Marta Szabo White, Georgia State University

We like to change up our cases each term so this gives us a good variety to pick from and rotate through. I feel like each case offers a different learning experience so it is good to incorporate variety.

Nicole Lowes, Liberty University

The Dess book comprehensively covers the fundamentals of strategy and supports concepts with research and managerial insights.

Joshua J. Daspit, Mississippi State University

Very engaging. Students will want to read it and find it hard to put down.

Amy Gresock, University of Michigan, Flint

Strategic Management by Dess, McNamara, Eisner, and Lee is the most engaging and relevant strategy text on the market. The information is convincingly presented and with enough timely examples that students will be engaged. The text also provides thorough, accurate coverage of strategy concepts. These factors combined are a recipe for student learning.

Drake Mullens, Tarleton State University

I use Strategic Management in a capstone course required of all business majors, and students appreci- ate the book because it synergizes all their business education into a meaningful and understandable whole. My students enjoy the book’s readability and tight organization, as well as the contemporary examples, case studies, discussion questions, and exercises.

William Sannwald, San Diego State University

The content is current and my students would find the real-world examples to be extremely interesting. My colleagues would want to know about it and I would make extensive use of the following features: Learning from Mistakes, Strategy Spotlights, Issues for Debate, and I especially like the Reflecting on Career Implications feature. Bottom line: the authors do a great job of explaining complex material and at the same time their use of up-to-date examples promotes learning.

Jeffrey Richard Nystrom, University of Colorado at Denver

The examples in each chapter are extremely useful to the students and the choice of cases are excellent for case study analysis.

Michael L. Sloan, San Diego State University

We always endeavor to improve our work and we are most appreciative of the extensive and thoughtful feedback that many strategy professionals have graciously given us. The author team has worked hard to incorporate many of their ideas into the Tenth Edition.

preface

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We believe we have made valuable improvements throughout our many revised editions of Strategic Management. At the same time, we strive to be consistent and “true” to our original overriding objective: a book that satisfies three Rs—rigor, relevance, and readable. And we are pleased that we have received feedback (such as the comments on the previous page) that is consistent with what we are trying to accomplish.

What are some of the features in Strategic Management that reinforce the three Rs? First, we build in rigor by drawing on the latest research by management scholars and insights from man- agement consultants to offer a current and comprehensive view of strategic issues. We reinforce this rigor with our Issues for Debate and Reflecting on Career Implications that require students to develop insights on how to address complex issues and understand how strategy concepts can enhance their career success. Second, to enhance relevance, we provide numerous examples from management practice in the text and Strategy Spotlights (sidebars). We also increase rele- vance by relating course topic and examples to current business and societal themes, including environmental sustainability, ethics, globalization, entrepreneurship, and data analytics. Third, we stress readability through an engaging writing style with minimal jargon to ensure an effective learning experience. This is most clearly evident in the conversational presentations of chapter opening Learning from Mistakes and chapter ending Issues for Debate.

Unlike other strategy texts, we provide three separate chapters that address timely topics about which business students should have a solid understanding. These are the role of intellec- tual assets in value creation (Chapter 4), entrepreneurial strategy and competitive dynamics (Chapter 8), and fostering entrepreneurship in established organizations (Chapter 12). We also provide an excellent and thorough chapter on how to analyze strategic management cases.

In developing Strategic Management: Text and Cases, we certainly didn’t forget the instructors. As we all know, you have a most challenging (but rewarding) job. We did our best to help you. We provide a variety of supplementary materials that should help you in class preparation and delivery. For example, our chapter notes do not simply summarize the material in the text. Rather (and consistent with the concept of strategy), we ask ourselves: “How can we add value?” Thus, for each chapter, we provide numerous questions to pose to help guide class discussion, at least 12 boxed examples to supplement chapter material, and three detailed “teaching tips” to further engage students. For exam- ple, we provide several useful insights on strategic leadership from one of Greg’s colleagues, Charles Hazzard (formerly Executive Vice President, Occidental Chemical). Also, we completed the chapter notes ourselves. That is, unlike many of our rivals, we didn’t simply farm the work out to others. Instead, we felt that such efforts help to enhance quality and consistency—as well as demonstrate our personal commitment to provide a top-quality total package to strategy instructors. With the Tenth Edition, we also benefited from valued input by our strategy colleagues to further improve our work.

Let’s now address some of the key substantive changes in the Tenth Edition. Then we will cover some of the major features that we have had in previous editions.

WHAT’S NEW? HIGHLIGHTS OF THE TENTH EDITION We have endeavored to add new material to the chapters that reflects the feedback we have received from our reviewers as well as the challenges today’s managers face. Thus, we all invested an extensive amount of time carefully reviewing a wide variety of books, academic and practitio- ner journals, and the business press.

We also worked hard to develop more concise and tightly written chapters. Based on feedback from some of the reviewers, we have tightened our writing style, tried to eliminate redundant examples, and focused more directly on what we feel is the most important content in each chap- ter for our audience. The overall result is that we were able to update our material, add valuable new content, and—at the same time—shorten the length of the chapters.

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PREFACE

Here are some of the major changes and improvements in the Tenth Edition:

• Digital Economy. We discuss and illustrate how the rise in digital technologies is changing the competitive environment and how firms are enhancing their strategic position by leveraging elements of the digital economy. A few examples include: • How Alibaba has created a sprawling e-commerce giant in Chapter 1 • How Zara is restructuring its operations to serve online customers in Chapter 3 • How Unilever uses artificial intelligence to hire the best talent in Chapter 4 • How firms use data analytics to enhance organizational control in Chapter 9

• Sustainability. With sustainability being an increasing concern of our students, customers, and investors, sustainability has become a key driver of organizational success. We illustrate how firms have incorporated sustainability as a core element of their strategy. A few examples include: • How firms proactively incorporate environmental concerns in their business

practices by eliminating plastic waste in Chapter 2 • How firms are focusing on sustainability across a range of elements of the value

chain and how these efforts support the attainment of long-term financial performance in Chapter 3

• How sustainable business strategies can attract and retain talent in Chapter 4 • How entrepreneurial firms are working to produce more environmentally

sustainable batteries in Chapter 12

• The importance of human and social capital for career and firm success. We enhance our discussion of how building and leveraging human and social capital is a core strategic activity. A few examples include: • How to network more effectively in Chapter 4 • How firms can build and leverage independent work teams in Chapter 9 • How firms can inspire passion in their employees in Chapter 9 • How superbosses can help employees working for them accomplish more than

they ever thought possible in Chapter 11

• Executive Insights: The Strategic Management Process. Here, we introduce an in-depth interview with Mr. Usman Ghani, an internationally recognized consultant who is Chairman of ConfluCore LLP. Usman provides several practical insights into the strategic management process based on his extensive consulting experience and academic back- ground at the Massachusetts Institute of Technology, where he earned three graduate degrees.

• Over half of the 12 opening Learning from Mistakes vignettes that lead off each chapter are totally new. Unique to this text, they are all examples of what can go wrong, and they serve as an excellent vehicle for clarifying and reinforcing strategy concepts. After all, what can be learned if one simply admires perfection?

• Over half of our Strategy Spotlights (sidebar examples) are brand new, and many of the others have been thoroughly updated. Although we have reduced the number of Spot- lights from the previous edition to conserve space, we still have a total of 60—among the most in the strategy market. We focus on bringing the most important strategy con- cepts to life in a concise and highly readable manner. And we work hard to eliminate unnecessary detail that detracts from the main point we are trying to make. Also, con- sistent with our previous edition, many of the Spotlights focus on two “hot” issues that are critical in leading today’s organizations—ethics and environmental sustainability—as well as the digital economy in this edition.

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Key content changes for the chapters include:

• Chapter 1 addresses why executives must communicate their long-term thinking to help ensure the support of investors and other stakeholders. Such an initiative has many benefits. Among these are to provide investors with two critical elements: a long-term value creation story (the past) and a long term-value creation plan (the future). Further, when a company espouses an authentic, sustainable purpose, it is more likely to attract, motivate, and retain talent—a core objective in the knowledge economy. We also address how research by Andrew Winston, founder of Winston Eco-Strategies, has demonstrated the dramatic increase in the percentage of S&P companies that have produced detailed and rigorous reports on how they manage environmental and social issues as well as how they have incorporated them into their financial reports.

• Chapter 2 discusses the importance of the digital economy as a fundamental shift in the business environment. The term digital economy refers to economic transactions and business operations that are based on digital computing technologies. We highlight how the rise of the digital economy has disrupted existing industries by, for instance, reducing the asset intensity of business operations. Embracing the opportunities created by the digital economy has allowed entrepreneurs to create new business models such as ride sharing services and social networks.

• Chapter 3 discusses how firms are leveraging artificial intelligence to increase the sustainability of their competitive advantages. Firms are beginning to use artificial intelligence (AI) to better assess the preferences of their customers, how customers use their products, and how to best structure the firm’s operations to build and maintain competitive advantages. Using AI, these firms are able to build sustainable advantages because their resource sets are built on path dependent and socially complex processes, making imitation difficult.

• Chapter 4 discusses some of the challenges that women face when it comes to networking, an activity that is vital for career advancement. Given that there are relatively fewer women in positions of leadership, it often becomes more difficult for them to find sponsors in order to make introductions and referrals. Professor Herminia Ibarra, of the London Business School, has proposed some suggestions on how women can more successfully engage in networking activities. These include making connections across diverse circles, investing time in extracurricular activities, and joining a professional women’s network. We also provide examples of how companies have overcome the geographic preferences of talented professionals by building dispersed facilities and creating and maintaining formal relationships with research institutions.

• Chapter 5 introduces the concept of unscaling and how firms are using it to create a combination strategy. While firms have traditionally built large-scaled operations to run as efficiently as possible in order to dominate markets, firms that pursue unscaling turn things on their head. Unscaled firms look to build small scale operations that meet the needs of particular customers as efficiently as possible, at times even more efficiently than scaled competitors. Unscaling involves both the leveraging of technology, such as artificial intelligence, and the reliance on suppliers or customers to provide critical inputs to the process. We illustrate the concept by showing how Waze, P&G, and Indochino all use unscaling to efficiently offer differentiated products and services.

• Chapter 6 discusses how CEO underpayment can be a trigger for acquisitions. Research shows that when CEOs are underpaid relative to their peer CEOs, they undertake acquisitions to grow the size of the firm and increase their compensation. Further, it appears to work for the acquiring CEOs. They do benefit by seeing their pay rise. Thus, this research provides evidence that CEOs sometimes undertake acquisitions to benefit themselves, not the stockholders of the firm.

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• Chapter 7 illustrates the potential of reverse innovation for the health care sector in high- income countries such as the United States. Reverse innovation refers to innovations that flow from low-income to high-income countries rather than the other way around. We illustrate how Indian hospital groups reconfigured their healthcare delivery to achieve high quality care at prices that are much lower than in the United States. These heathcare innovations subsequently found great success in parts of the United States that resemble the problems found in low-income countries.

• Chapter 8 challenges the conventional view that entrepreneurial firms are typically started by tech savvy college students or young adults. Research shows that the average age at which entrepreneurs start businesses is in their early forties. Further, the fastest growing firms were started by entrepreneurs who were even older, with founders of fast growing firms almost three times more likely to be over fifty than under thirty.

• Chapter 9 outlines disadvantages associated with outsider dominated boards of directors. The dominant view of boards of directors is that having boards that are primarily populated with outsiders, those not employed by or tied to the firm, is beneficial since the board will then be able to better monitor the firm’s CEO. However, we outline a number of disadvantages that arise with outsider dominated boards. First, the board receives less information about the firm’s operations since all information is filtered through the CEO. Second, the board has greater difficulty identifying who should be the next CEO of the firm since they don’t regularly interact with any executives other than the current CEO. Third, non-CEO executives miss out on opportunities to develop their strategic decision making skills by being part of the board.

• Chapter 10 discusses the power of small, independent teams in keeping the firm innovative and agile. We draw on consultants’ insights on how to structure and manage teams to make them more effective. Recommendations include keeping the size of the team small, staffing the team with top performers, empowering the team to spend their budget, holding the team accountable for their goals, and having an engaged manager.

• Chapter 11 delves into the attributes of superbosses. Superbosses not only build strong firms but also help those around them accomplish more than they ever thought possible. How do they do it? First, they strive to hire the best employees and surround themselves with unusually gifted people. They have no desire to be the smartest person in the room. Instead, Lorne Michaels, the producer of Saturday Night Live, ref lected the mindset of a superboss when he said, “If you look around the room and think, ‘God, these people are amazing,’ then you’re probably in the right room.” Once they have these highly skilled individuals on their team, superbosses also figure out how to develop employees. We discuss several actions managers can take to identify the best candidates for their firm and ways they can act to best develop their employees.

• Chapter 12 discusses the mindset needed to leverage the value of technologies in different markets. Firms often struggle in their efforts to leverage their existing technologies in new markets. We discuss a four-step process firms can employ to increase their effectiveness in leveraging their technologies in new markets. The steps redefine the technology or competency in general terms, identify new applications of the technology, select the most promising applications, and choose the best entry mode. We discuss these steps in more detail and provide an example of each in the chapter.

• Chapter 13 updates our Appendix: Sources of Company and Industry Information. As always, the authors owe a huge debt of gratitude to Ms. Ruthie Brock, of the University

PREFACE

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of Texas at Arlington. She has provided us with comprehensive and updated informa- tion for the Tenth Edition that is organized on a wide range of issues. These include competitive intelligence, annual report collections, company rankings, business web- sites, as well as strategic and competitive analysis. She has always been very gracious when we impose on her every two years!

• We have worked hard to further enhance our excellent case package with a major focus on fresh and current cases on familiar firms. • More than half of our cases are author-written (much more than the competition). • While many of the titles look familiar, we have created fresh stories and added

interesting data about the companies to minimize instructor preparation time and “maximize freshness” of the content.

• We have added several exciting new cases to the lineup including a return of South- west Airlines with a fresh story, The Movie Exhibition industry, Lime (bicycle ride- sharing), Venmo (mobile payments), FlipKart (Amazon competitor in India) and Alibaba (e-commerce).

• These new cases along with 32 fresh stories about familiar firms and classics such as Robin Hood give instructors many great options.

WHAT REMAINS THE SAME: KEY FEATURES OF EARLIER EDITIONS Let’s now briefly address some of the exciting features that remain from the earlier editions.

• Traditional organizing framework with three other chapters on timely topics. Crisply written chapters cover all of the strategy bases and address contemporary topics. First, the chapters are divided logically into the traditional sequence: strategy analysis, strategy formulation, and strategy implementation. Second, we include three chapters on such timely topics as intellectual capital/knowledge management, entrepreneurial strategy and competitive dynamics, and fostering corporate entrepreneurship and new ventures.

• Learning from Mistakes chapter-opening cases. To enhance student interest, we begin each chapter with a case that depicts an organization that has suffered a dramatic performance drop, or outright failure, by failing to adhere to sound strategic management concepts and principles. We believe that this feature serves to underpin the value of the concepts in the course and that it is a preferred teaching approach to merely providing examples of out- standing companies that always seem to get it right. After all, isn’t it better (and more challenging) to diagnose problems than admire perfection? As Dartmouth’s Sydney Finkelstein, author of Why Smart Executives Fail, notes: “We live in a world where success is revered, and failure is quickly pushed to the side. However, some of the greatest oppor- tunities to learn—for both individuals and organizations—come from studying what goes wrong.”* We’ll see how, for example, Mattress Firm grew to more than 3,200 stores and $3 billion in annual revenue—but then crashed into bankruptcy. Clearly, the advent of nimble internet rivals, such as Casper Sleep, Inc., led to their downfall. However, their demise was hastened by their aggressive expansion and the accumulation of excessive debt to fund it. We’ll also explore the bankruptcy of storied law firm Dewey & LeBoeuf LLP. Their failure can be attributed to three major issues: a reliance on borrowed money,