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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,

*Personal Communication, June 20, 2005.

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making large promises about compensation to incoming partners (which didn’t sit well with their existing partners!), and a lack of transparency about the firm’s financials.

• Issue for Debate at the end of each chapter. We find that students become very engaged (and often animated!) in discussing an issue that has viable alternate points of view. It is an exciting way to drive home key strategy concepts. For example, in Chapter 4, we ask whether or not providing financial incentives to employees to lose weight actually works. And, in Chapter 10 we address a trend that is taking place in many large corpo- rations: the flattening of hierarchical organizational structures. In fact, one survey found that 93 percent of polled firms indicate that they intend to flatten their organi- zation in the near future. On the one hand, such restructuring has its advantages—it can offer cost savings, flexibility, and quicker response times. However, some of these benefits may be offset by some negative consequences that can occur. These include the overstretching of management attention, additional friction among managers at various levels since there are fewer middle managers to resolve conflicts, and demotivating effects caused by reduced opportunities for managers to advance through the manage- ment ranks. Clearly, one size does not fit all. Firms must consider the relative benefits and costs of flattening their structures as well as take into account such factors as a firm’s size, technology, and culture as well as the industry in which it competes.

• Insights from Research. We include six of these features in the Tenth Edition—and half of them are entirely new. Here, we summarize key research findings on a variety of issues and, more importantly, address their relevance for making organizations (and managers!) more effective. For example, in Chapter 2 we discuss findings from a meta-analysis (research combining many individual studies) to debunk several myths about older workers—a topic of increasing importance, given the changing demographics in many developed countries. In Chapter 4, we address a study that explored the viability of re-hiring employees who had previously left the organizations. Such employees, called “boomerangs” may leave an orga- nization for several reasons and such reasons may strongly influence their willingness to return to the organization. And in Chapter 6, we explore a study that investigates how closely CEOs attend to media assessments of actions that they take. Using a large database of 745 large acquisitions undertaken by S&P 500 firms, researchers find that CEOs do pay attention to media evaluations of acquisitions. However, the extent to which they are future- or past-focused influences whether and how they learn from the media.

• Reflecting on Career Implications . . . We provide insights that are closely aligned with and directed to three distinct issues faced by our readers: prepare them for a job interview (e.g., industry analysis), help them with current employers or their career in general, or help them find potential employers and decide where to work. We believe this will be very valuable to students’ professional development.

• Consistent chapter format and features to reinforce learning. We have included several features in each chapter to add value and create an enhanced learning experience. First, each chapter begins with an overview and a list of key learning objectives. Second, as previously noted, the opening case describes a situation in which a company’s perfor- mance eroded because of a lack of proper application of strategy concepts. Third, at the end of each chapter there are four different types of questions/exercises that should help students assess their understanding and application of material:

1. Summary review questions. 2. Experiential exercises. 3. Application questions and exercises. 4. Ethics questions.

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Given the centrality of online systems to business today, each chapter contains at least one exercise that allows students to explore the use of the Internet in implementing a firm’s strategy.

• Key Terms. Approximately a dozen key terms for each chapter are identified in the margins of the pages. This addition was made in response to reviewer feedback and improves students’ understanding of core strategy concepts.

• Clear articulation and illustration of key concepts. Key strategy concepts are introduced in a clear and concise manner and are followed by timely and interesting examples from business practice. Such concepts include value-chain analysis, the resource-based view of the firm, Porter’s five forces model, competitive advantage boundaryless organizational designs, digital strategies, corporate governance, ethics, data analytics, and entrepreneurship.

• Extensive use of sidebars. We include 60 sidebars (or about five per chapter) called Strategy Spotlights. The Strategy Spotlights not only illustrate key points but also increase the readability and excitement of new strategy concepts.

• Integrative themes. The text provides a solid grounding in ethics, globalization, environ- mental sustainability, and technology. These topics are central themes throughout the book and form the basis for many of the Strategy Spotlights.

• Implications of concepts for small businesses. Many of the key concepts are applied to start-up firms and smaller businesses, which is particularly important since many students have professional plans to work in such firms.

• Not just a product, but an entire package. Strategic Management features the best chapter teaching notes available today. Rather than merely summarizing the key points in each chapter, we focus on value-added material to enhance the teaching (and learning) experience. Each chapter includes dozens of questions to spur discussion, teaching tips, in-class group exercises, and about a dozen detailed examples from business practice to provide further illustrations of key concepts.

TEACHING RESOURCES Instructor’s Manual (IM) Prepared by the textbook authors, along with valued input from our strategy colleagues, the accompanying IM contains summary/objectives, lecture/discussion outlines, discussion ques- tions, extra examples not included in the text, teaching tips, reflecting on career implications, experiential exercises, and more.

Test Bank Revised by Christine Pence of the University of California-Riverside, the test bank contains more than 1,000 true/false, multiple-choice, and essay questions. It is tagged with learning objectives as well as Bloom’s Taxonomy and AACSB criteria.

• Assurance of Learning Ready. Assurance of Learning is an important element of many accreditation standards. The Tenth Edition is designed specifically to support your Assurance of Learning initiatives. Each chapter in the book begins with a list of num- bered learning objectives that appear throughout the chapter. Every test bank question is also linked to one of these objectives, in addition to level of difficulty, topic area, Bloom’s Taxonomy level, and AACSB skill area. Test Builder, an easy-to-use, cloud- based test bank software, can search the test bank by these and other categories, provid- ing an engine for targeted Assurance of Learning analysis and assessment.

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• AACSB Statement. McGraw-Hill is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, the Tenth Edition has sought to recognize the curricula guidelines detailed in the AACSB standards for busi- ness accreditation by connecting selected questions in Dess 10e and the test bank to the general knowledge and skill guidelines found in the AACSB standards. The statements contained in this new edition are provided only as a guide for the users of this text. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While this new edition and the teaching pack- age make no claim of any specific AACSB qualification or evaluation, we have labeled selected questions within the title according to the six general knowledge and skills areas.

• Test Builder. A comprehensive bank of test questions is provided within a computerized test bank powered by Test Builder, a cloud-based tool that enables instructors to format tests that can be printed or administered within a LMS. Available in Connect, Test Builder offers a modern, streamlined interface for easy content configuration that matches course needs, without requiring a download. Test Builder allows you to:

• access all test bank content from a particular title. • easily pinpoint the most relevant content through robust filtering options. • manipulate the order of questions or scramble questions and/or answers. • pin questions to a specific location within a test. • determine your preferred treatment of algorithmic questions. • choose the layout and spacing. • add instructions and configure default settings.

Test Builder provides a secure interface for better protection of content and allows for just-in-time updates to flow directly into assessments.

PowerPoint Presentation Prepared by Pauline Assenza of Western Connecticut State University, it consists of more than 400 slides incorporating an outline for the chapters tied to learning objectives. Also included are instructor notes, multiple-choice questions that can be used as Classroom Performance System (CPS) questions, and additional examples outside the text to promote class discussion.

The Business Strategy Game and GLO-BUS Online Simulations Both allow teams of students to manage companies in a head-to-head contest for global market lead- ership. These simulations give students the immediate opportunity to experiment with various strat- egy options and to gain proficiency in applying the concepts and tools they have been reading about in the chapters. To find out more or to register, please visit www.bsg-online.com or www.glo-bus.com.

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COURSE DESIGN AND DELIVERY RESOURCES Craft your teaching resources to match the way you teach! With McGraw-Hill Create, www. mcgrawhillcreate.com, you can easily rearrange chapters, combine material from other content sources, and quickly upload content you have written, like your course syllabus or teaching notes. Find the content you need in Create by searching through thousands of leading McGraw-Hill textbooks. Arrange your book to fit your teaching style. Create even allows you to personalize your book’s appearance by selecting the cover and adding your name, school, and course infor- mation. Order a Create book and you’ll receive a complimentary print review copy in three to five business days or a complimentary electronic review copy (eComp) via email in about one hour. Go to www.mcgrawhillcreate.com today and register. Experience how McGraw-Hill Create empow- ers you to teach your students your way.

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ACKNOWLEDGMENTS Strategic Management represents far more than just the joint efforts of the four co-authors. Rather, it is the product of the collaborative input of many people. Some of these individuals are academic colleagues, others are the outstanding team of professionals at McGraw-Hill, and still others are those who are closest to us—our families. It is time to express our sincere gratitude.

First, we’d like to acknowledge the dedicated instructors who have graciously provided their insights since the inception of the text. Their input has been very helpful in both pointing out errors in the manuscript and suggesting areas that needed further development as additional top- ics. We sincerely believe that the incorporation of their ideas has been critical to improving the final product. These professionals and their affiliations are:

The Reviewer Hall of Fame Moses Acquaah, University of North Carolina–Greensboro

Todd Alessandri, Northeastern University

Larry Alexander, Virginia Polytechnic Institute

Thomas H. Allison, Washington State University

Brent B. Allred, College of William & Mary

Allen C. Amason, Georgia Southern University

Kathy Anders, Arizona State University

Jonathan Anderson, University of West Georgia

Peter H. Antoniou, California State University– San Marcos

Dave Arnott, Dallas Baptist University

Marne L. Arthaud-Day, Kansas State University

Dr. Bindu Arya, University of Missouri– St. Louis

Jay A. Azriel, York College of Pennsylvania

Jeffrey J. Bailey, University of Idaho

David L. Baker, PhD, John Carroll University

Strategic Management: Text and Cases

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PREFACE

Dennis R. Balch, University of North Alabama

Bruce Barringer, University of Central Florida

Barbara R. Bartkus, Old Dominion University

Barry Bayon, Bryant University

Brent D. Beal, Louisiana State University

Dr. Patricia Beckenholdt, Business and Professional Programs, University of Maryland, University College

Joyce Beggs, University of North Carolina- Charlotte

Michael Behnam, Suffolk University

Kristen Bell DeTienne, Brigham Young University

Eldon Bernstein, Lynn University

Lyda Bigelow, University of Utah

David Blair, University of Nebraska at Omaha

Daniela Blettner, Tilburg University

Dusty Bodie, Boise State University

William Bogner, Georgia State University

David S. Boss, PhD, Ohio University

Scott Browne, Chapman University

Jon Bryan, Bridgewater State College

Charles M. Byles, Virginia Commonwealth University

Mikelle A. Calhoun, Valparaiso University

Thomas J. Callahan, University of Michigan– Dearborn

Samuel D. Cappel, Southeastern Louisiana State University

Gary Carini, Baylor University

Shawn M. Carraher, University of Texas–Dallas

Tim Carroll, University of South Carolina

Don Caruth, Amberton University

Maureen Casile, Bowling Green State University

Gary J. Castrogiovanni, Florida Atlantic University

Radha Chaganti, Rider University

Erick PC Chang, Arkansas State University

Tuhin Chaturvedi, Joseph M. Katz Graduate School of Business, University of Pittsburgh

Jianhong Chen, University of New Hampshire

Tianxu Chen, Oakland University

Andy Y. Chiou, SUNY Farmingdale State College

Theresa Cho, Rutgers University

Timothy S. Clark, Northern Arizona University

Bruce Clemens, Western New England College

Betty S. Coffey, Appalachian State University

Wade Coggins, Webster University–Fort Smith Metro Campus

Susan Cohen, University of Pittsburgh

George S. Cole, Shippensburg University

Jennifer Collins, Florida A&M University

Joseph Coombs, Virginia Commonwealth University

Christine Cope Pence, University of California– Riverside

James J. Cordeiro, SUNY Brockport

Stephen E. Courter, University of Texas at Austin

Jeffrey Covin, Indiana University

Keith Credo, Auburn University

Joshua J. Daspit, PhD, Mississippi State University

Deepak Datta, University of Texas at Arlington

James Davis, Utah State University

Justin L. Davis, University of West Florida

David Dawley, West Virginia University

Daniel DeGravel, California State University Northridge, David Nazarian College of Business and Economics

Strategic Management: Text and Cases

xvii

Helen Deresky, State University of New York– Plattsburgh

Rocki-Lee DeWitt, University of Vermont

Jay Dial, Ohio State University

Michael E. Dobbs, Arkansas State University

Jonathan Doh, Villanova University

Dr. John Donnellan, NJCU School of Business

Tom Douglas, Clemson University

Jon Down, Oregon State University

Meredith Downes, Illinois State University

Mohinder Dugal, Western Connecticut State University

Alan E. Ellstrand, University of Arkansas

Dean S. Elmuti, Eastern Illinois University

Clare Engle, Concordia University

Mehmet Erdem Genc, Baruch College, CUNY

Tracy Ethridge, Tri-County Technical College

William A. Evans, Troy State University–Dothan

Frances H. Fabian, University of Memphis

Angelo Fanelli, Warrington College of Business

Michael Fathi, Georgia Southwestern University

Carolyn J. Fausnaugh, Florida Institute of Technology

Tamela D. Ferguson, University of Louisiana at Lafayette

David Flanagan, Western Michigan University

Kelly Flis, The Art Institutes

Karen Ford-Eickhoff, University of North Carolina Charlotte

Dave Foster, Montana State University

Isaac Fox, University of Minnesota

Charla S. Fraley, Columbus State Community College–Columbus, Ohio

Deborah Francis, Brevard College

Steven A. Frankforter, Winthrop University

Harold Fraser, California State University– Fullerton

Vance Fried, Oklahoma State University

Karen Froelich, North Dakota State University

Naomi A. Gardberg, Baruch College, CUNY

Joe Gerard, Western New England University

J. Michael Geringer, Ohio University

Diana L. Gilbertson, California State University– Fresno

Matt Gilley, St. Mary’s University

Debbie Gilliard, Metropolitan State College– Denver

Yezdi H. Godiwalla, University of Wisconsin– Whitewater

Sanjay Goel, University of Minnesota-Duluth

Sandy Gough, Boise State University

Amy Gresock, PhD The University of Michigan, Flint

Vishal K. Gupta, The University of Mississippi

Dr. Susan Hansen, University of Wisconsin– Platteville

Allen Harmon, University of Minnesota–Duluth

Niran Harrison, University of Oregon

Paula Harveston, Berry College

Ahmad Hassan, Morehead State University

Donald Hatfield, Virginia Polytechnic Institute

Kim Hester, Arkansas State University

Scott Hicks, Liberty University

John Hironaka, California State University– Sacramento

Anne Kelly Hoel, University of Wisconsin–Stout

Alan Hoffman, Bentley College

Gordon Holbein, University of Kentucky

Stephen V. Horner, Pittsburg State University

Strategic Management: Text and Cases

xviii

Jill Hough, University of Tulsa

John Humphreys, Eastern New Mexico University

James G. Ibe, Morris College

Jay J. Janney, University of Dayton

Lawrence Jauch, University of Louisiana–Monroe

Dana M. Johnson, Michigan Technical University

Homer Johnson, Loyola University, Chicago

Hyungu Kang, Central Michigan University

Patricia Kanishiro, Loyola University, Maryland

Marilyn R. Kaplan, Naveen Jindal School of Management, University of Texas–Dallas

James Katzenstein, California State University– Dominguez Hills

Joseph Kavanaugh, Sam Houston State University

Franz Kellermanns, University of Tennessee

Craig Kelley, California State University– Sacramento

Donna Kelley, Babson College

Dave Ketchen, Auburn University

John A. Kilpatrick, Idaho State University

Dr. Jaemin Kim, Stockton University

Brent H. Kinghorn, Emporia State University

Helaine J. Korn, Baruch College, CUNY

Stan Kowalczyk, San Francisco State University

Daniel Kraska, North Central State College

Donald E. Kreps, Kutztown University

Jim Kroeger, Cleveland State University

Subdoh P. Kulkarni, Howard University

Ron Lambert, Faulkner University

Theresa Lant, New York University

Jai Joon Lee, California State University Sacramento

Ted Legatski, Texas Christian University

David J. Lemak, Washington State University– Tri-Cities

Cynthia Lengnick-Hall, University of Texas at San Antonio

Donald L. Lester, Arkansas State University

Wanda Lester, North Carolina A&T State University

Krista B. Lewellyn, University of Wyoming

Benyamin Lichtenstein, University of Massachusetts at Boston

Jun Lin, SUNY at New Paltz

Zhiang (John) Lin, University of Texas at Dallas

Dan Lockhart, University of Kentucky

John Logan, University of South Carolina

Franz T. Lohrke, Samford University

Eduardo Lopez, Belmont University

Kevin B. Lowe, Graduate School of Management, University of Auckland

Nicole Lowes, Liberty University

Leyland M. Lucas, Morgan State University

Doug Lyon, Fort Lewis College

Rickey Madden, PhD, Presbyterian College

James Maddox, Friends University

Ravi Madhavan, University of Pittsburgh

Paul Mallette, Colorado State University

Santo D. Marabella, Moravian College

Catherine Maritan, Syracuse University

Daniel Marrone, Farmingdale State College, SUNY

Sarah Marsh, Northern Illinois University

Jim Martin, Washburn University

John R. Massaua, University of Southern Maine

Hao Ma, Bryant College

Eric Shaunn Mattingly, Boise State University

PREFACE

Strategic Management: Text and Cases

xix

Larry McDaniel, Alabama A&M University

Jean McGuire, Louisiana State University

Abagail McWilliams, University of Illinois-Chicago

Ofer Meilich, California State University– San Marcos

John E. Merchant, California State University– Sacramento

John M. Mezias, University of Miami

Michael Michalisin, Southern Illinois University at Carbondale

Elouise Mintz, St. Louis University

Doug Moesel, University of Missouri–Columbia

Fatma Mohamed, Morehead State University

Mike Montalbano, Bentley University

Debra Moody, University of North Carolina– Charlotte

Gregory A. Moore, Middle Tennessee State University

James R. Morgan, Dominican University and UC Berkeley Extension

Ken Morlino, Wilmington University

Sara A. Morris, Old Dominion University

Todd W. Moss, PhD, Syracuse University

Carolyn Mu, Baylor University

Stephen Mueller, Northern Kentucky University

John Mullane, Middle Tennessee State University

Chandran Mylvaganam, Northwood University

Sucheta Nadkarni, Cambridge University

Anil Nair, Old Dominion University

V.K. Narayanan, Drexel University

Maria L. Nathan, Lynchburg College

Louise Nemanich, Arizona State University

Kent Neupert, Boise State University

Charles Newman, University of Maryland, University College

Stephanie Newport, Austin Peay State University

Gerry Nkombo Muuka, Murray State University

Bill Norton, University of Louisville

Dr. Jill E. Novak Texas A&M University

Roman Nowacki, Northern Illinois University

Yusuf A. Nur, SUNY Brockport

Jeffrey Richard Nystrom, University of Colorado–Denver

William Ross O’Brien, Dallas Baptist University

d.t. ogilvie, Rutgers University

Floyd Ormsbee, Clarkson University

Dr. Mine Ozer, SUNY–Oneonta

Dr. Eren Ozgen, Troy University–Dothan Campus

Karen L. Page, University of Wyoming

Jacquelyn W. Palmer, University of Cincinnati

Julie Palmer, University of Missouri– Columbia

Daewoo Park, Xavier University

Gerald Parker, Saint Louis University

Ralph Parrish, University of Central Oklahoma

Vijay Patel, University of North Carolina– Charlotte

Amy Patrick, Wilmington University

John Pepper, The University of Kansas

Douglas K. Peterson, Indiana State University

Edward Petkus, Mary Baldwin College

Michael C. Pickett, National University

Peter Ping Li, California State University– Stanislaus

Michael W. Pitts, Virginia Commonwealth University

Laura Poppo, Virginia Tech

Strategic Management: Text and Cases

xx

Steve Porth, Saint Joseph’s University

Jodi A. Potter, Robert Morris University

Tobias Pret, Pace University

Scott A. Quatro, Grand Canyon University

Ranfeng Qiu, California State University– San Bernadino

Nandini Rajagopalan, University of Southern California

Annette L. Ranft, North Carolina State University

Abdul Rasheed, University of Texas at Arlington

Devaki Rau, Northern Illinois University

George Redmond, Franklin University

Kira Reed, Syracuse University

Clint Relyea, Arkansas State University

Barbara Ribbens, Western Illinois University

Maurice Rice, University of Washington

Violina P. Rindova, University of Texas–Austin

Ron Rivas, Canisius College

David Robinson, Indiana State University–Terre Haute

Kenneth Robinson, Kennesaw State University

Simon Rodan, San Jose State University

Patrick R. Rogers, North Carolina A&T State University

John K. Ross III, Texas State University–San Marcos

Robert Rottman, Kentucky State University

Matthew R. Rutherford, Gonzaga University

Carol M. Sanchez, Grand Valley State University

Doug Sanford, Towson University

William W. Sannwald, San Diego State University

Yolanda Sarason, Colorado State University

Marguerite Schneider, New Jersey Institute of Technology

Roger R. Schnorbus, University of Richmond

Terry Sebora, University of Nebraska–Lincoln

John Seeger, Bentley College

Jamal Shamsie, Michigan State University

Mark Shanley, University of Illinois at Chicago

Ali Shahzad, James Madison University

Lois Shelton, California State University– Northridge

Herbert Sherman, Long Island University

Weilei Shi, Baruch College, CUNY

Chris Shook, Auburn University

Jeremy Short, University of Oklahoma

Mark Simon, Oakland University–Michigan

Rob Singh, Morgan State University

Bruce Skaggs, University of Massachusetts

Lise Anne D. Slattern, University of Louisiana at Lafayette

Michael Sloan, San Diego State University

Wayne Smeltz, Rider University

Anne Smith, University of Tennessee

Andrew Spicer, University of South Carolina

James D. Spina, University of Maryland

John Stanbury, George Mason University & Inter-University Institute of Macau, SAR China

Timothy Stearns, California State University– Fresno

Elton Stephen, Austin State University

Charles E. Stevens, University of Wyoming

Alice Stewart, Ohio State University

Christopher Stewart, Metropolitan State University of Denver

Mohan Subramaniam, Carroll School of Management Boston College

PREFACE

Strategic Management: Text and Cases

xxi

Ram Subramanian, Grand Valley State University

Roy Suddaby, University of Iowa

Michael Sullivan, UC Berkeley Extension

Marta Szabo White, Georgia State University

Stephen Takach, University of Texas at San Antonio

Justin Tan, York University, Canada

Qingjiu Tao, PhD, James Madison University

Renata A. Tarasievich, University of Illinois at Chicago

Linda Teagarden, Virginia Tech

Bing-Sheng Teng, George Washington University

Alan Theriault, University of California–Riverside

Tracy Thompson, University of Washington– Tacoma

Karen Torres, Angelo State University

Mary Trottier, Associate Professor of Management, Nichols College

Robert Trumble, Virginia Commonwealth University

Francis D. (Doug) Tuggle, Chapman University

K.J. Tullis, University of Central Oklahoma

Craig A. Turner, PhD, East Tennessee State University

Beverly Tyler, North Carolina State University

Rajaram Veliyath, Kennesaw State University

S. Stephen Vitucci, Tarleton State University– Central Texas

Jay A. Vora, St. Cloud State University

Valerie Wallingford, Ph.D., Bemidji State University

Jorge Walter, Portland State University

Bruce Walters, Louisiana Tech University

Edward Ward, St. Cloud State University

N. Wasilewski, Pepperdine University

Andrew Watson, Northeastern University

Larry Watts, Stephen F. Austin University

Marlene E. Weaver, American Public University System

Paula S. Weber, St. Cloud State University

Kenneth E. A. Wendeln, Indiana University

Robert R. Wharton, Western Kentucky University

Laura Whitcomb, California State University– Los Angeles

Marta Szabo White, Georgia State University

Scott Williams, Wright State University

Ross A. Wirth, Franklin University

Gary Wishniewsky, California State University East Bay

Diana Wong, Bowling Green State University

Beth Woodard, Belmont University

John E. Wroblewski, State University of New York- Fredonia

Anne York, University of Nebraska- Omaha

Michael Zhang, Sacred Heart University

Monica Zimmerman, Temple University

Second, we would like to thank the people who have made our two important features possible. The information found in our six Insights from Research was provided courtesy of www. businessminded.com, an organization founded by K. Matthew Gilley, PhD (St. Mary’s Univer- sity) that transforms empirical management research into actionable insights for business lead- ers. We appreciate Matt’s graciousness and kindness in helping us out. And, of course, our Executive Insights: The Strategic Management Process would not have been possible without the gracious participation of Usman Ghani, a premier international consultant, and Chairman of ConfluCore, LLP.

Strategic Management: Text and Cases

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PREFACE

Third, the authors would like to thank several faculty colleagues who were particularly helpful in the review, critique, and development of the book and supplementary materials. Greg’s and Sean’s colleagues at the University of Texas at Dallas also have been helpful and supportive. These individuals include Mike Peng, Joe Picken, Kumar Nair, John Lin, Larry Chasteen, Tev Dalgic, and Livia Markoczy. Administrative assistant, Shalonda Hill, has been extremely helpful. Four doctoral students, Brian Pinkham, Steve Sauerwald, Kyun Kim, and Canan Mutlu, have provided many useful inputs and ideas. They also appreciate the support of his dean and associ- ate dean, Hasan Pirkul and Varghese Jacob, respectively. Greg wishes to thank a special col- league, Abdul Rasheed at the University of Texas at Arlington, who certainly has been a valued source of friendship and ideas for us for many years. He provided valuable contributions to many of the editions. Gerry thanks all of his colleagues at Michigan State University for their help and support over the years. He also thanks his mentor, Phil Bromiley, as well as the students and former students he has had the pleasure of working with. Alan thanks his colleagues at Pace University and the Case Association for their support in developing these fine case selections. Special thanks go to Jamal Shamsie at Michigan State University for his support in developing the case selections for this edition.

Fourth, we would like to thank the team at McGraw-Hill for their outstanding support throughout the entire process. As we work on the book through the various editions, we always appreciate their hard work and recognize how so many people add value to our final package. This began with John Biernat, formerly publisher, who signed us to our original contract. He was always available to us and provided a great deal of support and valued input throughout several editions. Presently, in editorial, Terri Schiesl, managing director, editorial director Mike Ablass- meir, and senior product developer Anne Ehrenworth kept things on track, responded quickly to our seemingly endless needs and requests, and offered insights and encouragement. We appreci- ate their expertise—as well as their patience! Once the manuscript was completed and revised, content project manager Harvey Yep expertly guided it through the content and assessment production process. Matt Diamond provided excellent design and artwork guidance. We also appreciate executive marketing manager Debbie Clare and marketing coordinator Julia Blanken- ship for their energetic, competent, and thorough marketing efforts. Last, but certainly not least, we thank MHE’s outstanding book reps—who serve on the front lines—as well as many in-house sales professionals. Clearly, they deserve a lot of credit (even though not mentioned by name) for our success.

Fifth, we acknowledge the valuable contributions of many of our strategy colleagues for their excellent contributions to our supplementary and digital materials. Such content really adds a lot of value to our entire package! We are grateful to Pauline Assenza at Western Connecticut State University for her superb work on case teaching notes as well as chapter and case PowerPoints. Patrick McGuigan, Pace University, deserves our thanks for his hard work in developing excel- lent digital materials for Connect. We thank Christine Pence, University of California–Riverside, for her important contributions in revising our test bank and chapter quizzes, and Todd Moss, Oregon State University, for his hard work in putting together an excellent set of videos online, along with the video grid that links videos to chapter material. Finally, we thank Steve Sauer- wald, University of Illinois– Chicago, for his excellent contributions to the content in some of the chapters.

Finally, we would like to thank our families. For Greg this includes his parents, the late William and Mary Dess, who have always been there for him. His wife, Margie, and daughter, Taylor, have been a constant source of love and companionship. Our family is also thrilled to welcome a new member—Alex, who married Taylor in December 2018. Gerry thanks his wife, Gaelen, for her love,

Strategic Management: Text and Cases

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support, and friendship; and his children, Megan and AJ, for their love and the joy they bring to his life. He also thanks his current and former PhD students who regularly inspire and challenge him. Alan thanks his family—his wife, Helaine, and his children, Rachel and Jacob—for their love and support. He also thanks his parents, Gail Eisner and the late Marvin Eisner, for their support and encouragement. Sean thanks his wife, Hannah, and his two boys, Paul and Stephen, for their unceasing love and care. He also thanks his parents, Kenny and Inkyung Lee, for being there whenever needed.

Strategic Management: Text and Cases

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LEARNING OBJECTIVES Learning Objectives numbered LO 1-1, LO 1-2, LO 1-3, etc., with corre- sponding icons in the margins to indicate where learning objectives are covered in the text.

LEARNING FROM MISTAKES Learning from Mistakes vignettes are examples of where things went wrong. Failures are not only interesting but also sometimes easier to learn from. And students realize strategy is not just about “right or wrong” answers, but requires critical thinking.

STRATEGY SPOTLIGHT These boxes weave themes of ethics, globaliza- tion, and technology into every chapter of the text, providing students with a thorough grounding nec- essary for understanding strategic management. Select boxes incorporate the digital economy, envi- ronmental sustainability, and ethical themes.

a guided

tour

PART 1: STRATEGIC ANALYSIS

CHAPTER

1

Learning Objectives

LO1-1 Define strategic management and its four key attributes. LO1-2 Understand the strategic management process and its three interrelated and

principal activities.

LO1-3 Identify the vital role of corporate governance and stakeholder management, as well as how “symbiosis” can be achieved among an organization’s stakeholders.

LO1-4 Understand the importance of social responsibility, including environmental sustainability, and how it can enhance a corporation’s innovation strategy.

LO1-5 Recognize the need for greater empowerment throughout the organization. LO1-6 Explain how an awareness of a hierarchy of strategic goals can help an

organization achieve coherence in its strategic direction.

We encourage you to reflect on how the concepts presented in this chapter can enhance your career success (see “Reflecting on Career Implications...” at the end of the chapter).

Strategic Management Creating Competitive Advantages

©Nico Muller Art/Shutterstock

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PART 1: STRATEGIC ANALYSIS

LEARNING FROM MISTAKES

What makes the study of strategic management so inter- esting? Things can change so rapidly! Some start-ups can disrupt industries and become globally recognized names almost overnight and the rankings of the world’s most valuable firms can dramatically change in a brief period of time. On the other hand, many impressive, high-flying firms can struggle to reclaim past glory—or fail altogether. As colorfully (and ironically!) noted by Arthur Martinez, Sears’s former Chairman: “Today’s peacock is tomorrow’s feather duster.”1

Consider the following:2

• The 33-year average tenure of companies on the S&P 500 in 1962 narrowed to 24 years by 2016 and is forecast to shrink to merely 12 years by 2027.

• At the beginning of 2000, the four firms in the world with the highest market values were General Electric, Exxon Mobil, Pfizer, and Citigroup. By late 2019, four tech firms headed the list: Apple, Alphabet (parent of Google), Amazon, and Microsoft.

• Record private equity activity, a strong M&A market, and the growth of start-ups with billion dollar market caps (called “unicorns”) are often viewed as leading factors to increase disruptions in a wide variety of industries.

• A quarter century ago, few would have predicted that a South Korean firm would be a global car giant, an Indian firm would be one of the world’s largest technology firms, and a huge Chinese Internet firm would list on an American stock exchange.

• In 1995, only about 3 percent of the companies on the Fortune 500 list were from emerging markets. This number has increased to 26 percent in 2013, and is predicted to grow to 45 percent by 2025.

• With the emergence of the digital economy, new entrants are shaking up long-standing industries. After all, Alibaba has become the world’s most valuable retailer—but holds no inventory; Airbnb is the world’s largest provider of accommodations— but owns no real estate; and Uber is the world’s largest car service—but owns no cars.

Retail has become one of the prime examples of an industry that has been impacted by the digital disruption and the emergence of online competitors. Many brick- and-mortar (i.e., high asset intensive) firms such as Bed,

Bath & Beyond, Urban Outfitters, Sears, Radio Shack, and J.C. Penney have either filed for bankruptcy, or have be- come mere shadows of their former selves.

Let’s take a closer look at another retailer, Mattress Firm, which filed for bankruptcy on October 5, 2018.3

Houston-based Mattress Firm was founded in 1986 and eventually grew to more than 3,200 stores and $3 billion in annual revenues. However, its pursuit of growth and dominance—largely via acquisition–in the industry led to its eventual demise.

A turning point came in 2015 when it purchased one of its chief rivals, Sleepy’s, for $780 million. Steve Stagner, Mattress Firm’s CEO at the time asserted, “This transfor- mational acquisition unites the nation’s two largest mat- tress specialty retailers providing customers with convenience, value, and choice.”

However, things certainly didn’t turn out as he had hoped. Acquiring Sleepy’s 1,000 stores left Mattress Firm severely over-retailed. As store traffic slowed, costly leases turned into an albatross around the firm’s neck. In bankruptcy court filings, the rapid expansion led to the “cannibalization” of stores that were clustered too closely and put them in direct competition with each other. This was poignantly stated by Hendre Ackermann, the firm’s CFO: “There are many examples of a Mattress Firm store being located literally across the street from another Mattress Firm store.”

Mattress Firm’s fortunes were also eroded by a set of more nimble competitors: online upstarts, including Casper, Lessa, Tuft & Needle, and Sapira. For example, Casper Sleep, Inc., founded in 2014, raised $240 million to sell mattresses directly to consumers. It provided easy on- line ordering, hassle-free delivery, and returns of reason- ably affordable mattresses. Within a year, Casper booked sales of $100 million.

The online rivals also had another major advantage over Mattress Firm: Shoppers had grown weary of the tra- ditional mattress-buying experience. This involved going into a store, testing out a slew of mattresses for a few minutes, and rushing into a decision on an expensive item designed to last for years. And, customers were often

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CHAPTER 1 :: STRATEGIC MANAGEMENT 9

THE STRATEGIC MANAGEMENT PROCESS We’ve identified three ongoing processes—analyses, decisions, and actions—that are central to strategic management. In practice, these three processes—often referred to as strategy analysis, strategy formulation, and strategy implementation—are highly interdependent and do not take place one after the other in a sequential fashion in most companies.

Intended versus Realized Strategies Henry Mintzberg, a management scholar at McGill University, argues that viewing the strategic management process as one in which analysis is followed by optimal decisions and their subsequent meticulous implementation neither describes the strategic manage- ment process accurately nor prescribes ideal practice.27 He sees the business environment as far from predictable, thus limiting our ability for analysis. Further, decisions are sel- dom based on optimal rationality alone, given the political processes that occur in all organizations.28

Understand the strategic management process and its three interrelated and principal activities.

LO 1-2

STRATEGY SPOTLIGHT1.1 AMBIDEXTROUS BEHAVIORS: COMBINING ALIGNMENT AND ADAPTABILITY A study involving 41 business units in 10 multinational compa- nies identified four ambidextrous behaviors in individuals. Such behaviors are the essence of ambidexterity, and they illustrate how a dual capacity for alignment and adaptability can be woven into the fabric of an organization at the individual level.

They take time and are alert to opportunities beyond the confines of their own jobs. A large computer company’s sales manager became aware of a need for a new software module that nobody currently offered. Instead of selling the customer something else, he worked up a business case for the new mod- ule. With management’s approval, he began working full time on its development.

They are cooperative and seek out opportunities to com- bine their efforts with others. A marketing manager for Italy was responsible for supporting a newly acquired subsidiary. When frustrated about the limited amount of contact she had with her peers in other countries, she began discussions with them. This led to the creation of a European marketing forum that meets quarterly to discuss issues, share best practices, and collaborate on marketing plans.

They are brokers, always looking to build internal net- works. When visiting the head office in St. Louis, a Canadian plant manager heard about plans for a $10 million investment for a new tape manufacturing plant. After inquiring further about the plans and returning to Canada, he contacted a regional man- ager in Manitoba, who he knew was looking for ways to build his business. With some generous support from the Manitoba gov- ernment, the regional manager bid for, and ultimately won, the $10 million investment.

They are multitaskers who are comfortable wearing more than one hat. Although an operations manager for a major coffee and tea distributor was charged with running his plant as effi- ciently as possible, he took it upon himself to identify value-added services for his clients. By developing a dual role, he was able to manage operations and develop a promising electronic module that automatically reported impending problems inside a coffee vending machine. With corporate funding, he found a subcontrac- tor to develop the software, and he then piloted the module in his own operations. It was so successful that it was eventually adopted by operations managers in several other countries.

A recent Harvard Business Review article provides some use- ful insights on how one can become a more ambidextrous leader. Consider the following questions:

• Do you meet your numbers? • Do you help others? • What do you do for your peers? Are you just their

in-house competitor? • When you manage up, do you bring problems—or

problems with possible solutions? • Are you transparent? Managers who get a reputation

for spinning events gradually lose the trust of peers and superiors.

• Are you developing a group of senior managers who know you and are willing to back your original ideas with resources?

Sources: Birkinshaw, J. and C. Gibson. 2004. Building ambidexterity into an organization. MIT Sloan Management Review, 45(4): 47–55; and Bower, J. L. 2007. Solve the succession crisis by growing inside-out leaders. Harvard Business Review, 85(11): 90–99.

STRATEGY SPOTLIGHT1.2 ENVIRONMENTAL SUSTAINABILITY IN THE FASHION INDUSTRY The $3 trillion fashion industry employs over 60 million people along its global value chain. Although it makes 100 billion accessories and garments each year, three-fifths of them are thrown away within a year, according to McKinsey & Company. Further, a vast amount of cotton, water, and power is used to make their products, but less than 1 percent is recycled into new clothes, according to an environ- mental research group in England. Amazingly, the United Nations Economic Commission for Europe estimates that about 40 percent of clothes in the wardrobes of developed countries are never worn! To provide some perspective, Rob Opsomer, a sustainability re- searcher asserts that “the equivalent of a dump truck filled with tex- tiles gets landfilled or incinerated every single second.”

Inditex SA, the company that owns Zara and several other brands, made 1.6 billion garments in 2016—a scale that has helped its stock price quintuple over a recent 10-year period. However, recently industry growth has slowed, in part because millennials have become sensitive to fast fashion’s impact on the environment. (In fact, according to Boston Consulting Group, one- third of this demographic consistently identifies sustainability as a factor that influences their purchasing habits.) Plus, they exhibit a preference for spending on experiences rather than goods.

Despite their strong past performance, Inditex has missed analysts’ revenue expectations in recent quarters and its shares have lost about one third of their value since the summer of 2017. As noted by Edwin Keh, CEO of the Hong Kong Research

This situation creates an opportunity for companies to use sustainability to differentiate their brands. With growing concerns over the waste, retailers have begun placing recycling bins prom- inently in many stores, using greener materials, etc., to help win over customers. Let’s look at some of Inditex’s initiatives:

• Began disassembling old clothing to spin into yarns for fashions it markets as “garments with a past.”

• Grouped many of its sustainability efforts—clothes made from organic cotton and repurposed fabrics into a sub- brand called Join Life.

• To boost the share of greener textiles in its mix, the firm has funded research programs at MIT and universities in Spain. One initiative is to try using 3D printing to make textiles using by-products from timber operations.

Inditex says that for now they’re absorbing the extra costs of using recycled or reconstituted garments. The Join Life line is priced competitively with other items in the Zara stores—T-shirts cost less than $10 and jeans are priced under $40. The firm is striving to keep a lid on prices of its greener materials and it ex- pects the cost to fall as production increases. Anna Gedda, an executive at rival H&M, whose firm has undertaken similar initia- tives, asserts, “We take it as a long-term investment instead of charging it to our customers. We believe sustainable fashion should be affordable for all.”