Interactive Applications Interactive Applications offer a variety of automatically graded exercises that require student to apply key concepts. Whether the assignment includes a click & drag, video case, or decision generator, these applications provide instant

feedback and progress tracking for students and detailed results for the instructor.

Case Exercises The Connect® Platform also includes case exercises for 12 of the 35 cases in this edition that require students to

work through questions based on both favorable and unfavorable Key Symptoms as well as the Underlying Causes

that affect Key Symptoms as they are observed in the case. Each multiple choice and short answer question number

under Key Symptoms corresponds to the same question number under Underlying Causes (e.g., Question 3 under

Key Symptoms corresponds to Question 3 under Underlying Causes). There is also a fi nal general question on

solutions that should address the causes.

Intelligent Response Technology Intelligent Response Technology (IRT) is a redesigned student interface for the Financial Analyses that accompany

the Case Exercises. In addition to a streamlined interface, IRT provides improved answer acceptance to reduce

students’ frustration with formatting issues (such as rounding), and, for select questions, provides a tabular format

that guides students through the process of case analysis. Additional questions have been added to test students’

mastery of the content more fully.

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Learning Management System Integration McGraw-Hill Campus is a one-stop teaching and learning experience available to use of any learning management system. Campus provides single sign-on to faculty and students for all McGraw-Hill material and technology from within the school website. McGraw-Hill Campus also allows instructors instant access to all supplements and teaching materials for all McGraw-Hill products.

Blackboard users also benefi t from McGraw-Hill’s industry-leading integration, providing single sign-on to access all Connect assignments and automatic feeding of assignment results to the Blackboard grade book.

EASY TO USE

POWERFUL REPORTING

Secure

Simple

Seamless

Get Connected Today! www.connect.mcgraw-hill.com

Connect generates comprehensive reports and graphs that provide instructors with an instant view of the performance of individual students, a specifi c section, or multiple sections. Since all content is mapped to learning outcomes, Connect reporting is ideal for accreditation or other administrative documentation.

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Gregory G. Dess University of Texas at Dallas

G. T. Lumpkin Syracuse University

Alan B. Eisner Pace University

Gerry McNamara Michigan State University

SEVENTH EDITION

strategic management

creating competitive advantages

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STRATEGIC MANAGEMENT: CREATING COMPETITIVE ADVANTAGES, SEVENTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2014 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2012, 2010, and 2008. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3

ISBN 978-0-07-763608-1 MHID 0-07-763608-2

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Library of Congress Cataloging-in-Publication Data

Dess, Gregory G. Strategic management : creating competitive advantages / Gregory G. Dess, University of Texas at Dallas, G. T. Lumpkin, Syracuse University, Alan B. Eisner, Pace University, Gerry McNamara, Michigan State University.—seventh edition. pages cm Includes bibliographical references and index. ISBN 978-0-07-763608-1 (alk. paper)—ISBN 0-07-763608-2 (alk. paper) 1. Strategic planning. I. Title. HD30.28.D4746 2014 658.4’012—dc23 2013029305

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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To my family, Margie and Taylor; my parents, Bill and Mary Dess; and Walter Descovich

–Greg

To my lovely wife, Vicki, and my students and colleagues

–Tom

To my family, Helaine, Rachel, and Jacob

–Alan

To my wonderful wife, Gaelen; my children, Megan and AJ; and my parents, Gene and Jane

–Gerry

DEDICATION

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.

G. T. (Tom) Lumpkin is the Chris J. Witting Chair and Professor of Entrepreneurship at Syracuse University in New York. Prior to joining the faculty at Syracuse, Tom was the Kent Hance Regents Endowed Chair and Professor of Entrepreneurship at Texas Tech University. His research interests include entrepreneurial orientation, opportunity recognition, strategy-making processes, social entrepreneurship, and innovative forms of organizing work. He has published numerous research articles in journals such as Strategic Management Journal, Academy of Management Journal, Academy of Management Review, Journal of Business Venturing, and Entrepreneurship: Theory and Practice. He is a member of the editorial review boards of Strategic Entrepreneurship Journal, Entrepreneurship Theory & Practice, and the Journal of Business Venturing. He received his PhD in management from the University of Texas at Arlington and MBA from the University of Southern California.

about the authors

ABOUT THE AUTHORS

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vii

Alan B. Eisner is Professor of Management and Department Chair, Management and Management Science Department, 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.

Gerry McNamara is a Professor of Management at Michigan State University. He received his PhD from the Carlson School of Management at the University of Minnesota. His research focuses on strategic decision making, organizational risk taking, and mergers and acquisitions. His research has been published in numerous journals, including the Academy of Management Journal, Strategic Management Journal, Organization Science, Organizational Behavior and Human Decision Processes, Journal of Management, and Journal of International Business Studies. His research on mergers and acquisitions has been abstracted in the New York Times, Bloomberg Businessweek, The Economist, and Financial Week. He is currently an Associate Editor for the Academy of Management Journal

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preface

Welcome to the Seventh Edition of Strategic Management: Creating Competitive Advantages! We are all very pleased with the positive market response to our previous edi- tion. Below is some of the encouraging feedback we have received from our reviewers:

The text is thorough and all-inclusive. I don’t need to refer to another book as a back-up. It addresses all aspects of strategic management from the initial inspiration of a vision to the nuts and bolts of putting the plan to work. It is well structured; it is clear how each chapter not only builds on the previous ones, but also how analysis, formulation, and implementation are interrelated.

Lois Shelton, California State University, Northridge

I use Strategic Management in a capstone course required of all business majors, and students appreciate 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

It is very easy for students to read because it presents strategy concepts in a simple but comprehensive manner. It covers important developments in the strategic management field that are usually ignored by other textbooks (e.g., concepts like social networks and social capital, the balanced scorecard, and new forms of organizational structure).

Moses Acquaah, University of North Carolina at Greensboro

Content is current and easy for students to grasp; good graphs and charts to illustrate important points in the chapter. Book is well organized around the AFI framework.

Lise Anne D. Slatten, University of Louisiana at Lafayette

It is the best written textbook for the undergraduate course that I have come across. Application materials tie concepts to real-world practice.

Justin L. Davis, University of West Florida

The Dess text takes a practical/easy approach to explain very difficult subject matter. It integrates a number of real-life scenarios to aid the student in their comprehension of key concepts. The standout of the text is the Reflecting on Career Implications. These end-of-chapter questions aid the student in applying their learning to their workplace in a manner that promotes career success.

Amy Patrick, Wilmington University

The Dess book overcomes many of the limitations of the last book I used in many ways: (a) presents content in a very interesting and engrossing manner without compromising the depth and comprehensiveness, (b) inclusion of timely and interesting illustrative examples, and (c) EOC exercises do an excellent job of complementing the chapter content.

Sucheta Nadkami, Drexel University

We are always striving to improve our work, and we are most appreciative of the extensive and constructive feedback that many strategy professionals have graciously given us. As always,

PREFACE

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we have worked hard to incorporate their ideas into the Seventh Edition—and we acknowledge them by name later in the Preface.

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 R’s: relevant, rigorous, and readable. That is, our tagline (paraphrasing the well-known Secret deodorant commercial) is: “Strong enough for the professor; made for the student.” 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.

To continue to earn the support of strategy instructors (and students!) we try to use an engaging writing style that minimizes unnecessary jargon and covers all of the traditional bases. We also integrate some central themes throughout the book—such as globalization, technology, ethics, environmental sustainability, and entrepreneurship—that are vital in understanding strategic management in today’s global economy. We draw on short examples from business practice to bring concepts to life by providing 85 Strategy Spotlights (more detailed examples in sidebars).

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 intellectual 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: Creating Competitive Advantage, 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. Also, the author team completed the chapter notes—along with the entire test bank—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 seventh 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 Seventh Edition. Then we will cover some of the major features that we have had in previous editions.

What’s New? Highlights of the Seventh Edition We have endeavored to add new material to the chapters that reflects both the feedback that we have received from our reviewers as well as the challenges that face today’s managers. Thus, we all invested an extensive amount of time carefully reviewing a wide variety of books, academic and practitioner 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 chapter 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 Seventh Edition:

• All of the 12 opening “Learning from Mistakes” vignettes that lead off each chapter at 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!

• Well 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 Spotlights from the previous edition to conserve space, we still have a total of 85—by far the most in the strategy market. We focus on bringing the most important strategy concepts 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, consistent with our previous edition, many of the Spotlights focus on three “hot” issues that are critical in leading today’s organizations: ethics, environmental sustainability, and crowdsourcing.

• We have added a new feature—Issue for Dcbate—at the end of each chapter. We have pretested these situations and find that students become very engaged (and often animated!) in discussing an issue that has viable alternative points of view. It is an exciting way to drive home key strategy concepts. For example, in Chapter 1, Seventh Generation is faced with a situation that confronts their values, and they must decide whether or not to provide their products to some of their largest customers. In Chapter 3, some interesting tradeoffs arose when The World Triathlon Corporation expanded their exclusive branding of Ironman to products that didn’t reflect the “spirit” of the brand. And, in Chapter 6, Delta Airlines’ diversification into the oil business via their acquisition of an oil refinery poses an issue for some interesting alternative points of view.

• Throughout the chapters, we provide many excerpts from interviews with top executives from Adam Bryant’s The Corner Office. Such viewpoints provide valuable perspectives from leading executives and help to drive home the value and purpose of key strategy concepts. For example, we include the perspectives of Tim Brown (CEO of IDEO) on employee empowerment, John Stumpf (CEO of Wells Fargo) on strategy implementation, and Gordon Bethune (former CEO of Continental Airlines) on the importance of incentive systems.

• We have completely rewritten the “Reflecting on Career Implications . . .” feature that we introduced in the Sixth Edition of Strategic Management. Based on reviewer feedback, we directed our attention to providing 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 feel this feature is significantly improved and should be of more value to students’ professional development.

Key content changes for the chapters include:

• Chapter 1 makes a strong business case for environmental sustainability and draws on Porter’s concept of “shared value” that was initially introduced in the Sixth Edition. Such issues advance the notion that firms should go far beyond a narrow focus on shareholder returns. Further, shared value promotes practices that enhance the competitiveness of the company while simultaneously advancing the social and economic conditions in which it operates.

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• Chapter 2 makes the distinction between “hard trends” and “soft trends” that was articulated by Dan Burrus in his recent book Flash Foresight. This distinction is important in determing the importance of current trends and their evolution over time. Soft trends are something that might happen and a probability with which it might happen can be assigned. In contrast, hard trends are based on measurable facts, events, or objects—they are something that will happen. We provide the example of how the identification of hard trends (in technology) led the renowned Mayo Clinic to develop a CD to help customers to access useful medical information. This initiative provided the Mayo Clinic with significant financial and nonfinancial benefits!

• Chapter 4 addresses two issues that are important to not only developing human capital in organizations but also for students entering—or enhancing their success in—an organization: mentorship versus sponsorship and the “trap” of ineffective networks. Knowing the distinction between mentors and sponsors has valuable implications for one’s career. Mentors may provide coaching and advice, and prepare one for the next position. Sponsors, on the other hand, are typically somebody in a senior position who can advocate and facilitate career moves. We also draw on research that suggests three types of “network traps” that professionals should work hard to avoid: the wrong structure, the wrong relationship, and the wrong behavior.

• Chapter 6 discusses when actions taken to change the scope of businesses in which a corporation competes lead to positive outcomes for the firm. We highlight the characteristics of both acquisitions and divestitures that lead to positive outcomes. With acquisitions, we focus on how the characteristics of the acquiring firm as well as the acquisition itself lead to positive reactions by the stock market to the announcement of the deal. With divestitures, we draw on the work by the Boston Consulting Group to highlight seven principles for effective divestitures.

• Chapter 7 looks into the hidden costs of offshoring. In recent years, many firms have moved parts of their operations to lower wage countries. In many cases, they have found that the expected cost savings were illusory. We discuss seven reasons why firms would not achieve the anticipated savings through offshoring and provide examples of firms that have benefited by bringing their operations back home.

• Chapter 8 includes an examination of crowdfunding, a rapidly growing means to finance entrepreneurial ventures. Crowdfunding involves drawing relatively small amounts of funding from a wide net of investors to provide potentially large pools of capital for entrepreneurial ventures. We discuss both the tremendous potential as well as the pitfalls of crowdfunding for entrepreneurs. Knowing that some of our students may want to be investors in these ventures, we also discuss issues that crowdfunding investors should consider when looking into these investment opportunities.

• Chapter 9 addresses how firms can build effective boards of directors. We identify how firms need to go beyond standard categories, such as insider versus outsider board members, to develop favorable board dynamics. We also discuss how the structure of boards has changed over the past 25 years.

• Chapter 10 examines the costs and benefits of nurturing strong relationships to ensure cooperation and achieve high levels of performance. Over the past 30 years, many scholars have argued that relational systems, where decisions regarding how to

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xii

facilitate control and coordination are driven by relationships rather than bureaucratic systems and contracts, are superior to more traditional control systems. We examine this issue and discuss how relational systems have both advantages and disadvantages. We conclude with a brief discussion of when managers may want to rely more on relationship systems and when they may want to rely more on formal structure and reward systems.

• Chapter 11 introduces the concept of “competency conipanions,” an important idea for managers to consider in developing their leadership ability. The idea is that leaders can benefit most by identifying and developing complementary strengths instead of continually working on already great qualities that they may possess. For example, a leader who has a strong competence in developing innovative ideas can extend that competency by developing strong communication skills.

• Chapter 13 updates our Appendix: Sources of Company and Industry Information. Here, we owe a big debt to Ruthie Brock and Carol Byrne, library professionals at the University of Texas at Arlington. These ladies have graciously provided us with comprehensive and updated information that is organized in a range of issues. These include competitive intelligence, annual report collections, company rankings, business websites, and strategic and competitive analysis. Such information is invaluable in analyzing companies and industries.

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 outstanding 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 opportunities to learn—both for individuals and organizations—come from studying what goes wrong.” * We’ll see how, for example, Borders went from enjoying enormous success as an innovative firm—with revenues of nearly $4 billion in 2005—to bankruptcy six years later. We will also explore why Daimler’s “ultra-urban” Smart car—despite its initial acclaim—has cost the firm $5.3 billion in cumulative losses over the years. And we’ll explore why

PREFACE

*Personal communication, June 20, 2005.

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Cisco’s eagerness to enter the digital video market via its acquisition of Pure Digital Technologies didn’t pan out.

• 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 set of bullets pointing to key learning objectives. Second, as previously noted, the opening case describes a situation in which a company’s performance 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

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 Web in implementing a firm’s strategy.

• “Reflecting on Career Implications” for each chapter. This feature—at the end of each chapter—will help instructors drive home the immediate relevance/value of strategy concepts. It focuses on how an understanding of key concepts helps business students early in their careers.

• 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, and entrepreneurship.

• Extensive use of sidebars. We include 85 sidebars (or about seven 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, environmental substainability, 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 textbook 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.

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xiv

PREFACE

Student Support Materials Online Learning Center (OLC) The following resources are available to students via the publisher’s OLC at www.mhhe. com/dess7e :

• Chapter quizzes students can take to gauge their understanding of material covered in each chapter.

• A selection of PowerPoint slides for each chapter. • Links to strategy simulations the Business Strategy Game & GLO-BUS. Both provide

a powerful and constructive way of connecting students to the subject matter of the course with a competition among classmates on campus and around the world.

Instructor Support Materials 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 questions, 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 has now been 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. Dess 7e is designed specifically to support your Assurance of Learning initiatives. Each chapter in the book begins with a list of numbered learning objectives that appear throughout the chapter, as well as in the end-of-chapter questions and exercises. 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. EZ Test, McGraw-Hill’s easy-to-use test bank software, can search the test bank by these and other categories, providing an engine for targeted Assurance of Learning analysis and assessment.

• AACSB Statement. The McGraw-Hill Companies is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, Dess 7e has sought to recognize the curricula guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in Dess 7e and the test bank to the general knowledge and skill guidelines found in the AACSB standards. The statements contained in Dess 7e 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 Dess 7e and the teaching package make no claim of any specific AACSB qualification or evaluation, we have labeled selected questions within Dess 7e according to the six general knowledge and skills areas.

• Computerized Test Bank Online. A comprehensive bank of test questions is provided within a computerized test bank powered by McGraw-Hill’s flexible electronic testing program, EZ Test Online ( www.eztestonline.com ). EZ Test Online

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allows you to create paper and online tests or quizzes in this easy-to-use program! Imagine being able to create and access your test or quiz anywhere, at any time without installing the testing software. Now, with EZ Test Online, instructors can select questions from multiple McGraw-Hill test banks or author their own, and then either print the test for paper distribution or give it online.

• Test Creation. • Author/edit questions online using the 14 different question type templates. • Create printed tests or deliver online to get instant scoring and feedback. • Create questions pools to offer multiple versions online – great for practice. • Export your tests for use in WebCT, Blackboard, PageOut, and Apple’s iQuiz. • Compatible with EZ Test Desktop tests you’ve already created. • Sharing tests with colleagues, adjuncts, TAs is easy.

• Online Test Management. • Set availability dates and time limits for your quiz or test. • Control how your test will be presented. • Assign points by question or question type with drop-down menu. • Provide immediate feedback to students or delay until all finish the test. • Create practice tests online to enable student mastery. • Your roster can be uploaded to enable student self-registration.

• Online Scoring and Reporting. • Automated scoring for most of EZ Test ’s numerous question types. • Allows manual scoring for essay and other open response questions. • Manual rescoring and feedback is also available. • EZ Test ’s grade book is designed to easily export to your grade book. • View basic statistical reports.

• Support and Help. • User’s guide and built-in page-specific help. • Flash tutorials for getting started on the support site. • Support website: www.mhhe.com/eztest. • Product specialist available at 1-800-331-5094. • Online Training: http://auth.mhhe.com/mpss/workshops/.

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 of the text to promote class discussion.

McGraw-Hill Connect™ Management Less Managing. More Teaching. Greater Learning. McGraw-Hill Connect Management is an online assignment and assessment solution that connects students with the tools and resources thev’ll need to achieve success.

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PREFACE

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• McGraw-Hill Connect Management Features. Connect Management offers a number of powerful tools and features to make managing assignments easier, so faculty can spend more time teaching. With Connect Management, students can engage with their coursework anytime and anywhere, making the learning process more accessible and efficient. Connect Management offers you the features described below.

• There are chapter quizzes for the 12 chapters, consisting of 15–25 multiple- choice questions, testing students’ overall comprehension of concepts presented in the chapter.

• There are 2 specially crafted interactives for each of the 12 chapters that drill students in the use and application of the concepts and tools of strategic analysis.

• The majority of the Connect exercises are automatically graded, thereby simplifying the task of evaluating each class member’s performance and monitoring the learning outcomes.

• Student Progress Tracking. Connect Management keeps instructors informed about how each student, section, and class is performing, allowing for more productive use of lecture and office hours. The progress-tracking function enables you to

• View scored work immediately and track individual or group performance with assignment and grade reports.

• Access an instant view of student or class performance relative to learning objectives.

• Collect data and generate reports required by many accreditation organizations, such as AACSB.

• Smart Grading. When it comes to studying, time is precious. Connect Management helps students learn more efficiently by providing feedback and practice material when they need it, where they need it. When it comes to teaching, your time also is precious. The grading function enables you to

• Have assignments scored automatically, giving students immediate feedback on their work and side-by-side comparisons with correct answers.

• Access and review each response, manually change grades, or leave comments for students to review.

• Reinforce classroom concepts with practice tests and instant quizzes.

• Simple Assignment Management. With Connect Management, creating assignments is easier than ever, so you can spend more time teaching and less time managing. The assignment management function enables you to

• Create and deliver assignments easily with selectable test bank items.

• Streamline lesson planning, student progress reporting, and assignment grading to make classroom management more efficient than ever.

• Go paperless with online submission and grading of student assignments.

• Instructor Library. The Connect Management Instructor Library is your repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Management Instructor Library includes

• Instructor Manual

• PowerPoint ® files

• Test Bank

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Videos A set of videos related to chapters can be found on the Online Learning Center (OLC) or Connect to support your classroom or student lab, or for home viewing. These thought- provoking video clips are available upon adoption of this text.

Online Learning Center (OLC) The instructor section of www.mhhe.com/dess7e also includes the Instructor’s Manual, PowerPoint Presentations, as well as additional resources.

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 leadership. These simulations give students the immediate opportunity to experiment with various strategy 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.mhhe.com/thompsonsims.

Additional Resources Create 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 information. 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 empowers you to teach your students your way.

e-book Options e-books are an innovative way for students to save money and to “go-green”, McGraw-Hill’s e-books are typically 40% of bookstore price. Students have the choice between an online and a downloadable CourseSmart e-book.

Through CourseSmart, students have the flexibility to access an exact replica of their textbook from any computer that has internet service without plug-ins or special software via the version, or create a library of books on their harddrive via the downloadable version. Access to the CourseSmart e-books is one year.

Features: CourseSmart e-books allow students to highlight, take notes, organize notes, and share the notes with other CourseSmart users. Students can also search terms across all e-books in their purchased CourseSmart library. CourseSmart e-books can be printed (5 pages at a time).

More info and purchase: Please visit www.coursesmart.com for more information and to purchase access to our e-books. CourseSmart allows students to try one chapter of the e-book, free of charge, before purchase.

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PREFACE

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McGraw-Hill Higher Education and Blackboard McGraw-Hill Higher Education and Blackboard have teamed up. What does this mean for you?

1. Your life, simplified. Now you and your students can access McGraw-Hill’s Connect ™ and Create ™ right from within your Blackboard course—all with one single sign-on. Say goodbye to the days of logging in to multiple applications.

2. Deep integration of content and tools. Not only do you get single sign-on with Connect and Create, you also get deep integration of McGraw-Hill content and content engines right in Blackboard. Whether you’re choosing a book for your course or building Connect assignments, all the tools you need are right where you want them—inside of Blackboard.

3. Seamless gradebooks. Are you tired of keeping multiple gradebooks and manually synchronizing grades into Blackboard? We thought so. When a student completes an integrated Connect assignment, the grade for that assignment automatically (and instantly) feeds your Blackboard grade center.

4. A solution for everyone. Whether your institution is already using Blackboard or you just want to try Blackboard on your own, we have a solution for you. McGraw-Hill and Blackboard can now offer you easy access to industry-leading technology and content, whether your campus hosts it or we do. Be sure to ask your local McGraw-Hill representative for details.

McGraw-Hill Customer Care Contact Information At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our product specialists 24 hours a day to get product training online. Or you can search our knowledge bank of Frequently Asked Questions on our support website, For customer support, call 800-331-5094, email hmsupport@mcgraw-hill.com, or visit www.mhhe.com/support. One of our technical support analysts will be able to assist you in a timely fashion.

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/ Irwin, 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 fi nal product. These professionals and their affi liations are:

The Reviewer Hall of Fame

Moses Acquaah, University of North Carolina–Greensboro

Todd Alessandri, Northeastern University

Larry Alexander, Virginia Polytechnic Institute

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Brent B. Allred, College of William & Mary

Allen C. Amason, University of Georgia

Kathy Anders, Arizona State University

Lise Anne D. Slatten, University of Louisiana at Lafayette

Peter H. Antoniou, California State University, San Marcos

Dave Arnott, Dallas Baptist University

Marne L. Arthaud-Day, Kansas State University

Jay Azriel, York University of Pennsylvania Jeffrey J. Bailey, University of Idaho

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

Joyce Beggs, University of North Carolina–Charlotte

Michael Behnam, Suffolk University

Kristen Bell DeTienne, Brigham Young University

Eldon Bernstein, Lynn University

David Blair, University of Nebraska at Omaha

Daniela Blettner, Tilburg University

Dusty Bodie, Boise State University

William Bogner, Georgia State 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

Theresa Cho, Rutgers 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

Joseph Coombs, Texas A & M 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

Deepak Datta, University of Texas at Arlington

James Davis, Utah State University

Justin L. Davis, University of West Florida

David Dawley, West Virginia University

Helen Deresky, State University of New York, Plattsburgh

Rocki-Lee DeWitt, University of Vermont

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PREFACE

Jay Dial, Ohio State University

Michael E. Dobbs, Arkansas State University

Jonathan Doh, Villanova University

Tom Douglas, Clemson University

Meredith Downes, Illinois State University

Jon Down, Oregon 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

Dave Foster, Montana State University

Isaac Fox, University of Minnesota

Deborah Francis, Brevard College

Steven A. Frankforter, Winthrop University

Vance Fried, Oklahoma State University

Karen Froelich, North Dakota State University

Naomi A. Gardberg, CNNY Baruch College

J. Michael Geringer, California Polytechnic State 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

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

Alan Hoffman, Bentley College

Gordon Holbein, University of Kentucky

Stephen V. Horner, Pittsburg State University

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

James Katzenstein, California State University, Dominguez Hills

Joseph Kavanaugh, Sam Houston State University

Franz Kellermanns, University of Tennessee

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Craig Kelley, California State University, Sacramento

Donna Kelley, Babson College

Dave Ketchen, Auburn University

John A. Kilpatrick, Idaho 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

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

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

Kevin Lowe, University of North Carolina, Greensboro

Leyland M. Lucas, Morgan State University

Doug Lyon, Fort Lewis College

Rickey Madden, Ph.D., 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

John R. Massaua, University of Southern Maine

Hao Ma, Bryant College

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

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

Sara A. Morris, Old Dominion University

Carolyn Mu, Baylor University

Stephen Mueller, Northern Kentucky University

John Mullane, Middle Tennessee State University

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xxii

Chandran Mylvaganam, Northwood University

Sucheta Nadkarni, Drexel University

Anil Nair, Old Dominion University V.K. Narayanan, Drexel University

Maria L. Nathan, Lynchburg College

Louise Nemanich, Arizona 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

Yusuf A. Nur, SUNY Brockport

Jeffrey R. Nystrom, University of Colorado

William Ross O’Brien, Dallas Baptist University

d.t. ogilvie, Rutgers University

Floyd Ormsbee, Clarkson University

Karen L. Page, University of Wyoming

Jacquelyn W. Palmer, University of Cincinnati

Julie Palmer, University of Missouri, Columbia

Gerald Parker, Saint Louis University

Daewoo Park, Xavier University

Ralph Parrish, University of Central Oklahoma

Amy Patrick, Wilmington University

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

Steve Porth, Saint Joseph’s University

Jodi A. Potter, Robert Morris University

Scott A. Quatro, Grand Canyon University

Nandini Rajagopalan, University of Southern California

Annette L. Ranft, Florida 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

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

PREFACE

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John Seeger, Bentley College

Jamal Shamsie, Michigan State University

Mark Shanley, University of Illinois at Chicago

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

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

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

Qingju Tao, Lehigh University

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

Robert Trumble, Virginia Commonwealth University

Francis D. (Doug) Tuggle, Chapman University

K.J. Tullis, University of Central Oklahoma

Craig A. Turner, Ph.D., 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

Bruce Walters, Louisiana Tech University

Jorge Walter, Portland State University

Edward Ward, St. Cloud State University

N. Wasilewski, Pepperdine University

Andrew Watson, Northeastern University

Larry Watts, Stephen F. Austin University

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

Scott Williams, Wright State University

Diana Wong, Bowling Green State University

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PREFACE

xxiv

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, 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 colleagues at the University of Texas at Dallas also have been helpful and support- ive. These individuals include Mike Peng, Joe Picken, Kumar Nair, John Lin, Larry Chasteen, Seung-Hyun Lee, Tev Dalgic, and Jane Salk. His administrative assistant, Mary Vice, has been extremely helpful. Three doctoral students, Brian Pinkham, Steve Saverwald, and Ciprian Stan, have provided many useful inputs and ideas, along with a research associate, Kimberly Flicker. He also appreciates the support of his dean and associate dean, Hasan Pirkul and Varghese Jacob, respectively. Tom would like to thank Gerry Hills, Abagail McWilliams, Rod Shrader, Mike Miller, James Gillespie, Ron Mitchell, Kim Boal, Keith Brigham, Jeremy Short, Tyge Payne, Bill Wan, Andy Yu, Abby Wang, Johan Wiklund, Mike Haynie, Alex McKelvie, Denis Gregoire, Alejandro Amezcua, Maria Minniti, Cathy Maritan, Ravi Dharwadkar, and Pam Brandes. Special thanks also to Jeff Stambaugh for his valuable contributions. Tom also extends a special thanks to Benyamin Lichtenstein for his support and encouragement. Both Greg and Tom wish to thank a special colleague, 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 pro- vided many valuable contributions to the seventh Edition. Alan thanks his colleagues at Pace University and the Case Association for their support in developing these fi ne case selections. Special thanks go to Jamal Shamsie at Michigan State University for his support in developing the case selections for this edition. Gerry thanks all of his colleagues at Michigan State Univer- sity 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, including Becky Luce, Cindy Devers, Federico Aime, Mike Mannor, Bernadine Dykes, Mathias Arrfelt, Kalin Kolev, Seungho Choi, Rob Davison, Dustin Sleesman, Danny Gamache, Adam Steinbach, and Daniel Chaffi n.

Third, 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 fi nal 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 sev- eral editions. Presently, in editorial, Paul Ducham, managing director, executive brand manager Mike Ablassmeir, and senior development editor Laura Griffi n, kept things on track, responded quickly to our seemingly endless needs and requests, and offered insights and encouragement. We appreciate their expertise—as well as their patience! Once the manuscript was completed and revised, content project manager Harvey Yep expertly guided it through the print produc- tion process. Pam Verros provided excellent design, photo selection, and artwork guidance. Susan Lombardi, content project manager, did a superb job adding value to our supplementary materials and digital content. We also appreciate marketing manager Elizabeth Trepkowski and marketing specialist Liz Steiner for their energetic, competent, and thorough marketing efforts. Last, but certainly not least, we thank MHE’s 70-plus outstanding book reps—who serve on the “front lines”—as well as many in-house sales professionals based in Dubuque, Iowa. Clearly, they deserve a lot of credit (even though not mentioned by name) for our success.

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Fourth, 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 Con- necticut State University for her superb work on case teaching notes as well as chapter and case PowerPoints. We thank Doug Sanford, Towson University, for his expertise in developing sev- eral pedagogical features, including the teaching notes for the “Learning from Mistakes. . .” and carefully reviewing our Instructor Manual’s chapters. Justin Davis, University of West Florida, along with Noushi Rahman, Pace University, deserve our thanks for their hard work in develop- ing excellent digital materials for Connect. And fi nally, we thank Christine Pence, University of California–Riverside, for her important contributions in revising our test bank 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 would like to thank our families. For Greg this includes his parents, 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. He would like to acknowledge his late uncle, Walter Descovich. Uncle Walt was truly a member of Tom Brokaw’s Greatest Generation. He served in the U.S. Navy during World War II—where he learned electronics—and later became a superintendent at Consolidated Edison in New York City. He, his wife, Eleanor, and his family have been an inspiration to Greg over the years. Tom thanks his wife, Vicki, for her constant love and companionship. Tom also thanks Lee Hetherington and Thelma Lumpkin for their inspiration, as well as his mom, Katy, and his sister, Kitty, for a lifetime of support. 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 encour- agement. Gerry thanks his wife, Gaelen, for her love, support, and friendship and his children, Megan and AJ, for their love and the joy they bring to his life. He also thanks his parents, Gene and Jane, for their encouragement and support in all phases of his life.

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Learning from Mistakes In 1997, Daimler AG introduced an “ultra-urban” car at the

Frankfurt Motor Show amid much fanfare. 1 Envisioned by

Nicholas Hayek (inventor of Swatch Watch) and Mercedes-

Benz, it received acclaim for its innovation, advanced

engineering, and functionality as well as being simply fun

to drive. Over one million were sold worldwide before it

entered the U.S. market a decade later. What was this car

that was transforming the urban transportation market? It

was the Smart fortwo—a pocket-sized two-seater, high-

efficiency vehicle made with cutting-edge materials that

were as light as they were strong and had an impressively

engineered Mercedes-Benz engine that made it fun to drive.

On January 16, 2008, the first Smart fortwo streaked

through the streets of Manhattan, New York. The Smart

fortwo was an immediate sensation in the United States,

with sales of 24,600 units in its first year. With rising gas

prices, a buoyant economy, and increasingly ecologically-

aware consumers, Daimler had not only found a market,

but also it was blazing a trail all across the United States.

However, sales quickly dropped—just 20,000 cars were

sold over the following three years. So where did Smart

take a wrong turn?

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Learning Objectives Learning Objectives numbered LO5.1, LO5.2, LO5.3, etc. with corresponding icons in the margins to indicate where learning objectives are covered in the text.

I h l 2000 P&G f d h i h ld h i

NGOs AS MONITORS OF MNCs Although the number of NGOs worldwide is hard to determine, according to a recent study there are at least 40,000 multinational NGOs. There are also hundreds of thousands based in individual countries, with India leading the pack with one NGO for 400 of its citizens. What are NGOs and what do they do? NGOs such as Greenpeace or World Wildlife Fund include a wide array of groups and organizations—from activist groups “reclaiming the streets” to development organizations delivering aid and providing essential public services. Other NGOs are research-driven policy organiza- tions, looking to engage with decision makers. Still others see them- selves as watchdogs, casting a critical eye over current events.

Some NGOs recently broadened their monitoring or watchdog role of multinational corporations (MNCs) to include not just the MNC itself but also the MNC’s supply chain. As an example, Apple in 2011 received massive media scrutiny from Chinese environ- mental NGOs because the beloved U.S. technology giant ignored pollution violations of some of its Chinese suppliers. Following intense media pressure, Apple quickly arranged talks with the Chi- nese environmental NGOs and eventually increased environmental standards for its suppliers. However, the responsibility of MNCs does not stop with their immediate supplier base. International brands such as Nike and Adidas were targets of international

media attention because they procured finished goods from Chinese textile companies with questionable environmental prac- tices. These cases highlight that MNCs face substantial challenges in what is commonly assumed to be an arm’s length market transaction.

Although many MNCs are quick to react to environmental con- cerns raised by NGOs, a more proactive management of environ- mental issues in their supply chain may prevent public scrutiny and other embarrassments. Apparel company Levi Strauss takes a proactive approach that encourages self-monitoring by their suppliers. For each false or misleading environmental record, Levi Strauss issues the supplier a “zero tolerance” warning and will terminate the relationship after three such warnings. However, if the supplier voluntarily reports environmental issues, Levi Strauss does not issue a warning, but instead works with the supplier to correct the problems. This proactive approach encourages self- monitoring and decreases the risk of becoming the target of NGO attention and media pressure.

Sources: Esty, D. C. & Winston, A. S. 2009. Green to Gold. Hoboken, NJ: Wiley: 69–70; Barboza, D. 2011. Apple cited as adding to pollution in China. The New York Times, September 1: np; Plambeck, E., Lee, H.L., and Yatsko, P. 2011. Improving environmental performance in your Chinese supply chain. MIT Sloan Management Review, 53(2): 43–51; and Shukla, A. 2010. First official estimate: An NGO for every 400 people in India. www.indianexpress.com , July 7: np.

STRATEGY SPOTLIGHT 1.3 ETHICS

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Learning from Mistakes Learning from Mistakes 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, globalization, and technology into every chapter of the text, providing students with a thorough grounding necessary for understanding strategic management. Select boxes incorporate crowdsourcing, environmental sustainability, and ethical themes.

guided

tour

Business-Level Strategy: Creating and Sustaining Competitive Advantages

After reading this chapter, you should have a good understanding of the following learning objectives:

LO5.1 The central role of competitive advantage in the study of strategic management, and the three generic strategies: overall cost leadership, differentiation, and focus.

LO5.2 How the successful attainment of generic strategies can improve a firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability.

LO5.3 The pitfalls managers must avoid in striving to attain generic strategies.

LO5.4 How firms can effectively combine the generic strategies of overall cost leadership and differentiation.

LO5.5 What factors determine the sustainability of a firm’s competitive advantage.

LO5.6 How Internet-enabled business models are being used to improve strategic positioning.

LO5.7 The importance of considering the industry life cycle to determine a firm’s business-level strategy and its relative emphasis on functional area strategies and value-creating activities.

LO5.8 The need for turnaround strategies that enable a firm to reposition its competitive position in an industry.

Learning from Mistak Some of the most widely known brands

and snack foods arena have been owned

Corporation. 1 Since the 1930s, Hostess Br

founded as Interstate Bakeries) produce

popular baked goods, including Wonder B

Ring Dings, Yodels, Zingers, and many o

Even with its iconic brands and sales in o

year, Hostess Brands found itself in a perilou

went into bankruptcy in 2012. Unable to f

solution to remain viable, in November

closed down all of its bakeries and was for

and sell off its brands to other bakeries. W

of their brands and their longstanding ma

was a surprise to many seeing the firm f

wrong?

The viability of a fi rm’s business-level strat by both the internal operations of a fi rm an and preferences of the market. Firms that s the appropriate resources and cost structure needs of the environment. Hostess had long themselves in the baked goods business simple yet fl avorful baked snack goods that in kids’ lunchboxes for generations. Their stro the environment was undone by a combinati

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GUIDED TOUR

countries, with India leading the pack with one NGO for 400 of it iti Wh t NGO d h t d th d ? NGO h Although many MNCs are quick to react to environmental c

of envi ic scru auss ta g by t ecord, g and

Howeve evi Stra supplie ages s

get of N

NJ: Wile The New 011.

MIT Sloa estimate p.

and everyone else “fends for themselves” in their independent, isolated functional areas. Instead, people throughout the organization must strive toward overall goals.

The need for such a perspective is accelerating in today’s increasingly complex, inter- connected ever-changing global economy As noted by Peter Senge of MIT the days

THE BUSINESS CASE FOR SUSTAINABILITY The corporate sustainability, or “green,” movement describes a business philosophy that goes beyond legal compliance with envi- ronmental regulations. Historically, companies engaged in social issues by handing out checks to charities or victims of natural disasters. While these forms of “green marketing” are here to stay, the new corporate sustainability movement wants not only to do good but also to save big bucks.

Companies across the world embrace the concept of sus- tainability as a powerful source of innovation and improving operational effectiveness. Companies that translate sustainable business practices into improved operational performance focus on the opportunity cost represented by waste instead of the short- term cost of implementing sustainable business practices. One industry in which sustainability creates competitive advantage is retailing. Take Walmart for example. Walmart is far ahead of its major competitors Target and Sears in terms of reducing waste and the weight of its packaging. In 2009, Walmart’s Japanese Seiyu chain converted the packaging for its private-label fresh-cut

fruit and salads from oil-based to corn-based plastic. This opera- tional improvement reduced packaging weight by 25 percent and lowered freight and warehouse costs by 13 percent, saving Walmart more than $195,000 a year.

International Paper (IP), a global paper and packaging com- pany, is another company that benefits from sustainable business practices. IP recognized that its future profitability depends on a steady supply of trees, and it has planted more than 4 billion tree seedlings since the 1950s. The company also cut dependence on fossil fuel by 21 percent from 2005 to 2010—partially achieved by burning limbs and other biomass debris from tree processing. These sustainability decisions paid off and saved IP $221 million annually. IP also formalized specific sustainability goals, such as reducing greenhouse gas emissions by 20 percent by 2020, high- lighting the company’s commitment to sustainability.

Sources: Stanford, D. 2011. Why sustainability is winning over CEOs. Bloomberg BusinessWeek, March 31: np; Gupta, N.J. & Benson, C. 2011. Sustainability and competitive advantage: An empirical study of value creation. Competitive Forum, 9(1): 121–136; International Paper. 2012. International Paper announces 12 voluntary sustainability goals to be achieved by 2020. www.internationalpaper.com , May 16: np.

STRATEGY SPOTLIGHT 1.4 ENVIRONMENTAL SUSTAINABILITY

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and everyone else “fends for themselves” in their independent, isolated functional areas. Instead, people throughout the organization must strive toward overall goals.

The need for such a perspective is accelerating in today’s increasingly complex, inter- connected ever-changing global economy As noted by Peter Senge of MIT the days

issues by handing out checks to charities or victims of natural disasters. While these forms of “green marketing” are here to stay, the new corporate sustainability movement wants not only to do good but also to save big bucks.

International Paper (IP), a global paper and packaging pany, is another company that benefits from sustainable bus practices. IP recognized that its future profitability depends steady supply of trees, and it has planted more than 4 billion seedlings since the 1950s. The company also cut dependen fossil fuel by 21 percent from 2005 to 2010—partially ach by burning limbs and other biomass debris from tree proces These sustainability decisions paid off and saved IP $221 m annually. IP also formalized specific sustainability goals, su reducing greenhouse gas emissions by 20 percent by 2020, lighting the company’s commitment to sustainability.

Sources: Stanford, D. 2011. Why sustainability is winning over CEOs. Bloombe BusinessWeek, March 31: np; Gupta, N.J. & Benson, C. 2011. Sustainability and competitive advantage: An empirical study of value creation. Competitive Forum 9(1): 121–136; International Paper. 2012. International Paper announces 12 volu sustainability goals to be achieved by 2020. www.internationalpaper.com , May m

HOW GOLDCORP USED CROWDSOURCING TO STRIKE GOLD! About 15 years ago, Toronto-based gold mining company Gold- corp was in big trouble. Besieged by strikes, lingering debts, and an exceedingly high cost of production, the firm had terminated mining operations. Conditions in the marketplace were quite poor, and the gold market was contracting. Most analysts assumed that the company’s 50-year-old mine in Red Lake, Ontario, was nearly dead. Without solid evidence of substantial new gold deposits, Goldcorp was likely to fold.

Clearly, CEO Robert McEwen needed a miracle. He was frus- trated with his in-house geologists’ reliability in estimating the value and location of gold on his property. He did something that was unprecedented in the industry: He published his geological data on the Web for all to see and challenged the world to do the prospecting. The “Goldcorp Challenge” posted a total of $575,000 in prize money to be awarded to the participants who submitted the best methods and estimates.

His reasoning: If he could attract the attention of world-class talent to the problem of finding more gold in Red Lake, just as Linux managed to attract world-class programmers to the cause of better software, he could tap into thousands of minds that he wouldn’t otherwise have access to. He could also speed up explo-

50 countries downloaded the company’s data and started their exploration. Says McEwen:

“We had math, advanced physics, intelligent systems, computer graphics, and organic solutions to inorganic problems. There were capabilities I had never seen before in the industry. When I saw the computer graphics, I almost fell out of my chair.”

The panel of five judges was astonished by the creativity of the submissions. The top winner, which won $105,000, was a collabo- ration by two groups in Australia: Fractal Graphics, of West Perth, and Taylor Wall & Associates, in Queensland. Together they had developed a powerful 3-D graphical depiction of the mine. One of the team members humorously stated, “I’ve never been to a mine. I’d never even been to Canada.” Overall, the contestants identified 110 targets on the Red Lake property, more than 80 percent of which yielded substantial quantities of gold. In fact, since the chal- lenge was initiated, an astounding 8 million ounces of gold have been found—worth well over $3 billion (given gold’s fluctuating market value). Most would agree that this is a pretty solid return on a half million dollar investment!

In 2012, Goldcorp had annual revenues of over $5 billion and a market value of $36 billion! Not bad for a once failing firm . . .

STRATEGY SPOTLIGHT 2.5 CROWDSOURCING

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Reflecting on Career Implications . . . Creating the Environmentally Aware Organization:

Advancing your career requires constant scanning, monitoring, and intelligence gathering to find out not only future job opportunities but also to understand how employers’ expectations are changing. Consider using websites such as LinkedIn to find opportunities. Merely posting your resume on a site such as LinkedIn may not be enough. Instead, consider in what ways you can use such sites for scanning, monitoring, and intelligence gathering.

SWOT Analysis: As an analytical method, SWOT analysis is applicable for individuals as it is for firms. It is important for you to periodically evaluate your strengths and weaknesses as well as potential opportunities and threats to your career. Such analysis should be followed by efforts to address your weaknesses by improving your skills and capabilities.

General Environment: The general environment consists of several segments, such as the demographic, sociocultural, political/legal, technological, economic, and global environments. It would be useful to evaluate how each of these segments can affect your career opportunities. Identify two or three specific trends (e.g., rapid technological change, aging of the population, increase in minimum wages) and their impact on your choice of careers. These also provide possibilities for you to add value for your organization.

Five-Forces Analysis: Before you go for a job interview, consider the five forces affecting the industry within which the firm competes. This will help you to appear knowledgeable about the industry and increase your odds of landing the job. It also can help you to decide if you want to work for that organization. If the “forces” are unfavorable, the long-term profit potential of the industry may be unattractive, leading to fewer resources available and—all other things being equal— fewer career opportunities.

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Key Terms Key Terms defined in the margins have been added to improve students’ understanding of core strategy concepts.

competitive advantage A firm’s resources and capabilities that enable it to overcome the competitive forces in its industry(ies).

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Reflecting on Career Implications This new section before the summary of every chapter consists of examples on how understanding of key concepts helps business students early in their careers.

Exhibits Both new and improved exhibits in every chapter provide visual presentations of the most complex concepts covered to support student comprehension.

EXHIBIT 1.3 The Strategic Management Process

Chapter 1

Introduction and Analyzing

Goals and Objectives

Chapter 4

Assessing Intellectual

Capital

Chapter 2

Analyzing the External Environment

Chapter 3

Analyzing the Internal Environment

Chapter 13

Case Analysis

Strategic Formulation Strategic Implementation

Strategic Analysis

Chapter 5

Formulating Business-Level

Strategies

Chapter 8

Entrepreneurial Strategy and Competitive Dynamics

Chapter 6

Formulating Corporate-

Level Strategies

Chapter 7

Formulating International Strategies

Chapter 9

Strategic Control and Corporate

Governance

Chapter 12

Fostering Corporate

Entrepreneur- ship

Chapter 10

Creating Effective

Organizational Designs

Chapter 11

Strategic Lead- Iership Excel- lence, Ethics and Change

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Online Learning Center (OLC) The website www.mhhe.com/dess7e follows the text chapter-by-chapter. OLC content is ancillary and supplementary germane to the textbook. As students read the book, they can go online to take self-grading quizzes, review material, or work through interactive exercises. It includes chapter quizzes, student PowerPoint slides, and links to strategy simulations The Business Strategy Game and GLO-BUS.

The instructor section also includes the Instructor’s Manual, PowerPoint Presentations, Test Bank as well as all student resources.

support materials

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Preface vi

part 1 Strategic Analysis 1 Strategic Management: Creating Competitive

Advantages 2

2 Analyzing the External Environment of the Firm 34

3 Assessing the Internal Environment of the Firm 70

4 Recognizing a Firm’s Intellectual Assets: Moving beyond a Firm’s Tangible Resources 104

part 2 Strategic Formulation 5 Business-Level Strategy: Creating and Sustaining

Competitive Advantages 140

6 Corporate-Level Strategy: Creating Value through Diversification 178

7 International Strategy: Creating Value in Global Markets 210

8 Entrepreneurial Strategy and Competitive Dynamics 246

part 3 Strategic Implementation 9 Strategic Control and Corporate Governance 276

10 Creating Effective Organizational Designs 310

11 Strategic Leadership: Creating a Learning Organization and an Ethical Organization 344

12 Managing Innovation and Fostering Corporate Entrepreneurship 376

part 4 Case Analysis 13 Analyzing Strategic Management Cases 412

Indexes I-1

brief contents

BRIEF CONTENTS

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Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi

PART 1 Strategic Analysis CHAPTER 1 Strategic Management: Creating Competitive Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

What Is Strategic Management? . . . . . . . . . . . . . 7 Defining Strategic Management . . . . . . . . . . . . . . . . . . . . . .7

The Four Key Attributes of Strategic Management . . . . . . .8

The Strategic Management Process . . . . . . . . . . 9 Intended versus Realized Strategies . . . . . . . . . . . . . . . . . .10

Strategy Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Strategy Formulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Strategy Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . .13

The Role of Corporate Governance and Stakeholder Management . . . . . . . . . . . . . 14 Alternative Perspectives of Stakeholder

Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Social Responsibility and Environmental Sustainability: Moving beyond the Immediate Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

The Strategic Management Perspective: An Imperative throughout the Organization . . . . . 20 Ensuring Coherence in Strategic Direction . . . . 22 Organizational Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Mission Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Strategic Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

CHAPTER 2 Analyzing the External Environment of the Firm: Creating Competitive Advantages . . . . 34

Creating the Environmentally Aware Organization . . . . . . . . . . . . . . . . . . . . . . . . . . 36 The Role of Scanning, Monitoring, Competitive

Intelligence, and Forecasting . . . . . . . . . . . . . . . . . . . . .36

SWOT Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

The General Environment . . . . . . . . . . . . . . . . 42 The Demographic Segment . . . . . . . . . . . . . . . . . . . . . . . . .42

The Sociocultural Segment . . . . . . . . . . . . . . . . . . . . . . . . .42

The Political/Legal Segment . . . . . . . . . . . . . . . . . . . . . . . .44

The Technological Segment . . . . . . . . . . . . . . . . . . . . . . . .45

The Economic Segment . . . . . . . . . . . . . . . . . . . . . . . . . . .45

The Global Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Relationships among Elements of the General Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

The Competitive Environment . . . . . . . . . . . . . 48 Porter’s Five-Forces Model of Industry

Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

How the Internet and Digital Technologies Are Affecting the Five Competitive Forces . . . . . . . . . .55

Using Industry Analysis: A Few Caveats . . . . . . . . . . . . . .59

Strategic Groups within Industries . . . . . . . . . . . . . . . . . . .61

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

CHAPTER 3 Assessing the Internal Environment of the Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Value-Chain Analysis . . . . . . . . . . . . . . . . . . . . 72 Primary Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

Support Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76

Interrelationships among Value-Chain Activities within and across Organizations . . . . . . . . . . . . . . . . . .79

The “Prosumer” Concept: Integrating Customers into the Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . .80

Applying the Value Chain to Service Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

Resource-Based View of the Firm . . . . . . . . . . . 82 Types of Firm Resources. . . . . . . . . . . . . . . . . . . . . . . . . . .83

contents

CONTENTS

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CONTENTS

Firm Resources and Sustainable Competitive Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85

The Generation and Distribution of a Firm’s Profits: Extending the Resource-Based View of the Firm . . . . .90

Evaluating Firm Performance: Two Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Financial Ratio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . .92

Integrating Financial Analysis and Stakeholder Perspectives: The Balanced Scorecard . . . . . . . . . . . . .94

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

CHAPTER 4 Recognizing a Firm’s Intellectual Assets: Moving beyond a Firm’s Tangible Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

The Central Role of Knowledge in Today’s Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Human Capital: The Foundation of Intellectual Capital . . . . . . . . . . . . . . . . . . . . . 109 Attracting Human Capital . . . . . . . . . . . . . . . . . . . . . . . . .110

Developing Human Capital . . . . . . . . . . . . . . . . . . . . . . . .112

Retaining Human Capital . . . . . . . . . . . . . . . . . . . . . . . . .116

Enhancing Human Capital: The Role of Diversity in the Workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

The Vital Role of Social Capital . . . . . . . . . . . 118 How Social Capital Helps Attract and Retain Talent . . . .120

Social Networks: Implications for Knowledge Management and Career Success . . . . . . . . . . . . . . . .120

The Potential Downside of Social Capital . . . . . . . . . . . .125

Using Technology to Leverage Human Capital and Knowledge . . . . . . . . . . . . . . . . . 126 Using Networks to Share Information . . . . . . . . . . . . . . .126

Electronic Teams: Using Technology to Enhance Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127

Codifying Knowledge for Competitive Advantage . . . . . .128

Protecting the Intellectual Assets of the Organization: Intellectual Property and Dynamic Capabilities . . . . . . . . . . . . . . . . . . . 129 Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . .131

Dynamic Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .131

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133

PART 2 Strategic Formulation CHAPTER 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages . . . . . . . . . 140

Types of Competitive Advantage and Sustainability . . . . . . . . . . . . . . . . . . . . . . 142 Overall Cost Leadership . . . . . . . . . . . . . . . . . . . . . . . . . .143

Differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147

Focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .152

Combination Strategies: Integrating Overall Low Cost and Differentiation . . . . . . . . . . . . . . . . . . .154

Can Competitive Strategies Be Sustained? Integrating and Applying Strategic Management Concepts . . . . . . . . . . . . . . . . . . 157 Atlas Door: A Case Example . . . . . . . . . . . . . . . . . . . . . .158

Are Atlas Door’s Competitive Advantages Sustainable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159

How the Internet and Digital Technologies Affect the Competitive Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 Overall Cost Leadership . . . . . . . . . . . . . . . . . . . . . . . . . .160

Differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161

Focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161

Are Combination Strategies the Key to E-Business Success? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162

Industry Life-Cycle Stages: Strategic Implications . . . . . . . . . . . . . . . . . . . . . . . . . . 162 Strategies in the Introduction Stage . . . . . . . . . . . . . . . . .164

Strategies in the Growth Stage . . . . . . . . . . . . . . . . . . . . .165

Strategies in the Maturity Stage . . . . . . . . . . . . . . . . . . . .165

Strategies in the Decline Stage . . . . . . . . . . . . . . . . . . . . .166

Turnaround Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . .169

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .172

CHAPTER 6 Corporate-Level Strategy: Creating Value through Diversification . . . . . . . . . . . . . . . 178

Making Diversification Work: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . 181

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Related Diversification: Economies of Scope and Revenue Enhancement . . . . . . . 182 Leveraging Core Competencies . . . . . . . . . . . . . . . . . . . .182

Sharing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184

Enhancing Revenue and Differentiation . . . . . 185 Related Diversification: Market Power . . . . . . 185 Pooled Negotiating Power . . . . . . . . . . . . . . . . . . . . . . . .185

Vertical Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .186

Unrelated Diversification: Financial Synergies and Parenting . . . . . . . . . . . . . . . . . 189 Corporate Parenting and Restructuring . . . . . . . . . . . . . . .189

Portfolio Management . . . . . . . . . . . . . . . . . . . . . . . . . . .190

Caveat: Is Risk Reduction a Viable Goal of Diversification? . . . . . . . . . . . . . . . . . . . . . . . . . . . .192

The Means to Achieve Diversification . . . . . . 193 Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . .193

Strategic Alliances and Joint Ventures . . . . . . . . . . . . . . .199

Internal Development . . . . . . . . . . . . . . . . . . . . . . . . . . . .200

How Managerial Motives Can Erode Value Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Growth for Growth’s Sake . . . . . . . . . . . . . . . . . . . . . . . .201

Egotism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .201

Antitakeover Tactics . . . . . . . . . . . . . . . . . . . . . . . . . . . . .202

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204

CHAPTER 7 International Strategy: Creating Value in Global Markets . . . . . . . . . . . . . . . . . . . . . . . . 210

The Global Economy: A Brief Overview . . . . . 212 Factors Affecting a Nation’s Competitiveness . . . . . . . . . . . . . . . . . . . . . . . 214 Factor Endowments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214

Demand Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214

Related and Supporting Industries . . . . . . . . . . . . . . . . . .215

Firm Strategy, Structure, and Rivalry . . . . . . . . . . . . . . . .215

Concluding Comment on Factors Affecting a Nation’s Competitiveness . . . . . . . . . . . . . . . . . . . . .215

International Expansion: A Company’s Motivations and Risks . . . . . . . . . . . . . . . . . . 217 Motivations for International Expansion . . . . . . . . . . . . .217

Potential Risks of International Expansion . . . . . . . . . . . .220

Global Dispersion of Value Chains: Outsourcing and Offshoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223

Achieving Competitive Advantage in Global Markets . . . . . . . . . . . . . . . . . . . . . . . 225 Two Opposing Pressures: Reducing Costs

and Adapting to Local Markets . . . . . . . . . . . . . . . . . .225

International Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . .228

Global Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .228

Multidomestic Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . .230

Transnational Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . .232

Global or Regional? A Second Look at Globalization . . . . .233

Entry Modes of International Expansion . . . . . 234 Exporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .235

Licensing and Franchising . . . . . . . . . . . . . . . . . . . . . . . .236

Strategic Alliances and Joint Ventures . . . . . . . . . . . . . . .237

Wholly Owned Subsidiaries . . . . . . . . . . . . . . . . . . . . . . .238

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .241

CHAPTER 8 Entrepreneurial Strategy and Competitive Dynamics . . . . . . . . . . . . . . . . 246

Recognizing Entrepreneurial Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . 248 Entrepreneurial Opportunities . . . . . . . . . . . . . . . . . . . . . .248

Entrepreneurial Resources . . . . . . . . . . . . . . . . . . . . . . . .251

Entrepreneurial Leadership . . . . . . . . . . . . . . . . . . . . . . . .255

Entrepreneurial Strategy . . . . . . . . . . . . . . . . . 256 Entry Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .257

Generic Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .260

Combination Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . .262

Competitive Dynamics . . . . . . . . . . . . . . . . . . 262 New Competitive Action . . . . . . . . . . . . . . . . . . . . . . . . . .263

Threat Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .264

Motivation and Capability to Respond . . . . . . . . . . . . . . .266

Types of Competitive Actions . . . . . . . . . . . . . . . . . . . . . .267

Likelihood of Competitive Reaction . . . . . . . . . . . . . . . . .269

Choosing Not to React: Forbearance and Co-opetition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .270

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .272

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CONTENTS

PART 3 Strategic Implementation CHAPTER 9 Strategic Control and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

Ensuring Informational Control: Responding Effectively to Environmental Change . . . . . . . 278 A Traditional Approach to Strategic Control . . . . . . . . . .278

A Contemporary Approach to Strategic Control. . . . . . . .279

Attaining Behavioral Control: Balancing Culture, Rewards, and Boundaries . . . . . . . . . 281 Building a Strong and Effective Culture . . . . . . . . . . . . . .281

Motivating with Rewards and Incentives . . . . . . . . . . . . .283

Setting Boundaries and Constraints . . . . . . . . . . . . . . . . .284

Behavioral Control in Organizations: Situational Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . .286

Evolving from Boundaries to Rewards and Culture . . . . .287

The Role of Corporate Governance . . . . . . . . 288 The Modern Corporation: The Separation of Owners

(Shareholders) and Management . . . . . . . . . . . . . . . . .290

Governance Mechanisms: Aligning the Interests of Owners and Managers . . . . . . . . . . . . . . . . . . . . . . .291

CEO Duality: Is It Good or Bad? . . . . . . . . . . . . . . . . . . .297

External Governance Control Mechanisms . . . . . . . . . . .298

Corporate Governance: An International Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .301

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .305

CHAPTER 10 Creating Effective Organizational Designs . . . . . 310

Traditional Forms of Organizational Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 Patterns of Growth of Large Corporations:

Strategy-Structure Relationships . . . . . . . . . . . . . . . . .312

Simple Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .314

Functional Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .314

Divisional Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .316

Matrix Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .319

International Operations: Implications for Organizational Structure . . . . . . . . . . . . . . . . . . . . . . .321

Global Start-Ups: A Recent Phenomenon . . . . . . . . . . . . .322

How an Organization’s Structure Can Influence Strategy Formulation . . . . . . . . . . . . . . . . . . . . . . . . . .324

Boundaryless Organizational Designs . . . . . . 324 The Barrier-Free Organization . . . . . . . . . . . . . . . . . . . . .324

The Modular Organization . . . . . . . . . . . . . . . . . . . . . . . .328

The Virtual Organization . . . . . . . . . . . . . . . . . . . . . . . . . .329

Boundaryless Organizations: Making Them Work . . . . . .331

Creating Ambidextrous Organizational Designs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 Ambidextrous Organizations: Key Design Attributes . . . .336

Why Was the Ambidextrous Organization the Most Effective Structure? . . . . . . . . . . . . . . . . . . . . . .337

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .338

CHAPTER 11 Strategic Leadership: Creating a Learning Organization and an Ethical Organization . . . . . 344

Leadership: Three Interdependent Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 Setting a Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .347

Designing the Organization . . . . . . . . . . . . . . . . . . . . . . .348

Nurturing a Culture Committed to Excellence and Ethical Behavior . . . . . . . . . . . . . . . . . . . . . . . . . .349

Getting Things Done: Overcoming Barriers and Using Power . . . . . . . . . . . . . . . . 350 Overcoming Barriers to Change . . . . . . . . . . . . . . . . . . . .350

The Effective Use of Power . . . . . . . . . . . . . . . . . . . . . . .351

Emotional Intelligence: A Key Leadership Trait . . . . . . . . . . . . . . . . . . . . . . . 354 Self-Awareness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .354

Self-Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .354

Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .355

Empathy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .355

Social Skill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .356

Emotional Intelligence: Some Potential Drawbacks and Cautionary Notes . . . . . . . . . . . . . . . .357

Developing Competency Companions and Creating a Learning Organization . . . . . . 358 Inspiring and Motivating People with a Mission

or Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .360

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Empowering Employees at All Levels . . . . . . . . . . . . . . .360

Accumulating and Sharing Internal Knowledge . . . . . . . .361

Gathering and Integrating External Information . . . . . . . .362

Challenging the Status Quo and Enabling Creativity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .363

Creating an Ethical Organization . . . . . . . . . . 364 Individual Ethics versus Organizational Ethics . . . . . . . .365

Integrity-Based versus Compliance-Based Approaches to Organizational Ethics . . . . . . . . . . . . .366

Role Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .368

Corporate Credos and Codes of Conduct . . . . . . . . . . . . .368

Reward and Evaluation Systems . . . . . . . . . . . . . . . . . . . .369

Policies and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . .370

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .372

CHAPTER 12 Managing Innovation and Fostering Corporate Entrepreneurship . . . . . . . . . . . . . . . 376

Managing Innovation . . . . . . . . . . . . . . . . . . . 378 Types of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .378

Challenges of Innovation . . . . . . . . . . . . . . . . . . . . . . . . .381

Cultivating Innovation Skills . . . . . . . . . . . . . . . . . . . . . .382

Defining the Scope of Innovation . . . . . . . . . . . . . . . . . . .384

Managing the Pace of Innovation . . . . . . . . . . . . . . . . . . .385

Staffing to Capture Value from Innovation . . . . . . . . . . . .386

Collaborating with Innovation Partners . . . . . . . . . . . . . .386

Corporate Entrepreneurship . . . . . . . . . . . . . . 387 Focused Approaches to Corporate

Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . .390

Dispersed Approaches to Corporate Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . .391

Measuring the Success of Corporate Entrepreneurship Activities . . . . . . . . . . . . . . . . . . . . .393

Real Options Analysis: A Useful Tool . . . . . . . 395 Applications of Real Options Analysis to Strategic

Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .395

Potential Pitfalls of Real Options Analysis . . . . . . . . . . . .396

Entrepreneurial Orientation . . . . . . . . . . . . . . 398 Autonomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .399

Innovativeness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .400

Proactiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .401

Competitive Aggressiveness . . . . . . . . . . . . . . . . . . . . . . .402

Risk Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .403

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .406

PART 4 Case Analysis CHAPTER 13 Analyzing Strategic Management Cases . . . . . . 412

Why Analyze Strategic Management Cases? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 How to Conduct a Case Analysis . . . . . . . . . . 415 Become Familiar with the Material . . . . . . . . . . . . . . . . .418

Identify Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .418

Conduct Strategic Analyses . . . . . . . . . . . . . . . . . . . . . . .419

Propose Alternative Solutions . . . . . . . . . . . . . . . . . . . . . .419

Make Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . .421

How to Get the Most from Case Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 Useful Decision-Making Techniques in Case Analysis . . . . . . . . . . . . . . . . . . . . . . . 424 Conflict Inducing Techniques . . . . . . . . . . . . . . . . . . . . . .427

Following the Analysis-Decision-Action Cycle in Case Analysis . . . . . . . . . . . . . . . . . . 432 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .436

Appendix 1 to Chapter 13: Financial Ratio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437

Appendix 2 to Chapter 13: Sources of Company and Industry Information . . . . . . . . . . . . . . . . . . . . . . . . . . 447

Indexes I-1 Company I-1 Name I-7 Subject I-21

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Chapter 1

Introduction and Analyzing

Goals and Objectives

Chapter 4

Assessing Intellectual

Capital

Chapter 2

Analyzing the External Environment

Chapter 3

Analyzing the Internal Environment

Chapter 13

Case Analysis

Strategic Formulation Strategic Implementation

Strategic Analysis

Chapter 5

Formulating Business-Level

Strategies

Chapter 8

Entrepreneurial Strategy and Competitive Dynamics

Chapter 6

Formulating Corporate-

Level Strategies

Chapter 7

Formulating International Strategies

Chapter 9

Strategic Control and Corporate

Governance

Chapter 12

Fostering Corporate

Entrepreneur- ship

Chapter 10

Creating Effective

Organizational Designs

Chapter 11

Strategic Lead- Iership Excel- lence, Ethics and Change

The Strategic Management Process

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PART 1: STRATEGIC ANALYSIS

Strategic Management Creating Competitive Advantages

chapter 1

After reading this chapter, you should have a good understanding of the following learning objectives:

LO1.1 The definition of strategic management and its four key attributes.

LO1.2 The strategic management process and its three interrelated and principal activities.

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

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

LO1.5 The need for greater empowerment throughout the organization.

LO1.6 How an awareness of a hierarchy of strategic goals can help an organization achieve coherence in its strategic direction.

Learning from Mistakes What makes the study of strategic management so

interesting? For one, struggling firms can become stars,

while high flyers can become earthbound very rapidly.

As colorfully noted by Arthur Martinez, Sears’ former

chairman: “Today’s peacock is tomorrow’s feather duster.”

Consider, for example, the change in membership on the

prestigious Fortune 500 list of the largest U.S. firms: 1

• Of the 500 companies that appeared on the first list in 1955, only 62, ranked by revenue, have appeared on the list every year since.

• Some of the most powerful companies on today’s list—businesses like Intel, Apple, and Google— grew from nothing to great on the strength of new technologies, bumping venerable old companies off the list.

• Nearly 2,000 companies have appeared on the list since its inception, and most are long gone from it. Just making the list guarantees nothing about your ability to endure.

• Between 2009 and 2013, admittedly more volatile years than most, over one hundred companies— including Bear Stearns, Chrysler, Circuit City, Merrill Lynch, RadioShack, and Tribune—dropped off the 500.

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PART 1: STRATEGIC ANALYSIS

Maintaining competitive success or even surviving over long periods of time is indeed very

difficult for companies of any size. As John Donahue, CEO of eBay, notes, “Almost every company

has hot moments. But only great companies achieve strong, sustainable performance over time.

While it’s fun to be hot; it’s far more gratifying to create an enduring, sustainable business.” 2 Next,

we will look at Borders, a firm which after years of success went into a rapid decline that eventually

led to its death.

In 1971, Louis and Tom Borders opened their first store in Ann Arbor, Michigan. 3 The brothers,

while students at the University of Michigan, created a then-revolutionary system to track sales

and inventory—and for years executives called it the company’s “secret sauce.” With their “Book

Inventory System,” Borders could oversee the flow of a huge number of titles broken into thousands

of different subject categories across multiple stores. As it grew, Borders provided the knowledge and

feel of the independents with its distinctive architecture, comfortable chairs, and reading nooks. In

addition, the stores carefully screened and trained employees, paying them relatively well along with

a generous set of benefits. It seemed like a winning strategy—and it worked for quite a while. By

the 1990s it, along with Barnes and Noble, controlled 40 percent of the retail book market. Borders’

financials were impressive: between 2003 and 2005, sales increased 11 percent to nearly $4 billion

and net income jumped 23 percent to $132 million. Unfortunately, 2005 was its last profitable year.

By 2009 and 2010, Borders was well into the red, losing a combined $293 million. In February 2011

it filed for bankruptcy protection. Attempts at reorganization failed, it soon began its final liquidation

of assets, and its last remaining stores closed their doors on September 18, 2011. What went wrong?

Sticking to what you know best can be dangerous. We’ve all heard the old adage: Focus on your

“core competency” and don’t get distracted by trends or flashy ideas. Borders became a multibillion

dollar business because of its physical retail presence. However, this approach also led to its demise.

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4 PART 1 :: STRATEGIC ANALYSIS

Borders focused on its retail strategy in the 2000s, expanding aggressively in the United States

and internationally—and taking on debt. It strove to improve the in-store experience for shoppers,

added cafes, and experimented with new concepts. Such a strategy may have worked a few decades

earlier, but while Borders was investing in physical real estate, shoppers were flocking to the Internet.

Borders was left with a conflicted strategy: Declining sales forced it to close hundreds of stores

(including its entire Waldenbooks chain), while it doubled down on other retail outlets.

Unfortunately, it treated the Internet like a passing trend instead of as a transformational

phenomenon. The company outsourced its Web operation to Amazon—which obviously became a

fierce rival. It waited until 2008 to develop its own Web strategy. Meanwhile, Amazon became the

dominant player in online bookselling and e-books, introducing the Kindle e-reader. Its big brick-

and-mortar rival, Barnes & Noble, a laggard itself, later introduced the popular Nook e-reader and

invested heavily in its own website. Borders was clearly late to the party—by then it had taken on

quite a bit of debt and had little to invest. In essence, it was forced to rely on third-party readers from

Sony and Kobo, which made it impossible to distinguish its Web offerings.

During its last eleven years, Borders was led by six different CEOs. None were around long enough

to make a lasting change or provide the vision that could maneuver the debt-laden company through

a shifting landscape. To the end, it kept a traditional mindset—focusing on rivals with which it was

most familiar. As the book industry continued to consolidate, this meant Barnes & Noble. However,

discounters like Walmart and Target sell a ton of books—at big discounts—and their prices are

usually matched by Amazon. Borders was faced with a dilemma: It could take the losses and match

the discounters, or it could justify its higher prices by convincing customers that they’d enjoy a

premium experience. Neither worked. As noted by Michael Souers, an analyst at Standard & Poor’s:

“They over-expanded and built up some debt on their balance sheet. Instead of leading and being

innovative, they were certainly a follower.”

A concluding note: Amazon continues to outdistance its rivals. Its sales have grown from

$25 billion to $57 billion over the last three years. During the same period, Amazon’s stock has

soared over 100 percent, and its market capitalization stands at an impressive $121 billion as of

mid-2013. Jeff Bezos, Amazon’s founder and CEO, can boast a net worth of over $23.6 billion. In

contrast, Borders is extinct.

Discussion Questions 1. What lessons can we learn from Borders’ failure? 2. What was their most critical error? Why? 3. What could Best Buy, a firm now facing a powerful challenge from Amazon, learn from Borders?

The recent demise of Borders illustrates how even well-established firms can fail in the marketplace if they do not anticipate and respond proactively to changes in the environment. Today’s leaders face a large number of complex challenges in the global marketplace. In considering how much credit (or blame) they deserve, two perspectives of leadership come immediately to mind: the “romantic” and “external control” perspectives. 4 First, let’s look at the romantic view of leadership. Here, the implicit assumption is that the leader is the key force in determining an organization’s success—or lack thereof. 5 This view dominates the popular press in business magazines such as Fortune, BusinessWeek, and Forbes, wherein the CEO is either lauded for his or her firm’s success or chided for the organization’s demise. 6

romantic view of leadership situations in which the leader is the key force determining the organization’s success— or lack thereof.

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CHAPTER 1 :: STRATEGIC MANAGEMENT 5

Consider, for example, the credit that has been bestowed on leaders such as Jack Welch, Andrew Grove, and Herb Kelleher for the tremendous accomplishments when they led their firms, General Electric, Intel, and Southwest Airlines, respectively.

Similarly, Apple’s success in the last decade has been attributed almost entirely to the late Steve Jobs, its former CEO, who died on October 5, 2011. 7 Apple’s string of hit prod- ucts, such as iMac computers, iPods, iPhones, and iPads, are testament to his genius for developing innovative, user-friendly, and aesthetically pleasing products. In addition to being a perfectionist in product design, Jobs also was a master showman with a cult fol- lowing. During his time as CEO between 1997 and 2011, Apple’s market value soared by over $300 billion!

On the other hand, when things don’t go well, much of the failure of an organization can also, rightfully, be attributed to the leader. 8 Border’s leadership clearly failed to respond effectively to changes taking place in the book retailing industry. In contrast, Apple fully capitalized on emerging technology trends with a variety of products, including sophisti- cated smartphones.

The contrasting fortunes of Hewlett-Packard under two different CEOs also demonstrate the influence leadership has on firm performance. 9 When Carly Fiorina was fired as CEO of the firm, HP enjoyed an immediate increase in its stock price of 7 percent—hardly a strong endorsement of her leadership! Her successor, Mark Hurd, led the firm to five years of out- standing financial results. Interestingly, when he abruptly resigned on August 6, 2010, the firm’s stock dropped 12 percent almost instantly! (To provide some perspective, this repre- sents a decrease in HP’s market value of about $12 billion.) And, since Hurd’s departure, HP’s market capitalization has dropped about 80 percent—as of early 2013!

However, this reflects only part of the picture. Consider another perspective, called the external control view of leadership. Here, rather than making the implicit assumption that the leader is the most important factor in determining organizational outcomes, the focus is on external factors that may positively (or negatively) affect a firm’s success. We don’t have to look far to support this perspective. Developments in the general environ- ment, such as economic downturns, governmental legislation, or an outbreak of major internal conflict or war, can greatly restrict the choices that are available to a firm’s execu- tives. Borders, as well as several other book retailers, found the consumer shift away from brick and mortar bookstores to online book buying (e.g., Amazon) and digital books an overwhelming environmental force against which they had few defenses.

Major unanticipated developments can often have very negative consequences for busi- nesses regardless of how well formulated their strategies are.

Let’s look at a few recent examples: 10

• Hurricane Katrina in 2007 had a disastrous effect on businesses located along the Gulf Coast.

• The financial meltdown of 2008 and the resultant deep recession during the following two years forced once proud corporations like General Motors and Citigroup to ask for government bailouts. Others, such as Merrill Lynch and Washington Mutual, had to be acquired by other firms.

• In the aftermath of BP’s disastrous oil well explosion on April 20, 2010, the fishing and tourism industries in the region suffered significant downturns. BP itself was forced to pay a $20 billion fine to the U.S. government.

• On March 11, 2011, a 9.0 earthquake and tsunami devastated Japan and resulted in the loss of more than 20,000 lives. During the next two trading days, the country’s stock exchange (Nikkei) suffered its biggest loss in 40 years. The disaster hit nearly every industry hard—especially energy companies. For example, Tokyo Electric Power Co., which operates a nuclear power plant that was severly damaged, fell 24.7 percent, and Toshiba Corp., a maker of nuclear power plants, slid 19.5 percent.

external control view of leadership situations in which external forces—where the leader has limited influence—determine the organization’s success.

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6 PART 1 :: STRATEGIC ANALYSIS

Firms as diverse as Toyota, Honda, and Sony were forced to halt production because extensive damage to roads and distribution systems made it nearly impossible to move products.

The continuing economic in Europe has been a source of considerable uncertainty for firms doing business in Europe and throughout the world. Strategy Spotlight 1.1 discusses some of the causes and consequences of the ongoing European crisis.

Before moving on, it is important to point out that successful executives are often able to navigate around the difficult circumstances that they face. At times it can be refreshing to see the optimistic position they take when they encounter seemingly insurmountable odds. Of course, that’s not to say that one should be naïve or Pollyannaish. Consider, for example, how one CEO is handling trying times: 11

ECONOMIC CRISIS IN EUROPE: THE FALLOUT CONTINUES The European economic crisis increasingly appears to be an unending drama in slow motion. While finance ministers and cen- tral bankers propose and reject or implement and fail with one solution after another, unemployment keeps rising, banks falter, and public anger boils over. Greece is on the verge of a political and economic meltdown, Portugal and Spain are in prolonged reces- sion, and Italy’s problems now seem worse than anticipated. Only a decade ago, the 27-nation European Union, and the 17-nation Eurozone within that, was considered an economic powerhouse. Today, the very future of the Union and the Euro seems mired in uncertainty.

What are some of the implications of the economic crisis so far? First, it has led to widespread political protests. As govern- ments like Portugal and Spain have been forced to cut government spending as part of the austerity programs they are implement- ing, public resentment has boiled over into often violent street protests. A public long used to generous welfare payments by the government finds it difficult to adjust to an environment with- out the safety nets that they have taken for granted for at least two generations. Second, political resentment has, in turn, led to changes in governments. In 2012, Francois Hollande was elected as president of France on a platform that threatened 75 percent taxes on the wealthy (which caused many prominent French citi- zens to change their citizenship!). Italy brought in Mario Monti, a seasoned economist, to lead the country out of the quagmire in place of the colorful, but highly controversial Silvio Berlusconi.

A major cause as well as consequence of the financial crisis has been the weakening of European banks, especially in countries such as Spain. As the real estate boom in Spain ended in an inevi- table bust, banks found themselves holding too much real estate as collateral that did not cover the value of the loans. The resulting crisis of confidence in banks has forced the European Central Bank to pump in vast resources to prop up the tottering banks.

The joint effects of less government spending, inability of banks to lend, and civil unrest in various countries has been dev- astating on the employment situation in Europe. Spain currently has an unemployment rate of 24 percent. At the beginning of 2012, the under-25 unemployment rate in Spain stood at a stag- gering 51.4 percent. This compares to an overall unemployment rate of 7.9 percent in the United States as of early 2013—a rate that most Americans consider unacceptable. This certainly helps us to place the situation in perspective! The high unemployment rate among the youth has led to a number of social problems, such as increased crime rates, drug use, and depression. Because many young people in Europe do not expect the situation to improve in the foreseeable future, there has been a sudden increase in out- ward migration. Thousands of Portuguese youngsters, for exam- ple, have been migrating to their country’s former colonies, such as Angola and Mozambique in Africa and Brazil in South America. One in ten college graduates now leave the country. In 2010 alone, the number of Portuguese workers in Brazil jumped by 60,000. Skilled Portuguese workers are also increasingly immigrating to countries such as the United States, Canada, and Australia. There are 50,000 Germans in Silicon Valley and over 500 start-ups in the San Francisco Bay area with French founders.

One industry that is feeling immense pain from the economic crisis is tourism. France, Spain, and Italy—the three biggest tourist destinations in Europe—have experienced double-digit declines in tourist arrivals and hotel occupancy rates in recent years. The tourism industry in France employs 900,000 people and generates $96 billion in revenues. In Spain, the industry employs 1.4 million people and generates about $110 billion in revenues. The decline in tourist arrivals has had a devastating effect on employment in tourism-related businesses such as hotels, restaurants, and travel.

Sources: Ash, L. 2011. Portugal’s jobless graduates flee to Africa and Brazil. bbc.co.uk , August 31: np; Les miserables. 2012. economist.com , July 28, np; Clouds over the Mediterranean. 2012. economist.com , July 28: np; and Govan, F. 2012. Spain’s lost generation: Youth unemployment surges above 50 percent. telegraph .co.uk , January 27: np.

STRATEGY SPOTLIGHT 1.1

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CHAPTER 1 :: STRATEGIC MANAGEMENT 7

Name a general economic woe, and chances are that Charles Needham, CEO of Metorex, is dealing with it.

• Market turmoil has knocked 80 percent off the shares of South Africa’s Metorex, the mining company that he heads.

• The plunge in global commodities is slamming prices for the copper, cobalt, and other minerals Metorex unearths across Africa. The credit crisis makes it harder to raise money.

• And fighting has again broken out in the Democratic Republic of Congo, where Metorex has a mine and several projects in development.

Such problems might send many executives to the window ledge. Yet Needham appears unruffled as he sits down at a conference table in the company’s modest offices in a Johan- nesburg suburb. The combat in northeast Congo, he notes, is far from Metorex’s mine. Commodity prices are still high, in historical terms. And Needham is confident he can raise enough capital, drawing on relationships with South African banks. “These are the kinds of things you deal with, doing business in Africa,” he says.

What Is Strategic Management? Given the many challenges and opportunities in the global marketplace, today’s managers must do more than set long-term strategies and hope for the best. 12 They must go beyond what some have called “incremental management,” whereby they view their job as mak- ing a series of small, minor changes to improve the efficiency of their firm’s operations. 13 Rather than seeing their role as merely custodians of the status quo, today’s leaders must be proactive, anticipate change, and continually refine and, when necessary, make dramatic changes to their strategies. The strategic management of the organization must become both a process and a way of thinking throughout the organization.

Defining Strategic Management Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. This definition captures two main elements that go to the heart of the field of strategic management.

First, the strategic management of an organization entails three ongoing processes: analy- ses, decisions, and actions. Strategic management is concerned with the analysis of strategic goals (vision, mission, and strategic objectives) along with the analysis of the internal and external environment of the organization. Next, leaders must make strategic decisions. These decisions, broadly speaking, address two basic questions: What industries should we com- pete in? How should we compete in those industries? These questions also often involve an organization’s domestic and international operations. And last are the actions that must be taken. Decisions are of little use, of course, unless they are acted on. Firms must take the necessary actions to implement their strategies. This requires leaders to allocate the neces- sary resources and to design the organization to bring the intended strategies to reality.

Second, the essence of strategic management is the study of why some firms outper- form others. 14 Thus, managers need to determine how a firm is to compete so that it can obtain advantages that are sustainable over a lengthy period of time. That means focusing on two fundamental questions:

• How should we compete in order to create competitive advantages in the marketplace? Managers need to determine if the firm should position itself as the low-cost producer or develop products and services that are unique and will enable the firm to charge premium prices. Or should they do some combination of both?

• How can we create competitive advantages in the marketplace that are unique, valuable, and difficult for rivals to copy or substitute? That is, managers need to make such advantages sustainable, instead of temporary.

LO1.1 The definition of strategic management and its four key attributes.

strategic management the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.

strategy The ideas, decisions, and actions that enable a firm to succeed.

competitive advantage A firm’s resources and capabilities that enable it to overcome the competitive forces in its industry(ies).

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8 PART 1 :: STRATEGIC ANALYSIS

Definition: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.

Key Attributes of Strategic Management

• Directs the organization toward overall goals and objectives. • Includes multiple stakeholders in decision making. • Needs to incorporate short-term and long-term perspectives. • Recognizes trade-offs between efficiency and effectiveness.

EXHIBIT 1.1 Strategic Management Concepts

Sustainable competitive advantage cannot be achieved through operational effective- ness alone. 15 The popular management innovations of the last two decades—total quality, just-in-time, benchmarking, business process reengineering, outsourcing—are all about operational effectiveness. Operational effectiveness means performing similar activities better than rivals. Each of these is important, but none lead to sustainable competitive advantage because everyone is doing them. Strategy is all about being different. Sustain- able competitive advantage is possible only by performing different activities from rivals or performing similar activities in different ways. Companies such as Walmart, Southwest Airlines, and IKEA have developed unique, internally consistent, and difficult-to-imitate activity systems that have provided them with sustained competitive advantages. A com- pany with a good strategy must make clear choices about what it wants to accomplish. Trying to do everything that your rivals do eventually leads to mutually destructive price competition, not long-term advantage.

The Four Key Attributes of Strategic Management Before discussing the strategic management process, let’s briefly talk about four attri- butes of strategic management. 16 It should become clear how this course differs from other courses that you have had in functional areas, such as accounting, marketing, opera- tions, and finance. Exhibit 1.1 provides a definition and the four attributes of strategic management.

First, strategic management is directed toward overall organizational goals and objec- tives. That is, effort must be directed at what is best for the total organization, not just a single functional area. Some authors have referred to this perspective as “organizational versus individual rationality.” 17 That is, what might look “rational” or ideal for one func- tional area, such as operations, may not be in the best interest of the overall firm. For example, operations may decide to schedule long production runs of similar products to lower unit costs. However, the standardized output may be counter to what the marketing department needs to appeal to a demanding target market. Similarly, research and devel- opment may “overengineer” the product to develop a far superior offering, but the design may make the product so expensive that market demand is minimal.

Second, strategic management includes multiple stakeholders in decision making. 18 Stakeholders are those individuals, groups, and organizations who have a “stake” in the success of the organization, including owners (shareholders in a publicly held corpora- tion), employees, customers, suppliers, the community at large, and so on. (We’ll discuss this in more detail later in this chapter.) Managers will not be successful if they focus on a single stakeholder. For example, if the overwhelming emphasis is on generating profits for the owners, employees may become alienated, customer service may suffer, and the sup- pliers may resent demands for pricing concessions.

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