Vertical integration meant course hero

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GREGORY G. DESS

University of Texas at Dallas

GERRY McNAMARA

Michigan State University

ALAN B. EISNER

Pace University

SEUNG-HYUN (SEAN) LEE

University of Texas at Dallas

text & cases

ninth edition

STRATEGIC MANAGEMENT

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STRATEGIC MANAGEMENT: TEXT AND CASES, NINTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw- Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2016, 2014, and 2012. 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.

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ISBN 978-1-259-81395-5 (bound edition) MHID 1-259-81395-9 (bound edition)

ISBN 978-1-259-89997-3 (loose-leaf edition) MHID 1-259-89997-7 (loose-leaf edition)

ISBN 978-1-259-89994-2 (instructor’s edition) MHID 1-259-89994-2 (instructor’s edition)

Portfolio Director: Michael Ablassmeir Lead Product Developer: Kelly Delso Product Developer: Anne Ehrenworth Executive Marketing Manager: Debbie Clare Content Project Managers: Harvey Yep (Core), Bruce Gin (Assessment) Buyer: Susan K. Culbertson Design: Matt Diamond Content Licensing Specialists: DeAnna Dausener (Image and Text) Cover Image: ©Anatoli Styf/Shutterstock Compositor: SPi Global

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Names: Dess, Gregory G., author. | McNamara, Gerry, author. | Eisner, Alan B., author. Title: Strategic management : text and cases / Gregory G. Dess, University of Texas at Dallas, Gerry McNamara, Michigan State University, Alan B. Eisner, Pace University. Description: Ninth edition. | New York, NY : McGraw-Hill Education, [2019] Identifiers: LCCN 2017052281 | ISBN 9781259813955 (alk. paper) Subjects: LCSH: Strategic planning. Classification: LCC HD30.28 .D4746 2019 | DDC 658.4/012—dc23 LC record available at https://lccn.loc.gov/2017052281

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.

mheducation.com/highered

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To my family, Margie and Taylor and my parents, the late Bill and Mary Dess; and Michael Wood

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

–Greg

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

–Gerry

To my family, Helaine, Rachel, and Jacob

–Alan

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

–Sean

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.

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

ABOUT THE AUTHORS

about the authors

©He GaoPhoto provided by the author

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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.

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

©Seung-Hyun Lee©Alan B. Eisner

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PREFACE

Welcome to the Ninth Edition of Strategic Management: Text and Cases! As noted on the cover, we are happy to introduce Seung- Hyun Lee to the author team. Greg has known Seung since we both joined the faculty at the University of Texas at Dallas in 2002. Seung has developed a very distinguished publication record in both strategic management and international business/international management and he has made many important contributions in these areas in the present edition. In particular, his international expertise has been particularly valuable in further “globalizing” our book.

We appreciate the constructive and positive feedback that we have received on our work. Here’s some of the encouraging feedback we have received from our reviewers:

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

Joshua J. Daspit, Mississippi State University

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

Amy Grescock, University of Michigan, Flint

Very easy for students to understand. Great use of business examples throughout the text.

Debbie Gilliard, Metropolitan State University, Denver

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

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, University of Cambridge

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

Jeffrey Richard Nystrom, University of Colorado at Denver

We always strive to improve our work and we are most appreciative of the extensive and thoughtful feedback that many strategy professionals have graciously given us. We endeavored to incorporate their ideas into the Ninth 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—rigor, relevance, and readable. And we are

preface

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pleased that we have received feedback (such as the comments on the previous page) that is consistent with what we are trying to accomplish.

What are some of the features in Strategic Management that reinforce the 3 R’s? First, we build in rigor by drawing on the latest research by management scholars and insights from management consultants to offer a current a current and comprehensive view of strategic issues. We reinforce this rigor with our “Issues for Debate” and “Reflecting on Career Implications. . .” that require students to develop insights on how to address complex issues and understand how strategy concepts can enhance their career success. Second, to enhance relevance, we provide numerous examples from management practice in the text and “Strategy Spotlights” (sidebars). We also increase relevance by relating course topic and examples to current business and societal themes, including environmental sustainability, ethics, globalization, entrepreneurship, and data analytics. Third, we stress readability with an engaging writing style with minimal jargon to ensure an effective learning experience. This is most clearly evident in the conversational presentations of chapter opening “Learning from Mistakes” and chapter ending “Issues for Debate.”

Unlike other strategy texts, we provide three separate chapters that address timely topics about which business students should have a solid understanding. These are the role of 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: Text and Cases, we certainly didn’t forget the instructors. As we all know, you have a most challenging (but rewarding) job. We did our best to help you. We provide a variety of supplementary materials that should help you in class preparation and delivery. For example, our chapter notes do not simply summarize the material in the text. Rather (and consistent with the concept of strategy), we ask ourselves: “How can we add value?” Thus, for each chapter, we provide numerous questions to pose to help guide class discussion, at least 12 boxed examples to supplement chapter material, and three detailed “teaching tips” to further engage students. For example, we provide several useful insights on strategic leadership from one of Greg’s colleagues, Charles Hazzard (formerly Executive Vice President, Occidental Chemical). Also, we completed the chapter notes—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 Ninth 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 Ninth Edition. Then we will cover some of the major features that we have had in previous editions.

WHAT’S NEW? HIGHLIGHTS OF THE NINTH EDITION We have endeavored to add new material to the chapters that reflects the feedback we have received from our reviewers as well as the challenges today’s managers face. Thus, we all invested an extensive amount of time carefully reviewing a wide variety of books, academic and 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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Here are some of the major changes and improvements in the Ninth Edition:

∙ Big Data/Data Analysis. A central theme of the Ninth Edition, it has become a leading and highly visible component of a broader technological phenomena—the emergence of digital technology. Such initiatives have the potential to enable firms to better customize their product and service offerings to customers while more efficiently and fully using the resources of the company. Throughout the text, we provide examples from a wide range of industries and government. This includes discussions of how Coca Cola uses data analytics to produce consistent orange juice, IBM’s leveraging of big data to become a healthcare solution firm, Caterpillar’s use of data analytics to improve machine reliability and to identify needed service before major machine failures, and Digital Reasoning’s efforts to use data analytics to enhance the ability of firms to control employees and avoid illegal and unethical behavior.

∙ Greater coverage of international business/international management (IB/IM from new co-author). As we noted at the beginning of the Preface, we have invited Seung-Hyun Lee, an outstanding IB/IM scholar, to join the author team and we are very pleased that he has accepted! Throughout the book we have included many concepts and examples of IB/IM that reflects the growing role of international operations for a wide range of industries and firms. We discuss how differences in national culture impact the negotiation of contracts and whether or not to adapt human resource practices when organizations cross national boundaries. We also include a discussion of how corporate governance practices differ across countries and discuss in depth how Japan is striving to develop balanced governance practices that incorporate elements of U.S. practices while retaining, at its core, elements of traditional Japanese practices. Additionally, we discuss why conglomerate firms thrive in Asian markets even as this form of organization has gone out of favor in the United States and Europe. Finally, we discuss research that suggests that firms in transition economies can improve their innovative performance by focusing on learning across boundaries within the firm compared to learning from outside partners.

∙ “Executive Insights: The Strategic Management Process.” Here, we introduce a nationally recognized leader and explore several key issues related to strategic management. The executive is William H. McRaven, a retired four-star admiral who leads the nation’s second largest system of higher education. As chief executive officer of the UT System, he oversees 14 institutions that educate 217,000 students and employ 20,000 faculty and more than 70,000 health care professionals, researchers, and staff. He is perhaps best known for his involvement in Operation Neptune Spear, in which he commanded the U.S. Navy Special Forces who located and killed al Qaeda leader Osama bin Laden. We are very grateful for his valuable contribution!

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

∙ Over half of our “Strategy Spotlights” (sidebar examples) are brand new, and many of the others have been thoroughly updated. Although we have reduced the number of Spotlights from the previous edition to conserve space, we still have a total of 64—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 two

PREFACE

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“hot” issues that are critical in leading today’s organizations: ethics and environmental sustainability—as well as data analytics in this edition.

Key content changes for the chapters include:

∙ Chapter 1 addresses three challenges for executives who are often faced with similar sets of opposing goals which can polarize their organizations. These challenges, or paradoxes, are called (1) the innovation paradox, the tension between existing products and new ones—stability and change; (2) the globalization paradox, the tension between global connectedness and local needs; and, (3) the obligation paradox, the tension between maximizing shareholder returns and creating benefits for a wide range of stakeholders— employees, customers, society, etc. We also discuss three theaters of practice that managers need to recognize in order to optimize the positive impact of the corporate social responsibility (CSR) initiatives. These are (1) Focusing on philanthropy, (2) Improving operational effectiveness, and (3) Transforming the business model.

∙ Chapter 2 introduces the concept of big data/data analytics—a technology that affects multiple segments of the general environment. A highly visible component of the digital economy, such technologies are altering the way business is conducted in a wide variety of sectors—government, industry, and commerce. We provide a detailed example of how it has been used to monitor the expenditures of federal, state, and local governments.

∙ Chapter 3 includes a discussion on program hiring to build human capital. With program hiring, firms offer employment to promising graduates without knowing which specific job the employee will fill. Firms employing this tactic believe it allows them to meet changing market conditions by hiring flexible employees who desire a dynamic setting. We also include a discussion of how Coca Cola is leveraging data analytics to produce orange juice that is consistent over time and can be tailored to meet local market tastes.

∙ Chapter 4 discusses research that has found that millennials have a different definition of diversity and inclusion than prior generations. That is, millennials look upon diversity as the blending of different backgrounds, experiences, and perspectives within a team, i.e., cognitive diversity. Earlier generations—the X-Generation and the Boomer Generation— tended to view diversity as a representation of fairness and protection for all regardless of gender, race, religion, etc. An important implication is that while many millennials believe that differences of opinion enable teams to excel, relatively few of them feel that their leaders share this perspective. The chapter also provides a detailed example of how data analytics can increase employee retention.

∙ Chapter 5 examines how firms can create strong competitive positions in platform markets. In platform markets, firms act as intermediaries between buyers and sellers. Success is largely based on the ability of the firm to be the de facto provider of this matching process. We discuss several actions firms can take to stake out a leadership position in these markets. In addition, we include a discussion of research outlining how firms can develop organizational structures and policies to draw on customer interactions to improve their innovativeness. The key finding from this research is that it is critical for firms to empower and incent front line employees to look for and share innovative insights they take away from customer interactions.

∙ Chapter 6 includes a section on different forms of strategic alliances and when they are most appropriate. In discussing the differences between contractual alliances, equity alliances, and joint ventures, students can better understand the range of options they

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have to build cooperative arrangements with other firms and the factors that influence the choice among these options.

∙ Chapter 7 explains two important areas in which culture can play a key role in managing organizations across national boundaries. First, we discuss situations in which it is best to not adapt one’s company culture—even if it conflicts with the culture country in which the firm operates. We provide the example of Google’s human resource policy of providing employees with lots of positive feedback during performance reviews. Why? Google feels that this is a key reason for its outstanding success in product innovation. Second, we address some of the challenges that managers encounter when they negotiate contracts across national boundaries. We discuss research that identifies several elements of negotiating behaviors that help to identify cultural differences.

∙ Chapter 8 identifies factors investors can examine when evaluating the risk of crowdfunded ventures. When firms raise funds through crowdfunding, they often have limited business and financial histories and haven’t yet built up a clear reputation. This raises the risks investors face. We identify some factors investors can look into to clarify the worthiness and risk of firms who are raising financial resources through crowdfunding.

∙ Chapter 9 discusses the increasingly important role that activist investors have in the corporate governance of publicly-traded firms. Activist investors are investors who take small but significant ownership stakes in large firms, typically 5 to 10 percent ownership, and push for major strategic changes in the firm. These activist investors are often successful, winning 70 percent of the shareholder votes they champion and have forced the exit of leaders of several large firms. Additionally, we discuss a corner of Wall Street where women dominate, as corporate governance heads at major institutional investors. These institutional investors hold large blocks of stock in all major corporations. As a result, these female leaders are in a position to push for governance changes in these corporations to make them more responsive to the concerns of investors, such as increasing opportunities for female corporate leaders.

∙ Chapter 10 discusses how firms can organize to improve their innovativeness. Often managers look to outside partners to learn new skills and access new knowledge to improve their innovative performance. We discuss research that suggests that efforts to look to create novel combinations of knowledge within the firm offer greater potential to generate stronger innovation performance. The key advantage of internal knowledge is that it is proprietary and potentially more applicable to the firm’s innovation efforts.

∙ Chapter 11 includes discussions of multiple firms that have changed their leadership and control systems to respond to challenges they’ve faced. This includes Marvin Ellison’s efforts to revive JC Penney after prior bad leadership, Target’s efforts to change its supply chain system to meet changing customer demands, and the decision procedures JC Johnson Inc. has put in place to improve its ability to lead its industry in sustainability efforts.

∙ Chapter 12 highlights the potential to learn from innovation failures. Too often, firms become risk averse in their behavior in order to avoid failure. We discuss how this can result in missing truly innovative opportunities. Drawing off research by Julian Birkinshaw, we discuss the need for firms to get their employees to take bold innovation actions and steps firms can take to learn from failed innovation efforts to be more effective in future innovation efforts. We also discuss research on the consequences of losing star innovation employees. Firms worry about the loss of key innovation personnel, but research shows that while there are costs associated with the loss of star

PREFACE

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innovators, there are also potential benefits. Firms that lose key innovators typically experience a loss in exploitation-oriented innovation, but they also often see an increase in exploration-oriented innovation.

∙ Chapter 13 provides an example of how the College of Business Administration at Towson University successfully introduced a “live” business case completion across all of it strategic management sections. The “description” and the “case completion checklist” includes many of the elements of the analysis-decision-action cycle in case analysis that we address in the chapter.

∙ 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 provided us with comprehensive and updated information for the Ninth Edition 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. We are always amazed by the diligence, competence—and good cheer—that Ruthie and Carol demonstrate when we impose on them every two years!

∙ We have worked hard to further enhance our excellent case package with a major focus on fresh and current cases on familiar firms. ∙ More than half of our cases are author-written (much more than the competition). ∙ We have updated our users favorite cases, creating fresh stories about familiar

companies to minimize instructor preparation time and “maximize freshness” of he content.

∙ We have added several exciting new cases to the lineup including Blackberry and Ascena (the successor company to Ann Talyor).

∙ We have also extensively updated 28 familiar cases with the latest news. ∙ Our cases are familiar yet fresh with new data and problems to solve.

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,