Strategic management, FT Rothaermel

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Content: YourVision...YourVoice...YourCourse...YourWay Make it happen through CREATE for Strategic Management, at www.McGrawHillCreate.com/Rothaermel Where do I find cases to incorporate into my class? You can access the full-length cases that accompany Strategic Management by Frank T. Rothaermel through McGrawHill's custom-publishing program, CREATE (McGrawHillCreate.com/Rothaermel). Through CREATE, you will be able to select from 24 author-written cases that go specifically with this textbook as well as cases from Harvard, Ivey Darden, NACRA, and much more! You can: Assemble your own course, selecting the chapters, cases, and readings that will work best for you. Or choose from several ready-to-go, author-recommended complete course solutions, which include chapters, cases, and readings, pre-loaded in CREATE. Among the pre-loaded solutions, you'll find options for undergrad, MBA, accelerated, and other strategy courses. How do I access these materials? You will find detailed instructions on how to select content for your course at McGrawHillCreate.com/Rothaermel. In addition, the case matrix that accompanies the textbook (and is also available at the Create landing page) gives an overview of the 24 author-written cases and how they fit with the 12 text chapters. Using these resources, you can easily: Select and arrange the content you want for your course and your students Combine material from different sources and even upload your own content Choose the format you want (print or e-book) Update your course materials as often as you like Receive your PDF review copy in minutes or a print review copy in just a few days. Want help getting started? For more information, please contact your local McGraw-Hill Learning Technology Consultant or email [email protected]
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SECOND EDITION Frank T. Rothaermel Georgia Institute of Technology
STRATEGIC MANAGEMENT, SECOND EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2015 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous edition © 2013. 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 ISBN 978-0-07-764506-9 (student edition) MHID 0-07-764506-5 (student edition) ISBN 978-0-07-764517-5 (instructor's edition) MHID 0-07-764517-0 (instructor's edition) Senior Vice President, Products & Markets: Kurt L. Strand Vice President, Content Production & Technology Services: Kimberly Meriwether David managing director: Paul Ducham Executive Brand Manager: Michael Ablassmeir Executive Director of Development: Ann Torbert Senior Development Editor: Laura Griffin Marketing Manager : Elizabeth Trepkowski Director, Content Production: Terri Schiesl Content Project Manager: Harvey Yep Senior Buyer: Debra R. Sylvester Design: Matt Diamond Cover Image: Veer Senior Content Licensing Specialist: Jeremy Cheshareck Typeface: 10/12 Times Roman Compositor: Laserwords Private Limited Printer: R. R. Donnelley 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 Rothaermel, Frank T. Strategic management / Frank T. Rothaermel, Georgia Institute of Technology.--Second edition. pages cm Revised edition of the work, Strategic management : concepts. Includes bibliographical references and index. ISBN-13: 978-0-07-764506-9 (student edition : alk. paper) ISBN-10: 0-07-764506-5 (student edition : alk. paper) ISBN-13: 978-0-07-764517-5 (instructor's edition : alk. paper) ISBN-10: 0-07-764517-0 (instructor's edition : alk. paper) 1. Strategic planning. I. Title. HD30.28.R6646 2015 658.4'012--dc23 2013044736 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
DEDICATION To my eternal family for their love, support, and sacrifice: Kelleyn, Harris, Winston, Roman, and Adelaide --FRANK T. ROTHAERMEL
CONTENTS IN BRIEF
PART ONE /
STRATEGY ANALYSIS 1
CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5
What Is Strategy, and Why Is It Important? 2 Strategic Leadership: Managing the Strategy Process 28 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 56 Internal Analysis: Resources, Capabilities, and Core Competencies 96 Competitive Advantage, Firm Performance, and Business Models 128
PART TWO /
STRATEGY FORMULATION 161 CHAPTER 6 Business Strategy: Differentiation, Cost Leadership, and Integration 162 CHAPTER 7 Business Strategy: Innovation and Entrepreneurship 198 CHAPTER 8 Corporate Strategy: Vertical Integration and Diversification 240 CHAPTER 9 Corporate Strategy: Mergers and Acquisitions, Strategic Alliances 276 CHAPTER 10 Global Strategy: Competing Around the World 306
PART THREE / STRATEGY IMPLEMENTATION 341 CHAPTER 11 Organizational Design: Structure, Culture, and Control 342 CHAPTER 12 Corporate Governance and Business Ethics 376
PART FOUR / MINICASES 405
HOW TO CONDUCT A CASE ANALYSIS 457
PART FIVE /
CASES (All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel)
vi
MINICASES AND FULL-LENGTH CASES
MINICASES /
FULL-LENGTH CASES /
1 Does Facebook Have a Strategy? 406 2 Michael Phelps: The Greatest Olympian 408 3 Teach For America: Inspiring Future Leaders 410 4 Strategy and Serendipity: A Billion-Dollar Bonanza 412 5 The Wonder from Sweden: Is IKEA's Success Sustainable? 413 6 Starbucks: Re-creating Its Uniqueness 416 7 LVMH in China: Building Its Empire of Desire 418 8 GE under Jack Welch vs. Jeffrey Immelt 421 9 Competing on Business Models: Google vs. Microsoft 424 10 From Good to Great to Gone: The Rise and Fall of Circuit City 427 11 China's Li Ning Challenges Nike and adidas 429 12 Which Automotive Technology Will Win? 432 13 Is Porsche Killing the Golden Goose? 434 14 The Rise of Samsung Electronics 437 15 Yummy Yum!'s Competitive Advantage in China 440 16 BYD--"Build Your Dreams" in America 444 17 Alibaba and China's E-Commerce: "Open Sesame" Comes True 446 18 The Premature Death of a Google Forerunner at Microsoft 449 19 Sony's Structure and Competitive Disadvantage 451 20 UBS's Billion-Dollar Ethics Scandals 454
(All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel) Facebook (in 2013): Will Wall Street Hit the "Like" Button? Tesla Motors (in 2013): Will Sparks Fly in the Automobile Industry? Tesla Motors (in 2011) and the U.S. auto industry Tesla Motors (in 2009) and the U.S. Auto Industry The Movie Exhibition Industry 2013 Apple (in 2013): How to Sustain a Competitive Advantage? Apple (in 2011) after Steve Jobs Make or Break at RIM (in 2013): Launching BlackBerry 10 McDonald's (in 2013): How to Win Again? Amazon.com (in 2013): Will Amazon Kindle Another Fire? Best Buy's Turn-Around Strategy (2013) Best Buy after Circuit City (in 2011): What's Next? UPS in India (in 2011)--A Package Deal? Microsoft and Xbox (in 2012): The Battle for the Living Room Grok (in 2013): Action Intelligence for Fast Data Numenta (in 2010): The Age of Truly Intelligent Machines? Genentech (in 2011): After the Acquisition by Roche Merck (in 2009): Open for Innovation? Healthymagination at GE (in 2011) Better World Books (in 2013): Social Entrepreneurship and the Triple Bottom Line Better World Books (in 2009): Social Entrepreneurship and the Triple Bottom Line Tropical Salvage's Growth Strategy (in 2010): From Recession to Expansion InterfaceRAISE (in 2010): Raising the Bar in Sustainability Consulting Siemens Energy (in 2010): How to Engineer a Green Future? IBM (in 2010) and the Emerging Cloud-Computing Industry Infosys Consulting in the U.S. (in 2010): What to Do Now? Bank of America (in 2010) and the New Financial Landscape
FULL-LENGTH CASES MARKED WITH A WERE AUTHORED OR CO-AUTHORED SPECIFICALLY FOR THIS BOOK BY FRANK T. ROTHAERMEL. vii
CONTENTS
PART ONE / STRATEGY ANALYSIS 1
CHAPTER 1 WHAT IS STRATEGY, AND WHY IS IT IMPORTANT? 2
CHAPTERCASE 1 Apple: Once the World's Most Valuable Company 3
1.1 What Strategy Is: Gaining and Sustaining
Competitive Advantage 4 What Is Competitive Advantage? 5
Industry vs. Firm Effects in Determining Performance 9
1.2 Stakeholders and Competitive Advantage 10 Stakeholder Strategy 11
Stakeholder Impact Analysis 13
1.3 The AFI Strategy Framework 17
1.4
Implications for the Strategist 19
/ CHAPTERCASE 1 Consider This... 19
CHAPTER 2 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY PROCESS 28
CHAPTERCASE 2 PepsiCo's Indra Nooyi: "Performance with a Purpose" 29
2.1 Vision, Mission, and Values 30 Vision and Mission 30 Living the Values 35
2.2 Strategic Leadership 35 What Do Strategic Leaders Do? 37 How Do You Become an Effective and Ethical Strategic Leader? 37 Formulating Strategy Across Levels: Corporate, Business, and Functional Managers 39
2.3 The Strategic Management Process 41 Top-Down Strategic Planning 41 Scenario Planning 42 Strategy as Planned Emergence: Top-Down and Bottom-Up 44
2.4
Implications for the Strategist 48
/ CHAPTERCASE 2 Consider This... 48
viii
CHAPTER 3 EXTERNAL ANALYSIS: INDUSTRY STRUCTURE, COMPETITIVE FORCES, AND STRATEGIC GROUPS 56
CHAPTERCASE 3 Tesla Motors and the U.S. Automotive Industry 57
3.1 The PESTEL Framework 58 Political/Legal Factors 59 Economic Factors 60 Sociocultural Factors 63 Technological Factors 64 Ecological Factors 64
3.2 Industry Structure and Firm Strategy:
The Five Forces Model 64 Competition in the Five Forces Model 65 The Threat of Entry 67 The Power of Suppliers 71 The Power of Buyers 72 The Threat of Substitutes 74 Rivalry among Existing Competitors 75 Adding a Sixth Force: The Strategic Role of Complements 80
3.3 Changes over Time: Industry Dynamics 82
3.4 Explaining Performance Differences Within the Same Industry: Strategic Groups 83 Mapping Strategic Groups 84 Mobility Barriers 86
3.5
Implications for the Strategist 86
/ CHAPTERCASE 3 Consider This... 88
CHAPTER 4 INTERNAL ANALYSIS: RESOURCES, CAPABILITIES, AND CORE COMPETENCIES 96 CHAPTERCASE 4 Nike's Core Competency: The Risky Business of Fairy Tales 97 4.1 Looking Inside the Firm for Core Competencies 100
4.2 The Resource-Based View 102 Two Critical Assumptions 104 The VRIO Framework 104 How to Sustain a Competitive Advantage 108
4.3 The Dynamic Capabilities Perspective 113
4.4 The Value Chain Analysis 115
4.5
Implications for the Strategist 117
Using SWOT Analysis to Combine External and Internal
Analysis 117
/ CHAPTERCASE 4 Consider This... 120
CHAPTER 5 COMPETITIVE ADVANTAGE, FIRM PERFORMANCE, AND BUSINESS MODELS 128
CHAPTERCASE 5 Assessing Competitive Advantage: Apple vs. BlackBerry 129
5.1 Competitive Advantage and Firm
Performance 131 Accounting Profitability 131 Shareholder Value Creation 136 Economic Value Creation 139 The Balanced Scorecard 143 The Triple Bottom Line 146
5.2 Business Models: Putting Strategy into
Action 148 Different Business Models 150
5.3
Implications for the Strategist 151
/ CHAPTERCASE 5 Consider This... 152
PART TWO / STRATEGY FORMULATION 161 CHAPTER 6 BUSINESS STRATEGY: DIFFERENTIATION, COST LEADERSHIP, AND INTEGRATION 162 CHAPTERCASE 6 P&G's Strategic Position Weakens 163 6.1 Business-Level Strategy: How to Compete for Advantage 165 Strategic Position 166 Generic Business Strategies 166
CONTENTS ix
6.2 Differentiation Strategy: Understanding Value Drivers 168 Product Features 169 Customer Service 171 Complements 171
6.3 Cost-Leadership Strategy: Understanding Cost Drivers 172 Cost of Input Factors 173 Economies of Scale 174 Learning Curve 176 Experience Curve 178
6.4 Business-Level Strategy and the Five Forces:
Benefits and Risks 178 Cost-Leadership Strategy: Benefits and Risks 178 Differentiation Strategy: Benefits and Risks 180
6.5 Integration Strategy: Combining Cost Leadership and Differentiation 181 Value and Cost Drivers of Integration Strategy 183 Integration Strategy Gone Bad: "Stuck in the Middle" 185
6.6 The Dynamics of Competitive Positioning 186
6.7
Implications for the Strategist 189
/ CHAPTERCASE 6 Consider This... 189
CHAPTER 7 BUSINESS STRATEGY: INNOVATION AND ENTREPRENEURSHIP 198
CHAPTERCASE 7 Wikipedia: The Free Encyclopedia 199
7.1 Competition Driven by Innovation 200 The Innovation Process 202
7.2 Strategic and Social Entrepreneurship 204
7.3 Innovation and the Industry Life Cycle 206 Introduction Stage 207 Growth Stage 209 Shakeout Stage 211 Maturity Stage 212 Decline Stage 212 Crossing the Chasm 213
7.4 Types of Innovation 219 Incremental vs. Radical Innovation 220 Architectural vs. Disruptive Innovation 222 The Internet as Disruptive Force: The Long Tail 225 Open Innovation 227
7.5
Implications for the Strategist 230
/ CHAPTERCASE 7 Consider This... 231
x CONTENTS
CHAPTER 8 CORPORATE STRATEGY: VERTICAL INTEGRATION AND DIVERSIFICATION 240
CHAPTERCASE 8 Refocusing GE: A Future of CleanTech and health care? 241
8.1 What Is Corporate Strategy? 242
8.2 The Boundaries of the Firm 244 Firms vs. Markets: Make or Buy? 245 Alternatives on the Make-or-Buy Continuum 247
8.3 Vertical Integration along the Industry
Value Chain 250 Types of Vertical Integration 251 Benefits and Risks of Vertical Integration 252 Alternatives to Vertical Integration 255
8.4 Corporate Diversification: Expanding Beyond a
Single Market 256 Types of Corporate Diversification 257 Leveraging Core Competencies for Corporate Diversification 260 Corporate Diversification and Firm Performance 263
8.5
Implications for the Strategist 266
/ CHAPTERCASE 8 Consider This... 267
CHAPTER 9 CORPORATE STRATEGY: MERGERS AND ACQUISITIONS, STRATEGIC ALLIANCES 276
CHAPTERCASE 9 How Buzz Lightyear, Iron Man, and Darth Vader Joined Mickey's Family 277
9.1 Mergers and Acquisitions 278 Merging With Competitors 278 Why Do Firms Make Acquisitions? 280 M&A and Competitive Advantage 282
9.2 Strategic Alliances 283 Why Do Firms Enter Strategic Alliances? 284 Governing Strategic Alliances 288 Alliance Management Capability 291
9.3
Implications for the Strategist 294
/ CHAPTERCASE 9 Consider This... 296
CHAPTER 10 GLOBAL STRATEGY: COMPETING AROUND THE WORLD 306
CHAPTERCASE 10 Hollywood Goes Global 307
10.1 What Is Globalization? 309 Stages of Globalization 310
10.2 Going Global: Why? 313 Advantages of Expanding Internationally 313 Disadvantages of Expanding Internationally 315
10.3 Going Global: Where and How? 318 Where in the World to Compete? The CAGE Distance Framework 318 How Do MNEs Enter Foreign Markets? 321
10.4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework 322 International Strategy 323 Multidomestic Strategy 325 Global-Standardization Strategy 325 Transnational Strategy 326
10.5 National Competitive Advantage: World Leadership in Specific Industries 327 Porter's Diamond Framework 329
10.6
Implications for the Strategist 331
/ CHAPTERCASE 10 Consider This... 332
PART THREE / STRATEGY IMPLEMENTATION 341 CHAPTER 11 ORGANIZATIONAL DESIGN: STRUCTURE, CULTURE, AND CONTROL 342 CHAPTERCASE 11 Zappos: Designed to Deliver Happiness 343 11.1 How to Organize for Competitive Advantage 345 Organizational Inertia and the Failure of Established Firms 346 The Key Elements of Organizational Structure 346 Assembling the Pieces: Mechanistic vs. Organic Organizations 349 11.2 Matching Strategy and Structure 351 Simple Structure 351 Functional Structure 351
CONTENTS xi
Multidivisional Structure 355 Matrix Structure 357
11.3 Organizational Culture: Values, Norms, and Artifacts 359 Where Do Organizational Cultures Come From? 360 How Does Organizational Culture Change? 361 Organizational Culture and Competitive Advantage 361
11.4 Strategic Control-and-Reward Systems 363 Input Controls 364 Output Controls 364
11.5
Implications for the Strategist 365
/ CHAPTERCASE 11 Consider This... 367
CHAPTER 12 CORPORATE GOVERNANCE AND BUSINESS ETHICS 376
CHAPTERCASE 12 HP's Boardroom Soap Opera Continues 377
12.1 The Shared Value Creation Framework 380 Public Stock Companies and Shareholder Capitalism 380 Creating Shared Value 381
12.2 Corporate Governance 383 Agency Theory 385 The Board of Directors 386 Other Governance Mechanisms 388
12.3 Strategy and Business Ethics 392
12.4
Implications for the Strategist 395
/ CHAPTERCASE 12 Consider This... 396
PART FOUR / MINICASES 405 1 Does Facebook Have a Strategy? 406 2 Michael Phelps: The Greatest Olympian 408 3 Teach For America: Inspiring Future Leaders 410 4 Strategy and Serendipity: A Billion-Dollar Bonanza 412 5 The Wonder from Sweden: Is IKEA's Success Sustainable? 413 6 Starbucks: Re-creating Its Uniqueness 416 7 LVMH in China: Building Its Empire of Desire 418
8 GE under Jack Welch vs. Jeffrey Immelt 421 9 Competing on Business Models: Google vs. Microsoft 424 10 From Good to Great to Gone: The Rise and Fall of Circuit City 427 11 China's Li Ning Challenges Nike and adidas 429 12 Which Automotive Technology Will Win? 432 13 Is Porsche Killing the Golden Goose? 434 14 The Rise of Samsung Electronics 437 15 Yummy Yum!'s Competitive Advantage in China 440 16 BYD--"Build Your Dreams" in America 444 17 Alibaba and China's E-Commerce: "Open Sesame" Comes True 446 18 The Premature Death of a Google Forerunner at Microsoft 449 19 Sony's Structure and Competitive Disadvantage 451 20 UBS's Billion-Dollar Ethics Scandals 454 HOW TO CONDUCT A CASE ANALYSIS 457 PART FIVE / FULL-LENGTH CASES (All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel) Facebook (in 2013): Will Wall Street Hit the "Like" Button? Tesla Motors (in 2013): Will Sparks Fly in the Automobile Industry? Tesla Motors (in 2011) and the U.S. Auto Industry Tesla Motors (in 2009) and the U.S. Auto Industry The Movie Exhibition Industry 2013 Apple (in 2013): How to Sustain a Competitive Advantage? Apple (in 2011) after Steve Jobs Make or Break at RIM (in 2013): Launching BlackBerry 10 McDonald's (in 2013): How to Win Again?
FULL-LENGTH CASES MARKED WITH A WERE AUTHORED OR CO-AUTHORED SPECIFICALLY FOR THIS BOOK BY FRANK T. ROTHAERMEL.
xii CONTENTS Amazon.com (in 2013): Will Amazon Kindle Another Fire? Best Buy's Turn-Around Strategy (2013) Best Buy after Circuit City (in 2011): What's Next? UPS in India (in 2011)--A Package Deal? Microsoft and Xbox (in 2012): The Battle for the Living Room Grok (in 2013): Action Intelligence for Fast Data Numenta (in 2010): The Age of Truly Intelligent Machines? Genentech (in 2011): After the Acquisition by Roche Merck (in 2010): Open for Innovation? Healthymagination at GE (in 2011) Better World Books (in 2013): Social Entrepreneurship and the Triple Bottom Line
Better World Books (in 2009): Social Entrepreneurship and the Triple Bottom Line Tropical Salvage's Growth Strategy (in 2010): From Recession to Expansion InterfaceRAISE (in 2010): Raising the Bar in Sustainability Consulting Siemens Energy (in 2010): How to Engineer a Green Future? IBM (in 2010) and the Emerging Cloud-Computing Industry (in 2010) Infosys Consulting in the U.S. (in 2010): What to Do Now? Bank of America (in 2010) and the New Financial Landscape Photo Credits 468 Name Index I-1 Company Index I-5 Subject Index I-10
CHAPTERCASES AND STRATEGY HIGHLIGHTS
CHAPTERCASES / 1 Apple: Once the World's Most Valuable Company 3 2 PepsiCo's Indra Nooyi: "Performance with a Purpose" 29 3 Tesla Motors and the U.S. Automotive Industry 57 4 Nike's Core Competency: The Risky Business of Fairy Tales 97 5 Assessing Competitive Advantage: Apple vs. BlackBerry 129 6 P&G's Strategic Position Weakens 163 7 Wikipedia: The Free Encyclopedia 199 8 Refocusing GE: A Future of Clean-Tech and Health Care? 241 9 How Buzz Lightyear, Iron Man, and Darth Vader Joined Mickey's Family 277 10 Hollywood Goes Global 307 11 Zappos: Designed to Deliver Happiness 343 12 HP's Boardroom Soap Opera Continues 377
STRATEGY HIGHLIGHTS / 1.1 JetBlue: "Stuck in the Middle"? 7 1.2 BP: "Lack of Business Integrity"? 17 2.1 Merck: Reconfirming Its Core Values 36 2.2 Starbucks' CEO: "It's Not What We Do" 46 3.1 How the Eurozone crisis Is Hurting Companies 62 3.2 The Five Forces in the Airline Industry 66 4.1 Applying VRIO: The Rise and Fall of Groupon 109 4.2 Bill "Lucky" Gates 111 5.1 Interface: The World's First Sustainable Company 147 5.2 Threadless: Leveraging Crowdsourcing to Design Cool T-Shirts 149 6.1 Trimming Fat at whole foods Market 170 6.2 Ryanair: Lower Cost than the Low-Cost Leader! 173 7.1 Apple Leverages Network Effects to Propel Growth 208 7.2 GE's New Innovation Mantra: Disrupt Yourself! 225 8.1 Toyota Locks Up Lithium for Car Batteries 249 8.2 The Tata Group: Integration at the Corporate Level 260 9.1 Food Fight: Kraft's Hostile Takeover of Cadbury 281 9.2 Strategic Alliances to Challenge Amazon 285 10.1 Does GM's Future Lie in China? 314 10.2 Walmart Retreats from Germany 316 11.1 W. L. Gore & Associates: Informality and Innovation 348 11.2 USA Today: Leveraging Ambidextrous Organizational Design 354 12.1 GE's Board of Directors 388 12.2 Did Goldman Sachs and the "Fabulous Fab" Commit Securities Fraud? 393
xiii
ABOUT THE AUTHOR Frank T. Rothaermel Georgia Institute of Technology FRANK T. ROTHAERMEL (PHD) is a professor of strategic management and holds the Russell and Nancy McDonough Chair in the Scheller College of Business at the Georgia Institute of Technology. Frank is also an Alfred P. Sloan Industry Studies Fellow. He received a National Science Foundation (NSF) CAREER award, which "is a Foundation-wide activity that offers the National Science Foundation's most prestigious awards in support of . . . those teacher-scholars who most effectively integrate research and education" (NSF CAREER Award description). Frank is also the area coordinator for Strategic Management. Frank's research interests lie in the areas of strategy, innovation, and entrepreneurship. To inform his research, he has conducted extensive field work and executive training with leading corporations such as Amgen, Daimler, Eli Lilly, Equifax, GE Energy, GE Healthcare, Hyundai Heavy Industries (South Korea), KimberlyClark, Microsoft, McKesson, NCR, Turner (TBS), among others. BusinessWeek named Frank one of Georgia Tech's Prominent Faculty in its national survey of business schools. The Kauffman Foundation views Frank as one of the world's 75 thought leaders in entrepreneurship and innovation. Frank has published some 30 articles in leading academic journals such as the Academy of Management Journal, Academy of Management Review, Organization Science, Strategic Management Journal, and elsewhere. Some of his academic articles are highly cited. Frank currently serves (or served) on the editorial boards of the Academy of Management Journal, Academy of Management Review, Organization Science, Strategic Management Journal, and Strategic Organization. Frank regularly translates his research findings for wider audiences in articles in Forbes, MIT Sloan Management Review, The Wall Street Journal, and elsewhere. He has received several recognitions for his research, including the Sloan Industry Studies Best Paper Award, the Academy of Management Newman Award, the Strategic Management Society Conference Best Paper Prize, the DRUID Conference Best Paper Award, and the Israel Strategy Conference Best Paper Prize. He is also the inaugural recipient of the Byars Faculty Excellence Award. Frank has a wide range of teaching experience, including at the Georgia Institute of Technology, Georgetown University, ICN Business School (France), Michigan State University, Politecnico di Milano (Italy), St. Gallen University (Switzerland), and the University of Washington. He received numerous teaching awards for excellence in the classroom. Frank holds a PhD degree in strategic management from the University of Washington, an MBA from the Marriott School of Management at Brigham Young University, and an M.Sc. (Diplom-Volkswirt) in economics from University of Duisburg, Germany. He was a visiting professor at the University of St. Gallen, Switzerland, and an Erasmus Scholar at Sheffield Hallam University, UK. Frank is a member of the Academy of Management, the Industry Studies Association (Founding Member), and the Strategic Management Society. VISIT THE AUTHOR AT: www.ftrStrategy.com xiv
PREFACE The market responded very positively to the first edition, and I'm grateful for that strong vote of confidence. In this second edition, I built upon the unique strengths of this text and continue to improve it based on hundreds of insightful reviews and important feedback from professors, students, and professionals. The vision for this text is to provide students with core concepts, frameworks, and analysis techniques in strategy that will integrate their functional course offerings and help them become managers who make well-reasoned strategic decisions. It is a research-based strategy text for the issues that managers face in a globalized and turbulent 21st century, blending theory, empirical research, and practical applications in a student-accessible form. The competition in the strategy textbook market can be separated into two overarching categories: traditional strategy books, which are the first-generation texts (from the 1980s); and more recent, research-based strategy books, which are the second-generation texts (from the 1990s). This new text is different--a third-generation strategy text, positioned to compete successfully with the primary first- and second-generation incumbents. The third-generation approach you will find here combines the student accessibility and application-oriented frameworks found in first-generation texts with the strategy research in the second-generation texts. This text synthesizes and integrates theory, empirical research, and practical applications in a unique combination of rigor and relevance. With a single strong voice, the chapters weave together classic and cutting-edge theory with in-chapter cases and strategy highlights, to demonstrate how companies gain and sustain competitive advantage. The strategic intent for the book is to combine quality and value with user-friendliness. In particular, the content of this product is based on the principles discussed next, each of which provides a value-added dimension for instructors or students, or both. Synthesis and integration of rigorous and relevant strategy material. For example, the text includes strategy material that has stood the test of time (such as the resource-based view and Porter's five forces model) as well as up-to-date strategy material and current research (such as the dynamic capabilities perspective and the triple bottom line). It also includes student-accessible coverage of strategic management research. It draws on articles published in the leading academic journals (for instance, Strategic Management Journal, Academy of Management Journal/Review, Organization Science, Management Science, Journal of Management, and so on). Although academic theory and empirical research form the foundation of the text, I also have integrated insights from leading practitioner outlets (such as Harvard Business Review, Sloan Management Review, California Management Review) to enhance the application of concepts. To weave in current examples and developments, I draw on The Wall Street Journal, Bloomberg Businessweek, Fortune, Forbes, and others. In sum, theory is brought to life via the embedded examples within each framework and concept. The comprehensive yet concise presentation of core concepts, frameworks, and techniques. Although comprehensive, the text does not include every single idea ever introduced to the strategy field. Many students don't read the assigned readings in their strategy textbooks because the books contain too much information, presented in a disjointed fashion. Many strategy books read more like a literature review, without addressing what the research findings mean and why they are important for managers. This jumble prevents students from seeing the bigger strategic picture. They may see the trees, but they fail to see the forest. In contrast, this text will be an enjoyable xv
xvi PREFACE
read for students--clear, concise, and filled with examples from companies today's students know--while at the same time providing the content and value-add that instructors expect. It has one vision and one voice! Combination of traditional and contemporary chapters. As a review of the chaptercontents listing will demonstrate, the text includes the traditional chapters needed in the core strategy course. In addition, it includes three contemporary standalone chapters that reviewers and users have identified as providing additional value: Chapter 2, "Strategic Leadership: Managing the Strategy Process," discusses the roles of leaders in setting strategy within three different models: top-down planning, scenario planning, and strategy as planned emergence. This chapter allows for a thorough discussion of the role of vision, mission, and values; customer versus product-oriented missions; the combination of intended and emergent strategies; and the importance of long-term success in anchoring a firm in ethical values. Chapter 5, "Competitive Advantage, Firm Performance, and Business Models," neatly ends the analysis section of the book by providing five approaches to measuring firm performance and assessing competitive advantage. It looks at three traditional approaches to measure performance (accounting profitability, economic value creation, and shareholder value creation) and at two holistic approaches (the balanced scorecard and the triple bottom line). Instructors can easily cover as many of the approaches as desired for their course and its goals. A new addition is the detailed discussion of business models. Putting strategy into action through innovative business models is becoming more and more important across all types of industries. Chapter 7, Innovation and Strategic Entrepreneurship, addresses the important topics of innovation and strategic entrepreneurship as aspects of business strategy. Driven by Schumpeter's "perennial gale of creative destruction," competition seems more heated than ever, with innovation playing a key role in gaining and sustaining competitive advantage. This chapter addresses various aspects of innovation, beginning with the industry life cycle (ILC) and the modes of competition and business-level strategies at various stages in the life cycle. Given the importance of different customer preferences at different stages of the ILC, it introduces the crossing-the-chasm framework and illustrates it with an application to the smartphone industry. Using tools and concepts of strategic management, it explores four types of innovation, social entrepreneurship, and the Internet as a disruptive force. This chapter especially will engage students and provide much food for thought in their jobs and careers. Up-to-date examples and discussion of current topics within a Global context. Having spoken to hundreds of students around the world, I want to minimize the frustration they express in seeing the same, out-of-date examples in so many of their (generic and boiler-plate) business-school textbooks. The book has been written for today's students to reflect the turbulence and dynamism that they will face as managers. I have drawn on up-to-date examples to illustrate how companies apply strategy concepts in today's business world. Although this text contains a standalone chapter on Global Strategy, examples throughout the book reflect the global nature of competition and the importance of emerging economies such as the BRIC countries and highlights non-U.S. competitors such as Lenovo, Siemens, the Tata Group, and BYD in globalized industries. Each chapter contains two Strategy Highlight boxes. These in-chapter examples apply a specific concept to a specific company. They are right-sized for maximum student appeal--long enough to contain valuable insights, and short enough to
encourage student reading. For a list of the Strategy Highlight companies and topics, see page xiii. I also have drawn topics and examples from recent and seminal business bestsellers, such as The Black Swan; Built to Last; Co-opetition; Crossing the Chasm; Good Strategy, Bad Strategy; Good to Great; Great by Choice; How the Mighty Fall; In the Plex; Innovator's Dilemma (and Solution); Innovator's DNA; Lean In; Playing to Win; Predictably Irrational; Steve Jobs; The Long Tail; The Wide Lens; Wisdom of the Crowds; World 3.0; and Why Smart Executives Fail; among others. I have included these ideas to expose students to topics that today's managers talk about. Being conversant with these concepts from business bestsellers will help today's students interview better and effortlessly join the discourse in the corporate world. Use of the AFI strategy framework. The book demonstrates that "less is more" through a focused presentation of the relevant strategy content using Analysis, Formulation, and Implementation as a guiding framework. This model (see Exhibit 1.5 on page 18) integrates process schools of strategy (based on organization theory, psychology, and sociology) with content schools of strategy (based on economics). Process and content can be viewed as the "Yin and Yang" of strategy. Current strategy textbooks typically favor one or the other but do not integrate them, which leads to an unbalanced and incomplete treatment of strategic management. The AFI strategy strives for beauty through balance, which is lacking in most current strategy texts on the market. The model also emphasizes that gaining and sustaining competitive advantage is accomplished in an iterative and recursive fashion. The framework offers a repository for theoretical strategy knowledge that is well translated for student consumption, and it provides a toolkit for practicing managers. High-quality cases, well integrated with textbook chapters. Cases are a fundamental ingredient in teaching strategy. My interactions with colleagues, reviewers, and Focus Group participants in the course of writing and developing chapters indicate varying instructor needs for top-notch, up-to-date cases that are well-integrated with the content presented. Within this text itself are two types of cases: ChapterCases begin and end each chapter, framing the chapter topic and content. The case at the beginning of the chapter highlights a strategic issue that a wellknown company faced and relates that company to a concept to be taught in the chapter. The end of each chapter returns to the ChapterCase, in a recapitulation of the case titled "Consider This. . .". Here, we ask students to reconsider the case, applying concepts and information presented in the chapter, along with additional information about the focus company. 20 miniCases, (following Chapter 12), all based on original research, provide a decision scenario that a company's manager might face. With suggested links to related chapters, they offer dynamic opportunities to apply strategy concepts by assigning them as add-ons to chapters, either as individual assignments or as group work, or by using them for class discussion. I have taken pride in authoring all of the ChapterCases and MiniCases. This additional touch allows quality control and ensures that chapter content and cases use one voice and are closely interconnected. Both types of case materials come with sets of questions to stimulate class discussion or provide guidance for written assignments. The instructor resources offer sample answers that apply chapter content to the cases. In addition to these in-text cases, 24 full-length Cases, authored or co-authored by me specifically to accompany this textbook, are available through McGraw-Hill's
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xviii PREFACE custom-publishing CreateTM program. Full-length cases NEW to the second edition address strategic issues at Facebook, McDonald's, BlackBerry, and Amazon. Among the others, the cases about BetterWorldBooks, Tesla Motors, Numenta, Best Buy, and Apple have been updated and revised for the new edition. Also available are three full-length cases--about Microsoft, Tropical Salvage, and the movie industry-- authored by other strategic-management instructors. Robust case teaching notes and financial data are available for all full-length cases accessed through Create. Direct applications of strategy to careers and lives. The examples in the book discuss products and services from companies with which students are familiar, such as Facebook, Starbucks, Apple, and Zipcar. Use of such examples aids in making strategy relevant to students' lives and helps them internalize strategy concepts and frameworks. This edition also provides a stronger focus on practice/applications. Each chapter now closes with a section titled Implications for the Strategist that highlights practical implications of the concepts and frameworks discussed and allows the student to build a cumulative toolkit in strategic management. It bridges the gap to practical application and makes the reader more confident in using the tools presented. In addition, at the end of each chapter's homework materials is an innovative text feature, titled myStrategy, which personalizes strategy concepts through direct application of the chapter topic to students' lives. Questions asked in these sections include: What is your positioning strategy in the job market? How will you differentiate yourself, and at what cost? and How much is an MBA worth to you? Such questions encourage students to think through strategic issues related to their budding careers. You may choose to make this feature a regular part of the course, or you may prefer to let students explore these items outside of the regular coursework. Either way, the myStrategy feature demonstrates opportunities to personalize strategy as students plan or enhance careers following completion of the strategy course and their degrees. For details about changes made in the second edition, see the list that follows. What's New in the Second Edition I have revised and updated the second edition in the following ways, many of which were inspired by conversations and feedback from users and reviewers of the first edition. CHANGES MADE THROUGHOUT ChapterCases and Strategy Highlights throughout have been either completely revised and updated or are new, as detailed in the following chapter-by-chapter entries. All major text examples have been updated or are new, with more in-depth discussion. More global coverage is included throughout, with a stronger China focus (both on the country as well as its global competitors). Additional coverage and discussion of more diverse strategic leaders has been included. Chapters now consistently contain two Strategy Highlight features per chapter. Chapters now contain a stronger practice/application focus throughout. Each chapter now closes with a section discussing practical Implications for the Strategist. Following Chapter 12 are 20 MiniCases--13 are brand-new MiniCases, many of which focus on China and Chinese companies competing in the West, and the remaining 7 are updated from the first edition.
Four brand-new full-length Cases (Facebook, McDonald's, BlackBerry, and Amazon) are available through McGraw-Hill Create (including financial data in e-format for analysis available through McGraw-Hill Connect). There is continued focus on providing a streamlined presentation by dropping some material when adding new content. This focus results in a fast-paced, reader-friendly text. CHAPTER 1 New ChapterCase about Apple's rise and current challenges to sustain a competitive advantage. Draws on Rumelt's insightful book Good Strategy, Bad Strategy to more clearly delineate the concept of strategy. Sharpened the definitions of strategy and competitive advantage. Part of this involved removing the section on "strategy as a theory of how to compete." Moved all stakeholder material (from Chapter 12) into Chapter 1. Now includes an extensive discussion of stakeholder strategy and corporate social responsibility in Chapter 1, to provide the foundation for that concept throughout the chapters. Moved a revised section of "Formulating Strategy Across Levels" to Chapter 2. Moved discussion on business models to Chapter 5, where it could be expanded. New Strategy Highlight 1.1 discussing the difficulty JetBlue experienced in trying to combine two different competitive strategies (low cost and differentiation). New Strategy Highlight 1.2 about BP's 2010 Gulf Coast oil spill and systemic safety issues over the last decade. New discussion and ethical/social issues questions about stakeholder relationships. Two new small-group exercises (one on black swan events and the other about the dangers of unclear choice of strategy). CHAPTER 2 New ChapterCase, about Indra Yoori as a strategic leader. Tightened chapter by moving/deleting section on strategic intent, thereby more closely linking discussions of vision and mission. Added extended coverage of strategic leadership (previously in Chapter 12) into Chapter 2, to highlight the role of strategic leaders early on in the chapters. Added a revised and updated section on formulating strategy across business levels (from Chapter 1 in 1e), with more examples provided; leads into coverage of the strategic management and types of strategic planning. Emphasized the role of strategic leaders in shaping strategy formulation and the strategy process. New Strategy Highlight 2.1 on Merck's core values and the development of drugs to treat river blindness and the challenges with the Vioxx recall. Added new ethical/social issues question asking students to identify whether actual company vision/mission statements are customer- or product-oriented, or a combination. Added a new small-group exercise related to STEM (science, technology, engineering, and math) disciplines and U.S. competitiveness.
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CHAPTER 3 New ChapterCase about Tesla Motors and the U.S. automotive industry. Sharpened the PESTEL discussion by subsuming Political/Legal factors and updating examples. Added new Strategy Highlight 3.1 on the Eurozone crisis (in the PESTEL discussion). Significantly expanded discussion of Porter's five forces to allow for in-depth treat- ment with current example (including new Strategy Highlight 3.2 on the five forces in the airline industry). Added B-section titled "Competition in the Five Forces Model" to highlight two key assumptions in this model. Subsumed structure-conduct-performance (SCP) model under "Rivalry among Existing Competitors" following Porter's seminal work in Competitive Strategy. Expanded discussion of SWOT with application example. Added new C-heads under threat of entry: network effects, economies of scale, customer switching costs, capital requirements, advantages independent of size, government policy, and threat of retaliation. Expanded the section on rivalry among existing competitors: Moved the discussion of industry structure and types into this section (the fifth force), in the subsection on competitive industry structure. Added Exhibit 3.4, "The Five Forces Competitive Analysis Checklist." Added small-group exercise (ethical/social issues) asking students to propose new guidelines for helping Kraft promote food to children in a socially responsible way. CHAPTER 4 New ChapterCase 4: Nike's Core Competency: The Risky Business of Fairy Tales Changes in chapter sequence: (1) Moved the section on how to sustain a competitive advantage to precede the value chain section. (2) Also moved the section on dynamic capabilities to earlier in the chapter; now precedes the value chain analysis. In the value chain analysis section, provided examples for low-cost and differentiated value chain. New Strategy Highlight 4.1: Applying VRIO: The rise and fall of Groupon. Discussed Circuit City as an in-text example of what happens when not reinvesting, honing, and upgrading core competencies. Expanded discussion of SWOT and added analysis of McDonald's in the implications for the strategist section. Used a new example for path dependence--why the U.S. carpet industry is based in Georgia. Added activities, capabilities, dynamic capabilities, and isolating mechanisms as key terms. Sharpened definitions and treatment of differences among resource, capability, and core competence in both text and art. New discussion question asks students to conduct a value chain analysis for McDonald's and then analyze whether changes in its priorities affected its value chain. Small-Group Exercise 2 asks students to build on the Groupon Strategy Highlight in the chapter in ways that will build dynamic capabilities and make its competencies more difficult to imitate.
CHAPTER 5 New ChapterCase, focusing on Apple vs. BlackBerry. Rearranged topics in first section (on firm performance), to put accounting profitabil- ity first, followed by shareholder value creation, and then economic value creation, balanced scorecard, and triple bottom line. Used Apple and BlackBerry data to analyze and compare profitability. Updated exhibits related to accounting profitability (e.g., stock market valuations of Amazon, Apple, Google, Microsoft, and Samsung; market capitalization of Apple). In shareholder value section, added key term market capitalization. Added section on corporate social responsibility, in triple bottom line section. Added section on business models (razor-razor blade; subscription-based; pay as you go; freemium). In the business models section, added a detailed discussion of business model innovation, an in-text example about Zipcar, and a Strategy Highlight about Threadless. Revised the economic value creation discussion to focus on two companies, with the same costs but slightly different strategies. Added two new exhibits showing economic value creation for two different firms (situations)--Exhibits 5.5 and 5.6. New discussion question related to the Threadless Strategy Highlight. Added a new small-group exercise asking students to prepare a presentation in support of the triple-bottom-line approach. CHAPTER 6 New ChapterCase, about recent strategic initiatives at P&G that were intended to help strengthen its competitive position, including bringing back A. G. Lafley. New Strategy Highlight 6.1 on Whole Foods (was the ChapterCase in 1e). Revised integration strategy example uses stores (Nordstrom, Target, Walmart) rather than cosmetics companies. Moved discussion of integration strategy at the corporate level to Chapter 8. Added new heading for stuck in the middle ("Integration Strategy `Gone Bad'") and used JCPenney as a text example. Moved discussion of mass customization into the section on integrated strategy. Clarified Exhibit 6.6 on effects of learning and experience. Reconceptualized the exhibit on value and cost drivers (now Exhibit 6.10). Changed ethical/social issue questions about scale of production and learning curves to a discussion question. Added a new ethical/social issue question relating to Whole Foods' business strategy and healthy foods. CHAPTER 7 Updated ChapterCase about Wikipedia. New section on the innovation process, introducing the "four I's"--idea, invention, innovation, imitation. Expanded section on entrepreneurship, including corporate and social entrepreneurship. Expanded the discussion of the industry life cycle section, including a subsection on the "shakeout stage."
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Added a new application of the industry life cycle to the smartphone industry in emerging and developed economies. Added Geoffrey Moore's "crossing the chasm" framework (unique to this text), including a text example of the application of this model to innovation in the smartphone industry. Added a subsection, including exhibits, on closed versus open innovation. Updated the discussion on accelerating technological change and moved the exhibit (from Chapter 1 in 1e). Clarified the text and retitled the exhibit on product and process innovation and the emergence of an industry standard, to make clear that this concept applies throughout the entire industry life cycle. New key terms added: first-mover advantages, invention, patent, crossing the chasm, innovation ecosystem, organizational inertia, Pareto principle, closed innovation, open innovation. Added a discussion question asking students to think about the effect of the Internet on retailing and how retailers might respond. Added a discussion question asking students to explore stories about low-tech innovations. Added a small-group exercise related to P&G's Connect 1 Develop open innovation system. CHAPTER 8 In the discussion of transaction cost economics, clarified the discussion on economies of scale and economies of scope. Also, changed discussion of the scope of the firm to the boundaries of the firm. Added new Exhibit 8.1 showing internal and external transaction costs, to aid students in understanding this somewhat abstract but critical concept in corporate strategy. Moved discussion of integration strategy at the corporate level to this chapter, where it now appears as Strategy Highlight 8.2 on the Tata Group, a multinational conglomerate. Added Exhibit 8.12 on dynamic corporate strategy, contrasting Nike and adidas. In Exhibit 8.2, added "Transaction-specific investments" in the Advantages/Firm box. Deleted all references to horizontal integration. Added as key terms internal transaction costs, external transaction costs, core com- petence-market matrix, and strategic alliances. Expanded Discussion Question 2 to apply it to Delta's vertical integration decision. Expanded Ethical/Social Issues Question 1 to ask students how firms can outsource HR management systems but continue to show their commitment to employees. CHAPTER 9 New ChapterCase about Disney and its serial acquisitions of Pixar, Marvel, and Lucas Films. Expanded and updated the discussion of M&A and its strategic alliances. Moved discussion of principal­agent problems to first in the list of reasons for mergers. Added discussion of real-options perspective into the section on strategic alliances. Added discussion of the new build-borrow-or-buy framework (Capron and Mitchell), with accompanying exhibit, in the Implications for the Strategist section.
PREFACE xxiii Added examples of serial acquisitions (e.g., Google bought YouTube; Google bought Waze to pre-empt Apple and FB; Google acquired Motorola's cell phone unit to be able to integrate hardware with software; Facebook bought Instagram; Yahoo bought Tumblr). Added as key terms: co-opetition, build-borrow-or-buy framework. Added discussion question about expected failure rates when merging with competi- tors as opposed to acquiring smaller companies. Added new ethical/social issues question about IKEA's strategic use of nonequity alli- ances and stakeholder partnerships. Added a new small-group exercise about the wave of consolidations in the U.S. office furniture-manufacturing industry located primarily in Michigan. Revised the second small-group exercise about social media usage in 2012 by the For- tune Global 100 companies. CHAPTER 10 Updated the ChapterCase with new data about the global appeal of Hollywood movies especially in regard to China. Revised the discussion of the integration-responsiveness framework to use more traditional terminology: international strategy, multidomestic strategy, globalstandardization strategy, transnational strategy. Changed discussion of the stages of globalization from a Strategy Highlight box to text. Added discussion of Ghemawat's World 3.0 framework. Clarified discussion of the disadvantages of expanding internationally. Added the CAGE (cultural, administrative, geographic, and economic) distance framework by Ghemawat (unique to this strategy text), with an accompanying exhibit. Streamlined coverage of Hofstede's national culture model. Added MTV as an example of an ineffective global-standardization strategy: started with global strategy, moved to multidomestic, now moving to transnational strategy. Added new Exhibit 10.6 to show dynamic strategic positioning for MTV Music Channel. Added as key terms: CAGE distance framework, multidomestic strategy. Added Discussion Question 3 about Ghemawat argument that the world isn't "flat" but is "semi-globalized." Added a new Ethical/Social Issues section question asking students to predict the per- sistence of Globalization 3.0 and to project what Globalization 4.0 might look like. Added Small-Group Exercise 1 about employment changes as U.S. companies become more globalized. Added new myStrategy feature about a personal strategy for building the three com- ponents of a global mind-set. CHAPTER 11 Introduced new model of how to assess strategic initiatives in regard to time horizon and resources required. Expanded discussion of SWOT implementation with application example (McDonald's) in the "Implications for the Strategist" section. Added and discussed key term: core rigidity. Added new Discussion Question 2 asking students to describe the values, norms, and artifacts of an organization with which they are familiar.
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Added new Ethical/Social Issues section question about organization culture and sports teams. Added a new small-group exercise asking students to think about how a university might apply the ROWE theory. CHAPTER 12 New ChapterCase on the continuing boardroom soap opera at Hewlett-Packard (highlighting how much HP deviated from its celebrated HP Way, shown in Exhibit 12.1). Strengthened the focus on the board of directors as a key corporate governance mechanism. Expanded the discussion of corporate governance and moved it to earlier in the chapter. Expansion includes more on agency theory (with related exhibit), adverse selection, moral hazard. Integrated discussion (and related exhibit) of a survey about attitudes toward corporate social responsibility across the globe. Added new discussion of Porter's shared value creation framework (unique to this text). Added current examples: Galleon Group's founder, Raj Rajaratnam; Carl Icahn's attempted LBO of Dell; Fabrice Tourre of Goldman Sachs. Added as key terms: shared value creation framework, adverse selection, moral hazard, leveraged buyout. Added new Strategy Highlight 12.2 on securities fraud by Fabrice Tourre at Goldman Sachs, and the resulting revision to Goldman's code of conduct. Moved section on strategic leadership to Chapter 2. Moved stakeholder impact analysis to Chapter 1. Moved discussion of corporate social responsibility to Chapters 1 and 5. Added new discussion question about the Business Roundtable's recommendation that the CEO not also serve as chairman of the board. Added new discussion question about how Nike might apply the shared value creation framework to global economic and social needs. Revised questions related to Small-Group Exercise 2 about the female and minority participation on corporate boards. MINICASES Added 13 brand-new MiniCases, many of which focus on China and Chinese companies competing in the West. Updated seven MiniCases from the first edition. FULL-LENGTH CASES Added four brand-new, full-length Cases: Facebook, McDonald's, BlackBerry, and Amazon. Revised and updated: BetterWorldBooks, Tesla Motors, Numenta, Best Buy, and Apple. All cases--including the new and revised cases plus all cases from the first edition that were authored by Frank Rothaermel--are available through McGraw-Hill Create. Cases include financial data in e-format for analysis.
Instructor Resources Multiple high-quality, fully integrated resources are available to make your teaching life easier: Connect, McGraw-Hill's online assignment and assessment system, offers a wealth of content for both students and instructors. Students will find interactive applications, chapter quizzes, templates for financial analysis, video cases, and--new in this edition--SmartBook and LearnSmart. Instructors will find tested and effective tools that enable automatic grading and student-progress tracking and reporting, and a trove of content to support teaching: The Instructors Manual (IM) includes thorough coverage of each chapter. New in this edition, we offer two versions of the IM, for newer and experienced faculty. Included in both versions are the appropriate level of theory, recent application or company examples, teaching tips, PowerPoint references, critical discussion topics, and answers to end-of-chapter exercises. The PowerPoint (PPT) slides provide comprehensive lecture notes, video links, and company examples not found in the textbook. There will be instructor mediaenhanced slides as well as notes with outside application examples. The Test Bank includes 100­150 questions per chapter, in a range of formats and with a greater-than-usual number of comprehension, critical-thinking, and application (or scenario-based) questions. It's tagged by learning objective, Bloom's Taxonomy levels, and AACSB compliance requirements. Links to videos that relate to concepts from chapters. The video links include sources such as Big Think, Stanford University's Entrepreneurship Corner, The McKinsey Quarterly, ABC, BBC, CBS, CNN, ITN/Reuters, MSNBC, NBC, PBS, and YouTube. The Online Learning Center (OLC), located at www.mhhe.com/ftrStrategy2e, offers resources for both instructors and students: At the instructors' portion of the OLC, which is password-protected, instructors can access all of the teaching resources described earlier, a Case Matrix relating cases to concepts within the chapters, and comprehensive Case Teaching Notes, including case financial analysis. At the students' portion of the OLC, students can take chapter quizzes to review concepts and click on links to videos that relate back to concepts covered in the chapter and/or cases. Frank Rothaermel was closely involved in developed all ancillaries, to ensure full integration with the strategy content in the text. TEGRITY CAMPUS Tegrity Campus makes class time available 24/7 by automatically capturing every lecture in a searchable format for students to review when they study and complete assignments. With a simple one-click start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browserbased viewing on a PC or Mac. Tegrity Campus' unique search feature helps students efficiently find what they need, when they need it, across an entire semester of class recordings. Help turn all your students' study time into learning moments immediately supported by your lecture. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus. mhhe.com.
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SIMULATIONS McGraw-Hill has two current strategy simulations--Business Strategy Game and GLO-BUS--that can be used with the textbook. For more information, contact your local McGraw-Hill sales representative. 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, seven days a week, 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, e-mail [email protected] com, or visit www.mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a timely fashion. ASSURANCE OF LEARNING READY Many educational institutions today are focused on the notion of assurance of learning, an important element of many accreditation standards. Strategic Management is designed specifically to support your assurance of learning initiatives with a simple yet powerful solution. Each chapter in the book begins with a list of numbered learning objectives, which appear throughout the chapter as well as in the end-of-chapter assignments. Every Test Bank question for Strategic Management maps to a specific chapter learning objective in the textbook. Each Test Bank question also identifies topic area, level of difficulty, Bloom's Taxonomy level, and AACSB skill area. You can use our Test Bank software, EZ Test and EZ Test Online, or Connect Management to easily search for learning objectives that directly relate to the learning objectives for your course. You can then use the reporting features of EZ Test to aggregate student results in a similar fashion, making the collection and presentation of Assurance of Learning data simple and easy. AACSB STATEMENT McGraw-Hill/Irwin is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, Strategic Management recognizes the curricula guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the Test Bank to the general knowledge and skill guidelines in the AACSB standards. The statements contained in Strategic Management are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While Strategic Management and the teaching package make no claim of any specific AACSB qualification or evaluation, we have within Strategic Management labeled selected questions according to six of the general knowledge and skills areas.
PREFACE xxvii Acknowledgments Any list of acknowledgments will almost always be incomplete, but I would like to thank some special people without whom this text would not have been possible. First and foremost, my wife Kelleyn, and our children: Harris, Winston, Roman, and Adelaide. Over the last few years, I have worked longer hours than when I was a graduate student to conduct the research and writing necessary for this text and accompanying case studies and other materials. I sincerely appreciate the sacrifice this has meant for my family. I was also fortunate to work with McGraw-Hill, and the best editorial and marketing team that one can imagine: Michael Ablassmeir (Executive Brand Manager), Paul Ducham (Managing Director), Ann Torbert (Executive Director of Development), Laura Griffin (Senior Development Editor), Elizabeth Trepkowski (Marketing Manager), Emily Hatteberg (Content Development Editor), Harvey Yep (Content Project Manager), and Matt Diamond (Designer). Thank you to senior management at McGraw-Hill Education who assembled this fine team. I was more than fortunate to work with a number of great colleagues on various resources that accompany this text. Their names and the resources they helped with follow: Marne Arthaud-Day (Kansas State University) on some Cases and Case Teaching Notes John Burr (Purdue University) on some Cases and Teaching Notes Anne Fuller (California State University, Sacramento), Connect digital co-author Syeda Noorein Inamdar (San Jose State University) on videos for the chapters and MiniCases Carol Jacobson (Purdue University) on end-of-chapter material David R. King (Iowa State University) on some Case Teaching Notes Louise Nemanich (Arizona State University) on the Instructor Resource Manual Charles Newman (University of Maryland University College), on videos for the full- length Cases Chris Papenhausen (University of Massachusetts, Dartmouth) on Strategic Financial Analysis Robert Porter (University of Central Florida) on the Running Case in Connect Marta Szabo White (Georgia State University) on the PowerPoint Slide Decks Erin Zimmer (Northwood University) on some Cases and Case Teaching Notes Over the years, I have been privileged to work with Karyn Lu, a superb copyeditor, on my scholarly research papers, and on this project. Karyn has been much more than a copyeditor, she has been a sounding board for ideas and has helped to make the delivery of the content as user-friendly as possible. Karyn was also instrumental in launching the social media support for professors and students on www.ftrStrategy, the Facebook strategy blog, and the Twitter feed for this text, a novel addition in the strategy content market. I would also like to thank Kelly Byrom for sharing her expertise in creating a sophisticated graphic design for the exhibits; Melissa Appleyard (Portland State University) and Carol Jacobson (Purdue University) for providing solid content and editorial suggestions; and Andrea Meyer and Laura Winig for superb case content editing. The Georgia Institute of Technology provided a conducive intellectual environment and superb institutional support to make this project possible. I thank Russell and Nancy McDonough for generously funding the endowed chair that I am honored to hold. I'm grateful for Dean Salbu and Senior Associate Dean Narasimhan for providing the exceptional
xxviii PREFACE leadership that allows faculty to fully focus on research, teaching, and service. I have been at Georgia Tech for over a decade, and could not have had better colleagues--all of whom are not only great scholars but also fine individuals whom I'm fortunate to have as friends: Marco Ceccagnoli, Annamaria Conti, Stuart Graham, Matt Higgins, David Ku, Jay Lee, John McIntyre, Alex Oettl, Henry Sauermann, Jerry Thursby, Marie Thursby, and Uriel Stettner at Georgia Tech. We have a terrific group of current and former PhD students, many of whom had a positive influence on this project, including Shanti Agung (Drexel University), Drew Hess (University of Virginia), Kostas Grigoriou (Florida International University), Jaiswal Mayank, Nicola McCarthy, German Retana (INCAE Business School, Costa Rica), Briana Sell, Jose Urbina, Carrie Yang, and Wei Zhang (Singapore Management University). I'd also like to thank the students at Georgia Tech, in the undergraduate and full-time day MBA, and the evening and executive MBA programs, as well as the executive MBA students from the ICN Business School in Nancy, France, on whom the materials were beta-tested. Their feedback helped fine-tune the content and delivery. Last, but certainly not least, I wish to thank the reviewers and focus group attendees who shared their expertise with us, from the very beginning when we developed the prospectus to the final text and cases that you hold in your hands. The reviewers have given us the greatest gift of all--the gift of time! These very special people are listed starting on page xxxi. I have long yearned to write a text that shows students and managers how exciting strategic management can be, but that at the same time presents the recent developments in the field, including the rigor upon which concepts and frameworks are now built, to make better strategic decisions in a turbulent and dynamic world. I'm fortunate that I had the support of many people to make this vision become a reality, and I'm truly grateful. Frank T. Rothaermel Georgia Institute of Technology Web: http://ftrStrategy.com Strategy Blog: http://www.facebook.com/ftrStrategy Twitter: @ftrStrategy
THANK YOU . . .
This book has gone through McGraw-Hill Education's thorough development process. Over the course of several years, the project has benefited from numerous developmental focus groups and symposiums, from hundreds of reviews from reviewers across the country, and from beta-testing of the first-edition manuscript on a variety of campuses. The author and McGraw-Hill wish to thank the following people who shared their insights, constructive criticisms, and valuable suggestions throughout the development of this project. Your contributions have improved this product.
Second Edition
REVIEWERS Todd Alessandri Northeastern University Cory J. Angert University of HoustonDowntown Asli Arikan The Ohio State University Jeffery Bailey University of Idaho Kevin Banning Auburn University at Montgomery Jeff Barden Oregon State University Patricia Beckenholdt University of Maryland University College John Burr Purdue University Richard A. L. Caldarola Troy University Brent Clark University of South Dakota Timothy S. Clark Northern Arizona University Anne N. Cohen University of Minnesota Brian Connelly Auburn University W. J. Conwell University of Texas at El Paso
Cynthia S. Cycyota United States Air Force Academy Samuel DeMarie Iowa State University Irem Demirkan Northeastern University Geoffrey Desa San Francisco State University Edward Desmarais Salem State University Michael E. Dobbs Eastern Illinois University William J. Donoher Missouri State University Tom Douglas University of Maryland University College and Colorado State University Stephen A. Drew Florida Gulf Coast University Derrick E. D'Souza University of North Texas Helen Eckmann Brandman University Linda Edelman Bentley University Alan Ellstrand University of Arkansas-Fayetteville
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xxx THANK YOU . . .
Syeda Noorein Inamdar San Jose State University Ana Elisa Iglesias Tulane University Sean Jasso University of California, Riverside Mahesh P. Joshi George Mason University Brent Kinghorn Missouri State University Frank Kozak Bowling Green State University Mario Krenn Louisiana State University Melody LaPreze Missouri State University Hun Lee George Mason University Tammy G. Hunt University of North Carolina Wilmington Charles J. F. Leflar University of Arkansas-Fayetteville Aristotle T. Lekacos Stony Brook University Tatiana S. Manolova Bentley University Daniel B. Marin Louisiana State University Sarah Marsh Northern Illinois University Patricia Matuszek Troy University-Montgomery Jeffrey E. McGee The University of Texas at Arlington Mike Montalbano Bentley University Todd Moss Oregon State University
John Mullane Middle Tennessee State University Chandran Mylvaganam Northwood University-Michigan Charles Newman University of Maryland University College Jill Novak Indian River State College Frank Novakowski Davenport University Jeffrey R. Nystrom University of Colorado Denver Kenny (Kyeungrae) Oh University of Missouri-St. Louis Kevin J. O'Mara Elon University Eren Ozgen Troy University-Dothan Mark Packard University of Missouri-Columbia Clifford R. Perry Florida International University Antoaneta Petkova San Francisco State University Erin Pleggenkuhle-Miles University of Nebraska-Omaha Robert Porter The University of Central Florida Vasudevan Ramanujam Case Western Reserve University Christopher Reutzel Utah State University Gary B. Roberts Kennesaw State University
Elton Scifres Stephen F. Austin State University Tim Schoenecker Southern Illinois University-Edwardsville Wendell Seaborne Franklin University Deborah Searcy Florida Atlantic University Jennifer Sexton Florida State University Eugene Simko Monmouth University Ned Smith University of Michigan Mark Starik San Francisco State University Mohan Subramaniam Boston College Ram Subramanian Montclair State University Jing'an Tang Sacred Heart University Paul W. Thurston, Jr. Siena College Jorge Walter The George Washington University Marta Szabo White Georgia State University Carolyn Wiethoff Indiana University Beth Woodard Belmont University Chuanyin Xie The University of Tampa SYMPOSIUM ATTENDEES M. David Albritton Northern Arizona University
THANK YOU . . . xxxi
Melissa Appleyard Portland State University LaKami T. Baker Auburn University James W. Bronson University of Wisconsin-Whitewater Barry Bunn Valencia College Janice F. Cerveny Florida Atlantic University Brian Connelly Auburn University John E. Gentner University of Dayton Theodore A. Khoury Portland State University Jerry Kopf Radford University Hun Lee George Mason University Rick McPherson University of Washington John M. Mezias University of Miami Don O. Neubaum Oregon State University Charles Newman University of Maryland University College Frank Novakowski Davenport University Don A. Okhomina Fayetteville State University Clifford R. Perry Florida International University Carolyn Wiethoff Indiana University Scott Williams Wright State University Cathy Coleman Wood University of Tennessee
First Edition REVIEWERS Joshua R. Aaron East Carolina University Moses Acquaah University of North Carolina at Greensboro Garry Adams Auburn University Todd Alessandri Northeastern University Brent B. Allred The College of William & Mary Semiramis Amirpour University of Texas at El Paso Melissa Appleyard Portland State University Marne Arthaud-Day Kansas State University Bindu Arya University of Missouri-St. Louis Seung Bach California State University, Sacramento David Baker Kent State University Dennis R. Balch University of North Alabama Edward R. Balotsky Saint Joseph's University Kevin Banning Auburn University at Montgomery Geoff Bell University of Minnesota, Duluth Heidi Bertels City University of New York Tim Blumentritt Kennesaw State University
William C. Bogner Georgia State University Dorothy Brawley Kennesaw State University Michael G. Brizek South Carolina State University James W. Bronson University of Wisconsin-Whitewater Jill A. Brown Bentley University Clint Chadwick University of Alabama in Huntsville Kenneth H. Chadwick Nicholls State University Betty S. Coffey Appalachian State University Anne N. Cohen University of Minnesota Susan K. Cohen University of Pittsburgh Parthiban David American University Darla Domke-Damonte Coastal Carolina University Stephen A. Drew Florida Gulf Coast University Arthur J. Duhaime III Nichols College David Duhon University of Southern Mississippi Danielle Dunne Fordham University Alan Ellstrand University of Arkansas-Fayetteville David Epstein University of Houston Downtown
xxxii THANK YOU . . .
Michael M. Fathi Georgia Southwestern State University Kevin Fertig University of Illinois at Urbana, Champaign Robert S. Fleming Rowan University Daniel Forbes University of Minnesota Isaac Fox University of Minnesota Susan Fox-Wolfgramm Hawaii Pacific University Steven A. Frankforter Winthrop University Anne W. Fuller California State University, Sacramento Venessa Funches Auburn University, Montgomery Jeffrey Furman Boston University J. Michael Geringer California Polytechnic State University, San Luis Obispo Debbie Gilliard Metropolitan State College of Denver Michelle Gittelman Rutgers University Devi R. Gnyawali Virginia Tech Sanjay Goel University of Minnesota Duluth Steve Gove Virginia Tech Michael Gunderson University of Florida Craig Gustin American InterContinental University
Stephen F. Hallam University of Akron Jon Timothy Heames West Virginia University Richard A. Heiens University of South Carolina, Aiken Duane Helleloid University of North Dakota Andrew M. Hess University of Virginia Ken Hess Metropolitan State University Phyllis Holland Valdosta State University Stephen V. Horner Arkansas State University George Hruby Cleveland State University Tammy Hunt University of North Carolina Wilmington Syeda Noorein Inamdar San Jose State University John G. Irwin Troy University Carol K. Jacobson Purdue University Scott Johnson Oklahoma State University Mahesh P. Joshi George Mason University Necmi Karagozoglu California State University, Sacramento J. Kay Keels Coastal Carolina University Franz Kellermanns University of North Carolina, Charlotte Jerry Kopf Radford University
Bruce C. Kusch Brigham Young University, Idaho K. Blaine Lawlor University of West Florida Marty Lawlor Rochester Institute of Technology John Lawrence University of Idaho Jon Lehman Vanderbilt University David Leibsohn California State University, Fullerton Jun Lin State University of New York (SUNY), New Paltz Joseph Mahoney University of Illinois at Urbana-Champaign Paul Mallette Colorado State University Daniel B. Marin Louisiana State University Louis Martinette University of Mary Washington Anthony U. Martinez San Francisco State University David Major Indiana University David McCalman University of Central Arkansas Jeffrey E. McGee The University of Texas at Arlington Michael Merenda University of New Hampshire Grant Miles University of North Texas
THANK YOU . . . xxxiii
Michael Miller University of Illinois at Chicago Elouise Mintz Saint Louis University Gwen Moore University of Missouri-St. Louis James P. Morgan Webster University, Fort Leonard Wood Richard T. Mpoyi Middle Tennessee State University Chandran Mylvaganam Northwood University-Michigan Louise Nemanich Arizona State University Frank Novakowski Davenport University Kevin J. O'Mara Elon University Chris Papenhausen University of Massachusetts, Dartmouth James M. Pappas Oklahoma State University Ronaldo Parente Florida International University Srikanth Paruchuri Pennsylvania State University Keith Perry San Jose State University Christine Cope Pence University of California, Riverside Luis A. Perez-Batres Central Michigan University JoDee Phillips Kaplan University Michael Pitts Virginia Commonwealth University
Robert Porter University of Central Florida Richard A. Quinn University of Central Florida Vasudevan Ramanujam Case Western Reserve University Annette L. Ranft University at Tennessee Gary B. Roberts Kennesaw State University Simon Rodan San Jose State University Yassir M. Samra Manhattan College Michael D. Santoro Lehigh University Gary Scudder Vanderbilt University Jim Sena California Polytechnic State University, San Luis Obispo Anju Seth Virginia Tech Deepak Sethi Old Dominion University Mark Sharfman University of Oklahoma Thomas Shirley San Jose State University Eugene Simko Monmouth University Faye A. Sisk Mercer University, Atlanta Lise Anne D. Slatten University of Louisiana, Lafayette Garry D. Smith Mississippi State University James D. Spina University of Maryland
Jing'an Tang Sacred Heart University Linda F. Tegarden Virginia Tech Thuhang Tran Middle Tennessee State University Kim K. J. Tullis University of Central Oklahoma Beverly B. Tyler North Carolina State University Isaiah O. Ugboro North Carolina A&T State University Bruce Walters Louisiana Tech University Jia Wang California State University, Fresno Andrew Ward Lehigh University Vincent Weaver Greenville Technical College Joel West Claremont Graduate University Laura Whitcomb California State University, Los Angeles Margaret White Oklahoma State University Marta Szabo White Georgia State University Ross A. Wirth Franklin University Michael J. Zhang Sacred Heart University Zhe Zhang Eastern Kentucky University Yanfeng Zheng The University of Hong Kong Arvids A. Ziedonis University of Oregon

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