Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN, author, title, or keyword for materials in your areas of interest. Important notice: Media content referenced within the product description or the product text may not be available in the eBook version. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Want to turn C’s into A’s? Obviously, right? But the right way to go about it isn’t always so obvious. Go digital to get the grades. MindTap’s customizable study tools and eTextbook give you everything you need all in one place. Engage with your course content, enjoy the flexibility of studying anytime and anywhere, stay connected to assignment due dates and instructor notifications with the MindTap Mobile app... and most of all…EARN BETTER GRADES. TO GET STARTED VISIT WWW.CENGAGE.COM/STUDENTS/MINDTAP Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 STRATEGIC MANAGEMENT Competitiveness & Globalization Concepts 12e Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 STRATEGIC MANAGEMENT Competitiveness & Globalization Concepts 12e Michael A. Hitt Texas A&M University and Texas Christian University R. Duane Ireland Texas A&M University Robert E. Hoskisson Rice University Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Strategic Management: Competitiveness & Globalization: Concepts, 12e © ����, ���� Cengage Learning® Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson ALL RIGHTS RESERVED. 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WCN 02-200-203 Brief Contents Preface, xv About the Authors, xxii Part 1: Strategic Management Inputs 1. Strategic Management and Strategic Competitiveness, 2 2. The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis, 38 3. The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages, 76 Part 2: Strategic Actions: Strategy Formulation 4. Business-Level Strategy, 108 5. Competitive Rivalry and Competitive Dynamics, 142 6. Corporate-Level Strategy, 172 7. Merger and Acquisition Strategies, 204 8. International Strategy, 236 9. Cooperative Strategy, 276 Part 3: Strategic Actions: Strategy Implementation 2 108 308 10. Corporate Governance, 308 11. Organizational Structure and Controls, 344 12. Strategic Leadership, 382 13. Strategic Entrepreneurship, 416 Part 4: Preparing an Effective Case Analysis C-1 Name Index, I-1 Company Index, I-20 Subject Index, I-23 vi Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents Preface xv About the Authors xxii Part 1: Strategic Management Inputs 2 1: Strategic Management and Strategic Competitiveness 2 Opening Case: Alibaba: An Online Colossus in China Goes Global 3 1-1 The Competitive Landscape 7 1-1a The Global Economy 8 1-1b Technology and Technological Changes 10 Strategic Focus: Starbucks Is “Juicing” Its Earnings per Store through Technological Innovations 11 1-2 The I/O Model of Above-Average Returns 14 1-3 The Resource-Based Model of Above-Average Returns 16 1-4 Vision and Mission 18 1-4a Vision 18 1-4b Mission 19 1-5 Stakeholders 19 Strategic Focus: The Failure of BlackBerry to Develop an Ecosystem of Stakeholders 20 1-5a Classifications of Stakeholders 21 1-6 Strategic Leaders 25 1-6a The Work of Effective Strategic Leaders 25 1-7 The Strategic Management Process 26 Summary 28 • Key Terms 28 • Review Questions 29 • Mini-Case 29 • Notes 30 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 38 Opening Case: Are There Cracks in the Golden Arches? 39 2-1 The General, Industry, and Competitor Environments 41 2-2 External Environmental Analysis 43 2-2a Scanning 43 2-2b Monitoring 44 2-2c Forecasting 44 2-2d Assessing 45 2-3 Segments of the General Environment 45 2-3a The Demographic Segment 45 2-3b The Economic Segment 48 2-3c The Political/Legal Segment 49 2-3d The Sociocultural Segment 50 2-3e The Technological Segment 51 2-3f The Global Segment 52 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 vii viii Contents 2-3g The Sustainable Physical Environment Segment 53 Strategic Focus: Target Lost Its Sway Because Tar-zhey No Longer Drew the Customers 54 2-4 Industry Environment Analysis 55 2-4a Threat of New Entrants 56 2-4b Bargaining Power of Suppliers 59 2-4c Bargaining Power of Buyers 60 2-4d Threat of Substitute Products 60 2-4e Intensity of Rivalry among Competitors 60 2-5 Interpreting Industry Analyses 63 2-6 Strategic Groups 63 Strategic Focus: Watch Out All Retailers, Here Comes Amazon; Watch Out Amazon, Here Comes Jet.com 64 2-7 Competitor Analysis 65 2-8 Ethical Considerations 67 Summary 68 • Key Terms 68 • Review Questions 68 • Mini-Case 69 • Notes 70 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages 76 Opening Case: Data Analytics, Large Pharmaceutical Companies, and Core Competencies: A Brave New World 77 3-1 Analyzing the Internal Organization 79 3-1a The Context of Internal Analysis 79 3-1b Creating Value 81 3-1c The Challenge of Analyzing the Internal Organization 81 3-2 Resources, Capabilities, and Core Competencies 84 3-2a Resources 84 Strategic Focus: Strengthening the Superdry Brand as a Foundation to Strategic Success 85 3-2b Capabilities 88 3-2c Core Competencies 89 3-3 Building Core Competencies 89 3-3a The Four Criteria of Sustainable Competitive Advantage 89 3-3b Value Chain Analysis 93 3-4 Outsourcing 96 3-5 Competencies, Strengths, Weaknesses, and Strategic Decisions 96 Strategic Focus: “We’re Outsourcing that Activity but Not That One? I’m Surprised!” 97 Summary 98 • Key Terms 99 • Review Questions 99 • Mini-Case 100 • Notes 101 Part 2: Strategic Actions: Strategy Formulation 108 4: Business-Level Strategy 108 Opening Case: Hain Celestial Group: A Firm Focused on “Organic” Differentiation 109 4-1 Customers: Their Relationship with Business-Level Strategies 112 4-1a Effectively Managing Relationships with Customers 112 4-1b Reach, Richness, and Affiliation 113 4-1c Who: Determining the Customers to Serve 114 4-1d What: Determining Which Customer Needs to Satisfy 114 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents 4-1e How: Determining Core Competencies Necessary to Satisfy Customer Needs 115 4-2 The Purpose of a Business-Level Strategy 116 4-3 Types of Business-Level Strategies 117 4-3a Cost Leadership Strategy 118 4-3b Differentiation Strategy 122 Strategic Focus: Apple vs. Samsung: Apple Differentiates and Samsung Imperfectly Imitates 126 4-3c Focus Strategies 127 4-3d Integrated Cost Leadership/Differentiation Strategy 129 Strategic Focus: RadioShack’s Failed Focus Strategy: Strategic Flip-Flopping 130 Summary 134 • Key Terms 135 • Review Questions 135 • Mini-Case 135 • Notes 136 5: Competitive Rivalry and Competitive Dynamics 142 Opening Case: Does Google Have Competition? Dynamics of the High Technology Markets 143 5-1 A Model of Competitive Rivalry 146 5-2 Competitor Analysis 147 5-2a Market Commonality 147 5-2b Resource Similarity 148 Strategic Focus: Does Kellogg Have the Tiger by the Tail or Is It the Reverse? 150 5-3 Drivers of Competitive Behavior 150 5-4 Competitive Rivalry 152 5-4a Strategic and Tactical Actions 152 5-5 Likelihood of Attack 153 5-5a First-Mover Benefits 153 5-5b Organizational Size 155 5-5c Quality 156 5-6 Likelihood of Response 157 5-6a Type of Competitive Action 157 5-6b Actor’s Reputation 158 5-6c Market Dependence 158 5-7 Competitive Dynamics 159 5-7a Slow-Cycle Markets 159 5-7b Fast-Cycle Markets 161 5-7c Standard-Cycle Markets 162 Strategic Focus: The Ripple Effect of Supermarket Wars: Aldi Is Changing the Markets in Many Countries 163 Summary 164 • Key Terms 166 • Review Questions 166 • Mini-Case 166 • Notes 167 6: Corporate-Level Strategy 172 Opening Case: Disney Adds Value Using a Related Diversification Strategy 173 6-1 Levels of Diversification 175 6-1a Low Levels of Diversification 176 6-1b Moderate and High Levels of Diversification 177 6-2 Reasons for Diversification 178 6-3 Value-Creating Diversification: Related Constrained and Related Linked Diversification 179 Copyright 2017 Cengage Learning. 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WCN 02-200-203 ix x Contents 6-3a Operational Relatedness: Sharing Activities 180 6-3b Corporate Relatedness: Transferring of Core Competencies 181 6-3c Market Power 182 6-3d Simultaneous Operational Relatedness and Corporate Relatedness 184 6-4 Unrelated Diversification 185 6-4a Efficient Internal Capital Market Allocation 185 Strategic Focus: GE and United Technology Are Firms that Have Pursued Internal Capital Allocation and Restructuring Strategies 186 6-4b Restructuring of Assets 187 6-5 Value-Neutral Diversification: Incentives and Resources 188 6-5a Incentives to Diversify 188 Strategic Focus: Coca-Cola’s Diversification to Deal with Its Reduced Growth in Soft Drinks 190 6-5b Resources and Diversification 192 6-6 Value-Reducing Diversification: Managerial Motives to Diversify 193 Summary 196 • Key Terms 196 • Review Questions 196 • Mini-Case 197 • Notes 198 7: Merger and Acquisition Strategies 204 Opening Case: Mergers and Acquisitions: Prominent Strategies for Firms Seeking to Enhance Their Performance 205 7-1 The Popularity of Merger and Acquisition Strategies 206 7-1a Mergers, Acquisitions, and Takeovers: What Are the Differences? 207 7-2 Reasons for Acquisitions 208 Strategic Focus: A Merger of Equals: Making It Happen Isn’t Easy! 209 7-2a Increased Market Power 210 7-2b Overcoming Entry Barriers 211 Strategic Focus: Different Strategic Rationales Driving Cross-Border Acquisitions 212 7-2c Cost of New Product Development and Increased Speed to Market 213 7-2d Lower Risk Compared to Developing New Products 214 7-2e Increased Diversification 214 7-2f Reshaping the Firm’s Competitive Scope 215 7-2g Learning and Developing New Capabilities 215 7-3 Problems in Achieving Acquisition Success 216 7-3a Integration Difficulties 217 7-3b Inadequate Evaluation of Target 218 7-3c Large or Extraordinary Debt 219 7-3d Inability to Achieve Synergy 220 7-3e Too Much Diversification 221 7-3f Managers Overly Focused on Acquisitions 221 7-3g Too Large 222 7-4 Effective Acquisitions 222 7-5 Restructuring 224 7-5a Downsizing 224 7-5b Downscoping 224 7-5c Leveraged Buyouts 225 7-5d Restructuring Outcomes 225 Summary 227 • Key Terms 228 • Review Questions 228 • Mini-Case 228 • Notes 230 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents 8: International Strategy 236 Opening Case: Netflix Ignites Growth Through International Expansion, But Such Growth Also Fires Up the Competition 237 8-1 Identifying International Opportunities 239 8-1a Incentives to Use International Strategy 239 8-1b Three Basic Benefits of International Strategy 241 8-2 International Strategies 243 8-2a International Business-Level Strategy 243 8-2b International Corporate-Level Strategy 246 Strategic Focus: Furniture Giant IKEA’s Global Strategy 248 8-3 Environmental Trends 250 8-3a Liability of Foreignness 250 8-3b Regionalization 251 8-4 Choice of International Entry Mode 252 8-4a Exporting 253 8-4b Licensing 253 8-4c Strategic Alliances 254 8-4d Acquisitions 255 8-4e New Wholly Owned Subsidiary 256 8-4f Dynamics of Mode of Entry 257 8-5 Risks in an International Environment 258 8-5a Political Risks 258 8-5b Economic Risks 259 Strategic Focus: The Global Soccer Industry and the Effect of the FIFA Scandal 260 8-6 Strategic Competitiveness Outcomes 262 8-6a International Diversification and Returns 262 8-6b Enhanced Innovation 263 8-7 The Challenge of International Strategies 264 8-7a Complexity of Managing International Strategies 264 8-7b Limits to International Expansion 264 Summary 265 • Key Terms 266 • Review Questions 266 • Mini-Case 266 • Notes 268 9: Cooperative Strategy 276 Opening Case: Google, Intel, and Tag Heuer: Collaborating to Produce a Smartwatch 277 9-1 Strategic Alliances as a Primary Type of Cooperative Strategy 279 9-1a Types of Major Strategic Alliances 279 9-1b Reasons Firms Develop Strategic Alliances 281 9-2 Business-Level Cooperative Strategy 284 9-2a Complementary Strategic Alliances 284 9-2b Competition Response Strategy 286 9-2c Uncertainty-Reducing Strategy 287 9-2d Competition-Reducing Strategy 287 Strategic Focus: Strategic Alliances as the Foundation for Tesla Motors’ Operations 288 9-2e Assessing Business-Level Cooperative Strategies 290 9-3 Corporate-Level Cooperative Strategy 290 9-3a Diversifying Strategic Alliance 291 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xi xii Contents 9-3b Synergistic Strategic Alliance 291 9-3c Franchising 291 9-3d Assessing Corporate-Level Cooperative Strategies 292 9-4 International Cooperative Strategy 292 9-5 Network Cooperative Strategy 293 9-5a Alliance Network Types 294 9-6 Competitive Risks with Cooperative Strategies 295 Strategic Focus: Failing to Obtain Desired Levels of Success with Cooperative Strategies 296 9-7 Managing Cooperative Strategies 297 Summary 299 • Key Terms 300 • Review Questions 300 • Mini-Case 300 • Notes 302 Part 3: Strategic Actions: Strategy Implementation 308 10: Corporate Governance 308 Opening Case: The Corporate Raiders of the 1980s Have Become the Activist Shareholders of Today 309 10-1 Separation of Ownership and Managerial Control 312 10-1a Agency Relationships 313 10-1b Product Diversification as an Example of an Agency Problem 314 10-1c Agency Costs and Governance Mechanisms 316 10-2 Ownership Concentration 317 10-2a The Increasing Influence of Institutional Owners 318 10-3 Board of Directors 319 10-3a Enhancing the Effectiveness of the Board of Directors 321 10-3b Executive Compensation 322 10-3c The Effectiveness of Executive Compensation 323 Strategic Focus: Do CEOs Deserve the Large Compensation Packages They Receive? 324 10-4 Market for Corporate Control 325 10-4a Managerial Defense Tactics 326 10-5 International Corporate Governance 328 10-5a Corporate Governance in Germany and Japan 328 Strategic Focus: “Engagement” versus “Activist” Shareholders in Japan, Germany, and China 330 10-5b Corporate Governance in China 331 10-6 Governance Mechanisms and Ethical Behavior 332 Summary 333 • Key Terms 334 • Review Questions 334 • Mini-Case 335 • Notes 336 11: Organizational Structure and Controls 344 Opening Case: Luxottica’s Dual CEO Structure: A Key to Long-Term Success or a Cause for Concern? 345 11-1 Organizational Structure and Controls 347 11-1a Organizational Structure 347 Strategic Focus: Changing McDonald’s Organizational Structure: A Path to Improved Performance? 348 11-1b Organizational Controls 350 11-2 Relationships between Strategy and Structure 351 11-3 Evolutionary Patterns of Strategy and Organizational Structure 351 11-3a Simple Structure 352 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Contents 11-3b Functional Structure 353 11-3c Multidivisional Structure 353 11-3d Matches between Business-Level Strategies and the Functional Structure 354 11-3e Matches between Corporate-Level Strategies and the Multidivisional Structure 357 Strategic Focus: Sony Corporation’s New Organizational Structure: Greater Financial Accountability and Focused Allocations of Resources 362 11-3f Matches between International Strategies and Worldwide Structure 365 11-3g Matches between Cooperative Strategies and Network Structures 369 11-4 Implementing Business-Level Cooperative Strategies 370 11-5 Implementing Corporate-Level Cooperative Strategies 371 11-6 Implementing International Cooperative Strategies 372 Summary 373 • Key Terms 373 • Review Questions 374 • Mini-Case 374 • Notes 375 12: Strategic Leadership 382 Opening Case: Can You Follow an Icon and Succeed? Apple and Tim Cook After Steve Jobs 383 12-1 Strategic Leadership and Style 384 12-2 The Role of Top-Level Managers 387 12-2a Top Management Teams 387 12-3 Managerial Succession 391 Strategic Focus: Trial by Fire: CEO Succession at General Motors 395 12-4 Key Strategic Leadership Actions 396 12-4a Determining Strategic Direction 396 12-4b Effectively Managing the Firm’s Resource Portfolio 397 Strategic Focus: All the Ways You Can Fail! 400 12-4c Sustaining an Effective Organizational Culture 401 12-4d Emphasizing Ethical Practices 402 12-4e Establishing Balanced Organizational Controls 403 Summary 406 • Key Terms 407 • Review Questions 407 • Mini-Case 407 • Notes 409 13: Strategic Entrepreneurship 416 Opening Case: Entrepreneurial Fervor and Innovation Drive Disney’s Success 417 13-1 Entrepreneurship and Entrepreneurial Opportunities 419 13-2 Innovation 420 13-3 Entrepreneurs 420 13-4 International Entrepreneurship 421 13-5 Internal Innovation 422 13-5a Incremental and Novel Innovation 423 Strategic Focus: Innovation Can Be Quirky 425 13-5b Autonomous Strategic Behavior 426 13-5c Induced Strategic Behavior 427 13-6 Implementing Internal Innovations 427 13-6a Cross-Functional Product Development Teams 428 13-6b Facilitating Integration and Innovation 429 13-6c Creating Value from Internal Innovation 429 13-7 Innovation through Cooperative Strategies 430 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xiii xiv Contents 13-8 Innovation through Acquisitions 431 Strategic Focus: What Explains the Lack of Innovation at American Express? Is It Hubris, Inertia, or Lack of Capability? 432 13-9 Creating Value through Strategic Entrepreneurship 433 Summary 435 • Key Terms 436 • Review Questions 436 • Mini-Case 436 • Notes 437 Part 4: Preparing an Effective Case Analysis C-1 Name Index I-1 Company Index I-20 Subject Index I-23 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Preface Our goal in writing each edition of this book is to present a new, up-to-date standard for explaining the strategic management process. To reach this goal with the 12th edition of our market-leading text, we again present you with an intellectually rich yet thoroughly practical analysis of strategic management. With each new edition, we work hard to achieve the goal of maintaining the standard that we established for presenting strategic management knowledge in a readable style. To prepare for each new edition, we carefully study the most recent academic research to ensure that the content about strategic management that we present to you is up to date and accurate. In addition, we continuously read articles appearing in many different and widely read business publications (e.g., Wall Street Journal, Bloomberg Businessweek, Fortune, Financial Times, Fast Company, and Forbes, to name a few). We also study postings through social media (such as blogs) given their increasing use as channels of information distribution. By studying a wide array of sources, we are able to identify valuable examples of how companies are using (or not using) the strategic management process. Though many of the hundreds of companies that we discuss in the book will be quite familiar, some will likely be new to you. One reason for this is that we use examples of companies from around the world to demonstrate the globalized nature of business operations. To maximize your opportunities to learn as you read and think about how actual companies use strategic management tools, techniques, and concepts (based on the most current research), we emphasize a lively and user-friendly writing style. To facilitate learning, we use an Analysis-Strategy-Performance framework that is explained in Chapter 1 and referenced throughout the book. Several characteristics of this 12th edition of our book are designed to enhance your learning experience: ■ First, this book presents you with the most comprehensive and thorough coverage of strategic management that is available in the market. ■ The research used in this book is drawn from the “classics” as well as the most recent contributions to the strategic management literature. The historically significant “classic” research provides the foundation for much of what is known about strategic management, while the most recent contributions reveal insights about how to effectively use strategic management in the complex, global business environment in which firms now compete. Our book also presents you with many up-to-date examples of how firms use the strategic management tools, techniques, and concepts that prominent researchers have developed. Indeed, although this book is grounded in the relevant theory and current research, it also is strongly application oriented and presents you, our readers, with a large number of examples and applications of strategic management concepts, techniques, and tools. In this edition, for example, we examine more than 600 companies to describe the use of strategic management. Collectively, no other strategic management book presents you with the combination of useful and insightful research and applications in a wide variety of organizations as does this text. xv Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xvi Preface Company examples you will find in this edition range from large U.S.-based firms such as Apple, Amazon.com, McDonald’s, Starbucks, Walmart, Walt Disney, General Electric, Intel, American Express, Coca-Cola, Google, Target, United Technologies, Kellogg, DuPont, Marriott, and Whole Foods. In addition, we examine firms based in countries other than the United States such as Sony, Aldi, Honda, Tata Consultancy, Alibaba, IKEA, Lenova, Luxottica, and Samsung. As these lists suggest, the firms examined in this book compete in a wide range of industries and produce a diverse set of goods and services. ■ We use the ideas of many prominent scholars (e.g., Ron Adner, Rajshree Agarwal, Gautam Ahuja, Raffi Amit, Africa Arino, Jay Barney, Paul Beamish, Peter Buckley, Ming-Jer Chen, Russ Coff, Rich D’Aveni, Kathy Eisenhardt, Gerry George, Javier Gimeno, Luis Gomez-Mejia, Melissa Graebner, Ranjay Gulati, Don Hambrick, Connie Helfat, Amy Hillman, Tomas Hult, Dave Ketchen, Dovev Lavie, Yadong Luo, Shige Makino, Costas Markides, Anita McGahan, Danny Miller, Will Mitchell, Margie Peteraf, Michael Porter, Nandini Rajagopalan, Jeff Reuer, Joan Ricart, Richard Rumelt, David Sirmon, Ken Smith, Steve Tallman, David Teece, Michael Tushman, Margarethe Wiersema, Oliver Williamson, Mike Wright, Anthea Zhang, and Ed Zajac) to shape the discussion of what strategic management is. We describe the practices of prominent executives and practitioners (e.g., Mary Barra, Jack Ma, Reed Hastings, Howard Schultz, John Mackey, Yang Yuanqing, Angela Ahrendt, Marilyn Hewson, Jeff Immelt, Ellen Kullman, Elon Musk, Paul Pullman, Li Ka-Shing, Karen Patz, and many others) to help us describe how strategic management is used in many types of organizations. The authors of this book are also active scholars. We conduct research on a number of strategic management topics. Our interest in doing so is to contribute to the strategic management literature and to better understand how to effectively apply strategic management tools, techniques, and concepts to increase organizational performance. Thus, our own research is integrated in the appropriate chapters along with the research of numerous other scholars, some of whom are noted above. In addition to our book’s characteristics, there are some specific features and revisions that we have made in this 12th edition that we are pleased to highlight for you: ■ New Opening Cases and Strategic Focus Segments. We continue our tradition of providing all-new Opening Cases and Strategic Focus segments! Many deal with companies located outside North America. In addition, all of the company-specific examples included in each chapter are either new or substantially updated. Through all of these venues, we present you with a wealth of examples of how actual organizations, most of which compete internationally as well as in their home markets, use the strategic management process for the purpose of outperforming rivals and increasing their performance. ■ New Mini-Cases have been added that demonstrate how companies deal with major issues highlighted in the text. There are 13 of these cases, one for each chapter, although some of them can overlap with other chapter content. Students will like their conciseness, but they likewise provide rich content that can serve as a catalyst for individual or group analysis and class discussion. Each Mini-Case is followed by a set of questions to guide analysis and discussion. ■ More than 1,200 new references from 2014 and 2015 are included in the chapters’ endnotes. We used the materials associated with these references to support new material added or current strategic management concepts that are included in this edition. In addition to demonstrating the classic and recent research from which we draw our material, the large number of references supporting the book’s contents Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xvii Preface ■ ■ ■ ■ allow us to integrate cutting-edge research and thinking into a presentation of strategic management tools, techniques, and concepts. New content was added to several chapters. Examples include the strategic ecosystem such as the one used by Apple with its ”ecosystem of app producers” (Chapters 1 and 4), sustainable physical environment (Chapter 3), mentoring new CEOs (Chapter 12), strategic leadership in family owned/controlled companies (Chapter 12), and acquisitions and innovation, open innovations, and managing the innovation portfolio (Chapters 4 and 13). Updated information is provided in several chapters. Examples include the stakeholder host communities (Chapter 1), all new and current demographic data (e.g., ethnic mix, geographic distribution) that describe the economic environment (Chapter 2), the general partner strategies of private equity firms (Chapter 7), information from the World Economic Forum Competitiveness Report regarding political risks of international investments (Chapter 8), updates about corporate governance practices being used in different countries (Chapter 10), updated data about the number of internal and external CEO selections occurring in companies today (Chapter 12), a ranking of countries by the amount of their entrepreneurial activities (Chapter 13), and a ranking of companies on their total innovation output (Chapter 13). An Exceptional Balance between current research and up-to-date applications of strategic management concepts in actual organizations located throughout the world. The content has not only the best research documentation but also the largest number of effective real-world examples to help active learners understand the different types of strategies organizations use to achieve their vision and mission and to outperform rivals. Twenty Cases are included in this edition. Offering an effective mix of organizations headquartered or based in North America and a number of other countries as well, the cases deal with contemporary and highly important topics. These cases are available in the MindTap digital learning suite. Many of the cases have full financial data (the analyses of which are in the Case Notes that are available to instructors). These timely cases present active learners with opportunities to apply the strategic management process and understand organizational conditions and contexts and to make appropriate recommendations to deal with critical concerns. Access the cases in the MindTap and customize your selection to best suit the needs of your course. Supplements to Accompany This Text MindTap. MindTap is the digital learning solution that helps instructors engage students and help them to become tomorrow’s strategic leaders. All activities are designed to teach students to problem-solve and think like leaders. Through these activities and real-time course analytics, and an accessible reader, MindTap helps you turn cookie cutter into cutting edge, apathy into engagement, and memorizers into higher-level thinkers. Customized to the specific needs of this course, activities are built to facilitate mastery of chapter content. We’ve addressed case analysis from cornerstone to capstone with a functional area diagnostic of prior knowledge, directed cases, branching activities, multimedia presentations of real-world companies facing strategic decisions, and a collaborative environment in which students can complete group case analysis projects together synchronously. Instructor Website. Access important teaching resources on this companion website. For your convenience, you can download electronic versions of the instructor supplements from the password-protected section of the site, including Instructor’s Resource Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xviii Preface Manual, Comprehensive Case Notes, Cognero Testing, Word Test Bank files, PowerPoint® slides, and Video Segments and Guide. To access these additional course materials and companion resources, please visit www.cengagebrain.com. ■ Instructor’s Resource Manual. The Instructor’s Resource Manual, organized around each chapter’s knowledge objectives, includes teaching ideas for each chapter and how to reinforce essential principles with extra examples. This support product includes lecture outlines and detailed guides to integrating the MindTap activities into your course with instructions for using each chapter’s experiential exercises, branching, and directed cases. Finally, we provide outlines and guidance to help you customize the collaborative work environment and case analysis project to incorporate your approach to case analysis, including creative ideas for using this feature throughout your course for the most powerful learning experience for your class. ■ Case Notes. These notes include directed assignments, financial analyses, and thorough discussion and exposition of issues in the case. Select cases also have assessment rubrics tied to National Standards (AACSB outcomes) that can be used for grading each case. The Case Notes provide consistent and thorough support for instructors, following the method espoused by the author team for preparing an effective case analysis. ■ Cognero. This program is easy-to-use test-creation software that is compatible with Microsoft Windows. Instructors can add or edit questions, instructions, and answers, and select questions by previewing them on the screen, selecting them randomly, or selecting them by number. Instructors can also create and administer quizzes online, whether over the Internet, a local area network (LAN), or a wide area network (WAN). ■ Test Bank. Thoroughly revised and enhanced, test bank questions are linked to each chapter’s knowledge objectives and are ranked by difficulty and question type. We provide an ample number of application questions throughout, and we have also retained scenario-based questions as a means of adding in-depth problem-solving questions. The questions are also tagged to National Standards (AACSB outcomes), Bloom’s Taxonomy, and the Dierdorff/Rubin metrics. ■ PowerPoints®. An all-new PowerPoint presentation, created for the 12th edition, provides support for lectures, emphasizing key concepts, key terms, and instructive graphics. ■ Video Segments. A collection of 13 BBC videos has been included in the MindTap Learning Path. These new videos are short, compelling, and timely illustrations of today’s management world. They are available on the DVD and Instructor website. Detailed case write-ups, including questions and suggested answers, appear in the Instructor’s Resource Manual and Video Guide. Cengage Learning Write Experience 3.0. This new technology is the first in higher education to offer students the opportunity to improve their writing and analytical skills without adding to your workload. Offered through an exclusive agreement with Vantage Learning, creator of the software used for GMAT essay grading, Write Experience evaluates students’ answers to a select set of assignments for writing for voice, style, format, and originality. We have trained new prompts for this edition! Micromatic Strategic Management Simulation (for bundles only). The Micromatic Business Simulation Game allows students to decide their company’s mission, goals, policies, and strategies. Student teams make their decisions on a quarter-by-quarter basis, determining price, sales and promotion budgets, operations decisions, and financing requirements. Each decision round requires students to make Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xix Preface approximately 100 decisions. Students can play in teams or play alone, compete against other players or the computer, or use Micromatic for practice, tournaments, or assessment. You can control any business simulation element you wish, leaving the rest alone if you desire. Because of the number and type of decisions the student users must make, Micromatic is classified as a medium to complex business simulation game. This helps students understand how the functional areas of a business fit together without being bogged down in needless detail and provides students with an excellent capstone experience in decision making. Smartsims (for bundles only). MikesBikes Advanced is a premier strategy simulation providing students with the unique opportunity to evaluate, plan, and implement strategy as they manage their own company while competing online against other students within their course. Students from the management team of a bicycle manufacturing company make all the key functional decisions involving price, marketing, distribution, finance, operations, HR, and R&D. They formulate a comprehensive strategy, starting with their existing product, and then adapt the strategy as they develop new products for emerging markets. Through the Smartsims easy-to-use interface, students are taught the cross-functional disciplines of business and how the development and implementation of strategy involves these disciplines. The competitive nature of MikesBikes encourages involvement and learning in a way that no other teaching methodology can, and your students will have fun in the process! Acknowledgments We express our appreciation for the excellent support received from our editorial and production team at Cengage Learning. We especially wish to thank Scott Person, our Senior Product Manager, and Tara Singer, our Content Developer. We are grateful for their dedication, commitment, and outstanding contributions to the development and publication of this book and its package of support materials. We are highly indebted to all of the reviewers of past editions. Their comments have provided a great deal of insight in the preparation of this current edition: Jay Azriel York College of Pennsylvania Ken Chadwick Nicholls State University Lana Belousova Suffolk University Bruce H. Charnov Hofstra University Ruben Boling North Georgia University Jay Chok Keck Graduate Institute, Claremont Colleges Matthias Bollmus Carroll University Peter Clement State University of New York–Delhi Erich Brockmann University of New Orleans Terry Coalter Northwest Missouri University David Cadden Quinnipiac University James Cordeiro SUNY Brockport Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xx Preface Deborah de Lange Suffolk University James McClain California State University–Fullerton Irem Demirkan Northeastern University Jean McGuire Louisiana State University Dev Dutta University of New Hampshire John McIntyre Georgia Tech Scott Elston Iowa State University Rick McPherson University of Washington Harold Fraser California State University–Fullerton Karen Middleton Texas A&M–Corpus Christi Robert Goldberg Northeastern University Raza Mir William Paterson University Monica Gordillo Iowa State University Martina Musteen San Diego State University George Griffin Spring Arbor University Louise Nemanich Arizona State University Susan Hansen University of Wisconsin–Platteville Frank Novakowski Davenport University Glenn Hoetker Arizona State University Consuelo M. Ramirez University of Texas at San Antonio James Hoyt Troy University Barbara Ribbens Western Illinois University Miriam Huddleston Harford Community College Jason Ridge Clemson University Carol Jacobson Purdue University William Roering Michigan State University James Katzenstein California State University, Dominguez Hills Manjula S. Salimath University of North Texas Robert Keidel Drexel University Deepak Sethi Old Dominion University Nancy E. Landrum University of Arkansas at Little Rock Manisha Singal Virginia Tech Mina Lee Xavier University Warren Stone University of Arkansas at Little Rock Patrice Luoma Quinnipiac University Elisabeth Teal University of N. Georgia Mzamo Mangaliso University of Massachusetts–Amherst Jill Thomas Jorgensen Lewis and Clark State College Michele K. Masterfano Drexel University Len J. Trevino Washington State University Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xxi Preface Edward Ward Saint Cloud State University Marta Szabo White Georgia State University Michael L. Williams Michigan State University Diana J. Wong-MingJi Eastern Michigan University Patricia A. Worsham California State Polytechnic University, Pomona William J. Worthington Baylor University Wilson Zehr Concordia University Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 About the Authors Michael A. Hitt Michael Hitt is a University Distinguished Professor Emeritus at Texas A&M University and a Distinguished Research Fellow at Texas Christian University. Dr. Hitt received his Ph.D. from the University of Colorado. He has coauthored or coedited 27 books and authored or coauthored many journal articles. A recent article listed him as one of the 10 most cited authors in management over a 25-year period. The Times Higher Education 2010 listed him among the top scholars in economics, finance, and management based on the number of highly cited articles he has authored. A recent article in the Academy of Management Perspectives lists him as one of the top two management scholars in terms of the combined impact of his work both inside (i.e., citations in scholarly journals) and outside of academia. He has served on the editorial review boards of multiple journals and is a former editor of the Academy of Management Journal and a former coeditor of the Strategic Entrepreneurship Journal. He received the 1996 Award for Outstanding Academic Contributions to Competitiveness and the 1999 Award for Outstanding Intellectual Contributions to Competitiveness Research from the American Society for Competitiveness. He is a fellow in the Academy of Management and in the Strategic Management Society, a research fellow in the Global Consortium of Entrepreneurship Centers, and received an honorary doctorate from the Universidad Carlos III de Madrid. He is a former president of both the Academy of Management and of the Strategic Management Society and a member of the Academy of Management’s Journals’ Hall of Fame. He received awards for the best article published in the Academy of Management Executive (1999), Academy of Management Journal (2000), Journal of Management (2006), and Family Business Review (2012). In 2001, he received the Irwin Outstanding Educator Award and the Distinguished Service Award from the Academy of Management. In 2004, Dr. Hitt was awarded the Best Paper Prize by the Strategic Management Society. In 2006, he received the Falcone Distinguished Entrepreneurship Scholar Award from Syracuse University. In 2014 and 2015, Dr. Hitt was listed as a Thomson Reuters Highly Cited Researcher (a listing of the world’s most influential researchers), and he was also listed as one of The World’s Most Influential Scientific Minds (a listing of the top cited researchers in science around the globe). R. Duane Ireland R. Duane Ireland is a University Distinguished Professor and holder of the Conn Chair in New Ventures Leadership in the Mays Business School, Texas A&M University. Dr. Ireland teaches strategic management courses at all levels. He has more than 200 publications, including approximately 25 books. His research, which focuses on diversification, innovation, corporate entrepreneurship, strategic entrepreneurship, and the informal economy, has been published in an array of journals. He has served as a member of multiple editorial review boards and is a former editor of the Academy of Management Journal. He has been a guest editor for 12 special issues of journals. He is a past president xxii Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 About the Authors of the Academy of Management. Dr. Ireland is a fellow of the Academy of Management and a fellow of the Strategic Management Society. He is a research fellow in the Global Consortium of Entrepreneurship Centers and received an award in 1999 for Outstanding Intellectual Contributions to Competitiveness Research from the American Society for Competitiveness. He received the Falcone Distinguished Entrepreneurship Scholar Award from Syracuse University in 2005, the USASBE Scholar in Corporate Entrepreneurship Award from USASBE in 2004, and the Riata Distinguished Entrepreneurship Scholar award from Oklahoma State University in 2014. He received awards for the best article published in Academy of Management Executive (1999), the Academy of Management Journal (2000), and the Journal of Applied Management and Entrepreneurship (2010). He received an Association of Former Students Distinguished Achievement Award for Research from Texas A&M University (2012). In 2014 and 2015, Dr. Ireland was listed as a Thomson Reuters Highly Cited Researcher (a listing of the world’s most influential researchers), and he was also listed as one of The World’s Most Influential Scientific Minds (a listing of the top cited researchers in science around the globe). Robert E. Hoskisson Robert E. Hoskisson is the George R. Brown Chair of Strategic Management at the Jesse H. Jones Graduate School of Business, Rice University. Dr. Hoskisson received his Ph.D. from the University of California-Irvine. His research topics focus on corporate governance, acquisitions and divestitures, corporate and international diversification, and cooperative strategy. He teaches courses in corporate and international strategic management, cooperative strategy, and strategy consulting. He has coauthored 26 books, including recent books on business strategy and competitive advantage. Dr. Hoskisson has served on several editorial boards for such publications as the Strategic Management Journal (current Associate Editor), Academy of Management Journal (Consulting Editor), Journal of International Business Studies (Consulting Editor), Journal of Management (Associate Editor) and Organization Science. His research has appeared in over 130 publications, including the Strategic Management Journal, Academy of Management Journal, Academy of Management Review, Organization Science, Journal of Management, Academy of Management Perspective, Academy of Management Executive, Journal of Management Studies, Journal of International Business Studies, Journal of Business Venturing, Entrepreneurship Theory and Practice, California Management Review, and Journal of World Business. Dr. Hoskisson is a fellow of the Academy of Management and a charter member of the Academy of Management Journal’s Hall of Fame. He is also a fellow of the Strategic Management Society and has received awards from the American Society for Competitiveness and the William G. Dyer Alumni award from the Marriott School of Management, Brigham Young University. He completed three years of service as a Representative-at-Large on the Board of Governors of the Academy of Management. Currently, he serves as Past President of the Strategic Management Society, and thereby serves on the Executive Committee of its Board of Directors. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 xxiii 1 Strategic Management and Strategic Competitiveness Studying this chapter should provide you with the strategic management knowledge needed to: Define strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process. 1-2 Describe the competitive landscape and explain how globalization and technological changes shape it. 1-3 Use the industrial organization (I/O) model to explain how firms can earn above-average returns. 1-4 Use the resource-based model to explain how firms can earn above-average returns. 1-5 Describe vision and mission and discuss their value. 1-6 Define stakeholders and describe their ability to influence organizations. 1-7 Describe the work of strategic leaders. 1-8 Explain the strategic management process. © RomanOkopny/Getty Images 1-1 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 ALIBABA: AN ONLINE COLOSSUS IN CHINA GOES GLOBAL Alibaba Drone.PNG China now has the world’s largest number of internet users and Alibaba is China’s largest ecommerce company (23 percent owned by Yahoo and 36 percent owned by Japan’s SoftBank). In 2014, when Alibaba completed its initial public offering (IPO) on the New York Stock Exchange, it immediately became worth more than Amazon and eBay combined and has a larger market capitalization than Walmart. Transactions of goods on Alibaba’s websites account for more than 2 percent of China’s GDP in 2012. Comparatively, Walmart’s sales account for 0.03 percent of U.S. GDP in 2012. Alibaba’s presence has turned China into the world’s second largest ecommerce market after the United States. Chinese consumers purchase products on Tmall, a consumer shopping site on Alibaba analogous to a department store and similar to Amazon. Because of China’s vast size and underdeveloped consumer market, it has few national mainland malls or brick and mortar department store chains. As such, the presence of Alibaba is stimulating consumption that would not otherwise take place in China. Furthermore, Alibaba’s presence changed consumer buying habits, especially in third- and fourth-tier (e.g., smaller and more geographically remote) cities because it gives consumers access to items that they could not previously obtain locally. Taobao is another website owned by Alibaba and is comparable to eBay in the United States. On Taobao, Alibaba does not stock or sell its own goods but rather provides platforms where manufacturers, resellers, and other middle-men open online storefronts. Larger consumer branded products prefer Tmall because Alibaba’s policies promote this site more heavily and fraudulent brands are less likely to be found on this site. For instance, popular brands such as Prada handbags must provide evidence that they are a licensed distributor before they are allowed to sell on Tmall. Taobao is more focused on small sellers; it has 6 million registered sellers with a vast range in size. Given these two websites, Alibaba is the easiest way for foreign retailers to enter the Chinese market because it has such reach. Online sales account for 90 percent of marketplace sales in China, compared with 24 percent for the United States in 2014. Accordingly, Alibaba provides the easiest way to enter the Chinese market for foreign retailers due the large access to consumers available through Alibaba’s websites. Alibaba’s websites also give smaller Chinese manufacturers the opportunity to increase domestic sales because of Alibaba’s reach. For example, Weighing Apparatus Group, originally a supplier of household and industrial scales for Bed Bath & Beyond, set up a website on Taobao in 2009. In 2014, one-fifth of its domestic sales now flow through its Taobao online storefront, allowing it to move beyond being only a supplier for other firm’s branded products. Alibaba through its Alipay system is working on a joint venture with Apple to provide back-end services for the Apple Pay payment system allowing iPhone users in China to pay for goods with Apple Pay using their Alipay accounts. This approach is fostering an improved mobile online strategy for Alibaba. It also facilitates better service for online Apple iPhone users who desire to browse and purchase on Alibaba websites. Fraudulent goods can be an important strategic issue in China because of previous product liability suits from banned or recalled goods sold to U.S. consumers. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 4 As such, Alibaba is collaborating with the United States Consumer Product Safety Commission to improve its credibility among U.S. consumers by helping to ban sale of fake and fraudulently branded or recalled goods. This is also facilitating Alibaba’s global access strategy. Alibaba is also moving into online media content and streaming video services. In 2014, it announced its acquisition of ChinaVision Media, producers or co-producers of films including “Crouching Tiger, Hidden Dragon” and “Breaking the Silence.” Just as Amazon and Netflix are producing their own media content, Alibaba is moving in this direction as well, as it competes with other service providers such as Tencent and Baidu in web communications and broadcasting in China. Getting its strategies right in the local domestic Chines market as well as internationally is key to Alibaba’s success. Sources: D. Tsuruoka, 2015, Alibaba blocks sale of unsafe goods to U.S. shoppers, Investor’s Business Daily Daily, www.investorsbusinessdaily.com, Jan 13; S. Cendrowski, 2014, Alibaba’s Maggie Wu and Lucy Peng: The dynamic duo behind the IPO, Fortune, www.fortune.com, September 17; R. Flannery, 2014, China media entrepreneur’s fortune soars on Alibaba investment, Forbes, www.forbes.com, March 12; C. Larson, 2014, In China its meet me at Tmall, Bloomberg Businessweek Businessweek, www.bloombergbusinessweek.com, September 11. A Strategic competitiveness is achieved when a firm successfully formulates and implements a value creating strategy. A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. A firm has a competitive advantage when it implements a strategy that creates superior value for customers and that competitors are unable to duplicate or find it too costly to try to imitate. s we see from the Opening Case, Alibaba is highly successful because its strategy in China has allowed it to have a massive impact in regard to online sales in a large emerging economy. It is now seeking to grow globally and gain widespread name/brand recognition through its 2014 IPO in New York. These attributes have enhanced its ability to compete in global online markets. Therefore, we can conclude that Alibaba has achieved strategic competitiveness. It clearly has been able to earn above-average returns, at least, domestically. Yet Alibaba has received its share of criticism because of its perceived contribution to the sale of fraudulent goods. However, it is addressing this issue through its collaboration with the United States Consumer Product Safety Commission. The top management of Alibaba has used the strategic management process (see Figure 1.1) as the foundation for the commitments, decisions, and actions they took to pursue strategic competitiveness and above-average returns. The strategic management process is fully explained in this book. We introduce you to this process in the next few paragraphs. Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. When choosing a strategy, firms make choices among competing alternatives as the pathway for deciding how they will pursue strategic competitiveness. In this sense, the chosen strategy indicates what the firm will do as well as what the firm will not do. As explained in the Opening Case, Alibaba has been a leader in its industry as one of the most successful facilitators of online sales in China and is now seeking to become a successful global business. However, in doing so it must respond to its changing environment. In fact, to adapt to local environments, it sometimes makes major changes. For example, it is coordinating with Apple Pay to improve access for the high number iPhones that Apple is now selling in China. A firm has a competitive advantage “when it implements a strategy that creates superior value for customers and that its competitors are unable to duplicate or find too costly to imitate.”1 An organization can be confident that its strategy has resulted in one or more useful competitive advantages only after competitors’ efforts to duplicate its strategy have ceased or failed. In addition, firms must understand that no competitive advantage is permanent.2 The speed with which competitors are able to acquire the skills Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 5 Chapter 1: Strategic Management and Strategic Competitiveness Figure 1.1 The Strategic Management Process Analysis Chapter 2 The External Environment Vision Mission Chapter 3 The Internal Organization Performance Strategy Strategy Formulation Strategy Implementation Chapter 4 Business-Level Strategy Chapter 5 Competitive Rivalry and Competitive Dynamics Chapter 6 CorporateLevel Strategy Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 7 Merger and Acquisition Strategies Chapter 8 International Strategy Chapter 9 Cooperative Strategy Chapter 12 Strategic Leadership Chapter 13 Strategic Entrepreneurship Strategic Competitiveness Above-A Above-Average Returns needed to duplicate the benefits of a firm’s value-creating strategy determines how long the competitive advantage will last.3 Above-average returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk. Risk is an investor’s uncertainty about the economic gains or losses that will result from a particular investment. The most successful companies learn how to effectively manage risk.4 Effectively managing risks reduces investors’ uncertainty about the results of their investment.5 Returns are often measured in terms of accounting figures, such as return on assets, return on equity, or return on sales. Alternatively, returns can be measured on the basis of stock market returns, such as monthly returns (the end-of-the-period stock price minus the beginning stock price divided by the beginning stock price, yielding a percentage return).6 Above-average returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk Risk is an investor’s uncertainty about the economic gains or losses that will result from a particular investment. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 6 Part 1: Strategic Management Inputs Average returns are returns equal to those an investor expects to earn from other investments with a similar amount of risk. The strategic management process is the full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns. In smaller, new venture firms, returns are sometimes measured in terms of the amount and speed of growth (e.g., in annual sales) rather than more traditional profitability measures7 because new ventures require time to earn acceptable returns (in the form of return on assets and so forth) on investors’ investments.8 Understanding how to exploit a competitive advantage is important for firms seeking to earn above-average returns.9 Firms without a competitive advantage or that are not competing in an attractive industry earn, at best, average returns. Average returns are returns equal to those an investor expects to earn from other investments with a similar amount of risk. In the long run, an inability to earn at least average returns results first in decline and, eventually, failure.10 Failure occurs because investors withdraw their investments from those firms earning less-than-average returns. As previously noted, there are no guarantees of permanent success. Companies that are prospering must not become overconfident. Research suggests that overconfidence can lead to excessive risk taking.11 Even considering Apple’s excellent current performance, it still must be careful not to become overconfident and continue its quest to be the leader for its markets. The strategic management process is the full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns (see Figure 1.1)12. The process involves analysis, strategy and performance (the A-S-P model—see Figure 1.1). The firm’s first step in the process is to analyze its external environment and internal organization to determine its resources, capabilities, and core-competencies—on which its strategy likely will be based. Alibaba has established its dominant position because it has excelled in using this process. The strategy portion of the model entails strategy formulation and strategy implementation. With the information gained from external and internal analyses, the firm develops its vision and mission and formulates one or more strategies. To implement its strategies, the firm takes actions to enact each strategy with the intent of achieving strategic competitiveness and above-average returns ((performance). Effective strategic actions that take place in the context of carefully integrated strategy formulation and implementation efforts result in positive performance. This dynamic strategic management process must be maintained as ever-changing markets and competitive structures are coordinated with a firm’s continuously evolving strategic inputs.13 In the remaining chapters of this book, we use the strategic management process to explain what firms do to achieve strategic competitiveness and earn above-average returns. We demonstrate why some firms consistently achieve competitive success while others fail to do so.14 As you will see, the reality of global competition is a critical part of the strategic management process and significantly influences firms’ performances.15 Indeed, learning how to successfully compete in the globalized world is one of the most significant challenges for firms competing in the current century.16 Several topics will be discussed in this chapter. First, we describe the current competitive landscape. This challenging landscape is being created primarily by the emergence of a global economy, globalization resulting from that economy, and rapid technological changes. Next, we examine two models that firms use to gather the information and knowledge required to choose and then effectively implement their strategies. The insights gained from these models also serve as the foundation for forming the firm’s vision and mission. The first model (industrial organization or I/O) suggests that the external environment is the primary determinant of a firm’s strategic actions. According to this model, identifying and then operating effectively in an attractive (i.e., profitable) industry or segment of an industry are the keys to competitive success.17 The second model (resource-based) suggests that a firm’s unique resources and capabilities are the critical link to strategic competitiveness.18 Thus, the first model is concerned primarily Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 7 Chapter 1: Strategic Management and Strategic Competitiveness with the firm’s external environment, while the second model is concerned primarily with the firm’s internal organization. After discussing vision and mission, directionsetting statements that influence the choice and use of strategies, we describe the stakeholders that organizations serve. The degree to which stakeholders’ needs can be met increases when firms achieve strategic competitiveness and earn above-average returns. Closing the chapter are introductions to strategic leaders and the elements of the strategic management process. 1-1 The Competitive Landscape The fundamental nature of competition in many of the world’s industries is changing. Although financial capital is no longer scarce due to the deep recession, markets are increasingly volatile.19 Because of this, the pace of change is relentless and ever-increasing. Even determining the boundaries of an industry has become challenging. Consider, for example, how advances in interactive computer networks and telecommunications have blurred the boundaries of the entertainment industry. Today, not only do cable companies and satellite networks compete for entertainment revenue from television, but telecommunication companies are moving into the entertainment business through significant improvements in fiber-optic lines.20 More recently, internet only streaming services have started to compete with cable, satellite, and telecommunication offerings. “Sling TV is part of a growing wave of offerings expected from tech, telecom and media companies in the coming year, posing a threat to the established television business, which takes in $170 billion a year. Meanwhile, the streaming outlets of Amazon, Hulu and Netflix continue to pour resources into developing more robust offerings. Sony, CBS, HBO and others are starting Internet-only subscription offerings.”21 Interestingly, Netflix and other streaming content providers such as Amazon are producing their own content; Netflix is producing repeat series such as “House of Cards,” “Orange Is the New Black,” and “Marco Polo”.22 As noted in the opening case, Alibaba intends to enter the entertainment business as Netflix and other content distributors and producers enter international markets. Other characteristics of the current competitive landscape are noteworthy. Conventional sources of competitive advantage such as economies of scale and huge advertising budgets are not as effective as they once were (e.g., due to social media advertising) in terms of helping firms earn above-average returns. Moreover, the traditional managerial mind-set is unlikely to lead a firm to strategic competitiveness. Managers must adopt a new mind-set that values flexibility, speed, innovation, integration, and the challenges that evolve from constantly changing conditions.23 The conditions of the competitive landscape result in a perilous business world, one in which the investments that are required to compete on a global scale are enormous and the consequences of failure are severe.24 Effective use of the strategic management process reduces the likelihood of failure for firms as they encounter the conditions of today’s competitive landscape. Hypercompetition describes competition that is excessive such that it creates inherent instability and necessitates constant disruptive change for firms in the competitive landscape.25 Hypercompetition results from the dynamics of strategic maneuvering among global and innovative combatants.26 It is a condition of rapidly escalating competition based on price-quality positioning, competition to create new know-how and establish first-mover advantage, and competition to protect or invade established product or geographic markets.27 In a hypercompetitive market, firms often aggressively challenge their competitors in the hopes of improving their competitive position and ultimately their performance.28 Hypercompetition describes competition that is excessive such that it creates inherent instability and necessitates constant disruptive change for firms in the competitive landscape. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 8 Part 1: Strategic Management Inputs Several factors create hypercompetitive environments and influence the nature of the current competitive landscape. The emergence of a global economy and technology, specifically rapid technological change, are the two primary drivers of hypercompetitive environments and the nature of today’s competitive landscape. 1-1a A global economy is one in which goods, services, people, skills, and ideas move freely across geographic borders. The Global Economy A global economy is one in which goods, services, people, skills, and ideas move freely across geographic borders. Relatively unfettered by artificial constraints, such as tariffs, the global economy significantly expands and complicates a firm’s competitive environment.29 Interesting opportunities and challenges are associated with the emergence of the global economy.30 For example, the European Union (a group of European countries that participates in the world economy as one economic unit and operates under one official currency, the euro) has become one of the world’s largest markets, with 700 million potential customers. “In the past, China was generally seen as a low-competition market and a low-cost producer. Today, China is an extremely competitive market in which local market-seeking multinational corporations (MNCs) must fiercely compete against other MNCs and against those local companies that are more cost effective and faster in product development. While China has been viewed as a country from which to source low-cost goods, lately, many MNCs such as Procter & Gamble (P&G), are actually net exporters of local management talent; they have been dispatching more Chinese abroad than bringing foreign expatriates to China.”31 China has become the second-largest economy in the world, surpassing Japan. India, the world’s largest democracy, has an economy that also is growing rapidly and now ranks as the fourth largest in the world.32 Simultaneously, many firms in these emerging economies are moving into international markets and are now regarded as MNCs. This fact is demonstrated by the case of Huawei Technologies Co. Ltd., a Chinese company that has entered the U.S. market. Barriers to entering foreign markets still exist and Huawei has encountered several, such as the inability to gain the U.S. government’s approval for acquisition of U.S. firms. Essentially, Huawei must build credibility in the U.S. market, and especially build a positive relationship with stakeholders such as the U.S. government. The nature of the global economy reflects the realities of a hypercompetitive business environment and challenges individual firms to seriously evaluate the markets in which they will compete. This is reflected in General Motor’s actions and outcomes. General Motors sold 3.54 million vehicles in China while selling less in North America, 3.4 million.33 One result of China being the largest domestic sales market is the increased competition GM now experiences in China from other competitors. Consider the case of General Electric (GE). Although headquartered in the United States, GE expects that as much as 60 percent of its revenue growth through 2015 will be generated by competing in rapidly developing economies (e.g., China and India). The decision to count on revenue growth in emerging economies instead of in developed countries such as the United States and in Europe seems quite reasonable in the global economy. GE achieved significant growth in 2010 partly because of signing contracts for large infrastructure projects in China and Russia. GE’s Chief Executive Officer (CEO), Jeffrey Immelt, argues that we have entered a new economic era in which the global economy will be more volatile and that most of the growth will come from emerging economies such as Brazil, China, and India.34 Therefore, GE is investing significantly in these emerging economies, in order to improve its competitive position in vital geographic sources of revenue and profitability. For example, Netflix, a subscription media streaming-video service provider, has seen its growth slow domestically. In the fourth quarter of 2014, Netflix added 1.9 million domestic U.S. streaming subscribers, which was down from 2.3 million in the fourth Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 9 Chapter 1: Strategic Management and Strategic Competitiveness M4OS Photos / Alamy period a year earlier. However, Netflix was able to add 4.3 streaming customers overall because foreign markets grew faster than expected. When this was announced, its stock price increased 16 percent in afterhours trading. Netflix plans to expand to over 200 countries by 2017, up from its current 50 countries, while likewise seeking to stay profitable. Reed Hastings, Netflix’s CEO, was encouraged by profitable results in Canada, Nordic countries, and Latin American countries. This group turned profitable notwithstanding the significant investment necessary to bring streaming Along with its international push, Netflix has expanded its ability to services to these countries. In the first allow content to be viewed on many devices (including mobile devices) part of 2015, the company expects to add beside regular TVs, as is shown in the photo. Australia and New Zealand and is exploring entering the Chinese market as well. Overall, Netflix added over 2.43 million subscribers outside of the United States, which exceed its expectation of 2.15 million subscribers. Besides international expansion, Netflix is adding a significant number of original shows including “House of Cards,” “Orange Is the New Black,” and “Marco Polo.” It finds that this original content costs less given viewer support compared to licensed content from major studios. This proprietary content as well as its expansion of licensing has lured customers away from cable and satellite TV providers. Its superior technology in providing precisely what consumers want and when they want it provides a domestic advantage which will carry over into its international expansion push (see Chapter 8 Opening Case for an expansion on Netflix’s international strategy).35 The March of Globalization Globalization is the increasing economic interdependence among countries and their organizations as reflected in the flow of goods and services, financial capital, and knowledge across country borders.36 Globalization is a product of a large number of firms competing against one another in an increasing number of global economies. In globalized markets and industries, financial capital might be obtained in one national market and used to buy raw materials in another. Manufacturing equipment bought from a third national market can then be used to produce products that are sold in yet a fourth market. Thus, globalization increases the range of opportunities for companies competing in the current competitive landscape.37 Firms engaging in globalization of their operations must make culturally sensitive decisions when using the strategic management process, as is the case in Starbucks’ operations in European countries. Additionally, highly globalized firms must anticipate ever-increasing complexity in their operations as goods, services, people, and so forth move freely across geographic borders and throughout different economic markets. Overall, it is important to note that globalization has led to higher performance standards in many competitive dimensions, including those of quality, cost, productivity, product introduction time, and operational efficiency. In addition to firms competing in the global economy, these standards affect firms competing on a domestic-only basis. The reason that customers will purchase from a global competitor rather than a domestic firm is that the global company’s good or service is superior. Workers now flow rather freely among global economies, and employees are a key source of competitive advantage.38 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 10 Part 1: Strategic Management Inputs Thus, managers have to learn how to operate effectively in a “multi-polar” world with many important countries having unique interests and environments.39 Firms must learn how to deal with the reality that in the competitive landscape of the twenty-first century, only companies capable of meeting, if not exceeding, global standards typically have the capability to earn above-average returns. Although globalization offers potential benefits to firms, it is not without risks. Collectively, the risks of participating outside of a firm’s domestic markets in the global economy are labeled a “liability of foreignness.”40 One risk of entering the global market is the amount of time typically required for firms to learn how to compete in markets that are new to them. A firm’s performance can suffer until this knowledge is either developed locally or transferred from the home market to the newly established global location.41 Additionally, a firm’s performance may suffer with substantial amounts of globalization. In this instance, firms may over diversify internationally beyond their ability to manage these extended operations.42 Over diversification can have strong negative effects on a firm’s overall performance. A major factor in the global economy in recent years has been the growth in the influence of emerging economies. The important emerging economies include not only the BRIC countries (Brazil, Russia, India, and China) but also the VISTA countries (Vietnam, Indonesia, South Africa, Turkey, and Argentina). Mexico and Thailand have also become increasingly important markets.43 Obviously, as these economies have grown, their markets have become targets for entry by large multinational firms. Emerging economy firms have also began to compete in global markets, some with increasing success.44 For example, there are now more than 1,000 multinational firms home-based in emerging economies with more than $1 billion in annual sales.45 In fact, the emergence of emerging-market MNCs in international markets has forced large MNCs based in developed markets to enrich their own capabilities to compete effectively in global markets.46 Thus, entry into international markets, even for firms with substantial experience in the global economy, requires effective use of the strategic management process. It is also important to note that even though global markets are an attractive strategic option for some companies, they are not the only source of strategic competitiveness. In fact, for most companies, even for those capable of competing successfully in global markets, it is critical to remain committed to and strategically competitive in both domestic and international markets by staying attuned to technological opportunities and potential competitive disruptions that innovations create.47 As illustrated in the Strategic Focus, Starbucks has increased its revenue per store through an emphasis on innovation in addition to its international expansion. 1-1b Technology and Technological Changes Technology-related trends and conditions can be placed into three categories: technology diffusion and disruptive technologies, the information age, and increasing knowledge intensity. These categories are significantly altering the nature of competition and as a result contributing to highly dynamic competitive environments. Technology Diffusion and Disruptive Technologies The rate of technology diffusion, which is the speed at which new technologies become available and are used, has increased substantially over the past 15 to 20 years. Consider the following rates of technology diffusion: It took the telephone 35 years to get into 25 percent of all homes in the United States. It took TV 26 years. It took radio 22 years. It took PCs 16 years. It took the Internet 7 years.48 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 11 Chapter 1: Strategic Management and Strategic Competitiveness Strategic Focus Starbucks Is “Juicing” Its Earnings per Store through Technological Innovations coffee roasting facility and also a consumer retail outlet. According to Schultz, it’s a retail theater where “you can watch beans being roasted, talk to master grinders, have your drink brewed in front of you in multiple ways, lounge in a coffee library, order a selection of gourmet brews and locally prepared foods.” Schultz calls this store in New York the “Willie Wonka Factory of coffee.” Based on this concept, Starbucks will open small “reserve” stores inspired by this flagship roastery concept across New York in 2015. These technology advances and different store offerings are also taking place internationally. For example, Starbucks is expanding a new store concept in India and it’s debuting this new concept store in smaller towns and suburbs. These new outlets are about half the size of existing Starbuck cafes in India. Kevin Schafer/Getty Images An important signal for a company is who is chosen as the new CEO. Howard Schultz of Starbucks has led the company through successful strategic execution over much of its history. In 2015, Kevin Johnson, a former CEO of Juniper Networks and 16 year veteran of Microsoft took over as CEO of Starbucks, succeeding Schultz. Johnson has engaged with the company’s digital operations and will supervise information technology and supply chain operations. Many brick and mortar stores have experienced decreasing sales in the United States as online traffic has increased. Interestingly, 2014 Starbuck sales store operations have risen 5 percent in the fourth quarter; this 5 percent came from increased traffic (2 percent from growth in sales and 3 percent in increased ticket size). The driver of this increase in sales is mainly an increase in technology applications. To facilitate this increase in sales per store, Starbucks is ramping up its digital tools such as mobile-payment platforms. Furthermore, it has ramped up online sales of gift cards as a way to drive revenue. In December 2014, it allowed customers to place online orders and pick them up in about 150 Starbucks outlets in the Portland, Oregon area. Besides leadership and a focus on technology, Starbucks receives suggestions, ideas, and experimentation from its employees. Starbucks employees, called baristas, are seen as partners who blend, steam, and brew the brand’s specialty coffee in over 21,000 stores worldwide. Schultz credits the employees as a dominant force in helping it to build its revenue gains. To further incentivize employees, Starbucks was one of the first to provide comprehensive health benefits and stock option ownership to part-time employees. Currently, employees have received more than $1 billion worth of financial gain through the stock option program. As an additional perk for U.S. employees, Schultz created a program to pay 100 percent of workers’ tuition to finish their degrees through Arizona State University. To date, 1,000 workers have enrolled in this program. Starbucks is also known for its innovations in new types of stores. For instance, it is testing smaller express stores in New York City that reduce client wait times. As noted earlier, Starbucks has emphasized online payment in its approaches which facilitates the speed of transaction. It now gives Starbucks rewards for mobile payment applications to its 12 million active users. Interestingly, this puts it ahead of iTunes and American Express Serve with its Starbucks mobile payment app in regard to number of users. To put its innovation on display, Starbucks opened its first “Reserve Roastery and Tasting Room.” This is a 15,000 square foot The photo illustrates the Starbuck’s app that allows customers to pre-order and speed service and payment. Sources: I. Brat & T. Stynes, 2015, Earnings: Starbucks picks a president from technology industry, Wall Street Journal, www.wsj.com, January 23; A. Adamczyk, 2014, The next big caffeine craze? Starbucks testing cold-brewed coffee, Forbes, www.forbes.com, August 18; R. Foroohr, 2014, Go inside Starbucks’ wild new “Willie Wonka Factory of coffee”, Time, www.time.com, December 8; FRPT-Retail Snapshot, 2014, Starbucks’ strategy of expansion with profitability: to debut in towns and suburbs with half the size of the new stores, FRPT-Retail Snapshot Snapshot, September 28, 9–10; L. Lorenzetti, 2014, Fortune’s world most admired companies: Starbucks where innovation is always brewing, Fortune, www.fortune.com, October 30; P. Wahba, 2014, Starbucks to offer delivery in 2015 in some key markets, Fortune, www.fortune. com, November 4; V. Wong, 2014, Your boss will love the new Starbucks delivery service, Bloomberg Businessweek Businessweek, www.businessweek.com, November 3. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 12 Part 1: Strategic Management Inputs The impact of technological changes on individual firms and industries has been broad and significant. For example, in the not-too-distant past, people rented movies on videotapes at retail stores. Now, movie rentals are almost entirely electronic. The publishing industry (books, journals, magazines, newspapers) is moving rapidly from hard copy to electronic format. Many firms in these industries, operating with a more traditional business model, are suffering. These changes are also affecting other industries, from trucking to mail services (public and private). Perpetual innovation is a term used to describe how rapidly and consistently new, information-intensive technologies replace older ones. The shorter product life cycles resulting from these rapid diffusions of new technologies place a competitive premium on being able to quickly introduce new, innovative goods and services into the marketplace.49 In fact, when products become somewhat indistinguishable because of the widespread and rapid diffusion of technologies, speed to market with innovative products may be the primary source of competitive advantage (see Chapter 5).50 Indeed, some argue that the global economy is increasingly driven by constant innovations. Not surprisingly, such innovations must be derived from an understanding of global standards and expectations of product functionality. Although some argue that large established firms may have trouble innovating, evidence suggests that today these firms are developing radically new technologies that transform old industries or create new ones.51 Apple is an excellent example of a large established firm capable of radical innovation. Also, in order to diffuse the technology and enhance the value of an innovation, firms need to be innovative in their use of the new technology, building it into their products.52 Another indicator of rapid technology diffusion is that it now may take only 12 to 18 months for firms to gather information about their competitors’ research and development (R&D) and product decisions.53 In the global economy, competitors can sometimes imitate a firm’s successful competitive actions within a few days. In this sense, the rate of technological diffusion has reduced the competitive benefits of patents.54 Today, patents may be an effective way of protecting proprietary technology in a small number of industries such as pharmaceuticals. Indeed, many firms competing in the electronics industry often do not apply for patents to prevent competitors from gaining access to the technological knowledge included in the patent application. Disruptive technologies—technologies that destroy the value of an existing technology and create new markets55—surface frequently in today’s competitive markets. Think of the new markets created by the technologies underlying the development of products such as iPods, iPads, Wi-Fi, and the web browser. These types of products are thought by some to represent radical or breakthrough innovations (we discuss more about radical innovations in Chapter 13.).56 A disruptive or radical technology can create what is essentially a new industry or can harm industry incumbents. However, some incumbents are able to adapt based on their superior resources, experience, and ability to gain access to the new technology through multiple sources (e.g., alliances, acquisitions, and ongoing internal research).57 Clearly, Apple has developed and introduced “disruptive technologies” such as the iPhone and iPod, and in so doing changed several industries. For example, the iPhone dramatically changed the cell phone industry, and the iPod and its complementary iTunes revolutionized how music is sold to and used by consumers. In conjunction with other complementary and competitive products (e.g., Amazon’s Kindle), Apple’s iPad is contributing to and speeding major changes in the publishing industry, moving from hard copies to electronic books. Apple’s new technologies and products are also contributing to the new “information age.” Thus, Apple provides an example of entrepreneurship through technology emergence across multiple industries.58 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 13 Chapter 1: Strategic Management and Strategic Competitiveness The Information Age Dramatic changes in information technology (IT) have occurred in recent years. Personal computers, cellular phones, artificial intelligence, virtual reality, massive databases (“big data”), and multiple social networking sites are only a few examples of how information is used differently as a result of technological developments. An important outcome of these changes is that the ability to effectively and efficiently access and use information. IT has become an important source of competitive advantage in virtually all industries. The Internet and IT advances have given small firms more flexibility in competing with large firms, if the technology is used efficiently.59 Both the pace of change in IT and its diffusion will continue to increase. For instance, the number of personal computers in use globally is expected to surpass 2.3 billion by 2015. More than 372 million were sold globally in 2011. This number is expected to increase to about 518 million in 2015.60 The declining costs of IT and the increased accessibility to them are also evident in the current competitive landscape. The global proliferation of relatively inexpensive computing power and its linkage on a global scale via computer networks combine to increase the speed and diffusion of IT. Thus, the competitive potential of IT is now available to companies of all sizes throughout the world, including those in emerging economies.61 Increasing Knowledge Intensity Knowledge (information, intelligence, and expertise) is the basis of technology and its application. In the competitive landscape of the twenty-first century, knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage.62 Indeed, starting in the 1980s, the basis of competition shifted from hard assets to intangible resources. For example, “Walmart transformed retailing through its proprietary approach to supply chain management and its information-rich relationships with customers and suppliers.”63 Relationships with customers and suppliers are an example of an intangible resource which needs to be managed.64 Knowledge is gained through experience, observation, and inference and is an intangible resource (tangible and intangible resources are fully described in Chapter 3). The value of intangible resources, including knowledge, is growing as a proportion of total shareholder value in today’s competitive landscape.65 In fact, the Brookings Institution estimates that intangible resources contribute approximately 85 percent of total shareholder value.66 The probability of achieving strategic competitiveness is enhanced for the firm that develops the ability to capture intelligence, transform it into usable knowledge, and diffuse it rapidly throughout the company.67 Therefore, firms must develop (e.g., through training programs) and acquire (e.g., by hiring educated and experienced employees) knowledge, integrate it into the organization to create capabilities, and then apply it to gain a competitive advantage.68 A strong knowledge-base is necessary to create innovations. In fact, firms lacking the appropriate internal knowledge resources are less likely to invest money in R&D.69 Firms must continue to learn (building their knowledge-base) because knowledge spillovers to competitors are common. There are several ways in which knowledge spillovers occur, including the hiring of professional staff and managers by competitors.70 Because of the potential for spillovers, firms must move quickly to use their knowledge in productive ways. In addition, firms must build routines that facilitate the diffusion of local knowledge throughout the organization for use everywhere that it has value.71 Firms are better able to do these things when they have strategic flexibility. Strategic flexibility is a set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment. Thus, strategic flexibility involves coping with uncertainty and its accompanying risks.72 Strategic flexibility is a set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 14 Part 1: Strategic Management Inputs Firms should try to develop strategic flexibility in all areas of their operations. However, those working within firms to develop strategic flexibility should understand that the task is not easy, largely because of inertia that can build up over time. A firm’s focus and past core competencies may actually slow change and strategic flexibility.73 To be strategically flexible on a continuing basis and to gain the competitive benefits of such flexibility, a firm has to develop the capacity to learn. Continuous learning provides the firm with new and up-to-date skill sets, which allow it to adapt to its environment as it encounters changes.74 Firms capable of rapidly and broadly applying what they have learned exhibit the strategic flexibility and the capacity to change in ways that will increase the probability of successfully dealing with uncertain, hypercompetitive environments. 1-2 The I/O Model of Above-Average Returns From the 1960s through the 1980s, the external environment was thought to be the primary determinant of strategies that firms selected to be successful.75 The industrial organization (I/O) model of above-average returns explains the external environment’s dominant influence on a firm’s strategic actions. The model specifies that the industry or segment of an industry in which a company chooses to compete has a stronger influence on performance than do the choices managers make inside their organizations.76 The firm’s performance is believed to be determined primarily by a range of industry properties, including economies of scale, barriers to market entry, diversification, product dif differentiation, the degree of concentration of firms in the industry, and market frictions.77 We examine these industry characteristics in Chapter 2. Grounded in economics, the I/O model has four underlying assumptions. First, the external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. Second, most firms competing within an industry or within a segment of that industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources. Third, resources used to implement strategies are assumed to be highly mobile across firms, so any resource differences that might develop between firms will be short-lived. Fourth, organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors.78 The I/O model challenges firms to find the most attractive industry in which to compete. Because most firms are assumed to have similar valuable resources that are mobile across companies, their performance generally can be increased only when they operate in the industry with the highest profit potential and learn how to use their resources to implement the strategy required by the industry’s structural characteristics. To do so, they must imitate each other.79 The five forces model of competition is an analytical tool used to help firms find the industry that is the most attractive for them. The model (explained in Chapter 2) encompasses several variables and tries to capture the complexity of competition. The five forces model suggests that an industry’s profitability (i.e., its rate of return on invested capital rel...
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