So—why do we need another book on business policy and strategic management? What does this book bring to its
readers that other books don't? To answer these questions, it is important to understand (1.) how business school
education has evolved in business schools, and (2.) strategic management's disciplinary status in colleges of business.
RESEARCH AND TEACHING IN BUSINESS SCHOOLS
In 1959, two evaluations of the status of undergraduate and graduate business education were published. The
first, sponsored by the Carnegie Foundation, concluded that "the central problem facing this branch of higher
education is that academic standards need to be materially increased." The second, funded by the Ford Foundation,
described in more detail what these academic standards should be by arguing that "business educators in increasing
numbers are recognizing that it is insufficient to transmit and apply present knowledge. It is the function of
higher education to advance the state of knowledge as well. A professional school of business that aspires to full
academic status must meet this test."
These evaluations of business education in the 1950s have had a profound impact on the structure and function
of business schools. Before the Carnegie and Ford studies, business school professors were often retired managers,
and business school classes consisted primarily of discussions about and applications of various informal rules
of thumb for managing different business functions. Today, most business school professors have Ph.D.s in either
a business discipline or a related nonbusiness discipline, and business school classes focus on discussions about
and applications of various models, concepts, and theories that have been developed by academic research. Where
previously the discussion of business practices was not well connected to any base academic disciplines, now teaching
and research in business draws directly from, and often contributes to, these base disciplines—including economics,
psychology, sociology, and mathematics.
Of all the functional areas in the business school, none began making the transition to a theory-grounded, research-based
discipline earlier than organizational behavior and finance. As early as the 1930s, organizational behavior researchers
were attempting to apply rigorous research methodologies derived from social psychology to study the behavior of
individuals and groups in organizations. The now famous studies of the Western Electric plant in Hawthorne, New
Jersey, demonstrated not only that social science research methods could be applied in an organizational context,
but that they could be used to describe complex social phenomena inside firms. In finance, Modigliani and Miller's
work on capital structure and the cost of capital, and Markowitz's and Tobin's work on portfolio selection, led
the way in the application of economic theory to financial decision making in firms. Since this early work, finance
has become, in a real sense, a subfield of microeconomics. Moreover, theoretical and empirical work in finance
has had a significant impact on the field of microeconomics more generally.
Many of the other disciplines in business schools have gone through similar evolutions. Where marketing used
to be taught by retired marketing executives, and marketing classes focused on the experiences of these managers,
now marketing classes are typically taught by faculty with Ph.D.s in marketing or related disciplines, and marketing
classes focus on understanding and applying models and concepts derived from economics, psychology, and statistics.
Where operations management used to have an uncertain discipline grounding, it now has become an arena where psychological,
sociological, mathematical, and statistical models are applied in managing quality, plant location, logistics,
and other critical operational activities in firms. Finally, where accounting used to focus solely on generally
accepted accounting rules, accounting research now draws more broadly on economics, psychology, and computer science
to develop those accounting rules and to anticipate their implications for firms.
Some have been concerned that this increased emphasis on rigorous business research has reduced the quality
of a business education. These observers have argued that although we now have much more rigorous methods for analyzing
a firm's business situation, we have lost the human touch that is required to manage real firms—a human touch that
used to be communicated to students by retired executives in the classroom. Of course, there is a great deal of
truth in this criticism. It is certainly the case that if all a manager did was to apply these research-derived
models in a firm, the firm would probably not perform very well. The management of a real organization is not something
that can easily be reduced to a computer algorithm. Discipline-based faculty must strive to expose their students
to this human touch. This is one reason for the continued popularity of case-based teaching in business schools.
Not only do cases provide students opportunities to apply the theoretical models they are learning, they also simulate
the socially complex context within which the application of these models must actually occur.
It is also the case that much of this rigorous business research is irrelevant to real business managers. In
any given issue of a research journal, maybe only one or two articles actually have the potential to be applied
in real organizations. The rest of this work is basic research. It is designed to address theoretical problems,
problems that often have limited application potential. However, this basic research is often necessary before
the applied work can be done. Moreover, when rigorous business research can be applied in real firms, its implications
can be staggering. For example, there is little doubt that the way that firms are managed today is fundamentally
different from how they were managed thirty years ago and that much of this change is traceable to work done in
organizational behavior and related business disciplines. There is also little doubt that theoretical advances
in finance have had an enormous impact on the structure and function of the modern economy. Leveraged buy-outs,
futures markets, derivatives, and capital budgeting are all examples of economic phenomena that have been fundamentally
altered by work in financial economics. Also, there is little doubt that the quality movement that swept the world
through the 1980s and early 1990s found its intellectual roots, and many of its management tools, in the work done
by operations management researchers. Indeed, there really isn't anything quite as practical as a good theory.
THE ACADEMIC STATUS OF STRATEGIC MANAGEMENT
Where does the discipline of strategic management stand in this evolutionary process? It is probably safe to
say that strategic management is one of the least developed and the least mature of all the disciplines in the
business school. Finance and organizational behavior were well on their way to becoming rigorous discipline-based
fields by the 1950s, and marketing, accounting, and operations were well on their way to this same status by the
1960s. But it was not until the late 1970s and early 1980s that work on a theoretically rigorous underpinning for
the field of strategic management was begun. Before this tines period, strategic management was often taught by
retired managers, and course content focused primarily on describing the activities and decisions of general managers
in organizations.
In many ways, the delayed maturity of the field of strategic management is quite understandable. Strategic management
is an inherently integrative activity in a firm—forcing managers to bring the skills and expertise of different
business functions together to conceive of and implement a strategy. Thus research on strategic management is an
inherently multidisciplinary task. To fully mature as an academic discipline, each of the specialties on which
strategic management scholars rely must also mature. Therefore it is not surprising that the evolution of the field
of strategic management was delayed until other business functions had matured from their pre-academic state to
become more discipline-based, research-oriented specialties. However, although the maturing of strategic management
has been delayed, it is certainly occurring.
Two events signaled the beginning of the evolution of the field of strategic management from its preacademic
stage to a modern, discipline-based research field: the publication (in 1980) of Michael Porter's book Competitive
Strategy and the publication (in 1974) of Richard Rumelt's book Strategy, Structure, and Economic Performance.
As is described in Chapters 3 and 4, Porter adapted concepts from industrial organization economics to the analysis
of threats and opportunities in a firm's competitive environment. Before Porter, the analysis of a firm's competitive
environment was not well structured and involved generating long idiosyncratic lists of threats and opportunities
facing a firm. After Porter, the critical threats in a firm's environment, as derived from IO economics, could
be described and opportunities facing a firm could be deduced from the structure of a firm's industry. Porter had
begun to provide a theoretical structure for analyzing one critical component of the business-level strategy formulation
problem.
As I indicate in Chapter 12, Rumelt took ideas that had been explored by business historians and business scholars
to develop a theory explaining the conditions under which corporate diversification strategies could add economic
value to a firm, as well as a model describing the organizational structure firms would need to realize the potential
value of a diversification effort. Before Rumelt, discussions of corporate strategy were mired in not very rigorous
discussions of synergy and the appropriate level of centralization and decentralization. After Rumelt, the kind
of product relatedness needed to achieve economies of scope was described, and the specific organizational structure
needed to realize these economies was detailed. Rumelt had begun to provide a theoretical structure for analyzing
some critical components of the corporate-level strategy formulation and implementation problem.
Just as Porter and Rumelt were completing their work, research in other disciplines began to be published that
was destined to have a significant impact on the evolution of the field of strategic management. In organizational
behavior, Ouchi's work on Japanese management systems significantly opened up the strategic implementation problem.
In economics, transactions cost economics and the evolutionary theory of the firm provided some powerful tools
for analyzing a firm's competitive position. In organization theory, population ecology theory was beginning to
provide insights to the competitive process facing firms. In finance and accounting, agency theory and positive
accounting were providing insights into the economics of organizational structure and organizational processes.
Many of these theoretical developments were described in a book I published with Bill Ouchi in 1986 titled Organizational
Economics.
The result of these theoretical breakthroughs in the field of strategic management and related disciplines has
been a rapid growth in the intellectual maturity of strategic management. The number of people studying strategic
phenomena in organizations has increased dramatically over the last several years. Currently, the Business Policy
and Strategy Division of the Academy of Management is the largest of all Academy divisions. Scholars with a wide
variety of disciplinary backgrounds, from finance to organizational behavior, are publishing in the strategic management
literature. New ideas are constantly being developed and tested.
Moreover, this growth in interest in strategic management phenomena has not been limited to just business school
academics. Much of the best of this work has had important implications for how real firms are managed. Porter's
books, including Competitive Strategy and Competitive Advantage, have been read and applied by many practicing
managers. C. K. Prahalad and Gary Hammel's Harvard Business Review article on core competencies—an article solidly
grounded in strategic management academic research—is the all-time best-selling reprint at HBR. Like earlier work
in finance, OB, and operations, research in strategic management has had, and continues to have, a profound impact
on management practice.
THE PURPOSE OF THIS BOOK
Unfortunately, many students of strategic management, whether they axe full-time students, part-time students,
or practicing managers, have found it difficult to get their minds around this rapidly evolving field. Individual
articles or books generally push only a single point of view and do not provide the overall integrative framework
necessary to apply strategic management concepts in real organizations. With a couple of exceptions, most text
books do not include information on the most up-to-date research in strategic management, nor do they provide guidance
to students or practitioners about how this research might be applied. The purpose of this book is to summarize
and integrate the latest research in strategic management and related disciplines in a way that is accessible to
students and practitioners and in a way that facilitates its application.
UNIQUE ATTRIBUTES OF THE BOOK
I have taken several actions to ensure the realization of this purpose.
INTEGRATING STRATEGIC MANAGEMENT RESEARCH
One of my purposes is to present an integrated view of the field of strategic management. To facilitate this
integration, the first five chapters of the book develop a framework (summarized in Chapter 5) that is then used
as an organizing framework for the rest of the chapters. Moreover, this framework recognizes that understanding
threats and opportunities in a firm's competitive environment and understanding the competitive implications of
a firm's organizational strengths and weaknesses are both important in strategy formulation and implementation.
Thus, unlike Porter and others, this book is not organized around different types of competitive environments
that firms might face. Such a structure unduly emphasizes environmental determinants of firm performance over organizational
determinants of performance. Instead, after the organizing framework is developed, chapters focus on specific strategic
options that firms may choose to gain competitive advantages. At the business level, these options include vertical
integration (Chapter 6), cost leadership (Chapter 7), product differentiation (Chapter 8), flexibility (Chapter
9), and tacit collusion (Chapter 10). At the corporate level, these options include strategic alliances (Chapter
11), diversification (Chapters 12 and 13), mergers and acquisitions (Chapter 14), and international strategies
(Chapter 15). How these strategic options help neutralize environmental threats and exploit environmental opportunities
is discussed in each of these chapters, in connection with a discussion of how organizational strengths and weaknesses
affect the ability of firms pursuing these strategies to gain sustained competitive advantages.
Another way in which the integration of the field of strategic management is facilitated is that strategy formulation
and strategy implementation are not discussed in separate parts of the book. Many books and articles seem to adopt
the fiction that it is possible to study strategy formulation and strategy implementation independently. This is
obviously incorrect. It would clearly be a mistake for firms to formulate their strategies without considering
how they were going to implement those strategies. Moreover, it is not possible to evaluate the quality of a firm's
strategy implementation efforts independent of the strategy that a firm is trying to implement. Yet many strategy
scholars focus either on strategy formulation or on strategy implementation, and many strategy texts address these
topics separately, in different parts of the book.
In this book, strategy formulation and strategy implementation are discussed together for each of the strategic
options facing firms. Thus, beginning with Chapter 6, the conditions under which pursuing a strategy will be economically
valuable, along with the conditions under which pursuing a strategy will be a source of sustained competitive advantage,
are discussed. Following this strategy formulation discussion, the actions that a firm must pursue to implement
this strategy are also discussed. For all but one of the strategic options facing firms (corporate diversification),
the strategy formulation and implementation discussions occur in the same chapter. For corporate diversification
strategies, the formulation discussion is in one chapter (Chapter 12), and the implementation discussion is in
the subsequent chapter (Chapter 13), because the diversification implementation literature is so large.
INCLUDING THE LATEST RESEARCH
Another of my purposes is to summarize the latest research findings in strategic management and related disciplines.
Several things have been done to accomplish this purpose. For example, within each chapter, current thinking and
research—some of it not yet published—is incorporated in the discussion. In Chapter 2's discussion of firm performance,
a variety of measures of firm performance that have only recently begun to appear in the strategy literature are
discussed, including the Treynor index, Sharpe's measure, Jensen's alpha, and Tobin's q. Other popular measures
of performance that have not been widely discussed in other strategy books are also introduced, including event
study methodologies for analyzing firm performance. Also, Chapter 5's discussion of organizational strengths and
weaknesses is a state-of-the-art summary of what has come to be known as the resource-based view of the firm. Chapter
10's discussion of tacit collusion draws on recent developments in game theory, and Chapter 11's discussion of
trust in strategic alliances draws on some very recently published work. Chapter 12's discussion of corporate diversification
strategies is well grounded in current work in strategic management and finance. Chapter 15's analysis of international
strategies draws on some of the most recent developments in this rapidly growing literature.
Each chapter reflects the latest developments in strategic management research, and my choice of which strategies
to focus on in Part II (business-level strategies) and Part III (corporate-level strategies) reflects currently
important topics in the field.
Many books limit their discussion of business-level strategies to competitive strategies (including cost leadership
and product differentiation), but this book includes discussions of vertical integration, flexibility (that is,
strategic decision making under uncertainty), and cooperative business level strategies as well. Moreover, two
classes of these cooperative strategies are discussed—tacit collusion and some strategic alliances. In an era of
downsizing and outsourcing, decisions about what business functions to keep within the boundaries of a firm are
extremely important. Chapter 6 presents the latest thinking about these and related vertical integration issues.
Rapidly changing global markets increase the importance of strategic decision making under uncertainty, the topic
of Chapter 9. Collusion strategies (Chapter 10) have been much in the business news lately and are important phenomena
about which students and practitioners need to be aware. Strategic alliance strategies (Chapter 11)—including nonequity
alliances, equity alliances, and joint ventures—are becoming increasingly more important for firms and especially
for firms looking to expand their business opportunities in nondomestic markets.
At the corporate level, this, book includes a chapter on strategic alliances (Chapter 11). Moreover, although
most strategy books have chapters on diversification and international strategies, fewer have discussions on merger
and acquisitions strategies—even though mergers and acquisitions are often popular means of implementing diversification
and global strategies. Chapter 14 presents the latest research on merger and acquisition strategies.
To ensure that this text includes the full range of the most recent work in strategic management and related
disciplines, each article in each issue of the Strategic Management Journal, the Academy of Management Review,
the Academy of Management Journal, the Academy of Management Executive, and the Rand Journal of Economics for the
last ten years was read and summarized. Then, if it was determined that an article had a strategic focus, the article
was classified as being germane to one or more of the chapters of this book. Not all of these articles are cited
in the book, but I am quite confident that any current major research stream published in these journals is reflected
in the content of my book. For example, I was able to relate every article published in SMJ to one of the chapters
of this book with the exception of a few articles on strategic management in small firms.
ENSURING, ACCESSIBILITY AND APPLICATION
If students and practitioners cannot read, understand, and apply all of this research, it will be of limited
value to them. Thus it was not enough to include all the major research streams in strategic management and related
disciplines; it was also important to make this work accessible and applicable. I have done several things to accomplish
this. First, the book is full of examples. Most of these examples come from either Fortune or the Wall Street Journal.
Indeed, each issue of Fortune for the last 10 years, and most editions of the Wall Street Journal over this same
time period, have been read in search of examples of the phenomena discussed in this book. If no examples of a
particular strategic phenomenon discussed in the research literature could be found, a discussion of this strategic
phenomenon was usually omitted from the book. The logic here is straightforward: If we can't find examples of a
phenomenon in the popular business literature, then the phenomenon, though perhaps theoretically interesting, is
probably not practically important and thus can be omitted without loss.
In addition, each chapter ends with a chapter summary and review questions. The summary highlights the key issues
discussed in the chapter, and the review questions force readers to go beyond what is written in a chapter, to
try to understand its implications for managing real firms.
One characteristic that enhances the accessibility and applicability of many strategic management texts is missing
in this book—cases. The lack of cases does not mean that cases are irrelevant in the teaching of strategic management.
Indeed, I think that case teaching is a very important component of any strategic management class. However, to
be most useful, cases should provide students and managers an opportunity to see how a set of ideas, a model, or
a technique can actually be used to engage in a strategic analysis and make a strategic decision. In this book
I focus on these ideas, models, and techniques, and I assume that teachers will choose their own cases in which
these tools can be applied.
There are numerous sources for case material that can he used in conjunction with this book. Moreover, the structure
of my text makes choosing cases relatively easy. Since much of the book is organized around specific strategic
options facing firms, cases that focus on firms trying to decide whether to pursue a particular strategic option
help demonstrate how the ideas and models in a chapter can be applied in a realistic setting. Thus, for example,
to help the discussion of cost-leadership competitive business strategies to come alive, cases on Nucor Steel and
Wal-Mart are good options, for these firms tend to focus on cost leadership. To help the discussion of strategic
alliances to come alive, cases on General Motors, AT&T, and Corning are good options, for these firms have
all been pursuing alliance strategies, albeit in very different ways and for very different reasons. The discussion
of vertical integration can be greatly enhanced by cases that focus on firms going through outsourcing decisions
and by cases that focus on firms that exist because of outsourcing (such as EDS).
CHANGES IN THE SECOND EDITION
Although the fundamental purpose of this book remains unchanged from the first edition, there are some important
changes in the second edition. Some of these changes are cosmetic. For example, students have indicated that they
prefer endnotes to in-text citations, and this approach to citations has been adopted in the second edition. This
has also given me the opportunity to make substantive comments along with the citations. Other changes have been
more substantive in nature.
For example, I was never satisfied with the definition of strategy in Chapter 1 of the first edition. Additional
reading and a great deal of thought have led me to adopt a different definition of strategy in the second edition.
This definition is logically consistent with the definition in the first edition, but I think it is more powerful
and insightful.
In Chapter 2 of the first edition, I reviewed net present value techniques for evaluating the performance of
a firm. While, technically speaking, these approaches are accurate, it is unusual to have the information necessary
to apply them in conducting strategic analyses of real firms. Moreover, these techniques are adequately described
elsewhere. In lieu of a review of these present value techniques, Chapter 2 in the second edition focuses on how
to adjust a firm's accounting numbers to more accurately characterize its level of economic performance. To this
end, Chapter 2 draws heavily on the work of Tom Copeland and his colleagues in a discussion of Return on Invested
Capital (ROIC) and Economic Profit (EP). The Market Value Added,(MVA) approach to estimating a firm's performance
is also discussed in Chapter 2.
The discussion of the impact of industry structure and firm performance in Chapter 3 is substantially enhanced
in the second edition. More traditional approaches to defining industry structure (such as perfect competition,
monopolistic competition, oligopoly, and monopoly) and their performance implications have been discussed. This
provides a broader theoretical underpinning to Porter's five forces framework.
Opportunities in additional industrial contexts have been added to Chapter 4. These include opportunities in
increasing returns or network industries, opportunities in hyper-competitive industries, and opportunities in empty
core industries.
One of the most significant changes in the second edition of the book involves shifting the discussion of vertical
integration strategies from Part III (Corporate Strategies) to Part 11 (Business Strategies). This was done because
I have become convinced that determining a firm's boundaries—what business functions it will and will not operate
in—logically precedes any business level strategic choices a firm may make. Thus, while it is still possible for
a firm's vertical integration strategy to turn into a corporate diversification strategy, I have concluded that,
on balance, it is important for the discussion of vertical integration to come before the discussion of other business
level strategies.
Substantively, Chapter 6—the new vertical integration chapter-has been significantly modified. In the first
edition, the only conceptual framework for doing vertical integration analysis included was transactions cost economics.
In the new edition, this transactions cost discussion is augmented by a discussion of the impact of capabilities
on vertical integration decisions (that is, a resource-based theory of vertical integration) and by a discussion
of the impact of uncertainty on vertical integration decisions (that is, a real options theory of vertical integration).
These three approaches to vertical integration can sometimes have contradictory management implications, and an
approach to reconciling these differences is also discussed. This chapter also is used to present some of the key
organizing issues associated with implementing any business level strategy. Thus, in this chapter, some of the
critical dimensions of the U-form structure are discussed as are some of the most critical management controls
and compensation policies that can be used to implement business level strategies. The description of the determinants
of compensation, and the relationship between compensation and the implementation of business level strategies,
has received particular attention in this chapter.
By introducing the basic organizing problems associated with implementing a business level strategy in Chapter
6, the discussion of implementing other business level strategies in subsequent chapters can focus on how these
basic organizing principles can be adapted to implement other business strategies. Thus, the discussion of the
particular organizing requirements for implementing cost leadership strategies, in Chapter 7, has been substantially
increased. Chapter 8's discussion of implementing product differentiation strategies has also been more fully developed.
In particular, this chapter now includes a discussion of some of the most recent research on managing innovation
in firms, under the assumption that implementing product differentiation strategies almost always involves implementing
a product innovation process. The process of managing innovation in firms was largely omitted in the first edition,
an omission that is reversed in the second edition.
Chapter 9 is entirely new in the second edition. Since the publication of the first edition, there has been
increasing interest—among scholars and managers—in decision making under uncertainty. The primary conceptual tool
that has been proposed for guiding strategic decision making under these conditions is real options analysis. As
described in Chapter 9, real options analysis builds on options theory, as developed in the field of finance. Chapter
9 describes why real options analysis is important, shows how real options analysis
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