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• Title Page
• Copyright
• Preface
• Acknowledgments
• Brief Contents
• Contents
• INTRODUCTION: STRATEGY AND ECONOMICS
• Why Study Strategy?
• Why Economics?
• The Need for Principles
• So What’s the Problem?
• A Framework for Strategy
• Boundaries of the Firm
• Market and Competitive Analysis
• Positioning and Dynamics
• Internal Organization
• The Book
• Endnotes
• ECONOMICS PRIMER: BASIC PRINCIPLES
• Costs
• Cost Functions
• Total Cost Functions
• Fixed and Variable Costs
• Average and Marginal Cost Functions
• The Importance of the Time Period: Long-Run versus Short-Run Cost Functions
• Sunk versus Avoidable Costs
• Economic Costs and Profitability
• Economic versus Accounting Costs
• Economic Profit versus Accounting Profit
• Demand and Revenues
• Demand Curve
• The Price Elasticity of Demand
• Brand-Level versus Industry-Level Elasticities
• Total Revenue and Marginal Revenue Functions
• Theory of the Firm: Pricing and Output Decisions
• Perfect Competition
• Game Theory
• Games in Matrix Form and the Concept of Nash Equilibrium
• Game Trees and Subgame Perfection
• Chapter Summary
• Questions
• Endnotes
• PART ONE FIRM BOUNDARIES
• 1 THE POWER OF PRINCIPLES: AN HISTORICAL PERSPECTIVE
• Doing Business in 1840
• Business Conditions in 1840: Life without a Modern Infrastructure
• Transportation
• Example 1.1 The Emergence of Chicago
• Communications
• Finance
• Production Technology
• Government
• Example 1.2 Building National Infrastructure: The Transcontinental Railroad
• Doing Business in 1910
• Business Conditions in 1910: A “Modern” Infrastructure
• Production Technology
• Transportation
• Communications
• Finance
• Government
• Example 1.3 Evolution of the Steel Industry
• Doing Business Today
• Modern Infrastructure
• Transportation
• Communications
• Finance
• Production Technology
• Government
• Infrastructure in Emerging Markets
• Example 1.4 The Gaizhi Privatization Process in China
• Three Different Worlds: Consistent Principles, Changing Conditions, and Adaptive Strategies
• Chapter Summary
• Questions
• Endnotes
• 2 THE HORIZONTAL BOUNDARIES OF THE FIRM
• Definitions
• Definition of Economies of Scale
• Definition of Economies of Scope
• Scale Economies, Indivisibilities, and the Spreading of Fixed Costs
• Economies of Scale Due to Spreading of Product-Specific Fixed Costs
• Economies of Scale Due to Trade-offs among Alternative Technologies
• Indivisibilities Are More Likely When Production Is Capital Intensive
• Example 2.1 Hub-and-Spoke Networks and Economies of Scope in the Airline Industry
• “The Division of Labor Is Limited by the Extent of the Market”
• Example 2.2 The Division of Labor in Medical Markets
• Special Sources of Economies of Scale and Scope
• Density
• Purchasing
• Advertising
• Costs of Sending Messages per Potential Consumer
• Advertising Reach and Umbrella Branding
• Research and Development
• Physical Properties of Production
• Inventories
• Complementarities and Strategic Fit
• Sources of Diseconomies of Scale
• Labor Costs and Firm Size
• Spreading Specialized Resources Too Thin
• Bureaucracy
• Economies of Scale: A Summary
• The Learning Curve
• The Concept of the Learning Curve
• Expanding Output to Obtain a Cost Advantage
• Example 2.3 Learning by Doing in Medicine
• Learning and Organization
• The Learning Curve versus Economies of Scale
• Example 2.4 The Pharmaceutical Merger Wave
• Diversification
• Why Do Firms Diversify?
• Efficiency-Based Reasons for Diversification
• Scope Economies
• Internal Capital Markets
• Problematic Justifications for Diversification
• Diversifying Shareholders’ Portfolios
• Identifying Undervalued Firms
• Reasons Not to Diversify
• Managerial Reasons for Diversification
• Benefits to Managers from Acquisitions
• Problems of Corporate Governance
• The Market for Corporate Control and Recent Changes in Corporate Governance
• Example 2.5 Activist Investors in Silicon Valley
• Performance of Diversified Firms
• Example 2.6 Haier: The World’s Largest Consumer Appliance and Electronics Firm
• Chapter Summary
• Questions
• Endnotes
• 3 THE VERTICAL BOUNDARIES OF THE FIRM
• Make versus Buy
• Example 3.1 What Apple “Makes” and What It “Buys” for the iPhone
• Upstream, Downstream
• Example 3.2 Licensing Biotechnology Products
• Defining Boundaries
• Some Make-or-Buy Fallacies
• Avoiding Peak Prices
• Tying Up Channels: Vertical Foreclosure
• Reasons to “Buy”
• Exploiting Scale and Learning Economies
• Example 3.3 Employee Skills: Make or Buy?
• Bureaucracy Effects: Avoiding Agency and Influence Costs
• Agency Costs
• Influence Costs
• Example 3.4 Disconnection at Sony
• Organizational Design
• Reasons to “Make”
• The Economic Foundations of Contracts
• Complete versus Incomplete Contracting
• Bounded Rationality
• Difficulties Specifying or Measuring Performance
• Asymmetric Information
• The Role of Contract Law
• Coordination of Production Flows through the Vertical Chain
• Example 3.5 Nightmares at Boeing: The 787 Dreamliner
• Leakage of Private Information
• Transaction Costs
• Relationship-Specific Assets
• Forms of Asset Specificity
• The Fundamental Transformation
• Rents and Quasi-Rents
• The Holdup Problem
• Example 3.6 Power Barges
• Holdup and Ex Post Cooperation
• The Holdup Problem and Transaction Costs
• Contract Negotiation and Renegotiation
• Example 3.7 A Game of Chicken? Specificity and Underinvestment in the Broiler Industry
• Investments to Improve Ex Post Bargaining Positions
• Distrust
• Reduced Investment
• Recap: From Relationship-Specific Assets to Transaction Costs
• Summarizing Make-or-Buy Decisions: The Make-or-Buy Decision Tree
• Chapter Summary
• Questions
• Endnotes
• 4 INTEGRATION AND ITS ALTERNATIVES
• What Does It Mean to Be “Integrated”?
• The Property Rights Theory of the Firm
• Alternative Forms of Organizing Transactions
• Example 4.1 Vertical Integration in a Mountain Paradise
• Governance
• Delegation
• Recapping PRT
• Path Dependence
• Making the Integration Decision
• Technical Efficiency versus Agency Efficiency
• The Technical Efficiency/Agency Efficiency Trade-off
• Example 4.2 Accountable Care Organizations
• Real-World Evidence
• Double Marginalization: A Final Integration Consideration
• Example 4.3 Vertical Integration of the Sales Force in the Insurance Industry
• Alternatives to Vertical Integration
• Tapered Integration: Make and Buy
• Franchising
• Example 4.4 Franchise Heat in China
• Strategic Alliances and Joint Ventures
• Example 4.5 Joint Ventures in Sub-Saharan Africa
• Implicit Contracts and Long-Term Relationships
• Example 4.6 Interfirm Business Networks in the United States: The Women’s Dress Industry in New Yo
• Business Groups
• Keiretsu
• Chaebol
• Business Groups in Emerging Markets
• Chapter Summary
• Questions
• Endnotes
• PART TWO MARKET AND COMPETITIVE ANALYSIS
• 5 COMPETITORS AND COMPETITION
• Competitor Identification and Market Definition
• The Basics of Market Definition and Competitor Identification
• Putting Competitor Identification into Practice
• Example 5.1 The SSNIP in Action: Defining Hospital Markets
• Empirical Approaches to Competitor Identification
• Geographic Competitor Identification
• Example 5.2 Whole Foods Attempts to Acquire Wild Oats
• Measuring Market Structure
• Market Structure and Competition
• Perfect Competition
• Many Sellers
• Homogeneous Products
• Excess Capacity
• Example 5.3 The Bottom Drops Out on Cubs Tickets
• Monopoly
• Monopolistic Competition
• Demand for Differentiated Goods
• Entry into Monopolistically Competitive Markets
• Oligopoly
• Example 5.4 Capacity Competition in the U.S. Beef Processing Industry13
• Cournot Quantity Competition
• The Revenue Destruction Effect
• Cournot’s Model in Practice
• Bertrand Price Competition
• Example 5.5 Cournot Equilibrium in the Corn Wet Milling Industry
• Why Are Cournot and Bertrand Different?
• Example 5.6 Electric Markets, Bertrand Competition, and Capacity Constraints
• Bertrand Price Competition When Products Are Horizontally Differentiated
• Evidence on Market Structure and Performance
• Price and Concentration
• Chapter Summary
• Questions
• Endnotes
• 6 ENTRY AND EXIT
• Some Facts about Entry and Exit
• Entry and Exit Decisions: Basic Concepts
• Barriers to Entry
• Bain’s Typology of Entry Conditions
• Analyzing Entry Conditions: The Asymmetry Requirement
• Example 6.1 How the Japanese Broke into the U.S. Car Market
• Structural Entry Barriers
• Control of Essential Resources
• Economies of Scale and Scope
• Example 6.2 Emirates Air
• Marketing Advantages of Incumbency
• Barriers to Exit
• Entry-Deterring Strategies
• Limit Pricing
• Example 6.3 Limit Pricing by Brazilian Cement Manufacturers
• Is Strategic Limit Pricing Rational?
• Example 6.4 Entry Barriers and Profitability in the Japanese Brewing Industry
• Predatory Pricing
• The Chain-Store Paradox
• Example 6.5 Predatory Pricing in the Laboratory
• Rescuing Limit Pricing and Predation: The Importance of Uncertainty and Reputation
• Wars of Attrition
• Example 6.6 Walmart Enters Germany . . . and Exits
• Predation and Capacity Expansion
• Strategic Bundling
• “Judo Economics”
• Evidence on Entry-Deterring Behavior
• Contestable Markets
• An Entry Deterrence Checklist
• Entering a New Market
• Preemptive Entry and Rent-Seeking Behavior
• Chapter Summary
• Questions
• Endnotes
• 7 DYNAMICS: COMPETING ACROSS TIME
• Microdynamics
• The Strategic Benefits of Commitment
• Strategic Substitutes and Strategic Complements
• The Strategic Effect of Commitments
• Example 7.1 Committed to a Settlement
• Tough and Soft Commitments
• A Taxonomy of Commitment Strategies
• The Informational Benefits of Flexibility
• Example 7.2 Commitment at Nucor and USX: The Case of Thin-Slab Casting
• Real Options
• A Framework for Analyzing Commitments
• Competitive Discipline
• Dynamic Pricing Rivalry and Tit-for-Tat Pricing
• Example 7.3 What Happens When a Firm Retaliates Quickly to a Price Cut: Philip Morris versus B.A.T.
• Why Is Tit-for-Tat So Compelling?
• Coordinating on the Right Price
• Impediments to Coordination
• The Misread Problem
• Example 7.4 Forgiveness and Provocability: Dow Chemicals and the Market for Reverse Osmosis Membrane
• Lumpiness of Orders
• Information about the Sales Transaction
• Volatility of Demand Conditions
• Asymmetries among Firms and the Sustainability of Cooperative Prices
• Price Sensitivity of Buyers and the Sustainability of Cooperative Pricing
• Market Structure and the Sustainability of Cooperative Pricing: Summary
• Facilitating Practices
• Price Leadership
• Advance Announcement of Price Changes
• Most Favored Customer Clauses
• Example 7.5 Are Most Favored Nation Agreements Anticompetitive?
• Uniform Delivered Prices
• Where Does Market Structure Come From?
• Sutton’s Endogenous Sunk Costs
• Example 7.6 The Evolution of the Chinese Down Apparel Industry
• Innovation and Market Evolution
• Learning and Industry Dynamics
• Chapter Summary
• Questions
• Endnotes
• 8 INDUSTRY ANALYSIS
• Performing a Five-Forces Analysis
• Internal Rivalry
• Entry
• Substitutes and Complements
• Supplier Power and Buyer Power
• Strategies for Coping with the Five Forces
• Coopetition and the Value Net
• Applying the Five Forces: Some Industry Analyses
• Chicago Hospital Markets Then and Now
• Market Definition
• Internal Rivalry
• Entry
• Substitutes and Complements
• Supplier Power
• Buyer Power
• Commercial Airframe Manufacturing
• Market Definition
• Internal Rivalry
• Barriers to Entry
• Substitutes and Complements
• Supplier Power
• Buyer Power
• Professional Sports
• Market Definition
• Internal Rivalry
• Entry
• Substitutes and Complements
• Supplier Power
• Buyer Power
• Conclusion
• Professional Search Firms
• Market Definition
• Internal Rivalry
• Entry
• Substitutes and Complements
• Supplier Power
• Buyer Power
• Conclusion
• Chapter Summary
• Questions
• Endnotes
• PART THREE STRATEGIC POSITION AND DYNAMICS
• 9 STRATEGIC POSITIONING FOR COMPETITIVE ADVANTAGE
• Competitive Advantage and Value Creation: Conceptual Foundations
• Competitive Advantage Defined
• Maximum Willingness-to-Pay and Consumer Surplus
• From Maximum Willingness-to-Pay to Consumer Surplus
• Value-Created
• Example 9.1 The Division of Value Creation for Gilead Sciences’ Sovaldi on the Back of an Envelope
• Value Creation and “Win–Win” Business Opportunities
• Value Creation and Competitive Advantage
• Analyzing Value Creation
• Example 9.2 Kmart versus Walmart
• Example 9.3 The Emergence of Uber . . . and the Demise of the Taxi?
• Value Creation and the Value Chain
• Value Creation, Resources, and Capabilities
• Example 9.4 Creating Value at Enterprise Rent-a-Car
• Example 9.5 Measuring Capabilities in the Pharmaceutical Industry
• Strategic Positioning: Cost Advantage and Benefit Advantage
• Generic Strategies
• The Strategic Logic of Cost Leadership
• The Strategic Logic of Benefit Leadership
• Example 9.6 “Haute Pot” Cuisine in China
• Extracting Profits from Cost and Benefit Advantage
• Comparing Cost and Benefit Advantages
• “Stuck in the Middle”
• Example 9.7 Strategic Positioning in the Airline Industry: Four Decades of Change
• Diagnosing Cost and Benefit Drivers
• Cost Drivers
• Cost Drivers Related to Firm Size, Scope, and Cumulative Experience
• Cost Drivers Independent of Firm Size, Scope, or Cumulative Experience
• Cost Drivers Related to Organization of the Transactions
• Benefit Drivers
• Methods for Estimating and Characterizing Costs and Perceived Benefits
• Estimating Costs
• Estimating Benefits
• Strategic Positioning: Broad Coverage versus Focus Strategies
• Segmenting an Industry
• Broad Coverage Strategies
• Focus Strategies
• Chapter Summary
• Questions
• Endnotes
• 10 INFORMATION AND VALUE CREATION
• The “Shopping Problem”
• Unraveling
• Alternatives to Disclosure
• Example 10.1 A Warranty for Surgery
• Example 10.2 The Evolution of Branding in Appliance Retailing
• Nonprofit Firms
• Report Cards
• Multitasking: Teaching to the Test
• Example 10.3 Teachers Teaching to the Test
• What to Measure
• Example 10.4 Calorie Posting in New York City Restaurants
• Risk Adjustment
• Presenting Report Card Results
• Gaming Report Cards
• Example 10.5 Hospital Report Cards
• The Certifier Market
• Certification Bias
• Matchmaking
• When Sellers Search for Buyers
• Example 10.6 The Netflix Challenge
• Chapter Summary
• Questions
• Endnotes
• 11 SUSTAINING COMPETITIVE ADVANTAGE
• Market Structure and Threats to Sustainability
• Threats to Sustainability in Competitive and Monopolistically Competitive Markets
• Threats to Sustainability under All Market Structures
• Evidence: The Persistence of Profitability
• The Resource-Based Theory of the Firm
• Imperfect Mobility and Cospecialization
• Example 11.1 Coffee, Tea, or Starbucks?
• Isolating Mechanisms
• Example 11.2 Sports Dynasties
• Impediments to Imitation
• Legal Restrictions
• Superior Access to Inputs or Customers
• Example 11.3 Cola Wars in Venezuela
• The Winner’s Curse
• Market Size and Scale Economies
• Intangible Barriers to Imitation
• Causal Ambiguity
• Dependence on Historical Circumstances
• Social Complexity
• Early-Mover Advantages
• Learning Curve
• Reputation and Buyer Uncertainty
• Buyer Switching Costs
• Network Effects
• Networks and Standards
• Example 11.4 Building Blocks of Sustainable Advantage
• Competing “For the Market” versus “In the Market”
• Knocking Off a Dominant Standard
• Early-Mover Disadvantages
• Imperfect Imitability and Industry Equilibrium
• Creating Advantage and Creative Destruction
• Disruptive Technologies
• The Productivity Effect
• The Sunk Cost Effect
• The Replacement Effect
• The Efficiency Effect
• Disruption versus the Resource-Based Theory of the Firm
• Innovation and the Market for Ideas
• Example 11.5 Patent Racing and the Invention of the Integrated Circuit
• Evolutionary Economics and Dynamic Capabilities
• The Environment
• Factor Conditions
• Demand Conditions
• Related Supplier or Support Industries
• Example 11.6 The Rise of the Swiss Watch Industry
• Strategy, Structure, and Rivalry
• Chapter Summary
• Questions
• Endnotes
• PART FOUR INTERNAL ORGANIZATION
• 12 PERFORMANCE MEASUREMENT AND INCENTIVES
• The Principal–Agent Relationship
• Combating Agency Problems
• Example 12.1 Differences in Objectives in Agency Relationships: Yahoo! And English Fruit
• Performance-Based Incentives
• Example 12.2 Hidden Action and Hidden Information in Garment Factory Fire Insurance
• Problems with Performance-Based Incentives
• Preferences over Risky Outcomes
• Risk Sharing
• Risk and Incentives
• Example 12.3 “Target and Terror” in English Hospitals
• Performance Measures That Fail to Reflect All Desired Actions
• Selecting Performance Measures: Managing Trade-offs between Costs
• Example 12.4 Herding, RPE, and the 2007–2008 Credit Crisis
• Do Pay-for-Performance Incentives Work?
• Implicit Incentive Contracts
• Subjective Performance Evaluation
• Promotion Tournaments
• Example 12.5 Quitters Never Win
• Efficiency Wages and the Threat of Termination
• Incentives in Teams
• Example 12.6 Teams and Communication in Steel Mills
• Chapter Summary
• Questions
• Endnotes
• 13 STRATEGY AND STRUCTURE
• An Introduction to Structure
• Individuals, Teams, and Hierarchies
• Complex Hierarchy
• Departmentalization
• Coordination and Control
• Approaches to Coordination
• Example 13.1 ABB’s Matrix Organization
• Types of Organizational Structures
• Functional Structure (U-form)
• Example 13.2 Organizational Structure at AT&T
• Multidivisional Structure (M-form)
• Matrix Structure
• Network Structure
• Why Are There So Few Structural Types?
• Strategy-Environment Coherence
• Technology and Task Interdependence
• Example 13.3 Steve Jobs and Structure at Apple
• Information Processing
• Structure Follows Strategy
• Example 13.4 Strategy, Structure, and the Attempted Merger Between the University of Chicago Hospita
• Strategy, Structure, and the Multinational Firm
• Example 13.5 Multinational Firms: Strategy and Infrastructure39
• Example 13.6 Reorganization at Rhône-Poulenc S.A.
• Hybrid Organizations
• Chapter Summary
• Questions
• Endnotes
• 14 ENVIRONMENT, POWER, AND CULTURE
• The Social Context of Firm Behavior
• Internal Context
• Power
• The Sources of Power
• Example 14.1 The Sources of Presidential Power
• Structural Views of Power
• Do Successful Organizations Need Powerful Managers?
• Example 14.2 Power and Poor Performance: The Case of the 1957 Mercury
• The Decision to Allocate Formal Power to Individuals
• Example 14.3 Power in the Boardroom: Why Let CEOs Choose Directors?
• Culture
• Culture Complements Formal Controls
• Example 14.4 Corporate Culture and Inertia at ICI
• Culture Facilitates Cooperation and Reduces Bargaining Costs
• Culture, Inertia, and Performance
• A Word of Caution about Culture
• Example 14.5 Corporate Culture at Aetna: Yoga and the CEO
• External Context, Institutions, and Strategies
• Example 14.6 Corporate Culture at Ford
• Institutions and Regulation
• Interfirm Resource Dependence Relationships
• Example 14.7 Preserving Culture in the Face of Growth: The Google IPO
• Industry Logics: Beliefs, Values, and Behavioral Norms
• Chapter Summary
• Questions
• Endnotes
• GLOSSARY
• NAME INDEX
• SUBJECT INDEX
• EULA