Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts

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Michael A. Hitt

Michael A. Hitt is a Distinguished Professor and holds the Joe B. Foster Chair in Business

Leadership at Texas A&M University. He received his Ph.D. from the University of

Colorado. He has more than 260 publications including 26 co-authored or co-edited

books and was cited as one of the 10 most-cited scholars in management over a 25-year

period in an article published in the 2008 volume of the Journal of Management.

Some of his books are Downscoping: How to Tame the Diversified Firm (Oxford

University Press, 1994); Mergers and Acquisitions: A Guide to Creating Value for

Stakeholders (Oxford University Press, 2001); Competing for Advantage, 2nd edition

(South-Western, 2008); and Understanding Business Strategy, 2nd edition (South-

Western Cengage Learning, 2009). He is co-editor of several books including the fol-

lowing: Managing Strategically in an Interconnected World (1998); New Managerial

Mindsets: Organizational Transformation and Strategy Implementation (1998); Dynamic

Strategic Resources: Development, Diffusion, and Integration (1999); Winning Strategies in

a Deconstructing World (John Wiley & Sons, 2000); Handbook of Strategic Management

(2001); Strategic Entrepreneurship: Creating a New Integrated Mindset (2002); Creating

Value: Winners in the New Business Environment (Blackwell Publishers, 2002); Managing

Knowledge for Sustained Competitive Advantage (Jossey-Bass, 2003); Great Minds in

Management: The Process of Theory Development (Oxford University Press, 2005), and

The Global Mindset (Elsevier, 2007). He has served on the editorial review boards of mul-

tiple journals, including the Academy of Management Journal, Academy of Management

Executive, Journal of Applied Psychology, Journal of Management, Journal of World

Business, and Journal of Applied Behavioral Sciences. Furthermore, he has served as

consulting editor and editor of the Academy of Management Journal. He is currently a

co-editor of the Strategic Entrepreneurship Journal. He is the current past president of the

Strategic Management Society and is a past president of the Academy of Management.

He is a Fellow in the Academy of Management and in the Strategic Management

Society. He received an honorary doctorate from the Universidad Carlos III de Madrid

and is an Honorary Professor and Honorary Dean at Xi’an Jiao Tong University. He

has been acknowledged with several awards for his scholarly research and he received

the Irwin Outstanding Educator Award and the Distinguished Service Award from the

Academy of Management. He has received best paper awards for articles published in

the Academy of Management Journal, Academy of Management Executive, and Journal

of Management.

About the Authors

xxi

About the Authors

R. Duane Ireland

R. Duane Ireland is a Distinguished Professor and holds the Foreman R. and Ruby

S. Bennett Chair in Business from the Mays Business School, Texas A&M University

where he previously served as head of the management department. He teaches stra-

tegic management courses at all levels (undergraduate, masters, doctoral, and execu-

tive). He has over 175 publications including more than a dozen books. His research,

which focuses on diversification, innovation, corporate entrepreneurship, and strate-

gic entrepreneurship, has been published in a number of journals, including Academy

of Management Journal, Academy of Management Review, Academy of Management

Executive, Administrative Science Quarterly, Strategic Management Journal, Journal of

Management, Strategic Entrepreneurship Journal, Human Relations, Entrepreneurship

Theory and Practice, Strategic Entrepreneurship Journal, Journal of Business Venturing,

and Journal of Management Studies, among others. His recently published books include

Understanding Business Strategy, 2nd edition (South-Western Cengage Learning,

2009), Entrepreneurship: Successfully Launching New Ventures, 3rd edition (Prentice-

Hall, 2010), and Competing for Advantage, 2nd edition (South-Western, 2008). He is

serving or has served as a member of the editorial review boards for a number of jour-

nals, including Academy of Management Journal, Academy of Management Review,

Academy of Management Executive, Journal of Management, Strategic Enterprenurship

Journal, Journal of Business Venturing, Entrepreneurship Theory and Practice, Journal

of Business Strategy, and European Management Journal. He is the current editor of the

Academy of Management Journal. He has completed terms as an associate editor for

Academy of Management Journal, as an associate editor for Academy of Management

Executive, and as a consulting editor for Entrepreneurship Theory and Practice. He has

co-edited special issues of Academy of Management Review, Academy of Management

Executive, Journal of Business Venturing, Strategic Management Journal, Journal of High

Technology and Engineering Management, and Organizational Research Methods (forth-

coming). He received awards for the best article published in Academy of Management

Executive (1999) and Academy of Management Journal (2000). In 2001, his co-authored

article published in Academy of Management Executive won the Best Journal Article

in Corporate Entrepreneurship Award from the U.S. Association for Small Business &

Entrepreneurship (USASBE).

He is a Fellow of the Academy of Management and is a 21st Century Entrepreneurship

Research Scholar. He served a three-year term as a Representative-at-Large member of

the Academy of Management’s Board of Governors. He received the 1999 Award for

Outstanding Intellectual Contributions to Competitiveness Research from the American

Society for Competitiveness and the USASBE Scholar in Corporate Entrepreneurship

Award (2004).

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. He received his Ph.D. from the

University of California-Irvine. Professor Hoskisson’s research topics focus on corpo-

rate governance, acquisitions and divestitures, corporate and international diversifica-

tion, corporate entrepreneurship, privatization, and cooperative strategy. He teaches

courses in corporate and international strategic management, cooperative strategy, and

strategy consulting, among others. Professor Hoskisson’s research has appeared in over

120 publications, including articles in the Academy of Management Journal, Academy

of Management Review, Strategic Management Journal, Organization Science, Journal

of Management, Journal of International Business Studies, Journal of Management

Studies, Academy of Management Perspectives, Academy of Management Executive,

California Management Review, and 26 co-authored books. He is currently an associ-

ate editor of the Strategic Management Journal and a consulting editor for the Journal

of International Business Studies, as well as serving on the Editorial Review board of

xxii

About the Authors

the Academy of Management Journal. Professor Hoskisson has served on several

editorial boards for such publications as the Academy of Management Journal (including

consulting editor and guest editor of a special issue), Journal of Management (includ-

ing associate editor), Organization Science, Journal of International Business Studies

(consulting editor), Journal of Management Studies (guest editor of a special issue) and

Entrepreneurship Theory and Practice. He has co-authored several books including

Understanding Business Strategy, 2nd Edition (South-Western Cengage Learning, 2009),

Competing for Advantage, 2nd edition (South-Western, 2008), and Downscoping: How to

Tame the Diversified Firm (Oxford University Press, 1994).

He has an appointment as a Special Professor at the University of Nottingham and

as an Honorary Professor at Xi’an Jiao Tong University. He is a Fellow of the Academy

of Management and a charter member of the Academy of Management Journals Hall of

Fame. He is also a Fellow of the Strategic Management Society. In 1998, he received an

award for Outstanding Academic Contributions to Competitiveness, American Society

for Competitiveness. He also received the William G. Dyer Distinguished Alumni Award

given at the Marriott School of Management, Brigham Young University. He com-

pleted three years of service as a representative at large on the Board of Governors of

the Academy of Management and currently is on the Board of Directors of the Strategic

Management Society.

PART 1

Strategic Management Inputs

1. Strategic Management and Strategic Competitiveness, 02

2. The External Environment: Opportunities, Threats,

Industry Competition, and Competitor Analysis, 34

3. The Internal Organization: Resources, Capabilities, Core

Competencies, and Competitive Advantages, 70

Studying this chapter should provide you with the strategic

management knowledge needed to:

1. Deﬁ ne strategic competitiveness, strategy, competitive advantage,

above-average returns, and the strategic management process.

2. Describe the competitive landscape and explain how globalization

and technological changes shape it.

3. Use the industrial organization (I/O) model to explain how ﬁ rms can

earn above-average returns.

4. Use the resource-based model to explain how ﬁ rms can earn above-

average returns.

5. Describe vision and mission and discuss their value.

6. Deﬁ ne stakeholders and describe their ability to inﬂ uence

organizations.

7. Describe the work of strategic leaders.

8. Explain the strategic management process.

this chapter should provide

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ve-aver

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the industrial or

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CHAPTER 1

Strategic Management

and Strategic

Competitiveness

Currently on a “tear,” McDonald’s ability

to create value for its stakeholders (such as

customers, shareholders, and employees)

during the challenging times of the global

recession that started roughly in early 2008

and continued throughout 2009 is indeed impressive. As one indicator of the quality of its

performance, consider the fact that during 2008, McDonald’s and Wal-Mart were the only

two Dow Jones Industrial Average stocks to end the year with a gain.

With one of the world’s most recognized brand names, mid-2009 found McDonald’s

operating roughly 32,000 restaurants in 118 countries. The largest fast-food restaurant

chain in the world, McDonald’s sales revenue was $70.7 billion in 2008, up from $64.1 billion

the year before. The chain serves over

58 million customers daily. McDonald’s

dominates the quick-service restaurant

industry in the United States, where

its revenue is several times larger than

Burger King and Wendy’s, its closest

competitors.

McDonald’s impressive performance

as the ﬁ rst decade of the twenty-ﬁ rst

century came to a close suggests that

the ﬁ rm is effectively implementing its

strategy. (We deﬁ ne strategy in this

chapter as an integrated and coordinated

set of commitments and actions designed

to exploit core competencies and gain

a competitive advantage.) However, the

picture for McDonald’s was much less

positive in 2003. In that year, some

analysts concluded that McDonald’s

“looked obsolete” as it failed to

notice changes in its customers’ interests

and needs. The fact that the company

reported its ﬁ rst-ever quarterly loss in

2003 and the decline in its stock price from roughly $48 per share to $13 per share

suggested that McDonald’s was becoming less competitive. However, by mid-2009 things

had changed dramatically for McDonald’s. Its “stock was trading at nearly $60, same-store

sales (had) grown for the 56th straight month and the company (could) boast of having

achieved double-digit operating-income growth during the onset of the ﬁ nancial crisis.”

How was this dramatic turnaround achieved?

After examining their ﬁ rm’s deteriorating situation in 2003, McDonald’s strategic leaders

decided to change its corporate-level strategy and to take different actions to implement its

business-level strategy. From a business-level strategy perspective (we discuss business-level

strategies in Chapter 4), McDonald’s decided to focus on product innovations and upgrades

of its existing properties instead of continuing to rapidly expand the number of units while

relying almost exclusively on the core products it had sold for many years as the source of

its sales revenue. From a corporate-level perspective (corporate-level strategies are

discussed in Chapter 6), McDonald’s decided to become less diversiﬁ ed. To reach this

objective, the ﬁ rm disposed of its interests in the Chipotle Mexican Grill restaurant concept

and the Boston Market chain and sold its minority interest in Prêt a Manger as well.

Operationally, McDonald’s starting listening carefully to its customers, who were demanding

value for their dollars and convenience as well as healthier products. One analyst describes

McDonald’s responses to what it was hearing from its customers this way: “McDonald’s

eliminated the super size option, offered more premium salads and chicken sandwiches and

provided greater value options. It also initiated better training for employees, extended

hours of service and redesigned stores to appeal to younger consumers.” In part, these

actions were taken to capitalize on an ever-increasing number of consumers who were

becoming and remain today very conscious about their budgets.

MCDONALD’S CORPORATION:

FIRING ON ALL CYLINDERS

WHILE PREPARING

FOR THE FUTURE

Caro/Alamy

McDonalds restaurant in Berlin, Germany.

McDonalds is the largest fast-food restaurant

chain in the world, operating in 118 countries.

Part 1: Strategic Management Inputs

However, as McDonald’s experiences in the early 2000s indicate, corporate success is

never guaranteed. The likelihood of a company being successful in the long term increases

when strategic leaders continually evaluate the appropriateness of their ﬁ rm’s strategies

as well as actions being taken to implement them. Given this, and in light of its decision in

2003 to continuously offer innovative food items to customers, McDonald’s added McCafe

coffee bars to all of its U.S. locations in 2009. McDonald’s coffee drinks create value for

customers by giving them high-quality drinks at prices that often are lower than those of

competitors such as Starbucks. A Southern-style chicken sandwich was also added to the

ﬁ rm’s line of chicken-based offerings. Allowing customers to order from in-store kiosks is

an example of an action the ﬁ rm recently took to create more convenience for customers.

The ﬁ rm continues upgrading its existing stores and in anticipation of a global economic

recovery, is buying prime real estate in Europe “… on the cheap as a result of the overall

downturn in construction spending.” This real estate is the foundation for McDonald’s

commitment to add 1,000 new European locations in the near future. Thus, McDonald’s

strategic leaders appear to be committed to making decisions today to increase the

likelihood that the ﬁ rm will be as successful in the future as it was in the last years of the

twenty-ﬁ rst century’s ﬁ rst decade.

Sources: J. Adamy, 2009, McDonald’s seeks way to keep sizzling, Wall Street Journal, http;://www.wsj.com,

March 10; M. Arndt, 2009, McDonald’s keeps gaining, BusinessWeek, http://www.businessweek.com, April 22;

M. Cavallaro, 2009, Still lovin’ the Golden Arches, Forbes, http://www.forbes.com, March 6; S. Dahle, 2009,

McDonald’s loves your recession, Forbes, http://www.forbes.com, February 17; D. Patnaik & P. Mortensen, 2009,

The secret of McDonald’s recent success, Forbes, http://www.forbes.com, February 4; M. Peer, 2009, Double-

edge dollar at McDonald’s, Forbes, http://www.forbes.com, January 26; A. Raghavan, 2009, McDonald’s Euro-

pean burger binge, Forbes, http://www.forbes.com, January 23; P. Ziobro, 2009, McDonald’s pounds out good

quarter, Wall Street Journal, http://www.wsj.com, April 23; 2009, McDonald’s Corp., Standard & Poor’s Stock

Report, http://www.standardandpoors.com, April 23.

As we see from the Opening Case, McDonald’s was quite successful in 2008 and 2009,

outperforming Burger King and Wendy’s, its two main rivals. McDonald’s performance

during this time period suggests that it is highly competitive (something we call a condi-

tion of strategic competitiveness) as it earned above-average returns. All firms, including

McDonald’s, use the strategic management process (see Figure 1.1) as the foundation for

the commitments, decisions, and actions they will take when pursuing strategic competi-

tiveness and above-average terms. 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, McDonald’s sold its interests in other food con-

cepts (e.g., Boston Market) in order to focus on developing new products and upgrading

existing facilities in its portfolio of McDonald’s restaurants around the globe.

Thus,

McDonald’s strategic leaders decided that the firm would pursue product innovations

and that it would not remain involved with additional food concepts such as Boston

Market and Chipotle. In-N-Out Burger, the privately held, 232-unit restaurant chain

with locations in only Arizona and California, focuses on product quality and will not

take any action with the potential to reduce the quality of its food items.

A firm’s strategy

also demonstrates how it differs from its competitors. Recently, Ford Motor Company

devoted efforts to explain to stakeholders how the company differs from its competitors.

The main idea is that Ford claims that it is “greener” and more technically advanced than

its competitors, such as General Motors and Chrysler Group LLC (an alliance between

Chrysler and Fiat SpA).

A firm has a competitive advantage when it implements a strategy competitors are

unable to duplicate or find too costly to try to imitate.

An organization can be confident

Part 1: Strategic Management Inputs

Strategic competitiveness

is achieved when a ﬁ rm

successfully formulates

and implements a value-

creating strategy.

strategy is an integrated

and coordinated set of

commitments and actions

designed to exploit core

competencies and gain a

competitive advantage.

A ﬁ rm has a competitive

advantage

when it

implements a strategy

competitors are unable to

duplicate or ﬁ nd too costly

to try to imitate.

Chapter 1: Strategic Management and Strategic Competitiveness

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.

The speed with which com-

petitors are able to acquire the skills needed to duplicate the benefits of a firm’s value-

creating strategy determines how long the competitive advantage will last.

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.

Effectively managing risks reduces investors’ uncertainty about the results of their

investment.

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). In smaller, new venture firms, returns are

Figure 1.1 The Strategic Management Process

Chapter 7

Merger and

Acquisition

Strategies

Chapter 4

Business-Level

Strategy

Chapter 8

International

Strategy

Chapter 5

Competitive

Rivalry and

Competitive

Dynamics

Chapter 9

Cooperative

Strategy

Chapter 6

Corporate-

Level Strategy

Chapter 11

Organizational

Structure and

Controls

Chapter 10

Corporate

Governance

Chapter 12

Strategic

Leadership

Strategic

Competitiveness

Above-Average

Returns

Chapter 13

Strategic

Entrepreneurship

Strategic Inputs

Strategic Actions

Strategic Outcomes

Vision

Mission

Strategy Implementation

Strategy Formulation

Feedback

Chapter 3

The Internal

Organization

Chapter 2

The External

Environment

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.

Part 1: Strategic Management Inputs

sometimes measured in terms of the amount and speed of growth (e.g., in annual

sales) rather than more traditional profitability measures

because new ventures

require time to earn acceptable returns (in the form of return on assets and so forth)

on investors’ investments.

Understanding how to exploit a competitive advantage is important for firms seeking

to earn above-average returns.

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. Failure occurs because investors withdraw their invest-

ments from those firms earning less-than-average returns.

After carefully evaluating its deteriorating performance and options, Circuit City

decided in 2009 to liquidate its operation.

(Linens ‘n Things, Bombay Co., Mervyn’s

LLC., and Sharper Image Corp. also liquidated in 2009, suggesting the difficulty of the

competitive environment for consumer retailers during the economic downturn.) Prior

to the liquidation decision, Circuit City filed for bankruptcy in November 2008. However,

because the firm could not find a buyer and could not reach a deal with an investor as

the means of gaining access to the financial capital it needed to successfully emerge from

bankruptcy, it had no choice other than to liquidate. Here is how then-acting CEO James

Marcum described Circuit City’s situation and liquidation decision: “We are extremely

disappointed by this outcome. We were unable to reach an agreement with our creditors

and lenders to structure a going-concern transaction in the limited timeframe available,

and so this is the only possible path for our company.”

As we explain in the Strategic Focus, stiff competition from Best Buy and mistakes

made when implementing its strategy are the primary causes of Circuit City’s failure

and subsequent disappearance from the consumer electronics retail sector. Commenting

about errors made at Circuit City, one analyst said, “This company made massive

mistakes.”

Additionally, Circuit City’s focus on short-term profits likely was a problem

as well in that such a focus tends to have a negative effect on a firm’s ability to create

value in the long term.

Best Buy was performing well following Circuit City’s demise. However, as we noted

above, there are no guarantees of permanent success. This is true for McDonald’s, even

considering its excellent current performance, and for Best Buy. Although Best Buy

clearly outperformed Circuit City, its primary direct rival for many years, the firm now

faces a strong competitive challenge from Wal-Mart.

In order to deal with this chal-

lenge Best Buy is positioning itself as the provider of excellent customer service while

selling high-end products with new interactive features. Additionally, the firm is rapidly

expanding its private-label electronics business. In this business, Best Buy is using “…the

mountains of customer feedback it collects from its stores to make simple innovations

to established electronic gadgetry.”

In contrast, Wal-Mart is positioning itself in the

consumer electronics segment as the low-price option and seeks to sell its increasing

breadth of consumer electronics products to a larger number of the more than 100 million

customers who shop in its stores weekly.

 e strategic management process (see Figure 1.1) is the full set of commitments,

decisions, and actions required for a  rm to achieve strategic competitiveness and earn

above-average returns.  e  rm’s  rst step in the process is to analyze its external envi-

ronment and internal organization to determine its resources, capabilities, and core

competencies—the sources of its “strategic inputs.” With this information, the  rm

develops its vision and mission and formulates one or more strategies. To implement its

strategies, the  rm takes actions toward achieving strategic competitiveness and above-

average returns. E ective strategic actions that take place in the context of carefully inte-

grated strategy formulation and implementation e orts result in positive outcomes.  is

dynamic strategic management process must be maintained as ever-changing markets

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

ﬁ rm to achieve strategic

competitiveness and earn

above-average returns.

When Circuit City announced on January 16,

2009, that it was out of options and that

liquidation was the only viable course of action

for it to take, the firm employed approximately

34,000 people to operate its 567 stores in the

United States and was the second largest consumer electronics retailer in the United States.

What caused Circuit City’s failure? As we’ll see, it appears that poor implementation of the

firm’s strategy was a key factor leading to the firm’s demise.

Circuit City’s genesis was in 1949, when Samuel S. Wurtzel opened the first Wards

Company retail store in Richmond, Virginia. A television and home appliances retailer,

Wards had a total of four stores in Richmond in 1959. The firm became public in 1961

and earned $246 million in revenue in 1983. Between 1969 and 1982, Wards grew by

acquiring numerous electronics retailers across the United States. In 1984, the company’s

name was changed to Circuit City and the firm was listed on the New York Stock

Exchange. Revenue growth continued, reaching $2

billion in 1990. Circuit City established CarMax, a

retail venture selling used vehicles, in 1993. After

some initial challenges, CarMax become quite

successful. In 2002, Circuit City announced that in

order to focus on its core retail consumer electronics

business, it would spin off its CarMax subsidiary into

a separate publicly traded company. By late 2008,

the firm was in serious trouble; as a result, 155

stores were closed and 17 percent of its workforce

was laid off.

With hindsight, we see that in the 1990s Circuit

City was complacent and rather ineffective in its

intense competition with Best Buy, its chief rival. Alan

Wurtzel, the son of the firm’s founder and a former

Circuit City CEO, supports this position, saying that

Circuit City “… didn’t take the threat from Best

Buy seriously enough and at some points was too

focused on short-term profit rather than long-term

value.”

Among the actions Best Buy took during the

1990s to compete against Circuit City was to estab-

lish larger stores in superior locations. Circuit City’s

commitment to focus on short-term profits prevented

the firm’s leaders from being acutely aware of the

value these new stores created for Best Buy. This

short-term focus led to what turned out to be some

highly damaging decisions, such as the one to lay off thousands of its veteran, higher-paid

employees, including sales personnel. These salespeople, who were earning attractive com-

missions because of their productivity, were replaced with lower-paid, less-experienced

personnel. Circuit City leaders thought that sales would not suffer as a result of this decision.

According to an analyst, “They (sales) did, and the damage to revenue—and Circuit City’s

reputation—was never undone.”

In addition to concentrating on finding ways to reduce costs rather than find ways to

create more value for customers, some believe that Circuit City made other mistakes while

CIRCUIT CITY: A TALE OF

INEFFECTIVE STRATEGY

IMPLEMENTATION

AND FIRM FAILURE

Ramin Talaie/CORBIS

A large “going out of business”

sign hangs over a Circuit City store

in Downtown Brooklyn. All of the

electronics retailer’s stores were

closed by the end of March 2009,

laying off more than 30,000

workers.