Economics of strategy / David Besanko ... [and others].

Format:

Book

Author/Creator:

Besanko, David, 1955-

Contributor:

Dranove, David.

Shanley, Mark (Mark T.)

Simon Nelson Patten Fund.

Language:

English

Subjects (All):

Strategic planning--Economic aspects.

Strategic planning.

Managerial economics.

Physical Description:

xxiv, 632 pages : illustrations ; 27 cm

Edition:

Third edition.

Place of Publication:

Hoboken, NJ : Wiley, [2004]

Summary:

Covering the broad sweep of modern economics and strategy research, this comprehensive book broke new ground in its original edition by applying modern economic principles to study the firm's strategic position. Completely updated and revised, this new edition integrates recent insights from the theory of the firm, industrial organization, and strategy research, while building upon a strong theoretical and empirical foundation familiar to academics working in economics and strategy. New co-author Scott Schaefer adds his expertise on organizational economics New chapters on performance evaluation and strategic fit Hundreds of examples ground theory in the everyday activities of the firm and show how the economic principles of strategy actually work A unique, modern treatment of topics

Contents:

Introduction: Strategy and Economics 1

Why Study Strategy? 1

Why Economics? 2

The Need for Principles 3

Example 1.1 The Rise and Fall of the New Economy's Darling: The Enron Story 5

A Framework for Strategy 7

Boundaries of the Firm 7

Market and Competitive Analysis 8

Position and Dynamics 8

Internal Organization 8

Primfr: Economic Concepts for Stratfgy 9

Costs 10

Cost Functions 11

The Importance of the Time Period: Long-Run versus Short-Run Cost Functions 16

Sunk versus Avoidable Costs 18

Economic Costs and Profitability 19

Economic versus Accounting Costs 19

Economic Profit versus Accounting Profit 20

Economic Profit and Net Present Value 21

Demand and Revenues 23

Demand Curve 23

The Price Elasticity of Demand 24

Total Revenue and Marginal Revenue Functions 28

Theory of the Firm: Pricing and Output Decisions 29

Perfect Competition 31

Game Theory 35

Games in Matrix Form and the Concept of Nash Equilibrium 36

Game Trees and Subgame Perfection 38

Part 1 Firm Boundaries 41

1 The Evolution of the Modern Firm 43

The World in 1840 44

Example 1.1 The Emergence of Chicago 49

The World in 1910 52

Example 1.2 Responding to the Business Environment: The Case of American Whaling 55

Example 1.3 Evolution of the Steel Industry 58

The World Today 60

Example 1.4 Economic Gyrations and Traffic Gridlock in Thailand 65

Three Different Worlds: Consistent Principles, Changing Conditions, and Adaptive Strategies 66

Example 1.5 Infrastructure and Emerging Markets: The Russian Privatization Program 67

Example 1.6 Building National Infrastructure: The Transcontinental Railroad 69

2 The Horizontal Boundaries of the Firm: Economies of Scale and Scope 72

Where Do Economies of Scale Come From? 73

Where Do Scale Economies Come From? 76

Example 2.1 Hub-and-Spoke Networks and Economies of Scope in the Airline Industry 80

Example 2.2 The Division of Labor in Medical Markets 82

Special Sources of Economies of Scale and Scope 85

Example 2.3 The Ace Hardware Corporation 87

Example 2.4 The Fall and Rise of Pharmacia and Upjohn 90

Sources of Diseconomies of Scale 92

Example 2.5 The AOL Time Warner Merger and Economies of Scope 94

The Learning Curve 95

Example 2.6 The Boston Consulting Group Growth/Share Paradigm 97

Appendix Using Regression Analysis to Estimate the Shapes of Cost Curves 102

3 The Vertical Boundaries of the Firm 105

Make versus Buy 106

Example 3.1 Vertical Disintegration in the Pharmaceutical Industry 108

Reasons to "Buy" 113

Example 3.2 Self-Insurance by British Petroleum 115

Example 3.3 Make versus Buy: Pepsi-Cola and Its Bottlers 123

Example 3.4 An Application of the Make-or-Buy Framework To Children's Memorial Hospital 125

Example 3.5 The Fundamental Transformation in the U.S. Automobile Industry 129

Example 3.6 Floating Power Plants 131

Example 3.7 Hostile Takeovers and Relationship-Specific Investments at Trans Union 133

Example 3.8 Underinvestment in Relationship-Specific Assets By British Subcontractors 135

Summarizing Make-or-Buy Decisions: The Make-or-Buy Decision Tree 136

4 Organizing Vertical Boundaries: Vertical Integration and Its Alternatives 140

Technical Efficiency versus Agency Efficiency 141

Example 4.1 The Virtual Corporation 147

Example 4.2 Vertical Integration of the Sales Force in the Insurance Industry 150

Process Issues in Vertical Mergers 151

Alternatives to Vertical Integration 153

Example 4.3 Tapered Integration in Gasoline Retailing 154

Example 4.4 Pfizer, Microsoft, and IBM Come to the Aid of Physicians 159

Example 4.5 Millennium Pharmaceuticals: Strategic Alliances 161

Example 4.6 Interfirm Business Networks in the United States: The Women's Dress Industry in New York City 165

5 Diversification 170

A Brief History 170

Example 5.1 Changes in Diversification, from American Can to Primerica 172

Why Do Firms Diversify? 174

Example 5.2 Acquiring for Synergy: BankAmerica Buys Continental 176

Managerial Reasons for Diversification 181

Performance of Diversified Firms 187

Example 5.3 Pepsi's Fast-Food Troika 191

Example 5.4 Diversification and Corporate Performance for Philip Morris 193

Part 2 Market and Competitive Analysis 197

6 Competitors and Competition 199

Competitor Identification and Market Definition 200

Example 6.1 Substitutes and Competition in the Postal Service 202

Measuring Market Structure 204

Example 6.2 Defining Coca-Cola's Market 206

Market Structure and Competition 207

Example 6.3 A Dog-Eat-Dog World: The Demise of the Online Pet Supply Industry 211

Example 6.4 The OPEC Cartel 213

Example 6.5 Pricing in the Airline Industry 217

Example 6.6 Cournot Equilibrium in the Corn Wet Milling Industry 223

Evidence on Market Structure and Performance 228

7 Strategic Commitment 232

Why Commitment Is Important 233

Example 7.1 Strategic Commitment and Preemption in the Global Airframe Market: Airbus versus Boeing 236

Example 7.2 Commitment and Irreversibility in the Airline Industry 237

Strategic Commitment and Competition 238

Example 7.3 Commitment at Nucor and USX: The Case of Thin-Slab Casting 249

Flexibility and Real Options 250

Example 7.4 Commitment versus Flexibility in the CD Market 252

Example 7.5 Corning's Nuclear Winter 253

A Framework for Analyzing Commitments 255

8 The Dynamics of Pricing Rivalry 259

Dynamic Pricing Rivalry 260

Example 8.1 What Happens When a Firm Retaliates Quickly to a Price Cut: Philip Morris versus B.A.T in Costa Rica 266

Example 8.2 Forgiveness and Provocability: Dow Chemicals and the Market for Reverse Osmosis Membrane 271

How Market Structure Affects the Sustainability of Cooperative Pricing 272

Example 8.3 General Motors and Zero-Percent Financing in the U.S. Automobile Industry 278

Example 8.4 Firm Asymmetries and the 1992 Fare War in the U.S. Airline Industry 280

Example 8.5 Pricing Discipline in the U.S. Cigarette Industry 281

Example 8.6 How Market Structure Conditions Conspire to Limit Profitability in the Heavy-Duty Truck Engine Industry 284

Facilitating Practices 286

Quality Competition 290

9 Entry and Exit 297

Some Facts About Entry and Exit 298

Example 9.1 Hyundai's Entry into the Steel Industry 300

Entry and Exit Decisions: Basic Concepts 301

Example 9.2 Patent Protection in the Pharmaceutical Industry 305

Example 9.3 Barriers to Entry in the Australian Airline Market 307

Example 9.4 Entry Barriers and Profitability in the Japanese Brewing Industry 308

Entry-Deterring Strategies 310

Example 9.5 Limit Pricing by Xerox 315

Example 9.6 Coffee Wars 319

Exit-Promoting Strategies 321

Example 9.7 DuPont's Use of Excess Capacity to Control the Market for Titanium Dioxide 323

Evidence on Entry-Deterring Behavior 324

10 Industry Analysis 327

Performing a Five-Forces Analysis 328

Coopetition and the Value Net 333

Applying the Five Forces: Some Industry Analyses 335

Part 3 Strategic Position and Dynamics 353

11 Strategic Positioning for Competitive Advantage 355

Competitive Advantage 358

Competitive Advantage and Value Creation: Analytical Tools and Conceptual Foundations 362

Example 11.1 The Division of the Value-Created in the Sale of Beer at a Baseball Game 369

Example 11.2 Value Creation Within a Vertical Chain: Integrated Delivery Systems in Health Care 372

Example 11.3 Creating Value at Enterprise Rent-A-Car 376

Example 11.4 Measuring Capabilities in the Pharmaceutical Industry 379

Strategic Positioning: Cost Advantage and Benefit Advantage 383

Example 11.5 Cost Advantage at Cemex 386

Example 11.6 Benefit Advantage at Superquinn 389

Example 11.7 Strategic Positions in the U.S.

Credit Card Industry: Capital One versus MBNA 395

Example 11.8 Continental Airlines: Moving to the Efficiency Frontier 401

Strategic Positioning: Broad Coverage versus Focus Strategies 402

12 Sustaining Competitive Advantage 420

How Hard Is It to Sustain Profits? 421

Sustainable Competitive Advantage 424

Example 12.1 Exploiting Resources: The Mattel Story 425

Example 12.2 American versus Northwest in Yield Management 428

Example 12.3 Cola Wars: Slugging It Out in Venezuela 433

Example 12.4 Maintaining Competitive Advantage in the On-Line Brokerage Market 437

Example 12.5 Switching Costs for the Newborn Set: Garanimals 441

Example 12.6 The Microsoft Case 443

Imperfect Imitability and Industry Equilibrium 446

13 The Origins of Competitive Advantage: Innovation, Evolution, and the Environment 452

Creative Destruction 454

Example 13.1 The Sunk Cost Effect in Steel: The Adoption Of the Basic Oxygen Furnace 458

The Incentive to Innovate 459

Example 13.2 Innovation in the PBX Market 461

Innovation Competition 462

Evolutionary Economics and Dynamic Capabilities 465

Example 13.3 Organizational Adaptation in the Photolithographic Alignment Equipment Industry 466

The Environment 467

Example 13.4 The Rise of the Swiss Watch Industry 470

Managing Innovation 471

Example 13.5 Competence, History, and Geography: The Nokia Story 472

14 Agency and Performance Measurement 476

The Principal/Agent Framework 477

Example 14.1 Agency Contracts in Franchising 485

Example 14.2 Pay, Performance, and Selection at Safelite Glass 487

Costs of Tying Pay to Performance 488

Example 14.3 Market Effects in Executive Compensation 497

Example 14.4 Cardiovascular Surgery Report Cards 501

Selecting Performance Measures: Managing Tradeoffs Between Costs 502

Do Pay-for-Performance Incentives Work? 505

15 Incentives in Firms 510

Implicit Incentive Contracts 510

Example 15.1 Promotion Tournaments at General Electric 517

Incentives in Teams 520

Example 15.2 Stock Options for Middle-Level Employees 524

Career Concerns and Long-Term Employment 525

Example 15.3 Career Concerns of Mutual Fund Managers 527

Incentives and Decision Making in Organizations 528

Example 15.4 Teams and Communication in Steel Mills 530

16 Strategy and Structure 534

Example 16.1 The Division of Labor Among Seamen: 1700-1750 538

Example 16.2 ABB's Matrix Organization 544

Contingency Theory 550

Example 16.3 Organizational Structure at AT&T 554

Structure Follows Strategy 555

Example 16.4 Strategy, Structure, and the Attempted Merger Between the University of Chicago Hospital and Michael Reese Hospital 556

Example 16.5 Samsung: Reinventing a Corporation 557

Example 16.6 Transnational Strategy and Organization Structure At SmithKline-Beecham 560

Example 16.7 WingspanBank.Com: A Network Organization 562

17 Environment, Power, and Culture 567

The Social Context of Firm Behavior 567

Internal Context 568

Power 569

Example 17.1 The Sources of Presidential Power 571

Example 17.2 Power and Poor Performance: The Case of the 1957 Mercury 574

Example 17.3 Power Shifts in the Newspaper Business 576

Example 17.4 Gary Wendt at Conseco 578

Culture 579

Example 17.5 Corporate Culture and Inertia at CPI 583

Example 17.6 Politics, Culture, and Corporate Governance 584

External Context, Institutions, and Strategies 586

18 Strategy and the General Manager 594

A Historical Perspective on the General Manager 595

What Do General Managers Do? 596.

Notes:

Includes bibliographical references and indexes.

Local Notes:

Acquired for the Penn Libraries with assistance from the Simon Nelson Patten Fund.

Presented by The American Academy of Political and Social Science in memory of Simon Nelson Patten; 2003/2004

ISBN:

047121213X

0471448974

OCLC:

51900580