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Economics of Strategy, Binder Ready Version focuses on the key economic concepts students must master in order to develop a sound business strategy. Ideal for undergraduate managerial economics and business strategy courses, Economics of Strategy offers a careful yet accessible translation of advanced economic concepts to practical problems facing business managers. Armed with general principles, today's students--tomorrows future managers--will be prepared to adjust their firms business strategies to the demands of the ever-changing environment. 

 

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Introduction: Strategy and Economics	p. 1
    Why Study Strategy?	p. 1
    Why Economics?	p. 2
    The Need for Principles	p. 3
        So What''s the Problem?	p. 4
Example 1.1	    The Rise and Fall of the New Economy''s Darling: The Enron Story	p. 5
    A Framework for Strategy	p. 7
        Boundaries of the Firm	p. 7
        Market and Competitive Analysis	p. 8
        Position and Dynamics	p. 8
        Internal Organization	p. 8
Primfr: Economic Concepts for Stratfgy	p. 9
    Costs	p. 10
        Cost Functions	p. 11
        The Importance of the Time Period: Long-Run versus Short-Run Cost Functions	p. 16
        Sunk versus Avoidable Costs	p. 18
    Economic Costs and Profitability	p. 19
        Economic versus Accounting Costs	p. 19
        Economic Profit versus Accounting Profit	p. 20
        Economic Profit and Net Present Value	p. 21
    Demand and Revenues	p. 23
        Demand Curve	p. 23
        The Price Elasticity of Demand	p. 24
        Total Revenue and Marginal Revenue Functions	p. 28
    Theory of the Firm: Pricing and Output Decisions	p. 29
    Perfect Competition	p. 31
    Game Theory	p. 35
        Games in Matrix Form and the Concept of Nash Equilibrium	p. 36
        Game Trees and Subgame Perfection	p. 38
Part 1	Firm Boundaries	p. 41
1	    The Evolution of the Modern Firm	p. 43
        The World in 1840	p. 44
Example 1.1	        The Emergence of Chicago	p. 49
        The World in 1910	p. 52
Example 1.2	        Responding to the Business Environment: The Case of American Whaling	p. 55
Example 1.3	        Evolution of the Steel Industry	p. 58
        The World Today	p. 60
Example 1.4	        Economic Gyrations and Traffic Gridlock in Thailand	p. 65
        Three Different Worlds: Consistent Principles, Changing Conditions, and Adaptive Strategies	p. 66
Example 1.5	        Infrastructure and Emerging Markets: The Russian Privatization Program	p. 67
Example 1.6	        Building National Infrastructure: The Transcontinental Railroad	p. 69
        Chapter Summary	p. 70
        Questions	p. 70
2	    The Horizontal Boundaries of the Firm: Economies of Scale and Scope	p. 72
        Where Do Economies of Scale Come From?	p. 73
        Where Do Scale Economies Come From?	p. 76
Example 2.1	        Hub-and-Spoke Networks and Economies of Scope in the Airline Industry	p. 80
Example 2.2	        The Division of Labor in Medical Markets	p. 82
        Special Sources of Economies of Scale and Scope	p. 85
Example 2.3	        The Ace Hardware Corporation	p. 87
Example 2.4	        The Fall and Rise of Pharmacia and Upjohn	p. 90
        Sources of Diseconomies of Scale	p. 92
Example 2.5	        The AOL Time Warner Merger and Economies of Scope	p. 94
        The Learning Curve	p. 95
Example 2.6	        The Boston Consulting Group Growth/Share Paradigm	p. 97
        Chapter Summary	p. 101
        Questions	p. 101
Appendix	        Using Regression Analysis to Estimate the Shapes of Cost Curves	p. 102
3	    The Vertical Boundaries of the Firm	p. 105
        Make versus Buy	p. 106
Example 3.1	        Vertical Disintegration in the Pharmaceutical Industry	p. 108
        Reasons to "Buy"	p. 113
Example 3.2	        Self-Insurance by British Petroleum	p. 115
Example 3.3	        Make versus Buy: Pepsi-Cola and Its Bottlers	p. 123
Example 3.4	        An Application of the Make-or-Buy Framework To Children''s Memorial Hospital	p. 125
Example 3.5	        The Fundamental Transformation in the U.S. Automobile Industry	p. 129
Example 3.6	        Floating Power Plants	p. 131
Example 3.7	        Hostile Takeovers and Relationship-Specific Investments at Trans Union	p. 133
Example 3.8	        Underinvestment in Relationship-Specific Assets By British Subcontractors	p. 135
        Summarizing Make-or-Buy Decisions: The Make-or-Buy Decision Tree	p. 136
        Chapter Summary	p. 137
        Questions	p. 138
4	    Organizing Vertical Boundaries: Vertical Integration and Its Alternatives	p. 140
        Technical Efficiency versus Agency Efficiency	p. 141
Example 4.1	        The Virtual Corporation	p. 147
Example 4.2	        Vertical Integration of the Sales Force in the Insurance Industry	p. 150
        Process Issues in Vertical Mergers	p. 151
        Alternatives to Vertical Integration	p. 153
Example 4.3	        Tapered Integration in Gasoline Retailing	p. 154
Example 4.4	        Pfizer, Microsoft, and IBM Come to the Aid of Physicians	p. 159
Example 4.5	        Millennium Pharmaceuticals: Strategic Alliances	p. 161
Example 4.6	        Interfirm Business Networks in the United States: The Women''s Dress Industry in New York City	p. 165
        Chapter Summary	p. 167
        Questions	p. 168
5	    Diversification	p. 170
        A Brief History	p. 170
Example 5.1	        Changes in Diversification, from American Can to Primerica	p. 172
        Why Do Firms Diversify?	p. 174
Example 5.2	        Acquiring for Synergy: BankAmerica Buys Continental	p. 176
        Managerial Reasons for Diversification	p. 181
        Performance of Diversified Firms	p. 187
Example 5.3	        Pepsi''s Fast-Food Troika	p. 191
Example 5.4	        Diversification and Corporate Performance for Philip Morris	p. 193
        Chapter Summary	p. 195
        Questions	p. 196
Part 2	Market and Competitive Analysis	p. 197
6	    Competitors and Competition	p. 199
        Competitor Identification and Market Definition	p. 200
Example 6.1	        Substitutes and Competition in the Postal Service	p. 202
        Measuring Market Structure	p. 204
Example 6.2	        Defining Coca-Cola''s Market	p. 206
        Market Structure and Competition	p. 207
Example 6.3	        A Dog-Eat-Dog World: The Demise of the Online Pet Supply Industry	p. 211
Example 6.4	        The OPEC Cartel	p. 213
Example 6.5	        Pricing in the Airline Industry	p. 217
Example 6.6	        Cournot Equilibrium in the Corn Wet Milling Industry	p. 223
        Evidence on Market Structure and Performance	p. 228
        Chapter Summary	p. 230
        Questions	p. 230
7	    Strategic Commitment	p. 232
        Why Commitment Is Important	p. 233
Example 7.1	        Strategic Commitment and Preemption in the Global Airframe Market: Airbus versus Boeing	p. 236
Example 7.2	        Commitment and Irreversibility in the Airline Industry	p. 237
        Strategic Commitment and Competition	p. 238
Example 7.3	        Commitment at Nucor and USX: The Case of Thin-Slab Casting	p. 249
        Flexibility and Real Options	p. 250
Example 7.4	        Commitment versus Flexibility in the CD Market	p. 252
Example 7.5	        Corning''s Nuclear Winter	p. 253
        A Framework for Analyzing Commitments	p. 255
        Chapter Summary	p. 257
        Questions	p. 257
8	    The Dynamics of Pricing Rivalry	p. 259
        Dynamic Pricing Rivalry	p. 260
Example 8.1	        What Happens When a Firm Retaliates Quickly to a Price Cut: Philip Morris versus B.A.T in Costa Rica	p. 266
Example 8.2	        Forgiveness and Provocability: Dow Chemicals and the Market for Reverse Osmosis Membrane	p. 271
        How Market Structure Affects the Sustainability of Cooperative Pricing	p. 272
Example 8.3	        General Motors and Zero-Percent Financing in the U.S. Automobile Industry	p. 278
Example 8.4	        Firm Asymmetries and the 1992 Fare War in the U.S. Airline Industry	p. 280
Example 8.5	        Pricing Discipline in the U.S. Cigarette Industry	p. 281
Example 8.6	        How Market Structure Conditions Conspire to Limit Profitability in the Heavy-Duty Truck Engine Industry	p. 284
        Facilitating Practices	p. 286
        Quality Competition	p. 290
        Chapter Summary	p. 295
        Questions	p. 295
9	    Entry and Exit	p. 297
        Some Facts About Entry and Exit	p. 298
Example 9.1	        Hyundai''s Entry into the Steel Industry	p. 300
        Entry and Exit Decisions: Basic Concepts	p. 301
Example 9.2	        Patent Protection in the Pharmaceutical Industry	p. 305
Example 9.3	        Barriers to Entry in the Australian Airline Market	p. 307
Example 9.4	        Entry Barriers and Profitability in the Japanese Brewing Industry	p. 308
        Entry-Deterring Strategies	p. 310
Example 9.5	        Limit Pricing by Xerox	p. 315
Example 9.6	        Coffee Wars	p. 319
        Exit-Promoting Strategies	p. 321
Example 9.7	        DuPont''s Use of Excess Capacity to Control the Market for Titanium Dioxide	p. 323
        Evidence on Entry-Deterring Behavior	p. 324
        Summary	p. 325
        Questions	p. 326
10	    Industry Analysis	p. 327
        Performing a Five-Forces Analysis	p. 328
        Coopetition and the Value Net	p. 333
        Applying the Five Forces: Some Industry Analyses	p. 335
        Chapter Summary	p. 347
        Questions	p. 348
        Appendix	p. 349
Part 3	Strategic Position and Dynamics	p. 353
11	    Strategic Positioning for Competitive Advantage	p. 355
        Competitive Advantage	p. 358
        Competitive Advantage and Value Creation: Analytical Tools and Conceptual Foundations	p. 362
Example 11.1	        The Division of the Value-Created in the Sale of Beer at a Baseball Game	p. 369
Example 11.2	        Value Creation Within a Vertical Chain: Integrated Delivery Systems in Health Care	p. 372
Example 11.3	        Creating Value at Enterprise Rent-A-Car	p. 376
Example 11.4	        Measuring Capabilities in the Pharmaceutical Industry	p. 379
        Strategic Positioning: Cost Advantage and Benefit Advantage	p. 383
Example 11.5	        Cost Advantage at Cemex	p. 386
Example 11.6	        Benefit Advantage at Superquinn	p. 389
Example 11.7	        Strategic Positions in the U.S. Credit Card Industry: Capital One versus MBNA	p. 395
Example 11.8	        Continental Airlines: Moving to the Efficiency Frontier	p. 401
        Strategic Positioning: Broad Coverage versus Focus Strategies	p. 402
        Chapter Summary	p. 408
        Questions	p. 409
        Appendix	p. 410
12	    Sustaining Competitive Advantage	p. 420
        How Hard Is It to Sustain Profits?	p. 421
        Sustainable Competitive Advantage	p. 424
Example 12.1	        Exploiting Resources: The Mattel Story	p. 425
Example 12.2	        American versus Northwest in Yield Management	p. 428
Example 12.3	        Cola Wars: Slugging It Out in Venezuela	p. 433
Example 12.4	        Maintaining Competitive Advantage in the On-Line Brokerage Market	p. 437
Example 12.5	        Switching Costs for the Newborn Set: Garanimals	p. 441
Example 12.6	        The Microsoft Case	p. 443
        Imperfect Imitability and Industry Equilibrium	p. 446
        Chapter Summary	p. 449
        Questions	p. 450
13	    The Origins of Competitive Advantage: Innovation, Evolution, and the Environment	p. 452
        Creative Destruction	p. 454
Example 13.1	        The Sunk Cost Effect in Steel: The Adoption Of the Basic Oxygen Furnace	p. 458
        The Incentive to Innovate	p. 459
Example 13.2	        Innovation in the PBX Market	p. 461
        Innovation Competition	p. 462
        Evolutionary Economics and Dynamic Capabilities	p. 465
Example 13.3	        Organizational Adaptation in the Photolithographic Alignment Equipment Industry	p. 466
        The Environment	p. 467
Example 13.4	        The Rise of the Swiss Watch Industry	p. 470
        Managing Innovation	p. 471
Example 13.5	        Competence, History, and Geography: The Nokia Story	p. 472
        Chapter Summary	p. 473
        Questions	p. 473
14	    Agency and Performance Measurement	p. 476
        The Principal/Agent Framework	p. 477
Example 14.1	        Agency Contracts in Franchising	p. 485
Example 14.2	        Pay, Performance, and Selection at Safelite Glass	p. 487
        Costs of Tying Pay to Performance	p. 488
Example 14.3	        Market Effects in Executive Compensation	p. 497
Example 14.4	        Cardiovascular Surgery Report Cards	p. 501
        Selecting Performance Measures: Managing Tradeoffs Between Costs	p. 502
        Do Pay-for-Performance Incentives Work?	p. 505
        Chapter Summary	p. 507
        Questions	p. 508
15	    Incentives in Firms	p. 510
        Implicit Incentive Contracts	p. 510
Example 15.1	        Promotion Tournaments at General Electric	p. 517
        Incentives in Teams	p. 520
Example 15.2	        Stock Options for Middle-Level Employees	p. 524
        Career Concerns and Long-Term Employment	p. 525
Example 15.3	        Career Concerns of Mutual Fund Managers	p. 527
        Incentives and Decision Making in Organizations	p. 528
Example 15.4	        Teams and Communication in Steel Mills	p. 530
        Chapter Summary	p. 531
        Questions	p. 532
16	    Strategy and Structure	p. 534
        An Introduction to Structure	p. 535
Example 16.1	        The Division of Labor Among Seamen: 1700-1750	p. 538
Example 16.2	        ABB''s Matrix Organization	p. 544
        Contingency Theory	p. 550
Example 16.3	        Organizational Structure at AT&T	p. 554
        Structure Follows Strategy	p. 555
Example 16.4	        Strategy, Structure, and the Attempted Merger Between the University of Chicago Hospital and Michael Reese Hospital	p. 556
Example 16.5	        Samsung: Reinventing a Corporation	p. 557
Example 16.6	        Transnational Strategy and Organization Structure At SmithKline-Beecham	p. 560
Example 16.7	        WingspanBank.Com: A Network Organization	p. 562
        Chapter Summary	p. 564
        Questions	p. 565
17	    Environment, Power, and Culture	p. 567
        The Social Context of Firm Behavior	p. 567
        Internal Context	p. 568
        Power	p. 569
Example 17.1	        The Sources of Presidential Power	p. 571
Example 17.2	        Power and Poor Performance: The Case of the 1957 Mercury	p. 574
Example 17.3	        Power Shifts in the Newspaper Business	p. 576
Example 17.4	        Gary Wendt at Conseco	p. 578
        Culture	p. 579
Example 17.5	        Corporate Culture and Inertia at CPI	p. 583
Example 17.6	        Politics, Culture, and Corporate Governance	p. 584
        External Context, Institutions, and Strategies	p. 586
        Chapter Summary	p. 591
        Questions	p. 593
18	    Strategy and the General Manager	p. 594
        Introduction	p. 594
        A Historical Perspective on the General Manager	p. 595
        What Do General Managers Do?	p. 596
        Chapter Summary	p. 607
Glossary	p. 609
Name Index	p. 618
Subject Index	p. 622