CHAPTER 21
Strategy Myths
CHAPTER SUMMARY AND TEACHING OBJECTIVES
What should a firm do to be successful? Is there some strategy secret that managers need to know to
earn economic profits? The answer to that is that there are no secrets. Yet some myths continue to hang
on as sure ways to the promised land of abnormal profits.
IMPORTANT TERMS
Winner’s Curse occurs when buyers pay more for something than it is worth because they are afraid
others are bidding for the same object
Superstar effect the idea that the best performer should receive a huge payment or prize relative to the
payment to the next best performer. This raises the average performance of all players
TOPICS AND TEACHING SUGGESTIONS
1. A Firm Has to Grow to Be Successful
2. A Firm Must Be Diversified to Minimize Risk
Diversification may be an effective strategy in portfolio management but it is not necessarily
3. Leadership and CEO Compensation
CEO compensation has received much publicity. Are large compensation packages appropriate?
4. Suppressed Technologies
Does it make sense to simply design a product so it just becomes obsolete in the future and
customers must buy from you again? First, reputation matters a lot and a bad one can be very bad.
5. Globalization: Harms Developing Nations, Homogenizes Cultures, and Ensures Business
Practices are the Same
102 Chapter 21: Strategy Myths
ANSWERS TO EXERCISES
1. What are “gains from trade”? What is the primary benefit of trade? Why is the idea that trade is
beneficial counter-intuitive?
2. What is the difference between “absolute advantage” and “comparative advantage”? How can
a less developed country like Mexico have a comparative advantage relative to the US?
Absolute advantage is based on total productivity. Comparative advantage is based on
3. Mark Twain, who said, “I’m all for progress; it’s change I don’t like.” What does this mean?
4. Describe the costs and benefits of protectionism. Who gains and who loses? Why are the costs
so much more subtle/difficult to see than the benefits?
5. Explain how trade barriers can act as a hidden tax.
6. Can a country have free trade and limited immigration? Can a country engage in free trade in
capital and restricted trade in other resources?
7. Are businessmen more likely to be honest than professors? Explain
8. Explain the following statement: “Environmental quality is a luxury good.”
9. According to a recent study, “In the late 19th century, it was popular for executives to strive for
revenue maximization.” (Competitor oriented Objectives: The Myth of Market Share”, by J. Scott
Armstrong and Kesten C. Green, International Journal of Business, 12(1), 2007, p. 116. ) Explain
and demonstrate how market share and revenue maximization are related.
10. Explain why suppressed technologies are unlikely to occur in competitive markets. Use the
idea of cartels to demonstrate why a conspiracy is unlikely to exist or to last.
11. Look up “planned obsolescence” online and then make a case for and against planned
obsolescence in competitive markets.
12. Is there an economic reason that CEOs are given huge compensation packages when they are
fired? Could the reason be corruption on the part of Boards of Directors and CEOs?
13. Explain the tournament view of compensation. Would a tournament be more effective if
CEOs were hired from people working at the firm or were hired from anyone, those working
at the firm or at any other firm?
14. Would you expect to find more corruption in private businesses or in government? Explain
15. It has been proposed that executive pay should not exceed the average non-CEO pay by more
than 20 times. Is this a good proposal? Explain
16. What does the following statement mean? The problem with sweatshops is that there are not
enough of them.
17. What does homogenization of cultures mean? Is it a necessary consequence of free trade?
Explain.
18. The Kenyan economics expert James Shikwati says that aid to Africa does more harm than
good. He is an avid proponent of globalization and argues that Western development policy in
Africa is disastrous. Why would Shikwati be opposed to foreign aid and in support of free
trade?