Experience indicates that strategic alliances

This digitally-delivered textbook contains proprietary intellectual content intended solely for the use of (1) authorized instructors and (2) students or other participants that are duly registered for the ValuePak versions of either The Business Strategy Game or GLO-BUS strategy simulations, both of which have been developed and copyrighted by Glo-Bus Software, Inc.

Special Note regarding Citations Those wishing to cite any of the contents are invited to use the following source citation: Arthur A. Thompson, Strategy: Core Concepts and Analytical Approaches, 5th Edition 2018-2019 (Burr Ridge, Illinois: McGraw-Hill Education, 2016)

Copyright © 2018 by Arthur A. Thompson

Published and distributed by McGraw Hill Education Burr Ridge, Illinois

Core Concepts and Analytical Approaches

STRATEGY

Arthur A. Thompson The University of Alabama

5th Edition (2018-2019)

Table of Contents

Chapter 1 What Is Strategy and Why Is It Important? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 What Do We Mean by “Strategy”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Strategy and the Quest for Competitive Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A Company’s Strategy Is Partly Proactive and Partly Reactive . . . . . . . . . . . . . . . . . . . . . . 6 Strategy and Ethics: Passing the Test of Moral Scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Relationship Between a Company’s Strategy and Its Business Model . . . . . . . . . . . . . 8 What Makes a Strategy a Winner? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Why Crafting and Executing Strategy Are Important Tasks . . . . . . . . . . . . . . . . . . . . . . . . . 11 The Road Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Chapter 2 Charting a Company’s Long-Term Direction: Vision, Mission, Objectives, and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 What Does the Strategy-Making, Strategy-Executing Process Entail? . . . . . . . . . . . . . . . . . 14 Task 1: Developing a Strategic Vision, Mission Statement, and Set of Core Values . . . . . . 15 Task 2: Setting Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Task 3: Crafting a Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Task 4: Implementing and Executing the Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Task 5: Evaluating Performance and Initiating Corrective Adjustments . . . . . . . . . . . . . . . . 30 Corporate Governance: The Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Chapter 3 Evaluating a Company’s External Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 The Strategically Relevant Factors Influencing a Company’s External Environment . . . . . 35 Assessing a Company’s Industry and Competitive Environment . . . . . . . . . . . . . . . . . . . . . 38 Question 1: What Competitive Forces Do Industry Members Face and How Strong Are They? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Question 2: What Factors Are Driving Industry Change and What Impact Will They Have? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Question 3: What Market Positions Do Rivals Occupy—Who Is Strongly Positioned and Who Is Not? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Question 4: What Strategic Moves Are Rivals Likely to Make Next? . . . . . . . . . . . . . . . . . 63 Question 5: What Are the Key Factors For Future Competitive Success? . . . . . . . . . . . . . . 64 Question 6: Is the Industry Outlook Conducive To Good Profitability? . . . . . . . . . . . . . . . . 65 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Copyright © 2016 by Arthur A . Thompson . All rights reserved . Not for distribution .

ii

Copyright © 2016 by Arthur A . Thompson . All rights reserved . Not for distribution .

iii

Chapter 4 Evaluating a Company’s Resources and Ability to Compete Successfully . . . . . . . . . . . . . . . 68 Question 1: How Well Is the Company’s Present Strategy Working? . . . . . . . . . . . . . . . . . . 69 Question 2: What Are the Company’s Resources and Capabilities and Do They Have the Competitive Power to Enable the Company to Build and/or Sustain a Competitive Advantage Over Rivals? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Question 3: What Are the Company’s Strengths and Weaknesses and How Do They Relate to Its Market Opportunities and External Threats? . . . . . . . . . . . 78 Question 4: Are the Company’s Prices and Costs Competitive with Those of Key Rivals, and Does It Have an Appealing Customer Value Proposition? . . . . . . . 84 Question 5: Is the Company Competitively Stronger or Weaker Than Key Rivals? . . . . . . 93 Question 6: What Strategic Issues and Problems Merit Front-Burner Managerial Attention? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Chapter 5 The Five Generic Competitive Strategy Options: Which One to Employ? . . . . . . . . . . . . . . 98 The Five Generic Competitive Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Low-Cost Provider Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Broad Differentiation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Focused (or Market Niche) Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Best-Cost Provider Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Successful Competitive Strategies Are Always Underpinned by Resources and Capabilities That Allow the Strategy to Be Well-Executed . . . . . . . . . . . . . . . . . . . . . . 116 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Chapter 6 Supplementing the Chosen Competitive Strategy—Other Important Strategy Choices . . . 118 Going on the Offensive—Strategic Options to Improve a Company’s Market Position . . . 120 Defensive Strategies—Protecting Market Position and Competitive Advantage . . . . . . . . . 124 Website Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Outsourcing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Vertical Integration Strategies: Operating Across More Stages of the Industry Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Strategic Alliances and Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Merger and Acquisition Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Choosing Appropriate Functional-Area Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Timing a Company’s Strategic Moves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

Chapter 7 Strategies for Competing Internationally or Globally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Why Companies Decide to Enter Foreign Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Why Competing Across National Borders Causes Strategy Making to Be More Complex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 The Concepts of Multicountry Competition and Global Competition . . . . . . . . . . . . . . . . . 148 Strategy Options for Establishing a Competitive Presence in Foreign Markets . . . . . . . . . . 149 Competing in Foreign Markets: The Three Competitive Strategy Approaches . . . . . . . . . . 153 Building Cross-Border Competitive Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 Profit Sanctuaries and Global Strategic Offensives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Chapter 8 Diversification Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 What Does Crafting a Diversification Strategy Entail? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Choosing The Diversification Path: Related vs. Unrelated Businesses . . . . . . . . . . . . . . . . . 168 Evaluating a Diversified Company’s Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

Chapter 9 Strategy, Ethics, and Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 What Do We Mean by Business Ethics? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Where Do Ethical Standards Come From? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 The Three Categories of Management Morality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 What Are the Drivers of Unethical Strategies and Business Behavior? . . . . . . . . . . . . . . . . 199 Why Should Company Strategies Be Ethical? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Strategy, Social Responsibility, and Corporate Citizenship . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Chapter 10 Building an OrganizationCapable of Good Strategy Execution . . . . . . . . . . . . . . . . . . . . . . . . 210 A Framework for Executing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Building an Organization Capable of Good Strategy Execution: Three Key Actions . . . . . 214 Staffing The Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 Developing and Strengthening Execution-Critical Resources and Capabilities . . . . . . . . . . 217 Structuring the Organization and Work Effort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Chapter 11 Managing Internal Operations: Actions That Promote Good Strategy Execution . . . . . . . . . 232 Steering Needed Resources to Execution-Critical Activities . . . . . . . . . . . . . . . . . . . . . . . . . 233 Ensuring That Policies and Procedures Facilitate Strategy Execution . . . . . . . . . . . . . . . . . 234 Adopting Best Practices and Employing Process Management Tools to Improve Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Installing Information and Operating Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 Tying Rewards and Incentives Directly to Achieving Good Execution- Critical Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

Chapter 12 Corporate Culture and Leadership—Keys to Good Strategy Execution . . . . . . . . . . . . . . . . 247 Instilling a Corporate Culture That Promotes Good Strategy Execution . . . . . . . . . . . . . . . 248 Leading the Strategy Execution Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

Copyright © 2016 by Arthur A . Thompson . All rights reserved . Not for distribution .

iv

Chapter 1 What Is Strategy and Why Is It Important? 1

Copyright © 2018 by Arthur A. Thompson. All rights reserved. Not for distribution.

Strategy: Core Concepts and Analytical Approaches

An e-book published by McGraw-Hill Education, Burr Ridge, IL

Arthur A. Thompson, The University of Alabama 5th Edition, 2018-2019

CHAPTER 1

What Is Strategy and Why Is It Important?

Strategy means making clear-cut choices about how to compete. —Jack Welch, former CEO, General Electric

Without a strategy the organization is like a ship without a rudder. —Joel Ross and Michael Kami

If your firm’s strategy can be applied to any other firm, you don’t have a very good one. —David J. Collis and Michael G. Rukstad

Managers of all types of businesses face three central questions: What’s our company’s present situation? What should the company’s future direction be and what performance targets should we set? What’s our plan for running the company and producing good results? Arriving at a thoughtful and probing answer to the question “What’s our company’s present situation?” prompts managers to evaluate industry conditions and competitive pressures, the company’s current market standing, its competitive strengths and weaknesses, and its future prospects in light of changes taking place in the business environment. The question “What should the company’s future direction be and what performance targets should we set?” pushes managers to consider what emerging buyer needs to try to satisfy, which growth opportunities to emphasize and which existing markets to de-emphasize or even abandon, where the company should be headed, and what outcomes the company should strive to achieve with respect to both its financial performance and its performance in the markets where it competes. The question “What’s our plan for running the company and producing good results?” challenges managers to craft a series of competitive moves and business approaches—what henceforth will be referred to as the company’s strategy—for heading the company in the intended direction, staking out a market position, attracting customers, and achieving the targeted financial and market performance.

The role of this chapter is to define the concept of strategy, identify the kinds of actions that determine what a company’s strategy is, introduce you to the concept of competitive advantage, and explore the tight linkage between a company’s strategy and its quest for competitive advantage. We will also explain why company strategies are partly proactive and partly reactive, why they evolve over time, and the relationship between a company’s strategy and its business model. We will conclude the chapter with a discussion of what sets a winning strategy apart from a ho-hum or flawed strategy and why the caliber of a company’s strategy determines whether it will enjoy a competitive advantage or be burdened by competitive disadvantage. By the end of the chapter, you will have a clear idea of why the tasks of crafting and executing strategy are core management functions and why excellent execution of an excellent strategy is the most reliable recipe for turning a company into a standout performer.

1

Copyright © 2018 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 1 • What Is Strategy and Why Is It Important? 2

What Do We Mean by “Strategy”?

A company’s strategy is defined by the specific market positioning, competitive moves, and business approaches that form management’s answer to “What’s our plan for running the company and producing good results?” A strategy represents managerial commitment to undertake one set of actions rather than another in an effort to compete successfully and achieve good performance outcomes.1 This commitment incorporates a coherent collection of choices and decisions about:

n How to attract and please customers.

n How to compete against rivals—and, ideally, gain a competitive advantage as opposed to being hamstrung by competitive disadvantage.

n How to position the company in the marketplace vis-à-vis rivals.

n How to pursue attractive opportunities to grow the business.

n How best to respond to changing economic and market conditions.

n How to manage each functional piece of the business (e.g., R&D, supply chain activities, production, sales and marketing, distribution, finance, and human resources).

n How to achieve the company’s performance targets.

In effect, when managers craft a company’s strategy, they are saying, “Among the many different business approaches and ways of competing we could have chosen, we have decided to employ this particular combination of competitive and operating approaches in moving the company in the intended direction, strengthening its market position and competitiveness, and meeting or beating our performance objectives.” Choosing among the various alternative hows is often tough, involving difficult trade- offs and sometimes high risk. But that is no excuse for company managers failing to decide upon a concrete course of action that spells out “This is the strategic path we are going to take and here’s what we are going to do to pursue competitive success in the marketplace and achieve good business results.”2

In most industries, company managers have considerable leeway in choosing the hows of strategy. For example, managers may see a promising opportunity for the company to compete against rivals by striving to keep costs low and selling products/services at attractively low prices. Often, there is room for a company to pursue competitive success by offering buyers more features, better performance, longer durability, more personalized customer service, and/or quicker delivery. Many companies strive to gain a competitive edge over rivals via cutting-edge technological features, longer warranties, clever advertising, better brand-name recognition, or the development of competencies and capabilities rivals cannot match. But it is foolhardy to pursue all of these options simultaneously in an attempt to be all things to all buyers. Choices of how best to compete against rivals have to be made in light of the firm’s resources and capabilities and in light of the competitive approaches rival companies are employing.

Likewise, there are all kinds of market-positioning options.3 Some companies target the high end of the market, whereas others go after the middle or low end. Some position themselves to compete in many market segments, endeavoring to attract many types of buyers with a wide variety of models and styles; other companies focus on a single market segment, with product offerings specifically

CORE CONCEPT A company’s strategy consists of the competitive moves and business approaches that managers employ to attract and please customers, compete successfully, capitalize on opportunities to grow the business, respond to changing market conditions, conduct operations, and achieve the targeted financial and market performance.

There’s no one roadmap or prescription for running a business in a successful manner. Many different avenues exist for competing successfully, staking out a market position, and operating the different pieces of a business.

Copyright © 2018 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 1 • What Is Strategy and Why Is It Important? 3

designed to meet the needs and preferences of a particular buyer type or buyer demographic. Some companies position themselves in only one part of the industry’s chain of production/distribution activities (preferring to be only in manufacturing or wholesale distribution or retailing), whereas others are partially or fully integrated, with operations ranging from components production to manufacturing and assembly to wholesale distribution to retailing. Some companies confine their operations to local or regional markets; others opt to compete nationally, internationally (in several countries), or globally (in all or most of the major country markets worldwide). Some companies decide to operate in only one industry, whereas others diversify broadly or narrowly into related or unrelated industries via acquisitions, joint ventures, strategic alliances, or starting up new businesses internally.

Strategy Is About Competing Differently Mimicking the strategies of successful industry rivals—with either copycat product offerings or maneuvers to stake out the same market position—rarely works. The best performing strategies are aimed at competing differently. This does not mean that the key elements of a company’s strategy have to be 100 percent different but rather that they must differ in at least some important respects. A strategy stands a better chance of succeeding when it is predicated on actions, business approaches, and competitive moves aimed at (1) appealing to buyers in ways that set a company apart from its rivals—particularly when it comes to doing what rivals don’t do or can’t do and (2) staking out a market position that is not crowded with strong competitors. Really successful strategies often contain some distinctive “a-ha!” quality that goes beyond merely attracting buyer attention but that, more importantly, delivers what buyers perceive as superior value and converts them into loyal customers. Indeed, the more a strategy is aimed at competing differently in ways that deliver superior value to buyers, the more likely the strategy will produce a valuable competitive edge over rivals.4

Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are the actions and moves in the marketplace that managers are taking to gain a competitive advantage over rivals. A company achieves a competitive advantage whenever it has some type of edge over rivals in attracting buyers and coping with competitive forces. There are many routes to competitive advantage, but they all involve providing buyers with what they perceive as superior value compared to the offerings of rival sellers. Superior value can mean a good product at a lower price, a superior product that is worth paying more for, or a best-value offering that represents an appealing combination of features, quality, service, and other attributes at an attractively low price. Five of the most frequently used and dependable strategic approaches to setting a company apart from rivals, delivering superior value, achieving competitive advantage, and converting buyers into loyal customers are:

1. Striving to be the industry’s low-cost provider, thereby aiming for a cost-based competitive advantage over rivals. Walmart and Southwest Airlines have earned strong market positions because of the low-cost advantages they have achieved over their rivals and their consequent ability to underprice competitors. Achieving lower costs than rivals can produce a durable competitive edge when rivals find it hard to match the low-cost leader’s approaches to driving costs out of the business.

2. Outcompeting rivals based on such differentiating features as higher quality, wider product selection, added performance, value-added services, more attractive styling, technological superiority, or some other attributes that set a company’s product offering apart from those of rivals. Successful adopters of differentiation strategies include Apple (innovative products), Johnson & Johnson in baby products (product reliability), Chanel and Rolex (top-of-the-line prestige), and Mercedes and BMW (engineering design and performance). Differentiation strategies can be powerful as long as a company is sufficiently innovative to thwart the efforts of clever rivals to copy or closely imitate its product offering and means of delivering superior value.

A creative, distinctive strategy that sets a company apart from rivals and delivers superior value to customers is a company’s most reliable ticket for winning a competitive advantage over rivals.

Copyright © 2018 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 1 • What Is Strategy and Why Is It Important? 4

3. Offering more value for the money. Giving customers more value for their money by meeting or beating buyers’ expectations regarding key quality/features/performance/service attributes while beating their price expectations is known as a best-cost provider strategy. This approach is a hybrid strategy that blends elements of the previous approaches. Toyota employs a best-cost provider strategy for its Lexus line of motor vehicles, as does Honda for its Acura line of cars and SUVs. Many consumers shop at L.L. Bean because of the good value it delivers: products with appealing quality/performance/features/ styling and attractively low prices. Likewise, Amazon.com has been highly successful in attracting customers with its more-value-for-the-money combination of appealing prices, wide selection, free shipping, extensive product information and reviews, and online shopping convenience.

4. Focusing on a narrow market niche and winning a competitive edge by doing a better job than rivals of serving the special needs and tastes of buyers that compose the niche. Prominent companies that enjoy competitive success in a specialized market niche include eBay in online auctions, Jiffy Lube International in quick oil changes, and The Weather Channel in cable TV.

5. Developing expertise and resource strengths that give the company competitive capabilities that rivals can’t easily imitate or trump with capabilities of their own. FedEx has superior capabilities in next- day delivery of small packages. Walt Disney has hard-to-beat capabilities in theme park management and family entertainment. Apple has formidable capabilities in innovative product design. Ritz-Carlton and Four Seasons have uniquely strong capabilities in providing their hotel guests with an array of personalized services. Hyundai has become the world’s fastest-growing automaker as a result of its advanced manufacturing processes and unparalleled quality control systems. Very often, winning a durable competitive edge over rivals hinges more on building competitively valuable expertise and capabilities than it does on having a distinctive product. Clever rivals can nearly always copy the attributes of a popular or innovative product, but for rivals to match experience, know-how, and specialized competitive capabilities that a company has developed and perfected over a long period of time is substantially harder to duplicate and takes much longer.

Forging a strategy that produces a competitive advantage has great appeal because it enhances a company’s financial performance. A company is almost certain to earn significantly higher profits when it enjoys a competitive advantage as opposed to when it competes with no advantage or is hamstrung by competitive disadvantage. Competitive advantage is the key to above-average profitability and financial performance because strong buyer preferences for a company’s products or services translate into higher sales volumes (Walmart) and/or the ability to command a higher price (Häagen-Dazs), which in turn tend to improve earnings, return on investment, and other important financial outcomes. Furthermore, if a company’s competitive edge holds promise for being sustainable (as opposed to just temporary), then so much the better for both the strategy and the company’s future profitability. What makes a competitive advantage sustainable (or durable) as opposed to temporary are actions and elements in the strategy that cause an attractive number of buyers to have lasting reasons to purchase a company’s products or services, despite competitors’ best efforts to nullify or overcome those reasons.

The tight connection between competitive advantage and profitability means the quest for sustainable competitive advantage always ranks center stage in crafting a strategy. The key to crafting a competitively powerful strategy hinges on incorporating one or more differentiating strategy elements that act as a magnet to draw customers and give them durable reasons to prefer its products or services. Indeed, what separates a powerful strategy from a run-of-the-mill or ineffective one is management’s ability to forge a series of moves, both in the marketplace and

CORE CONCEPT A company achieves competitive advantage when an attractive number of buyers are drawn to purchase its products or services rather than those of competitors. A company achieves sustainable competitive advantage when the basis for buyer preferences for its product offering relative to the offerings of its rivals is durable, despite competitors’ efforts to nullify or overcome the appeal of its product offering.

Copyright © 2018 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 1 • What Is Strategy and Why Is It Important? 5

internally, which tilts the playing field in the company’s favor and produces a sustainable competitive advantage over rivals. The bigger and more sustainable the competitive advantage, the better a company’s prospects for winning in the marketplace and earning superior long-term profits relative to its rivals. Without a strategy that leads to competitive advantage, a company risks being outcompeted by stronger rivals and/or handcuffed by mediocre success in the marketplace and uninspiring financial results.

Identifying a Company’s Strategy The best indicators of a company’s strategy are its actions in the marketplace and senior managers’ statements about the company’s current business approaches, future plans, and efforts to strengthen its competitiveness and performance. Figure 1.1 shows what to look for in identifying the key elements of a company’s strategy.

Once it is clear what to consider, the task of identifying a company’s strategy is mainly one of researching the company’s actions in the marketplace and its business approaches. In the case of publicly owned enterprises, senior executives often openly discuss the strategy in the company’s annual report and 10-K report, in press releases and company news (posted on the company’s website), and in the information provided to investors on the company’s website. To maintain the confidence of investors and Wall Street, most public companies are fairly open about their strategies. Company executives typically lay out key elements of their strategies in presentations to securities analysts (portions of which are usually posted in the investor relations section of the company’s website), and stories in the business media about the company often include aspects of the company’s strategy. Hence, except for some about-to-be-launched moves and changes that remain under wraps and in the planning stage, there’s usually nothing secret or undiscoverable about a company’s present strategy.

Figure 1.1 Identifying a Company’s Strategy—What to Look For

Actions to upgrade, build, or acquire competitively valuable capabilities and to correct competitive weaknesses

Actions to diversify the com- pany’s revenues and earnings by entering new businesses

Actions to gain sales and market share via more performance features, more appealing design, better quality or customer service, wider product selection, a stronger network of dealers/distributors, lower prices (based on lower costs), or other such actions

Actions to respond/adjust to changing market and competitive conditions or other external factors

Actions and approaches used in managing R&D, production, sales and marketing, finance, and other key activities

Actions to enter new geographic or product markets or to exit existing ones

Actions to capture emerging market opportunities and defend against external threats to the company’s business prospects

Actions to strengthen market standing and competitiveness by acquiring or merging with other companies

Actions to strengthen competitiveness via strategic alliances and collaborative partnerships

The Pattern of Actions and

Business Approaches that Define a Company’s

Strategy

Copyright © 2018 by Arthur A. Thompson. All rights reserved. Not for distribution.

Chapter 1 • What Is Strategy and Why Is It Important? 6

Why a Company’s Strategy Evolves Over Time All companies, sooner or later, find it necessary to modify aspects of their strategy in response to changing market conditions, advancing technology, the fresh moves of competitors, shifting buyer needs and preferences, emerging market opportunities, new ideas for improving the strategy, and/or mounting evidence that the strategy is not working well. Most of the time, a company’s strategy evolves incrementally from management’s ongoing efforts to fine-tune this or that piece of the strategy and to adjust certain strategy elements in response to new learning and unfolding events.5 However, on occasion, major strategy shifts are called for, such as when a strategy is clearly failing and the company faces a financial crisis, when market conditions or buyer preferences change significantly, or when important technological breakthroughs occur (as in medical devices and shale fracking). In some industries, conditions change at a fairly slow pace, making it feasible for the major components of a good strategy to remain in place for long periods. But in industries like smartphones, medical devices, computer chips and genetic engineering where market conditions and technology change frequently and in sometimes dramatic ways, the life cycle of a given strategy is short. It is not uncommon for companies in high-velocity environments to overhaul key elements of their strategies several times a year or even to “reinvent” how they intend to compete differently from rivals and deliver superior value to customers.6