Harlequin enterprises the mira decision case study

Strategic Management and Competitive Advantage Concepts and Cases fifTH ediTion

 Jay B. Barney • William S. Hesterly

This is a special edition of an established title widely  used by colleges and universities throughout the world.  Pearson published this exclusive edition for the benefit  of students outside the United States and Canada. If you  purchased this book within the United States or Canada  you should be aware that it has been imported without  the approval of the Publisher or Author.

Pearson Global Edition

GlobAl ediTion

GlobAl ediTion

For these Global Editions, the editorial team at Pearson has  collaborated with educators across the world to address a wide  range of subjects and requirements, equipping students with the best possible learning tools. This Global Edition preserves the cutting-edge  approach and pedagogy of the original, but also features alterations,  customization, and adaptation from the North American version.

barney H esterly

fifT H

ed

iT io

n Strategic M

anagem ent and C

om petitive A

dvantage Concepts and Cases

G lo

b A

l ed

iT io

n

Whatever your course goals, we’ve got you covered!

Use MyManagementLab® to improve student results!

• Study Plan – Help students build a basic understanding of key concepts. Students start by taking a pretest to gauge initial understanding of key concepts. Upon completion, they receive a personalized path of study based on the areas where they would benefit from additional study and practice.

• Business Today – Bring current events alive in your classroom with videos, discussion questions, and author blogs. Be sure to check back often; this section changes daily.

• Decision-making Simulations – Place your students in the role of a key decision-maker, where they are asked to make a series of decisions. The simulation will change and branch based on the decisions students make, providing a variation of scenario paths. Upon completion of each simulation, students receive a grade, as well as a detailed report of the choices they made during the simulation and the associated consequences of those decisions.

• Dynamic Study Modules – Through adaptive learning, students get personalized guidance where and when they need it most, creating greater engagement, improving knowledge retention, and supporting subject-matter mastery. Ultimately, students’ self-confidence increases and their results improve. Also available on mobile devices.

• Writing Space – Better writers make great learners—who perform better in their courses. Providing a single location to develop and assess concept mastery and critical thinking, the Writing Space offers assisted graded and create-your-own writing assignments, enabling you to exchange personalized feedback with students, quickly and easily.

Writing Space can also check students’ work for improper citation or plagiarism by comparing it against the world’s most accurate text comparison database, available from Turnitin.

http://www.pearsonmylabandmastering.com

What’s Out? Models, concepts, and topics that don’t pass a simple test: “Does this help students analyze cases and real business situations?”

What’s In? “VRIO” – an integrative framework (see next page for details).

■ Broad enough to apply in analyzing a variety of cases and real business settings.

■ Simple enough to understand and teach.

V R I O

V R I O

V R I O

V R I O

The Results? Provides students with the tools they need to do strategic analysis. Nothing more. Nothing less.

A01_BARN0088_05_GE_FM.INDD 1 13/09/14 3:08 PM

What Is It? This book is not just a list of concepts, models, and theories. It is the first undergraduate textbook to introduce a theory-based, multi-chapter organizing framework to add additional structure to the field of strategic management.

“VRIO” is a mechanism that integrates two existing theoretical frameworks: the positioning perspective and the resource-based view. It is the primary tool for accomplishing internal analysis. It stands for four questions one must ask about a resource or capability to determine its competitive potential:

1. The Question of Value: Does a resource enable a firm to exploit an environmental opportunity, and/or neutralize an environmental threat?

2. The Question of Rarity: Is a resource currently controlled by only a small number of competing firms?

3. The Question of Imitability: Do firms without a resource face a cost disadvantage in obtaining or developing it?

4. The Question of Organization: Are a firm’s other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources?

What’s the Benefit of the VRIO Framework? The VRIO framework is the organizational foundation of the text. It creates a decision-making framework for students to use in analyzing case and business situations.

Students tend to view concepts, models, and theories (in all of their coursework) as fragmented and disconnected. Strategy is no exception. This view encourages rote memorization, not real understanding. VRIO, by serv- ing as a consistent framework, connects ideas together. This encourages real understanding, not memorization.

This understanding enables students to better analyze business cases and situations—the goal of the course.

The VRIO framework makes it possible to discuss the formulation and implementation of a strategy simultaneously, within each chapter.

Because the VRIO framework provides a simple integrative structure, we are actually able to address issues in this book that are largely ignored elsewhere—including discussions of vertical integration, outsourcing, real options logic, and mergers and acquisitions, to name just a few.

“Value. Rarity. Imitability. Organization.”

A01_BARN0088_05_GE_FM.INDD 2 13/09/14 3:08 PM

5 E d i t i o n

Jay B. Barney t he University of Utah

William S. Hesterly t he University of Utah

Strategic Management and Competitive Advantage

Concepts and Cases Global Edition

Boston Columbus Hoboken Indianapolis New York San Francisco Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto

Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

A01_BARN0088_05_GE_FM.INDD 3 13/09/14 3:08 PM

Editor in Chief: Stephanie Wall Head of Learning Asset Acquisition, Global Editions: Laura Dent Acquisitions Editor: Daniel Tylman Program Management Lead: Ashley Santora Program Manager: Sarah Holle Editorial Assistant: Linda Albelli Acquisitions Editor, Global Editions: Vrinda Malik Senior Project Editor, Global Editions: Vaijyanti VP, Marketing: Maggie Moylan Product Marketing Manager: Anne Fahlgren Field Marketing Manager: Lenny Raper

Strategic Marketing Manager: Erin Gardner Project Management Lead: Judy Leale Project Manager: Karalyn Holland Senior Manufacturing Production Controller, Global Editions: Trudy Kimber Media Production Manager, Global Editions: M Vikram Kumar Procurement Specialist: Michelle Klein Cover Designer: Lumina Datamatics Interior Illustrations: Gary Hovland Cover Art: ©John T Takai/Shutterstock Full-Service Project Management, Interior Design, Composition: Integra

Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text.

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England

and Associated Companies throughout the world

Visit us on the World Wide Web at: www.pearsonglobaleditions.com

© Pearson Education Limited 2015

The rights of Jay B. Barney and William S. Hesterly to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.

Authorized adaptation from the United States edition, entitled Strategic Management and Competitive Advantage: Concepts and Cases, 5th edition, ISBN 978-0-13-312740-9, by Jay B. Barney and William S. Hesterly, published by Pearson Education © 2015.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.

All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners.

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library

10 9 8 7 6 5 4 3 2 1 15 14 13 12 11

ISBN 10: 1-292-06008-5 ISBN 13: 978-1-292-06008-8

Typeset in 10/12 Palatino LT Std Roman by Integra

Printed by Courier Kendallville in the United States of America

A01_BARN0088_05_GE_FM.INDD 4 13/09/14 3:08 PM

This book is dedicated to my family: my wife, Kim; our children, Lindsay, Kristian, and Erin, and their spouses; and, most of all, our nine grandchildren, Isaac, Dylanie, Audrey, Chloe, Lucas, Royal, Lincoln, Nolan, and Theo. They all help me remember that no suc- cess could compensate for failure in the home.

Jay B. Barney Salt Lake City, Utah

This book is for my family who has taught me life’s greatest lessons about what matters most. To my wife, Denise; my daughters, sons, and their spouses: Lindsay, Matt, Jessica, John, Alex, Brittany, Austin, Julia, Ian, and Drew.; and my grandchildren, Ellie, Owen, Emerson, Cade, Elizabeth, Amelia, Eden, Asher, Lydia, and Scarlett.

William Hesterly Salt Lake City, Utah

A01_BARN0088_05_GE_FM.INDD 5 13/09/14 3:08 PM

A01_BARN0088_05_GE_FM.INDD 6 13/09/14 3:08 PM

7

Brief Contents

Part 1: The ToolS of STrATegiC AnAlySiS

C H a p t E r 1 What Is Strategy and the Strategic Management Process? 24 C H a p t E r 2 Evaluating a Firm’s External Environment 48 C H a p t E r 3 Evaluating a Firm’s Internal Capabilities 84

End-of-Part 1 Cases PC 1–1

Part 2: BuSineSS-level STrATegieS

C H a p t E r 4 Cost Leadership 122 C H a p t E r 5 Product Differentiation 150

End-of-Part 2 Cases PC 2–1

Part 3: CorporATe STrATegieS

C H a p t E r 6 Vertical Integration 182 C H a p t E r 7 Corporate Diversification 208 C H a p t E r 8 Organizing to Implement Corporate Diversification 240 C H a p t E r 9 Strategic Alliances 268 C H a p t E r 1 0 Mergers and Acquisitions 296 C H a p t E r 1 1 International Strategies 328

End-of-Part 3 Cases PC 3–1

Appendix: Analyzing Cases and Preparing for Class Discussions 365 Glossary 369 Company Index 377 Name Index 380 Subject Index 385

A01_BARN0088_05_GE_FM.INDD 7 13/09/14 3:08 PM

A01_BARN0088_05_GE_FM.INDD 8 13/09/14 3:08 PM

9

Contents

Part 1: The ToolS of STrATegiC AnAlySiS

C H a p t E r 1 What Is Strategy and the Strategic Management Process? 24

Opening Case: Why Are These Birds So Angry? 24

Strategy and the Strategic Management process 26 Defining Strategy 26 The Strategic Management Process 26

What is Competitive a dvantage? 30 Research Made Relevant: How Sustainable Are

Competitive Advantages? 32

t he Strategic Management process, r evisited 32

Measuring Competitive a dvantage 33 Accounting Measures of Competitive Advantage 33 Strategy in Depth: The Business Model Canvas 34 Economic Measures of Competitive Advantage 38

The Relationship Between Economic and Accounting Performance Measures 40

Emergent Versus intended Strategies 40 Ethics and Strategy: Stockholders Versus Stakeholders 42 Strategy in the Emerging Enterprise: Emergent Strategies

and Entrepreneurship 43

Why You need to Know a bout Strategy 44

Summary 44 Challenge Questions 45 Problem Set 46 End Notes 47

C H a p t E r 2 Evaluating a Firm’s External Environment 48

Opening Case: iTunes and the Streaming Challenge 48

Understanding a Firm’s General Environment 50

t he Structure-Conduct-performance Model of Firm performance 53

Ethics and Strategy: Is a Firm Gaining a Competitive Advantage Good for Society? 54

a Model of Environmental t hreats 55 Threat from New Competition 56 Strategy in Depth: Environmental Threats

and the S-C-P Model 57 Threat from Existing Competitors 62 Threat of Substitute Products 63 Threat of Supplier Leverage 64 Threat from Buyers’ Influence 65 Environmental Threats and Average Industry

Performance 66 Another Environmental Force: Complementors 67

Research Made Relevant: The Impact of Industry and Firm Characteristics on Firm Performance 69

industry Structure and Environmental o pportunities 69

Opportunities in Fragmented Industries: Consolidation 70

Opportunities in Emerging Industries: First-Mover Advantages 71

Opportunities in Mature Industries: Product Refinement, Service, and Process Innovation 73

Strategy in the Emerging Enterprise: Microsoft Grows Up 75

Opportunities in Declining Industries: Leadership, Niche, Harvest, and Divestment 76

Summary 78 Challenge Questions 80 Problem Set 80 End Notes 81

A01_BARN0088_05_GE_FM.INDD 9 13/09/14 3:08 PM

10 Contents

C H a p t E r 3 Evaluating a Firm’s Internal Capabilities 84

Opening Case: When a Noun Becomes a Verb 84

t he r esource-Based View of the Firm 86 What Are Resources and Capabilities? 86 Critical Assumptions of the Resource-Based View 87 Strategy in Depth: Ricardian Economics and the

Resource-Based View 88

t he Vrio Framework 88 The Question of Value 89 Strategy in the Emerging Enterprise: Are Business

Plans Good for Entrepreneurs? 91 Ethics and Strategy: Externalities and the Broader

Consequences of Profit Maximization 93 The Question of Rarity 94 The Question of Imitability 95 The Question of Organization 100 Research Made Relevant: Strategic Human Resource

Management Research 101

a pplying the Vrio Framework 103 Applying the VRIO Framework to Southwest

Airlines 104

imitation and Competitive d ynamics in an industry 106

Not Responding to Another Firm’s Competitive Advantage 107

Changing Tactics in Response to Another Firm’s Competitive Advantage 108

Changing Strategies in Response to Another Firm’s Competitive Advantage 110

implications of the r esource-Based View 110 Where Does the Responsibility for Competitive

Advantage in a Firm Reside? 110 Competitive Parity and Competitive Advantage 112 Difficult-to-Implement Strategies 112 Socially Complex Resources 113 The Role of Organization 114

Summary 114 Challenge Questions 116 Problem Set 116 End Notes 117

End-of-part 1 Cases

Case 1–1: You Say You Want a Revolution: SodaStream International PC 1–1

Case 1–2: True Religion Jeans: Will Going Private Help It Regain Its Congregation? PC 1–11

Case 1–3: Wal-Mart Stores, Inc. PC 1–32 Case 1–4: Harlequin Enterprises: The Mira

Decision PC 1–46

Part 2: BuSineSS-level STrATegieS

C H a p t E r 4 Cost Leadership 122

Opening Case: The World’s Lowest-Cost Airline 122

What is Business-Level Strategy? 124

What is Cost Leadership? 124 Sources of Cost Advantages 124 Research Made Relevant: How Valuable Is Market

Share—Really? 131 Ethics and Strategy: The Race to the Bottom 133

t he Value of Cost Leadership 133 Cost Leadership and Environmental Threats 134 Strategy in Depth: The Economics of Cost Leadership 135

Cost Leadership and Sustained Competitive a dvantage 136

The Rarity of Sources of Cost Advantage 136 The Imitability of Sources of Cost Advantage 137

A01_BARN0088_05_GE_FM.INDD 10 13/09/14 3:08 PM

Contents 11

o rganizing to implement Cost Leadership 141 Strategy in the Emerging Enterprise: The Oakland A’s:

Inventing a New Way to Play Competitive Baseball 142 Organizational Structure in Implementing Cost

Leadership 143 Management Controls in Implementing Cost

Leadership 145

Compensation Policies and Implementing Cost Leadership Strategies 146

Summary 146 Challenge Questions 147 Problem Set 148 End Notes 149

C H a p t E r 5 Product Differentiation 150

Opening Case: Who Is Victoria, and What Is Her Secret? 150

What is product d ifferentiation? 152 Bases of Product Differentiation 153 Research Made Relevant: Discovering the Bases of Product

Differentiation 155 Product Differentiation and Creativity 158

t he Value of product d ifferentiation 159 Product Differentiation and Environmental

Threats 159 Strategy in Depth: The Economics of Product

Differentiation 160 Product Differentiation and Environmental

Opportunities 161

product d ifferentiation and Sustained Competitive a dvantage 162

Rare Bases for Product Differentiation 162 Ethics and Strategy: Product Claims and the Ethical

Dilemmas in Health Care 163 The Imitability of Product Differentiation 164

o rganizing to implement product differentiation 169 Organizational Structure and Implementing Product

Differentiation 170 Management Controls and Implementing Product

Differentiation 170 Strategy in the Emerging Enterprise: Going in Search

of Blue Oceans 171 Compensation Policies and Implementing Product

Differentiation Strategies 174

Can Firms implement product d ifferentiation and Cost Leadership Simultaneously? 174

No: These Strategies Cannot Be Implemented Simultaneously 175

Yes: These Strategies Can Be Implemented Simultaneously 176

Summary 177 Challenge Questions 178 Problem Set 179 End Notes 180

End-of-part 2 Cases

Case 2–1: Airasia X: Can the Low Cost Model go Long Haul? PC 2–1

Case 2–2: Ryanair—The Low Fares Airline: Whither Now? PC 2–17

Case 2–3: The Levi’s Personal Pair Proposal PC 2–43 Case 2–4: Papa John’s International, Inc. PC 2–53

A01_BARN0088_05_GE_FM.INDD 11 13/09/14 3:08 PM

12 Contents

Part 3: CorporATe STrATegieS

C H a p t E r 6 Vertical Integration 182

Opening Case: Outsourcing Research 182

What is Corporate Strategy? 184

What is Vertical integration? 184

t he Value of Vertical integration 185 Strategy in Depth: Measuring Vertical Integration 186 Vertical Integration and the Threat of

Opportunism 187 Vertical Integration and Firm Capabilities 189 Vertical Integration and Flexibility 190 Applying the Theories to the Management of Call

Centers 192 Research Made Relevant: Empirical Tests of Theories

of Vertical Integration 192 Integrating Different Theories of Vertical

Integration 194

Vertical integration and Sustained Competitive a dvantage 194

The Rarity of Vertical Integration 195

Ethics and Strategy: The Ethics of Outsourcing 195 The Imitability of Vertical Integration 197

o rganizing to implement Vertical integration 198 Organizational Structure and Implementing Vertical

Integration 198 Strategy in the Emerging Enterprise: Oprah, Inc. 199 Management Controls and Implementing Vertical

Integration 200 Compensation in Implementing Vertical Integration

Strategies 201

Summary 203 Challenge Questions 205 Problem Set 205 End Notes 206

C H a p t E r 7 Corporate Diversification 208

Opening Case: The Worldwide Leader 208

What is Corporate d iversification? 210 Types of Corporate Diversification 210 Limited Corporate Diversification 211 Related Corporate Diversification 212 Unrelated Corporate Diversification 213

t he Value of Corporate d iversification 213 What Are Valuable Economies of Scope? 213 Research Made Relevant: How Valuable Are Economies

of Scope, on Average? 214 Strategy in the Emerging Enterprise: Gore-Tex and Guitar

Strings 221 Can Equity Holders Realize These Economies of Scope

on Their Own? 229

Ethics and Strategy: Globalization and the Threat of the Multinational Firm 230

Corporate d iversification and Sustained Competitive a dvantage 231

Strategy in Depth: Risk-Reducing Diversification and a Firm’s Other Stakeholders 232

The Rarity of Diversification 233 The Imitability of Diversification 234

Summary 235 Challenge Questions 236 Problem Set 236 End Notes 238

A01_BARN0088_05_GE_FM.INDD 12 13/09/14 3:08 PM

Contents 13

C H a p t E r 8 Organizing to Implement Corporate Diversification 240

Opening Case: And Then There Is Berkshire Hathaway 240

o rganizational Structure and implementing Corporate d iversification 242

The Board of Directors 243 Strategy in Depth: Agency Conflicts Between Managers

and Equity Holders 245 Research Made Relevant: The Effectiveness of Boards

of Directors 246 Institutional Owners 247 The Senior Executive 248 Corporate Staff 249 Division General Manager 251 Shared Activity Managers 252

Management Controls and implementing Corporate d iversification 253

Evaluating Divisional Performance 254

Allocating Corporate Capital 257 Transferring Intermediate Products 258 Strategy in the Emerging Enterprise: Transforming Big

Business into Entrepreneurship 261

Compensation policies and implementing Corporate d iversification 262

Ethics and Strategy: Do CEOs Get Paid Too Much? 262

Summary 264 Challenge Questions 264 Problem Set 265 End Notes 266

C H a p t E r 9 Strategic Alliances 268

Opening Case: Breaking Up Is Hard to Do: Apple and Samsung 268

What is a Strategic a lliance? 270

How do Strategic a lliances Create Value? 271 Strategic Alliance Opportunities 271 Strategy in Depth: Winning Learning Races 274 Research Made Relevant: Do Strategic Alliances

Facilitate Tacit Collusion? 277

a lliance t hreats: incentives to Cheat on Strategic a lliances 278

Adverse Selection 279 Moral Hazard 279 Holdup 280 Strategy in the Emerging Enterprise: Disney and Pixar 281

Strategic a lliances and Sustained Competitive a dvantage 282

The Rarity of Strategic Alliances 282

The Imitability of Strategic Alliances 283 Ethics and Strategy: When It Comes to Alliances,

Do “Cheaters Never Prosper”? 284

o rganizing to implement Strategic a lliances 287

Explicit Contracts and Legal Sanctions 288 Equity Investments 288 Firm Reputations 289 Joint Ventures 290 Trust 291

Summary 292 Challenge Questions 293 Problem Set 293 End Notes 294

A01_BARN0088_05_GE_FM.INDD 13 13/09/14 3:08 PM

14 Contents

C H a p t E r 1 0 Mergers and Acquisitions 296

Opening Case: The Google Acquisition Machine 296

What a re Mergers and a cquisitions? 298

t he Value of Mergers and a cquisitions 299 Mergers and Acquisitions: The Unrelated Case 299 Mergers and Acquisitions: The Related Case 300

What does r esearch Say a bout r eturns to Mergers and a cquisitions? 304

Strategy in the Emerging Enterprise: Cashing Out 305 Why Are There So Many Mergers and Acquisitions? 306 Strategy in Depth: Evaluating the Performance Effects

of Acquisitions 308

Mergers and a cquisitions and Sustained Competitive a dvantage 309

Valuable, Rare, and Private Economies of Scope 310 Valuable, Rare, and Costly-to-Imitate Economies

of Scope 311

Unexpected Valuable Economies of Scope Between Bidding and Target Firms 312

Implications for Bidding Firm Managers 312 Implications for Target Firm Managers 317

o rganizing to implement a Merger or a cquisition 318

Post-Merger Integration and Implementing a Diversification Strategy 319

Special Challenges in Post-Merger Integration 319 Research Made Relevant: The Wealth Effects

of Management Responses to Takeover Attempts 320

Summary 324 Challenge Questions 325 Problem Set 325 End Notes 326

C H a p t E r 1 1 International Strategies 328

Opening Case: The Baby Formula Problem 328 Strategy in the Emerging Enterprise: International

Entrepreneurial Firms: The Case of Logitech 330

t he Value of international Strategies 331

to Gain a ccess to n ew Customers for Current products or Services 332

Internationalization and Firm Revenues 332 Strategy in Depth: Countertrade 336 Internationalization and Product Life Cycles 337 Internationalization and Cost Reduction 338

to Gain a ccess to Low-Cost Factors of production 338

Raw Materials 338 Labor 338 Ethics and Strategy: Manufacturing Tragedies and

International Business 339 Technology 340

to develop new Core Competencies 341 Learning from International Operations 341 Leveraging New Core Competencies in Additional

Markets 343

to Leverage Current Core Competencies in new Ways 343

to Manage Corporate r isk 343 Research Made Relevant: Family Firms in the Global

Economy 344

t he Local r esponsiveness/international integration t rade-o ff 345

t he t ransnational Strategy 347

Financial and political r isks in pursuing international Strategies 347

Financial Risks: Currency Fluctuation and Inflation 347

Political Risks 348

r esearch on the Value of international Strategies 350

international Strategies and Sustained Competitive a dvantage 351

The Rarity of International Strategies 351 The Imitability of International Strategies 352

t he o rganization of international Strategies 354 Becoming International: Organizational Options 354

Summary 359 Challenge Questions 360 Problem Set 361 End Notes 362

A01_BARN0088_05_GE_FM.INDD 14 13/09/14 3:08 PM

Contents 15

End-of-part 3 Cases

Case 3–1: eBay’s Outsourcing Strategy PC 3–1 Case 3–2: National Hockey League Enterprises

Canada: A Retail Proposal PC 3–14 Case 3–3: Starbucks: An Alex Poole Strategy

Case PC 3–19 Case 3–4: Rayovac Corporation: International

Growth and Diversification Through Acquisitions PC 3–32

Case 3–5: Aegis Analytical Corporation’s Strategic Alliances PC 3–44

Case 3–6: McDonald’s and KFC: Recipes for Success in China PC 3–54

a ppendix: a nalyzing Cases and preparing for Class d iscussions 365 Glossary 369 Company Index 377 Name Index 380 Subject Index 385

A01_BARN0088_05_GE_FM.INDD 15 13/09/14 3:08 PM

16

The first thing you will notice as you look through this edition of our book is that it con- tinues to be much shorter than most textbooks on strategic management. There is not the usual “later edition” increase in number of pages and bulk. We’re strong proponents of the philosophy that, often, less is more. The general tendency is for textbooks to get longer and longer as authors make sure that their books leave out nothing that is in other books. We take a different approach. Our guiding principle in deciding what to include is: “Does this concept help students analyze cases and real business situations?” For many concepts we considered, the answer is no. But, where the answer is yes, the concept is in the book.

New to This Edition This edition includes many new chapter-opening cases, including:

• Chapter 1: A case on the video app “Angry Birds” • Chapter 2: A case on the music streaming industry • Chapter 3: A case on how Google keeps going • Chapter 8: A case on Berkshire-Hathaway’s corporate strategy • Chapter 9: A case on the alliance between Apple and Samsung • Chapter 10: A case on Google’s acquisition strategy • Chapter 11: A case on the infant formula business in China

All the other opening cases have been reused and updated, along with all the examples throughout the book.

Two newer topics in the field have also been included in this edition of the book: the business model canvas (in Chapter 1) and blue ocean strategies (in Chapter 5).

This edition features several new and updated cases, including:

• You Say You Want a Revolution: Soda Stream International • True Religion Jeans: Will Going Private Help It Regain Its Congregation? • Walmart: Walmart Stores, Inc., in 2013 • Air Asia X: Can the Low Cost Model Go Long Haul? • RyanAir—The Low Fares Airline: Whither Now? • Papa John’s International, Inc. • e-Bay’s Outsourcing Strategy • National Hockey League Enterprises Canada: A Retail Proposal • Starbucks: An Alex Poole Strategy Case • Rayovac Corporation: International Growth and Diversification Through Acquisitions

VRIO Framework and Other Hallmark Features One thing that has not changed in this edition is that we continue to have a point of view about the field of strategic management. In planning for this book, we recalled our own educational experience and the textbooks that did and didn’t work for us then. Those few that stood out as the best did not merely cover all of the different topics in a field of study. They provided a framework that we could carry around in our heads, and they helped us

preface

A01_BARN0088_05_GE_FM.INDD 16 13/09/14 3:08 PM

preface 17

to see what we were studying as an integrated whole rather than a disjointed sequence of loosely related subjects. This text continues to be integrated around the VRIO framework. As those of you familiar with the resource-based theory of strategy recognize, the VRIO framework addresses the central questions around gaining and sustaining competitive advantage. After it is introduced in Chapter 3, the VRIO logic of competitive advantage is applied in every chapter. It is simple enough to understand and teach yet broad enough to apply to a wide variety of cases and business settings.

Our consistent use of the VRIO framework does not mean that any of the concepts fundamental to a strategy course are missing. We still have all of the core ideas and theories that are essential to a strategy course. Ideas such as the study of environmental threats, value chain analysis, generic strategies, and corporate strategy are all in the book. Because the VRIO framework provides a single integrative structure, we are able to address issues in this book that are largely ignored elsewhere—including discussions of vertical integra- tion, outsourcing, real options logic, and mergers and acquisitions, to name just a few.

We also have designed flexibility into the book. Each chapter has four short sections that present specific issues in more depth. These sections allow instructors to adapt the book to the particular needs of their students. “Strategy in Depth” examines the intellectual foundations that are behind the way managers think about and practice strategy today. “Strategy in the Emerging Enterprise” presents examples of strategic challenges faced by new and emerging enterprises. “Ethics and Strategy” delves into some of the ethical dilem- mas that managers face as they confront strategic decisions. “Research Made Relevant” includes recent research related to the topics in that chapter.

We have also included cases—including many new cases in this edition—that pro- vide students an opportunity to apply the ideas they learn to business situations. The cases include a variety of contexts, such as entrepreneurial, service, manufacturing, and interna- tional settings. The power of the VRIO framework is that it applies across all of these set- tings. Applying the VRIO framework to many topics and cases throughout the book leads to real understanding instead of rote memorization. The end result is that students will find that they have the tools they need to do strategic analysis. Nothing more. Nothing less.

Supplements At the Instructor Resource Center, at www.pearsonglobaleditions.com/Barney, instructors can download a variety of digital and presentation resources. Registration is simple and gives you immediate access to all of the available supplements. In case you ever need assistance, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit http://247.pearsoned.custhelp.com for answers to frequently asked questions and toll-free user support phone numbers.

The following supplements are available for download to adopting instructors:

• Instructor’s Manual • Case Teaching Notes • Test Item File • TestGen® Computerized Test Bank • PowerPoint Slides

Videos Videos illustrating the most important subject topics are available in MyLab—available for instructors and students, provides round-the-clock instant access to videos and cor- responding assessment and simulations for Pearson textbooks. Contact your local Pearson representative to request access.

A01_BARN0088_05_GE_FM.INDD 17 13/09/14 3:08 PM

18 preface

Other Benefits

Element Description Benefit Example

Chapter Opening Cases

We have chosen firms that are familiar to most stu- dents. Opening cases focus on whether or not Rovio Entertainment, Ltd.—maker of the popular video game “Angry Birds”—can sustain its success, how Ryanair has become the lowest cost airline in the world, how Victoria’s Secret has differentiated its products, how ESPN has diversified its operations, and so forth.

By having cases tightly linked to the material, students can develop strategic analysis skills by studying firms familiar to them.

24–25

Full Length Cases

This book contains selective, part-ending cases that underscore the concepts in each part. This provides a tight link to the chapter concepts to reinforce understanding of recent research. These are 1) decision oriented, 2) recent, 3) student-recognized companies, and 4) cases where the data are only partly analyzed.

Provides a tight link to chapter concepts, facilitating students’ ability to apply text ideas to case analysis.

PC 1–1– PC 1–10

Strategy in Depth

For professors and students interested in understanding the full intellectual underpinnings of the field, we have included an optional Strategy in Depth feature in every chapter. Knowledge in strategic management continues to evolve rapidly, in ways that are well beyond what is normally included in introductory texts.

Customize your course as desired to provide enrichment material for advanced students.

245

Research Made Relevant

The Research Made Relevant feature highlights very current research findings related to some of the strategic topics discussed in that chapter.

Shows students the evolving nature of strategy.

69

Challenge Questions

These might be of an ethical or moral nature, forcing students to apply concepts across chapters, apply concepts to themselves, or extend chapter ideas in creative ways.

Requires students to think critically.

147

Problem Set

Problem Set asks students to apply theories and tools from the chapter. These often require calculations. They can be thought of as homework assignments. If students struggle with these problems they might have trouble with the more complex cases. These problem sets are largely diagnostic in character.

Sharpens quantitative skills and provides a bridge between chapter material and case analysis.

179–180

Ethics and Strategy

Highlights some of the most important dilemmas faced by firms when creating and implementing strategies.

Helps students make better ethical decisions as managers.

230

Strategy in the Emerging Enterprise

A growing number of graduates work for small and medium-sized firms. This feature presents an extended example, in each chapter, of the unique strategic problems facing those employed in small and medium-sized firms.

This feature highlights the unique challenges of doing strategic analysis in emerging enterprises and small and medium- sized firms.

75

A01_BARN0088_05_GE_FM.INDD 18 13/09/14 3:08 PM

19

Obviously, a book like this is not written in isolation. We owe a debt of gratitude to all those at Pearson who have supported its development. In particular, we want to thank Stephanie Wall, Editor-in-Chief; Dan Tylman, Acquisitions Editor; Sarah Holle, Program Manager; Erin Gardner, Marketing Manager; Judy Leale, Project Manager Team Lead; and Karalyn Holland, Senior Project Manager.

Many people were involved in reviewing drafts of each edition’s manuscript. Their efforts undoubtedly improved the manuscript dramatically. Their efforts are largely un- sung but very much appreciated.

Thank you to these professors who participated in manuscript reviews:

Yusaf Akbar—Southern New Hampshire University

Joseph D. Botana II—Lakeland College

Pam Braden—West Virginia University at Parkersburg

Erick PC Chang—Arkansas State University

Mustafa Colak—Temple University

Ron Eggers—Barton College

Michael Frandsen—Albion College

Swapnil Garg—University of Florida

Michele Gee—University of Wisconsin, Parkside

Peter Goulet—University of Northern Iowa

Rebecca Guidice—University of Nevada Las Vegas

Laura Hart—Lynn University, College of Business & Management

Tom Hewett—Kaplan University

Phyllis Holland—Valdosta State University

Paul Howard—Penn State University

Richard Insinga—St. John Fisher College

Homer Johnson—Loyola University Chicago

Marilyn Kaplan—University of Texas at Dallas

Joseph Leonard—Miami University

Paul Maxwell—St. Thomas University, Miami

Stephen Mayer—Niagara University

Richard Nemanick—Saint Louis University

Hossein Noorian—Wentworth Institute of Technology

Ralph Parrish—University of Central Oklahoma

Raman Patel—Robert Morris College

Jiten Ruparel—Otterbein College

Acknowledgments

A01_BARN0088_05_GE_FM.INDD 19 13/09/14 3:08 PM

20 Acknowledgments

Roy Simerly—East Carolina University

Sally Sledge—Christopher Newport University

David Stahl—Montclair State University

David Stephens—Utah State University

Philip Stoeberl—Saint Louis University

Ram Subramanian—Grand Valley State University

William W. Topper—Curry College

Thomas Turk—Chapman University

Henry Ulrich—Central Connecticut State (soon to be UCONN)

Floyd Willoughby—Oakland University

Reviewers of the Fourth Edition

Terry Adler—New Mexico State University

Jorge Aravelo—William Patterson University

Asli M. Arikan—The Ohio State University

Scott Brown—Chapman University

Carlos Ferran—Governors State University

Samual Holloway—University of Portland

Paul Longenecker—Otterbein University

Shelly McCallum—Saint Mary’s University

Jeffrey Stone—CAL State–Channel Islands

Edward Taylor—Piedmont College

Les Thompson—Missouri Baptist University

Zhe Zhang—Eastern Kentucky University

All these people have given generously of their time and wisdom. But, truth be told, everyone who knows us knows that this book would not have been possible without Kathy Zwanziger and Rachel Snow.

Pearson would like to thank and acknowledge the following people for their work on the Global Edition.

For their contribution:

Malay Krishna—S.P. Jain Institute of Management & Research

Thum Weng-Ho—Murdoch University

And for their reviews:

S Siengthai—Asian Institute of Technology

Kate Mottaram—Coventry University

Charles Chow—Lee Kong Chian School of Business

Dr.Pardeep Kumar—MGM Institute of Management

A01_BARN0088_05_GE_FM.INDD 20 13/09/14 3:08 PM

21

WiLLia M S. HESt Er LY

William Hesterly is the Associate Dean for Faculty and Research as well as the Dumke Family Endowed Presidential Chair in Management in the David Eccles School of Business, University of Utah. After studying at Louisiana State University, he received bachelors and masters degrees from Brigham Young University and a Ph.D. from the

University of California, Los Angeles. Professor Hesterly has been recognized multiple times as the outstanding teacher in the MBA Program at the David Eccles School of Business and has also been the recipient of the Student’s Choice Award. He has taught in a variety of executive programs for both large and small companies. Professor Hesterly’s research on organizational economics, vertical integration,

organizational forms, and entrepreneurial networks has ap- peared in top journals including the Academy of Management Review, Organization Science, Strategic Management Journal, Journal of Management, and the Journal of Economic Behavior and Organization. Currently, he is studying the sources of value creation in firms and also the determinants of who captures the value from a firm’s competitive advantage. Recent papers in this area have appeared in the Academy of Management Review and Managerial and Decision Economics. Professor Hesterly’s research was recognized with the Western Academy of Management’s Ascendant Scholar Award in 1999. Dr. Hesterly has also received best paper awards from the Western Academy of Management and the Academy of Management. Dr. Hesterly currently serves as the senior editor of Long Range Planning and has served on the editorial boards of Strategic Organization, Organization Science, and the Journal of Management. He has served as Department Chair and also as Vice-President and President of the faculty at the David Eccles School of Business at the University of Utah.

JaY B. Barn EY

Jay Barney is a Presidential Professor of strategic manage- ment and the Lassonde Chair of Social Entrepreneurship of the Entrepreneurship and Strategy Department in the David Eccles Business School, The University of Utah. He received his Ph.D. from Yale and has held faculty appointments at UCLA, Texas A&M, and OSU [The Ohio State

University]. He joined the faculty at The University of Utah in summer of 2013. Jay has published more than 100 journal articles and books; has served on the editorial boards of Academy of Management Review, Strategic Management Journal, and Organization Science; has served as an associ- ate editor of The Journal of Management and senior editor at Organization Science; and currently serves as co-editor at the Strategic Entrepreneurship Journal. He has received

Author Biographies

honorary doctorate degrees from the University of Lund (Sweden), the Copenhagen Business School (Denmark), and the Universidad Pontificia Comillas (Spain) and has been elected to the Academy of Management Fellows and Strategic Management Society Fellows. He has held hon- orary visiting professor positions at Waikato University (New Zealand), Sun Yat-Sen University (China), and Peking University (China). He has also consulted for a wide vari- ety of public and private organizations, including Hewlett- Packard, Texas Instruments, Arco, Koch Industries Inc., and Nationwide Insurance, focusing on implementing large-scale organizational change and strategic analysis. He has received teaching awards at UCLA, Texas A&M, and Ohio State. Jay served as assistant program chair and program chair, chair elect, and chair of the Business Policy and Strategy Division. In 2005, he received the Irwin Outstanding Educator Award for the BPS Division of the Academy of Management, and in 2010, he won the Academy of Management’s Scholarly Contribution to Management Award. In 2008, he was elected as the President-elect of the Strategic Management Society, where he currently serves as past-president.

A01_BARN0088_05_GE_FM.INDD 21 13/09/14 3:08 PM

A01_BARN0088_05_GE_FM.INDD 22 13/09/14 3:08 PM

The Tools of sTraTegic analysis

1 P a r t

M01_BARN0088_05_GE_C01.INDD 23 17/09/14 4:15 PM

24

1. Define strategy.

2. Describe the strategic management process.

3. Define competitive advantage and explain its relation- ship to economic value creation.

4. Describe two different measures of competitive advantage.

Why a re t hese Birds So a ngry?

Rarely can the beg inning on an en tire industry be traced to a single ev ent on a specific da y. But

this is the case with the smart phone applications industry.

On June 29, 2007, A pple first introduced the iPhone. A central feature of the iP hone was

that it would be able t o run a wide v ariety of applications, or “apps.” And, most impor tantly for

the evolution of the apps industr y, Apple decided tha t while it w ould evaluate and distr ibute

these applications—through the online Apple App Store—it would not develop them. Instead,

Apple would “crowd source” most applications from outside developers.

And, thus, the smart phone applications industry began. By April 24, 2009, iP hone users had

downloaded more than 1 billion apps from the Apple App Store. During 2012, more than 45.6 billion

smart phone apps w ere downloaded from all sources, generating revenues in excess of $25 billion.

Projections suggest double-digit growth in this industry for at least another five years.

Of c ourse, much has changed sinc e 2007. F or e xample, A pple no w has six c ompetitors

for its A pple App Store, including A mazon App Store, Google Play Store, BlackBerry World, and

Windows Phone Store. Some of these stores distribute apps for non-Apple phone operating sys-

tems developed by Google (Android), BlackBerry, and Windows. But all of these distributors have

adopted Apple’s original model for developing applications: mostly outsource it to independent

development companies.

These development companies fall into four categories: (1) Internet companies— including

Google—who ha ve dev eloped smar t phone v ersions of popular I nternet sit es—including, f or

5. Explain the difference between emergent and intended strategies.

6. Discuss the importance of understanding a firm’s strategy even if you are not a senior manager in a firm.

L e a r n i n g O B j e c t i v e S After reading this chapter, you should be able to:

MyManagementLab® improve Your grade!

Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems.

1 c h a P t e r What is strategy

and the strategic Management Process?

M01_BARN0088_05_GE_C01.INDD 24 17/09/14 4:15 PM

25

example, YouTube and Google Maps; (2) traditional video game

companies—including S ega—who ha ve dev eloped smar t

phone v ersions of popular video games—including , f or e x-

ample, Sonic Dash; (3) diversified media companies—including

Disney—who ha ve built apps f eaturing char acters and st ories

developed in their far -flung media oper ations—including, f or

example, M onster’s Univ ersity; and (4) c ompanies who ha ve

been formed to develop entirely new apps.

There ar e, of c ourse, lit erally thousands—ma ybe hun -

dreds of thousands—of this last type of app development firm.

The proliferation of these firms— sometimes no more than one

person with an idea—has led t o a pr oliferation of apps acr oss

all smart phone platforms. Currently, there are 1.5 million do wnloadable apps available on both

the Apple App Store and Google Play Store.

Among these thousands of independen t developers, a few have been unusually suc cess-

ful. None exemplifies this “rag to riches” dynamic more than Rovio, an app development com-

pany headquartered outside Helsinki, Finland. Rovio is best known for an amazingly simple game

involving enraged avians—yes, Angry Birds.

The challenge facing R ovio, and all these suc cessful independent app dev elopers, is: C an

they go beyond developing a single “killer app,” or will they be “one-hit wonders?” Rovio is trying

to avoid this fa te by leveraging the A ngry Birds franchise into a ser ies of r elated apps—Angry

Birds Star Wars, Bad P iggies; by developing apps tha t build on new char acters—The Croods; by

diversifying into related non-app businesses— Angry Birds Toons; and b y licensing Angry Birds

characters to toy manufactures—including Mattel.

Rovio has ev en begun cr owd sour cing new app ideas tha t it can br ing t o mar ket.

Independent developers can pitch games and apps to Rovio online. Whether this effort will lead

to the next generation of Rovio apps is not yet known.

What is k nown is tha t the smar t phone applica tions industr y—an industr y that was cre-

ated only in 2007—is likely to grow and evolve dramatically over the next few years. And firms as

diverse as Google, Apple, Disney, Sega—and even Rovio—will have to evolve with it.

Sources: www.rovio.com ac cessed A ugust 23, 2013; www.distimo.com ac cessed A ugust 23, 2013; www.newrelic.com accessed August 23, 2013

© K

ev in

B rit

la nd

/A la

m y

M01_BARN0088_05_GE_C01.INDD 25 17/09/14 4:15 PM

26 Part 1: The Tools of strategic analysis

firms in the smart phone applications industry—whether they have entered this business from another media industry—like Google and Disney—or not—like Rovio—face classic strategic questions. How is this industry likely to evolve? What actions can be taken to change this evolution? How can firms gain advantages in this industry? How sustainable are these advantages?

The process by which these, and related, questions are answered is the strategic management process, and the answers that firms develop for these ques- tions help determine a firm’s strategy.

Strategy and the Strategic Management Process Although most can agree that a firm’s ability to survive and prosper depends on choosing and implementing a good strategy, there is less agreement about what a strategy is and even less agreement about what constitutes a good strategy. Indeed, there are almost as many different definitions of these concepts as there are books written about them.

Defining Strategy In this book, a firm’s strategy is defined as its theory about how to gain com- petitive advantages.1 A good strategy is a strategy that actually generates such advantages. Disney’s theory of how to gain a competitive advantage in the apps industry is to leverage characters from its movie business. Rovio’s theory is to develop entirely new content for its apps.

Each of these theories—like all theories—is based on a set of assumptions and hypotheses about the way competition in this industry is likely to evolve and how that evolution can be exploited to earn a profit. The greater the extent to which these assumptions and hypotheses accurately reflect how competition in this industry actually evolves, the more likely it is that a firm will gain a com- petitive advantage from implementing its strategies. If these assumptions and hypotheses turn out not to be accurate, then a firm’s strategies are not likely to be a source of competitive advantage.

But here is the challenge. It is usually very difficult to predict how competi- tion in an industry will evolve, and so it is rarely possible to know for sure that a firm is choosing the right strategy. This is why a firm’s strategy is almost always a theory: It’s a firm’s best bet about how competition is going to evolve and how that evolution can be exploited for competitive advantage.

The Strategic Management Process Although it is usually difficult to know for sure that a firm is pursuing the best strategy, it is possible to reduce the likelihood that mistakes are being made. The best way to do this is for a firm to choose its strategy carefully and systemati- cally and to follow the strategic management process. The strategic management process is a sequential set of analyses and choices that can increase the likeli- hood that a firm will choose a good strategy; that is, a strategy that generates competitive advantages. An example of the strategic management process is pre- sented in Figure 1.1. Not surprisingly, this book is organized around this strategic management process.

M01_BARN0088_05_GE_C01.INDD 26 17/09/14 4:15 PM

chapter 1: What is strategy and the strategic Management Process? 27

a Firm’s Mission The strategic management process begins when a firm defines its mission. A firm’s mission is its long-term purpose. Missions define both what a firm aspires to be in the long run and what it wants to avoid in the meantime. Missions are often written down in the form of mission statements.

Some Missions May n ot a ffect Firm Performance. Most mission statements incorpo- rate common elements. For example, many define the businesses within which a firm will operate—medical products for Johnson and Johnson; adhesives and substrates for 3M—or they can very simply state how a firm will compete in those businesses. Many even define the core values that a firm espouses.

Indeed, mission statements often contain so many common elements that some have questioned whether having a mission statement even creates value for a firm.2 Moreover, even if a mission statement does say something unique about a company, if that mission statement does not influence behavior throughout an or- ganization, it is unlikely to have much impact on a firm’s actions. After all, while Enron was engaging in wide ranging acts of fraud3, it had a mission statement that emphasized the importance of honesty and integrity.4

Some Missions c an improve Firm Performance. Despite these caveats, research has identified some firms whose sense of purpose and mission permeates all that they do. These firms include, for example, 3M, IBM, Philip Morris, Wal-Mart, and Disney. Some of these visionary firms, or firms whose mission is central to all they do have enjoyed long periods of high performance.5 From 1926 through 1995, an investment of $1 in one of these firms would have increased in value to $6,536. That same dollar invested in an average firm over this same time period would have been worth $415 in 1995.

These visionary firms earned substantially higher returns than average firms even though many of their mission statements suggest that profit maximizing, although an important corporate objective, is not their primary reason for existence. Rather, their primary reasons for existence are typically reflected in a widely held set of values and beliefs that inform day-to-day decision making. While, in other firms, managers may be tempted to sacrifice such values and be- liefs to gain short-term advantages, in these special firms, the pressure for short- term performance is balanced by widespread commitment to values and beliefs that focus more on a firm’s long-term performance.6

Of course, that these firms had performed well for many decades does not mean they will do so forever. Some previously identified visionary firms have stumbled more recently, including American Express, Ford, Hewlett-Packard, Motorola, and Sony. Some of these financial problems may be attributable to the fact that these formally mission-driven companies have lost focus on their mission.

Mission Objectives

External Analysis

Internal Analysis

Strategic Choice

Strategy Implementation

Competitive Advantage

Figure 1.1 The Strategic Management Process

M01_BARN0088_05_GE_C01.INDD 27 17/09/14 4:15 PM

28 Part 1: The Tools of strategic analysis

Some Missions c an hurt Firm Performance. Although some firms have used their mis- sions to develop strategies that create significant competitive advantages, missions can hurt a firm’s performance as well. For example, sometimes a firm’s mission will be very inwardly focused and defined only with reference to the personal values and priorities of its founders or top managers, independent of whether those values and priorities are consistent with the economic realities facing a firm. Strategies derived from such missions are not likely to be a source of competitive advantage.

For example, Ben & Jerry’s Ice Cream was founded in 1977 by Ben Cohen and Jerry Greenfield, both as a way to produce super-premium ice cream and as a way to create an organization based on the values of the 1960s’ counterculture. This strong sense of mission led Ben & Jerry’s to adopt some very unusual human re- source and other policies. Among these policies, the company adopted a compensa- tion system whereby the highest-paid firm employee could earn no more than five times the income of the lowest-paid firm employee. Later, this ratio was adjusted to seven to one. However, even at this level, such a compensation policy made it very difficult to acquire the senior management talent needed to ensure the growth and profitability of the firm without grossly overpaying the lowest-paid employees in the firm. When a new CEO was appointed to the firm in 1995, his $250,000 salary violated this compensation policy.

Indeed, though the frozen dessert market rapidly consolidated through the late 1990s, Ben & Jerry’s Ice Cream remained an independent firm, partly be- cause of Cohen’s and Greenfield’s commitment to maintaining the social values that their firm embodied. Lacking access to the broad distribution network and managerial talent that would have been available if Ben & Jerry’s had merged with another firm, the company’s growth and profitability lagged. Finally, in April 2000, Ben & Jerry’s Ice Cream was acquired by Unilever. The 66 percent premium finally earned by Ben & Jerry’s stockholders in April 2000 had been delayed for several years. In this sense, Cohen’s and Greenfield’s commitment to a set of personal values and priorities was at least partly inconsistent with the economic realities of the frozen dessert market in the United States.7

Obviously, because a firm’s mission can help, hurt, or have no impact on its performance, missions by themselves do not necessarily lead a firm to choose and implement strategies that generate competitive advantages. Indeed, as suggested in Figure 1.1, while defining a firm’s mission is an important step in the strategic management process, it is only the first step in that process.

Objectives Whereas a firm’s mission is a broad statement of its purpose and values, its objectives are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission. High-quality objectives are tightly connected to elements of a firm’s mission and are relatively easy to measure and track over time. Low-quality objectives either do not exist or are not connected to elements of a firm’s mission, are not quantitative, or are difficult to measure or difficult to track over time. Obviously, low-quality objectives cannot be used by management to evaluate how well a mission is being realized. Indeed, one indication that a firm is not that serious about realizing part of its mission statement is when there are no objectives, or only low-quality objectives, associated with that part of the mission.

external and internal a nalysis The next two phases of the strategic management process—external analysis and internal analysis—occur more or less simultaneously. By conducting an

M01_BARN0088_05_GE_C01.INDD 28 17/09/14 4:15 PM

chapter 1: What is strategy and the strategic Management Process? 29

external analysis, a firm identifies the critical threats and opportunities in its competitive environment. It also examines how competition in this environment is likely to evolve and what implications that evolution has for the threats and opportunities a firm is facing. A considerable literature on techniques for and approaches to conducting external analysis has evolved over the past several years. This literature is the primary subject matter of Chapter 2 of this book.

Whereas external analysis focuses on the environmental threats and op- portunities facing a firm, internal analysis helps a firm identify its organizational strengths and weaknesses. It also helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to be sources of such advantages. Finally, internal analysis can be used by firms to identify those areas of its organization that require improvement and change. As with external analysis, a considerable literature on techniques for and approaches to conducting internal analysis has evolved over the past several years. This literature is the primary subject matter of Chapter 3 of this book.

Strategic c hoice Armed with a mission, objectives, and completed external and internal analyses, a firm is ready to make its strategic choices. That is, a firm is ready to choose its theory of how to gain competitive advantage.

The strategic choices available to firms fall into two large categories: business-level strategies and corporate-level strategies. Business-level strategies are actions firms take to gain competitive advantages in a single market or indus- try. These strategies are the topic of Part 2 of this book. The two most common business-level strategies are cost leadership (Chapter 4) and product differentia- tion (Chapter 5).

Corporate-level strategies are actions firms take to gain competitive ad- vantages by operating in multiple markets or industries simultaneously. These strategies are the topic of Part 3 of this book. Common corporate-level strate- gies include vertical integration strategies (Chapter 6), diversification strategies (Chapters 7 and 8), strategic alliance strategies (Chapter 9), merger and acquisi- tion strategies (Chapter 10), and global strategies (Chapter 11).

Obviously, the details of choosing specific strategies can be quite complex, and a discussion of these details will be delayed until later in the book. However, the underlying logic of strategic choice is not complex. Based on the strategic management process, the objective when making a strategic choice is to choose a strategy that (1) supports the firm’s mission, (2) is consistent with a firm’s objec- tives, (3) exploits opportunities in a firm’s environment with a firm’s strengths, and (4) neutralizes threats in a firm’s environment while avoiding a firm’s weak- nesses. Assuming that this strategy is implemented—the last step of the strategic management process—a strategy that meets these four criteria is very likely to be a source of competitive advantage for a firm.

Strategy implementation Of course, simply choosing a strategy means nothing if that strategy is not implemented. Strategy implementation occurs when a firm adopts orga- nizational policies and practices that are consistent with its strategy. Three specific organizational policies and practices are particularly important in implementing a strategy: a firm’s formal organizational structure, its formal and informal management control systems, and its employee compensation policies. A firm that adopts an organizational structure, management controls,

M01_BARN0088_05_GE_C01.INDD 29 17/09/14 4:15 PM

30 Part 1: The Tools of strategic analysis

and compensation policy that are consistent with and reinforce its strategies is more likely to be able to implement those strategies than a firm that adopts an organizational structure, management controls, and compensation policy that are inconsistent with its strategies. Specific organizational structures, manage- ment controls, and compensation policies used to implement the business- level strategies of cost leadership and product differentiation are discussed in Chapters 4 and 5. How organizational structure, management controls, and compensation can be used to implement corporate-level strategies, includ- ing vertical integration, strategic alliance, merger and acquisition, and global strategies, is discussed in Chapters 6, 9, 10, and 11, respectively. However, there is so much information about implementing diversification strategies that an entire chapter, Chapter 8, is dedicated to the discussion of how this corporate-level strategy is implemented.

What Is Competitive Advantage? Of course, the ultimate objective of the strategic management process is to enable a firm to choose and implement a strategy that generates a competitive advan- tage. But what is a competitive advantage? In general, a firm has a competitive advantage when it is able to create more economic value than rival firms. Economic value is simply the difference between the perceived benefits gained by a customer that purchases a firm’s products or services and the full economic cost of these products or services. Thus, the size of a firm’s competitive advantage is the difference between the economic value a firm is able to create and the eco- nomic value its rivals are able to create.8

Consider the two firms presented in Figure 1.2. Both these firms compete in the same market for the same customers. However, Firm I generates $180 of economic value each time it sells a product or service, whereas Firm II generates $150 of economic value each time it sells a product or service. Because Firm I generates more economic value each time it sells a product or service, it has a competitive advantage over Firm II. The size of this competitive advantage is equal to the difference in the economic value these two firms create, in this case, $301$180 - $150 = $302.

However, as shown in the figure, Firm I’s advantage may come from differ- ent sources. For example, it might be the case that Firm I creates greater perceived benefits for its customers than Firm II. In panel A of the figure, Firm I creates per- ceived customer benefits worth $230, whereas Firm II creates perceived customer benefits worth only $200. Thus, even though both firms’ costs are the same (equal to $50 per unit sold), Firm I creates more economic value 1$230 - $50 = $1802 than Firm II 1$200 - $50 = $1502. Indeed, it is possible for Firm I, in this situa- tion, to have higher costs than Firm II and still create more economic value than Firm II if these higher costs are offset by Firm I’s ability to create greater perceived benefits for its customers.

Alternatively, as shown in panel B of the figure, these two firms may cre- ate the same level of perceived customer benefit (equal to $210 in this example) but have different costs. If Firm I’s costs per unit are only $30, it will generate $180 worth of economic value 1$210 - $30 = $1802. If Firm II’s costs are $60, it will generate only $150 of economic value 1$210 - $60 = $1502. Indeed, it might be possible for Firm I to create a lower level of perceived benefits for its customers than Firm II and still create more economic value than Firm II, as long

M01_BARN0088_05_GE_C01.INDD 30 17/09/14 4:15 PM

chapter 1: What is strategy and the strategic Management Process? 31

as its disadvantage in perceived customer benefits is more than offset by its cost advantage.

A firm’s competitive advantage can be temporary or sustained. As summa- rized in Figure 1.3, a temporary competitive advantage is a competitive advantage that lasts for a very short period of time. A sustained competitive advantage, in contrast, can last much longer. How long sustained competitive advantages can last is discussed in the Research Made Relevant feature. Firms that create the same economic value as their rivals experience competitive parity. Finally, firms that generate less economic value than their rivals have a competitive disadvantage. Not surprisingly, competitive disadvantages can be either temporary or sustained, depending on the duration of the disadvantage.

Total Perceived Customer Benefits = $230

Economic Value Created = $180

(A) Firm I’s Competitive Advantage When It Creates More Perceived Customer Benefits

Total Cost = $50

Total Perceived Customer Benefits = $200

Firm II

Firm II

Firm I

Firm I

Economic Value Created = $150

Total Cost = $50

Total Perceived Customer Benefits = $210

Economic Value Created = $180

(B) Firm I’s Competitive Advantage When It Has Lower Costs

Total Cost = $30

Total Perceived Customer Benefits = $210

Economic Value Created = $150

Total Cost = $60

Figure 1.2 The Sources of a Firm’s Competitive Advantage

Competitive Advantage When a firm creates more economic value than its rivals

Temporary Competitive Advantages

Competitive advantages that last a short time

Sustained Competitive Advantages

Competitive advantages that last a long time

Competitive Disadvantage When a firm creates less economic value than its rivals

Competitive Parity When a firm creates the same economic value as its rivals

Temporary Competitive Disadvantages

Competitive disadvantages that last a short time

Sustained Competitive Disadvantages

Competitive disadvantages that last a long time

Figure 1.3 Types of Competitive Advantage

M01_BARN0088_05_GE_C01.INDD 31 17/09/14 4:15 PM

32 Part 1: The Tools of strategic analysis

For some time, economists have been interested in how long firms are able to sustain competitive advantages. Traditional economic theory predicts that such advantages should be short- lived in highly competitive markets. This theory suggests that any competi- tive advantages gained by a particular firm will quickly be identified and imi- tated by other firms, ensuring competi- tive parity in the long run. However, in real life, competitive advantages often last longer than traditional economic theory predicts.

One of the first scholars to ex- amine this issue was Dennis Mueller. Mueller divided a sample of 472 firms into eight categories, depending on their level of performance in 1949. He then examined the impact of a firm’s initial performance on its subsequent perfor- mance. The traditional economic hy- pothesis was that all firms in the sample would converge on an average level of performance. This did not occur. Indeed, firms that were performing well in an earlier time period tended to perform well in later time periods, and firms that performed poorly in an earlier time pe- riod tended to perform poorly in later time periods as well.

Geoffrey Waring followed up on Mueller’s work by explaining why competitive advantages seem to

persist longer in some industries than in others. Waring found that, among other factors, firms that operate in in- dustries that (1) are informationally complex, (2) require customers to know a great deal in order to use an industry’s products, (3) require a great deal of research and development, and (4) have significant economies of scale are more likely to have sustained competitive advantages compared to firms that operate in industries with- out these attributes.

Peter Roberts studied the persis- tence of profitability in one particular industry: the U.S. pharmaceutical in- dustry. Roberts found that not only can firms sustain competitive advantages in this industry, but that the ability to do

so is almost entirely attributable to the firms’ capacity to innovate by bringing out new and powerful drugs.

The most recent work in this tradition was published by Anita McGahan and Michael Porter. They showed that both high and low per- formance can persist for some time. Persistent high performance is related to attributes of the industry within which a firm operates and the corpo- ration within which a business unit functions. In contrast, persistent low performance was caused by attributes of a business unit itself.

In many ways, the difference be- tween traditional economics research and strategic management research is that the former attempts to explain why competitive advantages should not persist, whereas the latter attempts to explain when they can. Thus far, most empirical research suggests that firms, in at least some settings, can sustain competitive advantages.

Sources: D. C. Mueller (1977). “The persistence of profits above the norm.” Economica, 44, pp. 369-380; P. W. Roberts (1999). “Product innovation, product- market competition, and persistent profitabil- ity in the U.S. pharmaceutical industry.” Strategic Management Journal, 20, pp. 655-670; G. F. Waring (1996). “Industry differences in the persistence of firm-specific returns.” The American Economic Review, 86, pp. 1253-1265; A. McGahan and M. Porter (2003). “The emergence and sustainability of abnormal profits.” Strategic Organization, 1(1), pp. 79-108.

How Sustainable Are Competitive Advantages?

research Made relevant

The Strategic Management Process, Revisited With this description of the strategic management process now complete, it is possible to redraw the process, as depicted in Figure 1.1, to incorporate the vari- ous options a firm faces as it chooses and implements its strategy. This is done in Figure 1.4. Figure 1.4 is the organizing framework that will be used throughout this book. An alternative way of characterizing the strategic management process—the business model canvas—is described in the Strategy in Depth feature.

M01_BARN0088_05_GE_C01.INDD 32 17/09/14 4:15 PM

chapter 1: What is strategy and the strategic Management Process? 33

Measuring Competitive Advantage A firm has a competitive advantage when it creates more economic value than its rivals. Economic value is the difference between the perceived customer benefits associated with buying a firm’s products or services and the full cost of producing and selling these products or services. These are deceptively simple definitions. However, these concepts are not always easy to measure directly. For example, the benefits of a firm’s products or services are always a matter of customer per- ception, and perceptions are not easy to measure. Also, the total costs associated with producing a particular product or service may not always be easy to identify or associate with a particular product or service. Despite the very real challenges associated with measuring a firm’s competitive advantage, two approaches have emerged. The first estimates a firm’s competitive advantage by examining its ac- counting performance; the second examines the firm’s economic performance. These approaches are discussed in the following sections.

Accounting Measures of Competitive Advantage A firm’s accounting performance is a measure of its competitive advantage cal- culated by using information from a firm’s published profit and loss and balance sheet statements. A firm’s profit and loss and balance sheet statements, in turn, are typically created using widely accepted accounting standards and principles. The application of these standards and principles makes it possible to compare the accounting performance of one firm to the accounting performance of other firms, even if those firms are not in the same industry. However, to the extent that these standards and principles are not applied in generating a firm’s accounting statements or to the extent that different firms use different accounting standards and principles in generating their statements, it can be difficult to compare the ac- counting performance of firms. These issues can be particularly challenging when comparing the performance of firms in different countries around the world.

One way to use a firm’s accounting statements to measure its competi- tive advantage is through the use of accounting ratios. Accounting ratios are simply numbers taken from a firm’s financial statements that are manipulated in ways that describe various aspects of a firm’s performance. Some of the most

Mission Objectives

External Analysis

Internal Analysis

Strategic Choice Strategy Implementation Competitive Advantage Impact: None Positive Negative

Measurable Specific

Business Strategies — Cost Leadership — Product Differentiation Corporate Strategies — Vertical Integration — Strategic Alliances — Diversification — Mergers and Acquisitions

Threats Opportunities

Strengths Weaknesses

Organizational Structure Control Processes Compensation Policy