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FOURTH EDITION
Strategic Management
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Frank T. Rothaermel Georgia Institute of Technology
FOURTH EDITION
Strategic Management
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STRATEGIC MANAGEMENT, FOURTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw- Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2015, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI 21 20 19 18
Bound: ISBN 978-1-259-92762-1 (student edition) MHID 1-259-92762-8 (student edition) ISBN 978-1-260-14192-4 (instructor edition) MHID 1-260-14192-6 (instructor edition)
Looseleaf: ISBN 978-1-260-14186-3 MHID 1-260-14186-1
Product Developers: Lai T. Moy Executive Marketing Manager: Debbie Clare Content Project Managers: Mary E. Powers (Core), Keri Johnson (Assessment) Buyer: Susan K. Culbertson Design: Matt Diamond Content Licensing Specialists: Brianna Kirschbaum Cover Image: (leadership concept on white background): ©ISerg/iStock/Getty Images RF; (globe): ©sankai/iStock/Getty Images RF Compositor: SPi Global
All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Names: Rothaermel, Frank T., author. Title: Strategic management: concepts / Frank T. Rothaermel, Georgia Institute of Technology. Description: Fourth Edition. | Dubuque: McGraw-Hill Education, 2018. | Revised edition of the author’s Strategic management, [2017] Identifiers: LCCN 2017049706 | ISBN 9781259927621 (paperback) Subjects: LCSH: Strategic planning. | Management. | BISAC: BUSINESS & ECONOMICS / Management. Classification: LCC HD30.28 .R6646 2018 | DDC 658.4/012—dc23 LC record available at https://lccn.loc.gov/2017049706
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
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DEDICATION
To my eternal family for their love, support, and sacrifice: Kelleyn, Harris, Winston, Roman, Adelaide, Avery, and Ivy.
—FRANK T. ROTHAERMEL
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vi
PART ONE / ANALYSIS 2
CHAPTER 1 What Is Strategy? 4
CHAPTER 2 Strategic Leadership: Managing the Strategy Process 30
CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 64
CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies 106
CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models 144
PART TWO / FORMULATION 180
CHAPTER 6 Business Strategy: Differentiation, Cost Leadership, and Blue Oceans 182
CHAPTER 7 Business Strategy: Innovation, Entrepreneurship, and Platforms 218
CHAPTER 8 Corporate Strategy: Vertical Integration and Diversification 264
CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers, and Acquisitions 308
CHAPTER 10 Global Strategy: Competing Around the World 338
PART THREE / IMPLEMENTATION 376
CHAPTER 11 Organizational Design: Structure, Culture, and Control 378
CHAPTER 12 Corporate Governance and Business Ethics 418
PART FOUR / MINICASES 447
HOW TO CONDUCT A CASE ANALYSIS 528
PART FIVE / FULL-LENGTH CASES Available through McGraw-Hill Create www.McGrawHillCreate.com/Rothaermel
CONTENTS IN BRIEF
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MINICASES /
1 Michael Phelps: The Role of Strategy in Olympics and Business 448
2 PepsiCo’s Indra Nooyi: Performance with Purpose 450 3 Yahoo: From Internet Darling to Fire Sale 453 4 How the Strategy Process Killed Innovation at
Microsoft 456
5 Apple: The iPhone Turns 10, so What’s Next? 459 6 Nike’s Core Competency: The Risky Business of
Creating Heroes 463
7 Dynamic Capabilities at IBM 466 8 Starbucks after Schultz: How to Sustain a Competitive
Advantage? 470
9 Business Model Innovation: How Dollar Shave Club Disrupted Gillette 474
10 Competing on Business Models: Google vs. Microsoft 476
11 Can Amazon Trim the Fat at Whole Foods? 481 12 LEGO’s Turnaround: Brick by Brick 484 13 Cirque du Soleil: Searching for a New Blue Ocean 488 14 Wikipedia: Disrupting the Encyclopedia Business 491 15 Disney: Building Billion-Dollar Franchises 494 16 Hollywood Goes Global 498 17 Samsung Electronics: Burned by Success? 503 18 Does GM’s Future Lie in China? 509 19 Flipkart vs. Amazon in India: Who’s Winning? 512 20 Alibaba—China’s Ecommerce Giant: Challenging
Amazon? 516
21 HP’s Boardroom Drama and Divorce 520 22 UBS: A Pattern of Ethics Scandals 524
FULL-LENGTH CASES /
All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel
Uber Technologies*
Starbucks Corporation*
Netflix, Inc.*
Walmart*
The Walt Disney Company*
Tesla, Inc. >>
Apple Inc. >>
Amazon.com, Inc. >>
Best Buy Co., Inc. >>
Facebook, Inc. >>
McDonald’s Corporation >>
Alphabet’s Google >>
Delta Air Lines, Inc. >>
UPS in India >>
The Movie Exhibition Industry >>+ Space X* + Kickstarter: Using Crowdfunding to Launch a New Board Game + Better World Books and the Triple Bottom Line
General Electric after GE Capital
IBM at the Crossroads
Merck & Co., Inc.
Grok: Action Intelligence for Fast Data
Make or Break at RIM: Launching BlackBerry 10
MINICASES & FULL-LENGTH CASES
* NEW TO THE FOURTH EDITION >> REVISED AND UPDATED FOR THE FOURTH EDITION + THIRD-PARTY CASE
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CHAPTERCASES /
1 Tesla’s Secret Strategy 5 2 Sheryl Sandberg: Leaning in at Facebook 31 3 Airbnb: Disrupting the Hotel Industry 65 4 Dr. Dre’s Core Competency: Coolness Factor 107 5 The Quest for Competitive Advantage: Apple vs.
Microsoft 145 6 JetBlue Airways: Finding a New Blue Ocean? 183 7 Netflix: Disrupting the TV Industry 219 8 Amazon.com: To Infinity and Beyond 265 9 Little Lyft Gets Big Alliance Partners 309 10 Sweden’s IKEA: The World’s Most Profitable
Retailer 339 11 Zappos: Of Happiness and Holacracy 379 12 Uber: Most Ethically Challenged Tech
Company? 419
STRATEGY HIGHLIGHTS /
1.1 Teach for America: How Wendy Kopp Inspires Future Leaders 12
1.2 Merck: Reconfirming Its Core Values 18 2.1 Starbucks CEO: “It’s Not What We Do” 44 2.2 BP “Grossly Negligent” in Gulf of Mexico
Disaster 55 3.1 BlackBerry’s Bust 71 3.2 The Five Forces in the Airline Industry 75 4.1 Applying VRIO: The Rise and Fall of Groupon 119 4.2 When Will P&G Play to Win Again? 125 5.1 Interface: The World’s First Sustainable
Company 165 5.2 Threadless: Leveraging Crowdsourcing to Design
Cool T-Shirts 166 6.1 Dr. Shetty: “The Henry Ford of Heart
Surgery” 200 6.2 How JCPenney Sailed Deeper into the Red
Ocean 208 7.1 Standards Battle: Which Automotive Technology
Will Win? 230 7.2 GE’s Innovation Mantra: Disrupt Yourself! 248 8.1 Is Coke Becoming a Monster? 276 8.2 The Tata Group: Integration at the Corporate
Level 289 9.1 How Tesla Used Alliances Strategically 315 9.2 Kraft’s Specialty: Hostile Takeovers 326 10.1 The Gulf Airlines Are Landing in the
United States 347 10.2 Walmart Retreats from Germany, and Lidl Invades
the United States 351 11.1 W.L. Gore & Associates: Informality and
Innovation 386 11.2 Sony vs. Apple: Whatever Happened to Sony? 400 12.1 GE’s Board of Directors 430 12.2 Why the Mild Response to Goldman Sachs
and Securities Fraud? 435
CHAPTERCASES & STRATEGY HIGHLIGHTS
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PART ONE / ANALYSIS 2 CHAPTER 1 WHAT IS STRATEGY? 4
CHAPTERCASE 1 Tesla’s Secret Strategy 5
1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage 6
What Is Competitive Advantage? 8 1.2 Vision, Mission, and Values 11
Vision 11 Mission 13 Values 17
1.3 The AFI Strategy Framework 19 1.4 Implications for Strategic Leaders 20
CHAPTERCASE 1 / Consider This... 21
CHAPTER 2 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY PROCESS 30
CHAPTERCASE 2 Sheryl Sandberg: Leaning in at Facebook 31
2.1 Strategic Leadership 32 What Do Strategic Leaders Do? 33 How Do You Become a Strategic Leader? 33 The Strategy Process Across Levels: Corporate, Business, and Functional Managers 36
2.2 The Strategic Management Process 38 Top-Down Strategic Planning 38 Scenario Planning 39 Strategy as Planned Emergence: Top-Down and Bottom-Up 41
2.3 Stakeholders and Competitive Advantage 47 Stakeholder Strategy 48 Stakeholder Impact Analysis 50
2.4 Implications for Strategic Leaders 55
CHAPTERCASE 2 / Consider This... 56
CHAPTER 3 EXTERNAL ANALYSIS: INDUSTRY STRUCTURE, COMPETITIVE FORCES, AND STRATEGIC GROUPS 64
CHAPTERCASE 3 Airbnb: Disrupting the Hotel Industry 65
3.1 The PESTEL Framework 67 Political Factors 68 Economic Factors 68 Sociocultural Factors 70 Technological Factors 70 Ecological Factors 70 Legal Factors 72
3.2 Industry Structure and Firm Strategy: The Five Forces Model 73
Industry vs. Firm Effects In Determining Firm Performance 73 Competition In the Five Forces Model 74 The Threat of Entry 76 The Power of Suppliers 79 The Power of Buyers 80 The Threat of Substitutes 82 Rivalry Among Existing Competitors 83 A Sixth Force: The Strategic Role of Complements 88
3.3 Changes over Time: Entry Choices and Industry Dynamics 90
Entry Choices 90 Industry Dynamics 92
3.4 Performance Differences within the Same Industry: Strategic Groups 93
The Strategic Group Model 93 Mobility Barriers 95
3.5 Implications for Strategic Leaders 96
CHAPTERCASE 3 / Consider This... 97
CHAPTER 4 INTERNAL ANALYSIS: RESOURCES, CAPABILITIES, AND CORE COMPETENCIES 106
CHAPTERCASE 4 Dr. Dre’s Core Competency: Coolness Factor 107
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4.1 Core Competencies 110 4.2 The Resource-Based View 113
Two Critical Assumptions 114 The Vrio Framework 115 Isolating Mechanisms: How to Sustain A Competitive Advantage 120
4.3 The Dynamic Capabilities Perspective 124 4.4 The Value Chain and Strategic Activity Systems 128
The Value Chain 128 Strategic Activity Systems 130
4.5 Implications for Strategic Leaders 133 Using Swot Analysis to Generate Insights From External and Internal Analysis 134
CHAPTERCASE 4 / Consider This... 135
CHAPTER 5 COMPETITIVE ADVANTAGE, FIRM PERFORMANCE, AND BUSINESS MODELS 144
CHAPTERCASE 5 The Quest for Competitive Advantage: Apple vs. Microsoft 145
5.1 Competitive Advantage and Firm Performance 146 Accounting Profitability 146 Shareholder Value Creation 153 Economic Value Creation 155 The Balanced Scorecard 161 The Triple Bottom Line 164
5.2 Business Models: Putting Strategy into Action 165 The Why, What, Who, and How of Business Models Framework 167 Popular Business Models 168 Dynamic Nature of Business Models 170
5.3 Implications for Strategic Leaders 171
CHAPTERCASE 5 / Consider This... 172
PART TWO / FORMULATION 180 CHAPTER 6 BUSINESS STRATEGY: DIFFERENTIATION, COST LEADERSHIP, AND BLUE OCEANS 182
CHAPTERCASE 6 JetBlue Airways: Finding a New Blue Ocean? 183
6.1 Business-Level Strategy: How to Compete for Advantage 185
Strategic Position 186 Generic Business Strategies 186
6.2 Differentiation Strategy: Understanding Value Drivers 188
Product Features 191 Customer Service 191 Complements 191
6.3 Cost-Leadership Strategy: Understanding Cost Drivers 192
Cost of Input Factors 194 Economies of Scale 194 Learning Curve 196 Experience Curve 199
6.4 Business-Level Strategy and the Five Forces: Benefits and Risks 201
Differentiation Strategy: Benefits and Risks 201 Cost-Leadership Strategy: Benefits and Risks 203
6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership 204
Value Innovation 205 Blue Ocean Strategy Gone Bad: “Stuck In the Middle” 207
6.6 Implications for Strategic Leaders 210
CHAPTERCASE 6 / Consider This... 211
CHAPTER 7 BUSINESS STRATEGY: INNOVATION, ENTREPRENEURSHIP, AND PLATFORMS 218
CHAPTERCASE 7 Netflix: Disrupting the TV Industry 219
7.1 Competition Driven by Innovation 221 The Innovation Process 222
7.2 Strategic and Social Entrepreneurship 225 7.3 Innovation and the Industry Life Cycle 227
Introduction Stage 228 Growth Stage 230 Shakeout Stage 233 Maturity Stage 234 Decline Stage 234 Crossing the Chasm 235
7.4 Types of Innovation 242 Incremental vs. Radical Innovation 243 Architectural vs. Disruptive Innovation 245
7.5 Platform Strategy 249 The Platform vs. Pipeline Business Models 249 The Platform Ecosystem 250
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7.6 Implications for Strategic Leaders 254
CHAPTERCASE 7 / Consider This... 254
CHAPTER 8 CORPORATE STRATEGY: VERTICAL INTEGRATION AND DIVERSIFICATION 264
CHAPTERCASE 8 Amazon.com: To Infinity and Beyond 265
8.1 What Is Corporate Strategy? 268 Why Firms Need to Grow 268 Three Dimensions of Corporate Strategy 269
8.2 The Boundaries of the Firm 271 Firms vs. Markets: Make or Buy? 272 Alternatives on the Make-or-Buy Continuum 274
8.3 Vertical Integration along the Industry Value Chain 278
Types of Vertical Integration 279 Benefits and Risks of Vertical Integration 281 When Does Vertical Integration Make Sense? 283 Alternatives to Vertical Integration 284
8.4 Corporate Diversification: Expanding Beyond a Single Market 285
Types of Corporate Diversification 287 Leveraging Core Competencies for Corporate Diversification 291 Corporate Diversification and Firm Performance 293
8.5 Implications for Strategic Leaders 297
CHAPTERCASE 8 / Consider This... 298
CHAPTER 9 CORPORATE STRATEGY: STRATEGIC ALLIANCES, MERGERS, AND ACQUISITIONS 308
CHAPTERCASE 9 Little Lyft Gets Big Alliance Partners 309
9.1 How Firms Achieve Growth 310 The Build-Borrow-Buy Framework 310
9.2 Strategic Alliances 313 Why Do Firms Enter Strategic Alliances? 314 Governing Strategic Alliances 317 Alliance Management Capability 320
9.3 Mergers and Acquisitions 323 Why Do Firms Merge With Competitors? 323 Why Do Firms Acquire Other Firms? 325 M&A and Competitive Advantage 327
9.4 Implications for Strategic Leaders 329
CHAPTERCASE 9 / Consider This... 330
CHAPTER 10 GLOBAL STRATEGY: COMPETING AROUND THE WORLD 338
CHAPTERCASE 10 Sweden’s IKEA: The World’s Most Profitable Retailer 339
10.1 What Is Globalization? 342 Stages of Globalization 343 State of Globalization 344
10.2 Going Global: Why? 346 Advantages of Going Global 346 Disadvantages of Going Global 350
10.3 Going Global: Where and How? 353 Where In the World to Compete? The Cage Distance Framework 353 How Do MNES Enter Foreign Markets? 357
10.4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework 358
International Strategy 359 Multidomestic Strategy 360 Global-Standardization Strategy 360 Transnational Strategy 361
10.5 National Competitive Advantage: World Leadership in Specific Industries 362
Porter’s Diamond Framework 364 10.6 Implications for Strategic Leaders 366
CHAPTERCASE 10 / Consider This... 367
PART THREE / IMPLEMENTATION 376 CHAPTER 11 ORGANIZATIONAL DESIGN: STRUCTURE, CULTURE, AND CONTROL 378
CHAPTERCASE 11 Zappos: Of Happiness and Holacracy 379
11.1 Organizational Design and Competitive Advantage 381
Organizational Inertia: The Failure of Established Firms 382 Organizational Structure 384 Mechanistic vs. Organic Organizations 385
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11.2 Strategy and Structure 387 Simple Structure 387 Functional Structure 388 Multidivisional Structure 390 Matrix Structure 394
11.3 Organizing for Innovation 398 11.4 Organizational Culture: Values, Norms, and Artifacts 401
Where Do Organizational Cultures Come From? 403 How Does Organizational Culture Change? 404 Organizational Culture and Competitive Advantage 405
11.5 Strategic Control-and-Reward Systems 407 Input Controls 408 Output Controls 408
11.6 Implications for Strategic Leaders 409
CHAPTERCASE 11 / Consider This... 410
CHAPTER 12 CORPORATE GOVERNANCE AND BUSINESS ETHICS 418
CHAPTERCASE 12 Uber: Most Ethically Challenged Tech Company? 419
12.1 The Shared Value Creation Framework 421 Public Stock Companies and Shareholder Capitalism 421 Creating Shared Value 423
12.2 Corporate Governance 425 Agency Theory 426 The Board of Directors 428 Other Governance Mechanisms 430
12.3 Strategy and Business Ethics 433 Bad Apples vs. Bad Barrels 434
12.4 Implications for Strategic Leaders 437
CHAPTERCASE 12 / Consider This... 438
PART FOUR / MINICASES 447
PART FIVE / FULL-LENGTH CASES All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel
Company Index 539 Name Index 545 Subject Index 547
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Frank T. Rothaermel Georgia Institute of Technology
FRANK T. ROTHAERMEL (PH.D.) is a Professor of Strategy & Innovation, holds the Russell and Nancy McDonough Chair in the Scheller College of Business at the Georgia Institute of Technology (GT), and is an Alfred P. Sloan Industry Stud- ies Fellow. He received a National Science Foundation (NSF) CAREER award, which “is a Foundation-wide activity that offers the National Science Founda- tion’s most prestigious awards in support of . . . those teacher-scholars who most effectively integrate research and education” (NSF CAREER Award description).
Frank’s research interests lie in the areas of strategy, innovation, and entre- preneurship. Frank has published over 30 articles in leading academic journals such as the Strategic Management Journal, Organization Science, Academy of Management Journal, Academy of Management Review, and elsewhere. Based on having published papers in the top 1 percent based on citations, Thomson Reuters identified Frank as one of the “world’s most influential scientific minds.” He is listed among the top-100 scholars based on impact over more than a decade in both economics and business. Bloomberg Businessweek named Frank one of Georgia Tech’s Prominent Faculty in its national survey of business schools. The Kauffman Foundation views Frank as one of the world’s 75 thought leaders in entrepreneurship and innovation.
Frank has received several recognitions for his research, including the Sloan Industry Studies Best Paper Award, the Academy of Management Newman Award, the Strategic Management Society Conference Best Paper Prize, the DRUID Conference Best Paper Award, the Israel Strategy Conference Best Paper Prize, and is the inaugural recipient of the Byars Faculty Excellence Award. Frank currently serves (or served) on the editorial boards of the Strategic Man- agement Journal, Organization Science, Academy of Management Journal, Academy of Manage- ment Review, and Strategic Organization.
Frank regularly translates his research findings for wider audiences in articles in the MIT Sloan Management Review, The Wall Street Journal, Forbes, and elsewhere. To inform his research Frank has conducted extensive field work and executive training with leading corporations such as Amgen, Daimler, Eli Lilly, Equifax, GE Energy, GE Healthcare, Hyundai Heavy Industries (South Korea), Kimberly-Clark, Microsoft, McKesson, NCR, Turner (TBS), UPS, among others.
Frank has a wide range of executive education experience, including teaching in programs at GE Management Development Institute (Crotonville, NY), Georgia Institute of Technology, George- town University, ICN Business School (France), Politecnico di Milano (Italy), St. Gallen University (Switzerland), and the University of Washington. He received numerous teaching awards for excel- lence in the classroom including the GT-wide Georgia Power Professor of Excellence award.
When launched in 2012, Frank’s Strategic Management text received the McGraw-Hill 1st Edition of the Year Award in Business & Economics. His Strategic Management text has been translated into Mandarin, Korean, and Greek. Several of his case studies are Most Popular among the cases distributed by Harvard Business Publishing.
Frank held visiting professorships at the EBS University of Business and Law (Germany), Singapore Management University (Tommie Goh Professorship), and the University of St. Gallen (Switzerland). He is a member of the Academy of Management and the Strategic Management Society.
Frank holds a PhD degree in strategic management from the University of Washington; an MBA from the Marriott School of Management at Brigham Young University; and is Diplom-Volkswirt (M.Sc. equivalent) in economics from the University of Duisburg-Essen, Germany. Frank completed training in the case teaching method at the Harvard Business School.
VISIT THE AUTHOR AT: http://ftrStrategy.com/
ABOUT THE AUTHOR
©Tony Benner
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PREFACE
The market for strategy texts can be broadly separated into two overarching categories: traditional, application-based and research-based. Traditional, application-based strategy books represent the first-generation texts with first editions published in the 1980s. The research-based strategy books represent the second-generation texts with first editions published in the 1990s. I wrote this book to address a needed new category—a third generation of strategy text that combines into one the student-accessible, application- oriented frameworks of the first-generation texts with the research-based frameworks of the second-generation texts.
The market response to this unique approach to teaching and studying strategy was overwhelmingly enthusiastic. Enthusiasm and support increased with each subsequent edi- tion. I’m truly grateful for the sustained support.
To facilitate an enjoyable and refreshing reading experience that enhances student learning and retention, I synthesize and integrate strategy frameworks, empirical research, and practical applications with current real-world examples. This approach and emphasis on real-world examples offers students a learning experience that uniquely combines rigor and relevance. As Dr. John Media of the University of Washington’s School of Medicine and life long researcher on how the mind organizes information explains:
How does one communicate meaning in such a fashion that learning is improved? A simple trick involves the liberal use of relevant real-world examples, thus peppering main learning points with meaningful experiences. . . . Numerous studies show this works. . . . The greater the number of examples . . . the more likely the students were to remember the informa- tion. It’s best to use real-world situations familiar to the learner. . . . Examples work because they take advantage of the brain’s natural predilection for pattern matching. Information is more readily processed if it can be immediately associated with information already present in the brain. We compare the two inputs, looking for similarities and differences as we encode the new information. Providing examples is the cognitive equivalent of adding more handles to the door. [The more handles one creates at the moment of learning, the more likely the information can be accessed at a later date.] Providing examples makes the information more elaborative, more complex, better encoded, and therefore better learned.*
Strategic Management brings conceptual frameworks to life via examples that cover products and services from companies with which students are familiar, such as Facebook, Google, Tesla, Starbucks, Apple, McDonald’s, Disney, Airbnb, and Uber. Liberal use of such examples aids in making strategy relevant to students’ lives and helps them internal- ize strategy concepts and frameworks. Integrating current examples with modern strategy thinking, I prepare students with the foundation they need to understand how companies gain and sustain competitive advantage. I also develop students’ skills to become success- ful leaders capable of making well-reasoned strategic decisions in a globalized and turbu- lent 21st century.
I’m pleased to introduce the new 4th edition of Strategic Management. My distinctive approach to teaching and transmitting strategy not only offers students a unique learning experience that combines theory and practice, but also provides tight linkages between concepts and cases. In this new 4th edition, I build upon the unique strengths of this prod- uct, and continue to add improvements based upon hundreds of insightful reviews and
*Source: Medina, J. (2014), Brain Rules: 12 Principles for Surviving and Thriving at Work, Home, and School (pp. 139–140). (Seattle: Pear Press).
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PREFACE xv
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important feedback from professors, students, and working professionals. The hallmark features of this text continue to be:
■ Student engagement via practical and relevant application of strategy concepts using a holistic Analysis, Formulation, and Implementation (AFI) Strategy Framework.
■ Synthesis and integration of empirical research and practical applications combined with relevant strategy material to focus on “What is important?” for the student and “Why is it important?”
■ Emphasis on diversity by featuring a wide range of strategic leaders from different backgrounds and fields, not just in business, but also in entertainment, professional sports, and so forth.
■ Coverage of an array of firms, including for-profit public (Fortune 100) companies, but also private companies (including startups) as well as non profit organizations. All of them need a good strategy!
■ Global perspective, with a focus on competing around the world, featuring many lead- ing companies from Asia, Europe, and Latin America, as well as the United States. I was fortunate to study, live, and work across the globe, and I attempt to bring this cosmopolitan perspective to bear in this text.
■ Direct personal applications of strategy concepts to careers and lives to help internal- ize the content (including the popular myStrategy modules at the end of each chapter).
■ Industry-leading digital delivery option (Create), adaptive learning system (Smart- Book), and online assignment and assessment system (Connect).
■ Standalone module on How to Conduct a Case Analysis. ■ High-quality Cases, well integrated with text chapters and standardized, high-quality
teaching notes; there are two types of cases that come with this text: ■ 12 ChapterCases begin and end each chapter, framing the chapter topic
and content. ■ 22 MiniCases (Part 4 of the book), all based on original research, provide
dynamic opportunities for students to apply strategy concepts by assigning them as add-ons to chapters, either as individual assignments or as group work, or by using them for class discussion.
I have taken great pride in authoring all 12 ChapterCases, Strategy Highlights (2 per chapter, for a total of 24), and 22 MiniCases. This additional touch allows quality control and ensures that chapter content and cases use one voice and are closely interconnected. Both types of case materials come with sets of questions to stimulate class discussion or provide guidance for written assignments. The instructor resources offer sample answers that apply chapter content to the cases.
In addition to these in-text cases, 23 full-length Cases, with 20 of them (that is almost 90 percent!) authored or co-authored by me specifically to accompany this textbook, are available through McGraw-Hill’s custom-publishing Create program (www.McGrawHill- Create.com/Rothaermel). Full-length cases NEW to the 4th edition are:
∙ Uber ∙ Netflix ∙ Starbucks ∙ Disney ∙ Walmart ∙ SpaceX
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xvi PREFACE
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Popular cases about Apple, Amazon, Facebook, McDonald’s, Tesla, and Best Buy among several others are significantly updated and revised. Robust and structurally updated case teaching notes are also available and accessible through Create; financial data for these cases may be accessed from the Instructor Resource Center in the Connect Library.
What’s New in the 4th Edition? I have revised and updated the 4th edition in the following ways, many of which were inspired by conversations and feedback from the many users and reviewers of the prior editions.
OVERVIEW OF MAJOR CHANGES IN 4E: ■ New A-head section on “Changes over Time: Entry Choices and Industry Dynamics”
in Chapter 3. ■ New A-head section on “The Value Chain and Strategic Activity Systems” in Chapter 4. ■ New A-head section “Platform Strategy” in Chapter 7. ■ New A-head section “Organizing for Innovation” in Chapter 11 (closed and open
innovation). ■ All new or updated and revised ChapterCases (including: Tesla, Sheryl Sandberg at
Facebook, Airbnb, Uber vs. Lyft, IKEA, and Zappos). ■ All new or updated and revised StrategyHighlights (two per chapter). ■ New or fully updated and revised MiniCases (four new, 18 revised and updated). ■ Fully updated and revised full-length cases, including most popular cases such as
Apple, McDonald’s, Best Buy, Amazon, Facebook, Delta Air Lines, Alphabet’s Google, etc.
In detail:
CHAPTER 1 ■ New ChapterCase: “Tesla’s Secret Strategy.” ■ New Strategy Highlight: “Teach for America: How Wendy Kopp Inspires Future
Leaders.” ■ Improved chapter flow through moving the updated section on “Vision, Mission, and
Values” into Chapter 1 (from Chapter 2).
CHAPTER 2 ■ New ChapterCase: “Sheryl Sandberg: Leaning in at Facebook.” ■ Improved chapter flow through moving the updated section on “Stakeholder Strategy”
into Chapter 2 (from Chapter 1).
CHAPTER 3 ■ New ChapterCase: “Airbnb: Disrupting the Hotel Industry.” ■ New A-head section on “Changes over Time: Entry Choices and Industry Dynamics.” ■ Improved chapter flow through moving the updated section on industry and firm
effects into Chapter 3 (from Chapter 1).
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CHAPTER 4 ■ New A-head section on “The Value Chain and Strategic Activity Systems.” ■ New Strategy Highlight: “When Will P&G Play to Win Again?”
CHAPTER 5 ■ New section on “the Why, What, Who, and How of Business Models Framework.” ■ Extended and updated discussion of business models to include new popular applica-
tions and examples, with a more in-depth discussion. ■ Extended and updated discussion of competitive advantage and firm performance
using the ongoing competition between Apple and Microsoft as an example through- out the chapter, including comparing the same two companies along different metrics and approaches to assess competitive advantage. Added a stronger dynamic element.
CHAPTER 6 ■ New section on the learning curve concept applied to Tesla’s manufacturing process
with real-world data and graphic illustration.
CHAPTER 7 ■ New A-head section “Platform Strategy.” ■ New Strategy Highlight “Standards Battle: Which Automotive Technology Will Win?”
CHAPTER 8 ■ Updated and revised ChapterCase featuring Amazon’s corporate strategy through ver-
tical integration and diversification. ■ Updated and expanded section on parent-subsidiary relationship, featuring GM and
(former) subsidiaries Opel and Vauxhall in Europe.
CHAPTER 9 ■ New ChapterCase: “Little Lyft Gets Big Alliance Partners,” featuring the smaller
ride-hailing competitor’s astute use of strategic alliances with strong partners such as GM and Alphabet’s Waymo to compete against Uber.
■ New Strategy Highlight “How Tesla Used Alliances Strategically”.
CHAPTER 10 ■ New section on “Globalization 3.1: Retrenchment?” ■ Updated and revised ChapterCase: “Sweden‘s IKEA: The World’s Most Profitable
Retailer,” highlighting IKEA’s strategy on competing in both developed and emerging economies across the world.
■ New Exhibit 10.4 juxtaposing: “Advantages and Disadvantages of International Expansion”.
■ Updated and revised Strategy Highlight: “Walmart Retreats from Germany, and Lidl Invades the United States,” highlighting how disruptors of the German grocery indus- try (Aldi and Lidl) are challenging Walmart on its home turf.
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CHAPTER 11 ■ New A-head Section “Organizing for Innovation” (closed and open innovation). ■ New Strategy Highlight: “Sony vs. Apple: Whatever Happened to Sony?” ■ New Exhibit 11.11 juxtaposing: “Advantages and Disadvantages of Different Organi-
zational Structures”.
CHAPTER 12 ■ Updated and revised ChapterCase: “Uber: Most Ethically Challenged Tech Company?”
including co-founder and long-time CEO Travis Kalanick’s forced resignation in the wake of several ethics scandals.
■ Updated and revised Strategy Highlight: “Why the Mild Response to Goldman Sachs and Securities Fraud?”
MINICASES ■ Added four-new: Yahoo, IBM, Dollar Shave Club, and Disney. ■ Updated and revised the most popular 18 MiniCases from the third edition. ■ Stronger focus on non-U.S. firms, especially on global competitors from Asia and
Europe. ■ Stronger focus on U.S. companies competing in China and India, facing strong
domestic competitors.
FULL-LENGTH CASES ■ All cases—including the new and revised cases plus all cases from the previous edi-
tions that were authored by Frank T. Rothaermel—are available through McGraw-Hill Create: http://www.mcgrawhillcreate.com/Rothaermel.
■ Added five new, author-written full-length Cases: Netflix, Starbucks, Uber, Walmart, and Disney.
■ Added one new, full-length Case: SpaceX by David R. King ■ Revised and updated the most popular cases including: Amazon, Apple, Alphabet’s
Google, Best Buy, Facebook, McDonald’s, Tesla, Delta Air Lines, and UPS in India, among others.
■ Updated and revised the popular case “The Movie Exhibition Industry” by Steve Gove. ■ Case Strategic Financial Analyses (SFAs) include financial data in e-format for analysis.
CONNECT Connect, McGraw-Hill’s online assignment and assessment system, offers a wealth of content for both students and instructors. Assignable activities include the following:
■ SmartBook, one of the first fully adaptive and individualized study tools, provides students with a personalized learning experience, giving them the opportunity to prac- tice and challenge their understanding of core strategy concepts. SmartBook has been extremely well received by strategy instructors across the globe. It allows the instruc- tor to set up all assignments prior to the semester, to have them auto-released on pre- set dates, and to receive auto-graded progress reports for each student and the entire class. Students love SmartBook because they learn at their own pace, and it helps
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PREFACE xix
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them to study more efficiently by delivering an interactive reading experience through adaptive highlighting and review.
■ Interactive Application Exercises (such as Whiteboard Animation video cases, MiniCase case analyses, click-and-drag activities, and new case exercises for Ama- zon, Apple, Tesla, McDonald’s, Best Buy, and Facebook) that require students to apply key concepts and so to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor.
■ Running case, an activity that begins with a review of a specific company and its applied strategy using appropriate tools (e.g., PESTEL, Porter’s five forces, VRIO, SWOT, and others). The analysis progresses from a broad perspective to the appro- priate company-level perspective—i.e., from global to industry to strategic group to company and within a firm. Students will develop a complete strategy analysis for the company and consider several scenarios for improving the company’s competitive advantage. The scenarios will include a financial analysis and justification and ulti- mately provide a specific recommendation. Connect provide a running case example for Hewlett-Packard (now HP Inc. and Hewlett Packard Enterprise).
■ Resources for financial analysis (such as strategic financial ratios, templates for strategic financial analysis, and financial ratio reviews) that provide students with the tools they need to compare performance among firms and to refresh or extend their working knowledge of major financial measures in a strategic framework.
CREATE ■ CREATE, McGraw-Hill’s custom-publishing tool, is where you access the full-length
cases (and Teaching Notes) that accompany Strategic Management (http://www. mcgrawhillcreate.com/Rothaermel). You can create customized course packages in print and/or digital form at a competitive price point.
■ Through CREATE, you will be able to select from 20 author-written cases and 3 instructor-written cases that go specifically with the new 4th edition, as well as cases from Harvard, Ivey Darden, NACRA, and much more! You can: Assemble your own course, selecting the chapters, cases (multiple different formats), and readings that will work best for you. Or choose from several ready-to-go, author-recommended complete course solutions, which include chapters, cases, and readings, pre-loaded in CREATE. Among the pre-loaded solutions, you’ll find options for undergrad, MBA, accelerated, and other strategy courses.
INSTRUCTOR RESOURCES Located in the Connect Library under the Instructor’s Resources tab, instructors will find tested and effective tools to support teaching:
■ The updated and revised Teacher’s Resource Manual (TRM) includes thorough coverage of each chapter, as well as guidance for integrating Connect—all in a single resource. Included in this newly combined TRM, which retains favorite features of the previous edition’s Instructor’s Manual, is the appropriate level of theory, framework, recent application or company examples, teaching tips, PowerPoint references, critical discussion topics, and answers to end-of-chapter exercises.
■ The PowerPoint (PPT) slides, available in an accessible version for individuals with visual impairment, provide comprehensive lecture notes, video links, and company
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xx PREFACE
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examples not found in the textbook. Options include instructor media-enhanced slides as well as notes with outside application examples.
■ The Test Bank includes 100–150 questions per chapter, in a range of formats and with a greater-than-usual number of comprehension, critical-thinking, and application (or scenario-based) questions. It’s tagged by learning objectives, Bloom’s Taxonomy levels, and AACSB compliance requirements. Many questions are new, and especially written for the new 4th edition.
■ The Video Guide includes video links that relate to concepts from chapters. The video links include sources such as Big Think, Stanford University’s Entrepreneurship Corner, The McKinsey Quarterly, ABC, BBC, CBS, CNN, ITN/Reuters, MSNBC, NBC, PBS, and YouTube.
Any list of acknowledgments will almost always be incomplete, but I would like to thank some special people without whom this text would not have been possible. First and fore- most, my wife Kelleyn, and our children: Harris, Winston, Roman, Adelaide, Avery, and Ivy. Over the last few years, I have worked longer hours than when I was a graduate student to conduct the research and writing necessary for this text and accompanying case studies and other materials. I sincerely appreciate the sacrifice this has meant for my family.
The Georgia Institute of Technology provided a conducive, intellectual environment and superb institutional support to make this project possible. I thank Russell and Nancy McDonough for generously funding the endowed chair that I am honored to hold. I’m grateful for Dean Maryam Alavi and Senior Associate Dean Peter Thompson for providing the exceptional leadership that allows faculty to fully focus on research, teaching, and ser- vice. I have been at Georgia Tech for 15 years, and could not have had better colleagues— all of whom are not only great scholars but also fine individuals whom I’m fortunate to have as friends: Marco Ceccagnoli, Annamaria Conti, Jonathan Giuliano, Stuart Graham, Matt Higgins, David Ku, John McIntyre, Alex Oettl, Pian Shu, Eunhee Sohn, and Laurina Zhang. We have a terrific group of current and former PhD students, many of whom had a positive influence on this project, including Shanti Agung (Drexel University), Drew Hess (Washington and Lee University), Kostas Grigoriou (McKinsey), Congshan Li, Jaiswal Mayank (Rider University), Nicola McCarthy, German Retana (INCAE Business School, Costa Rica), Maria Roche, Briana Sell Stenard (Mercer University), Jose Urbina, Carrie Yang (University of Chicago), and Wei Zhang (Singapore Management University).
I was also fortunate to work with McGraw-Hill, and the best editorial and market- ing team in the industry: Michael Ablassmeir (director), Susan Gouijnstook (man- aging director), Lai T. Moy (senior product developer), Debbie Clare (executive marketing manager), Mary E. Powers and Keri Johnson (content project managers), Matt Diamond (senior designer), and Haley Burmeister (editorial coordinator). Bill Teague, content development editor, worked tirelessly and carefully on the fourth edition manu- script. I’m also indebted to Ann Torbert and Karyn Lu for invaluable editorial guidance on prior editions.
ACKNOWLEDGMENTS
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ACKNOWLEDGMENTS xxi
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I’m more than grateful to the contributions of great colleagues on various resources that accompany this new edition of Strategic Management:
■ Heidi Bertels (College of Staten Island, CUNY) on the Test Bank and SmartBook ■ John Burr (Purdue University) on the Video Guide ■ Melissa Francisco (University of Central Florida) on the accessible PowerPoint
Presentations
■ Anne Fuller (California State University, Sacramento), on Connect, Teacher’s Resource Manual, and End-of-Chapter Material
■ David R. King (Florida State University) on select Full-length Cases and Full-length Case Teaching Notes
■ Chandran Mylvaganam (Northwood University) on the MiniCase Teaching Notes Shawn Riley (Kutztown University) for his expert reviews on the Case Exercises, Case SFAs, and MiniCase Case Analyses
I’d also like to thank the students at Georgia Tech, in the undergraduate and full-time day MBA, and the evening and executive MBA programs, as well as the executive MBA students from the ICN Business School in Nancy, France, on whom the materials were beta-tested. Their feedback helped fine-tune the content and delivery.
Last, but certainly not least, I wish to thank the reviewers and focus group attendees who shared their expertise with us, from the very beginning when we developed the pro- spectus to the final teaching and learning package that you hold in your hands. The review- ers have given us the greatest gift of all—the gift of time! These very special people are listed starting on page xxii.
Frank T. Rothaermel Georgia Institute of Technology
Web: ftrStrategy.com Email: frank@ftrStrategy.com
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This book has gone through McGraw-Hill Education’s thorough development process. Over the course of several years, the project has benefited from numerous developmental focus groups and symposiums, from hundreds of reviews from reviewers across the coun- try, and from beta-testing of the first-edition manuscript as well as market reviews of the of subsequent editions on a variety of campuses. The author and McGraw-Hill wish to thank the following people who shared their insights, constructive criticisms, and valuable suggestions throughout the development of this project. Your contributions have improved this product.
Joshua R. Aaron East Carolina University
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REVIEWERS AND SYMPOSIUM ATTENDEES
THANK YOU . . .
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THANK YOU . . . xxiii
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©McGraw-Hill Education
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PART
Analysis
CHAPTER 1 What Is Strategy?
CHAPTER 2 Strategic Leadership: Managing the Strategy Process
CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups
CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies
CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models
1
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Part 1: Analysis
Part 1: Analysis
Part 2: Formulation
1. What Is Strategy?
3. External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 4. Internal Analysis: Resources, Capabilities, and Core Competencies
5. Competitive Advantage, Firm Performance, and Business Models
6. Business Strategy: Differentiation, Cost Leadership, and Blue Oceans 7. Business Strategy: Innovation, Entrepreneurship, and Platforms
8. Corporate Strategy: Vertical Integration and Diversification 9. Corporate Strategy: Strategic Alliances, Mergers and Acquisitions
10. Global Strategy: Competing Around the World
11. Organizational Design: Structure, Culture, and Control
Getting Started
External and Internal Analysis
Formulation: Business Strategy
Formulation: Corporate Strategy
Implementation Gaining &
Sustaining Competitive Advantage
12. Corporate Governance and Business Ethics
2. Strategic Leadership: Managing the Strategy Process
Part 3: Implementation
Part 2: Formulation
The AFI Strategy Framework
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CHAPTER What Is Strategy?
Chapter Outline
1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage What Is Competitive Advantage?
1.2 Vision, Mission, and Values Vision Mission Values
1.3 The AFI Strategy Framework
1.4 Implications for Strategic Leaders
Learning Objectives
LO 1-1 Explain the role of strategy in a firm’s quest for competitive advantage.
LO 1-2 Define competitive advantage, sustainable competitive advantage, competitive disad- vantage, and competitive parity.
LO 1-3 Describe the roles of vision, mission, and values in a firm’s strategy.
LO 1-4 Evaluate the strategic implications of product-oriented and customer-oriented vision statements.
LO 1-5 Justify why anchoring a firm in ethical core values is essential for long-term success.
LO 1-6 Explain the AFI strategy framework.
1
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Tesla’s Secret Strategy
IN 2017, TESLA INC.— an American manufacturer of all-electric cars—boasted a market capitalization1 of over $60 billion, an appreciation of more than 1,400 percent over its initial public offering price in 2010. How can a California startup achieve a market valuation that exceeds that of GM, the largest car manufacturer in the world, making some 10 million vehicles a year? The answer: Tesla’s Secret Strategy. In a blog entry on Tesla’s website in the summer of 2006, Elon Musk, Tesla’s co-founder and CEO, explained the startup’s master plan:2
1. Build sports car.
2. Use that money to build an affordable car.
3. Use that money to build an even more affordable car.
4. While doing above, also provide zero- emission electric power generation options.
5. Don’t tell anyone.
Let’s see if Tesla stuck to its strategy. In 2008, Tesla introduced its first car: the Roadster, a $110,000 sports coupe with faster accel- eration than a Porsche or a Ferrari. Tesla’s first vehicle served as a prototype to demonstrate that electric vehicles can be more than mere golf carts. Tesla thus successfully com- pleted Step 1 of the master plan.
In Step 2, after selling some 2,500 Roadsters, Tesla discontinued its production in 2012 to focus on its next car: the Model S, a four-door family sedan, with a base price of $73,500 before tax credits. The line appeals to a somewhat larger market and thus allows for larger production runs to drive down unit costs. The Model S received an outstanding market reception. It was awarded not only the 2013 Motor Trend Car of the Year, but also
received the highest score of any car ever tested by Con- sumer Reports (99/100). Tesla manufactures the Model S in the Fremont, California, factory that it purchased from Toyota. By the end of 2016, it had sold some 125,000 of the Model S worldwide.
Hoping for an even broader customer appeal, Tesla also introduced the Model X, a crossover between an SUV and a family van with futuristic falcon-wing doors for convenient access to second- and third-row seating. The $100,000 starting sticker price of the Model X is quite steep, however; thus limiting mass-market appeal. Techni- cal difficulties with its innovative doors delayed its launch until the fall of 2015.
Tesla has now reached Step 3 of its master plan. In 2017, Tesla delivered the company’s newest car: the
Model 3, an all- electric compact luxury sedan, with a starting price of $35,000. Tesla received some 375,000 preorders within three months of unveiling its model. Many of the want-to-be Tesla owners stood in line overnight, eagerly awaiting the open- ing of the Tesla stores to put down a $1,000 deposit to secure a spot on the waiting list for the Model 3, a car they had never even seen, let alone taken for a
test drive. By the time Tesla delivered the first 30 cars of its new Model 3 (to Tesla employees for quality test- ing and appreciation of their hard work), the California car maker had received over 500,000 preorders. This cus- tomer enthusiasm amounted to $500 million in interest- free loans for Tesla. The Model 3 was slated for delivery by late 2017. Tesla hoped to sell 500,000 total vehicles by the end of 2018. To accomplish this ambitious goal, Musk also promised that Tesla would increase its annual production from 50,000 in 2015 to 1 million vehicles a year by 2020.
CHAPTERCASE 1
Tesla’s Model X with falcon wing doors. ©Bloomberg/Getty Images
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LO 1-1
Explain the role of strategy in a firm’s quest for competitive advantage.
WHY IS TESLA SO SUCCESSFUL? In contrast, the big-three U.S. automakers— Ford, GM, and Chrysler—struggled during the first decade of the 21st century, with
both GM and Chrysler filing for bankruptcy protection. If once-great firms can fail, why is any company successful? What enables some firms
to gain and then sustain their competitive advantage over time? How can managers influ- ence firm performance? These are the big questions that define strategic management. Answering these questions requires integrating the knowledge you’ve obtained in your studies of various business disciplines to understand what leads to superior performance, and how you can help your organization achieve it.
Strategic management is the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Mastery of stra- tegic management enables you to view an organization such as a firm or a nonprofit outfit in its entirety. It also enables you to think like a general manager to help position your organization for superior performance. The AFI strategy framework embodies this view of strategic management. It will guide our exploration of strategic management through the course of your study.
In this chapter, we lay the groundwork for the study of strategic management. We’ll introduce foundational ideas about strategy and competitive advantage. We then move from thinking about why strategy is important to considering the role an organization’s vision, mission, and values play in its strategy. Next, we take a closer look at the compo- nents of the AFI framework and provide an overview of the entire strategic management process. We conclude this introductory chapter, as we do with all others in this text, with a section titled Implications for Strategic Leaders. Here we provide practical applications and considerations of the material developed in the chapter. Let’s begin the exciting jour- ney to understand strategic management and competitive advantage.
1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage
Strategy is a set of goal-directed actions a firm takes to gain and sustain superior per- formance relative to competitors.4 To achieve superior performance, companies compete for resources: New ventures compete for financial and human capital, existing companies compete for profitable growth, charities compete for donations, universities compete for the best students and professors, sports teams compete for championships, while celebri- ties compete for media attention.
As highlighted in the ChapterCase, Tesla, a new entrant in the automotive industry, is com- peting with established U.S. companies such as GM, Ford, and Chrysler and also with for- eign automakers Toyota, Honda, Mercedes, and BMW, among others, for customers. In any
Step 4 of Musk’s master plan for Tesla aims to pro- vide zero-emission electric power generation options. To achieve this goal, Tesla acquired SolarCity, a solar energy company, for more than $2 billion in the fall of 2016. This joining creates the world’s first fully integrated clean-tech energy company by combining solar power, power storage, and transportation. A successful integration of Tesla and
SolarCity, where Musk is also chairman and an early inves- tor, would allow completion of Step 4 of Tesla’s master plan.
Step 5: “Don’t tell anyone”—thus the ChapterCase title “Tesla’s Secret Strategy.”3
You will learn more about Tesla by reading this chapter; related ques- tions appear in “ChapterCase 1 / Consider This . . . .”
strategic management An integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage.
strategy The set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors.
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competitive situation, a good strategy enables a firm to achieve superior performance relative to its competitors. This leads to the question: What is a good strategy?
1. A diagnosis of the competitive challenge. This element is accomplished through analy- sis of the firm’s external and internal environments (Part 1 of the AFI framework).
2. A guiding policy to address the competitive challenge. This element is accomplished through strategy formulation, resulting in the firm’s corporate, business, and functional strategies (Part 2 of the AFI framework).
3. A set of coherent actions to implement the firm’s guiding policy. This element is accomplished through strategy implementation (Part 3 of the AFI framework).
Let’s revisit ChapterCase 1 to see whether Tesla, Inc. is pursuing a good strategy. Tesla appears to be performing quite well when considering indicators such as stock apprecia- tion, where it outperforms its competitors by a wide margin. The high appreciation of Tesla stock points to investors’ expectations of future growth. By other measures, such as generating profits, Tesla underperforms compared to established car companies. Losses are common for startups early on, especially if the business requires large upfront invest- ments such as building new factories, which Tesla was required to do. What we can say at this point is that Tesla seems to be starting with a promising strategy and is in the process of gaining a competitive advantage. But can Tesla sustain its advantage over time? Let’s use the three elements of a good strategy to assess how Tesla CEO Elon Musk could turn an early lead into a sustainable competitive advantage.
THE COMPETITIVE CHALLENGE. A good strategy needs to start with a clear and criti- cal diagnosis of the competitive challenge. Musk, Tesla’s co-founder and CEO, describes himself as an “engineer and entrepreneur who builds and operates companies to solve environmental, social, and economic challenges.”5 Tesla was founded with the vision to “accelerate the world’s transition to sustainable transport.”6
To accomplish this mission, Tesla must build zero-emission electric vehicles that are attractive and affordable. Beyond achieving a competitive advantage for Tesla, Musk is working to set a new standard in automotive technology. He hopes that zero-emission elec- tric vehicles will one day replace gasoline-powered cars.
Tesla’s competitive challenge is sizable: To succeed it must manufacture attractive and affordable vehicles using its new technology, which will compete with traditional cars running on gasoline. It also needs the required infrastructure for electric vehicles, including a network of charging stations to overcome “range anxiety”7 by consumers; many mass-market electric vehi- cles cannot drive as far on one charge as gasoline-powered cars can with a full tank of gas. Gas stations can be found pretty much on any corner in cities and every couple of miles on highways.8
A GUIDING POLICY. After the diagnosis of the competitive challenge, the firm needs to for- mulate an effective guiding policy in response. The formulated strategy needs to be consis- tent, often backed up with strategic commitments such as sizable investments or changes to an organization’s incentive and reward system—big changes that cannot be easily reversed. Without consistency in a firm’s guiding policy, employees become confused and cannot make effective day-to-day decisions that support the overall strategy. Without consistency in strategy, moreover, other stakeholders, including investors, also become frustrated.
To address the competitive challenge, Tesla’s current guiding policy is to build a cost- competitive mass-market vehicle such as the new Model 3 (this is also Step 3 in Tesla’s “Secret Strategy,” as discussed in the ChapterCase). Tesla’s formulated strategy is consis- tent with its mission and the competitive challenge identified. It also requires significant strategic commitments such as Tesla’s $5 billion investment in a new lithium-ion battery
Good strategy A strategy is good when it enables a firm to achieve superior performance. It consists of three elements: (1) a diagnosis of the competitive challenge; (2) a guiding policy to address the competitive challenge; and (3) a set of coherent actions to implement a firm’s guiding policy.
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plant in Nevada, the so-called Gigafactory. Batteries are the most critical component for electric vehicles. To accomplish this major undertaking, Tesla has partnered with Pana- sonic of Japan, a world leader in battery technology.
COHERENT ACTIONS. Finally, a clear guiding policy needs to be implemented with a set of coherent actions. Tesla appears to implement its formulated strategy with actions consistent with its diagnosis of the competitive challenge. To accomplish building a cost-competitive mass-market vehicle, Tesla must benefit from economies of scale, which are decreases in cost per vehicle as output increases. To reap these critical cost reductions, Tesla must ramp up its production volume. This is a huge challenge: Tesla aims to increase its production output by some 20 times, from 50,000 cars built in 2015 to 1 million cars per year by 2020. Tesla’s retooling of its manufacturing facility in Fremont, California, to rely more heavily on cutting-edge robotics as well as its multibillion-dollar investment to secure an uninterrupted supply of lithium-ion batteries are examples of actions coherent with Tesla’s formulated strategy. At the same time, Tesla is further building out its network of charg- ing stations across the United States and globally. To fund this initiative, it announced that using the company’s charging network will no longer be free for new Tesla owners.
To accomplish the lofty goal of making zero-emission electric motors the new standard in automotive technology (rather than gas-powered internal combustion engines), Tesla decided to make its proprietary technology available to the public. Musk’s hope is that sharing Tesla’s patents will expand the overall market size for electric vehicles as other manufacturers, such as BMW with its i3 line of vehicles, can employ Tesla’s technology.
In review, to create a good strategy, three steps are crucial. First, a good strategy defines the competitive challenges facing an organization through a critical and honest assessment of the status quo. Second, a good strategy provides an overarching approach on how to deal with the competitive challenges identified. The approach needs to be communicated in policies that provide clear guidance for employees. Last, a good strategy requires effective implementation through a coherent set of actions.
WHAT IS COMPETITIVE ADVANTAGE? Competitive advantage is always relative, not absolute. To assess competitive advantage, we compare firm performance to a benchmark—that is, either the performance of other firms in the same industry or an industry average. A firm that achieves superior perfor- mance relative to other competitors in the same industry or the industry average has a competitive advantage.9 In terms of stock market valuation, Tesla has appreciated much more in recent years than GM, Ford, or Chrysler, and thus appears to have a competitive advantage, at least on this dimension.
A firm that is able to outperform its competitors or the industry average over a pro- longed period has a sustainable competitive advantage. Apple, for example, has enjoyed a sustainable competitive advantage over Samsung in the smartphone industry for over a decade since its introduction of the iPhone in 2007. Other phone makers such as Microsoft (which purchased Nokia) and BlackBerry have all but exited the smartphone market, while new entrants such as Xiaomi and Huawei of China are trying to gain traction.
If a firm underperforms its rivals or the industry average, it has a competitive disadvantage. For example, a 15 percent return on invested capital may sound like
LO 1-2
Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity.
competitive advantage Superior performance relative to other competitors in the same industry or the industry average.
competitive disadvantage Underperformance relative to other competitors in the same industry or the industry average.
sustainable competitive advantage Outperforming competitors or the industry average over a prolonged period of time.
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superior firm performance. In the consulting industry, though, where the average return on invested capital is often above 20 percent, such a return puts a firm at a competitive disadvantage. In contrast, if a firm’s return on invested capital is 2 percent in a declin- ing industry, like newspaper publishing, where the industry average has been negative (–5 percent) for the past few years, then the firm has a competitive advantage. Should two or more firms perform at the same level, they have competitive parity. In Chapter 5, we’ll discuss in greater depth how to evaluate and assess competitive advantage and firm performance.
To gain a competitive advantage, a firm needs to provide either goods or services consumers value more highly than those of its competitors, or goods or services similar to the competitors’ at a lower price. The rewards of superior value creation and capture are profitability and market share. Elon Musk is particularly motivated to address global warming, and thus formed Tesla to build electric vehicles with zero emissions. Sara Blakely, the founder and CEO of Spanx, the global leader in the shapewear industry, is motivated to change women’s lives. Sam Walton was driven by offering lower prices than his competitors when creating Walmart, the world’s largest retailer. For Musk, Blakely, Walton, and numerous other entrepreneurs and busi- nesspeople, creating shareholder value and making money is the consequence of filling a need and providing a product, service, or experience consumers wanted, at a price they could afford.
The important point here is that strategy is about creating superior value, while contain- ing the cost to create it, or by offering similar value at lower cost. Managers achieve these combinations of value and cost through strategic positioning. That is, they stake out a unique position within an industry that allows the firm to provide value to customers, while controlling costs. The greater the difference between value creation and cost, the greater the firm’s economic contribution and the more likely it will gain competitive advantage.
Strategic positioning requires trade-offs, however. As a low-cost retailer, Walmart has a clear strategic profile and serves a specific market segment. Upscale retailer Nordstrom has also built a clear strategic profile by providing superior customer service to a higher end, luxury market segment. Although these companies are in the same industry, their customer segments overlap very little, and they are not direct competitors. Walmart and Nordstrom have each chosen a distinct but different strategic position. The managers make conscious trade-offs that enable each company to strive for competitive advantage in the retail industry, using different competitive strategies: cost leadership versus differentiation. In regard to the customer service dimension, Walmart provides acceptable service by low- skill employees in a big-box retail outlet offering “everyday low prices,” while Nordstrom provides a superior customer experience by professional salespeople in a luxury setting.
A clear strategic profile—in terms of product differentiation, cost, and customer service—allows each retailer to meet specific customer needs. Competition focuses on creating value for customers (through lower prices or better service and selection, in this example) rather than destroying rivals. Even though Walmart and Nordstrom compete in the same industry, both can win if they achieve a clear strategic position through a well- executed competitive strategy. Strategy, therefore, is not a zero-sum game.
competitive parity Performance of two or more firms at the same level.
Spanx founder and CEO Sara Blakely, a graduate of Florida State University, is the world’s youngest female billionaire.
©ZUMA Press Inc/Alamy Stock Photo
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The key to successful strategy is to combine a set of activities to stake out a unique stra- tegic position within an industry. Competitive advantage has to come from performing dif- ferent activities or performing the same activities differently than rivals are doing. Ideally, these activities reinforce one another rather than create trade-offs. For instance, Walmart’s strategic activities strengthen its position as cost leader: Big retail stores in rural locations, extremely high purchasing power, sophisticated IT systems, regional distribution centers, low corporate overhead, and low base wages and salaries combined with employee profit sharing reinforce each other, to maintain the company’s cost leadership.
Since clear strategic positioning requires trade-offs, strategy is as much about deciding what not to do, as it is about deciding what to do.10 Because resources are limited, manag- ers must carefully consider their strategic choices in the quest for competitive advantage. Trying to be everything to everybody will likely result in inferior performance. In addition, operational effectiveness, marketing skills, and other functional expertise all strengthen a unique strategic position. Those capabilities, though, do not substitute for competitive strategy. Competing to be similar but just a bit better than your competitor is likely to be a recipe for cut-throat competition and low profit potential.
Let’s take this idea to its extreme in a quick thought experiment: If all firms in the same industry pursued a low-cost position through application of competitive benchmarking, all firms would have identical cost structures. None could gain a competitive advantage. Everyone would be running faster, but nothing would change in terms of relative strategic positions. There would be little if any value creation for customers because companies would have no resources to invest in product and process improvements. Moreover, the least-efficient firms would be driven out, further reducing customer choice.
To gain a deeper understanding of what strategy is, it may be helpful to think about what strategy is not.11 Be on the lookout for the following major hallmarks of what strategy is not:
1. Grandiose statements are not strategy. You may have heard firms say things like, “Our strategy is to win” or “We will be No. 1.” Twitter, for example, declared its “ambition is to have the largest audience in the world.”12 Such statements of desire, on their own, are not strategy. They provide little managerial guidance and often lead to goal conflict and confusion. Moreover, such wishful thinking frequently fails to address economic fundamentals. As we will discuss in the next section, an effective vision and mission can lay the foundation upon which to craft a good strategy. This foundation must be backed up, however, by strategic actions that allow the firm to address a competitive challenge with clear consideration of economic fundamentals, in particular, value cre- ation and costs.
2. A failure to face a competitive challenge is not strategy. If the firm does not define a clear competitive challenge, employees have no way of assessing whether they are making progress in addressing it. Managers at the now-defunct video rental chain Blockbuster, for example, failed to address the competitive challenges posed by new players Netflix, Redbox, Amazon Prime, and Hulu.
3. Operational effectiveness, competitive benchmarking, or other tactical tools are not strategy. People casually refer to a host of different policies and initiatives as some sort of strategy: pricing strategy, internet strategy, alliance strategy, operations strategy, IT strategy, brand strategy, marketing strategy, HR strategy, China strategy, and so on. All these elements may be a necessary part of a firm’s functional and global initiatives to support its competitive strategy, but these elements are not sufficient to achieve com- petitive advantage. In this text, though, we will reserve the term strategy for describing the firm’s overall efforts to gain and sustain competitive advantage.
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1.2 Vision, Mission, and Values The first step to gain and sustain a competitive advantage is to define an organization’s vision, mission, and values. Managers must ask the following questions: ■ Vision. What do we want to accomplish ultimately? ■ Mission. How do we accomplish our goals? ■ Values. What commitments do we make, and what guardrails do we put in place, to act
both legally and ethically as we pursue our vision and mission?
The vision is the first principle that needs to be defined because it succinctly identi- fies the primary long-term objective of the organization. Strategic leaders need to begin with the end in mind.13 In fact, early on strategic success is created twice. Leaders create the vision in the abstract by formulating strategies that enhance the chances of gaining and sustaining competitive advantage, before any actions of strategy implementation are taken in a second round of strategy creation. This process is similar to building a house. The future owner must communicate her vision to the architect, who draws up a blueprint of the home for her review. The process is iterated a couple of times until all the home- owner’s ideas have been translated into the blueprint. Only then does the building of the house begin. The same holds for strategic success; it is first created through strategy for- mulation based on careful analysis before any actions are taken. Let’s look at this process in more detail.
VISION A vision captures an organization’s aspiration and spells out what it ultimately wants to accomplish. An effective vision pervades the organization with a sense of winning and motivates employees at all levels to aim for the same target, while leaving room for indi- vidual and team contributions.
Tesla’s vision is to accelerate the world’s transition to sustainable transport. The goal is to provide affordable zero-emission mass-market cars that are the best in class. SpaceX is a spacecraft manufacturer and space transport services company, also founded by Elon Musk, whose inspirational vision is to make human life multi planetary. To achieve this goal, SpaceX aims to make human travel to Mars not only possible but also affordable. Moreover, SpaceX also sees a role in helping establish a self-sustainable human colony on Mars.14
Employees in visionary companies tend to feel part of something bigger than them- selves. An inspiring vision helps employees find meaning in their work. Beyond monetary rewards, it allows employees to experience a greater sense of purpose. People have an intrinsic motivation to make the world a better place through their work activities.15 This greater individual purpose in turn can lead to higher organizational performance.16 Basing actions on its vision, a firm will build the necessary resources and capabilities through continuous organizational learning, including learning from failure, to translate into reality what begins as a stretch goal or strategic intent.17
To provide meaning for employees in pursuit of the organization’s ultimate goals, vision statements should be forward-looking and inspiring. Strategy Highlight 1.1 shows how Wendy Kopp, the founder of Teach for America, uses an inspiring vision to effec- tively and clearly communicate what TFA ultimately wants to accomplish, while providing a stretch goal.
It’s not surprising that vision statements can be inspiring and motivating in the non- profit sector. Many people would find meaning in wanting to help children attain an excel- lent education (TFA) or wanting to be always there, touching the lives of people in need, the vision of the American Red Cross. But what about for-profit firms?
LO 1-3
Describe the roles of vision, mission, and values in a firm’s strategy.
vision A statement about what an organization ultimately wants to accomplish; it captures the company’s aspiration.
strategic intent A stretch goal that pervades the organization with a sense of winning, which it aims to achieve by building the necessary resources and capabilities through continuous learning.
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Teach for America: How Wendy Kopp Inspires Future Leaders
unattractive, low-status job into a high-prestige professional opportunity. Kopp works to eliminate educational inequality by enlisting the nation’s most promising future leaders in the effort. Thus to be chosen for TFA is a badge of honor.
In the first four months after creating TFA, Kopp received more than 2,500 applicants. Her marketing consisted of fly- ers in dorm rooms. During its first academic year (1990–91), TFA was able to serve five states and reached some 36,000 students. After 25 years, during the 2015–16 academic year, some 20,000 TFA corps members were teaching in 36 states (and Washington, D.C.) and more than 1,000 schools. To date, TFA has reached over 10 million students.
To see how all three components—vision, mission, and values—work together, see Exhibit 1.1, which provides a snap- shot of aspirations at Teach for America.
While initially targeted at college seniors, today, one-third of all TFA corps members applied as graduate students or professionals. In 2015, TFA added 4,100 new teachers to its corps from over 27,300 applications, representing more than 800 colleges and universities throughout the United States. This equates to about 15 percent acceptance, roughly equiv- alent to the admission rate of highly selective universities such as Northwestern, Cornell, or University of California, Berkeley. TFA’s teaching cohort is also much more diverse than the national average: While some 20 percent of teach- ers nationwide are people of color, about 50 percent of TFA corps members are. TFA corps members receive the same pay as other first-year teachers in the local school district.
Most importantly, TFA makes a significant positive impact on students. Some 95 percent of all school principals work- ing with TFA members say these teachers make a positive difference. A study commissioned by the U.S. Department of Education found that students being taught by TFA corps members showed significantly higher achievement, especially in math and science.
In 2016, after celebrating its 25th anniversary, TFA CEO Elisa Villanueva Beard recalls that she was inspired to sign up for TFA (when a freshman in high school) by Wendy Kopp’s “audacity to believe young people could make a profound dif- ference in the face of intractable problems standing between the ideals of a nation I loved and a starkly disappointing real- ity; who were bound by a fierce belief that all children, from American Indian reservations in South Dakota to Oakland to the Rio Grande Valley to the Bronx, should have the opportu- nity to write their own stories and fulfill their true potential.”18
Strategy Highlight 1.1
Wendy Kopp, Teach for America founder. ©Bloomberg/Getty Images
Teach for America (TFA) is a cadre of future leaders who work to ensure that underprivileged youth get an excellent educa- tion. The nonprofit organization recruits both graduates and professionals to teach for two years in economically disadvan- taged communities in the United States. TFA’s vision is: One day, all children in this nation will have the opportunity to attain an excellent education.
The idea behind TFA was developed by then-21-year-old Wendy Kopp as her college senior thesis (in 1989). Kopp was convinced that young people generally search for meaning in their lives by making a positive contribution to society. The genius of Kopp’s idea was to turn on its head the social perception of teaching—to make what could appear to be an
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VISION One day, all children in this nation will have the opportunity to attain an excellent education.
MISSION Our mission is to enlist, develop, and mobilize as many as possible of our nation’s most promising future leaders to grow and strengthen the movement for educational equity and excellence.
VALUES Transformational Change: We seek to expand educational opportunity in ways that are life- changing for children and transforming for our country. Given our deep belief in children and communities, the magnitude of educational inequity and its consequences, and our optimism about the solvability of the problem, we act with high standards, urgency, and a long-term view.
Leadership: We strive to develop and become the leaders necessary to realize educational excellence and equity. We establish bold visions and invest others in working towards them. We work in purposeful, strategic, and resourceful ways, define broadly what is within our control to solve, and learn and improve constantly. We operate with a sense of possibility, persevere in the face of challenges, ensure alignment between our actions and beliefs, and assume personal responsibility for results.
Team: We value and care about each other, operate with a generosity of spirit, and have fun in the process of working together. To maximize our collective impact, we inspire, challenge, and support each other to be our best and sustain our effort.
Diversity: We act on our belief that the movement to ensure educational equity will succeed only if it is diverse in every respect. In particular, we value the perspective and credibility that individuals who share the racial and economic backgrounds of the students with whom we work can bring to our organization, classrooms, and the long-term effort for change.
Respect & Humility: We value the strengths, experiences, and perspectives of others, and we recognize our own limitations. We are committed to partnering effectively with families, schools, and communities to ensure that our work advances the broader good for all children.
EXHIBIT 1.1 / Teach for America: Vision, Mission, and Values
SOURCE: www.teachforamerica.org.
Visionary companies, such as 3M, General Electric, Procter & Gamble (P&G), and Walmart, provide more aspirational ideas that are not exclusively financial. The upscale retailer Nordstrom’s vision, for example, is to provide outstanding service every day, one customer at a time. Visionary companies often outperform their competitors over the long run. Tracking the stock market performance of companies over several decades, strategy scholars found that visionary companies outperformed their peers by a wide margin.19 A truly meaningful and inspiring vision makes employees feel they are part of something bigger. This is highly motivating and, in turn, can improve firm financial performance.
MISSION Building on the vision, organizations establish a mission, which describes what an organi- zation actually does—that is, the products and services it plans to provide, and the markets in which it will compete. People sometimes use the terms vision and mission interchange- ably, but in the strategy process they differ. ■ A vision defines what an organization wants to accomplish ultimately, and thus the
goal can be described by the infinitive form of the verb starting with to. As discussed in Strategy Highlight 1.1, TFA’s vision is to attain an excellent education for all children.
■ A mission describes what an organization does; it defines how the vision is accom- plished and is often introduced with the preposition by. Accordingly, we can recast
Mission Description of what an organization actually does—the products and services it plans to provide, and the markets in which it will compete.
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TFA’s mission that it will achieve its vision by enlisting, developing, and mobilizing as many as possible of our nation’s most promising future leaders to grow and strengthen the movement for educational equity and excellence. (See Exhibit 1.1).
To be effective, firms need to back up their visions and missions with strategic commitments, in which the enterprise undertakes credible actions. Such commitments are costly, long-term oriented, and difficult to reverse.20 However noble the mission state- ment, to achieve competitive advantage companies need to make strategic commitments informed by economic fundamentals of value creation.
As mentioned in the ChapterCase, Tesla is investing billions of dollars to equip its car factory in California with cutting-edge robotics and to build the Gigafactory producing lithium-ion batteries in Nevada. These investments by Tesla are examples of strategic commitments because they are costly, long-term, and difficult to reverse. They are clearly supporting Tesla’s vision to accelerate the world’s transition to sustainable transport. Tesla hopes to translate this vision into reality by providing affordable zero-emission mass- market cars that are the best in class, which captures Tesla’s mission.
VISION STATEMENTS AND COMPETITIVE ADVANTAGE. Do vision statements help firms gain and sustain competitive advantage? It depends. The effectiveness of vision statements differs by type. Customer-oriented vision statements allow companies to adapt to chang- ing environments. Product-oriented vision statements often constrain this ability. This is because customer-oriented vision statements focus employees to think about how best to solve a problem for a consumer.21
Clayton Christensen shares how a customer focus let him help a fast food chain increase sales of milk shakes. The company approached Christensen after it had made several changes to its milk-shake offering based on extensive customer feedback but sales failed to improve. Rather than asking customers what kind of milk shake they wanted, he thought of the problem in a different way. He observed customer behavior and then asked customers, “What job were you trying to do that caused you to hire that milk shake?”22 He wanted to know what problem the customers were trying to solve. Surprisingly he found that roughly half of the milk shakes were purchased in the mornings, because customers wanted an easy breakfast to eat in the car and a diversion on long commutes. Based on the insights gained from this problem-solving perspective, the company expanded its milk-shake offerings to include healthier options with fruit chunks and provided a prepaid dispensing machine to speed up the drive-through, and thus improve customers’ morning commute. A customer focus made finding a solution much easier.
You could say that the restaurant company had a product orientation that prevented its executives from seeing unmet customer needs. Product-oriented vision statements focus employees on improving existing products and services without consideration of underly- ing customer problems to be solved. Our environments are ever-changing and sometimes seem chaotic. The increased strategic flexibility afforded by customer-oriented vision statements can provide companies with a competitive advantage.23 Let’s look at both types of vision statements in more detail.
PRODUCT-ORIENTED VISION STATEMENTS. A product-oriented vision defines a business in terms of a good or service provided. Product-oriented visions tend to force managers to take a more myopic view of the competitive landscape. Consider the strategic decisions of U.S. railroad companies. Railroads are in the business of moving goods and people from point A to point B by rail. When they started in the 1850s, their short-distance competition was the horse or horse-drawn carriage. There was little long-distance competition (e.g., ship canals or good roads) to cover the United States from coast to coast. Because of their
LO 1-4
Evaluate the strategic implications of product-oriented and customer-oriented vision statements.
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monopoly, especially in long-distance travel, these companies were initially extremely profitable. Not surprisingly, the early U.S. railroad companies saw their vision as being in the railroad business, clearly a product-based definition.
However, the railroad companies’ monopoly did not last. Technological innovations changed the transportation industry dramatically. After the introduction of the automo- bile in the early 1900s and the commercial jet in the 1950s, consumers had a wider range of choices to meet their long-distance transportation needs. Rail companies were slow to respond; they failed to redefine their business in terms of services provided to the con- sumer. Had they envisioned themselves as serving the full range of transportation and logistics needs of people and businesses across America (a customer-oriented vision), they might have become successful forerunners of modern logistics companies such as FedEx or UPS.
Recently, the railroad companies seem to be learning some lessons: CSX Railroad is now redefining itself as a green-transportation alternative. It claims it can move one ton of freight 423 miles on one gallon of fuel. However, its vision remains product-oriented: to be the safest, most progressive North American railroad.
CUSTOMER-ORIENTED VISION STATEMENTS. A customer-oriented vision defines a busi- ness in terms of providing solutions to customer needs. For example, “We provide solu- tions to professional communication needs.” Companies with customer-oriented visions can more easily adapt to changing environments. Exhibit 1.2 provides additional exam- ples of companies with customer-oriented vision statements. In contrast, companies that define themselves based on product-oriented statements (e.g., “We are in the typewriter business”) tend to be less flexible and thus more likely to fail. The lack of an inspiring needs-based vision can cause the long-range problem of failing to adapt to a changing environment.
Customer-oriented visions identify a critical need but leave open the means of how to meet that need. Customer needs may change, and the means of meeting those needs may change with it. The future is unknowable, and innovation is likely to provide new ways to meet needs that we cannot fathom today.24 For example, consider the need to transmit information over long distances. Communication needs have persisted throughout the mil- lennia, but the technology to solve this problem has changed drastically over time.25 Dur- ing the reign of Julius Caesar, moving information over long distances required papyrus, ink, a chariot, a horse, and a driver. During Abraham Lincoln’s time, railroads handled this task, while an airplane was used when Franklin Delano Roosevelt was president. Today,
EXHIBIT 1.2 / Companies with Customer-Oriented Vision Statements
Alibaba: To make it easy to do business anywhere.
Amazon: To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.
Better World Books: To harness the power of capitalism to bring literacy and opportunity to people around the world.
Facebook: To make the world more open and connected.
GE: To move, cure, build, and power the world.
Google: To organize the world’s information and make it universally accessible and useful.
Nike: To bring inspiration and innovation to every athlete in the world.
SpaceX: To make human life multi planetary.
Tesla: To accelerate the world’s transition to sustainable energy.
Walmart: To be the best retailer in the hearts and minds of consumers and employees.
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we use connected mobile devices to move information over long distances at the speed of light. The problem to be solved—moving information over long distance—has remained the same, but the technology employed to do this job has changed quite drastically. Chris- tensen recommends that strategic leaders think hard about how the means of getting a job done have changed over time and ask themselves, “Is there an even better way to get this job done?”
It is critical that an organization’s vision should be flexible to allow for change and adaptation. Consider how Ford Motor Co. has addressed the problem of personal mobility over the past 100 years. Before Ford entered the market in the early 1900s, people trav- eled long distances by horse-drawn buggy, horseback, boat, or train. But Henry Ford had a different idea. In fact, he famously said, “If I had listened to my customers, I would have built a better horse and buggy.”26 Instead, Henry Ford’s original vision was to make the automobile accessible to every American. He succeeded, and the automobile dramatically changed how mobility was achieved.
Fast-forward to today: Ford Motor Co.’s vision is to provide personal mobility for people around the world. Note that it does not even mention the automobile. By focusing on the consumer need for personal mobility, Ford is leaving the door open for exactly how it will fulfill that need. Today, it’s mostly with traditional cars and trucks propelled by gas-powered internal combustion engines, with some hybrid electric vehicles in its lineup. In the near future, Ford is likely to provide vehicles powered by alternative energy sources such as electric power or hydrogen. In the far-reaching future, perhaps Ford will get into the business of individual flying devices. Throughout all of this, its vision would still be relevant and compel its managers to engage in future markets. In contrast, a product- oriented vision would have greatly constrained Ford’s degree of strategic flexibility.
MOVING FROM PRODUCT-ORIENTED TO CUSTOMER-ORIENTED VISION STATEMENTS. In some cases, product-oriented vision statements do not interfere with the firm’s success in achieving superior performance and competitive advantage. Consider Intel Corp., one of the world’s leading silicon innovators. Intel’s early vision was to be the preeminent building-block supplier of the PC industry. Intel designed the first commercial micropro- cessor chip in 1971 and set the standard for microprocessors in 1978. During the personal computer (PC) revolution in the 1980s, microprocessors became Intel’s main line of busi- ness. Intel’s customers were original equipment manufacturers that produced consumer end-products, such as computer manufacturers HP, IBM, Dell, and Compaq.
In the internet age, though, the standalone PC as the end-product has become less important. Customers want to stream video and share selfies and other pictures online. These activities consume a tremendous amount of computing power. To reflect this shift, Intel in 1999 changed its vision to focus on being the preeminent building-block supplier to the internet economy. Although its product-oriented vision statements did not impede performance or competitive advantage, in 2008 Intel fully made the shift to a customer- oriented vision: to delight our customers, employees, and shareholders by relentlessly delivering the platform and technology advancements that become essential to the way we work and live. Part of this shift was reflected by the hugely successful “Intel Inside” adver- tising campaign in the 1990s that made Intel a household name worldwide.
Intel accomplished superior firm performance over decades through continuous adap- tations to changing market realities. Its formal vision statement lagged behind the firm’s strategic transformations. Intel regularly changed its vision statement after it had accom- plished each successful transformation.27 In such a case, vision statements and firm perfor- mance are clearly not related to one another.
It is also interesting to note that customer-oriented visions also frequently change over time. When Telsa was founded in 2003, its mission was to accelerate the world’s
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transition to sustainable transport. Over the last decade or so, Tesla completed several steps of its initial master plan (as detailed in the opening case), including providing zero- emission electric power generation options (Step 4), through the acquisition of the Solar- City. Tesla, therefore, no longer views itself as a car company but as a fully integrated clean-tech company. To capture this ambition more accurately Tesla changed its vision to accelerate the world’s transition to sustainable energy. To reposition Tesla as an inte- grated clean-tech energy company, in 2017, Tesla changed its official name from Tesla Motors to Tesla, Inc.
Taken together, empirical research shows that sometimes vision statements and firm performance are associated with one another. A positive relationship between vision state- ments and firm performance is more likely to exist under certain circumstances: ■ The visions are customer-oriented. ■ Internal stakeholders are invested in defining the vision. ■ Organizational structures such as compensation systems align with the firm’s vision
statement.28
The upshot is that an effective vision statement can lay the foundation upon which to craft a strategy that creates competitive advantage.
VALUES While many companies have powerful vision and mission statements, they are not enough. An organization’s values also need to be clearly articulated in the strategy process. A core values statement matters because it provides touchstones for the employees to understand the company culture. It offers bedrock principles that employees at all levels can use to deal with complexity and to resolve conflict. Such statements can help provide the organi- zation’s employees with a moral compass.
Consider that much of unethical behavior, while repugnant, may not be illegal. Often we read the defensive comment from a company under investigation or fighting a civil suit that “we have broken no laws.” However, any firm that fails to establish extra-legal, ethical standards will be more prone to behaviors that can threaten its very existence. A company whose culture is silent on moral lapses breeds further moral lapses. Over time such a culture could result in a preponderance of behaviors that cause the company to ruin its reputation, at the least, or slide into outright legal violations with resultant penalties and punishment, at the worst.
Organizational core values are the ethical standards and norms that govern the behav- ior of individuals within a firm or organization. Strong ethical values have two important functions. First, ethical standards and norms underlay the vision statement and provide stability to the strategy, thus laying the groundwork for long-term success. Second, once the company is pursuing its vision and mission in its quest for competitive advantage, they serve as guardrails to keep the company on track.
The values espoused by a company provide answers to the question, how do we accom- plish our goals? They help individuals make choices that are both ethical and effective in advancing the company’s goals. Strategy Highlight 1.2, featuring the pharmaceutical company Merck, provides an example of how values can drive strategic decision making, and what can happen if a company deviates from its core values.
One last point about organizational values: Without commitment and involvement from top managers, any statement of values remains merely a public relations exercise. Employ- ees tend to follow values practiced by strategic leaders. They observe the day-to-day deci- sions of top managers and quickly decide whether managers are merely paying lip service to the company’s stated values. Organizational core values must be lived with integrity,
LO 1-5
Justify why anchoring a firm in ethical core values is imperative for long- term success.
core values statement Statement of principles to guide an organization as it works to achieve its vision and fulfill its mission, for both internal conduct and external interactions; it often includes explicit ethical considerations.
Organizational core values Ethical standards and norms that govern the behavior of individuals within a firm or organization.
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Merck: Reconfirming Its Core Values Merck’s vision is to preserve and improve human life. The words of founder George W. Merck still form the basis of the company’s values today: We try to never forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that, they have never failed to appear.29
ENDING RIVER BLINDNESS In 1987, Ray Vagelos, a former Merck scientist turned CEO, announced the company would donate its recently discovered drug Mectizan, without charge, to treat river blindness. For centuries, river blindness—a parasitic disease that leads to loss of eyesight—plagued remote communi- ties in Africa and other parts of the world. Merck’s executives formed a novel private-public partnership, the Mectizan Donation Program (MDP), to distribute the drug in remote areas, where health services are often not available.
After more than 25 years, more than 1 billion treatments, and some 120,000 communities served, the disease had effectively been eradicated. Merck’s current CEO, Kenneth Frazier, announced himself “humbled” by the result of the company’s value-driven actions.30
WITHDRAWING VIOXX In the case of another drug, though, Merck’s values were brought into question. Vioxx was a painkiller developed to produce fewer gastrointestinal side effects than aspirin or ibuprofen. Once the Food and Drug Administration (FDA) approved the new drug in 1999, Merck engaged in typical big pharma promotional practices:
• Heavy direct-to-consumer advertising via TV and other media.
• Luxury doctor inducements, including consulting con- tracts and free retreats at exotic resorts.
Merck’s new drug was a blockbuster, generating revenues of $2.5 billion a year by 2002 and growing fast.
Allegations began to appear, however, that Vioxx caused heart attacks and strokes. Critics alleged that Merck had sup- pressed evidence about Vioxx’s dangerous side effects from
early clinical trials. In 2004, Merck voluntarily recalled the drug. Merck’s CEO at the time, Raymond Gilmartin, framed the situation in terms of knowledge learned after the initial release. He said he received a phone call from the head of research. “He told me that our long-term safety study of Vioxx was showing an increased risk of cardiovascular events compared to placebo, and the trial was being discon- tinued. . . . After analyzing the data further and consulting with outside experts, the Merck scientists recommended that we voluntarily withdraw the drug.”31
Regardless of what Merck knew when, the voluntary withdrawal reconfirmed in a costly way its core value that patients come before profits. Merck’s reputation damaged, its stock fell almost 30 percent, eradicating $27 billion in market value almost overnight—an amount much greater than the estimated net present value of the profits that Merck would have obtained from continued sales of Vioxx. Merck has been hit by lawsuits ever since; legal liabilities have cost the company up to $30 billion thus far.
Some corporate social responsibility experts argue that Merck should have never put Vioxx on the market in the first place, or that it should have at least provided up front, clear assessments of the risks associated with Vioxx.32
Strategy Highlight 1.2
Kenneth Frazier, CEO of Merck. ©Bloomberg/Getty Images
especially by the top management team. Unethical behavior by top managers is like a virus that spreads quickly throughout an entire organization. It is imperative that strategic lead- ers set an example of ethical behavior by living the core values. Strategic leaders have a strong influence in setting an organization’s vision, mission, and values. This is the first step in the entire strategic management process, which is captured in the AFI strategy framework to which we turn next.
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1.3 The AFI Strategy Framework How do organizations craft and execute a strategy that enhances their chances of achieving superior performance? A successful strategy details a set of actions that managers take to gain and sustain competitive advantage. Effectively managing the strategy process is the result of three broad tasks:
1. Analyze (A) 2. Formulate (F) 3. Implement (I)
The tasks of analyze, formulate, and implement are the pillars of research and knowl- edge about strategic management. Although we will study each of these tasks one at a time, they are highly interdependent and frequently happen simultaneously. Effective managers do not formulate strategy without thinking about how to implement it, for instance. Like- wise, while implementing strategy, managers are analyzing the need to adjust to changing circumstances.
We’ve captured these interdependent relationships in the AFI strategy framework shown in Exhibit 1.3. This framework (1) explains and predicts differences in firm per- formance, and (2) helps managers formulate and implement a strategy that can result in superior performance. In each of the three broad strategy tasks, managers focus on specific questions, listed below. We address these questions in specific chapters, as indicated.
LO 1-6
Explain the AFI strategy framework.
EXHIBIT 1.3 / The AFI Strategy Framework
1. What Is Strategy?
3. External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 4. Internal Analysis: Resources, Capabilities, and Core Competencies 5. Competitive Advantage, Firm Performance, and Business Models
6. Business Strategy: Differentiation, Cost Leadership, and Blue Oceans 7. Business Strategy: Innovation, Entrepreneurship, and Platforms
8. Corporate Strategy: Vertical Integration and Diversification 9. Corporate Strategy: Strategic Alliances, Mergers and Acquisitions
10. Global Strategy: Competing Around the World
11. Organizational Design: Structure, Culture, and Control
Getting Started
External and Internal Analysis
Formulation: Business Strategy
Formulation: Corporate Strategy
Implementation Gaining &
Sustaining Competitive Advantage
12. Corporate Governance and Business Ethics
2. Strategic Leadership: Managing the Strategy Process
Part 1: Analysis
Part 1: Analysis
Part 2: FormulationPart 2: Formulation
Part 3: Implementation
AFI strategy framework A model that links three interdependent strategic management tasks— analyze, formulate, and implement—that, together, help managers plan and implement a strategy that can improve performance and result in competitive advantage.
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Strategy Analysis (A) Topics and Questions ■ Strategic leadership and the strategy process: What roles do strategic leaders play? What
is the firm’s process for creating strategy and how does strategy come about? What is the relationship between stakeholder strategy and competitive advantage? (Chapter 2)
■ External analysis: What effects do forces in the external environment have on the firm’s potential to gain and sustain a competitive advantage? How should the firm deal with them? (Chapter 3)
■ Internal analysis: What effects do internal resources, capabilities, and core competen- cies have on the firm’s potential to gain and sustain a competitive advantage? How should the firm leverage them for competitive advantage? (Chapter 4)
■ Competitive advantage, firm performance, and business models: How does the firm make money? How can one assess and measure competitive advantage? What is the relationship between competitive advantage and firm performance? (Chapter 5)
Strategy Formulation (F) Topics and Questions ■ Business strategy: How should the firm compete: cost leadership, differentiation, or
value innovation? (Chapters 6 and 7) ■ Corporate strategy: Where should the firm compete: industry, markets, and geogra-
phy? (Chapters 8 and 9) ■ Global strategy: How and where should the firm compete: local, regional, national, or
international? (Chapter 10)
Strategy Implementation (I) Topics and Questions ■ Organizational design: How should the firm organize to turn the formulated strategy
into action? (Chapter 11) ■ Corporate governance and business ethics: What type of corporate governance is most
effective? How does the firm anchor strategic decisions in business ethics? (Chapter 12)
The AFI strategy framework shown in Exhibit 1.3 is repeated at the beginning of each part of this text to help contextualize where we are in our study of the firm’s quest to gain and sustain competitive advantage. In addition, the strategy process map, presented at the end of Chapter 1, illustrates the steps in the AFI framework in more detail. The different background shades correspond to each step in the AFI framework. This strategy process map highlights the key strategy concepts and frameworks we’ll cover in each chapter. It also serves as a checklist when you conduct a strategic management analysis.
We next turn to the Implications for Strategic Leaders section to provide practical appli- cations and considerations of the material discussed in this chapter.
1.4 Implications for Strategic Leaders Strategy is the art and science of success and failure. The difference between success and failure lies in an organization’s strategy. A good strategy defines the competitive challenge, provides a guiding policy, and is implemented by coherent actions. Superior performance is the consequence of a good strategy. Moreover, strategic leaders appreciate the fact that competition is everywhere; this awareness infuses the other elements of strategy. You need a good strategy to deal with competition.
To create a powerful foundation upon which to formulate and implement a good strat- egy, strategic leaders need to articulate an inspiring vision and mission backed up by ethical core values. Customer-oriented or problem-defining vision statements are often correlated with firm success over long periods of time. This is because they allow firms
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In 2016, 10 years after Tesla’s initial “secret strategy,” Elon Musk unveiled the second part of his master plan for the company (“Master Plan, Part Deux”) to continue the pursuit of its vision “to accelerate the advent of sustainable energy.” Again, CEO Musk detailed a set of stretch goals:33
1. Create stunning solar roofs with seamlessly integrated battery storage.
2. Expand the electric vehicle product line to address all major segments.
3. Develop a self-driving capability that is 10 times safer than manual via massive fleet learning.
4. Enable your car to make money for you when you aren’t using it.
In the updated strategy, Step 1 leverages the integration of SolarCity. The new Tesla company is now a fully integrated sustainable energy company, combining energy generation
CHAPTERCASE 1 Consider This . . .
with energy storage from SolarCity. It provides energy generation via beautiful new solar roofs that look like regu- lar shingles, but cost less, all things considered, and last lon- ger. Tesla also offers its Powerwall to residential consumers, which allows customers to store the solar energy captured on their roofs for later use. Energy generation, therefore, becomes decentralized. This implies that consumers are able to generate and use energy without being dependent on any utility, and are able to sell back excess energy to utilities. Indeed, consumers will generate not only energy for the use of their Tesla cars but also enough to cover the energy needs of the entire house.
In Step 2, Tesla is planning to expand the lineup of its electric vehicles to address all major segments, including pickup trucks, buses, and heavy-duty semis.
Tesla’s new solar roof, with a Tesla car and Powerwall in the garage. ©Tesla/Newscom
strategic flexibility to change in order to meet changing customer needs and exploit exter- nal opportunities. Another important implication of our discussion is that all employees should feel invested in and inspired by the firm’s vision and mission. Different companies use different tactics to achieve such commitment; some firms annually invite all employees to review and revise the statement of firm values; others ask employees to rank themselves, their departments, and management on success relative to the vision and mission. Belief in a company’s vision and mission motivates its employees.
The strategic leader also realizes that the principles of strategic management can be applied universally to all organizations. Strategy determines performance whether in organizations large or small, multinational Fortune 100 companies, for-profit or nonprofit organizations, in the private or the public sector, and in developed as well as emerging economies. A good strategy is more likely when strategic leaders apply the three-step AFI strategy framework:
1. Analyze the external and internal environments. 2. Formulate an appropriate business and corporate strategy. 3. Implement the formulated strategy through structure, culture, and controls.
Keep in mind that strategic leaders are making decisions under conditions of uncer- tainty and complexity. They must carefully monitor and evaluate the progress toward key strategic objectives and make adjustments by fine-tuning any strategy as necessary. We discuss how this is done in the next chapter where we focus on strategic leaders and the strategic management process.
This content is also relevant directly for you beyond the classroom: Applying the tools and frameworks developed in this text allows you to help your organization be more suc- cessful. You can also apply the strategic management toolkit to your own career to pursue your professional and other goals (see the myStrategy modules at the end of each chapter).
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22 CHAPTER 1 What Is Strategy?
In Step 3, Tesla is aiming to further develop the self- driving capabilities of its vehicles. The goal is to make self- driving vehicles 10 times safer than manual driving, and thus being able to offer fully autonomous vehicles.
Fully autonomous driving capabilities are required for Tesla to fulfill Step 4 of the new master plan: Turn your car into an income-generating asset. The idea is to offer an Uber- like service made up of Tesla vehicles, but without any driv- ers. On average, cars are used less than three hours during a day. The idea is that your autonomous-driving Tesla will be part of a shared vehicle fleet when you are not using your car. This will drastically reduce the total cost of ownership of a Tesla vehicle, and it will also allow pretty much anyone to ride in a Tesla as a result of the sharing economy.34
Questions
1. Do you agree with the assessment that Elon Musk and Tesla successfully fulfilled their first master plan
published in 2006? Why or why not? Buttress your arguments.
2. As of today, does Tesla have a good strategy? Why or why not? How do you know?
3. Describe the rationale behind Tesla’s new master plan. How does this new strategy help Tesla fulfill its vision? “Master Plan, Part Deux” in its entirety is on Tesla’s blog: https://www.tesla.com/blog/master-plan-part-deux
4. Apply the three-step process for crafting a good strat- egy outlined in the chapter (diagnose the competitive challenge, derive a guiding policy, and implement a set of coherent actions) to each element of the new master plan. On which steps of the new master plan has Tesla made the most progress? Explain. Also, which recommendations would you have for Elon Musk? Support your arguments with examples and observations.
This chapter detailed what strategy and competitive advantage is. It described the roles of vision, mission, and values in a firm’s strategy. It also set the stage for further study of strategic management by introducing the AFI strategy framework, as summarized by the follow- ing learning objectives and related take-away concepts.
LO 1-1 / Explain the role of strategy in a firm’s quest for competitive advantage. ■ Strategy is the set of goal-directed actions a firm
takes to gain and sustain superior performance relative to competitors.
■ A good strategy enables a firm to achieve supe- rior performance. It consists of three elements:
1. A diagnosis of the competitive challenge. 2. A guiding policy to address the competitive
challenge. 3. A set of coherent actions to implement the
firm’s guiding policy. ■ A successful strategy requires three integrative
management tasks—analysis, formulation, and implementation.
LO 1-2 / Define competitive advantage, sus- tainable competitive advantage, competitive disadvantage, and competitive parity. ■ Competitive advantage is always judged relative
to other competitors or the industry average. ■ To obtain a competitive advantage, a firm must
either create more value for customers while keeping its cost comparable to competitors, or it must provide the value equivalent to competitors but at a lower cost.
■ A firm able to outperform competitors for pro- longed periods of time has a sustained competi- tive advantage.
■ A firm that continuously underperforms its rivals or the industry average has a competitive disadvantage.
■ Two or more firms that perform at the same level have competitive parity.
■ An effective strategy requires that strategic trade- offs be recognized and addressed—for example, between value creation and the costs to create the value.
TAKE-AWAY CONCEPTS
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CHAPTER 1 What Is Strategy? 23
LO 1-3 / Describe the roles of vision, mission, and values in a firm’s strategy. ■ A vision captures an organization’s aspirations.
An effective vision inspires and motivates mem- bers of the organization.
■ A mission statement describes what an organiza- tion actually does—what its business is—and why and how it does it.
■ Core values define the ethical standards and norms that should govern the behavior of indi- viduals within the firm.
LO 1-4 / Evaluate the strategic implications of product-oriented and customer-oriented vision statements. ■ Product-oriented vision statements define a busi-
ness in terms of a good or service provided. ■ Customer-oriented vision statements define busi-
ness in terms of providing solutions to customer needs.
■ Customer-oriented vision statements provide managers with more strategic flexibility than product-oriented missions.
■ To be effective, visions and missions need to be backed up by hard-to-reverse
strategic commitments and tied to economic fundamentals.
LO 1-5 / Justify why anchoring a firm in ethical core values is essential for long-term success. ■ Ethical core values underlay the vision statement
to ensure the stability of the strategy, and thus lay the groundwork for long-term success.
■ Ethical core values are the guardrails that help keep the company on track when pursuing its mis- sion and its quest for competitive advantage.
LO 1-6 / Explain the AFI strategy framework. ■ The AFI strategy framework (1) explains and
predicts differences in firm performance, and (2) helps managers formulate and implement a strat- egy that can result in superior performance.
■ Effectively managing the strategy process is the result of three broad tasks:
1. Analyze (A) 2. Formulate (F) 3. Implement (I)
AFI strategy framework (p. 19) Competitive advantage (p. 8) Competitive disadvantage (p. 8) Competitive parity (p. 9) Core values statement (p. 17)
Good strategy (p. 7) Mission (p. 13) Organizational core values (p. 17) Strategic intentS (p. 11) Strategic management (p. 6)
Strategy (p. 6) Sustainable competitive
advantage (p. 8) Vision (p. 11)
KEY TERMS
DISCUSSION QUESTIONS
1. The text discusses strategic trade-offs that are different between Walmart and Nordstrom even though they are in the same industry. Think of another industry that you know fairly well and select two firms there that also have made very
different choices for these trade-offs. Describe some of the differences between these firms. What type of trade-off decisions have these firms made?
2. What characteristics does an effective mission statement have?
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24 CHAPTER 1 What Is Strategy?
ETHICAL/SOCIAL ISSUES
1. In the discussion about Merck (Strategy Highlight 1.2) it is clear the firm has followed a socially responsible path by donating more than 1 billion drug treatments to remedy river blindness in remote African communities. Yet Merck must also meet shareholder responsibilities and make profits on drugs in use in more affluent societies. How should a responsible firm make these trade-offs?
What steps can strategic leaders take to guide organizations on these challenging issues?
2. The list below shows a sample of various vision/ mission statements. Match the company with its corresponding statement. Also identify whether the statements are principally customer-oriented or product-oriented.
Vision/Mission Statement Type of Statement Matched Company Company
To be our customers’ favorite place and way to eat and drink. 1. Alibaba
To supply the consumer and our customers with the finest, high-quality products.
2. AutoNation
To help women feel great about themselves and their potential. 3. Barnes & Noble
To provide a global trading platform where practically anyone can trade practically anything.
4. CarMax
To operate the best omni-channel specialty retail business in America.
5. Darden Restaurants
To provide our customers great quality cars at great prices with exceptional customer service.
6. Dole Foods
To be financially successful through great people consistently delivering outstanding food, drinks and service in an inviting atmosphere.
7. eBay
To be America’s best run, most profitable automotive retailer. 8. Estée Lauder
Bringing the best to everyone we touch and being the best in everything we do.
9. Facebook
To develop the social infrastructure to give people the power to build a global community that works for all of us.
10. KFC
To give everyone the power to create and share ideas and information instantly, without barriers.
11. Manpower
To be the best worldwide provider of higher-value staffing services and the center for quality employment opportunities.
12. McDonald’s
To sell food in a fast, friendly environment that appeals to pride-conscious, health-minded consumers.
13. Spanx
To build the future infrastructure of commerce. 14. Twitter
3. The “job to do” approach discussed with the Clayton Christensen milk-shake example can be useful in a variety of settings. Even when we are the customers ourselves sometimes we don’t look for better solutions because we get into routines and habits. Think about a situa- tion you sometimes find frustrating in your own
life or one you hear others complaining about frequently. Instead of focusing on the annoy- ance, can you take a step back and look for the real job that needed doing when the frustration occurred? What other options can be developed to “do the job” that may lead to less irritation in these situations?
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How Much Are Your Values Worth to You?
H ow much are you willing to pay for the job you want? This may sound like a strange question, since your employer will pay you to work, but think again. Consider how much you value a specific type of work, or how much you would want to work for a specific organization because of its values.
A study shows scientists who want to continue engaging in research will accept some $14,000 less in annual salary to work at an organization that permits them to publish their findings in academic journals, implying that some scientists will “pay to be scientists.” This finding appears to hold in the general business world too. In a survey, 97 percent of Stanford MBA students indicated they would forgo some 14 percent of their expected salary, or about $11,480 a year, to work for a company that matches their own values with concern for stakeholders and sustainability. According to Monster.com, an online career service, about 92 percent of all undergraduates want to work
for a “green” company. These diverse examples demonstrate that people put a real dollar amount on pursuing careers in sync with their values.
On the other hand, certain high-powered jobs such as man- agement consulting or investment banking pay very well, but their high salaries come with strings attached. Professionals in these jobs work very long hours, including weekends, and often take little or no vacation time. These workers “pay for pay” in that they are often unable to form stable relationships, have lit- tle or no leisure time, and sometimes even sacrifice their health. People “pay for”—make certain sacrifices for—what they value, because strategic decisions require important trade-offs.35
1. Identify your personal values. How do you expect these values to affect your work life or your career choice?
2. How much less salary would (did) you accept to find employ- ment with a company that is aligned with your values?
3. How much are you willing to “pay for pay” if your dream job is in management consulting or investment banking?
mySTRATEGY
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CHAPTER 1 What Is Strategy? 25
SMALL GROUP EXERCISES
//// Small Group Exercise 1 The chapter applies the three elements of a good strat- egy to Tesla for insights into the company’s possible competitive advantage. As a group, choose a differ- ent firm that is well known to the students. Assign the competitive challenges and company guiding policies and search the internet for information about the firm’s actions. As a group discuss key actions the firm has taken and decide if they seem to be coherent. Does the firm demonstrate measures of a competitive advantage? If yes, does it look to be sustainable?
//// Small Group Exercise 2 Strategy Highlight 1.1 discusses the importance of the inspiring vision developed at Teach for America. In your group search the internet for other nonprofit organizations (Red Cross, Habitat for Humanity, etc.). Which of them has vision or mission statements that are appealing to donors, employees, and clients? Do these statements seem relevant in today’s environment or are they outdated? What improvements can you create for these organizational statements?
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26 CHAPTER 1 What Is Strategy?
1. Market capitalization = Share price x Number of shares outstanding. 2. Musk, E. (2006, Aug. 2), “The secret Tesla Motors Master Plan (just between you and me),” Tesla website, http://bit. ly/29Y1c3m. 3. This ChapterCase is based on: Hoang, H., and F. T. Rothaermel (2016), “How to manage alliances strategically,” MIT Sloan Manage- ment Review, Fall, 58(1): 69–76; Ramsey, M. (2016, Mar. 30), “A lot riding on Tesla’s Model 3 unveiling,” The Wall Street Journal; Ramsey, M., and C. Sweet (2016, Aug. 1), “Tesla and SolarCity agree to $2.6 billion deal,” The Wall Street Journal; and Pulliam, S., M. Ramsey, and I. J. Dugan (2016, Aug. 15), “Elon Musk sets ambitious goals at Tesla—and often falls short,” The Wall Street Journal. 4. This section draws on: McGrath, R.G. (2013), The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Boston, MA: Harvard Busi- ness Review Press); Rumelt, R. (2011), Good Strategy, Bad Strategy: The Difference and Why It Matters (New York: Crown Business); Porter, M.E. (2008), “The five competitive forces that shape strategy,” Harvard Busi- ness Review, January: 78–93; Porter, M.E. (1996), “What is strategy?” Harvard Business Review, November–December: 61–78; and Porter, M.E. (1980), Competitive Strategy: Techniques for Analyzing Competitors (New York: The Free Press). 5. As quoted in: Rothaermel, F. T., and D. King (2015), “Tesla Motors, Inc.,” McGraw- Hill Education Case Study MHE-FTR-032.
6. Khouri, A., and S. Masunaga (2015, May 1), “Tesla’s Elon Musk and his big ideas: A brief history,” Los Angeles Times. 7. Range anxiety denotes the concern that an electric vehicle has insufficient range to reach its destination on a single charge. Tesla’s cars can go some 250 miles per charge. The lower cost Nissan Leaf (~$30k) can go some 85 miles per charge, while GM’s Chevy Bolt can drive some 200 miles per charge, based on EPA estimates. The average American drives about 40 miles per day. http://www. fueleconomy.gov/ 8. The discussion of Tesla throughout this chapter is based on Rothaermel, F.T., and D. King (2015), Tesla Motors, Inc., McGraw-Hill Education Case Study MHE- FTR-032, and Hoang, H., and F. T. Rothaermel (2016), “How to manage alli- ances strategically,” MIT Sloan Management Review, Fall, 58(1): 69–76; Ramsey, M.
(2016, Mar. 30), “A lot riding on Tesla’s Model 3 unveiling,” The Wall Street Journal; Ramsey, M., and C. Sweet (2016, Aug. 1), “Tesla and SolarCity agree to $2.6 billion deal,” The Wall Street Journal; Pulliam, S., M. Ramsey, and I. J. Dugan (2016, Aug. 15), “Elon Musk sets ambitious goals at Tesla— and often falls short,” The Wall Street Journal; and Ramsey, M. (2014, Jun. 12), “Tesla Motors offers open licenses to its patents,” The Wall Street Journal. 9. This section draws on Porter, M.E. (2008, Jan.) “The five competitive forces that shape strategy,” Harvard Business Review; Porter, M.E. (1996), “What is strategy?” Harvard Business Review, November–December; and Porter, M.E. (1989), Competitive Strategy (New York: Free Press). 10. Rumelt, R.P. (2011), Good Strategy, Bad Strategy: The Difference and Why It Mat- ters (New York: Crown); and Porter, M.E. (1996), “What is strategy?” Harvard Business Review, November–December. 11. Rumelt, R.P. (2011), Good Strategy, Bad Strategy: The Difference and Why It Mat- ters (New York: Crown); and Porter, M.E. (1996), “What is strategy?” Harvard Business Review, November–December. 12. Koh, Y., and K. Grind (2014, Nov. 6), “Twitter CEO Dick Costolo struggles to define vision,” The Wall Street Journal. 13. Covey, S.R. (1989), The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change (New York: Simon & Schuster). 14. Musk, E. (2011, Sept. 29), “SpaceX vision and mission statement,” presentation to The National Press Club, Washington, DC, http://bit.ly/2frJx4f 15. Frankl, V.E. (1984), Man’s Search for Meaning (New York: Simon & Schuster). 16. Pink, D.H. (2011), The Surprising Truth about What Motivates Us (New York: River- head Books). 17. Hamel, G., and C.K. Prahalad (1989), “Strategic intent,” Harvard Business Review, May–June: 64–65; Hamel, G., and C.K. Prahalad (1994), Competing for the Future (Boston, MA: Harvard Busi- ness School Press); and Collins, J.C., and J.I. Porras (1994), Built to Last: Successful Habits of Visionary Companies (New York: HarperCollins). 18. Quote drawn from 2015 Teach for America annual report (http://bit. ly/2gguko8), which is also a source for this Strategy Highlight. Other sources:
2016–2017 Teach for America press kit (http://bit.ly/2fnrKO2); Simon, S. (2013, Sept. 10), “New study finds Teach for America recruits boost student achieve- ment in math,” Politico; Kopp, W. (2011), A Chance to Make History: What Works and What Doesn’t in Providing an Excel- lent Education for All (Philadelphia, PA: Public Affairs); Xu, Z., J. Hannaway, and C. Taylor (2008, Mar. 27), “Making a dif- ference? The effect of Teach for America on student performance in high school,” Urban Institute; “Wendy Kopp Explains Teach for America,” http://bit.ly/2gy1iTy (video 4.05 min); and Kopp, W. (2001), One Day, All Children. . .: The Unlikely Triumph of Teach for America and What I Learned Along the Way (Cambridge, MA: Perseus Book Group). 19. Collins, J.C., and J.I. Porras (1994), Built to Last: Successful Habits of Visionary Companies (New York: HarperCollins); Col- lins, J.C. (2001), Good to Great: Why Some Companies Make the Leap . . . And Others Don’t (New York: HarperBusiness). 20. Dixit, A., and B. Nalebuff (1991), Think- ing Strategically: The Competitive Edge in Business, Politics, and Everyday Life (New York: Norton); and Brandenburger, A.M., and B.J. Nalebuff (1996), Co-opetition (New York: Currency Doubleday). 21. For academic work on using a problem- solving perspective as the basis for under- standing the firm, see Nickerson, J., and T. Zenger (2004), “A knowledge-based theory of the firm—the problem-solving perspective,” Organization Science 15: 617–632. 22. This example is drawn from Clayton Christensen’s work as described in Kane, Y.I. (2014), Haunted Empire: Apple After Steve Jobs (New York: HarperCollins), 191. 23. Germain, R., and M.B. Cooper (1990), “How a customer mission statement affects company performance,” Industrial Market- ing Management 19(2): 47–54; Bart, C.K. (1997), “Industrial firms and the power of mission,” Industrial Marketing Manage- ment 26(4): 371–383; and Bart, C.K. (2001), “Measuring the mission effect in human intel- lectual capital,”Journal of Intellectual Capi- tal 2(3): 320–330. 24. Christensen, C. (1997), The Innovator’s Dilemma (New York: HarperCollins). 25. Kane, Y.I. (2014), Haunted Empire: Apple After Steve Jobs (New York: HarperCollins), 191.
ENDNOTES
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CHAPTER 1 What Is Strategy? 27
26. “The three habits . . . of highly irritating management gurus,” The Economist, October 22, 2009. 27. Burgelman, R.A., and A.S. Grove (1996), “Strategic dissonance,” California Management Review 38: 8–28; and Grove, A.S. (1996), Only the Paranoid Survive: How to Exploit the Crisis Points that Chal- lenge Every Company (New York: Currency Doubleday). 28. Bart, C.K., and M.C. Baetz (1998), “The relationship between mission statements and firm performance: An exploratory study,” Jour- nal of Management Studies 35: 823–853. 29. As quoted in: Collins, J. (2009), How the Mighty Fall. And Why Some Companies Never Give In (New York: HarperCollins), 53.
30. http://www.merck.com/about/featured- stories/mectizan1.html. 31. Gilmartin, R.V. (2011, Oct. 6), “The Vioxx recall tested our leadership,” Harvard Business Review Blog Network. 32. The Merck river blindness case and the quote by CEO Kenneth Frazier draw from: http://www.merck.com/about/featured-stories/ mectizan1.html. The Vioxx example draws from “Jury finds Merck liable in Vioxx death and awards $253 million,” The New York Times, August 19, 2005; Heal, G. (2008), When Principles Pay: Corporate Social Responsibil- ity and the Bottom Line (New York: Columbia Business School); Collins, J. (2009), How the Mighty Fall. And Why Some Companies Never Give In (New York: HarperCollins); and Wang,
T., and P. Bansal (2012), “Social responsibility in new ventures: profiting from a long-term ori- entation,” Strategic Management Journal 33: 1135–1153. 33. Musk, E. (2016, Jul. 20), “Master Plan, Part Deux,” http://bit.ly/2aa5LHv. 34. Other sources: Ramsey, M. (2016, Jul. 21), “Elon Musk unveils plans for new Tesla vehicle types,” The Wall Street Journal. 35. Based on Stern, S. (2004), “Do scien- tists pay to be scientists?”Management Sci- ence 50(6): 835–853; and Esty, D.C., and A.S. Winston (2009), Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, revised and updated (Hoboken, NJ: John Wiley).
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