Michael phelps strategizing for gold

Mini Case Study

Read Min Case Study 1 – Michael Phelps: Strategizing for gold and answer the four questions that follow (p. 428) in a two -three page paper (excluding title and reference pages) include at least three peer-reviewed sources found in the Potomac Library properly cited and referenced.

Additional Resource:

Badenhausen, K. 2013. How Michael Jordan Still Earns $80 Million a Year, Forbes: http://www.forbes.com/sites/kurtbadenhausen/2013/02/14/how-michael-jordan-still-earns-80-million-a-year/

Business Ethics

1 MHE-FTR-037-1259420477 Facebook, Inc. FB Social Media ■ ■ medium yes 5, 6 4, 7 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

2 MHE-FTR-030-1259420477 Better World Books and the Triple Bottom Line N/A Retail — ECommerce & Books ■ ■ ■ small no 1, 5 2, 3 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

3 MHE-FTR-032-1259420477 Tesla Motors, Inc. TSLA Electric Cars & Battery Storage ■ ■ ■ medium yes 3, 4 6, 7 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

4 MHE-FTR-031-1259420477 Apple, Inc. AAPL Consumer Electronics & Online Services ■ ■ ■ large yes 6, 7 4, 10 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

5 MHE-FTR-040-1259420477 The Movie Exhibition Industry N/A Entertainment ■ ■ medium no 1, 3 5, 6 ■ ■ ■ ■

6 MHE-FTR-038-1259420477 McDonald's Corporation MCD Restaurant—Fast Food ■ ■ large yes 6, 10 3, 4 ■ ■ ■ ■ ■ ■ ■ ■ ■

7 MHE-FTR-035-1259420477 Google Inc. GOOG Online Advertising & Information Industry ■ ■ large yes 3, 7 4, 8 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

8 MHE-FTR-039-1259420477 Best Buy Co., Inc. BBY Retail—Consumer Electronics ■ ■ large yes 3, 4 6, 9 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

9 MHE-FTR-028-1259420477 Delta Air Lines, Inc. DAL Airline ■ large yes 6, 10 3, 4 ■ ■ ■ ■ ■ ■ ■ ■

10 MHE-FTR-033-1259420477 Amazon.com, Inc. AMZN Retail—Ecommerce & Web Services ■ ■ ■ large yes 3, 8 4, 7 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

11 MHE-FTR-029-1259420477 Merck & Co., Inc. MRK Pharmaceutical & Biotech ■ ■ large yes 7, 9 8, 11 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

12 MHE-FTR-034-1259420477 IBM at the Crossroads IBM IT & Big Data ■ ■ large yes 3, 8 6, 7 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

13 MHE-FTR-036-1259420477 General Electric after GE Capital GE Conglomerate ■ ■ ■ large yes 8, 11 9, 12 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

14 MHE-FTR-025-1259420477 Grok: Action Intelligence for Fast Data N/A IT & Big Data ■ ■ small no 4, 5 6, 7 ■ ■ ■ ■ ■ ■ ■ ■ ■

15 MHE-FTR-020-1259420477 Make or Break at RIM: Launching BlackBerry 10 BBRY Consumer Electronics & Services ■ ■ ■ ■ medium yes 3, 7 4, 6 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

16 MHE-FTR-014-1259420477 Genentech: After the Acquisition by Roche RHHB Y Biotechnology ■ ■ large yes 9, 11 7, 8 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

17 MHE-FTR-013-1259420477 UPS in India—A Package Deal? UPS Delivery & Logistics ■ ■ large yes 3, 10 8, 9 ■ ■ ■ ■ ■ ■ ■ ■ ■

18 MHE-FTR-007-1259420477 Bank of America and the New Financial Landscape BAC Banking ■ ■ large yes 3, 12 9, 11 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

19 MHE-FTR-011-1259420477 Siemens Energy: How to Engineer a Green Future? SI Energy & Sustainability ■ ■ ■ large yes 8, 9 3, 11 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

20 MHE-FTR-012-1259420477 Infosys Consulting in the U.S.— What to Do Now? INFY IT & Big Data ■ ■ large yes 3, 10 8, 12 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

21 MHE-FTR-005-1259420477 InterfaceRAISE: Raising the Bar in Sustainability Consulting TILE Sustainability Consulting ■ ■ ■ medium yes 2, 11 4, 5 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

STEP 2 / Arrange cases and integrate your own content. Once you’ve selected the cases you want to use in your course, just drag and drop your selections into the order you prefer. You can also add section dividers to organize the cases and even seamlessly integrate your own con- tent, such as a syllabus, class notes, or exercises.

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■ For assistance in building your course solution, contact your local McGraw-Hill Learning Technology Consultant or email CreateRothaermel@mheducation.com

Where do I find cases to incorporate into my class? At the Create site, you can access the full-length cases that accompany Strategic Management by Frank T. Rothaermel.

You will be able to select from 24 cases written by Frank T. Rothaermel as well as cases from Harvard, Ivey, Darden, NACRA, other case authors, and much more!

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HIGH-QUALITY CASES, well integrated with content and frameworks in the chapters, are a key ingredient in teaching strategy. Most of the full-length cases available with Strategic Management, and accessible via McGraw-Hill’s Create™ website, have been

written specifically for the product by Frank T. Rothaermel, with the help of expert contributors. This linkage ensures close interconnection of chapter content and cases.

The cases cover a variety of core strategy issues and topics, including external analysis, competitive dynamics, innovation, mergers and acquisitions, alliances, and corporate ethics. All cases are accompanied by a rich set of Case Teaching Notes. Financial analyses (in Excel spreadsheets) and case videos also are available with selected cases.

You can access the full-length cases that accompany Strategic Management by Frank T. Rothaermel through McGraw-Hill’s custom-publishing program, Create, using a simple four-step process.

STEP 1 / Go to http://www.McGrawHillCreate/Rothaermel and click on “Explore this Collection.”

Search by keyword or browse by discipline to find and add the cases related to strategic management. You can use the case grid on the inside of this insert to learn more about the cases offered with this product. You can also browse Create’s collections and add cases from sources like Harvard Business Publishing, Darden Business Publishing, and Ivey Publishing.

Here, you also will find information about ExpressBooks, pre-loaded chapters and cases that will give you a quick start in creating a custom solution for your course.

For Steps 2 through 4, see the back page of this insert . . .

YourVision…YourVoice…YourCourse…YourWay

Make it happen through Create for Strategic Management, at

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THIRD EDITION

Frank T. Rothaermel Georgia Institute of Technology

Strategic Management

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STRATEGIC MANAGEMENT, THIRD EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2017 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 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 0 DOW/DOW 1 0 9 8 7 6

ISBN 978- 1-259-42047-4 (student edition) MHID 1-259-42047-7 (student edition) ISBN 978-1-259-76065-5 (instructor’s edition) MHID 1-259-76065-0 (instructor’s edition)

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Library of Congress Cataloging-in-Publication Data

Names: Rothaermel, Frank T., author. Title: Strategic management / Frank T. Rothaermel, Georgia Institute of Technology. Description: Third edition. | New York, NY : McGraw-Hill Education, [2017] Identifiers: LCCN 2015043145 | ISBN 9781259420474 Subjects: LCSH: Strategic planning. Classification: LCC HD30.28 .R6646 2017 | DDC 658.4/012—dc23 LC record available at http://lccn.loc.gov/2015043145

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.

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To my eternal family for their love, support, and sacrifice: Kelleyn, Harris, Winston, Roman, Adelaide, and Avery

—FRANK T. ROTHAERMEL

DEDICATION

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PART ONE / ANALYSIS 2

CHAPTER 1 What Is Strategy? 4

CHAPTER 2 Strategic Leadership: Managing the Strategy Process 32

CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 64

CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies 104

CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models 140

PART TWO / FORMULATION 172

CHAPTER 6 Business Strategy: Differentiation, Cost Leadership, and Blue Oceans 174

CHAPTER 7 Business Strategy: Innovation and Entrepreneurship 208

CHAPTER 8 Corporate Strategy: Vertical Integration and Diversification 252

CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 294

CHAPTER 10 Global Strategy: Competing Around the World 326

PART THREE / IMPLEMENTATION 362

CHAPTER 11 Organizational Design: Structure, Culture, and Control 364

CHAPTER 12 Corporate Governance and Business Ethics 400

PART FOUR / MINICASES 427

HOW TO CONDUCT A CASE ANALYSIS 516

PART FIVE / FULL-LENGTH CASES All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel

CONTENTS IN BRIEF

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MINICASES / 1 Michael Phelps: Strategy Formulation &

Implementation 428

2 Teach for America: How to Inspire Future Leaders 430 3 PepsiCo’s Indra Nooyi: Performance with Purpose 432 4 How the Strategy Process Kills Innovation

at Microsoft 435

5 Strategy and Serendipity: A Billion-Dollar Business 438 6 Apple: What’s Next? 440 7 Starbucks: Schultz Serves Up a Turnaround 443 8 Nike’s Core Competency:

The Risky Business of Fairy Tales 446

9 When Will P&G Play to Win Again? 449 10 Trimming Fat at Whole Foods Market 452 11 Is Porsche Killing the Golden Goose? 454 12 LEGO’s Turnaround: Brick by Brick 457 13 From Good to Great to Gone:

The Rise and Fall of Circuit City 460

14 Cirque du Soleil: Searching for a New Blue Ocean 462 15 Competing on Business Models: Google vs. Microsoft 465 16 Assessing Competitive Advantage: Apple vs.

Blackberry 469

17 Wikipedia: Disrupting the Encyclopedia Business 475 18 Standards Battle: Which Automotive Technology Will

Win? 478

19 “A” Is for Alphabet and “G” Is for Google: Alphabet’s Corporate Strategy and Google’s Strategy Process 480

20 HP’s Boardroom Drama and Divorce 484 21 Hollywood Goes Global 488 22 Does GM’s Future Lie in China? 492 23 Flipkart Is Fulfilling Its Wish and Beating

Amazon.com 494

24 LVMH in China: Cracks Its Empire of Desire? 497 25 Sony vs. Apple: Whatever Happened to Sony? 501 26 Struggling Samsung Electronics 505 27 Alibaba and China’s ECommerce: Reality Bites 509 28 UBS: A Pattern of Ethics Scandals 513 How to Conduct a Case Analysis 516

FULL-LENGTH CASES / All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel

Facebook, Inc.

Better World Books and the Triple Bottom Line

Tesla Motors, Inc.

Apple, Inc.

The Movie Exhibition Industry +

McDonald’s Corporation

Google Inc.*

Best Buy Co., Inc.

Delta Air Lines, Inc.*

Amazon.com, Inc.

Merck & Co., Inc.

IBM at the Crossroads

General Electric after GE Capital*

Grok: Action Intelligence for Fast Data

Make or Break at RIM: Launching BlackBerry 10

Genentech: After the Acquisition by Roche

UPS in India—A Package Deal?

Bank of America and the New Financial Landscape

Siemens Energy: How to Engineer a Green Future?

Infosys Consulting in the U.S.—What to Do Now?

InterfaceRAISE: Raising the Bar in Sustainability Consulting

MINICASES AND FULL-LENGTH CASES

* NEW TO THE THIRD EDITION REVISED AND UPDATED FOR THE THIRD EDITION + THIRD-PARTY CASE

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CHAPTERCASES / 1 Does Twitter Have a Strategy? 5 2 Marissa Mayer: Turnaround at Yahoo? 33 3 Tesla Motors and the U.S. Automotive Industry 65 4 Dr. Dre’s Core Competency: Coolness Factor 105 5 The Quest for Competitive Advantage: Apple vs.

Microsoft 141 6 JetBlue: “Stuck in the Middle”? 175 7 Netflix: Disrupting the TV Industry 209 8 How Amazon.com Became the Everything

Store 253 9 Disney: Building Billion-Dollar Franchises 295 10 The Wonder from Sweden: Is IKEA’s Success

Sustainable? 327 11 Zappos: From Happiness to Holacracy 365 12 Uber: Most Ethically Challenged Tech

Company? 401

STRATEGY HIGHLIGHTS / 1.1 Threadless: Leveraging Crowdsourcing to Design

Cool T-Shirts 10 1.2 BP “Grossly Negligent” in Gulf of Mexico

Disaster 20 2.1 Merck: Reconfirming Its Core Values 41 2.2 Starbucks’ CEO: “It’s Not What We Do” 51 3.1 Blackberry’s Bust 71 3.2 The Five Forces in the Airline Industry 74 4.1 Applying VRIO: The Rise and Fall of Groupon 117 4.2 Dynamic Capabilities at IBM 123 5.1 Interface: The World’s First Sustainable

Company 161 5.2 Airbnb: Tapping the Value of Unused Space 162 6.1 Dr. Shetty: “The Henry Ford of Heart Surgery” 189 6.2 How JCPenney Sailed Deeper into the Red

Ocean 198 7.1 How Dollar Shave Club Is Disrupting Gillette 236 7.2 GE’s Innovation Mantra: Disrupt Yourself! 237 8.1 Is Coke Becoming a Monster? 263 8.2 The Tata Group: Integration at the Corporate

Level 276 9.1 IBM and Apple: From Big Brother to Alliance

Partner 301 9.2 Food Fight: Kraft’s Hostile Takeover of

Cadbury 312 10.1 The Gulf Airlines Are Landing in the United

States 334 10.2 Walmart Retreats from Germany 337 11.1 The Premature Death of a Google-like Search

Engine at Microsoft 370 11.2 W.L. Gore & Associates: Informality and

Innovation 374 12.1 GE’s Board of Directors 411 12.2 Did Goldman Sachs and the “Fabulous Fab”

Commit Securities Fraud? 416

CHAPTERCASES & STRATEGY HIGHLIGHTS

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CONTENTS

PART ONE / ANALYSIS 2 CHAPTER 1 WHAT IS STRATEGY? 4

CHAPTERCASE 1 Does Twitter Have a Strategy? 5

1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage 6

What Is Competitive Advantage? 8 Industry vs. Firm Effects in Determining Firm Performance 11

1.2 Stakeholders and Competitive Advantage 12 Stakeholder Strategy 14 Stakeholder Impact Analysis 15

1.3 The AFI Strategy Framework 20 1.4 Implications for the Strategist 22

CHAPTERCASE 1 / Consider This... 23

CHAPTER 2 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY PROCESS 32

CHAPTERCASE 2 Marissa Mayer: Turnaround at Yahoo? 33

2.1 Vision, Mission, and Values 34 Vision 35 Mission 36 Values 36

2.2 Strategic Leadership 40 What Do Strategic Leaders Do? 42 How Do You Become a Strategic Leader? 43 Formulating Strategy across Levels: Corporate, Business, and Functional Managers 43

2.3 The Strategic Management Process 46 Top-Down Strategic Planning 46 Scenario Planning 47 Strategy as Planned Emergence: Top-Down and Bottom-Up 49

2.4 Implications for the Strategist 53

CHAPTERCASE 2 / Consider This... 55

CHAPTER 3 EXTERNAL ANALYSIS: INDUSTRY STRUCTURE, COMPETITIVE FORCES, AND STRATEGIC GROUPS 64

CHAPTERCASE 3 Tesla Motors and the U.S. Automotive Industry 65

3.1 The PESTEL Framework 66 Political Factors 67 Economic Factors 68 Sociocultural Factors 69 Technological Factors 70 Ecological Factors 70 Legal Factors 72

3.2 Industry Structure and Firm Strategy: The Five Forces Model 72

Competition in the Five Forces Model 73 The Threat of Entry 75 The Power of Suppliers 79 The Power of Buyers 80 The Threat of Substitutes 81 Rivalry among Existing Competitors 82 A Sixth Force: The Strategic Role of Complements 89

3.3 Changes over Time: Industry Dynamics 89 3.4 Performance Differences within the Same Industry: Strategic Groups 90

The Strategic Group Model 91 Mobility Barriers 93

3.5 Implications for the Strategist 93

CHAPTERCASE 3 / Consider This... 95

CHAPTER 4 INTERNAL ANALYSIS: RESOURCES, CAPABILITIES, AND CORE COMPETENCIES 104

CHAPTERCASE 4 Dr. Dre’s Core Competency: Coolness Factor 105

4.1 Core Competencies 108 4.2 The Resource-Based View 111

Two Critical Assumptions 112 The VRIO Framework 113 Isolating Mechanisms: How to Sustain a Competitive Advantage 118

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4.3 The Dynamic Capabilities Perspective 122 4.4 The Value Chain Analysis 127 4.5 Implications for the Strategist 129

Using SWOT Analysis to Combine External and Internal Analysis 130

CHAPTERCASE 4 / Consider This... 132

CHAPTER 5 COMPETITIVE ADVANTAGE, FIRM PERFORMANCE, AND BUSINESS MODELS 140

CHAPTERCASE 5 The Quest for Competitive Advantage: Apple vs. Microsoft 141

5.1 Competitive Advantage and Firm Performance 142

Accounting Profitability 143 Shareholder Value Creation 149 Economic Value Creation 151 The Balanced Scorecard 156 The Triple Bottom Line 159

5.2 Business Models: Putting Strategy into Action 160

Popular Business Models 163 Dynamic Nature of Business Models 164

5.3 Implications for the Strategist 165

CHAPTERCASE 5 / Consider This... 166

PART TWO / FORMULATION 172 CHAPTER 6 BUSINESS STRATEGY: DIFFERENTIATION, COST LEADERSHIP, AND BLUE OCEANS 174

CHAPTERCASE 6 JetBlue: “Stuck in the Middle”? 175

6.1 Business-Level Strategy: How to Compete for Advantage 177

Strategic Position 178 Generic Business Strategies 178

6.2 Differentiation Strategy: Understanding Value Drivers 180

Product Features 182 Customer Service 182 Complements 182

6.3 Cost-Leadership Strategy: Understanding Cost Drivers 183

Cost of Input Factors 184 Economies of Scale 184 Learning Curve 187 Experience Curve 190

6.4 Business-Level Strategy and the Five Forces: Benefits and Risks 191

Differentiation Strategy: Benefits and Risks 192 Cost-Leadership Strategy: Benefits and Risks 192

6.5 Blue Ocean Strategy: Combining Cost Leadership and Differentiation 194

Value Innovation 194 Blue Ocean Strategy Gone Bad: “Stuck in the Middle” 197

6.6 Implications for the Strategist 200

CHAPTERCASE 6 / Consider This... 200

CHAPTER 7 BUSINESS STRATEGY: INNOVATION AND ENTREPRENEURSHIP 208

CHAPTERCASE 7 Netflix: Disrupting the TV Industry 209

7.1 Competition Driven by Innovation 211 The Innovation Process 212

7.2 Strategic and Social Entrepreneurship 215 7.3 Innovation and the Industry Life Cycle 217

Introduction Stage 219 Growth Stage 220 Shakeout Stage 223 Maturity Stage 224 Decline Stage 224 Crossing the Chasm 225

7.4 Types of Innovation 231 Incremental vs. Radical Innovation 232 Architectural vs. Disruptive Innovation 234 Open Innovation 238

7.5 Implications for the Strategist 241

CHAPTERCASE 7 / Consider This... 242

CHAPTER 8 CORPORATE STRATEGY: VERTICAL INTEGRATION AND DIVERSIFICATION 252

CHAPTERCASE 8 How Amazon.com Became the Everything Store 253

8.1 What Is Corporate Strategy? 255 Why Firms Need to Grow 255 Three Dimensions of Corporate Strategy 257

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8.2 The Boundaries of the Firm 258 Firms vs. Markets: Make or Buy? 259 Alternatives on the Make-or-Buy Continuum 261

8.3 Vertical Integration along the Industry Value Chain 264

Types of Vertical Integration 266 Benefits and Risks of Vertical Integration 267 When Does Vertical Integration Make Sense? 269 Alternatives to Vertical Integration 270

8.4 Corporate Diversification: Expanding Beyond a Single Market 271

Types of Corporate Diversification 273 Leveraging Core Competencies for Corporate Diversification 275 Corporate Diversification and Firm Performance 279

8.5 Implications for the Strategist 282

CHAPTERCASE 8 / Consider This... 283

CHAPTER 9 CORPORATE STRATEGY: STRATEGIC ALLIANCES AND MERGERS AND ACQUISITIONS 294

CHAPTERCASE 9 Disney: Building Billion-Dollar Franchises 295

9.1 How Firms Achieve Growth 296 The Build-Borrow-Buy Framework 297

9.2 Strategic Alliances 299 Why Do Firms Enter Strategic Alliances? 300 Governing Strategic Alliances 304 Alliance Management Capability 307

9.3 Mergers and Acquisitions 309 Why Do Firms Merge with Competitors? 310 Why Do Firms Acquire Other Firms? 311 M&A and Competitive Advantage 313

9.3 Implications for the Strategist 315

CHAPTERCASE 9 / Consider This... 316

CHAPTER 10 GLOBAL STRATEGY: COMPETING AROUND THE WORLD 326

CHAPTERCASE 10 The Wonder from Sweden: Is IKEA’s Success Sustainable? 327

10.1 What Is Globalization? 329 Stages of Globalization 331 State of Globalization 332

10.2 Going Global: Why? 333 Advantages of Going Global 333

Disadvantages of Going Global 336 10.3 Going Global: Where and How? 338

Where in the World to Compete? The CAGE Distance Framework 339 How Do MNEs Enter Foreign Markets? 342

10.4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework 343

International Strategy 344 Multidomestic Strategy 345 Global-Standardization Strategy 346 Transnational Strategy 347

10.5 National Competitive Advantage: World Leadership in Specific Industries 348

Porter’s Diamond Framework 350 10.6 Implications for the Strategist 352

CHAPTERCASE 10 / Consider This... 353

PART THREE / IMPLEMENTATION 362 CHAPTER 11 ORGANIZATIONAL DESIGN: STRUCTURE, CULTURE, AND CONTROL 364

CHAPTERCASE 11 Zappos: From Happiness to Holacracy 365

11.1 Organizational Design and Competitive Advantage 367

Organizational Inertia: The Failure of Established Firms 368 Organizational Structure 371 Mechanistic vs. Organic Organizations 372

11.2 Strategy and Structure 374 Simple Structure 375 Functional Structure 375 Multidivisional Structure 377 Matrix Structure 381

11.3 Organizational Culture: Values, Norms, and Artifacts 384

Where Do Organizational Cultures Come From? 386 How Does Organizational Culture Change? 386 Organizational Culture and Competitive Advantage 387

11.4 Strategic Control-and-Reward Systems 389 Input Controls 390 Output Controls 390

11.5 Implications for the Strategist 391

CHAPTERCASE 1 / Consider This... 392

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CHAPTER 12 CORPORATE GOVERNANCE AND BUSINESS ETHICS 400

CHAPTERCASE 12 Uber: Most Ethically Challenged Tech Company? 401

12.1 The Shared Value Creation Framework 403 Public Stock Companies and Shareholder Capitalism 403 Creating Shared Value 405

12.2 Corporate Governance 407 Agency Theory 408 The Board of Directors 409 Other Governance Mechanisms 412

12.3 Strategy and Business Ethics 414 12.4 Implications for the Strategist 418

CHAPTERCASE 12 / Consider This... 419

PART FOUR / MINICASES 427

PART FIVE / FULL-LENGTH CASES All available through McGraw-Hill Create, www.McGrawHillCreate.com/Rothaermel Company Index I1 Name Index I7 Subject Index I9

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Frank T. Rothaermel Georgia Institute of Technology

FRANK T. ROTHAERMEL (PH.D.) is a professor of strategy, 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 Studies Fellow. He received a National Science Foundation (NSF) CAREER award, which “is a Foundation-wide activity that offers the National Science Foundation’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 entrepreneurship. Frank has published over 30 articles in lead- ing academic journals such as the Strategic Management Journal, Organization Science, Academy of Management Journal, Academy of Management Review, and elsewhere. He has received several rec- ognitions 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, and the Israel Strategy Conference Best Paper Prize.

Thomson Reuters identified Frank as one of the “world’s most influential scientific minds” for having published in the top 1% of citation-based journal articles. He was listed among the top-100 scholars for his more than decade-long impact in both economics and business. Businessweek named Frank one of Georgia Tech’s Prominent Faculty in their national survey of business schools. The Kauffman Foundation views Frank as one of the world’s 75 thought leaders in entrepreneurship and innovation.

To inform his research Frank has conducted extensive field work and executive train- ing with leading corporations such as Amgen, Daimler, Eli Lilly, Equifax, GE Energy, GE Healthcare, Hyundai Heavy Industries (South Korea), Kimberly-Clark, Microsoft, McKes- son, NCR, Turner (TBS), UPS, among others. Frank regularly translates his research find- ings for wider audiences in articles in Forbes, MIT Sloan Management Review, Wall Street Journal, and elsewhere.

Frank has a wide range of executive education experience, including teaching in pro- grams at Georgia Institute of Technology, Georgetown University, ICN Business School (France), Politecnico di Milano (Italy), St. Gallen University (Switzerland), and the Uni- versity of Washington. He received numerous teaching awards for excellence in the class- room including the GT institute-wide Georgia Power Professor of Excellence award. When launched (in 2012), Frank’s Strategic Management textbook received the McGraw-Hill 1st Edition of the Year Award in Business & Economics.

Frank holds a PhD degree in strategic management from the University of Washington; a MBA from the Marriott School of Management at Brigham Young University; and a M.Sc. (Diplom-Volkswirt) in economics from the University of Duisburg-Essen, Germany. Frank completed training in the case teaching method at the Harvard Business School. He was a visiting professor at the University of St. Gallen, Switzerland, and an Erasmus Scholar at Sheffield Hallam University, UK.

VISIT THE AUTHOR AT: http://ftrStrategy.com/

ABOUT THE AUTHOR

© Kelleyn Rothaermel

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PREFACE

Strategic Management is a research- and application-based strategy text that covers issues facing managers in a globalized and turbulent 21st century.

When the first edition published, the market response was overwhelmingly enthusiastic, and I was grateful for the strong vote of confidence. When the second edition published, the enthusiasm was even greater; I remain ever grateful for the sustained support. In this third edition, I build upon the unique strengths of the text and continue to add improve- ments based upon hundreds of insightful reviews and important feedback from professors, students, and professionals.

The strategy textbook market has long been separated into two overarching categories: traditional, application-based and research-based. Traditional, application-based strategy books represent the first-generation texts whose first editions were published in the 1980s. The research-based strategy books represent the second-generation texts whose first editions were published in the 1990s. This text represents a new category of strategy textbook—a third-generation text that combines the student accessible, application- oriented framework of the first-generation texts with the research-based framework of the second-generation texts. It integrates core concepts, frameworks, and analysis techniques in strategy with functional course offerings; it also aims to help students become managers capable of making well-reasoned strategic decisions.

To facilitate an enjoyable and refreshing reading experience that enhances learning, I synthesize and integrate theory, 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 information. 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 han- dles 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 theory to life via examples that cover products and services from companies with which students are familiar, such as Facebook, Google, Starbucks, Apple, and Uber. Use of such examples aids in making strategy relevant to students’ lives and helps them internalize strategy concepts and frameworks.

The hallmark features of this text continue to be:

■ Use of a holistic Analysis, Formulation, and Implementation (AFI) Strategy Framework.

■ Synthesis and integration of empirical research and practical applications combined with rel- evant strategy material to focus on what is important for the student and why it is important.

*Source: Medina, J. (2014). Brain Rules: 12 Principles for Surviving and Thriving at Work, Home, and School (pp. 139–140). Pear Press. Kindle Edition.

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■ Comprehensive but concise presentation of core concepts, frameworks, and techniques.

■ Combination of traditional and contemporary strategy concepts. ■ Up-to-date examples and discussion of current topics within a global context. ■ Stand-alone chapter on competitive advantage, including a focus on triple bottom line

and sustainability. ■ Direct applications of strategy to careers and lives (including the popular myStrategy

modules at the end of each chapter). ■ Inclusion of Strategy Term Project (end-of-chapter) and interactive Running Case on

HP (in Connect). ■ Industry-leading digital delivery options and adaptive learning systems (Create,

SmartBook, LearnSmart, and Connect) ■ High-quality Cases, well integrated with textbook chapters and standardized, high-

quality teaching notes; there are two types of cases: ■ ChapterCases begin and end each chapter, framing the chapter topic and content. ■ 28 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 pride in authoring all of the ChapterCases, Strategy Highlights, and Mini- Cases. 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, 21 full-length cases, authored or co-authored by me specifically to accompany this textbook, are available through McGraw-Hill’s custom- publishing Create program (www.McGrawHillCreate.com/Rothaermel). Full-length cases New to the third edition are: Delta, General Electric, and Google. Popular cases about Apple, Amazon.com, IBM, Facebook, McDonald’s, Tesla Motors, and Better World Books among several others are significantly updated and revised. Robust and standardized case teaching notes are also available and accessible through Create; financial data for these cases may be accessed from the Instructor Resource site on Connect.

What’s New in the Third Edition? I have revised and updated the third edition in the following ways, many of which were inspired by conversations and feedback from the many users and reviewers of the first and second editions.

OVERVIEW OF IMPORTANT CHANGES IN 3E: ■ New section on blue ocean strategy (Chapter 6), with application examples and strat-

egy canvas. ■ More global coverage included throughout, with a stronger Asian focus both on the

continent as well as its global competitors. ■ Stronger focus on sustainable business. ■ Increased the total number of MiniCases to 28 (15 brand new, 13 revised). ■ New, completely revised, or updated ChapterCases and Strategy Highlights.

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■ Stronger integration and expanded discussion of ChapterCases throughout. ■ Increased emphasis on practice and applications of strategy concepts and

frameworks. ■ Updated or new firm, product, and service examples to afford more in-depth discussion. ■ Enhanced graphic design and rendering of exhibits throughout entire text.

In detail:

CHAPTER 1 ■ New ChapterCase about Twitter’s rise and current challenges. ■ New Strategy Highlight 1.1 discussing Threadless and its use of crowdsourcing to

help produce better products and maintain competitive advantage. ■ Updated Strategy Highlight 1.2 about BP’s Gulf Coast oil spill and systemic safety

issues over the last decade.

CHAPTER 2 ■ New ChapterCase about Yahoo’s CEO Marissa Mayer and the attempted turnaround

under her leadership. ■ Created new and stand-alone sections on each vision, mission, and values. ■ Updated Strategy Highlight 2.1 on Merck’s core values and the development of drugs

to treat river blindness and the challenges with the Vioxx recall. ■ Added a new table comparing and contrasting top-down strategic planning, scenario

planning, and strategy as planned emergence (brief descriptions, pros and cons, where best used); see Exhibit 2.9.

■ Added new sections to expand discussion of autonomous actions, serendipity, and resource allocation process as part of strategy as planned emergence.

■ Added new ethical/social issues question focusing on Merck’s responsibility to meet the needs of both its customers and its shareholders.

CHAPTER 3 ■ Updated ChapterCase about Tesla Motors and the U.S. automotive industry. ■ Separate discussion of political and legal factors in the PESTEL framework. ■ Sharpened the discussion of PESTEL framework overall. ■ New Strategy Highlight 3.1: “BlackBerry’s Bust.” ■ Updated the discussion of competition in the U.S. domestic airline industry through-

out the chapter, and in Strategy Highlight 3.2: “The Five Forces in the Airline Industry.”

CHAPTER 4 ■ New ChapterCase about Dr. Dre, and multi-billion-dollar Apple acquisition of Beats

Electronics. ■ Fresh examples of core competencies and their applications. ■ Interlocution of the concept of Core Rigidities. ■ Expanded discussion on dynamic capabilities, including new Strategy Highlight 4.2:

“Dynamic Capabilities at IBM.”

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■ Included new Exhibit 4.6 showing IBM’s successful transition throughout several technological discontinuities over the last 125 years.

■ Sharpened discussion of SWOT, including moving (an updated version of) the SWOT application to McDonald’s in the Instructor Manual.

CHAPTER 5 ■ New ChapterCase, focusing on Apple vs. Microsoft and their quest for competitive

advantage over time. ■ Extended discussion of Apple and Microsoft (turnaround under new CEO Satya

Nadella) throughout the chapter. ■ Sharpened discussion of competitive advantage and firm performance. ■ Expanded discussion of business models to include new popular applications and

examples, with a more in-depth discussion. ■ New Strategy Highlight 5.2 on Airbnb and its novel business model.

CHAPTER 6 ■ New ChapterCase about JetBlue and how its straddling of different strategy positions

led to being “Stuck in the Middle” and a competitive disadvantage. ■ New section on Blue Ocean Strategy. ■ Application of the Blue Ocean Strategy canvas to the U.S. domestic airline industry. ■ Discussion of the Eliminate-Reduce-Raise-Create framework from Blue Ocean Strat-

egy and application to IKEA. ■ New Strategy Highlight 6.1: “Dr. Shetty: The Henry Ford of Heart Surgery,” focusing

on cost reductions in healthcare. ■ New Strategy Highlight 6.2: “How JCPenney Sailed into the Red Ocean.” ■ Dropped the section “The Dynamics of Competitive Positioning” ■ New myStrategy module, comparing and contrasting low-cost and differentiated

workplaces.

CHAPTER 7 ■ New ChapterCase on Netflix and the disruption in the TV industry. ■ Coverage of innovation process expanded with a stronger focus on how to manage

innovation. ■ More in-depth coverage of product and process innovation over the entire industry life

cycle, including revision of Exhibit 7.6 “Product and Process Innovation throughout an Industry Life Cycle.”

■ Revision of Exhibit 7.9 “Features and Strategic Implications of the Industry Life Cycle.” ■ New Strategy Highlight 7.1: “How Dollar Shave Club Is Disrupting Gillette.” ■ Dropped the section “The Internet as Disruptive Force: The Long Tail.” ■ Revised the myStrategy module and end-of-chapter section around debate on whether

college adds to potential success of entrepreneurs.

CHAPTER 8 ■ New ChapterCase on how Amazon.com diversified over time to become the “Every-

thing Store,” including a detailed exhibit showing Amazon.com’s key strategic initia- tives and stock market valuation from the idea of in 1994 to 2015 (Exhibit 8.1).

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■ New section titled, “Why Firms Need to Grow.” ■ New Strategy Highlight 8.1 “Is Coke Becoming a Monster?” ■ More in-depth discussion of Exhibit 8.4 “Alternatives on the Make-or-Buy Contin-

uum” in the text. ■ New subsection on “When Does Vertical Integration Make Sense?” ■ Revised section of “Types of Corporate Diversification” to sharpen discussion and

provide graphic support as Rumelt’s framework categorizing different types of diver- sification is developed (Exhibit 8.8).

■ Expanded discussion to clarify more fully the sources of value creation and costs of vertical integration and diversification (Exhibit 8.11).

CHAPTER 9 ■ Revised and updated ChapterCases focusing on Disney’s attempt to build billion-

dollar franchises, with strategic alliances, and mergers and acquisitions as critical to corporate strategy execution.

■ Changed macro structure of chapter by moving the Build-Borrow-Buy Framework upfront to guide and frame the discussion corporate strategy execution using.

■ Discussion of strategic alliances before mergers and acquisitions. ■ Included a new section entitled “How Firms Achieve Growth.” ■ New Strategy Highlight 9.1 “IBM and Apple: From Big Brother to Big Alliance Partner.” ■ Revised to myStrategy module to sharpen the discussion of network strategy in terms

of career management.

CHAPTER 10 ■ New ChapterCase on IKEA, with a focus on the question whether the Swedish furni-

ture retailer’s success is sustainable while competing globally. ■ Reorganization of section “What Is Globalization” into two subsections, focusing on

the stage and state of globalization respectively. ■ New Strategy Highlight 10.1 “The Gulf Airlines Are Landing in the United States.”

CHAPTER 11 ■ Revised and updated ChapterCase “Zappos: From Happiness to Holacracy.” ■ Included discussion on Holacracy as new organization structure. ■ Expanded discussion with detailed visual support of section “Organizational Inertia:

The Failure of Established Firms.” ■ New Strategy Highlight 11.1 “The Premature Death of a Google-like Search Engine

at Microsoft.” ■ Dropped section on using SWOT analysis for strategy implementation.

CHAPTER 12 ■ New ChapterCase on Uber and its ethical lapses. ■ Strong integration of Uber ChapterCase throughout the body of the chapter. ■ Updated Strategy Highlight 12.1 “GE’s Board of Directors,” including discussion

chairperson—CEO duality in the body of the chapter. ■ Updated Strategy Highlight 12.2 “Did Goldman Sachs and the Fabulous Fab Commit

Securities Fraud?”

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MINICASES ■ Added 15 brand-new MiniCases. ■ Updated 13 MiniCases from second edition. ■ Stronger focus on non-U.S. firms, especially on global competitors from Asia. ■ Stronger focus on competing in China and India, facing strong domestic competitors.

FULL-LENGTH CASES ■ Added three brand-new, full-length Cases: Delta Air Lines, General Electric after GE

Capital, and Google. ■ Revised and updated: Amazon.com, Apple, Best Buy, Better World Books, Facebook,

IBM, McDonald’s, Merck, Tesla Motors, and Better World Books, among others. ■ Also included is an updated version of the popular case “The Movie Exhibition Indus-

try” by Steve Gove and Brett Matherne. ■ All cases—including the new and revised cases plus all cases from the first and sec-

ond editions that were authored by Frank T. Rothaermel—are available through McGraw-Hill Create: http://www.mcgrawhillcreate.com/Rothaermel.

■ Cases include financial data in e-format for analysis.

Instructor Resources Connect, McGraw-Hill’s online assignment and assessment system, offers a wealth of content for both students and instructors. Students will find the following:

■ 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 appropriate company-level perspective—i.e., from global to industry to strategic group to company. Students will develop a 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 ultimately provide a specific recommendation.

■ Interactive applications (such as click-drag activities, video cases, and—new in this edition—case analyses for each of the MiniCases) that require students to apply key concepts; instant feedback and progress tracking are also available.

■ Resources for analysis (such as financial ratios, templates for strategic financial analysis, and financial review activities) that provide students with the tools they need to compare performance between firms and to refresh or extend their working knowl- edge of major financial measures in a strategic framework.

■ LearnSmart and SmartBook, which has been significantly improved for this edition to provide students with more opportunity to probe concepts at a higher level of thinking.

Under the Instructor’s Resources tab, instructors will find tested and effective tools that enable automatic grading and student-progress tracking and reporting, and a trove of content to support teaching:

■ The Combined Instructor Manual (IM) includes thorough coverage of each chapter, support for newer and experienced faculty, as well as guidance for integrating Connect— all in a single resource. Included in this newly combined IM is the appropriate level of theory, recent application or company examples, teaching tips, PowerPoint references, critical discussion topics, and answers to end-of-chapter exercises.

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■ The PowerPoint (PPT) slides provide comprehensive lecture notes, video links, and company examples not found in the textbook. There will be 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.

■ The Video Guide is new for this edition and includes video links that relate to con- cepts from chapters. The video links include sources such as Big Think, Stanford Uni- versity’s Entrepreneurship Corner, The McKinsey Quarterly, ABC, BBC, CBS, CNN, ITN/Reuters, MSNBC, NBC, PBS, and YouTube.

CREATE, McGraw-Hill’s custom-publishing program, is where you access the full-length cases that accompany Strategic Management (http://www.mcgrawhillcreate.com/Rothaermel). Through CREATE, you will be able to select from 20 author-written cases that go specifi- cally with this textbook as well as cases from Harvard, Ivey Darden, NACRA, and much more! You can: Assemble your own course, selecting the chapters, cases, 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.

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, and Avery. 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 provid- ing the exceptional leadership that allows faculty to fully focus on research, teaching, and service. I have been at Georgia Tech for over a decade, 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, Stuart Graham, Matt Higgins, David Ku, John McIntyre, Alex Oettl, Henry Sauermann, Eunhee Sohn, Jerry Thursby, and Marie Thursby. We have a terrific group of current and former PhD stu- dents, many of whom had a positive influence on this project, including Shanti Agung (Drexel University), Drew Hess (Washington and Lee University), Kostas Grigoriou (Flor- ida International University), Jaiswal Mayank, Nicola McCarthy, German Retana (INCAE Business School, Costa Rica), Briana Sell, (Mercer University) Jose Urbina, Carrie Yang (University of Chicago), and Wei Zhang (Singapore Management University).

ACKNOWLEDGMENTS

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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 (Managing Director), Lai T. Moy (Senior Product Developer), Casey Keske (Senior Marketing Man- ager), Mary E. Powers and Keri Johnson (Content Project Managers), and Matt Diamond (Designer). Bill Teague, Freelance Content Development Editor, worked tirelessly and carefully on the third edition manuscript. Thank you to senior management at McGraw- Hill Education, especially Kurt Strand (Senior Vice President, Products & Markets), who assembled this fine team.

I’m more than grateful to work with a number of great colleagues on various resources that accompany this text:

■ Marne Arthaud-Day (Kansas State University) on some Cases and Case Teaching Notes

■ Heidi Bertels (College of Staten Island, CUNY) on SmartBook and LearnSmart ■ John Burr (Purdue University) on the Video Guide ■ Melissa Francisco (University of Central Florida) on the PowerPoint Slide Decks ■ Anne Fuller (California State University, Sacramento), on Connect Interactives,

Connect Instructor Manual, and End-of-Chapter Material ■ David R. King (Iowa State University) on MiniCase Teaching Notes as well as on

select Full-length Cases and Full-length Case Teaching Notes ■ Stuart Napshin (Kennesaw State University) on Connect Interactives ■ Louise Nemanich (Arizona State University) on the Instructor Manual ■ Chris Papenhausen (University of Massachusetts, Dartmouth) on Strategic Financial

Analysis

■ Robert Porter (University of Central Florida) on the Running Case in Connect

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 text and cases that you hold in your hands. The reviewers have given us the greatest gift of all—the gift of time! These very special people are listed starting on page xxiii.

Frank T. Rothaermel Georgia Institute of Technology

Web: http://ftrStrategy.com/ Strategy Blog: http://www.facebook.com/ftrStrategy

Twitter: @ftrStrategy

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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 developmen- tal focus groups and symposiums, from hundreds of reviews from reviewers across the country, and from beta-testing of the first-edition manuscript as well as market reviews of the second edition on a variety of campuses. The author and McGraw-Hill wish to thank the following people who shared their insights, constructive criticisms, and valu- able suggestions throughout the development of this project. Your contributions have improved this product.

THANK YOU . . .

Joshua R. Aaron East Carolina University

Moses Acquaah University of North Carolina at Greensboro

Garry Adams Auburn University

Todd Alessandri Northeastern University

M. David Albritton Northern Arizona University

Benjamin N. Alexander Tulane University

Brent B. Allred The College of William & Mary

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Melissa Appleyard Portland State University

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Clint Chadwick University of Alabama in Huntsville

REVIEWERS AND SYMPOSIUM ATTENDEES

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THANK YOU . . . xxi

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Kenneth H. Chadwick Nicholls State University

Betty S. Coffey Appalachian State University

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Jason Scott Earl Brigham Young University Hawaii

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Helen Eckmann Brandman University

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David Epstein University of Houston Downtown

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Steve Gove University of Vermont

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Joel West Claremont Graduate University

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Laura Whitcomb California State University, Los Angeles

Margaret White Oklahoma State University

Marta Szabo White Georgia State University

Carolyn Wiethoff Indiana University

Scott Williams Wright State University

James Winters Portland State University

Ross A. Wirth Franklin University

Cathy Coleman Wood University of Tennessee

Beth Woodard Belmont University

Chuanyin Xie The University of Tampa

George Young Liberty University

Michael J. Zhang Sacred Heart University

Zhe Zhang, Ph.D. School of Business, Eastern Kentucky University

Yanfeng Zheng The University of Hong Kong

Arvids A. Ziedonis Boston University

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Required=Results

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Analysis

PART 1

CHAPTER 1 What Is Strategy? 4

CHAPTER 2 Strategic Leadership: Managing the Strategy Process 32

CHAPTER 3 External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 64

CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies 104

CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models 140

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The AFI Strategy Framework

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 and Entrepreneurship

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

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Chapter 1

What Is Strategy?

Chapter Outline

1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage What Is Competitive Advantage? Industry vs. Firm Effects in Determining Firm Performance

1.2 Stakeholders and Competitive Advantage Stakeholder Strategy Stakeholder Impact Analysis

1.3 The AFI Strategy Framework

1.4 Implications for the Strategist

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 Differentiate the roles of firm effects and industry effects in determining firm performance.

LO 1-4 Evaluate the relationship between stakeholder strategy and sustainable competitive advantage.

LO 1-5 Conduct a stakeholder impact analysis.

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Does Twitter Have a Strategy?

TWITTER IS NOT FLYING HIGH. In the summer of 2015, Twitter’s stock price was 50 percent lower than what it was shortly after the social networking service went pub- lic November 7, 2013. Twitter’s disappointing performance led to the departure of its CEO, Dick Costolo, who served from 2010 to 2015. Co- founder Jack Dorsey was brought back as Twitter’s CEO. With several high- profile departures and continuing unabated demo- tions, the young company faced turmoil among its executive ranks.

Launched in 2006, Twitter is often called the “SMS of the Internet” because it allows users to send short messages or “tweets” restricted to 140 characters with pic- tures and videos often attached.1 Twitter’s leader described the social media service as an “indispens- able companion to life in the moment” and “the world’s largest informa- tion network.”2 Users can follow other people on the social network. For example, Katy Perry, the American singer, song- writer, and actress, has more than 70 million followers. Justin Bieber (with 65 million) and President Barack Obama (with 60 million) round out the top three in terms of followers. When a user follows another, she can see that person’s status updates in her Twitter feed.

Twitter has some 300 million worldwide active users, that is, people who log in at least once a month. Core users

stay connected pretty much permanently, providing multi- ple status updates throughout the day. Although most tweets cover trivia, Twitter’s claim to significance rises from its role in political revolutions such as the Arab Spring or live coverage of breaking news, including the raid on Osama bin Laden’s compound in Pakistan. Twitter also appears

constantly in the mass media. TV channels show tweets of athletes, politi- cians, or other celebrities, often live during their shows. Some 20 percent of smartphone users in the United States, and close to 10 percent internationally, use Twitter regularly.

Twitter’s business model is to grow its user base and then charge advertis- ers for promoting goods and services to that base of users. Individual

users pay nothing. Their tweets give Twitter free user-generated content to drive more traffic. Com- panies pay for “promoted tweets” that are directly inserted into a user’s news stream. Advertis- ers value how Twitter can deliver their ads in real time. In one famous episode, when a blackout halted the 2013 Super Bowl for over half an hour, Nabisco promoted Oreo cookies by tweet- ing, “Power out? No

problem. You can still dunk in the dark.” Advertisers can also target their ads based on the user’s interests or loca- tion, the time of day, and so on.

Twitter faces several challenges that make its future prospects highly uncertain. Amid turnover and reshuf- fling in the management and engineering ranks, Twit- ter struggles to grow its user base. Compare Twitter’s

CHAPTERCASE 1

CEO of Square; Dick Costolo, CEO of Twitter, 2010–2015. © AP Photo/Lionel Cironneau

Jack Dorsey, co-founder and CEO of Twitter. © Thomas Samson/Getty Images

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WHY IS TWITTER STRUGGLING? In contrast, why are Facebook and Google so successful? For that matter, why is any company successful? What enables some

firms to gain and then sustain their competitive advantage over time? Why do once-great firms fail? How can managers influence 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 strategic management enables you to view a firm in its entirety. It also enables you to think like a general manager to help position your firm for superior performance. The AFI strategy framework (shown on page 3) 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 and then con- sider the role of business in society. Next, we take a closer look at the components 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 sec- tion titled “Implications for the Strategist.” Here we provide practical applications and considerations of the material developed in the chapter. Let’s begin the exciting journey 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 performance relative to competitors.5 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, and universi- ties compete for the best students and professors. Sports teams compete for championships, while celebrities compete for media attention. As highlighted in the ChapterCase, Twitter is competing for more users against other social media such as SnapChat, Facebook and its messaging service WhatsApp,and others. In any competitive situation, therefore, a good strategy enables a firm to achieve superior performance. This leads to the question: What is a good strategy?

A good strategy consists of three elements:6

1. A diagnosis of the competitive challenge. This element is accomplished through analysis of the firm’s external and internal environments (Part 1 of the AFI framework).

strategic management An integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage.

LO 1-1

Explain the role of strategy in a firm’s quest for competitive advantage.

strategy The set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors.

300 million monthly users to Facebook’s 1.5 billion. Twitter needs a larger user base to attract more online advertisers and better monetize its social media service. When serv- ing as CEO, Costolo made the tweet-worthy declaration that Twitter’s “ambition is to have the largest audience in the world.”3 Yet, the trend runs in the opposite direction as Twitter’s user growth has slowed considerably while Facebook is getting even larger, with a steep rise in users

on mobile devices. If Twitter fails to grow in user size to increase the value of the communication platform for online advertisers, it might become either a takeover tar- get for much larger digital advertising companies such as Google or be overtaken by a new social media news app.4

You will learn more about Twitter by reading the chapter; related questions appear on page 23.

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CHApTER 1 What Is Strategy? 7

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 Twitter is pursuing a good strategy. A quick rereading indicates that Twitter appears to be underperforming, and thus its strategy does not seem to be a good one. Let’s take a closer look at the three elements of a good strategy to see how Twitter’s CEO could turn a bad strategy into a winning one.7

THE COMpETITIVE CHALLENGE. A good strategy needs to start with a clear and critical diagnosis of the competitive challenge. ChapterCase 1 indicates that the biggest competitive challenge for Twitter is to grow its user base to become more valuable for online advertisers. With some 300 million active users compared to Facebook’s roughly 1.5 billion monthly users, Twitter is viewed by advertisers as a niche application. Compa- nies direct the bulk of their digital ad dollars to Facebook and Google rather than Twitter. Moreover, Twitter suffers in comparison to Facebook for reasons other than sheer scale. Facebook allows advertisers to target their online ads much more precisely based on a host of demographic data that the social network collects and infers about each user, including birth year, university affiliation, network of friends, interests, and so on.

A GUIDING pOLICY. Next, after the diagnosis of the competitive challenge, the strategist needs to formulate an effective guiding policy in response. The formulated strategy needs to be consistent, 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, a firm’s employees become confused and cannot make effective day-to-day decisions that support the overall strategy. Without con- sistency in strategy, moreover, other stakeholders, including investors, also become frustrated.

Here is where Twitter’s problems begin. While its leaders are well aware of the compet- itive challenge it faces and have diagnosed this challenge correctly, they still lack a clear, guiding policy for facing this challenge. They could respond to it by taking steps to accel- erate user sign-ups and usage. For example, such steps could include making the sign-up process and use of the services easier, explaining the sometimes idiosyncratic conventions on Twitter to a broader audience, and rooting out offensive content. However, rather than formulating a guiding policy to grow active core users, Twitter has emphasized defining its user base more broadly. When serving as CEO, Costolo specifically declared that the com- pany should be seen as “three geometrically [con]centric circles” reflecting three types of users. The first inner circle represents direct users of the social media service; the second, visitors to the Twitter site who do not log in; and the third, people who view Twitter con- tent on affiliate sites such as cable news networks, live sportscasts, and other websites. Twitter decided that it should henceforth pursue all three types of users.

The goal of providing a new definition of Twitter users is clear: To expand the percep- tion of its reach so as to compare more favorably to Facebook. Changing the definition of users, however, is not sufficient to address the competitive challenge of growing the base of core users. Moreover, users in the second and third circle are harder to track, and more importantly, they are also much less valuable to advertisers than core users.

COHERENT ACTIONS. Finally, a clear guiding policy needs to be implemented with a set of coherent actions. Changing the goalpost of which users to go after not only con- fused management, but it also limited functional guidance for employees in day-to-day

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8 CHApTER 1 What Is Strategy?

operations. Consequences of an unclear mission followed: Frustration among managers and engineers increased, leading to turnover of key personnel. Internal turmoil was further stoked by a number of management demotions as well as promotions of close personal friends of the respective CEO. From its inception, Twitter’s culture has been hampered by infighting and public intrigues among co-founders and other early leaders.

In summary, a good strategy is more than a mere goal or a company slogan. Declaring that Twitter’s “ambition is to have the largest audience in the world”8 is not a good strat- egy; it is no strategy at all. Rather it is a mere statement of desire. In creating a good strat- egy, 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 all employees involved. 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 Google has a competitive advantage over Facebook, Twitter, and Yahoo in digital advertising. In smartphones, Apple has achieved a competitive advantage over Samsung, Microsoft, and BlackBerry. A firm that is able to outperform its competi- tors or the industry average over a prolonged period of time has a sustainable competitive advantage.

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 supe- rior 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 disad- vantage. In contrast, if a firm’s return on invested capital is 2 percent in a declining indus- try, like newspaper publishing, where the industry average has been negative (25 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.10 The rewards of superior value creation and capture are profitability and market share. Sam Walton was driven by offering lower prices than his competitors. Steve Jobs wanted to “put a ding in the universe”— making a difference by delivering products and services people love. Mark Zuckerberg built Facebook to make the world more open and connected. Google co-founders Larry Page and Sergey Brin are motivated to make the world’s information universally accessible. For Walton, Jobs, Zuckerberg, Page, Brin, and numerous other entrepreneurs

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.

sustainable competitive advantage Outperforming competitors or the industry average over a prolonged period of time.

competitive disadvantage Underperformance relative to other competitors in the same industry or the industry average.

competitive parity Performance of two or more firms at the same level.

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CHApTER 1 What Is Strategy? 9

and businesspeople, 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 containing the cost to create it. Managers achieve this combination 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: 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 lux- ury setting. A clear strategic profile—in terms of product differentiation, cost, and cus- tomer 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.

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.11 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.

Given Twitter’s new emphasis on its target audience as comprising three discrete segments, many employees at Twitter lament confusion in deciding how to serve all three. As Twitter attempts to be more attractive to different types of users simultaneously, it encounters trade-offs that are hard if not impossible to reconcile. Consider the function- ality of an application such as search or mobile use, for example: Core users have very different needs from the needs of casual visitors or passive viewers of Twitter content. In an attempt to match Facebook’s scale, Twitter is attempting to be everything to every- body, without considering the strategic trade-offs. This resulted not only in low employee morale, but also in inferior performance. In contrast, Facebook is fully committed to pro- viding a superior user experience for its 1.5 billion active core users on mobile devices.12

The key to successful strategy is to combine a set of activities to stake out a unique position within an industry. Competitive advantage has to come from performing differ- ent 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 loca- tions, 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. Strategy Highlight 1.1 takes a closer look at how the online startup Threadless used different activi- ties than rivals to gain a competitive advantage in the apparel industry.

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10 CHApTER 1 What Is Strategy?

Strategy Highlight 1.1

Threadless: Leveraging Crowdsourcing to Design Cool T-Shirts

Threadless, an online design community and apparel store (www .threadless.com), was founded in 2000 by two students with $1,000 as start-up capital. Jake Nickell was then at the Illinois Institute of Art and Jacob DeHart at Purdue University. After Jake had won an online T-shirt design contest, the two entrepreneurs came up with a business model to leverage user-generated con- tent. The idea is to let consumers “work for you” and turn consum- ers into prosumers, a hybrid between producers and consumers.

Members of the Threadless community, which is some 2.5 million strong, do most of the work, which they consider fun: They submit T-shirt designs online, and com- munity members vote on which designs they like best. The designs receiving the most votes are put in production,

printed, and sold online. Each Monday, Threadless releases 10 new designs and reprints more T-shirts throughout the week as inventory is cleared out. The cost of Threadless T-shirts is a bit higher than that of competitors, about $25.

Threadless leverages crowdsourcing, a process in which a group of people voluntarily perform tasks that were traditionally completed by a firm’s employees. Rather than doing the work in-house, Threadless outsources its T-shirt design to its website community. The concept of leveraging a firm’s own customers via Internet-enabled technology to help produce better products is explicitly included in the Threadless business model. In particu- lar, Threadless is leveraging the wisdom of the crowds, where the resulting decisions by many participants in the online forum are often better than decisions that could have been made by a single individual. To more effectively leverage this idea, the crowds need to be large and diverse.

At Threadless, the customers play a critical role across the entire value chain, from idea generation to design, marketing, sales forecasting, and distribution. The Threadless business model translates real-time market research and design contests into quick sales. Threadless produces only T-shirts that were approved by its community. Moreover, it has a good understanding of market demand because it knows the number of people who participated in each design contest. In addition, when scoring each T-shirt design in a contest, Threadless users have the option to check “I’d buy it.” These features give the Threadless community a voice in T-shirt design and also coax community members into making a prepurchasing commitment. Threadless does not make any signifi- cant investments until the design and market size are determined, minimizing its downside.

Not surprisingly, Threadless has sold every T-shirt that it has printed. Moreover, it has a cult-like following and is outperforming established companies American Eagle, Old Navy, and Urban Outfitters with their more formulaic T-shirt designs.13

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 competi- tor 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.

Jacob DeHart, left, and Jake Nickell, center, (co-founders) and Jeffrey Kalmikoff (early CEO) created Threadless, an online company that sells millions of dollars’ worth of T-shirts annually. © Jason Wambsgans/MCT/Newscom

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CHApTER 1 What Is Strategy? 11

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.14 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 declared its “ambition is to have the largest audience in the world.” 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 chapter, an effective vision and mission can lay the founda- tion 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 creation and costs.

2. A failure to face a competitive challenge is not strategy. If the firm does not define a clear competitive challenge, managers 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.

INDUSTRY VS. FIRM EFFECTS IN DETERMINING FIRM pERFORMANCE Firm performance is determined primarily by two factors: industry and firm effects. Industry effects describe the underlying economic structure of the industry. They attribute firm performance to the industry in which the firm competes. The structure of an industry is determined by elements common to all industries, elements such as entry and exit barri- ers, number and size of companies, and types of products and services offered. In a series of empirical studies, academic researchers have found that about 20 percent of a firm’s profitability depends on the industry it’s in.15 In Chapter 3, when studying external analysis, we’ll gain a deeper understanding of an industry’s underlying structure and how it affects firm performance.

Firm effects attribute firm performance to the actions managers take. In Chapter 4, we’ll look inside the firm to understand why firms within the same industry differ, and how differences among firms can lead to competitive advantage.

For now, the key point is that managers’ actions tend to be more important in determin- ing firm performance than the forces exerted on the firm by its external environment.16 Empirical research studies indicate that a firm’s strategy can explain up to 55 percent of its performance.17 Exhibit 1.1 shows these findings.

LO 1-3

Differentiate the roles of firm effects and industry effects in determining firm performance.

industry effects Firm performance attributed to the structure of the industry in which the firm competes.

firm effects Firm performance attributed to the actions managers take.

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12 CHApTER 1 What Is Strategy?

Although a firm’s industry environment is not quite as important as the firm’s strategy within its industry, they jointly determine roughly 75 percent of overall firm performance. The remaining 25 percent relates partly to business cycles and other effects.

Competition—the ongoing struggle among firms to gain and sustain competitive advantage—does not take place in isolation. Managers therefore must understand the relationship between strategic management and the role of business in society, which we will turn to next.

1.2 Stakeholders and Competitive Advantage Companies with a good strategy generate value for society. When firms compete in their own self-interest while obeying the law and acting ethically, they ultimately create value. Value creation occurs because companies with a good strategy are able to provide prod- ucts or services to consumers at a price point that they can afford while making a profit at the same time. Both parties benefit from this trade as each captures a part of the value created. In so doing, they make society better.18 Value creation in turn lays the founda- tion for the benefits that successful economies can provide: education, public safety, and health care, among others. Superior performance allows a firm to reinvest some of its profits and to grow, which in turn provides more opportunities for employment and fulfilling careers. Although Google started as a research project in graduate school by Larry Page and Sergey Brin, it is worth roughly $350 billion and employs some 55,000 people worldwide, not to mention the billions of people across the world who rely on it for information gathering.19

Strategic failure, in contrast, can be expensive. Once a leading technology company, Hewlett-Packard was known for innovation, resulting in superior products. The “HP way of management” included lifetime employment, generous benefits, work/life balance, and freedom to explore ideas, among other perks.20 However, HP has not been able to address the competitive challenges of mobile computing or business IT services effectively. As a result, HP’s stakeholders suffered. Shareholder value was destroyed. The company also had to lay off tens of thousands of employees in recent years. Its customers no longer received the innovative products and services that made HP famous.

LO 1-4

Evaluate the relationship between stakeholder strategy and sustainable competitive advantage.

Up to 55%

~25%

~20%

Other Effects (Business Cycle Effects,

Unexplained Variance)

Firm Effects

Industry Effects

EXHIBIT 1.1 / Industry, Firm, and Other Effects Explaining Superior Firm Performance

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CHApTER 1 What Is Strategy? 13

The contrasting examples of Google and HP illustrate the relationship between indi- vidual firms and society at large. Recently, this relationship received more critical scrutiny due to some major shocks to free-market capitalism.

In the first decade of the 21st century, several black swan events eroded the public’s trust in business as an institution and capitalism as an economic system.21 In the past, most people assumed that all swans are white, so when they first encountered swans that were black, they were surprised. Today, the metaphor of a black swan describes the high impact of a highly improbable event.22 Examples of black swan events include the fall of the Berlin Wall and the subsequent collapse of the Soviet Union, the 9/11 terrorist attacks, the Fukushima nuclear disaster in Japan, and the Arab Spring. Such events were consid- ered to be highly improbable and thus unexpected, but when they did occur, each had a very profound impact.

The implicit trust relationship between the corporate world and society at large has deteriorated because of the arrival of several black swans. One of the first black swan events of the 21st century occurred when the accounting scandals at Enron, Arthur Andersen, WorldCom, Tyco, Adelphia, and Parmalat (of Italy) came to light. Those events led to bankruptcies, large-scale job loss, and the destruction of billions of dollars in shareholder value. As a result, the public’s trust in business and free market capitalism began to erode.

Another black swan event occurred in the fall of 2008 with the global financial crisis, which shook the entire free market system to its core.23 A real estate bubble had developed in the United States, fueled by cheap credit and the availability of subprime mortgages. When that bubble burst, many entities faced financial stress or bankruptcy—those who had unsustainable mortgages, investors holding securities based on those mortgages, and the financial institutions that had sold the securities. Some went under, and others were sold at fire-sale prices. Home foreclosures skyrocketed as a large number of borrowers defaulted on their mortgages. House prices in the United States plummeted by roughly 30 percent. The Dow Jones Industrial Average (DJIA) lost about half its market value, plunging the United States into a deep recession.

The impact was worldwide. The freezing of capital markets during the global financial crisis triggered a debt crisis in Europe. Some European governments (notably Greece) defaulted on government debt; other countries were able to repay their debts only through the assistance of other, more solvent European countries. This severe financial crisis not only put Europe’s common currency, the euro, at risk, but also led to a prolonged and deep recession in Europe.

In the United States, the Occupy Wall Street protest movement was born out of dissatisfaction with the capitalist system. Issues of income disparity, corporate eth- ics, corporate influence on governments, and ecological sustainability were key drivers. The Occupy movement, organized through social media platforms such as Twitter and Facebook, eventually expanded around the world.

Although these black swan events in the business world differed in their specifics, two common features are pertinent to our study of strategic management.24 First, these events demonstrate that managerial actions can affect the economic well-being of large numbers of people around the globe. Most of the events resulted from executive actions (or inactions) within a single organization, or compounded across a specific industry or government.

The second pertinent feature relates to stakeholders—organizations, groups, and indi- viduals that can affect or be affected by a firm’s actions.25 This leads us to stakeholder strategy, which we discuss next.

black swan events Incidents that describe highly improbable but high-impact events.

stakeholders Organizations, groups, and individuals that can affect or are affected by a firm’s actions.

© Krys Bailey/Alamy

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14 CHApTER 1 What Is Strategy?

STAKEHOLDER STRATEGY Stakeholders have a vested claim or interest in the performance and continued survival of the firm. Stakeholders can be grouped by whether they are internal or external to a firm. As shown in Exhibit 1.2, internal stakeholders include stockholders, employees (including executives, managers, and workers), and board members. External stakeholders include customers, suppliers, alliance partners, creditors, unions, communities, governments at various levels, and the media.

All stakeholders make specific contributions to a firm, which in turn provides differ- ent types of benefits to different stakeholders. Employees contribute their time and talents to the firm, receiving wages and salaries in exchange. Shareholders contribute capital in the hope that the stock will rise and the firm will pay dividends. Communities provide real estate, infrastructure, and public safety. In return, they expect that companies will pay taxes, provide employment, and not pollute the environment. The firm, therefore, is embedded in a multifaceted exchange relationship with a number of diverse internal and external stakeholders.

If any stakeholder withholds participation in the firm’s exchange relationships, it can negatively affect firm performance. The aerospace company Boeing, for example, has a long history of acrimonious labor relations, leading to walk-outs and strikes. This in turn has not only delayed production of airplanes but also raised costs. Borrowers who purchased subprime mortgages are stakeholders (in this case, customers) of financial institutions. When they defaulted in large numbers, they threatened the survival of these financial institutions and, ultimately, of the entire financial system.

Stakeholder strategy is an integrative approach to managing a diverse set of stakehold- ers effectively in order to gain and sustain competitive advantage.26 The unit of analysis is the web of exchange relationships a firm has with its stakeholders (see Exhibit 1.2). Stakeholder strategy allows firms to analyze and manage how various external and inter- nal stakeholders interact to jointly create and trade value.27 A core tenet of stakeholder strategy is that a single-minded focus on shareholders alone exposes a firm to undue risks. Simply putting shareholder interest above all else can undermine economic performance and even threaten the very survival of the enterprise. The strategist, therefore, must under- stand the complex web of exchange relationships among different stakeholders. With that understanding, the firm can proactively shape the various relationships to maximize the

stakeholder strategy An integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage.

External Stakeholders • Customers • Suppliers • Alliance Partners • Creditors • Unions • Communities • Governments • Media

Internal Stakeholders

Be ne

fit s

Be ne

fit s

Be ne

fit s

Be ne

fit s

Co nt

rib ut

io ns

Co nt

rib ut

io ns

• Employees • Stockholders • Board Members

A B

B A

EXHIBIT 1.2 / Internal and External Stakeholders in an Exchange Relationship with the Firm

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CHApTER 1 What Is Strategy? 15

joint value created and manage the distribution of this larger pie in a fair and transparent manner. Effective stakeholder management exemplifies how managers can act to improve firm performance, thereby enhancing the firm’s competitive advantage and the likelihood of its continued survival.28

Target Corporation has gathered numerous awards that reflect its strong relationship with its stakeholders. It has been named on lists such as best places to work, most admired com- panies, most ethical companies, best in class for corporate governance, and grassroots inno- vation. Since its founding, Target has contributed 5 percent of its profits to education, the arts, and social services in the communities in which it operates and reached the milestone of contributing $4 million per week in 2012. To demonstrate its commitment to minorities and women, Target launched a program to bring minority- and women-owned businesses into its supply chain. Volunteerism and corporate giving strengthen the relationship Target has with its employees, consumers, local communities, and suppliers. These actions, along with many others, can help Target gain competitive advantage as a retailer as long as the benefits Target accrues from its stakeholder strategy exceed the costs of such programs.29

Strategy scholars have provided several arguments as to why effective stakeholder man- agement can benefit firm performance:30

■ Satisfied stakeholders are more cooperative and thus more likely to reveal information that can further increase the firm’s value creation or lower its costs.

■ Increased trust lowers the costs for firms’ business transactions. ■ Effective management of the complex web of stakeholders can lead to greater organi-

zational adaptability and flexibility. ■ The likelihood of negative outcomes can be reduced, creating more predictable and

stable returns. ■ Firms can build strong reputations that are rewarded in the marketplace by business

partners, employees, and customers. Most managers do care about public perception of the firm, and frequently celebrate and publicize high-profile rankings such as the “World’s Most Admired Companies” published annually by Fortune.31 In 2014, the top five companies in this ranking were Apple, Amazon, Google, Berkshire Hathaway (the conglomerate led by Warren Buffett), and Starbucks. Because of its continued innovation in products, services, and delivery, Apple has been ranked as the world’s most admired company for the past several years by Fortune.

STAKEHOLDER IMpACT ANALYSIS The key challenge of stakeholder strategy is to effectively balance the needs of various stakeholders. The firm needs to ensure that its primary stakeholders—the firm’s share- holders and other investors—achieve their objectives. At the same time, the firm needs to recognize and address the concerns of other stakeholders—employees, suppliers, and customers—in an ethical and fair manner, so that they too are satisfied. This all sounds good in theory, but how can managers go about this in practice?

Stakeholder impact analysis provides a decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders. This tool helps the firm achieve a competitive advantage while acting as a good corporate citizen. Stakeholder impact analysis takes managers through a five-step process of recognizing stakeholders’ claims. In each step, managers must pay particular attention to three important stakeholder attributes: power, legitimacy, and urgency.32

■ A stakeholder has power over a company when it can get the company to do something that it would not otherwise do.

LO 1-5

Conduct a stakeholder impact analysis.

stakeholder impact analysis A decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders, enabling the firm to achieve competitive advantage while acting as a good corporate citizen.

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16 CHApTER 1 What Is Strategy?

■ A stakeholder has a legitimate claim when it is perceived to be legally valid or otherwise appropriate.

■ A stakeholder has an urgent claim when it requires a company’s immediate attention and response.

Exhibit 1.3 depicts the five steps in stakeholder impact analysis and the key questions to be asked. Let’s look at each step in detail.

STEp 1: IDENTIFY STAKEHOLDERS. In step 1, the firm asks, “Who are our stakeholders?” In this step, the firm focuses on stakeholders that currently have, or potentially can have, a material effect on a company. This prioritization identifies the most powerful internal and external stakeholders as well as their needs. For public-stock companies, key stakeholders are the shareholders and other suppliers of capital. If shareholders are not satisfied with returns to investment, they will sell the company’s stock, leading to depreciation in the firm’s market value. If this process continues, it can make the company a takeover target, or launch a vicious cycle of continued decline.

A second group of stakeholders includes customers, suppliers, and unions. Local com- munities and the media are also powerful stakeholders that can materially affect the smooth operation of the firm. Any of these groups, if their needs are not met, can materially affect the company’s operations.

For example, Boeing opened a new airplane factory in South Carolina in 2011 to move production away from its traditional plant near Seattle, Washington. In contrast to Washington state, in South Carolina the work force is nonunionized, which should lead to fewer work interruptions due to strikes, higher productivity, and improvements along other performance dimensions (like on-time delivery of new airplanes). In 2014, Boeing announced that its new 787 Dreamliner jet would be exclusively built in its nonunionized South Carolina factory.33

STEp 2: IDENTIFY STAKEHOLDERS’ INTERESTS. In step 2, the firm asks, “What are our stakeholders’ interests and claims?” Managers need to specify and assess the interests and claims of the pertinent stakeholders using the power, legitimacy, and urgency criteria

STEP 2

STEP 1 Who are our stakeholders?

What are our stakeholders’ interests and claims?

What opportunities and threats do our stakeholders present?

What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders?

What should we do to effectively address the stakeholder concerns?

STEP 3

STEP 4

STEP 5

H

H

H

H

EXHIBIT 1.3 / Stakeholder Impact Analysis

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CHApTER 1 What Is Strategy? 17

introduced earlier. As the legal owners, shareholders have the most legitimate claim on a company’s profits. However, the wall separating the claims of ownership (by sharehold- ers) and of management (by employees) has been eroding. Many companies incentivize top executives by paying part of their overall compensation with stock options. They also turn employees into shareholders through employee stock ownership plans (ESOPs). These plans allow employees to purchase stock at a discounted rate or use company stock as an investment vehicle for retirement savings. For example, Coca-Cola, Google, Microsoft, Southwest Airlines, Starbucks, Walmart, and Whole Foods all offer ESOPs. Clearly, the claims and interests of stakeholders who are employed by the company, and who depend on the company for salary and other benefits, will be somewhat different from those of stakeholders who merely own stock. The latter are investors who are primarily interested in the increased value of their stock holdings through appreciation and dividend payments. Executives, managers, and workers tend to be more interested in career opportunities, job security, employer-provided health care, paid vacation time, and other perks.

Even within stakeholder groups there can be significant variation in the power a stake- holder may exert on the firm. For example, public companies pay much more attention to large investors than to the millions of smaller, individual investors. Shareholder activ- ists, such as Carl Icahn, Daniel Loeb, or T. Boone Pickens, tend to buy equity stakes in a corporation that they believe is underperforming to put public pressure on a company to change its strategy. Examples include the takeover battle at Dell Computer (which founder Michael Dell subsequently took private), the pressure on PepsiCo to spin off its Frito- Lay brand, or on eBay to sell PayPal, which it did. Even top-performing companies are not immune to pressure by shareholder activists.34 As a result of a sustained competitive advantage over the last decade, Apple had not only become the most valuable company on the planet but also amassed some $200 billion in cash in the process. Apple CEO Tim Cook faced significant pressure from Carl Icahn, who held roughly $4 billion worth of Apple stock, to buy back more of its shares and thus to further raise Apple’s share price.

Although both individual and activist investors may claim the same legitimacy as stockholders, shareholder activists have much more power over a firm. They can buy and sell a large number of shares at once, or exercise block-voting rights in the corporate- governance process (which we’ll discuss in detail in Chapter 12). Shareholder activists frequently also demand seats on the company’s boards to more directly influence its corporate governance, and with it exert more pressure to change a company’s strategy. These abilities make activist investors potent stakeholders.

STEp 3: IDENTIFY OppORTUNITIES AND THREATS. In step 3, the firm asks, “What opportunities and threats do our stakeholders present?” Since stakeholders have a claim on the company, opportunities and threats are two sides of the same coin. Consumer boycotts, for example, can be a credible threat to a company’s behavior. Some consumers boycotted Nestlé products when the firm promoted infant formula over breast milk in developing countries. PETA35 called for a boycott of McDonald’s due to alleged animal-rights abuses.

In the best-case scenario, managers transform such threats into opportunities. Sony Corp., for example, was able to do just that.36 During one holiday season, the Dutch gov- ernment blocked Sony’s entire holiday season shipment of PlayStation game systems, valued at roughly $500 million, into the European Union because of a small but legally unacceptable amount of toxic cadmium discovered in one of the system’s cables. This inci- dent led to an 18-month investigation in which Sony inspected over 6,000 supplier facto- ries around the world to track down the source of the problem. The findings allowed Sony to redesign and develop a cutting-edge supplier management system that now adheres to a stringent extended value chain responsibility.

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18 CHApTER 1 What Is Strategy?

STEp 4: IDENTIFY SOCIAL RESpONSIBILITIES. In step 4, the firm asks, “What economic, legal, ethical, and philanthropic responsibilities do we have to our stakehold- ers?” To identify these responsibilities more effectively, scholars have advanced the notion of corporate social responsibility (CSR). This framework helps firms recognize and address the economic, legal, ethical, and philanthropic expectations that society has of the business enterprise at a given point in time.37 According to the CSR perspec- tive, managers need to realize that society grants shareholders the right and privilege to create a publicly traded stock company. Therefore, the firm owes something to soci- ety.38 Moreover, CSR provides managers with a conceptual model that more completely describes a society’s expectations and can guide strategic decision making more effec- tively. In particular, CSR has four components: economic, legal, ethical, and philan- thropic responsibilities.39

Economic Responsibilities. The business enterprise is first and foremost an economic institution. Investors expect an adequate return for their risk capital. Creditors expect the firm to repay its debts. Consumers expect safe products and services at appropriate prices and quality. Suppliers expect to be paid in full and on time. Governments expect the firm to pay taxes and to manage natural resources such as air and water under a decent steward- ship. To accomplish all this, firms must obey the law and act ethically in their quest to gain and sustain competitive advantage.

Legal Responsibilities. Laws and regulations are a society’s codified ethics, embody- ing notions of right and wrong. They also establish the rules of the game. For example, business as an institution can function because property rights exist and contracts can be enforced in courts of law. Managers must ensure that their firms obey all the laws and regulations, including but not limited to labor, consumer protection, and environ- mental laws.

One far-reaching piece of U.S. legislation in terms of business impact, for example, is the Patient Protection and Affordable Care Act (PPACA), more commonly known as Affordable Care Act (ACA) or Obamacare. Key provisions of this federal law include, among others, that firms with 50 or more full-time employees must offer affordable health insurance to their employees and dependents, or pay a fine for each worker. This will make it harder for entrepreneurs to grow their ventures above this threshold. One reaction of many small businesses has been to reduce the number of full-time workers to 49 employ- ees and add part-time employees only, which do not fall under this provision. Another reaction of employers is to offer lower wages to compensate for higher health care costs. Moreover, health insurance providers are no longer allowed to deny coverage based on preexisting medical conditions. Some observers are concerned that this may drive up health care premiums further as the overall risk pool of insurers will be less healthy. In an attempt to balance the risk pool, however, the ACA also includes the so-called individual mandate, which requires every individual, including young and healthy people, to carry health insurance or pay a fine. People who cannot afford health insurance will receive government subsidies.40

Ethical Responsibilities. Legal responsibilities, however, often define only the minimum acceptable standards of firm behavior. Frequently, managers are called upon to go beyond what is required by law. The letter of the law cannot address or anticipate all possible business situations and newly emerging concerns such as Internet privacy or advances in DNA testing, genetic engineering, and stem-cell research.

corporate social responsibility (CSR) A framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time.

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CHApTER 1 What Is Strategy? 19

A firm’s ethical responsibilities, therefore, go beyond its legal responsibilities. They embody the full scope of expectations, norms, and values of its stakeholders. Managers are called upon to do what society deems just and fair. Starbucks, for example, developed an ethical sourcing policy to help source coffee of the highest quality, while adhering to fair trade and responsible growing practices. On the other hand, Starbucks has been criticized for not paying an adequate amount of taxes in the United Kingdom. Albeit entirely legal, Starbucks did pay very little in corporate income taxes since opening its first store in the UK in 1998 (around $13.5 million total). In an attempt to silence the critics, to stop pro- tests, and to please its British customers, Starbucks volunteered an additional tax payment of $16 million for the 2013–14 tax year, despite having no legal obligation to do so.41

philanthropic Responsibilities. Philanthropic responsibilities are often subsumed under the idea of corporate citizenship, reflecting the notion of voluntarily giving back to society. Over the years, Microsoft’s corporate philanthropy program has donated more than $3 billion in cash and software to people who can’t afford computer technology.42

The pyramid in Exhibit 1.4 summarizes the four components of corporate social respon- sibility.43 Economic responsibilities are the foundational building block, followed by legal, ethical, and philanthropic responsibilities. Note that society and shareholders require eco- nomic and legal responsibilities. Ethical and philanthropic responsibilities result from a society’s expectations toward business. The pyramid symbolizes the need for firms to carefully balance their social responsibilities. Doing so ensures not only effective strategy implementation, but also long-term viability.

STEp 5: ADDRESS STAKEHOLDER CONCERNS. Finally, in step 5, the firm asks, “What should we do to effectively address any stakeholder concerns?” In the last step in stake- holder impact analysis, managers need to decide the appropriate course of action for the firm, given all of the preceding factors. Thinking about the attributes of power, legiti- macy, and urgency helps to prioritize the legitimate claims and to address them accord- ingly. Strategy Highlight 1.2 describes how the U.S. government legitimized claims by thousands of businesses and individuals in the aftermath of the BP oil spill in the Gulf of Mexico, causing the claims to become of great urgency to BP.

Philanthropic Responsibilities

Ethical Responsibilities

Legal Responsibilities

Economic Responsibilities

Corporate citizenship

Do what is right, just, and fair

Laws and regulations are society’s codified ethics

Define minimum acceptable standard

Gain and sustain competitive advantage

EXHIBIT 1.4 / The Pyramid of Corporate Social Responsibility Source: Adapted from A. B. Carroll (1991), “The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders,” Business Horizons, July–August: 42.

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20 CHApTER 1 What Is Strategy?

Strategy Highlight 1.2

Bp “Grossly Negligent” in Gulf of Mexico Disaster On April 20, 2010, an explosion occurred on BP’s Deepwater Horizon oil drilling rig off the Louisiana coastline, killing 11 workers. The subsequent oil spill continued unabated for over three months. It released an estimated 5 million barrels of crude oil into the Gulf of Mexico, causing the largest environmental disaster in U.S. history. Two BP employees even faced manslaughter charges. The cleanup alone cost BP $14 billion. Because of the company’s haphazard handling of the crisis, Tony Hayward, BP’s CEO at the time, was fired.

Technical problems aside, many experts argued that BP’s problems were systemic, because management had repeat- edly failed to put an adequate safety culture in place. In 2005, for example, BP experienced a catastrophic accident at a Texas oil refinery, which killed 15 workers. A year later, a leaking BP pipeline caused the largest oil spill ever on Alaska’s North Slope. BP’s strategic focus on cost reductions, initiated a few years earlier, may have significantly compro- mised safety across the board. In a fall 2014 ruling, a federal judge declared that BP’s measures to cut costs despite safety risks “evince an extreme deviation from the standard of care and a conscious disregard of known risks.”44

In the aftermath of the gulf oil spill, BP faced thousands of claims by many small business owners in the tourism and sea- food industries. These business owners were not powerful indi- vidually, and pursuing valid legal claims meant facing protracted and expensive court proceedings. As a collective organized in a potential class-action lawsuit, however, they were powerful. Moreover, their claims were backed by the U.S. government, which has the power to withdraw BP’s business license or can- cel current permits and withhold future ones. Collectively, the small business owners along the Gulf Coast became powerful

BP stakeholders, with a legitimate claim that needed to be addressed. In response, BP agreed to pay over $25 billion to settle their claims and cover other litigation costs.

Even so, this was not the end of the story for BP. Additional fines and other environmental costs added another $8.5 billion. BP’s total tab for the Gulf of Mexico disaster was some $43 billion.45 To make matters worse, BP was found to have committed “gross negligence” (reckless and extreme behav- ior) by a federal court in the fall of 2014. This could result in an additional pollution fine of around $18 billion, bringing the total to a staggering $60 billion. BP CEO Bob Dudley sold about $40 billion in assets so far, turning BP into a smaller company that aims to become more profitable in coming years.

Moreover, claiming that BP displayed a “lack of business integ- rity” in handling the gulf oil spill, the Environmental Protection Agency (EPA) banned BP from any new contracts with the U.S. government. If the EPA decision stands, the ban would put BP at a major competitive disadvantage. It would be unable to acquire new leases for oil field exploration in the United States, or to continue as a major supplier of refined fuel to the armed forces.46

Source: U.S. Coast Guard

1.3 The AFI Strategy Framework How do firms 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)

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CHApTER 1 What Is Strategy? 21

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 man- agers do not formulate strategy without thinking about how to implement it, for instance. Likewise, while implementing strategy, managers are analyzing the need to adjust to chang- ing circumstances.

We’ve captured these interdependent relationships in the AFI strategy framework shown in Exhibit 1.5. 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 management tasks, managers focus on specific questions, listed below. We address these questions in specific chapters, as indicated.

Strategy Analysis (A) Topics and Questions ■ Strategic leadership and the strategy process: What roles do strategic leaders play?

What are the firm’s vision, mission, and values? What is the firm’s process for creating strategy and how does strategy come about? (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)

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.

EXHIBIT 1.5 / 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 and Entrepreneurship

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

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22 CHApTER 1 What Is Strategy?

■ 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 geography?

(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 1.5 will be 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.

1.4 Implications for the Strategist The difference between success and failure lies in a firm’s strategy. Applying the tools and frameworks developed in this text will allow you to help your firm be more success- ful. Moreover, 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). Basically, strategy is the art and science of success and failure.

The strategist appreciates the fact that competition is everywhere. The strategist knows that the principles of strategic management can be applied universally to all organizations. Strategists work in organizations from small startups to large, multina- tional Fortune 100 companies, from for-profit to nonprofit organizations, in the private as well as public sector, and in developed as well as emerging economies. The strate- gist also knows that firm performance is determined by a set of interdependent factors, including firm and industry effects. The strategist is empowered by the fact that the actions he or she creates have more influence on firm performance than the external environment.

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CHApTER 1 What Is Strategy? 23

The excitement was high when Twitter went public in the fall of 2013. Twitter’s share price soared from $26 at its initial public offering (IPO) to over $73 within a few short weeks. But a year and a half later, after ups and downs, Twitter was trading well under the IPO price. To add insult to injury, Twitter’s debt was rated “junk,” reflecting the higher risk of default in relation to investment-grade bonds. At the same time, Twitter’s market capitalization was about $25 billion (share price × outstanding shares) with annual revenues of $1.4 billion, while losing roughly $1 billion a year.

By the summer of 2015, Dick Costolo was coming under increasing pressure because of Twitter’s lack of user and revenue growth. As a consequence, he was forced to resign July 1. A former improv comedian, Costolo’s leader- ship style involved not only frequent but also often unex- pected and rapid shifts in strategy. This may have worked well in Twitter’s early days when he turned the rough-and- tumble startup into a highly sought-after candidate by Wall Street for an initial public offering (IPO). Costolo strug- gled to define a clear and consistent strategy for a business that continued to lose money despite a tremendous cul- tural impact. This led to frustration and confusion among Twitter employees and other stakeholders. What Twitter needs, they argued, is a leader who takes a more proac- tive and strategic stance, as Mark Zuckerberg did when he declared that services on mobile devices is the future of Facebook and backed up this commitment with a high level of investments. In July 2015, Twitter co-founder Jack Dorsey returned as CEO; Dick Costolo tweeted “Welcome

back, @jack!!” The question remains whether Jack Dorsey, who serverd as Twitter’s CEO from 2008 to 2010, can turn the company around. He is quite busy, because he is also the CEO of Square, a mobile payment services company.47

Questions 1. Why is Twitter struggling? What role do industry

and firm effects play here?

2. What grade would you give Dick Costolo, Twitter’s CEO from 2010 to 2015? Support your decision with specifics. Also, list some of his leader- ship strengths and weaknesses. What recommenda- tions would you have for the new Twitter CEO to be a more effective strategic leader?

3. Why is a good strategy so important, especially at high- tech startups like Twitter? Why is crafting a good strat- egy at Twitter so difficult? What are some of the pitfalls that a CEO of a company such as Twitter needs to watch out for when crafting and implementing a strategy?

4. Apply the three-step process for developing a good strategy outlined above (diagnose the competitive challenge, derive a guiding policy, and implement a set of coherent actions) to Twitter’s situation today. Which recommendations would you have for Twitter to outperform its competitors in the future?

CHAPTERCASE 1 Consider This . . .

To be more effective, the strategist follows a three-step process: 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 the strategist is making decisions under conditions of uncertainty and complexity. As the strategist is following the AFI steps, he or she maintains an awareness of key stakeholders and how they can affect or be affected by the decisions that are made. The strategist then monitors and evaluates the progress toward key strategic objectives and makes adjustments by fine-tuning the strategy as necessary. We discuss how this is done in the next chapter where we focus on strategic leaders and the strategic management process.

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24 CHApTER 1 What Is Strategy?

rot20477_ch01_002-031.indd 24 11/25/15 01:40 PM

TAKE-AWAY CONCEpTS

This chapter defined strategy and competitive advan- tage and discussed the role of business in society. It also set the stage for further study of strategic man- agement, as summarized by the following 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, sustainable 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 prolonged periods of time has a sustained competitive 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.

LO 1-3 / Differentiate the roles of firm effects and industry effects in determining firm performance. ■ A firm’s performance is more closely related to

its managers’ actions (firm effects) than to the external circumstances surrounding it (industry effects).

■ Firm and industry effects, however, are interde- pendent. Both are relevant in determining firm performance.

LO 1-4 / Evaluate the relationship between stakeholder strategy and sustainable competitive advantage. ■ Stakeholders are individuals or groups that have

a claim or interest in the performance and con- tinued survival of the firm. They make specific contributions for which they expect rewards in return.

■ Internal stakeholders include stockholders, employees (for instance, executives, managers, and workers), and board members.

■ External stakeholders include customers, sup- pliers, alliance partners, creditors, unions, com- munities, governments at various levels, and the media.

■ Several recent black swan events eroded the pub- lic’s trust in business as an institution and in free market capitalism as an economic system.

■ The effective management of stakeholders—the organization, groups, or individuals that can materially affect or are affected by the action of a firm—is necessary to ensure the continued sur- vival of the firm and to sustain any competitive advantage.

LO 1-5 / Conduct a stakeholder impact analysis. ■ Stakeholder impact analysis considers the needs

of different stakeholders, which enables the firm to perform optimally and to live up to the expec- tations of good citizenship.

■ In a stakeholder impact analysis, managers pay particular attention to three important stakeholder attributes: power, legitimacy, and urgency.

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DISCUSSION QUESTIONS

1. Consider the brief description of Target’s stake- holder relationships and combine that informa- tion with your experience shopping in a Target store. How might Target’s stakeholders, in particular its employees, customers, local com- munities, and suppliers, influence the manager’s decisions about building competitive advantage in the analysis stage of the AFI framework? How might Target gather information from its stakeholders to inspire a better customer experi- ence in the formulation stage in order to differ- entiate? Or in order to lower costs? Brainstorm by jotting down as many ideas as you can think of about how key stakeholders may affect or be affected by the implementation stage.

2. BP’s experience in the Gulf of Mexico has made it the poster company for how not to manage stakeholder relationships effectively (see Strategy Highlight 1.2). What advice would you give to

BP’s managers to help them continue to rebuild stakeholder relationships in the gulf region and beyond? How can BP repair its damaged repu- tation? Brainstorm ways that top management might leverage the experience gained by reactions in the gulf and use that knowledge to motivate local managers and employees in other locales to build stakeholder relationships proactively so that BP avoids this type of negative publicity.

3. As noted in the chapter, research found that firm effects are more important than industry effects. What does this mean? Can you think of situations where this might not be true? Explain.

4. Choose an industry with a clear leader, and then examine the differences between the leader and one or two of the other competitors in the indus- try. How do the strategies differ? What has the leader done differently? Or what different things has the leader done?

■ Stakeholder impact analysis is a five-step process that answers the following questions for the firm:

1. Who are our stakeholders? 2. What are our stakeholders’ interests and claims? 3. What opportunities and threats do our stake-

holders present?

4. What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders?

5. What should we do to effectively address the stakeholder concerns?

KEY TERMS

AFI strategy framework (p. 21) Black swan events (p. 13) Competitive advantage (p. 8) Competitive disadvantage

(p. 8)

Competitive parity (p. 8)

Corporate social responsibility (CSR) (p. 18)

Firm effects (p. 11) Industry effects (p. 11) Stakeholders (p. 13) Stakeholder impact analysis (p. 15)

Stakeholder strategy (p. 14) Strategic management (p. 6) Strategy (p. 6) Sustainable competitive

advantage (p. 8)

ETHICAL/SOCIAL ISSUES

1. Choose one of the companies discussed in the chapter (including BP, Target, Threadless, Twit- ter, or Facebook). By looking at the

company’s annual report on its website or conducting an Internet search for news about the company, identify instances where the company

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has acted ethically or showed its interest in a key stakeholder—or where it has failed to do so.

2. Corporate leaders are responsible for set- ting the firm’s strategies to gain and sustain a competitive advantage. Should managers be concerned only about the company’s financial performance? What responsibility do company managers have for other consequences of their strategies? For example, should Walmart try to mitigate the negative impact its arrival in

communities can have on small locally owned stores? Should Apple be concerned about the working conditions at Foxconn (the company that manufactures the iPhone and the iPad in China)? Why or why not? Explain.

3. Other than Whole Foods, think of company examples where “doing things right” and acting in the interests of broader stakeholders (rather than just stockholders alone) have produced a stronger competitive advantage. Why was this the case?

//// Small Group Exercise Form small groups of three to four students. Search the Internet on the following topic and debate your findings.

The chapter includes a discussion of black swan events that were improbable and unexpected yet had an extreme impact on the well-being of individuals, firms, and nations. Nassim Nicholas Taleb, author of The Black Swan, has argued that policy makers and decision makers need to focus on building more robust organizations or systems rather than on improv- ing predictions of events. This notion is reflected in the response to the predicted increase in powerful storms and storm surges. Hurricanes Katrina (which

devastated New Orleans and parts of the Gulf Coast) and Sandy (which wreaked havoc on the New Jersey coast) have stimulated discussions about how to not only build a more resilient infrastructure and build- ings, but also develop more flexible and effective responses.

Each group should search the Internet about options and plans to (1) build more sustainable communities that will help threatened areas cope with superstorms, storm surges, or drought conditions, and (2) organize responses to black swan events (including natural disasters or terrorist attacks) more effectively. Brain- storm additional recommendations that you might make to policy makers.

SMALL GROUp EXERCISES

STRATEGY TERM pROJECT The HP Running Case, a related activity for each strategy term project module, is available in Connect.

//// project Overview The goal of the strategy term project is to give you practical experience with the elements of strategic management. This can be done individually or in a study group. Each end-of-chapter assignment requires data collection and analysis relating the material discussed in the chapter to the firm you select here for study throughout the course. At the end of each chapter, we make additional stages of a strategic analysis available. The goal of this term-long proj- ect is to give you a tangible application of many of the concepts discussed in the text. By the end of the project, you will not only have practice in using key strategic management components and processes

to increase your understanding of the material, but you will also be able to conduct a complete strategic management analysis of any company.

The “HP Running Case,” a related activity for each strategy term project module, is available in Connect.

//// Module 1: Initial Firm Selection and Review

In this first module, you will identify a firm to study for this project. We suggest you select one company and use it for each module in this term project. Choose a firm that you find interesting or one that is part of an industry you would like to know more about. Through- out the modules, you will be required to obtain and analyze a significant amount of data about the firm. Therefore, a key criterion is also to choose a firm that has data available for you to gather.

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The primary approach to this project is to select a publicly held firm. Many large firms (for example, Apple, Google, and GE) have been widely reported on in the business and popular press, and a wealth of information is available on them. Other medium-sized public firms, such as Tesla Motors, Netflix, and Black- Berry, can be used as example firms for this project. One cautionary note: For firms that are less than three years public or in industries that are not well-defined, it will take extra effort to properly identify such items as competitors and suppliers. But if it is a firm you are truly motivated to study, the effort can be quite rewarding.

Relevant data on all public firms can be freely obtained using web services such as Edgar (www.sec .gov/edgar.shtml). (For guidance on how to pull data from the Securities and Exchange Commission (SEC) website, ask your instructor to download instructions from the Instructor’s Resources tab in Connect at www .mhhe.com/ftrStrategy3e.) Annual reports for firms also are a treasure trove of information. These reports and other quarterly update materials are often available from the firm’s own website (look for “about us” or “investor relations” tabs, often located at the bottom of the company’s website). Additionally, most univer- sity and public libraries have access to large databases of articles from many trade publications. (Factiva and ABI/Proquest are two examples.) Company profiles of a variety of publicly listed firms are available at reli- able websites such as Hoovers.com and finance.yahoo. com. Also, many industries have quite active trade

associations that will have websites and publications that can also be useful in this process. Your local librar- ian can likely provide you with additional resources that may be licensed for library use or that are other- wise not available online. Examples of these are Value Line Ratings & Reports and Datamonitor.

A second approach to this project is to select a smaller firm in your area. These firms may have cov- erage in the local press. However, if the firm is not public, you will need to ensure you have access to a wide variety of data from the firm. If this is a firm for which you have worked or where you know people, please check ahead of time to be sure the firm is will- ing to share its information with you. This approach can work well, especially if the firm is interested in a detailed analysis of its strategic position. But to be suc- cessful with this project, be sure you will have access to a broad range of data and information (perhaps including interviews of key managers at the firm).

If you are in doubt on how to select a firm, check with your instructor before proceeding. In some instances, your instructor will assign firms to the study groups.

For this module, complete or answer the following: 1. Provide a brief history of the company. 2. List the top management of the firm and note

what experience and leadership skills the execu- tives bring to the firm. If it is a larger conglomer- ate, list both the corporate and business managers.

3. What is the principal business model of the firm? (How does the firm make most of its profits?)

How to position Yourself for Career Advantage

A s presented in the chapter, firm-level decisions have a significant impact on the success or failure of organizations. Industry-level effects, however, can also play an important role (see Exhibit 1.1). Many consid- erations go into deciding what career choices you make during your working life. Exhibit MS 1.1 provides a sample of revenue growth rates in various industries for a recent five-year period. It shows the data for the top-25 and bot- tom-25 industries, including the total industry average

(out of roughly 100 industries tracked). Using that table, answer the following questions.

1. If you are about to embark on a new career or consider switching careers, what effect should the likelihood of industry growth play in your decision?

2. Why could growth rates be an important consideration? Why not?

3. The data in the table show the most recent five years available. How do you expect this list to look five years from now? Which three to five industries do you expect to top the list, and which three to five industries will be at the bottom of the list? Why?

mySTRATEGY

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EXHIBIT MS1.1 / Top-25 and Bottom-25 Industries (by Revenue Growth Rates), 2010–201448 Top Segments Bottom Segments

Rank Industry Growth Rank Industry Growth

1 Auto & Truck 30.26% 71 Advertising 5.44% 2 Electrical Equipment 29.39% 72 Engineering/Construction 5.04% 3 Green & Renewable Energy 28.92% 73 Insurance (Life) 4.98% 4 Real Estate (Development) 28.52% 74 Insurance (General) 4.83% 5 Oil/Gas (Production and Exploration) 26.59% 75 Recreation 4.79% 6 Reinsurance 26.15% 76 Oil/Gas (Integrated) 4.72% 7 Precious Metals 23.22% 77 Beverage (Soft) 4.72% 8 Oil/Gas Distribution 22.80% 78 Computers/Peripherals 4.34% 9 Real Estate (General/Diversified) 20.70% 79 Rubber & Tires 4.31%

10 Real Estate Investment Trust (R.E.I.T.) 19.18% 80 Retail (Grocery and Food) 4.11% 11 Oilfield Svcs/Equip. 18.31% 81 Business & Consumer Services 4.10% 12 Real Estate (Operations & Services) 17.24% 82 Aerospace/Defense 4.07% 13 Farming/Agriculture 17.02% 83 Metals & Mining 3.76% 14 Drugs (Biotechnology) 16.84% 84 Retail (General) 3.67% 15 Environmental & Waste Services 16.37% 85 Telecom (Wireless) 3.51% 16 Drugs (Pharmaceutical) 16.29% 86 Education 3.27% 17 Entertainment 16.26% 87 Cable TV 3.16% 18 Software (System & Application) 15.90% 88 Electronics (Consumer & Office) 2.20% 19 Investments & Asset Management 15.73% 89 Unclassified 2.00% 20 Heathcare Information and Technology 14.92% 90 Software (Entertainment) 1.95% 21 Transportation 14.50% 91 Office Equipment & Services 1.72% 22 Chemical (Basic) 14.17% 92 Coal & Related Energy 1.20% 23 Banks (Regional) 13.45% 93 Utility (General) 0.45% 24 Retail (Distributors) 13.32% 94 Publishing & Newspapers 0.12% 25 Homebuilding 13.29% 95 Shipbuilding & Marine 20.18%

Note: During this five-year period, the average revenue growth across U.S. industrial segments was 11.5 percent.

ENDNOTES 1. SMS stands for short message service, by which cell phone users text one another.

2. Koh, Y., and K. Grind, “Twitter CEO Dick Costolo struggles to define vision,” The Wall Street Journal, November 6, 2014; Koh, Y., “Twitter CEO Dick Costolo stepping down,” The Wall Street Journal, June 11, 2015; and “Twit- ter’s future: How high can it fly?” The Economist, November 8, 2014.

3. “Twitter’s future,” The Economist.

4. This ChapterCase is based on: Koh, Y., and T.W. Martin, “Twitter’s debt is rated as junk,” The Wall Street Journal, November 14, 2014; “Twitter’s future,” The Economist; Koh and Grind, “Twitter CEO Dick Costolo struggles to

define vision”; Bilton, N. (2013), Hatching Twit- ter: A True Story of Money, Power, Friendship, and Betrayal (London, UK: Sceptre); Guynn, J., “Twitter CEO Dick Costolo is determined to get the last laugh,” Los Angeles Times, January 30, 2011; and http://www.wolframalpha.com/ input/?i5Twitter. 5. 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 Business 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 Business 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). 6. Rumelt, Good Strategy, Bad Strategy. 7. This section draws on: “Twitter’s future,” The Economist; Koh and Grind, “Twit- ter CEO Dick Costolo”; and Bilton, Hatching Twitter.

8. “Twitter’s future,” The Economist. 9. This section draws on Porter, “The five com- petitive forces,” “What is strategy?” and Com- petitive Strategy.

10. Ibid.

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11. Rumelt, Good Strategy, Bad Strategy; and Porter, “What is strategy?” 12. Albergotti, R., “Facebook vows aggressive spending,” The Wall Street Journal, October 28, 2014. 13. Nickell, J. (2010), Threadless: Ten Years of T-shirts from the World’s Most Inspiring Online Design Community (New York: Abrams); Howe, J. (2008), Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business (New York: Crown Business); and Surowiecki, J. (2004), The Wisdom of Crowds (New York: Anchor Books). 14. Rumelt, Good Strategy, Bad Strategy; Por- ter, “What is strategy?” and Porter, Competitive Strategy.

15. This interesting debate unfolds in the follow- ing articles, among others: Misangyi, V.F., H. Elms, T. Greckhamer, and J.A. Lepine (2006), “A new perspective on a fundamental debate: A mul- tilevel approach to industry, corporate, and busi- ness unit effects,” Strategic Management Journal 27: 571–590; Hawawini, G., V. Subramanian, and P. Verdin (2003), “Is performance driven by industry- or firm-specific factors? A new look at the evidence,” Strategic Management Journal 24: 1–16; McGahan, A.M., and M.E. Porter (1997), “How much does industry matter, really?” Stra- tegic Management Journal 18: 15–30; Rumelt, R.P. (1991), “How much does industry matter?” Strategic Management Journal 12: 167–185; and Hansen, G.S., and B. Wernerfelt (1989), “Deter- minants of firm performance: The relative impor- tance of economic and organizational factors,” Strategic Management Journal 10: 399–411. 16. Ibid. 17. Ibid. 18. Smith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, 5th ed. (published 1904) (London: Methuen and Co.). 19. Levy, S. (2011), In The Plex: How Google Thinks, Works, and Shapes Our Lives (New York: Simon & Schuster); and www.wolframalpha.com/input/?i5google. 20. “The HP Way,” see www.hpalumni.org/ hp_way.htm; and Packard, D. (1995), HP Way: How Bill Hewlett and I Built Our Company (New York: Collins). 21. This discussion draws on: Carroll, A.B., and A.K. Buchholtz (2012), Business & Society. Eth- ics, Sustainability, and Stakeholder Management (Mason, OH: South-Western Cengage); Porter, M.E., and M.R. Kramer (2011), “Creating shared value: How to reinvent capitalism—and unleash innovation and growth,” Harvard Business Review, January–February; Parmar, B.L., R.E. Freeman, J.S. Harrison, A.C. Wicks, L. Purnell, and S. De Colle (2010), “Stakeholder theory: The state of the art,” Academy of Management Annals 4: 403–445; and Porter, M.E., and M.R. Kramer (2006), “Strategy and society: The link between competitive advantage and corporate social responsibility,” Harvard Business Review, December: 80–92. 22. Talib, N.N. (2007), The Black Swan: The Impact of the Highly Improbable (New York: Random House).

23. See the discussion by Lowenstein, R. (2010), The End of Wall Street (New York: Penguin Press); Paulson, H.M. (2010), On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (New York: Business Plus); and Wessel, D. (2010), In FED We Trust: Ben Bernanke’s War on the Great Panic (New York: Crown Business). 24. Parmar et al., “Stakeholder theory.” 25. Phillips, R. (2003), Stakeholder Theory and Organizational Ethics (San Francisco: Berrett- Koehler); Freeman, E.R., and J. McVea (2001), “A stakeholder approach to strategic manage- ment,” in Hitt, M.A., E.R. Freeman, and J.S. Har- rison (eds.), The Blackwell Handbook of Strategic Management (Oxford, UK: Blackwell), 189–207; Freeman, E.R. (1984), Strategic Management: A Stakeholder Approach (Boston, MA: Pitman). 26. To acknowledge the increasing importance of stakeholder strategy, the Strategic Manage- ment Society (SMS)—the leading association for academics, business executives, and consultants interested in strategic management—has recently created a stakeholder strategy division; see http:// strategicmanagement.net/. Also see Anderson, R.C. (2009), Confessions of a Radical Industrial- ist: Profits, People, Purpose—Doing Business by Respecting the Earth (New York: St. Martin’s Press); Sisodia, R.S., D.B. Wolfe, and J.N. Sheth (2007), Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (Upper Saddle River, NJ: Prentice-Hall Pearson); and Svendsen, A. (1998), The Stakeholder Strat- egy: Profiting from Collaborative Business Rela- tionships (San Francisco: Berrett-Koehler). 27. Parmar et al., “Stakeholder theory,” 406. 28. Ibid. 29. Kapner, S., L. Stevens, and S. Germano, “Wal-Mart and Target take fight to Amazon for holiday sales,” The Wall Street Journal, Novem- ber 28, 2014. 30. Parmar et al., “Stakeholder theory,” 406 31. Fortune 2014 The World’s Most Admired Companies, http://fortune.com/ worlds-most-admired-companies/. 32. Eesley, C., and M.J. Lenox (2006), “Firm responses to secondary stakeholder action,” Strategic Management Journal 27: 765–781; and Mitchell, R.K., B.R. Agle, and D.J. Wood (1997), “Toward a theory of stakeholder identification and salience,” Academy of Management Review 22: 853–886. 33. Ostrower, J., “Boeing to build stretched 787- 10 in South Carolina,” The Wall Street Journal, July 30, 2014. 34. Benoit, D., “Icahn ends Apple push with hefty profit,” The Wall Street Journal, February 10, 2014. 35. People for the Ethical Treatment of Animals (PETA) is an animal-rights organization. 36. This example is drawn from: Esty, D.C., and A.S. Winston (2006), Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (Hoboken, NJ: Wiley). 37. This discussion draws on: Carroll, A.B., and A.K. Buchholtz (2012), Business & Society:

Ethics, Sustainability, and Stakeholder Manage- ment (Mason, OH: South-Western Cengage); Carroll, A.B. (1991), “The pyramid of corporate social responsibility: Toward the moral manage- ment of organizational stakeholders,” Business Horizons, July–August: 39–48; and Carroll, A.B. (1979), “A three-dimensional, conceptual model of corporate social performance,” Academy of Management Review 4: 497–505. 38. For an insightful but critical treatment of this topic, see the 2003 Canadian documentary film The Corporation.

39. For recent empirical findings concern- ing the relationship between corporate social responsibility and firm performance, see Barnett, M.L., and R.M. Salomon (2012), “Does it pay to be really good? Addressing the shape of the relationship between social and financial per- formance,” Strategic Management Journal, 33: 1304–1320; Wang, T., and Bansal, P. (2012), “Social responsibility in new ventures: profiting from a long-term orientation,” Strategic Manage- ment Journal, 33: 1135–1153; and Jayachandran, S., K. Kalaignanam, and M. Eilert (2013), “Product and environmental social performance: Varying effect on firm performance,” Strategic Management Journal, 34: 1255–1264. 40. “Will Obamacare destroy jobs?” The Econo- mist, August 21, 2013; and Patton, M., “Obam- acare: Seven major provisions and how they affect you,” Forbes, November 27, 2013. 41. “Wake up and smell the coffee: Starbucks’s tax troubles are a sign of things to come for mul- tinationals,” The Economist, December 15, 2012. 42. Gates, B., “How to help those left behind,” Time, August 11, 2008. 43. Carroll, “The pyramid of corporate social responsibility,” 39–48. 44. Gilbert, D., and J. Scheck, “BP is found grossly negligent in Deepwater Horizon disaster,” The Wall Street Journal, September 4, 2014. 45. The total listed here ran to $47.5 billion, but BP was able to recover some $5 billion in the process. Gilbert and Scheck, “BP is found grossly negligent.” 46. Gilbert and Scheck; Gara, T., “U.S. govern- ment slams BP’s ‘lack of business integrity,’” The Wall Street Journal, November 28, 2012; “BP and the Deepwater Horizon disaster,” The Economist, November 15, 2012; Fowler, T., “BP slapped with record fine,” The Wall Street Jour- nal, November 15, 2012; and Fowler, T., “BP, plaintiffs reach settlement in Gulf oil spill,” The Wall Street Journal, March 4, 2012. 47. Rusli, E.M., “Profitable learning curve for Facebook CEO Mark Zuckerberg,” The Wall Street Journal, July 5, 2014; Albergotti, “Face- book vows aggressive spending”; Koh and Grind, “Twitter CEO Dick Costolo”; Koh, “Twitter CEO Dick Costolo stepping down”; “Twitter’s future,” The Economist; and Koh and Martin, “Twitter’s debt is rated as junk.” 48. Compiled from Value Line data by A. Damo- daran, NYU, used as of January 2015, at http:// people.stern.nyu.edu/adamodar/New_Home_ Page/datafile/histgr.html.