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Analysis Macro Environment PESTEL

Crafting and Executing Strategy THE QUEST FOR COMPETITIVE ADVANTAGE

Concepts and Cases

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Arthur A. Thompson The University of Alabama

Margaret A. Peteraf Dartmouth College

John E. Gamble Texas A&M University–Corpus Christi

A. J. Strickland III The University of Alabama

THE QUEST FOR COMPETITIVE ADVANTAGE

Concepts and Cases | TWENTIETH EDITION

Crafting and Executing Strategy

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Thompson, Arthur A., 1940- Crafting and executing strategy : the quest for competitive advantage : concepts and cases/

Arthur A. Thompson, Margaret A. Peteraf, John E. Gamble, A. J. Strickland III. -- Twentieth edition.

pages cm ISBN 978-0-07-772059-9 (alk. paper) 1. Strategic planning. 2. Strategic planning–Case studies. I. Title. HD30.28.T53 2015 658.4’012–dc23 2014033211

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.

CRAFTING AND EXECUTING STRATEGY: THE QUEST FOR COMPETITIVE ADVANTAGE, CONCEPTS AND CASES, TWENTIETH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2012, 2010, and 2008. 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.

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ISBN 978-0-07-772059-9 MHID 0-07-772059-8

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To our families and especially our spouses: Hasseline, Paul, and Kitty.

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A rthur A. Thompson, Jr., earned his B.S. and Ph.D. degrees in economics from The University of Tennessee, spent three years on the economics faculty at Virginia Tech, and served on the faculty of The University of Alabama’s College of Commerce and Business Administration for 24 years. In 1974 and again in 1982, Dr. Thompson spent semester-long sabbaticals as a visiting scholar at the Harvard Business School.

His areas of specialization are business strategy, competition and market analysis, and the economics of business enterprises. In addition to publishing over 30 articles in some 25 different professional and trade publications, he has authored or co-authored five text- books and six computer-based simulation exercises. His textbooks and strategy simula- tions have been used at well over 1,000 college and university campuses worldwide.

Dr. Thompson spends much of his off-campus time giving presentations, putting on management development programs, working with companies, and helping operate a busi- ness simulation enterprise in which he is a major partner.

Dr. Thompson and his wife of 53 years have two daughters, two grandchildren, and a Yorkshire Terrier.

M argaret A. Peteraf is the Leon E. Williams Professor of Management at the Tuck School of Business at Dartmouth College. She is an internationally recognized scholar of strategic management, with a long list of publications in top management journals. She has earned myriad honors and prizes for her contributions, including the 1999 Strategic Manage- ment Society Best Paper Award recognizing the deep influence of her work on the field of Strategic Management. Professor Peteraf is a fellow of the Strategic Management Society and the Academy of Management. She served previously as a member of the Board of Governors of both the Society and the Academy of Management and as Chair of the Busi- ness Policy and Strategy Division of the Academy. She has also served in various editorial roles and on numerous editorial boards, including the Strategic Management Journal, the Academy of Management Review, and Organization Science. She has taught in Executive Education programs in various programs around the world and has won teaching awards at the MBA and Executive level.

Professor Peteraf earned her Ph.D., M.A., and M.Phil. at Yale University and held previ- ous faculty appointments at Northwestern University’s Kellogg Graduate School of Man- agement and at the University of Minnesota’s Carlson School of Management.

ABOUT THE AUTHORS

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J ohn E. Gamble is a Professor of Management and Dean of the College of Business at Texas A&M University–Corpus Christi. His teaching and research for nearly 20 years has focused on strategic management at the undergraduate and graduate levels. He has con- ducted courses in strategic management in Germany since 2001, which have been spon- sored by the University of Applied Sciences in Worms.

Dr. Gamble’s research has been published in various scholarly journals and he is the author or co-author of more than 75 case studies published in an assortment of strategic management and strategic marketing texts. He has done consulting on industry and market analysis for clients in a diverse mix of industries.

Professor Gamble received his Ph.D., Master of Arts, and Bachelor of Science degrees from The University of Alabama and was a faculty member in the Mitchell College of Busi- ness at the University of South Alabama before his appointment to the faculty at Texas A&M University–Corpus Christi.

D r. A. J. (Lonnie) Strickland is the Thomas R. Miller Professor of Strategic Management at the Culverhouse School of Business at The University of Alabama. He is a native of north Georgia, and attended the University of Georgia, where he received a Bachelor of Science degree in math and physics; Georgia Institute of Technology, where he received a Master of Science in industrial management; and Georgia State University, where he received his Ph.D. in business administration.

Lonnie’s experience in consulting and executive development is in the strategic manage- ment arena, with a concentration in industry and competitive analysis. He has developed strategic planning systems for numerous firms all over the world. He served as Director of Marketing and Strategy at BellSouth, has taken two companies to the New York Stock Exchange, is one of the founders and directors of American Equity Investment Life Hold- ing (AEL), and serves on numerous boards of directors. He is a very popular speaker in the area of strategic management.

Lonnie and his wife, Kitty, have been married for 48 years. They have two children and two grandchildren. Each summer, Lonnie and his wife live on their private game reserve in South Africa where they enjoy taking their friends on safaris.

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viii

PREFACE

B y offering the most engaging, clearly articulated, and conceptually sound text on strategic management, Crafting and Executing Strategy has been able to main-tain its position as the leading textbook in strategic management for 30 years. With this latest edition, we build on this strong foundation, maintaining the attributes of the book that have long made it the most teachable text on the market, while updat- ing the content, sharpening its presentation, and providing enlightening new illustra- tions and examples.

The distinguishing mark of the 20th edition is its enriched and enlivened presenta- tion of the material in each of the 12 chapters, providing an as up-to-date and engross- ing discussion of the core concepts and analytical tools as you will find anywhere. As with each of our new editions, there is an accompanying lineup of exciting new cases that bring the content to life and are sure to provoke interesting classroom discussions, deepening students’ understanding of the material in the process.

While this 20th edition retains the 12-chapter structure of the prior edition, every chapter—indeed every paragraph and every line—has been reexamined, refined, and refreshed. New content has been added to keep the material in line with the latest developments in the theory and practice of strategic management. In other areas, cov- erage has been trimmed to keep the book at a more manageable size. Scores of new examples have been added, along with 15 new Illustration Capsules, to enrich under- standing of the content and to provide students with a ringside view of strategy in action. The result is a text that cuts straight to the chase in terms of what students really need to know and gives instructors a leg up on teaching that material effectively. It remains, as always, solidly mainstream and balanced, mirroring both the penetrating insight of academic thought and the pragmatism of real-world strategic management.

A standout feature of this text has always been the tight linkage between the con- tent of the chapters and the cases. The lineup of cases that accompany the 20th edi- tion is outstanding in this respect—a truly appealing mix of strategically relevant and thoughtfully crafted cases, certain to engage students and sharpen their skills in apply- ing the concepts and tools of strategic analysis. Many involve high-profile companies that the students will immediately recognize and relate to; all are framed around key strategic issues and serve to add depth and context to the topical content of the chap- ters. We are confident you will be impressed with how well these cases work in the classroom and the amount of student interest they will spark.

For some years now, growing numbers of strategy instructors at business schools worldwide have been transitioning from a purely text-case course structure to a more robust and energizing text-case-simulation course structure. Incorporating a competition-based strategy simulation has the strong appeal of providing class mem- bers with an immediate and engaging opportunity to apply the concepts and analytical tools covered in the chapters and to become personally involved in crafting and exe- cuting a strategy for a virtual company that they have been assigned to manage and that competes head-to-head with companies run by other class members. Two widely used and pedagogically effective online strategy simulations, The Business Strategy Game and GLO-BUS, are optional companions for this text. Both simulations were created by Arthur Thompson, one of the text authors, and, like the cases, are closely linked to the content of each chapter in the text. The Exercises for Simulation Partici- pants, found at the end of each chapter, provide clear guidance to class members in

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applying the concepts and analytical tools covered in the chapters to the issues and decisions that they have to wrestle with in managing their simulation company.

To assist instructors in assessing student achievement of program learning objectives, in line with AACSB requirements, the 20th edition includes a set of Assurance of Learn- ing Exercises at the end of each chapter that link to the specific learning objectives appear- ing at the beginning of each chapter and highlighted throughout the text. An important instructional feature of the 20th edition is its more closely integrated linkage of selected chapter-end Assurance of Learning Exercises and cases to the publisher’s web-based assignment and assessment platform called Connect™. Your students will be able to use the online Connect™ supplement to (1) complete two of the Assurance of Learning Exercises appearing at the end of each of the 12 chapters, (2) complete chapter-end quiz- zes, and (3) enter their answers to a select number of the suggested assignment questions for 7 of the 31 cases in this edition. Many of the Connect™ exercises are automatically graded, thereby enabling you to easily assess the learning that has occurred.

In addition, both of the companion strategy simulations have a built-in Learning Assurance Report that quantifies how well each member of your class performed on nine skills/learning measures versus tens of thousands of other students worldwide who completed the simulation in the past 12 months. We believe the chapter-end Assurance of Learning Exercises, the all-new online and automatically graded Connect™ exer- cises, and the Learning Assurance Report generated at the conclusion of The Business Strategy Game and GLO-BUS simulations provide you with easy-to-use, empirical measures of student learning in your course. All can be used in conjunction with other instructor-developed or school-developed scoring rubrics and assessment tools to comprehensively evaluate course or program learning outcomes and measure compli- ance with AACSB accreditation standards.

Taken together, the various components of the 20th-edition package and the sup- porting set of instructor resources provide you with enormous course design flexibility and a powerful kit of teaching/learning tools. We’ve done our very best to ensure that the elements constituting the 20th edition will work well for you in the classroom, help you economize on the time needed to be well prepared for each class, and cause stu- dents to conclude that your course is one of the very best they have ever taken—from the standpoint of both enjoyment and learning.

DIFFERENTIATING FEATURES OF THE 20TH EDITION Six standout features strongly differentiate this text and the accompanying instruc- tional package from others in the field:

1. Our integrated coverage of the two most popular perspectives on strategic management—positioning theory and resource-based theory—is unsurpassed by any other leading strategy text. Principles and concepts from both the positioning perspective and the resource-based perspective are prominently and comprehen- sively integrated into our coverage of crafting both single-business and multibusi- ness strategies. By highlighting the relationship between a firm’s resources and

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x PREFACE

capabilities to the activities it conducts along its value chain, we show explicitly how these two perspectives relate to one another. Moreover, in Chapters 3 through 8 it is emphasized repeatedly that a company’s strategy must be matched not only to its external market circumstances but also to its internal resources and competi- tive capabilities.

2. Our coverage of cooperative strategies and the role that interorganizational activ- ity can play in the pursuit of competitive advantage, is similarly distinguished. The topics of the value net (newly added), strategic alliances, licensing, joint ven- tures, and other types of collaborative relationships are featured prominently in a number of chapters and are integrated into other material throughout the text. We show how strategies of this nature can contribute to the success of single-business companies as well as multibusiness enterprises, whether with respect to firms operating in domestic markets or those operating in the international realm.

3. With a stand-alone chapter devoted to this topic, our coverage of business eth- ics, corporate social responsibility, and environmental sustainability goes well beyond that offered by any other leading strategy text. Chapter 9, “Ethics, Cor- porate Social Responsibility, Environmental Sustainability, and Strategy,” fulfills the important functions of (1) alerting students to the role and importance of ethi- cal and socially responsible decision making and (2) addressing the accreditation requirement of the AACSB International that business ethics be visibly and thor- oughly embedded in the core curriculum. Moreover, discussions of the roles of values and ethics are integrated into portions of other chapters to further reinforce why and how considerations relating to ethics, values, social responsibility, and sustainability should figure prominently into the managerial task of crafting and executing company strategies.

4. Long known as an important differentiator of this text, the case collection in the 20th edition is truly unrivaled from the standpoints of student appeal, teachability, and suitability for drilling students in the use of the concepts and analytical treat- ments in Chapters 1 through 12. The 31 cases included in this edition are the very latest, the best, and the most on target that we could find. The ample information about the cases in the Instructor’s Manual makes it effortless to select a set of cases each term that will capture the interest of students from start to finish.

5. The text is now more tightly linked to the publisher’s trailblazing web-based assign- ment and assessment platform called Connect™. This will enable professors to gauge class members’ prowess in accurately completing (a) selected chapter-end exercises, (b) chapter-end quizzes, and (c) the creative author- developed exercises for seven of the cases in this edition.

6. Two cutting-edge and widely used strategy simulations—The Business Strategy Game and GLO-BUS—are optional companions to the 20th edition. These give you an unmatched capability to employ a text-case-simulation model of course delivery.

ORGANIZATION, CONTENT, AND FEATURES OF THE 20TH-EDITION TEXT CHAPTERS

• Chapter 1 serves as a brief, general introduction to the topic of strategy, focusing on the central questions of “What is strategy?” and “Why is it important?” As such, it serves as the perfect accompaniment for your opening-day lecture on what

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PREFACE xi

the course is all about and why it matters. Using the newly added example of Star- bucks to drive home the concepts in this chapter, we introduce students to what we mean by “competitive advantage” and the key features of business-level strategy. Describing strategy making as a process, we explain why a company’s strategy is partly planned and partly reactive and why a strategy tends to co-evolve with its environment over time. We show that a viable business model must provide both an attractive value proposition for the company’s customers and a formula for making profits for the company. New to this chapter is a depiction of how the Value-Price-Cost Framework can be used to frame this discussion.We show how the mark of a winning strategy is its ability to pass three tests: (1) the fit test (for internal and external fit), (2) the competitive advantage test, and (3) the perfor- mance test. And we explain why good company performance depends not only upon a sound strategy but upon solid strategy execution as well.

• Chapter 2 presents a more complete overview of the strategic management pro- cess, covering topics ranging from the role of vision, mission, and values to what constitutes good corporate governance. It makes a great assignment for the sec- ond day of class and provides a smooth transition into the heart of the course. It introduces students to such core concepts as strategic versus financial objectives, the balanced scorecard, strategic intent, and business-level versus corporate-level strategies. It explains why all managers are on a company’s strategy-making, strategy-executing team and why a company’s strategic plan is a collection of strategies devised by different managers at different levels in the organizational hierarchy. The chapter concludes with a section on the role of the board of direc- tors in the strategy-making, strategy-executing process and examines the condi- tions that led to recent high-profile corporate governance failures.

• The next two chapters introduce students to the two most fundamental perspec- tives on strategy making: the positioning view, exemplified by Michael Porter’s “five forces model of competition”; and the resource-based view. Chapter 3 pro- vides what has long been the clearest, most straightforward discussion of the five forces framework to be found in any text on strategic management. It also offers a set of complementary analytical tools for conducting competitive analysis and demonstrates the importance of tailoring strategy to fit the circumstances of a company’s industry and competitive environment. What’s new in this edition is the inclusion of the value net framework for conducting analysis of how coopera- tive as well as competitive moves by various parties contribute to the creation and capture of value in an industry.

• Chapter 4 presents the resource-based view of the firm, showing why resource and capability analysis is such a powerful tool for sizing up a company’s com- petitive assets. It offers a simple framework for identifying a company’s resources and capabilities and explains how the VRIN framework can be used to determine whether they can provide the company with a sustainable competitive advantage over its competitors. Other topics covered in this chapter include dynamic capa- bilities, SWOT analysis, value chain analysis, benchmarking, and competitive strength assessments, thus enabling a solid appraisal of a company’s relative cost position and customer value proposition vis-á-vis its rivals. An important feature of this chapter is a table showing how key financial and operating ratios are cal- culated and how to interpret them. Students will find this table handy in doing the number crunching needed to evaluate whether a company’s strategy is delivering good financial performance.

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xii PREFACE

• Chapter 5 sets forth the basic approaches available for competing and winning in the marketplace in terms of the five generic competitive strategies—low-cost leadership, differentiation, best-cost provider, focused differentiation, and focused low cost. It describes when each of these approaches works best and what pitfalls to avoid. It explains the role of cost drivers and uniqueness drivers in reducing a company’s costs and enhancing its differentiation, respectively.

• Chapter 6 focuses on other strategic actions a company can take to complement its competitive approach and maximize the power of its overall strategy. These include a variety of offensive or defensive competitive moves, and their timing, such as blue-ocean strategies and first-mover advantages and disadvantages. It also includes choices concerning the breadth of a company’s activities (or its scope of operations along an industry’s entire value chain), ranging from hori- zontal mergers and acquisitions, to vertical integration, outsourcing, and strategic alliances. This material serves to segue into the scope issues covered in the next two chapters on international and diversification strategies.

• Chapter 7 takes up the topic of how to compete in international markets. It begins with a discussion of why differing market conditions across countries must neces- sarily influence a company’s strategic choices about how to enter and compete in foreign markets. It presents five major strategic options for expanding a com- pany’s geographic scope and competing in foreign markets: export strategies, licensing, franchising, establishing a wholly owned subsidiary via acquisition or “greenfield” venture, and alliance strategies. It includes coverage of topics such as Porter’s Diamond of National Competitive Advantage, profit sanctuaries, and the choice between multidomestic, global, and transnational strategies. This chap- ter explains the impetus for sharing, transferring, or accessing valuable resources and capabilities across national borders in the quest for competitive advantage, connecting the material to that on the resource-based view from Chapter 4. The chapter concludes with a discussion of the unique characteristics of competing in developing-country markets.

• Chapter 8 concerns strategy making in the multibusiness company, introducing the topic of corporate-level strategy with its special focus on diversification. The first portion of this chapter describes when and why diversification makes good strategic sense, the different means of diversifying a company’s business lineup, and the pros and cons of related versus unrelated diversification strategies. The second part of the chapter looks at how to evaluate the attractiveness of a diver- sified company’s business lineup, how to decide whether it has a good diversi- fication strategy, and what the strategic options are for improving a diversified company’s future performance. The evaluative technique integrates material con- cerning both industry analysis and the resource-based view, in that it considers the relative attractiveness of the various industries the company has diversified into, the company’s competitive strength in each of its lines of business, and the extent to which its different businesses exhibit both strategic fit and resource fit.

• Although the topic of ethics and values comes up at various points in this text- book, Chapter 9 brings more direct attention to such issues and may be used as a stand-alone assignment in either the early, middle, or late part of a course. It concerns the themes of ethical standards in business, approaches to ensuring con- sistent ethical standards for companies with international operations, corporate social responsibility, and environmental sustainability. The contents of this chap- ter are sure to give students some things to ponder, rouse lively discussion, and

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PREFACE xiii

help to make students more ethically aware and conscious of why all companies should conduct their business in a socially responsible and sustainable manner.

• The next three chapters (Chapters 10, 11, and 12) comprise a module on strategy execution that is presented in terms of a 10-step framework. Chapter 10 provides an overview of this framework and then explores the first three of these tasks: (1) staffing the organization with people capable of executing the strategy well, (2) building the organizational capabilities needed for successful strategy exe- cution, and (3) creating an organizational structure supportive of the strategy execution process.

• Chapter 11 discusses five additional managerial actions that advance the cause of good strategy execution: (1) allocating resources to enable the strategy execution process, (2) ensuring that policies and procedures facilitate rather than impede strategy execution, (3) using process management tools and best practices to drive continuous improvement in the performance of value chain activities, (4) install- ing information and operating systems that help company personnel carry out their strategic roles, and (5) using rewards and incentives to encourage good strat- egy execution and the achievement of performance targets.

• Chapter 12 completes the framework with a consideration of the roles of cor- porate culture and leadership in promoting good strategy execution. The recur- ring theme throughout the final three chapters is that executing strategy involves deciding on the specific actions, behaviors, and conditions needed for a smooth strategy- supportive operation and then following through to get things done and deliver results. The goal here is to ensure that students understand that the strategy-executing phase is a make-things-happen and make-them-happen-right kind of managerial exercise—one that is critical for achieving operating excel- lence and reaching the goal of strong company performance.

In this latest edition, we have put our utmost effort into ensuring that the 12 chap- ters are consistent with the latest and best thinking of academics and practitioners in the field of strategic management and provide the topical coverage required for both undergraduate and MBA-level strategy courses. The ultimate test of the text, of course, is the positive pedagogical impact it has in the classroom. If this edition sets a more effective stage for your lectures and does a better job of helping you persuade students that the discipline of strategy merits their rapt attention, then it will have fulfilled its purpose.

THE CASE COLLECTION The 31-case lineup in this edition is flush with interesting companies and valuable lessons for students in the art and science of crafting and executing strategy. There’s a good blend of cases from a length perspective—21 of the 31 cases are under 15 pages yet offer plenty for students to chew on; 5 are medium-length cases; and the remainder are detail-rich cases that call for more sweeping analysis.

At least 28 of the 31 cases involve companies, products, people, or activities that students will have heard of, know about from personal experience, or can easily iden- tify with. The lineup includes at least 15 cases that will deepen student understanding of the special demands of competing in industry environments where product life cycles are short and competitive maneuvering among rivals is quite active. Twenty-four of the cases involve situations in which company resources and competitive capabilities

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xiv PREFACE

play as large a role in the strategy-making, strategy executing scheme of things as industry and competitive conditions do. Scattered throughout the lineup are 12 cases concerning non-U.S. companies, globally competitive industries, and/or cross-cultural situations. These cases, in conjunction with the globalized content of the text chapters, provide abundant material for linking the study of strategic management tightly to the ongoing globalization of the world economy. You’ll also find 5 cases dealing with the strategic problems of family-owned or relatively small entrepreneurial businesses and 25 cases involving public companies and situations where students can do further research on the Internet.

The “Guide to Case Analysis” follows the last case. It contains sections on what a case is, why cases are a standard part of courses in strategy, preparing a case for class discussion, doing a written case analysis, doing an oral presentation, and using financial ratio analysis to assess a company’s financial condition. We suggest having students read this guide before the first class discussion of a case.

A number of cases have accompanying videotape segments on the DVD.

THE TWO STRATEGY SIMULATION SUPPLEMENTS: THE BUSINESS STRATEGY GAME AND GLO-BUS

The Business Strategy Game and GLO-BUS: Developing Winning Competitive Strategies —two competition-based strategy simulations that are delivered online and that feature automated processing and grading of performance—are being marketed by the publisher as companion supplements for use with the 20th edition (and other texts in the field).

• The Business Strategy Game is the world’s most popular strategy simulation, having been used by over 2,500 instructors in courses involving approximately 750,000 students on 1,050 university campuses in 661 countries.

• GLO-BUS, a somewhat simpler strategy simulation introduced in 2004, has been used by more than 1,4501 instructors in courses involving over 180,000 students at 6401 university campuses in 481 countries.

How the Strategy Simulations Work In both The Business Strategy Game (BSG) and GLO-BUS, class members are divided into teams of one to five persons and assigned to run a company that competes head- to-head against companies run by other class members.

• In BSG, team members run an athletic footwear company, producing and market- ing both branded and private-label footwear.

• In GLO-BUS, team members operate a digital camera company that designs, assembles, and markets entry-level digital cameras and upscale, multifeatured cameras.

In both simulations, companies compete in a global market arena, selling their prod- ucts in four geographic regions—Europe-Africa, North America, Asia-Pacific, and Latin America. Each management team is called upon to craft a strategy for their com- pany and make decisions relating to plant operations, workforce compensation, pric- ing and marketing, social responsibility/citizenship, and finance.

Company co-managers are held accountable for their decision making. Each com- pany’s performance is scored on the basis of earnings per share, return-on-equity

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PREFACE xv

investment, stock price, credit rating, and image rating. Rankings of company perfor- mance, along with a wealth of industry and company statistics, are available to com- pany co-managers after each decision round to use in making strategy adjustments and operating decisions for the next competitive round. You can be certain that the market environment, strategic issues, and operating challenges that company co-managers must contend with are very tightly linked to what your class members will be reading about in the text chapters. The circumstances that co-managers face in running their simulation company embrace the very concepts, analytical tools, and strategy options they encounter in the text chapters (this is something you can quickly confirm by skimming through some of the Exercises for Simulation Participants that appear at the end of each chapter).

We suggest that you schedule 1 or 2 practice rounds and anywhere from 4 to 10 regular (scored) decision rounds (more rounds are better than fewer rounds). Each decision round represents a year of company operations and will entail roughly two hours of time for company co-managers to complete. In traditional 13-week, semester- long courses, there is merit in scheduling one decision round per week. In courses that run 5 to 10 weeks, it is wise to schedule two decision rounds per week for the last sev- eral weeks of the term (sample course schedules are provided for courses of varying length and varying numbers of class meetings).

When the instructor-specified deadline for a decision round arrives, the simulation server automatically accesses the saved decision entries of each company, determines the competitiveness and buyer appeal of each company’s product offering relative to the other companies being run by students in your class, and then awards sales and market shares to the competing companies, geographic region by geographic region. The unit sales volumes awarded to each company are totally governed by:

• How its prices compare against the prices of rival brands. • How its product quality compares against the quality of rival brands. • How its product line breadth and selection compare. • How its advertising effort compares. • And so on, for a total of 11 competitive factors that determine unit sales and mar-

ket shares.

The competitiveness and overall buyer appeal of each company’s product offer- ing in comparison to the product offerings of rival companies is all-decisive—this algorithmic feature is what makes BSG and GLO-BUS “competition-based” strategy simulations. Once each company’s sales and market shares are awarded based on the competitiveness of its respective overall product offering, the various company and industry reports detailing the outcomes of the decision round are then generated. Com- pany co-managers can access the results of the decision round 15 to 20 minutes after the decision deadline.

The Compelling Case for Incorporating Use of a Strategy Simulation There are three exceptionally important benefits associated with using a competition- based simulation in strategy courses taken by seniors and MBA students:

• A three-pronged text-case-simulation course model delivers significantly more teaching-learning power than the traditional text-case model. Using both cases and a strategy simulation to drill students in thinking strategically and applying what they read in the text chapters is a stronger, more effective means of helping

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xvi PREFACE

them connect theory with practice and develop better business judgment. What cases do that a simulation cannot is give class members broad exposure to a variety of companies and industry situations and insight into the kinds of strategy-related problems managers face. But what a competition-based strategy simulation does far better than case analysis is thrust class members squarely into an active, hands-on managerial role where they are totally responsible for assessing market conditions, determining how to respond to the actions of competitors, forging a long-term direction and strategy for their company, and making all kinds of operating decisions. Because they are held fully account- able for their decisions and their company’s performance, co-managers are strongly motivated to dig deeply into company operations, probe for ways to be more cost-efficient and competitive, and ferret out strategic moves and deci- sions calculated to boost company performance. Consequently, incorporating both case assignments and a strategy simulation to develop the skills of class members in thinking strategically and applying the concepts and tools of strate- gic analysis turns out to be more pedagogically powerful than relying solely on case assignments—there’s stronger retention of the lessons learned and better achievement of course learning objectives.

To provide you with quantitative evidence of the learning that occurs with using The Business Strategy Game or GLO-BUS, there is a built-in Learning Assurance Report showing how well each class member performs on nine skills/learning measures versus tens of thousands of students worldwide who have completed the simulation in the past 12 months.

• The competitive nature of a strategy simulation arouses positive energy and steps up the whole tempo of the course by a notch or two. Nothing sparks class excite- ment quicker or better than the concerted efforts on the part of class members at each decision round to achieve a high industry ranking and avoid the perilous con- sequences of being outcompeted by other class members. Students really enjoy taking on the role of a manager, running their own company, crafting strategies, making all kinds of operating decisions, trying to outcompete rival companies, and getting immediate feedback on the resulting company performance. Lots of back- and-forth chatter occurs when the results of the latest simulation round become available and co-managers renew their quest for strategic moves and actions that will strengthen company performance. Co-managers become emotionally invested in running their company and figuring out what strategic moves to make to boost their company’s performance. Interest levels climb. All this stimulates learning and causes students to see the practical relevance of the subject matter and the benefits of taking your course.

As soon as your students start to say “Wow! Not only is this fun but I am learn- ing a lot,” which they will, you have won the battle of engaging students in the subject matter and moved the value of taking your course to a much higher plateau in the business school curriculum. This translates into a livelier, richer learning experience from a student perspective and better instructor-course evaluations.

• Use of a fully automated online simulation reduces the time instructors spend on course preparation, course administration, and grading. Since the simulation exercise involves a 20- to 30-hour workload for student teams (roughly 2 hours per decision round times 10 to 12 rounds, plus optional assignments), simulation adopters often compensate by trimming the number of assigned cases from, say, 10 to 12 to perhaps 4 to 6. This significantly reduces the time instructors spend reading cases, studying teaching notes, and otherwise getting ready to lead class

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PREFACE xvii

discussion of a case or grade oral team presentations. Course preparation time is further cut because you can use several class days to have students meet in the computer lab to work on upcoming decision rounds or a three-year strategic plan (in lieu of lecturing on a chapter or covering an additional assigned case). Not only does use of a simulation permit assigning fewer cases, but it also permits you to eliminate at least one assignment that entails considerable grading on your part. Grading one less written case or essay exam or other written assignment saves enormous time. With BSG and GLO-BUS, grading is effortless and takes only minutes; once you enter percentage weights for each assignment in your online grade book, a suggested overall grade is calculated for you. You’ll be pleasantly surprised—and quite pleased—at how little time it takes to gear up for and admin- ister The Business Strategy Game or GLO-BUS.

In sum, incorporating use of a strategy simulation turns out to be a win–win propo- sition for both students and instructors. Moreover, a very convincing argument can be made that a competition-based strategy simulation is the single most effective teaching/learning tool that instructors can employ to teach the discipline of business and competitive strategy, to make learning more enjoyable, and to promote better achievement of course learning objectives.

A Bird’s-Eye View of The Business Strategy Game The setting for The Business Strategy Game (BSG) is the global athletic footwear industry (there can be little doubt in today’s world that a globally competitive strategy simulation is vastly superior to a simulation with a domestic-only setting). Global mar- ket demand for footwear grows at the rate of 7 to 9 percent annually for the first five years and 5 to 7 percent annually for the second five years. However, market growth rates vary by geographic region—North America, Latin America, Europe-Africa, and Asia-Pacific.

Companies begin the simulation producing branded and private-label footwear in two plants, one in North America and one in Asia. They have the option to establish production facilities in Latin America and Europe-Africa, either by constructing new plants or by buying previously constructed plants that have been sold by competing companies. Company co-managers exercise control over production costs on the basis of the styling and quality they opt to manufacture, plant location (wages and incentive compensation vary from region to region), the use of best practices and Six Sigma pro- grams to reduce the production of defective footwear and to boost worker productivity, and compensation practices.

All newly produced footwear is shipped in bulk containers to one of four geographic distribution centers. All sales in a geographic region are made from footwear invento- ries in that region’s distribution center. Costs at the four regional distribution centers are a function of inventory storage costs, packing and shipping fees, import tariffs paid on incoming pairs shipped from foreign plants, and exchange rate impacts. At the start of the simulation, import tariffs average $4 per pair in Europe-Africa, $6 per pair in Latin America, and $8 in the Asia-Pacific region. However, the Free Trade Treaty of the Americas allows tariff-free movement of footwear between North America and Latin America. Instructors have the option to alter tariffs as the game progresses.

Companies market their brand of athletic footwear to footwear retailers worldwide and to individuals buying online at the company’s website. Each company’s sales and market share in the branded footwear segments hinge on its competitiveness on 11 fac- tors: attractive pricing, footwear styling and quality, product line breadth, advertising,

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xviii PREFACE

use of mail-in rebates, appeal of celebrities endorsing a company’s brand, success in convincing footwear retailers to carry its brand, number of weeks it takes to fill retailer orders, effectiveness of a company’s online sales effort at its website, and customer loyalty. Sales of private-label footwear hinge solely on being the low-price bidder.

All told, company co-managers make as many as 53 types of decisions each period that cut across production operations (up to 10 decisions per plant, with a maximum of four plants), plant capacity additions/sales/upgrades (up to 6 decisions per plant), worker compensation and training (3 decisions per plant), shipping (up to 8 decisions per plant), pricing and marketing (up to 10 decisions in four geographic regions), bids to sign celebrities (2 decision entries per bid), financing of company operations (up to 8 decisions), and corporate social responsibility and environmental sustainability (up to 6 decisions).

Each time company co-managers make a decision entry, an assortment of on- screen calculations instantly shows the projected effects on unit sales, revenues, mar- ket shares, unit costs, profit, earnings per share, ROE, and other operating statistics. The on-screen calculations help team members evaluate the relative merits of one decision entry versus another and put together a promising strategy.

Companies can employ any of the five generic competitive strategy options in selling branded footwear—low-cost leadership, differentiation, best-cost provider, focused low cost, and focused differentiation. They can pursue essentially the same strategy worldwide or craft slightly or very different strategies for the Europe-Africa, Asia-Pacific, Latin America, and North America markets. They can strive for competi- tive advantage based on more advertising, a wider selection of models, more appealing styling/quality, bigger rebates, and so on.

Any well-conceived, well-executed competitive approach is capable of succeed- ing, provided it is not overpowered by the strategies of competitors or defeated by the presence of too many copycat strategies that dilute its effectiveness. The challenge for each company’s management team is to craft and execute a competitive strategy that produces good performance on five measures: earnings per share, return on equity investment, stock price appreciation, credit rating, and brand image.

All activity for The Business Strategy Game takes place at www.bsg-online.com .

A Bird’s-Eye View of GLO-BUS The industry setting for GLO-BUS is the digital camera industry. Global mar- ket demand grows at the rate of 8 to 10 percent annually for the first five years and 4 to 6 percent annually for the second five years. Retail sales of digital cameras are seasonal, with about 20 percent of consumer demand coming in each of the first three quarters of each calendar year and 40 percent coming during the big fourth-quarter retailing season.

Companies produce entry-level and upscale, multifeatured cameras of varying designs and quality in a Taiwan assembly facility and ship assembled cameras directly to retailers in North America, Asia-Pacific, Europe-Africa, and Latin America. All cameras are assembled as retail orders come in and are shipped immediately upon completion of the assembly process—companies maintain no finished-goods invento- ries, and all parts and components are delivered on a just-in-time basis (which elimi- nates the need to track inventories and simplifies the accounting for plant operations and costs). Company co-managers exercise control over production costs on the basis of the designs and components they specify for their cameras, workforce compensa- tion and training, the length of warranties offered (which affects warranty costs), the

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PREFACE xix

amount spent for technical support provided to buyers of the company’s cameras, and their management of the assembly process.

Competition in each of the two product market segments (entry-level and multifea- tured digital cameras) is based on 10 factors: price, camera performance and quality, number of quarterly sales promotions, length of promotions in weeks, size of the pro- motional discounts offered, advertising, number of camera models, size of the retail dealer network, warranty period, and amount/caliber of technical support provided to camera buyers. Low-cost leadership, differentiation strategies, best-cost provider strategies, and focus strategies are all viable competitive options. Rival companies can strive to be the clear market leader in either entry-level cameras or upscale multifea- tured cameras or both. They can focus on one or two geographic regions or strive for geographic balance. They can pursue essentially the same strategy worldwide or craft slightly or very different strategies for the Europe-Africa, Asia-Pacific, Latin America, and North America markets. Just as with The Business Strategy Game, almost any well-conceived, well-executed competitive approach is capable of succeeding, pro- vided it is not overpowered by the strategies of competitors or defeated by the presence of too many copycat strategies that dilute its effectiveness.

Company co-managers make 49 types of decisions each period, ranging from R&D, camera components, and camera performance (10 decisions) to production operations and worker compensation (15 decisions) to pricing and marketing (15 deci- sions) to the financing of company operations (4 decisions) to corporate social respon- sibility (5 decisions). Each time participants make a decision entry, an assortment of on-screen calculations instantly shows the projected effects on unit sales, revenues, market shares, unit costs, profit, earnings per share, ROE, and other operating sta- tistics. These on-screen calculations help team members evaluate the relative merits of one decision entry versus another and stitch the separate decisions into a cohesive and promising strategy. Company performance is judged on five criteria: earnings per share, return on equity investment, stock price, credit rating, and brand image.

All activity for GLO-BUS occurs at www.glo-bus.com .

Administration and Operating Features of the Two Simulations The Internet delivery and user-friendly designs of both BSG and GLO-BUS make them incredibly easy to administer, even for first-time users. And the menus and controls are so similar that you can readily switch between the two simulations or use one in your undergraduate class and the other in a graduate class. If you have not yet used either of the two simulations, you may find the following of particular interest:

• Setting up the simulation for your course is done online and takes about 10 to 15 minutes. Once setup is completed, no other administrative actions are required beyond those of moving participants to a different team (should the need arise) and monitoring the progress of the simulation (to whatever extent desired).

• Participant’s Guides are delivered electronically to class members at the website— students can read the guide on their monitors or print out a copy, as they prefer.

• There are 2- to 4-minute Video Tutorials scattered throughout the software (includ- ing each decision screen and each page of each report) that provide on-demand guidance to class members who may be uncertain about how to proceed.

• Complementing the Video Tutorials are detailed and clearly written Help sections explaining “all there is to know” about (a) each decision entry and the relevant

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xx PREFACE

cause-effect relationships, (b) the information on each page of the Industry Reports, and (c) the numbers presented in the Company Reports. The Video Tuto- rials and the Help screens allow company co-managers to figure things out for themselves, thereby curbing the need for students to ask the instructor “how things work.”

• Team members running the same company who are logged in simultaneously on different computers at different locations can click a button to enter Collaboration Mode, enabling them to work collaboratively from the same screen in viewing reports and making decision entries, and click a second button to enter Audio Mode, letting them talk to one another.

• When in “Collaboration Mode,” each team member sees the same screen at the same time as all other team members who are logged in and have joined Collaboration Mode. If one team member chooses to view a particular decision screen, that same screen appears on the monitors for all team members in Col- laboration Mode.

• Each team member controls their own color-coded mouse pointer (with their first-name appearing in a color-coded box linked to their mouse pointer) and can make a decision entry or move the mouse to point to particular on-screen items.

• A decision entry change made by one team member is seen by all, in real time, and all team members can immediately view the on-screen calculations that result from the new decision entry.

• If one team member wishes to view a report page and clicks on the menu link to the desired report, that same report page will immediately appear for the other team members engaged in collaboration.

• Use of Audio Mode capability requires that each team member work from a computer with a built-in microphone (if they want to be heard by their team members) and speakers (so they may hear their teammates) or else have a headset with a microphone that they can plug into their desktop or laptop. A headset is recommended for best results, but most laptops now are equipped with a built-in microphone and speakers that will support use of our new voice chat feature.

• Real-time VoIP audio chat capability among team members who have entered both the Audio Mode and the Collaboration Mode is a tremendous boost in functionality that enables team members to go online simultaneously on com- puters at different locations and conveniently and effectively collaborate in running their simulation company.

• In addition, instructors have the capability to join the online session of any company and speak with team members, thus circumventing the need for team members to arrange for and attend a meeting in the instructor’s office. Using the standard menu for administering a particular industry, instructors can connect with the company desirous of assistance. Instructors who wish not only to talk but also to enter Collaboration (highly recommended because all attendees are then viewing the same screen) have a red-colored mouse pointer linked to a red box labeled Instructor.

Without a doubt, the Collaboration and Voice-Chat capabilities are hugely valuable for students enrolled in online and distance-learning courses where meeting face-to-face is impractical or time-consuming. Likewise, the

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PREFACE xxi

instructors of online and distance-learning courses will appreciate having the capability to join the online meetings of particular company teams when their advice or assistance is requested.

• Both simulations are quite suitable for use in distance-learning or online courses (and are currently being used in such courses on numerous campuses).

• Participants and instructors are notified via e-mail when the results are ready (usu- ally about 15 to 20 minutes after the decision round deadline specified by the instructor/game administrator).

• Following each decision round, participants are provided with a complete set of reports—a six-page Industry Report, a one-page Competitive Intelligence report for each geographic region that includes strategic group maps and bulleted lists of competitive strengths and weaknesses, and a set of Company Reports (income statement, balance sheet, cash flow statement, and assorted production, market- ing, and cost statistics).

• Two “open-book” multiple-choice tests of 20 questions are built into each simu- lation. The quizzes, which you can require or not as you see fit, are taken online and automatically graded, with scores reported instantaneously to participants and automatically recorded in the instructor’s electronic grade book. Students are automatically provided with three sample questions for each test.

• Both simulations contain a three-year strategic plan option that you can assign. Scores on the plan are automatically recorded in the instructor’s online grade book.

• At the end of the simulation, you can have students complete online peer evalua- tions (again, the scores are automatically recorded in your online grade book).

• Both simulations have a Company Presentation feature that enables each team of company co-managers to easily prepare PowerPoint slides for use in describing their strategy and summarizing their company’s performance in a presentation to either the class, the instructor, or an “outside” board of directors.

• A Learning Assurance Report provides you with hard data concerning how well your students performed vis-à-vis students playing the simulation worldwide over the past 12 months. The report is based on nine measures of student proficiency, business know-how, and decision-making skill and can also be used in evaluat- ing the extent to which your school’s academic curriculum produces the desired degree of student learning insofar as accreditation standards are concerned.

For more details on either simulation, please consult Section 2 of the Instructor’s Manual accompanying this text or register as an instructor at the simulation websites ( www.bsg-online.com and www.glo-bus.com ) to access even more comprehensive information. You should also consider signing up for one of the webinars that the sim- ulation authors conduct several times each month (sometimes several times weekly) to demonstrate how the software works, walk you through the various features and menu options, and answer any questions. You have an open invitation to call the senior author of this text at (205) 722-9145 to arrange a personal demonstration or talk about how one of the simulations might work in one of your courses. We think you’ll be quite impressed with the cutting-edge capabilities that have been programmed into The Business Strategy Game and GLO-BUS, the simplicity with which both simula- tions can be administered, and their exceptionally tight connection to the text chapters, core concepts, and standard analytical tools.

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xxii PREFACE

RESOURCES AND SUPPORT MATERIALS FOR THE 20TH EDITION

For Students

Key Points Summaries At the end of each chapter is a synopsis of the core concepts, analytical tools, and other key points discussed in the chapter. These chapter-end synopses, along with the core concept definitions and margin notes scat- tered throughout each chapter, help students focus on basic strategy principles, digest the messages of each chapter, and prepare for tests.

Two Sets of Chapter-End Exercises Each chapter concludes with two sets of exercises. The Assurance of Learning Exercises can be used as the basis for class discussion, oral presentation assignments, short written reports, and substi- tutes for case assignments. The Exercises for Simulation Participants are designed expressly for use by adopters who have incorporated use of a simulation and want to go a step further in tightly and explicitly connecting the chapter content to the simu- lation company their students are running. The questions in both sets of exercises (along with those Illustration Capsules that qualify as “mini-cases”) can be used to round out the rest of a 75-minute class period should your lecture on a chapter last for only 50 minutes.

The Connect™ Management Web-Based Assignment and Assess- ment Platform Beginning with the 18th edition, we began taking advantage of the publisher’s innovative Connect™ assignment and assessment platform and created several features that simplify the task of assigning and grading three types of exercises for students:

• There are self-scoring chapter tests consisting of 20 to 25 multiple-choice ques- tions that students can take to measure their grasp of the material presented in each of the 12 chapters.

• There are two author-developed Interactive Application exercises for each of the 12 chapters that drill students in the use and application of the concepts and tools of strategic analysis.

• The Connect ™ platform also includes author-developed Interactive Application exercises for 14 of the 31 cases in this edition that require students to work through answers to a select number of the assignment questions for the case. These exer- cises have multiple components and can include calculating assorted financial ratios to assess a company’s financial performance and balance sheet strength, identifying a company’s strategy, doing five-forces and driving-forces analysis, doing a SWOT analysis, and recommending actions to improve company perfor- mance. The content of these case exercises is tailored to match the circumstances presented in each case, calling upon students to do whatever strategic thinking and strategic analysis are called for to arrive at pragmatic, analysis-based action recommendations for improving company performance.

All of the Connect ™ exercises are automatically graded (with the exception of those exercise components that entail student entry of short-answer and/or essay answers), thereby simplifying the task of evaluating each class member’s performance

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PREFACE xxiii

and monitoring the learning outcomes. The progress-tracking function built into the Connect ™ Management system enables you to:

• View scored work immediately and track individual or group performance with assignment and grade reports.

• Access an instant view of student or class performance relative to learning objectives.

• Collect data and generate reports required by many accreditation organizations, such as AACSB.

LearnSmart and SmartBook TM LearnSmart is an adaptive study tool proven to strengthen memory recall, increase class retention, and boost grades. Stu- dents are able to study more efficiently because they are made aware of what they know and don’t know. Real-time reports quickly identify the concepts that require more attention from individual students—or the entire class. SmartBook is the first and only adaptive reading experience designed to change the way students read and learn. It creates a personalized reading experience by highlighting the most impactful concepts a student needs to learn at that moment in time. As a student engages with SmartBook, the reading experience continuously adapts by highlighting content based on what the student knows and doesn’t know. This ensures that the focus is on the content he or she needs to learn, while simultaneously promoting long-term retention of material. Use SmartBook’s real-time reports to quickly identify the concepts that require more attention from individual students–or the entire class. The end result? Students are more engaged with course content, can better prioritize their time, and come to class ready to participate.

For Instructors

Instructor Library The Connect Management Instructor Library is your repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture.

Instructor’s Manual The accompanying IM contains:

• A section on suggestions for organizing and structuring your course. • Sample syllabi and course outlines. • A set of lecture notes on each chapter. • Answers to the chapter-end Assurance of Learning Exercises. • A copy of the test bank. • A comprehensive case teaching note for each of the 31 cases. These teaching

notes are filled with suggestions for using the case effectively, have very thorough, analysis-based answers to the suggested assignment questions for the case, and con- tain an epilogue detailing any important developments since the case was written.

Test Bank and EZ Test Online There is a test bank containing over 900 multiple-choice questions and short-answer/essay questions. It has been tagged with AACSB and Bloom’s Taxonomy criteria. All of the test bank questions are also acces- sible within a computerized test bank powered by McGraw-Hill’s flexible electronic

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xxiv PREFACE

testing program, EZ Test Online ( www.eztestonline.com ). Using EZ Test Online allows you to create paper and online tests or quizzes. With EZ Test Online, instructors can select questions from multiple McGraw-Hill test banks or author their own and then either print the test for paper distribution or give it online.

PowerPoint Slides To facilitate delivery preparation of your lectures and to serve as chapter outlines, you’ll have access to approximately 500 colorful and professional-looking slides displaying core concepts, analytical procedures, key points, and all the figures in the text chapters.

The Business Strategy Game and GLO-BUS Online Simu- lations Using one of the two companion simulations is a powerful and construc- tive way of emotionally connecting students to the subject matter of the course. We know of no more effective way to arouse the competitive energy of students and pre- pare them for the challenges of real-world business decision making than to have them match strategic wits with classmates in running a company in head-to-head competi- tion for global market leadership.

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PREFACE xxv

ACKNOWLEDGMENTS We heartily acknowledge the contributions of the case researchers whose case-writing efforts appear herein and the companies whose cooperation made the cases possible. To each one goes a very special thank-you. We cannot overstate the importance of timely, carefully researched cases in contributing to a substantive study of strategic management issues and practices.

A great number of colleagues and students at various universities, business acquaintances, and people at McGraw-Hill provided inspiration, encouragement, and counsel during the course of this project. Like all text authors in the strategy field, we are intellectually indebted to the many academics whose research and writing have blazed new trails and advanced the discipline of strategic management. In addition, we’d like to thank the following reviewers who provided seasoned advice and splendid suggestions over the years for improving the chapters:

Robert B. Baden, Edward Desmarais, Stephen F. Hallam, Joy Karriker, Wendell Seaborne, Joan H. Bailar, David Blair, Jane Boyland, William J. Donoher, Stephen A. Drew, Jo Anne Duffy, Alan Ellstrand, Susan Fox-Wolfgramm, Rebecca M. Guidice, Mark Hoelscher, Sean D. Jasso, Xin Liang, Paul Mallette, Dan Marlin, Raza Mir, Mansour Moussavi, James D. Spina, Monica A. Zimmerman, Dennis R. Balch, Jeffrey R. Bruehl, Edith C. Busija, Donald A. Drost, Randall Harris, Mark Lewis Hoelscher, Phyllis Holland, James W. Kroeger, Sal Kukalis, Brian W. Kulik, Paul Mallette, Anthony U. Martinez, Lee Pickler, Sabine Reddy, Thomas D. Schramko, V. Seshan, Charles Strain, Sabine Turnley, S. Stephen Vitucci, Andrew Ward, Sibin Wu, Lynne Patten, Nancy E. Landrum, Jim Goes, Jon Kalinowski, Rodney M. Walter, Judith D. Powell, Seyda Deligonul, David Flanagan, Esmerlda Garbi, Mohsin Habib, Kim Hester, Jeffrey E. McGee, Diana J. Wong, F. William Brown, Anthony F. Chelte, Gregory G. Dess, Alan B. Eisner, John George, Carle M. Hunt, Theresa Marron-Grodsky, Sarah Marsh, Joshua D. Martin, William L. Moore, Donald Neubaum, George M. Puia, Amit Shah, Lois M. Shelton, Mark Weber, Steve Barndt, J. Michael Geringer, Ming-Fang Li, Richard Stackman, Stephen Tallman, Gerardo R. Ungson, James Boulgarides, Betty Diener, Daniel F. Jennings, David Kuhn, Kathryn Martell, Wilbur Mouton, Bobby Vaught, Tuck Bounds, Lee Burk, Ralph Catalanello, William Crittenden, Vince Luchsinger, Stan Mendenhall, John Moore, Will Mulvaney, Sandra Richard, Ralph Roberts, Thomas Turk, Gordon Von Stroh, Fred Zimmerman, S. A. Billion, Charles Byles, Gerald L. Geisler, Rose Knotts, Joseph Rosenstein, James B. Thurman, Ivan Able, W. Harvey Hegarty, Roger Evered, Charles B. Saunders, Rhae M. Swisher, Claude I. Shell, R. Thomas Lenz, Michael C. White, Dennis Callahan, R. Duane Ireland, William E. Burr II, C. W. Millard, Richard Mann, Kurt Christensen, Neil W. Jacobs, Louis W. Fry, D. Robley Wood, George J. Gore, and William R. Soukup.

We owe a debt of gratitude to Professors Catherine A. Maritan, Jeffrey A. Martin, Richard S. Shreve, and Anant K. Sundaram for their helpful comments on vari- ous chapters. We’d also like to thank the following students of the Tuck School of Business for their assistance with the revisions: Sarah Boole, Kenneth P. Fraser, John L. Gardner, Dennis L. Huggins, Peter Jacobson, Jacob Adam Johnson, Heather Levy, Judith H. Lin, Brian R. McKenzie, Andrew J. Miller, Kiera O’Brien, Sara Paccamonti, Avni V. Patel, Maximilian A. Pinto, Christopher C. Sukenik, Ross M. Templeton, and Nicholas J. Ziemba. And we’d like to acknowledge the help of Dartmouth students

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xxvi PREFACE

Mathieu A. Bertrand, Meghan L. Cooney, Harold W. Greenstone, Campbell Haynes, Alexander P. Judson, Sarah E. Knapp, Amy Li, Roger L. Melick, Alexander C. Olesen, Mahala S. Pagan, Jenna Pfeffer, Jordan M. West, and Sean Zhang, as well as Tuck staff member Mary Biathrow.

As always, we value your recommendations and thoughts about the book. Your com- ments regarding coverage and contents will be taken to heart, and we always are grate- ful for the time you take to call our attention to printing errors, deficiencies, and other shortcomings. Please e-mail us at athompso@cba.ua.edu , margaret.a.peteraf@ tuck.dartmouth.edu , john.gamble@tamucc.edu , or astrickl@cba.ua.edu .

Arthur A. Thompson

Margaret A. Peteraf

John E. Gamble

A. J. Strickland

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Crafting and Executing Strategy THE QUEST FOR COMPETITIVE ADVANTAGE

Concepts and Cases

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xxviii

GUIDED TOUR

Chapter Structure and Organization

The Managerial Process of Crafting and Executing Company Strategies

Part I: Concepts and Techniques for Crafting and Executing Strategy

Part II: Cases in Crafting and Executing Strategy

Chapter 1 Chapters3 and 4

Section A: Introduction and Overview

Section B: Core Concepts and Analytical

Tools

Section C: Crafting a Strategy

Section D: Executing the

Strategy

What Is Strategy and Why Does It Matter?

Concepts and Analytical Tools for Evaluating a Company’s Situation

Single- Business

Companies

Chapters 5, 6, and 7

Multibusiness or Diversified Companies

Chapter 8

Tailoring Strategy to Various Company Situations

Section A: Crafting Strategy in Single-Business Companies (20 cases) Section B: Crafting Strategy in Diversified Companies (2 cases) Section C: Implementing and Executing Strategy (6 cases) Section D: Strategy, Ethics, and Social Responsibility (3 cases)

Chapter 2 Chapters10, 11, and 12 Chapter

9

The Links between Ethics, Corporate Social Responsibility, Sustainability, and Strategy

Managerial Keys to Successfully Executing the Chosen Strategy

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CHAPTER 1

What Is Strategy and Why Is It Important?

Learning Objectives

THIS CHAPTER WILL HELP YOU UNDERSTAND:

LO 1 What we mean by a company’s strategy.

LO 2 The concept of a sustainable competitive advantage.

LO 3 The five most basic strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

LO 4 That a company’s strategy tends to evolve because of changing circumstances and ongoing efforts by management to improve the strategy.

LO 5 Why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula.

LO 6 The three tests of a winning strategy.

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Learning Objectives are listed at the beginning of each chapter; corresponding numbered indicators in the margins show where learning objectives are covered in the text.

ILLUSTRATION CAPSULE 9.4

Having sold over 2 million pairs of shoes worldwide, self- designated “Chief Shoe Giver” Blake Mycoskie founded TOMS on the principle of “One for One.” Operating under the belief that “the way you shop can change the world,” TOMS donates a pair of shoes to a child in need in over 50 different countries for every pair purchased. Each pair is made with sustainable materials that include organic canvas and recycled materials that minimize TOMS’s ecological footprint. TOMS has been recog- nized with the Award for Corporate Excellence by the Office of the Secretary of State, while Fortune magazine has named Mycoskie to its “40 under 40” list.

Mycoskie credits much of TOMS’s growth not to success in traditional avenues of advertising but, rather,

to the story behind the TOMS shoe as told by TOMS’s customers. By focusing on the story behind its product and the importance of sustainable giving, TOMS gen- erates brand awareness through motivated customers who share their feel-good purchases with friends and family. By utilizing user marketing rather than corpo- rate marketing, TOMS successfully pitches a grassroots company-image and bundles a lifestyle with its product.

TOMS’s environmental sustainability approach includes offering a line of vegan shoes, which contain no animal by-products, and maintaining its commitment to use earth and animal-friendly materials whenever possible. Its shoeboxes are made with 80 percent recycled waste and are printed with soy ink. Through these production considerations, TOMS caters to an environmentally con- scious demographic with few established competitors and with loyal consumers who have helped TOMS expe- rience sustained growth despite the global recession.

From Shoe Giving Trips to employee training on the importance of environmental sustainability, TOMS aspires to offer its employees “more than a 9-to-5” job. This commitment to a worthwhile cause creates not only happier employees but also more autonomous and creative global citizens who work together to inspire change. By attaining economic growth through an emphasis on social justice and environmental sustain- ability, TOMS has maintained a well-balanced triple bottom line.

TOMS’s Well-Balanced Triple Bottom Line

Note: Developed with Sean Zhang.

Source: Keynote statements by Blake Mycoskie and other information posted at www.toms.com .

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Illustration Capsules appear in boxes throughout each chapter to provide in-depth examples, connect the text presentation to real-world companies, and convincingly demonstrate “strategy in action.” Some are appropriate for use as mini-cases.

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2. Taking full advantage of experience- and learning-curve effects. The cost of performing an activity can decline over time as the learning and experience of company personnel build. Learning and experience economies can stem from debugging and mastering newly introduced technologies, using workers’ experi- ences and suggestions to install more efficient plant layouts and assembly proce- dures, and repeatedly picking sites for and building new plants, retail outlets, or distribution centers—gaining speed and greater effectiveness in the process.

FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company Costs

Learning and experience

Input costs

Supply chain efficiencies

Capacity utilization

Outsourcing or vertical

integration

Communication systems and information technology

Incentive systems and

culture

Economies of scale

Production technology and design

Bargaining power

COST DRIVERS

Source: Adapted from M. Porter, Competitive Advantage: Creating and Sustaining Competitive Advantage (New York: Free Press, 1985).

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LO 4

The concepts of corporate social responsibility and environmental sustainability and how companies balance these duties with economic responsibilities to shareholders.

CORE CONCEPT

Corporate social responsibility (CSR) refers to a company’s duty to operate in an honorable manner, provide good working conditions for employees, encourage workforce diversity, be a good steward of the environment, and actively work to better the quality of life in the local communities where it operates and in society at large.

The idea that businesses have an obligation to foster social betterment, a much-debated topic over the past 50 years, took root in the 19th century when progressive companies in the aftermath of the industrial revolution began to provide workers with housing and other amenities. The notion that corporate executives should balance the interests of all stakeholders—shareholders, employees, customers, suppliers, the communities in which they operate, and society at large—began to blossom in the 1960s. Some years later, a group of chief executives of America’s 200 largest corporations, calling them- selves the Business Roundtable, came out in strong support of the concept of corporate social responsibility (CSR):

Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholder must receive a good return but the legitimate concerns of other constituencies (customers, employees, communities, suppliers and society at large) also must have the appropriate attention. . . . [Leading managers] believe that by giving enlightened consideration to bal- ancing the legitimate claims of all its constituents, a corporation will best serve the interest of its shareholders.

Today, corporate social responsibility is a concept that resonates in western Europe, the United States, Canada, and such developing nations as Brazil and India.

The Concepts of Corporate Social Responsibility and Good Corporate Citizenship The essence of socially responsible business behavior is that a company should balance strategic actions to benefit shareholders against the duty to be a good cor- porate citizen. The underlying thesis is that company managers should display a social conscience in operating the business and specifically take into account how management decisions and company actions affect the well-being of employees, local communities, the environment, and society at large. 20 Acting in a socially

responsible manner thus encompasses more than just participating in community ser- vice projects and donating money to charities and other worthy causes. Demonstrating

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Margin Notes define core concepts and call attention to important ideas and principles.

Figures scattered throughout the chapters provide conceptual and analytical frameworks.

KEY POINTS

1. Deciding which of the five generic competitive strategies to employ—overall low cost, broad differentiation, focused low cost, focused differentiation, or best cost—is perhaps the most important strategic commitment a company makes. It tends to drive the remaining strategic actions a company undertakes and sets the whole tone for pursuing a competitive advantage over rivals.

2. In employing a low-cost provider strategy and trying to achieve a low-cost advan- tage over rivals, a company must do a better job than rivals of cost-effectively managing value chain activities and/or it must find innovative ways to eliminate cost-producing activities. An effective use of cost drivers is key. Low-cost pro- vider strategies work particularly well when price competition is strong and the products of rival sellers are virtually identical, when there are not many ways to differentiate, when buyers are price-sensitive or have the power to bargain down prices, when buyer switching costs are low, and when industry newcomers are likely to use a low introductory price to build market share.

3. Broad differentiation strategies seek to produce a competitive edge by incorporat- ing attributes that set a company’s product or service offering apart from rivals in ways that buyers consider valuable and worth paying for. This depends on the appropriate use of value drivers. Successful differentiation allows a firm to (1) command a premium price for its product, (2) increase unit sales (if additional buyers are won over by the differentiating features), and/or (3) gain buyer loy- alty to its brand (because some buyers are strongly attracted to the differentiating

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Key Points at the end of each chapter provide a handy summary of essential ideas and things to remember.

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stringent quality standards, and committed to sus- tainable agriculture.”

Mackey’s vision was for Whole Foods to become an international brand synonymous with carrying the highest-quality natural and organic foods available and being the best food retailer in every community in which a Whole Foods store was located. The com- pany sought to offer the highest-quality, least pro- cessed, most flavorful and naturally preserved foods available, and it marketed them in appealing store environments that made shopping at Whole Foods interesting and enjoyable. Mackey believed that mar- keting high-quality natural and organic foods to more and more customers in more and more communi- ties would, over time, gradually transform the diets of individuals in a manner that would help them live longer, healthier, more pleasurable lives.

THE NATURAL AND ORGANIC FOODS INDUSTRY The retail grocery industry in the United States—which included conventional supermarkets, supercenters, and limited-assortment and natural/gourmet-positioned supermarkets—had sales of approximately $603 bil- lion in 2012, up 3 percent over 2011. 1 Within this broader category, retail sales of food products labeled “natural” were approximately $81 billion, a 10 percent increase over the prior year. 2

Foods labeled “organic” generated estimated retail sales across North America approaching $35 billion in 2013, up from $9 billion in 2002. Natural

Whole Foods Market in 2014: Vision, Core Values, and Strategy

Arthur A. Thompson The University of Alabama

Founded in 1980, Whole Foods Market had evolved from a local supermarket for natural and health foods in Austin, Texas, into the most visible and best-known leader of the natural and organic food movement across the United States, helping the industry gain acceptance among grow- ing numbers of consumers concerned about the food they ate. The company had 2013 sales revenues of $12.9 billion and in spring 2014 had 379 stores in the United States, Canada, and Great Britain. Over the past 22 years, sales had grown at a compound annual rate of 25.2 percent, and profits had grown at a com- pound average rate of 30.4 percent. In 2013, Whole Foods was the 8th-largest food and drug retailer in the United States (up from 21st in 2009) and ranked 232nd on Fortune magazine’s 2013 list of the 500 largest companies in the United States. Over 7 mil- lion customers visited Whole Foods stores in 41 U.S. states, Canada, and the United Kingdom each week, and Whole Foods was the number-two retail brand on Twitter, with 4 million followers.

Whole Foods’ mission was “to promote the vitality and well-being of all individuals by supply- ing the highest quality, most wholesome foods avail- able.” The core of the mission involved promoting organically grown foods, healthy eating, and the sustainability of the world’s entire ecosystem. For many years, the company used the slogan “Whole Foods, Whole People, Whole Planet” to capture the essence of its mission. John Mackey, the com- pany’s cofounder and co-CEO, was convinced that Whole Foods’ rapid growth and market success had much to do with its having “remained a uniquely mission-driven company—highly selective about what we sell, dedicated to our core values and

CASE 03

Copyright © 2014 by Arthur A. Thompson. All rights reserved.

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Thirty-one cases detail the strategic circumstances of actual companies and provide practice in applying the concepts and tools of strategic analysis.

EXERCISE FOR SIMULATION PARTICIPANTS

1. Is your company’s strategy ethical? Why or why not? Is there anything that your company has done or is now doing that could legitimately be considered “shady” by your competitors?

2. In what ways, if any, is your company exercising corporate social responsibility? What are the elements of your company’s CSR strategy? Are there any changes to this strategy that you would suggest?

3. If some shareholders complained that you and your co-managers have been spend- ing too little or too much on corporate social responsibility, what would you tell them?

4. Is your company striving to conduct its business in an environmentally sustainable manner? What specific additional actions could your company take that would make an even greater contribution to environmental sustainability?

5. In what ways is your company’s environmental sustainability strategy in the best long-term interest of shareholders? Does it contribute to your company’s competi- tive advantage or profitability?

LO 1

LO 4

LO 3, LO 4

LO 4

LO 4

ENDNOTES 12 Thomas Donaldson and Thomas W. Dunfee, “Towards a Unifi ed Conception of Business Ethics: Integrative Social Contracts Theory,” Academy of Management Review 19, no. 2 (April 1994), pp. 252–284; Andrew Spicer, Thomas W. Dunfee, and Wendy J. Bailey, “Does National Context Matter in Ethical Decision Making? An Empirical Test of Integrative Social Contracts Theory,” Academy of Management Journal 47, no. 4 (August 2004), p. 610. 13 Lynn Paine, Rohit Deshpandé, Joshua D. Margolis, and Kim Eric Bettcher, “Up to Code: Does Your Company’s Conduct Meet World- Class Standards?” Harvard Business Review 83, no. 12 (December 2005), pp. 122–133. 14 John F. Veiga, Timothy D. Golden, and Kath- leen Dechant, “Why Managers Bend Company Rules,” Academy of Management Executive 18, no. 2 (May 2004). 15 www.reuters.com/article/2014/02/06/ us-sac-martoma-idUSBREA131TL20140206 . 16 Lorin Berlin and Emily Peck, “National Mortgage Settlement: States, Big Banks Reach $25 Billion Deal,” Huff Post Business, February 9, 2012, www.huffingtonpost.

1 James E. Post, Anne T. Lawrence, and James Weber, Business and Society: Corpo- rate Strategy, Public Policy, Ethics, 10th ed. (New York: McGraw-Hill, 2002). 2 Mark S. Schwartz, “Universal Moral Values for Corporate Codes of Ethics,” Journal of Business Ethics 59, no. 1 (June 2005), pp. 27–44. 3 Mark S. Schwartz, “A Code of Ethics for Cor- porate Codes of Ethics,” Journal of Business Ethics 41, no. 1–2 (November–December 2002), pp. 27–43. 4 T. L. Beauchamp and N. E. Bowie, Ethical Theory and Business (Upper Saddle River, NJ: Prentice-Hall, 2001). 5 www.cnn.com/2013/10/15/world/child-labor- index-2014/ (accessed February 6, 2014). 6 U.S. Department of Labor, “The Department of Labor’s 2012 Findings on the Worst Forms of Child Labor,” www.dol.gov/ilab/programs/ ocft/PDF/2012OCFTreport.pdf . 7 W. M. Greenfi eld, “In the Name of Corporate Social Responsibility,” Business Horizons 47, no. 1 (January–February 2004), p. 22. 8 Rajib Sanyal, “Determinants of Bribery in

20 Timothy M. Devinney, “Is the Socially Responsible Corporation a Myth? The Good, the Bad, and the Ugly of Corporate Social Responsibility,” Academy of Management Per- spectives 23, no. 2 (May 2009), pp. 44–56. 21 Information posted at www.generalmills.com (accessed March 13, 2013). 22 Adrian Henriques, “ISO 26000: A New Stan- dard for Human Rights?” Institute for Human Rights and Business, March 23, 2010, www.institutehrb.org/blogs/guest/ iso_26000_a_new_standard_for_human_rights. html?gclid=CJih7NjN2aICFVs65QodrVOdyQ (accessed July 7, 2010). 23 Gerald I.J.M. Zetsloot and Marcel N. A. van Marrewijk, “From Quality to Sustainability,” Journal of Business Ethics 55 (2004), pp. 79–82. 24 Tilde Herrera, “PG&E Claims Industry First with Supply Chain Footprint Project,” Green- Biz.com , June 30, 2010, www.greenbiz.com/ news/2010/06/30/-pge—claims-industry-first- supply-chain-carbon-footprint-project. 25 J. G. Speth, The Bridge at the End of the World: Capitalism, the Environment, and

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Exercises at the end of each chapter, linked to learning objectives, provide a basis for class discussion, oral presentations, and written assignments. Several chapters have exercises that qualify as mini-cases.

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FOR STUDENTS: An Assortment of Support Materials

The Business Strategy Game or GLO-BUS Simulation Exercises Either one of these text supplements involves teams of students managing companies in a head-to- head contest for global market leadership. Company co-managers have to make decisions relating to product quality, production, workforce compensation and training, pricing and marketing, and financing of company operations. The challenge is to craft and execute a strategy that is powerful enough to deliver good financial performance despite the competitive efforts of rival companies. Each company competes in America, Latin America, Europe-Africa, and Asia-Pacific.

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Crafting and Executing Strategy THE QUEST FOR COMPETITIVE ADVANTAGE

Concepts and Cases

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BRIEF CONTENTS

PART 1 Concepts and Techniques for Crafting and Executing Strategy

Section A: Introduction and Overview

1 What Is Strategy and Why Is It Important? 2 2 Charting a Company’s Direction: Its Vision, Mission, Objectives, and

Strategy 18

Section B: Core Concepts and Analytical Tools

3 Evaluating a Company’s External Environment 44 4 Evaluating a Company’s Resources, Capabilities,

and Competitiveness 78

Section C: Crafting a Strategy

5 The Five Generic Competitive Strategies 116 6 Strengthening a Company’s Competitive Position 144 7 Strategies for Competing in International Markets 174 8 Corporate Strategy 210 9 Ethics, Corporate Social Responsibility, Environmental

Sustainability, and Strategy 254

Section D: Executing the Strategy

10 Building an Organization Capable of Good Strategy Execution 286 11 Managing Internal Operations 316 12 Corporate Culture and Leadership 342

PART 2 Cases in Crafting and Executing Strategy

Section A: Crafting Strategy in Single-Business Companies

1 Mystic Monk Coffee C-2 2 BillCutterz.com: Business Model, Strategy, and the Challenges

of Exponential Growth C-6

3 Whole Foods Market in 2014: Vision, Core Values, and Strategy C-11 4 Papa John’s International, Inc.: Its Strategy in the Pizza Restaurant

Industry C-40

5 Under Armour’s Strategy in 2014: Potent Enough to Win Market Share from Nike and Adidas? C-50

6 Lululemon Athletica, lnc. in 2014: Can the Company Get Back on Track? C-73

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BRIEF CONTENTS xxxv

7 Lagunitas Brewing Company, Inc.—2013 C-91 8 Cooper Tire & Rubber Company in 2014: Competing in a Highly

Competitive Market for Replacement Tires C-101

9 Panera Bread Company in 2014: Can a Slowdown in the Company’s Growth Be Avoided? C-121

10 Chipotle Mexican Grill in 2014: Will Its Strategy Become the Model for Reinventing the Fast Food Industry? C-140

11 Sirius XM Satellite Radio Inc. in 2014: On Track to Succeed after a Near-Death Experience? C-158

12 Sony Music Entertainment and the Evolution of the Music Industry C-178 13 Vera Bradley in 2014: Will the Company’s Strategy Reverse Its

Downward Trend? C-188

14 J.Crew In 2014: Will Its Turnaround Strategy Improve Its Competitiveness? C-200

15 The United Methodist Church: Challenges to Its Ministerial Mission in 2014 C-209

16 Nucor Corporation in 2014: Combating Low-Cost Foreign Imports and Depressed Market Demand for Steel Products C-216

17 Tesla Motors’ Strategy to Revolutionize the Global Automotive Industry C-245

18 Tata Motors in 2014: Its Multibrand Approach to Competing in the Global Automobile Industry C-274

19 Deere & Company in 2014: Its International Strategy in the Agricultural, Construction, and Forestry Equipment Industry C-285

20 Wal-Mart in Africa C-295

Section B: Crafting Strategy in Diversified Companies

21 PepsiCo’s Diversification Strategy in 2014 C-306 22 The Walt Disney Company: Its Diversification Strategy in 2014 C-319

Section C: Implementing and Executing Strategy

23 Robin Hood C-335 24 Dilemma at Devil’s Den C-337 25 Southwest Airlines in 2014: Culture, Values, and Operating

Practices C-340

26 Nordstrom: Focusing on a Culture of Service C-376 27 Employee Training & Development at Ritz-Carlton: Fostering an

Exceptional Customer Service Culture C-390

28 Amazon’s Big Data Strategy C-403

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xxxvi BRIEF CONTENTS

Section D: Strategy, Ethics, and Social Responsibility

29 NCAA Athletics: Are Its Amateurism and Financial Assistance Policies Ethical? C-414

30 TOMS Shoes: A Dedication to Social Responsibility 423 31 Samsung’s Environmental Responsibility: Striking the Right Note for

Corporate Survival 432

GUIDE TO CASE ANALYSIS CA-1

PHOTO CREDITS PC-1

INDEXES COMPANY I-1 NAME I-17 SUBJECT I-24

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CONTENTS

PART 1 Concepts and Techniques for Crafting and Executing Strategy 1

Section A: Introduction and Overview

1 What Is Strategy and Why Is It Important? 2 WHAT DO WE MEAN BY STRATEGY? 3

Strategy Is about Competing Differently 4 Strategy and the Quest for Competitive Advantage 4 Why a Company’s Strategy Evolves over Time 8 A Company’s Strategy Is Partly Proactive and Partly Reactive 8

A COMPANY’S STRATEGY AND ITS BUSINESS MODEL 9 WHAT MAKES A STRATEGY A WINNER? 12 WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS 12

Good Strategy 1 Good Strategy Execution 5 Good Management 13

THE ROAD AHEAD 13

ILLUSTRATION CAPSULE 1.1 Starbucks’s Strategy in the Coffeehouse Market 6

1.2 Pandora, Sirius XM, and Over-the-Air Broadcast Radio: Three Contrasting Business Models 11

2 Charting a Company’s Direction: Its Vision, Mission, Objectives, and Strategy 18 WHAT DOES THE STRATEGY-MAKING, STRATEGY-EXECUTING PROCESS ENTAIL? 19 STAGE 1: DEVELOPING A STRATEGIC VISION, MISSION STATEMENT, AND SET OF CORE VALUES 20

Developing a Strategic Vision 21 Communicating the Strategic Vision 21 Developing a Company Mission Statement 24 Linking the Vision and Mission with Company Values 25

STAGE 2: SETTING OBJECTIVES 27 The Imperative of Setting Stretch Objectives 27 What Kinds of Objectives to Set 27 The Need for a Balanced Approach to Objective Setting 28 Setting Objectives for Every Organizational Level 30

STAGE 3: CRAFTING A STRATEGY 30 Strategy Making Involves Managers at All Organizational Levels 30 A Company’s Strategy-Making Hierarchy 32 Uniting the Strategy-Making Hierarchy 34 A Strategic Vision 1 Mission 1 Objectives 1 Strategy 5 A Strategic Plan 34

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STAGE 4: EXECUTING THE STRATEGY 35 STAGE 5: EVALUATING PERFORMANCE AND INITIATING CORRECTIVE ADJUSTMENTS 36 CORPORATE GOVERNANCE: THE ROLE OF THE BOARD OF DIRECTORS IN THE STRATEGY-CRAFTING, STRATEGY-EXECUTING PROCESS 36

ILLUSTRATION CAPSULES 2.1 Examples of Strategic Visions—How Well Do They Measure Up? 23

2.2 Patagonia, Inc.: A Values-Driven Company 26

2.3 Examples of Company Objectives 29

2.4 Corporate Governance Failures at Fannie Mae and Freddie Mac 39

Section B: Core Concepts and Analytical Tools

3 Evaluating a Company’s External Environment 44 THE STRATEGICALLY RELEVANT FACTORS IN THE COMPANY’S MACRO-ENVIRONMENT 45 ASSESSING THE COMPANY’S INDUSTRY AND COMPETITIVE ENVIRONMENT 47 THE FIVE FORCES FRAMEWORK 48

Competitive Pressures Created by the Rivalry among Competing Sellers 50 The Choice of Competitive Weapons 52 Competitive Pressures Associated with the Threat of New Entrants 52 Competitive Pressures from the Sellers of Substitute Products 56 Competitive Pressures Stemming from Supplier Bargaining Power 57 Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity 60 Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? 62 Matching Company Strategy to Competitive Conditions 63

COMPLEMENTORS AND THE VALUE NET 63 INDUSTRY DYNAMICS AND THE FORCES DRIVING CHANGE 64

Identifying the Forces Driving Industry Change 65 Assessing the Impact of the Forces Driving Industry Change 66 Adjusting the Strategy to Prepare for the Impacts of Driving Forces 67

STRATEGIC GROUP ANALYSIS 67 Using Strategic Group Maps to Assess the Market Positions of Key Competitors 68 The Value of Strategic Group Maps 69

COMPETITOR ANALYSIS 70 KEY SUCCESS FACTORS 72 THE INDUSTRY OUTLOOK FOR PROFITABILITY 73

ILLUSTRATION CAPSULES 3.1 Comparative Market Positions of Producers in the U.S. Beer Industry:

A Strategic Group Map Example 69

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CONTENTS xxxix

4 Evaluating a Company’s Resources, Capabilities, and Competitiveness 78 QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING? 79 QUESTION 2: WHAT ARE THE COMPANY’S MOST IMPORTANT RESOURCES AND CAPABILITIES, AND WILL THEY GIVE THE COMPANY A LASTING COMPETITIVE ADVANTAGE OVER RIVAL COMPANIES? 83

Identifying the Company’s Resources and Capabilities 84 Assessing the Competitive Power of a Company’s Resources and Capabilities 87

QUESTION 3: WHAT ARE THE COMPANY’S STRENGTHS AND WEAKNESSES IN RELATION TO THE MARKET OPPORTUNITIES AND EXTERNAL THREATS? 89

Identifying a Company’s Internal Strengths 90 Identifying Company Weaknesses and Competitive Deficiencies 91 Identifying a Company’s Market Opportunities 91 Identifying the Threats to a Company’s Future Profitability 93 What Do the SWOT Listings Reveal? 93

QUESTION 4: HOW DO A COMPANY’S VALUE CHAIN ACTIVITIES IMPACT ITS COST STRUCTURE AND CUSTOMER VALUE PROPOSITION? 94

The Concept of a Company Value Chain 95 The Value Chain System 98 Benchmarking: A Tool for Assessing Whether the Costs and Effectiveness of a Company’s Value Chain Activities Are in Line 99 Strategic Options for Remedying a Cost or Value Disadvantage 100 Improving Internally Performed Value Chain Activities 102 Translating Proficient Performance of Value Chain Activities into Competitive Advantage 103

QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS? 104