Strategic management by frank t rothaermel pdf

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FOURTH EDITION

Strategic Management

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Frank T. Rothaermel Georgia Institute of Technology

FOURTH EDITION

Strategic Management

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STRATEGIC MANAGEMENT, FOURTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw- Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2017, 2015, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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Bound: ISBN 978-1-259-92762-1 (student edition) MHID 1-259-92762-8 (student edition) ISBN 978-1-260-14192-4 (instructor edition) MHID 1-260-14192-6 (instructor edition)

Looseleaf: ISBN 978-1-260-14186-3 MHID 1-260-14186-1

Product Developers: Lai T. Moy Executive Marketing Manager: Debbie Clare Content Project Managers: Mary E. Powers (Core), Keri Johnson (Assessment) Buyer: Susan K. Culbertson Design: Matt Diamond Content Licensing Specialists: Brianna Kirschbaum Cover Image: (leadership concept on white background): ©ISerg/iStock/Getty Images RF; (globe): ©sankai/iStock/Getty Images RF Compositor: SPi Global

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Names: Rothaermel, Frank T., author. Title: Strategic management: concepts / Frank T. Rothaermel, Georgia Institute of Technology. Description: Fourth Edition. | Dubuque: McGraw-Hill Education, 2018. | Revised edition of the author’s Strategic management, [2017] Identifiers: LCCN 2017049706 | ISBN 9781259927621 (paperback) Subjects: LCSH: Strategic planning. | Management. | BISAC: BUSINESS & ECONOMICS / Management. Classification: LCC HD30.28 .R6646 2018 | DDC 658.4/012—dc23 LC record available at https://lccn.loc.gov/2017049706

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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DEDICATION

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

—FRANK T. ROTHAERMEL

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vi

PART ONE / ANALYSIS 2

CHAPTER 1 What Is Strategy? 4

CHAPTER 2 Strategic Leadership: Managing the Strategy Process 30

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

CHAPTER 4 Internal Analysis: Resources, Capabilities, and Core Competencies 106

CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models 144

PART TWO / FORMULATION 180

CHAPTER 6 Business Strategy: Differentiation, Cost Leadership, and Blue Oceans 182

CHAPTER 7 Business Strategy: Innovation, Entrepreneurship, and Platforms 218

CHAPTER 8 Corporate Strategy: Vertical Integration and Diversification 264

CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers, and Acquisitions 308

CHAPTER 10 Global Strategy: Competing Around the World 338

PART THREE / IMPLEMENTATION 376

CHAPTER 11 Organizational Design: Structure, Culture, and Control 378

CHAPTER 12 Corporate Governance and Business Ethics 418

PART FOUR / MINICASES 447

HOW TO CONDUCT A CASE ANALYSIS 528

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

CONTENTS IN BRIEF

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MINICASES /

1 Michael Phelps: The Role of Strategy in Olympics and Business 448

2 PepsiCo’s Indra Nooyi: Performance with Purpose 450 3 Yahoo: From Internet Darling to Fire Sale 453 4 How the Strategy Process Killed Innovation at

Microsoft 456

5 Apple: The iPhone Turns 10, so What’s Next? 459 6 Nike’s Core Competency: The Risky Business of

Creating Heroes 463

7 Dynamic Capabilities at IBM 466 8 Starbucks after Schultz: How to Sustain a Competitive

Advantage? 470

9 Business Model Innovation: How Dollar Shave Club Disrupted Gillette 474

10 Competing on Business Models: Google vs. Microsoft 476

11 Can Amazon Trim the Fat at Whole Foods? 481 12 LEGO’s Turnaround: Brick by Brick 484 13 Cirque du Soleil: Searching for a New Blue Ocean 488 14 Wikipedia: Disrupting the Encyclopedia Business 491 15 Disney: Building Billion-Dollar Franchises 494 16 Hollywood Goes Global 498 17 Samsung Electronics: Burned by Success? 503 18 Does GM’s Future Lie in China? 509 19 Flipkart vs. Amazon in India: Who’s Winning? 512 20 Alibaba—China’s Ecommerce Giant: Challenging

Amazon? 516

21 HP’s Boardroom Drama and Divorce 520 22 UBS: A Pattern of Ethics Scandals 524

FULL-LENGTH CASES /

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

Uber Technologies*

Starbucks Corporation*

Netflix, Inc.*

Walmart*

The Walt Disney Company*

Tesla, Inc. >>

Apple Inc. >>

Amazon.com, Inc. >>

Best Buy Co., Inc. >>

Facebook, Inc. >>

McDonald’s Corporation >>

Alphabet’s Google >>

Delta Air Lines, Inc. >>

UPS in India >>

The Movie Exhibition Industry >>+ Space X* + Kickstarter: Using Crowdfunding to Launch a New Board Game + Better World Books and the Triple Bottom Line

General Electric after GE Capital

IBM at the Crossroads

Merck & Co., Inc.

Grok: Action Intelligence for Fast Data

Make or Break at RIM: Launching BlackBerry 10

MINICASES & FULL-LENGTH CASES

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

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CHAPTERCASES /

1 Tesla’s Secret Strategy 5 2 Sheryl Sandberg: Leaning in at Facebook 31 3 Airbnb: Disrupting the Hotel Industry 65 4 Dr. Dre’s Core Competency: Coolness Factor 107 5 The Quest for Competitive Advantage: Apple vs.

Microsoft 145 6 JetBlue Airways: Finding a New Blue Ocean? 183 7 Netflix: Disrupting the TV Industry 219 8 Amazon.com: To Infinity and Beyond 265 9 Little Lyft Gets Big Alliance Partners 309 10 Sweden’s IKEA: The World’s Most Profitable

Retailer 339 11 Zappos: Of Happiness and Holacracy 379 12 Uber: Most Ethically Challenged Tech

Company? 419

STRATEGY HIGHLIGHTS /

1.1 Teach for America: How Wendy Kopp Inspires Future Leaders 12

1.2 Merck: Reconfirming Its Core Values 18 2.1 Starbucks CEO: “It’s Not What We Do” 44 2.2 BP “Grossly Negligent” in Gulf of Mexico

Disaster 55 3.1 BlackBerry’s Bust 71 3.2 The Five Forces in the Airline Industry 75 4.1 Applying VRIO: The Rise and Fall of Groupon 119 4.2 When Will P&G Play to Win Again? 125 5.1 Interface: The World’s First Sustainable

Company 165 5.2 Threadless: Leveraging Crowdsourcing to Design

Cool T-Shirts 166 6.1 Dr. Shetty: “The Henry Ford of Heart

Surgery” 200 6.2 How JCPenney Sailed Deeper into the Red

Ocean 208 7.1 Standards Battle: Which Automotive Technology

Will Win? 230 7.2 GE’s Innovation Mantra: Disrupt Yourself! 248 8.1 Is Coke Becoming a Monster? 276 8.2 The Tata Group: Integration at the Corporate

Level 289 9.1 How Tesla Used Alliances Strategically 315 9.2 Kraft’s Specialty: Hostile Takeovers 326 10.1 The Gulf Airlines Are Landing in the

United States 347 10.2 Walmart Retreats from Germany, and Lidl Invades

the United States 351 11.1 W.L. Gore & Associates: Informality and

Innovation 386 11.2 Sony vs. Apple: Whatever Happened to Sony? 400 12.1 GE’s Board of Directors 430 12.2 Why the Mild Response to Goldman Sachs

and Securities Fraud? 435

CHAPTERCASES & STRATEGY HIGHLIGHTS

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

CHAPTERCASE 1 Tesla’s Secret Strategy 5

1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage 6

What Is Competitive Advantage? 8 1.2 Vision, Mission, and Values 11

Vision 11 Mission 13 Values 17

1.3 The AFI Strategy Framework 19 1.4 Implications for Strategic Leaders 20

CHAPTERCASE 1 / Consider This... 21

CHAPTER 2 STRATEGIC LEADERSHIP: MANAGING THE STRATEGY PROCESS 30

CHAPTERCASE 2 Sheryl Sandberg: Leaning in at Facebook 31

2.1 Strategic Leadership 32 What Do Strategic Leaders Do? 33 How Do You Become a Strategic Leader? 33 The Strategy Process Across Levels: Corporate, Business, and Functional Managers 36

2.2 The Strategic Management Process 38 Top-Down Strategic Planning 38 Scenario Planning 39 Strategy as Planned Emergence: Top-Down and Bottom-Up 41

2.3 Stakeholders and Competitive Advantage 47 Stakeholder Strategy 48 Stakeholder Impact Analysis 50

2.4 Implications for Strategic Leaders 55

CHAPTERCASE 2 / Consider This... 56

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

CHAPTERCASE 3 Airbnb: Disrupting the Hotel Industry 65

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

3.2 Industry Structure and Firm Strategy: The Five Forces Model 73

Industry vs. Firm Effects In Determining Firm Performance 73 Competition In the Five Forces Model 74 The Threat of Entry 76 The Power of Suppliers 79 The Power of Buyers 80 The Threat of Substitutes 82 Rivalry Among Existing Competitors 83 A Sixth Force: The Strategic Role of Complements 88

3.3 Changes over Time: Entry Choices and Industry Dynamics 90

Entry Choices 90 Industry Dynamics 92

3.4 Performance Differences within the Same Industry: Strategic Groups 93

The Strategic Group Model 93 Mobility Barriers 95

3.5 Implications for Strategic Leaders 96

CHAPTERCASE 3 / Consider This... 97

CHAPTER 4 INTERNAL ANALYSIS: RESOURCES, CAPABILITIES, AND CORE COMPETENCIES 106

CHAPTERCASE 4 Dr. Dre’s Core Competency: Coolness Factor 107

CONTENTS

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4.1 Core Competencies 110 4.2 The Resource-Based View 113

Two Critical Assumptions 114 The Vrio Framework 115 Isolating Mechanisms: How to Sustain A Competitive Advantage 120

4.3 The Dynamic Capabilities Perspective 124 4.4 The Value Chain and Strategic Activity Systems 128

The Value Chain 128 Strategic Activity Systems 130

4.5 Implications for Strategic Leaders 133 Using Swot Analysis to Generate Insights From External and Internal Analysis 134

CHAPTERCASE 4 / Consider This... 135

CHAPTER 5 COMPETITIVE ADVANTAGE, FIRM PERFORMANCE, AND BUSINESS MODELS 144

CHAPTERCASE 5 The Quest for Competitive Advantage: Apple vs. Microsoft 145

5.1 Competitive Advantage and Firm Performance 146 Accounting Profitability 146 Shareholder Value Creation 153 Economic Value Creation 155 The Balanced Scorecard 161 The Triple Bottom Line 164

5.2 Business Models: Putting Strategy into Action 165 The Why, What, Who, and How of Business Models Framework 167 Popular Business Models 168 Dynamic Nature of Business Models 170

5.3 Implications for Strategic Leaders 171

CHAPTERCASE 5 / Consider This... 172

PART TWO / FORMULATION 180 CHAPTER 6 BUSINESS STRATEGY: DIFFERENTIATION, COST LEADERSHIP, AND BLUE OCEANS 182

CHAPTERCASE 6 JetBlue Airways: Finding a New Blue Ocean? 183

6.1 Business-Level Strategy: How to Compete for Advantage 185

Strategic Position 186 Generic Business Strategies 186

6.2 Differentiation Strategy: Understanding Value Drivers 188

Product Features 191 Customer Service 191 Complements 191

6.3 Cost-Leadership Strategy: Understanding Cost Drivers 192

Cost of Input Factors 194 Economies of Scale 194 Learning Curve 196 Experience Curve 199

6.4 Business-Level Strategy and the Five Forces: Benefits and Risks 201

Differentiation Strategy: Benefits and Risks 201 Cost-Leadership Strategy: Benefits and Risks 203

6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership 204

Value Innovation 205 Blue Ocean Strategy Gone Bad: “Stuck In the Middle” 207

6.6 Implications for Strategic Leaders 210

CHAPTERCASE 6 / Consider This... 211

CHAPTER 7 BUSINESS STRATEGY: INNOVATION, ENTREPRENEURSHIP, AND PLATFORMS 218

CHAPTERCASE 7 Netflix: Disrupting the TV Industry 219

7.1 Competition Driven by Innovation 221 The Innovation Process 222

7.2 Strategic and Social Entrepreneurship 225 7.3 Innovation and the Industry Life Cycle 227

Introduction Stage 228 Growth Stage 230 Shakeout Stage 233 Maturity Stage 234 Decline Stage 234 Crossing the Chasm 235

7.4 Types of Innovation 242 Incremental vs. Radical Innovation 243 Architectural vs. Disruptive Innovation 245

7.5 Platform Strategy 249 The Platform vs. Pipeline Business Models 249 The Platform Ecosystem 250

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7.6 Implications for Strategic Leaders 254

CHAPTERCASE 7 / Consider This... 254

CHAPTER 8 CORPORATE STRATEGY: VERTICAL INTEGRATION AND DIVERSIFICATION 264

CHAPTERCASE 8 Amazon.com: To Infinity and Beyond 265

8.1 What Is Corporate Strategy? 268 Why Firms Need to Grow 268 Three Dimensions of Corporate Strategy 269

8.2 The Boundaries of the Firm 271 Firms vs. Markets: Make or Buy? 272 Alternatives on the Make-or-Buy Continuum 274

8.3 Vertical Integration along the Industry Value Chain 278

Types of Vertical Integration 279 Benefits and Risks of Vertical Integration 281 When Does Vertical Integration Make Sense? 283 Alternatives to Vertical Integration 284

8.4 Corporate Diversification: Expanding Beyond a Single Market 285

Types of Corporate Diversification 287 Leveraging Core Competencies for Corporate Diversification 291 Corporate Diversification and Firm Performance 293

8.5 Implications for Strategic Leaders 297

CHAPTERCASE 8 / Consider This... 298

CHAPTER 9 CORPORATE STRATEGY: STRATEGIC ALLIANCES, MERGERS, AND ACQUISITIONS 308

CHAPTERCASE 9 Little Lyft Gets Big Alliance Partners 309

9.1 How Firms Achieve Growth 310 The Build-Borrow-Buy Framework 310

9.2 Strategic Alliances 313 Why Do Firms Enter Strategic Alliances? 314 Governing Strategic Alliances 317 Alliance Management Capability 320

9.3 Mergers and Acquisitions 323 Why Do Firms Merge With Competitors? 323 Why Do Firms Acquire Other Firms? 325 M&A and Competitive Advantage 327

9.4 Implications for Strategic Leaders 329

CHAPTERCASE 9 / Consider This... 330

CHAPTER 10 GLOBAL STRATEGY: COMPETING AROUND THE WORLD 338

CHAPTERCASE 10 Sweden’s IKEA: The World’s Most Profitable Retailer 339

10.1 What Is Globalization? 342 Stages of Globalization 343 State of Globalization 344

10.2 Going Global: Why? 346 Advantages of Going Global 346 Disadvantages of Going Global 350

10.3 Going Global: Where and How? 353 Where In the World to Compete? The Cage Distance Framework 353 How Do MNES Enter Foreign Markets? 357

10.4 Cost Reductions vs. Local Responsiveness: The Integration-Responsiveness Framework 358

International Strategy 359 Multidomestic Strategy 360 Global-Standardization Strategy 360 Transnational Strategy 361

10.5 National Competitive Advantage: World Leadership in Specific Industries 362

Porter’s Diamond Framework 364 10.6 Implications for Strategic Leaders 366

CHAPTERCASE 10 / Consider This... 367

PART THREE / IMPLEMENTATION 376 CHAPTER 11 ORGANIZATIONAL DESIGN: STRUCTURE, CULTURE, AND CONTROL 378

CHAPTERCASE 11 Zappos: Of Happiness and Holacracy 379

11.1 Organizational Design and Competitive Advantage 381

Organizational Inertia: The Failure of Established Firms 382 Organizational Structure 384 Mechanistic vs. Organic Organizations 385

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11.2 Strategy and Structure 387 Simple Structure 387 Functional Structure 388 Multidivisional Structure 390 Matrix Structure 394

11.3 Organizing for Innovation 398 11.4 Organizational Culture: Values, Norms, and Artifacts 401

Where Do Organizational Cultures Come From? 403 How Does Organizational Culture Change? 404 Organizational Culture and Competitive Advantage 405

11.5 Strategic Control-and-Reward Systems 407 Input Controls 408 Output Controls 408

11.6 Implications for Strategic Leaders 409

CHAPTERCASE 11 / Consider This... 410

CHAPTER 12 CORPORATE GOVERNANCE AND BUSINESS ETHICS 418

CHAPTERCASE 12 Uber: Most Ethically Challenged Tech Company? 419

12.1 The Shared Value Creation Framework 421 Public Stock Companies and Shareholder Capitalism 421 Creating Shared Value 423

12.2 Corporate Governance 425 Agency Theory 426 The Board of Directors 428 Other Governance Mechanisms 430

12.3 Strategy and Business Ethics 433 Bad Apples vs. Bad Barrels 434

12.4 Implications for Strategic Leaders 437

CHAPTERCASE 12 / Consider This... 438

PART FOUR / MINICASES 447

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

Company Index 539 Name Index 545 Subject Index 547

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Frank T. Rothaermel Georgia Institute of Technology

FRANK T. ROTHAERMEL (PH.D.) is a Professor of Strategy & Innovation, holds the Russell and Nancy McDonough Chair in the Scheller College of Business at the Georgia Institute of Technology (GT), and is an Alfred P. Sloan Industry Stud- ies Fellow. He received a National Science Foundation (NSF) CAREER award, which “is a Foundation-wide activity that offers the National Science Founda- tion’s most prestigious awards in support of . . . those teacher-scholars who most effectively integrate research and education” (NSF CAREER Award description).

Frank’s research interests lie in the areas of strategy, innovation, and entre- preneurship. Frank has published over 30 articles in leading academic journals such as the Strategic Management Journal, Organization Science, Academy of Management Journal, Academy of Management Review, and elsewhere. Based on having published papers in the top 1 percent based on citations, Thomson Reuters identified Frank as one of the “world’s most influential scientific minds.” He is listed among the top-100 scholars based on impact over more than a decade in both economics and business. Bloomberg Businessweek named Frank one of Georgia Tech’s Prominent Faculty in its national survey of business schools. The Kauffman Foundation views Frank as one of the world’s 75 thought leaders in entrepreneurship and innovation.

Frank has received several recognitions for his research, including the Sloan Industry Studies Best Paper Award, the Academy of Management Newman Award, the Strategic Management Society Conference Best Paper Prize, the DRUID Conference Best Paper Award, the Israel Strategy Conference Best Paper Prize, and is the inaugural recipient of the Byars Faculty Excellence Award. Frank currently serves (or served) on the editorial boards of the Strategic Man- agement Journal, Organization Science, Academy of Management Journal, Academy of Manage- ment Review, and Strategic Organization.

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

Frank has a wide range of executive education experience, including teaching in programs at GE Management Development Institute (Crotonville, NY), Georgia Institute of Technology, George- town University, ICN Business School (France), Politecnico di Milano (Italy), St. Gallen University (Switzerland), and the University of Washington. He received numerous teaching awards for excel- lence in the classroom including the GT-wide Georgia Power Professor of Excellence award.

When launched in 2012, Frank’s Strategic Management text received the McGraw-Hill 1st Edition of the Year Award in Business & Economics. His Strategic Management text has been translated into Mandarin, Korean, and Greek. Several of his case studies are Most Popular among the cases distributed by Harvard Business Publishing.

Frank held visiting professorships at the EBS University of Business and Law (Germany), Singapore Management University (Tommie Goh Professorship), and the University of St. Gallen (Switzerland). He is a member of the Academy of Management and the Strategic Management Society.

Frank holds a PhD degree in strategic management from the University of Washington; an MBA from the Marriott School of Management at Brigham Young University; and is Diplom-Volkswirt (M.Sc. equivalent) in economics from the University of Duisburg-Essen, Germany. Frank completed training in the case teaching method at the Harvard Business School.

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

ABOUT THE AUTHOR

©Tony Benner

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PREFACE

The market for strategy texts can be broadly separated into two overarching categories: traditional, application-based and research-based. Traditional, application-based strategy books represent the first-generation texts with first editions published in the 1980s. The research-based strategy books represent the second-generation texts with first editions published in the 1990s. I wrote this book to address a needed new category—a third generation of strategy text that combines into one the student-accessible, application- oriented frameworks of the first-generation texts with the research-based frameworks of the second-generation texts.

The market response to this unique approach to teaching and studying strategy was overwhelmingly enthusiastic. Enthusiasm and support increased with each subsequent edi- tion. I’m truly grateful for the sustained support.

To facilitate an enjoyable and refreshing reading experience that enhances student learning and retention, I synthesize and integrate strategy frameworks, empirical research, and practical applications with current real-world examples. This approach and emphasis on real-world examples offers students a learning experience that uniquely combines rigor and relevance. As Dr. John Media of the University of Washington’s School of Medicine and life long researcher on how the mind organizes information explains:

How does one communicate meaning in such a fashion that learning is improved? A simple trick involves the liberal use of relevant real-world examples, thus peppering main learning points with meaningful experiences. . . . Numerous studies show this works. . . . The greater the number of examples . . . the more likely the students were to remember the informa- tion. It’s best to use real-world situations familiar to the learner. . . . Examples work because they take advantage of the brain’s natural predilection for pattern matching. Information is more readily processed if it can be immediately associated with information already present in the brain. We compare the two inputs, looking for similarities and differences as we encode the new information. Providing examples is the cognitive equivalent of adding more handles to the door. [The more handles one creates at the moment of learning, the more likely the information can be accessed at a later date.] Providing examples makes the information more elaborative, more complex, better encoded, and therefore better learned.*

Strategic Management brings conceptual frameworks to life via examples that cover products and services from companies with which students are familiar, such as Facebook, Google, Tesla, Starbucks, Apple, McDonald’s, Disney, Airbnb, and Uber. Liberal use of such examples aids in making strategy relevant to students’ lives and helps them internal- ize strategy concepts and frameworks. Integrating current examples with modern strategy thinking, I prepare students with the foundation they need to understand how companies gain and sustain competitive advantage. I also develop students’ skills to become success- ful leaders capable of making well-reasoned strategic decisions in a globalized and turbu- lent 21st century.

I’m pleased to introduce the new 4th edition of Strategic Management. My distinctive approach to teaching and transmitting strategy not only offers students a unique learning experience that combines theory and practice, but also provides tight linkages between concepts and cases. In this new 4th edition, I build upon the unique strengths of this prod- uct, and continue to add improvements based upon hundreds of insightful reviews and

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

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important feedback from professors, students, and working professionals. The hallmark features of this text continue to be:

■ Student engagement via practical and relevant application of strategy concepts using a holistic Analysis, Formulation, and Implementation (AFI) Strategy Framework.

■ Synthesis and integration of empirical research and practical applications combined with relevant strategy material to focus on “What is important?” for the student and “Why is it important?”

■ Emphasis on diversity by featuring a wide range of strategic leaders from different backgrounds and fields, not just in business, but also in entertainment, professional sports, and so forth.

■ Coverage of an array of firms, including for-profit public (Fortune 100) companies, but also private companies (including startups) as well as non profit organizations. All of them need a good strategy!

■ Global perspective, with a focus on competing around the world, featuring many lead- ing companies from Asia, Europe, and Latin America, as well as the United States. I was fortunate to study, live, and work across the globe, and I attempt to bring this cosmopolitan perspective to bear in this text.

■ Direct personal applications of strategy concepts to careers and lives to help internal- ize the content (including the popular myStrategy modules at the end of each chapter).

■ Industry-leading digital delivery option (Create), adaptive learning system (Smart- Book), and online assignment and assessment system (Connect).

■ Standalone module on How to Conduct a Case Analysis. ■ High-quality Cases, well integrated with text chapters and standardized, high-quality

teaching notes; there are two types of cases that come with this text: ■ 12 ChapterCases begin and end each chapter, framing the chapter topic

and content. ■ 22 MiniCases (Part 4 of the book), all based on original research, provide

dynamic opportunities for students to apply strategy concepts by assigning them as add-ons to chapters, either as individual assignments or as group work, or by using them for class discussion.

I have taken great pride in authoring all 12 ChapterCases, Strategy Highlights (2 per chapter, for a total of 24), and 22 MiniCases. This additional touch allows quality control and ensures that chapter content and cases use one voice and are closely interconnected. Both types of case materials come with sets of questions to stimulate class discussion or provide guidance for written assignments. The instructor resources offer sample answers that apply chapter content to the cases.

In addition to these in-text cases, 23 full-length Cases, with 20 of them (that is almost 90 percent!) authored or co-authored by me specifically to accompany this textbook, are available through McGraw-Hill’s custom-publishing Create program (www.McGrawHill- Create.com/Rothaermel). Full-length cases NEW to the 4th edition are:

∙ Uber ∙ Netflix ∙ Starbucks ∙ Disney ∙ Walmart ∙ SpaceX

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xvi PREFACE

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Popular cases about Apple, Amazon, Facebook, McDonald’s, Tesla, and Best Buy among several others are significantly updated and revised. Robust and structurally updated case teaching notes are also available and accessible through Create; financial data for these cases may be accessed from the Instructor Resource Center in the Connect Library.

What’s New in the 4th Edition? I have revised and updated the 4th edition in the following ways, many of which were inspired by conversations and feedback from the many users and reviewers of the prior editions.

OVERVIEW OF MAJOR CHANGES IN 4E: ■ New A-head section on “Changes over Time: Entry Choices and Industry Dynamics”

in Chapter 3. ■ New A-head section on “The Value Chain and Strategic Activity Systems” in Chapter 4. ■ New A-head section “Platform Strategy” in Chapter 7. ■ New A-head section “Organizing for Innovation” in Chapter 11 (closed and open

innovation). ■ All new or updated and revised ChapterCases (including: Tesla, Sheryl Sandberg at

Facebook, Airbnb, Uber vs. Lyft, IKEA, and Zappos). ■ All new or updated and revised StrategyHighlights (two per chapter). ■ New or fully updated and revised MiniCases (four new, 18 revised and updated). ■ Fully updated and revised full-length cases, including most popular cases such as

Apple, McDonald’s, Best Buy, Amazon, Facebook, Delta Air Lines, Alphabet’s Google, etc.

In detail:

CHAPTER 1 ■ New ChapterCase: “Tesla’s Secret Strategy.” ■ New Strategy Highlight: “Teach for America: How Wendy Kopp Inspires Future

Leaders.” ■ Improved chapter flow through moving the updated section on “Vision, Mission, and

Values” into Chapter 1 (from Chapter 2).

CHAPTER 2 ■ New ChapterCase: “Sheryl Sandberg: Leaning in at Facebook.” ■ Improved chapter flow through moving the updated section on “Stakeholder Strategy”

into Chapter 2 (from Chapter 1).

CHAPTER 3 ■ New ChapterCase: “Airbnb: Disrupting the Hotel Industry.” ■ New A-head section on “Changes over Time: Entry Choices and Industry Dynamics.” ■ Improved chapter flow through moving the updated section on industry and firm

effects into Chapter 3 (from Chapter 1).

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CHAPTER 4 ■ New A-head section on “The Value Chain and Strategic Activity Systems.” ■ New Strategy Highlight: “When Will P&G Play to Win Again?”

CHAPTER 5 ■ New section on “the Why, What, Who, and How of Business Models Framework.” ■ Extended and updated discussion of business models to include new popular applica-

tions and examples, with a more in-depth discussion. ■ Extended and updated discussion of competitive advantage and firm performance

using the ongoing competition between Apple and Microsoft as an example through- out the chapter, including comparing the same two companies along different metrics and approaches to assess competitive advantage. Added a stronger dynamic element.

CHAPTER 6 ■ New section on the learning curve concept applied to Tesla’s manufacturing process

with real-world data and graphic illustration.

CHAPTER 7 ■ New A-head section “Platform Strategy.” ■ New Strategy Highlight “Standards Battle: Which Automotive Technology Will Win?”

CHAPTER 8 ■ Updated and revised ChapterCase featuring Amazon’s corporate strategy through ver-

tical integration and diversification. ■ Updated and expanded section on parent-subsidiary relationship, featuring GM and

(former) subsidiaries Opel and Vauxhall in Europe.

CHAPTER 9 ■ New ChapterCase: “Little Lyft Gets Big Alliance Partners,” featuring the smaller

ride-hailing competitor’s astute use of strategic alliances with strong partners such as GM and Alphabet’s Waymo to compete against Uber.

■ New Strategy Highlight “How Tesla Used Alliances Strategically”.

CHAPTER 10 ■ New section on “Globalization 3.1: Retrenchment?” ■ Updated and revised ChapterCase: “Sweden‘s IKEA: The World’s Most Profitable

Retailer,” highlighting IKEA’s strategy on competing in both developed and emerging economies across the world.

■ New Exhibit 10.4 juxtaposing: “Advantages and Disadvantages of International Expansion”.

■ Updated and revised Strategy Highlight: “Walmart Retreats from Germany, and Lidl Invades the United States,” highlighting how disruptors of the German grocery indus- try (Aldi and Lidl) are challenging Walmart on its home turf.

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CHAPTER 11 ■ New A-head Section “Organizing for Innovation” (closed and open innovation). ■ New Strategy Highlight: “Sony vs. Apple: Whatever Happened to Sony?” ■ New Exhibit 11.11 juxtaposing: “Advantages and Disadvantages of Different Organi-

zational Structures”.

CHAPTER 12 ■ Updated and revised ChapterCase: “Uber: Most Ethically Challenged Tech Company?”

including co-founder and long-time CEO Travis Kalanick’s forced resignation in the wake of several ethics scandals.

■ Updated and revised Strategy Highlight: “Why the Mild Response to Goldman Sachs and Securities Fraud?”

MINICASES ■ Added four-new: Yahoo, IBM, Dollar Shave Club, and Disney. ■ Updated and revised the most popular 18 MiniCases from the third edition. ■ Stronger focus on non-U.S. firms, especially on global competitors from Asia and

Europe. ■ Stronger focus on U.S. companies competing in China and India, facing strong

domestic competitors.

FULL-LENGTH CASES ■ All cases—including the new and revised cases plus all cases from the previous edi-

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

■ Added five new, author-written full-length Cases: Netflix, Starbucks, Uber, Walmart, and Disney.

■ Added one new, full-length Case: SpaceX by David R. King ■ Revised and updated the most popular cases including: Amazon, Apple, Alphabet’s

Google, Best Buy, Facebook, McDonald’s, Tesla, Delta Air Lines, and UPS in India, among others.

■ Updated and revised the popular case “The Movie Exhibition Industry” by Steve Gove. ■ Case Strategic Financial Analyses (SFAs) include financial data in e-format for analysis.

CONNECT Connect, McGraw-Hill’s online assignment and assessment system, offers a wealth of content for both students and instructors. Assignable activities include the following:

■ SmartBook, one of the first fully adaptive and individualized study tools, provides students with a personalized learning experience, giving them the opportunity to prac- tice and challenge their understanding of core strategy concepts. SmartBook has been extremely well received by strategy instructors across the globe. It allows the instruc- tor to set up all assignments prior to the semester, to have them auto-released on pre- set dates, and to receive auto-graded progress reports for each student and the entire class. Students love SmartBook because they learn at their own pace, and it helps

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PREFACE xix

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them to study more efficiently by delivering an interactive reading experience through adaptive highlighting and review.

■ Interactive Application Exercises (such as Whiteboard Animation video cases, MiniCase case analyses, click-and-drag activities, and new case exercises for Ama- zon, Apple, Tesla, McDonald’s, Best Buy, and Facebook) that require students to apply key concepts and so to close the knowing and doing gap, while providing instant feedback for the student and progress tracking for the instructor.

■ Running case, an activity that begins with a review of a specific company and its applied strategy using appropriate tools (e.g., PESTEL, Porter’s five forces, VRIO, SWOT, and others). The analysis progresses from a broad perspective to the appro- priate company-level perspective—i.e., from global to industry to strategic group to company and within a firm. Students will develop a complete strategy analysis for the company and consider several scenarios for improving the company’s competitive advantage. The scenarios will include a financial analysis and justification and ulti- mately provide a specific recommendation. Connect provide a running case example for Hewlett-Packard (now HP Inc. and Hewlett Packard Enterprise).

■ Resources for financial analysis (such as strategic financial ratios, templates for strategic financial analysis, and financial ratio reviews) that provide students with the tools they need to compare performance among firms and to refresh or extend their working knowledge of major financial measures in a strategic framework.

CREATE ■ CREATE, McGraw-Hill’s custom-publishing tool, is where you access the full-length

cases (and Teaching Notes) that accompany Strategic Management (http://www. mcgrawhillcreate.com/Rothaermel). You can create customized course packages in print and/or digital form at a competitive price point.

■ Through CREATE, you will be able to select from 20 author-written cases and 3 instructor-written cases that go specifically with the new 4th edition, as well as cases from Harvard, Ivey Darden, NACRA, and much more! You can: Assemble your own course, selecting the chapters, cases (multiple different formats), and readings that will work best for you. Or choose from several ready-to-go, author-recommended complete course solutions, which include chapters, cases, and readings, pre-loaded in CREATE. Among the pre-loaded solutions, you’ll find options for undergrad, MBA, accelerated, and other strategy courses.

INSTRUCTOR RESOURCES Located in the Connect Library under the Instructor’s Resources tab, instructors will find tested and effective tools to support teaching:

■ The updated and revised Teacher’s Resource Manual (TRM) includes thorough coverage of each chapter, as well as guidance for integrating Connect—all in a single resource. Included in this newly combined TRM, which retains favorite features of the previous edition’s Instructor’s Manual, is the appropriate level of theory, framework, recent application or company examples, teaching tips, PowerPoint references, critical discussion topics, and answers to end-of-chapter exercises.

■ The PowerPoint (PPT) slides, available in an accessible version for individuals with visual impairment, provide comprehensive lecture notes, video links, and company

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examples not found in the textbook. Options include instructor media-enhanced slides as well as notes with outside application examples.

■ The Test Bank includes 100–150 questions per chapter, in a range of formats and with a greater-than-usual number of comprehension, critical-thinking, and application (or scenario-based) questions. It’s tagged by learning objectives, Bloom’s Taxonomy levels, and AACSB compliance requirements. Many questions are new, and especially written for the new 4th edition.

■ The Video Guide includes video links that relate to concepts from chapters. The video links include sources such as Big Think, Stanford University’s Entrepreneurship Corner, The McKinsey Quarterly, ABC, BBC, CBS, CNN, ITN/Reuters, MSNBC, NBC, PBS, and YouTube.

Any list of acknowledgments will almost always be incomplete, but I would like to thank some special people without whom this text would not have been possible. First and fore- most, my wife Kelleyn, and our children: Harris, Winston, Roman, Adelaide, Avery, and Ivy. Over the last few years, I have worked longer hours than when I was a graduate student to conduct the research and writing necessary for this text and accompanying case studies and other materials. I sincerely appreciate the sacrifice this has meant for my family.

The Georgia Institute of Technology provided a conducive, intellectual environment and superb institutional support to make this project possible. I thank Russell and Nancy McDonough for generously funding the endowed chair that I am honored to hold. I’m grateful for Dean Maryam Alavi and Senior Associate Dean Peter Thompson for providing the exceptional leadership that allows faculty to fully focus on research, teaching, and ser- vice. I have been at Georgia Tech for 15 years, and could not have had better colleagues— all of whom are not only great scholars but also fine individuals whom I’m fortunate to have as friends: Marco Ceccagnoli, Annamaria Conti, Jonathan Giuliano, Stuart Graham, Matt Higgins, David Ku, John McIntyre, Alex Oettl, Pian Shu, Eunhee Sohn, and Laurina Zhang. We have a terrific group of current and former PhD students, many of whom had a positive influence on this project, including Shanti Agung (Drexel University), Drew Hess (Washington and Lee University), Kostas Grigoriou (McKinsey), Congshan Li, Jaiswal Mayank (Rider University), Nicola McCarthy, German Retana (INCAE Business School, Costa Rica), Maria Roche, Briana Sell Stenard (Mercer University), Jose Urbina, Carrie Yang (University of Chicago), and Wei Zhang (Singapore Management University).

I was also fortunate to work with McGraw-Hill, and the best editorial and market- ing team in the industry: Michael Ablassmeir (director), Susan Gouijnstook (man- aging director), Lai T. Moy (senior product developer), Debbie Clare (executive marketing manager), Mary E. Powers and Keri Johnson (content project managers), Matt Diamond (senior designer), and Haley Burmeister (editorial coordinator). Bill Teague, content development editor, worked tirelessly and carefully on the fourth edition manu- script. I’m also indebted to Ann Torbert and Karyn Lu for invaluable editorial guidance on prior editions.

ACKNOWLEDGMENTS

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ACKNOWLEDGMENTS xxi

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I’m more than grateful to the contributions of great colleagues on various resources that accompany this new edition of Strategic Management:

■ Heidi Bertels (College of Staten Island, CUNY) on the Test Bank and SmartBook ■ John Burr (Purdue University) on the Video Guide ■ Melissa Francisco (University of Central Florida) on the accessible PowerPoint

Presentations

■ Anne Fuller (California State University, Sacramento), on Connect, Teacher’s Resource Manual, and End-of-Chapter Material

■ David R. King (Florida State University) on select Full-length Cases and Full-length Case Teaching Notes

■ Chandran Mylvaganam (Northwood University) on the MiniCase Teaching Notes Shawn Riley (Kutztown University) for his expert reviews on the Case Exercises, Case SFAs, and MiniCase Case Analyses

I’d also like to thank the students at Georgia Tech, in the undergraduate and full-time day MBA, and the evening and executive MBA programs, as well as the executive MBA students from the ICN Business School in Nancy, France, on whom the materials were beta-tested. Their feedback helped fine-tune the content and delivery.

Last, but certainly not least, I wish to thank the reviewers and focus group attendees who shared their expertise with us, from the very beginning when we developed the pro- spectus to the final teaching and learning package that you hold in your hands. The review- ers have given us the greatest gift of all—the gift of time! These very special people are listed starting on page xxii.

Frank T. Rothaermel Georgia Institute of Technology

Web: ftrStrategy.com Email: frank@ftrStrategy.com

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This book has gone through McGraw-Hill Education’s thorough development process. Over the course of several years, the project has benefited from numerous developmental focus groups and symposiums, from hundreds of reviews from reviewers across the coun- try, and from beta-testing of the first-edition manuscript as well as market reviews of the of subsequent editions on a variety of campuses. The author and McGraw-Hill wish to thank the following people who shared their insights, constructive criticisms, and valuable suggestions throughout the development of this project. Your contributions have improved this product.

Joshua R. Aaron East Carolina University

Moses Acquaah University of North Carolina, Greensboro

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REVIEWERS AND SYMPOSIUM ATTENDEES

THANK YOU . . .

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THANK YOU . . . xxiii

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©McGraw-Hill Education

McGraw-Hill Connect® is a highly reliable, easy-to- use homework and learning management solution that utilizes learning science and award-winning adaptive tools to improve student results.

73% of instructors who use Connect

require it; instructor satisfaction increases

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Quality Content and Learning Resources

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SmartBook helps students study more efficiently by delivering an interactive reading experience through adaptive highlighting and review.

Homework and Adaptive Learning

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More students earn As and Bs when

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Connect Insight® generates easy-to-read reports on individual students, the class as a whole, and on specific assignments.

The Connect Insight dashboard delivers data on performance, study behavior, and effort. Instructors can quickly identify students who struggle and focus on material that the class has yet to master.

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Connect integrates with your LMS to provide single sign-on and automatic syncing of grades. Integration with Blackboard®, D2L®, and Canvas also provides automatic syncing of the course calendar and assignment-level linking.

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PART

Analysis

CHAPTER 1 What Is Strategy?

CHAPTER 2 Strategic Leadership: Managing the Strategy Process

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

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

CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models

1

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Part 1: Analysis

Part 1: Analysis

Part 2: Formulation

1. What Is Strategy?

3. External Analysis: Industry Structure, Competitive Forces, and Strategic Groups 4. Internal Analysis: Resources, Capabilities, and Core Competencies

5. Competitive Advantage, Firm Performance, and Business Models

6. Business Strategy: Differentiation, Cost Leadership, and Blue Oceans 7. Business Strategy: Innovation, Entrepreneurship, and Platforms

8. Corporate Strategy: Vertical Integration and Diversification 9. Corporate Strategy: Strategic Alliances, Mergers and Acquisitions

10. Global Strategy: Competing Around the World

11. Organizational Design: Structure, Culture, and Control

Getting Started

External and Internal Analysis

Formulation: Business Strategy

Formulation: Corporate Strategy

Implementation Gaining &

Sustaining Competitive Advantage

12. Corporate Governance and Business Ethics

2. Strategic Leadership: Managing the Strategy Process

Part 3: Implementation

Part 2: Formulation

The AFI Strategy Framework

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CHAPTER What Is Strategy?

Chapter Outline

1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage What Is Competitive Advantage?

1.2 Vision, Mission, and Values Vision Mission Values

1.3 The AFI Strategy Framework

1.4 Implications for Strategic Leaders

Learning Objectives

LO 1-1 Explain the role of strategy in a firm’s quest for competitive advantage.

LO 1-2 Define competitive advantage, sustainable competitive advantage, competitive disad- vantage, and competitive parity.

LO 1-3 Describe the roles of vision, mission, and values in a firm’s strategy.

LO 1-4 Evaluate the strategic implications of product-oriented and customer-oriented vision statements.

LO 1-5 Justify why anchoring a firm in ethical core values is essential for long-term success.

LO 1-6 Explain the AFI strategy framework.

1

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Tesla’s Secret Strategy

IN 2017, TESLA INC.— an American manufacturer of all-electric cars—boasted a market capitalization1 of over $60 billion, an appreciation of more than 1,400 percent over its initial public offering price in 2010. How can a California startup achieve a market valuation that exceeds that of GM, the largest car manufacturer in the world, making some 10 million vehicles a year? The answer: Tesla’s Secret Strategy. In a blog entry on Tesla’s website in the summer of 2006, Elon Musk, Tesla’s co-founder and CEO, explained the startup’s master plan:2

1. Build sports car.

2. Use that money to build an affordable car.

3. Use that money to build an even more affordable car.

4. While doing above, also provide zero- emission electric power generation options.

5. Don’t tell anyone.

Let’s see if Tesla stuck to its strategy. In 2008, Tesla introduced its first car: the Roadster, a $110,000 sports coupe with faster accel- eration than a Porsche or a Ferrari. Tesla’s first vehicle served as a prototype to demonstrate that electric vehicles can be more than mere golf carts. Tesla thus successfully com- pleted Step 1 of the master plan.

In Step 2, after selling some 2,500 Roadsters, Tesla discontinued its production in 2012 to focus on its next car: the Model S, a four-door family sedan, with a base price of $73,500 before tax credits. The line appeals to a somewhat larger market and thus allows for larger production runs to drive down unit costs. The Model S received an outstanding market reception. It was awarded not only the 2013 Motor Trend Car of the Year, but also

received the highest score of any car ever tested by Con- sumer Reports (99/100). Tesla manufactures the Model S in the Fremont, California, factory that it purchased from Toyota. By the end of 2016, it had sold some 125,000 of the Model S worldwide.

Hoping for an even broader customer appeal, Tesla also introduced the Model X, a crossover between an SUV and a family van with futuristic falcon-wing doors for convenient access to second- and third-row seating. The $100,000 starting sticker price of the Model X is quite steep, however; thus limiting mass-market appeal. Techni- cal difficulties with its innovative doors delayed its launch until the fall of 2015.

Tesla has now reached Step 3 of its master plan. In 2017, Tesla delivered the company’s newest car: the

Model 3, an all- electric compact luxury sedan, with a starting price of $35,000. Tesla received some 375,000 preorders within three months of unveiling its model. Many of the want-to-be Tesla owners stood in line overnight, eagerly awaiting the open- ing of the Tesla stores to put down a $1,000 deposit to secure a spot on the waiting list for the Model 3, a car they had never even seen, let alone taken for a

test drive. By the time Tesla delivered the first 30 cars of its new Model 3 (to Tesla employees for quality test- ing and appreciation of their hard work), the California car maker had received over 500,000 preorders. This cus- tomer enthusiasm amounted to $500 million in interest- free loans for Tesla. The Model 3 was slated for delivery by late 2017. Tesla hoped to sell 500,000 total vehicles by the end of 2018. To accomplish this ambitious goal, Musk also promised that Tesla would increase its annual production from 50,000 in 2015 to 1 million vehicles a year by 2020.

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Tesla’s Model X with falcon wing doors. ©Bloomberg/Getty Images

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

WHY IS TESLA SO SUCCESSFUL? In contrast, the big-three U.S. automakers— Ford, GM, and Chrysler—struggled during the first decade of the 21st century, with

both GM and Chrysler filing for bankruptcy protection. If once-great firms can fail, why is any company successful? What enables some firms

to gain and then sustain their competitive advantage over time? How can managers influ- ence firm performance? These are the big questions that define strategic management. Answering these questions requires integrating the knowledge you’ve obtained in your studies of various business disciplines to understand what leads to superior performance, and how you can help your organization achieve it.

Strategic management is the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Mastery of stra- tegic management enables you to view an organization such as a firm or a nonprofit outfit in its entirety. It also enables you to think like a general manager to help position your organization for superior performance. The AFI strategy framework embodies this view of strategic management. It will guide our exploration of strategic management through the course of your study.