The global strategy that emphasizes a "think-global, act-global" strategic theme focuses on

tho99691_fm_i-xlii.indd i 12/09/16 04:50 PM

Crafting and Executing Strategy THE QUEST FOR COMPETITIVE ADVANTAGE:

Concepts

Final PDF to printer

tho99691_fm_i-xlii.indd ii 12/09/16 04:50 PM

Final PDF to printer

tho99691_fm_i-xlii.indd iii 12/09/16 04:50 PM

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 | TWENTY-FIRST EDITION

Crafting and Executing Strategy

Final PDF to printer

tho99691_fm_i-xlii.indd iv 12/15/16 08:14 PM

CRAFTING & EXECUTING STRATEGY: THE QUEST FOR COMPETITIVE ADVANTAGE, CONCEPTS, TWENTY-FIRST EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2016, 2014, and 2012. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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

This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 17

ISBN 978-1-259-89969-0 MHID 1-259-89969-1

Chief Product Officer, SVP Products & Markets: G. Scott Virkler

Vice President, General Manager, Products & Markets: Michael Ryan

Vice President, Content Design & Delivery: Betsy Whalen

Managing Director: Susan Gouijnstock Director: Michael Ablassmeir Director, Product Development: Meghan

Campbell Lead Product Developer: Kelly Delso Senior Product Developer: Lai T. Moy Freelance Product Developer: Michelle

Houston Director of Marketing: Robin Lucas Senior Market Development Manager: Nicole

Young

Marketing Managers: Necco McKinley, Debbie Clare

Lead Digital Product Analyst: Sankha Basu Director, Content Design & Delivery: Terri

Schiesl Executive Program Manager: Mary Conzachi Content Project Managers: Mary E. Powers,

Keri Johnson Buyer: Sandy Ludovissy Design: David Hash Content Licensing Specialists: Ann Marie

Jannette, Melisa Seegmiller Cover Image: ©one AND only/Shutterstock.com Compositor: SPi Global Printer: LSC Communications

All credits appearing on page are considered to be an extension of the copyright page.

Library of Congress Control Number: 2016962650

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

Final PDF to printer

tho99691_fm_i-xlii.indd v 12/09/16 04:50 PM

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

Final PDF to printer

vi

tho99691_fm_i-xlii.indd vi 12/09/16 04:50 PM

Arthur 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 textbooks and six computer-based simulation exercises. His textbooks and strategy simulations 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 56 years have two daughters, two grandchildren, and a Yorkshire Terrier.

Margaret 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 Management Society Best Paper Award recognizing the deep influence of her work on the field of Strate- gic 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 Business 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 previous faculty appointments at Northwestern University’s Kellogg Graduate School of Management and at the University of Minnesota’s Carlson School of Management.

ABOUT THE AUTHORS

Final PDF to printer

vii

tho99691_fm_i-xlii.indd vii 12/09/16 04:50 PM

John 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 sponsored 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.

Dr. 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 Holding (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 49 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.

Final PDF to printer

viii

tho99691_fm_i-xlii.indd viii 12/09/16 04:50 PM

PREFACE

By 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 over 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 updating the content, sharpening its presentation, and providing enlightening new illustrations and examples.

The distinguishing mark of the 21st 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.

While this 21st 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 17 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.

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 competi- tion-based strategy simulation has the strong appeal of providing class members 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 executing 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, are closely linked to the content of each chapter in the text. The Exercises for Simulation Participants, found at the end of each chapter, provide clear guidance to class members in applying the concepts and analyti- cal 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 objec- tives, in line with AACSB requirements, the 21st edition includes a set of Assurance of Learning Exercises at the end of each chapter that link to the specific learning objec- tives appearing at the beginning of each chapter and highlighted throughout the text. An important instructional feature of the 21st edition is its more closely integrated linkage of selected chapter-end Assurance of Learning Exercises to the publisher’s web-based assignment and assessment platform called Connect™. Your students will be able to use the online Connect™ supplement to complete two of the Assurance

Final PDF to printer

ix

tho99691_fm_i-xlii.indd ix 12/09/16 04:50 PM

of Learning Exercises appearing at the end of each of the 12 chapters, and complete chapter-end quizzes. 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 Con- nect™ exercises, 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 compliance 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 21ST EDITION Seven 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 per- spective and the resource-based perspective are prominently and comprehensively integrated into our coverage of crafting both single-business and multibusiness strate- gies. By highlighting the relationship between a firm’s resources and capabilities to the activities it conducts along its value chain, we show explicitly how these two per- spectives 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 competitive 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, ecosystems, strategic alliances, licensing, joint ven- tures, and other types of collaborative relationships are featured prominently in a

Final PDF to printer

x PREFACE

tho99691_fm_i-xlii.indd x 12/09/16 04:50 PM

ORGANIZATION, CONTENT, AND FEATURES OF THE 21ST-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 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. A key feature of this chapter is a depiction of how the Value-Price-Cost Framework can be used to frame this discussion.We

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. The attention we give to international strategies, in all their dimensions, make this textbook an indispensable aid to understanding strategy formulation and execu- tion in an increasingly connected, global world. Our treatment of this topic as one of the most critical elements of the scope of a company’s activities brings home to students the connection between the topic of international strategy with other topics concerning firm scope, such as multibusiness (or corporate) strategy, out- sourcing, insourcing, and vertical integration.

4. 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.

5. The text is now more tightly linked to the publisher’s trailblazing web-based assignment and assessment platform called Connect™. This will enable professors to gauge class members’ prowess in accurately completing selected chapter-end exercises, and chapter-end quizzes.

6. Two cutting-edge and widely used strategy simulations—The Business Strategy Game and GLO-BUS—are optional companions to the 21st edition. These give you an unmatched capability to employ a text-case-simulation model of course delivery.

Final PDF to printer

PREFACE xi

tho99691_fm_i-xlii.indd xi 12/09/16 04:50 PM

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 performance 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 strat- egies devised by different managers at different levels in the organizational hier- archy. The chapter concludes with a section on the role of the board of directors in the strategy-making, strategy-executing process and examines the conditions that led to recent high-profile corporate governance failures. A new illustration capsule on Volkswagen’s emissions scandal brings this section to life.

∙ The next two chapters introduce students to the two most fundamental perspectives on strategy making: the positioning view, exemplified by Michael Porter’s “five forces model of competition”; and the resource-based view. Chapter 3 provides 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 demon- strates the importance of tailoring strategy to fit the circumstances of a company’s industry and competitive environment. The chapter includes a discussion of the value net framework, which is useful for conducting analysis of how cooperative 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 competitive assets. It offers a simple framework for identifying a company’s resources and capa- bilities and explains how the VRIN framework can be used to determine whether they can provide the company with a sustainable competitive advantage over its com- petitors. Other topics covered in this chapter include dynamic capabilities, SWOT analysis, value chain analysis, benchmarking, and competitive strength assessments, thus enabling a solid appraisal of a company’s cost position and customer value proposition vis-á-vis its rivals. An important feature of this chapter is a table show- ing how key financial and operating ratios are calculated and how to interpret them. Students will find this table handy in doing the number crunching needed to evalu- ate whether a company’s strategy is delivering good financial performance.

∙ 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 provider, broad 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,

Final PDF to printer

xii PREFACE

tho99691_fm_i-xlii.indd xii 12/09/16 04:50 PM

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 company’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 Dia- mond of National Competitive Advantage, profit sanctuaries, and the choice between multidomestic, global, and transnational strategies. This chapter explains the impe- tus 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 dis- cussion 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 diversi- fied company’s business lineup, how to decide whether it has a good diversifica- tion strategy, and what strategic options are available 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 con- cerns the themes of ethical standards in business, approaches to ensuring consis- tent ethical standards for companies with international operations, corporate social responsibility, and environmental sustainability. The contents of this chapter are sure to give students some things to ponder, rouse lively discussion, and 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) staff- ing the organization with people capable of executing the strategy well, (2) building the organizational capabilities needed for successful strategy execution, and (3) cre- ating an organizational structure supportive of the strategy execution process.

Final PDF to printer

PREFACE xiii

tho99691_fm_i-xlii.indd xiii 12/09/16 04:50 PM

∙ 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 strategy 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 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 21st edition (and other texts in the field).

∙ The Business Strategy Game is the world’s most popular strategy simulation, hav- ing been used by nearly 3,000 different instructors for courses involving some 800,000 students at 1,185+ university campuses in 72 countries. It features global competition in the athletic footwear industry, a product/market setting familiar to students everywhere and one whose managerial challenges are easily grasped.

∙ GLO-BUS, a newer and somewhat simpler strategy simulation first introduced in 2004 and freshly revamped in 2016 to center on competition in two exciting product categories--wearable miniature action cameras and unmanned camera- equipped drones suitable for multiple commercial purposes, has been used by 1,685+ different instructors for courses involving over 240,000 students at 730+ university campuses in 53 countries.

Final PDF to printer

xiv PREFACE

tho99691_fm_i-xlii.indd xiv 12/09/16 04:50 PM

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 both simulations, companies compete in a global market arena, selling their products 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 company and make decisions relating to plant operations, workforce compensation, pricing 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 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 read- ing 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 market

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 and buyer appeal of its respective overall product offering vis-à-vis

Final PDF to printer

PREFACE xv

tho99691_fm_i-xlii.indd xv 12/09/16 04:50 PM

those of rival companies, the various company and industry reports detailing the out- comes of the decision round are then generated. Company 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 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 vari- ety 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 operat- ing decisions. Because they are held fully accountable 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 decisions 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 con- cepts and tools of strategic 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 com- pleted 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 excitement quicker or better than the concerted efforts on the part of class members at each deci- sion round to achieve a high industry ranking and avoid the perilous consequences 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 operat- ing 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.

Final PDF to printer

xvi PREFACE

tho99691_fm_i-xlii.indd xvi 12/09/16 04:50 PM

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 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 com- petitive 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 market 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.

Final PDF to printer

PREFACE xvii

tho99691_fm_i-xlii.indd xvii 12/09/16 04:50 PM

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 inven- tories in that region’s distribution center. Costs at the four regional distribution cen- ters 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, 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 celeb- rities (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 compet- itive advantage based on more advertising, a wider selection of models, more appeal- ing 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 In GLO-BUS, class members run companies that are in a neck-and-neck race for global market leadership in two product categories: (1) wearable video cameras smaller than a teacup that deliver stunning video quality and have powerful photo capture capa- bilities (comparable to those designed and marketed by global industry leader GoPro

Final PDF to printer

xviii PREFACE

tho99691_fm_i-xlii.indd xviii 12/09/16 04:50 PM

and numerous others) and (2) sophisticated camera-equipped copter drones that incor- porate a company designed and assembled action-capture camera and that are sold to commercial enterprises for prices in the $850 to $2,000+ range. Global market demand for action cameras grows at the rate of 6-8% annually for the first five years and 4-6% annually for the second five years. Global market demand for commercial drones grows briskly at rates averaging 20% for the first two years, then gradually slows over 8 years to a rate of 4-6%.

Companies assemble action cameras and drones of varying designs and performance capabilities at a Taiwan facility and ship finished goods directly to buyers in North America, Asia-Pacific, Europe-Africa, and Latin America. Both products are assembled usually within two weeks of being received and are then shipped to buyers no later than 2-3 days after assembly. Companies maintain no finished goods inventories and all parts and components are delivered by suppliers on a just-in-time basis (which eliminates the need to track inventories and simplifies the accounting for plant operations and costs).

Company co-managers determine the quality and performance features of the cam- eras and drones being assembled. They impact production costs by raising/lowering specifications for parts/components and expenditures for product R&D, adjusting work force compensation, spending more/less on worker training and productivity improve- ment, lengthening/shortening warranties offered (which affects warranty costs), and how cost-efficiently they manage assembly operations. They have options to manage/ control selling and certain other costs as well.

Each decision round, company co-managers make some 50 types of decisions relating to the design and performance of the company’s two products (21 decisions, 10 for cameras and 11 for drones), assembly operations and workforce compensa- tion (up to 8 decision entries for each product), pricing and marketing (7 decisions for cameras and 5 for drones), corporate social responsibility and citizenship (up to 6 decisions), and the financing of company operations (up to 8 decisions). In addition, there are 10 entries for cameras and 7 entries for drones involving assumptions about the competitive actions of rivals; these entries help company co-managers to make more accurate forecasts of their company’s unit sales (so they have a good idea of how many cameras and drones will need to be assembled each year to fill customer orders). Each time co-managers make a decision entry, an assortment of on-screen calculations instantly shows the projected effects on unit sales, revenues, market shares, total profit, earnings per share, ROE, costs, and other operating outcomes. All of these on-screen calculations help co-managers evaluate the relative merits of one decision entry versus another. Company managers can try out as many different decision combinations as they wish in stitching the separate decision entries into a cohesive whole that is pro- jected to produce good company performance.

Competition in action cameras revolves around 11 factors that determine each company’s unit sales/market share:

1. How each company’s average wholesale price to retailers compares against the all-company average wholesale prices being charged in each geographic region.

2. How each company’s camera performance and quality compares against industry- wide camera performance/quality.

3. How the number of week-long sales promotion campaigns a company has in each region compares against the regional average number of weekly promotions.

4. How the size of each company’s discounts off the regular wholesale prices during sales promotion campaigns compares against the regional average promotional discount.

Final PDF to printer

PREFACE xix

tho99691_fm_i-xlii.indd xix 12/09/16 04:50 PM

5. How each company’s annual advertising expenditures compare against regional average advertising expenditures.

6. How the number of models in each company’s camera line compares against the industry-wide average number of models.

7. The number of retailers stocking and merchandising a company’s brand in each region.

8. Annual expenditures to support the merchandising efforts of retailers stocking a company’s brand in each region.

9. The amount by which a company’s expenditures for ongoing improvement and updating of its company’s website in a region is above/below the all-company regional average expenditure.

10. How the length of each company’s camera warranties compare against the war- ranty periods of rival companies.

11. How well a company’s brand image/reputation compares against the brand images/ reputations of rival companies.

Competition among rival makers of commercial copter drones is more narrowly focused on just 9 sales-determining factors:

1. How a company’s average retail price for drones at the company’s website in each region compares against the all-company regional average website price.

2. How each company’s drone performance and quality compares against the all- company average drone performance/quality.

3. How the number of models in each company’s drone line compares against the industry-wide average number of models.

4. How each company’s annual expenditures to recruit/support 3rd-party online elec- tronics retailers in merchandising its brand of drones in each region compares against the regional average.

5. The amount by which a company’s price discount to third-party online retailers is above/below the regional average discounted price.

6. How well a company’s expenditures for search engine advertising in a region compares against the regional average.

7. How well a company’s expenditures for ongoing improvement and updating of its website in a region compares against the regional average.

8. How the length of each company’s drone warranties in a region compares against the regional average warranty period.

9. How well a company’s brand image/reputation compares against the brand images/ reputations of rival companies.

Each company typically seeks to enhance its performance and build competitive advantage via its own custom-tailored competitive strategy based on more attractive pricing, greater advertising, a wider selection of models, more appealing performance/ quality, longer warranties, a better image/reputation, and so on. The greater the differ- ences in the overall competitiveness of the product offerings of rival companies, the bigger the differences in their resulting sales volumes and market shares. Conversely, the smaller the overall competitive differences in the product offerings of rival com- panies, the smaller the differences in sales volumes and market shares. This algorith- mic approach is what makes GLO-BUS a “competition-based” strategy simulation and accounts for why the sales and market share outcomes for each decision round are

Final PDF to printer

xx PREFACE

tho99691_fm_i-xlii.indd xx 12/09/16 04:50 PM

always unique to the particular strategies and decision combinations employed by the competing companies.

As with BSG, all the various generic competitive strategy options—low-cost leader- ship, differentiation, best-cost provider, focused low-cost, and focused differentiation— are viable choices for pursuing competitive advantage and good company performance. A company can have a strategy aimed at being the clear market leader in either action cameras or drones or both. It can focus its competitive efforts on one or two or three geo- graphic regions or strive to build strong market positions in all four geographic regions. It can pursue essentially the same strategy worldwide or craft customized strategies for the Europe-Africa, Asia-Pacific, Latin America, and North America markets. Just as with The Business Strategy Game, most any well-conceived, well-executed competitive approach is capable of succeeding, 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 com- petitive 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 GLO-BUS occurs at www.glo-bus.com.

Special Note: The time required of company co-managers to complete each decision round in GLO-BUS is typically about 15- to 30-minutes less than for The Business Strategy Game because

(a) there are only 8 market segments (versus 12 in BSG), (b) co-managers have only one assembly site to operate (versus potentially as many as

4 plants in BSG, one in each geographic region), and (c) newly-assembled cameras and drones are shipped directly to buyers, eliminating

the need to manage finished goods inventories and operate distribution centers.

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 con- trols 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 cause-effect relationships, (b) the information on each page of the Industry Reports,

Final PDF to printer

PREFACE xxi

tho99691_fm_i-xlii.indd xxi 12/09/16 04:50 PM

and (c) the numbers presented in the Company Reports. The Video Tutorials 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 head- set 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 run- ning 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 con- nect 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 valu- able for students enrolled in online and distance-learning courses where meeting face-to-face is impractical or time-consuming. Likewise, the instructors of online and distance-learning courses will appreciate having the capability to join the online meet- ings of particular company teams when their advice or assistance is requested.

Final PDF to printer

xxii PREFACE

tho99691_fm_i-xlii.indd xxii 12/09/16 04:50 PM

∙ 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 (usually 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 pro- ficiency, business know-how, and decision-making skill and can also be used in evaluating 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.

Final PDF to printer

PREFACE xxiii

tho99691_fm_i-xlii.indd xxiii 12/09/16 04:50 PM

RESOURCES AND SUPPORT MATERIALS FOR THE 21ST 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 chap- ter-end synopses, along with the core concept definitions and margin notes scattered 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 are useful for helping students prepare for class discussion and to gauge their understanding of the material. The Exercises for Simulation Participants are designed expressly for use in class which incorporate the use of a simulation. These exercises explicitly connect the chapter con- tent to the simulation company the students are running. Even if they are not assigned by the instructor, they can provide helpful practice for students as a study aid.

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.

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 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 International.

LearnSmart and SmartBook™ 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

Final PDF to printer

xxiv PREFACE

tho99691_fm_i-xlii.indd xxiv 12/09/16 04:50 PM

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 Assurance of Learning Aids Each chapter begins with a set of Learning Objectives, which are tied directly to the material in the text meant to address these objectives with helpful signposts. At the conclusion of each chapter, there is a set of Assurance of Learning Exercises that can be used as the basis for class discussion, oral presentation assignments, short written reports, and substitutes for case assignments. Similarly, there is a set of Exercises for Simulation Participants that 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 simula- tion 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.

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 test bank for all 12 chapters.

Test Bank The test bank contains over 900 multiple-choice questions and short- answer/essay questions. It has been tagged with AACSB and Bloom’s Taxonomy crite- ria. All of the test bank questions are also accessible via TestGen. TestGen is a complete, state-of-the-art test generator and editing application software that allows instructors to quickly and easily select test items from McGraw Hill’s TestGen testbank content and to organize, edit, and customize the questions and answers to rapidly generate paper tests. Questions can include stylized text, symbols, graphics, and equations that are inserted directly into questions using built-in mathematical templates. TestGen’s random

Final PDF to printer

PREFACE xxv

tho99691_fm_i-xlii.indd xxv 12/09/16 04:50 PM

generator provides the option to display different text or calculated number values each time questions are used. With both quick-and-simple test creation and flexible and robust editing tools, TestGen is a test generator system for today’s educators.

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

CREATE™ is McGraw-Hill’s custom-publishing program where you can access full-length readings and cases that accompany Crafting and Executing Strategy: The Quest for a Competitive Advantage (http://create.mheducation.com/thompson). Through Create™, you will be able to select from 30 readings that go specifically with this textbook. These include cases and readings from Harvard, MIT, and much more! You can assemble your own course and select the chapters, cases, and read- ings that work best for you. Also, you can choose from several ready-to-go, author- recommended complete course solutions. Among the pre-loaded solutions, you’ll find options for undergrad, MBA, accelerated, and other strategy courses.

The Business Strategy Game and GLO-BUS Online Simula- tions Using one of the two companion simulations is a powerful and constructive 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 prepare 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.

Final PDF to printer

xxvi PREFACE

tho99691_fm_i-xlii.indd xxvi 12/09/16 04:50 PM

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 acquain- tances, 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 intel- lectually 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, Ste- phen 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, Ste- phen 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 various chapters. We’d also like to thank the following students of the Tuck School of Business for their assistance with the revisions: Sarah Boole, Katie Coster, Jacob Crandall, Robin Daley, Mike Gallagher, Danny Garver, Dennis L. Huggins, Peter Jacobson, Heather Levy, Ken Martin, Brian R. McKenzie, Kiera O’Brien, Sara Paccamonti, Byron Pey- ster, Jared Pomerance, Jeremy Reich, Christopher C. Sukenik, Frances Thunder, David

Final PDF to printer

PREFACE xxvii

tho99691_fm_i-xlii.indd xxvii 12/09/16 04:50 PM

Washer, Fan Zhou, and Nicholas J. Ziemba. And we’d like to acknowledge the help of Dartmouth students Mathieu A. Bertrand, Meghan L. Cooney, Margo Cox, Harold W. Greenstone, Maria Hart, Amy Li, Sara Peterson, Pallavi Saboo, Artie Santry, Isaac Takushi, 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

Final PDF to printer

Final PDF to printer

tho99691_fm_i-xlii.indd xxix 12/09/16 04:50 PM

The Business Strategy Game or GLO-BUS Simulation Exercises

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.

xxix

Final PDF to printer

xxx

tho99691_fm_i-xlii.indd xxx 12/09/16 04:50 PM

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 46 4 Evaluating a Company’s Resources, Capabilities, and

Competitiveness 82

Section C: Crafting a Strategy

5 The Five Generic Competitive Strategies 120 6 Strengthening a Company’s Competitive Position: Strategic Moves,

Timing, and Scope of Operations 148

7 Strategies for Competing in International Markets 178 8 Corporate Strategy: Diversification and the Multibusiness

Company 214

9 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy 258

Section D: Executing the Strategy

10 Building an Organization Capable of Good Strategy Execution: People, Capabilities, and Structure 290

11 Managing Internal Operations: Actions That Promote Good Strategy Execution 320

12 Corporate Culture and Leadership: Keys to Good Strategy Execution 346

INDEXES COMPANY I-1 NAME I-7 SUBJECT I-11

BRIEF CONTENTS

Final PDF to printer

xxxi

tho99691_fm_i-xlii.indd xxxi 12/09/16 04:50 PM

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 13

Good Strategy + Good Strategy Execution = Good Management 13 THE ROAD AHEAD 14

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

1.2 Pandora, SiriusXM, 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 26 The Imperative of Setting Stretch Objectives 26 What Kinds of Objectives to Set 28 The Need for a Balanced Approach to Objective Setting 28 Setting Objectives for Every Organizational Level 30

Final PDF to printer

xxxii CONTENTS

tho99691_fm_i-xlii.indd xxxii 12/09/16 04:50 PM

STAGE 3: CRAFTING A STRATEGY 31 Strategy Making Involves Managers at All Organizational Levels 31 A Company’s Strategy-Making Hierarchy 32 Uniting the Strategy-Making Hierarchy 35 A Strategic Vision + Mission + Objectives + Strategy = A Strategic Plan 35

STAGE 4: EXECUTING THE STRATEGY 36 STAGE 5: EVALUATING PERFORMANCE AND INITIATING CORRECTIVE ADJUSTMENTS 37 CORPORATE GOVERNANCE: THE ROLE OF THE BOARD OF DIRECTORS IN THE STRATEGY-CRAFTING, STRATEGY-EXECUTING PROCESS 37

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

2.2 Patagonia, Inc.: A Values-Driven Company 27

2.3 Examples of Company Objectives 30

2.4 Corporate Governance Failures at Volkswagen 40

Section B: Core Concepts and Analytical Tools

3 Evaluating a Company’s External Environment 46 THE STRATEGICALLY RELEVANT FACTORS IN THE COMPANY’S MACRO-ENVIRONMENT 47 ASSESSING THE COMPANY’S INDUSTRY AND COMPETITIVE ENVIRONMENT 49 THE FIVE FORCES FRAMEWORK 50

Competitive Pressures Created by the Rivalry among Competing Sellers 52 The Choice of Competitive Weapons 54 Competitive Pressures Associated with the Threat of New Entrants 54 Competitive Pressures from the Sellers of Substitute Products 58 Competitive Pressures Stemming from Supplier Bargaining Power 60 Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity 62 Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? 65 Matching Company Strategy to Competitive Conditions 65

COMPLEMENTORS AND THE VALUE NET 66 INDUSTRY DYNAMICS AND THE FORCES DRIVING CHANGE 67

Identifying the Forces Driving Industry Change 67 Assessing the Impact of the Forces Driving Industry Change 70 Adjusting the Strategy to Prepare for the Impacts of Driving Forces 70

STRATEGIC GROUP ANALYSIS 71 Using Strategic Group Maps to Assess the Market Positions of Key Competitors 71 The Value of Strategic Group Maps 73

Final PDF to printer

CONTENTS xxxiii

tho99691_fm_i-xlii.indd xxxiii 12/09/16 04:50 PM

COMPETITOR ANALYSIS 74 KEY SUCCESS FACTORS 75 THE INDUSTRY OUTLOOK FOR PROFITABILITY 76

ILLUSTRATION CAPSULES 3.1 Comparative Market Positions of Selected Companies in the Casual

Dining Industry: A Strategic Group Map Example 72

4 Evaluating a Company’s Resources, Capabilities, and Competitiveness 82 QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING? 83 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? 87

Identifying the Company’s Resources and Capabilities 88 Assessing the Competitive Power of a Company’s Resources and Capabilities 91

QUESTION 3: WHAT ARE THE COMPANY’S STRENGTHS AND WEAKNESSES IN RELATION TO THE MARKET OPPORTUNITIES AND EXTERNAL THREATS? 94

Identifying a Company’s Internal Strengths 94 Identifying Company Weaknesses and Competitive Deficiencies 95 Identifying a Company’s Market Opportunities 95 Identifying the Threats to a Company’s Future Profitability 97 What Do the SWOT Listings Reveal? 97

QUESTION 4: HOW DO A COMPANY’S VALUE CHAIN ACTIVITIES IMPACT ITS COST STRUCTURE AND CUSTOMER VALUE PROPOSITION? 99

The Concept of a Company Value Chain 99 The Value Chain System 103 Benchmarking: A Tool for Assessing Whether the Costs and Effectiveness of a Company’s Value Chain Activities Are in Line 104 Strategic Options for Remedying a Cost or Value Disadvantage 105 Translating Proficient Performance of Value Chain Activities into Competitive Advantage 107

QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS? 109

Strategic Implications of Competitive Strength Assessments 111

QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION? 112

ILLUSTRATION CAPSULES 4.1 The Value Chain for Boll & Branch 102

4.2 Delivered-Cost Benchmarking in the Cement Industry 106

Final PDF to printer

xxxiv CONTENTS

tho99691_fm_i-xlii.indd xxxiv 12/09/16 04:50 PM

Section C: Crafting a Strategy

5 The Five Generic Competitive Strategies 120 TYPES OF GENERIC COMPETITIVE STRATEGIES 121 LOW-COST PROVIDER STRATEGIES 122

The Two Major Avenues for Achieving a Cost Advantage 123 The Keys to Being a Successful Low-Cost Provider 128 When a Low-Cost Provider Strategy Works Best 128 Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy 129

BROAD DIFFERENTIATION STRATEGIES 129 Managing the Value Chain to Create the Differentiating Attributes 130 Delivering Superior Value via a Broad Differentiation Strategy 132 When a Differentiation Strategy Works Best 134 Pitfalls to Avoid in Pursuing a Differentiation Strategy 135

FOCUSED (OR MARKET NICHE) STRATEGIES 136 A Focused Low-Cost Strategy 136 A Focused Differentiation Strategy 137 When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive 138 The Risks of a Focused Low-Cost or Focused Differentiation Strategy 138

BEST-COST PROVIDER STRATEGIES 140 When a Best-Cost Provider Strategy Works Best 141 The Risk of a Best-Cost Provider Strategy 141

THE CONTRASTING FEATURES OF THE FIVE GENERIC COMPETITIVE STRATEGIES: A SUMMARY 143

Successful Competitive Strategies Are Resource-Based 143

ILLUSTRATION CAPSULES 5.1 Amazon’s Path to Becoming the Low-Cost Provider in E-commerce 127

5.2 Clinícas del Azúcar’s Focused Low-Cost Strategy 137

5.3 Canada Goose’s Focused Differentiation Strategy 139

5.4 American Giant’s Best-Cost Provider Strategy 142

6 Strengthening a Company’s Competitive Position: Strategic Moves, Timing, and Scope of Operations 148 LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A COMPANY’S MARKET POSITION 149

Choosing the Basis for Competitive Attack 150 Choosing Which Rivals to Attack 152 Blue-Ocean Strategy—a Special Kind of Offensive 152

DEFENSIVE STRATEGIES—PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE 153

Blocking the Avenues Open to Challengers 154 Signaling Challengers That Retaliation Is Likely 155

Final PDF to printer

CONTENTS xxxv

tho99691_fm_i-xlii.indd xxxv 12/09/16 04:50 PM

TIMING A COMPANY’S STRATEGIC MOVES 155 The Potential for First-Mover Advantages 155 The Potential for Late-Mover Advantages or First-Mover Disadvantages 156 To Be a First Mover or Not 158

STRENGTHENING A COMPANY’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS 158 HORIZONTAL MERGER AND ACQUISITION STRATEGIES 159

Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results 161

VERTICAL INTEGRATION STRATEGIES 162 The Advantages of a Vertical Integration Strategy 163 The Disadvantages of a Vertical Integration Strategy 165 Weighing the Pros and Cons of Vertical Integration 166

OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS 167

The Risk of Outsourcing Value Chain Activities 168

STRATEGIC ALLIANCES AND PARTNERSHIPS 169 Capturing the Benefits of Strategic Alliances 171 The Drawbacks of Strategic Alliances and Partnerships 172 How to Make Strategic Alliances Work 173

ILLUSTRATION CAPSULES 6.1 Bonobos’s Blue-Ocean Strategy in the U.S. Men’s Fashion Retail Industry 154

6.2 Uber’s First-Mover Advantage in Mobile Ride-Hailing Services 157

6.3 Bristol-Myers Squibb’s “String-of-Pearls” Horizontal Acquisition Strategy 162

6.4 Kaiser Permanente’s Vertical Integration Strategy 167

7 Strategies for Competing in International Markets 178 WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS 179 WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX 181

Home-Country Industry Advantages and the Diamond Model 181 Opportunities for Location-Based Advantages 183 The Impact of Government Policies and Economic Conditions in Host Countries 184 The Risks of Adverse Exchange Rate Shifts 185 Cross-Country Differences in Demographic, Cultural, and Market Conditions 187

STRATEGIC OPTIONS FOR ENTERING INTERNATIONAL MARKETS 188 Export Strategies 188 Licensing Strategies 189 Franchising Strategies 189 Foreign Subsidiary Strategies 190 Alliance and Joint Venture Strategies 191

Final PDF to printer

xxxvi CONTENTS

tho99691_fm_i-xlii.indd xxxvi 12/09/16 04:50 PM

INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES 193 Multidomestic Strategies—a “Think-Local, Act-Local” Approach 194 Global Strategies—a “Think-Global, Act-Global” Approach 195 Transnational Strategies—a “Think-Global, Act-Local” Approach 196

INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE 199

Using Location to Build Competitive Advantage 199 Sharing and Transferring Resources and Capabilities across Borders to Build Competitive Advantage 200 Benefiting from Cross-Border Coordination 202

CROSS-BORDER STRATEGIC MOVES 202 Using Profit Sanctuaries to Wage a Strategic Offensive 202 Using Profit Sanctuaries to Defend against International Rivals 203

STRATEGIES FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES 204

Strategy Options for Competing in Developing-Country Markets 204

DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES 206

ILLUSTRATION CAPSULES 7.1 Walgreens Boots Alliance, Inc.: Entering Foreign Markets via Alliance

Followed by Merger 192

7.2 Four Seasons Hotels: Local Character, Global Service 198

7.3 How Ctrip Successfully Defended against International Rivals to Become China’s Largest Online Travel Agency 208

8 Corporate Strategy: Diversification and the Multibusiness Company 214 WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? 215 WHEN TO CONSIDER DIVERSIFYING 216 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING 217 APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP 218

Diversifying by Acquisition of an Existing Business 218 Entering a New Line of Business through Internal Development 218 Using Joint Ventures to Achieve Diversification 219 Choosing a Mode of Entry 219

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES 221 DIVERSIFICATION INTO RELATED BUSINESSES 221

Identifying Cross-Business Strategic Fit along the Value Chain 224 Strategic Fit, Economies of Scope, and Competitive Advantage 226

DIVERSIFICATION INTO UNRELATED BUSINESSES 228 Building Shareholder Value via Unrelated Diversification 229 The Path to Greater Shareholder Value through Unrelated Diversification 232

Final PDF to printer

CONTENTS xxxvii

tho99691_fm_i-xlii.indd xxxvii 12/09/16 04:50 PM

The Drawbacks of Unrelated Diversification 232 Misguided Reasons for Pursuing Unrelated Diversification 233

COMBINATION RELATED–UNRELATED DIVERSIFICATION STRATEGIES 234 EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY 235

Step 1: Evaluating Industry Attractiveness 236 Step 2: Evaluating Business Unit Competitive Strength 237 Step 3: Determining the Competitive Value of Strategic Fit in Diversified Companies 242 Step 4: Checking for Good Resource Fit 243 Step 5: Ranking Business Units and Assigning a Priority for Resource Allocation 246 Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance 247

ILLUSTRATION CAPSULES 8.1 The Kraft–Heinz Merger: Pursuing the Benefits of Cross-Business

Strategic Fit 229

8.2 Restructuring for Better Performance at Hewlett-Packard (HP) 252

9 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy 258 WHAT DO WE MEAN BY BUSINESS ETHICS? 259 WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS? 260

The School of Ethical Universalism 260 The School of Ethical Relativism 261 Ethics and Integrative Social Contracts Theory 264

HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY 265 DRIVERS OF UNETHICAL BUSINESS STRATEGIES AND BEHAVIOR 266 WHY SHOULD COMPANY STRATEGIES BE ETHICAL? 269

The Moral Case for an Ethical Strategy 269 The Business Case for Ethical Strategies 269

STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND ENVIRONMENTAL SUSTAINABILITY 272

The Concepts of Corporate Social Responsibility and Good Corporate Citizenship 272 What Do We Mean by Sustainability and Sustainable Business Practices? 278 Crafting Corporate Social Responsibility and Sustainability Strategies 279 The Moral Case for Corporate Social Responsibility and Environmentally Sustainable Business Practices 281 The Business Case for Corporate Social Responsibility and Environmentally Sustainable Business Practices 282

Final PDF to printer

xxxviii CONTENTS

tho99691_fm_i-xlii.indd xxxviii 12/09/16 04:50 PM

ILLUSTRATION CAPSULES 9.1 IKEA’s Global Supplier Standards: Maintaining Low Costs While

Fighting the Root Causes of Child Labor 263

9.2 How Novo Nordisk Puts Its Ethical Principles into Practice 270

9.3 Warby Parker: Combining Corporate Social Responsibility with Affordable Fashion 275

9.4 Unilever’s Focus on Sustainability 280

Section D: Executing the Strategy

10 Building an Organization Capable of Good Strategy Execution: People, Capabilities, and Structure 290 A FRAMEWORK FOR EXECUTING STRATEGY 292

The Principal Components of the Strategy Execution Process 292

BUILDING AN ORGANIZATION CAPABLE OF GOOD STRATEGY EXECUTION: THREE KEY ACTIONS 295 STAFFING THE ORGANIZATION 296

Putting Together a Strong Management Team 296 Recruiting, Training, and Retaining Capable Employees 297

DEVELOPING AND BUILDING CRITICAL RESOURCES AND CAPABILITIES 300

Three Approaches to Building and Strengthening Capabilities 300 The Strategic Role of Employee Training 303 Strategy Execution Capabilities and Competitive Advantage 303

MATCHING ORGANIZATIONAL STRUCTURE TO THE STRATEGY 305 Deciding Which Value Chain Activities to Perform Internally and Which to Outsource 305 Aligning the Firm’s Organizational Structure with Its Strategy 308 Determining How Much Authority to Delegate 312 Facilitating Collaboration with External Partners and Strategic Allies 315 Further Perspectives on Structuring the Work Effort 315

ILLUSTRATION CAPSULES 10.1 Management Development at Deloitte Touche Tohmatsu Limited 298

10.2 Zara’s Strategy Execution Capabilities 304

10.3 Which Value Chain Activities Does Apple Outsource and Why? 307

11 Managing Internal Operations: Actions That Promote Good Strategy Execution 320 ALLOCATING RESOURCES TO THE STRATEGY EXECUTION EFFORT 321 INSTITUTING POLICIES AND PROCEDURES THAT FACILITATE STRATEGY EXECUTION 323

Final PDF to printer

CONTENTS xxxix

tho99691_fm_i-xlii.indd xxxix 12/09/16 04:50 PM

ADOPTING BEST PRACTICES AND EMPLOYING PROCESS MANAGEMENT TOOLS 325

How the Process of Identifying and Incorporating Best Practices Works 325 Business Process Reengineering, Total Quality Management, and Six Sigma Quality Programs: Tools for Promoting Operating Excellence 326 Capturing the Benefits of Initiatives to Improve Operations 331

INSTALLING INFORMATION AND OPERATING SYSTEMS 332 Instituting Adequate Information Systems, Performance Tracking, and Controls 333

USING REWARDS AND INCENTIVES TO PROMOTE BETTER STRATEGY EXECUTION 334

Incentives and Motivational Practices That Facilitate Good Strategy Execution 335 Striking the Right Balance between Rewards and Punishment 336 Linking Rewards to Achieving the Right Outcomes 338

ILLUSTRATION CAPSULES 11.1 Charleston Area Medical Center’s Six Sigma Program 330

11.2 How the Best Companies to Work for Motivate and Reward Employees 337

11.3 Nucor Corporation: Tying Incentives Directly to Strategy Execution 340

12 Corporate Culture and Leadership: Keys to Good Strategy Execution 346 INSTILLING A CORPORATE CULTURE CONDUCIVE TO GOOD STRATEGY EXECUTION 347

Identifying the Key Features of a Company’s Corporate Culture 348 Strong versus Weak Cultures 352 Why Corporate Cultures Matter to the Strategy Execution Process 354 Healthy Cultures That Aid Good Strategy Execution 355 Unhealthy Cultures That Impede Good Strategy Execution 357 Changing a Problem Culture 359

LEADING THE STRATEGY EXECUTION PROCESS 362 Staying on Top of How Well Things Are Going 364 Mobilizing the Effort for Excellence in Strategy Execution 364 Leading the Process of Making Corrective Adjustments 366

A FINAL WORD ON LEADING THE PROCESS OF CRAFTING AND EXECUTING STRATEGY 367

ILLUSTRATION CAPSULES 12.1 Strong Guiding Principles Drive the High-Performance Culture at Epic 349

12.2 Culture Transformation at América Latina Logística 363

INDEXES COMPANY I-1 NAME I-7 SUBJECT I-11

Final PDF to printer

Final PDF to printer

tho99691_fm_i-xlii.indd xli 12/09/16 04:50 PM

Crafting and Executing Strategy THE QUEST FOR COMPETITIVE ADVANTAGE:

Concepts

Final PDF to printer

Final PDF to printer

tho32789_ch01_001-017.indd 1 10/11/16 07:45 PM

PART 1

Concepts and Techniques for Crafting and Executing Strategy

Final PDF to printer

tho32789_ch01_001-017.indd 2 10/11/16 07:45 PM

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.

© Fanatic Studio/Getty Images

Final PDF to printer

tho32789_ch01_001-017.indd 3 10/11/16 07:45 PM

Strategy means making clear-cut choices about how to compete.

Jack Welch—Former CEO of General Electric

I believe that people make their own luck by great preparation and good strategy.

Jack Canfield—Corporate trainer and entrepreneur

The underlying principles of strategy are enduring, regardless of technology or the pace of change.

Michael Porter—Professor and consultant

According to The Economist, a leading publication on business, economics, and international affairs, “In business, strategy is king. Leadership and hard work are all very well and luck is mighty useful, but it is strategy that makes or breaks a firm.”1 Luck and circumstance can explain why some companies are blessed with initial, short-lived success. But only a well-crafted, well-executed, constantly evolving strategy can explain why an elite set of companies somehow manage to rise to the top and stay there, year after year, pleasing their customers, share- holders, and other stakeholders alike in the pro- cess. Companies such as Apple, Disney, Microsoft, Alphabet (parent company of Google), Berkshire Hathaway, General Electric, and Amazon come to mind—but long-lived success is not just the prov- ince of U.S. companies. Diverse kinds of com- panies, both large and small, from many different countries have been able to sustain strong perfor- mance records, including Korea’s Samsung (in elec- tronics), the United Kingdom’s HSBC (in banking),

Dubai’s Emirates Airlines, Switzerland’s Swatch Group (in watches and luxury jewelry), China Mobile (in telecommunications), and India’s Tata Steel.

In this opening chapter, we define the concept of strategy and describe its many facets. We explain what is meant by a competitive advantage, dis- cuss the relationship between a company’s strat- egy and its business model, and introduce you to the kinds of competitive strategies that can give a company an advantage over rivals in attracting cus- tomers and earning above-average profits. We look at what sets a winning strategy apart from others and why the caliber of a company’s strategy deter- mines whether the company will enjoy a competi- tive advantage over other firms. By the end of this chapter, you will have a clear idea of why the tasks of crafting and executing strategy are core man- agement functions and why excellent execution of an excellent strategy is the most reliable recipe for turning a company into a standout performer over the long term.

A company’s strategy is the set of actions that its managers take to outperform the company’s competitors and achieve superior profitability. The objective of a well- crafted strategy is not merely temporary competitive success and profits in the short run, but rather the sort of lasting success that can support growth and secure the

WHAT DO WE MEAN BY STRATEGY?

Final PDF to printer

4 PART 1 Concepts and Techniques for Crafting and Executing Strategy

tho32789_ch01_001-017.indd 4 10/11/16 07:45 PM

Strategy is about competing differently from rivals—doing what competitors don’t do or, even better, doing what they can’t do!

LO 2

The concept of a sustainable competitive advantage.

CORE CONCEPT

A company’s strategy is the set of actions that its managers take to outperform the company’s competitors and achieve superior profitability.

LO 1

What we mean by a company’s strategy.

company’s future over the long term. Achieving this entails making a managerial commitment to a coherent array of well-considered choices about how to compete.2 These include:

∙ How to position the company in the marketplace. ∙ How to attract customers. ∙ How to compete against rivals. ∙ How to achieve the company’s performance targets. ∙ How to capitalize on opportunities to grow the business. ∙ How to respond to changing economic and market conditions.

In most industries, companies have considerable freedom in choosing the hows of strategy.3 Some companies strive to achieve lower costs than rivals, while others aim for product superiority or more personalized customer service dimensions that rivals cannot match. Some companies opt for wide product lines, while others concentrate their energies on a narrow product lineup. Some deliberately confine their operations to local or regional markets; others opt to compete nationally, internationally (several countries), or globally (all or most of the major country markets worldwide).

Strategy Is about Competing Differently Mimicking the strategies of successful industry rivals—with either copycat product offerings or maneuvers to stake out the same market position—rarely works. Rather, every company’s strategy needs to have some distinctive element that draws in customers and provides a competitive edge. Strategy, at its essence, is about competing differently— doing what rival firms don’t do or what rival firms can’t do.4 This does not mean that the key elements of a company’s strategy have to be 100 percent different, but rather that they must differ in at least some important respects. A strategy stands a better chance of succeeding when it is predicated on actions, business approaches, and competitive moves aimed at (1) appealing to buyers in ways that set a company apart from its rivals and (2) staking out a market position that is not crowded with strong competitors.

A company’s strategy provides direction and guidance, in terms of not only what the company should do but also what it should not do. Knowing what not to do can be as important as knowing what to do, strategically. At best, making the wrong strategic moves will prove a distraction and a waste of company resources. At worst, it can bring about unintended long-term consequences that put the com- pany’s very survival at risk.

Figure 1.1 illustrates the broad types of actions and approaches that often char- acterize a company’s strategy in a particular business or industry. For a more con-

crete example of the specific actions constituting a firm’s strategy, see Illustration Capsule 1.1 describing Starbucks’s strategy in the specialty coffee market.

Strategy and the Quest for Competitive Advantage The heart and soul of any strategy are the actions in the marketplace that managers are taking to gain a competitive advantage over rivals. A company achieves a competitive advantage whenever it has some type of edge over rivals in attracting buyers and cop- ing with competitive forces. There are many routes to competitive advantage, but they all involve either giving buyers what they perceive as superior value compared to the offerings of rival sellers or giving buyers the same value as others at a lower cost to the firm. Superior value can mean a good product at a lower price, a superior product that

Final PDF to printer

CHAPTER 1 What Is Strategy and Why Is It Important? 5

tho32789_ch01_001-017.indd 5 10/11/16 07:45 PM

FIGURE 1.1 Identifying a Company’s Strategy—What to Look For

Actions to strengthen competitiveness via strategic alliances and collaborative

partnerships

Actions to strengthen market standing and

competitiveness by acquiring or merging with other companies

Actions to gain sales and market share

with lower prices based on

lower costs

Actions to capture emerging market opportunities and defend against external

threats to the company’s business prospects

Actions and approaches used in managing R&D, production,

sales and marketing, finance, and other

key activities

Actions to enter new product or geographic

markets or to exit existing ones

Actions to upgrade, build, or acquire competitively important resources and

capabilities THE PATTERN

OF ACTIONS AND BUSINESS APPROACHES

THAT DEFINE A COMPANY’S

STRATEGY

Actions to strengthen the firm’s bargaining

position with suppliers, distributors, and others

Actions to gain sales and market share via more

performance features, more appealing design, better

quality or customer service, wider product selection,

or other such actions

is worth paying more for, or a best-value offering that represents an attractive combina- tion of price, features, quality, service, and other attributes. Delivering superior value or delivering value more efficiently—whatever form it takes—nearly always requires per- forming value chain activities differently than rivals and building capabilities that are not readily matched. In Illustration Capsule 1.1, it’s evident that Starbucks has gained a competitive advantage over its rivals in the coffee shop industry through its efforts to create an upscale experience for coffee drinkers by catering to individualized tastes, enhancing the atmosphere and comfort of the shops, and delivering a premium product

Final PDF to printer

6

tho32789_ch01_001-017.indd 6 10/11/16 07:45 PM

ILLUSTRATION CAPSULE 1.1

Since its founding in 1985 as a modest nine-store opera- tion in Seattle, Washington, Starbucks had become the premier roaster and retailer of specialty coffees in the world, with nearly 23,000 store locations as of Octo- ber 2015. In fiscal 2015, its annual sales were expected to exceed $19 billion—an all-time high for revenues and net earnings. The key elements of Starbucks’s strategy in the coffeehouse industry included:

• Train “baristas” to serve a wide variety of specialty cof- fee drinks that allow customers to satisfy their individual preferences in a customized way. Starbucks essentially brought specialty coffees, such as cappuccinos, lattes, and macchiatos, to the mass market in the United States, encouraging customers to personalize their coffee-drinking habits. Requests for such items as an “Iced Grande Hazelnut Macchiato with Soy Milk, and no Hazelnut Drizzle” could be served up quickly with con- sistent quality.

• Emphasize store ambience and elevation of the cus- tomer experience at Starbucks stores. Starbucks’s management viewed each store as a billboard for the company and as a contributor to building the compa- ny’s brand and image. Each detail was scrutinized to enhance the mood and ambience of the store to make sure everything signaled “best-of-class” and reflected the personality of the community and the neighbor- hood. The thesis was “everything mattered.” The com- pany went to great lengths to make sure the store fixtures, the merchandise displays, the artwork, the music, and the aromas all blended to create an inviting environment that evoked the romance of coffee and signaled the company’s passion for coffee. Free Wi-Fi drew those who needed a comfortable place to work while they had their coffee.

• Purchase and roast only top-quality coffee beans. The company purchased only the highest-quality Ara- bica beans and carefully roasted coffee to exacting standards of quality and flavor. Starbucks did not use chemicals or artificial flavors when preparing its roasted coffees.

• Foster commitment to corporate responsibility. Starbucks was protective of the environment and contributed posi- tively to the communities where Starbucks stores were located. In addition, Starbucks promoted fair trade prac- tices and paid above-market prices for coffee beans to provide its growers and suppliers with sufficient funding to sustain their operations and provide for their families.

• Expand the number of Starbucks stores domestically and internationally. Starbucks operated stores in high- traffic, high-visibility locations in the United States and abroad. The company’s ability to vary store size and for- mat made it possible to locate stores in settings such as downtown and suburban shopping areas, office buildings, and university campuses. The company also focused on making Starbucks a global brand, expanding its reach to more than 65 countries in 2015.

• Broaden and periodically refresh in-store product offer- ings. Non-coffee products by Starbucks included teas, fresh pastries and other food items, candy, juice drinks, music CDs, and coffee mugs and accessories.

• Fully exploit the growing power of the Starbucks name and brand image with out-of-store sales. Starbucks’s Consumer Packaged Goods division included domes- tic and international sales of Frappuccino, coffee ice creams, and Starbucks coffees.

Starbucks’s Strategy in the Coffeehouse Market

© Craig Warga/Bloomberg via Getty Im- ages

Sources: Company documents, 10-Ks, and information posted on Starbucks’s website.

produced under environmentally sound fair trade practices. By differentiating itself in this manner from other coffee purveyors, Starbucks has been able to charge prices for its coffee that are well above those of its rivals and far exceed the low cost of its inputs. Its expansion policies have allowed the company to make it easy for customers to find a Starbucks shop almost anywhere, further enhancing the brand and cementing customer loyalty. A creative distinctive strategy such as that used by Starbucks is a company’s

© Craig Warga/Bloomberg via Getty Images

Final PDF to printer

CHAPTER 1 What Is Strategy and Why Is It Important? 7

tho32789_ch01_001-017.indd 7 10/11/16 07:45 PM

most reliable ticket for developing a competitive advantage over its rivals. If a strategy is not distinctive, then there can be no competitive advantage, since no firm would be meeting customer needs better or operating more efficiently than any other.

If a company’s competitive edge holds promise for being sustainable (as opposed to just temporary), then so much the better for both the strategy and the company’s future profitability. What makes a competitive advantage sustainable (or durable), as opposed to temporary, are elements of the strategy that give buyers lasting rea- sons to prefer a company’s products or services over those of competitors—reasons that competitors are unable to nullify or overcome despite their best efforts. In the case of Starbucks, the company’s unparalleled name recognition, its reputation for high-quality specialty coffees served in a comfortable, inviting atmosphere, and the accessibility of the shops make it difficult for competitors to weaken or overcome Starbucks’s competitive advantage. Not only has Starbucks’s strategy provided the company with a sustainable competitive advantage, but it has made Starbucks one of the most admired companies on the planet.

Five of the most frequently used and dependable strategic approaches to setting a company apart from rivals, building strong customer loyalty, and winning a com- petitive advantage are: 1. A low-cost provider strategy—achieving a cost-based advantage over rivals.

Walmart and Southwest Airlines have earned strong market positions because of the low-cost advantages they have achieved over their rivals. Low-cost pro- vider strategies can produce a durable competitive edge when rivals find it hard to match the low-cost leader’s approach to driving costs out of the business.

2. A broad differentiation strategy—seeking to differentiate the company’s product or service from that of rivals in ways that will appeal to a broad spectrum of buyers. Successful adopters of differentiation strategies include Apple (innova- tive products), Johnson & Johnson in baby products (product reliability), LVMH (luxury and prestige), and BMW (engineering design and performance). One way to sustain this type of competitive advantage is to be sufficiently innovative to thwart the efforts of clever rivals to copy or closely imitate the product offering.

3. A focused low-cost strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs and thus being able to serve niche members at a lower price. Private-label manufacturers of food, health and beauty products, and nutritional supplements use their low-cost advantage to offer supermarket buyers lower prices than those demanded by producers of branded products.

4. A focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering buyers customized attributes that meet their specialized needs and tastes better than rivals’ products. Lulule- mon, for example, specializes in high-quality yoga clothing and the like, attract- ing a devoted set of buyers in the process. Jiffy Lube International in quick oil changes, McAfee in virus protection software, and The Weather Channel in cable TV provide some other examples of this strategy.

5. A best-cost provider strategy—giving customers more value for the money by satisfying their expectations on key quality features, performance, and/or service attributes while beating their price expectations. This approach is a hybrid strat- egy that blends elements of low-cost provider and differentiation strategies; the aim is to have lower costs than rivals while simultaneously offering better dif- ferentiating attributes. Target is an example of a company that is known for its hip product design (a reputation it built by featuring limited edition lines by designers

CORE CONCEPT

A company achieves a competitive advantage when it provides buyers with superior value compared to rival sellers or offers the same value at a lower cost to the firm. The advantage is sustainable if it persists despite the best efforts of competitors to match or surpass this advantage.

LO 3

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

Final PDF to printer

8 PART 1 Concepts and Techniques for Crafting and Executing Strategy

tho32789_ch01_001-017.indd 8 10/11/16 07:45 PM

such as Jason Wu), as well as a more appealing shopping ambience for discount store shoppers. Its dual focus on low costs as well as differentiation shows how a best-cost provider strategy can offer customers great value for the money.

Winning a sustainable competitive edge over rivals with any of the preceding five strategies generally hinges as much on building competitively valuable expertise and capabilities that rivals cannot readily match as it does on having a distinctive product offering. Clever rivals can nearly always copy the attributes of a popular product or service, but for rivals to match the experience, know-how, and specialized capabilities that a company has developed and perfected over a long period of time is substan- tially harder to do and takes much longer. FedEx, for example, has superior capabili- ties in next-day delivery of small packages, while Apple has demonstrated impressive product innovation capabilities in digital music players, smartphones, and e-readers. Hyundai has become the world’s fastest-growing automaker as a result of its advanced manufacturing processes and unparalleled quality control systems. Capabilities such as these have been hard for competitors to imitate or best.