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Crafting and Executing Strategy THE QUEST FOR COMPETITIVE ADVANTAGE

Concepts and Cases

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Arthur A. Thompson The University of Alabama

Margaret A. Peteraf Dartmouth College

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

A. J. Strickland III The University of Alabama

THE QUEST FOR COMPETITIVE ADVANTAGE

Concepts and Cases | TWENTIETH EDITION

Crafting and Executing Strategy

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

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

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

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

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

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2012, 2010, and 2008. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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

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

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vi

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

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

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

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

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

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

ABOUT THE AUTHORS

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

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

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

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

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

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

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viii

PREFACE

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

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

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

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

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

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

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

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

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

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

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

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x PREFACE

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

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

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

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

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

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

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

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

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PREFACE xi

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

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

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

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

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xii PREFACE

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

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

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

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

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

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PREFACE xiii

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

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