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CRAFTING AND EXECUTING STRATEGY The Quest for Competitive Advantage Concepts and Cases CRAFTING AND EXECUTING STRATEGY The Quest for Competitive Advantage Concepts and Cases | 23RD EDITION Arthur A. Thompson Margaret A. Peteraf John E. Gamble A.J. Strickland III The University of Alabama Texas A&M University–Corpus Christi Dartmouth College The University of Alabama Final PDF to printer CRAFTING & EXECUTING STRATEGY: CONCEPTS AND CASES Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10121. Copyright ©2022 by McGraw Hill LLC. All rights reserved. Printed in the United States of America. 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 LLC, 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 24 23 22 21 ISBN 978-1-265-02824-4 MHID 1-265-02824-9 Cover Image: Image Source/Getty Images All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. 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 LLC, and McGraw Hill LLC does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered tho28249_fm_ise.indd iv 10/08/20 08:00 AM To our families and especially our spouses: Hasseline, Paul, Heather, and Kitty. About the Authors Courtesy of Arthur A. Thompson, Jr. Courtesy of Margaret A. Peteraf vi Arthur A. Thompson, Jr., earned his BS and PhD 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 and his wife of 58 years have two daughters, two grandchildren, and a Yorkshire Terrier. Margaret A. Peteraf is the Leon E. Williams Professor of Management Emerita 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 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 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 PhD, MA, and MPhil 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. 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 25 years has focused on strategic management at the undergraduate and graduate levels. He has conducted 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 PhD, MA, and BS degrees from The University of Alabama and was a faculty member in the Mitchell College of Business 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 BS degree in math and physics; Georgia Institute of Technology, where he received an MS in industrial management; and Georgia State University, where he received his PhD in business administration. Lonnie’s experience in consulting and executive development is in the strategic management 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 over 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. Courtesy of Richard’s Photography, LLC. Courtesy of Dr. A. J. (Lonnie) Strickland vii Preface B y offering the most engaging, clearly articulated, and conceptually sound text on strategic management, Crafting and Executing Strategy has been able to maintain its position as the leading textbook in strategic management for over 35 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 23rd edition is its enriched and enlivened presentation of the material in each of the 12 chapters, providing an as up-to-date and engrossing 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 23rd 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, coverage has been trimmed to keep the book at a more manageable size. Scores of new examples have been added, along with many new Illustration Capsules, to enrich understanding 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 content of the chapters and the cases. The lineup of cases that accompany the 23rd edition 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 applying 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 chapters. 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 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 viii 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 Participants, found at the end of each chapter and integrated into the Connect package for the text, provide clear guidance to class members in 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 23rd edition includes a set of Assurance of Learning Exercises at the end of each chapter that link to the specific learning objectives appearing at the beginning of each chapter and highlighted throughout the text. An important instructional feature of the 23rd edition is its more closely integrated linkage of selected chapter-end Assurance of Learning Exercises and cases to Connect™. Your students will be able to use Connect™ to (1) complete chapter-specific activities, including selected Assurance of Learning Exercises appearing at the end of each of the 12 chapters as well as video and comprehension cases, (2) complete chapter-end quizzes, (3) complete suggested assignment questions for 14 of the 27 cases in this edition and (4) complete assignment questions for simulation users. All Connect exercises are automatically graded (with the exception of select Exercises for Simulation Participants), 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™ 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 23rd edition package and the supporting 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 23rd 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 students to conclude that your course is one of the very best they have ever taken—from the standpoint of both enjoyment and learning. ix x PREFACE DIFFERENTIATING FEATURES OF THE 23RD EDITION Nine standout features strongly differentiate this text and the accompanying instructional package from others in the field: 1. We provide the clearest discussion of business models to be found anywhere. By introducing this often-misunderstood concept right in the first chapter and defining it precisely, we give students a leg up on grasping this important concept. Follow-on discussions in the next eight chapters drive the concept home. Illustration capsules and cases show how a new business model can enable a company to compete successfully even against well-established rivals. In some cases, a new business model can even be the agent for disrupting an existing industry. 2. 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 comprehensively integrated into our coverage of crafting both single-business and multibusiness strategies. 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 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 competitive capabilities. 3. With this new edition, we provide the clearest, easiest to understand presentation of the value-price-cost framework. In recent years, this framework has become an essential aid to teaching students how companies create economic value in the course of conducting business. We show how this simple framework informs the concept of the business model as well as the all-important concept of competitive advantage. In Chapter 5, we add further clarity by showing in pictorial fashion how the value-price-cost framework relates to the different sources of competitive advantage that underlie the five generic strategies. 4. Our coverage of cooperative strategies and the role that interorganizational activity can play in the pursuit of competitive advantage is similarly distinguished. The topics of the value net, ecosystems, strategic alliances, licensing, joint ventures, 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. 5. The attention we give to international strategies, in all their dimensions, make this textbook an indispensable aid to understanding strategy formulation and execution 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, outsourcing, insourcing, and vertical integration. 6. With a standalone chapter devoted to these topics, our coverage of business ethics, corporate social responsibility, and environmental sustainability goes well beyond that offered by any other leading strategy text. Chapter 9, “Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy,” fulfills the important functions of (1) alerting students to the role and importance of ethical and socially PREFACE responsible decision making and (2) addressing the accreditation requirement of the AACSB International that business ethics be visibly and thoroughly embedded in the core curriculum. Moreover, discussions of the roles of values and ethics are integrated into portions of other chapters, beginning with the first chapter, 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. 7. Long known as an important differentiator of this text, the case collection in the 23rd edition is truly unrivaled from the standpoints of student appeal, teachability, and suitability for drilling students in the use of the concepts and analytical treatments in Chapters 1 through 12. The 27 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. 8. The text is now optimized for hybrid and online delivery through robust assignment and assessment content integrated into Connect™. This will enable professors to gauge class members’ prowess in accurately completing (a) additional exercises and selected chapter-end exercises, (b) chapter-end quizzes, (c) exercises for simulation participants, and (d) exercises for 14 of the cases in this edition. 9. Two cutting-edge and widely used strategy simulations—The Business Strategy Game and GLO-BUS—are optional companions to the 23rd edition. These give you an unmatched capability to employ a text-case-simulation model of course delivery. ORGANIZATION, CONTENT, AND FEATURES OF THE 23RD-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 example of Apple, Inc., 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. As part of this strategy making process, we discuss the importance of ethics in choosing among strategic alternatives. We introduce the concept of a business model and offer a clear definition along with an illustration capsule that provides examples from the real world of business. We explain why 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 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 process, covering topics ranging from the role of vision, mission, and values to what constitutes good corporate governance. It makes a great assignment for the second day of class and provides a smooth transition into the heart of the course. xi xii PREFACE • • • • 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 directors in the strategy-making, strategy-executing process and examines the conditions that have led to recent high-profile corporate governance failures. The 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 classic “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 competitor analysis, identifying strategic groups along with the mobility barriers that limit movement among them, and demonstrates 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 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 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 showing 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 evaluate 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— broad low-cost, broad differentiation, best-cost, focused differentiation, and focused low cost. It demonstrates pictorially the link between generic strategies, the value-price-cost framework, and competitive advantage. The chapter also describes when each of the five approaches works best and what pitfalls to avoid. Additionally, 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 blueocean 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 horizontal 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. PREFACE • 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 necessarily 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 Diamond of National Competitive Advantage, multi-market competition, and the choice between multidomestic, global, and transnational strategies. This chapter 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 diversified company’s business lineup, how to decide whether it has a good diversification strategy, and what strategic options are available for improving a diversified company’s future performance. The evaluative technique integrates material concerning 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 textbook, Chapter 9 brings more direct attention to such issues and may be used as a standalone assignment in either the early, middle, or late part of a course. It concerns the themes of ethical standards in business, approaches to ensuring consistent 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 action 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 execution, and (3) creating an organizational structure supportive of the strategy execution process. Chapter 11 discusses five additional managerial actions that advance the cause of good strategy execution: (1) allocating resources to enable the strategy execution process, (2) ensuring that policies and procedures facilitate rather than impede strategy execution, (3) using process management tools and best practices to drive continuous improvement in the performance of value chain activities, (4) installing information and operating systems that help company personnel carry out their xiii xiv PREFACE strategic roles, and (5) using rewards and incentives to encourage good strategy execution and the achievement of performance targets. • Chapter 12 completes the 10-step framework with a consideration of the importance of creating a healthy corporate culture and exercising effective leadership in promoting good strategy execution. The recurring 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 excellence and reaching the goal of strong company performance. In this latest edition, we have put our utmost effort into ensuring that the 12 chapters are consistent with the latest and best thinking of academics and practitioners in the field of strategic management and provide the topical coverage required for both undergraduate and MBA-level strategy courses. The ultimate test of the text, of course, is the positive pedagogical impact it has in the classroom. If this edition sets a more effective stage for your lectures and does a better job of helping you persuade students that the discipline of strategy merits their rapt attention, then it will have fulfilled its purpose. THE CASE COLLECTION The 27-case lineup in this edition is flush with interesting companies and valuable lessons for students in the art and science of crafting and executing strategy. There’s a good blend of cases from a length perspective—about two-thirds of the cases are under 15 pages yet offer plenty for students to chew on; and the remainder are detail-rich cases that call for more sweeping analysis. At least 25 of the 27 cases involve companies, products, people, or activities that students will have heard of, know about from personal experience, or can easily identify with. The lineup includes at least 20 cases that will deepen student understanding of the special demands of competing in industry environments where product life cycles are short and competitive maneuvering among rivals is quite active. Twenty-three of the cases involve situations in which company resources and competitive capabilities play as large a role in the strategy-making, strategy executing scheme of things as industry and competitive conditions do. Scattered throughout the lineup are 20 cases concerning nonU.S. companies, globally competitive industries, and/or cross-cultural situations. These cases, in conjunction with the globalized content of the text chapters, provide abundant material for linking the study of strategic management tightly to the ongoing globalization of the world economy. You’ll also find 8 cases dealing with the strategic problems of family-owned or relatively small entrepreneurial businesses and 24 cases involving public companies and situations where students can do further research on the Internet. The “Guide to Case Analysis” follows the last case. It contains sections on what a case is, why cases are a standard part of courses in strategy, preparing a case for class discussion, doing a written case analysis, doing an oral presentation, and using financial ratio analysis to assess a company’s financial condition. We suggest having students read this guide before the first class discussion of a case. A number of cases have accompanying YouTube video segments which are listed in Section 3 of the Instructor’s Manual, in a separate Video Library within the Instructor’s Resources, and in the Teaching Note for each case. PREFACE 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 23rd edition (and other texts in the field). • The Business Strategy Game is the world’s most popular strategy simulation, having been used by nearly 3,600 different instructors for courses involving close to one million students at 1,300 university campuses in 76 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. A freshly updated and much-enhanced version of The Business Strategy Game was introduced in August 2018. • 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 2,100 different instructors for courses involving nearly 360,000 students at 800+ university campuses in 53 countries. How the Strategy Simulations Work In both The Business Strategy Game (BSG) and GLO-BUS, class members are divided into teams of one to five persons and assigned to run a company that competes headto-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 production operations, workforce compensation, pricing and marketing, social responsibility/citizenship, and finance. Company co-managers are held accountable for their decision making. Each company’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 performance, along with a wealth of industry and company statistics, are available to company co-managers after each decision round to use in making strategy adjustments and operating decisions for the next competitive round. You can be certain that the market environment, strategic issues, and operating challenges that company co-managers must contend with are very tightly linked to what your class members will be reading about in the text chapters. The circumstances that co-managers face in running their simulation company embrace the very concepts, analytical tools, and strategy options they encounter in the text chapters (this is something you can quickly confirm by skimming through some of the Exercises for Simulation Participants that appear at the end of each chapter). We suggest that you schedule one or two practice rounds and anywhere from four 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 xv xvi PREFACE 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 five to 10 weeks, it is wise to schedule two decision rounds per week for the last several 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 offering 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 those of rival companies, the various company and industry reports detailing the outcomes 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 competitionbased 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 variety of companies and industry situations and insight into the kinds of strategy-related problems managers face. But what a competition-based strategy simulation does far better than case analysis is thrust class members squarely into an active, hands-on managerial role where they are totally responsible for assessing market conditions, determining how to respond to the actions of competitors, forging a long-term direction and strategy for their company, and making all kinds of operating decisions. Because they are held fully 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, PREFACE incorporating both case assignments and a strategy simulation to develop the skills of class members in thinking strategically and applying the concepts and tools of 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 completed the simulation in the past 12 months. • The competitive nature of a strategy simulation arouses positive energy and steps up the whole tempo of the course by a notch or two. Nothing sparks class excitement quicker or better than the concerted efforts on the part of class members at each decision round to achieve a high industry ranking and avoid the perilous 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 operating decisions, trying to outcompete rival companies, and getting immediate feedback on the resulting company performance. Lots of backand-forth chatter occurs when the results of the latest simulation round become available and co-managers renew their quest for strategic moves and actions that will strengthen company performance. Co-managers become emotionally invested in running their company and figuring out what strategic moves to make to boost their company’s performance. Interest levels climb. All this stimulates learning and causes students to see the practical relevance of the subject matter and the benefits of taking your course. As soon as your students start to say, “Wow! Not only is this fun but I am learning 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 two 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 bring their laptops to class or meet in a 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 administer The Business Strategy Game or GLO-BUS. xvii xviii PREFACE In sum, incorporating use of a strategy simulation turns out to be a win–win proposition for both students and instructors. Moreover, a very convincing argument can be made that a competition-based strategy simulation is the single most effective teaching/ learning tool that instructors can employ to teach the discipline of business and competitive strategy, to make learning more enjoyable, and to promote better achievement of course learning objectives. A Bird’s-Eye View of The Business Strategy Game The setting for The Business Strategy Game (BSG) is the global athletic footwear industry (there can be little doubt in today’s world that a globally competitive strategy simulation is vastly superior to a simulation with a domestic-only setting). Global market demand for footwear grows at the rate of seven to nine percent annually for the first five years and five to seven 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. 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 programs to reduce the production of defective footwear and to boost worker productivity, and compensation practices. All newly produced footwear is shipped in bulk containers to one of four geographic distribution centers. All sales in a geographic region are made from footwear inventories in that region’s distribution center. Costs at the four regional distribution centers are a function of inventory storage costs, packing and shipping fees, import tariffs paid on incoming pairs shipped from foreign plants, and exchange rate impacts. At the start of the simulation, import tariffs average $4 per pair in North America, $6 in Europe-Africa, $8 per pair in Latin America, and $10 in the Asia-Pacific region. 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 13 factors: 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 brand reputation. Sales of private-label footwear hinge solely on being the low-price bidder. All told, company co-managers make as many as 57 types of decisions each period that cut across production operations (up to 11 decisions per plant, with a maximum of four plants), the addition of facility space, equipment, and production improvement options (up to eight decisions per plant), worker compensation and training (up to six decisions per plant), shipping and distribution center operations (five decisions per geographic region), pricing and marketing (up to nine decisions in four geographic regions), bids to sign celebrities (two decision entries per bid), financing of company operations (up to eight decisions), and corporate social responsibility and environmental sustainability (up to eight decisions). Plus, there are 10 entries for each region pertaining to assumptions about the upcoming-year actions and competitive efforts of rival companies that factor directly into the forecasts of a company’s unit sales, revenues, and market share in each of the four geographic regions. PREFACE Each time company co-managers make a decision entry, an assortment of on-screen calculations instantly shows the projected effects on unit sales, revenues, market shares, unit costs, profit, earnings per share, ROE, and other operating 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 competitive advantage based on more advertising, a wider selection of models, more appealing styling/quality, bigger rebates, and so on. Any well-conceived, well-executed competitive approach is capable of 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 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 capabilities (comparable to those designed and marketed by global industry leader GoPro and numerous others) and (2) sophisticated camera-equipped copter drones that incorporate 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 six to eight percent annually for the first five years and four to six percent annually for the second five years. Global market demand for commercial drones grows briskly at rates averaging 18 percent for the first two years, then gradually slows over eight years to a rate of four to six percent. 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 two to three 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 cameras 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 improvement, 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 compensation (up to eight xix xx PREFACE decision entries for each product), pricing and marketing (seven decisions for cameras and five for drones), corporate social responsibility and citizenship (up to six decisions), and the financing of company operations (up to eight decisions). In addition, there are 10 entries for cameras and seven 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 projected 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 allcompany average wholesale prices being charged in each geographic region. 2. How each company’s camera performance and quality compares against industrywide 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. 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 warranty 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 nine 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. PREFACE 4. How each company’s annual expenditures to recruit/support third-party online electronics 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 differences 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 companies, the smaller the differences in sales volumes and market shares. This algorithmic 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 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 leadership, 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 geographic 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 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 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 four 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. xxi xxii PREFACE Administration and Operating Features of the Two Simulations The Internet delivery and user-friendly designs of both BSG and GLO-BUS make them incredibly easy to administer, even for first-time users. And the menus and controls are so similar that you can readily switch between the two simulations or use one in your undergraduate class and the other in a graduate class. If you have not yet used either of the two simulations, you may find the following of particular interest: • Setting up the simulation for your course is done online and takes about 10 to • • • • 15 minutes. Once setup is completed, no other administrative actions are required beyond those of moving participants to a different team (should the need arise) and monitoring the progress of the simulation (to whatever extent desired). Participant’s Guides are delivered electronically to class members at the website— students can read the guide on their monitors or print out a copy, as they prefer. There are two to four minute Video Tutorials scattered throughout the software (including each decision screen and each page of each report) that provide ondemand 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 causeeffect relationships, (b) the information on each page of the Industry Reports, 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 and hold an online meeting. ∘ 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 Collaboration Mode. ∘ Each team member controls their own color-coded mouse pointer (with their first-name appearing in a color-coded box linked to their mouse pointer) and can make a decision entry or move the mouse to point to particular on-screen items. ∘ A decision entry change made by one team member is seen by all, in real time, and all team members can immediately view the on-screen calculations that result from the new decision entry. ∘ If one team member wishes to view a report page and clicks on the menu link to the desired report, that same report page will immediately appear for the other team members engaged in collaboration. ∘ Use of Audio Mode capability requires that each team member work from a computer with a built-in microphone (if they want to be heard by their team members) and speakers (so they may hear their teammates) or else have a headset with a microphone that they can plug into their desktop or laptop. A headset is recommended for best results, but most laptops now are equipped with a built-in microphone and speakers that will support use of our new voice chat feature. PREFACE ∘ 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 computers at different locations and conveniently and effectively collaborate in running their simulation company. ∘ In addition, instructors have the capability to join the online session of any company and speak with team members, thus circumventing the need for team members to arrange for and attend a meeting in the instructor’s office. Using the standard menu for administering a particular industry, instructors can connect with the company desirous of assistance. Instructors who wish not only to talk but also to enter Collaboration (highly recommended because all attendees are then viewing the same screen) have a red-colored mouse pointer linked to a red box labeled Instructor. Without a doubt, the Collaboration and Voice-Chat capabilities are hugely valuable for students enrolled in online and distance-learning courses where meeting face-toface is impractical or time-consuming. Likewise, the instructors of online and distancelearning courses will appreciate having the capability to join the online meetings of particular company teams when their advice or assistance is requested. • Both simulations work equally well for online courses and in-person classes. • Participants and instructors are notified via e-mail when the results are ready (usu• • • • • • ally about 15 to 20 minutes after the decision round deadline specified by the instructor/game administrator). Following each decision round, participants are provided with a complete set of reports—a six-page Industry Report, a Competitive Intelligence report for each geographic region that includes strategic group maps and a set of Company Reports (income statement, balance sheet, cash flow statement, and assorted production, marketing, and cost statistics). Two “open-book” multiple-choice tests of 20 questions are built into each simulation. 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 evaluations (again, the scores are automatically recorded in your online grade book). Both simulations have a Company Presentation feature that enables each team of company co-managers to easily prepare PowerPoint slides for use in describing their strategy and summarizing their company’s performance in a presentation to either the class, the instructor, or an “outside” board of directors. A Learning Assurance Report provides you with hard data concerning how well your students performed vis-à-vis students playing the simulation worldwide over the past 12 months. The report is based on nine measures of student proficiency, business know-how, and decision-making skill and can also be used in evaluating the extent to which your school’s academic curriculum produces the desired degree of student learning insofar as accreditation standards are concerned. xxiii xxiv PREFACE 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 simulation 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 simulations can be administered, and their exceptionally tight connection to the text chapters, core concepts, and standard analytical tools. RESOURCES AND SUPPORT MATERIALS FOR THE 23RD EDITION For Students Key Points Summaries At the end of each chapter is a synopsis of the core concepts, analytical tools, and other key points discussed in the chapter. These chapter-end synopses, along with the core concept definitions and margin notes 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 exer- cises. 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 content 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. Connect™ The 23rd edition takes full advantage of Connect™, a personalized teaching and learning tool. The Connect™ package for this edition includes several robust and valuable features that simplify the task of assigning and grading three types of exercises for students: • Autograded chapter quizzes that students can take to measure their grasp of the material presented in each of the 12 chapters. • A variety of interactive exercises for each of the 12 chapters that drill students in the use and application of the concepts and tools of strategic analysis, including selected Assurance of Learning Exercises and newly integrated Exercises for Simulation Participants. • Case Exercises for 14 of the 27 cases in this edition that require students to work through answers to a select number of the assignment questions for the case. These exercises have multiple components and are tailored to match the circumstances presented in each case, calling upon students to do whatever strategic thinking and PREFACE strategic analysis are called for to arrive at pragmatic, analysis-based action recommendations for improving company performance. All Connect™ exercises are automatically graded (with the exception of a few select Exercises for Simulation Participants that entail answers in the form of short essays), thereby simplifying the task of evaluating each class member’s performance and monitoring the learning outcomes. The progress-tracking function built into Connect™ 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. SmartBook 2.0® SmartBook 2.0 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 simulation company their students are running. New to this edition is the incorporation of these assignable Exercises for Simulation Participants within Connect. 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 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. xxv xxvi PREFACE • • • • A set of lecture notes on each chapter. Answers to the chapter-end Assurance of Learning Exercises. A test bank for all 12 chapters. A comprehensive case teaching note for each of the 27 cases. These teaching notes are filled with suggestions for using the case effectively, have very thorough, analysis-based answers to the suggested assignment questions for the case, and contain an epilogue detailing any important developments since the case was written. Test Builder The accompanying Test Bank, which contains over 900 multiple choice and short answer/essay questions, is available in Connect™ via Test Builder. Test Builder is a cloud-based tool that enables instructors to format tests that can be printed or administered within an LMS. Test Builder offers a modern, streamlined interface for easy content configuration that matches course needs, without requiring a download. Test Builder provides a secure interface for better protection of content and allows for just-in-time updates to flow directly into assessments. PowerPoint Slides To facilitate delivery preparation of your lectures and to serve as chapter outlines, you’ll have access to approximately 500 colorful and professionallooking 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 readings 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 Simulations 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 competition for global market leadership. 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, PREFACE carefully researched cases in contributing to a substantive study of strategic management issues and practices. A great number of colleagues and students at various universities, business acquaintances, and people at McGraw-Hill provided inspiration, encouragement, and counsel during the course of this project. Like all text authors in the strategy field, we are intellectually indebted to the many academics whose research and writing have blazed new trails and advanced the discipline of strategic management. In addition, we’d like to thank the following reviewers who provided seasoned advice and splendid suggestions over the years for improving the chapters: Robert B. Baden, Edward Desmarais, Stephen F. Hallam, Joy Karriker, Wendell Seaborne, Joan H. Bailar, David Blair, Jane Boyland, William J. Donoher, Stephen A. Drew, Jo Anne Duffy, Alan Ellstrand, Susan Fox-Wolfgramm, Rebecca M. Guidice, Mark Hoelscher, Sean D. Jasso, Xin Liang, Paul Mallette, Dan Marlin, Raza Mir, Mansour Moussavi, James D. Spina, Monica A. Zimmerman, Dennis R. Balch, Jeffrey R. Bruehl, Edith C. Busija, Donald A. Drost, Randall Harris, Mark Lewis Hoelscher, Phyllis Holland, James W. Kroeger, Sal Kukalis, Brian W. Kulik, Paul Mallette, Anthony U. Martinez, Lee Pickler, Sabine Reddy, Thomas D. Schramko, V. Seshan, Charles Strain, Sabine Turnley, S. Stephen Vitucci, Andrew Ward, Sibin Wu, Lynne Patten, Nancy E. Landrum, Jim Goes, Jon Kalinowski, Rodney M. Walter, Judith D. Powell, Seyda Deligonul, David Flanagan, Esmerlda Garbi, Mohsin Habib, Kim Hester, Jeffrey E. McGee, Diana J. Wong, F. William Brown, Anthony F. Chelte, Gregory G. Dess, Alan B. Eisner, John George, Carle M. Hunt, Theresa Marron-Grodsky, Sarah Marsh, Joshua D. Martin, William L. Moore, Donald Neubaum, George M. Puia, Amit Shah, Lois M. Shelton, Mark Weber, Steve Barndt, J. Michael Geringer, Ming-Fang Li, Richard Stackman, Stephen Tallman, Gerardo R. Ungson, James Boulgarides, Betty Diener, Daniel F. Jennings, David Kuhn, Kathryn Martell, Wilbur Mouton, Bobby Vaught, Tuck Bounds, Lee Burk, Ralph Catalanello, William Crittenden, Vince Luchsinger, Stan Mendenhall, John Moore, Will Mulvaney, Sandra Richard, Ralph Roberts, Thomas Turk, Gordon Von Stroh, Fred Zimmerman, S. A. Billion, Charles Byles, Gerald L. Geisler, Rose Knotts, Joseph Rosenstein, James B. Thurman, Ivan Able, W. Harvey Hegarty, Roger Evered, Charles B. Saunders, Rhae M. Swisher, Claude I. Shell, R. Thomas Lenz, Michael C. White, Dennis Callahan, R. Duane Ireland, William E. Burr II, C. W. Millard, Richard Mann, Kurt Christensen, Neil W. Jacobs, Louis W. Fry, D. Robley Wood, George J. Gore, and William R. Soukup. We owe a debt of gratitude to Professors Catherine A. Maritan, Jeffrey A. Martin, Richard S. Shreve, and Anant K. Sundaram for their helpful comments on various chapters. We’d also like to thank the following students of the Tuck School of Business for their assistance with the revisions: Alen A. Ameni, Dipti Badrinath, Stephanie K. Berger, Courtney D. Bragg, Katie Coster, Jacob Crandall, Robin Daley, Kathleen T. Durante, Shawnda Lee Duvigneaud, Isaac E. Freeman, Vedrana B. Greatorex, Brittany J. Hattingh, Sadé M. Lawrence, Heather Levy, Margaret W. Macauley, Ken Martin, Brian R. McKenzie, Mathew O’Sullivan, Sara Paccamonti, Byron Peyster, Jeremy Reich, Carry S. Resor, Edward J. Silberman, David Washer, and Lindsey Wilcox. And we’d like to acknowledge the help of Dartmouth students Avantika Agarwal, Charles K. Anumonwo, Maria Hart, Meaghan I. Haugh, Artie Santry, as well as Tuck staff member Doreen Aher. xxvii xxviii PREFACE As always, we value your recommendations and thoughts about the book. Your comments regarding coverage and contents will be taken to heart, and we always are grateful for the time you take to call our attention to printing errors, deficiencies, and other shortcomings. Please e-mail us at firstname.lastname@example.org, margaret.a.peteraf@ tuck.dartmouth.edu, email@example.com, or firstname.lastname@example.org. Arthur A. Thompson Margaret A. Peteraf John E. Gamble A. J. Strickland 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 North America, Latin America, Europe-Africa, and Asia-Pacific.Fanatic Studio/Getty Images xxix Instructors: Student Success Starts with You Tools to enhance your unique voice Want to build your own course? No problem. Prefer to use our turnkey, prebuilt course? Easy. Want to make changes throughout the semester? Sure. And you’ll save time with Connect’s auto-grading too. 65% Less Time Grading Study made personal Incorporate adaptive study resources like SmartBook® 2.0 into your course and help your students be better prepared in less time. 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Top: Jenner Images/Getty Images, Left: Hero Images/Getty Images, Right: Hero Images/Getty Images Brief Contents PART 1 Concepts and Techniques for Crafting and Executing Strategy Section A: Introduction and Overview 1 2 What Is Strategy and Why Is It Important? Charting a Company’s Direction 2 20 Section B: Core Concepts and Analytical Tools 3 4 Evaluating a Company’s External Environment 50 Evaluating a Company’s Resources, Capabilities, and Competitiveness 90 Section C: Crafting a Strategy 5 6 7 8 9 The Five Generic Competitive Strategies 126 Strengthening a Company’s Competitive Position 156 Strategies for Competing in International Markets Corporate Strategy 186 222 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy 266 Section D: Executing the Strategy 10 11 12 Building an Organization Capable of Good Strategy Execution Managing Internal Operations 296 328 Corporate Culture and Leadership 352 PART 2 Cases in Crafting and Executing Strategy Section A: Crafting Strategy in Single-Business Companies ® ® ® ® xxxii 1 2 3 4 Airbnb in 2020 5 Macy’s, Inc.: Will Its Strategy Allow It to Survive in the Changing Retail Sector? C51 6 C2 Competition in the Craft Beer Industry in 2020 C7 Costco Wholesale in 2020: Mission, Business Model, and Strategy C18 Ford Motor Company: Will the Company’s Strategic Moves Restore its Competitiveness and Financial Performance? C43 TOMS Shoes: Expanding Its Successful One For One Business Model C59 BRIEF CONTENTS 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 xxxiii lululemon athletica’s Strategy in 2020: Is the Recent Growth in Retail Stores, Revenues, and Profitability Sustainable? C68 ® Under Armour’s Strategy in 2020: Can It Revive Sales and Profitability in Its Core North American Market? C86 ® Spotify in 2020: Can the Company Remain Competitive? C112 Beyond Meat, Inc. C124 ® Netflix’s 2020 Strategy for Battling Rivals in the Global Market for Streamed Video Subscribers C140 ® Twitter Inc. in 2020 ® C161 Yeti in 2020: Can Brand Name and Innovation Keep it Ahead of the Competition? C173 GoPro in 2020: Have its Turnaround Strategies Failed? C184 Publix Super Markets: Its Strategy in the U.S. Supermarket and Grocery Store Industry C198 Tesla’s Strategy in 2020: Can It Deliver Sustained Profitability? C212 ® Unilever’s Purpose-led Brand Strategy: Can Alan Jope Balance Purpose and Profits? C238 Domino’s Pizza: Business Continuity Strategy during the Covid-19 Pandemic C249 Burbank Housing: Building from the Inside Out C260 Boeing 737 MAX: What Response Strategy is Needed to Ensure Passenger Safety and Restore the Company’s Reputation? C273 The Walt Disney Company: Its Diversification Strategy in 2020 C279 ® Robin Hood ® C293 Section B: Crafting Strategy in Diversified Companies 23 24 Southwest Airlines in 2020: Culture, Values, and Operating Practices C295 Uber Technologies in 2020: Is the Gig Economy Labor Force Working for Uber? C315 Section C: Implementing and Executing Strategy 25 Starbucks in 2020: Is the Company on Track to Achieve Attractive Growth and Operational Excellence? C325 ® BRIEF CONTENTS xxxiv ® 26 27 Nucor Corporation in 2020: Pursuing Efforts to Grow Sales and Market Share Despite Tough Market Conditions C354 Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? C389 Guide to Case Analysis CA-1 INDEXES Company I-1 Name I-9 Subject I-15 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? 4 Strategy Is about Competing Differently 4 Strategy and the Quest for Competitive Advantage 5 Why a Company’s Strategy Evolves over Time 8 A Company’s Strategy Is Partly Proactive and Partly Reactive Strategy and Ethics: Passing the Test of Moral Scrutiny 9 9 A COMPANY’S STRATEGY AND ITS BUSINESS MODEL 11 WHAT MAKES A STRATEGY A WINNER? 12 WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS 14 Good Strategy + Good Strategy Execution = Good Management 15 THE ROAD AHEAD 15 ILLUSTRATION CAPSULES 1.1 Apple Inc.: Exemplifying a Successful Strategy 7 1.2 Pandora, SiriusXM, and Over-the-Air Broadcast Radio: Three Contrasting Business Models 13 2 Charting a Company’s Direction 20 WHAT DOES THE STRATEGY-MAKING, STRATEGY-EXECUTING PROCESS ENTAIL? 22 STAGE 1: DEVELOPING A STRATEGIC VISION, MISSION STATEMENT, AND SET OF CORE VALUES 24 Developing a Strategic Vision 24 Communicating the Strategic Vision 25 Expressing the Essence of the Vision in a Slogan 27 Why a Sound, Well-Communicated Strategic Vision Matters 27 Developing a Company Mission Statement 27 Linking the Vision and Mission with Company Values 28 STAGE 2: SETTING OBJECTIVES 31 Setting Stretch Objectives 31 What Kinds of Objectives to Set 31 xxxv xxxvi CONTENTS The Need for a Balanced Approach to Objective Setting Setting Objectives for Every Organizational Level 34 32 STAGE 3: CRAFTING A STRATEGY 35 Strategy Making Involves Managers at All Organizational Levels A Company’s Strategy-Making Hierarchy 36 Uniting the Strategy-Making Hierarchy 39 A Strategic Vision + Mission + Objectives + Strategy = A Strategic Plan 39 35 STAGE 4: EXECUTING THE STRATEGY 40 STAGE 5: EVALUATING PERFORMANCE AND INITIATING CORRECTIVE ADJUSTMENTS 41 CORPORATE GOVERNANCE: THE ROLE OF THE BOARD OF DIRECTORS IN THE STRATEGY-CRAFTING, STRATEGY-EXECUTING PROCESS 41 ILLUSTRATION CAPSULES 2.1 Examples of Strategic Visions—How Well Do They Measure Up? 2.2 TOMS Shoes: A Mission with a Company 2.3 Examples of Company Objectives 26 30 33 2.4 Corporate Governance Failures at Volkswagen 44 Section B: Core Concepts and Analytical Tools 3 Evaluating a Company’s External Environment 50 ASSESSING THE COMPANY’S INDUSTRY AND COMPETITIVE ENVIRONMENT 52 ANALYZING THE COMPANY’S MACRO-ENVIRONMENT 53 ASSESSING THE COMPANY’S INDUSTRY AND COMPETITIVE ENVIRONMENT 57 The Five Forces Framework 57 Competitive Pressures Created by the Rivalry among Competing Sellers 57 The Choice of Competitive Weapons 61 Competitive Pressures Associated with the Threat of New Entrants 61 Whether Entry Barriers Are High or Low 62 The Expected Reaction of Industry Members in Defending against New Entry 63 Competitive Pressures from the Sellers of Substitute Products Competitive Pressures Stemming from Supplier Bargaining Power 67 Competitive Pressures Stemming from Buyer Bargaining Power and Price Sensitivity 69 Whether Buyers Are More or Less Price-Sensitive 71 Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? 72 Matching Company Strategy to Competitive Conditions COMPLEMENTORS AND THE VALUE NET 73 73 64 CONTENTS INDUSTRY DYNAMICS AND THE FORCES DRIVING CHANGE 74 Identifying the Forces Driving Industry Change 75 Assessing the Impact of the Forces Driving Industry Change 78 Adjusting the Strategy to Prepare for the Impacts of Driving Forces 78 STRATEGIC GROUP ANALYSIS 78 Using Strategic Group Maps to Assess the Market Positions of Key Competitors 78 The Value of Strategic Group Maps 79 COMPETITOR ANALYSIS AND THE SOAR FRAMEWORK 81 Current Strategy 82 Objectives 82 Resources and Capabilities Assumptions 83 82 KEY SUCCESS FACTORS 83 THE INDUSTRY OUTLOOK FOR PROFITABILITY 84 ILLUSTRATION CAPSULES 3.1 The Differential Effects of the Coronavirus Pandemic of 2020 56 3.2 Comparative Market Positions of Selected Companies in the Pizza Chain Industry: A Strategic Group Map Example 80 3.3 Business Ethics and Competitive Intelligence 84 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness 90 QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING? 92 QUESTION 2: WHAT ARE THE COMPANY’S STRENGTHS AND WEAKNESSES IN RELATION TO THE MARKET OPPORTUNITIES AND EXTERNAL THREATS? 95 Identifying a Company’s Internal Strengths 96 Identifying Company Internal Weaknesses 97 Identifying a Company’s Market Opportunities 97 Identifying External Threats 97 What Do the SWOT Listings Reveal? 99 QUESTION 3: WHAT ARE THE COMPANY’S MOST IMPORTANT RESOURCES AND CAPABILITIES, AND WILL THEY GIVE THE COMPANY A LASTING COMPETITIVE ADVANTAGE? 100 Identifying the Company’s Resources and Capabilities Types of Company Resources 101 Identifying Organizational Capabilities 100 102 Assessing the Competitive Power of a Company’s Resources and Capabilities 103 The Four Tests of a Resource’s Competitive Power 103 A Company’s Resources and Capabilities Must Be Managed Dynamically The Role of Dynamic Capabilities 105 105 QUESTION 4: HOW DO VALUE CHAIN ACTIVITIES IMPACT A COMPANY’S COST STRUCTURE AND CUSTOMER VALUE PROPOSITION? 106 xxxvii xxxviii CONTENTS The Concept of a Company Value Chain 106 Comparing the Value Chains of Rival Companies 108 A Company’s Primary and Secondary Activities Identify the Major Components of Its Internal Cost Structure 108 The Value Chain System 109 Benchmarking: A Tool for Assessing the Costs and Effectiveness of Value Chain Activities 111 Strategic Options for Remedying a Cost or Value Disadvantage 113 Improving Internally Performed Value Chain Activities 113 Improving Supplier-Related Value Chain Activities 114 Improving Value Chain Activities of Distribution Partners 114 Translating Proficient Performance of Value Chain Activities into Competitive Advantage 115 How Value Chain Activities Relate to Resources and Capabilities 115 QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS? 116 Strategic Implications of Competitive Strength Assessments 118 QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION? 119 ILLUSTRATION CAPSULES 4.1 The Value Chain for Everlane, Inc. 109 4.2 Benchmarking in the Solar Industry 112 4.3 Benchmarking and Ethical Conduct 113 Section C: Crafting a Strategy 5 The Five Generic Competitive Strategies 126 TYPES OF GENERIC COMPETITIVE STRATEGIES 128 BROAD LOW-COST STRATEGIES 129 The Two Major Avenues for Achieving a Cost Advantage Cost-Efficient Management of Value Chain Activities 129 Revamping of the Value Chain System to Lower Costs 132 Examples of Companies That Revamped Their Value Chains to Reduce Costs 129 132 The Keys to a Successful Broad Low-Cost Strategy 134 When a Low-Cost Strategy Works Best 134 Pitfalls to Avoid in Pursuing a Low-Cost Strategy 135 BROAD DIFFERENTIATION STRATEGIES 136 Managing the Value Chain in Ways that Enhance Differentiation Revamping the Value Chain System to Increase Differentiation Delivering Superior Value via a Broad Differentiation Strategy When a Differentiation Strategy Works Best 140 Pitfalls to Avoid in Pursuing a Differentiation Strategy 141 FOCUSED (OR MARKET NICHE) STRATEGIES 142 A Focused Low-Cost Strategy 142 A Focused Differentiation Strategy 144 When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive 144 136 138 139 CONTENTS The Risks of a Focused Low-Cost or Focused Differentiation Strategy 146 BEST-COST (HYBRID) STRATEGIES 146 When a Best-Cost Strategy Works Best The Risk of a Best-Cost Strategy 149 147 THE CONTRASTING FEATURES OF THE GENERIC COMPETITIVE STRATEGIES 149 Successful Generic Strategies Are Resource-Based Generic Strategies and the Three Different Approaches to Competitive Advantage 151 149 ILLUSTRATION CAPSULES 5.1 Vanguard’s Path to Becoming the Low-Cost Leader in Investment Management 5.2 Clinícas del Azúcar’s Focused Low-Cost Strategy 143 5.3 Canada Goose’s Focused Differentiation Strategy 145 5.4 Trader Joe’s Focused Best-Cost Strategy 133 148 6 Strengthening a Company’s Competitive Position 156 LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A COMPANY’S MARKET POSITION 158 Choosing the Basis for Competitive Attack 158 Choosing Which Rivals to Attack 160 Blue-Ocean Strategy—a Special Kind of Offensive 160 DEFENSIVE STRATEGIES—PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE 161 Blocking the Avenues Open to Challengers 162 Signaling Challengers That Retaliation Is Likely 163 TIMING A COMPANY’S STRATEGIC MOVES 163 The Potential for First-Mover Advantages 163 The Potential for Late-Mover Advantages or First-Mover Disadvantages 166 To Be a First Mover or Not 166 STRENGTHENING A COMPANY’S MARKET POSITION VIA ITS SCOPE OF OPERATIONS 167 HORIZONTAL MERGER AND ACQUISITION STRATEGIES 168 Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results 169 VERTICAL INTEGRATION STRATEGIES 171 The Advantages of a Vertical Integration Strategy Integrating Backward to Achieve Greater Competitiveness Integrating Forward to Enhance Competitiveness 172 171 171 The Disadvantages of a Vertical Integration Strategy 173 Weighing the Pros and Cons of Vertical Integration 174 OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS 176 The Risk of Outsourcing Value Chain Activities 177 xxxix xl CONTENTS STRATEGIC ALLIANCES AND PARTNERSHIPS 177 Capturing the Benefits of Strategic Alliances The Drawbacks of Strategic Alliances and Their Relative Advantages 180 How to Make Strategic Alliances Work 181 179 ILLUSTRATION CAPSULES 6.1 Etsy’s Blue Ocean Strategy in Online Retailing of Handmade Crafts 6.2 Tinder Swipes Right for First-Mover Success 165 6.3 Walmart’s Expansion into E-Commerce via Horizontal Acquisition 6.4 Tesla’s Vertical Integration Strategy 162 170 175 7 Strategies for Competing in International Markets 186 WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS 188 WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX 189 Home-Country Industry Advantages and the Diamond Model 189 Demand Conditions 189 Factor Conditions 190 Related and Supporting Industries 191 Firm Strategy, Structure, and Rivalry 191 Opportunities for Location-Based Advantages 191 The Impact of Government Policies and Economic Conditions in Host Countries 192 The Risks of Adverse Exchange Rate Shifts 193 Cross-Country Differences in Demographic, Cultural, and Market Conditions 195 STRATEGIC OPTIONS FOR ENTERING INTERNATIONAL MARKETS 196 Export Strategies 196 Licensing Strategies 197 Franchising Strategies 197 Foreign Subsidiary Strategies 198 Alliance and Joint Venture Strategies 199 The Risks of Strategic Alliances with Foreign Partners 200 INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES 201 Multidomestic Strategies—a “Think-Local, Act-Local” Approach 202 Global Strategies—a “Think-Global, Act-Global” Approach 203 Transnational Strategies—a “Think-Global, Act-Local” Approach 204 INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE 206 Using Location to Build Competitive Advantage 207 When to Concentrate Activities in a Few Locations 207 When to Disperse Activities across Many Locations 208 Sharing and Transferring Resources and Capabilities across Borders to Build Competitive Advantage 208 Benefiting from Cross-Border Coordination 210 CONTENTS CROSS-BORDER STRATEGIC MOVES 210 Waging a Strategic Offensive 210 Defending against International Rivals 211 STRATEGIES FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES 212 Strategy Options for Competing in Developing-Country Markets 212 DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES 214 ILLUSTRATION CAPSULES 7.1 Walgreens Boots Alliance, Inc.: Entering Foreign Markets via Alliance Followed by Merger 200 7.2 Four Seasons Hotels: Local Character, Global Service 206 7.3 WeChat’s Strategy for Defending against International Social Media Giants in China 216 8 Corporate Strategy 222 WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? 224 WHEN TO CONSIDER DIVERSIFYING 224 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING 225 APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP 226 Diversifying by Acquisition of an Existing Business 226 Entering a New Line of Business through Internal Development Using Joint Ventures to Achieve Diversification 227 Choosing a Mode of Entry 228 The Question of Critical Resources and Capabilities The Question of Entry Barriers 228 The Question of Speed 228 The Question of Comparative Cost 229 227 228 CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES 229 DIVERSIFICATION INTO RELATED BUSINESSES 229 Identifying Cross-Business Strategic Fit along the Value Chain 232 Strategic Fit in Supply Chain Activities 234 Strategic Fit in R&D and Technology Activities 234 Manufacturing-Related Strategic Fit 234 Strategic Fit in Sales and Marketing Activities 234 Distribution-Related Strategic Fit 235 Strategic Fit in Customer Service Activities 235 Strategic Fit, Economies of Scope, and Competitive Advantage 235 From Strategic Fit to Competitive Advantage, Added Profitability, and Gains in Shareholder Value 236 DIVERSIFICATION INTO UNRELATED BUSINESSES 238 Building Shareholder Value via Unrelated Diversification The Benefits of Astute Corporate Parenting 240 Judicious Cross-Business Allocation of Financial Resources 241 Acquiring and Restructuring Undervalued Companies 241 238 xli xlii CONTENTS The Path to Greater Shareholder Value through Unrelated Diversification 242 The Drawbacks of Unrelated Diversification 242 Demanding Managerial Requirements 242 Limited Competitive Advantage Potential 243 Misguided Reasons for Pursuing Unrelated Diversification 243 COMBINATION RELATED–UNRELATED DIVERSIFICATION STRATEGIES 244 EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY 244 Step 1: Evaluating Industry Attractiveness 245 Calculating Industry-Attractiveness Scores 246 Interpreting the Industry-Attractiveness Scores 247 Step 2: Evaluating Business Unit Competitive Strength 248 Calculating Competitive-Strength Scores for Each Business Unit 248 Interpreting the Competitive-Strength Scores 249 Using a Nine-Cell Matrix to Simultaneously Portray Industry Attractiveness and Competitive Strength 249 Step 3: Determining the Competitive Value of Strategic Fit in Diversified Companies 252 Step 4: Checking for Good Resource Fit 252 Financial Resource Fit 253 Nonfinancial Resource Fit 255 Step 5: Ranking Business Units and Assigning a Priority for Resource Allocation 256 Allocating Financial Resources 256 Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance 257 Sticking Closely with the Present Business Lineup 257 Broadening a Diversified Company’s Business Base 257 Retrenching to a Narrower Diversification Base 259 Restructuring a Diversified Company’s Business Lineup 260 ILLUSTRATION CAPSULES 8.1 Examples of Companies Pursuing a Related Diversification Strategy 233 8.2 The Kraft–Heinz Merger: Pursuing the Benefits of Cross-Business Strategic Fit 237 8.3 Examples of Companies Pursuing an Unrelated Diversification Strategy 8.4 Restructuring Strategically at VF Corporation 239 261 9 Ethics, Corporate Social Responsibility, Environmental Sustainability, and Strategy 266 WHAT DO WE MEAN BY BUSINESS ETHICS? 268 WHERE DO ETHICAL STANDARDS COME FROM—ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS? 268 The School of Ethical Universalism 268 The School of Ethical Relativism 269 The Use of Underage Labor 269 The Payment of Bribes and Kickbacks 270 Why Ethical Relativism Is Problematic for Multinational Companies Ethics and Integrative Social Contracts Theory 271 271 CONTENTS HOW AND WHY ETHICAL STANDARDS IMPACT THE TASKS OF CRAFTING AND EXECUTING STRATEGY 272 DRIVERS OF UNETHICAL BUSINESS STRATEGIES AND BEHAVIOR 273 Faulty Oversight, Enabling the Unscrupulous Pursuit of Personal Gain and Self-Interest 273 Heavy Pressures on Company Managers to Meet Short-Term Performance Targets A Company Culture That Puts Profitability and Business Performance Ahead of Ethical Behavior 276 275 WHY SHOULD COMPANY STRATEGIES BE ETHICAL? 277 The Moral Case for an Ethical Strategy 277 The Business Case for Ethical Strategies 277 STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND ENVIRONMENTAL SUSTAINABILITY 279 The Concepts of Corporate Social Responsibility and Good Corporate Citizenship 280 Corporate Social Responsibility and the Triple Bottom Line 282 What Do We Mean by Sustainability and Sustainable Business Practices? 285 Crafting Corporate Social Responsibility and Sustainability Strategies 287 The Moral Case for Corporate Social Responsibility and Environmentally Sustainable Business Practices 289 The Business Case for Corporate Social Responsibility and Environmentally Sustainable Business Practices 289 ILLUSTRATION CAPSULES 9.1 Ethical Violations at Uber and their Consequences 9.2 How PepsiCo Put Its Ethical Principles into Practice 274 279 9.3 Warby Parker: Combining Corporate Social Responsibility with Affordable Fashion 283 9.4 Unilever’s Focus on Sustainability 288 Section D: Executing the Strategy 10 Building an Organization Capable of Good Strategy Execution 296 A FRAMEWORK FOR EXECUTING STRATEGY 298 The Principal Components of the Strategy Execution Process What’s Covered in Chapters 10, 11, and 12 299 BUILDING AN ORGANIZATION CAPABLE OF GOOD STRATEGY EXECUTION: THREE KEY ACTIONS 300 STAFFING THE ORGANIZATION 302 Putting Together a Strong Management Team 302 Recruiting, Training, and Retaining Capable Employees DEVELOPING AND BUILDING CRITICAL RESOURCES AND ORGANIZATIONAL CAPABILITIES 305