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McGRAW-HILL INT ATIONAL EDITION

Crafting and Executing Strategy The Quest for Competitive Advantage

Concepts and Cases

Fourteenth Edition

Arthur A. Thompson, Jr. University of Alabama A. J. Strickland III University of Alabama John E. Gamble University of South Alabama

_ McGraw-Hili _Irwin

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CRAFTING AND EXECUTING STRATEGY, THE QUEST FOR COMPETITIVE ADVANTAGE: CONCEPTS AND CASES Published by McGraw-Hill/Irwin, a business unit ofThe McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright 2005, 2003, 2001, 1999, 1998, 1996, 1995, 1993, 1992, 1990, 1987, 1984, 1981, 1978 by The McGraw-Hill Companies, Inc. All rights reserved. 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 The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 0-07-111220-0

To our families and especially our wives: Hasseline, Kitty, and Debra

I authors

Arthur A. Thompson, Jr., earned his BS and PhD degrees in economics from the University ofTennessee in ~961 and 1965, respectively; spent three years on the economICS faculty at VlrgmIa 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. He has published over 30 articles in some 25 different professional and trade publications and has authored or co-authored five textbooks and four computer-based simulation exercises.

Dr. Thompson is a frequent speaker and consultant on the strategic issues con-fronting the electric utility industry, particularly as concerns the challenges posed by industry restructuring, re-regulation, competition, and customers' freedom of choice. He spends much of his off-campus time giving presentations to electric utility groups and conducting management development programs for electric utility executives all over the world.

Dr. Thompson and his wife of 43 years have two daughters, two grandchildren, and a Yorkshire terrier.

D r. A. 1. (Lonnie) Strickland, a native of North Georgia, attended the Univer-sity of Georgia, where he received a bachelor of science degree in math,and physics in 1965. Afterward he entered the Georgia Institute ofTechnology, where he received a master of science in industrial management. He earned a PhD in business administration from Georgia State University in 1969. He currently holds the title of Professor of Strategic Management in the Graduate School of Business at the University of Alabama.

Dr. Strickland's experience in consulting and executive development is in the strategic management area, with a concentration in industry and competitive analysis. He has developed strategic planning systems for such firms as the Southern Company, BellSouth, South Central Bell, American Telephone and Telegraph, Gulf States Paper, Carraway Methodist Medical Center, Delco Remy, Mark IV Industries, Amoco Oil Company, USA Group, General Motors, and Kimberly Clark Corporation (Medical Products). He is a very popular speaker on the subject of implementing strategic change and serves on several corporate boards.

About the Authors

He has served as director of marketing for BellSouth, where he had responsibility for $1 billion in revenues and $300 million in profits.

In the international arena, Dr. Strickland has done extensive work in Europe, the Middle East, Central America, Malaysia, Australia, and Africa. In France he developed a management simulation of corporate decision making that enables management to test various strategic alternatives.

In the area of research, he is the author of 15 books and texts. His management simulations, Tempomatic IV and Micromatic, were pioneering innovations that enjoyed prominent market success for two decades.

Recent awards for Dr. Strickland include the Outstanding Professor Award for the Graduate School of Business and the Outstanding Commitment to Teaching Award for the University of Alabama, in which he takes particular pride. He is a member of vari-ous honor leadership societies: Mortar Board, Order of Omega, Beta Gamma Sigma, Omicron Delta Kappa, and Jasons. He is past national president of Pi Kappa Phi social fraternity.

j ohn E. Gamble is currently Chairman of the Department of Management and Associate Professor ofManage~ent in t~e Mitchell College of Business at The UniversIty of South Alabama. HIS teachmg speCIalty at USA IS strategIc man-

agement and he also conducts a course in strategic management in Germany through a collaborative MBA program sponsored by the Universit}1 of Applied Sciences in LudwigshafenIWorms, the State of Rhineland Westphalia, and the University of South Alabama.

Dr. Gamble's research interests center on strategic issues in entrepreneurial, health care, and manufacturing settings. His work has b.een published in such scholarly jour-nals as Journal of Business venturing, Journal of Labor Research, Health Care Man-agement Review, and Labor Studies Journal. He is the author or co-author of more than 20 case studies published in various strategic management and strategic marketing texts. He has done conSUlting on industry and market analysis and strategy formulation and implementation issues with clients in public utilities, technology, non-profit, and entrepreneurial businesses.

Professor Gamble received his Ph.D. in management from the University of Al-abama in 1995. Dr. Gamble also has a Bachelor of Science degree and a Master of Arts degree from The University of Alabama.

vii

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he\preface

There's a different look and feel to this 14th edition, starting with a more descriptive tItle-Crafting and Executing Strategy: The Quest for Competitive Advantage-that more clearly conveys the central thrust of basic courses in business and com-petitive strategy. The new face we've put on this edition includes a modified chapter organization, streamlined chapter presentations, more coverage of some topics and less coverage of others, and an all-new and very timely chapter: "Strategy, Ethics, and Social Responsibility." Yet the fundamental character that has driven the text's success over the years remains firmly intact. The treatment of basic concepts and analytical tools is solidly mainstream, very much in step with both theory and practice, and laced with the best examples we could muster. As is traditional in all of our new editions, there is a fresh line-up of the best and most current cases available. And we've prepared a comprehen-sive package of support materials that truly work in the classroom and that provide max-imum flexibility in custom-tailoring a course to particular needs and preferences.

I. TEXT WITH ON-TARGET CONTENT

ii

In our view, for a seniorlMBA-level strategy text to qualify as having on-target content, it must: Explain core concepts and provide examples of their relevance and use by actual

companies. Present understandable explanations of essential analytical tools, how they are used,

and where they fit into the managerial process of crafting and executing strategy. Be up-to-date and comprehensive, with solid coverage of the landmark changes in

competitive markets and company strategies being driven by globalization and In-ternet technology.

Focus squarely on what every student needs to know about crafting, implementing, and executing business strategies in today's market environments.

Contain fresh, value-adding cases that feature interesting products and companies, illustrate the important kinds of strategic challenges managers face, embrace valu-able teaching points, and spark student interest.

We believe the 14th edition measures up on all five of these criteria. Chapter discus-sions cut straight to the chase about what students really need to know-despite the addition of a new 33-page chapter, the 13 chapters of this edition are 50 pages shorter than the 13 chapters of the previous edition. Our explanations of core concepts and an-alytical tools are, however, covered in enough depth to make them understandable and usable, the rationale being that a shallow explanation carries little punch and has al-most no pedagogical value. We have chosen current examples to which students can easily relate. We have striven to incorporate all relevant state-of-the-art research that is pertinent in a first course in strategy. And we were quite fortunate in assembling a truly fine lineup of interesting, relevant, and challenging cases to drive home valuable lessons in the whys and hows of successfully crafting and executing strategy.

Preface

ORGANIZATION, CONTENT, AND FEATURES OF THE TEXT CHAPTERS The 13 chapters in this edition reflect not only the normal updating and shifts in topical emphasis and coverage but also a modestly different organization of chapters and top-ics. There's a much improved two-chapter introduction to the concept of strategy and the managerial process of crafting and executing strategy. Chapters 3 and 4 layout the con-cepts and tools of analyzing a company's external environment and internal resources and capabilities. There is a four-chapter module on a single-business company's strategy alternatives and a single chapter (condensed from two chapters in prior editions) cover-ing multibusiness diversification. The chapter on Internet strategy that was a prominent feature in the 12th and 13th editions has been dropped; now that Internet technology and use of the Internet have become standard strategy components at most companies worldwide, we think Internet strategy no longer justifies separate chapter-length treat-ment. However, the material in this deleted chapter that continues to be relevant has been included as a prominent part of Chapters 3, 4, and 6. The all-new Chapter 10, "Strategy, Ethics and Social Responsibility," fills a much-needed gap in coverage and can be assigned at any of several places in the course. We continue with our three-chapter coverage of what managerial actions underlie effective strategy execution.

In all 13 chapters, we have diligently kept the presentations aligned with latest de-velopments in the theory and practice of strategic management. We've gone all-out to incorporate the latest advances in the conceptual underpinning of strategic manage-ment and to clearly describe the changes in business strategies, value chain operations, business practices, and competitive conditions being wrought by the continuing march toward globalization and the rapid adoption of Internet technology applications by companies worldwide. The chap\er discussions mirror the growing scope and strategic importance of collaborative alliances, the continuing spread 'of high-velocity change to more industries and company.environments, and the recently heightened imperatives oflinking strategy and operating practices to what is ethically and socially acceptable. Much is made of the need to match a company's strategy both to its external market cir-cumstances and to its internal resources and competitive capabilities. The resource-based view of the firm is prominently integrated into the discussion of crafting both single-business and multibusiness strategies. The three-chapter module on executing strategy embraces a strong resource-based perspective, stressing the importance of in-tellectual capital, core competencies, and competitive capabilities.

The following rundown summarizes the noteworthy chapter features and topical emphasis in this edition:

Chapter 1 has been extensively rewritten and revised to focus on the central ques-tions of "What is strategy?" and "Why is it important?" It defines what is meant by the term strategy and describes the identifying elements of a company's strat-egy, why a company's strategy tends to change and evolve over time, why a com-pany's strategy is partly planned and partly reactive, and why management efforts to craft a company's strategy entail a quest for competitive advantage. In addition, there are sections discussing the importance of ethical considerations in crafting strategy, how a company's strategy relates to its "business model," and why good strategy + good strategy execution = good management. The role of this first chapter is to give readers a solid grasp of what the term strategy means, pique their interest, and convince them that the ins and outs of crafting and executing a

ix

Preface

winning strategy are things every business student should know. We intend for this chapter to be a perfect accompaniment for a first day's lecture on what the course is all about and why it matters.

Chapter 2 delves into the managerial process of actually crafting and executing a strategy-it makes a great assignment for the second day of class. This chapter is structured around the five-step managerial process of crafting and executing strat-egy: (1) forming a strategic vision of where the company is headed and why, (2) setting objectives and performance targets that measure the company's progress, (3) crafting a strategy to achieve these targets and move the company to-ward its market destination, (4) implementing and executing the strategy, and (5) monitoring progress and making corrective adjustments as needed. This chap-ter is also introductory in nature and presents such core concepts as strategic vi-sions and business missions, strategic versus financial objectives, strategic plans, and strategic intent. There's a section underscoring that a company's strategic plan is a collection of strategies devised by different managers at different levels in the organizational hierarchy. We've taken pains to explain why all managers are on a company s strategy-making, strategy-executing team, why managers are well ad-vised to make the concepts and techniques of strategic management a basic part of their toolkit, and why the best companies want their personnel to be true "students of the business." The chapter winds up with a section on corporate governance.

Chapter 3 presents the now-standard tools of industry and competitive analysis and makes a case for why it is important for management to tailor strategy to fit the cir-cumstances of a company's industry and competitive environment. The standout feature of this chapter is a dramatically enhanced and more visual presentation of Michael E. Porter's five-forces model of competition-we think it is the clearest, most compelling five-forces model discussion of any text in the field. Globalization and Internet technology are treated as potent driving forces capable of reshaping in-dustry competition-their roles as change agents have become factors that most companies in most industries must reckon with in forging winning strategies.

Chapter 4 establishes the equal importance of doing solid company situation analysis as a basis for matching strategy to organizational resources, competen-cies, and competitive capabilities. The roles of core competencies and organiza-tional resources and capabilities in creating customer value and helping build competitive advantage are center stage in the discussions of company resource strengths and weaknesses. SWOT analysis is cast as a simple, easy-to-use way to assess a company's resources and overall situation. There is solid coverage of the now-standard tools of value chain analysis, benchmarking, and competitive strength assessments-all of which, we believe, provide insight into a company's relative cost position and market standing vis-a.-vis rivals. There's solid coverage of how company implementation of Internet technology applications is altering company and industry value chains and the performance of particular value chain activities.

Chapter 5 deals with a company's quest for competitive advantage and is framed around the five generic c9mpetitive strategies: low-cost leadership, differentiation, best-cost provider, fo~used differentiation, and focused low-cost.

Chapter 6 extends th~ coverage of the previous chapter and deals with what other strategic actions a company can take to complement its choice of a basic competi-tive strategy. The chapter features sections on what use to make of strategic alliances

Preface

and collaborative partnerships; what use to make of mergers and acquisitions in strengthening the company's competitiveness; when to integrate backward or for-ward into more stages of the industry value chain; the merits of outsourcing certain value chain activities from outside specialists; whether and when to employ offen-sive and defensive moves; and the different ways a company can use the Internet as a distribution channel to position itself in the marketplace.

Chapter 7 explores a company's strategy options for expanding beyond its domes-tic boundary and competing in the markets of either a few or a great many coun-tries-options ranging from an export strategy to licensing and franchising to multicountry strategies to global strategies to heavy reliance on strategic alliances and joint ventures. Four strategic issues unique to competing multinationally are given special attention: (1) whether to customize the company's offerings in each different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide; (2) whether to employ essentially the same basic competitive strategy in the markets of all countries where it operates or whether to modify the company's competitive approach country-by-country as may be needed to fit the specific market conditions and competitive circumstances it encounters; (3) locating production facilities, distri-bution centers, and customer service operations to maximum competitive advan-tage; and (4) efficient cross-borde];. transfer of a company's resource strengths and capabilities to build competitive"advantage. There's also coverage of concepts of profit sanctuaries and cross-market subsidization, the special problems associated with entry into the markets of emerging countries; and strategies that local com-panies in such emerging countries as India, China, Brazil, and Mexico can use to defend against the invasion of opportunity-seeking, resource-rich global giants.

Chapter 8 looks at the broad strategy options for companies competing in five dif-ferent industry environments: (1) emerging industries of the future; (2) turbulent high-velocity markets; (3) mature, slow-groWth industries; (4) stagnant and de-clining industries; and (5) fragmented industries. And it covers the strategy-making challenges that confront companies pursuing rapid growth, companies in industry-leading positions, companies in runner-up positions, and crisis-ridden companies. These nine situations merit special attention in strategy courses be-cause of their widely representative nature and because they reinforce the points made in Chapters 3 and 4 that winning strategies have to be matched both to in-dustry and competitive conditions and to company resources and capabilities.

In this edition we have combined our two-chapter treatment of diversification into a single streamlined but meaty chapter. The treatment of diversification strategies for multibusiness enterprises in Chapter 9 begins by laying out the various paths for becoming diversified, explains how a company can use diversification to create or compound competitive advantage for its business units, and examines the strategic options an already-diversified company has to improve its overall performance. In the middle part of the chapter, the analytical spotlight is on the techniques and pro-cedures for assessing the strategic attractiveness of a diversified company's busi-ness portfolio-the relative attractiveness of the various businesses the company has diversified into, a multi-industry company's competitive strength in each of its lines of business, and the strategic fits and resource fits among a diversified com-pany's different businesses. The chapter concludes with a brief survey of a com-pany's four main postdiversification strategy alternatives: (1) broadening the

xi

Preface

diversification base, (2) divesting some businesses and retrenching to a narrower diversification base, (3) restructuring the makeup of the company's business lineup, and (4) multinational diversification.

Chapter 10 examines the controversial issues of whether and why a company's strategy should pass the test of moral scrutiny. Students usually acknowledge that a company and its personnel have a legal duty to obey the law and play by the rules offair competition. But today's students seem to be much less clear on (1) whether a company has a duty to operate according to the ethical norms of the societies in which it operates and (2) whether a company has a duty or obligation to contribute to the betterment of society independent of the needs and preferences of the cus-tomers it serves. Is it in the best interests of shareholders for a company to operate ethically and/or to operate in a socially responsible manner? The focus of this chapter is squarely on what link, if any, there should be between a company's ef-forts to craft and execute a winning strategy and its duties to (a) conduct its activ-ities in an ethical manner and (b) demonstrate socially responsible behavior by being a committed corporate citizen and attending to the needs of nonowner stake-holders-employees, the communities in which it operates, the disadvantaged, and society as a whole. The chapter reflects the very latest in the literature and contains a section on moral, immoral, and amoral managerial behavior, a section address-ing "the business of business is business, not ethics" kind of thinking, a section on the concept of social responsibility, and sections that explore the business case for ethical and socially responsible behavior. The chapter has been written as a stand-alone chapter that can be assigned in the early, middle, or late part of the course.

The three-chapter module on executing strategy (Chapters 11-13) is anchored around a pragmatic, compelling conceptual framework: (1) building the resource strengths and organizational capabilities needed to execute the strategy in compe-tent fashion; (2) allocating ample resources to strategy-critical activities; (3) ensur-ing that policies and procedures facilitate rather than impede strategy execution; (4) instituting best practices and pushing for continuous improvement in how value chain activities are performed; (5) installing information and operating systems that enable company personnel to better carry out their strategic roles proficiently; (6) tying rewards and incentives directly to the achievement of performance targets and good strategy execution; (7) shaping the work environment and corporate cul-ture to fit the strategy; and (8) exerting the internal leadership needed to drive exe-cution forward. The recurring theme of these three chapters is that executing strategy entails figuring out the specific actions, behaviors, and conditions that are 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 under-stand the strategy-implementing/strategy-executing phase is a make-things-happen and make-them-happen-right kind of managerial exercise.

Our top priority has been to ensure that the 13 chapters of text hit the bull's-eye with respect to content and represent the best thinking of both academics and practitioners. All the chapters contain enough relevant examples to make the presentation convinc-ing, pertinent, and worthwhile to readers preparing for careers in management and business. The boxed Illustration Capsules in each chapter relate stories aimed at both informing students and persuading them that the discipline of strategy merits their rapt attention. We believe our enthusiasm for and dedication to the subject matter will come across to readers.

Preface

THE CASE COLLECTION The 37 cases included in this edition are the very latest and best that we could find. The lineup is flush with examples of strategy in action and valuable lessons for students in the art and science of crafting and executing strategy. And there's a good blend of cases from a length perspective-close to a fourth are under 15 pages yet offer plenty for stu-dents to chew on; about a third are medium-length cases; and the remainder are longer, detail-rich cases. At least 23 of the 37 cases involve high-profile companies, products, or people that students will have heard of, know about from personal experience, or can easily identify with. There are four dot-com company cases, plus several others that will provide students with insight into the special demands of competing in industry environments where technological developments are an everyday event, product life cycles are short, and competitive maneuvering among rivals comes fast and furious. At least 27 of the cases involve situations where company resources and competitive ca-pabilities playas large a role in the strategy-making, strategy-implementing scheme of things as industry and competitive conditions do. Scattered throughout the lineup are 16 cases concerning non-U.S. companies, globally competitive industries, and/or cross-cultural situations; these cases, in conjunction with the globalized content of the text chapters, provide ample material for tightly linking the study of crafting and exe-cuting strategy to the ongoing globalization of the world economy. You'll also find 5 cases dealing with the strategic problems of family-owned or relatively small entre-preneurial businesses and 22 cases involving public companies about which students can do further research on the Internet. Eleven of the cases (Starbucks, Competition in the Bottled Water Industry, Dell Computer, McDonald's, eBay, Harley-Davidson, Land 0' Lakes, Kmart, Continental Airlines, Southwest Airlines, and Beringer Family Win-ery) have accompanying videotape segments. We believe you will find the collection of 37 cases quite appealing, eminently teachable, and very suitable for drilling students in the use of the concepts and analytical treatments in Chapters 1 through 13. It is a case lineup that should stimulate student interest from beginning to end.

In addition, five other recent cases researched and written by the authors of the text can be downloaded from the Internet using the unique code provided with the purchase of a new text. This extends the number of cases available in the total package to 42.

TWO ACCOMPANYING SIMULATION EXERCISES: THE BUSINESS STRATEGY GAME AND GLO-BUS Two strategy-related simulations-The Business Strategy Game (the new online 8th edition and the older disk-based 7.2 version) and GLG-BUS: Developing Winning Competitive Strategies-are available as companion supplements for use with this and other texts in the field. The Business Strategy Game is the world's leading strategy sim-ulation, having been played by well over 350,000 students, and the new online 8th edi-tion is far and away the best and the simplest to administer of any previous version. GLG-BUS, a somewhat less complicated online simulation that was introduced in the fall of2003, has been favorably received (having been played by some 6,000 students in over 100 sections) and is equally suitable for courses in business strategy. Table 1 provides a comparison of the industry and competitive features of BSG Gnline and GLO-BUS.

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xiv Preface

1 A Comparison of GLO-BUS versus The Business Strategy Game

Industry setting

Market scope

Number of market segments

Number of decision variables

Competitive variables used to determine market share (All sales and market share differences are the result of differing competitive efforts among rival cempanies)

Time frame .of decisiens

Strategy options (Which options deliver the best performance hinges on the interaction and competitive strength of the strategies empleyed by rival companies-not on "silver bullet" decisien combinations that players are challenged te discover.)

GLO-BUS The Business Strategy Game

Digital camera industry

Worldwide. Production occurs at a single plant in Taiwan and. sales are made, to retaHers in 4regions: North America, Latin America, Europe-Africa, and Asia Pacific

A total of8~ geographic segments for entry-level cameras and 4 geographic segments for multifeatured cameras

Character arid performance of the camera line (10 decisions)

Production operations and worker compensation ( 15 decisions),

Pricing and marketing (15 decisi.ons inA geographic. regions)

Financing of company operations (4 decisions)

'Number .of quarterly sa.les premetions Lengthefpremetiens in weeks Promotional ciisceunts Advertising it Numberofca.nieramedels Size .of dealer network Warranty period Technical support

One year, with an .option te update as many as 8 of the 44 decisions quarterly

Companies can pursue cempetitive advantage based en (a) low-costor differentiation, (b) competing globally or in select segments, and (e) using largely the same strategy across all regions or strategies that are tailored te conditions in each market segment.

Atl:1leticfootwear industry

Worldwide, Both production and sales activjii.~s .can be pursued .in North America, Latin America, Europe:Africa, and Asia Pacific

Motal of 12~geographic segments each for. branded footwear sales to retailers,for online footwear sales. direct to~onsurTl,ers, and.for private-label sales to miJltistore retai,lers

Production operations and worker compensation (16 decisions each plant;.witha maximum .of 4 plants)

..Shipping (up to 8 decisions each plant)

pricin~ ~nd m!"rketing (13 decisions in4geograpl1icregions) , .. '

.' Finl;lncing of company operations . \5 decisions) .,

Ii Price .' Number of models/styles . '. Styling/quality rating AdvertiSing .', Size of retailer network Celebrity. endorsements . Delivery time Retailer suppert MaiHnrebates Shipping charges (Intemet salfils only)

One year

Cempanies have the widest possible strategy-making 'Iatitude-:-striving. for competitive advantage based on (a) lew cost .or differentiatien, (b) competing globally or in seiecl segments, and (e) using largely the same strategy across all regions or strategies that are tailored teconditions in each market segment.

(continues)

Preface xv

table 1 (concluded)

Degree of complexity

Time required to make a complete decision

GLO-BUS The Business Strategy Game

GLO-BUSBasic (easy to moderate) GLO-BUS Plus (easy fo moderate) GLOBUSTetal (medium) Less complex than BSGbecause all preduction is in a, single plant, there are ne finished goods inventories (newly assembled cameras are built to order and shipped directly to retailers), and sales forecasting is simpler

About 1:5 hours per decision. (once players gain familiarity with seftware and reports). GLO-BUS Plus requires about1 0 minutes more than GLO-BUS Basic per decision and GLO-BUS Total can entail up to 30 minutes additional time per decision

More complex than GLO-BUS because companies can operate up to feur plants, there are 12 market segments (as compared to 8 in GLO-BUSj, finished goods inventories have to be managed at four distribution centers, and players have to develop a sales forecast based on their competitive strategy and the expected competitive efforts of rivals

2 te 2.5 hours per decisien (once players gain familiarity with seftware and reports)

Both simulations have attractiv~Coperating and administrative characteristics that make them a breeze to use in giving students valuable practice in thinking strategically and applying basic strategy concepts and analytical tools:

Both students and instructors have anytime, anywhere access on PCs connected to the Internet and loaded with Internet Explorer and Microsoft Excel (2000, XP, or 2003 versions), a delivery format that is perfect for either on-campus classes or distance learning. ' Time requirements for instructors to administer the simulations are minimal. In-structors must go through Industry Setup and specify a decision schedule and de-sired scoring weights (which can be altered later). Setting up the simulation for your course is done online and takes about 1 Oc 15 minutes. Once setup is com-pleted, no other administrative actions are required beyond that of moving partici-pants to a different team (should the need arise) and monitoring the progress of the simulation (to whatever extent desired). Instructors who wish to do so can track happenings in the simulation by printing copies of the Industry and Company re-ports (done online), change selected costs and rates to introduce different operat-ing conditions (players are automatically notified of any changes if instructors so choose), and serve as a consultant to troubled companies. There's no software for students or administrators to download and no disks to fool with. When participants log on to the Web site, the needed programming and com-pany data is automatically transferred into Excel on the user's PC for the duration of the session and then automatically saved and uploaded back to the server on exit. All work must be done online and the speed for participants using dial-up modems is quite satisfactory. The results of each decision are processed automatically on the simulation's server and made available to all participants within 1 hour following the decision dead-line specified by the instructor! game administrator. There is a state-of-the-art

Preface

server dedicated to the simulation; the server has ample backup capability and is maintained by a highly reliable Web-hosting service that guarantees 99.9 percent reliability on a 2417 basis.

Participants and instructors are notified via e-mail when the results are ready; the e-mail contains highlights of the results.

Decision schedules are determined by the instructor (done online and automati-cally communicated to all players). Decisions can be made once a week, twice a week, or even twice daily, depending on how instructors want to conduct the exer-cise). One popular decision schedule involves I or 2 practice decisions, 6-10 reg-ular decisions, and decisions made once a week across the whole term. A second popular schedule is 1 or 2 practice decisions, 6-8 regular decisions, and biweekly decisions, all made during last four or five weeks of the course (when it can be as-sumed that students have pretty much digested the contents of Chapters 1-8, got-ten somewhat comfortable with what is involved in crafting strategy for a single-business company situation, and prepared several assigned cases.

Instructors have the flexibility to prescribe 0, 1, or 2 practice decisions and from 3 to 10 regular decisions.

Company teams can be composed of 1 to 5 players each and the number of teams in a single industry can range from 4 to 12. If your class size is too large for a sin-gle industry, then it is a simple matter to create two or more industries for a single class section. You'll find that having more than one industry per class presents no significant change in administrative requirements, because everything is processed automatically and all company and individual performances are automatically recorded in your online grade book. Thus it turns out not to be an extra adminis-trative burden to divide a large class into two or more industries.

Participant's Guides are delivered at the Web site-students can read the guide on their monitors or print out a copy, as they prefer. The Player's Guide for The Busi-ness Strategy Game is 32 pages, and the Participant's Guide for GLG-BUS is 25 pages. There are built-in help screens and on-screen information that provide students with the instructions and information needed to guide them to enter wise decisions. Students make all decisions online and access all the results online.

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

There are extensive built-in "Help" screens explaining (a) each decision entry, (b) the information on each page of the Industry Reports, and ( c) the numbers pre-sented in the Company Reports. The Help screens allow company co-managers to figure things out for themselves, thereby curbing the need for students to always run to the instructor with questions about how things work.

Two open-book multiple-choice tests of 20 questions (optional, but strongly rec-ommended) are included as part of each of the two simulations. The quizzes are taken online and automatically graded, with scores reported instantaneously to par-ticipants and automatically recorded in instructor's electronic grade book. Quiz 1 has a time limit of 45 minutes and covers contents of the Participant's Guide. Quiz 2 has a time limit of75 minutes and checks whether players understand what the numbers in the company reports mean and how they are calculated. Students are automatically provided with three sample questions for each test.

Preface

At the end of the simulation exercises, there are peer evaluations that instructors can have students complete. The peer evaluations are optional but strongly recom-mended; they are completed online and automatically recorded in instructor's elec-tronic grade book. Results can be reviewed by clicking on each co-manager's peer scores in grade book.

All three coauthors of this book are avid longtime simulation users. Our own experi-ences, together with numerous discussions with colleagues around the world, have con-vinced us that competition-based simulation games are the single most effective, most stimulating exercise available for giving students valuable practice in being active strategic thinkers and in reading the signs of industry change, reacting to the moves of competitors, evaluating strengths and weaknesses in their company's competitive posi-tion, and deciding what to do to improve a company's financial performance. We see two big reasons why simulations like The Business Strategy Game and GLG-BUS are rapidly growing in popularity and merit a place in today's strategy courses: Both simulations were carefully designed to connect directly to the chapter mate-

rial and give students the experience of putting what they read in the chapters into play. Moreover, instructors have opportunity after opportunity to draw upon the in-dustry and company circumstances in the simulation for examples to use in lec-tures on the text chapters-examjlles that all students in the class can relate to because of their personal experience in running their companies.

The market and competitive dynamics of an industry simulation-which makes the simulation a "live case" in which class members are active managerial partici-pants-force class members to wrestle with charting a long-term direction for their company, setting strategic and financial objectives, and crafting strategies that produce good results and perhaps lead to competitive advantage. In both The Business Strategy Game and GLG-BUS, students are provided with strategic group maps and lists of competitive strengths and weaknesses; as well as an assortment of benchmarks and comparative financial statistics, allowing them to diagnose their company's market standing and decide on a course of action to improve it. And by having to live with the decisions they make, players experience what it means to be accountable for their decisions and achieving satisfactory results. All this serves to drill students in responsible decision making and to improve their business acumen and managerial judgment.

To learn more about these two simulations, please visit www.bsg-online.com or www.glo-bus.com. A "Guided Tour" link on these Web sites provides a quick bird's-eye view and takes about five minutes-enough to determine whether there's sufficient interest on your part to explore further. If you call the senior author of this text, the simulation authors will be glad to provide you with a personal tour of either or both simulations (while you are on your PC) and walk you through the many features.

STUDENT SUPPORT MATERIALS IN THE 14TH EDITION PACKAGE 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 margin

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xviii Preface

notes scattered throughout each chapter, help students focus on basic strategy principles, dIgest the messages of each chapter, and prepare for tests.

Chapter-End Exercises Each chapter contains a select number of exercises most related to research on the In-ternet, that reinforce key concepts and topics cove:ed in the chapters.

A Value-Added Web Site The student section of www.mhhe.comJthompson contains a number of helpful aids:

Self-scoring 20-question chapter tests that students can take to measure their grasp of the material presented in each of the 13 chapters.

A "Guide to Case Analysis" containing sections on what a case is, why cases are a standard part of courses in strategy, preparing a case for class discussion, doing a wntten case analysIs, domg an oral presentation, and using financial ratio analysis to assess a company's financial condition.

A table containing formulas and brief explanations of all the various financial ra-tIOS that are commonly used in evaluating a company's financial statements and fi-nancial strengths.

A select number of Power Point slides for each chapter.

PowerWeb PowerWeb is now available within the Online Learning Center. Links to PowerWeb ar-ticles, news updates, and weekly updates archive are available within each chapter and organized by topic.

Case-TUTOR Software Accompanying the 37 cases is a downloadable software package containing assign-ment questions for all 37 cases in the text, plus analytically structured exercises for 13 of the cases that coach students in doing the strategic thinking needed to arrive at solid answers to the assignment questions for that case. Conscientious completion of the case preparation exercises helps students gain quicker command of the concepts and analytical techniques and points them toward doing good strategic analysis-each of the 13 cases for which there is a case preparation exercise is indicated by the Case-TUTOR logo in the case listing section of the Table of Contents (the Case-TuToR logo also appears on the first page of cases for which there is an exercise). Students can download the Case-TUTOR software at the publisher's Web site.

INSTRUCTOR SUPPORT MATERIALS IN THE 14TH EDITION PACKAGE

Test Bank There is an 1100-question test bank prepared by the coauthors containing multiple-choice questions and suggested essay questions for each chapter.

Preface

Computest A computerized version of the test bank allows you to generate tests quite conveniently and to add in your own questions.

Instructor's Manual There's a comprehensive two-volume Instructor's Manual that contains a lengthy sec-tion on suggestions for organizing and structuring your course, advice on making ef-fective use of a simulation, sample syllabi and daily course outlines, lecture outlines, test questions, and comprehensive teaching notes for each of the 37 cases.

PowerPoint Slides To facilitate preparation of your lectures and to serve as chapter outlines, you'll have access to approximately 500 colorful, professional-looking slides displaying core con-cepts, analytical procedures, key points, and all the figures in the text chapters. The slides are the creation of Professor lana Kuzmicki ofTroy State University.

Accompanying Case Vicleos Eleven of the cases-Starbucks, Competition in the Bottled Water Industry, Dell Com-puter, McDonald's, eBay, Harley-Davidson, Land 0' Lakes, Kmart, Continental Air-lines, Southwest Airlines, and Beringer Family Winery-have accompanying videotape segments that you can show during the course of the case discussions. Sug-gestions for using each video are contained in the teaching note for that case.

Instructor Resource CD-ROM The Instructor's Manual, the PowerPoint Slides, various video clips, teaching notes for the 37 cases in the text, and the five supplemental e-cases and their corresponding teaching notes have all been installed on a CD available to adopters. The CD (or the hard copy of the Instructor's Manual) is a useful aid for compiling a syllabus and daily course schedule, preparing customized lectures, and developing tests on the text chapters.

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 and interesting way to stimulate the competitive energy of students and prepare them for the rigors of real-world business decision making than to have them match strategic wits with classmates in running a company in head-to-head competi-tion for global market leadership.

Web Site: www.mhhe.com/thompson The instructor portion of the Web site contains a password-protected section that provides epilogue updates on the 37 cases contained in this text, along with downloadable files of the Instructor's Manual, the PowerPoint slides, and other support-related materials.

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With the 14th edition, we've done our level best to satisfy the market's legitimate yearning for a comprehensive teaching/learning package that squarely targets what every business student needs to know about crafting and executing business strategies, that fulfills instructor expectations, that works magic in the classroom, and that wins the applause of students. Our goal has been to raise the bar for what a text package in the discipline of strategy ought to deliver. We have gone the extra mile to equip you with a smorgasbord of teaching/learning opportunities and keep the nature of student assignments varied and interesting. We've pursued every avenue we know to provide you with all the resources and materials you'll need to design and deliver a course that is on the cutting.edge and delivers what you are looking for.

ACKNOWLEDGMENTS We heartily acknowledge the contributions of the case researchers whose casewriting efforts appear herein and the companies whose cooperation made the cases possible. To each one goes a very special thank-you. We cannot overstate the importance of timely, carefully researched cases in contributing to a substantive study of strategic management issues and practices. From a research standpoint, strategy-related cases are invaluable in exposing the generic kinds of strategic issues that companies face, in forming hypotheses about strategic behavior, and in drawing experienced-based gener-alizations about the practice of strategic management. From an instructional stand-point, strategy cases give students essential practice in diagnosing and evaluating the strategic situations of companies and organizations, in applying the concepts and tools of strategic analysis, in weighing strategic options and crafting strategies, and in tack-ling the challenges of successful strategy execution. Without a continuing stream of fresh, well-researched, and well-conceived cases, the discipline of strategic manage-ment would lose its close ties to the very institutions whose strategic actions and be-havior it is aimed at explaining and guiding. There's no question, therefore, that first-class case research makes a valuable scholarly contribution to the theory and prac-tice of managing the strategy-making, strategy-executing process.

In addition, a great number of colleagues and students at various universities, busi-ness 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 crafting and executing organizational strategies. The following reviewers provided seasoned advice and suggestions that fur-ther guided our preparation of this particular edition:

Seyda Deligonul, St. John Fisher College and Michigan State UniverSity David Flanagan, Western Michigan University Esmeralda Garbi, Florida Atlantic University Mohsin Habib, University of Massachusetts-Boston Kim Hester, Arkansas State University Jeffrey E. McGee, The University of Texas at Arlington Diana J. Wong, Eastern Michigan University

We also express our thanks to those reviewers who provided valuable guidance in steering our efforts to improve earlier editions: F. William Brown, Anthony F. Chelle, 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, 1. 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 VonStroh, Fred Zimmerman, S. A. Bil-lion, Charles Byles, Gerald L. Geisler, Rose Knotts, Joseph Rosenstein, James B. Thur-man, Ivan Able, W. Harvey Hegarty, Roger Evered, Charles B. Saunders, Rhae M. Swisher, Claude 1. Shell, R. Thomas Lenz, Michael C. White, Dennis Callahan, R. Du-ane Ireland, William E. Burr II, C. W. Millard, Richard Mann, Kurt Christensen, Neil W. Jacobs, Louis W. Fry, D. Robley Wood, George 1. Gore, and William R. Soukup.

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 usatathompso@cba.ua.edu.astrickl@cba.ua.edu. or jgamble@usouthal.edu; fax us at (295) 348-6695; or write us at P.O. Box 870225; Department of Management and Marketing; The University of Alabama; Tuscaloosa, Alabama 35487-0225.

Arthur A. Thompsou

A. J. Strickland John E. Gamble

Part II: Cases in Crafting and Executing Strategy

xxii

Section A: Crafting Strategy in Single-Business Companies (24 cases) Section B: Crafting Strategy in Diversified Companies (3 cases) Section C: Implementing and Executing Strategy (8 cases) Section D: Strategy, Ethics, and Social Responsibility (2 cases)

Each chapter begins with a series of pertinent quotes and an introductory prevIew of its contents.

In-depth examples-..... -+--- illustration Capsules-appear in :'!:c"':;'oof:';:~;,=~;~~:;,;,; boxes throughout each chapter to

illustrate important chapter topics, connect the text presentation to real world companies, and convincingly demonstrate "strategy in action."

xxiii

Chapter I What Is Strategy and Why Is It Important?

A Company's Strategy Emerges Incrementally and Then core concept Evolves over Time A company's strategy should always be viewed as Changing circumstances and a work in progress. Most of the time a company's strategy emerges in bits ongoing management efforts to and pieces, the result of trial and error, experimentation, deliberate manage~ Improve the strategy cause a ment design, and ongoing management actions to fine~tune this or that piece company's strategy to ~merge (IIIt-\----, of the strategy and to adjust certain strategy elements in response to unfold- and evolve over tlme-a condl-ing events. Nonetheless, on occasion, fine-tuning the existing strategy is not tion that makes the task of enough and major strategy shifts are called for, such as when a strategy is crafting a strategy a work in clearly failing and the company faces a financial crisis, when market condi- =;pro,;;9;;,;re,;SS;,' n;;;o;;;, a~o=ne=-t~im,;e=.v=en=t=== tions or buyer preferences change significantly and new opportunities arise, when competitors do something unexpected, or when imp'ortant technologi-cal breakthroughs occur. Some industries are more volatile than others. Industry envi-ronments characterized by high-velocity change require companies to rapidly adapt their strategies.) For example, during the Internet gold rush and subsequent dot-com crash of 1997-2002, technology companies and e-commerce firms found it essential to revise demand forecasts. adjust key elements of their strategies, and update their fi-nancial projections at least quarterly and sometimes more frequently.

But regardless of whether a company's strategy changes gradually or A company's strategy is driven swiftly, the important point is that a company's present strategy is temporary partly by management analysiS and on trial, pending new ideas for improvement from management, chang- and choice and partly by the .11+-----' lng competitive conditions, and any other changes in the company's situation necessity of adapting and that managers believe warrant strategic adjustments, A company's strategy at =';,.a;;;rn;;in;9;bY;,:d,;oi~n9:,,' ====== any given point is fluid, representing the temporary outcome of an ongoing process that, on the one hand, involves reasoned and intuitive management efforts to design an effective strategy (a well-thought-out plan) and, on the other hand, involves responses to market change and constant experimentation and tinkering (adaptations to new conditions and learning about what has worked well enough to continue and what didn't work and has been abandoned). Crafting Strategy Calls for Good Entrepreneurship The constantly evolving nature of a company's situation puts a premium on management's ability to exhibit astute entrepreneurship. The faster a company's business environment is chang-ing, the more critical it becomes for its managers to be adept in reading the winds of change and making timely strategic adjustments.4 Managers are always under the gun to pick up on happenings in the external environment and steer company activities in directions that are aligned with unfolding market conditions. This means studying market trends and competitors' actions, listening to customers and anticipating their changing needs and expectations, scrutinizing the business possibilities that spring from new technological developments, building the firm's market position via acqulsi~ tions or new product introductions, and pursuing ways to strengthen the firm's com~ petitive capabilities. It means paying attention to early warnings of future change and being willing to experiment with dare-to-be~different ways to establish a market posi~ tion in that future. It means proactively searching out opportunities to do new things or to do existing things in new or better ways. When obstacles unexpectedly appear in a company's path, it means adapting rapidly and innovatively. Masterful strategies come partly (maybe mostly) by doing things differently from competitors where it counts-outilZllovating them, being more efficient, being more imaginative, adaptingjaster-rather than running with the herd. Good strategy making is therefore inseparable from good business entrepreneurship. One cannot exist without the other.

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

figure 2. I The Strategy-Making, Strategy-Executing Process

Figures placed throughout the chapters provide conceptual and analytical frameworks,

xxiv

Phase 1 Phase 2 Phase 3 Phase 4 Phase 6

Chapler! What!sS!flItegyandWhy!sltlmpomnt? t5

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

keylpoints :iIIIl---------------+----------The tasks of crafting and executing company strategies are the heart and soul of man-aging a business enterprise and winning in the marketplace. A company's strategy is the game plan management is using to stake out a market position, conduct its opera~ tions, attract and please customers, compete successfully, and achieve organizational objectives. The central thrust of a company's strategy is und:rtaking moves to build and strengthen the company's long-term competitive pgsition and financial perfor-mance and, ideally, gain a competitive advantage over rivals that then becomes a com-pany's ticket to .above-average profitability. A company's strategy typicaUy evolves and reforms over time, emerging from a blend of (1) proactive and purposeful actions on the part of company managers and (2) as~needed reactions to unanticipated develop-ments and fresh market conditions.

Closely related to the concept of strategy is the concept of a company's business model. A company's business model is management's storyline for now and why the company's product offerings and competitive approaches wHl generate a revenue stream and have an associated cost structure that produces attractive earnings and re-turn on investment-in effect, a company's business model sets forth the economic logic for making money in a particular business, given the company's current strategy.

A winning strategy fits the circumstances of a company's external situation and its internal resource strengths and competitive capabilities, builds competitive advantage, and boosts company performance. "y

Crafting and executing strategy are core management functions. Whether a com~ pany wins or loses in the marketpiace is directly attributable to the caliber of a com pany's strategy and the proficiency with which the strategy is executed.

Several short, mostly Internet-research-related exercises at the end of each chapter provide a supplement to assigned cases and a further way to reinforce core concepts.

I exercises =a----------------+---=---------1. Go to www.redhat.comandcheckwhetherthecompanY'sbusiness model is work~

ing. Is the company sufficiently profitable to validate its business model and strat-egy? Is its revenue stream from selling technical support services growing or declining as a percentage of total revenues? Does your review of the company's re-cent financial performance suggest that its business model and strategy are chang lng? Read the company's latest statement about its business model.

2. Go to www.levistrauss.comlaboutfvision and read what the company says about how its corporate values of originality, empathy, integrity, and courage are con~ nected to its vision of clothing the world by marketing the most appealing and widely worn casual clothing in the world. Do you believe what the company says, or are its statements just a bunch of nice pontifications that represent the chief ex-ecutive officer's personal values (and also good public relations)?

xxv

Starbucks in 2004: Driving for Global Dominance

Amit). Shah Froslhurg Stale Universi(V

lAs qwtc

I contents

partlole Concepts and Techniques for Crafting and Executing Strategy Section A: Introduction and Overview

1. What Is Strategy and Why Is It Important? 2 2. The Managerial Process of Crafting and Executing Strategy 16

Section B: Core Concepts and Analytical Tools 3. Analyzing a Company's External Environment 44 4. Analyzing a Company's Resources and Competitive Position 86

Section C: Crafting a Strategy 5. The Five Generic Competitive Strategies: Which One to EmploY? 114 6. Beyond Competitive Strategy: Other Important Strategy Choices 140 7. Competing in Foreign Markets 172 8. Tailoring Strategy to Fit Specific Industry and Company Situations 202 9. Diversification: Strategies for Managing a Group of Businesses 234

10. Strategy, Ethics, and Social Responsibility 282 Section D: Executing the Strategy 11. Building Resource Strengths and Organizational Capabilities 316 12. Managing Internal Operations: Actions That Promote Better

Strategy Execution 344 13. Corporate Culture and Leadership: Keys to Good Strategy Execution 368

partl~o Cases in Crafting and Executing Strategy SectionA: Crafting Strategy in Single Business Companies

1. Starbucks in 2004: Driving for Global Dominance C-2 2. Netflix C-33 3. Azalea Seafood Gumbo Shoppe in 2004 C-42 4. Non Stop Yacht, S.L. C-58 5. Competition in the Bottled Water Industry C-70 6. Dollar General and the Extreme Value Retailing Industry C-86 7. Growth Strategy and Slotting at No Pudge! Foods, Inc. C-102 8. Dell Computer in 2003: Driving for Industry Leadership C-109 9. Electronic Arts and the Global Video Game Industry C-140

xxviii

Brief Contents

10. Nexity and the U.S. Banking Industry C-163 11. Making It Big C-185 12. Outback Steakhouse C-197 13. McDonald's: Polishing the Golden Arches C-213 14. Maple Leaf Consumer Foods-Fixing Hot Dogs C-235 15. Krispy Kreme Doughnuts, Inc. C-245 16. Andrea lung and Avon Products in 2003: Accelerating the Transformation C-267 17. eBay: In a Leagne by Itself C-292 18. Note on the Security Management and Manufacturers Industry C-318 19. Pivot International-Pursuing Growth C-343 20. Bayer AG: Children's ASPIRIN C-360 21. Harley-Davidson C-376 22. Hero Honda Motors (India) Ltd.: Is It Honda That Made It a Hero? C-396 23. PumaAG C-41l 24. The Globalization of Beringer Blass Wine Estates C-433 Section B: Crafting Strategy in Diversified Companies 25. Land O'Lakes, Inc C-46l 26. Unilever's Path to Growth Strategy: Is It Working? C-479 27. LVMH's Diversification Strategy into Luxury Goods C-509 Section C: Implementing and Executing Strategy 28. Robin Hood C-532 29. Procter & Gamble: Organization 2005 and Beyond C-534 30. The Global Leadership of Carlos Ghosn at Nissan C-546 31. Wal-Mart Stores, Inc.: A New Set of Challenges C-557 32. Kmart: Striving for a Comeback C-583 33. The Portman Ritz-Carlton: Asia's Best Employer C-603 34. Continental Airlines in 2003: Sustaining the Turnaround C-6ll 35. Southwest Airlines: Culture, Values, and Operating Practices C-636 Section D: Strategy, Ethics, and Social Responsibility 36. Benziger Family Winery C-665 37. Andy Decker and the Ethics of Downloading Music from the Internet C-680

indexes Organization I-I Name 1-13 Subject 1-19

endnotes

xxix

I contents

part I ole Concepts and Techniques for Crafting and Executing Strategy 1

xxx

Section A: Introduction and Overview

1. What Is Strategy and Why Is It Important? 2 What Is Strategy? 3

Identifying a Company s Strategy 4 Strategy and the Quest for Competitive Advantage 5 Strategy Is Partly Proactive and Partly Reactive 8 Strategy and Ethics: Passing the Test of Moral Scrutiny 10

The Relationship between a Company's Strategy and Its Business Model 11 What Makes a Strategy a Winner? 11 Why Are Crafting and Executing Strategy Important? 13

Good Strategy + Good Strategy Execution = Good Management 14 illustration capsules 1.1. The Chief Elements of Southwest Airlines' Strategy 5 1.2. Microsoft and Red Hat Linux: Two Contrasting Business

Models 12

2. The Managerial Process of Crafting and Executing Strategy 16 What Does the Process of Crafting and Executing Strategy Entail? 1,7 Developing a Strategic Vision: Phase 1 of the Strategy-Making, Strategy-Executing Process 17

Linking the Vision with Company Values 21 Communicating the Strategic Vision 24

Setting Objectives: Phase 2 of the Strategy-Making, Strategy-Executing Process 26

What Kinds of Objectives to Set: The Need for a Balanced Scorecard 27 Crafting a Strategy: Phase 3 of the Strategy-Making, Strategy-Executing Process 32

The Strategy-Making Pyramid 34 Uniting the Strategy-Making Effort 37 Merging the Strategic Vision, Objectives, and Strategy into a Strategic Plan 37

Implementing and Executing the Strategy: Phase 4 of the Strategy-Making, Strategy-Executing Process 38

Table of Contents

Initiating Corrective Adjustments: Phase 5 of the Strategy-Making, Strategy-Executing Process 39 Corporate Governance: The Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process 40 illustration capsules 2.1. Exelon's Strategic Vision 22 2.2. Examples of Strategic Visions-How Well Do They Measure Up? 23 2.3. Intel's Two Strategic Inflection Points 26 2.4. Examples of Company Objectives 28 2.5. Organizations That Use a Balanced Scorecard Approach to Objective

Setting 30

Section B: Core Concepts and Analytical Tools

3. Analyzing a Company's External Environment 44 The Strategically Relevant Components of a Company's External Environment 45 Thinking Strategically about a COlnpany's Industry and Competitive Environment 46 Question 1: What Are the Industry's Dominant Economic Features? 48 Question 2: What Kinds of Competitive Forces Are Industry Members Facing? 50

The Rivalry among Competing Sellers 50 The Potential Entry of New Competitors 55 Competitive Pressures from the Sellers of Substitute Products 59 Competitive Pressures Stemming from Supplier Bargaining Power and Supplier-Seller ColiabO'ration 60 Competitive Pressures Stemmingfrom Buyer Bargaining Power and Seller-Buyer Collaboration 64 Determining Whether the Collective Strength ofihe Five Competitive Forces Promotes Profitability 67

Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have? 68

The Concept of Driving Forces 68 Identifying an Industry s Driving Forces 69 Assessing the Impact of the Driving Forces 74 The Link between Driving Forces and Strategy 74

Question 4: What Market Positions Do Rivals Occupy- Who Is Strongly Positioned and Who Is Not? 75

Using Strategic Group Maps to Assess the Market Positions of Key Competitors 75 What Can Be Learned from Strategic Group Maps 77

Question 5: What Strategic Moves Are Rivals Likely to Make Next? 77 Identifying Competitors' Strategies and Resource Strengths and Weaknesses 78 Predicting Competitors' Next Moves 79

Question 6: What Are the Key Factors for Future Competitive Success? 80

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xxxii Table of Contents

Question 7: Does the Outlook for the Industry Present an Attractive Opportunity? 82 illustration capsules 3.1. Comparative Market Positions of Selected Retail Chains: A Strategic

Group Map Application 76

4. Analyzing a Company's Resources and Competitive Position 86 Question 1: How Well Is the Company's Present Strategy Working? 87 Question 2: What Are the Company's Resource Strengths and Weaknesses and Its External Opportunities and Threats? 89

Identifying Company Resource Strengths and Competitive Capabilities 89 Identifying Company Resource Weaknesses and Competitive Deficiencies 93 Identifying a Company:' Market Opportunities 94 Identifying Threats to a Company:' Future Profitability 94 What Do the SWOT Listings Reveal? 94

Question 3: Are the Company's Prices and Costs Competitive? 98 The Concept of a Company Value Chain 98 Why the Value Chains of Rival Companies Often Differ 100 The value Chain System for an Entire Industry 100 Developing the Data to Measure a Company:' Cost Competitiveness 102 Benchmarking the Costs of Key Value Chain Activities 103 Strategic Options for Remedying a Cost Disadvantage 106 Translating Proficient Pelformance of Value Chain Activities into Competitive Advantage 106

Question 4: Is the Company Competitively Stronger or Weaker Than Key Rivals? 108 Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial Attention? 111 illustration capsules 4.1. Value Chain Costs for Companies in the Business of Recording and

Distributing Music CDs 103 4.2. Benchmarking and Ethical Conduct 105

Section C: Crafting a Strategy

5. The Five Generic Competitive Strategies: Which One to Employ? 114 The Five Generic Competitive Strategies 115 Low-Cost Provider Strategies 117

The Two Major Avenues for Achieving a Cost Advantage 117 The Keys to Success in Achieving Low-Cost Leadership 124 When a Low-Cost Provider Strategy Works Best 125 The Pitfalls of a Low-Cost Provider Strategy 126

Table of Contents

Differentiation Strategies 126 Types of Differentiation Themes 127 Where along the Value Chain to Create the Differentiating Attributes 127 Achieving a Differentiation-Based Competitive Advantage ]28 The Importance of Perceived Value 129 Keeping the Cost of Differentiation in Line 129 When a Differentiation Strategy Works Best 129 The Pitfalls of a Differentiation Strategy 130

Best-Cost Provider Strategies 130 The Big Risk of a Best-Cost Provider Strategy ]32

Focused (or Market Niche) Strategies 132 A Focused Low-Cost Strategy 132 A Focused Differentiation Strategy 133 When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive 134 The Risks of a Focused Low-Cost or Focused Differentiation Strategy 135

The Contrasting Features of the Five Generic Competitive Strategies: A Summary 135 illustration capsules 5.1. Nucor Corporation's Low-Cost Provider Strategy 118 5.2. Utz Quality Foods' Use ofInternet Technology to Reengineer Value Chain

Activities 123 5.3. Toyota's Best-Cost Producer Strategy for Its Lexus Line 131 5.4. Mote16's Focused Low-Cost Strategy 133 5.5. Ritz-Carlton's Focused Differentiation Strategy OR Progressive

Insurance's Focused Differentiation Strategy in Auto Insurance? 134

.' 6. Beyond Competitive Strategy: Other Important Strategy Choices 140 Strategic Alliances and Collaborative Partnerships 141

The Pervasive Use of Alliances 143 Why and How Strategic Alliances Are Advantageous 144 Alliances and Partnerships with Foreign Companies 145 Why Many Alliances Are Unstable or Break Apart 146 The Strategic Dangers of Relying Heavily on Alliances and Collaborative Partnerships 146

Merger and Acquisition Strategies 146 Vertical Integration Strategies: Operating across More Stages of the Industry Value Chain 150

The Strategic Advantages of Vertical Integration ]50 The Strategic Disadvantages of Vertical Integration 15]

Outsourcing Strategies: Narrowing the Boundaries of the Business 153

Advantages of Outsourcing 153 The Pitfalls of Outsourcing 155

Using Offensive Strategies to Secure Competitive Advantage 155 Basic Types of Offensive Strategies ] 56

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:xxiv Table of Contents

Choosing Which Rivals to Attack 159 Choosing the Basis for Attack 159

Using Defensive Strategies to Protect the Company's Position 160 Blocking the Avenues Open to Challengers 160 Signaling Challengers That Retaliation Is Likely 160

Strategies for U sing the Internet as a Distribution Channel 161 Using the Internet Just to Disseminate Product Information 161 Using the Internet as a Minor Distribution Channel 162 Brick-and-Click Strategies: An Appealing Middle Ground 162 Strategies for Online Enterprises 163

Choosing Appropriate Functional-Area Strategies 166 First-Mover Advantages and Disadvantages 167 illustration capsules 6.1. How Clear Channel Has Used Mergers and Acquisitions to Become a

Global Market Leader 149 6.2. Office Depot's Brick-and-Click Strategy 164 6.3. The Battle in Consumer Broadband: First-Movers versus

Late-Movers 169

7. Competing in Foreign Markets 172 Why Companies Expand into Foreign Markets 174

The Difference between Competing Internationally and Competing Globally 174

Cross-Country Differences in Cultural, Demographic, and Market Conditions 175

The Potential for Locational Advantages 176 The Risks of Adverse Exchange Rate Shifts 176 Host Government Policies 178

The Concepts of Multicountry Competition and Global Competition 178 Strategy Options for Entering and Competing in Foreign Markets 180

Export Strategies 180 Licensing Strategies 181 Franchising Strategies 181 A Multicountry Strategy or a Global Strategy? 182

The Quest for Competitive Advantage in Foreign Markets 185 Using Location to Build Competitive Advantage 185 Using Cross-Border Transfers of Competencies and Capabilities to Build Competitive Advantage 187 Using Cross-Border Coordination to Build Competitive Advantage 188

Profit Sanctuaries, Cross-Market Subsidization, and Global Strategic Offensives 189

Using Cross-Market Subsidization to Wage a Strategic Offensive 189 Global Strategic Offensives 191

Strategic Alliances and Joint Ventures with Foreign Partners 191 The Risks of Strategic Alliances with Foreign Partners 192 Making the Most of Strategic Alliances with Foreign Partners 193

Competing in Emerging Foreign Markets 195 Strategy Implications 196 Strategies for Local Companies in Emerging Markets 196

illustration capsules 7.1. Coca-Cola, McDonald's, and Nestle: Users of Multi country

Strategies 184 7.2. Cross-Border Strategic Alliances 194

Table of Contents

8. Tailoring Strategy to Fit Specific Industry and Company Situations 202 Strategies for Competing in Emerging Industries 203

Challenges When Competing in Emerging Industries 204 Strategic Avenues for Competing in an Emerging Indusuy 205

Strategies for Competing in Turbulent, High-Velocity Markets 206 Strategic Postures for Coping with Rapid Change 206 Strategic Moves for Fast-Changing Markets 208

Strategies for Competing in Maturing Industries 210 Industry Changes Resultingfrom -Market Maturity 210 Strategic Moves in Maturing Indil~tries 211 Strategic Pitfalls in Maturing IndusU'ies 212

Strategies for Firms in Stagnant or Declining Industries 213 Strategies for Competing in Fragmented'Industries 214

Reasons for Supply-Side Fragmentation 214 Strategic Options for a Fragmented Industly 216

Strategies for Sustaining Rapid Company Growth 217 The Risks of Pursuing Mtlltiple Strategy Horizons 218

Strategies for Industry Leaders 219 Strategies for Runner-Up Firms 221

Obstacles for Firms with Small Market Shares '222 Strategic Approachesfor Runner-Up Companies 222

Strategies for Weak and Crisis-Ridden Businesses 224 Turnaround Strategies for Businesses in Crisis 225 Liquidation-the Strategy of Last Resort 228 End-Game Strategies 228

10 Commandments for Crafting Successful Business Strategies 229 Matching Strategy to Any Industry and Company Situation 230 illustration capsules 8.1. Yamaha's Strategy in the Stagnant Piano Industry 215 8.2. How Microsoft Uses Its Muscle to Maintain Market Leadership 221 8.3. Lucent Technologies' Turnaround Strategy: Slow to Produce Results 227

9. Diversification: Strategies for Managing a Group of Businesses 234 When to Diversify 236

Factors That Signal It Is Time to Diversifj, 237

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Building Shareholder Value: The Ultimate Justification for Diversifying 238 Strategies for Entering New Businesses 239

Acquisition of an Existing Business 239 Internal Start-Up 239

=----;,.----; Joint Ventures and Strategic Partnerships 240

Choosing the Diversification Path: Related versus Unrelated Businesses 241 The Case for Diversifying into Related Businesses 241

" Cross-Business Strategic Fits along the Value Chain 242 Strategic Fit, Economies of Scope, and Competitive Advantage 245

The Case for Diversifying into Unrelated Businesses 248 The Merits of an Unrelated Diversification Strategy 249 The Drawbacks of Unrelated Diversification 252

Combination Related-Unrelated Diversification Strategies 253 Evaluating the Strategy of a Diversified Company 254

Step 1: Evaluating Industry Attractiveness 255 Step 2: Evaluating Business-Unit Competitive Strength 258 Step 3: Checking the Competitive Advantage Potential of Cross-Business Strategic Fits 262

Step 4: Chec1angfor Resource Fit 263 Step 5: Ranlang the Business Units on the Basis of Performance and Priority for Resource Allocation 266 Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance 267

After a Company Diversifies: The Four Main Strategy Alternatives 269 Strategies to Broaden a Diversified Company s Business Base 270 Divestiture Strategies Aimed at Retrenching to a Narrower Diversification Base 271 Strategies to Restructure a Companys Business Lineup 273 Multinational Diversification Strategies 275

illustration capsules 9, I, Five Companies That Have Diversified into Related Businesses ,246 9.2. Five Companies That Have Diversified into Unrelated Businesses 250 9.3, Managing Diversification at Johnson & Johnson 271 9.4. The Global Scope of Four Prominent Diversified Multinational

Corporations 276

10. Strategy, Ethics, and Social Responsibility 282 Strategy and Ethics 283

What Do We Mean by Business Ethics? 283 The Three Categories of Management Morality 284 What Are the Drivers of Unethical Strategies and Business Behavior? 285 Business Ethics in the Global Community 289 Approaches to Managing a Company s Ethical Conduct 295 Why Should Company Strategies Be Ethical? 298 Linking a Company s Strategies to Its Ethical Principles and Core Values 299

Strategy and Social Responsibility 301 What Do We Mean by Social Responsibility? 302 Linking Strategy and Social Responsibility 304 The Moral Case for Corporate Social Responsibility 305 The Business Case for Socially Responsible Behavior 306 The Controversy over Do-Good Executives 308

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How Much Attention to Social Responsibility Is Enough? 310 Linking Social Performance Targets to Executive Compensation 310

illustration capsules 10.1, When Cultures Clash on Ethical Standards: Some Examples 291 10.2. Strategies to Gain New Business at Wall Street Investment Banking

Firms: Ethical or Unethical? 300

Section D: Executing the Strategy

11. Building Resource Strengths and Organizational Capabilities 316 A Framework for Executing Strategy 318 The Principal Managerial Components of the Strategy Execution Process 319 Building a Capable Organization 321 Staffing the Organization 322

Putting Together a Strong Management Team 322 Recruiting and Retaining Capable Employees 322

Building Core Competencies and Competitive Capabilities 324 The Three-Stage Process of Developing and Strengthening Competencies and Capabilities 325 From Competencies and Capabilities to Competitive Advantage 327 The Strategic Role of Employee Training 328

Matching Organization Structure to Strategy 328 Deciding Which Value Chain Activities to Perform Internally and Which to Outsource 328 Making Strategy-Critical Activities the Main Building Blocks of the Organization Structure 331 Determining the Degree of Authority and Independence to Give Each Unit and Each Employee 334 Providingfor Internal Cross-Unit Coordination 337 Providingfor Collaboration with Outside Suppliers and Strategic Allies 338 Perspectives on Stnlcturing the Work Effort 339

Organizational Structures of the Future 340 illustration capsules 11.1, How General Electric Develops a Talented and Deep

Management Team 323 11.2. Cross-Unit Coordination on Technology at 3M

Corporation 339

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12. Managing Internal Operations: Actions That Promote Better Strategy Execution 344 Marshaling Resources Behind the Drive for Good Strategy Execution 345 Instituting Policies and Procedures That Facilitate Strategy Execution 346 Adopting Best Practices and Striving for Continuous Improvement 349

How the Process of Identifying and Incorporating Best Practices Works 349 TQM and Six Sigma Quality Programs: Toolsfor Promoting Operational Excellence 351 Capturing the Benefits of Best-Practice and Continuous Improvement Programs 354

Installing Information and Operating Systems 356 Instituting Adequate Information Systems, Performance Tracking, and Controls 357 Exercising Adequate Controls over Empowered Employees 358

Tying Rewards and Incentives to Strategy Execution 359 Strategy-Facilitating Motivational Practices 359 Strildng the Right Balance between Rewards and Punishment 362 LinJdng the Reward System to Strategically Relevant Performance Outcomes 362

illustration capsules 12.1. Graniterock's "Short Pay" Policy: An Innovative Way to Promote Strategy

Execution 348 12.2. Whirlpool's Use of Six Sigma to Promote Operating Excellence 353 12.3. Companies with Effective Motivation and Reward Techniques 361 12.4. Nucor and Bank One: Two Companies That Tie Incentives Directly to

Strategy Execution 363

13. Corporate Culture and Leadership: Keys to Good Strategy Execution 368

Building a Corporate Culture That Promotes Good Strategy Execution 369

what to Lookfor in Identifying a Company's Corporate Culture 370 Culture: Ally or Obstacle to Strategy Execution? 373 Strong versus weak Cultures 375 Unhealthy Cultures 376 Adaptive Cultures 378 Creating a Strong Fit between Strategy and Culture 379 Grounding the Culture in Core Values and Ethics 383 Establishing a Strategy-Culture Fit in Multinational and Global Companies 390

Leading the Strategy Execution Process 391 Staying on Top of How well Things Are Going 391 Putting Constructive Pressure on the Organization to Achieve Good Results 392 Keeping the Internal Organization Focused on Operating Excellence 394 Leading the Development of Better Competencies and Capabilities 395 Displaying Ethical Integrity and Leading Social Responsibility Initiatives 395 Leading the Process of Making Corrective Adjustments 397

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illustration capsules 13.1. The Culture at Alberto-Culver 370 13.2. The Culture-Change Effort at Alberto-Culver's North American

Division 384 13.3. Lockheed Martin's Corrective Actions after Violating U.S. Antibribery

Laws 396

part I Cases in Crafting and Executing Strategy C-1 Section A: Crafting Strategy in Single-Business Companies

1. Starbucks in 2004: Driving for Global Dominance C-2 Arthur A. Thompson, The University of Alabama

2.

3.

4.

5.

6.

7.

8.

Amit 1 Shah, Frostburg State University Thomas F Hawk, Frostburg State University

Netflix C-33 Braxton Maddox, The University of Alabama Azalea Seafood Gumbo Shoppe in 2004 C-42 John E. Gamble, University of South Alabama Non Stop Yacht, S.L. C-58 Charlene Nicholls-Nixon, The University of western Ontario Competition in the Bottled Water Industry C-70 John E. Gamble, University of South Alabama Dollar General and the Extreme Value Retailing Industry C-86 Sue A. Cullers, Tarleton State University S. Stephen Vitucci, Tarleto;"State University-Central Texas

Growth Strategy and Slotting at No Pudge! Foods, Inc. C-102 Chris Robertson, Northeastern University

Dell Computer in 2003: Driving for Industry Leadership C-I09 Arthur A. Thompson, The University of Alabama John E. Gamble, University of South Alabama

9. Electronic Arts and the Global Video Game Industry C-140 Arthur A. Thompson, The University of Alabama

10. Nexity and the U.S. Banking Industry C-163 John Frank Yother, the University of Alabama

11. Making It Big C-185 Joan Winn, University of Denver

12. Outback Steakhouse C-197 Sarah June Gauntlett, University of Alabama

13, McDonald's: Polishing the Golden Arches C-213 Lou Marino, The University of Alabama Katy Beth Jackson, The University of Alabama

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14. Maple Leaf Consumer Foods-Fixing Hot Dogs C-235 Allen Morrison, The University of Western Ontario

15. Krispy Kreme Doughnuts, Inc. C-245 Arthur A. Thompson, The University of Alabama Amit J Shah, Frostburg State University

16. Andrea Jung and Avon Products in 2003: Accelerating the Transformation C-267 John E. Gamble, University of South Alabama

III 17. eBay: In a League by Itself C-292 Louis Marino, The University of Alabama Patrick Kreisler, The University of Alabama

18. Note on the Security Management and Manufacturers Industry C-3l8 Marilyn L. Taylor, University of Missouri-Kansas City Theresa A. Coates, Rensselaer Polytechnic Institute

19. Pivot International-Pursuing Growth C-343 Marilyn L. Taylor, University of Missouri-Kansas City Theresa A. Coates, Rensselaer Polytechnic Institute

20. Bayer AG: Children's ASPIRIN C-360 Lauranne Buchanan, Thunderbird-The American Graduate School of International Management Christopher K. Merker, Thunderbird-The American Graduate School of International Management

21. Harley-Davidson C-376 John E. Gamble, University of South Alabama Roger Schiifer, University of South Alabama

22. Hero Honda Motors (India) Ltd.: Is It Honda That Made It a Hero? C-396 Kannan Ramaswamy, Thunderbird-The American Graduate School of International Management Rahul Sanchez, Thunderbird-The American Graduate School of International Management

23. Puma AG C-41l Lutz Kaufmann, The WHU Otto Beisheim Graduate School of Management

24. The Globalization of Beringer Blass Wine Estates C-433 Armand Gilinsky, Jr., Sonoma State University Raymond H. Lopez, Pace University Richard Castaldi, San Francisco State University

Section B: Crajiing Strategy in Diversified Companies 25. Land O'Lakes, Inc. C-46 I

Michael A. Boland, Kansas State University VincentAmanor-Boadu, Kansas State University David Barton, Kansas State University

II 26. Unilever's Path to Growth Strategy: Is It Working? C-479 Arthur A. Thompson, The University of Alabama

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II 27. LVMH's Diversification Strategy into Luxury Goods C-509 John E. Gamble, University of South Alabama

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Section C: Implementing and Executing Strategy

28. Robin Hood C-532 Joseph Lampe!, New York University

29. Procter & Gamble: Organization 2005 and Beyond C-534 Ravi Madapati, ICFAI Knowledge Center

30. The Global Leadership of Carlos Ghosn at Nissan C-546 John P Millikin, Thunderbird-The American Graduate School of International Management Dean Fu, Thunderbird-The American Graduate School of International Management

31. Wal-Mart Stores, Inc.: A New Set of Challenges C-557 Arthur A. Thompson, The University of Alabama

32. Krnart: Striving for a Comeback C-583 John E. Gamble, University of South Alabama

33. The Portman Ritz-Carlton: Asia's Best Employer C-603 Matthew Chang, International Institute for Management Development Ellie Weldon, International Institute for Management Development