Crafting and THE QUEST FOR COMPETITIVE ADVANTAGE: Concepts ... ? Crafting and Executing Strategy THE

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  • Crafting and

    Executing

    Strategy

    THE QUEST FOR COMPETITIVE ADVANTAGE:

    Concepts I TWENTY-FIRST EDITION

    Arthur A. Thompson

    The University of Alabama

    Margaret A. Peteraf

    Dartmouth College

    John E. Gamble

    Texas A&M University-Corpus Christi

    A.J. Strickland III

    The University of Alabama

    Mc Graw Hill Educatiori

  • CONTENTS

    PARTI Concepts and Techniques for Crafting and Executing Strategy 1

    Section A: Introduction and Overview

    1 What Is Strategy and Why Is It Important? 2

    WH AT DO WE ME AN BY STRATEGY? 3 Strategy Is about Competing Differently 4 Strategy and the Quest for Competitive Advantage 4 Why a Company's Strategy Evolves over Time 8 A Company's Strategy Is Partly Proactive and Partly Reactive 8

    A COMPANY'S STRATEGY AND ITS BUSINESS MODEL 9 WHAT MAKES A STRATEGY A WINNER? 12 WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS 13

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

    ILLUSTRATION CAPSULES 1.1 Starbucks's Strategy in the Coffeehouse Market 6 1.2 Pandora, SiriusXM, and Over-the-Air Broadcast Radio:

    Three Contrasting Business Models 11

    2 Charting a Company's Direction: Its Vision, Mission, Objectives, and Strategy 18

    WHAT DOES THE STRATEGY-MAKING, STRATEGY-EXECUTING PROCESS ENTAIL? 19 STAGE1: DEVELOPING A STRATEGIC VISION, MISSION STATEMENT, AND SET OF CORE VALUES 20

    Developing a Strategie Vision 21 Communicating the Strategie Vision 21 Developing a Company Mission Statement 24 Linking the Vision and Mission with Company Values 25

    STAGE 2: SETTING OBJECTIVES 26 The Imperative of Setting Stretch Objectives 26 What Kinds of Objectives to Set 28 The Need for a Balanced Approach to Objective Setting 28 Setting Objectives for Every Organizational Level 30

    xxxi

  • xxxii CONTENTS

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

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

    ILLUSTRATION CAPSULES 2.1 Examples of Strategie VisionsHow Well Do They Measure Up? 23 2.2 Patagonia, Inc.: A Values-Driven Company 27 2.3 Examples of Company Objectives 30 2.4 Corporate Governance Failures at Volkswagen 40

    SectionB: Core Concepts and Analytical Tools

    3 Evaluating a Company's External Environment 46

    THE STRATEGICALLY RELEVANT FACTORS IN THE COMPANY'S MACRO-ENVIRONMENT 47 ASSESSING THE COMPANY'S INDUSTRY AND COMPETITIVE ENVIRONMENT 49 THE FIVE FORCES FRAMEWORK 50

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

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

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

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

  • CONTENTS xxxiii

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

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

    Dining Industry: A Strategie Group Map Example 72

    4 Evaluating a Company's Resources, Capabilities, and Competitiveness 82

    QUESTION 1: HOW WELL IS THE COMPANY'S PRESENT STRATEGY WORKING? 83 QUESTION 2: WHAT ARE THE COMPANY'S MOST IMPORTANT RESOURCES AND CAPABILITIES, AND WILL THEY GIVE THE COMPANY A LASTING COMPETITIVE ADVANTAGE OVER RIVAL COMPANIES? 87

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

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

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

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

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

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

    Strategie Implications of Competitive Strength Assessments 111 QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION? 112

    ILLUSTRATION CAPSULES 4.1 The Value Chain for Boll & Branch 102 4.2 Delivered-Cost enchmarking in the Cement Industry 106

  • xxxiv CONTENTS

    Section C: Crafting a Strategy

    5 The Five Generic Competitive Strategies 120

    TYPES OF GENERIC COMPETITIVE STRATEGIES 121 LOW-COST PROVIDER STRATEGIES 122

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

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

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

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

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

    Successful Competitive Strategies Are Resource-Based 143

    ILLUSTRATION CAPSULES 5.1 Amazon's Path to Becoming the Low-Cost Provider in E-commerce 127 5.2 Clirucas del Azcar's Focused Low-Cost Strategy 137 5.3 Canada Goose's Focused Differentiation Strategy 139 5.4 American Giant's Best-Cost Provider Strategy 142

    6 Strengthening a Company's Competitive Position: Strategie Moves, Timing, and Scope of Operations 148

    LAUNCHING STRATEGIC OFFENSIVES TO IMPROVE A COMPANY'S MARKET POSITION 149

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

    DEFENSIVE STRATEGIESPROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE 153

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

  • CONTENTS XXXV

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

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

    Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results 161

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

    OUTSOURCING STRATEGIES: NARROWING THE SCOPE OF OPERATIONS 167

    The Risk of Outsourcing Value Chain Activities 168 STRATEGIC ALLIANCES AND PARTNERSHIPS 169

    Capturing the Benefits of Strategie Alliances 171 The Drawbacks of Strategie Alliances and Partnerships 172 How to Make Strategie Alliances Work 173

    ILLUSTRATION CAPSULES 6.1 Bonobos's Blue-Ocean Strategy in the U.S. Men's Fashion Retail Industry 154 6.2 Uber's First-Mover Advantage in Mobile Ride-Hailing Services 157 6.3 Bristol-Myers Squibb's "String-of-Pearls" Horizontal Acquisition Strategy 162 6.4 Kaiser Permanente's Vertical Integration Strategy 167

    7 Strategies for Competing in International Markets 178

    WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS 179 WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY MAKING MORE COMPLEX 181

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

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

  • xxxvi CONTENTS

    INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES 193 Multidomestic Strategiesa "Think-Local, Act-Local" Approach 194 Global Strategiesa "Think-Global, Act-Global" Approach 195 Transnational Strategiesa "Think-Global, Act-Local" Approach 196

    INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE 199

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

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

    STRATEGIES FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES 204

    Strategy Options for Competing in Developing-Country Markets 204 DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES 206

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

    Followed by Merger 192 7.2 Four Seasons Hotels: Local Character, Global Service 198 7.3 How Ctrip Successfully Defended against International Rivals to

    Become China's Largest Online Travel Agency 208

    8 Corporate Strategy: Diversification and the Multibusiness Company 214

    WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? 215 WHEN TO CONSIDER DIVERSIFYING 216 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING 217 APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP 218

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

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

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

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

  • CONTENTS xxxvii

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

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

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

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

    Strategie Fit 229 8.2 Restructuring for Better Performance at Hewlett-Packard (HP) 252

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

    WHAT DO WE MEAN BY BUSINESS ETHICS? 259 WHERE DO ETHICAL STANDARDS COME FROM-ARE THEY UNIVERSAL OR DEPENDENT ON LOCAL NORMS? 260

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

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

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

    STRATEGY, CORPORATE SOCIAL RESPONSIBILITY, AND ENVIRONMENTAL SUSTAINABILITY 272

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

  • xxxviii CONTENTS

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

    Fighting the Root Causes of Child Labor 263 9.2 How Novo Nordisk Puts Its Ethical Principles into Practice 270 9.3 Warby Parker: Combining Corporate Social Responsibility with Affordable

    Fashion 275 9.4 Unilever's Focus on Sustainability 280

    Section D: Executing the Strategy

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

    A FRAMEWORK FOR EXECUTING STRATEGY 292 The Principal Components of the Strategy Execution Process 292

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

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

    DEVELOPING AND BUILDING CRITICAL RESOURCES AND CAPABILITIES 300

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

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

    ILLUSTRATION CAPSULES 10.1 Management Development at Deloitte Touche Tohmatsu Limited 298 10.2 Zara's Strategy Execution Capabilities 304 10.3 Which Value Chain Activities Does Apple Outsource and Why? 307

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

    ALLOCATING RESOURCES TO THE STRATEGY EXECUTION EFFORT 321 INSTITUTING POLICES AND PROCEDURES THAT FACILITATE STRATEGY EXECUTION 323

  • CONTENTS xxxix

    ADOPTING BEST PRACTICES AND EMPLOYING PROCESS MANAGEMENT TOOLS 325

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

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

    USING REWARDS AND INCENTIVES TO PROMOTE BETTER STRATEGY EXECUTION 334

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

    ILLUSTRATION CAPSULES 11.1 Charleston Area Medical Center's Six Sigma Program 330 11.2 How the Best Companies to Work for Motivate and Reward Employees 337 11.3 Nucor Corporation: Tying Incentives Directly to Strategy Execution 340

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

    INSTILLING A CORPORATE CULTURE CONDUCIVE TO GOOD STRATEGY EXECUTION 347

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

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

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

    ILLUSTRATION CAPSULES 12.1 Strong Guiding Principles Drive the High-Performance Culture at Epic 349 12.2 Culture Transformation at America Latina Logfstica 363

    INDEXES COMPANY 1-1

    NAME I-7

    SUBJECT 1-11

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