[SOLVED] MANA 5395 The University of Texas at Tyler Management Discussion – Business Finance

2) Where Does Economic Value Go?In a properly functioning economic market, where does the economic value created by firms go? In other words, who gets it? Why?Think about the phrase “properly functioning economic market” in the previous sentence. What does this mean? This assumption (“in a properly functioning economic market. . .”) is intended to imply that Figure 1 is a closed system (i.e. that it’s possible, for example, for individual firms to operate in a market context without producing externalities, positive or negative). Is this really possible? For example, given that firm behavior has the potential to contribute to the stability (or instability) of the larger economic system itself, doesn’t this imply that firms always have some systemic or social responsiblity?Systemic analysis is about understanding the role of firms in the larger social system. Take a look at the rectangle labeled “firms” in the above sketch. What kind of control, if any, should society be able to exercise over what goes on in this box? How can (do) firms exercise influence over society with regard to societal attempts to control firm behavior (see arrows #4 and #5 in Figure 1)?STRATEGIC
Personalize
with Your
Notes
MANAGEMENT
CONCEPTS AND CASES
JEFF DYER / PAUL GODFREY
ROBERT JENSEN / DAVID BRYCE
Carry What
You Need
Succeed
In Praise of Strategic Management
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“Clearly, the greatest strength is the uniqueness of the information as compared to
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texts I have seen or used.”
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STRATEGIC
MANAGEMENT
C O N C E P T S A N D T O O L S F O R C R E AT I N G R E A L W O R L D S T R A T E G Y
JEFF DYER
Brigham Young University, Marriott School
PAUL GODFREY
Brigham Young University, Marriott School
ROBERT JENSEN
Brigham Young University, Marriott School
DAVID BRYCE
Brigham Young University, Marriott School
VICE PRESIDENT & DIRECTOR George Hoffman
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FREELANCE MARKETING SPECIALIST Kelly Simmons
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ISBN 9781118976586 (Prelim)
ISBN 9780470937389 (BRV)
ISBN 9781119134756 (EVALC)
ISBN 9781119134763 (Concepts BRV)
Library of Congress Cataloging-in-Publication Data
Dyer, Jeff (Professor of Strategy)
Strategic management / Jeff Dyer, Paul Godfrey, Robert Jensen, David Bryce.
pages cm
Includes index.
ISBN 978-0-470-93738-9 (looseleaf)
1. Strategic planning. I. Title.
HD30.28.D9223 2015
658.4c012—dc23
2015020159
The inside back cover will contain printing identification and country of origin if omitted from this page. In
addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is correct.
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
fm.indd 6
10/12/2015 12:36:14 PM
About the Authors
JEFF DYER (Ph.D., UCLA, 1993) is the is
the Horace Beesley Professor of Strategy
at the Marriott School, BYU where he
serves as Chair of the Department of
Organizational Leadership and Strategy.
Before joining BYU, Dr. Dyer was a
professor at the University of Pennsylvania’s
Wharton School where he maintains an
adjunct professor position and continues
to teach Executive MBAs. Dr. Dyer’s has considerable consulting
experience, having spent 5 years working as a strategy consultant
and manager at Bain & Company, where he consulted with such
clients as Baxter International, Kraft, Maryland National Bank,
and First National Stores. Since then he has been a consultant,
speaker, or trainer for a variety of companies, including Adobe,
AT&T, Cisco, General Electric, General Mills, Gilead Sciences,
Harley-Davidson, Hewlett Packard, Intel, Johnson & Johnson,
and Sony. Dyer is the only strategy scholar in the world to have
published at least five times in the Harvard Business Review and
five times in Strategic Management Journal, the top academic
journal in the strategy field. In 2012, he was ranked the world’s
#1 “most influential” management scholar among scholars who
completed their Ph.D.s after 1990. This ranking, published in
Academy of Management Perspectives, was based upon an equal
weighting of academic citations (academic influence) and
non-“.edu” Google searches (business influence). His recent
book, The Innovator’s DNA, is a business best seller and has been
published in 13 languages, and his new book, The Innovator’s
Method, has already hit top 10 business bestseller lists.
PAUL C. GODFREY (Ph.D., Washington,
1994) currently serves as the William and
Roceil Low Professor of Business Strategy
in the Marriott School of Management at
Brigham Young University. Paul teaches
classes to BYU undergraduates, as well as
MBA and Executive MBA students, and
he was honored in 2013 with the Marriott
School’s Teaching Award. His research has
appeared in the Academy of Management Review, the Strategic
Management Journal, the Journal of Business Ethics, and the
Journal of Management Inquiry. He has recently published a
book on eliminating poverty with Stanford University Press.
He has also co-edited two other books and served as a special
issue editor for two academic journals. He currently serves as
Associate Academic Director of the Economic Self-Reliance
Center at the Marriott School, and he has been working with
Habitat for Humanity of Utah County for the past 18 months
in refining their strategic plan. Paul received his MBA and PhD
degrees from the University of Washington and a Bachelor of
Science degree in Political Science from the University of Utah.
ROBERT J. JENSEN (Ph.D., Wharton,
2006) serves as the Whitman Faculty
and Peery Research Fellow Associate
Professor of Strategy and International
Business at the Marriott School, BYU.
Robert teaches undergraduate classes
in Strategy and Global Strategy and
Master’s Degree classes in Strategy.
He has published in many of the top
management journals, including Strategic Management
Journal, Organization Science, Management Science,
and the Journal of International Business Studies (where
he currently serves on the editorial review board). His
professional awards include the McKinsey & Company/
SMS Best Conference Paper prize, honorable mention;
finalist for both the Blackwell Best Dissertation Prize from
the Academy of Management, and the William H. Newman
Best Paper from a Dissertation award, and runner up for
the Booz Allen Hamilton/SMS Ph.D. fellowship. His work
was honored as the best paper published in Competitiveness
Review in 2009, and his papers have been selected seven
times for the best paper proceedings of the Academy of
Management.
DAVID J. BRYCE (Ph.D., Wharton, 2003)
is Associate Professor of Organizational
Leadership and Strategy at the Marriott
School of Management and has been
an adjunct Associate Professor of
Management at the Wharton School
where he has taught strategy in the MBA
program for executives. David earned a
Ph.D. in strategy and applied economics
from the Wharton School and is author on a number of
thought-leading articles for senior executives, including
articles in the Harvard Business Review. He conducts
research in the area of corporate strategy and has published
in top academic journals such as Management Science and
Organization Science. For more than 20 years, he has served
as consultant on important strategic challenges to executives
of start-ups, mid-market companies, and major corporations,
including Eli Lilly, Prudential, Procter & Gamble, Microsoft,
Johnson & Johnson, and the LG Group. He has worked with
clients on enterprise strategy, new market entry, branding,
pricing, positioning, and growth. He has also conducted
many strategy-oriented leadership training sessions over the
past 10 years within the Fortune 50, including extensively
at Microsoft. Prior to his academic career, he held partner,
vice president, and other senior positions at several global
management consulting firms.
[ vii ]
Preface
Why does the world need another strategy textbook? The answer is that we simply have
not been able to find a textbook that we felt fully met the needs of our students. What are
those needs? First, we wanted to write a textbook that would engage students’ interest
using numerous practical examples and tools that would help them actually DO analysis to
answer key strategic questions.
For example, leading firms and strategy consulting firms have tools to teach strategists
how to actually conduct a “5 Forces” analysis, calculate a scale or experience curve, or conduct a net promoter score analysis. We wanted to provide those tools. We also wanted to
create interactive learning tools that would connect with a new generation of learners. This
meant we needed to provide interactive digital learning experiences such as the “white
board” animated videos that we have created to support our textbook. When students are
more engaged, they learn more—and they enjoy it more! Not surprisingly, this increases
student satisfaction with the course and the professor.
As we looked at how we could create an enjoyable and engaging strategy course learning
experience, we realized as an author group that we were somewhat uniquely qualified to
create that type of experience. Why? Because we collectively have over 13 years of full-time
management consulting experience at top consulting firms.
Why does this matter? Because we have practical experience applying strategy concepts
and tools to real companies—practical experience that we have embedded in this textbook.
Perhaps just as important, we know how to write to a management audience, having published three books targeting a practitioner audience, seven articles in Harvard Business
Review, and another four articles in Sloan Management Review. Perhaps most important
is the fact that we’ve tested the text, cases, video animations, and strategy tools with large
groups of business students at BYU and Wharton over the past 10 years—with remarkable
results. Average student satisfaction ratings have been 6.6/7.0 across multiple instructors
for strategy courses using our materials. The bottom line is that we see better student satisfaction and higher teaching ratings because of using this material. In just the past year,
we have class tested Strategic Management at over 40 institutions with over 900 students. In
exit surveys, 76% of students rated the experience as positive or very positive. A few of their
quotes are in the margin below.
Key Book Differentiators
Because this is a strategy book, we should tell you that our strategy in writing this book is to
offer unique value. The key differentiators of this book can be summarized with the acronym
TACT—Text, Animated Executive Summary Videos, Cases, and Tools.
MY FAVORITE ASPECT WAS THE EXAMPLES
USED TO EXPLAIN THE CONCEPTS.
IT REALLY HELPED ME UNDERSTAND THE
MATERIAL.
–BILL BOCHICCHIO, STUDENT,
VILLANOVA UNIVERSITY
THE WHITEBOARD ANIMATIONS WERE
VERY ENTERTAINING AND HELPED
EXPLAIN SOME OF THE CONCEPTS IN
REAL LIFE SITUATIONS.
–CAMERON LANDRY, STUDENT,
MCNEESE STATE UNIVERSITY
1
Text. Each of our chapters is written in an accessible Harvard Business Review style
with lots of practical examples, and each chapter is roughly 20 percent shorter than
the chapters of the average strategy textbook. You can assign the whole chapter (not
just a few pages) and feel confident that your students will not perceive it as a waste of
time. This is not to say that we haven’t included core strategy concepts, frameworks, and
theories. They are all there.
Animated Executive Summary Videos. Each chapter is accompanied by at least one
8-10 minute animated video that brings the content to life. Today’s students love to learn
through interactive technology, and student response to our animated videos has been
positively off-the-charts. Research shows that student recall increases by more than 15
percent when material is presented with a white board animation versus a typical talking
head lecture.1 These animated videos allow you to flip the classroom. When students
Study by Richard Wiseman. Available at http://www.sparkol.com/blog/how-scribe-videos-increase-your-studentslearning-by-15/
[ viii ]
PREFACE
[ ix ]
view the videos before class, they get the core concepts in a memorable way. Then you
have more time to discuss questions and help them deeply understand and synthesize
the concepts and tools.
Cases. We will admit that differentiating cases isn’t easy, but we think we’ve done a
few things to make using our cases easier. Our cases offer new, shortened, and updated
“classic” cases on familiar companies (e.g., Walmart, Coke and Pepsi, Intel, Southwest,
Nike, etc.). If you build your course around these cases, you’ll experience very low
switching costs moving to our book. We’ve also written cases on companies and topics
that millennials gravitate to such as Amazon, Harley-Davidson, Skype, Netflix/Redbox/
Hulu, Samsung, and the AT&T-Apple alliance.
We also provide brief Case Notes and PowerPoint presentations to summarize key
takeaways for each case.
Tools. Almost every chapter will offer a “Strategy Tool” to teach students how to apply
a theory, framework, or concept. Students will feel like they have learned how to DO
something—actually conduct analysis that will help with strategic decisions. Some of
these tools are used in Fortune 500 companies and in strategy consulting firms such as
Bain, BCG, and McKinsey when they do strategy analysis for clients. For example, the
book shows the student how to assess the attractiveness of an industry, how to calculate
and use a scale or experience curve, how to create a net promoter score to assess whether
a differentiation strategy is working, and how to decide whether to “make” versus “buy.”
Many of the end-of-chapter cases integrate the strategy tool into the case so you can
easily have students apply the tool as they analyze the case. Our students tell us that
these tools help them feel that they are acquiring useful analytical skills to help them in
making strategic decisions.
We think the combination of well-conceived and executed Text, Animated Executive Summary Videos, Cases, and Tools can dramatically improve student satisfaction with your
strategy course. Indeed, a random sample of strategy professors who reviewed our text book
preferred it over their current textbooks by almost 4:1. That’s a pretty powerful endorsement.
So, does the world need another strategy text? We answer “yes,” and we offer one that
provides students with a well-designed, engaging, and learning-rich combination of TACT:
Text, Animated Executive Summary Videos, Cases, and Tools. We’ve also found that, when
our students enjoy their courses, we enjoy teaching much more.
Student and Instructor Resources
Companion Website. The Strategic Management Website at http://www.wiley.com/
college/dyer contains myriad tools and links to aid both teaching and learning, including
resources listed here.
Teaching Notes. The Teaching Notes offer helpful teaching ideas. They offer chapterby-chapter text highlights, learning objectives, chapter outlines, and answers to end-ofchapter material.
Case Notes. Written for each case presented with Strategic Management, each Case
Note includes a brief case summary, learning objectives for the instructor, learning
outcomes for the students, and a brief teaching plan with questions and answers. In
addition, we’ve provided a matrix showing alternative teaching approaches for each case.
Test Bank. This comprehensive Test Bank contains nearly 100 questions per chapter.
The multiple-choice, fill-in, and short-essay questions vary in degree of difficulty. All
questions are tagged with learning objectives, Bloom’s Taxonomy categories, and AACSB
Standards. The Computerized Test Bank allows instructors to modify and add questions
to the master bank and to customize their exams. In addition, a Respondus Test Bank is
available for use with learning management systems.
PowerPoint Presentation Slides. This robust set of slides for chapters and cases can
be accessed on the instructor companion site. Lecture notes accompany most slides.
A set of slides without lecture notes is available on the student companion site.
THE CASES WERE MY FAVORITE
PART—UNDERSTANDING REAL
WORLD EXAMPLES HELPED PUT
THINGS INTO PROPER PERSPECTIVE.
– PHILIP SIEKMANN, STUDENT,
PENNSYLVANIA COLLEGE OF
TECHNOLOGY
I LIKED THE EXAMPLES AND THEIR
OVERALL RELEVANCE. I ALSO LIKED
THE STRATEGIC TOOLS AND THE
EXPLANATIONS.
–DAVID GRANTHAM, STUDENT,
KENNESAW STATE UNIVERSITY
I FOUND IT TO BE A VERY EASY READ.
IT WAS ONE OF THE FEW BUSINESS
TEXTBOOKS THAT I ENJOYED
READING WHICH MADE LEARNING
EASIER AND MORE FUN.
–TAYLOR LEE, STUDENT,
SAN JOSE STATE UNIVERSITY
[x]
PREFACE
WileyPLUS Learning Space
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A place where students can define their strengths and nurture these skills, WileyPLUS
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Acknowledgements
Writing a book is a daunting task, and we’ve had much help in this process. We thank our
colleagues in the Academy for years of interactions too numerous to mention, but each of
which enlarged our view and clarified our understanding of how to teach strategy most
effectively. Thanks to our colleagues and our students at BYU and the Wharton School for
their excellent feedback on drafts of our book. Their insightful comments on the text, animations, cases, and tools brought gaps and holes to light that we would have missed. Thank you
to James Aida, Preston Alder, David Benson, Jared Brand, Tyler Cornaby, Caleb Flint, Mark
Hansen, Michael Hendron, Bryson Hilton, Chad Howland, Benjamin King, David Kryscynski, Jake Lundin, Christian Mealey, Matthew Moen, Kyle Nelson, Lee Perry, and Erin Pew for
their research and assistance writing the cases.
We gratefully acknowledge the advice, cooperation, wisdom, and work of the team at
John Wiley who shepherded this book from its inception to its publication. Executive Editor
Lisé Johnson, Sponsoring Editor Jennifer Manias, Freelance Editor Susan McLaughlin,
Product Design Manager Allison Morris, and Marketing Managers Christopher DeJohn and
Kelly Simmons have all taught us about the process of bringing such a massive undertaking
to fruition. Their professionalism has enriched the content of the book and our own lives,
and their patience with us as we moved through the process has been inspiring. In addition,
we’d like to thank the remainder of the team at Wiley: Thomas Nery, Suzie Chapman, Billy
Ray, Elena Santa Maria, and Amanda Dallas.
Finally, we’d like to thank the numerous reviewers who have contributed valuable time
and incredible feedback:
Reviewers
Joshua Aaron, East Carolina University
Mitchell Adrian, McNeese State University
A D Amar, Seton Hall University
Kristin Backhaus, SUNY New Paltz
Chip Baumgardner, Penn College
Brian Boyd, Arizona State University
Luke Cashen, Nicholls State University
Kalyan Chakravarty, California State University, Northridge
Brian Connelly, Auburn University
Kristal Davison, University of Mississippi
Meredith Downes, Illinois State University
Linda Edelman, Bentley University
James Fiet, University of Louisville
Quentin Fleming, University of South Carolina
William Forster, Lehigh University
Donna Galla, American Military University
Joseph Goldman, University of Minnesota
John Guarino, Averett University
William Hayden, SUNY Buffalo
Michael Hennelly, West Point
Tim Holcomb, Florida State University
Lucas Hopkins, Middle Georgia State University
David Hover, San Jose State University
M. Nesij Huvaj, University of Connecticut
Joy Karriker, East Carolina University
Richard Kernochan, California State University, Northridge
Konghee Kim, St. Cloud State University
John Lipinski, Middle Tennessee State University
Al Lovvorn, The Citadel
Dali Ma, Drexel University
Tatiana Manilova, Bentley University
Ismatilla Mardanov, Southeast Missouri State University
Daniel Marrone, Farmingdale State College
Michael McDermott, Northern Kentucky University
Ghoreishi Minoo, Millersville University
Mike Montalbano, Bentley University
John Morris, Oregon State University
Patricia Norman, Baylor University
William Norton, Georgia Southern University
Roman Nowacki, Northern Illinois University
Don Okhomina, Fayetteville State University
Hugh O’Neill, University of North Carolina
Christopher Penney, Mississippi State University
Peter Pinto, Bowling Green University
Herve Queneau, Brooklyn College
Amit Shah, Frostburg State University
James Spina, University of Maryland
Don Stull, Texas Tech University
Ram Subramanian, Montclair State University
Charles Wainwright, Belmont University
Jorge Walter, Portland State University
Edward Ward, St. Cloud State University
Paula Weber, St. Cloud State University
Yanli Zhang, Montclair State University
Focus Group Participants
Mitchell Adrian, McNeese State University
Frances Amatucci, Slippery Rock University of Pennsylvania
[ xi ]
[ xii ]
ACKNOWLEDGEMENTS
Elsa Anaya, Palo Alto Community College
Bindu Arya, University of Missouri, St Louis
Koren Borges, University of North Florida
Kalyan Chakravarty, California State University, Northridge
Larry Chasteen, University of Texas, Dallas
William Forster, Lehigh University
Dean Frost, Bemidji State University
Anne Fuller, California State University, Sacramento
Donna Galla, American Military University
Lucas Hopkins, Middle Georgia State University
Dawn Keig, Brenau University
Vance Lewis, University of Texas, Dallas
Sali Li, University of South Carolina
John Lipinski, Middle Tennessee State University
Cindy Liu, Cal State Polytechnic University
Daniel Marrone, Farmingdale State College
Don Okhomina, Fayetteville State University
Michael Provitera, Barry University
Herve Queneau, Brooklyn College
Timothy Rogers, Ozarks Tech Community College
Veronica Rosas-Tatum, Palo Alto Community College
Mark Ryan, Hawkeye Community College
Stephen Takach, University of Texas, San Antonio
Beverly Tyler, North Carolina State University
Edward Ward, St. Cloud State University
James Weber, St. Cloud State University
Carol Young, Metropolitan State University
Wiley Technology Summit Participants
Lakami Baker, Auburn University
Brent Beal, University of Texas, Tyler
Larry Chasteen, University of Texas, Dallas
Dean Frost, Bemidji State University
Stephen Hallam, University of Akron
David King, Iowa State University
Donald Kopka, Towson University
Marie Milena Loubeau, Miami Dade College
Don Okhomina, Fayetteville State University
Thomas Shirley, San Jose State University
Thomas Swartwood, Drake University
Class Testers
Mitchell Adrian, McNeese State University
Rajshree Agarwal, University of Maryland, College Park
Francis Amatucci, Slippery Rock University
Jeff Bailey, University of Idaho
Lakami Baker, Auburn University
Chip Baumgardner, Penn College
Brent Beal, University of Texas, Tyler
Gregory Blundell, Kent State University, Kent
John Buttermore, Slippery Rock University
McKay Christensen, Brigham Young University
Daniel Connors, Providence College
Dean Frost, Bemidji State University
James Glasglow, Villanova University
David Gras, Texas Christian University
John Guarino, Averett University
Uma Gupta, Buffalo State University
Stephen Hallam, University of Akron
John Hopkins, Clemson University
Paul Hudec, Wisconsin School of Engineering
David King, Iowa State University
Donald Kopka, Towson State University
David Kryscynski, Brigham Young University
Martin Lewison, Farmingdale State College
George Mason, Providence College
Stuart Napshin, Kennesaw State University
Scott Newbert, Villanova University
Roman Nowacki, Northern Illinois University
Don Okhomina, Fayetteville State University
Paulo Prochno, University of Maryland, College Park
Rhonda Rhodes, Cal Poly Pomona
William Ritchie, James Madison University
Douglas Sanford, Towson University
Ben Shaffer, University of Wisconsin, Milwaukee
Lois Shelton, California State University, Northridge
Thomas Shirley, San Jose State University
Richard Smith, Iowa State University
Roger Strickland, Santa Fe College
Thomas Swartwood, Drake University
Ram Subramanian, Montclair State University
Xiwei Yi, University of Houston, Downtown
Yuping Zeng, Southern Illinois University,
Edwardsville
Student Focus Group Participants
Rachel Abel, Auburn University
William Annan, Villanova University
Andrea Arbon, Brigham Young University
Vincent Arrington, McNeese State University
Brian Basili, Villanova University
Kelly Becker, Clemson University
Cody Brackett, Iowa State University
Doreen Compher, The University of Akron
Lincoln Eppard, Iowa State University
Laura Eppley, Kent State University
Hannah Gay, University Wisconsin, Milwaukee
Yuliya Gitman, Drake University
Laura Jones, University of Texas at Tyler
Daniel Larsen, Iowa State University
Tyler Look, Auburn University
Miranda Matuke, Bemidji State University
Michael Minocchi, Kent State University
Monica Ghadiyaram, Virginia Tech
Moriah Mitsuda, Brigham Young University
Ashley Mueller, University Wisconsin, Milwaukee
Rebeka Perkins, Santa Fe College
Zaineb Sehgal, University of Texas at Tyler
Bryttan Thompson, Iowa State University
Mythy Tran, Santa Fe College
Taylor VanDevender, McNeese State University
Corrie VanDyke, Clemson University
Kelsey Vetter, Iowa State University
Christopher Wahl, Drake University
Courtney Weiner, Towson University
Stew Williamson, Brigham Young University
Sarah Wright, The University of Akron
Lynn Wu, Virginia Tech
Brief Contents
SECTION I: OVERVIEW
Chapter 01: What Is Business Strategy?
2
SECTION II: EXTERNAL ENVIRONMENT
Chapter 02: Analysis of the External Environment: Opportunities and Threats
20
SECTION III: THE NATURE OF BUSINESS UNIT COMPETITIVE ADVANTAGE
Chapter 03: Internal Analysis: Strengths, Weaknesses, and Competitive Advantage
Chapter 04: Cost Advantage
Chapter 05: Differentiation Advantage
46
66
86
SECTION IV: CORPORATE LEVEL STRATEGIES
Chapter 06: Corporate Strategy
Chapter 07: Vertical Integration and Outsourcing
Chapter 08: Strategic Alliances
Chapter 09: International Strategy
106
128
146
168
SECTION V: STRATEGY IN DYNAMIC ENVIRONMENTS
Chapter 10: Innovative Strategies That Change the Nature of Competition
Chapter 11: Competitive Strategy
194
214
SECTION VI: MAKING AND IMPLEMENTING STRATEGY
Chapter 12: Implementing Strategy
Chapter 13: Corporate Governance and Ethics
Chapter 14: Strategy and Society
236
256
274
CASEBOOK
CASE 01: Walmart Stores: Gaining and Sustaining Competitive Advantage
CASE 02: Coca-Cola and Pepsi: The Shifting Landscape of the Carbonated Soft Drink Industry
CASE 03: Intel (A): Dominance in Microprocessors
CASE 04: Southwest Airlines: Flying High with Low Costs
CASE 05: Harley-Davidson: Growth Challenges Ahead
CASE 06: Intel (B): Responding to the Smart Phone Threat
CASE 07: Nike: Sourcing and Strategy in Athletic Footwear
CASE 08: AT&T and Apple: a Strategic Alliance
CASE 09: Samsung: Overtaking Philips, Panasonic, and Sony as the Leader in
the Consumer Electronics Industry
CASE 10: New Business Models: Netflix, Redbox, Hulu, and Others in Home Movie Entertainment
CASE 11: Smartphone Wars
CASE 12: Lincoln Electric: Aligning for Global Growth
CASE 13: Corporate Governance and Ethics: A Series of Decisions
CASE 14: Safe Water Network: Mastering the Model at Dzemeni
CASE 15: Walmart versus Amazon.com (recommended for Chapters 1, 3, 4, 11)
CASE 16: Skype: Competing with Free (recommended for Chapters 10, 4, 11)
CASE 17: Sears: In Need of a Turnaround Strategy (recommended for Chapter 13)
C-2
C-12
C-22
C-32
C-45
C-54
C-62
C-70
C-82
C-92
C-101
C-112
C-119
C-121
C-132
C-142
C-152
[ xiii ]
Contents
SECTION I: OVERVIEW
CHAPTER 01: WHAT IS BUSINESS STRATEGY?
2
STRATEGY AT APPLE 4
OVERALL INDUSTRY ATTRACTIVENESS 33
WHAT IS BUSINESS STRATEGY? 5
Competitive Advantage 6
Strategy in Practice: Measuring American Home
Products’ Competitive Advantage 6
The Strategic Management Process 7
WHAT INFORMATION AND ANALYSIS GUIDES
STRATEGY FORMULATION? 10
Mission 10
External Analysis 10
Internal Analysis 11
Strategy in Practice: Apple’s Evolving Mission 11
HOW ARE STRATEGIES FORMULATED? 12
Strategy Vehicles for Achieving Strategic
Objectives 12
Strategy Implementation 13
WHO IS RESPONSIBLE FOR BUSINESS STRATEGY? 14
Strategy in Practice: Walmart Functional Strategies
Implement the Overall Strategy 14
Who Benefits from a Good Business Strategy? 15
Ethics and Strategy: The Price Companies Pay to Stay
Competitive 15
Why You Need to Know Business Strategy 16
ì SUMMARY 16
ì KEY TERMS 17
ì REVIEW QUESTIONS 17
ì APPLICATION EXERCISES 18
ì REFERENCES 18
SECTION II: EXTERNAL ENVIRONMENT
CHAPTER 02: ANALYSIS OF THE EXTERNAL
ENVIRONMENT: OPPORTUNITIES AND
THREATS
20
NOKIA AND THE SMARTPHONE INDUSTRY 22
DETERMINING THE RIGHT LANDSCAPE: DEFINING A
FIRM’S INDUSTRY 23
Strategy in Practice: How the U.S. Government Defines
Industries 24
FIVE FORCES THAT SHAPE AVERAGE PROFITABILITY
WITHIN INDUSTRIES 25
Rivalry: Competition among Established
Companies 26
[ xiv ]
Buyer Power: Bargaining Power and Price Sensitivity 28
Supplier Bargaining Power 29
Threat of New Entrants 30
Threat of Substitute Products 32
HOW THE GENERAL ENVIRONMENT SHAPES FIRM
AND INDUSTRY PROFITABILITY 34
Complementary Products or Services 35
Technological Change 35
General Economic Conditions 36
Demographic Forces 37
Ecological/Natural Environment 37
Global Forces 38
Political, Legal, and Regulatory Forces 38
Social/Cultural Forces 38
ì SUMMARY 39
ì KEY TERMS 39
ì REVIEW QUESTIONS 39
ì APPLICATION EXERCISES 40
ì STRATEGY TOOL: EVALUATING INDUSTRY
ATTRACTIVENESS USING PORTER’S FIVE
FORCES MODEL 40
ì REFERENCES 44
SECTION III: THE NATURE OF BUSINESS
UNIT COMPETITIVE ADVANTAGE
CHAPTER 03: INTERNAL ANALYSIS:
STRENGTHS, WEAKNESSES, AND
COMPETITIVE ADVANTAGE
46
DISNEY: NO MICKEY MOUSE COMPANY 48
THE VALUE CHAIN 49
THE RESOURCE-BASED VIEW 50
Resources 50
Capabilities 51
Priorities 52
Strategy in Practice: Preserving Disney’s Capabilities:
Don’t Mess with the Mouse! 52
CREATING A SUSTAINABLE COMPETITIVE ADVANTAGE:
THE VRIO MODEL OF SUSTAINABILITY 53
Strategy in Practice: Values and Priorities at Pixar 53
Value 54
Rarity 54
Inimitability 54
Ethics and Strategy: Nondisclosure, Noncompete, and
Resource Protection 55
Organized to Exploit 57
CONTENTS
CHAPTER 05: DIFFERENTIATION ADVANTAGE
Assessing Competitive Advantage with VRIO 57
Strategy in Practice: Disney Responds to a
Competitive Threat 58
WHAT IS PRODUCT DIFFERENTIATION? 89
SOURCES OF PRODUCT DIFFERENTIATION 89
Different Product/Service Features 90
Quality or Reliability 92
Convenience 92
Ethics and Strategy: At What Point Does Marketing
Become Lying? 93
Brand Image 94
66
THE WORLD’S CHEAPEST CAR 68
ECONOMIES OF SCALE AND SCOPE 69
Ability to Spread Fixed Costs of Production 70
Ability to Spread Nonproduction Costs 70
Specialization of Machines and Equipment 70
Specialization of Tasks and People 71
Evaluating Economies of Scale: The Scale Curve 71
Strategy in Practice: The Downside of Size and
Scale in the Airline Industry 72
Economies of Scope 73
LEARNING AND EXPERIENCE 73
The Learning Curve 74
The Experience Curve 74
Experience Curves and Market Share 75
Strategy in Practice: The Relationship Between
Market Share and Profitability in Retail Industries 76
How Strategists Use the Scale and Experience Curves
to Make Decisions 77
Proprietary Knowledge 78
LOWER INPUT COSTS 79
Bargaining Power over Suppliers 79
Cooperation with Suppliers 79
Location Advantages 80
Preferred Access to Inputs 80
DIFFERENT BUSINESS MODEL OR VALUE CHAIN 80
Eliminating Steps in the Value Chain 81
Performing Completely New Activities 81
Revisiting Tata 81
ì SUMMARY 81
ì KEY TERMS 82
ì REVIEW QUESTIONS 82
ì APPLICATION EXERCISES 83
ì STRATEGY TOOL: HOW TO CALCULATE A SCALE
CURVE OR EXPERIENCE CURVE 83
ì REFERENCES 84
86
THE RISE OF FACEBOOK 88
THE COMPANY DIAMOND: A TOOL FOR ASSESSING
COMPETITIVE ADVANTAGE 59
Gathering Data for Company Diamond Analysis 60
Using the Company Diamond 60
ì SUMMARY 62
ì KEY TERMS 63
ì REVIEW QUESTIONS 63
ì APPLICATION EXERCISE 63
ì REFERENCES 64
CHAPTER 04: COST ADVANTAGE
[ xv ]
HOW TO FIND SOURCES OF PRODUCT
DIFFERENTIATION 94
Customer Segmentation 94
Mapping the Consumption Chain 97
BUILDING THE RESOURCES AND CAPABILITIES TO
DIFFERENTIATE 100
Assessing Differentiation Performance 101
Strategy in Practice: How Starbucks Built the
Resources to Differentiate 101
ì SUMMARY 102
ì KEY TERMS 102
ì REVIEW QUESTIONS 103
ì APPLICATION EXERCISES 103
ì STRATEGY TOOL: THE NET PROMOTER SCORE 103
ì REFERENCES 104
SECTION IV: CORPORATE LEVEL
STRATEGIES
CHAPTER 06: CORPORATE STRATEGY
106
CISCO SYSTEMS: GROWTH THROUGH
DIVERSIFICATION AND ACQUISITION 108
CORPORATE VERSUS BUSINESS UNIT STRATEGY 109
CREATING VALUE THROUGH DIVERSIFICATION 110
Levels of Diversification 110
Value Creation: Exploit and Expand Resources and
Capabilities 111
The Six Ss 112
Strategy in Practice: Creating Value at Newell
Rubbermaid 113
Strategy in Practice: The Challenges of a
Conglomerate: ITT Industries 114
Destroying Value Through Diversification 115
METHODS OF DIVERSIFICATION 117
THE ACQUISITION AND INTEGRATION PROCESS 118
Making the Acquisition 118
Integrating the Target 119
Ethics and Strategy: Transparency During the
Acquisition Process 120
[ xvi ]
CONTENTS
Strategy in Practice: How GE Integrates
Acquisitions 123
Joint Venture 153
Vertical and Horizontal Alliances 153
Strategy in Practice: Bose: Working with Suppliers in
Vertical Alliances 154
ì SUMMARY 123
ì KEY TERMS 124
ì REVIEW QUESTIONS 125
ì APPLICATION EXERCISES 125
ì REFERENCES 125
CHAPTER 07: VERTICAL INTEGRATION AND
OUTSOURCING
128
DELL AND ASUS: A TALE OF TWO COMPANIES 130
WHAT IS VERTICAL INTEGRATION? 131
The Value Chain 131
Forward Integration and Backward Integration 132
THREE KEY REASONS TO VERTICALLY INTEGRATE 133
Capabilities 133
Coordination 134
Control 136
DANGERS OF VERTICAL INTEGRATION 137
Loss of Flexibility 137
Strategy in Practice: A Classic “Make vs. Buy”
Mistake 137
Loss of Focus 138
ADVANTAGES OF OUTSOURCING 139
Ethics and Strategy: Should You Outsource to
Subcontractors that Use Child Labor? 139
Strategy in Practice: Outsourcing via
Crowdsourcing 140
DANGERS OF OUTSOURCING 141
Strategy in Practice: How to Prevent a Subcontractor
from Becoming a Competitor 142
ì SUMMARY 142
ì KEY TERMS 143
ì REVIEW QUESTIONS 143
ì APPLICATION EXERCISES 143
ì STRATEGY TOOL: MAKE VERSUS BUY
ASSESSMENT 144
REFERENCES
144
ì
CHAPTER 08: STRATEGIC ALLIANCES
146
TOKYO DISNEYLAND 148
WAYS TO CREATE VALUE IN ALLIANCES 155
Combine Unique Resources 155
Pool Similar Resources 156
Strategy in Practice: General Motors’ Learning Alliance
with Toyota 156
Create New, Alliance-Specific Resources 157
Lower Transaction Costs 157
THE RISKS OF ALLIANCES 158
Hold-Up 158
Misrepresentation 158
Building Trust to Lower the Risks of Alliances 158
Ethics and Strategy: The Blame Game in Strategic
Alliances 159
BUILDING AN ALLIANCE MANAGEMENT
CAPABILITY 161
Improves Knowledge Management 161
Increases External Visibility 161
Provides Internal Coordination 162
Facilitates Intervention and Accountability 162
ì SUMMARY 163
ì KEY TERMS 163
ì REVIEW QUESTIONS 164
ì APPLICATION EXERCISES 164
ì STRATEGY TOOL: WHEN TO CHOOSE AN
ALLIANCE VERSUS AN ACQUISITION 165
ì REFERENCES 166
CHAPTER 09: INTERNATIONAL STRATEGY
168
LINCOLN ELECTRIC LEARNS SOME DIFFICULT
LESSONS 170
THE GLOBALIZATION OF BUSINESS 171
WHY FIRMS EXPAND INTERNATIONALLY 173
Growth 173
Efficiency 173
Managing Risk 174
Knowledge 174
Responding to Customers or Competitors 175
WHAT IS A STRATEGIC ALLIANCE? 149
Choosing an Alliance 150
Strategy in Practice: Walt Disney and Oriental Land:
Why Ally? 151
WHERE FIRMS SHOULD EXPAND 175
Cultural Distance 177
Administrative Distance 177
Geographic Distance 178
Economic Distance 178
TYPES OF ALLIANCES 152
Nonequity or Contractual Alliance 152
Equity Alliance 153
HOW FIRMS COMPETE INTERNATIONALLY 179
Strategy in Practice: How Coca-Cola Manages
Economic Distance in Ghana 179
CONTENTS
Multidomestic Strategy—Adapt to Fit the
Local Market 180
Strategy in Practice: National Competitive
Advantage 181
Global Strategy—Aggregate and Standardize
to Gain Economies of Scale 182
Arbitrage Strategy 183
Ethics and Strategy: Is Economic Arbitrage Ethical?
Won’t It Lead to Worker Exploitation? 183
Combining International Strategies 184
HOW A FIRM GETS INTO A COUNTRY: MODES OF
ENTRY 185
Exporting 185
Licensing and Franchising 185
Alliances and Joint Ventures 186
Wholly Owned Subsidiaries 187
Choosing a Mode of Entry 187
ì SUMMARY 188
ì KEY TERMS 188
ì REVIEW QUESTIONS 189
ì APPLICATION EXERCISES 189
ì STRATEGY TOOL: THE INTERNATIONAL
STRATEGY TRIANGLE—DETERMINING
WHICH STRATEGY TO USE 190
ì REFERENCES 192
Strategy in Practice: Where Do Innovative Strategies
Come From? 207
Hypercompetition: The Accelerating Pace of
Innovation 209
INNOVATION AND THE PRODUCT/BUSINESS/
INDUSTRY LIFE CYCLE (S-CURVE) 209
Introduction Stage 209
Growth Stage 209
Maturity Stage 209
Decline Stage 210
ì SUMMARY 211
ì KEY TERMS 212
ì REVIEW QUESTIONS 211
ì APPLICATION EXERCISES 212
ì REFERENCES 212
CHAPTER 11: COMPETITIVE STRATEGY
214
DELTA SIMPLIFIES ITS FARES 216
UNDERSTANDING THE COMPETITIVE LANDSCAPE 217
Strategic Groups and Mobility Barriers 217
Strategy Canvas 219
Strategy in Practice: A Real-World Strategic Group
Map 220
EVALUATING THE COMPETITION 221
What Drives the Competitor? 221
What Is the Competitor Doing or Capable of Doing? 222
How Will a Competitor Respond to Specific Moves? 222
Using Game Theory to Evaluate Specific Moves 222
SECTION V: STRATEGY IN DYNAMIC
ENVIRONMENTS
CHAPTER 10: INNOVATIVE STRATEGIES THAT
CHANGE THE NATURE OF COMPETITION
[ xvii ]
194
INNOVATIVE STRATEGIES IN HOME MOVIE
ENTERTAINMENT 196
WHAT IS AN INNOVATIVE STRATEGY? 197
Incremental versus Radical Innovation. 197
Strategy in Practice: Understanding Business
Models 199
CATEGORIES OF INNOVATIVE STRATEGIES 200
Reconfiguring the Value Chain to Eliminate Activities
(Disintermediation) 200
Low-End Disruptive Innovations 201
Strategy in Practice: The Internet as a “Disruptive”
Technology 202
High-End/Top-Down Disruptive Innovations 203
Strategy in Practice: Why Incumbents Don’t Respond
Effectively to Low-End Disruptions 204
Reconfiguring the Value Chain to Allow for Mass
Customization 205
Blue Ocean Strategy—Creating New Markets by
Targeting Nonconsumers 205
Free Business/Revenue Models 206
PRINCIPLES OF COMPETITIVE STRATEGY 226
Ethics and Strategy: Is Collusion Ethical? 226
Know Your Strengths and Weaknesses 227
Bring Strength against Weakness 227
Protect and Neutralize Vulnerabilities 228
Develop Strategies That Cannot Be Easily Copied 227
COMPETITIVE ACTIONS FOR DIFFERENT MARKET
ENVIRONMENTS 228
Competition under Monopoly 228
Competition under Oligopoly 229
“Perfect” Competition 230
Strategy in Practice: Tacit Collusion Between AT&T and
Verizon 231
Dynamic Environments 232
ì SUMMARY 232
ì KEY TERMS 233
ì REVIEW QUESTIONS 233
ì APPLICATION EXERCISES 233
ì STRATEGY TOOL: WHEN DOES DEFECTING FROM
COLLUSION MAKE SENSE? 234
REFERENCES
234
ì
[ xviii ]
CONTENTS
SECTION VI: MAKING AND IMPLEMENTING
STRATEGY
CHAPTER 12: IMPLEMENTING STRATEGY
236
HOW CITIBANK TRANSFORMED ITSELF INTO
A RETAIL BANK 238
ALIGNMENT: THE 7 S MODEL 239
Strategy 240
Structure 240
Strategy in Practice: How to Use the 7 S Model 241
Systems 242
Staffing 242
Skills 242
Style 243
Ethics and Strategy: Creating an Ethical Climate and
Culture Through the 7 S Model 243
Shared Values 244
STRATEGIC CHANGE 245
The Three Phases of Change 245
The Eight Steps to Successful Change 246
Strategy in Practice: Work Gloves Create Change 247
MEASUREMENT 250
Line of Sight 250
Strategy in Practice: Creating Line of Sight Measures 251
ì SUMMARY 252
ì KEY TERMS 253
ì REVIEW QUESTIONS 253
ì APPLICATION EXERCISES 253
ì REFERENCES 254
CHAPTER 13: CORPORATE GOVERNANCE
AND ETHICS
ETHICS AND GOVERNANCE FAILURES
AT ENRON 258
THE PURPOSES OF THE CORPORATION 259
The Shareholder Primacy Model 260
The Stakeholder Model 261
Strategy in Practice: Mapping Stakeholder
Influence 262
GOVERNANCE: BOARDS AND INCENTIVES 263
The Board of Directors 264
Compensation and Incentives 265
Strategy in Practice: America’s Best and Worst
Boards 265
CORPORATE ETHICS 266
Corporate Culture and Ethics 267
Creating an Ethical Climate 268
Strategy in Practice: Google, Censorship, and
Google.cn 268
256
Strategy in Practice: The Johnson & Johnson
Credo 269
ì SUMMARY 270
ì KEY TERMS 270
ì REVIEW QUESTIONS 271
ì APPLICATION EXERCISES 271
ì REFERENCES 271
CHAPTER 14: STRATEGY AND SOCIETY
274
FUNDACION PARAGUAYA: FIGHTING POVERTY
IN LATIN AMERICA 276
STRATEGY AND SOCIAL-VALUE ORGANIZATIONS 277
THE TOOLS OF STRATEGY AND THE CREATION OF
SOCIAL VALUE 278
External Analysis and the Value Net 278
Internal Analysis: Resources and Capabilities 279
Cost Leadership, Differentiation, and Innovative
Strategies 280
Corporate Strategy and Alliances 280
Strategy in Practice: Detroit Mercy Law School—
Creating Unique Value for Students 280
Implementation and Governance 281
STRATEGY AND SOCIAL CHANGE 281
Corporate Social Responsibility (CSR) 281
CSR and Firm Performance 282
SOCIAL ENTREPRENEURSHIP 283
Types of Social Entrepreneurship 284
Strategy in Practice: Community Enterprise
Solutions 284
Skills of Social Entrepreneurs 285
Strategy in Practice: Kinder, Lydenberg, and
Domini, and the Creation of Socially Responsible
Investing 285
Challenges in Social Entrepreneurship 286
ì SUMMARY 288
ì KEY TERMS 288
ì REVIEW QUESTIONS 288
ì APPLICATION EXERCISES 289
ì REFERENCES 289
APPENDIX A: DATA SOURCES FOR ANALYSIS
292
APPENDIX B: 20 VALUABLE FINANCIAL RATIOS
FOR STRATEGIC ANALYSIS
302
GLOSSARY
INDEX
305
I-1
CONTENTS
CASEBOOK
[ xix ]
C-1
CASE 01: Walmart Stores: Gaining and Sustaining
Competitive Advantage C-2
CASE 02: Coca-Cola and Pepsi: and the Shifting Landscape of
the Carbonated Soft Drink Industry C-12
CASE 03: Intel (A): Dominance in Microprocessors C-22
CASE 04: Southwest Airlines: Flying High with Low
Costs C-32
CASE 05: Harley-Davidson: Growth Challenges Ahead C-45
CASE 06: Intel (B): Responding to the Smart Phone
Threat C-54
CASE 07: Nike: Sourcing and Strategy in Athletic Footwear C-62
CASE 08: AT&T and Apple: A Strategic Alliance C-70
CASE 09: Samsung: Overtaking Philips, Panasonic, and
Sony as the Leader in the Consumer Electronics
Industry C-82
CASE 10: New Business Models: Netflix, Redbox, Hulu, and
Others in Home Movie Entertainment C-92
CASE 11: Smartphone Wars C-101
CASE 12: Lincoln Electric: Aligning for Global Growth C-112
CASE 13: Corporate Governance and Ethics: A Series of
Decisions C-119
CASE 14: Safe Water Network: Mastering the Model at
Dzemeni C-121
CASE 15: Walmart versus Amazon.com C-132
(recommended for Chapters 1, 3, 4, 11)
CASE 16: Skype: Competing with Free C-142
(recommended for Chapters 10, 4, 11)
CASE 17: Sears: In Need of a Turnaround Strategy C-152
(recommended for Chapter 13)
What Is Business Strategy?
01
© MARIO ANZUONI/Reuters /Corbis
LEARNING OBJECTIVES
Studying this chapter should provide you with the knowledge to:
1
Define business strategy, including the importance of
competitive advantage, the four choices that are critical to
strategy formulation, and the strategic management process.
2
Summarize the information that the company’s mission and
thorough external and internal analysis provide to guide strategy.
3
Discuss how strategies are formulated and implemented in
order to achieve objectives.
4
Explain who is responsible for, and who benefits from, good
business strategy.
[3]
01
I
Strategy at Apple
n 2000, Apple computer held a loyal customer base but
was limping along as a relatively minor player in the
personal computer market. Launched by Steve Jobs
and Steve Wozniak, Apple was one of the pioneers in the
industry. Unlike other PC makers that relied on Microsoft’s
operating system and application software, Apple wrote its
own operating system software and much of its application
software, which was known as being easy to use. In fact,
Apple was the first to introduce software on a low cost
personal computer with drop-down menus and a graphical
user interface that allowed customers to easily complete
a task—like drag a file to the trash to delete it. However,
Apple’s investment in unique software led to high-priced
computers and created files that were originally incompatible
with those of Microsoft’s Windows operating system and
Office software suite. As a result, Apple rarely achieved more
than about a 5 percent share of the computer market.1
These advantages helped iPod quickly move to industry
leadership, despite the fact that an iPod cost 15 to 25 percent
more than a Rio.3 At the time the iPod was launched, it
was difficult for most consumers to legally access digital
downloads of songs. Initially, the iPod was only snapped up
by a relatively small group of users, mostly teenagers and
college students, who were illegally downloading songs
through Napster and other free downloading sites.
Apple recognized that in order to grow the market for
iPods, it needed to help consumers legally access songs to
play on their iPods. As a result, Apple developed software
called iTunes, allowing customers to legally download songs.
One main reason iTunes was able to provide legal downloads
before its competitors was because Steve Jobs, as CEO of both
Apple and Pixar (the animation movie production company),
understood that music companies, like movie companies,
were concerned about people pirating their products. So
Apple worked with the music
companies to sell songs that had
CUSTOMERS NOW COULD EASILY AND LEGALLY ACCESS SONGS SIMPLY BY
been digitized using software
CONNECTING THEIR iPODS TO THEIR COMPUTERS AND LETTING THE SOFTWARE DO
that prevented customers from
TO THE REST. EVEN A TECHNOLOGY-CHALLENGED GRANDPARENT COULD DO IT.
copying the songs to more than
a few computers. iTunes was
designed to be easy to use with the iPod. Customers now could
That all changed in 2001, however, when Apple entered
easily and legally access songs simply by connecting their
an entirely new market with the launch of an MP3 portable
iPods to their computers and letting the software do to the rest.
music player called the iPod. Apple’s MP3 player was not
Even a technology-challenged grandparent could do it.4
the first on the market. A company called Rio had offered an
MP3 player for a couple of years before iPod’s entry into the
But Apple wasn’t done with its music player strategy.
market. But iPod quickly took market share from the Rio, for
Apple’s experience in the computer business was that
three primary reasons:
other companies could make similar products, often
at lower prices. Indeed, while Apple and IBM were the
1. iPod had a mini hard drive that allowed it to hold 500
pioneers of the personal computer industry and dominated
songs, as opposed to the roughly 15 songs the Rio
it during the early years, lower-priced competitors like
could hold using flash memory.
Dell, Hewlett-Packard, Lenovo, and ASUS, eventually
2. iPod was the first to introduce a “fly wheel” navigacame to dominate the market. Apple realized it needed to
tion button—the round button that was easy to use and
prevent easy imitation of its music offering. So it created
allowed users to quickly scroll through menus and songs.
proprietary software called Fairplay that restricted the use
3. iPod was backed with Apple’s name and an innovative
of music downloaded from iTunes to iPods only. That meant
design.2
[4]
[5]
WHAT IS BUSINESS STRATEGY?
consumers couldn’t buy a lower-priced MP3 player and use
it with iTunes because it was incompatible. If they wanted to
use a different MP3 player, they would have to download and
pay for music a second time.5
To top it off, Apple did something that no other maker of
computers, music players, or any other electronic device
company had done. It opened its own stores to sell Apple
products. This required that Apple learn how to operate retail
stores. The Apple Stores helped Apple create a direct link to
its customers, making it easier for consumers to learn about
and try out Apple products—and get their products serviced.
As a result of Apple’s strategic initiatives, it has built
a very secure market position in music players, currently
holding over 70 percent of that market.6 But the battle isn’t
over. Amazon has entered the industry, offering music
buyers unrestricted use of its songs. Moreover, competitors
e-Music, Rhapsody.com, and Spotify are offering music via
subscription. Users can listen to any song they want for a
monthly subscription fee. And Pandora, a free online radio
service, offers similar unlimited access to songs. The $17
billion music industry is so large that it will continue to
attract new competitors who want to dethrone Apple.
ì
How did Apple enter the music industry and within 10 years become the dominant seller of
both songs and music players? Why is Pandora, a start-up, succeeding in the music industry
while former giant Sony (maker of the Walkman and Discman) is struggling? For that matter, why is any company successful? Understanding the series of actions taken by Apple to
achieve a dominant position in the online music business will go a long way toward understanding business strategy—a company’s plan to gain, and sustain, competitive advantage in
its markets. In this chapter, we’ll help you get started by answering some basic questions. We
begin with the most obvious: “What is a business strategy?”
WHAT IS BUSINESS STRATEGY?
The word strategy comes from the Greek word strategos, meaning, “the art of the general.”
In other words, the origin of strategy comes from the art of war, and, specifically, the role of
a general in a war. In fact, there is a famous treatise titled The Art of War that is said to have
been authored by Sun Tzu, a legendary Chinese general. In the art of war, the goal is to win—
but that is not the strategy. Can you imagine the great general Hannibal saying something
like, “Our strategy is to beat Rome!” No, Hannibal’s goal was to defeat Rome. His strategy was
to bring hidden strengths against the weaknesses of his enemy at the point of attack—which
he did when he crossed the Alps to attack in a way that his enemies did not believe he could.
He achieved an advantage through his strategy.
In similar fashion, a company’s business strategy is defined as a company’s plan to gain,
and sustain competitive advantage in the marketplace. This plan is based on the theory its
leaders have about how to succeed in a particular market. This theory involves predictions
of which markets are attractive and how a company can offer unique value to customers
in those markets in a way that won’t be easily imitated by competitors. This theory then
gets translated into a plan to gain competitive advantage. Apple’s theory of how to gain a
competitive advantage in music download business was to create cool and easy-to-use MP3
players that could easily—and legally—download digital songs from a computer through
the iTunes store. Apple sought to sustain its advantage by making it impossible for competitor MP3 players to download songs from the iTunes store. The Apple Stores contributed to
Apple’s advantage by providing a direct physical link to customers that competitors couldn’t
match. In this particular instance, Apple’s plan to gain, and sustain, competitive advantage
worked. But there have been other times, such as with the Apple Newton Message Pad (the
first handheld computer that Apple sold as a personal digital assistant) that Apple’s theory
about how to gain and sustain competitive advantage did not work. Sometimes strategies
are successful and sometimes they are not.
Strategies are more likely to be successful when the plan explicitly takes into account
four factors:
1. the attractiveness of a market
2. how to offer unique value relative to the competition
business strategy A plan to
achieve competitive advantage
that involves making four strategic
choices: (1) markets to compete
in; (2) unique value the firm will
offer in those markets; (3) the
resources and capabilities required
to offer that unique value better
than competitors; and (4) ways to
sustain the advantage by preventing
imitation.
competitive advantage When
a firm generates higher profits
compared to its competitors.
market The industry and
geographic area that a company
competes in.
unique value The reason a firm
wins with customers or the value
proposition it offers to customers,
such as a low cost advantage or
differentiation advantage.
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3. what resources or capabilities are necessary to deliver that unique value
4. how to sustain a competitive advantage once it has been achieved.
The goal of the strategic plan is to create competitive advantage. First, let’s examine the goal.
Competitive Advantage
What exactly do we mean when we use the term competitive advantage? 7 In the sports world,
it is usually obvious when a team has a competitive advantage over another team: The better team wins the game by having a higher score. The ability to consistently win is based on
attracting and developing better players and coaches, and by employing strategies to exploit
the weaknesses of opponents. In the business world, the scoring is measured by looking
at the profits (as a percentage of invested capital) generated by each firm. We describe the
S T R AT E GY I N P R A CT I C E
Measuring American Home Products’
Competitive Advantage
T
o see which firms in an industry are most successful,
we typically compare their return on assets (ROA), a
calculation of operating profits divided by total assets, or
their return on equity (ROE), which is operating profits divided
by total stockholders’ equity. The company that consistently
generates the highest returns for its investors, in terms of ROA
or ROE, wins the game. For example, from 1971 to 2000, the
pharmaceutical company American Home Products averaged
19 percent ROA, compared to competitor American Cyanamid’s
7 percent. American Home Products’ ROA was higher than
American Cyanamid’s every year for 30 years. This is evidence
that during this time period, American Home Products had a
competitive advantage over American Cyanamid.8 American
Home Products’ advantage over American Cyanamid
frequently has been attributed to its ability to develop more
blockbuster drugs (through more effective research and
development) and to quickly get those drugs to market through
a larger and more effective sales force.
Profitability of Different Firms in the Pharmaceutical Industry
20
18
Operating Profit (ROA %)
16
14
12
10
8
6
4
2
Source: Annual reports; 1973–1992
American
Cyanamid
Pfizer
Upjohn
Schering Plough
Eli Lilly
Bristol Myers
Squibb
Merck
American Home
Products
0
WHAT IS BUSINESS STRATEGY?
most common ways of measuring profits in Strategy in Practice: Measuring American Home
Products’ Competitive Advantage.
Just as in sports, where an inferior team may outscore a superior team on a given day,
it may be possible for an inferior company to outscore a superior company in a particular
quarter, or perhaps even a year. Competitive advantage requires that a firm consistently outperform its rivals in generating above-average profits. A firm has a competitive advantage
when it can consistently generate above-average profits through a strategy that competitors
are unable to imitate or find too costly to imitate. Above-average profits are profit returns
in excess of what an investor expects from other investments with a similar amount of risk.
Risk is an investor’s uncertainty about the profits or losses that will result from a particular
investment. For example, investors suffer a lot of uncertainty (and, hence, risk) when they
put their money into a start-up company that is trying to launch products based on a new
technology, such as a solar power company. There is much less risk in investing in a stable
firm with a long history of profitability, such as a utility company that supplies power to
customers who have few, if any, alternative sources of power.9
Many organizations work to achieve objectives other than profit. For example, universities, many hospitals, government agencies, not-for-profit organizations, and social entrepreneurs play important roles in making our economy work and our society a better place to
live. These organizations do not measure their success in terms of profit rates, but they still
use many of the tools of strategic management to help them succeed (see Chapter 14). For
these organizations, success might be measured using tangible outcomes such as the number of degrees granted, patient health and satisfaction measures, people served, or some
other measure of an improved society.
The primary source of a company’s competitive advantage can come from several areas
of its operations. For example, the diamond company De Beers has an advantage that comes
from paying lower costs for its diamonds than other companies do, because De Beers owns
its own diamond mines. Competitive advantage can also come from different functional areas
within the company. Biotechnology pioneer Genentech’s advantage comes primarily from
research and development that has produced several blockbuster drugs; Toyota’s advantage in
automobiles comes primarily from its operations (known as the Toyota Production System);
Procter & Gamble’s advantage in household products comes largely from its sales and marketing, and Nordstrom’s advantage as a retailer comes largely from its merchandising and service.
[7]
above-average profits Returns in
excess of what an investor expects
from other investments with a
similar amount of risk.
The Strategic Management Process
The processes that firms use to develop a strategy can differ dramatically across firms. In
some cases, executives do not spend significant time on strategy formulation and strategies
are often based only on recent experience and limited information. However, we propose
that a better approach to the formulation of strategy is the strategic management process
outlined in Figure 1.1. The strategic management process for formulating and implementing
strategy involves thorough external analysis and internal analysis. Only after conducting
an analysis of the company’s external environment and its internal resources and capabilities are a firm’s executives and managers able to identify the most attractive business opportunities and to formulate a strategy for achieving competitive advantage.
The central task of the strategy formulation process is specifying the high-level plan and
set of actions the company will take in its quest to achieve competitive advantage. Once the
plan for creating competitive advantage is created, the final step is to develop a detailed plan
to effectively implement, or put into action, the firm’s strategy through specific activities.
The focus of the strategic management process should be to make four key strategic
choices, as shown in Figure 1.2
1. Which markets the company will pursue. A company’s markets include both the industries in which it competes and its geographic markets.
2. What unique value to offer the customer in those markets. This is the firm’s value proposition, the reason the company wins with a set of customers.10
3. What resources and capabilities are required? What does the company need to have
and know how to do so that it can deliver its unique value better than competitors, and
exactly how will the company deliver its unique value?11
strategic management
process The process by which
organizations formulate a plan
and allocate resources to achieve
competitive advantage that involves
making four strategic choices:
(1) markets to compete in; (2)
unique value the firm will offer in
those markets; (3) the resources
and capabilities required to offer
that unique value better than
competitors; and (4) ways to
sustain the advantage by preventing
imitation.
external analysis Examining
the forces that influence industry
attractiveness, including
opportunities and threats that exist
in the environment.
internal analysis The analysis of
a firm’s resources and capabilities
to assess how effectively the firm
is able to deliver the unique value
(value proposition) that it hopes to
provide to customers.
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[ Figure 1.1 ] The Strategic Management Process
Mission
External Analysis
Internal Analysis

Strategy Formulation
Business Level
Strategies
Strategy
Vehicles
Corporate
Strategy
[Chapter 6]
Dynamic
Strategic Actions
Cost
Advantage
[Chapter 4]
Differentiation
Advantage
[Chapter 5]
Vertical
Integration
[Chapter 7]
Strategic
Alliances
[Chapter 8]
Disruptive
Business
Models
[Chapter 10]
Competitor
Interaction/
Game Theory
[Chapter 11]
International
Strategy
[Chapter 9]
Strategy Implementation
Strategy
Implementation
[Chapter 12]
Governance
and Ethics
[Chapter 13]
Social Value
Organizations
[Chapter 14]
4. How the company will capture value and sustain a competitive advantage over time.
Firms need to create barriers to imitation to keep other companies from delivering the
same value.
Markets. One of the first decisions a company must make is which markets it will serve.
Leaders must choose the industries a company competes in and the product and service
markets within those industries. For example, before iPod, Apple only competed in the
computer industry. Its product markets included desktop and laptop computers. Launching
iPod and iTunes took Apple into the music industry. Later, when Apple launched the iPhone,
it entered the cell phone business.
It is also important to select geographic markets to serve. Apple competes on a worldwide
basis, which allows it to spread heavy research and development costs across its many geographic markets. By contrast, Walmart started by focusing on rural markets, which allowed
it to offer lower prices than the “mom and pop” retail stores in small towns.12
Unique Value. After a company chooses the markets in which to compete, it then
attempts to offer unique value in those markets. This is often referred to as a company’s
value proposition, or the value that it proposes to offer to customers. Companies typically
try to achieve a competitive advantage by choosing between one of two generic strategies
WHAT IS BUSINESS STRATEGY?
[9]
[ Figure 1.2 ] Four Key Strategic Choices in Strategic
Management
Markets to
Pursue

Unique Value to
Offer

Resources and
Capabilities to
Develop

Sustaining
Advantage

for offering unique value: low cost or differentiation. Companies such as Walmart, Ryanair,
Taco Bell, and Kia attract customers by being cost leaders, offering products or services
that are priced lower than competitor offerings. A firm that chooses a low-cost strategy
(the focus of Chapter 4) focuses on reducing its costs below those of its competitors. Key
sources of cost advantage include economies of scale, lower-cost inputs, or proprietary
production know-how.
A firm that chooses a differentiation strategy (the focus of Chapter 5) focuses on offering features, quality, convenience, or image that customers cannot get from competitors.
Apple’s unique value is offering iPods (music players), iPhones (smart phones), and iPads
(tablets) that are well designed, innovative, easy to use, and have features that competing
products don’t have (“there’s an App for that”). In similar fashion, Starbucks wins through
differentiation by offering multiple blends of high-quality coffee in convenient locations.
Resources and Capabilities. Delivering unique value requires developing resources and
capabilities that will allow the company to perform activities better than competitors.
Indeed, perhaps the most critical role of the strategist is to figure out how to build or acquire the
resources and capabilities necessary to deliver unique value.
Resources refer to assets that the firm accumulates over time, such as plants, equipment,
land, brands, patents, cash, and people. Steve Jobs was a key resource for Apple because he
had the uncanny ability to figure out what customers wanted before even they knew.
Capabilities refers to processes (or recipes) the firm develops to coordinate human activity to achieve specific goals. To illustrate, Starbucks has key resources that allow it to succeed
through differentiation, include its Starbucks brand, its retail store locations, its recipes to
produce different coffee blends, and even some patents to protect those recipes. Its capabilities include its processes to roast coffee beans for the best flavor, create new coffee blends,
design stores with great atmosphere, and find optimal store locations. These resources and
capabilities have allowed Starbucks to deliver unique value to customers, thereby helping
the company outperform other coffee shops within the coffee retailing industry.
Sustaining Advantage. By being the first to offer music downloads through its easy-to-use
iTunes software, Apple encouraged its customers to store their entire music libraries on
iTunes. Designing iTunes so that it wouldn’t download songs to other music players helped
Apple to prevent competing MP3 players from taking market share from iPod. Of course,
Apple’s brand image and its Apple Stores also prevent competitors from easily imitating its
products and services. These actions helped Apple capture the value it created.
cost advantage An advantage that
a firm has over its competitors
in the activities associated with
producing a product or service,
thereby allowing it to produce the
same product at lower cost.
differentiation advantage An
advantage a firm has over its
competitors by making a product
more attractive by offering unique
qualities in the form of features,
reliability, and convenience that
distinguishes it from competing
products.
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WHAT INFORMATION AND ANALYSIS GUIDES
STRATEGY FORMULATION?
As Figure 1.1 shows, the earliest steps in the strategic management process involve analyses
and choices that later result in the formulation and implementation of a company’s strategy.
These choices are made within the context of the company’s mission and only after an analysis of the external environment and internal organization.
Mission
mission A company’s primary
purpose that often specifies the
business or businesses in which
the firm intends to compete—or
the customers it intends to serve.
A company’s mission outlines the company’s primary purpose and often specifies the business or businesses in which the firm intends to compete—or the customers it intends to
serve. People in business often use the terms mission, vision, or purpose somewhat interchangeably. For our purposes in this book, we will use the term mission to refer to the primary purpose of the organization.
Most business firms start with a mission, even if it isn’t formally stated. For example,
Starbucks founder Howard Schultz got the idea to introduce coffee bars to America when
he visited Italy and experienced the great coffee and convenience of Italian espresso bars.
His external analysis of the coffee shop industry in the United States led him to believe
that there was an opportunity to bring an exceptional coffee experience to America. Schultz
once said American coffee was so bad it tasted like “swill.” He discovered café latte when
visiting an espresso bar in Verona, Italy, and thought, “I have to take this to America.”13 So
he launched Starbucks, a company that offered higher-quality coffee than traditional coffee
shops, and included many varieties at a premium price. In essence, Starbucks started with a
mission to bring high-quality coffee to the masses in the United States.
As companies grow and develop formal mission statements, these statements often
define the core values that a firm espouses, and are often written to inspire employees to
behave in particular ways. Starbucks formalized its mission as follows:
Our mission: to nurture and inspire the human spirit—one person, one cup, and one
neighborhood at a time.14
It then proceeds with the statement: Here are the principles of how we live that every day—
which is followed by a set of principles or values designed to guide employee behaviors. Even
after it has been formalized, however, a company’s mission is still open to interpretation, as
Strategy in Practice: Apple’s Evolving Mission shows.
External Analysis
SWOT analysis Strategic
planning method used to evaluate
the strengths, weaknesses,
opportunities, and threats involved
in a business.
External analysis is critical for addressing the first strategic choice: Where should we compete? External analysis involves: (1) an examination of the competition and the forces that
shape industry competition and profitability; and (2) customer analysis to understand what
customers really want. The combined results of external analysis with internal analysis of
the firm are often summarized as a SWOT analysis. SWOT is an acronym for Strengths,
Weaknesses, Opportunities, and Threats.15 External analysis is particularly useful for shedding light on the latter two: opportunities and threats.
Industry Analysis. One of the central questions for the strategist is to determine which
markets or industries to compete in. The fact of the matter is that all industries are not
created equal. To illustrate, between 1992 and 2006, the average return on invested capital
in U.S. industries ranged from as low as zero to more than 50 percent.16 The most profitable
industries include prepackaged software, soft drinks, and pharmaceuticals. These industries
are more than five times as profitable as the least profitable industries, which include airlines,
hotels, and steel. This does not mean that a steel or airline company cannot be successful or
profitable (Southwest Airlines has been quite profitable17), but it does mean that the average
profitability of all firms in these industries is low compared to other industries. This makes
the challenge of making money in these low-profit industries even greater.
WHAT INFORMATION AND ANALYSIS GUIDES STRATEGY FORMULATION?
[ 11 ]
S T R AT E GY I N P R A CT I C E
Apple’s Evolving Mission
W
hen Steve Jobs and Steve Wozniak launched Apple in
1976, their primary purpose was to make great computers
that people loved to use. Twenty-four years later, Apple was still
essentially a computer company when it launched the iPod, a
device that took the company into the music industry.
But did you know that Apple was not the first computer
company to make a small, handheld MP3 player with a minihard drive that could store your entire music library? That honor
goes to Compaq (later acquired by HP). Compaq developed an
MP3 player before Apple, but the company decided this was
not an industry and product market that it wanted to enter.
Compaq decided not to pursue the MP3 business because it
saw its mission as being a computer maker, and music players
fell outside of that mission. Instead of refining the design and
launching its MP3 player on the market, Compaq sold the
technology to a Korean company. In contrast, Apple decided that
this product market was not outside its mission.
Apple’s decision was influenced by its external analysis.
Apple looked at the multibillion-dollar music business and
quickly realized that no company was offering legal digital
downloads—so the market was wide open because of the
challenges of protecting the files from easily being copied.
Apple’s leaders also considered its internal capabilities.
Unlike Compaq—which only made computer hardware but
not software—Apple had vast experience at writing software
for Apple computers. It also had far greater design expertise
than Compaq. In fact, the company had long been hailed for
the cutting-edge designs of the iMac and some of its other
computers. Apple decided to channel its internal capabilities
at writing software to navigate an MP3 player. Apple’s
software engineers came up with the innovative “flywheel”
design for navigating the iPod. Likewise, it channeled its
design capabilities toward designing a product that was
elegant and small enough to fit in your pocket.
As a result of formulating a strategy to enter the MP3
player market—and subsequently the iPhone and iPad
markets—Apple’s mission has broadened. The company no
longer focuses on just being a computer maker. In fact, in
2007 it changed its name from Apple Computer Inc. to Apple
Inc. to reflect this change in its mission.
Why are some industries more profitable than others? Strategy professor Michael Porter
developed a model for conducting industry analysis called the Five Forces that Shape Industry Competition.18 Understanding the five forces that shape industry competition is one of
the starting points for developing strategy, and will be discussed in detail in Chapter 2. This
framework helps managers think about what the company can do to increase its power over
suppliers and buyers, create barriers to other firms looking to enter the market, reduce the
threat of substitute products or services, and reduce rivalry with competitors.
Customer Analysis. External analysis also involves an analysis of customers or potential
customers, notably an analysis of their needs and price sensitivity. In particular, the
strategist can make better decisions about how to offer unique value by considering groups
of customers who all have similar needs. This is called customer segmentation analysis.19
For example, in the automobile industry, some customers want cars that are very stylish,
powerful, luxurious, and packed with technology and gadgets. These customers are the
focus of companies such as Porsche, Mercedes Benz, BMW, and Lexus. Others want trucks
with the capacity to haul heavy items and move easily over rough terrain. These customers
are the focus of the truck divisions of Chevy and Ford. Still others want economy cars for
basic transportation—the focus of Hyundai and Kia.
External analysis should enlighten managers about the competitive forces that influence
the profitability of particular markets and industries, as well as opportunities and threats. In
addition, it should shed light on what customers want and what they are willing to pay to
have their needs met.
Internal Analysis
Whereas external analysis focuses on a company’s industry, customers, and competitors, internal analysis focuses on the company itself. Internal analysis completes the SWOT by focusing
price sensitivity The degree
to which the price of a product
or service affects consumers’
willingness to purchase the product
or service.
segmentation analysis Dividing up
customers into groups or segments
based on similar needs or wants.
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ì WHAT IS BUSINESS STRATEGY?
resource-based review of firm
Determining the strategic
resources available to a company.
on strengths and weaknesses. More formally, internal analysis involves an analysis of the company’s set of resources and capabilities that can be deployed—or should be developed—to
deliver unique value to customers. We discuss internal analysis in greater detail in Chapter 3.
In the 1980s, the resource-based view of the firm, also known as the resource-based
model, was developed to explain why some firms outperform other firms within the same
industry.20 Why does Nucor make money in the steel business when most of its U.S. competitors do not? Why does Southwest fly high in the air travel business while most of its
competitors are ( financially) grounded? The resource-based model assumes that each company is a collection of resources and capabilities (also referred to as competencies) that are
deployed to deliver unique value.21
Firms that don’t have the resources and capabilities that are necessary to implement the
strategies they are contemplating, may need to improve, change, or possibly create them
in order to offer unique value to their customers. This is where resource allocation becomes
an important dimension of strategy. Once a company decides how it hopes to offer unique
value, it must allocate the resources necessary to build those resources or capabilities. For
example, once Target realized that it could not compete directly on prices with Walmart,
it allocated additional resources to move “upmarket.” This involved investing heavily in a
trends department, a new mix of higher-quality products, relationships with designers, more
expensive suburban retail locations, and significant TV advertising to get the message out
to customers.
HOW ARE STRATEGIES FORMULATED?
corporate strategy Decisions
about what markets to compete
in, made by executives at the
corporate level of an organization.
business unit strategy Decisions
about how to gain and sustain
advantage, made at the manager
level for each standalone
business unit within a company.
functional strategy Decisions
about how to effectively implement
the business unit strategy within
functional areas like finance,
product development, operations,
information technology, sales and
marketing, and customer service.
strategy vehicles Activities and
strategic choices—such as make
versus buy, acquisitions, and
strategic alliances—that influence
a firm’s ability to enter particular
markets, deliver unique value to
customers, or create barriers to
imitating its product.
Formulating a strategy involves selecting which actions the company will take to gain and
sustain competitive advantage. Remember, competitive advantage requires that the company do all of the following:
ì Provide unique value to a set of customers in the appropriate markets.
ì Develop a set of resources and capabilities that allow the company to deliver that
unique value to customers better than competitors.
ì Sustain the competitive advantage by figuring out how to prevent imitation of the
chosen strategy.
A company will also need to formulate, and then implement, strategy at three different
levels of the organization: corporate, business unit (product), and functional.
Corporate strategy refers to decisions that are made by senior corporate executives about where to compete in terms of industries and markets. For example, Amazon’s
corporate executives made the decision to enter the electronic reader/tablet business with
the Kindle where it would face new competitors like Apple. Similarly, Amazon’s launch of
Amazon Web Services—a business that provides web hosting, cloud storage, and marketplace software—was made at corporate headquarters by the corporate management team.
Business unit strategy is made at the level of the strategic business unit—standalone business units in a company that typically have their own profit and loss responsibility. Amazon’s
online discount business would be considered one business unit, whereas Kindle and Amazon Web Services would be different business units. The general manager of each business
unit addresses the questions we’ve identified regarding how to gain and sustain advantage
in that particular market. Finally, within each business unit are different functions such as
finance, product development, operations, information technology, sales and marketing,
and customer service. A functional strategy should align with the overall business unit
strategies to effectively implement the business unit strategy (see Figure 1.3).
Strategy Vehicles for Achieving Strategic Objectives
In many instances, firms rely on a few key strategy vehicles to help them enter attractive
markets and build the resources and capabilities necessary to deliver unique value. These
strategy vehicles include such things as diversification, acquisitions, alliances, vertical
HOW ARE STRATEGIES FORMULATED?
[ 13 ]
[ Figure 1.3 ] Multiple Levels of Strategic Analysis
Multiple Levels of Strategic Analysis
Corporate
Strategy
(Where to compete)
Business Unit 1
Strategy
(How to compete)
R&D
Strategy
(How to
implement)
Business Unit 2
Strategy
(How to compete)
Operations
Strategy
(How to
implement)
Marketing
Strategy
(How to
implement)
Identifies where to
compete in terms of
industries and
markets.
Identifies what unique
value to offer (cost or
differentiation) and
how to deliver it
Provides guidance for
managing and allocating
resources to distinct
business units
Provides a plan
to achieve competitive
advantage
H.R.
Strategy
(How to
implement)
Strategies and tactics of the functional areas should
align with and implement the overall business unit strategy.
integration, and international expansion. In some cases, a firm may choose to grow by diversifying, adding to its products or opening a new line of business. Acquisition is a strategy
vehicle used for growth and diversification or to acquire key resources.
For example, when Apple acquired NeXT Computing, the late Steve Jobs’s start-up, Apple
acquired the operating system that became OSX—and the acquisition brought Steve Jobs
back to Apple.22 More recently, Apple acquired SIRI, a company that made voice recognition
and search software that was the technology behind SIRI (pronounced sir’-ee), Apple’s personal assistant on the iPhone.
Sometimes companies decide to access new resources and capabilities through a strategic alliance—an exclusive relationship with another firm—rather than through acquisition.
For example, Apple teamed up with AT&T in an alliance to launch the iPhone in the United
States. AT&T put huge promotional dollars behind the iPhone—and paid Apple 10 percent
of their revenues from each iPhone subscriber—in order to be the exclusive distributor of
iPhones for the first five years.
Vertical integration, or the make-buy decision, is also a vehicle for achieving objectives.23
For example, when Apple decided to move into retailing by establishing Apple Stores, the
company made a decision to “make” stores that sold their own products, rather than simply
“buy” the retailing services of stores run by other companies, like Best Buy or Walmart. Finally,
companies may use international expansion as a vehicle to achieve economies of scale, access
key resources, or learn new skills. Indeed, some companies use international expansion as
a primary source of competitive advantage. These strategy vehicles—discussed in detail in
Chapters 6 to 9—are important tools that strategists use to achieve key strategic objectives.
Strategy Implementation
The final step in the strategic management process is to implement the strategy that was
chosen during the strategy formulation phase. Strategy implementation occurs when a
company adopts a set of organizational processes that enable it to effectively carry out its
strategy. Effective implementation typically requires the following:
1. The functional strategies within the company—research and development, operations,
sales and marketing, human resource management—are well aligned with delivering
the unique value identified in the overall strategy. Implementation is generally more
successful when a company can measure how effectively functional activities are being
performed to support the overall strategy.
strategy implementation The
translation of a chosen strategy
into organizational action so
as to effectively implement the
activities required to achieve
strategic goals and objectives.
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ì WHAT IS BUSINESS STRATEGY?
S T R AT E GY I N P R A CT I C E
Walmart Functional Strategies Implement
the Overall Strategy

W
hen a company has a clear strategy regarding how it
plans to offer unique value, or “win” with customers,
this helps guide the implementation of the overall strategy
within each of the different business functions. As we’ve
discussed, Walmart’s strategy is to win by being a cost
leader in its markets. Walmart’s functional areas support
that strategy in a number of ways:24
ì Walmart’s human resource management strategy focuses
on keeping labor costs as low as possible. Walmart pays
relatively low wages and has few layers of management, which minimizes labor costs. Walmart also has
a nonunion stance and once even closed a store in
Canada when the workers tried to unionize.25 Managers have small offices with inexpensive furniture, and
when they travel, they stay at inexpensive hotels and
frequently share a room.
ì Walmart’s information technology and operations areas
also focus attention on cost reduction. Walmart has
invested in information technology to lower the costs
of communicating with thousands of suppliers and to
provide suppliers with real-time data on what products
are selling, at what price, in what store.
ì Walmart purchasing department negotiates aggressively
with suppliers. Walmart uses its tremendous buying
power to get the lowest prices on products from its
suppliers. It also offers a product mix that appeals to
price-sensitive customers.
ì Marketing does price checks at competitors. The
goal of the marketing staff is to ensure that
Walmart’s prices are always as low, if not lower,
than competitors.
2. The organization’s structure, systems, staff, skills, style (culture), and shared values are
designed to facilitate the execution of the strategy. This is the McKinsey 7-S framework,
which is useful for creating the alignment necessary to ensure effective implementation.
We discuss how companies can effectively create alignment with their strategy—or
change the organization to align with a new strategy—in Chapter 12. The Strategy in Practice: Walmart Functional Strategies Implement the Overall Strategy feature describes some of
the actions that Walmart has taken to ensure that its functional activities align with and
implement the overall business unit strategy.
To ensure successful implementation, the organization should have clear metrics, or ways
to measure whether or not the plan is being implemented. In Chapter 12, we provide a strategy tool, our version of the balanced scorecard, which suggests some useful metrics that
functional area leaders, and the CEO and top management team, can use to determine how
effectively strategies are being implemented.26
WHO IS RESPONSIBLE FOR BUSINESS STRATEGY?
strategic leaders Organizational
leaders charged with formulating
and implementing a strategy with
the objective of ensuring the survival
and success of an organization.
deliberate strategy A plan or
pattern of action that is formulated
through a deliberate planning
process that is then carried out to
achieve the mission or goals of an
organization.
Strategic leaders are typically the leaders of an organization who develop strategy through
the strategic management process. These leaders are responsible for not only formulating
strategy, but also for explaining the strategy in a way that employees will understand—and
in a way that will motivate employees to execute it. Chapter 13 explains the role the board
of directors and the top management team play in formulating and implementing strategy.
Theorist Henry Mintzberg refers to strategies that are developed by management, using the
strategic management process shown in Figure 1.1, as “intended” or “deliberate” strategies.27
Deliberate strategies are implemented as a result of careful analysis of markets, customers,
competitors, and a firm’s resources and capabilities. Target’s move to upscale discount retailing came after it concluded that it could not compete with Walmart on costs and prices. So
WHO IS RESPONSIBLE FOR BUSINESS STRATEGY?
ETHICS
[ 15 ]
A N D ST R AT E GY
The Price Companies Pay to Stay Competitive
O
ne of the central ethical challenges facing the strategist
is making decisions designed to deliver unique value
to customers. A decision could, for example, focus on low
cost and how it might result in reduced value for specific
stakeholder groups.
Over the past few years, an increasing number of US
companies have shut down US facilities and fired American
workers as they have shifted their activities overseas to save
money. For example, IBM laid off over 1,200 employees in
New York and Vermont because their jobs could be done
more cost effectively in “Brazil, India, and now China.”31
In similar fashion, HP announced layoffs of 500 customer
service workers in Arkansas due to global restructuring,
the term often used to describe a company’s plan to fire
workers and move activities from one location to another.32
And Eaton, a 101-year-old Cleveland-based manufacturer
of electronic components, moved its corporate address to
Ireland, where the top corporate tax rate is 12.5 percent
versus 35 percent in the United States. These are only a
few of the many examples of organizations making difficult
decisions in order to stay competitive. But at what price?
In each of these instances, the company’s leaders
are responding to customer demands (lower prices) and
shareholder demands (higher profit returns). But in doing
so, they are neglecting employee demands (job retention)
and community demands (taxes provide community
benefits). Some may question whether it is ethical to fire
employees and avoid US taxes in order to better meet
the desires of customers and shareholders. Others will
argue that if the company does not keep its customers
and shareholders happy, employees will eventually lose
their jobs anyway because the company will not be cost
competitive, and companies that go bankrupt cannot pay
taxes. The challenge of meeting the sometimes-competing
needs of various stakeholder groups is one that is
constantly faced by a company’s leaders. A typical response
is to prioritize stakeholders’ needs—with customers and
shareholders needs coming first—and take strategic
actions that best meet their needs. But actions that take
unduly from employees and communities to compensate
customers and shareholders are viewed by many as
unethical.
it created a trends department, created partnerships with high-end fashion designers (e.g.,
Oscar de la Renta) and stores (Neiman Marcus), offered a higher-end mix of products, and
built stores in more affluent suburban areas as opposed to rural towns. Target’s strategy to
become Tarzhay was the result of a deliberate strategic plan.
Emergent strategy is a strategy that was not expressly intended in the original planning
of strategy. Strategies that emerge when leaders recognize and act on unexpected opportunities that occur through serendipity, such as ideas from people within the organization, are
called emergent strategies.28 Apple’s transformation from a computer company to a company known mostly for its music players and cell phones was the result of a strategy that
emerged after the introduction of the iPod. The iPod opened up opportunities—such as the
iPhone and iPad—that the company’s senior executives did not necessarily foresee.
Successful companies typically have strategies that are partly deliberate, due to effective
strategic planning processes, and partly emergent, due to a willingness to respond to ideas
that come from within the organization. In a successful company, ever…
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